Shale Archives - Page 2 of 7 - The Automatic Earth

U.S. President Donald Trump ignited a political firestorm on Tuesday by firing FBI Director James Comey, who had been leading an investigation into the Trump 2016 presidential campaign’s possible collusion with Russia to influence the election outcome. The Republican president said he fired Comey, the top U.S. law enforcement official, over his handling of an election-year email scandal involving then-Democratic presidential nominee Hillary Clinton. The move stunned Washington and raised suspicions among Democrats and others that the White House was trying to blunt the FBI probe involving Russia. Some Democrats compared Trump’s move to the “Saturday Night Massacre” of 1973, in which President Richard Nixon fired an independent special prosecutor investigating the Watergate scandal.

White House officials denied allegations that there was any political motive in the move by Trump, who took office on Jan. 20. Senate Democratic leader Chuck Schumer said he spoke to Trump and told him he was “making a very big mistake” in firing Comey, adding the president did not “really answer” in response. An independent investigation into Moscow’s role in the election “is now the only way to go to restore the American people’s faith,” Schumer said. Though many Democrats have criticized Comey’s handling of the Clinton email probe, they said they were troubled by the timing of Trump’s firing of him.

[..] Pushing back against critics of the move, White House officials said Deputy Attorney General Rod Rosenstein, a career prosecutor who took office on April 25, assessed the situation at the FBI and concluded that Comey had lost his confidence. Rosenstein sent his recommendation to Sessions, who concurred and they forwarded their recommendation to Trump, who accepted it on Tuesday, they said. The White House released a memo in which Rosenstein wrote: “I cannot defend the Director’s handling of the conclusion of the investigation of Secretary Clinton’s emails, and I do not understand his refusal to accept the nearly universal judgment that he was mistaken.”

The facts are classified.

• Turning Gen. Flynn into Road Kill (Robert Parry)

Not to defend retired Lt. Gen. Michael Flynn for his suspect judgment, but it should be noted that his case represents a disturbing example of how electronic surveillance and politicized law enforcement can destroy an American citizen’s life in today’s New McCarthyism. The testimony on Monday by former acting Attorney General Sally Yates and former Director of National Intelligence James Clapper offered no evidence of Flynn’s wrongdoing – those facts were deemed “classified” – yet the pair thoroughly destroyed Flynn’s reputation, portraying him as both a liar and a potential traitor. That Senate Democrats, in particular, saw nothing troubling about this smearing of the former director of the Defense Intelligence Agency and, briefly, President Trump’s national security adviser was itself troubling. Republicans were a bit more skeptical but no one, it seemed, wanted to be labeled as soft on Russia.

So, there was no skepticism toward Yates’s curious assertion that Flynn’s supposed lying to Vice President Mike Pence about the details of a phone call with Russian Ambassador Sergey Kislyak somehow opened Flynn to Russian blackmail – her core explanation for why she rushed to Trump’s White House with warnings of this allegedly grave danger. Yates also talked ominously about “underlying” information that raised further questions about Flynn’s patriotism, but that evidence, too, couldn’t be shared with the American people; it was classified, leaving it to your imagination the depth of Flynn’s perfidy. Despite the thinness of Yates’s charges – and the echoes of Sen. Joe McCarthy with his secret lists of communists that he wouldn’t release – the mainstream U.S. news media has bestowed on Yates a hero status without any concern that she might be exaggerating the highly unlikely possibility that the Russians would have blackmailed Flynn.

Her supposition was that since Vice President Mike Pence’s account of the Kislyak-Flynn conversation deviated somewhat from the details of what was actually said, the Russians would seize on the discrepancy to coerce Flynn to do their bidding. But that really makes no sense, in part, because even if the Russians did pick up the discrepancy, they would assume correctly that U.S. intelligence had its own transcript of the conversation, so there would be no basis for blackmail. Yates’s supposed alarm might make for a good spy novel but it has little or no basis in the real world. But it is hard for Americans to assess her claims because all the key facts are classified.

NATO has become an anti-ISIS vehicle. Wonder if they realize this. Turkey is a member.

• NATO Chief Finds a New Friend in Trump (Spiegel)

In Donald Trump’s eyes, NATO Secretary-General Jens Stoltenberg was actually the head of an alliance that history had made superfluous. The new American president made clear during his election campaign that he considered NATO to be a Cold War relic – cumbersome, expensive and useless. But when Stoltenberg appeared at a joint press conference during a visit to the new U.S. leader in the White House, nary a word indicated any resentment over NATO. “I said it was obsolete. It is no longer obsolete,” Trump said in a spectacular turnaround. So what happened? Stoltenberg chuckles at the question before fastening his seat belt. The Belgian air force passenger jet taxis onto the runway at the airport in Rome as it prepares to take off for Brussels. “We learn something new every day,” he says.

“Donald Trump and I discussed how NATO must further develop because the world has changed.” Above all, change means that the Europeans will have to increase their defense spending in the future – both Republican Trump and Social Democrat Stoltenberg are in agreement on the issue. In recent weeks, an alliance has formed between the two, very different men. The blustering U.S. president, who has little foreign policy experience, and the measured secretary-general from Norway are now pulling together, with both desiring more money for the alliance. Stoltenberg, 58, is now paying visits to European capitals in order to drum up the necessary funds. In two weeks, Trump plans to travel to Europe for the first time as U.S. president, and it is no coincidence that one of his first stops on May 25 will be to the massive new NATO headquarters in Brussels.

In addition to his demand for more money from other alliance members, Trump is also hoping NATO will take on a greater role in the fight against Islamic State (IS). He would like to see NATO join the U.S.-led coalition against the terrorist organization. Stoltenberg has long been of the opinion that the era of peace dividends has passed, particularly given Russia’s annexation of Crimea and the IS establishment of a “caliphate” in Syria and Iraq. But it was only with Trump’s election that his demands have gained significant momentum. Ironically, the very man who until recently considered NATO to be superfluous is now one of Stoltenberg’s closest allies.

And this flies straight in the face of Turkey’s NATO membership.

• Trump Approves Plan to Arm Syrian Kurds (NBC)

Two U.S. defense officials tell NBC News that President Donald Trump has approved a plan to arm the Syrian Kurdish militia — an important U.S. ally in Syria in the fight against ISIS. One of the officials said the move is significant because it supports the notion that the Syrian Democratic Force is the fighting force that will eventually go in to Raqqa, a city in Syria’s center which has been under ISIS control since 2014. The move also reinforces the idea that the entire Syrian Democratic Force, Syrian Kurds (YPG) and the Syrian Arab Coalition, has the backing of the U.S. Trump and members of the Cabinet spoke about it during a meeting late yesterday at the White House with Secretary of Defense James Mattis joining by video teleconference.

The order has been signed and that “allows the process to begin to function,” one official said. Once the order comes to the Pentagon, the U.S. can begin providing the Syrian Kurds with arms and equipment fairly quickly since some equipment is pre-positioned. [..] The Turks will be notified about the decision soon and the officials expect a strong reaction from them. In March, Secretary of State Rex Tillerson traveled to Turkey to meet with President Recep Tayyip Erdogan, who sees the YPG as terrorists.

Erdogan is not amused. And his recent attack on Israel won’t help.

• Turkey Hopes US Will End Support Of Syrian Kurdish YPG (R.)

Turkey hopes the United States will end its policy of supporting the Syrian Kurdish YPG militia, Deputy Prime Minister Nurettin Canikli said on Wednesday, adding that Ankara could not accept its NATO ally backing the group. Canikli’s comments are among the first official responses after U.S. officials said on Tuesday that President Donald Trump has approved supplying arms to the YPG to support an operation to retake the Syrian city of Raqqa from Islamic State. Ankara views the YPG as the Syrian extension of the outlawed Kurdistan Workers Party (PKK), considered a terrorist group by the United States, Turkey and Europe. The United States sees the YPG as a valuable partner in the fight against Islamic State in northern Syria.

“We cannot accept the presence of terrorist organizations that would threaten the future of the Turkish state,” Canikli said in an interview with Turkish broadcaster A Haber. “We hope the U.S. administration will put a stop to this wrong and turn back from it. Such a policy will not be beneficial, you can’t be in the same sack as terrorist organizations.” Turkish President Tayyip Erdogan is expected to meet Trump in Washington next week. Erdogan has repeatedly castigated the United States for its support for the YPG, saying its NATO ally should support it fully in the fight against terrorism. The Pentagon has sought to stress that it saw arming the Kurdish forces as necessary to ensure a victory in Raqqa, Islamic State’s de facto capital in Syria and a hub for planning the group’s attacks against the West.

Extremely incompetent. But the CIA doesn’t have to be competent, all it has to do is be secretive.

• Assange: ‘CIA Is Basically Useless, Incompetent’ (Exp.)

Mr Assange, declared by the Donald Trump administration as US public enemy number one, was speaking ahead of a live Spanish television interview. He told current affairs show When It’s Gone: “The CIA is basically useless. They are extremely incompetent as an organisation. “It is the organisation that gave us the end of democracy in Iran, Pinochet, the destruction of Libya, the rise of ISIS within Libya, al-Qaeda, the Syrian disaster and the Iraq war. “It is one of the most useless organisations in the world.” US intelligence agencies have concluded that Russia was behind the hack, and used Wikileaks to harm the chances of Mrs Clinton and favour Mr Trump. Mr Assange said the release was not intended to affect the election.

“This is the greatest suckers rally we’ve ever seen.”

• Stockman: There Is No Reason To Own Stocks At This Point In The Game (DR)

[..] “There will be panic in the financial markets. This is not priced in. The market isn’t expecting anything. I think it will cause some very difficult times.” The interviewer then asked what his expectations on a government shutdown would look like with Trump.” [..] “I doubt he’ll go for a shutdown by choice. The leadership is not going to stand for it. They have a false idea that Republicans can govern by keeping the Washington Monument open even if we’re bankrupting the country by piling spending. I don’t think they’re going to elect to have a shutdown. What I think is going to happen instead is they’re going to run out of borrowing authority with the debt ceiling, it is now frozen on March 15. We’re locked in at $19.8 trillion so when they run out of cash in a few months, they’ll need a majority in both houses to vote through a multi-trillion bill in both houses. They won’t have the votes.”

[..] “The market is pricing itself for perfection for all of eternity. This is crazy. We’ve got headwinds everywhere. The auto industry is now starting to roll over. The red ponzi in China has only a matter of time before it explodes. We now have debt for the household sector above where it was for the 2008 crisis. I think the market could easily drop to 1,300-1,600 by 30% or more once the fantasy ends. The government will show its true colors. We are headed for a fiscal bloodbath.” Stockman voiced his concern for clarity remarking, “This crazy notion that there is going to be a Trump tax cut and fiscal stimulus must be put to rest once and for all. It’s not going to happen. They can’t pass a tax cut that big without a budget resolution that incorporates $10 or $15 trillion of debt over the next decade. Week by week, slowly the market is beginning to figure this out.

What it means is, all of the corporate insiders are selling stock like there is no tomorrow… where institutional sales of stock have been going up since the election and what we have is the usual end of the cycle. This is the greatest suckers rally we’ve ever seen.” When asked what he would recommend to protect yourself he urged, “The main thing is, get out of the markets. These markets are unstable. They’re rigged and unsustainable… there is no reason to own stocks at this point in the game. It is so overvalued that maybe you can get another two or three out but you’re facing a 30% or 40% down. The risk versus reward is horrible. The bond market is one giant bubble because the central bank’s have been buying bonds worldwide. They’re buying a trillion and still buying a trillion or so on an annual basis. All of that is coming to a halt.”

Credit is still cheap. Even, or especially, depending on how you look at it, for zombies.

• Shale Drillers Are Outspending the World With $84 Billion Spree (BBG)

U.S. shale explorers are boosting drilling budgets 10 times faster than the rest of the world to harvest fields that register fat profits even with the recent drop in oil prices. Flush with cash from a short-lived OPEC-led crude rally, North American drillers plan to lift their 2017 outlays by 32% to $84 billion, compared with just 3% for international projects, according to analysts at Barclays. Much of the increase in spending is flowing into the Permian Basin, a sprawling, mile-thick accumulation of crude beneath Texas and New Mexico, where producers have been reaping double-digit returns even with oil commanding less than half what it did in 2014. That’s bad news for OPEC and its partners in a global campaign to crimp supplies and elevate prices. Wood Mackenzie estimates that new spending will add 800,000 barrels of North American crude this year, equivalent to 44% of the reductions announced by the Saudi- and Russia-led group.

“The specter of American supply is real,” Roy Martin, a Wood Mackenzie research analyst in Houston, said in a telephone interview. “The level of capital budget increases really surprised us.” Drilling budgets around the world collapsed in 2016 as the worst crude market collapse in a generation erased cash flows, forcing explorers to cancel expansion projects, cut jobs and sell oil and natural gas fields to raise cash. The pain also swept across OPEC, which in November relented by agreeing with several non-OPEC nations to curb output by 1.8 million barrels a day. Oil prices that initially popped above $55 in the weeks after the cut was announced have since dipped to around $46, reflecting pessimism that the OPEC-led deal can withstand the onslaught of U.S. shale.

[..] EOG, the second-largest U.S. explorer that doesn’t own refineries, plans to boost spending by 44% this year to between $3.7 billion and $4.1 billion. Pioneer is eyeing a 33% increase to $2.8 billion. The sub-group that includes North American shale drillers like EOG and Pioneer is collectively targeting $53 billion in spending this year, up from $35 billion in 2016, according to the Barclays analysts. U.S. oil production is already swelling, even though output from the new wells being drilled won’t materialize above ground for months. The Energy Department’s statistics arm raised its full-year 2017 supply estimate to 9.31 million barrels a day on Tuesday, a 1% increase from the April forecast. Next year, U.S. fields will pump 9.96 million barrels a day, 0.6% more than the department estimated last month.

What are the odds anyone will be charged that May wants to keep on?

• UK Tory MPs Could Learn Fate Of Electoral Spending Inquiry By Wednesday (G.)

Dozens of Conservative MPs expect to learn shortly whether they will be charged with fraud in relation to their spending at the last election, as deadlines for the Crown Prosecution Service to make a decision approaches. MPs and their agents have been under investigation by 14 police forces for more than a year over their spending declarations at the 2015 election. They are now likely to learn their fates before the general election, possibly as soon as Wednesday as the various time limits for bringing charges are coming to an end. If it happens on Wednesday, this could be in time for Theresa May to jettison any candidates facing prosecution before the deadline for final nominations at 4pm on Thursday, but the timeline for replacements would be extremely tight.

Any decision to prosecute them would be an explosive twist in the general election with more than 20 MPs in the last parliament potentially facing charges under the Representation of the People Act. But the bar for prosecution is considered to be high, with the police having to prove intent to submit wrongful expenditure claims. Tory MPs maintain they recorded their spending as directed by the national party. The allegations centre around the declaration of spending on Conservative battle bus tour in 2015, which took activists to dozens of marginal seats before the election. This was declared as national campaign spending, with the Tories some millions below their official limit. But it emerged that the activists had been campaigning on behalf of specific Conservative MPs, rather than the party generally, leading to claims that the spending should have been record as local expenditure.

Bit of an oddity for now. But events could change that, fast.

• Anonymous Warns World To ‘Prepare’ For World War 3 (NYP)

The infamous hacktivist group Anonymous has released a chilling new video — urging people across the globe to “prepare” for World War 3 – as the US and North Korea continue to move “strategic pieces into place” for battle. “All the signs of a looming war on the Korean peninsula are surfacing,” the group says in the ominous six-minute clip, posted on YouTube over the weekend. Using their signature Guy Fawkes character, the hackers make several claims about recent military movements in the region — and alleged warnings made by Japan and South Korea about imminent nuclear attacks from the North — as they deliver their frightening prophecy. “Watching as each country moves strategic pieces into place,” the organization says, in its notorious robotic voice. “But unlike past world wars, although there will be ground troops, the battle is likely to be fierce, brutal and quick. It will also be globally devastating, both on environmental and economical levels.”

According to Anonymous, President Trump’s test of the Minuteman 3 intercontinental ballistic missile last week — coupled with a recent warning from Japanese officials to citizens, telling them to make preparations for a possible nuclear attack — are ultimately proof that all signs are pointing to a major conflict between the US and North Korea. In addition, China reportedly has urged its citizens in the Hermit Kingdom to return home as tensions continue to escalate over their nuclear weapons program. “This is a real war with real global consequences,” the group explains. “With three superpowers drawn into the mix, other nations will be coerced into choosing sides, so what do the chess pieces look like so far?”

Macron as evil incarnate.

• French Election A Catastrophe For World Peace (Paul Craig Roberts)

Marine Le Pen’s defeat, if the vote count was honest, indicates that the French are even more insouciant than Americans. The week before the election the Russian high command announced that Washington had convinced the Russian military that Washington intended a preemptive nuclear first strike against Russia. No European leader saw danger in this annoucement except Le Pen. No European leader, and no one in Washington, has stepped forward to reassure the Russians. In the US apparently only my readers even know of the Russian conclusion. Simply nothing is said in the Western media about the extraordinary risk of convincing Russia that the US is preparing a first strike against Russia. Nothing in the 20th century Cold War comes close to this. Le Pen, as Trump did prior to his castration by the military/security complex, understands that military conflict with Russia means death for humanity.

Why were the French voters unconcerned with what may be their impending deaths? The answer is that the French have been brainwashed into believing that to stand for France, as Marine Le Pen does, is to place patriotism and nationalism above diversity and is fascist. All of Europe, except for the majority of the British, has been brainwashed into the belief that it is Hitler-like or fascist to stand up for your country. For a French man or woman to escape the fascist designation, he or she must be Europeans, not French, German, Dutch, Italian, Greek, Spanish, Portuguese. Brainwashed as the French are that it is fascist to stand up for France, the French voted for the international bankers and for the EU. The French election was a disaster for Europeans, but it was a huge victory for the American neoconservatives who will now be able to push Russia to war without European opposition.

Macron as a hologram.

• Emmanuel Clinton and the Revolt of the Elites (Escobar)

So in the end the West was saved by the election of Emmanuel Macron as President of France: relief in Brussels, a buoyant eurozone, rallies in Asian markets. That was always a no-brainer. After all, Macron was endorsed by the EU, Goddess of the Market, and Barack Obama. And he was fully backed by the French ruling class. This was a referendum on the EU – and the EU, in its current set-up, won. Cyberwar had to be part of the picture. No one knows where the MacronLeaks came from – a last minute, massive online dump of Macron campaign hacked emails. WikiLeaks certified the documents it had time to review as legitimate. That did not stop the Macron galaxy from immediately blaming it on Russia. Le Monde, a once-great paper now owned by three influential Macron backers, faithfully mirrored his campaign’s denunciation of RT and Sputnik, information technology attacks and, in general, the interference of Russia in the elections.

The Macron Russophobia in the French media-sphere also happens to include Liberation, once the paper of Jean-Paul Sartre. Edouard de Rothschild, the previous head of Rothschild & Cie Banque, bought a 37% controlling stake in the paper in 2005. Three years later, an unknown Emmanuel Macron started to rise in the mergers and acquisitions department, soon acquiring a reputation as “the Mozart of finance.” After a brief stint at the Ministry of Finance, a movement, En Marche! was set up for him by a network of powerful players and think tanks. Now, the presidency. Welcome to the revolving door, Moet & Chandon-style. In the last TV face-off with Marine Le Pen, Macron did not shy from displaying condescending/rude streaks and even raked some extra%age points by hammering “Marine” as a misinformed, corrupt, “hate-filled” nationalist liar who “feeds off France’s misery” and would precipitate “civil war.”

That may in fact come back to haunt him. Macron is bound to be a carrier of France’s internal devaluation; a champion of wage “rigor,” whose counterpoint will be a boom of under-employment; and a champion of increasing precariousness on the road to boost competitiveness. Big Business lauds his idea of cutting corporate tax from 33% to 25% (the European average). But overall, what Macron has sold is a recipe for a “see you on the barricades” scenario: severe cuts in health spending, unemployment benefits and local government budgets; at least 120,000 layoffs from the public sector; and abrogation of some key workers’ rights. He wants to advance the “reform” of the French work code – opposed by 67% of French voters – ruling by decree.

Macron as a greater fool.

• Paris Afterparty (Jim Kunstler)

First mistake: Emmanuel Macron’s handlers played Beethoven’s “Ode to Joy” instead of the French national anthem at the winner’s election rally. Well, at least they didn’t play “Deutschland Über Alles.” The tensions in the Euroland situation remain: the 20%-plus youth unemployment, the papered-over insolvency of the European banks, and the implacable contraction of economic activity, especially at the southern rim of the EU. The clash of civilizations brought on by the EU’s self-induced refugee glut still hangs over the continent like a hijab. That there was no Islamic terror violence around the election should not be reassuring. The interests of the jihadists probably lie in the continued squishiness of the status quo, with its sentimental multiculture fantasies — can’t we all just get along? — so En Marche was their best bet. LePen might have pushed back hard. Macron looks to bathe France’s Islamic antagonists in a nutrient-medium of Hollandaise lite.

The sclerosis of Europe is assured for now. But events are in charge, not elected officials so much, and Europe’s economic fate may be determined by forces far away and beyond its power to control, namely in China, where the phony-baloney banking system is likely to be the first to implode in a global daisy-chain of financial uncontrolled demolition. Much of that depends on the continuing stability of currencies. The trouble is they are all pegged to fatally unrealistic expectations of economic expansion. Without it, the repayment of interest on monumental outstanding debt becomes an impossibility. And the game of issuing more new debt to pay the interest on the old debt completely falls apart. Once again, the dynamic relationship between real capital creation and the quandaries of the oil industry lurks behind these failures of economy.

In a crisis of debt repayment, governments will not know what else to do except “print” more money, and this time they are liable to destroy faith in the value of “money” the world over. I put “money” in quotation marks because the dollars, euros, yuan, and yen are only worth what people believe them to be, subject to measurement against increasingly fictional indexes of value, such as interest rates, stock and bond markets, government-issued employment and GDP stats, and other benchmarks so egregiously gamed by the issuing authorities that Ole Karl Marx’s hoary warning finally comes to pass and everything solid melts into air.

Revolving credit seemed like a good idea through the 20th century, and it sure worked to build an economic matrix based on cheap energy, which is, alas, no more. What remains is the wishful pretense that the old familiar protocols can still work their magic. The disappointment will be epic, and the result next time may be political figures even worse than LePen and Trump. Consider, though, that what you take for the drumbeat of nationalism is actually just a stair-step down on a much-longer journey out of the globally financialized economy. Because the ultimate destination down this stairway is a form of local autarky that the current mandarins of the status quo can’t even imagine.

They want it all, all of Greece. Beware.

• Germany: Greek Gold, Real Estate As Collateral If IMF Out Of Program (KTG)

The Bavarian Minister of Finance, Markus Soeder (CSU), a fierce Grexit supporter of Merkel’s CDU sister party apparently has moved away from his demand for a Greek euro exit. During a visit to Athens, Soeder said that the problems around Britain’s exit from the EU showed how difficult a Grexit would be. In addition, the Brexit already causes enough uncertainty. and Germany wants neither problems, nor uncertainty that could harm its profits especially before the parliamentary elections in autumn 2017. As Grexit is out of question, Greece should use gold reserves and real estate as collateral if the IMF stays out of the Greek program. However, Markus Soeder brought back an older idea of his, an idea he openly formulated in February 2017: that Greece pledges Gold, cash and real estate in order to get the bailout tranches, the loans by the European creditors, who love to call them financial aid.

“Soeder did not give up serious demands on Greece wile he was in Athens,” German magazine Der Spiegel writes. If the IMF does not participate in the Greek program, “new money can only be provided against collateral such as cash or real estate,” Soeder said. Soeder referred to Finland that participated in the second aid package for Greece only in 2012 and only after then Greek finance minister Evangelos Venizelos signed a bilateral agreement on colateral. “This worked,” the CSU politician said about the deal. Soeder’s demand is, however, amply theoretical, since he continues to regard an IMF participation as indispensable. He has the same problem as Federal Minister of Finance Wolfgang Schäuble (CDU): He strongly rejects further debt relief, as the IMF makes it a condition. “I have made it quite clear that a debt cut is out of question for Germany, as it the idea about issuing Eurobonds or similar.”

Brussels pisses on Greek courts.

• Greek Court Finds New Pension Cuts Illegal Under Greek, European Law (K.)

The Plenary of the State Audit Council has ruled that the cuts to main and supplementary pensions that the government and its creditors have agreed on contravene the European Convention of Human Rights, sources said on Tuesday night. The council also decided that the fiscal bill containing the cuts, to be implemented from 2019, contravenes Greek legislation as it has been tabled to the audit council without an actuarial study. A bill, outlining the pension cuts and other measures agreed with creditors is due to go to a vote in Parliament next week.

Nothing new here. WIll anything change now that an EU body finds the same many others have before them?

• Damning Findings From EU Audit Of Greek & Italian Refugee “Hotspots” (Oxfam)

1. EU Court of Auditors found “overcrowded” camps, migrants “sleeping rough”, and “scant access to basic services” According to the Court of Auditors, hotspots are seriously overcrowded, particularly on the Greek islands of Lesvos, Chios and Samos. People are fleeing from the camps, because they don’t have sufficient access to water and there are too few doctors to provide adequate health care. People also didn’t feel safe in the hotspots since fights often break out in the camps. Many of these people ended up sleeping on the streets outside the hotspots. The appalling situation in hotspots is also documented by NGOs, who have reported that people in the hotspots have been exposed to degrading conditions and had their rights denied. More than 2,000 people were forced to sleep in barely heated tents during the freezing winter.

2. Children held for months in “inappropriate conditions” against international laws and standards, the auditors say The auditors raised serious concerns about the situation of unaccompanied children in hotspots. In most hotspots children were confined either to fenced areas, or accommodated without protection from adults, exposing them to the risk of abuse. Children were held for three months or more closed in behind fences in the Moria hotspot after it was converted to a de-facto detention centre. In some hotspots, girls and boys were held together, against standard practice. NGOs have been raising concerns about this situation for months. Now the Court of Auditors has confirmed that the welfare of the children in Moria was put at risk.

3. ‘‘No framework for remedying bottlenecks or sharing lessons learnt”, the Court found Overall, the ‘hotspot approach’ has been disorganised and inconsistent, the EU auditors found. The absence of consistent guidelines for the way hotspots should be managed means that responsibilities between the various actors are not clearly defined. Conditions and services are far worse in some hotspots than in others. The unfairness of this inconsistency has been criticised by NGOs, who have also highlighted the lack of oversight over decisions and accountability for human rights violations.

Furthermore, it is difficult to track the situation of people in the hotspots and how the management of the camps affects them – because key data is not shared between authorities. Neither the length of time migrants spend in hotspots while waiting to register and complete their asylum application in Greece, nor the total number of migrants identified, registered, or receiving return orders in Italy was shared. The Court of Auditor’s recommendations to better define the roles of the different agencies involved and to appoint a manager for each hotspot exposes that management is currently lacking.

4. The auditors highlight that the “functioning of hotspots is affected by bottle-necks in the follow-up procedures” The hotspots were meant to be just a first step in the EU’s migration response. Member states should then have stepped in to facilitate the relocation and integration of these people across Europe, or facilitate their safe and dignified return. That has not happened. The set-up of the hotspots is a completely new way for national governments to cooperate with EU institutions and agencies within a member state’s territory. If follow up continues to falter, the pressure on the hotspots will only grow. This could lead to people living in the hotspots being exposed to even more suffering, and the risk that authorities will abandon acceptable legal and living standards increases. This has been evident since December, if not earlier.

5. The EU-Turkey deal “had a major impact on the functioning of hotspots” and on detentions, the auditors say The EU-Turkey deal of March 2016 had a great impact on the functioning of the hotspots, as becomes evident when we look at the details of the auditors’ report. When the deal with Turkey was announced, hotspots turned into de-facto detention centres, provoking criticism from many NGOs. But the current European approach only attempts to increase the use of detention for asylum seekers even further. The auditors have detailed the hotspots procedures in the annex to their report, and reading this makes clear how difficult it is not to be detained in the process they record.

The findings of the European Court of Auditors suggest that hotspots are being made to work at the expense of people, for the sake of fulfilling policy objectives. It is vital that safeguards are in place to ensure that people are not forced to stay in the hotspots under the conditions the EU auditors and NGOs have found to be degrading. Very close scrutiny is needed to protect the rights of those who arrive looking for safety on Europe’s shores.

Debt Rattle January 18 2017

Jan 182017

January 18, 2017 Posted by Raúl Ilargi Meijer at 10:08 am Finance Tagged with: ageing, Assange, Brexit, Libor, Manning, OPEC, Putin, Shale, Snowden, Trump, Xi 5 Responses »

Albert Freeman Effect of gasoline shortage in Washington, DC 1942

• Why Theresa May Is Right To Take A Huge Gamble On Hard Brexit (MW)

• Trump Is Waving Adios To The Longstanding ‘Strong Dollar Policy’ (MW)

• The Issue Is Not Trump, It’s Us (John Pilger)

• Focus Turns To Julian Assange After US Decision To Free Chelsea Manning (G.)

• Russia Extends Snowden’s Residency Permit ‘By A Couple Of Years’ (R.)

• Putin Mocks Claims That Trump Was Spied On (AFP)

• PBOC Cash Injections Surge To Record $60 Billion Before Holidays (BBG)

• China New Home Prices Rise 12.4% Y/Y In December (R.)

• Rustbelt China Province Admits It Faked Fiscal Data For Years (BBG)

• Saudis Claim Victory Over US Shale Industry (AEP)

• Rising U.S. Shale-Oil Output Threatens OPEC’s Production Pact (MW)

• Italian Conservative Tajani Wins Race To Head European Parliament (R.)

• The Bankers Who Fixed The World’s Most Important Number (G.)

• Percentage of World Population Age 65+ in 2015 and 2050 (BR)

While I tend to largely agree with this, I also think what makes these discussions obsolete is that I haven’t seen a single person talk about the possibility that EU will not survive as is, or the single market, and what that would in turn mean for Brexit. Not a single one. Meanwhile, Britain has declared mudslinging its new national sport, and that will continue to make predicting anything at all very hard.

• Why Theresa May Is Right To Take A Huge Gamble On Hard Brexit (MW)

First, there is very little evidence that membership of the Single Market is worth the costs. Every country in the world has access to the single market, under WTO Rules, although occasionally subject to some very minor tariffs. What you lose by leaving is any voice in how the rules of that market are set, and the hassle and paperwork involved in exporting. How much that is really worth, it is hard to judge. What we do know is that ever since the single market was launched in 1992, the EU has been one of the slowest-growing regions in the world, and that trade between its member states has started to decline. If it is so important to an economy, that is, to put it mildly, a bit odd. The only honest position is to say we have absolutely no idea what difference it will make. No country has left the single market before. But given the obligations that come with it — especially open borders and budget contributions — it may well not be worth much.

Second, it strengthens the U.K.’s negotiating position. If Britain goes into the haggling over the terms of departure saying it has decided to leave the single market, and that there is nothing it really wants from Brussels, then suddenly the conversation changes. After all, there are two things the EU wants from the U.K.: the net budget contribution, which accounts for 7% of its total spending, and access to our market, given that the U.K. runs a massive trade deficit with Europe. The EU doesn’t have to have either — it will get by OK without them. But they are helpful. If the U.K. can offer both, while asking for virtually nothing in return, it is more likely to get what it genuinely wants — which is mainly free access to Europe for its financial sector.

Finally, the politics look right. The Conservative Party has remarkably and quickly reassembled itself as the Brexit Party. That might be the right or the wrong decision, but it is where the majority of the country is right now. After all, Leave won the referendum despite fierce warnings of catastrophe from the rest of the world. Of its opponents, the Liberal Democrats want to go back in, and Labour is hopelessly undecided. If Brexit is a reasonable success — and that simply means it regains control of its borders, and the economy keeps expanding even if it is at a lower rate than before — then the Tories will be rewarded with power for a generation. That makes it a prize worth fighting for.

True, the risks are great. The potential disruption to the economy may be a lot worse than anyone yet realizes. The pound could collapse, inflation could soar, and joblessness start to rise. If any of that happens, May will go down as a catastrophic prime minister. But it is more likely she has called this right — and a hard Brexit will turn out to be best the best option available.

Question is, how much can teh US do as long as the USD is the reserve currency and so much global debt is denominated in it?

• Trump Is Waving Adios To The Longstanding ‘Strong Dollar Policy’ (MW)

The strong dollar policy—a mantra of Democratic and Republican administrations for more than two decades—may be headed for the scrap heap once Donald Trump is sworn in as president on Friday. Indeed, Trump sent the dollar skittering lower Tuesday after he told The Wall Street Journal that the U.S. currency was “too strong,” in part due to Chinese efforts to hold down the yuan. But while much is made of Trump’s questioning of the need for NATO or the lasting power of the EU, an administration-level push for a weaker currency would hardly be without precedent. It would, however, be an adjustment a generation of investors and traders who came of age in an era when the executive branch at least paid lip service to the notion that a strong dollar was a desirable aim.

The tide last shifted during the Clinton administration after Robert Rubin, the former Goldman Sachs chief, took over as Treasury secretary from Lloyd Bentsen in early 1995. Before that, Bentsen and U.S. Trade Representative Mickey Kantor had often used language that inadvertently—or not—tended to weaken the dollar. Bentsen got the ball rolling early in Clinton’s first term, calling for a stronger yen in a February 1993 appearance and shocking currency traders who duly bid up the Japanese currency. As recounted in a 2001 paper by economists Brad DeLong and Barry Eichengreen, Bentsen saw the stronger yen as potentially helpful in alleviating the U.S. trade deficit, while Kantor saw a weaker dollar providing leverage in trade talks. That may sound a bit familiar. Trump made the U.S. trade deficit a centerpiece of his campaign, using it to argue that it was proof the nation is getting its lunch eaten by competitors in a zero-sum world.

[..] Douglas Borthwick, managing director of Chapdelaine Foreign Exchange, argued in a note earlier this month that an incoming Trump administration, by throwing out the strong dollar policy, could use the currency as a linchpin in implementing its economic agenda: “With a removal of the Strong USD Policy, the US Dollar will weaken against its global counterparts. This will give the FED the ability to normalize US interest rates, as they can use the weaker USD and the resulting inflation as an excuse for raising rates. The FED will then be used by the Administration as a brake on US Dollar weakness. The weaker USD will also force other countries struggling to get their economies moving to rewrite trade agreements in a way that is more advantageous to the US. In other words, we will see a normalization of US Interest rates, and better negotiated trade deals. Both a win for the new Administration.”

Pilger’s not a fan of Obama. Good read.

• The Issue Is Not Trump, It’s Us (John Pilger)

One of the persistent strands in U.S. political life is a cultish extremism that approaches fascism. This was given expression and reinforced during the two terms of Barack Obama. “I believe in American exceptionalism with every fiber of my being,” said Obama, who expanded the United States’ favorite military pastime: bombing and death squads (“special operations”) as no other president has done since the Cold War. According to a Council on Foreign Relations survey, in 2016 alone Obama dropped 26,171 bombs. That is 72 bombs every day. He bombed the poorest people on earth, in Afghanistan, Libya, Yemen, Somalia, Syria, Iraq, Pakistan. Every Tuesday — reported the New York Times — he personally selected those who would be murdered by mostly hellfire missiles fired from drones.

Weddings, funerals, shepherds were attacked, along with those attempting to collect the body parts festooning the “terrorist target.” A leading Republican senator, Lindsey Graham, estimated, approvingly, that Obama’s drones killed 4,700 people. “Sometimes you hit innocent people and I hate that,” he said, “but we’ve taken out some very senior members of Al Qaeda.” Like the fascism of the 1930s, big lies are delivered with the precision of a metronome, thanks to an omnipresent media whose description now fits that of the Nuremberg prosecutor: “Before each major aggression, with some few exceptions based on expediency, they initiated a press campaign calculated to weaken their victims and to prepare the German people psychologically … In the propaganda system … it was the daily press and the radio that were the most important weapons.”

Assange doesn’t lie. But he may demand the US clarify its positions.

• Focus Turns To Julian Assange After US Decision To Free Chelsea Manning (G.)

The decision by the US president, Barack Obama, to commute the sentence of Chelsea Manning has brought fresh attention to the fate of Julian Assange. On Twitter last week, Assange’s anti-secrecy site WikiLeaks posted: “If Obama grants Manning clemency Assange will agree to US extradition despite clear unconstitutionality of DoJ [Department of Justice] case.” Obama’s move will test the promise. The president commuted Manning’s 35-year sentence, freeing her in May, nearly three decades early. In a statement on Tuesday, Assange said Manning should never have been convicted and described her as “a hero, whose bravery should have been applauded not condemned”. Assange went on to demand that the US government “immediately end its war on whistleblowers and publishers, such as WikiLeaks and myself”, but made no mention of the Twitter pledge.

His lawyer said he has been pressing the Justice Department for updates on an investigation concerning WikiLeaks. The transgender former intelligence analyst, born Bradley Manning, was convicted in August 2013 of espionage and other offences after admitting to leaking 700,000 sensitive military and diplomatic classified documents to WikiLeaks in 2010. Assange has been holed up for more than four years at the Ecuadorian embassy in London. He has refused to meet prosecutors in Sweden, where he remains wanted on an allegation of rape, fearing he would be extradited to the US to face espionage charges if he leaves the embassy. In a statement on Tuesday, a lawyer for Assange did not address whether Assange intended to come to the US.

“For many months, I have asked the DoJ to clarify Mr Assange’s status. I hope it will soon,” Assange’s lawyer, Barry Pollack, said in the statement. “The Department of Justice should not pursue any charges against Mr Assange based on his publication of truthful information and should close its criminal investigation of him immediately.” Another Assange lawyer, Melinda Taylor, said: “Julian’s US lawyers have repeatedly asked the Department of Justice to clarify Julian Assange’s status and would like them to do so now by announcing it is closing the investigation and pursuing no charges.”

Only right thing to do.

• Russia Extends Snowden’s Residency Permit ‘By A Couple Of Years’ (R.)

Former U.S. intelligence contractor Edward Snowden has been given leave to remain in Russia for another couple of years, a spokeswoman for the Russian foreign ministry said. “Snowden’s residency in Russia has just been extended by another couple of years,” the spokeswoman, Maria Zakharova, said in a post on Facebook.

He must be having so much fun with this. And he’s right: “This shows a significant level of degradation of the political elite in the West.”

• Putin Mocks Claims That Trump Was Spied On (AFP)

President Vladimir Putin cracked raunchy jokes on Tuesday as he poked fun at claims that Russian secret services filmed US President-elect Donald Trump with prostitutes. Showing he is familiar with the claims in the explosive dossier, Putin launched into a series of ribald jokes about prostitutes, riffing on Trump’s former role as owner of the Miss Universe beauty contest. The unsubstantiated dossier published by American media last week alleged that Russia had gathered compromising information on Trump, namely videos involving prostitutes at a luxury Moscow hotel, supposedly as a potential means for blackmail. In his first public comments on the claims, Putin rubbished the idea that Russian secret services would have spied on Trump during his 2013 visit to Moscow for the Miss Universe final, as alleged in the dossier.

“Trump when he came to Moscow… wasn’t any kind of political figure, we didn’t even know of his political ambitions,” Putin said, responding to a journalist’s question at a news conference. “Does anyone think that our special services chase every American billionaire? Of course not, it’s just completely ridiculous.” Putin also questioned why Trump would feel the need to hire prostitutes, given his opportunities to meet beautiful women at the Miss Universe contest. “He’s a grown-up for a start and secondly a man who spent his whole life organising beauty contests and meeting the most beautiful women in the world,” Putin said. “I can hardly imagine that he ran off to a hotel to meet our girls of ‘lowered social responsibility’,” said Putin, adding jokingly “although they are of course the best in the world. “I doubt Trump fell for that.”

Putin went on to compare those behind the dossier unfavourably with prostitutes. “The people who order falsifications of the kind that are now circulating against the US president-elect – they are worse than prostitutes, they don’t have any moral limits at all. “The fact that such methods are being used against the US president-elect is a unique case: nothing like this has happened before. “This shows a significant level of degradation of the political elite in the West.”

Xi ordered no market selloffs while he’s in Davos. Joke.

• PBOC Cash Injections Surge To Record $60 Billion Before Holidays (BBG)

China’s benchmark money-market rate surged the most in 19 months, with record central bank cash injections being overwhelmed by demand before the Lunar New Year holidays. The People’s Bank of China put in a net 410 billion yuan ($60 billion) through open-market operations on Wednesday, the biggest daily addition since Bloomberg began compiling the data in 2004. That brings the total injections so far this week to 845 billion yuan. The interbank seven-day repurchase rate jumped 17 basis points, the most since June 2015, to 2.58% as of 1:18 p.m. in Shanghai, according to weighted average prices. Demand for cash tends to increase before the Lunar New Year holidays, when households withdraw money to pay for gifts and get-togethers.

Month-end corporate tax payments are adding to the pressure this time, with the break running from Jan. 27 through Feb. 2. The PBOC offered 200 billion yuan of seven-day reverse repos and 260 billion yuan of 28-day contracts, compared with 50 billion yuan of loans maturing on Wednesday. “The PBOC aims to ensure that the liquidity situation remains adequate, while the 28-day reverse repo is apparently targeted at covering the holidays,” said Frances Cheung at Societe Generale. “There could also be preparation for any indirect tightening impact from potential outflows.” China’s central bank has been offering more 28-day reverse repos than one-week loans in the past two weeks, while curbing the injection of cheaper, short-term funds amid efforts to lower leverage in the financial system. It drained a net 595 billion yuan in the first week of January, before switching to a net injection of 100 billion yuan last week as the seasonal funding demand started to emerge.

The result of cash injections.

• China New Home Prices Rise 12.4% Y/Y In December (R.)

Average new home prices in China’s 70 major cities rose 12.4% in December from a year earlier, slowing slightly from a 12.6% increase in November, an official survey showed on Wednesday. Compared with a month earlier, home prices rose 0.3% nationwide, slowing from November’s 0.6%, according to Reuters calculations from data issued by the National Bureau of Statistics (NBS). Shenzhen, Shanghai and Beijing prices rose 23.5%, 26.5% and 25.9%, respectively, from a year earlier. Monthly growth in Shanghai and Shenzhen slowed but was unchanged in Beijing as local governments’ tightening measures took effect.

China relied heavily on a surging real estate market and government stimulus to help drive economic growth in 2016, but policymakers have grown concerned that the property frenzy will fuel price bubbles and risk a market crash, with serious consequences for the broader economy. Soaring home prices have prompted more than 20 Chinese cities to tighten lending requirements on house purchases, while regulators have told banks to strengthen their risk management on property loans.

Scapegoating. You pick one to make the rest look good in comparison. But this is endemic, in a variety of forms.

• Rustbelt China Province Admits It Faked Fiscal Data For Years (BBG)

The rust-belt province of Liaoning fabricated fiscal numbers from 2011 to 2014, local officials have said, raising fresh doubts about the accuracy of China’s economic data just days ahead of the release of the nation’s full-year growth report. City and county governments in the northwestern region committed fiscal data fraud in the period, Governor Chen Qiufa said at a meeting with provincial lawmakers Tuesday, according to state-run People’s Daily. Fiscal revenues were inflated by at least 20 percent, and some other economic data were also false, the paper said, without specifying categories. Chen said the data were made up because officials wanted to advance their careers. The fraud misled the central government’s judgment of Liaoning’s economic status, he said, citing a report from the National Audit Office in 2016.

With growth now moderating, officials have sought to improve the credibility of economic data as diffusing financial risks becomes a key policy consideration, along with keeping growth ticking along at a rapid clip. Ning Jizhe, head of the National Bureau of Statistics, has said China should prevent fake economic data and increase the quality of its statistics. Liaoning has seen an unprecedented purge of more than 500 deputies from its legislature. The deputies were implicated in vote buying and bribery in the first provincial-level case of its kind in the Communist Party’s almost seven-decade rule, according to the official Xinhua News Agency. Former provincial party chief Wang Min, who led Liaoning from 2009 until 2015, was earlier expelled following corruption allegations by China’s top anti-graft watchdog.

Wonderful pair of articles. Take your pick. Ambrose has one view, while…

• Saudis Claim Victory Over US Shale Industry (AEP)

Saudi Arabia’s oil sheikhs insisted defiantly in Davos that they have defeated the challenge of the American shale industry and restored the balance to the global oil markets after two years of trauma and glut. The country’s energy minister Khalid Al-Falih said US oil frackers had survived only by tapping the most prolific wells and would face surging costs once again as recovery builds, while cannibalisation of their plant will prevent a rapid rebound in US output. “Their supply infrastructure has been decimated,” he said, speaking at the World Economic Forum. Mr Al-Falih admitted for the first time that Saudi Arabia’s decision to flood the world crude markets in 2014 and force a collapse in prices was essentially aimed at US shale frackers, a claim always denied in the past.

“If we had cut production and kept prices at three-digit levels, they would have kept adding one million barrels a day each year, for year after year. Saudi production would have been three million barrels day less in 2017 under that scenario. It was not sustainable,” he said. US drillers bridle at the suggestion that the Saudis won, insisting that they held Opec and Russia to a standstill, forcing them to capitulate last November with an agreement by 22 states to trim output by 1.2m barrels a day, and even that may not prove enough. “Opec engaged in a price war against US producers and they lost,” said Kenneth Hersh from Energy Capital. “This has brought the cost structure down for the whole world. There is no longer a cartel any more.”

Amin Nasser, head of Saudi Aramco, insisted that the job of knocking back shale is largely accomplished and that the market would rebalance by the first half of this year. The cycle is now switching to the opposite extreme. He warned that the world needs $1 trillion of fresh investment in oil projects each year just to keep up with growing demand, and the risk of “price spikes” later this decade is rising fast. The warning was echoed by Fatih Birol, head of the International Energy Agency, who fears a looming oil shortage after an unprecedented collapse in spending on exploration and development over the last two years. “Alarm bells will be ringing if there is no major new investment this year,” he said.

….MarketWatch has the exact opposite.

• Rising U.S. Shale-Oil Output Threatens OPEC’s Production Pact (MW)

The oil market got a stark reminder Tuesday that rising oil production in the U.S. could upend efforts by major producers to bring global supply and demand for crude back in to balance. Just ahead of the settlement for oil futures prices on the New York Mercantile Exchange on Tuesday, the Energy Information Administration released a report on drilling productivity—forecasting a monthly rise of 41,000 barrels a day in February oil production to 4.748 million barrels a day. “That is bearish for oil and a concern for OPEC,” said James Williams, energy economist at WTRG Economics, pointing out that the volume of new oil per rig has climbed because of gains in efficiency.

“If maintained, the expected February production gain means production from the shale plays will be up at least a half million barrels per day by the end of the year,” said Williams. Prices for February West Texas Intermediate crude lost the bulk of the day’s gain on Tuesday to settle with a modest 11-cent climb at $52.48 a barrel. “Since rigs are higher now than in December and should continue to increase, that means a half million [barrel-per-day] gain in production by year-end is a conservative estimate,” Williams said. “Most OPEC members expected this, but U.S. shale production will be the closest monitored data after OPEC’s own compliance with quotas,” he said.

Backroom dealmaking. Why the EU is on its way out.

• Italian Conservative Tajani Wins Race To Head European Parliament (R.)

Centre-right politician Antonio Tajani was elected the new president of the European Parliament on Tuesday after defeating his socialist rival, a fellow Italian, in a daylong series of votes. The new speaker, 63, a former EU commissioner and an ally of former premier Silvio Berlusconi, succeeds German Social Democrat Martin Schulz at a time of crisis for the European Union. Britain wants a divorce deal that needs the legislature’s blessing while old adversary Russia and old ally the United States both pose new threats to EU survivors holding together. Schulz’s tenure saw close cooperation with the centre-right head of the EU executive, Jean-Claude Juncker, but ended with recriminations over the end of a left-right grand coalition. That could spell trouble for the smooth passage of EU laws on a range of issues.

And the win for Tajani, who beat centre-left leader and fellow Italian Gianni Pittella by 351 votes to 282 in a fourth-round runoff, gives the right a lock on three pivotal EU political institutions. That has stirred some calls for change from either Juncker at the European Commission or Donald Tusk, who chairs the European Council of national leaders. However, there is no clear consensus for such changes. Tajani, mindful of the scars left by an unusually bruising battle over a post which can be a powerful influence on which EU rules are made, promised to be “a president for all of you”. His eventual victory came with backing from pro-EU liberals as well as from the ruling conservative parties of Britain and Poland, both of them sharply critical of the EU’s failings. They bristle at the EU impinging on national sovereignty and see it as bureaucratic and wasteful.

Not THE world, but THEIR world.

• The Bankers Who Fixed The World’s Most Important Number (G.)

By the time the market opened in London, Lehman’s demise was official. Hayes instant-messaged one of his trusted brokers in the City to tell him what direction he wanted Libor to move. Typically, he skipped any pleasantries. “Cash mate, really need it lower,” Hayes typed. “What’s the score?” The broker sent his assurances and, over the next few hours, followed a well-worn routine. Whenever one of the Libor-setting banks called and asked his opinion on what the benchmark would do, the broker said – incredibly, given the calamitous news – that the rate was likely to fall. Libor may have featured in hundreds of trillions of dollars of loans and derivatives, but this was how it was set: conversations among men who were, depending on the day, indifferent, optimistic or frightened.

When Hayes checked the official figures later that night, he saw to his relief that yen Libor had fallen. Hayes was not out of danger yet. Over the next three days, he barely left the office, surviving on three hours of sleep a night. As the market convulsed, his profit and loss jumped around from minus $20 million to plus $8 million in just hours, but Hayes had another ace up his sleeve. ICAP, the world’s biggest inter-dealer broker, sent out a “Libor prediction” email each day at around 7am to the individuals at the banks responsible for submitting Libor. Hayes messaged an insider at ICAP and instructed him to skew the predictions lower. Amid the chaos, Libor was the one thing Hayes believed he had some control over. He cranked his network to the max, offering his brokers extra payments for their cooperation and calling in favours at banks around the world.

By Thursday, 18 September, Hayes was exhausted. This was the moment he had been working towards all week. If Libor jumped today, all his puppeteering would have been for nothing. Libor moves in increments called basis points, equal to one one-hundredth of a percentage point, and every tick was worth roughly $750,000 to his bottom line. For the umpteenth time since Lehman faltered, Hayes reached out to his brokers in London. “I need you to keep it as low as possible, all right?” he told one of them in a message. “I’ll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?” “All right,” the broker repeated. “I’m a man of my word,” Hayes said. “I know you are. No, that’s done, right, leave it to me,” the broker said.

Yes, you should be scared. For your children.

• Percentage of World Population Age 65+ in 2015 and 2050 (BR)

Debt Rattle August 1 2016

Aug 012016

August 1, 2016 Posted by Raúl Ilargi Meijer at 8:54 am Finance Tagged with: Abenomics, capital controls, glut, oil, PMI, poverty, Shale, Social Security Comments Off

Wyland Stanley Marmon touring car at Yosemite 1919

• Abe’s Fiscal Plan Follows a Long Road of Packages That Failed (BBG)

• China July Factory Activity Unexpectedly Dips (R.)

• China’s Love Affair With U.S. Real Estate Fades (BBG)

• For Social Security “Time’s Up – The Pain Must Begin Now” (CH)

• Impact Of Poverty Costs The UK £78 Billion A Year (G.)

• Did Germany Just Blink? (DQ)

• US Shale Producers Weather Oil Price Storm (AEP)

• Growing Oil Glut Shows Investors There’s Nowhere to Go But Down (BBG)

• Amid Britain Nuclear Debacle, China’s Xinhua Decries ‘Suspicion’ (R.)

• Greece Eases Back On Capital Controls In Bid To Reverse Currency Flight (G.)

• Building a Progressive International (YV)

• India Rescues 10,000 Starving Workers In Saudi Arabia (Sky)

There’s a hole in the bucket, dear Shinzo.

• Abe’s Fiscal Plan Follows a Long Road of Packages That Failed (BBG)

Prime Minister Shinzo Abe’s “bold” plan to revive the economy with a $273 billion package leaves him traveling down a well-trod path: it marks the 26th dose of fiscal stimulus since the country’s epic markets crash in 1990, in a warning for its effectiveness. The nation has had extra budgets every year since at least 1993, and even with that extra spending, it has still had six recessions, an entrenched period of deflation, soaring debt and a rapidly aging population that has left the world’s third-largest economy still struggling to get off the floor. While some analysts say the latest round of spending may buy the economy time, few are convinced it will be enough to dramatically change the course.

First off, much of the 28 trillion yen announced by Abe last week won’t be spending, but lending. And if previous episodes are any guide, an initial sugar hit to markets and growth will quickly fade amid a realization that extra spending does little to cure the economy’s underlying problems. A Goldman Sachs study found that markets gave up their gains in the first month after the cabinet approved the stimulus in 18 of the 25 packages it studied since 1990. Skeptics of Abe’s latest plan aren’t hard to find. Instead of adding to a debt pile already more than twice the economy’s size, more should be done to tackle thorny structural problems such as a declining labor force and protected industries, according to Naoyuki Shinohara, a former Japanese finance ministry official.

“Looking at the history of the Japanese economy, there have been lots of fiscal stimulus packages,” according to Shinohara, who was a top official at the IMF until last year. “But the end result is that it didn’t have much impact on the potential growth rate.”

A lot of seemingly contradictory reports today. Manufacturing PMI down, but services PMI up.

• China July Factory Activity Unexpectedly Dips (R.)

Activity in China’s manufacturing sector eased unexpectedly in July as orders cooled and flooding disrupted business, an official survey showed, adding to fears the economy will slow in coming months unless the government steps up a huge spending spree. While a similar private survey showed business picked up for the first time in 17 months, the increase was only slight and the much larger official survey on Monday suggested China’s overall industrial activity remains sluggish at best. Both surveys showed persistently weak demand at home and abroad were forcing companies to continue to shed jobs, even as Beijing vows to shut more industrial overcapacity that could lead to larger layoffs.

And other readings on Monday pointed to signs of cooling in both the construction industry and real estate, which were key drivers behind better-than-expected economic growth in the second quarter. The official Purchasing Managers’ Index (PMI) eased to 49.9 in July from the previous month’s 50.0 and below the 50-point mark that separates growth from contraction on a monthly basis. While the July reading showed only a slight loss of momentum, Nomura’s chief China economist Yang Zhao said it may be a sign that the impact of stimulus measures earlier this year may already be wearing off. That has created a dilemma for Beijing as the Communist Party seeks to deliver on official targets, even as concerns grow about the risks of prolonged, debt-fueled stimulus.

“The government has realized the downward pressure is great but they’ve also realized that stimulus to stimulate the economy continuously is not a good idea and they want to continue to focus on reform and deleveraging,” Zhao said.

Monopoly money running out.

• China’s Love Affair With U.S. Real Estate Fades (BBG)

For David Wong, the business of selling homes isn’t as good this year as it was in 2015, and he’s blaming that on a decline in customers from China. “The residential-property market here, especially for those priced between $2.5 million to $3 million, has been affected by China’s measures to control capital flight,” said the New York City-based Keller Williams Realty Landmark broker. “You need to cut the price, or it may take a real long time.” Wong is not the only one who has felt the cooling in the U.S. real estate market for foreign buyers. Total sales to Chinese buyers in the 12 months through March fell for the first time since 2011, to $27.3 billion from $28.6 billion a year earlier, according to an annual research report released by the National Association of Realtors.

The number of properties purchased by Chinese also declined to 29,195 units from 34,327 units. While the total international sales saw its first decline in three years, the 1.25% pace is slower than 4.5% recorded for Chinese buying. In terms of U.S. dollar value, the total share of Chinese buying of international sales dropped from 27.5% to 26.7%. [..] The yuan began plummeting in August, driving the Chinese currency to a five-year low versus the U.S. dollar. The Chinese authorities have been compelled to increasingly tighten the noose on cross-border capital flows to defend the yuan and to slow down the burnout of the nation’s foreign-exchange reserves since then. This includes increasing scrutiny of transfers overseas, to closely check whether individuals send money abroad by breaking up foreign-currency purchases into smaller transactions.

This is why I recently wrote that a basic income should replace old-age provisions.

• For Social Security “Time’s Up – The Pain Must Begin Now” (CH)

In 2010, Social Security (OASDI) unofficially went bankrupt. For the first time since the enactment of the SS amendments of 1983, annual outlays for the program exceeded receipts (excluding interest credited to the trust funds). The deficit has grown every year since 2010 and is now up to 8% annually and is projected to be 31% in 2026 and 44% by ’46. The chart below highlights the OASDI annual surplus growth (blue columns) and total surplus (red line). This chart includes interest payments to the trust funds and thus looks a little better than the unvarnished reality. For a little perspective, the program pays more than 60 million beneficiaries (almost 1 in 5 Americans), OASDI (Old Age, Survivors, Disability Insurance) represents 25% of all annual federal spending, and for more than half of these beneficiaries these benefits represent their sole or primary source of income.

The good news is since SS’s inception in 1935, the program collected $2.9 trillion more than it paid out. The bad news is that the $2.9 trillion has already been spent. But by law, Social Security is allowed to pretend that the “trust fund” money is still there and continue paying out full benefits until that fictitious $2.9 trillion is burned through. To do this, the Treasury will issue another $2.9 trillion over the next 13 years to be sold as marketable debt so it may again be spent (just moving the liability from one side of the ledger, the Intergovernmental, to the other, public marketable). However, according to the CBO, Social Security will have burnt through the pretend trust fund money (that wasn’t there to begin with) by 2029.

Below, the annual OASDI surplus (in red) peaking in 2007, matched against the annual growth of the 25-64yr/old (in blue) and 65+yr/old (grey) populations. The impact of the collapse of the growth among the working age population and swelling elderly population is plain to see. And it will get far worse before it eventually gets better. [..] Americans turning 67 in 2030 will be told that after being mandated to pay their full share of SS taxation throughout their working lifetime, they will not see anything near their full benefits in their latter years. However, those in retirement now and those retiring between now and 2029 are being paid in full despite the shortfall in revenue. They will be paid in full until this arbitrary “trust fund” is theoretically drained.

I have no intention of funding, in full, current retirees benefits with my tax dollars only to know I will hit the finish line with a 30%+ reduction that will only worsen over time. My goal is to pay it forward to my kids and then do my best to never to be a burden to them. The SS (OASDI) benefits must be cut now to be in line with revenues. Raise taxes, lower benefits…your choice. But I’m not about to make the old whole so I can then subsequently see my generation go bankrupt in my latter years.

Perfect fit for a basic income. But it won’t come. Austerity as controlled poverty is a power(ful) tool.

• Impact Of Poverty Costs The UK £78 Billion A Year (G.)

Dealing with the effects of poverty costs the public purse £78bn a year, or £1,200 for every person in the UK, according to the first wide-ranging report into the impact of deprivation on Britain’s finances. The Joseph Rowntree Foundation (JRF) estimates that the impact and cost of poverty accounts for £1 in every £5 spent on public services. The biggest chunk of the £78bn figure comes from treating health conditions associated with poverty, which amounts to £29bn, while the costs for schools and police are also significant. A further £9bn is linked to the cost of benefits and lost tax revenues. The research, carried out for JRF by Heriot-Watt and Loughborough universities, is designed to highlight the economic case, on top of the social arguments, for tackling poverty in the UK.

The prime minister, Theresa May, has made cutting inequality a central pledge. Julia Unwin, the chief executive of the foundation, said: “It is unacceptable that in the 21st century, so many people in our country are being held back by poverty. But poverty doesn’t just hold individuals back, it holds back our economy too. “Taking real action to tackle the causes of poverty would bring down the huge £78bn yearly cost of dealing with its effects, and mean more money to create better public services and support the economy. UK poverty is a problem that can be solved if government, businesses, employers and individuals work together.”

“But did anyone tell you that Germany from 2009 onwards bailed out its failing banks with public money? Banks, that is, with holes in their balance sheets visible from the Moon.”

• Did Germany Just Blink? (DQ)

Put simply, the EU is a half-way house with too much democracy and nothing in the way of transfer union. “There are too many moving parts in the electoral politics of 28 nation states, and too many conceivable random-like events that could push political and economic developments in one direction or another, with impossible-to-predict consequences and timelines,” the agency added. The perfect case in point is Italy’s banking crisis. If the country’s struggling banks are not saved with a combination of public and private money — a process that, to all intents and purposes, began on Friday with the announcement of Monte dei Paschi’s suspension of the ECB’s stress test as well as a €5 billion capital expansion later this year — the resulting carnage could unleash not only a tsunami of financial contagion but also an unstoppable groundswell of political opposition to the EU.

For a taste of just how disastrous the political fallout would be for Italy’s embattled premier, Matteo Renzi, here’s an excerpt from a furious tirade given by Italian financial journalist Paolo Barnard on prime-time TV, addressing Renzi directly:

“You went to meet Mrs. Merkel to ask for a minor public funded bail-out of Italian banks and you got a sharp NO. But did anyone tell you that Germany from 2009 onwards bailed out its failing banks with public money? “Banks, that is, with holes in their balance sheets visible from the Moon.

Germany bailed them out to the tune of €704 billion. It was all paid for by European taxpayers’ money, public funds that is. “It was done through the EU Commission of Mr Barroso and by Mr Mario Draghi at the ECB. Didn’t you know that Mr Renzi? Couldn’t you have barked this right into Ms Merkel’s face?”

Barnard rounded off his rant with a rallying call for Italians to follow the UK’s example and demand an exit from the EU — a prospect that should be taken very seriously given that one of the manifesto pledges of Italy’s rising opposition party, the 5-Star Movement, is to call a referendum on Italy’s membership of the euro.

Ambrose has religion. He believes!

• US Shale Producers Weather Oil Price Storm (AEP)

Opec’s worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has failed to break the back of the US shale industry. The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is an illusive victory. North America’s hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.

Scott Sheffield, the outgoing chief of Pioneer Natural Resources, threw down the gauntlet last week – with some poetic licence – claiming that his pre-tax production costs in the Permian Basin of West Texas have fallen to $2.25 a barrel. “Definitely we can compete with anything that Saudi Arabia has. We have the best rock,” he said. Revolutionary improvements in drilling technology and data analytics that have changed the cost calculus faster than most thought possible. The “decline rate” of production over the first four months of each well was 90pc a decade ago for US frackers. This dropped to 31pc in 2012. It is now 18pc. Drillers have learned how to extract more. Mr Sheffield said the Permian is as bountiful as the giant Ghawar field in Saudi Arabia and can expand from 2m to 5m barrels a day even if the price of oil never rises above $55.

His company has cut production costs by 26pc over the last year alone. Pioneer is now so efficient that it already adding five new rigs despite today’s depressed prices in the low $40s, and it is not alone. The Baker Hughes count of North America oil rigs has risen for seven out of the last eight weeks to 374, and this understates the effect. Multi-pad drilling means that three wells are now routinely drilled from the same rig, and sometimes six or more. Average well productivity has risen fivefold in the Permian since early 2012. Consultants Wood Mackenzie estimated in a recent report that full-cycle break-even costs have fallen to $37 at Wolfcamp and Bone Spring in the Permian, and to $35 in the South Central Oklahoma Oil Province. The majority of US shale fields are now viable at $60.

Once again: demand.

• Growing Oil Glut Shows Investors There’s Nowhere to Go But Down (BBG)

Money managers have never been more certain that oil prices will drop. They increased bets on falling crude by the most ever as stockpiles climbed to the highest seasonal levels in at least two decades, nudging prices toward a bear market. The excess supply hammered the second-quarter earnings of Exxon Mobil and Chevron. Inventories are near the 97-year high reached in April as oil drillers boosted rigs for a fifth consecutive week. “The rise in supplies will add more downward pressure,” said Michael Corcelli, chief investment officer at Alexander Alternative Capital, a Miami-based hedge fund. “It will be a long time before we can drain the excess.”

Hedge funds pushed up their short position in West Texas Intermediate crude by 38,897 futures and options combined during the week ended July 26, according to the Commodity Futures Trading Commission. It was the biggest increase in data going back to 2006. WTI dropped 3.9% to $42.92 a barrel in the report week, and traded at $41.75 at 12:20 p.m. Singapore time. WTI fell by 14% in July, the biggest monthly decline in a year. It’s down by 19% since early June, bringing it close to the 20% drop that would characterize a bear market.

U.S. crude supplies rose by 1.67 million barrels to 521.1 million in the week ended July 22, according to U.S. Energy Information Administration data. Stockpiles reached 543.4 million barrels in the week ended April 29, the highest since 1929. Gasoline inventories expanded for a third week to 241.5 million barrels, the most since April. “The flow is solidly bearish,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It reflects a recognition that the market is, at least for the time being, oversupplied.”

Hinkley Point is about the worst British plan ever, and that’s saying something.

• Amid Britain Nuclear Debacle, China’s Xinhua Decries ‘Suspicion’ (R.)

China will not tolerate “unwanted accusations” about its investments in Britain, a country that cannot risk driving away other Chinese investors as it looks for post-Brexit trade deals, China’s official Xinhua news agency said on Monday. British Prime Minister Theresa May was concerned about the security implications of a planned Chinese investment in the Hinkley Point nuclear plant and intervened to delay the project, a former colleague and a source said on Saturday.The plan by France’s EDF to build two reactors with financial backing from a Chinese state-owned company was championed by May’s predecessor David Cameron as a sign of Britain’s openness to foreign investment.

But just hours before a signing ceremony was due to take place on Friday, May’s new government said it would review the project again, raising concern that Britain’s approach to infrastructure deals, energy supply and foreign investment may be changing. China General Nuclear Power, which would hold a stake of about a third in the project, said on Saturday it respected the decision of the new British government to take the time needed to familiarise itself with the program. Xinhua, in an English-language commentary, said China understood and respected Britain’s requirement for more time to think about the deal. “However, what China cannot understand is the ‘suspicious approach’ that comes from nowhere to Chinese investment in making the postponement,” it said.

The project will create thousands of jobs and create much needed energy following the closure of coal-fired power plants, Xinhua added, dismissing fears China would put “back-doors” into the project. “For a kingdom striving to pull itself out of the Brexit aftermath, openness is the key way out,” it said.

But please don’t think this means problems are over.

• Greece Eases Back On Capital Controls In Bid To Reverse Currency Flight (G.)

More than a year after they were imposed, capital controls in Greece will be substantially eased on Monday in a bid to lure back billions of euros spirited out of the country, or stuffed under mattresses, at the height of the eurozone crisis. The relaxation of restrictions, whose announcement sent shockwaves through markets and the single currency, is aimed squarely at boosting banking confidence in the eurozone’s weakest member. The Greek finance ministry estimates around €3bn-€4bn could soon be returned to a system depleted of more than €30bn in deposits in the run-up to Athens sealing a third bailout to save it from economic collapse last summer.

“The objective is to re-attract money back to the banking system which in turn will create more confidence in it,” said Prof George Pagoulatos who teaches European politics and economy at Athens University. “And there are several billion that can be returned. People just need to feel safe.” As such the loosening of measures initially seen as an aberration in the 19-strong bloc is being viewed as a test case: of the faith Greeks have in economic recovery and the ability of their leftist-led government to oversee it. New deposits will not be subject to capital controls; limits on withdrawals of money brought in from abroad will also be higher; and ATM withdrawals will be raised to €840 every two weeks in a reversal of the policy that allowed depositors to take out no more than €420 every week.

[..] From 2008, the year before the country’s debt crisis erupted, until the end of 2015, an estimated 244,700 small- and medium-sized businesses have closed with many more expected to declare bankruptcy this year. The latest move, which follows easing of transactions abroad, is directed at small entrepreneurs, for years the lifeline of the Greek economy, and individual depositors. But while economists are calling the easing of restrictions a significant step to normalisation, Greek finances are far from repaired. Challenges for the prime minister, Alexis Tsipras, are expected to peak – along with social discontent – in the autumn when his fragile two-party coalition is forced to meet more milestones and creditor demands, starting with the potentially explosive issue of labour reform. Further disbursement of aid – €2.8bn – will depend exclusively on the painful measures being passed.

The Great Deflation.

• Building a Progressive International (YV)

Politics in the advanced economies of the West is in the throes of a political shakeup unseen since the 1930s. The Great Deflation now gripping both sides of the Atlantic is reviving political forces that had lain dormant since the end of World War II. Passion is returning to politics, but not in the manner many of us had hoped it would. The right has become animated by an anti-establishment fervor that was, until recently, the preserve of the left. In the United States, Donald Trump, the Republican presidential nominee, is taking Hillary Clinton, his Democratic opponent, to task – quite credibly – for her close ties to Wall Street, eagerness to invade foreign lands, and readiness to embrace free-trade agreements that have undermined millions of workers’ living standards.

In the United Kingdom, Brexit has cast ardent Thatcherites in the role of enthusiastic defenders of the National Health Service. This shift is not unprecedented. The populist right has traditionally adopted quasi-leftist rhetoric in times of deflation. Anyone who can stomach revisiting the speeches of leading fascists and Nazis of the 1920s and 1930s will find appeals – Benito Mussolini’s paeans to social security or Joseph Goebbels’ stinging criticism of the financial sector – that seem, at first glance, indistinguishable from progressive goals.
What we are experiencing today is the natural repercussion of the implosion of centrist politics, owing to a crisis of global capitalism in which a financial crash led to a Great Recession and then to today’s Great Deflation.

The right is simply repeating its old trick of drawing upon the righteous anger and frustrated aspirations of the victims to advance its own repugnant agenda. It all began with the death of the international monetary system established at Bretton Woods in 1944, which had forged a post-war political consensus based on a “mixed” economy, limits on inequality, and strong financial regulation. That “golden era” ended with the so-called Nixon shock in 1971, when America lost the surpluses that, recycled internationally, kept global capitalism stable.

What a crazy story.

• India Rescues 10,000 Starving Workers In Saudi Arabia (Sky)

The Indian government has come to the rescue of more than 10,000 of their starving citizens in Saudi Arabia. Some 16,000 kg of food was distributed on Saturday night by the consulate to penniless workers who’ve lost their jobs and not been paid. The issue came to light when a man tweeted India’s foreign minister Sushma Swaraj saying around 800 Indians had not eaten for three days in Jeddah, asking her to intervene. Investigations found that there were thousands starving across Saudi Arabia and Kuwait. Ms Swaraj instructed the consulate to make sure no unemployed worker is to go without food, and is said to have monitored the situation on an hourly basis.

She tweeted: “Large number of Indians have lost their jobs in Saudi Arabia and Kuwait. The employers have not paid wages, closed down their factories. “The number of Indian workers facing food crisis in Saudi Arabia is over ten thousand.” Many workers in Saudi Arabia and Kuwait have been living in inhumane conditions after losing their jobs. Hundreds have been laid off without being paid their wages. Indian newspapers reported that one firm – the Saudi Oger company – did not pay wages for seven months. Of its 50,000 employees, 4,000 were Indians. India’s Consul General Mohammad Noor Rehman Sheikh, told a news agency: “For the last seven months these Indian workers of Saudi Oger were not getting their salaries and the company had also stopped providing food to these workers.”

[..] India’s junior foreign minister VK Singh has been tasked to travel to Saudi Arabia to put in place an evacuation process which is due to begin soon. He had successfully led the evacuation of a large number of Indians from war-torn Yemen and most recently from South Sudan. There are more than three million Indians living and working in Saudi Arabia and more than 800,000 in Kuwait. Falling oil prices have hit the economy of Saudi Arabia and other Gulf countries.

The Peak Oil Paradox -Revisited-

Jul 192016

July 19, 2016 Posted by Raúl Ilargi Meijer at 3:13 pm Finance Tagged with: conventional, decline, Hubbert, paradox, peak oil, scarcity, Shale, unconventional 14 Responses »

M. King Hubbert

It’s been a while since we posted an article by our friend Euan Mearns, who was active at The Oil Drum at the same time Nicole and I were. Is it really 11 years ago that started, and almost 9 since we left? You know the drill: we ‘departed’ because they didn’t want us to cover finance, which we said was the more immediate crisis, yada yada. Euan stayed on for longer, and the once unequalled Oil Drum is no more.

On one of our long tours, which were based around Nicole’s brilliant public speaking engagements, we went to see Euan in Scotland, he teaches at Aberdeen University. I think it was 2011?! An honor. Anyway, always a friend.

And there’s ono-one I can think of who’d be better at explaining the Peak Oil Paradox in today’s context. So here’s a good friend of the Automatic Earth, Euan Mearns:

Euan Mearns: Back in the mid-noughties the peak oil meme gained significant traction in part due to The Oil Drum blog where I played a prominent role. Sharply rising oil price, OPEC spare capacity falling below 2 Mbpd and the decline of the North Sea were definite signs of scarcity and many believed that peak oil was at hand and the world as we knew it was about to end. Forecasts of oil production crashing in the coming months were ten a penny. And yet between 2008, when the oil price peaked, and 2015, global crude+condensate+NGL (C+C+NGL) production has risen by 8.85 Mbpd to 91.67 Mbpd. That is by over 10%. Peak oilers need to admit they were wrong then. Or were they?

Introduction

It is useful to begin with a look at what peak oil was all about. This definition from Wikipedia is as good as any:

Peak oil, an event based on M. King Hubbert’s theory, is the point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter terminal decline. Peak oil theory is based on the observed rise, peak, fall, and depletion of aggregate production rate in oil fields over time.

Those who engaged in the debate can be divided into two broad classes of individual: 1) those who wanted to try and understand oil resources, reserves, production and depletion rates based on a myriad of data sets and analysis techniques with a view to predicting when peak oil may occur and 2) those who speculated about the consequences of peak oil upon society. Such speculation normally warned of dire consequences of a world running short of transport fuel and affordable energy leading to resource wars and general mayhem. And none of this ever came to pass unless we want to link mayhem in Iraq*, Syria, Yemen, Sudan and Nigeria to high food prices and hence peak oil. In which case we may also want to link the European migrant crisis and Brexit to the same.

[* One needs to recall that GWI was precipitated over Kuwait stealing oil from Iraq, from a shared field on the Kuwait-Iraq border, leading to the Iraqi invasion of 1991.]

The peak oil debate on The Oil Drum was a lightning conductor for doomers of every flavour – peak oil doom (broadened to resource depletion doom), economic doom and environmental doom being the three main courses on the menu. The discussion was eventually hijacked by Greens and Green thinkers, who, not content with waiting for doomsday to happen, set about manufacturing arguments and data to hasten the day. For example, fossil fuel scarcity has morphed into stranded fossil fuel reserves that cannot be burned because of the CO2 produced, accompanied by recommendations to divest fossil fuel companies from public portfolios. Somewhat surprisingly, these ideas have gained traction in The United Nations, The European Union and Academia.

It is not my intention to dig too deeply into the past. Firmly belonging to the group of data analysts, in this post I want to take a look at two different data sets to explore where peak oil stands today. Is it dead and buried forever, or is it lurking in the shadows, waiting to derail the global economy again?

The USA and Hubbert’s Peak

The USA once was the poster child of peak oil. The Peak Oil theory was first formulated there by M. King Hubbert who in 1956 famously forecast that US production would peak around 1970 and thereafter enter an era of never-ending decline (Figure 1). Hubbert’s original paper is well worth a read.

Figure 1 From Hubbert’s 1956 paper shows the peak and fall in US production for ultimate recovery of 150 and 200 billion barrels. The 200 billion barrel model shows a peak of 8.2 Mbpd around 1970 that proved to be uncannily accurate.

Looking to Figure 2 we see that Hubbert’s prediction almost came true. US production did indeed peak in 1970 at 9.64 Mbpd while Hubbert’s forecast was a little lower at 8.2 Mbpd. The post-peak decline was interrupted by the discovery of oil on the N slope of Alaska and opening of the Aleyska pipeline in 1977 that was not considered in Hubbert’s work. Herein lies one of the key weaknesses of using Hubbert’s methodology. One needs to take into account known unknowns. We know for sure that unexpected discoveries and unexpected technology developments will occur, it’s just we don’t know, what, when and how big.

Figure 2 In red, US crude oil production from the EIA shows progressive growth from 1900 to 1970. The oil industry believed this growth would continue forever and was somewhat aghast when M. King Hubbert warned the party may end in 1970 which it duly did. The discovery of oil in Alaska created a shoulder on the decline curve. But apart from that, Hubbert’s forecast remained good until 2008 when the shale drillers and frackers went to work. Hubbert’s 1970 peak was matched by crude oil in 2015 and exceeded by C+C+NGL that same year.

Following the secondary Alaska peak of 8.97 Mbpd (crude oil) in 1985, production continued to decline and reached a low of 5 Mbpd (crude oil) in 2008. But since then, the rest is history. The shale drillers and frackers went to work producing an astonishing turnaround that most peak oil commentators, including me, would never have dreamt was possible.

Before going on to contemplate the consequences of the shale revolution, I want to dwell for a moment on the production and drilling activity in the period 1955 to 1990. 1955 to 1970 we see that total rigs* declined from 2683 to 1027. At the same time crude oil production grew from 6.8 to 9.6 Mbpd. It was in 1956 that Hubbert made his forecast and in the years that followed, US production grew by 41% while drilling rigs declined by 62%. No wonder the industry scoffed at Hubbert.

[* Note that Baker Hughes’ archive pre-1987 does not break out oil and gas rigs from the total.]

But then post 1970, as production went into reverse, the drilling industry went into top gear, with operational rigs rising sharply to a peak of 3974 in 1981. But to no avail, production in the contiguous 48 states (excluding Alaska) continued to plunge no matter how hard the oil and its drilling industry tried to avert it. Hubbert must surely have been proven right, and his methodology must surely be applicable not only to the US but to the World stage?

The oil price crash of 1981 put paid to the drilling frenzy with rig count returning to the sub-1000 unit baseline where it would remain until the turn of the century. The bear market in oil ended in 1998 and by the year 2000, the US drilling industry went back to work, drilling conventional vertical wells at first but with horizontal drilling of shale kicking in around 2004/05. Production would turn around in 2009.

Those who would speak out against peak oil in the mid-noughties, like Daniel Yergin and Mike Lynch, would argue that high price would result in greater drilling activity and technical innovation that would drive production to whatever level society demanded. They would also point out that new oil provinces would be found, allowing the resource base to grow. And they too must surely have been proved to be correct.

But there is a sting in the tail of this success story since drilling and producing from shale is expensive, it is dependent upon high price to succeed. But over-production of LTO has led to the price collapse, starving the shale drilling industry of cash flow and ability to borrow, leading to widespread bankruptcy. In fact informed commentators like Art Berman and Rune Likvern have long maintained that the shale industry has never turned a profit and has survived via a rising mountain of never ending debt. Economists will argue, however, that improved technology and efficiency will reduce costs and make shale competitive with other sources of oil and energy. We shall see.

Herein lies a serious conundrum for the oil industry and OECD economies. They may be able to run on shale oil (and gas) for a while at least, but the industry cannot function properly within current market conditions. Either prices need to be set at a level where a profit can be made, or production capped to protect price and market share. This of course would stifle innovation and is not likely to happen until there are queues at gas stations.

2008-2015 Winners and Losers

BP report oil production data for 54 countries / areas including 5 “other” categories that make up the balance of small producers in any region. I have deducted 2008 production (barrels per day) from 2015 production and sorted the data on the size of this difference. The data are plotted in Figure 3.

Figure 3 The oil production winners to the left and losers to the right, 2008 to 2015. The USA is the clear winner while Libya is the clear loser. About half of the countries show very little change. Click chart for a large readable version.

What we see is that production increased in 27 countries and decreased in the other 27 countries. One thing we can say is that despite prolonged record-high oil price, production still fell in half of the world’s producing countries. We can also see that in about half of these countries any rise or fall was barely significant and it is only in a handful of countries at either end of the spectrum where significant gains and losses were registered. Let’s take a closer look at these.

Figure 4 The top ten winners, 2008 to 2015.

The first thing to observe from Figure 4 is that the USA and Canada combined contributed 7.096 Mbpd of the 8.852 Mbpd gain 2008-2015. That is to say that unconventional light tight oil (LTO) production from the USA and LTO plus tar sands production from Canada make up 80% of the global gain in oil production (C+C+NGL). Iraq returning to market in the aftermath of the 2003 war makes up 18%. In other words expensive unconventional oil + Iraq makes up virtually all of the gains although concise allocation of gains and losses is rather more complex than that. Saudi Arabia, Russia, The UAE, Brazil, China, Qatar and Colombia have all registered real gains (5.258 Mbpd) that have been partly cancelled by production losses elsewhere.

Figure 5 The top ten losers, 2008 to 2015.

Looking to the losers (Figure 5) we see that Libya, Iran, Syria, Sudan and Yemen contribute 2.828 Mbpd of lost production that may be attributed to war, civil unrest or sanctions. I am not going to include Venezuela and Algeria with this group and will instead attribute declines in these countries (0.979 Mbpd) to natural reservoir depletion, although a slow down in OECD technical assistance in these countries may have exacerbated this situation. That leaves the UK, Mexico and Norway as the three large OECD producers that register a significant decline (1.687 Mbpd) attributed to natural declines in mature offshore provinces. Let me try to summarise these trends in a balance sheet:

Figure 6 The winner and loser balance sheet.

We see that these 20 countries account for 8.463 Mbpd net gain compared with the global figure of 8.85 Mbpd. We are capturing the bulk of the data and the main trends. In summary:

Unconventional LTO and tar sands + 7.096 Mbpd
Net conventional gains + 2.592 Mbpd
Net conflict losses -1.225 Mbpd

The sobering point here for the oil industry and society to grasp is that during 8 years when the oil price was mainly over $100/bbl, only 2.592 Mbpd of conventional production was added. That is about 3.1%. Global conventional oil production was all but static. And the question to ask now is what will happen in the aftermath of the oil price crash?

One lesson from recent history is that the oil industry and oil production had substantial momentum. It is nearly two years since the price crash, and while global production is now falling slowly it remains in surplus compared with demand. This has given the industry plenty time to cut staff, drilling activity and to delay or cancel projects that depend upon high price. In a post-mature province like the North Sea, the current crisis will also hasten decommissioning. It seems highly likely that momentum on the down leg will be replaced by inertia on the up leg with a diminished industry unwilling to jump back on the band wagon when price finally climbs back towards $100 / bbl, which it surely will do one day in the not too distant future.

For many years I pinned my colours to peak oil occurring in the window 2012±3 years. Noting that the near-term peak was 97.08 Mbpd on July 15 2015 it is time to dust off that opinion (Figure 7). The decline since the July 2015 peak is of the order 2% per annum (excluding the Fort McMurray impact). It seems reasonable to presume that this decline may continue for another two years, or even longer. That would leave global production at around 92 Mbpd mid 2018. It is nigh impossible to predict what will happen, especially in a world over run by political and economic uncertainty. Another major spike in oil price seems plausible and this could perhaps destabilise certain economies, banks and currencies. Should this occur, another price collapse will follow, and it’s not clear that production will ever recover to the July 2015 peak. Much will depend upon the future of the US shale industry and whether or not drilling for shale oil and gas gains traction in other countries.

Figure 7 The chart shows in blue global total liquids production (C+C+NGL+refinery gains+biofuels) according to the Energy Information Agency (EIA). The near term peak was 97.08 Mbpd in July 2015. The decline since then, excluding the Fort McMurray wild fire impact, is of the order 2% per annum. In the current low price environment, it is difficult to see anything arresting this decline before the end of next year. In fact, decline may accelerate and go on beyond the end of 2017. The dashed line shows the demand trajectory and scheduled balancing of supply and demand by the end of this year. By the end of next year the supply deficit could be of the order 3 Mbpd which on an annualised basis would result in a stock draw of 1.1 billion barrels. But remember, forecasts are ten a penny 🙂

Concluding Thoughts

M. King Hubbert’s forecast for US oil production and the methodology it was based on has been proven to be sound when applied to conventional oil pools in the USA. When decline takes hold in any basin or province, it is extremely difficult to reverse even with a period of sustained high price and the best seismic imaging and drilling technology in the world.
On this basis we can surmise that global conventional oil production will peak one day with unpredictable consequences for the global economy and humanity. It is just possible that the near term peak in production of 97.08 Mbpd in July 2015 may turn out to be the all-time high.
Economists who argued that scarcity would lead to higher price that in turn would lead to higher drilling activity and innovation have also been proven to be correct. Much will depend upon Man’s ability to continue to innovate and to reduce the cost of drilling for LTO in order to turn a profit at today’s price levels. If the shale industry is unable to turn a profit then it will surely perish without State intervention in the market.
But from 2008 to 2015, oil production actually fell in 27 of 54 countries despite record high price. Thus, while peak oil critics have been proven right in North America they have been proven wrong in half of the World’s producing countries.
Should the shale industry perish, then it becomes highly likely that Mankind will face severe liquid fuel shortages in the years ahead. The future will then depend upon substitution and our ability to innovate within other areas of the energy sector.

Debt Rattle February 20 2016

Feb 202016

February 20, 2016 Posted by Raúl Ilargi Meijer at 9:18 am Finance Tagged with: Brexit, China, commodities, crash, EMU, Fannie Mae, FX, oil, refugees, Shale 3 Responses »

Russell Lee “Yreka, California. Magazine stand” 1942

• Commodities’ $3.6 Trillion Black Hole (BBG)

• ‘It’s Going To Be Much Worse Than 2008’ (FS)

• Has The Market Crash Only Just Begun? (ZH)

• The US Economy Has Not Recovered and Will Not Recover (PCR)

• Worldwide M&A Activity Falls 23% (Reuters)

• US Shale Faces March Madness With $1.2 Billion in Interest Due (BBG)

• Moody’s Tallies 28 Downgrades In The Energy Sector Since December (MW)

• Why Oil Rout Is Hurting The Global Economy Instead Of Helping (MW)

• China’s Foreign Exchange Reserves Dwindling Rapidly (NY Times)

• China ‘Removes’ Top Securities Regulator (Reuters)

• Fannie Mae At Risk Of Needing A Bailout (FT)

• Independent Modelling May Show Way Out Of Oz Housing Bubble (SMH)

• Brexit!? France And Germany Can Not Wait (Gefira)

• Tsipras, Merkel, Hollande Agree On Open Borders Until March 6 Summit (Kath.)

• EU Summit On Refugee Crisis Ends In Disarray (FT)

• Two Children Drown Every Day On Average Trying To Reach Europe (UNHCR)

” If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5% of the total assets of all the world’s publicly traded banks. [..] U.S. subprime mortgages represented less than 1% of listed banks’ assets at the end of 2007.

• Commodities’ $3.6 Trillion Black Hole (BBG)

Markets rallied this week after it became clear that some of the world’s biggest oil producers were going to curb production to stop prices from dropping any further. The news also buoyed other commodities, from coal to iron ore. Then everything dropped on Thursday with oil. Before the global financial crisis, a rise in raw-materials prices used to be bad news for the economy and stocks in general. Since central bank easy-money policies took off, that’s become a thing of the past:

One possible explanation is the level of exposure that banks and investors have to the industry. The 5,000 biggest publicly traded companies tracked by Bloomberg in the iron and steel, metals and mining, and energy sectors have a combined $3.6 trillion in debt, according to their most recent financial reports, double what they had at the end of 2008. Much of the increase is due to money that was borrowed to dig mines and wells whose output, at previous prices, would have easily repaid most maturing bonds and loans. But as commodity prices have tumbled, so has the ability of companies to meet their obligations. The Bloomberg Commodity Index is still only 3.9% higher than a 25-year low hit on Jan. 20. Five years ago, those companies tracked by Bloomberg had more operating income than debt, on average. Now, it would take them more than eight years’ worth of current earnings, without provisioning for interest, taxes, depreciation or amortization, to clear their combined net obligations.

Yield-hungry bond investors sucked up a lot of the debt that was issued and now hold about $2.1 trillion of outstanding notes. They’ll be first to feel the pain considering Standard & Poor’s has already downgraded securities equivalent to 47% of that amount and made some 400 negative-ratings moves in the basic materials and energy sectors over the past 12 months alone. Such scale and depth is reminiscent of the way banks were slaughtered by ratings companies during the 2008 financial crisis. It’s unclear where the other portion of the $3.6 trillion in liabilities lies but probably, most of it is owed to banks. If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5% of the total assets of all the world’s publicly traded banks. That doesn’t seem very significant, or any cause for concern. But to put it in some context, U.S. subprime mortgages represented less than 1% of listed banks’ assets at the end of 2007.

“You have every major economic zone in the world in big, big trouble including the US and that is why I say this crisis has the potential of becoming much, much worse than the last one.” (h/t Stockman)

• ‘It’s Going To Be Much Worse Than 2008’ (FS)

Bert Dohmen, founder of Dohmen Capital Research, is uber-bearish and believes that it is time for investors to panic (before everyone else does) given a potential collapse of the stock market greater than what we saw in 2008. Here’s what he had to say on Thursday’s podcast: “Over a year ago we said that we are now in a transition year from a bull market to a bear market and from a growing economy to a recession—and this could be a very deep recession… now we see that we are finally there and more and more people are starting to realize it. But I raise the question here, ‘Is it too late to panic?’ Because…the advice given by so many analysts is ‘Don’t panic, don’t sell, don’t panic.’ And I say, ‘Yes, panic!’ And it’s not too late to panic. Panicking at the right time can save you a lot of money…

I predict in this bear market you will see the majority of stocks—majority meaning over 50% of the stocks—selling at $5 or less. Okay, just put that into your portfolio and see if you should be selling some stocks… We here other analysts say, ‘Oh, this is nothing like 2008’ and I agree with that, but I say that because I think it’s going to be much worse. 2008 was really a crisis triggered by the subprime mortgage market and the confetti that the Wall Street firms distributed around the world. They took those subprime mortgages, put them into pools, they sold participations in these pools, in these CDOs…they got a triple-AAA rating on all this garbage and sold it around the world and then they started defaulting. That caused ripples throughout the financial system and a global financial crisis, okay; but it was basically a mortgage crisis—that’s how it started.

Now, look at what we have currently. We have every major economic zone in the world in financial trouble. You have Japan with a debt-to-GDP ratio of 280%. You have China at 300% debt-to-GDP. China has over $34 trillion of debt and the banking system is flooded with bad loans. The best estimate—and this was two years ago I wrote a book called The Coming China Crisis—and I said the best estimate is that they have $11 trillion of bad loans in the banking system. $11 trillion is the annual GDP of China—this is huge! You have Europe, you have Latin America in trouble, you have Russia in big trouble, you have Saudi Arabia even thinking about doing an IPO on their big oil company in order to make up for the shortfall of oil revenues. You have every major economic zone in the world in big, big trouble including the US and that is why I say this crisis has the potential of becoming much, much worse than the last one.”

“..it can’t be done in a non-messy way.”

• Has The Market Crash Only Just Begun? (ZH)

Having successfully called the market’s retreat in the fall of 2015, Universa’s Mark Spitznagel is not taking a victory lap as he warns Bloomberg TV that “the crash has only just begun.” Investors are facing the most binary “let’s make a deal” market in history in Spitznagel’s view: choose Door #1 to bet on Keynesianism, central planners, and monetary interventionism; or Door #2 to bet on free markets and natural price discovery. “There is massive cognitive dissonance here,” Spitznagel explains as history teaches us that door #2 is the right choice… but it’s not possible to do that today as investors have been coerced to choose door #1, but when door #1 is slammed open “we will see that dreaded black swan monster.” That is what is going on right now:

“Investors want to go with The Fed when it’s working – like David Zervos… the problem is, when do you know that it is not working?” “At some point this stops working…” “the market is going through a resolution process, transitioning from the cognitive dissonance of Door #1 to the harsh reality of Door #2… if everyone were to change doors at the same time, that is a market crash… it can’t be done in a non-messy way.”

Must watch reality check behind the smoke and mirrors we call markets… (we note Mark’s excellent analogy starting at around 3:10)

Amen Paul Craig Roberts.

• The US Economy Has Not Recovered and Will Not Recover (PCR)

The US economy died when middle class jobs were offshored and when the financial system was deregulated. Jobs offshoring benefitted Wall Street, corporate executives, and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits. However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.

The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits. Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One source of this credit was the rise in housing prices that the Federal Reserves low interest rate policy made possible.

Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it. The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized. Under Fed chairman Bernanke the economy was kept going with Quantitative Easing, a massive increase in the money supply in order to bail out the “banks too big to fail.” Liquidity supplied by the Federal Reserve found its way into stock and bond prices and made those invested in these financial instruments richer.

Corporate executives helped to boost the stock market by using the companies’ profits and by taking out loans in order to buy back the companies’ stocks, thus further expanding debt. Those few benefitting from inflated financial asset prices produced by Quantitative Easing and buy-backs are a much smaller%age of the population than was affected by the Greenspan consumer credit expansion. A relatively few rich people are an insufficient number to drive the economy. The Federal Reserve’s zero interest rate policy was designed to support the balance sheets of the mega-banks and denied Americans interest income on their savings. This policy decreased the incomes of retirees and forced the elderly to reduce their consumption and/or draw down their savings more rapidly, leaving no safety net for heirs.

As trade plummets, so does M&A. So how are they going to pump up stock prices now? All buybacks all the time?

• Worldwide M&A Activity Falls 23% (Reuters)

Worldwide mergers and acquisitions deals have fallen 23% to $336 billion so far this year compared with last year, but cross-border activity by amount targeting U.S.-based companies reached a record high, Thomson Reuters data shows. After hitting a record high by deals value in 2015, worldwide M&A activity has been hurt this year by falling oil prices, worries about slowing growth in China and the health of the financial sector. A trio of deals for U.S. companies topped the list of M&A announced this week, including Chinese company Tianjin Tianhai’s $6.3 billion offer for U.S.-based Ingram Micro, bringing year-to-date China outbound M&A targeting the U.S. to $23.3 billion. China, Ireland and Canada account for 88% of cross-border acquirers in the U.S. so far this year. European M&A activity, which lagged the U.S. in 2015, has hit $92 billion so far this year, up 4% compared with a year ago, after state-owned ChemChina announced it would buy Swiss seeds and pesticides group Syngenta for $43 billion in February.

$9.8 billion for the year. With hedges disappearing.

• US Shale Faces March Madness With $1.2 Billion in Interest Due (BBG)

The U.S. shale industry must come up with $1.2 billion in interest payments by the end of March as $30-a-barrel oil makes it harder for companies to scrape up the cash needed to stay current on their debts. Almost half of the interest is owed by companies with junk-rated credit, according to data compiled by Bloomberg on 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. Energy XXI said in a filing Tuesday that it missed an $8.8 million interest payment. The following day, SandRidge announced that it didn’t make a $21.7 million interest payment. “You’ve seen two of these happen in two days, and I wouldn’t be surprised to see more in the next month as these payments come due,” said Jason Wangler at Wunderlich in Houston.

Energy XXI may not be able to meet its commitments in the next 12 months, raising “substantial doubt regarding the Company’s ability to continue as a going concern,” according to a company filing with the U.S. Securities and Exchange Commission. A company representative didn’t return a phone call and e-mail seeking comment. SandRidge “has sufficient liquidity to make these interest payments, but has elected to use the 30-day grace period in connection with its ongoing discussions with stakeholders,” the company said in a statement released Wednesday. “Today’s actions will preserve liquidity and flexibility as we continue to engage in constructive dialogue with our stakeholders,” James Bennett, SandRidge president and chief executive officer, said in the statement.

Oil has tumbled about 70% since a June 2014 peak of $107 a barrel. While prices were high, many drillers spent more money than they earned, plugging the shortfall with debt. That debt has become increasingly burdensome as prices collapse. Since the start of 2015, 48 North American oil and gas producers have declared bankruptcy, owing more than $17 billion, according to law firm Haynes & Boone. Deloitte said this week that bankruptcies in the oil and gas industry could surpass levels seen in the Great Recession.

And with hedges gone, borrowing gets much more expensive at the same time.

• Moody’s Tallies 28 Downgrades In The Energy Sector Since December (MW)

Moody’s Investors Service said Friday it has downgraded a total of 28 energy companies since December, as it continues a global review of the troubled sector. The agency surprised investors in January when it placed the credit ratings of 120 energy companies and 55 mining companies from around the world on review for a possible downgrade. The move came after a deep slump in the price of oil and other commodities, hurt by oversupply and the slowdown in China, a major consumer of natural resources. Today’s tally includes issuers that had already been placed on review in December and surprised some in the market. “Moody’s drops another hammer,” is how analysts at credit research firm CreditSights described the move Friday.

“Over the past several weeks, it has become increasingly clear in our discussions with clients and in hearing from company managements that the agency was taking a very Draconian view of the sector,” they wrote in a note. Moody’s said it downgraded two energy companies by five notches each, sending them deep into speculative-grade, or “junk” territory. Denbury Resources was cut to Caa2 from Ba3, and Whiting Petroleum was cut to Caa1 from Ba2. The agency downgraded seven energy companies by four notches, nine companies by three notches and five companies by two notches. The agency affirmed ratings on another nine companies. It continues to review a total of 137 global issuers for a possible downgrade.

Oil is everywhere in society. And lots of places rely on mostly high, but certainly somewhat stable, prices.

• Why Oil Rout Is Hurting The Global Economy Instead Of Helping (MW)

Saudi Arabia saw Standard & Poor’s cut its credit rating cut two notches this week to A-minus—an unsurprising move that nevertheless helps illustrate why collapsing oil prices haven’t seemed to be the economic boon many had anticipated. In a Thursday note, Carl Weinberg, chief economist at High Frequency Economics, used the downgrade—along with cuts in ratings for Bahrain, Oman and Kazakhstan—to remind clients of his explanation of how falling commodity prices can weigh on global growth. Weinberg has calculated that a $100 drop in the price of a barrel of crude would reduce global income from extraction alone by $3.2 trillion, or about 4.5% of world gross domestic product. That’s to say nothing of the impact on global economic activity from oil sales, transportation and exploration.

The U.S. benchmark settled below $31 a barrel on Thursday, or about $76 below its mid-2014 high after settling as low as $26.21 earlier this month. Brent crude, the global benchmark, ended Thursday at $34.28. It traded around $115 a barrel in mid-2014. It isn’t wrong to assume that those losses would rebound to the benefit of oil consumers, Weinberg says. But the rub lies in the fact that consumers in oil-importing countries may be more likely to stash those savings away while workers in oil-exporting countries would have been more likely to spend that lost income. That means it can take “years or decades” before that savings is translated into spending. He writes:

If purchasing power is transferred from one country to another, and if the countries receiving the windfall have a higher marginal propensity to save than the countries that are paying the transfer, then world GDP will be reduced. So if oil-importing countries tend to have higher incomes and higher savings rates, then world GDP will be reduced. In other words, halving the weekly income of an oil field worker in Nigeria earning near-subsistence wages will likely affect his or her consumption more than reducing the monthly auto fuel bill of a dentist in Belgium by the equivalent amount.

Needless to say, the oil market carnage has translated into real fiscal problems for oil-producing nations. It feeds into ideas that this week’s talk of a production freeze that would include OPEC members and Russia—seemingly shot down by Saudi Arabia after Iran refused to comply—was a sign of desperation. While freezing output at record levels wasn’t seen as likely to do much to alleviate a global glut, oil futures have rallied on the idea that producers are at least talking to each other is an important step. Helima Croft, global head of commodities at RBC Capital Markets, said this week’s talks were “one of the first clear acknowledgments by the oil heavyweights that all isn’t entirely well in the current price environment.”

It might even lay the groundwork for a “more proactive” approach later in the year after OPEC has had a chance to gauge the impact of Iran’s post-sanctions return to the global oil market as well as the trajectory of non-OPEC production, Croft said in a Tuesday note. ”Recently, some leading Saudi experts have suggested that by the June meeting, those variables will be known, and with the supply-and-demand balance expected to be tighter by then, it will be easier for cartel to pull additional barrels if needed in order to accelerate a price recovery,” she wrote.

“Beijing has also instructed bank branches in Hong Kong to limit their lending of renminbi to make it harder for traders and investors to place bets against the Chinese currency in financial markets.”

• China’s Foreign Exchange Reserves Dwindling Rapidly (NY Times)

During China’s biggest boom years, its currency could have risen in value as huge sums in dollars, euros and yen flowed into the country. Instead, Beijing tightly controlled the value of the renminbi, buying up much of the inflows and putting them into its reserves instead. That brought angry accusations from the United States and Europe that it was manipulating its currency to help keep Chinese exports inexpensive and competitive in foreign countries. Now that the renminbi faces pressure to fall, China is spending its reserves in an effort to prop up the currency. But many American lawmakers and presidential candidates still accuse China of keeping its currency artificially weak. The reserves are still considerable, more than double Japan’s, which has the world’s second-largest amount.

The central bank chief, Mr. Zhou, and others have questioned whether the reserves are too big and the money could be better invested if left in the private sector. Mr. Zhou led a move over the last two years to make it easier for Chinese companies and families to invest their own money overseas, only to find in recent months that the outflows have been disconcertingly fast at times. China has taken steps to stem further flows out of the country. This winter the Chinese authorities arrested the leaders of underground banks that were converting billions of renminbi into dollars and euros. They also made it harder for Chinese citizens to use their renminbi to buy insurance policies in dollars. More quietly, Beijing bank regulators have halted sales within China of investment funds known as wealth management products that are denominated in dollars.

Beijing has also instructed bank branches in Hong Kong to limit their lending of renminbi to make it harder for traders and investors to place bets against the Chinese currency in financial markets. “We did receive notice from Beijing in the earlier part of January to be more stringent in approving renminbi-denominated loans,” said a Hong Kong-based China bank executive, who insisted on anonymity for fear of employer retaliation. “It is no fun being caught in the middle, with marketing officers wanting to do more business and the higher-ups telling you to be tougher when reviewing credit proposals.” The erosion of reserves is also politically awkward, given public perception, and Beijing has taken steps aimed directly at shoring them up.

Big deal. He offered to step down last month. Beijing should understand that heavy-handedness does not boost confidence. What does this say about how Chinese securities have been regulated until today? Not much good.

• China ‘Removes’ Top Securities Regulator (Reuters)

China has removed the head of its securities regulator following a turbulent period in the country’s stock markets, appointing a top state banking executive as his replacement, as leaders move to restore confidence in the economy. The announcement on the official Xinhua news agency on Saturday follows a string of assurances from senior leaders following the Lunar New Year holiday that China will underpin its slowing economy and steady its wobbly currency. Xinhua said Xiao Gang, chairman of the China Securities Regulatory Commission (CSRC) since 2013, had been succeeded by Liu Shiyu, chairman of the Agricultural Bank of China Ltd. (AgBank) and a former deputy governor of the central bank. “Xiao’s departure is not a surprise following the recent stock disaster. This is a role vulnerable to public criticism because most Chinese retail investors are destined to lose money in such a market,” said Zhang Kaihua, a fund manager of Nanjing-based hedge fund Huyang Investment.

Xiao and the CSRC came under fire as China’s Shanghai and Shenzhen stock markets slumped as much as 40% in just a few months last summer. In a further blow, a stock index “circuit breaker” introduced in January to limit stock market losses was deactivated after four days of use because it was blamed for exacerbating a sharp selloff. Online media nicknamed Xiao “Mr. Circuit Breaker.” Reuters reported in January that Xiao, 57, had offered to resign following the “circuit-breaker” failure. The CSRC said at the time the information did not conform to the facts. The gyrations in China’s stock markets, an unexpected devaluation of the yuan in August and sharp falls in currency reserves rattled global markets, raising concerns about the health of the economy and Beijing’s ability to steer the country through both a protracted slowdown in growth and a shift away from manufacturing towards services.

They do it on purpose. Set it up so poorly losses are inevitable, and meanwhile use it to keep housing prices propped up. The taxpayer can fork over the difference.

• Fannie Mae At Risk Of Needing A Bailout (FT)

Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned. Fannie Mae’s chief executive and its regulator are sounding the alarm on a decline in the institution’s capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds. Their warnings highlight Washington’s inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis. Since 2008 Fannie Mae has been in the post-crisis limbo of state-sponsored “conservatorship,” neither fully nationalized nor private, following several unsuccessful attempts by Congress to overhaul it.

Because the government does not let Fannie Mae retain profits, Tim Mayopoulos, its chief executive, told the Financial Times on Friday that its capital buffer, which has dwindled from $30 billion before the crisis to $1.2 billion today, was on track to disappear by January 2018. At that point it would be unable to weather quarterly losses and would need to draw on Treasury funds to avoid being placed into receivership. So far investors who own Fannie Mae’s mortgage-backed securities have not been spooked, Mr. Mayopoulos said, but he added: “We are a major source of liquidity to the mortgage markets and it would be better to avoid testing the market as to what the breaking point is well in advance of us getting to that point.” His comments came the day after Mel Watt, Fannie Mae’s top regulator, thrust the issue into the spotlight.

Addressing both Fannie Mae and its counterpart Freddie Mac, Mr Watt, director of the Federal Housing Finance Agency, said: “The most serious risk and the one that has the most potential for escalating in the future is the enterprises’ lack of capital.” “If investor confidence in enterprise securities went down and liquidity declined as a result, this could have real ramifications on the availability and cost of credit for borrowers,” he said in a speech. Fannie Mae’s inability to retain profits, which must instead be swept into government coffers, also makes it almost impossible for the institution to exit federal control.

Refusing to kill the golden goose.

• Independent Modelling May Show Way Out Of Oz Housing Bubble (SMH)

Independent modelling has dented the Turnbull government’s attack on Labor’s negative gearing policy, finding it will generate billions for the Commonwealth with the vast bulk of revenue coming from just the top 10% of households who negatively gear their properties. The report’s author says the policy would likely slow the pace of house-price growth and boost new housing construction, making it “potentially the biggest housing affordability policy the country has seen.” Prime Minister Malcolm Turnbull launched a scathing attack on Labor’s negative gearing policy on Friday, saying home owners across the country would see the value of the family home “smashed” by the “very blunt, very crude” idea.

In a clear sign his government is preparing to launch a massive scare campaign in the lead-up to the 2016 election over Labor’s proposal, which is designed to save $32 billion over a decade, Mr Turnbull warned the policy was “calculated” to reduce the value of all homes. n”The Labor Party’s negative gearing policy and its wind-back on the capital gains discount – its increase in tax on capital gains – is a very dangerous one. It’s been very, very poorly thought out,” Mr Turnbull said on Friday. “The consequence of it will be a decline in property prices, every home owner in Australia has a lot to fear from Bill Shorten.”

But independent modelling shows there will be “significant” long-term savings from Labor’s proposal to quarantine negative gearing to new housing investments from July 2017, eventually raising between $3.5 to $3.9 billion a year. It also shows Labor’s proposal to cut the capital gains tax discount from 50% to 25% would raise about $2 billion a year in the long term. It shows the vast majority of savings would be at the expense of the top 10% of earners who negatively gear their properties. It also estimates that by restricting negative gearing to new housing, the policy would “increase the share of investment housing devoted to newly built housing” by 10 to 20%. It does not say house prices would drop. “Our modelling shows that negative gearing benefits high-income families with 52.6% of the benefit going to the top 20% of incomes,” the paper says.

EU must turn into EMU. Which nobody wants outside of Brussels and EU capitals. Anyway, the coming economic downturn will turn the EMU into a crumbling ruin.

• Brexit!? France And Germany Can Not Wait (Gefira)

If London decides to leave the European Union nobody in Europe will even notice. Great Britain is an entirely separate country, isolated from the European Union and does not participate in the Euro or Schengen Agreement. The EU as a political platform is disintegrating and becoming more and more irrelevant and will be displaced by the European Monetary Union (EMU). The center of power in Europe has shifted from the EU to the EMU and London politicians are fully aware of it. A Brexit will accelerate the process of political integration of the EMU members and make the EU politically less significant.

Over the past decade we saw:
• Countries can enter the European Union;
• The very core values of the European Union can be set aside as we saw happening in Turkey just before the European Commission announced to restart Turkey’s accession negotiations;
• Trade relations with Great Britain can be suspended without any upheaval, as we saw it concerning non-EU member Russia;
• Borders can be opened and closed as is the case in south-east Europe due to the refugee crisis;
• The Dublin Regulation can be dissolved overnight in the face of the fact that more than a million refugees have entered Europe since the summer of 2015;

All these events hardly changed the life of the Europeans. Being a member of the European Monetary Union is of another magnitude. The Greek euro crisis changed the lives of millions of Greeks. During the tense days in July 2015, when the future of Greece, the EMU and indirect the future of Europe was at stake, Chancellor Merkel and President Hollande held 24 hours emergency meetings as did the Eurogroup. Great Britain and the European Parliament did not play any role whatsoever in these decisive moments for the future of Europe. Cameron was not even invited to share his opinion.

The European Monetary Union is doomed for further political integration; the euro members have no other option but to create a fiscal union and a banking union. Without these two pillars, the whole Euro will fall apart dragging with it the complete Western financial system. A fiscal and banking union means that these countries have to integrate far beyond the European Union framework. Prime Minister Cameron is an annoyance for the already struggling EMU. The European Monetary Union faces extreme difficulties, as on one hand further integration of the Euro countries is inevitable and on the other hand, the widespread support for this integration is eroding. In 2011, French President Sarkozy told Cameron:”We’re sick of you criticizing us and telling us what to do. You say you hate the euro, you didn’t want to join, and now you want to interfere in our meetings”.

The EMU countries face a big political problem that is to be solved. Germany and France will never let countries outside the EMU have a say in their affairs as Cameron proposed. The diplomatic words from French Prime Minister Manuel Valls make it all clear to London as he said; “a Brexit is a shock for Europe but still members can not pick and choose rules that suit them”. The UK leaving the EU will make life easier for Paris and Berlin as Figaro writes: “Brexit? An opportunity for Europe, for France and for Paris”. When the UK is outside the EU Frankfurt and Paris will have more opportunities to crush London as a financial center. London could not miss Merkel’s warning against gains for British banks under ‘Brexit’. If the UK decides to leave, Berlin and Paris will do definitely more than prevent London banks from making any gain; they will do everything to establish Paris or Frankfurt as the financial center of the EMU at London’s expense.

Expect refugee numbers to soar over next 2 weeks.

• Tsipras, Merkel, Hollande Agree On Open Borders Until March 6 Summit (Kath.)

Greek Prime Minister Alexis Tsipras met with German Chancellor Angela Merkel and French President Francois Hollande on the sidelines of a European Union summit in Brussels on Friday. At the meeting, which reportedly lasted for an hour, the three leaders discussed the refugee crisis and the Greek bailout. According to a close Tsipras aide, the Greek premier reiterated that Greece would not accept any action against its interests. The three leaders agreed that the key with regard to decreasing the migration flow was Turkey and that NATO’s involvement was a positive development. Tsipras reportedly received assurances from Germany and France that assistance would be provided if necessary.

A pivotal point in the discussion was that the three leaders stressed that there would be no change in the European borders’ status quo until March 6, when a new summit on the refugee crisis is scheduled to take place, after Turkish PM Ahmet Davutoglu canceled his trip to Brussels following a bomb attack in Ankara which claimed the lives of 28 people on Wednesday. The leaders also agreed that representatives of the institutions should return to Athens as soon as possible in order to complete the review.

Because Brexit allows convenient alternate story line. Much more important than human misery.

• EU Summit On Refugee Crisis Ends In Disarray (FT)

Chancellor Angela Merkel hoped this week’s EU summit on migration would provide at least a show of European unity in the refugee crisis. Instead, it ended in disarray. An Austrian plan to cap the entry of asylum-seekers at just 80 a day left the German leader isolated, Greece threatening to scupper any deal on Brexit in response, and leaders more divided than ever over the EU’s biggest challenge in decades. European leaders, from Berlin to Vienna to Athens, are now improvising and pursuing often contradictory policies. Ms Merkel took even her own officials by surprise when she demanded another summit on the refugee crisis on March 6, just before three key German regional elections on March 13 and before the onset of spring boosts the numbers crossing the Aegean.

Refugee arrivals have picked up, with more than 4,800 arriving in Greece from Turkey on Thursday a rate not far off the autumn peak, when an average of 7,000 people a day were arriving. A backlog is building up along the western Balkans route, where fractious states have had to pull together to cope with the arrival of more than 1m people since the start of 2015. In private, previously optimistic officials are starting to despair, with worries shifting to a potential humanitarian disaster on the bloc s south eastern border. An EU leader said: “It’s a serious situation”. Ms Merkel is still banking on a deal with Ankara to secure the vulnerable Greek-Turkish frontier. As the chancellor said in the early hours on Friday: “It is an absolute given that we must urgently move faster”.

But bad luck waylaid even this plan: Turkish prime minister Ahmet Davutoglu cancelled a planned trip to Brussels to discuss migration following a car-bomb attack in Ankara. After the stormy summit debate, a tired looking Ms Merkel put a brave face on events at the 2.30am press conference, pointing to the efforts made in recent weeks to engage with Turkish president Recep Tayyip Erdogan and boost Greece’s sea defences by deploying Nato ships. Meanwhile, Vienna has been accused of trampling on international law, including the Geneva Convention on refugees, throwing already barely enforced rules on asylum into further doubt. “Conventions are like fairies; if you stop believing in them, they die”, said Elizabeth Collett, a director at the Migration Policy Institute.

However, the Austrian public backs its chancellor Werner Faymann’s migrant cap, with Der Standard newspaper on Friday defending him, saying that Brussels had scored “an own goal” by criticising Vienna. Ms Merkel, who rarely criticises EU partners in public, said that she had been “surprised” by Mr Faymann. Privately, German officials are furious that an old ally has broken ranks. Brussels had desperately attempted to force member states to abide by the rules, with little success. Despite EU member states agreeing to share out 160,000 refugees from Italy and Greece among themselves, fewer than 600 have actually been moved. While some leaders such as Viktor Orban, Hungary’s prime minister, have noisily disagreed, others — such as Madrid and Paris — have simply dragged their feet.

Here’s warning you once again, Brussels, you’re not going to survive this, somone will have your head on a platter for it, and it ain’t going to be silver. Even this UNHCR piece tries to blame the smugglers, but Europe could have provided safe passage all along.

• Two Children Drown Every Day On Average Trying To Reach Europe (UNHCR)

Two children have drowned every day on average since September 2015 trying to cross the eastern Mediterranean to find safety with their families in Europe, UNHCR, the UN Refugee Agency, said today. In a joint statement, issued in Geneva, UNHCR, UNICEF and the IOM warned that the number of child deaths was on the increase and called for more measures to increase safety for those escaping conflict and despair. Since last September, when the tragic death of toddler Aylan Kurdi captured the world’s attention, more than 340 children, many of them babies and toddlers, have drowned in the eastern Mediterranean. The total number of children who have died may be even greater, the sister organisations said, with their bodies lost at sea and never recovered.

One of those statistics was seven-year-old Houda from Afghanistan who went missing in a shipwreck off the Greek island of Kos at the end of January. Her mother, father, two sisters and one of her brothers had left Kabul for Istanbul earlier that month after her father, a middle-ranking police officer, received death threats. In Turkey, the family made a deal with a smuggler who promised them an “extra-safe trip in a spacious large boat” to Greece. To pay for the trip, Houda’s father had sold his house and borrowed money from family and friends. At night in a dark bay as they prepared to leave, they saw the boat was little more than a sailing coffin. It was small, old and massively overcrowded with around 80 passengers covering a few metres of deck. They tried to step back, but were forced by the smuggler to board the boat with no questions.

Smugglers allow no last-minute change of mind. Houda’s sister Aisha and her brother Aziz survived that deadly trip, along with 26 others, but her mother, father and an older sister perished. Their bodies were recovered. Houda’s was never found. Aisha and Aziz, 16 and 15 respectively, had learned to swim in school and that saved them. The stretch of the Aegean Sea between Turkey and Greece is now among the deadliest routes in the world for refugees and migrants. “These tragic deaths in the Mediterranean are unbearable and must stop,” said UN High Commissioner for Refugees Filippo Grandi. “Clearly, more efforts are needed to combat smuggling and trafficking. Also, as many of the children and adults who have died were trying to join relatives in Europe, organising ways for people to travel legally and safely, through resettlement and family reunion programmes for example, should be an absolute priority if we want to reduce the death toll,” he added.

With children now accounting for 36% of those on the move, the chance of them drowning on the Aegean Sea crossing from Turkey to Greece has grown proportionately. During the first six weeks of 2016, 410 people drowned out of the 80,000 people crossing the eastern Mediterranean. This amounts to a 35-fold increase year-on-year from 2015. Aisha and Aziz are now accommodated at a transit facility UNHCR runs with a national NGO offering specialized services to unaccompanied refugee children in Greece until they are assigned to a permanent facility. They wish to reunite as soon as possible with what remains of their family. They have a brother in Germany and hope one day to be able to join him there.

“These children expressed incredible dignity and courage throughout the many challenges they faced after the shipwreck. After already identifying the corpses of his own family members at the Coast Guard, Aziz insisted on seeing more pictures in order to recognize fellow travellers and help in their identification so that their families could also find out what had happened to them. They repeatedly expressed their gratitude towards me and other colleagues for the help we provided,” said Georgios Papadimitriou, a senior protection officer with UNHCR.

Debt Rattle January 24 2016

Jan 242016

January 24, 2016 Posted by Raúl Ilargi Meijer at 7:56 am Finance Tagged with: default, Economics, Iraq, oil, primary dealers, refugees, Schengen, Shale, Varoufakis 5 Responses »

Harris&Ewing “Street scene with snow, F STreet Washington, DC” 1918

• Iraq Sells Oil For $22 A Barrel, Calls For IMF Help (BBG)

• American Oil Companies Are Starting To Scream “Mayday” (CNN)

• US Shale’s Big Squeeze (FT)

• Squeezed Primary Dealers Quit European Government Bond Markets (Reuters)

• US Banks Cut Off Mexican Clients as Regulatory Pressure Increases (WSJ)

• Ideological Divisions Undermine Economics (Economist)

• A Greek Conspiracy: How The ECB Crushed Varoufakis’ Plans (Häring)

• Britain ‘Poised To Open Door To Thousands Of Migrant Children’ (Guardian)

• Germany Scolds Austria For Greek Schengen Threats (AFP)

• EU Leaders Consider Two-Year Suspension Of Schengen Rules (Telegraph)

The battle gets ugly.

• Iraq Sells Oil For $22 A Barrel, Calls For IMF Help (BBG)

Prime Minister Haidar al-Abadi said the plunge in oil prices means Iraq needs IMF support to continue its fight against Islamic State, a battle he says his country is winning despite little support from its neighbors. “We’ve been anticipating there would be some drop of prices but this has taken us by surprise,” Abadi said of the oil collapse in an interview at the World Economic Forum in Davos, Switzerland. “We can defeat Daesh but with this fiscal problem, we need the support” of the IMF, he said. “We have to sustain the economy, we have to sustain our fight.” The conflict with Islamic State, which swept through swaths of northern Iraq in the summer of 2014, has destroyed economic infrastructure, disrupted trade and discouraged investment.

Iraq is now facing the “double shock” of war as well as the crude-oil price drop, and has “urgent” balance-of-payment and budget needs, the IMF said in January as it approved a staff-monitored program to pave the way for a possible loan. Under the program, Iraq will seek to reduce its non-oil primary deficit. “We have cut a lot of our expenditures, government expenditures,” Abadi said in the interview. But the war brings its own costs. “We are paying salaries for the uniformed armies, for our fighters” and their weapons, Abadi said in Davos. Speaking later in a panel session in the Swiss resort, Abadi said Iraqi oil sold on Thursday for $22 a barrel, and after paying costs the country is left with $13 per barrel.

He called for neighbors to do more to help. The only country to have provided financial assistance is Kuwait, he said, which gave Iraq $200 million. “Daesh is on the retreat and it is collapsing but somebody is sending a life line to them,” Abadi said, citing victories for his forces in the key western city of Ramadi and using an Arabic acronym for Islamic State. “Neighbors are fighting for supremacy, using sectarianism.” Shiite Iran supports several of the biggest militias aiding Iraqi forces in the fight against Islamic State. Its rivalry with the Middle East’s biggest Sunni power, Saudi Arabia, has flared in recent weeks, complicating efforts to end conflicts in Iraq, Syria and Yemen. Iraq has managed to stop the advance of Islamic State in Iraq but if neighbors continue to inflame sectarianism, successes can be reversed, he said. “We are supposed to be in the same boat,” Abadi said. “In reality, we aren’t.”

“..42nd driller to file for bankruptcy in this commodity crunch..”

• American Oil Companies Are Starting To Scream “Mayday” (CNN)

Last year, 42 North American drillers filed for bankruptcy, according to law firm Haynes and Boone. It’s only likely to get worse this year. Experts say there are a lot of parallels between today’s crisis and the last oil crash in 1986. Back then, 27% of exploration and production companies went bust. Defaults are skyrocketing again. In December, exploration and production company defaults topped 11%, up from just 0.5% the previous year, according to Fitch Ratings. That’s a 2,000%-plus jump. It’s just the beginning, says John La Forge, head of real assets strategy at Wells Fargo. If history repeats, people should prepare for the default rate to double in the next year or so. No wonder America’s biggest banks are setting aside a lot of money in anticipation that more energy companies will go belly up.

Energy companies borrowed a lot of money when oil was worth over $100 a barrel. The returns seemed almost guaranteed if they could get the oil out of the ground. But now oil is barely trading just above $30 a barrel and a growing number of companies can’t pay back their debts. “The fact that a price below $100 seemed inconceivable to so many is kind of astonishing,” says Mike Lynch, president of Strategic Energy and Economic Research. “A lot of people just threw money away thinking the price would never go down.” On the last day of 2015, Swift Energy, an “independent oil and gas company” headquartered in Houston, became the 42nd driller to file for bankruptcy in this commodity crunch. The company is trying to sort out over $1 billion in debt at a time when the firm’s earnings have declined over 70% in the past year.

Trimming costs and laying off workers can’t close that kind of gap. “In the 1980s, there was a bumper sticker that people in Texas had that said, ‘God give me one more boom and I promise not to screw it up,'” says Lynch. “People should have those bumper stickers ready again.” The last really big oil bust was in the late 1980s. The Saudis really controlled the price then, says La Forge. Now the Saudis (and other members of OPEC) are in a battle with the United States, which has become a major player again in energy production. No one wants to cut back on production and risk losing market share. “It will be the U.S. companies that go out of business,” predicts La Forge. OPEC countries don’t have a lot of smaller players like the United States does. It’s usually the government that controls oil drilling and production in OPEC nations.

La Forge predicts the governments can hold their position longer. As the smaller players run out of cash, they will get swallowed up by bigger ones. “The big boys and girls will snap up a lot of cheap assets,” predicts Lynch. There’s a lot of debate about whether oil prices have bottomed out. Crude oil hit its lowest price since 2003 this week. But even if prices have stabilized, the worst isn’t over for oil companies. “Some companies went under in 1986-’87 even when prices rebounded,” says La Forge. This week, Blackstone (BGB) CEO Stephen Schwarzman said his firm is finally taking a close look at bargains in the energy sector. One of the largest bankruptcies so far is Samson Resources of Oklahoma. In 2011, private equity firm KKR (KKR) bought it for over $7 billion. Now it’s struggling to deal with over $1 billion in debt that’s due this year alone.

Can’t read on shale without mention of default anymore.

• US Shale’s Big Squeeze (FT)

The boom years left the US oil industry deep in debt. The 60 leading US independent oil and gas companies have total net debt of $206bn, from about $100bn at the end of 2006. As of September, about a dozen had debts that were more than 20 times their earnings before interest, tax, depreciation and amortisation. Worries about the health of these companies have been rising. A Bank of America Merrill Lynch index of high-yield energy bonds, which includes many indebted oil companies, has an average yield of more than 19%. Almost a third of the 155 US oil and gas companies covered by Standard & Poor’s are rated B-minus or below, meaning they are at high risk of default.

The agency this month revised down its expectations of future oil prices, meaning that many of those companies’ ratings are likely to be cut even further. Credit ratings for the more financially secure investment grade companies are also likely to be lowered this time. Some companies under financial strain will be able to survive by selling assets. Private capital funds raised $57bn last year to invest in energy, according to Preqin, an alternative assets research service, and most of that money is still looking for a home. Companies with low-quality assets or excessive debts will not make it. Tom Watters of S&P expects “a lot more defaults this year”. Bankruptcies, a cash squeeze and poor returns on investment mean companies will continue to cut their capital spending.

The number of rigs drilling oil wells in the US has dropped 68% from the peak in October 2014 to 510 this week, and it is likely to fall further. So far, the impact on US oil production has been minimal. Output in October was down 4% from April, as hard-pressed companies squeeze as much revenue as possible out of their assets. Saudi Arabia’s strategy of allowing oil prices to fall to curb competing sources of production appears to be succeeding But Harold Hamm, chief executive of Continental Resources, one of the pioneers of the shale boom, says the downturn in activity is likely to intensify. “We’re seeing capex being slashed to almost nothing,” he says. “At low prices, people aren’t going to keep producing.” He expects US oil production to fall sharply this year, and says people may be surprised by how fast it goes.

Poor banks.

• Squeezed Primary Dealers Quit European Government Bond Markets (Reuters)

A rise in the number of banks giving up primary dealer roles in European government bond markets threatens to further reduce liquidity and eventually make it more expensive for some countries to borrow money. Increased regulation and lower margins have seen five banks exit various countries in the last three months. Others look set to follow, further eroding the infrastructure through which governments raise debt. While these problems are for now masked by the European Central Bank buying €60 billion of debt every month to try to stimulate the euro zone economy, countries may feel the effects more sharply when the ECB scheme ends in March 2017. Since 2012, most euro zone governments have lost one or two banks as primary dealers, while Belgium – one of the bloc’s most indebted states – is down five.

Primary dealers are integral to government bond markets, buying new issues at auctions to service demand from investors and to maintain secondary trading activity. Without their support, countries would find it harder to sell debt, forcing them to offer investors higher interest rates. Over the last quarter alone, Credit Suisse pulled out of most European countries, ING quit Ireland, Commerzbank left Italy, and Belgium did not re-appoint Deutsche Bank as a primary dealer and dropped Nordea as a recognised dealer. In that time, only Danske Bank has added to its primary dealer roles in the bloc’s main markets. But even Danske is worried. “I’ve never seen it so bad,” said Soeren Moerch, head of fixed income trading at Danske Markets.

“When further banks reduce their willingness to be a primary dealer then liquidity will go even lower…we could have more failed auctions and we could see a big washout in the market.” Acting as a dealer has become increasingly expensive for banks under new regulations because of the amount of capital it requires, while trading profits that once made up for the initial spend have diminished in an era of ultra-low rates. “Shareholders would be shocked if they knew the scale of the costs that some businesses are taking,” said one banker who has worked at several major investment houses with primary dealer functions. The decline in dealers comes as many of the world’s largest financial firms, such as Morgan Stanley and Deutsche Bank, launch strategic reviews that are likely to impact their fixed income operations.

The risk that the euro zone could slide back into recession, having barely recovered from its long-running debt crisis, could exacerbate the withdrawal by prompting banks to retreat into their home markets. “It is a negative trend. The opposite that we saw in the first 10 years of the euro,” said Sergio Capaldi at Intesa SanPaolo. “For smaller countries…the fact that there are less players is something that could have a negative affect on market liquidity and borrowing costs.”

Squeezed them for all they’re worth.

• US Banks Cut Off Mexican Clients as Regulatory Pressure Increases (WSJ)

U.S. banks are cutting off a growing number of customers in Mexico, deciding that business south of the border might not be worth the risks in the wake of mounting regulatory warnings. At issue are correspondent-banking relationships that allow Mexican banks to facilitate cross-border transactions and meet their clients’ needs for dealing in dollars—in effect, giving them access to the U.S. financial system. The global firms that provide those services are increasingly wary of dealing with Mexican banks as well as their customers, according to U.S. bankers and people familiar with the matter.

The moves are consistent with a broader shift across the industry, in which banks around the world are retreating from emerging markets as regulators ramp up their scrutiny and punishment of possible money laundering. For many banks, the money they can earn in such countries isn’t worth the cost of compliance or the penalties if they step across the line. U.S. financial regulators have long warned about the risks in Mexico of money laundering tied to the drug trade. The urgency spiked more than a year ago, when the Financial Crimes Enforcement Network, a unit of the Treasury Department, sent notices warning banks of the risk that drug cartels were laundering money through correspondent accounts, people familiar with the advisories said. Earlier, the Office of the Comptroller of the Currency sent a cautionary note to some big U.S. banks about their Mexico banking activities.

But the pain Mexican firms are experiencing is relatively new. The fallout is affecting Mexican banks of various sizes such as Grupo Elektra’s Banco Azteca, Grupo Financiero Banorte and Monex Grupo Financiero, and their customers, the people said. Regulators have consistently said they don’t direct banks to cut ties with specific countries or a large swath of customers. But the advisories, which had nonpublic components that haven’t been previously reported, were interpreted by several big banks as a fresh signal that they do business in Mexico at their own peril, according to people familiar with the matter. “All they know is that sanctions are big and revenues are small,” said Luis Niño de Rivera, vice chairman of Banco Azteca, based in Mexico City. “It’s simple arithmetic: ‘I make a million dollars and they’re going to fine me a billion? I won’t do that.’”

A field of pretense.

• Ideological Divisions Undermine Economics (Economist)

Dismal may not be the most desirable of modifiers, but economists love it when people call their discipline a science. They consider themselves the most rigorous of social scientists. Yet whereas their peers in the natural sciences can edit genes and spot new planets, economists cannot reliably predict, let alone prevent, recessions or other economic events. Indeed, some claim that economics is based not so much on empirical observation and rational analysis as on ideology. In October Russell Roberts, a research fellow at Stanford University’s Hoover Institution, tweeted that if told an economist’s view on one issue, he could confidently predict his or her position on any number of other questions. Prominent bloggers on economics have since furiously defended the profession, citing cases when economists changed their minds in response to new facts, rather than hewing stubbornly to dogma.

Adam Ozimek, an economist at Moody’s Analytics, pointed to Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, who flipped from hawkishness to dovishness when reality failed to affirm his warnings of a looming surge in inflation. Tyler Cowen, an economist at George Mason, published a list of issues on which his opinion has shifted (he is no longer sure that income from capital is best left untaxed). Paul Krugman chimed in. He changed his view on the minimum wage after research found that increases up to a certain point reduced employment only marginally (this newspaper had a similar change of heart). Economists, to be fair, are constrained in ways that many scientists are not. They cannot brew up endless recessions in test tubes to work out what causes what, for instance.

Yet the same restriction applies to many hard sciences, too: geologists did not need to recreate the Earth in the lab to get a handle on plate tectonics. The essence of science is agreeing on a shared approach for generating widely accepted knowledge. Science, wrote Paul Romer, an economist, in a paper* published last year, leads to broad consensus. Politics does not. Nor, it seems, does economics. In a paper on macroeconomics published in 2006, Gregory Mankiw of Harvard University declared: “A new consensus has emerged about the best way to understand economic fluctuations.” But after the financial crisis prompted a wrenching recession, disagreement about the causes and cures raged. “Schlock economics” was how Robert Lucas, a Nobel-prize-winning economist, described Barack Obama’s plan for a big stimulus to revive the American economy. Mr Krugman, another Nobel-winner, reckoned Mr Lucas and his sort were responsible for a “dark age of macroeconomics”.

Nice details.

• A Greek Conspiracy: How The ECB Crushed Varoufakis’ Plans (Häring)

A central bank governor in Athens conspires with the President of the Republic to sabotage the negotiation strategy of his government to weaken it in its negotiations with the European Central Bank. After the government has capitulated, this governor, who is a close friend of the new finance minister and boss of the finance ministers wife, and the President of the Republic travel together to the ECB to collect their praise and rewards. This is not an invention, this is now documented. On 19 January the German Central Bank in Frankfurt informed the media that the Greek President Prokopis Pavlopoulos visited the ECB and met with ECB-President Mario Draghi, and that he was accompanied by the President of the Greek central Bank, Yanis Stournaras.

Remember. When the Syriza-led government in Athens was in tense negotiations with the European institutions, the ECB excerted pressure by cutting Greek banks off the regular financing operations with the ECB. They could get euros only via Emergency Liquidty Assistance from the Greek central bank and the ECB placed a strict limit on these. Finance minister Yanis Varoufakis worked on emergency plans to keep the payment system going in case the ECB would cut off the euro supply completely. It has already been reported and discussed that a close aide of Stournaras sabotaged the government during this time by sending a memo to a financial journalist, which was very critical with the governments negotiation tactics and blamed it for the troubles of the banks, which the ECB had intensified, if not provoked.

A few days ago, Stournaras himself exposed a conspiracy. He bragged that he had convened former prime ministers and talked to the President of the Republic to raise a wall blocking Varoufakis emergency plan. In retrospect it looks as if Alexis Tsipras might have signed his capitulation to Stournaras and the ECB already in April 2015, when he replaced Varoufakis as chief negotiator by Euklid Tsakalotos, who would later become finance minister after Varoufakis resigned. In this case the nightly negotiating marathon in July, after which Tsipras publicly signed his capitulation, might just have been a show to demonstrate that he fought bravely to the end. Why would I suspect that? Because I learned in a Handelsblatt-Interview with Tsakalotos published on 15 January 2016 that he is a close friend of Stournaras. Looking around a bit more, I learned that Tsakalotos wife is ‘Director Advisor’ to the Bank of Greece.

This is the Wikipedia entry: “Heather Denise Gibson is a Scottish economist currently serving as Director-Advisor to the Bank of Greece (since 2011). She is the spouse of Euclid Tsakalotos, current Greek Minister of Finance.” At the time she entered, Stournaras was serving as Director General of a think tank of the Bank of Greece. The friendship of the trio goes back decades to their time together at a British university. They even wrote a book together in 1992. Thus: The former chief negotiator of the Greek government is and was a close friend of the central bank governor and the central bank governor was the boss of his wife. The governor of the Bank of Greece, which is part of the Eurosystem of central banks, gets his orders from the ECB, i.e. the opposing side in the negotiations. He actively sabotaged the negotiation strategy of his government. If this does not look like an inappropriate association for a chief negotiator, I don’t know what would.

Someone grabbed Cameron by the nuts?

• Britain ‘Poised To Open Door To Thousands Of Migrant Children’ (Guardian)

David Cameron is considering plans to admit thousands of unaccompanied migrant children into the UK within weeks, as pressure grows on ministers to provide a haven for large numbers of young people who have fled their war-torn homelands without their parents. Amid growing expectation that an announcement is imminent, Downing Street said ministers were looking seriously at calls from charities, led by Save the Children, for the UK to admit at least 3,000 unaccompanied young people who have arrived in Europe from countries including Syria and Afghanistan, and who are judged to be at serious risk of falling prey to people traffickers. Government sources said such a humanitarian gesture would be in addition to the 20,000 refugees the UK has already agreed to accept, mainly from camps on the borders of Syria, by 2020.

Following a visit to refugee camps in Calais and Dunkirk on Saturday, Labour leader Jeremy Corbyn called on Cameron to offer children not just a refuge in the UK but proper homes and education, equivalent to the welcome received by those rescued from the Nazis and brought to the UK in 1939. “We must reach out the hand of humanity to the victims of war and brutal repression,” he said. “Along with other EU states, Britain needs to accept its share of refugees from the conflicts on Europe’s borders, including the horrific civil war in Syria. “We have to do more. As a matter of urgency, David Cameron should act to give refuge to unaccompanied refugee children now in Europe – as we did with Jewish Kindertransport children escaping from Nazi tyranny in the 1930s.

And the government must provide the resources needed for those areas accepting refugees – including in housing and education – rather than dumping them in some of Britain’s poorest communities.” Signs that the prime minister may act came after a week in which concern has risen in European capitals, and among aid agencies and charities, about the high number of migrants still pouring into the EU just as cold weather bites along the routes many are taking through the Balkans and central and eastern Europe. With one week of January to go, about 37,000 migrants and refugees have already arrived in the EU by land or sea, roughly 10 times the equivalent total for the month last year. The number of Mediterranean deaths stands at 158 this year.

It’s a free for all now.

• Germany Scolds Austria For Greek Schengen Threats (AFP)

This week Greece slammed a Financial Times report saying several European ministers and senior EU officials believed threatening suspension from Schengen could persuade Greece to protect its borders more effectively. Junior interior minister for migration Yiannis Mouzalas said the report contained ”falsehoods and distortions” but Mikl-Leitner said temporary exclusion was a real possibility. “If the Athens government does not finally do more to secure the (EU’s) external borders then one must openly discuss Greece’s temporary exclusion from the Schengen zone,” Mikl-Leitner said in an interview with German daily Die Welt. “It is a myth that the Greco-Turkish border cannot be controlled,” Mikl-Leitner said.

“When a Schengen signatory does not permanently fulfil its obligations and only hesitatingly accepts aid then we should not rule out that possibility,” she added. “The patience of many Europeans has reached its limit ... We have talked a lot, now we must act. It is about protecting stability, order and security in Europe.” Germany’s Steinmeier criticised Vienna’s warning however. “There won’t be any solution to the refugee crisis if solidarity disappears,” he said. “On the contrary, we must work together and concentrate all our efforts to fight against the causes that are pushing the refugees into flight, to reinforce the EU’s outer borders and to achieve a fair redistribution (of asylum seekers) within Europe.”

Chance of Schengen survival below zero.

• EU Leaders Consider Two-Year Suspension Of Schengen Rules (Telegraph)

The Schengen system of free movement could be suspended for two years under emergency measures to be discussed by European ministers on Monday, as the French Prime Minister warned the crisis could bring down the entire European Union. Manuel Valls said that the “very idea of Europe” will be torn apart until the flows of migrants expected to surge in spring are turned away. On Monday, interior ministers from the EU will meet in Amsterdam to discuss emergency measures to allow states to reintroduce national border controls for two years. The powers are allowed under the Schengen rules, but would amount to an unprecedented abandonment of the 30-year old agreement that allows passport-free travel across 26 states. The measure could be brought in from May, when a six-month period of passport checks introduced by Germany expires.

The European Commission would have to agree that there are “persistent serious deficiencies” in the Schengen zone’s external border to activate it. “This possibility exists, it is there and the Commission is prepared to use it if need be,” said Natasha Bertaud, a spokesman for Jean-Claude Juncker. Greece has been blamed by states for failing to identify and register hundreds of thousands of people flowing over its borders. Other states that have introduced emergency controls are Sweden, Austria, France, Denmark and Norway, which is not in the EU but is in Schengen. “We’re not currently in that situation,” Ms Bertaud added. “But interior ministers will on Monday in Amsterdam have the opportunity to discuss and it’s on the agenda what steps should be taken or will need to be taken once we near the end of the maximum period in May.”

In a further blow, Mr Valls said that France would keep its state of emergency, which has included border checks, until the Islamic State of Iraq and Levant network is destroyed. “It is a total and global war that we are facing with terrorism,” he said. He warned that without proper border controls to turn away refugees, the 60-year old European project could disintegrate. “It’s Europe that could die, not the Schengen area. If Europe can’t protect its own borders, it’s the very idea of Europe that could be thrown into doubt. It could disappear, of course – the European project, not Europe itself, not our values, but the concept we have of Europe, that the founding fathers had of Europe.

Debt Rattle January 17 2016

Jan 172016

January 17, 2016 Posted by Raúl Ilargi Meijer at 9:28 am Finance Tagged with: AIIB, China, contagion, crash, Fed, GDP, oil, refugees, Schäuble, Shale Comments Off

DPC Madison Avenue, Memphis, Tennessee 1906

• Why Are We Looking On Helplessly As Markets Crash All Over The World? (Hutton)

• China’s Stock Market Value Plummets By $600 Billion In One Week (Xinhua)

• The Ugly Subtext Beneath China’s Two-Track Economy Tale (FT)

• Buckle Your Seatbelts: China Could Rock Markets Next Week (CNBC)

• China’s Economy Grew By Around 7% In 2015, Premier Li Says (Reuters)

• The Fantasy And The Reality Of China’s Economic Rebalancing (CNBC)

• China Stocks Watchdog Acknowledges Flaws in Equities Regulation (BBG)

• China-Led AIIB Development Bank Aims to Swiftly Approve Loans (AP)

• Dallas Fed Quietly Suspends Energy Mark-To-Market On Loss Contagion Fears (ZH)

• Wall Street Braces for Bigger Shale Losses After Oil Drops Below $30 (BBG)

• With Liftoff Done, the Fed Revisits a $4.5 Trillion Quandary (BBG)

• Saudi Aramco – $10 Trillion Mystery At The Heart Of The Gulf State (Guardian)

• Market Meltdown Rattles Canadian Investors, Panic Sets In (BBG)

• German Lawmakers Urge Merkel To Tell Draghi: End Record-Low Rates (BBG)

• The Business Case For Helping Refugees (Gillian Tett)

• Schäuble Proposes Special EU Tax On Gasoline To Finance Refugee Costs (Reuters)

• Five Bodies Wash Up On Shore Of Samos (AP)

“The Chinese economy is a giant Ponzi scheme. Tens of trillions of dollars are owed to essentially bankrupt banks – and worse, bankrupt near-banks that operate in the murky shadowlands of a deeply dysfunctional mix of Leninism and rapacious capitalism. “

• Why Are We Looking On Helplessly As Markets Crash All Over The World? (Hutton)

There has always been a tension at the heart of capitalism. Although it is the best wealth-creating mechanism we’ve made, it can’t be left to its own devices. Its self-regulating properties, contrary to the efforts of generations of economists trying to prove otherwise, are weak. It needs embedded countervailing power – effective trade unions, law and public action – to keep it honest and sustain the demand off which it feeds. Above all, it needs an ordered international framework of law, finance and trade in which it can do deals and business. It certainly can’t invent one itself. The mayhem in the financial markets over the last fortnight is the result of confronting this tension. The oil price collapse should be good news. It makes everything cheaper. It puts purchasing power in the hands of business and consumers elsewhere in the world who have a greater propensity to spend than most oil-producing countries. A low oil price historically presages economic good times. Instead, the markets are panicking.

They are panicking because what is driving the lower oil price is global disorder, which capitalism is powerless to correct. Indeed, it is capitalism running amok that is one of the reasons for the disorder. Profits as a share of national income in Britain and the US touch all-time highs; wages touch an all-time low as the power of organised labour diminishes and the gig economy of short-term contracts takes hold. The excesses of the rich, digging underground basements to house swimming pools, cinemas and lavish gyms, sit alongside the travails of the new middle-class poor. These are no longer able to secure themselves decent pensions and their gig-economy children defer starting families because of the financial pressures.

The story is similar if less marked in continental Europe and Japan. Demand has only been sustained across all these countries since the mid-1980s because of the relentless willingness of banks to pump credit into the hands of consumers at rates much faster than the rate of economic growth to compensate for squeezed wages. It was a trend only interrupted by the credit crunch and which has now resumed with a vengeance. The result is a mountain of mortgage and personal debt but with ever-lower pay packets to service it, creating a banking system that is fundamentally precarious. The country that has taken this further than any other is China. The Chinese economy is a giant Ponzi scheme. Tens of trillions of dollars are owed to essentially bankrupt banks – and worse, bankrupt near-banks that operate in the murky shadowlands of a deeply dysfunctional mix of Leninism and rapacious capitalism.

The Chinese Communist party has bought itself temporary legitimacy by its shameless willingness to direct state-owned banks to lend to consumers and businesses with little attention to their creditworthiness. Thus it has lifted growth and created millions of jobs. It is an edifice waiting to implode. Chinese business habitually bribes Communist officials to put pressure on their bankers to forgive loans or commute interest; most loans only receive interest payments haphazardly or not at all. If the losses were crystallised, the banking system would be bust overnight. On top, huge loans have been made to China’s vast oil, gas and chemical industries on the basis of oil being above $60 a barrel, so more losses are in prospect.

Some $600 billion lost in one week.

• China’s Stock Market Value Plummets (Xinhua)

China’s declining stock market has resulted in a sharp decrease in the market capitalization of the two bourses in Shanghai and Shenzhen. The market value of the Shanghai and Shenzhen bourses plummeted to 42.74 trillion yuan (about 6.5 trillion U.S. dollars) on Friday’s closing of market, down nearly 9% from the previous week. There are 1,081 and 1,747 listed companies in the Shanghai and Shenzhen stock markets, where the price-earnings ratio were 14.54 and 41.38 respectively. China’s has the world’s second-most capitalized stock market behind the United States, after overtaking Japan a year ago. After a bearish week, the Shanghai and Shenzhen bourses were valued at 24.26 trillion yuan and 18.48 trillion yuan respectively by the close of market on Friday.

Amid global market turbulence accompanying lackluster domestic economic data, the benchmark Shanghai index lost 8.96% to end at 2,900.97 points, and the Shenzhen index shrank 8.18% to close at 9,997.92 points over the week. On Saturday, China’s securities watchdog vowed to learn a lesson from the stock market rout. “Wild market swings revealed our supervision and management loopholes,” said Xiao Gang, head of the China Securities Regulatory Commission, at a national conference on securities market regulation. “We will improve regulation mechanisms, intensify supervision and guard against risks so as to create a stable and sound market,” Xiao said.

Reconfirming what I’ve written on China earlier: “Coal miners do not become internet programmers overnight, or even delivery men.”

• The Ugly Subtext Beneath China’s Two-Track Economy Tale (FT)

This week the Chinese government will attempt to take back control of the narrative. The release of its 2015 economic growth estimate on January 19 provides an opportunity for Beijing to argue that a renewed outburst of stock market chaos and currency policy confusion over recent weeks was just surface noise, while the underlying economy remains sound. That China’s once vaunted economic managers suddenly find themselves in this position is a reminder of how dramatically they too can be wrong-footed by events, albeit ones that were under their control until a series of self-inflicted policy errors. Until China’s stock market bubble burst on June 15 — President Xi Jinping’s birthday of all days — the rest of the world was obsessed with the country’s downwards economic growth trajectory.

An ill-advised stock market rescue in July, followed by a poorly communicated currency policy adjustment in August, gave the world a bigger issue to worry about — the competence of China’s leadership, or lack thereof. In this context, the second and third quarter gross domestic product estimates, in line with the government’s 7% growth target, were reassuring. Chinese officials now freely admit that the country’s growth story is a tale of two economies. There is the bad old industrial economy — credit-fuelled and investment-led, resulting in chronic overcapacity and unsold apartment blocks. And there is the good new services economy — innovative and consumption-driven. Their key point is that the rise of the latter will balance the decline of the former, as has been the case this year.

As a result, they argue, the overall economy will hum along at a “sustainable” rate of about 6.5% over the next five years. This spells trouble for the African, Australian, Russian and South American commodity producers who have grown fat off Chinese demand over the past 20 years. But it should benefit European and US service providers, market access permitting, as well as Japanese and South Korean gadget makers. If only it were that simple. There are at least two known unknowns that could disrupt China’s smooth glide path. The first is what happens to rust-belt regions that have plenty of the old economy but not much of the new. “It will be very difficult for those who work in the old economy to transition into the new economy,” says Chen Long, China economist at Gavekal Dragonomics.

“Coal miners do not become internet programmers overnight, or even delivery men.” The second is a potential debt crisis of historic proportions, stemming in part from the government’s fears about the consequences for coal country if they were to turn off the credit taps. In 2007, on the eve of the global financial crisis, China’s overall debt to GDP ratio was 147%. Now it is at 231% and climbing. “They absolutely have no room left for further debt accumulation,” says Rodney Jones at Wigram Capital, an economic advisory firm. “That’s the central issue — not the exchange rate, not the stock market. These are symptoms. The problem is unsustainable growth and continued rapid accumulation of debt, leverage and credit.”

“China is expected to release fourth-quarter GDP, industrial production and retail sales data Tuesday morning.”

• Buckle Your Seatbelts: China Could Rock Markets Next Week (CNBC)

Global markets are poised for more volatility next week with key economic data from China expected to show that the world’s second-largest economy continues to grow at its slowest pace since the financial crisis, despite aggressive measures taken by the central bank to boost growth. “There has been ongoing fear bubbling since August that the China slowdown is worse than expected. Investors are nervous that we’ll see a massive downside correction in China’s economy. That’s why this data is so important to markets,” said James Rossiter at TD Securities. China is expected to release fourth-quarter GDP, industrial production and retail sales data Tuesday morning. Wasif Latif at USAA Investments agrees.

“These data reports next week could be very important in their power to either confirm or refute the current narrative that China is experiencing a very bad slowdown,” said Latif. The kick-off to 2016 has been challenging to say the least for China which continues to show signs of weakness, particularly on the manufacturing and services front. This downbeat data has pushed investors to alter their global forecasts, readjust earnings expectations and talk about what life with a slowing China means for trading stocks bonds and commodities this year. Markets around the world have been under pressure due in part to China worries. The Shanghai Composite is already down 18% this year and down over 40% from its June 2014 high.

Barclays strategists wrote that China remains a key source of turmoil as it affects currencies, commodities and financial volatility. Analysts also point to Beijing’s unpredictable nature in addressing the country’s economic woes and market structure. For instance in the last week, China reversed a new rule on circuit breakers that had brought stocks to a complete halt after just minutes of trading. Questions remain over whether the central bank of China will respond to weak data through its currency, or if the government will intervene in new ways if stocks continue to fall on the domestic markets.

Li Keqiang decided to give us the good news a few days early. Curious.

• China’s Economy Grew By Around 7% In 2015, Premier Li Says (Reuters)

China’s economy grew by around 7% in 2015, with the services sector accounting for half of GDP, Premier Li Keqiang said on Saturday. The premier also said that employment had expanded more than expected and that consumption contributed nearly 60% of economic growth. Li made theremarks at the opening ceremony for the China-backed Asian Infrastructure Investment Bank (AIIB) in Beijing. China’s fourth-quarter and full-year 2015 GDP figures are expected to be released on Jan. 19. Analysts polled by Reuters have forecast 2015 growth cooled to 6.9%, down from 7.3% in 2014 and the slowest pace in a quarter of a century. China does not intend to use a cheaper yuan as a way to boost exports and has the tools to keep the currency stable, the premier said, state news agency Xinhua had reported earlier Saturday.

“China has no intention of stimulating exports via competitive devaluation of currencies,” the premier said at the meeting in Beijing, which marks China’s previously announced official entry into the bank. Li added that China is capable of keeping the yuan’s exchange rate basically stable at an appropriate and balanced level, Xinhua reported. After a nearly 3% devaluation in mid August 2015 which rattled markets, China’s yuan has fallen over 1% so far in 2016, as the nation has struggled to contain capital outflows in the wake of a dramatic equity market collapse and weak economic data. Despite recent declines, China has the world’s largest foreign exchange reserves, and policymakers have repeatedly said they have the firepower to keep the yuan stable.

From January 11.

• The Fantasy And The Reality Of China’s Economic Rebalancing (CNBC)

China’s economic expansion may be far less than official estimates of 6.8% and could be closer to 2.4%, according to a new report. The GDP growth of the world’s second-largest economy has slowed steadily since 2010, although levels remain far higher than those achieved by most developed and many developing economies. Last month, China’s central bank forecast that GDP would slow to 6.8% in 2016 from an estimated in 6.9% in 2015. However, Fathom, a macro research consultancy based in London, claimed in a report that China’s economy is only expanding at 2.4% per annum.

“We have long questioned the legitimacy of China’s official GDP statistics. Pointing to only a mild growth deceleration, we find these impossible to reconcile with a whole host of alternative evidence, not least our own measure of China’s economic activity which suggests that growth could be as low as 2.4%,” Fathom said in the report published Friday entitled “The fantasy and the reality of China’s economic rebalancing.” This year, global markets remain alert to any hints that China’s economic slowdown might be accelerating. Major U.S. stock indexes lost around 6% or more last week, as these fears helped fuel a rout in global stocks. International analysts and economists have long suspected that Chinese official GDP figures were inflated. Not many have suggested that annual growth could actually be as low as 2.4%, however. The IMF, for instance, estimates that China’s economy grew by 6.8% in 2015 and forecasts it will expand by 6.3% in 2016.

“While there is evidence that the old growth engine, powered by manufacturing, investment and exports, has started to stutter, we find far fewer indicators that point to a pickup in consumption. This is contrary to China’s official GDP breakdown, which suggests that activity in the tertiary sector is not only the largest as a share of nominal GDP but also the fastest growing, with annual growth outpacing that of both primary and secondary industries,” Fathom said. The official GDP data reported by Chinese regional government is particularly questionable. In December, China official news agency, Xinhua, reported that economic levels in parts of China’s northeastern rust belt were overstated. One county in Liaoning province posted extra fiscal revenue of 847 million yuan ($129 million) in 2013, 127% higher than the real figure, according to media reports.

“The slumping stock market, fleeing liquidity, speedy deleveraging activities, augmented by self-defeating redemption at mutual funds and selloffs in futures, spiraled into a full-scale crisis like a domino effect..”

• China Stocks Watchdog Acknowledges Flaws in Equities Regulation (BBG)

The Chinese equities watchdog has acknowledged loopholes and ineptitude within its regulatory system after a review of the turmoil that’s shaken markets since last June. An immature bourse and participants, incomplete trading rules, an inadequate market system and an inappropriate regulatory system were to blame and regulators will learn from their mistakes, Xiao Gang, chairman of China Securities Regulatory Commission, said in a transcript of an internal meeting of the regulator that was posted on the agency’s website on Saturday. Chinese shares fell into a bear market again on Friday, wiping out gains from an unprecedented state rescue amid waning confidence in the government’s ability to manage the country’s financial markets.

The initial collapse in June, which came after cheerleading by state media helped fuel an unprecedented boom in mainland equities, triggered stock purchases by the government, restrictions on trading and a temporary ban on initial public offerings. Xiao was criticized for helping to talk up the market as the bubble developed. “The slumping stock market, fleeing liquidity, speedy deleveraging activities, augmented by self-defeating redemption at mutual funds and selloffs in futures, spiraled into a full-scale crisis like a domino effect,” Xiao said in the transcript. “During the abnormal volatility in the stock market, some institutions let illegal and irregular activities ride instead of taking responsibility to stabilize the market.”

It’s been a wild ride for Chinese stock investors. The Shanghai Composite Index more than doubled in the 12 months through May before losing 34% by the end of September as regulators failed to manage a surge in leveraged bets by individual investors. A state-sponsored market rescue campaign sparked a rally toward the end of the year but those gains have been wiped out this month. “The stock market developed so fast that the regulations failed to catch up,” said Ronald Wan, chief executive of Partners Capital International Ltd., an investment bank in Hong Kong. “Only when the laws and regulations improve, can the market develop in a healthy way. That cannot be done in one or two months.”

Losses this year were fueled by a controversial circuit-breaker system, which authorities scrapped in the first week of January after finding that it spurred investors to rush for the exits on big down days. The turbulence in China has rippled through global markets this year, contributing to a 8.5% drop in the MSCI All-Country World Index. The CSRC will try to learn from its overseas counterparts but will avoid wholesale adoption of another nation’s regulatory system, said Xiao. IPO reforms will be gradual and the registration system for offerings won’t be settled in one step, he said. China plans to shift to a registration-based system for IPOs, loosening the grip of the CSRC, which has controlled the timing and pricing of listings.

Peanuts.

• China-Led AIIB Development Bank Aims to Swiftly Approve Loans (AP)

The head of the newly opened Asia Infrastructure Investment Bank said the China-led group is aiming to approve its first loans before the end of the year, part of Beijing’s efforts to weave together regional trade partners and solidify its global status. The AIIB officially opened at a ceremony on Saturday in Beijing, formalizing the emergence of a competitor to the Washington-led World Bank and strengthening China’s influence over global development and finance. AIIB’s inaugural president, the Chinese banker Jin Liqun, said Sunday that Asia still faces “severe connectivity gaps and significant infrastructure bottlenecks.” The bank would welcome the US and Japan, two economic powers that have declined invitations to join the organization, said Jin, who was previously a high-ranking official at both the World Bank and Japan-led Asian Development Bank.

Washington has said it welcomes the additional financing for development but had expressed concern looser lending standards might undercut efforts by existing institutions to promote environmental and other safeguards. Chinese officials have said the bank will complement existing institutions and promised to adhere to international lending standards. Chinese President Xi Jinping has outlined a broad plan called “One Belt One Road” to deepen trade relations with neighboring countries and open new markets, with the AIIB a key component of that strategy. Leaders in the world’s No. 2 economy have long felt they don’t have proportional influence inside international financial institutions dominated by Western powers. China pledged to put up most of the bank’s $50 billion in capital and says the total will eventually be as high as $100 billion. Xi on Saturday unveiled an additional $50 million fund for infrastructure projects in less-developed countries.

Fed sees recession.

• Dallas Fed Quietly Suspends Energy Mark-To-Market On Loss Contagion Fears (ZH)

We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston. This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down.

Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches. In other words, the Fed has advised banks to cover up major energy-related losses. The reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks’ commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.

In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.” Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up. Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we firsst showed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.

Bail-in or bail-out?

• Wall Street Braces for Bigger Shale Losses After Oil Drops Below $30 (BBG)

The Wall Street banks that financed the U.S. shale boom are facing growing losses as oil falls below $30 a barrel. Losses are spreading from bondholders to banks amid the worst oil crash in a generation. Wells Fargo, Citigroup and JPMorgan have set aside more than $2 billion combined to cover souring energy loans and will add to that safety net if prices remain low, the companies reported this week. Losses are mounting as more oil and natural gas producers default on debt payments and declare bankruptcy. Wells Fargo lost $118 million on its energy portfolio in the fourth quarter and Citigroup lost $75 million. “It takes time for losses to emerge, and at current levels we would expect to have higher oil and gas losses in 2016,” John Stumpf, Wells Fargo’s chairman and CEO, said during a Friday earnings call.

Oil plunged 36% in the past year, putting an end to the debt-fueled drilling spree that pushed U.S. oil production to the highest in more than 40 years. After years of spending more than they made, shale companies have parked drilling rigs and fired thousands of workers in an effort to conserve cash. In 2015, 42 oil and and gas producers went bust owing more than $17 billion, according to law firm Haynes & Boone. The weakness in oil and gas lending was a hot topic during bank earnings calls this week, and it’s clear that the potential for losses is snowballing the longer prices remain low. Wells Fargo’s energy reserves of $1.2 billion are enough to cover 7% of the $17 billion of the bank’s outstanding oil and gas loans.

JPMorgan Chase boosted energy loan-loss reserves by $550 million last year and said it will add another $750 million if oil stays at $30 for 18 months. Citigroup increased reserves by $250 million and that will go up by an additional $600 million in the first half of 2016 if oil prices remain at $30. If oil falls to $25, that number may double. Lenders are walking a tightrope between helping their clients stay afloat and looking out for their own bottom line. Borrowers with risky credit typically put up their oil and gas properties as collateral for their loan. Historically, lenders managed to get all of their money back, even in bankruptcy, by liquidating the assets. However, foreclosing on a troubled borrower comes with the risk that the properties will sell for less than is owed to the bank.

With no credibility left, Fed options are limited.

• With Liftoff Done, the Fed Revisits a $4.5 Trillion Quandary (BBG)

Federal Reserve officials who spent months debating their first interest-rate increase in almost a decade are turning next to the thorny question of what to do with a balance sheet equivalent to the size of Japan’s economy. A month after liftoff, turmoil in global financial markets has pushed out expectations for more rate hikes and raised concern about what tools are available to fight the next downturn. Vice Chairman Stanley Fischer has suggested the $4.5 trillion balance sheet could be maintained as a way to hold down longer-term Treasury yields while the short-term policy rate was lifted. Fischer’s idea – discussed in a Jan. 3 speech partly on strategies for pulling the short-term rate away from zero – was taken up in more practical terms by New York Fed President William C. Dudley Friday.

Reinvesting maturing bonds and putting off a reduction in the balance sheet until the federal funds rate is raised somewhat higher “makes sense,” Dudley said. “Having more ‘dry powder’ in the form of higher short-term interest rates seems more desirable than less dry powder and a smaller balance sheet,” he said. Fed Chair Janet Yellen made similar comments in her Dec. 16 press conference, meaning the three most senior officials still view the central bank’s vast holdings of debt as an active policy tool rather than a relic of the financial crisis that needs to be shrunk as soon as possible. “Dudley’s view is if we get to choose our tool” to tighten policy, “then we are going to choose interest rates,” said Michael Hanson, senior economist at Bank of America.

That’s the safer choice, Hanson said, because officials are highly uncertain what shrinking the balance sheet would do to financial markets. The preference to maintain trillions in bond holdings for months to come, however, isn’t likely to be popular with all Federal Open Market Committee participants. Richmond Fed President Jeffrey Lacker favors an “expeditious” unwinding of the Fed’s bond holdings. The Fed’s balance sheet swelled to $4.5 trillion in 2014 from about $900 billion in 2008 on purchases of Treasuries and mortgage-backed securities, during three stages of a strategy known as quantitative easing.

IPO looks silly.

• Saudi Aramco – $10 Trillion Mystery At The Heart Of The Gulf State (Guardian)

The possible selloff of at least part of Aramco, previously considered the country’s crown jewel, has stunned the global energy and investment sectors as much as locals. One Wall Street report claimed an American financial adviser was forced to stop his car because he was laughing so much from sheer incredulity when the Aramco float news broke. But plans for an initial public offering by what may be most secretive – but almost certainly the most valuable – company in the world have been confirmed by its chairman, Khalid al-Falih. “We are considering … a listing of the main company and obviously the main company will include upstream,” he said last week, thereby indicating that the flotation plan could give access to the country’s 260bn barrels of oil reserves and 263 trillion cubic feet of gas.

Among the more than 100 oil and gas fields controlled by Aramco – which began life as the California-Arabian Standard Oil Company in 1933 – are Ghawar, the world’s largest onshore oil location, plus Safaniya, the biggest offshore field in the world. The scale of the Aramco empire dwarfs every other corporation in the world. Its oil assets alone are 10 times more than those held by the world’s largest publicly quoted oil company, ExxonMobil. If the Texas-based business has a stock market value of $400bn, that would make Aramco’s oil assets potentially worth $4tn. Energy analysts admit they find it impossible to accurately calculate the exact worth of a company that boasts of producing 9.5m barrels of oil a day – one in every eight of the world’s production.

But some estimates go as high as $10tn. That is 10 times the combined value of Apple and Alphabet (the new parent company of Google). They know Aramco has huge oil and gas reserves, a raft of refineries and other business interests, but details are scant. The company does not publish its accounts or even its revenues, never mind its profits.

Panic should have started long ago.

• Market Meltdown Rattles Canadian Investors, Panic Sets In (BBG)

A record losing streak in the loonie, plunging bond yields and about $150 billion wiped out in the stock market have left Canadian investors hanging by a thread. Panic is starting to set in. “The word fear is finally starting to come up,” said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel in Calgary. “Clients and people are starting to panic. It’s sinking in, but no one knows what to do.” North American stock markets wrapped up one of their most turbulent weeks in recent memory Friday as oil prices and the dollar plunged further. The commodity-sensitive loonie plumbed depths not seen since 2003 as it fell for an 11th-straight day, losing 0.81 of a U.S. cent to close at 68.82 cents US.

The benchmark Standard & Poor’s/TSX Composite Index dropped 262.57, or 2.13%, to 12,073.46 — its lowest close since June 2013 — after rebounding more than 165 points on Thursday. Yields on five-year government bonds fell to a record low of 0.511% Wednesday as speculation builds the Bank of Canada will cut interest rates next week. Canada’s economy, heavily weighed toward resource industries, has been rocked by concerns about the slowdown in China that has pushed the price of West Texas Intermediate crude below $30 for the first time since 2003. Prices for Canada’s heavy crude, which trades at a discount to the U.S. benchmark, have sunk to around $15 a barrel.

The February contract for WTI crude fell $1.78 to US$29.42 on Friday, while February natural gas fell four cents to US$2.10 per mmBTU. “Right now … people are looking at oil and saying the price of oil is dropping, ergo the economic outlook doesn’t look good. I think it’s as simple as that,” said Ian Nakamoto, director of research at 3Macs. “If oil rallies like it did (Thursday), I think the markets rise here.” But Nakamoto isn’t betting we’ve seen the bottom for oil just yet. “One thing we do know is the supply is greater than demand, so structurally it looks likes prices still have further to go here on the downside.”

What independent central bank?

• German Lawmakers Urge Merkel To Tell Draghi: End Record-Low Rates (BBG)

Lawmakers allied with German Chancellor Angela Merkel say it’s time for the ECB to outline an exit strategy from record-low interest rates and she should tell Mario Draghi so. As Merkel hosted the ECB president for a private meeting in Berlin on Friday, German banks, her party bloc and Bundesbank head Jens Weidmann are pushing for Draghi to explain how he’ll get out of quantitative easing. Designed to counter “economic malaise” as Europe’s debt crisis recedes, the policy is seen by critics as hurting German savers and retail investors, who tend to prefer low-risk investments. “I trust that the chancellor will clearly address the concerns related to the ECB’s policy” when she hosts Draghi at the chancellery, said Alexander Radwan, a member of the German parliament’s finance committee and lawmaker from Merkel’s party bloc.

Merkel should help to ensure “that Europe recognizes the limits of central-bank policy,” he said. While ECB policy is out of Merkel’s hands, low borrowing costs for the 19 euro-area nations are adding to dissatisfaction among members of her party, whose loyalty is already strained by euro-area bailouts and a record influx of refugees to Germany. Draghi argues that the central bank’s €1.5 trillion bond-buying program is needed to try to revive inflation and he’s pledged to do more if prices don’t pick up. Merkel and Draghi held what Steffen Seibert, Merkel’s chief spokesman, described as an “informal and confidential” meeting. The chancellor’s office declined to comment on what they discussed.

That reticence hasn’t stopped Wolfgang Schaeuble, Merkel’s finance minister since 2009 and one of her key allies, from publicly prodding the ECB and portraying its policies as a threat to financial stability. Monetary policy has fueled a tendency toward “exaggeration in financial markets,” with liquidity spurring nervousness “that’s materializing in China now,” Schaeuble said in Brussels on Thursday. “I will not deny that the low interest rates are worrying us,” Antje Tillmann, the finance-policy spokeswoman of Merkel’s party bloc, said in an interview. Germany can manage the low-rate environment only in the short term “and I hope therefore that this will change. I believe Mr. Draghi knows that we’re waiting for this.” Weidmann warned on Tuesday in Paris that low rates over an extended period squeeze bank profits and risk fueling financial bubbles.

Help for refugees will have to come from the people, not government or business. That’s why our AE for Athens Fund works. No side issues.

• The Business Case For Helping Refugees (Gillian Tett)

Last year Hamdi Ulukaya, a Kurdish entrepreneur who created the billion-dollar US-based Chobani yoghurt empire, travelled to Greece to see the swelling refugee crisis with his own eyes. Unsurprisingly, he was horrified by the human suffering that he witnessed, particularly as he shares a cultural affinity with many of the refugees — he grew up near the Syrian border in Turkey, before moving to the US as a student. But Ulukaya was also appalled by something else: the hopelessly bureaucratic and old-fashioned nature of the organisations running the aid efforts. “The refugee issue is being dealt with using [methods from] the 1940s and it’s in the hands of the UN and mostly government and you don’t see a lot of private sector and entrepreneurs involved,” he told me last week.

“I decided we have got to hack this — we have got to bring another perspective into this issue, there are technologies that can be used.” So Ulukaya decided to act. Last year he established a foundation, Tent, to channel financial aid and innovation efforts into refugee work. He also declared that he would give half his fortune to refugee causes (he has made an eye-popping $1.4bn from his wildly popular Chobani yoghurts in recent years). And he has stepped up efforts to hire as many refugees as he can at his yoghurt plants, where they currently account for 30 per cent of the total workforce, or 600 people. “There are 11 or 12 languages spoken in our factories,” says Ulukaya. “We have translators 24 hours a day.”

Now, however, Ulukaya wants to take his campaign further. At next week’s World Economic Forum (WEF) meeting in Davos, he will call on other CEOs to join a campaign to channel corporate money, lobbying initiatives, services and jobs to refugees. Five companies have already signed up: Ikea, MasterCard, Airbnb, LinkedIn and UPS — and Ulukaya says more are poised to join. I daresay some FT readers will shrug their shoulders at this; indeed, as a journalist, part of me feels a little cynical. Over the past couple of years, there has been a string of philanthropy initiatives from American billionaires. And this year’s WEF meeting is likely to produce another wave of pious pledges, not least because many corporate elites will be arriving in Switzerland keenly aware that they need to do more to quell a popular backlash over income inequality.

But what makes Ulukaya’s move unusual — and admirable — is his unashamed embrace of the refugee cause. And that illustrates a bigger point: the voice of business has been extraordinarily muted, if not absent, from this wider policy debate. To be sure, some companies, such as American Express, Starbucks, Google and Uniqlo, have made donations to humanitarian groups involved in helping refugees. Others have offered practical services: Daimler, for example, has provided buildings and medical devices. Most companies, however, have avoided getting too embroiled in the issue, preferring to concentrate on less political causes such as medical aid. “With few exceptions, the business community has been absent from the debate about how to best deal with the refugee crisis, not only in the short term but, importantly, in the long term,” says Ioannis Ioannou, a professor at London Business School.

More talk of a ‘coalition of the willing’. More division in Europe.

• Schäuble Proposes Special EU Tax On Gasoline To Finance Refugee Costs (Reuters)

German Finance Minister Wolfgang Schaeuble has proposed the introduction of a special tax on gasoline in European Union member states to finance refugee-related costs such as strengthening the continent’s joint external borders. Schaeuble’s proposal drew criticism from members of his own conservative party, the Christian Democratic Union (CDU), as well as from the Social Democrats (SPD), junior partner in Chancellor Angela Merkel’s ruling coalition. “I’ve said if the funds in the national budgets and the European budget are not sufficient, then let us agree for instance on collecting a levy on every liter of gasoline at a specific amount,” Schaeuble told Sueddeutsche Zeitung newspaper in an interview published on Saturday.

“We have to secure Schengen’s external borders now. The solution of these problems must not founder due to a limitation of funds,” the veteran politician said. Asked if all EU countries should increase their payments to Brussels to finance joint refugee-related costs, Schaeuble said: “If someone is not willing to pay, I’m nonetheless prepared to do it. Then we’ll build a coalition of the willing.” Schaeuble gave no details on how high the extra levy on gasoline should be and whether Brussels or the EU member states would be in charge of collecting it. Schaeuble’s was met with criticism across the party political spectrum. “I’m strictly against any tax increase in light of the good budgetary situation,” said CDU deputy Julia Kloeckner who wants to win a regional election in the western state of Rhineland-Palatinate in March.

When describing dead bodies they know nothing about, AP chooses to go with “most likely migrants”. Whereas, obviously, they’re at least as likely to be refugees. They know it, we know it, but the bias is too strong to overcome. Plus, it’s like saying all refugees are migrants. And if you repeat it often enough… Does any of you people ever think about the lack of respect for the dead you promote?

• Five Bodies Wash Up On Shore Of Samos (AP)

Five people, most likely migrants, have been found dead off the eastern Greek island of Samos, Greek authorities report. The Greek coast guard has recovered the bodies of two men and three women, and are trying to recover the sixth in rough seas, a coast guard spokeswoman told AP. No vessel has been recovered yet. The rescue operation continues, said the spokeswoman, who was not authorized to be identified because of the continuing operation. Samos, which lies very close to the Turkish coast, is one of the main points of entry for migrants, most refugees from Syria and Iraq.

Debt Rattle December 28 2015

Dec 282015

December 28, 2015 Posted by Raúl Ilargi Meijer at 9:55 am Finance Tagged with: Abenomics, arms, China, floods, Japan, refugees, Russia, Shale, steel 2 Responses »

DPC Gillender Building, corner of Nassau and Wall Streets, built 1897, wrecked 1910 1900

• Japan Output, Retail Sales Slump, Dampen Recovery Prospects (Reuters)

• Japan Business Lobby Head Won’t Commit To Higher Wages (Reuters)

• China Industrial Profits Fall For Sixth Straight Month (Reuters)

• Head Of China Telecom ‘Taken Away’ As Probe Launched (AFP)

• World Steel Chief Calls Chinese Glut ‘Serious And Critical’ (USA Today)

• Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure (BBG)

• End Of Easy Money For Mini-Refiners Splitting US Shale? (Reuters)

• China Fines Eight Shipping Lines $63 Million for Price Collusion (BBG)

• The Danger Of Safety (Tengdin)

• Britain Needs Dutch-Style Delta Plan To Stem Tide Of Floods (Guardian)

• US Sees Bearable Costs, Key Goals Met For Russia In Syria So Far (Reuters)

• US Foreign Arms Deals Increased Nearly $10 Billion in 2014 (NY Times)

• Britain’s New, Open Way to Sell Arms (BBG)

• China Passes Antiterrorism Law That Critics Fear May Overreach (NY Times)

• China Approves New Two-Child Birth Policy (WSJ)

• Greek Construction Sector Shrinks By 63% Since 2011 (Kath.)

• Germany Hires 8,500 Teachers To Teach German To 196,000 Child Refugees (AFP)

• Refugee Crisis Creates ‘Stateless Generation’ Of Children In Limbo (Guardian)

Oh, sure: “Manufacturers surveyed by the trade ministry expect to increase production by 0.9% in December and raise it by 6.0% in January. Zero Hedge take: ” • Household Spending plunges 2.9% YoY – worst since March (post-tax-hike) • Jobless Rate jumps to 3.3% (from 3.1%) • Industrial Production drops 1.0% MoM – worst in 3 months • Retail Trade tumbles 1.0% YoY – biggest drop since March (post-tax-hike) • Retail Sales plunges 2.5% MoM – Worst drop since Fukushima Tsunami (absent tax-hike)

• Japan Output, Retail Sales Slump, Dampen Recovery Prospects (Reuters)

Japan’s factory output fell for the first time in three months in November and retail sales slumped, suggesting that a clear recovery in the world’s third-largest economy will be delayed until early in 2016. While manufacturers expect to increase output in coming months, the weak data casts doubt on the Bank of Japan’s view that an expected pick-up in exports and consumption will help jump-start growth and accelerate inflation toward its 2% target. Industrial output fell 1.0% in November from the previous month, more than a median market forecast for a 0.6% decline, data by the trade ministry showed on Monday. Separate data showed that retail sales fell 1.0% in November from a year earlier, more than a median forecast for a 0.6% drop, as warm weather hurt sales of winter clothing.

“We’re finally seeing signs of pick-up in exports, but the economy has yet to make a clear turnaround,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “There’s a risk consumption will remain sluggish and prevent economic growth from picking up,” he said. Japan’s economy narrowly dodged recession in July-September and analysts expect only modest growth in the current quarter, as consumption and exports lack steam. Some analysts warn the economy may suffer a contraction in October-December if household spending remains weak. Taro Saito, senior economist at NLI Research Institute, expects consumption in the current quarter to have risen less than a 0.4% quarter-on-quarter increase in July-September.

Wary of soft growth, the government plans nearly $800 billion in record spending in the budget for the fiscal year that will begin on April 1. The BOJ has signalled readiness to expand stimulus if risks threaten Japan’s recovery prospects. The central bank fine-tuned its stimulus programme on Dec. 18 to ensure it can keep up or even accelerate its money-printing. While sluggish emerging market demand dims the export outlook, analysts expect output to gradually increase early in 2016 as automakers ramp up production of new models. Manufacturers surveyed by the trade ministry expect to increase production by 0.9% in December and raise it by 6.0% in January.

Abe can still go nuttier. Just watch him. He has one policy only, has been pumping it for 3 years now, and it has failed miserably (as we always said it must). So that’s his career. Next: panic.

• Japan Business Lobby Head Won’t Commit To Higher Wages (Reuters)

The head of an influential Japanese business lobby won’t pass on the government’s requests to its members to raise salaries next year, a worrying sign that real wages may not increase fast enough to boost consumption in the country. Higher wages are crucial to policymakers’ efforts to break a decades-long cycle of weak growth and deflation. Prime Minister Shinzo Abe has won modest wage gains from the largest firms, but this has been slow to filter through the economy. Renewed concern about a slowdown in emerging markets and weak overseas demand could make more companies reluctant to raise wages. This could in turn scupper the government’s efforts to increase consumption and put the Bank of Japan’s 2% inflation target out of reach.

“The government is hoping for higher wages, but the Keizai Doyukai, as an organization that corporate executives personally belong to, is not going to tell its members what to do,” said Yoshimitsu Kobayashi, chairman of the Keizai Doyukai, which regularly participates in the government’s corporate policy panels and is one of Japan’s top three business lobbies. “Companies that don’t have money obviously won’t raise wages.” Since taking office in late 2012, Abe has repeatedly asked big business lobbies to encourage their members to raise wages at annual spring salary negotiations with unions. Abe will also raise the minimum wage by about 3% from next fiscal year to encourage salaries to rise more broadly throughout the economy.

Many companies have enjoyed record profits recently, so there is room for these companies to offer their workers higher pay, Kobayashi said. Japanese companies also have the funds needed to increase domestic investment in plants, research and develop their workers’ skills, he said. However, around 65% of people work at small and medium-sized enterprises, many of which are losing money and are therefore unlikely to raise salaries or spend extra money on training employees.

“Profits of state-owned enterprises among major industrial firms saw a 23% slump in the first 11 months this year..”

• China Industrial Profits Fall For Sixth Straight Month (Reuters)

Profits earned by Chinese industrial companies in November fell 1.4% from a year earlier, marking a sixth consecutive month of decline, statistics bureau data showed on Sunday. Industrial profits – which cover large enterprises with annual revenue of more than 20 million yuan ($3.1 million) from their main operations – fell 1.9% in the first 11 months of the year compared with the same period a year earlier, the National Bureau of Statistics (NBS) said on its website. The November profits of industrial firms have seen some improvement from the previous month. In October, profits fell 4.6% from a year earlier. “The November industrial profit data matched earlier output data and they showed some signs of stabilizing, which are in line with recent data from other Asian countries,” said Zhou Hao at Commerzbank in Singapore, adding the figures were slightly better than market expectations.

The NBS said investment returns for industrial companies in November increased from a year earlier by 9.25 billion yuan ($1.43 billion). The jump in November profits from the auto manufacturing and electricity sectors, up 35% and 51% from a year earlier, respectively, helped narrow overall declines, the statistics bureau said. “Declines in industrial profits narrowed in November, but uncertainties still exist,” said He Ping, an official of the Industry Department at NBS. He added that inventory of finished goods grew at a faster pace last month. Profits of state-owned enterprises (SOEs) among major industrial firms saw a 23% slump in the first 11 months this year from the same period in 2014. Mining remained the laggard sector, with profits falling 56.5% in the same period. Aluminum producer China Hongqiao Group said in early December it would cut annual capacity by 250,000 tonnes immediately to curb supplies.

Eight Chinese nickel producers including state-owned Jinchuan Group, said they would cut production by 15,000 tonnes of metal in December and reduce output next year by at least 20% from this year, in a bid to lift prices from their worst slump in over a decade. China’s producer prices have been in negative territory for nearly four years due to weak domestic demand and overcapacity. The country’s top leader last week outlined main economic targets for next year after they held the annual Central Economic Work Conference, where it said the government will push forward “supply-side reform” to help generate new growth engines in the world’s second-largest economy while tackling factory overcapacity and property inventories.

Hotshots keep disappearing over there. Think they have a luxury resort they all gather in?

• Head Of China Telecom ‘Taken Away’ As Probe Launched (AFP)

The head of China Telecom, one of the nation’s big three telecoms firms, is under investigation for “severe disciplinary violations”, the government said Sunday, the latest high-profile target in a corruption crackdown. News of the probe into Chang Xiaobing, 58, was given in a statement on the website of the Central Commission for Discipline Inspection, the watchdog of the ruling Communist Party. The term is normally a euphemism for graft. Chang had been “taken away”, according to an article in the respected business magazine Caijing, which added that he disappeared just days before a meeting of the state-owned company planned for December 28. A memo saying the meeting would be postponed was issued on the evening of the 26th, the article said.

Chang’s phone was switched off and he had not responded to multiple calls, it added. In August, after 11 years as chairman and party secretary of China’s second largest telecoms provider China Unicom, Beijing announced Chang would head China Telecom. That decision, Caijing said, was made despite widespread rumours that the executive was under investigation. It sparked speculation about an imminent tie-up between the two industry leaders and the third major player, China Mobile. In April the state news agency Xinhua reported that China was considering merging scores of its biggest state-owned companies to create around 40 national champions from the existing 111.

Authorities have been pursuing a hard-hitting campaign against allegedly crooked officials since President Xi Jinping took office in 2013, a crusade that some experts have called a political purge. Several high-profile business leaders have been caught up in the web of graft investigations after authorities pledged they would turn their efforts to the state-owned enterprise system, a bulwark of graft that has resisted multiple attempts at reform. The campaign is seen as an attempt to force executives of state firms, who jealously guard their prerogatives, to toe the party line, reducing resistance to structural reforms intended to bolster the slowing economy. Beijing announced it had begun investigations into the country’s telecom industry earlier this year, while Chang was still at China Unicom.

2016 looks like a black year for steel. And not only steel.

• World Steel Chief Calls Chinese Glut ‘Serious And Critical’ (USA Today)

The global steel industry is reeling amid a plunge in steel prices, a flood of low-priced imports from China and other countries, and a collapse in investment in pipes for oil drilling as a result of tumbling crude prices. USA TODAY economics reporter Paul Davidson spoke about these challenges with Wolfgang Eder, chairman of the World Steel Association and CEO of Austrian steel giant Voestalpine. The company has 46,000 employees worldwide and 2,500 workers and nearly two dozen factories in the USA.

Q: U.S. steelmakers are awaiting decisions on trade cases against China for illegally dumping steel below cost in this country. Is this a global problem? A: The current Chinese overcapacity problem affects all parts of the world. Chinese plants (are selling) not only to the U.S. but also to Europe. It’s an intensive discussion of what should be the reaction and an ongoing discussion to what extent Europe should follow the U.S. (in filing trade cases). The problem at the moment is enormous. I do hope we will find some balance again in the next months, but at the moment, the situation is a very serious and critical one.

Q: What’s the long-term solution? A: In the long run, a solution to the problem can only come from the reduction of capacities. According to OECD (countries in the Organization for Economic Cooperation and Development ), there are 600 to 700 million tons of overcapacity (worldwide), the largest part in China. That means permanent pressure on margins and prices.

Q: Is the plunge in steel prices affecting your company, Voestalpine? A: We are not (selling) any material via the spot market. We do have only high-quality steel, and this steel is only sold based on contracts. We are, of course, the (supplier) for the German auto producers — BMW, Mercedes, Audi, Porsche. So we are one of the largest suppliers for these car producers. They are only buying really high-tech, high-quality material where we can differentiate. Two-thirds (of production) is downstream — we make complete automotive components, exteriors of cars, we produce complete rail tracks.

Q: Still, you do make some raw steel, and the drop in prices has affected you, hasn’t it? A: We have started additional cost-cutting measures. We try to avoid layoffs because we do not want to lose highly qualified people. So for the time being, we have (cut staff) in only a very few locations — some in Germany, some in Brazil. And, of course, we try to extend our product range. We intend to sell more automotive parts.

Q: Have you been affected by the downturn in oil and gas drilling? A: We have not yet been affected by the weakness in the oil and gas market, but we do expect, looking forward … the second half (of the fiscal year) will be a really more difficult period. Inventories are extremely high now, of oil and gas, but also inventories for all the production equipment are at very high levels. We cannot expect oil and gas levels will come down quickly over the winter as they have reached levels we have never seen before. So it’s unlikely we’ll see recovery of this segment before the summer of next year.

The same people eager to claim OPEC no longer functions are just as eager to say OPEC kills US shale.

• Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure (BBG)

In 2015, the fracking outfits that dot America’s oil-rich plains threw everything they had at $50-a-barrel crude. To cope with the 50% price plunge, they laid off thousands of roughnecks, focused their rigs on the biggest gushers only and used cutting-edge technology to squeeze all the oil they could out of every well. Those efforts, to the surprise of many observers, largely succeeded. As of this month, U.S. oil output remained within 4% of a 43-year high. The problem? Oil’s no longer at $50. It now trades near $35. For an industry that already was pushing its cost-cutting efforts to the limits, the new declines are a devastating blow. These drillers are “not set up to survive oil in the $30s,” said R.T. Dukes at Wood Mackenzie in Houston.

The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016. That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers. It’s a high-risk strategy, one whose success will ultimately hinge on whether shale drillers drop out before the financial pain within OPEC nations themselves becomes too great. Drillers including Samson and Magnum Hunter have already filed for bankruptcy. About $99 billion in face value of high-yield energy bonds are trading at distressed prices, according to Bloomberg Intelligence analyst Spencer Cutter.

The BofA Merrill Lynch U.S. High Yield Energy Index has given up almost all of its outperformance since 2001, with the yield reaching its highest level relative to the broader market in at least 10 years. “You are going to see a pickup in bankruptcy filings, a pickup in distressed asset sales and a pickup in distressed debt exchanges,” said Jeff Jones at Blackhill Partners. “And $35 oil will clearly accelerate the distress.”

“They also question how the new landscape will affect traders such as BP and Trafigura, which signed long-term contracts to buy all the output from those facilities.”

• End Of Easy Money For Mini-Refiners Splitting US Shale? (Reuters)

Energy companies and oil trading firms that teamed up to build several mini-refineries that convert a swelling surplus of ultra-light U.S. crude into fuels for export seemed like a pretty safe investment bet for a while. The bet was built on several converging dynamics: an ever-rising supply of condensate; a U.S. refining system built to run heavier crudes; and a longstanding ban on crude exports that appeared unlikely to unwind amid partisan paralysis in Washington, D.C. Now, as U.S. oil output reverses its five-year rise and after lawmakers ended the 40-year-old export ban this month, oil executives and analysts question the wisdom of nearly $1 billion worth of so-called condensate splitters built over the past year, and the future of another $1.2 billion planned.

Traders are wondering what will happen with existing splitters run by companies such as Kinder Morgan. They also question how the new landscape will affect traders such as BP and Trafigura, which signed long-term contracts to buy all the output from those facilities. Other pending projects without guaranteed buyers could be abandoned, experts say. The once-restricted domestic crude not only faces increased competition. It also is hurt by the inversion of the global oil market, where once-abundant U.S. production is declining while global supplies are rising. This has eliminated the price discount that underpinned their model.

“It’s a much different competitive environment now that we don’t have distressed condensate,” said Sandy Fielden, an analyst with RBN Energy. While the same can be said of the nation’s larger, older fleet of full-scale refineries, splitters may be most exposed to the sudden changes, given their dependence on the most deeply discounted variety of oil. “Why would you distill it here if you can distill it elsewhere? The only reason you want to do it here is when it’s cheaper, but now it doesn’t make sense,” said Nick Rados, global business director of feedstocks for IHS Chemical.

Peanuts.

• China Fines Eight Shipping Lines $63 Million for Price Collusion (BBG)

China fined eight shipping lines 407 million yuan ($63 million) in total after finding them responsible for price collusion in the transportation of vehicles and heavy machinery. Japan’s Nippon Yusen, Mitsui OSK lines, Kawasaki Kisen Kaisha and Eastern Car Liner, Korea’s Eukor Car Carriers, Norway’s Wallenius Wilhelmsen, Chile’s Cia. Sud Americana de Vapores and its shipping line were the eight indicted after a year-long investigation, the National Development and Reform Commission said in a statement on its website Monday. The companies acknowledge wrongdoing, the top Chinese economic planning agency said. The probe follows similar investigations by the European Union in 2013 and Japan’s Fair Trade Commission.

Japanese regulators raided the offices of five shipping lines in 2013 over allegations they discussed raising rates together for transporting cars, and imposed fines on Nippon Yusen and Kawasaki Kisen in January 2014. AP Moeller-Maersk, CMA CGMand MSC Mediterranean Shipping were among companies in the European Union probe. Eukor will accept the Chinese decision and pay a fine of 284.7 million yuan, the company said in a statement on its website. The company also has implemented a competition law compliance program and corrective measures including antitrust compliance training, it said. Nippon Yusen has fully cooperated with the investigation by the Chinese agency and consequently received an immunity from the fine, the Japanese company said in a statement.

Re: Minsky.

• The Danger Of Safety (Tengdin)

The US Forest Service was created in 1905. Teddy Roosevelt signed the bill in response to a series of disastrous forest fires, like the Great Hinckley Fire of 1894. These fires threatened future commercial timber supplies, and the Federal Government had begun to establish national forest reserves. Why create them, people wondered, if they were just going to burn down? So the Forest Service established a systematic approach to fire control, building a network of roads, lookout towers, ranger stations, and communications. They also offered financial incentives for states to fight fires. With new technology, like airplanes, smokejumpers, and chemicals, they established their 10 am policy: every fire should be suppressed by 10 am the day following its initial report.

But a funny thing happened: by eliminating fire from the forest ecosystem, a lot of dead wood and other fuel accumulated over time. This insured that when fires did break out, they would become far more destructive. Moreover, scientists noted that fire was an essential part of many plant and tree life cycles. The Forest Service changed its approach from fire control to fire management-letting naturally occurring fires burn, unless they threatened developed areas. Is this part of what led to the Financial Crisis of 2007-2009? During the 25 years prior, economists had noted that more effective bank regulation and monetary policy had led to a “Great Moderation”-a significant dampening of the business cycle in the US and other developed nations.

It’s possible that reduced economic volatility led investors, homeowners, and banks to take on greater risks. In essence, the Fed’s policy of fire suppression allowed toxic assets to be created and distributed throughout the financial ecosystem. Highly regulated (and insured) banks were replaced by (uninsured) shadow banks. These assumed particular risks and contributed to a culture of increased systemic risk. When some of their assets began to unravel, it was impossible to contain the damage. We find a sort of risk-homeostasis in other areas. Anti-lock brakes encourage more aggressive driving; better skydiving gear allows hazardous high-speed maneuvers close to the ground. This is sometimes called the Peltzman effect: people behave as if they want a certain level of risk in their lives.

This appears to be the case with ecosystems and economies, too. Are safety measures useless, then? Absolutely not! The rate of accidental fatalities has fallen dramatically over time, and there are also fewer bank failures. But like the US Forest Service, we need to focus on risk management rather than risk reduction. Don’t assume government regulators will control your financial risks. Diversification, analysis, and-above all-not paying too much are still crucial, and always will be. The biggest risk, after all, is believing that we aren’t taking any risk. In a dynamic world, that’s guaranteed to fail.

Britain lost decades not acting on what was already obvious all those years ago.

• Britain Needs Dutch-Style Delta Plan To Stem Tide Of Floods (Guardian)

When more than 1,800 people died in the wake of the 1953 North Sea flood in the Netherlands, the national reaction was: never again. The resulting Delta programme to close off the south-western river delta from the sea was so bold that its name became synonymous with dealing with a crisis. If an issue needs a major response, you can be sure that a Dutch politician will call for a “Delta plan to tackle X”. It is time that the UK took some of that attitude and got a Delta plan to tackle flooding. Flooding has become an almost annual event in the UK. We are waiting for the next storm and flash flood to hit, with another group – or even the same group – of people evacuated, all followed by the promise of some money for a bit of flood defence work. As a nation, we can no longer afford to accept that.

Consider the personal misery for those affected, even in areas not traditionally flood-prone like Manchester and Leeds. Consider that the financial cost of these events will continue to rise – and not only for the government. Every home insurance policy now includes a £10.50 Flood Re levy to subsidise insurance for homes with a high risk of flooding. With the climate changing and becoming more volatile, we can expect heavier rain and more severe storms. Water management systems in the UK, and in particular in England, are unable to deal with what lies ahead. After almost every flood, journalists and policymakers go to the Netherlands to learn how they are adapting to climate change and what lessons there are for the UK. We see Dutch projects in the news, such as a neighbourhood with floating homes that forms part of a major national programme to create space for the rivers.

But those lessons never seem to be taken on board. Come the next flood, off they all go to Holland again. For the Dutch, water management goes to the core of their national identity. The country was forged in the battle against water. This common fight led to the pooling of resources and decision-making in regional water authorities – among the oldest democratic institutions in the world – which continue that work today. The national habit of consensus decision-making in tackling major issues became known internationally in the 90s as the “polder model”, echoing its water-based roots. No Dutch politician wants to be part of the generation that fails in the common endeavour against water, and no voter would accept someone caught sleeping on their watch.

The Netherlands has adapted to the changing nature of the threat. Today, the biggest danger is not the sea swallowing the land but the rain overwhelming it. The main focus no longer is building higher dykes and bigger dams, like they did after the 1953 flood. Instead, the Dutch have spent the past decade deepening and widening rivers, creating new side canals that provide extra capacity, and setting aside land as dedicated flood plains. This €2.3bn project is still ongoing. All this so that when the water does come, the swollen rivers can expand without flooding homes and causing misery. In Britain, we need to start to realise and accept that flooding is becoming an equally existential issue. There can be no northern powerhouse or sustainable prosperity anywhere if it risks being swept away by the rain.

Putin won.

• US Sees Bearable Costs, Key Goals Met For Russia In Syria So Far (Reuters)

Three months into his military intervention in Syria, Russian President Vladimir Putin has achieved his central goal of stabilizing the Assad government and, with the costs relatively low, could sustain military operations at this level for years, U.S. officials and military analysts say. That assessment comes despite public assertions by President Barack Obama and top aides that Putin has embarked on an ill-conceived mission in support of Syrian President Bashar al-Assad that it will struggle to afford and that will likely fail. “I think it’s indisputable that the Assad regime, with Russian military support, is probably in a safer position than it was,” said a senior administration official, who requested anonymity. Five other U.S. officials interviewed by Reuters concurred with the view that the Russian mission has been mostly successful so far and is facing relatively low costs.

The U.S. officials stressed that Putin could face serious problems the longer his involvement in the more than four-year-old civil war drags on. Yet since its campaign began on Sept. 30, Russia has suffered minimal casualties and, despite domestic fiscal woes, is handily covering the operation’s cost, which analysts estimate at $1-2 billion a year. The war is being funded from Russia’s regular annual defense budget of about $54 billion, a U.S. intelligence official said. The expense, analysts and officials said, is being kept in check by plummeting oil prices that, while hurting Russia’s overall economy, has helped its defense budget stretch further by reducing the costs of fueling aircraft and ships. It has also been able to tap a stockpile of conventional bombs dating to the Soviet era.

Putin has said his intervention is aimed at stabilizing the Assad government and helping it fight the Islamic State group, though Western officials and Syrian opposition groups say its air strikes mostly have targeted moderate rebels. Russia’s Syrian and Iranian partners have made few major territorial gains. Yet Putin’s intervention has halted the opposition’s momentum, allowing pro-Assad forces to take the offensive. Prior to Russia’s military action, U.S. and Western officials said, Assad’s government looked increasingly threatened.

Let’s all buy shares!

• US Foreign Arms Deals Increased Nearly $10 Billion in 2014 (NY Times)

Foreign arms sales by the United States jumped by almost $10 billion in 2014, about 35%, even as the global weapons market remained flat and competition among suppliers increased, a new congressional study has found. American weapons receipts rose to $36.2 billion in 2014 from $26.7 billion the year before, bolstered by multibillion-dollar agreements with Qatar, Saudi Arabia and South Korea. Those deals and others ensured that the United States remained the single largest provider of arms around the world last year, controlling just over 50% of the market. Russia followed the United States as the top weapons supplier, completing $10.2 billion in sales, compared with $10.3 billion in 2013.

Sweden was third, with roughly $5.5 billion in sales, followed by France with $4.4 billion and China with $2.2 billion. South Korea, a key American ally, was the world’s top weapons buyer in 2014, completing $7.8 billion in contracts. It has faced continued tensions with neighboring North Korea in recent years over the North’s nuclear weapons program and other provocations. The bulk of South Korea’s purchases, worth more than $7 billion, were made with the United States and included transport helicopters and related support, as well as advanced unmanned aerial surveillance vehicles. Iraq followed South Korea, with $7.3 billion in purchases intended to build up its military in the wake of the American troop withdrawal there.

Brazil, another developing nation building its military force, was third with $6.5 billion worth of purchase agreements, primarily for Swedish aircraft. The report to Congress found that total global arms sales rose slightly in 2014 to $71.8 billion, from $70.1 billion in 2013. Despite that increase, the report concluded that “the international arms market is not likely growing over all,” because of “the weakened state of the global economy.”

What better sign is there of our collective insanity?

• Britain’s New, Open Way to Sell Arms (BBG)

Champion cyclist Ryan Perry, a British army captain, was uncharacteristically tipsy the night of Nov. 25, but no one could blame him for enjoying the Champagne. Standing on the stage of a grand 15th century hall in London, the 28-year-old cradled a crystal plaque naming him the army’s sportsman of the year. Seated in front of him was one of the British military’s most influential officers, the chief of the general staff, or CGS. “Yesterday I was riding around Burnley in the wind and rain,” Perry told the crowd, referring to his seaside hometown. “Tonight I’m drinking Champagne with CGS.” Attending the banquet were executives from at least 20 contractors for the U.K.’s Ministry of Defence—including U.S.-based arms manufacturers Boeing, Lockheed Martin, and Raytheon.

They raised glasses with senior military officials, many of whom are directly involved in spending some of the $268 billion in defense procurement the U.K. has planned for the next decade. The contractors paid for the black-tie dinner in the historic Guildhall. The corporations are sponsoring the dinner through Team Army, a charity established in 2011 after an antibribery law went into effect in the U.K. The law was enacted following a string of high-profile corruption cases, including some in defense deals. Team Army’s role is to be in the middle of what were once unofficial big-dollar transactions between generals and defense companies. “It’s as clean as we can make the damn thing,” says Lamont Kirkland, a general who ran the army’s boxing, rugby, and winter sports programs before retiring to lead the charity.

Arms makers and other contractors pay Team Army as much as £70,000 ($104,000) for memberships. The members sponsor tables or buy tickets for Champagne receptions and other fêtes. Corporate suites at premier soccer games, rugby matches, and horse races are also used to raise money. Contractors are invited to spend time at the events with the top brass who buy their wares. The charity uses money from the contractors to fund military sports programs, Paralympics, and elite military athletes. Top-draw competitions, including the annual army-navy rugby match at London’s 82,000-seat Twickenham Stadium, are used for more fundraising. Although the official numbers won’t be public until 2016, Team Army raised a record amount this year, Kirkland says. Since 2011 the charity has amassed about $4.5 million for military sports.

China, US, France, what’s the difference?!

• China Passes Antiterrorism Law That Critics Fear May Overreach (NY Times)

China’s legislature approved an antiterrorism law on Sunday after months of international controversy, including criticism from human rights groups, business lobbies and President Obama. Critics had said that the draft version of the law used a recklessly broad definition of terrorism, gave the government new censorship powers and authorized state access to sensitive commercial data. The government argued that the requirements were needed to prevent terrorist attacks. Opponents countered that the new powers could be abused to monitor peaceful citizens and steal technological secrets. Whether the complaints persuaded the government to dilute the bill was not clear: State news media did not immediately publish the text of the new law.

But an official who works for the Standing Committee of the National People’s Congress indicated that at least some rules authorizing greater state access to encrypted data remained in the law. “Not only in China, but also in many places internationally, growing numbers of terrorists are using the Internet to promote and incite terrorism, and are using the Internet to organize, plan and carry out terrorist acts,” the official, Li Shouwei, told a news conference in Beijing. Mr. Li, a criminal law expert, said the antiterrorism law included a requirement that telecommunication and Internet service providers “shall provide technical interfaces, decryption and other technical support and assistance to public security and state security agencies when they are following the law to avert and investigate terrorist activities.”

The approval by the legislature, which is controlled by the Communist Party, came as Beijing has become increasingly jittery about antigovernment violence, especially in the ethnically divided region of Xinjiang in western China, where members of the Uighur minority have been at growing odds with the authorities. Chinese leaders have ordered security forces to be on alert against possible terrorist slaughter of the kind that devastated Paris in November. Over the weekend, the shopping neighborhood of Sanlitun in Beijing was under reinforced guard by People’s Armed Police troops after several foreign embassies, including that of the United States, warned that there were heightened security risks there around Christmas.

“..Chinese people over the age of 65 will jump 85% to 243 million by 2030..”

• China Approves New Two-Child Birth Policy (WSJ)

China’s lawmakers will allow all couples to have two children from the beginning of next year, implementing a new birth policy aimed at mitigating a potential demographic crisis. In a congressional meeting Sunday, Chinese lawmakers approved the new birth policy, which will take effect Jan. 1, 2016, Xinhua reported. Top Communist Party leaders had previously approved the new policy. The announcement sets a timeline for a policy that will replace the country’s controversial 35-year-old one-child policy. The National Health and Family Planning Commission, which implements China’s reproduction policy, said at the time it would move slowly to avoid population spikes. Demographers have warned China’s leaders for the past decade that falling birthrates in the nation may cause a future labor shortage that would endanger economic growth.

China has the world’s largest population at 1.37 billion, but its working-age population -those aged 15 to 64- is shrinking. The United Nations projects the number of Chinese people over the age of 65 will jump 85% to 243 million by 2030, up from 131 million this year. Many health experts say that while the new policy will likely enable up to 100 million couples to have additional children, they don’t expect a baby boom. Many Chinese couples say the cost of having children is prohibitive, and some will opt to have only one child. A previous relaxation of China’s one-child policy did not lead to a significant increase in baby numbers. Health officials previously said they are moving to simplify the birth application procedures for couples, who currently have to go through a complicated procedure that can often take months.

This is actually an article on some grand projects that do still get built. I like the other side of the coin better.

• Greek Construction Sector Shrinks By 63% Since 2011 (Kath.)

As construction continues to slump, the prevalent impression is that all building activity has come grinding to a halt. Yet this is only one side of the coin and mainly concerns private projects. According to data from the Hellenic Statistical Authority (ELSTAT), construction activity (measured by the number of permits issued) throughout the country dropped by 63.47% in the period from 2011 to 2014. Attica has been hit hardest by the economic crisis, with construction nosediving 73.10%, while the greatest losses have been seen in the residential property market. Up until the start of the crisis, 75% of investments in construction went toward residential property. In the third quarter of 2014, this had shrunk to 31%, with losses of €23.29 billion.

This is the “big picture” as a walk around any neighborhood in the Greek capital will attest. But there are also the shining exceptions, projects that were started well before the crisis or that defied the circumstances and forged ahead. The most important similarity between these projects is that they have progressed enough so they are no longer at risk of remaining on paper. And, irrespective of their scale, they are all important, if only on a symbolic level because they create a sense that something is happening, that there is movement in the works.

Where did they find them?

• Germany Hires 8,500 Teachers To Teach German To 196,000 Child Refugees (AFP)

Germany has recruited 8,500 people to teach child refugees German, as the country expects the number of new arrivals to soar past the million mark in 2015, Die Welt daily reported on Sunday. About 196,000 children fleeing war and poverty will enter the German school system this year, and 8,264 “special classes” have been created to help them catch up with their peers, Die Welt said, citing a survey carried out in 16 German federal states. Germany’s education authority says 325,000 school-aged children reached the EU country in 2015 during Europe’s worst migration crisis since the second world war.

Germany expects more than a million asylum seekers this year, which is five times more than in 2014. It has put a strain on its ability to provide services to all the newcomers. “Schools and education administrations have never been confronted with such a challenge,” Brunhild Kurth, who heads the education authority, told Die Welt. “We must accept that this exceptional situation will become the norm for a long time to come.” Heinz-Peter Meidinger, head of the DPhV teachers’ union, said Germany would need up to 20,000 additional teachers to cater for the new numbers. “By next summer, at the latest, we will feel that gap,” he said.

Better solve this fast.

• Refugee Crisis Creates ‘Stateless Generation’ Of Children In Limbo (Guardian)

Europe’s refugee crisis is threatening to compound a hidden problem of statelessness, with experts warning that growing numbers of children are part of an emerging “stateless generation”. Gender-biased nationality laws in Syria combined with ineffective legal safeguards in the EU states mean that many children born to Syrian refugees in Europe are at high risk of becoming stateless – a wretched condition of marginalisation that affects 10 million people worldwide. Under Syrian law, only men can pass citizenship on to their children. The UN estimates that 25% of Syrian refugee households are fatherless. “A lot of those who are resettled to Europe are women whose husband or partner was killed or lost and are being resettled with their kids or are pregnant at the time, so that is becoming a bigger problem,” said Zahra Albarazi of the Institute on Statelessness and Inclusion, based in the Netherlands.

Sanaa* is a 35-year-old single mother who gave birth to her daughter, Siba*, in Berlin last year. “I went to the Syrian embassy and explained my situation but they said they cannot give Siba a passport because the father should be Syrian, and the father and mother married,” Sanaa said. Germany, in common with the rest of Europe, does not automatically grant citizenship to children born there. This means Siba does not have citizenship of any country. Under international treaties including the UN convention on the rights of the child, governments are obliged to grant nationality to any child born on their soil who would otherwise be stateless. But few EU countries have adopted this principle into domestic law and those that have consistently fail to implement it.

The UNHCR refugee agency estimates that at least 680,000 people in Europe are without citizenship of any country, although experts say the true figure is likely to be far higher because stateless people are hard to count. The statelessness problem is particularly bad in south-east Asia: in Myanmar alone the UN estimates there are more than 810,000 stateless people. But the situation in Europe is about to get much worse as a result of the unprecedented migration. Up until now, groups such as the Roma and Russian-speaking people from the Baltics have been most affected, although the UN blames statelessness on a “bewildering array of causes”, with people from a wide range of backgrounds finding they are not legally entitled to citizenship of any country.

No research has been done into the scale of statelessness among the children of Syrian refugees in Europe, but it is thought that many are likely to be in the same position as Siba. Statelessness in Europe can pose huge problems. Experts say many parents are unaware that their children are stateless. Often the children realise they do not have legal citizenship only when they reach adulthood and find they cannot legally work, marry, own property, vote or even graduate from school. [..] The UN says more than 30,000 babies born to Syrian refugees in Lebanon are at risk of statelessness. And research by Refugees International (RI) this year found that many of the 60,000 children born to Syrian refugees in Turkey since 2011 could be in the same position.

Debt Rattle September 26 2015

Sep 262015

September 26, 2015 Posted by Raúl Ilargi Meijer at 9:27 am Finance Tagged with: Boehner, diesel, EM, GCHQ, industrial farming, refugees, Shale, swaps, VW, warships 4 Responses »

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

• VW’s Systematic Fraud Threatens To Engulf The Entire Industry (Economist)

• Volkswagen Scandal Spreads Throughout Europe’s Credit Markets (Bloomberg)

• EU Warned On Devices At Centre Of VW Scandal Two Years Ago (FT)

• VW Bungles Restart With New CEO From Old Guard (Reuters)

• More Volkswagen Engines May Be Implicated, German Minister Says (Bloomberg)

• Did -Political- Privilege Enable Volkswagen’s Diesel Deception? (Bloomberg)

• Problems at Volkswagen Start in the Boardroom (NY Times)

• Boehner Resigns From Congress: ‘House Leadership Turmoil Would Do Harm‘ (CNBC)

• It’s All ‘Perverted’ Now as U.S. Swap Spreads Tumble Below Zero (Bloomberg)

• Junk-Debt Investors Fight for Scraps as US Shale Rout Deepens (Bloomberg)

• Wall Street Braces For Grim Third Quarter Earnings Season (Reuters)

• It’s Carnage Out There For Emerging Markets (CNBC)

• Emerging Markets Are Facing a Big Foreign FX Debt Bill (Tracy Alloway)

• Bill and Melinda Gates Foundation Sues Petrobras, Auditor for Fraud (WSJ)

• How Much Longer Can Consumers Underpin Canada’s Economy? (Reuters)

• British Spies Track “Every Visible User On The Internet” (Intercept)

• Industrial Farming Is One Of The Worst Crimes In History (Guardian)

• Europe’s Refugees Are Modern-Day Pioneers (McArdle)

• EU To Use Warships To Curb Human Traffickers (Al Jazeera)

“Hidden within the German firm is a big finance operation that makes loans to car buyers and dealers and also takes deposits, acting as a bank.”
“..more than half Europe’s claimed gains in efficiency since 2008 have been “purely theoretical”, says T&E.”

• VW’s Systematic Fraud Threatens To Engulf The Entire Industry (Economist)

Class-action lawsuits from aggrieved motorists will arrive at the speed of a turbocharged Porsche. On September 22nd VW announced a €6.5 billion provision to cover the costs of the scandal but that is likely to prove too little. By that stage the company’s value had fallen €26 billion. The financial damage could go further. Hidden within the German firm is a big finance operation that makes loans to car buyers and dealers and also takes deposits, acting as a bank. Its assets have more than doubled in the past decade and make up 44% of the firm’s total. And it may be vulnerable to a run. In previous crises “captive-finance” arms of industrial firms have proven fragile. After the Deepwater Horizon disaster BP’s oil-derivative trading arm was cut off from long-term contracts by some counterparties.

General Motors’ former finance arm, GMAC, had to be bailed out in 2009. With €164 billion of assets in June, VW’s finance operation is as big as GMAC was six years ago, and it appears to be more dependent on short-term debts and deposits to fund itself. Together, VW’s car and finance businesses had €67 billion of bonds, deposits and debt classified as “current” in June. This means—roughly speaking—that lenders can demand repayment of that sum over the next 12 months. The group also has a big book of derivatives which it uses to hedge currency and interest-rate risk and which represented over €200 billion of notional exposure at the end of 2014. It is impossible to know if these derivatives pose a further risk, but if counterparties begin to think VW could be done for they might try to wind down their exposure to the car firm or demand higher margin payments from it.

If depositors, lenders and counterparties were to refuse to roll over funds to VW, the company could hang on for a bit. It has €33 billion of cash and marketable securities on hand, as well as unused bank lines and the cashflow from the car business. The German government would lean on German banks to prop up their tarnished national champion, 20% of which is owned by the state of Lower Saxony. So far the cost of insuring VW’s debt has risen, but not to distressed levels. Still, unless the company convinces the world that it can contain the cost of its dishonesty, it could yet face a debt and liquidity crisis.

The losses accelerate.

• Volkswagen Scandal Spreads Throughout Europe’s Credit Markets (Bloomberg)

A week after it admitted to cheating on U.S. emissions tests for years, Volkswagen’s pain is beginning to spread throughout Europe’s credit markets. The Bank of France stopped trading two securities backed by Volkswagen auto loans on Friday, while executives of parts supplier Schaeffler AG find themselves fielding questions about their biggest customer as they drum up support for an initial public offering, according to people familiar with the matters. Since Volkswagen admitted Sept. 18 that it had cheated on U.S. air pollution tests since 2009, the chief executive officer resigned, the company became the target of a joint investigation by 27 U.S. states and the stock price tumbled 28%. Matthias Mueller, the former Porsche chief who was appointed Volkswagen’s CEO Friday, said his most urgent task is to win back trust for the company.

“Under my leadership, Volkswagen will do everything it can to develop and implement the most stringent compliance and governance standards in our industry,” he said in a statement. The two Volkswagen-related securities weren’t in an updated list the Bank of France distributed on Friday after being included in the original version sent to investors earlier this week, said the people, who asked not to be identified because they aren’t authorized to discuss the matter publicly. The Paris-based bank is buying asset-backed securities under a ECB purchase program designed to help boost lending in the euro area. Volkswagen Financial Services has €22.8 billion of outstanding asset-backed debt, according to a September presentation on its website.

Everyone knew. And everyone was involved.

• EU Warned On Devices At Centre Of VW Scandal Two Years Ago (FT)

EU officials had warned of the dangers of defeat devices two years before the Volkswagen emissions scandal broke, highlighting Europe’s failure to police the car industry. A 2013 report by the European Commission’s Joint Research Centre drew attention to the challenges posed by the devices, which are able to skew the results of exhaust readings. But regulators then failed to pursue the issue — despite the fact the technology had been illegal in Europe since 2007. EU officials said they had never specifically looked for such a device themselves and were not aware of any national authority that located one. The technology is at the heart of a scandal that exploded last Friday when US regulators revealed Volkswagen had used it to rig emissions tests, potentially laying itself open to criminal charges and substantial fines.

The Environmental Protection Agency said the defeat devices turn on emissions controls when vehicles are being tested but turn them off during regular driving. This means that while on the road, the cars are able to emit up to 40 times the amount of nitrogen oxides that US environmental standards allow. Initially the focus was exclusively on cars sold by Volkswagen into the US market. But Germany has now said that the company cheated in the same way in Europe as well. The inability of regulators across the EU to expose this deceit has shone a spotlight on the lobbying power of the European motor industry, which has made a huge gamble on diesel. Some 53% of new car sales in the EU are diesels, up from just more than 10% in the early 1990s.

Meanwhile the British government came under fire on Friday from the opposition Labour party after it admitted receiving evidence nearly a year ago that some diesel cars were fitted with equipment to rig emissions tests. The Department for Transport received evidence in October 2014 that there was a “real world nitrogen oxides compliance issue” for diesel passenger cars. The evidence was contained in a 60-page report by the International Council on Clean Transportation. It tested 15 vehicles and found they produced an average of seven times the legal limit for the deadly gas. One car produced 25 times the limit. The DfT said the report demonstrated the shortcomings in the old testing system and that ministers had been pushing for the EU to accelerate the introduction of a real-driving emissions test.

Defense!

• VW Bungles Restart With New CEO From Old Guard (Reuters)

Matthias Mueller is the wrong chief executive for Volkswagen. The scandal-hit German carmaker on Sept. 25 appointed the 62-year-old CEO of its brand Porsche to replace Martin Winterkorn, who resigned days earlier after VW admitted tampering with its cars to falsify regulatory emissions tests. Just as with new chair Hans Dieter Poetsch, it has chosen an insider when it should have looked beyond its Wolfsburg base. Mueller knows the gigantic carmaker inside out, and has what it takes to fix operational woes. But having been at the group since the late 1970s, he is also a deeply entrenched member of the Wolfsburg old guard. His insider status suggests he is an imperfect investigator of the scandal. From 2007 and 2010, he was the group’s head of product management, responsible for all vehicle projects of the Volkswagen brand.

The company started to fit diesel cars with so-called “defeat devices” that manipulated emission tests in 2009. VW’s supervisory board has stressed that the new CEO is personally untainted by the wrongdoing. Investors have no choice but to take its word. But given VW’s investigation is in its early days, it still seems an unnecessary risk, especially as a well-versed auto manager with no Wolfsburg history was readily available. Herbert Diess, the new head of VW’s passenger-car group, was poached from rival BMW earlier this year. The scope of the misconduct is massive, and the scandal is still evolving. This week, Volkswagen has admitted 20% of all its passenger cars sold from 2009 to 2014 might be affected by the emissions manipulations.

On Sept. 25, Germany’s transport minister Alexander Dobrindt said VW falsified emission data of light commercial vehicles too. Switzerland banned the sale of affected models. And Bloomberg reported on the same day that executives in Wolfsburg controlled key aspects of the rigged emissions tests, referring to three unnamed people familiar with the company’s U.S. operations. Winterkorn’s speedy exit was the right move. But the departed CEO is still around, as chief executive of Porsche SE, the holding company that owns 50.7% of VW voting shares. The group as a whole urgently needed a proper restart to cope with the emission scandal. For now, it does not look like it is getting one.

Of course there are.

• More Volkswagen Engines May Be Implicated, German Minister Says (Bloomberg)

Volkswagen may also have used software to fake diesel-emission tests in 1.2-liter engines, widening the number of vehicles under scrutiny, German Transportation Minister Alexander Dobrindt said. “There’s also discussion now about 1.2-liter cars being affected,” Dobrindt said in a speech to parliament in Berlin on Friday. “At least for now we believe that possible manipulations can come to light here, too. That’s being further investigated in the current talks with Volkswagen.” So far, the “illegal” tampering with emission controls affects about 2.8 million Volkswagen vehicles in Germany with 1.6-liter and 2-liter diesel engines, including light utility vans, Dobrindt said.

Germany’s motor-vehicle certification bureau has asked VW for “a binding statement on whether the company can redress the technical manipulations it has acknowledged so the vehicles can be returned to a condition that meets technical regulations,” said Dobrindt, who set up a government investigating commission this week after Volkswagen’s actions came to light. Volkswagen “has pledged full support for the commission’s work and to cooperate in the investigation,” he said.

“..’das VW-Gesetz,’ the Volkswagen Law.”

• Did -Political- Privilege Enable Volkswagen’s Diesel Deception? (Bloomberg)

In Italy, the privilege is called potere speciale; in France, action spécifique; in the U.K., it’s a “golden share.” Those are all different names for an ownership stake that gives a government—be it national or local—special powers above any other shareholder. That makes a crucial difference in running a business. Governments, for example, have good reason to prevent jobs from moving to more competitive labor markets. A golden share can help with that. In Europe, most golden shares are held in utilities and telecoms, companies that were state monopolies before being privatized. For more than a decade, the European Union, as it expanded and liberalized its common open market, has been trying to undo the persistence of state control. But there is one golden share that has endured, a German law so breathtakingly exceptional it can only be called what it is in fact called—“das VW-Gesetz,” the Volkswagen Law.

It is explicitly designed for a single company. Germany has managed to defend its golden share against the EU because VW had built a reputation as a force for good: responsible corporate citizen, pioneer in environmental progess. That reputation has just run out of Fahrvergnügen. Regulators in the U.S., France, South Korea, Italy, and now Germany have announced investigations into whether Volkswagen purposely designed software so its diesel engines could defeat emissions tests. The company will recall 11 million cars, and its stock has fallen as much as 30% on the news. The company quickly set aside $7.3 billion to cover costs related to the scandal, a figure that may fall short of the mark. On Sept. 21, Martin Winterkorn, Volkswagen’s chief executive officer, apologized, looking panicked.

A metallurgist with a Ph.D. who used to run technical development for Volkswagen, Winterkorn has a reputation as an engineer’s engineer. But there was no easy fix here. On Sept. 23 he offered his resignation to the company’s supervisory board. The board quickly accepted. “The damage done,” said a board member at a press conference in Braunschweig, “cannot be measured.” The same day, Stephan Weil, prime minister of Lower Saxony, the state where Volkswagen is headquartered, announced that “whoever’s responsible would be aggressively sued.” He spoke at the same press conference—and on behalf of the company. Weil sits on Volkswagen’s supervisory board, because Lower Saxony owns 20% of the company.

Per the Volkswagen Law, Saxony has a controlling interest with virtual veto power—the golden share. Weil is both government minister and owner. This is a coziness that is exceptional even in consensus-driven Germany. Publicly held German companies have two boards. Executives sit on the management board. They are in turn controlled by the supervisory board, which includes shareholders and labor leaders. Broadly, Germany’s dual-board structure preserves executive independence. Yet at Volkswagen, labor has an extra friend on the top board: the state. “You have the voice of the government present in the shareholder meetings,” says Carsten Gerner-Beuerle at the London School of Economics. “That is not something you’d see in any other board.”

“It’s been a soap opera ever since it started.”

• Problems at Volkswagen Start in the Boardroom (NY Times)

There is a long tradition of scandal and skulduggery in the auto industry, but few schemes appear as premeditated as Volkswagen’s brazen move to use sophisticated software to circumvent United States emissions standards. That such a thing could happen at Volkswagen, Germany’s largest company and the world’s largest automaker by sales — 202.5 billion euros last year — has mystified consumers and regulators around the world. But given Volkswagen’s history, culture and corporate structure, the real mystery may be why something like this didn’t happen sooner. “The governance of Volkswagen was a breeding ground for scandal,” said Charles M. Elson, professor of finance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “It was an accident waiting to happen.”

The company, founded by the Nazis before World War II, is governed through an unusual hybrid of family control, government ownership and labor influence. Even by German standards, “Volkswagen stands apart,” said Markus Roth, a professor at Philipps-University Marburg and an expert in European corporate governance. “It’s been a soap opera ever since it started.” Volkswagen’s recent history — a decades-long feud within the controlling Porsche family, a convoluted takeover battle and a boardroom coup — has dominated the German financial pages and tabloids alike. This week, the German newspaper Süddeutsche Zeitung compared Volkswagen’s governance to that of North Korea, adding that its “autocratic leadership style has long been out of date.” It said “a functioning corporate governance is missing.”

Until a forced resignation this spring, the company was dominated by Ferdinand Piëch, 78, the grandson of Ferdinand Porsche and the father of 12 children. He reigned over Volkswagen’s supervisory board and directed a successful turnaround at the luxury brand Audi before taking the reins at its parent, Volkswagen, in 1993. Mr. Piëch set the goal of Volkswagen’s becoming the world’s largest automaker by sales, a goal the company achieved this past year. He stepped down as chairman in April after unsuccessfully trying to oust the company’s chief executive, Martin Winterkorn, who himself was forced out this week. One measure of Mr. Piëch’s influence: In 2012, shareholders elected his fourth wife, Ursula, a former kindergarten teacher who had been the Piëch family’s governess before her marriage to Ferdinand, to the company’s supervisory board.

Although many shareholders protested her lack of qualifications and independence, they have little or no influence. Porsche and Piëch family members own over half the voting shares and vote them as a bloc under a family agreement. Labor representatives hold three of the five seats on the powerful executive committee, and half the board seats are held by union officials and labor. Of the remaining seats, two are appointed by the government of Lower Saxony, the northwestern German state that owns 20% of the voting shares. Two are representatives of Qatar Holding, Qatar’s sovereign wealth fund, which owns 17% of Volkswagen’s voting shares. Members of the Piëch and Porsche families hold three more seats, and a management representative holds another. Outside views rarely penetrate. “It’s an echo chamber,” Professor Elson said.

“I know this, I’m doing this for the right reasons and you know what, the right things will happen as a result.”

• Boehner Resigns From Congress: ‘House Leadership Turmoil Would Do Harm‘ (CNBC)

House Speaker John Boehner, under fire from conservatives over a looming government shut down, said Friday he will resign from Congress at the end of October. “Prolonged leadership turmoil would do irreparable damage to the institution,” he said. In an afternoon news conference, Boehner became emotional when expressing gratitude to his family and constituents, and said he was proud of what he’s accomplished. However, Boehner said he plans to get as much work done as he can on outstanding fiscal issues before he leaves Congress at the end of October. He said although he doesn’t know what he will do in the future, “I know this, I’m doing this for the right reasons and you know what, the right things will happen as a result.”

Boehner, 65, told House Republicans of his decision earlier in the morning. Later, he left a meeting and answered a reporter’s shouted question about how he felt with, “It’s a wonderful day.” President Barack Obama said he was taken by surprise by Boehner’s decision, adding that he called the Republican leader after hearing the news. “John Boehner is a good man. He is a patriot. He cares deeply about the House, an institution in which he has served for a long time. He cares about his constituents and he cares about America,” Obama told reporters at a joint press conference with China’s president.

“We have obviously had a lot of disagreements, and politically we’re at different ends of the spectrum, but I will tell you he has always conducted himself with courtesy and civility with me,” Obama said. House Majority Leader Kevin McCarthy of California will likely be Boehner’s successor, political observers told CNBC. Boehner said that although the choice of the next speaker is up to members of Congress, he thinks McCarthy would make an “excellent speaker.”

“.. it theoretically signals that traders view the credit of banks as superior to that of the U.S. government..”

• It’s All ‘Perverted’ Now as U.S. Swap Spreads Tumble Below Zero (Bloomberg)

At the height of the financial crisis, the unprecedented decline in swap rates below Treasury yields was seen as an anomaly. The phenomenon is now widespread. Swap rates are what companies, investors and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields – the spread between the two being negative – is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. Back in 2009, it was only negative in the 30-year maturity, a temporary offshoot of deleveraging and market swings following the credit crisis. These days, swap spreads are near or below zero across maturities.

The shift is a result of a confluence of events, says Aaron Kohli, an interest-rate strategist in New York at BMO Capital Markets. It’s a ripple effect of regulations spawned by the credit crunch, combined with large-scale selling of Treasuries and surging corporate issuance.
“All of these effects have been pushing swap spreads the same way – lower,” Kohli said. “If this doesn’t go away after quarter-end, it could be the fact that a lot of the structural changes that have taken place in the marketplace are now manifesting. And this might then be one of the most visceral examples.”

Take your losses and pull the plug.

• Junk-Debt Investors Fight for Scraps as US Shale Rout Deepens (Bloomberg)

It’s every U.S. shale investor for himself as the worst oil rout in almost 30 years drags down its latest victims. Investors in $158.2 million of Goodrich Petroleum’s debt agreed to take 47 cents on the dollar in exchange for stock warrants for some note holders and a lien on Goodrich’s oil acreage, according to a company statement today. That puts them second in line if the Houston-based company liquidates its assets in bankruptcy and pushes the remaining holders of $116.8 million in original bonds to the back of the pack. “In the industry it’s called ‘getting primed,’” said Spencer Cutter, a credit analyst with Bloomberg Intelligence. “It’s every man for himself. They’re trying to get in and get exchanged, and if you can’t you’re getting left out in the cold.”

Wildcatters attracted billions of dollars during the boom after years of near-zero interest rates sent investors hunting for returns in riskier corners of the market. U.S. high-yield debt has more than doubled since 2004 to $1.3 trillion while the amount issued to junk-rated energy companies has grown four-fold to $208 billion, according to Barclays. Most of the companies spent money faster than they made it even when oil was $100 a barrel and are struggling to stay afloat with prices at $45. Goodrich didn’t name the bondholders who participated in the swap. The largest holder was Franklin Resources, which owned about 24% of the bonds, according to data compiled by Bloomberg. Franklin has invested in the debt of other distressed drillers, including Halcon Resources, SandRidge Energy and Linn Energy.

This was Goodrich’s second exchange this month. Three weeks ago, the company swapped $55 million on convertible notes for bonds worth half as much. To sweeten the deal, it lowered the share price at which investors can turn their notes into stock to $2. Investors who didn’t participate in Goodrich’s earlier exchange took another hit with today’s swap because it put holders of the new bonds ahead of them in liquidation. Prices fell four cents to 18 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Caterpillar is set to drag down a wide swath of shares.

• Wall Street Braces For Grim Third Quarter Earnings Season (Reuters)

Wall Street is bracing for a grim earnings season, with little improvement expected anytime soon. Analysts have been cutting projections for the third quarter, which ends on Wednesday, and beyond. If the declining projections are realized, already costly stocks could become pricier and equity investors could become even more skittish. Forecasts for third-quarter S&P 500 earnings now call for a 3.9% decline from a year ago, based on Thomson Reuters data, with half of the S&P sectors estimated to post lower profits thanks to falling oil prices, a strong U.S. dollar and weak global demand. Expectations for future quarters are falling as well. A rolling 12-month forward earnings per share forecast now stands near negative 2%, the lowest since late 2009, when it was down 10.1%, according to Thomson Reuters I/B/E/S data.

That’s further reason for stock investors to worry since market multiples are still above historic levels despite the recent sell-off. Investors are inclined to pay more for companies that are showing growth in earnings and revenue. The weak forecasts have some strategists talking about an “earnings recession,” meaning two quarterly profit declines in a row, as opposed to an economic recession, in which gross domestic product falls for two straight quarters. “Earnings recessions aren’t good things. I don’t care what the state of the economy is or anything else,” said Michael Mullaney, chief investment officer at Fiduciary Trust in Boston.

The S&P 500 is down about 9% from its May 21 closing high, dragged down by concern over the effect of slower Chinese growth on global demand and the uncertain interest rate outlook. The low earnings outlook adds another burden. China’s weaker demand outlook has also pressured commodity prices, particularly copper. This week, Caterpillar slashed its 2015 revenue forecast and announced job cuts of up to 10,000, among many U.S. industrial companies hit by the mining and energy downturn. Also this week, Pier 1 Imports cut its full-year earnings forecast, while Bed Bath & Beyond gave third-quarter guidance below analysts’ expectations.

The continuing story. Getting worse by the day.

• It’s Carnage Out There For Emerging Markets (CNBC)

It’s been another week of bloodshed in emerging markets, with the Brazilian real, South African rand and Turkish lira all pummelled to record lows as China growth concerns and uncertainty about U.S. rate hikes continue to bite. Remarks by Fed Chair Janet Yellen late Thursday suggesting the central bank could still raise rates this year sparked fresh selling on Friday, with the Malaysian ringgit and Indonesian rupiah falling to their lowest levels since the Asian financial crisis in 1998. “EM currencies are being squeezed between concerns about the severity of China’s economic slowdown and increasing uncertainty regarding U.S. monetary policy,” Nicholas Spiro at Spiro Sovereign Strategy, told CNBC.

“Country-specific vulnerabilities, notably in Brazil and Turkey, are also weighing on sentiment – indeed more so than external factors in the case of many EMs,” he said. A rout in Brazil’s currency – what has shed almost 10% this month and almost 60% this year – against a backdrop of a political crisis and an economy mired in recession, has also soured sentiment towards other emerging markets. “In short, the world is not falling apart. Yet for EM, Brazil is vital,” analysts at Standard Bank said in a note. “Too big to fail but not big to save. IMF, would you please step in and save us all?” To stem the slide, Brazil’s central bank on Thursday warned it would use its foreign exchange reserves to defend the currency.

These strong words bought some respite to the real, which bounced more than 5% and off a record low of about 4.248 per dollar hit earlier on Thursday. Brazil isn’t the only country bank taking action to shore up a battered currency. Indonesia’s central bank on Friday said it will announce new steps to increase onshore supply of dollars – part of a move to support the rupiah, which has shed about 20% of its value this year.

Brazil will soon need capital controls. Like Greece. And like Greece, it needs debt retsructuring.

• Emerging Markets Are Facing a Big Foreign FX Debt Bill (Tracy Alloway)

The extent of emerging markets’ foreign-currency borrowing binge is laid bare in new number-crunching from CreditSights. With EM currencies down a collective 15% since the start of the year, the cost of repaying debt and loans denominated in foreign currencies, such as the U.S. dollar and the euro for EM countries, is likely to increase. With that scenario in mind, CreditSights analysts Richard Briggs and David Watts have analyzed cross-border lending data from the Bank for International Settlements and corporate bond index data from Bank of America Merrill Lynch to try to figure out just how big EM’s foreign debt bill could be.

First up are the BIS data on cross-border lending, scaled against a country’s foreign currency revenue (i.e. exports). Bank figures range from a mere 6% in South Korea to a whopping 56% in Brazil. Next up are corporate bonds, via BofAML’s hard-currency, emerging-market corporate bond index, as a% of foreign-currency revenue. Brazil dominates again, with a big chunk of its foreign FX bonds having been sold by energy companies. Combine cross-border lending, plus foreign FX corporate bonds, then add a smattering of government debt, and you get the CreditSights chart below, showing total hard-currency borrowing by country Brazil is the standout, followed by Turkey and Colombia.

It’s not a pretty chart, and unfortunately, as the CreditSights analysts note, the real picture of emerging markets’ foreign-currency borrowing is probably even uglier. (When it comes to corporate bonds, for instance, the BofAML index excludes dollar or euro-denominated debt that exceeds certain thresholds.)

We have tried to capture as much of the hard currency debt as we can reliably get for a cross country comparison using BIS and the bond index data but the actual total will almost certainly be higher given that only BIS reporting banks are included and the bond debt only includes the index eligible deals.

Oh dear.

Isn’t Gates just getting what he deserves for his large fossil fuel investments?

• Bill and Melinda Gates Foundation Sues Petrobras, Auditor for Fraud (WSJ)

The Bill and Melinda Gates Foundation is suing Brazil’s Petróleo Brasileiro SA and its auditor in a New York court, claiming a vast corruption scheme centered on the state-run oil company caused the charitable organization to lose tens of millions of dollars. The foundation, started by the billionaire co-founder of Microsoft and his wife, joins a long list of plaintiffs seeking to recoup money they lost as the scandal hammered the value of their investments in Petrobras shares. It is just the latest bad news for the troubled oil company, which is scrambling to restore its reputation, rebuild investor confidence and pay down ballooning debt amid a global slump in oil prices.

Petrobras has long maintained it was a victim of a yearslong bid-rigging and bribery ring that Brazilian prosecutors say was cooked up by suppliers and a few crooked insiders who fleeced the oil company for at least $2 billion. The Gates lawsuit, filed against Petrobras and the Brazilian unit of PricewaterhouseCoopers LLP or PwC, alleges that corruption at the oil company was so widespread as to be “institutional” and that wrongdoing was “willfully ignored” by its auditor. “The depth and breadth of the fraud within Petrobras is astounding. By Petrobras’s own admission, the kickback scheme infected over $80 billion of its contracts, representing approximately one-third of its total assets,” the lawsuit said.

“Equally breathtaking is that the fraud went on for years under PwC’s watch, who repeatedly endorsed the integrity of Petrobras’ internal controls and financial reports. This is not a case of rogue actors. This is a case of institutional corruption, criminal conspiracy, and a massive fraud on the investing public.” The Gates Foundation filed the lawsuit late Thursday in the Southern District Court of New York. A co-plaintiff in the lawsuit is WGI Emerging Markets Fund, LLC, which managed investments for the Gates Foundation. The Gates Foundation held more than $27 million in Petrobras shares as of 2013, according to a tax filing.

Must. Get. Rid. Of. Harper.

• How Much Longer Can Consumers Underpin Canada’s Economy? (Reuters)

The Bank of Canada is hoping the average Canadian continues to do the heavy lifting for the economy and gets it out of its rut from the first half of the year, even with dangerously high household debt levels. That may be a big ask. Canada’s average household debt-to-income ratio is back at a record high of 164.6% in the second quarter, driven by mortgages, after inching lower in the previous two quarters. Since the financial crisis Canadian household debt has increased at the second-fastest pace among developed nations, according to a recent McKinsey Global Institute study. Greece topped the list. Citing figures from Ipsos Reid, a 2014 Bank of Canada report concluded that 40% of all household debt was held by borrowers who had a total debt-to-income ratio greater than 250%, compared to the average of 162.3%.

This segment of heavily indebted borrowers rose to about 12% in 2014 from around 6% in 2000. Consumer spending – primarily related to the housing market – has been the main driver of the Canadian economy over the past five years. It buoyed and boosted Canada through the worst of the global financial crisis, even as the U.S. housing market and economy crashed. But now Canada’s economy has taken a sharp turn for the worse. The jobless rate hit a one-year high of 7% in August as sharp falls in oil prices took their toll. Even U.S. Federal Reserve Chair Janet Yellen cited the slowdown in Canada, an important U.S. trade partner, in its concerns about the global economy that led it to hold off yet again on its first rate rise in nearly a decade.

Because they can.

• British GCHQ Spies Track “Every Visible User On The Internet” (Intercept)

There was a simple aim at the heart of the top-secret program: Record the website browsing habits of “every visible user on the Internet.” Before long, billions of digital records about ordinary people’s online activities were being stored every day. Among them were details cataloging visits to porn, social media and news websites, search engines, chat forums, and blogs. The mass surveillance operation — code-named KARMA POLICE — was launched by British spies about seven years ago without any public debate or scrutiny. It was just one part of a giant global Internet spying apparatus built by the United Kingdom’s electronic eavesdropping agency, Government Communications Headquarters, or GCHQ.

The revelations about the scope of the British agency’s surveillance are contained in documents obtained by The Intercept from National Security Agency whistleblower Edward Snowden. Previous reports based on the leaked files have exposed how GCHQ taps into Internet cables to monitor communications on a vast scale, but many details about what happens to the data after it has been vacuumed up have remained unclear. Amid a renewed push from the U.K. government for more surveillance powers, more than two dozen documents being disclosed today by The Intercept reveal for the first time several major strands of GCHQ’s existing electronic eavesdropping capabilities. One system builds profiles showing people’s web browsing histories. Another analyzes instant messenger communications, emails, Skype calls, text messages, cell phone locations, and social media interactions.

Separate programs were built to keep tabs on “suspicious” Google searches and usage of Google Maps. The surveillance is underpinned by an opaque legal regime that has authorized GCHQ to sift through huge archives of metadata about the private phone calls, emails and Internet browsing logs of Brits, Americans, and any other citizens — all without a court order or judicial warrant. Metadata reveals information about a communication — such as the sender and recipient of an email, or the phone numbers someone called and at what time — but not the written content of the message or the audio of the call. As of 2012, GCHQ was storing about 50 billion metadata records about online communications and Web browsing activity every day, with plans in place to boost capacity to 100 billion daily by the end of that year.

The agency, under cover of secrecy, was working to create what it said would soon be the biggest government surveillance system anywhere in the world. The power of KARMA POLICE was illustrated in 2009, when GCHQ launched a top-secret operation to collect intelligence about people using the Internet to listen to radio shows. The agency used a sample of nearly 7 million metadata records, gathered over a period of three months, to observe the listening habits of more than 200,000 people across 185 countries, including the U.S., the U.K., Ireland, Canada, Mexico, Spain, the Netherlands, France, and Germany.

“The animals suffer greatly, yet they live on and multiply. Doesn’t that contradict the most basic principles of Darwinian evolution?”

• Industrial Farming Is One Of The Worst Crimes In History (Guardian)

At first sight, domesticated animals may seem much better off than their wild cousins and ancestors. Wild buffaloes spend their days searching for food, water and shelter, and are constantly threatened by lions, parasites, floods and droughts. Domesticated cattle, by contrast, enjoy care and protection from humans. People provide cows and calves with food, water and shelter, they treat their diseases, and protect them from predators and natural disasters. True, most cows and calves sooner or later find themselves in the slaughterhouse. Yet does that make their fate any worse than that of wild buffaloes? Is it better to be devoured by a lion than slaughtered by a man? Are crocodile teeth kinder than steel blades?

What makes the existence of domesticated farm animals particularly cruel is not just the way in which they die but above all how they live. Two competing factors have shaped the living conditions of farm animals: on the one hand, humans want meat, milk, eggs, leather, animal muscle-power and amusement; on the other, humans have to ensure the long-term survival and reproduction of farm animals. Theoretically, this should protect animals from extreme cruelty. If a farmer milks his cow without providing her with food and water, milk production will dwindle, and the cow herself will quickly die. Unfortunately, humans can cause tremendous suffering to farm animals in other ways, even while ensuring their survival and reproduction.

The root of the problem is that domesticated animals have inherited from their wild ancestors many physical, emotional and social needs that are redundant in farms. Farmers routinely ignore these needs without paying any economic price. They lock animals in tiny cages, mutilate their horns and tails, separate mothers from offspring, and selectively breed monstrosities. The animals suffer greatly, yet they live on and multiply. Doesn’t that contradict the most basic principles of Darwinian evolution? The theory of evolution maintains that all instincts and drives have evolved in the interest of survival and reproduction. If so, doesn’t the continuous reproduction of farm animals prove that all their real needs are met? How can a cow have a “need” that is not really essential for survival and reproduction?

“They have had enough to fear. Now they have hope.”

• Europe’s Refugees Are Modern-Day Pioneers (McArdle)

“They lose everything when their boats overturn – everything from their cell phones to their babies,” the Belgian nurse told me. He said it in a matter-of-fact tone that I recognized from my days giving tours of the cleaned-up Ground Zero site. It is not the sound of people who don’t care; it is the sound of people who have been living in the middle of horror for so long that they cannot keep stopping to cry. I cried when I got on the boat to leave the island of Lesbos, walking past the tent city that has sprung up at the docks. I cried all over again when my mother called to ask how my trip to Greece had been. But the refugees weren’t crying. So many of them looked happy, sitting under makeshift tents put together out of reams of netting and whatever cloth they could find.

Some smiled as they walked down the road with a backpack or a garbage bag that contained everything they had in the world. Others smiled as they walked down the road without one. Children laughed, men waved, mothers grinned shyly. “They’re safe now,” said one of the doctors at Kara Tepe, the temporary camp where refugees, largely from Syria, wait for passage to the European mainland. “They’re happy because they’re safe.”

[..] These hundreds of thousands survived the Taliban, the Islamic State, the Syrian civil war. They survived a perilous crossing, clinging to their children in a flimsy raft. They have finally arrived on safe shores. Where will these refugees go? America is willing to eventually take 100,000 Syrians a year. Where will these refugees go? Europe is squabbling over the distribution of 120,000 people over the next two years. Where will these refugees go? Mostly, no one knows. There is no plan for most of the estimated 4 million who have fled Syria so far, or for the thousands who are still coming every day. Where will these refugees go? The few I was able to talk to had no answer, but they were not afraid. They have had enough to fear. Now they have hope.

Europe and the U.S. have seen these people as a problem to be solved, or at best an obligation to be fulfilled. Take another look: These people are pioneers. Future citizens, teachers, engineers, P.T.A. dads, entrepreneurs, valedictorians, doctors. They are following in the footsteps of the immigrants who built the United States: the ones who chose to strike out for unknown territory, heading west with not much more than a knapsack. The modern-day pioneers striving toward Europe shouldn’t have to beg for a chance to build productive lives in Germany or Britain or the U.S. We should be going out to invite them in. We should have started much sooner.

Criminally insane.

• EU To Use Warships To Curb Human Traffickers (Al Jazeera)

The EU will use warships to catch and arrest human traffickers in international waters as part of a military operation aimed at curbing the flow of refugees into Europe, the bloc’s foreign affairs chief has said. “The political decision has been taken, the assets are ready,” Federica Mogherini said on Thursday at the headquarters of the European Union’s military operation in Rome. The first phase of the EU operation was launched in late June. It included reconnaissance, surveillance and intelligence gathering, and involved speaking to refugees rescued at sea and compiling data on trafficker networks. The operation currently involves four ships – including an Italian aircraft carrier – and four planes, as well as 1,318 staff from 22 European countries.

Beginning on October 7, the new phase will allow for the seizure of vessels and arrests of traffickers in international waters, as well as the deployment of European warships on the condition that they do not enter Libyan waters. “We will be able to board, search, seize vessels in international waters, [and] suspected smugglers and traffickers apprehended will be transferred to the Italian judicial authorities,” Mogherini said. “We have now a complete picture of how, when and where the smugglers’ organisations and networks are operating so we are ready to actively dismantle them,” she said. The new measures come at a time when Europe is enduring the largest refugee crisis since World War II.

An estimated 13.9 million people became refugees in 2014, while an average of 42,500 were displaced from their homes each day due to conflict and persecution, according to the UN refugee agency. Europe has already received more than 700,000 asylum applications in 2015. The Organisation for Economic Co-operation and Development predicts that number will exceed one million by the end of the year. Expanding the operation into Libyan waters is still pending the approval of the EU’s security council and the Libyan government. “We have a lot to do in high seas, and in the meantime we are continuing to work on the legal framework that could make it possible for us to operate also in Libyan territorial waters,” she added.

Gerry Simpson, a senior researcher at Human Rights Watch’s refugee programme, described the operation as “lawful but misguided”. “EU officials are misguided when they treat smugglers and traffickers as the root of the refugee problem,” he told Al Jazeera. “The roots of the problem are the violence in their home countries, as well as the conditions in the first countries where they take refuge – Egypt, Libya, Turkey [and] Sudan.” “Instead of wasting tax payers money on tackling smugglers who will always find a way to bring their clients to Europe, officials should pressure or support those first countries of asylum to properly protect and help refugees,” Simpson said.

Debt Rattle September 11 2015

Sep 112015

September 11, 2015 Posted by Raúl Ilargi Meijer at 9:57 am Finance Tagged with: BRICS, China, debt restructuring, euro, Juncker, oil, refugees, Shale, Syria, volatility, Warsaw 5 Responses »

John Collier Japanese restaurant, Monday after Pearl Harbor, San Francisco Dec 8 1941

• It Is In Warsaw Not Athens That The March Of The Euro Will Be Halted (Telegraph)

• The German Counter-Attack On Juncker’s Euro Plans (FT)

• Brussels Plans Radical New Eurozone Treasury And Euro Parliament (Telegraph)

• Oil Could Drop as Low as $20, Goldman Says (Bloomberg)

• Shale Drillers Turn to Asset Sales as Early Swagger Wanes (Bloomberg)

• Emerging-Market Currencies: Things Look to Get Worse (WSJ)

• Brazil Reduced To Junk As BRICS Facade Crumbles (AEP)

• China’s ‘New Normal’ Growth Model Is Starting to Get Expensive (Bloomberg)

• Is Today’s Volatility an Echo of 1987? (A. Gary Shilling)

• UN Votes For New Debt Rules But UK, US Try To Block (Jubilee Debt Campaign)

• The ECB Could Kick-Start The Economy With A Limited Basic Income (BI.org)

• Rajoy’s Trump-Like Candidate Poses Trump-Like Risks in Catalonia (Bloomberg)

• Bribes, Debt, $100 Billion Lost: Nigeria Can’t Keep the Power On (Bloomberg)

• Auckland House Prices Rising $345 A Day (NZ Herald)

• Sue Your Bank, Keep Your Home, Repeat (Bloomberg)

• The Civil War In Syria – Part 2 (Beppe Grillo)

“It is about as keen on the euro as Nigel Farage.”

• It Is In Warsaw Not Athens That The March Of The Euro Will Be Halted (Telegraph)

Another week, and another Greek crisis looms. It might seem only yesterday that the markets were on tenterhooks over whether the country would finally bring its miserable experiment in sharing a currency with Germany and France to an end, or whether there would be a last-minute compromise that would keep the show on the road for a few more months. Now, with elections due on September 20, and no clear victor likely, the whole circus is about to start up again. Investors could be forgiven for tuning out of the whole saga, and going back to worrying about whether anyone will actually pay £60 for an Apple Pencil, or what dramas lie in store for the Crawley family in the new series of Downton Abbey instead.

There is, however, an election coming up that genuinely matters to the future of the single currency – only it is taking place not in Greece, but in Poland. When that country elects a new government next month, the likely victor, the Law & Justice Party, will effectively close off the option of joining the euro one day. In reality, Greece was always too small and chaotic an economy to matter one way or another to the eurozone. But if Poland, along with the other rising economic powers of eastern Europe, turns its back on the euro, then that is far more serious. [..] When the big new countries of eastern Europe joined the EU, all of them were technically committed to joining the single currency as well. A few of the smaller ones have done so. Slovakia, Slovenia, Latvia and Lithuania have all joined since the currency was launched.

But with a combined population of less than 12m people, none of them has the weight to make much of an impact. The big countries are a different matter. With a combined population of 60m, Poland, Hungary and the Czech Republic are of a similar size, taken together, to Britain or France. Whether they ultimately join or not can have a big impact. From next month, that is going to be increasingly unlikely. Parliamentary elections are likely to result in the Right-wing Law & Justice party taking power. The party’s Andrzej Duda already overturned the odds to win the presidency earlier this year. It is about as keen on the euro as Nigel Farage. Only this week, Duda insisted that if Poland was to ever join the euro there would have to be a referendum: there is more chance of Nicola Sturgeon getting elected MP for Tunbridge Wells than of any country voting to join the euro – it usually gets pushed through without consultation.

Translation: France vs Germany.

• The German Counter-Attack On Juncker’s Euro Plans (FT)

When Jean-Claude Juncker this week told a packed European Parliament he intends to forge a eurozone system for guaranteeing bank deposits, the European Commission president’s intention was to send a firm message of determination to strengthen the single currency’s foundations. But just days after Juncker’s “state of the union” address, his attempt to sow hopeful seeds has hit stony ground in Berlin, where the plan was taken more as a declaration of war. Germany’s fightback begins when finance ministers gather in Luxembourg on Friday, and is set out in a “non paper” obtained by the FT. Unlike the series of emergency gatherings on Greece this summer, the weekend “informal” meeting of eurozone finance ministers was intended to be a calmer, and above all shorter, stocktaking of the health of the common currency.

Now, however, Germany has decided to use it as an opportunity to put down clear red lines in an attempt to redirect the eurozone reform discussion, which gained momentum following the mess of the July Greek bailout deal on what Berlin believes is an unacceptable course. Several other eurozone governments – notably France – were urging a speeding up of the eurozone reforms as a way to build confidence in the single currency after the tremors caused by a near “Grexit”, but the German paper, by so openly breaking with the EC, may instead highlight the deep differences that still exist. For Germany, Juncker’s announcement that he intends to “move swiftly on all fronts – economic, financial, fiscal and political Union,” seems to be viewed as a classic case of Europe seeking to put German taxpayers’ money where the EU’s mouth is. Or, alternatively, of putting the cart of shared financial risks, before the cart of tough creditor discipline.

Europe had better stop this nonsense.

• Brussels Plans Radical New Eurozone Treasury And Euro Parliament (Telegraph)

The survival of economic and monetary union will require the creation of new supra-national institutions, including a joint eurozone treasury and a separate euro parliament, according to the single currency’s bail-out chief. Klaus Regling, head of the European Stability Mechanism (ESM), joined a clamour of voices in Brussels who are pushing for member states to cede sovereignty in bid to establish a full-blown fiscal union on the Continent. The first step will be the creation of a eurozone finance ministry, backed by a separate chamber for the currency’s 19 member states in the European parliament, said Mr Regling, who oversees the euro’s €500bn rescue fund. The move is necessary to “increase the robustness and minimise the vulnerabilities of the currency union”, said Mr Regling.

He added it would “imply a significant transfer of sovereignty, requiring democratic legitimacy”, which could be provided by a “special chamber of the European Parliament composed of deputies solely from euro area Member States”. His comments follow on from Jean-Claude Juncker, president of the European Commission, who is pushing for the creation of a euro treasury, along with a system of common deposit insurance and beefed-up tax and spending powers for the European parliament. Details of the new treasury – which would act as a finance ministry, pooling funds from euro member states – remain sketchy. But the notion has long been championed by France who want to steer EMU away from simply an enforcer of fiscal discipline, into a true economic government of Europe. Paris has also called for the eurozone to have a permanent finance minister.

Benoit Couere, France’s executive board member on the ECB, has called for the new treasury to be founded on the principles of the ESM – which currently pools contributions guaranteed by all members states for use in times of emergency financial stress. The ESM will be providing up to €60bn of Greece’s latest rescue deal, and has been deployed to bail-out Spanish and Cypriot banks over the last three years. But plans to forge ahead with a political and fiscal union are likely to meet fierce resistance in Berlin. Germany, Europe’s largest creditor state and biggest contributor to eurozone rescue schemes, has rejected surrendering tax and budget powers to Brussels before tougher rules are put in place to limit spending and punish errant governments – including the French. “It’s much more of a French idea rather than something according to Germany’s vision for the euro,” said Michael Wohlgemuth, director of the Open Europe think-tank in Berlin. “Germans don’t even have a word for ‘treasury'”.

Everyone must and will drill drill drill for cash flow.

• Oil Could Drop as Low as $20, Goldman Says (Bloomberg)

The global surplus of oil is even bigger than Goldman Sachs thought and that could drive prices as low as $20 a barrel. While it’s not the base-case scenario, a failure to reduce production fast enough may require prices near that level to clear the oversupply, Goldman said in a report e-mailed Friday. The bank cut its forecast for Brent and WTI crude through 2016 on the expectation that the glut will persist on OPEC production growth, resilient non-OPEC supply and slowing demand expansion. “The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016,” Goldman analysts including Damien Courvalin wrote in the report. “We continue to view U.S. shale as the likely near-term source of supply adjustment.”

Goldman trimmed its 2016 estimate for West Texas Intermediate to $45 a barrel from a May projection of $57. The bank also reduced its 2016 Brent crude prediction to $49.50 a barrel from $62. WTI for October delivery fell as much as 45 cents, or 1%, to $45.47 a barrel on the New York Mercantile Exchange and is heading for a weekly decline. Prices are down 14% this year. Brent for October settlement is 1.7% lower this week. Oil in New York has slumped more than 25% from its June closing peak amid signs the glut will persist. Leading members of OPECs are sustaining output, while Iran seeks to boost supply once international sanctions are lifted. U.S. stockpiles remain about 100 million barrels above the five-year seasonal average.

“We now believe the market requires non-OPEC production to shift from our prior expectation of modest growth to large declines in 2016,” Goldman said. “The uncertainty on how and where that adjustment will take place has increased.” The U.S. pumped 9.14 million barrels a day of oil last week, almost 3 million barrels above the five-year seasonal average, according to data from the Energy Information Administration. While the EIA this week cut its 2015 output forecast for the nation by 1.5% to 9.22 million barrels a day, production this year is still projected to be the highest since 1972. OPEC, the supplier of 40% of the world’s crude, has produced above its 30-million-barrel-a-day quota for the past 15 months. Iranian Oil Minister Bijan Namdar Zanganeh has vowed to increase output by 1 million barrels a day once sanctions are removed as the nation seeks to regain market share.

What’s a company worth that is forced to sell its assets?

• Shale Drillers Turn to Asset Sales as Early Swagger Wanes (Bloomberg)

A renewed plunge in oil prices and the winding down of other financial lifelines is forcing shale drillers to auction off once-prized assets and settle for less in potential deals. This week, companies such as Chesapeake Energy Corp. said they are embracing the strategy as they confront the reality of a prolonged, painful crash. While executives have assured investors that it won’t be a fire sale, recent deals suggest that prices have fallen significantly from even a few months ago, according to data compiled by Bloomberg. With one-sixth of major independent oil and gas producers facing debt payments that are more than 20% of their revenue, austerity has replaced the swagger that characterized the earliest days of the oil bust.

Contracts that locked in higher prices are expiring, leading banks to reduce credit lines in coming months. Drillers caught in the squeeze may be forced to auction off some of their best holdings to raise cash or accept more expensive financing to avoid bankruptcy, according to more than a dozen bankers, lawyers and company officials who specialize in energy deals. “These companies are starting to be a little more realistic about their situation and to face up to the fact that they will probably have to do something they don’t want to do,” said Omar Samji, a partner in law firm Jones Day in Houston. “There’s not going to be an easy lifeline.” The first wave of deals is already looming: sales of land holdings in prolific oil regions. Oil market gyrations since July have made valuations hard to pin down, dimming the outlook for sales of whole companies.

Instead, executives are looking to shore up their balance sheets by selling land or wooing deep-pocketed private equity groups or hedge funds to invest in their operations in exchange for a share of revenue, Samji said. Cobalt sold off discoveries in Angola last month and EOG has begun an auction for acreage in Colorado and Wyoming. Anadarko said it will continue to weigh offers, and Chesapeake said Tuesday it’s still pursuing asset sales. The Oklahoma City-based producer is said to be seeking buyers for dry gas acreage in the Utica shale formation, according to people with knowledge of the matter. “Chesapeake is not desperate,” Chief Executive Officer Doug Lawler told investors Tuesday. “We are not going to have a fire sale on any asset.”

And more worserer after that.

• Emerging-Market Currencies: Things Look to Get Worse (WSJ)

Investor bets that Brazil and South Africa will default on their debt hit their highest level since the financial crisis, underscoring the stress mounting on emerging-market economies heading into the most anticipated Federal Reserve meeting in years. The cost to buy credit-default swaps—insurance-like contracts that compensate users for debt defaults—is far from the only sign that investor anxiety is building ahead of the Fed’s two-day meeting concluding Sept. 17. Currencies in Turkey, South Africa and Malaysia have plunged to the weakest levels in many years against the dollar. The average 10-year government debt yield in emerging countries has increased significantly, even as U.S. yields have slipped this summer. Bond yields move inversely to prices.

Many investors believe the Fed will raise short-term interest rates this year for the first time since 2006, intensifying the strain on developing nations that in many cases already are struggling with slowing growth, substantial debt and crumbling demand for the commodities that are at the heart of many of their domestic economies. Turkey and Brazil are considered especially vulnerable by many investors, thanks to economic imbalances that will likely be exacerbated by the declines of their currencies. Turkey’s external debt, or debt borrowed from foreigners, as a%age of its GDP is among the highest of all emerging countries, while Brazil is facing problems including weaker commodity prices, sluggish Chinese demand for its goods and the government’s struggles to cut spending without hitting revenue.

“Signatures were accumulating at 30,000 an hour on the pro-impeachment website on Thursday.”

• Brazil Reduced To Junk As BRICS Facade Crumbles (AEP)

Brazil’s currency has plummeted to an all-time low and borrowing costs have tightened viciously after Standard & Poor’s slashed the country’s debt to junk status, warning that the budget deficit has reached danger levels. The downgrade is a painful blow to a nation that thought it had finally escaped the Latin American curse of boom-bust cycles and joined the top league of rich economies. It is the second of the big emerging market (EM) economies to be stripped of its investment grade rating this year after Russia crashed out of the club in January. Little remains of the BRICS allure that captivated the world seven years ago, and now looks like a marketing gimmick. The Brazilian real tumbled to 3.90 against the US dollar as markets braced for parallel moves by Fitch or Moody’s.

The currency has lost 31pc of its value this year and more than 60pc since early 2011, when slums in the favelas of Rio were selling for the price of four-bedroom houses in the US. “The numbers are going to get much worse before they get better. We see nothing on the horizon that could be perceived as ‘good’ news,” said Win Thin from Brown Brothers Harriman. Mr Thin expects the real to reach 4.50 over the next three to six months in a cathartic overshoot, with the Bovespa index of equities likely to fall by another two-fifths, testing its post-Lehman low of 29,435 as the excesses of the credit bubble come home to roost. Investors have begun to shed holdings of Brazilian debt, afraid that some funds may be forced to eject Brazil from their indexes and liquidate holdings if a second agency joins S&P.

Yields on 10-year domestic bonds spiked almost one%age point to 15.6pc in panic trading in Sao Paolo on Thursday. S&P said Brazil’s government has failed to get a grip on rampant over-spending as tensions erupt between President Dilma Rousseff’s Workers Party (PT) and her coalition partners, and the economy slides into deep recession, leaving it badly exposed as the US Federal Reserve starts to drain liquidity from the global economy. “We now expect the general government deficit to rise to an average of 8pc of GDP in 2015 and 2016,” it said. Mrs Rousseff said Brazil would “pay all its bills and meet all its obligations”. Yet it is unclear how long she can last as momentum builds for impeachment over her role in the Petrobras corruption scandal.

Signatures were accumulating at 30,000 an hour on the pro-impeachment website on Thursday. “People are sick of this government, which has yet to offer any way out of the crisis. It is utterly incapable of governing,” said opposition leader Mendoca Filho. The country is now in a classic stagflation trap. S&P expects the economy to contract by 2.5pc this year and 0.5pc next year, causing the debt ratio to ratchet up quickly. Mrs Rousseff is being forced to tighten policy into the recession in a belated bid to salvage credibility, just as the commodity slump eats into export revenues from iron ore and other raw materials. The current account deficit is 4pc of GDP.

Gabriel Gersztein, from BNP Paribas, said nothing short of a 400 to 500 point rise in rates would stabilize the currency, but the central bank cannot plausibly do this because it would deepen the downturn, playing havoc with debt dynamics. Bhanu Baweja, from UBS, said public debt is likely to reach 72.5pc of GDP by 2018 and could rise relentlessly after that as the country passes its demographic sweet spot and starts to age rapidly. “The clock slowly ticks on, asking ever louder questions about public debt sustainability,” he said.

Command P.

• China’s ‘New Normal’ Growth Model Is Starting to Get Expensive (Bloomberg)

When Premier Li Keqiang took the stage Thursday at the World Economic Forum s Summer Davos meeting in Dalian, he told business leaders that although China faces challenges, growth is on track and fundamentals remain sound. The upbeat message is all part of a New Normal narrative from China s leadership as the economy transitions from relying on heavy industry and debt to one driven by consumption and services. What Li didn t mention was the spiraling bill associated with keeping the economy on course to hit the Communist Party s growth target of about 7% for this year.

From building bridges and highways to shoring up the nation’s currency and stock markets, China is rolling out hundreds of billions of dollars in its biggest stimulus since the package that followed the 2008 global financial crisis. More spending is coming, with the finance ministry this week urging an acceleration of projects and promising to cut fees and taxes for companies, while provinces are taking their own steps to support growth. Beijing has turned on the taps, lifting spending on everything from infrastru cture to public services, said Frederic Neumann at HSBC in Hong Kong. The nation’s authorities cannot be accused of sitting idly by as growth decelerates, with measures announced year-to-date amounting to substantial policy support, he said.

The world’s second-largest economy is growing at its slowest pace in 25 years, forcing the central bank to cut interest rates five times since November and funnel credit to local governments to finance new construction. Estimates vary on the overall size of spending given the difficulty in netting out new expenditure and money that would have been spent anyway. Shen Jianguang at Mizuho Securities expects the stimulus package to be as large as the one rolled out in 2009 and 2010, with fixed asset investment of up to 10 trillion yuan ($1.57 trillion) over the next two to three years.

No, Gary. Today’s markets are their own echo.

• Is Today’s Volatility an Echo of 1987? (A. Gary Shilling)

Volatility – the rate at which prices move up or down – has leaped in many security markets recently. The St. Louis Fed’s Financial Stress Index, whose 18 components include yields on junk and corporate bonds, an index of bond market volatility, and the Standard & Poor’s 500 index, is almost at a four-year high. I believe the restrictions on bank trading imposed by the 2010 Dodd-Frank Act, including the ban on banks’ proprietary trading and increased capital requirements, are a key reason, at least in the U.S. Large banks and other financial institutions simply aren’t carrying the big trading positions they once did, and therefore, liquidity in many markets has atrophied.

Then there’s China’s stock-market nosedive and currency devaluation. They provided a wake-up call about China’s slowing growth and the global effects on commodity prices, emerging markets and money flows. Volatility in U.S. markets may also be due in part to the delayed effects of the ending of quantitative easing by the U.S. Federal Reserve late last year. Since stocks began to revive in March 2009, equities have been floating on a sea of Fed money with little connection to the slowly growing economy beneath – something I dubbed “the Grand Disconnect.” Then there’s the shaky base of corporate earnings growth. With slower economic growth, sales gains have been slight. And business pricing power has been almost nonexistent, with minimal inflation and a strong dollar.

So top-line revenue growth – the foundation for profit gains – has been largely missing. Resourceful American businesses have cut costs ruthlessly to make up for the lack of revenue growth. As a result, profits’ share of national income leaped from the lows of the 2007-2009 recession. But profits’ share has stalled over the last several years, reflecting the slowing of productivity growth. Also, stocks aren’t cheap relative to earnings. The price-to-earnings ratio on the S&P 500 index over the last year is 18.2, compared with the norm of 19.4 over the last 20 years. But the better measure is the cyclically adjusted ratio, developed by Robert Shiller, which uses real earnings over the preceding 10 years to iron out cyclical fluctuations. On that basis, the current price-to-earnings ratio of 25.84 is 55% above the long-run norm of 16.6. And since the norm has been about 16.6 almost since 1992, price-to-earnings should run below trend for years to come, assuming the 16.6 remains valid.

Now you know where bankers rule.

• UN Votes For New Debt Rules But UK, US Try To Block (Jubilee Debt Campaign)

The United Nations General Assembly has voted to accept new rules to guide sovereign debt restructurings. At a vote in New York on Thursday evening, the set of nine principles were adopted with 136 votes in favour, just 6 against and 41 abstentions. However, implementation of the principles is in doubt as the majority of international debt is governed by US or UK law. Both the US and UK were amongst the just six countries which voted against. The other four countries which voted against were Canada, Germany, Israel and Japan.

Commenting on the vote, Tim Jones, policy officer, Jubilee Debt Campaign, said: “This could prove to be a historic breakthrough. The vast majority of nations have spoken out for a change to the broken debt system. From the Greek debt debacle, to Argentina being held to ransom by vulture funds, to decades-old debt crises in Jamaica and El Salvador the need for change has never been clearer. It is outrageous that the UK has chosen to put reckless lenders ahead of people around the world by voting against these principles.”

The vote adopted nine principles that should be respected when restructuring sovereign debt: sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy, sustainability and majority restructuring. The principles come from negotiations over the last year, which most EU countries refused to take part in.

But will do QEn instead.

• The ECB Could Kick-Start The Economy With A Limited Basic Income (BI.org)

QE thus does not appear to be the best way forward for Europe. This is why there are economists who propagate a more efficient alternative, the so-called “helicopter money” approach. For as long as the economy fails to recover, newly printed money is simply distributed directly to the general population, as if it were dropped from a helicopter. Research shows that the money would be spent pretty much straight after it’s received, which would restore confidence to invest among businesses. It would also restore business confidence to take on new employees, who in turn respond by consuming more. And so the result becomes a virtuous circle. But there are drawbacks. Sharing out helicopter money is a temporary measure that can only be adopted in exceptional circumstances.

If at some point it transpires that the ECB has gone too far and created a threat of runaway inflation, it is very difficult to remove the newly created money from the economy. This is why there is a clear need for a structural and flexible policy measure which the central bank is able to use to kick-start the economy as and when it is necessary. A variation on the helicopter theme, a monetary basic income, provides a way forward. Under this scenario, the ECB would distribute an amount of money to each citizen on a monthly basis, calculated as a%age of average income (the amount therefore varies between countries). Let’s assume for the sake of simplicity that the amount is €400 a month throughout the Eurozone. It’s important that the individual Eurozone countries remain responsible for raising the €400 – for example by reducing benefit payments or tax allowance levels – whereupon they pay it back to the ECB.

So far, this is a neutral measure that shuffles money around without creating a stimulus. This remains the case except in times of crisis when the central bank increases the monthly payment to, say, €600, until the economy recovers. Meanwhile, each national authority keeps its repayment levels fixed at €400. The ECB thereby ends up printing an additional €200 per person per month, and this money is relatively quickly spent. As the economy recovers and growth and inflation figures rise, the basic income can be returned to the neutral level of €400. In cases where the ECB had been too generous, the basic income level could even be lowered temporarily to €300 until inflation stabilizes. This would essentially remove money from the economy.

Bring on the crazies.

• Rajoy’s Trump-Like Candidate Poses Trump-Like Risks in Catalonia (Bloomberg)

Prime Minister Mariano Rajoy’s decision to pick a Donald Trump-style candidate to fire up his base in Catalonia is exposing Spain’s governing party to risks that Republican leaders in the U.S. may recognize. Xavier Garcia Albiol, a 47-year-old former basketballer who stands six foot eight inches (2 meters) tall, defied the People’s Party’s declines across most of Catalonia in 2011 to become mayor of the region’s third-biggest city with a campaign that demonized immigrants. While Rajoy may have calculated Albiol’s track record was worth the risk, he probably didn’t bank on the kind of off-message comments that have seen the would-be Republican presidential candidate rile his party’s establishment in the U.S. – in an interview last week, Albiol attacked the PP’s strategy for containing Catalonia’s efforts to break away from Spain and said the prime minister had made mistakes.

Rajoy is trying to revive his party’s fortunes in Catalonia’s Sept. 27 regional election to create a firebreak against Ciudadanos, a rival for the anti-independence, pro-business vote that is set to deny the prime minister an outright majority in December’s general election. The election campaign proper kicks off on Friday when the separatist parties aim to bring hundreds of thousands of supporters onto the streets of Barcelona. Spain’s 10-year bonds fell yesterday with yields rising 2 basis points to 2.102% after a survey by the state pollster, CIS, showed separatist parties might win a majority with 68 or 69 deputies in the 135-strong chamber.

The PP is set to win as few as 12 seats, with barely half the votes of Ciudadanos, the poll showed. Outflanked by Ciudadanos’s early opposition to Catalonia’s separatist president, Artur Mas, Rajoy is betting that Albiol’s ability to attract blue-collar voters by playing on their concerns about immigrants can limit the damage for his party. “It shows that the PP is fully aware of its marginal role in Catalonia,” Lluis Orriols, a political scientist at Madrid’s Carlos III University, said in a phone interview. “Like Donald Trump, the PP candidate can mobilize a group of voters you can’t reach otherwise, but you can hardly aspire to win like that.”

A sign of things to come.

• Bribes, Debt, $100 Billion Lost: Nigeria Can’t Keep the Power On (Bloomberg)

Five minutes into Frank Edozie’s presentation on the challenges facing Nigeria’s power industry, the electricity cut out in the Jasmine Hall at the upmarket Eko Hotel in Lagos. “Very timely,” Edozie, a former power ministry adviser and a senior consultant to the U.K.-funded Nigerian Infrastructure Advisory Facility, said over the low muttering and laughter of an audience of more than 100 people. “We probably ran out of gas.” There’s no end in sight to the daily blackouts that the government says are costing Africa’s largest economy about $100 billion a year in missed potential and that President Muhammadu Buhari calls a “national shame.”

Gas shortages, pipeline vandalism, inadequate funding, unprofitable prices and corruption mean fixing the electricity cuts two years after a partial sale of state power companies to private investors won’t be easy. Generated output has never risen above 5,000 megawatts, which is about a third of peak demand, and if it did the state-owned transmission system can’t deliver any more than that before it starts breaking down. South Africa, with a less than a third of Nigeria’s population of about 180 million, has nine times more installed capacity and it too is grappling with blackouts. Nigeria, Africa’s biggest oil producer, ranked the worst of 189 countries after Bangladesh and Madagascar on the ease of getting electricity connected to businesses, costing almost 7% of lost sales each month, according to a 2015 World Bank Doing Business report.

The power bottleneck comes on top of slump in oil prices and currency that are threatening Nigeria’s role as a destination for investors. Economic growth slowed to 2.4% on an annual basis in the second quarter from 6.5% a year earlier. About two-thirds of Nigeria’s people have no access to electricity, and at the current plant commissioning rate, supply will barely meet 9,500 megawatts by 2020, according to a 2014 World Bank project document. Demand is expected to increase 10% each year. Buhari’s party promised before he won power in March’s election to generate 40,000 megawatts within four to eight years.

Blindly stumbling towards the cliff.

• Auckland House Prices Rising $345 A Day (NZ Herald)

Auckland house prices were up $125,950 on last year – or $345 a day – according to sales data out from the Real Estate Institute. The city’s median sale price rose from $614,050 last August to $740,000 last month and prices were up $5000 since July. Colleen Milne, REINZ chief executive, said the presence of Auckland buyers in other regions was becoming more noticeable with a surge in Auckland investors buying in Dunedin and continued strong demand for properties in the Waikato and Bay of Plenty from Auckland buyers.

Nationally, 7766 homes were sold last month, up 41.7% annually but down 4.4% on the previous month of July. The national median price rose $45,000 annually to $465,000. The figures from REINZ come as the Reserve Bank cut official interest rates to 2.75%, and banks followed suit, cutting their floating mortgage rates. Most economists expect the Reserve to now retain an easing bias, with some tipping the rate to drop to 2% by early next year.

Almost funny.

• Sue Your Bank, Keep Your Home, Repeat (Bloomberg)

Four years ago, Robert and Joan Potter were facing a crisis. The monthly payments on their two-bedroom home in the coastal suburb of Laguna Niguel, Calif., had ballooned from $2,000 to $5,000 in the decade since they bought it for about $360,000. Now the retirees were rapidly falling behind. “It was my parents’ dream home,” said their son, Derrick, 43. Derrick, who works as a mortgage consultant, said Robert and Joan got suckered into the kind of inflationary deal known as a negative amortization loan, since outlawed by state legislators. “They had some sleazy mortgage broker who said my mom, who hasn’t worked in 25 years, made $10,000 a month.” Still, there was hope. The Potters heard about a firm called Brookstone Law, which was pioneering a novel strategy for challenging allegedly predatory banks.

The best part: As long as Brookstone was representing Robert and Joan, the bank would hold off on collecting mortgage payments or foreclosing. In 2011, Robert and Joan paid Brookstone $6,000 to become the lead plaintiffs in a “mass joinder” lawsuit against their lender, JPMorgan Chase Bank. Similar to class actions, mass joinders allow large numbers of people to collectively sue one defendant, except that in a mass joinder the plaintiffs do not have identical claims. Settlements, if there are any, get sorted out individually, depending on each plaintiff’s circumstances. Brookstone’s case against Chase alleged mortgage-related misconduct such as wrongful foreclosure and breach of contract. It demanded that the bank pay for lost home equity, lowered credit scores, and further damages.

It claimed that when the Potters refinanced in 2006, the bank manipulated them into taking a loan they couldn’t afford and hid its true interest rate. The suit was filed in Los Angeles County Superior Court on April 15, 2011. Eventually, Brookstone signed up more than 250 clients to join it. Casting itself as defending the little guys caught up in the subprime crisis, Brookstone, founded by a 41-year old attorney named Vito Torchia Jr., has represented at least 4,000 clients in a dozen mass joinder lawsuits against big banks, including Wells Fargo and Bank of America. Court documents indicate Brookstone’s earnings during 2011 and 2012 could be in the tens of millions of dollars. Yet the firm has yet to win a single one of these cases on the merits.

“For the Washington-Ankara-Riyadh axis, the objective of getting rid of ISIL implies the real objective which is to get rid of Assad.”

• The Civil War In Syria – Part 2 (Beppe Grillo)

Foreign Fighters. The proliferation of Islamic militias in the region has been helping to create a jihadist “melting pot” in the last few months. In Iraq and in Syria this is channeling the ambitions of hundreds of foreign fighters who have set off to get to the front to join up with the rebel militias who are fighting against Assad’s government troops. This is a crucial element in the Syrian civil war. Today it’s estimated that the two most important jihadist groups, the al-Nusra Front, and the Islamic State in Iraq and the Levant have recruited to their ranks at least 9,000 non-Syrian fighters which is about 20% of the total. Including the other islamic groupings and the Free Syrian Army, this brings the overall figure to between 11,000 and 15,000.

According to estimates from our intelligence services, there are more than 60 of our fellow citizens who have gone off to fight side by side with the terrorists and at least 10 of these are Italians or naturalised Italians. Anyway, it’s a tiny number compared to the more than 1,500 who have set off from France, and the 800-1000 from Britain, or the 650 Germans and the 400 from the Netherlands and from Belgium. In this process, even the women have had leading roles: the Italian woman Maria Giulia Sergio is one of the young people that has recently chosen to convert to Islam to then join up in Syria. Since al-Baghdadi’s proclamation of the Caliphate, the Centre for the Study of Radicalisation and Political Violence in London has estimated that at least 4,000 western citizens have joined the conflicts in Iraq and Syria. Of these, about 550 are thought to be women who have set off from Europe and are now in the territory controlled by ISIL.

The controversial role of Ankara and the weapons going to the Peshmerga. In this coming and going of presumed and potential jihadists, Turkey is playing a crucial role. According to some people, even though Turkey is a member of NATO and a close ally of the West, it is in fact thought to be one of the leading supporters of ISIL. And anyway, it’s not by chance that the main strongholds of the terrorist group are situated along the border with Turkey. Meanwhile, the United States is arming and training the “moderate“ rebels and now ISIS fighters have rifles bearing the inscription: “Property of US Govt“. This was discovered by a governmental organisation: Conflict Armament Research.

The international coalition and the Washington-Riyadh axis . Having understood, with a certain delay, the danger of the expansion of the jihadist militias in the region, in August 2014, Obama made an agreement with a few partners in Europe, including ltaly, to establish an international coalition to fight ISIS. To support this, our government has so far sent 2.5 million dollars-worth of weapons, including machine guns, grenades, fighter planes and more than a million rounds of ammunition, as well as humanitarian assistance. The mission has given many people to believe that all of a sudden, Washington has changed tack and has decided to support the Syrian regime. That’s just not true. For the Washington-Ankara-Riyadh axis, the objective of getting rid of ISIL implies the real objective which is to get rid of Assad.

This can be seen in the words spoken by Obama who recently when he said that he was even ready to hit Syrian government positions if attacks on the ciilian population were found to be coming from such positions. However, the humanitarian factor carries very little weight on the political stage. The crucial point today is exclusively the future of Assad: Moscow and Teheran are asking for him to stay in power, the West is continuing to exert pressure to have him resign. Anyway, history teaches us that up until now, outside interference has never had the outcomes that were hoped for. In fact, it has always contributed to increasing sectarian clashes. Dividing up power into ethnic and religious quotas on the basis of one’s own interests is thought to be a deterrent for any sort of peaceful transition in preparation for national unity. Iraq, Lebanon, Afghanistan and Libya should tell us something.

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Introduction

The USA and Hubbert’s Peak

2008-2015 Winners and Losers

Concluding Thoughts

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