Jul 142017
 
 July 14, 2017  Posted by at 9:21 am Finance Tagged with: , , , , , , , , , , ,  4 Responses »
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Pablo Picasso Nude, Green Leaves and Bust 1932

 

Global Shares Rise To Record New Highs (R.)
Britain In Worse Shape To Withstand A Recession Than In 2007 (G.)
IMF Warns Canada On Housing, Trade, Rate Hikes (R.)
40% Of The Fed’s Interest On Excess Reserves Is Paid To Foreign Banks (ZH)
Will Corporate Bonds Cross Over? (DDMB)
Turkey Chooses Russia Over NATO for Missile Defense (BBG)
100,000 and Counting: No Letup in Turkey Coup Purges a Year On (BBG)
Philip Morris’ Anti-Anti-Smoking Campaign (R.)
Globalisation: The Rise And Fall Of An Idea That Swept The World (G.)
Tepco: Decision Already Been Made To Release Radioactive Tritium Into Sea (JT)
Italy’s Poor Almost Triple in a Decade Amid Economic Slumps

 

 

Nothing has value anymore.

Global Shares Rise To Record New Highs (R.)

Upbeat data helped send world shares to a fourth all-time high in less than a month on Thursday as Wall Street edged higher in anticipation of solid earnings, while crude oil gained on evidence of stronger demand in China. Stocks were buoyed in Asia and elsewhere a day after Federal Reserve Chair Janet Yellen signaled a rise in interest rates would be less aggressive than some investors had expected. Sentiment was boosted after China reported upbeat data on exports and imports for June, the latest sign that the global growth is picking up a bit. That offset reports of higher production by key members of OPEC in a report by the International Energy Agency (IEA), lifting oil prices.

The data pushed Asian shares up more than 1% and lifted MSCI’s 47-country gauge of global equity markets to a fresh record high with a gain of 0.29%. “Yesterday’s move was in response to Yellen comments that should inflation remain below the 2% target rate, the central bank will be less aggressive in their tightening program,” said Sam Stovall, chief investment strategist at CFRA Research. “Today, the market is saying that’s old news and let’s focus on the matter at hand, which is earnings that will be coming out in earnest this week,” Stovall said. U.S. shares rose in anticipation second-quarter earnings will grow 7.8% for S&P 500 companies, according to Thomson Reuters data.

Read more …

Don’t worry, everybody is.

Britain In Worse Shape To Withstand A Recession Than In 2007 (G.)

Britain’s public finances are in worse shape to withstand a recession than they were on the eve of the 2007 financial crash a decade ago and face the twin threat of a fresh downturn and Brexit, the Treasury’s independent forecaster has warned. The Office for Budget Responsibility – the UK’s fiscal watchdog – said another recession was inevitable at some point and that Theresa May’s failure to win a parliamentary majority in last month’s election left the public finances more vulnerable to being blown off course than they were in 2007. In its first in-depth analysis of the fiscal risks facing Britain, the OBR said its main message was clear: “Governments should expect nasty fiscal surprises from time to time – because policy can only reduce risks, not eliminate them – and plan accordingly.

“And they have to do so in the context of ongoing pressures that are likely to weigh on receipts and drive up spending and a variety of risks that governments choose to expose themselves to for policy reasons. This is true for any government, but this one also has to manage the uncertainties posed by Brexit, which could influence the likelihood or impact of other risks.” The OBR said the size of the UK’s Brexit divorce bill – currently a matter of dispute between London and Brussels – would have little impact on the public finances. But it noted that even a small fall in Britain’s underlying growth rate after departure from the EU would lead to a big increase in the country’s debt burden.

If a knock to trade with the rest of Europe caused productivity to slip by just 0.1 percentage points over the next 50 years, tax receipts would be £36bn lower. With spending growth left unchanged, the debt-to-GDP ratio would end up around 50 percentage points higher, the OBR added. The campaign group Open Britain said the OBR’s report showed “a hard Brexit poses a real threat to our economy. People voted for £350m a week for the NHS, not a £36bn black hole in the public finances that could mean severe cuts to the NHS”.

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Has Australia been warned yet?

IMF Warns Canada On Housing, Trade, Rate Hikes (R.)

The IMF said on Thursday that while Canada’s economy has regained momentum, housing imbalances have increased and uncertainty surrounding trade negotiations with the United States could hurt the recovery. The report, written before the central bank raised interest rates by a quarter of a percentage point on Wednesday to 0.75%, also said the Bank of Canada’s current monetary policy stance is appropriate, and it cautioned against tightening. “While the output gap has started to close, monetary policy should stay accommodative until signs of durable growth and higher inflation emerge,” it said, adding that rate hikes should be “approached cautiously.” Cheng Hoon Lim, IMF mission chief for Canada, later clarified that even with Wednesday’s rate hike, monetary policy remains “appropriately accommodative.”

“The Bank of Canada’s increase of the policy rate reflects encouraging economic data over the past few months. We welcome the good news on the economy,” Lim said in an emailed statement. “Given the considerable uncertainty around the growth and inflation outlook, the Bank should continue to take a cautious approach in further adjusting the monetary policy stance,” she added. In a statement following its annual policy review with Canada, the IMF cautioned that risks to Canada’s outlook are significant – particularly the danger of a sharp correction in the housing market, a further decline in oil prices, or U.S. protectionism. It said financial stability risks could emerge if the housing correction is accompanied by a recession, but said stress tests have shown Canadian banks could withstand a “significant loss” on their uninsured residential mortgage portfolio, in part because of high capital position.

House prices in Toronto and Vancouver have more than doubled since 2009 and the boom has fueled record household debt, a vulnerability that has also been noted by the Bank of Canada. “The main risk on the domestic side is a sharp correction in the housing market that impairs bank balance sheets, triggers negative feedback loops in the economy, and increases contingent claims on the government,” the Fund said. The Fund also warned U.S. protectionism could hurt Canada, laying out a scenario for higher tariffs that could come with the renegotiation of NAFTA. If the United States raises the average tariff on imports from Canada by 2.1 percentage points and there is no retaliation from Canada, there would be a short-term impact on real GDP of about 0.4%.

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Bankers have no more use for borders than birds do.

40% Of The Fed’s Interest On Excess Reserves Is Paid To Foreign Banks (ZH)

Recall that as we showed first all the way back in 2011, the total cash on the books of commercial banks with operations in the US tracks the Fed’s excess reserves almost dollar for dollar. More importantly, the number is broken down by small and large domestic banks, as well as international banks. It is the last number that is of biggest interest, because now that Congress is finally scrutinizing the $4.5 trillion elephant in the room, i.e., the Fed’s balance sheet, it may be interested to know that approximately 40%, or $838 billion as of the latest weekly data, in reserves parked at the Fed belongs to foreign banks.

While we will reserve judgment, and merely point out that of the $100 or so billion in dividends and buybacks announced by US banks after the latest stress test a substantial amount comes directly courtesy of the Fed – cash that ultimately ends up in shareholders’ pockets – we will note that the interest the Fed pays to foreign banks operating in the US who have parked reserves at the Fed, amounts to $10.4 billion annualized as of this moment. This is a subsidy from the Fed, supposedly an institution that exists for the benefit of the US population, going directly and without any frictions to foreign banks, who – just like in the US – then proceed to dividend and buybacks these funds, “returning” them to their own shareholders, most of whom are foreign individuals.

While the number appears modest, it is poised to grow substantially as the Fed Funds rate is expected to keep growing, ultimately hitting 3.0% according to the Fed. Indicatively, assuming excess reserves remain unchanged for the next 2-3 years and rates rise to 3.0%, that would imply a total annual subsidy to commercial banks amounting to $65 billion, of which $25 billion would go to foreign banks every year. We wonder if this is the main reason why the Fed is so desperate to trim its balance sheet as it hikes rates, as sooner or later, someone in Congress will figure this out.

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Unintended consequences? One of many?

Will Corporate Bonds Cross Over? (DDMB)

Unbeknownst to unassuming corporate bond holders, they too will soon be forced into the slow lane. For the moment, the vast majority fancy themselves that equally exasperating driver who won’t get out of the fast lane, determined to bully their way to their damned destination. As for the perils of tailgating, they’re for the other guy, the less agile driver with rubbery reflexes. That’s all good and well and has been for many years. Bond market fender benders are nearly nonexistent. The question is: Will central bankers worldwide turn placid parkways into highways to hell as they ‘remove accommodation,’ to borrow from their gently genteel jargon? That’s certainly one way to interpret Federal Reserve Chair Janet Yellen’s latest promise to shrink the balance sheet ‘appreciably.’

Care for a translation? How easily does “Aggressive Quantitative Tightening” roll off the tongue? Perhaps you’ve just bitten yours instead. Enter the International Monetary Fund (IMF), The Institute of International Finance (IIF), The Bank of International Settlements (BIS), and by the way, the Emerging Markets complex including and especially China. As a former central banker, it is with embarrassing ease yours truly can bandy about fantastic figures. No surprise that nary an eyebrow was raised at the latest figures out of the IIF that aggregate global debt is closing in on $220 trillion, as touched on last week. Consider that to be the broad backdrop. Now, narrow in on the IMF’s concerns that financial stability could be rocked by a rumble in US corporate debt markets.

Using firms’ capacity to service their debts from current earnings as a simple and elegant yard stick, the report warned that one in ten firms are failing outright. The last two years of levering up have exacted rapid damage: earnings have fallen to less than six times interest expense, this during an era of unprecedented low interest rates. And as record non-financial debt as a percentage of GDP quickly approaches 50%, the share of income required to service this mountain is at a seven-year high. Should financial conditions tighten (the report was published in April prior to the Fed’s June rate hike), one-in-five firms are likely to default, which rises to 22% if rates continue to rise.

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“..The Russian system would not be compatible with other NATO defense systems, but also wouldn’t be subject to the same constraints imposed by the alliance, which prevents Turkey from deploying such systems on the Armenian border, Aegean coast or Greek border..”

Turkey Chooses Russia Over NATO for Missile Defense (BBG)

Turkey has agreed to pay $2.5 billion to acquire Russia’s most advanced missile defense system, a senior Turkish official said, in a deal that signals a turn away from the NATO military alliance that has anchored Turkey to the West for more than six decades. The preliminary agreement sees Turkey receiving two S-400 missile batteries from Russia within the next year, and then producing another two inside Turkey, according to the Turkish official, who asked not to be named because of the sensitivity of the matter. A spokesman for Russia’s arms-export company Rosoboronexport OJSC said he couldn’t immediately comment on details of a deal with Turkey. Turkey has reached the point of an agreement on a missile defense system before, only to scupper the deal later amid protests and condemnation from NATO.

Under pressure from the U.S., Turkey gave up an earlier plan to buy a similar missile-defense system from a state-run Chinese company, which had been sanctioned by the U.S. for alleged missile sales to Iran. Turkey has been in NATO since the early years of the Cold War, playing a key role as a frontline state bordering the Soviet Union. But ties with fellow members have been strained in recent years, with Turkish President Recep Tayyip Erdogan pursuing a more assertive and independent foreign policy as conflict engulfed neighboring Iraq and Syria. Tensions with the U.S. mounted over U.S. support for Kurdish militants in Syria that Turkey considers terrorists, and the relationship with the European Union soured as the bloc pushed back against what it sees as Turkey’s increasingly autocratic turn.

Last month, Germany decided to withdraw from the main NATO base in Turkey, Incirlik, after Turkey refused to allow German lawmakers to visit troops there. The missile deal with Russia “is a clear sign that Turkey is disappointed in the U.S. and Europe,” said Konstantin Makienko, an analyst at the Center for Analysis of Strategies and Technologies, a Moscow think-tank. “But until the advance is paid and the assembly begins, we can’t be sure of anything.” The Russian system would not be compatible with other NATO defense systems, but also wouldn’t be subject to the same constraints imposed by the alliance, which prevents Turkey from deploying such systems on the Armenian border, Aegean coast or Greek border, the official said. The Russian deal would allow Turkey to deploy the missile defense systems anywhere in the country, the official said.

[..] The official said the systems delivered to Turkey would not have a friend-or-foe identification system, which means they could be deployed against any threat without restriction.

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That must have been one hell of a conspiracy.

100,000 and Counting: No Letup in Turkey Coup Purges a Year On (BBG)

The scale of Turkey’s crackdown on alleged government opponents following last year’s attempted coup was confirmed by a top official, as the nation prepares to mark the anniversary of the failed putsch amid deepening concern over the rule of law. Authorities have fired 103,824 state employees and suspended 33,483 more since the July 15 bid to seize power by a section of the military, Deputy Prime Minister Numan Kurtulmus said in an interview. The purge of suspected followers of U.S.-based cleric Fethullah Gulen, accused by the government of orchestrating the coup attempt, is necessary to ensure national security, he said. ustice Ministry data showed 50,546 suspected members of Gulen’s organization were in prison on July 3, and that arrest warrants had been issued for 8,000 others. The preacher denies involvement in the takeover attempt.

“There might be crypto members of Feto who walk on the snow without leaving tracks,” Kurtulmus said, using an abbreviation of Gulen’s first name that officials have adopted since the defeated military power grab to refer to his movement. “Related agencies are carefully conducting their work against this possibility.” Just this week, Erdogan rebuffed criticism over the detention of a group of international rights activists, including the director of Amnesty International Turkey, as they held a workshop on an island off Istanbul. “They gathered as if they were holding a meeting to continue July 15,” the president said. Amnesty criticized Turkey on Tuesday after the detentions were extended by seven days. “It is truly absurd that they are under investigation for membership of an armed terrorist organization,” Amnesty Europe Director John Dalhuisen said in an email. “For them to be entering a second week in police cells is a shocking indictment of the ruthless treatment of those who attempt to stand up for human rights in Turkey.”

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Dirty deeds.

Philip Morris’ Anti-Anti-Smoking Campaign (R.)

A group of cigarette company executives stood in the lobby of a drab convention center near New Delhi last November. They were waiting for credentials to enter the World Health Organization’s global tobacco treaty conference, one designed to curb smoking and combat the influence of the cigarette industry. Treaty officials didn’t want them there. But still, among those lined up hoping to get in were executives from Japan Tobacco International and British American Tobacco Plc. There was a big name missing from the group: Philip Morris International Inc. A Philip Morris representative later told Reuters its employees didn’t turn up because the company knew it wasn’t welcome. In fact, executives from the largest publicly traded tobacco firm had flown in from around the world to New Delhi for the anti-tobacco meeting.

Unknown to treaty organizers, they were staying at a hotel an hour from the convention center, working from an operations room there. Philip Morris International would soon be holding secret meetings with delegates from the government of Vietnam and other treaty members. The object of these clandestine activities: the WHO’s Framework Convention on Tobacco Control, or FCTC, a treaty aimed at reducing smoking globally. Reuters has found that Philip Morris International is running a secretive campaign to block or weaken treaty provisions that save millions of lives by curbing tobacco use. [..] Confidential company documents and interviews with current and former Philip Morris employees reveal an offensive that stretches from the Americas to Africa to Asia, from hardscrabble tobacco fields to the halls of political power, in what may be one of the broadest corporate lobbying efforts in existence.

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It needs growth, and there ain’t none.

Globalisation: The Rise And Fall Of An Idea That Swept The World (G.)

It was only a few decades ago that globalisation was held by many, even by some critics, to be an inevitable, unstoppable force. “Rejecting globalisation,” the American journalist George Packer has written, “was like rejecting the sunrise.” Globalisation could take place in services, capital and ideas, making it a notoriously imprecise term; but what it meant most often was making it cheaper to trade across borders – something that seemed to many at the time to be an unquestionable good. In practice, this often meant that industry would move from rich countries, where labour was expensive, to poor countries, where labour was cheaper. People in the rich countries would either have to accept lower wages to compete, or lose their jobs. But no matter what, the goods they formerly produced would now be imported, and be even cheaper.

And the unemployed could get new, higher-skilled jobs (if they got the requisite training). Mainstream economists and politicians upheld the consensus about the merits of globalisation, with little concern that there might be political consequences. Back then, economists could calmly chalk up anti-globalisation sentiment to a marginal group of delusional protesters, or disgruntled stragglers still toiling uselessly in “sunset industries”. These days, as sizable constituencies have voted in country after country for anti-free-trade policies, or candidates that promise to limit them, the old self-assurance is gone. Millions have rejected, with uncertain results, the punishing logic that globalisation could not be stopped. The backlash has swelled a wave of soul-searching among economists, one that had already begun to roll ashore with the financial crisis. How did they fail to foresee the repercussions?

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The world should not allow the Fukushima secrecy any longer.

Tepco: Decision Already Been Made To Release Radioactive Tritium Into Sea (JT)

Radioactive tritium, said to pose little risk to human health, will be released from the crippled Fukushima No. 1 nuclear power complex into the sea, according to a top official of the plant operator. “The decision has already been made,” Takashi Kawamura, chairman of Tokyo Electric Power Company, said in a recent interview with media outlets, referring to the discharge of tritium, which remains in filtered water even after highly toxic radioactive materials are removed from water used to cool the damaged reactors at the plant. At other nuclear power plants, tritium-containing water has routinely been released into the sea after it is diluted. But the move by Tepco has prompted worries among local fishermen about the potential ramifications for their livelihood as public perceptions about fish and other marine products caught off Fukushima could worsen.

They are the first public remarks by the utility’s management on the matter, as Tepco continues its cleanup of toxic water and tanks containing it continue to fill the premises of the plant, where three reactors suffered meltdowns after tsunami flooded the complex in March 2011 following a massive earthquake. Kawamura’s comments came at a time when a government panel is still debating how to deal with tritium-containing water at the Fukushima plant, including whether to dump it into sea. Saying its next move is contingent on the panel’s decision, Kawamura indicated in the interview that Tepco will wait for a decision by the government before it actually starts releasing the water into sea. “We cannot keep going if we do not have the support of the state” as well as Fukushima Prefecture and other stakeholders, he said.

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The EU is one big success story.

Italy’s Poor Almost Triple in a Decade Amid Economic Slumps

Italians living below the level of absolute poverty almost tripled over the last decade as the country went through a double-dip, record-long recession. The absolute poor, or those unable to purchase a basket of necessary goods and services, reached 4.7 million last year, up from almost 1.7 million in 2006, national statistics agency Istat said Thursday. That is 7.9% of the population, with many of them concentrated in the nation’s southern regions. As Italy went through its deepest, and then its longest, recession since World War II between 2008 and 2013, more than a quarter of the nation’s industrial production was wiped out. Over the same period unemployment also rose, with the rate rising to as high as 13% in 2014 from a low of 5.7% in 2007. Joblessness was at 11.3% at last check in May.

For decades, Italy has grappled with a low fertility rate – just 1.35 children per woman compared with a 1.58 average across the 28-nation EU as of 2015, the last year for which comparable data are available. “The poverty report shows how it is pointless to wonder why there are fewer newborn in Italy,” said Gigi De Palo, head of Italy’s Forum of Family Associations. “Making a child means becoming poor, it seems like in Italy children are not seen as a common good.” The number of absolute poor rose last year in the younger-age classes, reaching 10% in the group of those between 18 and 34 years old. It fell among seniors to 3.8% in the age group of 65 and older, the Istat report also showed.

Earlier this year, the Rome-based parliament approved a new anti-poverty tool called inclusion income that is replacing existing income-support measures. It will benefit 400,000 households, for a total of 1.7 million people, Il Sole 24 Ore daily reported, citing parliamentary documents. The program will be funded with resources of around €2 billion ($2.3 billion) this year which should rise to nearly €2.2 billion in 2018, Sole also said

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Jan 152016
 
 January 15, 2016  Posted by at 10:26 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle January 15 2016
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DPC Foundry, Detroit Shipbuilding Co., Wyandotte, Michigan 1915

WTI, Brent Oil Sink Under $30 (FT)
China Stocks Enter Bear Market as State-Fueled Rally Evaporates (BBG)
Asia Shares Hit 3-1/2-Year Lows As Oil Resumes Fall (Reuters)
A Towering Chinese Debt Mountain Looms Over Markets (BBG)
China’s Capital Flight (BBG)
China Wants a Reserve Currency and Control, But Can’t Have Both (BBG)
Layoffs and Unrest Loom in China as Growth Slows (BBG)
The Simple Truth About China’s Market (BBG)
China Credit Growth Surged In December Amid Fresh Stimulus (BBG)
Glimmers Of Hope For Oil As Russia Poised To Slash Output – But.. (AEP)
The ‘Real’ Price Of Oil Is Below $17 (ZH)
Saudi Life With $30 Oil (BBG)
Saudi Arabia Plans New Sovereign Wealth Fund (Reuters)
Iron Ore Risks Tumbling Into $20s on Demand Fall: Citi (BBG)
How Australian Households Became The Most Indebted In The World (Guardian)
Greece: A European Tragedy (Mody)
Dutch Populist Wilders Says EU Finished, Netherlands Must Leave (BBG)
Europe Doesn’t Need Stronger Borders (Legrain)
Switzerland Joins Denmark In Seizing Assets From Refugees (Guardian)
Nine Bodies Of Refugees, Migrants Found Off Turkish Coast (Reuters)
Three Children Drown Off The Coast Of Greece’s Agathonisi Island (Kath.)

Yay! Imagine yourself on a sleigh going down a steep slope.

WTI, Brent Oil Sink Under $30 (FT)

At pixel time: WTI is at $29.67 per barrel, down 4.9% to a new 12-year low. Brent, meanwhile, is down 3.31% to $29.87. This is doing oily currencies no favours, on which more shortly. It’s unhelpful even to less oily currencies too; Barclays for example trimmed its inflation outlook for the UK based in part on the slide in oil. It also shoved out its expectation for the first UK rate rise to the fourth quarter of this year, from the second. Sterling trades at $1.4344 right now, a new five-and-a-half year low.

Read more …

Last hour or so.

China Stocks Enter Bear Market as State-Fueled Rally Evaporates (BBG)

Chinese stocks fell into a bear market for the second time in seven months, wiping out gains from an unprecedented state rescue campaign as investors lose confidence in government efforts to manage the country’s markets and economy. The Shanghai Composite Index sank 3.5% to 2,900.97 at the close, falling 21% from its December high and sinking below its nadir during a $5 trillion rout in August. Friday’s decline was attributed to persistent investor concerns over volatility in the yuan and a report that some banks in Shanghai have halted accepting shares of smaller listed companies as collateral for loans. “The market entered a disaster mode at the start of the year and it’s still in that pattern now,” said Wu Kan at JK Life Insurance in Shanghai.

“The market has completely no confidence and the basic reason is that stocks are expensive, particularly those small caps,” he said, adding that he plans to swap large-cap shares for small caps. The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990. [..] “The bottom has fallen out of the market in the last two weeks,” said Francis Lun at Geo Securities in Hong Kong “Investors have lost confidence after two weeks of meddling by government officials.”

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Contagion.

Asia Shares Hit 3-1/2-Year Lows As Oil Resumes Fall (Reuters)

Asian stocks surrendered earlier gains to hit 3-1/2-year lows on Friday as renewed pressure on oil prices and disappointing Chinese data kept investors on edge. MSCI’s broadest index of Asia-Pacific shares outside Japan declined 0.3% to the lowest level since June 2012, and was on track for a loss of 2.7% for the week. Japan’s Nikkei rose 0.7%, but was set for a weekly loss of 1.9%. Oil prices rebounded on Thursday, with international benchmark Brent futures rising 2.4% to $31.03 a barrel, recovering from its 12-year low of $29.73 hit earlier in the day. But that rally, largely driven by short-covering after a 20% fall since the start of year, proved to be shortlived. The collapse in oil prices has spooked financial markets as investors worried about the health of the global economy, with a slowdown in China and volatility in its markets making for a nervous start to the year.

“Market sentiment was cautious to begin with, as overnight gains in US equities were complicated by losses by European indices,” said Bernard Aw, market strategist at IG in Singapore. “Furthermore, oil prices were under pressure once again, constraining any relief rally in energy and material stocks.” Brent crude opened weaker on Friday and lost 0.6% to $30.69. U.S. crude fared even worse, slumping 1.8% to $30.63 as the prospect of additional Iranian supply looms over the market. It had posted the first significant gains for 2016 in the previous session. Stocks in China also returned to negative territory after a brief rebound in late trading on Thursday. The bounce – which saw the Shanghai Composite index reverse an earlier fall to a 4 1/2 month low to end 2% higher – raised suspicions among dealers that a “National Team” of investors, who participated in a rescue when markets plunged in August, had been behind the move again.

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It only gets worse.

A Towering Chinese Debt Mountain Looms Over Markets (BBG)

Lost in all the Chinese stock and currency market gyrations, policy missteps and mixed data is this economic reality: The government is constrained by a credit bubble that has ballooned to $28 trillion in an economy growing at its slowest pace in 25 years. Policy zig-zags have left investors divided over how wedded President Xi Jinping and Premier Li Keqiang are to financial sector reform and shifting their $10 trillion-plus economy from one powered by investment and exports to one more focused on consumption and services. China has appeared to backtrack on pledges to make its management of the yuan more market driven and there’s uncertainty over the government’s willingness to remove stock price supports imposed during a $5 trillion sell-off last summer.

Amid the confusion, the benchmark CSI 300 Index, down 14% in 2016, has revisited the lows of last year’s rout and pressure on the currency continues. Against that backdrop, Chinese officialdom faces the high-wire act of trying to keep the economy growing rapidly enough to repay past obligations, without resorting to a fresh pick-up in debt to fund more stimulus. It was China’s reliance on credit-fueled growth in the wake of the 2008 global financial crisis that resulted in one of the biggest debt expansions in recent history, and today’s hangover. “China is nowhere close to reining in its debt problems,” said Charlene Chu, the former Fitch analyst known for her warnings over China’s debt risks and now a partner of Autonomous Research Asia Ltd. “It is one of the key factors weighing on GDP growth and one of the reasons why foreign investors are so concerned about China’s trajectory.”

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Xi finds out he can’t stop this.

China’s Capital Flight (BBG)

Xi seems to realize that he paid a high price for the honor of having the Chinese yuan included, starting this October, in the International Monetary Fund’s basket of reserve currencies along with the dollar, the euro, the yen, and the British pound. To be included in the basket, China had to demonstrate that the yuan was “freely usable.” That forced it to lower some investment barriers—enabling the capital flight now bedeviling the leadership. The Institute of International Finance estimated in October that net capital flows out of China would reach $478 billion in 2015. New estimates due this month could show even larger outflows, the IIF says. It’s worth taking a close look at what “capital flight” really means for China. Capital flows out of the country aren’t necessarily bad; they’re simply the mirror image of its trade surplus.

Whenever China chooses to use a dollar, euro, pound, or ringgit earned from exports to buy a foreign asset, it’s sending capital abroad. Many foreign acquisitions strengthen the country, economically and politically. The problem now is that more money wants to get out of the country than wants to get in. Here’s the math: Last year, the IIF estimates, China had a little more than $250 billion coming in from the surplus on its current account, the broadest measure of trade. It got an additional $70 billion or so in net capital from nonresidents, including Chinese companies’ overseas affiliates. But those inflows were swamped by a record $550 billion in net outflows by individuals and companies inside China. Who stashed all that money abroad? The Bank for International Settlements attempted to answer that question in its Quarterly Review in September using the example of a hypothetical Chinese multinational.

During the boom years, BIS economist Robert McCauley wrote, such a company made money by borrowing at near-zero rates in the U.S. and Europe, converting the money to yuan, and investing in China at higher yields. Now, he wrote, it was reversing course: borrowing more in yuan and holding more money in foreign currencies. That’s the dynamic the government is trying to overcome with its yuan-buying. The IIF projected in October that the government would need to sell off more than $220 billion of its reserves last year to meet the demand for foreign currency. The actual number was probably closer to half a trillion. The nation’s stockpile of foreign exchange reserves has dwindled to about $3.3 trillion. The cushion is shrinking. “Considering China’s foreign debt, trade, and exchange rate management, it needs around $3 trillion in foreign exchange reserves to be comfortable,” says Hao Hong at Bocom International.

What Xi is running up against is what international economists call the trilemma, or the impossible trinity. It says that a country can’t have all three of the following things at once: a flexible monetary policy, free flows of capital, and a fixed exchange rate. They fight one another. As soon as China started allowing free (or at least freer) flows of capital, it was inevitable that it would have to give up on one of the other two objectives. If it wanted to keep the yuan from falling, it would have to raise interest rates higher than is good for the domestic economy, essentially giving up on setting an appropriate monetary policy. Or, if it wanted to set interest rates as it pleased, it would have to allow the yuan to sink.

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Do they really not get this?

China Wants a Reserve Currency and Control, But Can’t Have Both (BBG)

This week’s unprecedented surge in the cost of borrowing yuan in Hong Kong is putting a spotlight on one of China’s biggest policy dilemmas: whether to create a real international reserve currency, or to keep control of its value. The cost of maintaining control came to the fore on Tuesday as interbank lending rates in the city jumped five-fold to a record 66.82%, a side effect of central bank intervention to combat the yuan’s slump to a five-year low. Such efforts to influence market pricing are untenable if China wants to develop active offshore markets for financing and trade in the currency, according to Rabobank Group and Royal Bank of Canada. “These measures are sustainable if China has no desire to internationalize the currency, but it wants to be a reserve currency,” said Michael Every at Rabobank in Hong Kong.

“It will have to accept that other holders of the offshore yuan can have a say in its value.” For Every, the most likely outcome is that China will give in to market forces and let the yuan weaken by another 13% this year, a view that puts him at the bearish end of strategist forecasts compiled by Bloomberg. Pressure to free up the exchange rate has increased after the IMF said the yuan will join its basket of reserve currencies in October and policy makers pledged to decrease capital controls by 2020 – a key step toward yuan internationalization. The PBOC’s actions in recent days suggest they’re not ready to loosen their grip. While the central bank has said its daily reference rate for the yuan is largely determined by market pricing, analysts say the fixing has differed from what the monetary authority’s methodology suggested it would be.

The PBOC has repeatedly bought the yuan in Hong Kong this week, soaking up supply of the currency, and China’s foreign-exchange regulator was said to verbally instruct some banks operating in the mainland to limit yuan outflows and reduce offshore liquidity. Those measures have succeeded, at least temporarily, in propping up the currency and converging the yuan’s onshore and offshore rates. But the intervention has also dented investor confidence.

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Not pretty.

Layoffs and Unrest Loom in China as Growth Slows (BBG)

While most of the world has fixated on the plunging Shanghai and Shenzhen stock exchanges and Beijing’s missteps managing the currency, China’s labor market has become increasingly fragile. As wage arrears and layoffs grow, unrest in factories and on construction sites is spreading. Worker protests and demonstrations doubled last year, to 2,774, with December’s total of more than 400 such incidents, setting a monthly record. The protests come as China’s slower growth crimps profits and concerns about poor policymaking sap investor confidence.

“The increase in strikes and protests began last August around the time of the yuan devaluation and subsequent stock market crash and continued to build during the final quarter of the year, as the economy has showed little sign of improvement,” says Geoffrey Crothall at Hong Kong-based workers’ advocacy organization China Labour Bulletin. That’s worrisome for China’s Communist Party, which came to power in 1949 claiming to represent the working masses. In a sign of its nervousness, Beijing on Jan. 8 formally arrested four labor organizers in Guangdong, amid a broad crackdown on rights activists. “The situation is not so good these days,” Zhang Zhiru, a Shenzhen-based labor campaigner, said in a text message. “It is not convenient to accept interviews from the foreign media.”

The government’s official unemployment rate for urban workers is fiction: It’s remained largely unchanged at around 4% even when China’s economy has dipped significantly in the past, as during the global financial crisis. Still, most outside observers estimate the real figure may be a couple of%age points higher (the Conference Board’s China Center for Economics and Business puts it at about 6%). Wage growth has been outpacing gross domestic product growth in recent years, and 10.7 million urban jobs were created in the first nine months of last year, surpassing the official full-year target of 10 million, according to the Ministry of Human Resources and Social Security.

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“Announcing last call to a bar full of drinkers tends not to encourage moderation, either..”

The Simple Truth About China’s Market (BBG)

“This is insane,” said Chen Gang, chief investment officer for Shanghai Heqi Tongyi Asset Management, on Jan. 7, the day stock trading in China lasted only 29 wild minutes before market circuit breakers shut it down. Unlike some would-be sellers that day, he says he unloaded all his firm’s equity holdings by the time the exit door closed. The circuit breakers, put in place just a few days before, called for an all-day trading halt if shares dropped 7%. Those rules have taken much of the blame for China’s latest market chaos. The China Securities Regulatory Commission said they had a “magnet effect”—as shares fell, people may have rushed to get sell orders in while they still could, pulling prices down to the trigger point even faster. (Announcing last call to a bar full of drinkers tends not to encourage moderation, either.) The focus on poorly designed trading curbs may, however, distract from a less exotic source of risk: speculation.

The median stock on mainland exchanges still trades at about 57 times earnings—at least twice as expensive as any other major market. (Leading China stock indexes don’t look nearly so pricey but are weighted to financial companies, which tend to carry lower valuations.) In spite of currency instability and concerns about slowing economic growth, investors are treating the typical Chinese company as if its potential is somewhere between that of Google and Facebook. A boom in initial public offerings made parts of the stock market look more like a lottery. Shares of Beijing Baofeng Technology, a developer of online video players, soared 4,200% in 55 trading days after going public on the Shenzhen stock exchange in March. (The stock then dropped 31% before suspending trading in October.)

With the market crowded with novice retail investors, other companies simply renamed themselves to look like tech stocks, recalling the 1960s “tronics” and 1990s dot-com booms in the U.S. “There are stocks that are basically junk, but they’re trading at outrageous valuations because there’s a lot of market manipulation,” says Jian Shi Cortesi at GAM in Zurich. “The way down is always very volatile.” China’s stock market didn’t used to be so exciting. Under President Xi Jinping’s administration, articles in state-run media encouraged people to invest, fostering a belief that the government would make sure everyone profited. The benchmark CSI 300 index climbed 150% in the 12 months before the market slide that began in June, and it’s still up 53% from the start of that run.

The nation has more than 90 million individual investors, compared with 87.8 million members of the Communist Party. Now retail investors are having doubts. Hua Jie, a 56-year-old retiree in Sichuan province, says she hasn’t been this downbeat on the nation’s stock market since she began investing more than a decade ago. “I no longer want to play this game,” says Hua, a former saleswoman at a consumer electronics store in Chengdu. “I’ve lost faith in the regulators.” Many institutional investors, too, have been quick to bail as markets turn south. Hedge funds often have agreements with investors requiring liquidation if their holdings drop below a certain value. That may have helped accelerate the early January rout.

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Deleverage my behind.

China Credit Growth Surged In December Amid Fresh Stimulus (BBG)

China’s broadest measure of new credit surged the most since June as companies increase borrowing on the corporate bond market, underscoring a shift away from reliance on state-backed banks for funding. Aggregate financing rose to 1.82 trillion yuan ($276 billion) in December, according to a report from the People’s Bank of China on Friday, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey. The data shows companies are turning to alternative sources for credit given banks’ reluctance to lend. It also adds to signs the economy is stabilizing, not slumping as its falling currency and plunging stock market seem to suggest. “The real economy is relatively strong,” said Wang Tao at UBS in Hong Kong. “The credit supply offers strong support and that’s related to the central government’s call for financial institutions to bolster the economy.”

The rising bond issuance is due to lower barriers for companies to enter the market and falling interest rates, Wang said. “This helps cut the financing costs for companies,” Wang said. The PBOC’s monetary easing has been driving down borrowing costs and spurring bond sales. Chinese corporations sold 8.1 trillion yuan of notes last year, the highest in history and a jump of 34% from 2014. Yield spread between five-year top rated corporate bonds and government securities plunged 69 basis points last year, according to ChinaBond, the biggest annual drop in its data going back to 2007. Chinese property developers, which had been frequent overseas borrowers, are switching to local bonds to avoid rising debt costs as the yuan weakens. The builders sold the equivalent of $72 billion of domestic debentures in 2015 compared with just $11 billion of dollar notes, the first time local sales have overtaken foreign ones, according to Bloomberg Intelligence.

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Has the word pipedream ever been more fitting?

Glimmers Of Hope For Oil As Russia Poised To Slash Output – But.. (AEP)

The first signs of a thaw are emerging for the battered oil market after Russia signalled a sharp fall in exports this year, a move that may offset the long-feared surge of supply from Iran. The oil-pipeline monopoly Transneft said Russian companies are likely to cut crude shipments by 6.4pc over the course of 2016, based on applications submitted so far by Lukoil, Rosneft, Gazprom and other producers. This amounts to a drop of 460,000 barrels a day (b/d), enough to eliminate a third of the excess supply flooding the world and potentially mark the bottom of the market. Russia is the world’s biggest producer of oil, and has been exporting 7.3m b/d over recent months. Transneft told journalists in Moscow that tax changes account for some of the fall but economic sanctions are also beginning to inflict serious damage.

External credit is frozen and drillers cannot easily import equipment and supplies. New projects have been frozen and output from the Soviet-era fields in western Siberia is depleting at an average rate of 8pc to 11pc each year. Russia’s deputy finance minister, Maxim Oreshkin, told news agency TASS that the oil price crash could lead to “hard and fast closures in coming months”. What is unclear is whether the production cuts are purely driven by markets or whether it is in part a political move to pave the way for a deal with Saudi Arabia. Opec stated in December that it is too small to act alone and will not cut production unless non-OPEC states join the effort to stabilize the market, a plea clearly directed at Russia. Kremlin officials insist publicly that they cannot tell listed Russian companies what to do, and claim that Siberian weather makes it harder to switch supply on and off. Oil veterans say there are ways to cut quietly if president Vladimir Putin gives the order.

Helima Croft, from RBC Capital Markets, said the expected cuts could be the first steps towards an accord. “As the economic reality of lower oil prices begins to bite, perhaps Putin will push for a course correction and reach a deal with the Saudis. It would certainly upend the current conventional wisdom that Opec is down for the count,” she said. Russia has a strong incentive to strike a deal. Anton Siluanov, the finance minister, said the Kremlin is drawing up drastic plans to slash spending by 10pc, warning that the country’s reserve fund may run dry by the end of the year. “We have decided not to touch defence spending for now,” he said. The budget deficit is running near 5pc of GDP at current oil prices, yet the country lacks an internal bond market and cannot borrow abroad.

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Nice theory.

The ‘Real’ Price Of Oil Is Below $17 (ZH)

“You see a big destruction in the income of the oil and commodity producers,” exclaims an analyst but, as Bloomberg notes, while oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is considerably deeper. Adjusted for inflation, WTI is its lowest since 2002 and worse still Saudi Light Crude is trading at below $17 (in 1998 dollar terms) – the lowest since the 1980s… Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

In fact, while sub-$30 per barrel oil sounds very scary, Saudi prices would be less than $17 a barrel when converted into dollar levels for 1998, the year oil sank to its lowest since the 1980s. Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said.

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Unrest looms large.

Saudi Life With $30 Oil (BBG)

Times are getting tougher in the Hathut household, so father Mohammad is looking for extra work and the three kids are being told to switch off the lights to cut his electricity bill. This is Saudi Arabia in 2016. It may be a familiar story to austerity-hit Europeans and Americans, but in a nation synonymous with conspicuous consumption, the belt-tightening has been unsettling. Unprecedented cuts to fuel and energy subsidies are forcing the kind of rigor never seen during the era of petrodollar-fueled wealth that quadrupled per-capita income since the late 1980s. “A lot of things will change,” said Hathut, 30, who plans to supplement his income as a business-administration teacher at a Riyadh university with private training sessions. “But many youths are still in a state of shock. They haven’t processed the news and what to do.”

With oil having plunged to about $30 a barrel, signs of the tectonic shift taking place in the ultra-conservative Islamic kingdom are everywhere: from the royal palace where the nation’s founding family is contemplating the sale of its monopoly oil producer to the homes and businesses adjusting to the new economy.Those aged 15 to 34, who make up more than 40% of the 21 million Saudis, are at the forefront of the upheaval. No longer can they take for granted free health care, gasoline at 20 cents a liter and routine pay increases. Even the power of the religious police, which upholds the strict brand of Islam that defines Saudi Arabia, may no longer go unchecked by the government. The Consultative Council, an advisory body, last month urged the Commission for the Promotion of Virtue and Prevention of Vice to compile a list of banned behaviors to prevent abuse by officers.

They can arrest unmarried couples found together in a car or people caught with flowers on Valentine’s Day. More women are entering the workplace and were able to run in local elections for the first time last month, though they’re still banned from driving. It’s “night and day” from 20 years ago when investment banker Khlood Aldukheil, 42, would get into the elevator to go up to her office only to be told no women worked in the building. People used to hang up on her because they thought they were calling the wrong department, she said. Young, social media-savvy Saudis now expect to have more of a say in running and modernizing the country, changing Saudi Arabia as we know it, said Ghanem Nuseibeh, at Cornerstone Global Associates. “Saudi youth won’t be content with what the previous generations were content with,” said Nuseibeh. “Whatever the state is going to take away from them because of dwindling financial resources they would expect to receive it by some other means.”

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That should solve everything..

Saudi Arabia Plans New Sovereign Wealth Fund (Reuters)

Saudi Arabia plans to create a new sovereign fund to manage part of its oil wealth and diversify its investments, and has asked investment banks and consultancies to submit proposals for the project, according to people familiar with the matter. Plunging oil prices have strained Saudi Arabia’s finances. The kingdom’s state budget deficit is at a record high and net foreign assets dived more than $100 billion in 15 months. The new fund could change the way tens of billions of dollars are invested and affect some of the world’s leading asset managers, particularly in the United States, where the bulk of Saudi Arabia’s foreign assets are managed. “Keeping the foreign reserves at a good level is necessary to maintain a solid financial position and support the riyal,” said one of the sources.

Another source said the Saudi government sent out a “request for proposal” to banks and consultants late last year, seeking ideas on how to structure a new fund. The sources asked not to be identified because the plans are confidential. They said the Saudi government did not tell them the size of the planned new fund. One source said the fund would focus on investing in businesses outside the energy industry, such industrials, chemicals, maritime and transportation. The sources stressed that no final decisions had been made, and a range of options were being studied. The sources said managers of the planned fund may be able to invest directly in companies rather than channelling investments through foreign asset managers. This could maximize returns. The second source said he understood the new fund would ideally be up and running within 12 to 24 months, with an office in New York.

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Commodities prices will restart their epic decline.

Iron Ore Risks Tumbling Into $20s on Demand Fall: Citi (BBG)

After oil sank into the $20s this week, will iron ore follow suit? “There’s a strong possibility that iron ore falls below $30 in 2016,” Citigroup’s Ivan Szpakowski said on Thursday after the bank cut price forecasts through to 2018 in a report. In the first half, “the biggest pressure is actually from the demand side. It’s actually going to come from weak steel demand in China,” said Szpakowski. The raw material is seen at $36 this year, 12% lower than previously forecast, and $35 in 2017 and 2018, down from $39 and $40, analysts including Szpakowski wrote in the Jan. 14 report. The base-case forecast over a three-year horizon was cut to $35 from $40, while the bear-case was put at $28.

Iron ore has been routed as the world’s largest miners including Rio Tinto and BHP Billiton in Australia and Brazil’s Vale expanded low-cost output while demand growth stalled in China. Lower costs including freight and energy and weakening currencies in producer nations are enabling suppliers to reduce their break-even rates and withstand lower prices. Costs had fallen more than expected, the bank said. “Given the market’s need for further curtailments, we see the evolution of costs as one of the two most important factors for the iron ore market, alongside Chinese policy decisions affecting steel demand,” the bank said in the report. “We see challenges for iron ore ahead.” Ore with 62% content delivered to Qingdao rose 1.8% to $40.22 a dry ton on Thursday after slumping 4.1% to $39.51 a day earlier.

The steel-making commodity bottomed at $38.30 on Dec. 11, a record in daily prices dating back to May 2009. Steel output in China will probably shrink 2.6% this year as local consumption weakens and mills encounter stiffer opposition to exports, Szpakowski estimated. Supply fell 2.2% to 738.38 million tons in the first 11 months of last year, according to official data. China, which makes about half the world’s steel, is set to report full-year output on Jan. 19. “Under our bear case, we believe medium-term prices would need to fall to around $28 a ton, primarily due to assumptions of weaker oil and export-country currencies,” Citigroup said in the report, with the bull case for iron ore at $45.

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By drinking Kool-Aid.

How Australian Households Became The Most Indebted In The World (Guardian)

The results are in: Australian households have more debt compared to the size of the country’s economy than any other in the world. Research by the Federal Reserve has shown the consolidated household debt to GDP ratio increased the most for Australia between 1960 and 2010 out of a select group of OECD nations. Australia’s household sector has accumulated massive unconsolidated debt compared with other countries. As of the third quarter of 2015, it now has the world’s most indebted household sector relative to GDP, according to LF Economics’ analysis of national statistics. Denmark long held this unholy accomplishment, but has been slowly deleveraging over the last several years as its housing bubble peaked and burst during the GFC.

The latest debt-financed boom in Sydney and Melbourne has resulted in Australia now overtaking Denmark, a comparison of official figures from Australia and Denmark has shown. Australia has around $2 trillion in unconsolidated household debt relative to $1.6 trillion in GDP. Australia’s ratio is 123.08%, while Denmark’s fell slightly to 122.99% in the third quarter of 2015, a marginal difference of 9 basis points. Although Denmark holds the record in terms of peak debt of 140.14% in the last quarter of 2009, as Australia continues to leverage and Denmark deleverages the current gap between the two will widen. Apart from Switzerland (which alongside Denmark has a negative interest rate), no other country is close in terms of having such extreme household sector debts.

The UK ratio is 85.9% while in the US it is 79.1%. Due to Switzerland’s opaque financial accounts, it is impossible to calculate a figure for this quarter. Its ratio for the second quarter of 2015 is 121.3%, and household debt is rising very slowly, so it would take an extraordinary increase over the quarter to potentially beat Australia. [..] Australian property investors and homeowners are burdened with massive mortgages, especially new and marginal entrants. Unlike winning a gold medal at the Olympics, having the world’s most indebted household sector is not an achievement the nation should be proud of. This is where Australia’s real debt and deficit problem lies, not in the public sector.

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“Miracles do happen, but are not customarily invoked for economic projections..” (Hold on, mainstream economics is all about miracles. Like the perennial growth miracle.)

A 3-Year Austerity Freeze Will Allow Resumption Of Growth in Greece (Mody)

From 2009 to 2015, the Greek government s primary deficit (deficit not counting interest payments) declined from 10% of GDP to nearly zero. Greece ran a 10% of GDP current account deficit with the rest of the world; now the balance shows a surplus. Compare the numbers with Ireland, Portugal, and Spain, or compare them with the historical record of reducing deficits: Greece has delivered as much, or more.But the austerity was much harsher for Greece. Public spending was pushed down by about 25%, an order of magnitude more than in the other countries. This caused GDP and tax revenues to collapse. The perverse consequence was a soaring public debt ratio, which rose from 145% of GDP in 2009 to 200% of GDP. Simply put, Greece was pushed to run much harder and fell further behind.

Greece’s creditors now want more austerity. Because, once again, growth projections are absurdly optimistic, the debt burden could escalate uncontrollably, leading to calls for more austerity in a never-ending cycle.Twice in the last year when they voted Syriza to power in December 2014 and in July 2015 when they rejected the creditors deal the Greek people pleaded that this calamity be stopped. But with the threat of blowing Greece up, the creditors powered on. From 1981, when it joined the European Union, the Greek economy grew by expanding the Greek state. Europe was supposed to anchor democracy and foster prosperity. Instead, corruption and entitlement became entrenched. With the incentives so deeply embedded, each change in government only reshuffled the individuals enjoying state patronage. Both Europe and Greece failed.

The creditors now wish to convey that they are pushing to redeem themselves and Greece. But real change to create a new growth model for Greece and unravel the corrupt networks will take years. In the meanwhile, asking Greece for further fiscal consolidation of 3.5% of GDP over the next three years is stunning economic illiteracy, more so because one of the creditors the IMF has intellectually discredited this policy. By itself, such austerity could cause GDP to contract by 7%. Plus, prices will decline, making household and business debt harder to repay, further undermining growth and public finances. The creditors projections show a miraculous resumption of growth. Miracles do happen, but are not customarily invoked for economic projections.The creditors obsession with Greek pensions as too high even if true is somewhat beside the point.

Pensions are important in sustaining the livelihoods of vulnerable families. And it is not just a warm and fuzzy regard for social equity and justice that is at stake. The scale of reduction proposed, along with all the other austerity measures, will have immediate macroeconomic consequences. As consumption declines, so will growth and prices. Greece s debt-deflation cycle will continue. Higher private and public debt burdens will further undermine the banking system. Make no mistake, deeper economic distress cannot cure long-term economic pathologies, just as heavy-lifting is not recommended to revive a patient from cardiac arrest. The long-term damage will be far-reaching. For a start, the most talented are leaving in droves. Greece’s weak growth prospects will only become worse.

[..] Greece has a nearly balanced primary budget. A three-year freeze on austerity will allow resumption of growth. An agenda to lower and rationalize pensions then would make more sense. But Greece also needs deep debt relief. The coy promises of driblets of relief are intended as a clever tactic for dragging Greek authorities down the road of needed reform. But if such reform undermines growth, the needed debt relief will increase with time. Greece will become a permanent ward of the creditors. The Greeks will suffer more pain and the creditors will see less of their money.

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Much as it pains me to say it, but he’s right on the EU.

Dutch Populist Wilders Says EU Finished, Netherlands Must Leave (BBG)

The European Union is teetering, and Dutch Freedom Party leader Geert Wilders wants to tip it over the edge. Wilders, 52, whose party leads opinion polls with calls to close Dutch borders to refugees, pledged to immediately pull the Netherlands out of the 28-nation EU should he become prime minister in elections due in March next year. The EU is unraveling and that’s to be encouraged, he said, urging the U.K. to quit the bloc in its forthcoming referendum. “We are not sovereign any more; we are not even allowed to form our own immigration policy or even close our borders and I would do that,” Wilders said Thursday in an interview in the Dutch parliament building in The Hague. “I would wish the Dutch to be more like Switzerland. In the heart of Europe, but not in the EU.”

A household name in the Netherlands since 2004, when he split from the mainstream Liberal party to form his own on an anti-Islam platform, the bouffant-haired blond has enjoyed a swell of support as voters have grown increasingly alarmed at the arrival in Europe of more than a million refugees from Syria and elsewhere. The latest poll showed him winning the most parliamentary seats – as many as Prime Minister Mark Rutte’s Liberals won in 2012 – if elections were held now. After years of turbulence surrounding Greek membership of the euro, the focus of uncertainty in the EU has shifted to Britain, where Prime Minister David Cameron is set to call a referendum as early as June on whether the U.K. should stay in or leave.

Wilders said he “hopes” Britons will opt to quit, with a knock-on effect on the Netherlands. In the event of a so-called Brexit, “you will see that it will be easier for other countries to make the same decision,” Wilders said. “The beginning of the end of the European Union has already started. And it can be an enormous incentive for other countries if the United Kingdom would leave.”

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I covered the topic of legality of EU border controls a while back (and better, I would argue), see for instance: Greece Is A Nation Under Occupation. This is exactly why people like Wilders and Le Pen are right on Europe: no country’s leader has the legal right to squander its sovereignty.

Europe Doesn’t Need Stronger Borders (Legrain)

Before World War I, people could travel around the world without a passport, as Austrian writer Stefan Zweig famously did. Since then, passports, border checks, and bureaucratic and physical barriers to freedom of movement have become the norm. That’s what made the Schengen Area so special: From 1995 onward, 26 European countries (22 of the 28 EU countries, plus four others) abolished their border controls and adopted a common travel-visa policy. People and goods were able to travel unimpeded from Lisbon to Lithuania, Budapest to Brittany. As well as providing practical advantages, it was a powerful symbol of how Europe was coming together. But the refugee crisis and the Paris terrorist attacks on Nov. 13, 2015, have strained Schengen to the breaking point.

Germany (to limit refugee inflows) and France (to keep out potential terrorists) are now demanding the creation of a powerful EU border guard to police the Schengen Area’s external border. The European Commission has duly proposed the establishment of a beefed-up “European Border and Coast Guard” with a bigger budget and staff than its feeble current incarnation, Frontex. Controversially, the new force would have the power to intervene to plug leaky borders – even against the wishes of the government of the country concerned. But such a huge surrender of national sovereignty to an EU agency of dubious competence and limited accountability is undesirable, unnecessary, and potentially illegal. The EU ought to be able to handle the arrival of the roughly million refugees and other desperate migrants who entered without permission last year.

They account for only 0.2% of the EU population of 508 million – and are outnumbered by the 1.25 million Syrian refugees in tiny Lebanon (population 4.5 million). They are also far fewer than the 2 million or so other migrants who arrive in EU countries each year through standard channels. But regrettably, the predominantly poor and Muslim newcomers tend to be seen as a burden and a threat. And in the absence of a generous, orderly, and fair system for welcoming refugees and processing asylum claims, most governments try to pass the unwanted newcomers on to others through a variety of means, from waving them on their way (Greece and Italy) to keeping them out with razor-wire fences (Hungary). Now that the two countries that had maintained an open door, Germany and Sweden, are closing it, the EU is trying to stop refugees from reaching Europe altogether.

[..] EU officials already control Greece’s budget. Do they really think it’s a good idea to march into Greece and take control of its borders too? Indeed, Steve Peers, a professor of EU law at the University of Essex who edits the EU Law Analysis blog, argues that the EU border guard’s proposed powers would contravene the EU treaties: “[W]hile the EU can establish rules on border controls and regulate how Member States’ authorities implement them, it cannot itself replace Member States’ powers of coercion or control, or require Member States to carry out a particular operation.”

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A few refugees and Europe loses all decency. Deplorable.

Switzerland Joins Denmark In Seizing Assets From Refugees (Guardian)

Refugees arriving in Switzerland have to turn over to the state any assets worth more than 1,000 Swiss francs (£690) to help pay for their upkeep, broadcaster SRF reported on Thursday, revealing a practice that has drawn sharp rebukes for Denmark. SRF’s 10 vor 10 news programme showed a receipt a refugee from Syria said he received from authorities when he had to turn over more than half of the cash his family had left after paying traffickers to help them get to the neutral Alpine country. It also showed an information sheet for refugees that stated: “If you have property worth more than 1,000 Swiss francs when you arrive at a reception centre you are required to give up these financial assets in return for a receipt.”

Stefan Frey, from refugee aid group Schweizerische Fluechtlingshilfe, was quoted as saying: “This is undignified … This has to change.” SRF cited the state migration authority SEM as justifying the measure, noting the law called for asylum seekers and refugees to contribute where possible to the cost of processing their applications and providing social assistance. An SEM spokeswoman told SRF: “If someone leaves voluntarily within seven months this person can get the money back and take it with them. Otherwise the money covers costs they generate.” In addition, refugees who win the right to stay and work in Switzerland have to surrender 10% of their pay for up to 10 years until they repay 15,000 Swiss francs in costs, according to the report.

Denmark is amending a proposal to confiscate refugees’ possessions to pay for their stay. It plans to raise the amount they will be allowed to keep after coming under fire from the United Nations refugee agency. Several organisations, including the Office of the UN High Commissioner for Refugees, have censured the Nordic country for the proposal, as well as for others that would delay family reunification and make acquiring refugee and residence status more difficult.

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But of course, nothing condemns the EU like the drowning children.

Nine Bodies Of Refugees, Migrants Found Off Turkish Coast (Reuters)

The bodies of nine migrants, some of whom may have drowned up to 10 days earlier while trying to reach Europe by sea, were found on Turkey’s coast in recent days, as neither cold winter waters nor government efforts seemed to stem the flow of migrants. The bodies of five men and one woman were found washed up on the shores of Seferihisar near Izmir on Tuesday, district governor Resul Celik told Reuters, adding doctors believe they drowned 5 to 10 days ago. The coast guard said separately in a statement that it had found the bodies of a girl and two women near Ayvalik further north after a boat partially capsized. It rescued 13 people, but a search continued for two men and a boy.

In a deal struck at the end of November, Turkey promised to help stem the flow of migrants to Europe in return for cash, visas and renewed talks on joining the European Union. But European officials have repeatedly said Turkey’s efforts to curb migrant arrivals were falling short. The International Organization for Migration (IOM) said on Tuesday 18,872 migrants had arrived in Europe by sea in the first 11 days of the year, almost all of them to Greece. 47 people died trying to make this route. Turkish officials have said dozens of suspected ring-leaders of human trafficking networks have been arrested and the Turkish government has said it is trying to reduce illegal immigration by giving Syrians, who represent the biggest portion of arrivals to Europe, work permits.

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Tsipras needs to man up and lead Greece out of the EU. The difference in moral values is an insult.

Three Children Drown Off The Coast Of Greece’s Agathonisi Island (Kath.)

Three children drowned off the coast of the southeast Aegean island of Agathonisi early on Friday, as the boat they were traveling in from Turkey to Greece capsized. A rescue boat belonging to a nongovernmental organization managed to save the other 20 passengers who were on board a boat. The rescue team was alerted by a military base on the small island, after the boat was seen capsizing and sinking by an officer. The rescued passengers, whose nationality was not immediately known, were to be transferred to the nearby island of Samos so they could receive medical attention.

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Aug 192015
 
 August 19, 2015  Posted by at 8:43 am Finance Tagged with: , , , , , , , , , ,  7 Responses »
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Lewis Wickes Hine Newsies in St. Louis 1910

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

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

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

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

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

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Must read from Pettis.

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

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

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

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

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

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

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

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

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

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

China Shadow Banks Appeal For Government Bailout (FT)

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

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

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

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

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Much of it is fleeing abroad.

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

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

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

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

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From Fed mounthpiece Hilsenrath.

US Lacks Ammo for Next Economic Crisis (WSJ)

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

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

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

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

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Sure, throw some more oil on the fire.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Dying breaths?!

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

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

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

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

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Wile E.

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

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

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

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

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A view from the right.

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

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

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

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

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

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The ugly side of the response.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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