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No No No! That Is Not Deflation!

Dec 042014
 
 December 4, 2014  Posted by at 9:05 pm Finance Tagged with: , , , , , ,  28 Responses »


Dorothea Lange Homeless mother and child walking from Phoenix to Imperial County CA Feb 1939

So, Matthew Lynn, I’m sure you’re a fine young man and your mommy loves you to bits, but you’re obviously in the wrong line of work. Or maybe the right one, come to think of it, since if you can make enough people see the world your way, in the end you’ll be right. That’s how journalism is defined these days. Anything goes, provided you can make people believe what you write. The problem is, that process can only end up with everyone a lot dumber than they already are. The lowest common denominator wins the day, every day.

My problem with that is, why does someone work for a finance site like MarketWatch who has no clue what finance actually is, and how it works? Your ignorance leads you, I’m sure without any bad intentions, to insult millions of people who are having a very bad time. Does that mean anything to you? See, I’m guessing it doesn’t. I think you don’t know bad times, because if you did, you would never write the offensive blubber you do.

But Matthew, this once, and only once, I’m going to say what I have to say about your mindless drivel. Because I don’t care one bit about the investor crowd whose fancy you’re trying to tickle, I’m here for the people you aim to leave by the wayside (yeah, I know, you had no idea..). And you know, normally I don’t care anymore, I can’t get angry every single time some nutjob gets his stuff upside down. But this goes too far, you’ve overstretched even your lowest common standards.

In your article, you paint the perfect example of why seeing deflation only as falling prices is so completely useless, numbing and dumbing. Hey, maybe I should thank you for that.

If you refuse to look a WHY prices fall, you never learn a thing, and you will always be behind. Apart from the fact that the idea of Greece and Spain doing well can easily be refuted by 1000 other data sources, there’s the simple fact that looking at one day or week or month tells you nothing. You need to look at consumer spending over at least the past few years. That would also show more respect for the over 25% of the working population, and over 50% of youth, who are unemployed in both Greece and Spain, and who are the topic of your ‘article’.

Here’s you, Matthew:

If Deflation Is So Terrible, Why Are Spain, Greece Growing?

Prices are starting to fall across the European continent. Mass unemployment, and a grinding recession are forcing companies with too much capacity to charge less for their products. Company profits will soon be collapsing, while government debt ratios threaten to spiral out of control. The threat of deflation is so worrying, the European Central Bank is expected to throw everything in its armory to prevent it, and to get prices rising again. It may even move towards full-blown quantitative easing as early as Thursday.

You get it awfully wrong from the get-go. What you call “companies with too much capacity” are simply those who could sell their products before the recession set in, and would now have to fire people to get rid of that ‘overcapacity’, thereby lowering spending capacity, which would lead to even more ‘overcapacity’, and therefore more unemployed. I’m thinking you must have studied economics, because that’s the only place people pick up such warped notions. It’s a chicken and egg thing, Matthew, a horse and a cart, and getting them the wrong way around is not going to help.

What you describe but don’t understand is deflation. It starts with a drop in spending, caused by lower or no wages, saving or simply the demise of confidence. It doesn’t start with overcapacity. It starts with people losing their jobs.

But here’s a puzzle. The two countries with the worst deflation in Europe are Greece and Spain. And two of the countries with the best growth? Funnily enough, that also happens to be Greece and Spain. So if deflation is so terrible, how come those two are recovering fastest? The answer is that deflation is not nearly as bad as it sometimes made out to be by mainstream economists.

Matthew, I’m not a mainstream economist. I’m not an economist at all, and I see that as my saving grace. Steve Keen is a good friend, but I don’t know any other economists who make any sense to me (Steve says he know a few, so we’re covered). But I don’t think even Steve fully gets deflation either. Which of course he’ll deny.

Still, saying that Greece and Spain are doing just great despite their deflation is simply meaningless. Deflation is not about prices, it’s about spending. And people in Greece have been forced to lower their spending for years now. So much so that one single extra boat of tourists would suffice to raise its GDP. But that makes no difference for the population. Which means Greece is not doing well. Yeah, the highest GDP growth in Europe, but that only says something about the rest. Still, selling a few additional retsinas and tzatzikis may lift Greece, but not Europe. Here’s more you:

The real problem is debt. But if that is true, perhaps the eurozone would be better off trying to fix its debt crisis than campaigning to raise prices – especially as it probably won’t have much success with that anyway. There is no question that the eurozone is sliding inexorably towards deflation. Only last week, we learned that the inflation rate across the zone ratcheted down to 0.3% last month, from 0.4% a month earlier, and a significantly lower figure than the market expected. It has been going steadily down for some time. Consumer inflation has not hit the ECB’s target level of 2% since the start of 2013. It has been falling steadily since it peaked at 3% in late 2011.

I must admit, after reading that again, I have no idea where you’re going with it. The problem is debt, I get that, and I agree too, and that should be fixed, kudos, but after that, you don’t seem to have much of a train of thought, just numbers.

It would be rash to expect that to change any time soon. The oil price has collapsed, and other commodity prices are coming down as well. That will all feed into the inflation rate. Retail sales are still weak, and unemployment is still rising. People who have lost their job don’t spend money – and companies don’t hike prices when the shops are empty.

What you’re describing there is not so much deflation itself, but its consequences. And you yourself just claimed that deflation is not all that bad, didn’t you?

Most economists will tell you that is very worrying — and that the ECB needs to act immediately to stop it getting worse. People will postpone buying anything because they think it will be cheaper next month. Companies will be reluctant to invest because they see their prices and profits going down. Confidence will be sapped, and the economy will suffer. Even worse, the debts of peripheral eurozone countries will spiral out of control — because the amount they owe will remain the same, but there will be less income to service it. But there is something odd about that analysis. The two countries with the worst price data are also the two countries doing best within Europe.

What happens is that Greece and Spain have become so cheap that tourists from other countries come and spend their money on their beaches. That lifts their GDP. Nothing to do with the people in the street. Nor does it have anything to do with deflation. Deflation is defined by the speed at which people spend their money (provide the money supply remains reasonably high). If no-one spends, prices fall. The reason people don’t spend is because they’re too poor. I’m lousy at rocket science, but I do get that one.

Just take a look at the figures. In Greece, prices are falling at an annual rate of 1.7%. In Spain, they are falling by 0.4%. So presumably those are the two countries that have been hit hardest? Well, it has not quite worked out like that. The fastest growing economy in the eurozone right now is none other than Greece. True, it is not exactly China, but it is expanding at an annual rate of 1.9% right now. And how about Spain? Its economy is also growing again, at an annualized rate of 1.6%.

You see, this is where you start to be insulting. You have a nation full of people who don’t even know anymore how to pay for a doctor, and because of some empty government massaged number you want to tell those same people they’re actually doing fine? They’re still as poor as they were before Samaras published that number, and before you reported on it.

By contrast, the economies where prices are still rising are not doing as well. Over in Germany, the supposed powerhouse of Europe, the inflation rate is still just in positive territory, at an annual rate of 0.5%. But growth in the third quarter was only 0.1%, narrowly avoiding recession. The same is true in France – inflation just about stayed positive, but growth has completely stalled.

Yeah, I know, it’s shooting fish in a barrel here for me: if you don’t know what inflation or deflation is, you’re bound to get everything wrong and upside down. But even then, don’t you at least think when you write “the economies where prices are still rising are not doing as well”, that that is weird? Because it would mean that countries who are already knee deep in deflation, whether it’s your definition or mine, with lower prices and therefore higher unemployment, do better than those who have fewer jobless. Doesn’t that strike you as odd?

So there does not appear to be much of a connection between rising prices and stronger growth. Nor do falling prices appear to be hurting very much.

See, now I’m getting pissed off. Did you even read that? Falling prices, Matthew, are the result of having more than half of your young people out of work for years on end. What the f*ck do you mean, they don’t appear to be hurting that much?

So what is going on? In reality, there is nothing terrible about prices falling. It is what happens in a competitive economy. Most of us like it when the stuff we buy gets cheaper. There is no serious evidence to suggest that it deters people from buying things. If it did, no one would ever buy a television or a smartphone, because they know perfectly well that they can get a better one for less money next year. In reality, they buy plenty of both.

This is where I give up on you, Matthew, and where I call on the MarketWatch board to fir your ass. Chances are, I know, that they agree with this absurdity, but what the heck, I’m calling anyway. I mean, what the hell is this supposed to mean: “There is no serious evidence to suggest that it deters people from buying things. If it did, no one would ever buy a television or a smartphone ..”

There’s plenty evidence, go to Athens, go to their soupkitchens and hospitals, and you’ll see that deflation DOES deter people from buying smartphones. Because they need the money, if they even have any, to pay for treatments to keep their children alive that we don’t even have to think twice about. It doesn’t deter them becise deflation loewred prices, but because deflation took their jobs away.

People buy things when they need them, taking price trends into account – after all, you can’t take either the money or the phone with you when you die, so you can’t postpone the purchase forever. Neither is there much evidence that it saps the confidence of companies. Again, if it did, no one would make any kind of consumer electronics. Businesses will invest where they think they can make money, and so long as costs are falling as well it is fine for prices to come down.

No people don’t buy things when they need them when they can’t afford them, you ignorant drip. You’re completely clueless about the world out there. And I take that personal, because these are my people. They’re all my people.

The threat to growth from deflation is wildly oversold. Indeed, for most of the 19th century deflation was completely normal — and that didn’t stop the industrial revolution in its tracks. Indeed, mild deflation may actually be helping Spain and Greece. As things get cheaper, consumers feel a bit more confident – and start spending again.

Yeah, the 19th century was a great period, wasn’t it, Matthew, and completely normal to boot, whatever that may mean. Just ask Marx and Dickens how normal it was, or the millions who came to America escaping the hell that was much of Europe. All Oliver Twist needed was a bit more confidence, so he could start spending again…

The one thing that is a problem is where there are high debts, as there certainly are across the eurozone. If prices fall, then those debt ratios are just going to get worse and worse. At a certain point, they will be unsustainable. But in that case, surely the right response is to deal with the debt, not the deflation. Many eurozone countries have debts that they probably won’t ever be able to repay.

If they thought inflation was going to deal with that for them, they will be disappointed. It isn’t going to happen. By far the best thing for them to do now would be to restructure their debts. The ECB will throw everything it has at fighting deflation. But it is probably not going to work – and it might well be better if it didn’t.

See, Matthew, you actually know some things. But you don’t understand them. I know, if only because you end with this cracker:

Deflation is not nearly as bad as everyone thinks.

I don’t really know what to say in the face of so much, what do you call this, nonsense, propaganda, ignorance? I write because I don’t like what happens to the people that folks like Matthew Lynn couldn’t care less about, as long as their little economic theories seem to fit whatever little rich lives they lead.

I have nothing with that. I have something with the people. And I therefore find comments like the ones above by Matthew Lynn repulsive.

Here’s real life:

Is The Greek Economy Improving?

The Guardian’s Greece correspondent, Helena Smith, is deeply sceptical about the heralded recovery having any real impact on the ground. “The ‘success story’ peddled by the government differs wildly to what life is really like on the ground – with plummeting living standards, unprecedented unemployment and the inability of most to keep up with bills, including the barrage of new taxes that can change with lightning speed on any given day,” she says.

“Five years down the road the crisis, to great degree, has been ‘normalised’ but the disconnect is evident in the collateral damage caused by the massive devaluation Greece has been forced to undergo in return for emergency funding: suicides, homelessness, a middle class pauperised by austerity. “And all eclipsed by a level of uncertainty, shared by all who live in a country whose debt load – the biggest impediment to real economic recovery – has actually grown since the crisis began.” [..]

Catherine Moschonas, from Thessaloniki: “Wages still much lower than a few years ago but taxes are MUCH higher, especially land taxes – the state is now taxing real estate that people can’t find tenants for and can’t sell because nobody’s buying. Generally policies are driving rather than limiting tax evasion – otherwise people can’t make ends meet (quite apart from perceived lack of social justice in measures taken).

“For families, healthcare increasingly a major financial concern as hospitals or sections close and social insurance is cut – but most people can’t afford private healthcare. People with relatively decent paychecks are one sick parent away from disaster. I don’t see any sign that things are improving”

Greece’s Recovery Is Deceptive

A small economic recovery is little consolation when one considers that in the past 5 years of recession, the Greek economy has lost a fifth of its total volume. And in a country that has seen unemployment rise to 28%, a drop of half a percentage point is not particularly noticeable.

.. the conservative Prime Minister Antonis Samaras desperately needs successes to mobilize his core voters. But real life is not helping him much. Growth in Greece is still very fragile, restructuring of inefficient state apparatuses is still very slow, tax avoidance has not been clamped down on, privatization is stalling, and austerity measures are driving more and more people to despair – younger generations in particular are struggling with a dearth of opportunities ..

.. even in these unusual circumstances, the Greek parties are not in a position to achieve even a basic consensus on how to rescue the country. Even now, they are feverishly preparing for a new election instead of trying to establish some political stability and continuity. Leading members of Syriza have even suggested demanding leftover war reparations from Germany and use them in calculations for a new budget. This might sound like a farce from the periphery of the eurozone, but it is testament to the backwardness of political culture in Greece. Anyone who wants to help the Greek people needs to keep their politicians and governments under control first.

Greeks Struggle To Get By Despite Economic ‘Recovery’

The number of Greeks at risk of poverty has more than doubled in the last five years – from about 20% in 2008 to 44% in 2013, according to a report by the International Labor Organization.

Sorry if I get too emotional for your taste at times, but I have a hard time with sheer and especially mean hubris. Telling people things are great since their basic necessities just got cheaper, exactly BECAUSE they can no longer afford them (because that IS deflation), that must be the pits. Still, it’s how 99% of economists ‘understand’ the world. Now you know why it’s all such a mess.

Debt Rattle November 9 2014

Nov 092014
 
 November 9, 2014  Posted by at 12:23 pm Finance Tagged with: , , , , , , , , ,  3 Responses »


DPC League Island Navy Yard, Philadelphia. USS Brooklyn spar deck 1898

• Fed to Markets: Brace for Volatility (WSJ)
• Central Banks Warn of Possible Bumpy Ride for Markets (Bloomberg)
• US Earnings Outlook Might Be Less Rosy Than Investors Think (Reuters)
• Gorbachev Warns US, Allies Put World On ‘The Brink Of A New Cold War’ (FT)
• Hungary Under ‘Great Pressure’ From US Over Its Energy Deals With Russia (RT)
• Kuroda Sprang Easing Surprise To Head Off Damaging Inflation Forecast (Reuters)
• It’s a Bad Time to Be a Saver in Europe (Bloomberg)
• We Can Control Risks Facing The Economy, Says China’s Xi Jinping (Reuters)
• Sweden Grapples With Massive Household Debt As Rates Hit Zero (Reuters)
• UK Condemned Over Arms Sales To Repressive States (Observer)
• It’s Official: Spain is Unraveling (Don Quijones)
• Catalans Prepare to Open the Polls in Defiance of Spain (Bloomberg)
• The Albanian World Cup Gambler Who Robbed The National Vault (Reuters)
• Prepare For An Invasion From The North: “Polar Vortex, The Sequel” (CBS)
• Harsh Winter Outlook Made More Dire by Siberia Snow (Bloomberg)
• Bird Decline Poses Loss Not Just For Environment, But Human Soul (Guardian)

As rate hikes come.

• Fed to Markets: Brace for Volatility (WSJ)

Federal Reserve officials are warning investors and foreign central bankers to brace for market turbulence as the Fed prepares to raise short-term interest rates next year. In a speech to central bankers Friday in Paris, Fed Chairwoman Janet Yellen said rate increases, when they materialize in advanced economies, “could lead to some heightened financial volatility.” New York Fed President William Dudley, at the same conference, issued a more detailed alert. “This shift in policy will undoubtedly be accompanied by some degree of market turbulence,” he said of future rate increases in the U.S. “Moreover, it could create significant challenges for those emerging market economies that have been the beneficiaries of large capital inflows in recent years.”

They offered their warnings as the Labor Department released new data showing the U.S. job market is improving faster than the Fed expects. The unemployment rate, at 5.8% in October, was below the 6.3% to 6.6% range the Fed projected last December for the end of 2014. In September, the Fed revised that projection to 5.9%-6.0%, still higher than the October rate. Other metrics being watched closely by the Fed showed continued gains. For instance, the percentage of the U.S. population that is employed rose to 59.2%, its highest level since July 2009. This employment-to-population ratio increased one percentage point from a year earlier, its largest one-year gain since March 1995. The Fed is eyeing rate increases as unemployment declines and slack in the economy slowly diminishes. Higher rates will be aimed at preventing the economy from overheating.

Read more …

“Normalization could lead to some heightened financial volatility .. ”

• Central Banks Warn of Possible Bumpy Ride for Markets (Bloomberg)

Global central bankers said financial markets could suffer a bout of turbulence – again – when they begin to withdraw monetary stimulus. Janet Yellen and William Dudley of the Fed, Mexico’s Agustin Carstens and Bank of England Governor Mark Carney were among those to use a Paris conference of policy makers yesterday to talk about potential fallout from the eventual shift from record-low interest rates used to revive growth since the global financial crisis in 2008. “Normalization could lead to some heightened financial volatility,” Yellen told the gathering convened by the Bank of France. Carney said “the transition could be bumpy.” The comments suggest central bankers are trying to prepare better for the global effects of any withdrawal than in 2013, when then-Chairman Ben S. Bernanke unexpectedly signaled the Fed could soon start reducing bond purchases. That pushed up yields and rattled investors worldwide in the so-called taper tantrum.

Fed Chair Yellen and Dudley, president of the Fed Bank of New York, recognized the importance of U.S. officials being clear in their plans. “The Federal Reserve will strive to clearly and transparently communicate its monetary policy strategy in order to minimize the likelihood of surprises that could disrupt financial markets,” Yellen said. [..] Given a likely increase in U.S. rates next year will “undoubtedly be accompanied by some degree of market turbulence,” Dudley said the central bank has an obligation to provide global stability. “It is clear in retrospect that our attempts in the spring of 2013 to provide guidance about the potential timing and pace of tapering confused market participants,” Dudley said. With that episode in mind, Carstens said there is a “potential for financial market disruption” amid the unwinding of unconventional monetary policy.

Read more …

They’re hot air.

• US Earnings Outlook Might Be Less Rosy Than Investors Think (Reuters)

With the U.S. Q3 earnings season almost at an end, many investors are breathing a sigh of relief as more companies surpassed profit expectations than in any quarter since 2010. But some analysts say investors may be brushing off their worries about corporate profits a little too soon. While most S&P 500 companies beat analysts’ expectations for third-quarter earnings, many just barely topped estimates, said Pankaj Patel at Evercore ISI in New York. Of the S&P 500 companies that had reported results as of early this week, 66% exceeded expectations, according to Evercore’s data analysis. But that figure falls to just 43% after stripping away companies that beat expectations by 5% or less, Patel’s research shows. The figure excluding beats of 5% or less is also well below the%age of beats according to data based on Thomson Reuters polls of analysts. On that data, 74% of S&P 500 companies so far have exceeded analysts’ expectations, which is the highest for any quarter since the second quarter of 2010.

Results have come in from 88% of the S&P 500. The results could mean that an increasing number of companies are trying to “manage their beat rate,” possibly to mask profit weakness, Patel said, noting that companies that exceed expectations by 5% or less typically see their share prices decline in the three days following results. “The beat rate is artificially high, but people still watch that %,” Patel said. “They keep buying and the market goes higher.” The S&P 500 has risen more than 3% since Oct. 8, roughly when this earnings season began. The index is up 9.1% from its Oct. 15 low. In addition, analysts’ keep trimming their profit forecasts. Estimates for fourth-quarter earnings are down from the start of the quarter, along with estimates for the first part of 2015. Earnings growth for the fourth quarter now is estimated at 7.6% compared with an Oct. 1 forecast for 11.1% growth, Thomson Reuters data showed. For the 2015 first quarter, profit growth is seen at 8.8%, down from an Oct. 1 forecast for 11.5% growth.

Moreover, the magnitude by which Q4 estimates are falling has increased compared with the previous quarter, said Nick Raich, chief executive officer of The Earnings Scout, a research firm specializing in earnings trends. In outlooks given by companies themselves – done by only a minority of companies – the news is not good. Negative outlooks outnumber positive ones for Q4 so far by a ratio of 3.9 to 1, up from the third quarter’s ratio of 3.3 to 1, Thomson Reuters data showed. “That’s a worsening trend,” Raich said. “The outlooks have gotten a little bit worse this quarter.” Outlooks could become even dimmer if lackluster demand overseas translates into weak results for the fourth quarter. “The United States clearly is the bright spot in the world,” said Uri Landesman, president of Platinum Partners in New York. “The rest of the world isn’t nearly as strong, so demand coming from certain places is weaker, and the currency is going to have an enormous impact going forward.”

Read more …

How many western officials have you seen trying to address Gorby’s accusations?

• Gorbachev Warns US, Allies Put World On ‘The Brink Of A New Cold War’ (FT)

Former Soviet Union leader Mikhail Gorbachev warned on Saturday that the Ukraine crisis had brought the world to “the brink of a new Cold War”. “The world is on the brink of a new Cold War. Some say it has already begun, ” said the 83-year-old former Kremlin chief in a sombre speech delivered in Berlin at an event to mark the 25th anniversary of the fall of the Berlin Wall this weekend. He was speaking as reports from eastern Ukraine suggested that Kiev’s troops and the Russia-backed rebels may be preparing for renewed fighting. Agency reporters in eastern Ukraine said they saw more than 80 unmarked military vehicles on the move on Saturday in rebel-controlled areas of eastern Ukraine. The apparent escalation threatens the fragile ceasefire agreed in Minsk in early September and increases the danger of further pressure on east-west relations.

Speaking at a conference within a few metres of the iconic Brandenburg Gate, Mr Gorbachev accused the west, led by the US, of “triumphalism” after the fall of the Berlin Wall ended Soviet dominance in eastern Europe. Trust between Russia and the west had “collapsed” in the last few months, he said, highlighting the damage done by the Ukraine crisis. He called for new initiatives to restore trust, including a lifting of personal sanctions imposed by the US and the EU on top Russian officials in response to Moscow’s actions in Ukraine. Mr Gorbachev clearly sees the west as the culprit in the crisis, having given his unequivocal backing to Mr Putin last week. He said, before arriving in Germany, that he was “absolutely convinced that Putin protects Russia’s interests better than anyone else.”

Read more …

Hungary PM Orban is an interesting man. The country is doing quite well, relatively.

• Hungary Under ‘Great Pressure’ From US Over Its Energy Deals With Russia (RT)

Washington is exerting heavy pressure on Hungary over the country’s decision to give a green light for the construction of the South Stream gas pipeline and expedite the construction by allowing companies without licenses to participate in the project. “The US is putting Hungary under great pressure fearing Moscow’s rapprochement with Budapest,”Hungarian media cited Prime Minister Viktor Orban saying in Munich, Germany after a meeting with Bavarian state premier Horst Seehofer. Orban said that Hungary’s relations with Russia have become “entangled in geopolitical and military and security policy issues,” AFP reports. The PM said that US is retaliating for Budapest’s willingness to endorse the South Stream gas pipeline development as well as a deal that would see Russia’s Rosatom expand Hungary’s nuclear power.

Under a deal worth up to €10 billion Rosatom will build a 2,000 megawatt addition to Hungary’s state-owned nuclear power plant MVM Paksi Atomeromu. Russia is Hungary’s largest trade partner outside of the EU, with exports worth $3.4 billion in 2013. Also it is highly dependent on Russian energy. “We don’t want to get close to anyone, and we don’t intend to move away from anybody,” Orban said.“We are not pursuing a pro-Russian policy but a pro-Hungarian policy,” as expansion of the nuclear plant was the “only possible means” to lower dependence on external energy resources. The PM remained firm that “cheap energy is key in strengthening Hungary’s competitiveness” as he also defended the law which gave a green light for the construction of the South Stream pipeline that would bypass Ukraine as a transit nation in EU gas supply chain. It “ensures Hungary gas supplies by eliminating risks posed by situation in Ukraine,” Orban said.“Even if South Stream does not diversify gas sources, it diversifies delivery routes.”

Read more …

A forecast based on slumping oil prices.

• Kuroda Sprang Easing Surprise To Head Off Damaging Inflation Forecast (Reuters)

The Bank of Japan Governor not only surprised the markets with his latest splurge of monetary easing. He sprang it on his own board members just two days earlier, jolted into action to stop them making a low-ball forecast that might have sunk his flagship inflation target. To achieve maximum effect for the shock decision, Haruhiko Kuroda and right-hand man Masayoshi Amamiya kept only a handful of elite central bank bureaucrats in the loop as they laid the ground for the expansion of their quantitative and qualitative easing (QQE) program. They didn’t even give the usual forewarning to senior bureaucrats at the Ministry of Finance, according to interviews with nearly a dozen insiders and government sources with knowledge of the bank’s deliberations.

No leaks reached the media, and the announcement at the Oct. 31 policy meeting pushed the Nikkei stock average to seven-year highs and the yen to seven-year lows against the dollar. The market reaction will have been welcome news to Kuroda, but the impact he wanted above all was to alter inflation expectations in a country that has struggled with crippling deflation for two decades. Timing was critical – and not of his choosing. At the policy meeting the board would also issue a new consumer inflation forecast for the next fiscal year, based on the median estimate from the nine members. But two days before publication, the preliminary estimate was only around 1.5%, three of the sources said. That was well below the 1.9% forecast made in July, and if published could have been fatal to his key goal of hitting 2% from April next year.

Since price expectations play a key role in the consumer behaviours that ultimately determine prices, doubts about the target could be self-fulfilling. There were other triggers for action, including October’s plunge in oil prices and the fact that an easing burst would have more market impact in the week the U.S. Federal Reserve decided to turn its own liquidity taps off. But it was the inflation forecast that convinced Kuroda and his aides to go for another burst of stimulus, three sources said. Board members would then have to revisit their estimates in light of the new action.

Read more …

“If you’re a central bank, it’s not a good sign when institutions actively seek to deter customers from owning your currency.”

• It’s a Bad Time to Be a Saver in Europe (Bloomberg)

In the post-crisis economic environment, with record-low interest rates in many countries, it’s better to be a borrower than a lender, despite Shakespeare’s admonition to be neither. These days, however, it’s even worse to be a saver. Since the European Central Bank in June sought to prod banks to lend more – by imposing negative interest rates on banks’ ECB deposits – savers are discovering that banks aren’t the only ones paying for the privilege of having cash on hand. At least three banks – State Street Corp., Bank of New York Mellon, and Deutsche Skatbank – have introduced negative rates for large euro deposits. It makes financial sense for the banks: If the ECB is charging them 0.2% for holding their cash, banks have a fiduciary duty to try to recoup that cost.

The result is that depositors suffer the consequences of the ECB’s interest-rate tyranny. They would do better to stash their money in mattresses. The ECB addressed the implications of its monetary-policy shift on its website after it cut its deposit rate below zero. It asked the question: “Do I now have to pay my bank to keep my savings for me? What is the effect of this negative deposit rate on my savings?” And then it answered itself:

There will be no direct impact on your savings. Only banks that deposit money in certain accounts at the ECB have to pay. Commercial banks may of course choose to lower interest rates for savers. The ECB’s interest rate decisions will in fact benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.

So the first sentence turned out to be incorrect. And the final sentence provides scant comfort to a depositor whose hard-earned cash is dribbling away and is too pessimistic about the future of the European economy to find more productive uses for the money, such as spending it or investing it. We’ve been here before, including in 2012 when depositors fled the euro and piled into other currencies. Credit Suisse imposed negative rates on Swiss franc cash balances, for example, and said it would “invite our customers to keep cash balances as low as possible to avoid negative credit charges.” State Street also imposed negative rates on Danish kroner deposits. If you’re a central bank, it’s not a good sign when institutions actively seek to deter customers from owning your currency.

Read more …

Sure.

• We Can Control Risks Facing The Economy, Says China’s Xi Jinping (Reuters)

The risks faced by China’s economy are “not so scary” and the government is confident it can head off the dangers, president Xi Jinping told global business leaders on Sunday to dispel worries about the world’s second-largest economy. In a speech to chief executives at the Asia Pacific Economic Cooperation (Apec) CEO summit, Xi said even if China’s economy were to grow 7%, that would still rank it at the forefront of the world’s economies. China’s economy, the world’s second-largest, has had a rocky year. Growth slid to a low not seen since the 2008/09 global financial crisis in the third quarter dragged by a housing slowdown, softening domestic demand and unsteady exports. “Some people worry that China’s economic growth will fall further, can it climb over the ridge?” Xi said. “There are indeed risks, but it’s not so scary.

“Even at growth of around 7%, regardless of speed or volume, (we) are among the best in the world,” he said, noting that China’s economy remained “stable”. The remarks from Xi came a day after data showed annual growth in Chinese exports and imports cooled in October, in another sign of fragility in the economy that could prompt policymakers to take further action to stoke growth. To shore up activity, policymakers have loosened monetary and fiscal policies since April to ensure that the economy can grow by around 7.5% this year. A marked slowdown in growth would hit countries all over the world, but especially commodity producers such as Australia, Indonesia and Brazil that have benefited from strong Chinese demand.

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This will not end well. There are limits.

• Sweden Grapples With Massive Household Debt As Rates Hit Zero (Reuters)

Sweden’s new center-left government and its financial authorities are under huge pressure when they meet on Tuesday to tackle a mountain of household debt that is casting a long shadow over one of Europe’s few economic bright spots. Having slashed rates to zero to fight the risk of deflation, top Swedish officials are now in a quandary over how to rein in borrowing and house price rises without sending the real estate market into a downward spiral. The country’s AAA-rated economy is still one of Europe’s strongest, with low public debt, sound state finances and banks among the best capitalized and most profitable in Europe. But consumers, barely touched by the financial crisis, have loaded up on cheap mortgages and caused Swedish property prices to triple over the last 20 years, prompting a warning from the IMF that the market is 20% overvalued. Adding to the problem: Sweden has built too few houses for the last 20 years and its capital Stockholm is one of Europe’s fastest growing cities.

Critics say the former center-right government added fuel to the fire by slashing real estate taxes and leaving 30% mortgage tax relief untouched. Meanwhile, Sweden’s household debt-to-income ratio has risen to above 170% – among Europe’s highest. The worry is that private consumption, nearly half of GDP, would suffer if rates rose or property prices fell. “The longer we wait, the bigger the imbalances are,” said Bengt Hansson, analyst at the Swedish National Board of Housing Planning and Building. “We already have a bubble, but we will avoid an even bigger bubble.” It will be hard to dissuade bullish Swedish consumers. In Stockholm’s frenzied housing market, buyers make multi-million crown offers to snap up flats they may only have seen in photographs. And cranes and scaffolding are common sights in suburbia as householders take advantage of generous tax breaks for home improvements.

“We don’t think it will crash badly,” said Peter, a 47 year-old investment advisor, who with his wife Maria has just bought a house in Stockholm for around 12 million Swedish crowns ($1.62 million). “It might stop going up for a while, but over the longer term we expect it to go up,” he added, suggesting the lack of housing and population growth in Stockholm would support prices. Attempts by regulators so far to slow credit growth – squeezing banks by making them put aside more capital and draw up voluntary mortgage pay-down plans – have not worked because interest rates have continued to fall. Last week the central bank cut rates to zero in an attempt to answer criticism that it is not doing enough to tackle another economic risk – deflation – even while it acknowledged the problem that would create in containing household debt. “There is a fairly large consensus that household debt is a concern,” Swedish central bank chairman Stefan Ingves said after the cut. “If households continue to borrow, we could end up with very big problems later on, and this is what we want to avoid.”

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They all do it. We have no morals left.

• UK Condemned Over Arms Sales To Repressive States (Observer)

The government has been accused of dishonesty over arms sales as new figures reveal that the value of British weapons sales to “countries of concern” has already hit £60m this year. Former Tory defence minister Sir John Stanley, who chairs the Commons committees on arms export controls, says ministers failed to come clean on a “significant change in policy” that makes it easier to export arms to countries with a poor human rights record. He said in a recent parliamentary debate that the government has not acknowledged that such a change has taken place, and it “should consider most carefully whether they should now offer an apology to the committees”.

The government used to reject arms export licences where there was concern they might be used for “internal repression”, but now a licence will be refused only if there is a “clear risk” that military equipment might be used in violation of international law. Former Foreign Office minister Peter Hain, who established the strict criteria on arms sales, last night demanded that the government be transparent about the change and called for parliament to be allowed a vote. He said: “The present government has run a coach and horses through our arms export controls, circumventing the legislation we put in place by putting a particular spin on it. It has enabled them to sell arms to countries and for purposes that should not be allowed under the legislation.

“There is a clear policy in the legislation that arms should only be sold to countries for defensive purposes and not for internal suppression or external aggression. In the case of Gaza over the summer, that has clearly been flouted. Bahrain is another example.” Data from the Department for Business, Innovation and Skills reveals that in the first six months of 2014 the UK granted licences worth £63.2m of arms sales to 18 of the 28 states on its official blacklist, countries about which the Foreign Office has the “most serious wide-ranging human rights concerns”. Israel, Saudi Arabia, the Central African Republic, Sri Lanka and Russia were among the countries that Britain approved military equipment for.

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How much corruption can one government shake off?

• It’s Official: Spain is Unraveling (Don Quijones)

Since taking office in late 2011, Rajoy’s government has been embroiled in one sordid political scandal after another. In the latest episode, the Punica Affair, more than 100 politicians have been arrested and charged with varying acts of white collar crime, including taking kick backs from private sector companies. Payment often came in the form of cash-stuffed envelopes although, as El Confidencial reports, it could also include completely free-of-charge construction work on a politicians’ property, luxury holidays, hunting trips and even an intimate evening or two with a high-class prostitute. Most of the politicians involved in the scandal are – or at least were – members of the governing Popular Party. The rest belong – or at least belonged – to the other partner in Spain’s (until now) two-party system, the not-really-socialist-at-all party, the PSOE.

The good news is that some of Spain’s corrupt politicians and business figures are finally seeing the sharp (or at least not entirely blunt) end of the law. Scores have been arrested and some are even going down. The bad news is that Rajoy’s scandal-tarnished government of self.serving mediocrities still stands, albeit more precariously than ever. In El Pais‘ latest poll of voters’ intentions in next year’s general election, the Popular Party (PP) was, for the first time in decades, relegated to third place. Indeed, the two incumbent parties – the PP and PSOE – were unable to muster 50% of the vote between them. The most popular party in the poll was Podemos, a stridently left-wing political movement founded just at the beginning of this year. In May’s European elections the party picked up five seats; now, six months later, it is apparently the hottest contender for the spoils in next year’s general election, picking up 27% of the votes polled – 6%% more than PP and one more than PSOE.

Lead by Pablo Iglesias, a firebrand (or as the right-wing media like to call him “demagogic”) 35-year-old professor of political science, Podemos has masterfully exploited the general public’s disaffection with a political establishment that serves no one’s interests but its own – and, of course, those of the country’s biggest businesses and banks. The political establishment is quite rightly blamed for stoking and feeding the country’s biggest ever real estate bubble. Thanks to a change in the property laws enacted in 1997 by the Aznar government, local and regional administrations were encouraged to part-finance themselves through granting authorization for ever larger public and private construction projects, many of which turned out to be white elephants (empty toll roads, high-speed train stations planted slap bang in the middle of nowhere, ghost airports…).

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That same corrupt government demands the moral high road when it comes to Catalunya.

• Catalans Prepare to Open the Polls in Defiance of Spain (Bloomberg)

In more than 900 towns across Catalonia, an army of volunteers is preparing to open polling stations today and offer compatriots a vote on independence in defiance of Spain’s central government and its highest court. The informal ballot, stripped of legal validity by a Constitutional Court ruling in September, poses two questions: Do you want Catalonia to be a state? And should that state be independent? Separatists led by regional president Artur Mas aim to win a majority in favor of breaking up Spain and use that mandate to force Prime Minister Mariano Rajoy to negotiate. The runup to the vote has been marked by legal salvos: Rajoy’s government reminded public officials in Catalonia of their obligation to respect the Constitutional Court ban as Mas had an appeal to that ruling thrown out by the Supreme Court.

The Catalan government talked of filing a lawsuit against Spain in an international court while an activist group in Madrid responded with its own suit to state prosecutors demanding police halt the balloting. “The Spanish government is being really short-sighted,” said Alex Quiroga, a lecturer in Spanish history at Newcastle University in England. “Continually saying ‘no’ and appealing to the Constitutional Court doesn’t help. It’s clear that only through negotiation can they solve the problem.” Spain’s prosecutor’s office in Catalonia asked regional police to report on any public-sector premises such as schools being used for the vote and to gather information about the persons responsible for allowing their use, according to an e-mailed statement from the prosecutor. It also requested Catalonia’s Education Department to explain whether it asked principals to allow the schools to be used for the vote.

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Great story. “All three keys needed to access the vault were kept in his personal safe.”

• The Albanian World Cup Gambler Who Robbed The National Vault (Reuters)

In the end, it wasn’t the security cameras or the audit inspections in the vault of Albania’s central bank that brought down Ardian Bitraj. It was the high blood pressure and lack of sleep, the burden of a multi-million-dollar secret. Sitting down with his boss this July, Bitraj confessed his deception: over a four-year period he had stolen the equivalent of $6.5 million from the vault, covering his tracks by stuffing the empty cash boxes with books and balls of string. The revelation brought down the central bank governor, led to the arrest of 18 employees and tarnished the reputation of an institution once lauded for its professionalism. And all for the sake of a gambling habit that led to massive losses, culminating in a series of fatal bets on the soccer World Cup.

The full story of the Balkan bank heist is only just emerging, gleaned by Reuters in interviews with bankers, investigators and others involved, and from legal documents including a transcript of Bitraj’s confession. It started in May 2010, when Bitraj, who had risen to become head of the cash processing department at the bank, first opened the metal and plastic clasps to the wooden boxes that hold its cash reserves in the cryptically named X Building on the outskirts of the capital Tirana. Bitraj, 45, had a penchant for placing bets on soccer matches, so roughly once a month he would wait for his co-workers to leave the room and swipe up to 2 million leks, roughly $18,000, according to the confession.

Choosing carefully how he returned the boxes, Bitraj would make sure those he had tampered with were not in line for delivery to Albania’s commercial banks, nor likely to be picked on in the regular random audit of the vault. As the thefts mounted, he would stuff the boxes with packaging, balls of string and books to replace the weight of the cash. All three keys needed to access the vault were kept in his personal safe. In statements to police, bank employees said they had not received any directive on how or where to store the keys. Bitraj says auditors checked only 2% of the cash boxes in the vault. Fired governor Ardian Fullani says it was 5%, maintaining that checks in the former communist country were comparable with other central banks in Europe.

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Beware the US economy, or rather the reports and excuses that will be written on the cold.

• Prepare For An Invasion From The North: “Polar Vortex, The Sequel” (CBS)

Prepare yourself for an invasion from the north. A blast of polar air is about to send temperatures plunging in the heart of America. It’s the return of the polar vortex that brought misery a year ago. A mass of whirling cold air will dip southward this weekend, sending the mercury plunging. As the cold air moves south and east, it has the potential to affect as many as 243 million people with wind chills in the single digits in some places and snow. It’s all triggered by a Super Typhoon named Nuri. Images from the European Space Station show that Nuri is a growing meteorological bomb blanketing the Bering Sea. The 50-foot waves and 100 mile-an-hour winds will make conditions similar to those we had two years ago, and could make Nuri the biggest storm of the year.

But it would be wrong to think that it will affect only Alaska’s far-flung Aleutian Islands or those famous fishermen who work in the North Pacific. WBBM’s meteorologist Megan Glaros in Chicago explains. “The remnants of Super Typhoon Nuri will create a big buckle in the jet stream,” Glaros says. “And in several days time, it’s going to mean a big dip in the jet which will connect us with a big mass of Arctic air – taking temperatures east of the Rockies down to 10 to 30 degrees below average.” Say “a big mass of arctic air” to anyone who lives in the Midwest and it conjures painful memories of the dreaded polar vortex that hit the region last winter.

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“A rapid advance of Eurasian snow cover during the month of October favors that the upcoming winter will be cold across the Northern Hemisphere …”

• Harsh Winter Outlook Made More Dire by Siberia Snow (Bloomberg)

Remember how evidence was mounting last month that early snowfall was accumulating across Siberia? And remember how there’s a theory that says this snowfall signals a cold winter? So in the two and a half weeks since, the news for the winter-haters has, unfortunately, only gotten worse. About 14.1 million square kilometers of snow blanketed Siberia at the end of October, the second most in records going back to 1967, according to Rutgers University’s Global Snow Lab. The record was in 1976, which broke a streak of mild winters in the eastern U.S. In addition, the speed at which snow has covered the region is the fastest since at least 1998. Taken together they signal greater chances for frigid air to spill out of the Arctic into more temperate regions of North America, Europe and Asia, said Judah Cohen, director of seasonal forecasting at Atmospheric and Environmental Research in Lexington, Massachusetts, who developed the theory linking Siberian snow with winter weather.

“A rapid advance of Eurasian snow cover during the month of October favors that the upcoming winter will be cold across the Northern Hemisphere,” Cohen said in an interview yesterday. “This past October the signal was quite robust.” There are a few steps to get from the snows of Siberia to the chills in New York City. Cold air builds over the expanse of snow, strengthening the pressure system known as a Siberian high. The high weakens the winds that circle the North Pole, allowing the cold air to leak into the lower latitudes. The term Polar Vortex actually refers to those winds, not the frigid weather.

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The connection between our souls and our living world was lost in our heads long ago. 147 million fewer sparrows, a drop of 62% of their total population, since 1980; starling numbers have fallen by 45 million or 53%; skylarks are down by 37 million (46%).

• Bird Decline Poses Loss Not Just For Environment, But Human Soul (Guardian)

‘That’s a buzzard!” says Richard Gregory, gesturing at a tall birch tree stump 50 metres or so away, from which a flapping streak of brown and white has just disappeared. “That was a buzzard. That’s one of the ones I was telling you about. It’s back.” When Gregory was a young child, toddling around the green bits of Cheshire with a monocular, a glimpse of a buzzard made for a thrilling day out – though he was mad about birds by the age of four, he was in his teens before he ticked the large raptor off his list. Now, though, thanks to reintroduction projects and legal protections, its number and that of several other birds of prey is on the up in Britain.

We glimpse another one, as it happens, a few minutes later, and while I suppose there is just a possibility it was the same bird on a second swoop, I’m counting that as a double sighting. The recovery in recent decades of Britain’s raptor population is welcome for a number of reasons. Firstly, it means I was right after all that time I spotted a red kite while driving up the A1 and everyone else in the car said I was talking rubbish. Secondly, it’s a snatch of good news in what could otherwise seem an unrelentingly grim picture. These are bad days to be a bird. A study released this week found that the most common birds in Europe are declining at an alarming rate, and that is not an idle term.

By studying 30 years of data across 25 countries, conservationists estimated that there are now a brain-boggling 421 million fewer birds flapping across the continent’s skies than were around in 1980. House sparrows alone account for a third of that decline, with 147 million fewer birds, a drop of 62% of their total population; starling numbers have fallen by 45 million or 53%; skylarks are down by 37 million (46%). Yes, the marsh harrier has recovered a bit, and feral pigeons and ring necked parakeets are doing well in cities, but overall, concluded the report, “global biodiversity is undergoing unprecedented decline”, and some of the species taking the hardest hit are birds which were once, not so long ago, abundant in our skies.

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Debt Rattle November 8 2014

Nov 082014
 
 November 8, 2014  Posted by at 1:07 pm Finance Tagged with: , , , , , , , , , , ,  3 Responses »


Russell Lee Auto transport passing through Eufaula, Oklahoma Feb 1940

• For Wall Street, It’s Not Politicians That Matter, But Profits (MarketWatch)
• Ron Paul: Two- Party US Political System In Reality A Monopoly (RT)
• Majority Of New October Jobs Pay Below Average Wage (MarketWatch)
• When Will Americans Ever Get Raises? (BW)
• Only 92.4 Million Americans Not In Labor Force (Zero Hedge)
• US Shale Drillers Idle Rigs From Texas to Utah Amid Oil Rout (Bloomberg)
• Transocean Takes $2.76 Billion Charge Amid Rig Glut (Bloomberg)
• Consumer Credit in US Climbs on Demand for Car, Student Loans (Bloomberg)
• Fannie-Freddie CEOs Tout Do-It-Yourself Housing Finance Overhaul (Bloomberg)
• China Export, Import Growth Slows, Reinforcing Signs Of Fragility (Reuters)
• El-Erian: Strong Dollar Could Derail The Recovery (CNBC)
• G20 Experts To Act On Corporations’ Internal Loans That Help Cut Tax (Guardian)
• Luxembourg, The Country Where Accountants Outnumber Police 4:1 (Guardian)
• The $9 Billion Witness: Meet JPMorgan Chase’s Worst Nightmare (Matt Taibbi)
• Russia, China Close To Reaching 2nd Mega Gas Deal (RT)
• Catalans Recast Spanish History in Drive for Independence (Bloomberg)
• Greek Minister: Markets Are Sending Us A Message (CNBC)
• Danish Women Urged to Drop Work Till 2015 to Protest Pay Gap (Bloomberg)
• Drones Over French Nuclear Sites Prompt Parliamentary Probe (Bloomberg)

“.. much of Wall Street’s profit engine isn’t sustainable. For most of the last two years, too-big-to-fail bank profits haven’t been driven by banking, they’ve been driven by sharp increases in investment banking”.

• For Wall Street, It’s Not Politicians That Matter, But Profits (MarketWatch)

There’s been much in the way of speculation about how the Republican sweep in Tuesday’s midterms may impact Wall Street — the industry. Some believe a shift in control will help. Others are less sure. Both may miss a bigger point: big financial firms are on a cyclical high that isn’t built to last. David Reilly and John Carney argue that big banks are unlikely to get big breaks from Congress even though Republicans have tended to be softer on regulation. Writing for the Wall Street Journal’s “Heard on the Street” section, Reilly and Carney note “reviving the debate over financial reform could also resurrect the question of what to do about too-big-to-fail banks and renew calls for them to be broken up.” On the flip side, MarketWatch’s Philip van Doorn writes that many banks may be able to lift dividends if the new Republican leadership in the U.S. Senate follows through on promises to ease restrictions on capital requirements. Both camps make strong arguments. And they’re not really in opposition.

Tuesday’s victory by Republicans opens the door for eased banking rules, but it comes with risk of a political backlash. Investors may be better served by looking at some trends in the industry to gauge just how profitable the big six — Bank of America, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley and Wells Fargo may perform in the future. On the plus side, the stream of positive economic data, including Friday’s jobs report, is likely to lead the Federal Reserve to keep its distance from quantitative easing and enter a new phase of rate increases that, in turn, would boost interest rates paid on loans and other credit instruments. This has been a big drag on bank industry profits since the financial crisis and recession. That’s the good news. The potential bad news is that much of Wall Street’s profit engine isn’t sustainable. For most of the last two years, too-big-to-fail bank profits haven’t been driven by banking, they’ve been driven by sharp increases in investment banking: underwriting equity and debt offerings and advising on mergers and acquisitions.

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“What do they do with our young people? They send them all around the world, getting involved in wars and telling them they have to have democratic elections ..”

• Ron Paul: Two- Party US Political System In Reality A Monopoly (RT)

Former Congressman Ron Paul told RT in the midst of Tuesday’s midterm elections that the “monopoly” system run by the leaders of the two main parties is all too evident as Americans go to the polls this Election Day. “This whole idea that a good candidate that’s rating well in the polls can’t get in the debate, that’s where the corruption really is,” Paul, the 79-year-old former House of Representatives lawmaker for Texas, told RT during Tuesday’s special midterm elections coverage. “It’s a monopoly…and they don’t even allow a second option,” he said. “If a third party person gets anywhere along, they are going to do everything they can to stop that from happening,” the retired congressman continued.

Paul, a longtime Republican, has been critical of the two-party dichotomy that dominates American politics for decades, and once ran as the Libertarian Party’s nominee for president of the United States. While third-party candidates continue to vie against the left and right establishment, however, Paul warned RT that even the two-party system as Americans know it is in danger. “What do they do with our young people? They send them all around the world, getting involved in wars and telling them they have to have democratic elections,” he told RT. “But here at home, we don’t have true Democracy. We have a monopoly of ideas that is controlled by the leaders of two parties. And they call it two parties, but it’s really one philosophy.”

All hope isn’t lost, however; according to Paul, American politics can still be changed if individuals intent on third-party ideas introduce their ethos to the current establishment. Americans can “fight to get rid of the monopoly of Republicans and Democrats,” Paul said, or “try to influence people with ideas and infiltrate both political parties.” With respect to the midterm elections, though, Paul told RT that he’s uncertain what policies will prevail this year — excluding, of course, an obvious win for the status quo. “I think the status quo is pretty strong right now, and I imagine that the status quo is going to win the election tonight,” he said Tuesday afternoon.

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Erosion presented as recovery.

• Majority Of New October Jobs Pay Below Average Wage (MarketWatch)

The U.S. is becoming an engine of job creation once again, but it’s more like a four-cylinder instead of an eight-cylinder one. The 214,000 gain in new jobs in October marked the ninth straight month in which net hiring topped 200,000. The last time that happened was in 1994. Yet only about 40% of the new jobs created in October were in fields that pay above the average hourly U.S. wage of $24.57. That’s down from 60% in September. The mediocre nature of many new jobs and slow wage growth are perhaps the biggest obstacle to a full-blown economic recovery. The biggest increase in hiring in October occurred at restaurants and bars, which added a seasonally adjusted 42,000 positions. Retailers hired 27,000 workers. Temps accounted for 15,000 jobs. Transport — think package deliverers — took on 13,000 new employees. All these industries pay less than the national average.

Some of the new jobs are also unlikely to last long. Restaurants and retailers, for example, tend to beef up staff ahead of the holidays and slim down after New Year’s. Temp jobs, on the other hand, have often been converted into full-time positions. Companies use temps sometimes as a trial for a full-time job. Whatever the case, it’s not a good idea to give too much weight to the composition of hiring in any one month. Some 60% of the 256,000 jobs created in September, for instance, were in fields that pay above the average U.S. wage. That’s higher than normal. There’s also been a pronounced shift in 2014 toward higher paying jobs vs. the prior year. A MarketWatch analysis shows that roughly 58% of the new jobs created this year pay above the average hourly wage, compared to less than 50% in 2013. Still, both the composition of jobs and the trend in hourly pay bear close watching over the next few months. Both have to improve to get the U.S. economy fully back on track more than five years after the recovery started.

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“The unemployment rate is no longer a sufficient statistic.” An accurate gauge of the market, he says, must include people who’ve given up looking for work and those working in part-time or low-paying jobs because they can’t find anything else”.

• When Will Americans Ever Get Raises? (BW)

Americans are overdue for a fatter paycheck: Average earnings haven’t risen in more than six years. The labor market is finally recovering—the unemployment rate is down to 5.9% from 8.2% in July 2012—and that usually pushes up wages. But it’s not clear that job growth will translate into pay increases in 2015. In an August speech, Federal Reserve Chair Janet Yellen speculated that “pent-up wage deflation” might have held wages down during the recovery. What does that mean? “In a downturn, employers may need to cut wages, but they are reluctant to do so,” says San Francisco Fed economist Mary Daly. They prefer laying people off, which they believe tends to have less impact on workforce morale, she says. The result is that when the economy recovers, employers are slower to raise pay than if they had imposed cuts during the slump.

Daly says wages were slow to increase after the past three recessions, too. She estimates that unemployment will have to fall to 5.2% before wages begin rising. Even a drop to that level might not be low enough to spur gains. Dartmouth economist Daniel Blanchflower says the labor market is in worse shape than the unemployment rate suggests. “Something changed in 2010,” he says. “The unemployment rate is no longer a sufficient statistic.” An accurate gauge of the market, he says, must include people who’ve given up looking for work and those working in part-time or low-paying jobs because they can’t find anything else. Measures that include discouraged workers, such as the labor force participation rate, have worsened since 2008. Blanchflower says pay won’t increase until the slack is absorbed, and he can’t predict when that might happen.

Today’s unusually high long-term unemployment could keep wages low for years, according to Till von Wachter, an economist at the University of California at Los Angeles. People who’ve been out of work for six months or more “may have seen their skills deteriorate,” he says, “and some job losers found their previous occupation is no longer available and skills not in demand. This happens in every recession, but this last one was worse because there was more job loss.” He estimates that each additional month you’re unemployed after the first month lowers your next job’s pay by almost 1%.

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Smells like recovery?!

• Only 92.4 Million Americans Not In Labor Force (Zero Hedge)

Following last month’s total collapse in the participation rate, dropping to 36 year lows, this month there was a modest improvement in the composition of the labor force, with the Household Survey suggesting the ranks of the Employed rose by 683K people, while the Unemployed actually declined by 267K, leading to a drop of the people not in the labor force to 92.378 million from 92.584 million. In other words, a little over 101 million Americans are unemployed or out of the labor force. Still, if only looking at this metric, the Fed would likely have no choice but to proceed with a rate hike in the first half of 2015.

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“There’s no doubt about it now. We’re already down 49 rigs since the peak in October. It’ll have fallen by more than 100 rigs by the end of year.”

• US Shale Drillers Idle Rigs From Texas to Utah Amid Oil Rout (Bloomberg)

The shale-oil drilling boom in the U.S. is showing early signs of cracking. Rigs targeting oil sank by 14 to 1,568 this week, the lowest since Aug. 22, Baker Hughes said yesterday. The Eagle Ford shale formation in south Texas lost the most, dropping nine to 197. The nation’s oil rig count is down from a peak of 1,609 on Oct. 10. Drillers are slowing down as crude prices tumbled 24% in the past four months. Transocean said yesterday that its earnings would take a hit by a drop in fees and demand for its rigs. The slide threatens to curb a production boom in U.S. shale formations that has helped bring prices at the pump below $3 a gallon for the first time since 2010 and shrink the nation’s dependence on foreign oil imports. “We are officially seeing the slowdown in oil drilling,” James Williams, president of energy consulting company WTRG Economics, said yesterday. “There’s no doubt about it now. We’re already down 49 rigs since the peak in October. It’ll have fallen by more than 100 rigs by the end of year.”

Orices are down 17% in the past year. Executives at several large U.S. shale producers, including Chesapeake Energy and EOG Resources, have vowed to maintain or even raise production as they reported earnings this week. They say their success in bringing down costs means they can make money even if prices slump further. The oil rig count will drop to 1,325 by the middle of next year amid lower prices, Genscape, an energy data company said in a report. Drillers from Apache to Continental Resources have said this week that they’re laying down rigs in some oil plays. Transocean, owner of the biggest fleet of deep-water drilling rigs, is delaying the release of its Q3 results after saying its earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts drilling business and a drop in rig-use fees. Transocean’s competitors will probably have to take similar measures as “this is going to be an industry wide phenomenon,” Goldman Sachs said in a research note yesterday.

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The shale mirage makes its first victims. Many will follow.

• Transocean Takes $2.76 Billion Charge Amid Rig Glut (Bloomberg)

Transocean, owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an industrywide glut in the expensive vessels just as crude-oil prices tumble. The company will delay posting third-quarter results after saying earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts-drilling business and a drop in rig-use fees. Shares in the Vernier, Switzerland-based company, which pushed back the release of its earnings report to Monday instead of today, fell 0.7% to $29.71 at the close in New York. Oil’s decline to a four-year low in recent months has caused companies to consider spending cuts, which would further reduce demand for rigs and the rates Transocean can charge to lease them to explorers. The drop in prices comes after rig contractors responded to rising demand during the past few years with the biggest batch of construction orders for rigs since the advent of deep-water drilling in the 1970s.

“Ouch,” analysts from Tudor Pickering Holt & Co. wrote in a note to investors today. The announcement “reflects the reality of this oversupplied floater rig market globally.” Other rig owners may also face writedowns, Waqar Syed, an analyst at Goldman Sachs Group Inc., wrote today in a note to investors. Among those that may be affected are Diamond Offshore Drilling, Noble, Ensco, Rowan and Atwood Oceanics, he wrote. “This is going to be an industrywide phenomenon for the next few years,” Syed wrote. “Companies that have spent substantial amounts in the past 10-15 years in upgrading their 1970-1980 vintage rigs may face some writedowns.” Noble regularly does impairment tests on its assets, said John Breed, a company spokesman. “With the current figuration of the Noble fleet, it seems like a major writedown wouldn’t be something we would be looking at.”

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More debt. Which is a good thing, right?

• Consumer Credit in US Climbs on Demand for Car, Student Loans (Bloomberg)

Consumer borrowing increased at a faster rate in September as American households took out loans for cars and education. The $15.9 billion increase in credit followed a revised $14 billion advance in August, the Federal Reserve reported today in Washington. Non-revolving loans, including borrowing for motor vehicles and college tuition, rose $14.5 billion in September. Gains in the labor market and stock portfolios, the lowest gasoline prices in four years, and cheap borrowing costs are giving Americans the confidence to borrow. Faster wage growth would provide a bigger boost for households wary of taking on more debt. The September gain in consumer borrowing was in line with the $16 billion median forecast of 34 economists in a Bloomberg survey. Estimates ranged from increases of $12 billion to $22 billion.

The report doesn’t track mortgages, home-equity lines of credit and other debt secured by real estate. Revolving credit, which includes credit-card balances, climbed $1.4 billion after a $201 million decline in August, today’s Fed figures showed. The September gain in non-revolving credit followed a $14.2 billion increase in the prior month. Today’s report showed that student loans in the third quarter increased to $1.3 trillion from $1.27 trillion in the prior three months. Borrowing for the purchase of motor vehicles climbed to $940.9 billion last quarter from $918.7 billion from April through June. Auto sales cooled in September to a 16.3 million annualized rate, capping the best quarter for the industry in more than eight years, according to data from Ward’s Automotive Group.

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The guys brought in to dissolve the GSEs now want to keep them running. The neverending nightmare, courtesy of lenders who want to offload shaky loans to the government.

• Fannie-Freddie CEOs Tout Do-It-Yourself Housing Finance Overhaul (Bloomberg)

The top executives of Fannie Mae and Freddie Mac, brought in to be stewards until the government figures out how to shut them down, are increasingly sounding like they think the two companies should continue to exist. Timothy J. Mayopoulos of Fannie Mae and Donald Layton of Freddie Mac today both pointed to steps they’re taking to boost stability and competition in the mortgage market, while stopping short of urging lawmakers to drop plans for an overhaul that would put them out of business. “People should recognize that there’s a lot of reform that’s already underway at Fannie Mae,” Mayopoulos said in a telephone interview. “There have been a lot of proposals for substantial changes to housing finance. People need to make sure whatever is put in place is practical and it can work.”

Fannie Mae and Freddie Mac, which were taken into U.S. conservatorship in 2008 amid soaring losses on subprime loans, reported third-quarter financial results today that will see them send a combined $6.8 billion to the Treasury before the end of the year. The payments stem from terms of their $187.5 billion bailout requiring them to turn over all profits. With the latest installments, Fannie Mae, which had a third-quarter profit of $3.9 billion, and Freddie Mac, which reported $2.8 billion, will have sent taxpayers $38 billion more than they took in the aid. The payments are considered to be a return on the U.S. investment and not a repayment, which means there’s no legal avenue for them to exit conservatorship. Changing the bailout terms is one area where lawmakers could help, Mayopoulos said. “That’s something that Congress will ultimately need to address if this company’s going to continue to operate,” he said. “It’s very difficult without capital.”

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‘Fragility’, spoken like a true spinner.

• China Export, Import Growth Slows, Reinforcing Signs Of Fragility (Reuters)

Annual growth in China’s exports and imports slowed in October, data showed on Saturday, reinforcing signs of fragility in the world’s second-largest economy that could prompt policymakers to roll out more stimulus measures. Exports have been the lone bright spot in the last few months, perhaps helping to offset soft domestic demand, but there are doubts about the accuracy of the official numbers amid signs of a resurgence of speculative currency flows through inflated trade receipts. Exports rose 11.6% in October from a year earlier, slowing from a 15.3% jump in September, the General Administration of Customs said. The figure was slightly above market expectations in a Reuters poll of a 10.6% rise.

A decline in China’s leading index on exports in October pointed to weaker export growth in the next two to three months, the administration said. “The economy still faces relatively big downward pressure as exports face uncertainties while weak imports indicate sluggish domestic demand,” said Nie Wen, an economist at Hwabao Trust in Shanghai. “The central bank may continue to ease policy in a targeted way.” Imports rose an annual 4.6% in October, pulling back from a 7% rise in September, and were weaker than expected. That left the country with a trade surplus of $45.4 billion for the month, which was near record highs.

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Really? Recovery?

• El-Erian: Strong Dollar Could Derail The Recovery (CNBC)

Mohamed El-Erian, the chief economic adviser to Allianz, has warned that policymakers don’t understand how much of a risk a strong dollar and volatile currency markets could pose to market “soundness” and the economic recovery. The former Pimco chief executive and co-chief investment officer said volatility had returned to currency markets as central banks diverge in their response to lackluster growth and deflation. This could result in “excessive movements” in currencies becoming a risk themselves, he said. “This (the strong dollar) is a key issue and I don’t think this is an issue that the markets or the policy makers have understood enough as yet—we have gone from a world where there was relative harmony in what central banks were doing—to a world where there was diverging direction and for good reasons: the economies are doing different things,” he told CNBC on Friday.

“If the other parts of the policy apparatus do not respond, then the only market that accommodates these divergent trends is the currency markets. I could tell you that, as someone who participates in the markets, this poses a threat to volatility and market soundness as a whole and the sorts of excessive movements that may result in currencies becoming a risk themselves to economic recovery,” he added. El-Erian’s comments come as the the Russian rouble tumbled to new lows on Friday before bouncing back. The rouble hit its weakest-ever level against the U.S. dollar early on Friday, sliding to 48.6, before recovering to trade at 46.2 within a few hours – 1.3% higher on the day.

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There are far more tricks than regulators.

• G20 Experts To Act On Corporations’ Internal Loans That Help Cut Tax (Guardian)

Tax experts responsible for the G20-led shakeup of international tax rules are discussing radical measures to bar global corporations from using internal loans, that bear no relation to their borrowing needs, in order to avoid tax. If adopted, the move could wipe out vast swaths of the financial industry at a stroke in countries such as Switzerland and Luxembourg, which have for years courted the intra-group financing offices of multinational firms by operating friendly local tax regimes. Raffaele Russo, one of the OECD tax experts leading the reform programme that has come in response to increasingly aggressive tax planning by multinationals, told the Guardian that if the proposals were backed, “this will be the end of [tax] base erosion and profit shifting using intra-group financing”. Measures to tackle multinationals taking large tax deductions for interest payments on loans within the same group are hinted at in a report published in September.

It said: “A formulary type of approach which ties the deductible interest payments to external debt payments may lead to results that better reflect the business reality of multinational … groups.” While other measures are also on the table, pressure to take radical steps to stamp out intra-group loans contrived for tax avoidance has grown this week after revelations about tax agreements rubber-stamped by the Luxembourg tax office. Luxembourg finance minister Pierre Gramegna used a public session during a meeting of European finance ministers in Brussels to deliver a statement in reaction to this week’s revelations about tax agreements with multinationals. “My country [has] come under scrutiny in the latest days. The rulings of Luxembourg are being done according to the national laws of Luxembourg and also according to international conventions. What is being done is totally legal.” He acknowledged rulings and weak tax treaties had led to “situations where companies are paying no taxes or very little taxes [which] is obviously not a good result”.

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Sounds dull. But profitable.

• Luxembourg, The Country Where Accountants Outnumber Police 4:1 (Guardian)

Welcome to Luxembourg, where accountants outnumber the police by four to one – and people enjoy some of the highest living standards in the world. “Conquer the world from your Luxembourg headquarters,” is the title of one government-sponsored marketing brochure promoting the Grand Duchy and its “business-friendly legal and fiscal framework”. “Political decision-makers are very accessible to companies,” it promises. The big four accountancy firms tend to agree, if a 2009 presentation by PricewaterhouseCoopers is anything to go by: the authorities are “flexible and welcoming”, “easily contactable” and offer “a readiness for dialogue and quick decision-making” it said in the document, part of a trove of documents obtained by the International Consortium of Investigative Journalists and shared with the Guardian. The big four are huge global enterprises that employ 750,000 people in total and have combined earnings of $117bn (£74bn), according to the latest figures – making them bigger than the economy of Angola.

Their footprint is especially large in Luxembourg, where they employ 6,200 people – among a population of 550,000. The Grand Duchy’s economy has come to be dominated by high finance since the decline of its steel factories. Today, financial services are Luxembourg’s biggest earner, accounting for more than a third of the national income. Almost half the workforce are foreigners, with 44% of employees commuting in daily from France, Germany and Belgium. Despite the financial crisis, accountancy has been booming. Deloitte has increased its Luxembourg staff by 142% in less than a decade to 1,700. PwC is comfortably ahead of Deloitte, its nearest rival. The biggest of the big four, which once described itself as “an ambassador of Luxembourg abroad”, it employs more people in Luxembourg than the country’s police force: it has 2,300 staff, while the gendarmerie has 1,600 officers. That makes it the country’s ninth largest employer, behind steelmaker ArcelorMittal and French bank BNP Paribas.

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Good to see Taibbi back at Rolling Stone, and back to what he does best.

• The $9 Billion Witness: Meet JPMorgan Chase’s Worst Nightmare (Matt Taibbi)

She tried to stay quiet, she really did. But after eight years of keeping a heavy secret, the day came when Alayne Fleischmann couldn’t take it anymore. “It was like watching an old lady get mugged on the street,” she says. “I thought, ‘I can’t sit by any longer.'” Fleischmann is a tall, thin, quick-witted securities lawyer in her late thirties, with long blond hair, pale-blue eyes and an infectious sense of humor that has survived some very tough times. She’s had to struggle to find work despite some striking skills and qualifications, a common symptom of a not-so-common condition called being a whistle-blower. Fleischmann is the central witness in one of the biggest cases of white-collar crime in American history, possessing secrets that JPMorgan Chase CEO Jamie Dimon late last year paid $9 billion (not $13 billion as regularly reported – more on that later) to keep the public from hearing.

Back in 2006, as a deal manager at the gigantic bank, Fleischmann first witnessed, then tried to stop, what she describes as “massive criminal securities fraud” in the bank’s mortgage operations. Thanks to a confidentiality agreement, she’s kept her mouth shut since then. “My closest family and friends don’t know what I’ve been living with,” she says. “Even my brother will only find out for the first time when he sees this interview.” Six years after the crisis that cratered the global economy, it’s not exactly news that the country’s biggest banks stole on a grand scale. That’s why the more important part of Fleischmann’s story is in the pains Chase and the Justice Department took to silence her.

She was blocked at every turn: by asleep-on-the-job regulators like the Securities and Exchange Commission, by a court system that allowed Chase to use its billions to bury her evidence, and, finally, by officials like outgoing Attorney General Eric Holder, the chief architect of the crazily elaborate government policy of surrender, secrecy and cover-up. “Every time I had a chance to talk, something always got in the way,” Fleischmann says. This past year she watched as Holder’s Justice Department struck a series of historic settlement deals with Chase, Citigroup and Bank of America. The root bargain in these deals was cash for secrecy. The banks paid big fines, without trials or even judges – only secret negotiations that typically ended with the public shown nothing but vague, quasi-official papers called “statements of facts,” which were conveniently devoid of anything like actual facts.

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Going strong. What sanctions?

• Russia, China Close To Reaching 2nd Mega Gas Deal (RT)

Moscow and Beijing have agreed many of the aspects of a second gas pipeline to China, the so-called western route. It’s in additional to the eastern route which has already broken ground after a $400 billion deal was clinched in May. “We have reached an understanding in principle concerning the opening of the western route,” the Russian President told media ahead of his visit on November 9-11 to the Asia Pacific Economic Conference (APEC). “We have already agreed on many technical and commercial aspects of this project laying a good basis for reaching final arrangements,” the Russian President added.

In May, China and Russia signed a $400 billion deal to construct the Power of Siberia pipeline, which will annually deliver 38 billion cubic meters (bcm) of gas to China. The Power of Siberia, the eastern route, will connect Russia’s Kovykta and Chaynda fields with China, where recoverable resources are estimated at about 3 trillion cubic meters. The opening of the western route, the Altai, would link Western China and Russia and supply an additional 30 bcm of gas, nearly doubling the gas deal reached in May. When the Altai route is complete China will become Russia’s biggest gas customer. The ability to supply China with 68 bcm of gas annually surpasses the 40 bcm it supplies Germany each year.

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The victor writes the history.

• Catalans Recast Spanish History in Drive for Independence (Bloomberg)

In a former market hall in Barcelona, Catalans are busy championing a historic defeat. A museum and cultural center built around the 300-year-old ruins of the city aims to educate visitors about the 1714 siege during the War of Spanish Succession. The battle lasted more than a year and destroyed the old neighborhood amid “epic and heroic resistance,” according to the center’s pamphlet. For Catalan nationalists, the defeat marks the end of their region’s freedom and the beginning of their domination by Madrid. For others, there’s a catch: the version of events on display at the museum, funded by the regional government that’s been pushing for an independence referendum, is unrecognizable to most historians outside Catalonia. “It’s science fiction,” said Alejandro Quiroga, a lecturer in Spanish history at Newcastle University in England who comes from Madrid. “The distortions are tremendous. That’s part of the process of nation building.”

As they develop a narrative around national identity, arguments over the interpretation of history have for decades dogged the Catalan nationalists. Barcelona’s leadership gained control of education under the constitutional settlement that followed the death in 1975 of General Francisco Franco, who had banned the use of the Catalan language. The movement has transformed into a full-blown campaign to leave Spain over the past three years. This weekend, activists will hold an unofficial independence vote in defiance of a Spanish court ruling and the Madrid government. “It fits in with my nationalistic feelings,” said Eugenio Suarez, 61, an industrial engineer who visited the museum on Oct. 14, a little over a year after it first opened. “I am a nationalist for other reasons, so I come here to remember what Barcelona and Catalonia was and still is.” In the northeast of the country, Catalonia is the largest economic region, where output per capita is 17% above the European Union average compared with 5% below for Spain as a whole.

The risk of political upheaval temporarily halted a rally in Spanish bonds last month. Unionists and some historians say that successive regional governments have contributed to building a Catalan majority by promoting a partial, at times false, version of the region’s history through its schools and cultural institutions. In Spanish history books, Felipe V’s troops overran Barcelona at the end of a 14-month siege, bringing an end to the war. The way the Catalan nationalists tell it, that defeat marks the end of a golden age for Catalonia. The attack “led to the capitulation of Barcelona and the loss of Catalonia’s freedoms,” says the leaflet handed out to visitors at the center in the El Born district. The museum shows “the vibrant and dynamic Barcelona of 1700,” while the defeat “is a symbol of the historic fight of the citizens to defend the constitutions and institutions of the country.”

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” .. a warning for Greek politicians to “stop promising people things that we cannot deliver. Then things are going to go wrong.”

• Greek Minister: Markets Are Sending Us A Message (CNBC)

As Greece waits to hear whether it will be allowed to withdraw early from a bailout program that saved the country from insolvency, its minister of public order said a recent rise in Greek interest rates is a warning that the country can’t undo reforms. Minister Vassilis Kikilias, on a visit to New York and Washington, D.C., said investors’ negative reaction toward Greece in recent weeks wasn’t due only to its attempt to leave the bailout ahead of schedule, but also about “global” events in the markets. He did add, however, that it was also a warning for Greek politicians to “stop promising people things that we cannot deliver. Then things are going to go wrong.”

Greek stocks and government bonds sold off when Greek Prime Minister Antonis Samaras announced he would try to leave the multibillion-dollar bailout program early. The European Commission took up consideration of the proposal this week. But yields also rose on fears there will be snap elections in the spring and the leader of the radical left, Alexis Tsipras, might win the election. He is currently leading in the polls. Kikilias said he hopes and believes there won’t be an election next year. A goal of the government, he said, is to change the structure of the Greek government in order to have more consistent elections cycles.

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“Go to a tropical island for the rest of the year!”

• Danish Women Urged to Drop Work Till 2015 to Protest Pay Gap (Bloomberg)

Women, take today off! In fact, take the rest of the year off! Danish unions representing more than 1.1 million private and public employees, at least half the country’s workforce, are urging women members to do just that – and only half in jest – to protest a 17% pay gap to men. “It’s a way to remove the gender pay gap in a split second,” Lise Johansen, head of the campaign for the Danish Confederation of Trade Unions, said in a telephone interview. “Go to a tropical island for the rest of the year!” While “everyone knows it’s a joke,” the protest, now in its fifth year, highlights the challenges Denmark faces even as it ranks among the countries with the smallest pay disparities, Johansen said.

Scandinavian countries have been the most successful in closing the gender gap, the World Economic Forum said in a report last week. Denmark ranked number five in the study of 142 countries, trailing Iceland, Finland, Norway – where the government has recently made military service mandatory for women – and Sweden. Yet in terms of wage equality for similar work, Denmark ranked 38, according to the report.

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This weird story just keeps going. Latest drone was spotted yesterday.

• Drones Over French Nuclear Sites Prompt Parliamentary Probe (Bloomberg)

French parliament will hold hearings this month on the threat posed by drones to nuclear installations even as the mystery of who is behind a series of flights over more than a dozen sites remains unsolved. Reactor builder Areva confirmed today a drone had been spotted over one of its sites while two more plants operated by Electricite de France (EDF) were visited by the remote-controlled flying objects this week. Over a little more than a month, drones have been seen at 14 of EDF’s 19 plants, according to a person familiar with the events. The flights are “irresponsible,” deputy Jean-Yves Le Deaut, a member of the Socialist Party, said by telephone. “It’s giving people ideas and suggests parallels with cyber-attacks.”

The lawmaker will head a one-day public hearing Nov. 24 into whether drone flights can be dangerous to atomic installations. Organized by the parliament’s office for evaluation of scientific and technological choices, OPECST, it will include representatives from the country’s nuclear and drone industries as well as security experts, he said. “Nuclear isn’t for staging a video game,” Le Deaut said. “It’s urgent to stop this mess.” The flights haven’t so far inflicted damage nor has anyone publicly claimed responsibility. While Interior Minister Bernard Cazeneuve has said an inquiry is underway, the flights have continued for more than a month, the latest at the Areva installation last night. Two men are being investigated for flying an aircraft in a protected zone near EDF’s Belleville-sur-Loire nuclear plant, AFP reported, citing Bourges prosecutor Vincent Bonnefoy. The incident isn’t related to the flights at other nuclear sites, he was quoted as saying.

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Debt Rattle October 27 2014

Oct 272014
 
 October 27, 2014  Posted by at 11:38 am Finance Tagged with: , , , , , , , ,  1 Response »


Unknown California State Automobile Association signage 1925

• Stock Markets Threatened By Collapse In Chinese Consumer Demand (Questor)
• Scariest Day For Market Looms, And It’s Not Halloween (CNBC)
• What Next After China’s Foreign Reserves Fall? (MarketWatch)
• 15 Big Oil Sell Signals That Warn Of A 50% Stock Crash (Paul B. Farrell)
• Oil Speculators Bet Wrong as Rebound Proves Fleeting (Bloomberg)
• Goldman Cuts Oil Forecasts as US Market Clout Increases (Bloomberg)
• A Scary Story for Emerging Markets (Worth Wray)
• Fed-Driven ‘Locomotive USA’ (Ivanovitch)
• U.S. Gains From ‘Good’ Deflation as Europe Faces the Bad and Ugly (Bloomberg)
• Spain’s Export-Led Recovery Comes At Price Of EU-Wide Deflationary Vortex (AEP)
• Europe’s Bank Test Celebrations Mask Mounting Challenges (Reuters)
• Europe Must Act Now To Avoid ‘Lost Decade (FT)
• Italy Under Pressure As Nine Banks Fail Stress Tests (FT)
• Italy’s Stress Test Fail: Attack Of The ‘Drones’ (CNBC)
• Italy Market Watchdog Bans Short Selling On Monte Paschi Bank Shares (Reuters)
• Europe’s Banks Are Still a Threat (Bloomberg)
• Draghi Sets Stimulus Pace as ECB Reveals Covered-Bond Purchases (Bloomberg)
• German Business Confidence Drops For 6th Straight Month (AP)
• Hundreds Give Up US Passports After New Tax Rules Start (Bloomberg)
• Arctic Ice Melt Seen Doubling Risk of Harsh Winters in Europe, Asia (Bloomberg)
• Nurse’s Lawyers Promise Legal Challenge to Ebola Quarantine (NBC)

I can repeat this every single day: China is in much worse shape than we know from official numbers.

• Stock Markets Threatened By Collapse In Chinese Consumer Demand (Questor)

The capitulation of the Chinese consumer threatens to drag stock markets around the world into a death spiral as one of the pillars of global growth is undermined. Figures from the world’s largest consumer goods groups last week laid bare the shocking weakness of consumer demand in China, which threatens to pull down global stock markets that have been priced to perfection by more than five years of extraordinary monetary policy and asset price inflation. For China to avoid a hard landing it was essential for consumer spending to pick up from where centrally planned infrastructure spending left off, but there are signs this simply isn’t happening. Unilever, the world’s third largest consumer goods company, said they were surprised by the “unusually rapid” slowdown in Chinese consumer demand. The company said that sales growth had slumped to about 2pc during the nine months ended September, down from about 8pc growth last year. The slowdown in Chinese sales growth to about 2pc is also an average – there are pockets where trading is far worse.

The company added that sales to the big hypermarkets in the country are less than 2pc or even negative in some cases. Nestle, the worlds largest food company, recently reported falling sales for the first nine months of the year and also warned of “challenging” Chinese trading conditions. The fear of China going backwards is now becoming a reality, as the Chinese consumer is not picking up from where capital investment left off. Immediately after the 2008 banking crisis China launched the largest stimulus package and infrastructure investment program the world has ever seen. China has used 6.6 gigatons of cement in the last three years compared to 4.5 gigatons the USA has used in 100 years. The stimulus package increased fixed capital investment to 50pc of GDP, while domestic consumption withered to only 35pc. The lopsided economy led Hu Jintao, the President of China until 2012, to call the period of growth “unstable, unbalanced, uncoordinated and unsustainable.” The hope was it would eventually kick start consumer spending.

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• What Next After China’s Foreign Reserves Fall? (MarketWatch)

Should we be worried that China’s prodigious foreign-exchange accumulation has gone into reverse? Last week, China’s forex regulator reassured markets that there was no need to worry about a $100 billion fall in reserves in the third quarter — the largest such drop since 1996. China’s foreign reserve pile fell to $3.89 trillion from $3.99 trillion at the end of June. Guan Tao, head of China’s State Administration of Foreign Exchange’s balance-of-payments department, cited the end of the Federal Reserve’s quantitative easing policy as a main factor contributing to the decline, adding there were no risks or problems. But some analysts are less sanguine, especially when this rare dwindling of China’s cash pile coincides with the economy growing at its slowest pace in five years, according to third-quarter data.

Société Générale strategist Albert Edwards writes that a reserve decline of this magnitude reflects deteriorating Chinese competitiveness from its excessively strong real foreign-exchange rate. Daiwa Research, meanwhile, highlights the significance of these outflows in undermining the ability of the People’s Bank of China (PBOC) to expand its balance sheet. In recent decades, China’s reserve accumulation has been the fuel for its massive money-supply growth. Thanks to twin capital and trade surpluses, the PBOC was able to behave like a massive money-printing machine. Now, as reserve accumulation goes into reverse, so too does the money supply. M2 – which includes currency, checking deposits and some time deposits — grew at just at 12.9% year-on-year for September, versus 14.7% year-on-year for June. SocGen’s Edwards warns that China faces a looming credit crunch and is already on a deflationary precipice. China’s consumer inflation rate slowed to 1.6% in September, down from 2% previously.

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Fed meeting to announce end of QE on Wednesday.

• Scariest Day For Market Looms, And It’s Not Halloween (CNBC)

The Federal Reserve in the coming week is expected to end its quantitative easing program – the much-anticipated action that’s been at the very heart of the market’s fears. After a two-day meeting, the Fed Wednesday is expected to announce the completion of its bond purchases, based on improvements in the economy. Markets will now look forward to the time – expected at some point next year—when the Fed believes the economy is strong enough for it to raise short-term interest rates from zero. The economic calendar also heats up in the week ahead, with durable goods Tuesday; third-quarter GDP Thursday, and income and spending and employment costs data Friday. All of the data becomes even more important as the markets attempt to interpret the Fed’s process of normalizing rates.

The Fed “tries to reinvigorate corporate risk taking, and finally we get to the point where corporate risk taking picks up again, and they’re supposed to remove the accommodation. That was just a bridge,” said Tobias Levkovich, chief equity strategist at Citigroup. While recent market volatility has been blamed on everything from Ebola to a global growth scare, one common thread going through all markets is the underlying concern that the Fed’s removal of its easing program will be the financial equivalent of taking off the training wheels. Markets already have stumbled, and analysts expect more volatility ahead as they continue to move closer to a world with more normal interest rate levels.

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“Graham says the next bear will hit around election time 2016. The third $10 trillion stock crash early in this new 21st century.”

• 15 Big Oil Sell Signals That Warn Of A 50% Stock Crash (Paul B. Farrell)

Big Oil investors beware: “The day of the huge international oil company is drawing to a close,” warned the Economist last year. Since then, Big Oil sell signals have gotten louder, more frequent, confirming fears of a crash in Big Oil, in the entire energy industry, rippling through Wall Street stocks, the global economy. When? Before the new president is elected, in 2016. Scenario like 2008, when McCain lost. Yes, the overhyped shale boom was supposed to make America energy independent, investors happy. Wrong. Risks are rocketing, volatility increasing. Why? Big Oil is vulnerable, they’re running scared, making bigger, costlier, deadlier and dumber bets that threaten the global economy. Worse, Big Oil is in denial about their high-risk, self-destructive gambles.

Main Street’s also in denial. Yes, we’re in a rare historical event now. Two bulls back-to-back, with no bear market in between. Makes investors feel it’ll go forever, like 1999. True, stocks have been roaring since March 2009 when the bottom hit at 6,547 on the Dow after a 54% drop from the October 2007 high of 14,164. Since, a steady climb to a recent DJIA record at 17,279, with gains over 250%. But now our Double Bull has stopped roaring. But market giants are warning, bye-bye bull. Jeremy Grantham, founder of the $117 billion GMO money-management firm, predicts another megatrillion dollar crash, repeating the bears of 2000 and again in 2008. Wall Street lost roughly $10 trillion each time. Graham says the next bear will hit around election time 2016. The third $10 trillion stock crash early in this new 21st century.

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“People came in and tried to pick the bottom, and they picked wrong.”

• Oil Speculators Bet Wrong as Rebound Proves Fleeting (Bloomberg)

Hedge funds rushed back into oil too quickly, boosting bullish bets amid a rebound last week, only to then watch surging U.S. crude supplies push prices right back down to a two-year low. The net-long positions in West Texas Intermediate futures rose 5.7% in the seven days ended Oct. 21, U.S. Commodity Futures Trading Commission data show. Short bets shrank 20%, the most in three months, while longs dropped 2.8%. After rising as analysts speculated prices had reached a floor, WTI sank again after stockpiles climbed nationally and at Cushing, Oklahoma, the delivery point for New York Mercantile Exchange futures. It fell to $80.52 on Oct. 22, the lowest settlement since June 2012, and ended the week down 24% from the year’s high.

The U.S. benchmark, which slipped into a bear market Oct. 9, may dip to $75 by the end of year, Bank of America Corp. said Oct. 23. The “swiftness of the selloff” attracted bargain hunters, John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said by phone Oct. 24. “People came in and tried to pick the bottom, and they picked wrong.” U.S. oil inventories increased 7.11 million barrels in the seven days ended Oct. 17 to 377.7 million, the Energy Information Administration said Oct. 22. Supply has grown by about 21 million in three weeks.

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A good call for once?

• Goldman Cuts Oil Forecasts as US Market Clout Increases (Bloomberg)

Goldman Sachs cut its forecasts for Brent and WTI crude prices next year on rising global supplies, predicting OPEC will lose influence over the oil market amid the U.S. shale boom. The bank is becoming more confident in the scale and sustainability of U.S. shale oil production and said U.S. benchmark prices need to decline to $75 a barrel for a slowdown in output growth. Brent will average $85 a barrel in the first quarter, down from a previous forecast of $100, and West Texas Intermediate will sell for $75 a barrel in the period, from an earlier estimate of $90, analysts including Jeffrey Currie wrote in a report. The biggest members of the Organization of Petroleum Exporting Countries are discounting supplies to defend market share rather than cutting production to boost prices that have collapsed into a bear market.

The highest U.S. output in almost 30 years is helping increase stockpiles as exporters including Saudi Arabia reduce prices to stimulate demand. “We believe that OPEC will no longer act as the first-mover swing producer and that U.S. shale oil output will be called upon to fill this role,” Goldman said in the report. “Our forecast also reflects the realization of a loss of pricing power by core-OPEC.” Any near-term OPEC production cut will be modest until there is sufficient evidence of a slowdown in U.S. shale oil production growth, according to the report. Global producers may need to cut almost 800,000 barrels a day of output next year to limit a build in inventories and ultimately balance the global oil market in 2016, Goldman said.

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“the global debt drama would end with an epic US dollar rally, a dramatic reversal in capital flows, and an absolute bloodbath for emerging markets … ”

• A Scary Story for Emerging Markets (Worth Wray)

In the autumn of 2009, Kyle Bass told me a scary story that I did not understand until the first “taper tantrum” in May 2013. He said that – in additon to a likely string of sovereign defaults in Europe and an outright currency collapse in Japan – the global debt drama would end with an epic US dollar rally, a dramatic reversal in capital flows, and an absolute bloodbath for emerging markets. Extending that outlook, my friends Mark Hart and Raoul Pal warned that China – seen then by many as the world’s rising power and the most resilient economy in the wake of the global crisis – would face an outright economic collapse, an epic currency crisis, or both. All that seemed almost counterintuitive five years ago when the United States appeared to be the biggest basket case among the major economies and emerging markets seemed far more resilient than their “submerging” advanced-economy peers.

But Kyle Bass, Mark Hart, and Raoul Pal are not your typical “macro tourists” who pile into common-knowledge trades and react with the herd. They are exceptionally talented macroeconomic thinkers with an eye for developing trends and the second- and third-order consequences of major policy shifts. On top of their wildly successful bets against the US subprime debacle and the European sovereign debt crisis, it’s now clear that they saw an even bigger macro trend that the whole world (and most of the macro community) missed until very recently: policy divergence. Their shared macro vision looks not only likely, not only probable, but IMMINENT today as the widening gap in economic activity among the United States, Europe, and Japan is beginning to force a dangerous divergence in monetary policy.

In a CNBC interview earlier this week from his Barefoot Economic Summit (“Fed Tapers to Zero Next Week”), Kyle Bass explained that this divergence is set to accelerate in the next couple of weeks, as the Fed will likely taper its QE3 purchases to zero. Two days later, Kyle notes, the odds are high that the Bank of Japan will make a Halloween Day announcement that it is expanding its own asset purchases. Such moves only increase the pressure on Mario Draghi and the ECB to pursue “overt QE” of their own.
Such a tectonic shift, if it continues, is capable of fueling a 1990s-style US dollar rally with very scary results for emerging markets and dangerous implications for our highly levered, highly integrated global financial system.

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“No other country buys more than it sells to the rest of the world”. The curse of the reserve currency.

• Fed-Driven ‘Locomotive USA’ (Ivanovitch)

No other country buys more than it sells to the rest of the world: America’s net contribution to the growth of the world economy in the first eight months of this year amounted to $480.8 billion, or about 3% of its GDP. And here is a striking contrast: Germany, the world’s fourth-largest economy, is currently getting a net contribution from the rest of the world to the tune of $280 billion – nearly 7% of its GDP. Not even China is sucking so much demand out of the world economy. In the year to the second quarter, China’s trade surplus is estimated at about 2% of its GDP. Those taking potshots at the U.S. government’s foreign policy have a point here that could strongly resonate with the American public, because exports directly or indirectly support more than 11 million American jobs, or close to one-tenth of the country’s latest employment numbers.

It might, therefore, be a good idea to help the Fed’s efforts to steady the economy by getting Germany, China and other large surplus countries to generate more growth from their domestic demand. We may then be able to sell them something instead of being their dumping ground: In the first eight months of this year, our trade deficits with Germany and China were up 14% and 4%, respectively, from the year earlier. But don’t hold your breath for such actions by Washington, or by multilateral agencies whose job it is to ensure balanced trade relationships in the world economy. Nothing of the sort will happen. As in the past, large trade surplus countries won’t budge. They know that during the forthcoming elections – starting with the mid-term Congressional elections next month and culminating with the U.S. presidential contest in 2016 – the Fed will do everything possible to keep economy and employment in a reasonably good shape.

That, of course, means that the locomotive USA will be an increasingly steady pillar of global output, and an expanding market for export-led economies. Germany’s sinking economy, for example, will continue to force local companies to seek salvation on external markets. An apparently rising political hostility with Russia seems to be turning German businesses toward an open, properly regulated and welcoming American market. Problems with China will also cause Germany to lower its formidable export boom on the U.S. That is a conclusion one may draw from the analysis of Sebastian Heilemann, a prominent German sinologist and a director of the Mercator Institute for China Studies (MERICS) in Berlin. Ominously, he is talking about the “dark clouds” in Chinese-German relations, saying that German companies are suffering from Chinese (get the euphemism) “reverse engineering,” and from increasing administrative difficulties of doing business in the Middle Kingdom.

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There’s no such thing as good deflation.

• U.S. Gains From ‘Good’ Deflation as Europe Faces the Bad and Ugly (Bloomberg)

When it comes to deflation there’s the good – and there’s the bad and ugly. Europe faces the risk of the latter as it teeters on the edge of a recession that could trigger a debilitating dive in prices and wages. The U.S., meanwhile, may end up with the more benign version as surging oil and gas supplies push energy costs down and the economy ahead. “Bad deflation weakens growth,” Nancy Lazar, co-founder and a partner at Cornerstone Macro LP in New York, wrote in a report to clients this month. “Good deflation lifts growth.” Lazar also co-founded International Strategy & Investment Group LLC more than 20 years ago. That’s welcome news for U.S. investors. Billionaire Paul Tudor Jones, one of the most successful hedge-fund managers, said on Oct. 20 that U.S. stocks will outperform other equity markets for the rest of the year, according to two people who heard him speak at the closed-door Robin Hood Investors conference in New York.

Hedge fund manager David Tepper, who runs the $20 billion Appaloosa Management LP, told the same conference the following day that investors should bet against the euro, two people familiar with his remarks said. The Standard & Poor’s 500 Index has risen 6.3% so far this year, while the Stoxx Europe 600 Index has fallen 0.3%. The euro is down 7.8% against the dollar since the start of 2014. Treasuries have returned 5.3% this year, compared with 7.6% for German bunds and 15% for Greek debt, according to Bloomberg World Bond Indexes. The U.S. has the “best hand” among nations, while Europe is “the sick one,” Jamie Dimon, chief executive officer of JPMorgan Chase & Co. in New York, said at an Oct. 21 event held by the Urban Land Institute in New York.

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Pushing wages down with unemployment at 27.5% is the easy part. In a currency union, you’re going to export those low wages too, though. And that will implode the EU.

• Spain’s Export-Led Recovery Comes At Price Of EU-Wide Deflationary Vortex (AEP)

[..] A deal reached with Renault after much soul-searching in 2012 cuts entry pay for new workers by 27.5pc, to roughly €17,000 a year (£13,400). Older workers keep their jobs at frozen pay, but with fewer holidays and tougher conditions. Joaquin Arias from the trade union federation CCOO said the terms amounted to blackmail. “The alternative was slow death. We would never have accepted such a plan if the crisis hadn’t been so bad.” Wage costs are now 40pc below levels in comparable French plants in France, the chief reason why Renault and Peugeot have cut their output of vehicles in their home country by half over the last decade. French unions may rage against “social dumping”, but they now face the asphyxiation of their industry unless they too knuckle under. “The French factories are going through exactly what we faced five years ago. It is very hard for everybody, but they too are having to follow the Spanish model,” said Mr Estevez. [..]

Fernando de Acuña, head of Spain’s top property consultancy RR de Acuña, warns that the country is going through an illusionary mini-bubble, with people betting on a fresh cycle in the housing market when the crippling effects of the last boom-bust cycle have yet to be cleared. “We think prices will fall by another 20pc over the next three years. There is still an overhang of 1.7m unsold homes in an annual market of around 230,000. The developers have 467,000 units on their books, and half of these are indirectly controlled by the banks. It is extend and pretend. There are another 150,000 in foreclosure proceedings that are backed up because the courts are saturated,” he said. “People don’t want to hear any of this. We were called criminals and terrorists when we warned in 2007 the country was going to Hell, but we were right, because we base our analysis on the facts and not on wishful thinking,” he said.

It has always been debatable whether Spain can hope to pull itself out of a low-growth trap by relying on exports alone, given that it still has a relatively closed economy with a trade gearing of just 34pc of GDP, far lower than Ireland at 108pc. The current account is already slipping back into deficit in any case as imports surge, suggesting that Spain is still nowhere near a competitive equilibrium within the eurozone. It is already “overheating” in a sense even with 5.6m people unemployed. The International Monetary Fund says Spain’s exchange rate is up to 15pc overvalued. Ominously, the export boom has been fading despite the success of the car industry. Total shipments rose just 1pc in the year to August compared with the same period in 2013, with falls of 11pc to Latin America, and of 13pc to the Middle East. Exports actually contracted by 5pc in August from a year earlier.

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“One-fifth of European banks are at risk of insolvency … ”

• Europe’s Bank Test Celebrations Mask Mounting Challenges (Reuters)

Investors were spared immediate pain on Sunday after the European Central Bank’s landmark banking health check did not force massive capital hikes amongst the euro zone’s top lenders. But the sector’s long-term attractiveness has been damaged by revelations of extra non-performing loans and hidden losses that will dent future profits. The ECB said on Sunday the region’s 130 most important lenders were just €25 billion ($31.69 billion) short of capital at the end of last year, based on an assessment of how accurately they had valued their assets and whether they could withstand another three years of crisis. The amount of new money needed falls to less than €7 billion after factoring in developments in 2014, well shy of the €50 billion of extra cash investors surveyed by Goldman Sachs in August were expecting.

That means existing investors will only be asked for a fraction of the demand they expected in order to maintain their shareholdings. But, those who read the details of the ECB’s proclamation on the health of the euro zone banking sector would have seen more ominous signs too, as the ECB pointed to the amount of work that remains to be done to restore the region’s lenders. The review said an extra €136 billion of loans should be classed as non-performing – increasing the tally of non-performing loans by 18% – and that an extra €47.5 billion of losses should be taken to reflect assets’ true value. “Banks face a significant challenge as the sector remains chronically unprofitable and must address their €879 billion exposure to non-performing loans as this will tie-up significant amounts of capital,” accountancy firm KPMG noted.

Others took a bleaker view. “One-fifth of European banks are at risk of insolvency,” said Jan Dehn, head of research at Ashmore, referencing the fact that one-fifth of banks fell shy of the ECB’s pass mark at the end of last year. He added that the ECB’s efforts to boost the euro zone’s sluggish growth through pumping money into the economy would not work if banks were too poorly capitalised to lend. After the ECB adjusted banks’ capital ratios to reflect supervisors’ assessments of banks’ asset values, 31 had core capital below the 10% mark viewed by investors as a safety threshold, while a further 28 had ratios just 1 percentage point above.

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That headline could just as well be 5 years old. Nothing changed. Just new shades of porcine lipstick.

• Europe Must Act Now To Avoid ‘Lost Decade (FT)

The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policy makers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly. How is this affecting the markets? The recent rally in US fixed income is materially different than when rates last approached 2%. Previously, the Federal Reserve was actively managing the yield curve to reduce long-term borrowing costs in order to stimulate the economy. The current rally is caused by a massive deflationary wave unleashed upon the US by beggar-thy-neighbour policies in Europe and Asia.

The precipitous decline in energy and commodity prices and competitive pressures on prices for traded goods will probably push inflation, as measured by the Fed’s favoured personal consumption expenditures index, back down toward 1%. This raises the likelihood that any increase in the policy rate by the Fed will be pushed into 2016 or later. With inflationary expectations falling and the relative attractiveness of US Treasury yields over German Bunds and Japanese government bonds, US long-term rates are likely to continue to be well supported with limited room to rise and a dynamic that could push them lower from here. In the real economy, the decline in energy prices should offset the effect of reduced exports, which is supportive of US growth in the near term. This will help equities recover from the recent storm of volatility as we move deeper into the fourth quarter, which is a time of seasonal strength for the stock market. However, this may prove to be the rally to sell. Results from currency translations for large, multinational companies will weigh heavily on S&P 500 earnings in the first half of 2015.

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Leave the euro, and restructure all bank debt. It’s the only thing that makes any sense at all. But it’s not even considered.

• Italy Under Pressure As Nine Banks Fail Stress Tests (FT)

Italy’s central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector. Officials at the Bank of Italy criticised parameters in regulatory stress tests as unrealistically harsh on Italian banks and disputed the exact number of failures, after nine Italian lenders fell short in a comprehensive review unveiled by the European Central Bank. Across the euro area, some 25 banks emerged with capital shortfalls following an unprecedented regulatory effort aimed at dispelling the cloud of uncertainty surrounding the European banking sector’s health.

The announcement represents the culmination of more than a year of intensive work costing hundreds of millions of euros and involving thousands of officials and accountants – all aimed at restoring investor faith in European banks ahead of the launch of a unified banking supervisor in Frankfurt. The biggest failure was Banca Monte dei Paschi di Siena, which has already hired bankers at Citigroup and UBS to advise on its options after it received takeover approaches. German banks emerged largely unscathed, with only one technical failure, while Spain clawed its way through with no shortfalls.

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Italy’s “public debt-to-GDP ratio was 134% in the second quarter of 2014, compared to 94% for the euro zone as a whole”.

• Italy’s Stress Test Fail: Attack Of The ‘Drones’ (CNBC)

Italy’s report card was by far the worst from this weekend’s European bank stress tests, with nine of its 15 banks tested failing to reach the levels of capital required. The country’s relationship with European authorities could get increasingly fractious, with the European Commission yet to approve its 2015 budget. And tensions are set to continue as its banks look to raise more capital than any other country to reach ECB requirements at a time when the Italian economy is back in recession. There was a “surgical targeting of Italian banks with asset quality review (AQR) drones (by the ECB),” according to Carlo Alberto Carnevale-Maffe, professor of strategy at Italy’s Bocconi University. “The ECB targeted the banks with the lowest level of transparency and governance, and the highest links with the political system,” he told CNBC.

Unicredit and Intesa Sanpaolo, the country’s two biggest lenders, both passed the tests, but some of their smaller counterparts are struggling as the economy stagnates, and the level of sovereign debt on their balance sheets starts to look more worrying. While household debt levels in Italy are relatively low, its public debt-to-GDP ratio was 134% in the second quarter of 2014, compared to 94% for the euro zone as a whole. Federico Ghizzoni, chief executive of UniCredit, told CNBC he was “very satisfied” with his bank’s result and added: “For the system in general, the results including what has been done in 2014 is OK.” Ghizzoni predicted there will be an increase in mergers and acquisitions in the Italian banking sector as a result of the tests.

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World’s oldest bank turns into merger target.

• Italy Market Watchdog Bans Short Selling On Monte Paschi Bank Shares (Reuters)

Italy’s Consob has banned short selling on Monte dei Paschi’s shares on Monday and Tuesday, the Italian market regulator said in a statement. Shares in Italy’s third biggest bank lost more than 17% on Monday after results from a pan-European health check of lenders showed on Sunday that Monte dei Paschi faced a capital shortfall of €2.1 billion – the biggest gap among the 130 lenders under scrutiny.

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“In one way, the ECB had good reason to be strict.” Question is then, why didn’t it?

• Europe’s Banks Are Still a Threat (Bloomberg)

The European Central Bank has just published the results of new “stress tests” on European Union banks, hoping to convince financial markets that the banking system is now strong enough to weather another crisis. This latest exercise is a big improvement over previous efforts, which were widely derided as too soft – but it’s still not good enough. The test had two parts. The first was a detailed examination of loans, to see whether they were worth what the banks said. This found that most of 130 banks under review had overvalued their assets – by a total of €47.5 billion ($60 billion) at the end of last year. The second part asked, with assets correctly valued, whether the banks had enough capital to safely endure another recession and financial-market shock. It found that 25 did not, and 13 of those need to raise €9.5 billion in capital, over and above what they’ve added so far this year.

This closer scrutiny has helped. Deutsche Bank AG raised €8.5 billion in equity this year to boost its chances of passing. Weak institutions, such as Portugal’s Banco Espirito Santo and Austria’s Volksbanken network, are restructuring or shutting down. By strengthening the system and increasing confidence in it, the ECB’s tests might reverse a two-year slump in private-sector lending. That’s the hope, anyway. Trouble is, even the new tests were pretty soft. Economists at Switzerland’s Center for Risk Management at Lausanne, for example, have put the capital shortfall for just 37 banks at almost €500 billion – as opposed to the roughly €10 billion reported by the ECB for its sample of 130. This more stringent test used a method that mimics how the market value of equity actually behaves under stress.

In one way, the ECB had good reason to be strict. It had to contend with doubts aroused by the previous unpersuasive tests. Also, it takes over as the euro area’s supranational bank supervisor on Nov. 4, so any lingering issues will be its responsibility. But it knew that if it were too tough, the blow to confidence could have plunged the EU back into crisis. The euro area already has a stalled recovery and stands on the brink of deflation; an alarming report on the banks might have done more harm than good. So the design of the exercise was compromised. It used a measure of capital that relies on banks to weight assets by risk — an opportunity to fudge the numbers. It ignored the credit freezes, forced asset sales and contagion that can cause huge losses in bad times. The worst-case scenario projected a fall in euro-area output of just 1.4%in 2015 (in 2009, it dropped 4.5%). And no governments default.

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It’s already crystal clear that there’s not enough to purchase: “In reality, it is what follows that will be important, or maybe more importantly, what doesn’t follow.”

• Draghi Sets Stimulus Pace as ECB Reveals Covered-Bond Purchases (Bloomberg)

Investors will be handed a clue today in to just how aggressive Mario Draghi is willing to be. At 3:30 p.m. in Frankfurt, the European Central Bank will reveal how much it spent on covered bonds last week after returning to that market for a third time as part of a renewed bid to stave off deflation. The central bank bought at least €800 million ($1 billion) of assets from Portugal to Germany in the three days since the program began on Oct. 20, traders said last week. Formal details will help them divine how quickly the ECB president can reach his target of expanding the institution’s balance sheet by as much as €1 trillion. “In terms of the ECB’s aspiration to expand its balance sheet, the market wants it all now,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London.

“There’s scope for immediate disappointment to the scale of the purchases we see today.” With the economy stuttering and inflation forecast to have stayed below 1% for a 13th month in October, Draghi is under pressure to do more. While central banks from the U.S. to Japan used large-scale asset purchases to bolster their balance sheets and kick-start lending, the ECB has so far refrained from such a step. German opposition to sovereign-bond purchases means officials have chosen covered bonds and asset-backed securities as the latest tools to help expand the balance sheet. While policy makers say their plans will spark new issuance, economists at firms including Morgan Stanley and Commerzbank say the central bank will probably need to buy other assets to reach the target.

Of the region’s €2.6 trillion covered-bond market, the ECB will only buy assets eligible under its collateral framework for refinancing loans, denominated in euros and issued by credit institutions in the euro area. Purchases will be announced weekly, starting today, and the pool of bonds eligible is about €600 billion, ECB Vice President Vitor Constancio said this month. ABS buying is scheduled to begin later this quarter and there are about €400 billion of such assets eligible to buy, according to Constancio. “Covered bond and ABS purchases appear to be the line of least resistance for the ECB,” said Jon Mawby, a London-based fund manager at GLG Partners LP, which manages $32 billion. “In reality, it is what follows that will be important, or maybe more importantly, what doesn’t follow.”

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Lowest in 22 months.

• German Business Confidence Drops For 6th Straight Month (AP)

Business confidence in Germany, Europe’s largest economy, has dropped for a sixth consecutive month as concerns over the turmoil in Ukraine and elsewhere continue to take their toll. The Ifo institute said Monday that its confidence index dropped to 103.2 points in October from 104.7 in September, as business leaders’ assessments of their current situation and their expectations for the next six months both fell. The government and independent economists have cut their growth forecasts for Germany after a string of disappointing industrial data for August. Economists warn if international crises escalate or Africa’s Ebola outbreak spreads the impact could become greater. Ifo’s survey is based on responses from about 7,000 companies in various sectors.

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All your bucks are belong to us.

• Hundreds Give Up US Passports After New Tax Rules Start (Bloomberg)

The number of Americans renouncing U.S. citizenship increased 39% in the three months through September after rules that make it harder to hide assets from tax authorities came into force. People giving up their nationality at U.S. embassies increased to 776 in the third quarter, from 560 in the year-earlier period, according to Federal Register data published yesterday. Tougher asset-disclosure rules that started July 1 under the Foreign Account Tax Compliance Act, or Fatca, prompted more of the estimated 6 million Americans living overseas to give up their passports. The appeal of U.S. citizenship for expatriates faded further as more than 100 Swiss banks began to turn over data on American clients to avoid prosecution for helping tax evaders.

The U.S., the only Organization for Economic Cooperation and Development nation that taxes citizens wherever they reside, stepped up the search for tax dodgers after UBS paid a $780 million penalty in 2009 and handed over data on about 4,700 accounts. Shunned by Swiss and German banks and with Fatca starting, more than 9,000 Americans living overseas gave up their passports over the past five years. Fatca requires U.S. financial institutions to impose a 30% withholding tax on payments made to foreign banks that don’t agree to identify and provide information on U.S. account holders. It allows the U.S. to scoop up data from more than 77,000 institutions and 80 governments about its citizens’ overseas financial activities..

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Winter time.

• Arctic Ice Melt Seen Doubling Risk of Harsh Winters in Europe, Asia (Bloomberg)

The decline in Arctic sea ice has doubled the chance of severe winters in Europe and Asia in the past decade, according to researchers in Japan. Sea-ice melt in the Arctic, Barents and Kara seas since 2004 has made more than twice as likely atmospheric circulations that suck cold Arctic air to Europe and Asia, a group of Japanese researchers led by the University of Tokyo’s Masato Mori said in a study published yesterday in Nature Geoscience. “This counterintuitive effect of the global warming that led to the sea ice decline in the first place makes some people think that global warming has stopped. It has not,” Colin Summerhayes, emeritus associate of the Scott Polar Research Institute, said in a statement provided by the journal Nature Geoscience, where the study is published.

The findings back up the view of United Nations climate scientists that a warmer average temperature for the world will make storms more severe in some places and change the character of seasons in many others. It also helps debunk the suggestion that slower pace of global warming in the past decade may suggest the issue is less of a problem. “Although average surface warming has been slower since 2000, the Arctic has gone on warming rapidly throughout this time,” he said.

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The mess the US makes of its ebola response reaches staggering proportions. How is it possible that it has been so hugely unprepared?

Breaking: 5-year old boy monitired for ebola in NY.

• Nurse’s Lawyers Promise Legal Challenge to Ebola Quarantine (NBC)

Lawyers for a nurse quarantined in a New Jersey hospital say they’ll sue to have her released in a constitutional challenge to state restrictions for health care workers returning to New Jersey after treating Ebola patients in West Africa. Civil liberties attorney Norman Siegel said Kaci Hickox, who was quarantined after arriving Friday at the Newark airport, shows no symptoms of being infected and should be released immediately. He and attorney Steven Hyman said the state attorney general’s office had cooperated in getting them access to Hickox. Late Sunday, a spokesman for New Jersey Gov. Chris Christie issued a statement saying that people who had come into contact with someone with Ebola overseas would be subject to a mandatory quarantine at home. It did not explain why Hickox was being held at the hospital, though it did say, “Non-residents would be transported to their homes if feasible and, if not, quarantined in New Jersey.”

Hyman told NBC News he wasn’t sure what the statement meant for Hickox’s release. “I think we’re getting closer to it,” he said. He and Siegel, speaking earlier outside Newark University Hospital, where she is quarantined, said they spent 75 minutes with her on Sunday. They said she was being kept in a tented area on the hospital’s first floor with a bed, folding table and little else — they said she was able to get a laptop computer with wi-fi access only Sunday. But they said she is not being treated. “She is fine. She is not sick,” Hyman said. Photos they released showed her in hospital garb peering through a plastic window of the tented-off area.

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Germany’s Bad Numbers Are Great News For All Of Us

Oct 072014
 
 October 7, 2014  Posted by at 8:52 pm Finance Tagged with: , , , , , , , ,  9 Responses »


DPC St. Mary’s Canal parade, Sault Sainte Marie, MI 1905

Something’s happening in Europe that I would like to cheer and encourage at the top of my lungs. While only yesterday, most European leaders, the ECB and the IMF were busy chiding Germany for not lowering taxes or increasing government investment in its economy, today’s release of German economic data should either shut them up or drastically change their tune.

Then again, they are to a (wo)man too self-obsessed and -important to keep their traps closed, and they know only the one tune. That should lead to some serious bitterness, of which I’m also full-heartedly in favor. For everyone’s good but that of the self-absorbed politicians, the eurozone should be demolished, and entirely new, far more modest treaties between the nations negotiated.

If we can agree the single currency, and the legal settings it is caught in, have already done great damage to the over 50% of young people in Spain and Greece who may never find jobs at all, to the Italians and Irish who were keelhauled in the name of the greater good, and and and, and to all the millions in all the other eurozone member nations, if we can agree on that, things are going to get much worse if the euro project is not abandoned as soon as possible.

The good thing about Germany’s bad, make that awful, numbers is that they will raise the voices of euroskeptics across the country. If there is to be a change in view or politics from Angela Merkel and her people, it’s not going to be what the rest of Europe wants, a softer stance on Mario Draghi’s ABS junk paper purchases. Quite the opposite: Germans will increase their calls for Deutschland first, and Merkel can no longer ignore them.

Berlin will have to turn to protectionist policies, sort of like the antithesis the the entire European project that has seen so much support from these very Germans. Merkel cannot accept looser financial policies in Brussels, which carry the risk – bordering on certainty – that her taxpayers will be on the hook for losses incurred in the ECB’s last ditch attempts to save itself and the currency. Merkel’s – existing and potential – voters will not accept it.

That de facto means she must turn her back on Europe. It will not be advertized that way, at least not in the beginning, but it is what it all comes down to. Whether you agree or not that Germany’s own points of view and actions have contributed to the misery large parts of Europe are in, the fact remains they’re miserable and slip sliding into worse. Something needs to be done, but no-one can agree on what.

Draghi’s highly expensive and highly disputed buy buy buy plans can’t actually solve any problems, neither the ones countries already had nor those the euro straightjacket added. What the plans may do is buy a bit of time. Time that will be used to further tighten the euro noose around everyone’s neck.

Central banks can’t solve problems, but they sure can make them worse. This may sound strange when you look at what many see as a recovery in the US, but just wait a few more years and then look at what $10+ trillion has bought Americans, or $25 trillion has done for China.

In the end, it’s all just more debt piled on top of debt, and nothing but a huge blind spot in the range of vision of economists, edged on by those who seek to profit from a nation’s taxpayers being dragged down further towards servitude. That you could boost a broke economy be making it more broke, or even risk doing so, is insanity squared, but it’s also what every economics textbook says should be done.

In a few days, another fake Economic Nobel (Fauxbel) will be awarded to another clown or comic troupe with some utterly useless theory, their field lauded as a science without ever obeying even the most basic scientific principles. And some day people will ask: ‘what were they thinking?’, but they’ll have to ask their questions from cardboard shovels and corrugated shanty towns.

The fast rising right-of-Merkel Alternative for Deutschland party will grab onto today’s bad bad data (25% plunge in new car sales, 8.8% less capital goods (machinery etc.) produced, factory orders down 5.7%, overall industrial production down 4% MoM) to demand protection for Germans, and less, not more, Berlin involvement in the EU and eurozone.

At the – well, ok, arguably – worst point in euro history, with all other ‘solutions’ failed and debt levels higher than ever, Mario Draghi wants to raise those levels even more. Merkel doesn’t have the political room to allow him to, because she doesn’t have the economic room anymore. As soon as she announces some, any, cut in domestic services, the AfD and other voices will clamor: cut the Greeks first.

France is gasping for breath, Italy is on life support, Greece, Cyprus and Spain are in the emergency room, and Europe’s German engine has just quit. A 500+ million ‘union’ with no steering wheel and no engine is on its way to the brink of a deep cliff. Someone’s going to jump ship, no question about it. The Germans themselves might be the first.

Nobody in Europe has anything to lose from the demise of the eurozone, at least nothing that they wouldn’t lose anyway, but every single European save for a cabal of power brokers and narcissists has a ton and a half of happiness and self-fulfillment and independence to lose from the continuation of the failed project. Luckily for them, the German data promise to bring the merciful end that much closer.

What’s wrong with the EU is the same as what’s wrong with NATO, the IMF, the World Bank. They are institutions that start with noble ideals, but soon start to gobble up ever more power, and with no-one to hold them to account. That kind of structure in turn attracts a certain kind of people, the ones who don’t like to be held to account.

And though I’m a little hesitant to include the US in all this, since it”s so much older, I certainly wouldn’t discard Washington offhand as a place where the wrong kind of people have gathered far too much power.

Debt Rattle Oct 1 2014: Europe Is Crumbling Into Collapse

Oct 012014
 
 October 1, 2014  Posted by at 9:40 pm Finance Tagged with: , , , , , , ,  16 Responses »


David Myers Theatre on 9th Street, Washington, DC July 1939

For me, the quote of the day is this one: “If there’s a periphery of the eurozone’s periphery, that’s Naples.”. The city of Napoli hosts ECB boss Mario Draghi and the heads of Europe’s central banks this week in some very posh former Bourbon family royal palace, and the contradictions involved couldn’t be more striking.

Napoli is home to an immense amount of poverty and misery, and the advent of the EU and the euro has done absolutely nothing to make life in the city any better. Quite the contrary. And there’s not a single thing in sight that holds any promise of alleviating the deepening Italian downfall. Therefore things can, and will, only get worse from here.

And that’s not just true for Italy, or Napoli. It’s true for all of Europe. That is not because Mario Draghi hasn’t spent enough money, or too much of it, or that he’s spent it in the wrong places. It’s because Napels is not Berlin or Frankfurt, or even Milan in the much richer north of Italy. And because Italy is not Germany, and Greece is not Finland, and trying to force all of them into one and the same economic mold can only possibly end in the poor getting poorer.

Unless there would be a massive wealth transfer from rich to poor, from north to south, but that’s never been in the cards. The intention was always to make the EU a tide to lift all boats, or even, in the wildest dreams, a boat to lift all tides. That intention has failed in dramatic fashion. But not one single one of the architects and present day leaders is ready to fess up to their failures.

Almost 15 years after the euro was introduced, the battlefields are littered with dead and wounded bodies. And the only answer that comes from Brussels is to strengthen the – financial and political – army. The only answer that comes from Brussels is that Europe, including Italy, Greece, Spain, needs more Brussels, more centralized control.

And Napoli is not the only place that can lay claim to the title “periphery of the eurozone’s periphery”. Spain and Greece have unemployment numbers just like Napoli, only for them it’s in their entire countries. All have had youth unemployment at well over 50% for years now, a sort of real life version of throwing your babies away with the bathwater. And all have regions and cities where things are much worse still.

Oh well, at least Bloomberg has a poetic headline for once:

Draghi Takes ECB to Land of Gomorrah as Naples Prays

As Europe’s central bankers gather in Naples to discuss the state of the region’s economy, the city stands as a stark warning of just how bad things can get. “If there’s a periphery of the eurozone’s periphery, that’s Naples,” said economist Riccardo Realfonzo, a former councilman of the Southern Italian city. “The gap between the debate at the Royal Palace in Capodimonte and everyday life can’t be filled with just monetary policy.”

In Naples “there is a hunger for bread and justice, hope and future, work, legality and planning,” local Catholic Archbishop Crescenzio Sepe on Sept. 19 told the faithful gathered in the city’s medieval cathedral for the ritual of the so-called miracle of San Gennaro, the patron saint.

Last year, Naples scored the highest among Italy’s main cities on the misery index, a gauge which combines unemployment and deflation. With a reading of 26.7% it stood above Greece. Much like Greece, Naples, hard hit by Italy’s longest recession on record, risked default this year after a court rejected plans to cut municipal debt of about €1 billion ($1.3 billion). [..] Naples’ 2013 gross domestic product per capita was one-third less than Italy’s average and its unemployment was more than double the national average at 25.8%.

The outlook for the future is far from rosy after Italy entered a new recession in the second quarter and the government was forced to cut the country’s growth forecast. Finance Minister Pier Carlo Padoan said yesterday 2014 GDP is seen shrinking 0.3%, compared with an April forecast of a 0.8% expansion. The government also sees GDP growing just 0.6% next year, compared with a previous estimate of 1.3%.

In that setting, or rather overseeing it from a heavily guarded and inaccessible palace, enjoying the best food and wine freshly printed money can buy, Europe’s central bank bosses are planning their next moves.

And still the only answer is more Brussels. Where Mario Draghi now wants to start buying up Greek and Cypriot junk loans, simply because that’s all they have left to sell. That’s where we stand today. We’re back to toilet paper as the only thing that represents any value.

And, you know, if a country like Spain, with 25% unemployment, can get investors to nevertheless buy its bonds with real yields below zero, maybe there is some – although doomed – logic somewhere in Draghi’s ideas. If you distort and pervert values enough so nobody knows what anything is worth anymore, and you still have all these big funds needing to roll over their ‘investments’, you have them trapped, or at least temporarily.

The question is, for how long?

European Bond Yields Go Negative

Record-low interest rates in Europe have flipped bond investing on its head. Some bond buyers, typically paid for lending out their money, have begun paying borrowers to look after their cash. In September, yields on two-year Irish government debt dipped below zero for the first time, just four years after the country needed a €67.5 billion ($85.6 billion) bailout to avert a banking-system collapse. At the height of the eurozone’s debt crisis, Ireland’s two-year bonds were yielding more than 14%.

Now, they are yielding about minus 0.01%. Yields move inversely to prices. The sharp drop in Ireland’s borrowing costs marks a rapid return of investor confidence, but the recovery is also part of a wider theme in Europe: central-bank policy pushing interest rates ever lower, and in some cases, turning bond yields negative.

[..] “We think negative yields will spread, because the impact of the ECB’s rate cut is ongoing,” said Mr. Bayliss. Yields will continue their decline as short-term debt matures and cash is reinvested, he added. “You’re going to see more countries and longer maturities in the negative-rate camp,” he said. Given that backdrop, one way investors can boost returns is by buying longer-dated bonds. Spanish government debt maturing in July 2017, for instance, yields roughly 0.5%, according to Tradeweb.

By instead lending to Spain for 10 years, yields jump to about 2%. Another way to snag higher yields is to buy riskier bonds with lower credit ratings. Ben Bennett, a credit strategist at Legal & General Investment Management, says that with investment-grade corporate bonds yielding so little the only way to get a reasonable return in Europe is by lending to junk-rated companies or by buying junior bonds that are first to take a hit if a company defaults on its debt. “This should work out fine if the ECB’s policies kick-start the European economy, but they don’t have a very successful track record in recent years,” Mr. Bennett said.

They sure don’t. And that’s not even Draghi’s fault, he’s just a clown. The entire structure of the EU is to blame. Draghi won’t be able to buy any toilet paper unless Merkel gives in. But the EU economy has now started to drag down Germany as well, so she will have to choose to protect her own people first. Which is precisely where the EU fails, that that is still possible.

In the US California can’t say screw Kansas. In the EU, that is an option. The richer nations only signed up to the project to get richer off it. The same as the poorer. Nobody ever gave any thought to what should be done is everybody got poorer, and if they did, it certainly wasn’t put into written words. So Germany CAN elect to put itself first, and try to boost its economy at the expense of Spain. And that’s what it’ll do, especially after the recent rise of anti-euro sentiments.

Sentiments that will crop up and grow in ever more places in ever stronger ways. Because there is no way to save the pan-European ideals within the settings laid out inside the EU. You can’t turn Spain into Germany overnight, for the same reason that you can’t demand the Spanish turn to beer and bratwurst from one day to the next.

There is not one reason why Europe couldn’t be a looser organization of nation states, each with their own currency if that works better for them, but still with many ties defined by those things that do indeed bind them. The thing is, France has close ties to Spain, they share the same border, and France has similar ties to Germany, but Germany and Spain don’t have those ties.

It’s much easier to resolve regional differences within a country the size of France or Spain that it is within a 28-member EU. The differences have become too overwhelming. People from Finland vote on issues in Greece, but they have no idea about those issues. While the Greeks sink into desolation:

60% Of Greeks Live At Or Below Poverty Line

Three in every five Greeks, or some 6.3 million people, were living in poverty or under the threat of poverty in 2013 due to material deprivation and unemployment, a report by Parliament’s State Budget Office showed on Thursday. Using data on household incomes and living conditions, the report – titled “Minimum Income Policies in the European Union and Greece: A Comparative Analysis” – found that “some 2.5 million people are below the threshold of relative poverty, which is set at 60% of the average household income.” It added that “3.8 million people are facing the threat of poverty due to material deprivation and unemployment,” resulting in a total of 6.3 million people.

In the medium term, Europe will fall to bits. It’s inevitable. The crumbling of the walls could only be prevented by overall increasing wealth, but the very structure of the Union doesn’t allow for that to happen. And neither does the global economy.

As for the cheap loans and the yields on peripheral sovereign bonds, the money that investors have out there will flee in a massive move to the global financial center, the US, as soon as interest rates there are raised. Which is another major reason why they indeed will be raised. Come to daddy.

And the EU will go from the lofty ideal of a peacemaker to the reality of being a cause for unrest and then war. It has already made that switch, but nobody notices yet.

Draghi Takes ECB to Land of Gomorrah as Naples Prays (Bloomberg)

As Europe’s central bankers gather in Naples to discuss the state of the region’s economy, the city stands as a stark warning of just how bad things can get. “If there’s a periphery of the eurozone’s periphery, that’s Naples,” said economist Riccardo Realfonzo, a former councilman of the Southern Italian city. “The gap between the debate at the Royal Palace in Capodimonte and everyday life can’t be filled with just monetary policy.” In Naples “there is a hunger for bread and justice, hope and future, work, legality and planning,” local Catholic Archbishop Crescenzio Sepe on Sept. 19 told the faithful gathered in the city’s medieval cathedral for the ritual of the so-called miracle of San Gennaro, the patron saint.

Last year, Naples scored the highest among Italy’s main cities on the misery index, a gauge which combines unemployment and deflation. With a reading of 26.7% it stood above Greece, according to Bloomberg calculations. Much like Greece, Naples, hard hit by Italy’s longest recession on record, risked default this year after a court rejected plans to cut municipal debt of about €1 billion ($1.3 billion). Nor do its troubles end there. Located in one of Italy’s poorest and most crime-ridden areas, Naples’ 2013 gross domestic product per capita was one-third less than Italy’s average and its unemployment was more than double the national average at 25.8%. The city is also prey to periodic garbage crises caused by overflowing landfills and saw its transport system come to a halt last year amid strikes and fuel shortages.

• European Bond Yields Go Negative (WSJ)

Record-low interest rates in Europe have flipped bond investing on its head. Some bond buyers, typically paid for lending out their money, have begun paying borrowers to look after their cash. In September, yields on two-year Irish government debt dipped below zero for the first time, just four years after the country needed a €67.5 billion ($85.6 billion) bailout to avert a banking-system collapse. At the height of the eurozone’s debt crisis, Ireland’s two-year bonds were yielding more than 14%. Now, they are yielding about minus 0.01%. Yields move inversely to prices. The sharp drop in Ireland’s borrowing costs marks a rapid return of investor confidence, but the recovery is also part of a wider theme in Europe: central-bank policy pushing interest rates ever lower, and in some cases, turning bond yields negative.

Germany, the Netherlands, Austria, Finland, Belgium and France had already seen their two-year borrowing costs drop below zero amid a move by the European Central Bank to start charging eurozone banks for keeping deposits at the ECB. That policy shift is encouraging lenders to look for cheaper ways to park their surplus cash. If “you buy short-dated Irish or French paper and pay less [than depositing at the ECB], you’re improving your net income, even if the yields are still negative,” said Jonathan Bayliss, a managing director for global government bonds at Goldman Sachs Asset Management in London. Ireland’s drop into negative territory came after the ECB on Sept. 4 cut benchmark interest rates by 0.1 percentage point to 0.05% and overnight deposit rates by the same amount to minus 0.2%, in a fresh bid to revive the region’s stalling economy. The ECB said it intends also to buy bonds backed by loans such as residential mortgages in an attempt to boost lending, potentially further weighing on yields.

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Nice image.

• Trading The Euro: A Seat On The Titanic? (CNBC)

With the European Central Bank set to meet on Thursday, currency strategists are weighing up whether to join a crowded trade and short the euro or whether to go long and get comfortable with what has been described as a “seat on the Titanic.” The common currency – shared by the 18 nations in the region – has been a one-way trip south this year with the ECB expanding its balance sheet while central banks in the U.S. and the U.K. have been looking to reverse their ultra-easy policies. The currency has depreciated 8.22% year-to-date against a greenback that has recently hit a four-year high against a basket of currencies. The euro is on course for its worst yearly drop since 2005 and September marked its biggest monthly fall since February 2013.

Ranko Berich, the head of market analysis at Monex Europe, a U.K.-based foreign exchange company, believes that the euro could be set for a major collapse. “A long position on the euro might as well be a seat on the Titanic,” he said in a note on Tuesday. Meanwhile, John Higgins, the chief markets economist at Capital Economics, has given a forecast of $1.15 for the euro by the end of 2016. “We suspect (the euro) will drop further as the monetary policies of the (Federal Reserve) and the ECB continue to diverge by more than widely envisaged,” he said in a research note late Tuesday.

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• Mario Draghi Pushes For ECB To Accept Greek And Cypriot ‘Junk’ Loans (FT)

Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank. Mr Draghi, ECB president, will this week unveil details of a plan to buy hundreds of billions of euros’ worth of private-sector assets – the central bank’s latest attempt to save the euro zone from economic stagnation. The ECB’s executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the euro zone’s monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter. Mr Draghi’s proposal is designed to make the program of buying ABS, which are bundles of loans sliced and diced into packages, as inclusive as possible.

If it is backed by the majority of members of the ECB’s governing council, the central bank would be able to buy instruments from banks of all 18 euro zone member states. However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the euro zone’s largest economy. Bundesbank president Jens Weidmann, who also sits on the ECB’s policy-making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks. Wolfgang Schäuble, Germany’s finance minister, has also voiced his opposition, saying purchases would heighten concerns about potential conflicts of interest between the ECB’s role as monetary policymaker and bank supervisor.

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Inevitable.

• Factories Slashing Prices Toughens Draghi’s Deflation Battle (Bloomberg)

Euro-area manufacturing expanded at the slowest pace in 14 months, according to today’s report. The gauge stood at 50.3 in September, just above the 50 mark that divides expansion from contraction, and below a preliminary estimate of 50.5. Euro-area factories cut prices in September by the most in more than a year and German manufacturing shrank, underlining the mounting challenge facing Mario Draghi. The European Central Bank president is on a mission to avert deflation as the euro region’s economic landscape deteriorates. Purchasing Managers’ Indexes from Markit Economics showed manufacturing activity also contracted in France, Austria and Greece, with a gauge for the 18-nation region pointing to almost stagnant output. As the euro area’s economic weakness spreads to countries in the region’s core, the ECB will face increased scrutiny tomorrow when it unveils details of an asset-purchase plan.

The fresh round of stimulus comes against a backdrop of weak inflation and stuttering growth, with geopolitical uncertainty and high unemployment weighing on confidence and demand. “ It is very hard to put any positive spin” on the data, said Howard Archer, chief European economist at IHS Global Insight in London. “Clutching at straws, the best that can be said is that it indicates that the manufacturing sector is still growing.” Euro-area manufacturing expanded at the slowest pace in 14 months, according to today’s report. The gauge stood at 50.3 in September, just above the 50 mark that divides expansion from contraction, and below a preliminary estimate of 50.5. The euro slid after the German report and extended its decline after euro-area data were published. Today’s PMI data make for a “gloomy reading,” said Chris Williamson, chief economist at Markit in London. “The weakening manufacturing sector will intensify pressure on the ECB to do more to revive the economy and no doubt strengthen calls for full-scale quantitative easing.”

A manufacturing gauge for Germany, once Europe’s export-led powerhouse economy, slid to 49.9 last month, the lowest level in 15 months, with new orders falling at the fastest pace since 2012. By contrast, factory activity in Italy returned to growth, with expansions also registered in Spain, the Netherlands and Ireland. In the euro area, new orders fell for the first time since June 2013 due to weak domestic demand and waning exports, Markit said, casting doubt on forecasts that the industry will pick up toward the end of the year. There’s “negative momentum in manufacturing activity, especially in Germany where the pace of slowdown is rather pronounced,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “The data flags clear downside risks to the ECB staff’s growth forecast.”

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• Germany A Fresh Source Of Weakness As Eurozone PMI Falls (MarketWatch)

Activity in the eurozone’s manufacturing sector slowed more sharply than first estimated in September, with Germany joining France in contraction, while Italy staged a surprise revival. Fresh signs that the currency area’s economy remains mired in stagnation, with manufacturers cutting prices for the first time since April, will likely add to pressure on the European Central Bank to take more dramatic stimulus measures to boost demand and inflation. The headline measure from data firm Markit’s monthly survey of purchasing managers at more than 3,000 manufacturers fell to 50.3 from 50.7 in August, an indication that activity barely increased. A reading above 50.0 for the Purchasing Managers Index indicates an expansion in activity, while a reading below that level signals a contraction. The final measure was slightly below the preliminary estimate of 50.5 released in September, and the lowest in 14 months.

In a setback for the currency area’s recovery hopes, Germany’s manufacturing sector was a fresh source of weakness, with its PMI falling to a 15-month low and indicating that activity declined — albeit very marginally. “In a sign of spreading economic malaise, Germany, Austria and Greece all joined France in reporting manufacturing downturns in September,” said Chris Williamson, Markit’s chief economist. Williamson said the surveys suggest the currency area’s “northern industrial heartland has succumbed to the various headwinds of weak demand within the euro area, falling business and consumer confidence, (and) waning exports due to the Ukraine crisis and Russian sanctions.” The surveys suggest that manufacturing activity won’t soon revive, with new orders declining for the first time in 15 months, and export orders rising at the slowest pace since July 2013.

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• Germany Fights On Two Fronts To Preserve The Eurozone (MarketWatch)

The European Court of Justice announced Sept. 22 that hearings in the case against the European Central Bank’s (ECB) bond-buying program known as Outright Monetary Transactions (OMT) will begin Oct. 14. Though the process is likely to be lengthy, with a judgment not due until mid-2015, the ruling will have serious implications for Germany’s relationship with the rest of the eurozone. The timing could hardly be worse, coming as an anti-euro party has recently been making strides in the German political scene, steadily undermining the government’s room for maneuver. The roots of the case go back to late 2011, when Italian and Spanish sovereign bond yields were following their Greek counterparts to sky-high levels as the markets showed that they had lost confidence in the eurozone’s most troubled economies’ ability to turn themselves around. By summer 2012 the situation in Europe was desperate.

Bailouts had been undertaken in Greece, Ireland and Portugal, while Italy was getting dangerously close to needing one. But Italy’s economy, and particularly its gargantuan levels of government debt, meant that it would be too big to receive similar treatment. In any event, the previous bailouts were not calming financial markets. As Spain and Italy’s bond yields lurched around the 7% mark, considered the point where default becomes inevitable, the new president of the European Central Bank, Mario Draghi, said the ECB was willing to do whatever it took to save the euro. In concert with the heads of the European governments, the ECB developed a mechanism that enables it to buy unlimited numbers of sovereign bonds to stabilize a member country, a weapon large enough to cow bond traders.

Draghi never actually had to step in because the promise of intervention in bond markets convinced investors that eurozone countries would not be allowed to default. But Draghi’s solution was not to everyone’s taste. Notable opponents included Jens Weidmann, president of the German Bundesbank. Along with many Germans, Weidmann felt the ECB was overstepping its jurisdictional boundaries, since EU treaties bar the bank from financing member states. Worse, were OMT ever actually used, it essentially would be spending German money to bail out what many Germans considered profligate Southern Europeans.

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No.

• China’s Latest Property Rescue Package: Will It Work? (CNBC)

The latest steps to rescue China’s sagging property sector are among the most high-profile yet, but don’t expect a market turnaround, economists say. Late Tuesday, the People’s Bank of China and China Banking Regulatory Commission announced measures to support housing sales and increase lending to cash-strapped property developers. “These measures are substantial enough to improve sentiment and sales on the property market,” Louis Kuijs, chief China economist at RBS wrote in a note. “[But] we do not expect this package to lead to a rapid recovery of the real estate sector… given the inventories of unsold housing and additional large volumes of housing in construction but not finished hanging over the market,” he said. New measures include granting second-home buyers that have paid off their first mortgage access to lower mortgage rates and lower down-payment requirements.

Now they’re eligible for a 30% discount on mortgage rates, an offer previously limited to first-home buyers. Down payment levels were also cut to 30% from 60-70%. In addition, banks were asked to support the funding needs of “quality” developers, increase their access to the bond market and introduce pilot programs for REITs. An acceleration in China’s property market downturn in recent months intensified concerns about slowing economic growth. New home prices fell for the fourth straight month in August, down 1.1% from the month before, after dipping 0.9% in July, according to Reuters’ calculations of figures released by the National Bureau of Statistics. Many analysts have cited the cooling property sector as a major risk for the economy. The sector accounts for about 15% of gross domestic product and is linked to some 40 industries from furniture to steel.

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And surging.

• Dollar-Yen Breaches 110 For First Time Since 2008 (CNBC)

The dollar hit a new high six-year high against the yen on Wednesday, breaching 110 for the first time since August 2008. The currency pair reached 110.08 in early Asian trading, prompting a Japanese government spokesperson to say that authorities will monitor the yen’s movement carefully. The greenback has strengthened more than 8% against the yen since early August, driven by the Federal Reserve’s tightening monetary policy and recent weakness in the Japanese economy. Japanese policymakers welcome a weaker yen, which boosts exports, but the rapid move is worrying. Japan is stuck with a chronic trade deficit; a major yen depreciation raises the cost of buying materials abroad, squeezing corporate earnings. The dollar-yen could rise slightly further, but will stabilize soon, according to Eisuke Sakakibara, former vice finance minister of Japan.

“Although Japanese economy is currently somewhat weaker than anticipated, it’s still doing fairly well,” said Sakakibara, also known as Mr Yen for his influence on Japan’s currency when he was in office from 1997 to 1999. “Continued weakness of the yen is unlikely; this is clearly the strength of the U.S. dollar. The market has already incorporated the strength of the U.S. dollar so I wouldn’t think dollar-yen will go beyond 112 or 113 – It will be in range trading between 107 and 112 in my view,” he added. There have been increasing calls for policymakers to take further action to prop up the Japanese economy, which has been hit hard by a sales tax hike introduced in April. Fresh data on Tuesday showed a mixed reading – retail sales rose 1.2% on year in August, while household spending fell an annual 4.7%. The Bank of Japan (BOJ) is due to meet next week and many analysts have penciled in a move from the central bank to ease monetary policy further. But Sakakibara believes BOJ governor Haruhiko Kuroda will reserve his ammunition for now.

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Oops.

• Japan Stunned After Massive $617 Billion “Fat Finger” Trading Error (ZH)

A few days ago, Bloomberg had a fascinating profile of the person, pardon degenerate Pachinko gambler, who goes under the name CIS, and who is the “mystery man who moves the Japanese market.” In a nutshell, CIS, a momentum day trader and living proof of survivorship bias in finance (because for every CIS who has, allegedly, made it some 999,999 have failed) has amassed a fortune that he says now exceeds 16 billion yen after having traded 1.7 trillion yen in his career, generating an after tax profit of 6 billion yen in 2013 alone. Of course, the numbers are likely wildly fabricated for pageview purposes becuase as Bloomberg itself admits, “CIS didn’t offer a complete accounting of his investing returns and his wealth for this story, and some of his claims can’t be verified.”

That said, it is indeed the case that Japan has increasingly become a cartoon market in which while days can go by without a single trade taking place in its rigged bond market, where the BOJ has soaked up all the liquidity, when it comes to equities, it has become a free for all for “Mr. Watanabes” who have never taken finance, accounting or economics, but who know all about heatmaps and chasing momentum, and as a result, in a rising market/tide environment, have all grown ridiculously rich. The problem, of course, is that what some may call a market is anything but, and has become a fragile playground for a few technicians who move massive sums of money from Point A to Point B, hoping to outsmart the few remaining others, while in the process earning the rents that the BOJ is eagerly handing out by injecting liquidity at a pace that dwarfs what the Fed did for the past 2 years.

The other problem is that it is a merely of time before everything crashes into a pile of smoldering rubble thanks to the unprecedented fragility that is now embedded in every market, although most likely in Japan first. Which leads us to what just happened in Japan when as Bloomberg reports, stock orders amounting to a whopping $617 billion (yes Bilion with a B) or more than the size of Sweden’s economy, were canceled in Japan earlier today, for reasons unknown although the early culprit is that this was one of the biggest trading errors of all time. Of course, since this trade was noted, and DKed, one can assume that a major whale was on the losing end of the trade: recall that this is precisely what happened to Goldman time and again, when some errant algo caused the firm to lose millions on several occasions in 2012 and 2013. There is one tiny difference: this time it was not Goldman, and the total amount was not a few paltry million but over half a trillion dollars!

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Creative accounting shouldn’t be this transparent.

• Fall In UK Living Standards Deeper Than Thought (Guardian)

The UK’s fall in living standards has been worse than previously thought, the TUC claimed, after new figures showed a bigger squeeze on households’ disposable incomes. The Office for National Statistics published sweeping updates to its previous estimates on the economy on Tuesday that suggested Britain recovered from the recession three-quarters sooner than initial estimates. Its move to new ways of measuring GDP put the size of the economy at 2.7% above its pre-crisis peak in 2008, compared with the previous estimate of 0.2%. But the TUC said the figures also revealed that the toll taken by years of falling real wages was greater than previously thought, as estimates of household disposable income were revised to show it further off its previous peak.

For 2013, real household disposable income per capita, described by the TUC as “the most comprehensive measure of living standards”, was 2.6% below its peak according to the latest data. It was £16,881 in 2013 down from a peak of £17,324 in 2007. On the previous figures, the measure had been 1.8% off the peak, standing at £15,764 in 2013 down from a peak of £16,060 hit in 2009.The TUC general secretary, Frances O’Grady, said: “While the size of the economy has been revised up, household incomes have been revised down. It turns out the UK’s living standards crisis is even worse than we thought.” “This is set to be the first full parliament since the second world war when the government leaves office with people’s pay packets worth less than when they came into power. There is something deeply wrong when the economy is growing, but the people who do all the work face ever shrinking pay and falling living standards.”

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Love it!

• Drugs, Hookers, New GDP Measuring Make UK Economy Look Better (Guardian)

Britain’s economy was bigger and grew faster than previously thought over the second quarter, according to official figures that measure GDP in a new way. The economy also recovered sooner than previously thought from the recession. The Office for National Statistics (ONS) said the economy expanded 0.9% over April to June as both the dominant services sector and construction enjoyed strong growth. That beat economists’ forecasts for GDP growth to hold at a previous estimate of 0.8%. But at the same time the ONS revised down the first quarter figure to 0.7% from 0.8%, leaving the estimate of year-on-year growth at 3.2%. The size of the economy was also upgraded as the ONS moved to a new European-wide way of measuring GDP and incorporated other changes.

Under the new method, illegal activities such as drug dealing and prostitution are included and other activities are accounted for differently, including research & development and military spending. Explaining the figures, the ONS said: “The new data are based on the most far-reaching set of improvements to the national accounts in the last 15 years or so.” The ONS left full-year GDP growth in 2013 unrevised at 1.7%. But it said the changes meant that UK GDP recouped lost ground from the downturn sooner than previously thought. “The new data show that during the recent downturn the economy shrank by 6.0%, rather than the 7.2% previously estimated. GDP was also estimated to have exceeded its pre-financial crisis levels in Q3 2013, three quarters sooner than previously estimated. However, overall, the average absolute quarter-on-quarter revision between 1997 and 2014 Q2 was 0.16%age points,” statisticians wrote alongside the data.

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They, too, are Wall Street banks.

• Fed Rate Policies Aid Foreign Banks (WSJ)

Banks based outside the U.S. have been unlikely beneficiaries of the Federal Reserve’s interest-rate policies, and they are likely to keep profiting as the Fed changes the way it controls borrowing costs. Foreign firms have received nearly half of the $9.8 billion in interest the Fed has paid banks since the beginning of last year for the money, called reserves, they deposit at the U.S. central bankaccording to an analysis of Fed data by The Wall Street Journal. Those lenders control only about 17% of all bank assets in the U.S. Moreover, the Fed’s plans for raising interest rates make it likely banks will see those payments grow in coming years. Though small in relation to their overall revenues, interest payments from the Fed have been a source of virtually risk-free returns for foreign banks. Large holders of Fed reserves include Deutsche Bank, UBS, Bank of China and Bank of Tokyo-Mitsubishi, according to bank regulatory filings. U.S. banks including JP Morgan, Wells Fargo and Bank of America are also big recipients of Fed interest payments, according to the filings.

“It is a small transfer from U.S. taxpayers to foreign taxpayers,” said Joseph Gagnon, a former Fed economist at the Peterson Institute for International Economics. The transfer, he added, was a side effect of Fed policy, not a goal. Behind the payments is a complex interplay between new government regulatory policies and new methods the Fed has developed to control short-term interest rates. The Fed has pumped nearly $3 trillion into the banking system since the 2008 financial crisis, increasing banks’ reserves, in efforts to stabilize markets and boost economic growth. Since 2008, it has paid banks interest of 0.25% on those reserves. The Fed affirmed this month that the rate it pays on reserves will be the primary tool it uses to raise short-term borrowing costs from near zero when the time comes, likely next year. In part because regulatory requirements discourage domestic banks from holding more cash reserves than they need, many of the reserves created by the Fed are held by foreign banks.

In the past, the Fed influenced interest rates by increasing or reducing money in the banking system through small amounts of short-term bond trades with banks. This caused the Fed’s benchmark federal funds rate to rise or fall, influencing other borrowing costs across the economy, such as those on mortgages, credit cards and business loans. Because there is so much money in the financial system now, that old method won’t work and the Fed plans to rely primarily on adjusting the interest rate on reserves to change the fed funds rate and other borrowing costs. The interest payments totaled $4.7 billion so far this year and $5.1 billion last year, and will increase over time as the Fed raises rates. The Fed remits most of its profits to the U.S. Treasury, and the rising cost of the interest payments could put downward pressure on the amount the central bank sends to taxpayers each year, the Fed has said.

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The U.S. government is borrowing about $8 trillion a year.

• If Something Rattles This Ponzi, Life In America Will Change Overnight (MS)

I know that headline sounds completely outrageous. But it is actually true. The U.S. government is borrowing about $8 trillion a year, and you are about to see the hard numbers that prove this. When discussing the national debt, most people tend to only focus on the amount that it increases each 12 months. And as I wrote about recently, the U.S. national debt has increased by more than a trillion dollars in fiscal year 2014. But that does not count the huge amounts of U.S. Treasury securities that the federal government must redeem each year. When these debt instruments hit their maturity date, the U.S. government must pay them off. This is done by borrowing more money to pay off the previous debts. In fiscal year 2013, redemptions of U.S. Treasury securities totaled $7,546,726,000,000 and new debt totaling $8,323,949,000,000 was issued. The final numbers for fiscal year 2014 are likely to be significantly higher than that. So why does so much government debt come due each year?

Well, in recent years government officials figured out that they could save a lot of money on interest payments by borrowing over shorter time frames. For example, it costs the government far more to borrow money for 10 years than it does for 1 year. So a strategy was hatched to borrow money for very short periods of time and to keep “rolling it over” again and again and again. This strategy has indeed saved the federal government hundreds of billions of dollars in interest payments, but it has also created a situation where the federal government must borrow about $8 trillion a year just to keep up with the game. So what happens when the rest of the world decides that it does not want to loan us 8 trillion dollars a year at ultra-low interest rates? Well, the game will be over and we will be in a massive amount of trouble.

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• French Policy Stupor Sends Bearish Equity Bets Soaring (Bloomberg)

French stocks have beaten euro-area stocks for six years. Options traders are betting 2014 will be different. With a budget deficit poised to rise and economic growth running at half the region’s rate, investor sentiment on the CAC 40 Index is deteriorating. Options protecting against swings in the equity gauge cost the most since April 2013 relative to the Euro Stoxx 50 Index, data compiled by Bloomberg show. French stocks slid in the last three months, completing their first quarterly loss in more than two years. International investors are losing patience because policy measures in Europe’s second-largest economy have failed to keep up with those in Spain, Portugal or Ireland, said Yves Maillot, head of European equities for Natixis Asset Management in Paris.

“Being bearish on French stocks is definitely a sentiment story,” Maillot said by phone. “Reforms have only just begun in France and there is still so much to do.” A Bank of America Corp.’s European fund-manager survey conducted last month showed a net 38% of respondents see France as the country they most want to be underweight in the coming year, meaning they plan to own less of the shares than are represented in equity benchmarks. That’s the most in Europe. About 18% are overweight euro-area stocks, an improvement from a month earlier, the survey showed.

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• 60% Of Greeks Live At Or Below Poverty Line (Ekathimerini)

Three in every five Greeks, or some 6.3 million people, were living in poverty or under the threat of poverty in 2013 due to material deprivation and unemployment, a report by Parliament’s State Budget Office showed on Thursday. Using data on household incomes and living conditions, the report – titled “Minimum Income Policies in the European Union and Greece: A Comparative Analysis” – found that “some 2.5 million people are below the threshold of relative poverty, which is set at 60% of the average household income.” It added that “3.8 million people are facing the threat of poverty due to material deprivation and unemployment,” resulting in a total of 6.3 million people.

The State Budget Office’s economists who drafted the report argued that in contrast with other European countries “which implement programs to handle social inequalities, Greece, which faces huge phenomena of extreme poverty and social exclusion, is acting slowly.” They added that there is high demand for social assistance, while its supply by the state is “fragmented and full of administrative malfunctions.” In that context “the social safety net is inefficient, while there is no prospect for the recovery of income losses resulting from the economic recession in the near future,” the report noted, reminding readers that the measure of the minimum guaranteed income “arrived in Greece belatedly.”

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• Maybe This Is Why Carmen Segarra Drove the Fed Nuts (Bloomberg)

We’ve lost something in our human nature since – we’re guessing – the conclusion of the Second World War. Certainly since Vietnam. It’s the willingness to be firm, to say things no one wants to hear, in person. We lost the muscle that allows us to say “no” to something because it might risk upsetting someone, even if it’s the right thing to do, because people are petty and insecure, and no matter the substance of the message that goes along with “no,” it will be how you say “no” that overshadows why you say “no.” “No” means anything negative: I disagree. You are wrong. You didn’t do what you said you would. You’re late and wasted my time. This is central to why Carmen Segarra was fired from the New York Federal Reserve, the dirty laundry from it all now scattered about Wall Street’s front yard for all the neighbors to see. Beyond the other elements to the conflict that resulted in the termination of a woman who did the job she was hired to do, but didn’t do it the way Jennifer Aniston would have done it, lies human nature.

It’s now human nature to play nice. Above all, be nice. It will be referred to as being “professional” or being “collegial.” We’d always thought that risking screwing something up because of a preoccupation with hurting someone’s feelings was being unprofessional. There are those other elements that might explain why Segarra was fired besides the nice quotient, but it’s almost impossible to believe her termination had anything to do with job performance. Like most except Goldman Sachs, we hate to disagree with the New York Fed, but what Ivy League- and Sorbonne-educated international lawyer secretly records herself doing a crappy job for 46 hours? After reading the Pro Publica story and listening to the parallel radio version produced by “This American Life,” we came away asking why, exactly, someone at the New York Fed or any regulator would be afraid of, or intimidated by, the bank or industry they regulate so much that they’d sacrifice Segarra or anyone else in her position. We had to know to help us understand.

Michael Lewis knows his way around Wall Street a little, so we asked him. His column on all this hit the same day as the news. He came up with some of the other, more practical elements. “The simple answer is that it’s become standard practice for Fed employees to go to work for Wall Street firms, so the last thing they want to do is to alienate those firms and come across as people who don’t ‘get it,’” Lewis wrote to us in an e-mail. “When you ask a person making $150,000 a year to control a person making $1.5 million a year, you are asking for trouble,” he wrote. “To that, add the problem that the typical Fed regulator is in the awkward position of having to be educated about whatever the Wall Street firm has dreamed up.”

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• The Rational Complacency Of Financial Markets (Roubini)

There appear to be good reasons why global markets so far have reacted benignly to today’s geopolitical risks. What could change that? Several scenarios come to mind. First, the Middle East turmoil could affect global markets if one or more terrorist attacks were to occur in Europe or the US – a plausible development, given that several hundred Islamic State jihadis are reported to have European or US passports. Markets tend to disregard the risks of events whose probability is hard to assess, but that have a major impact on confidence when they do occur. Thus, a surprise terrorist attack could unnerve global markets. Second, markets could be incorrect in their assessment that conflicts such as that between Russia and Ukraine, or Syria’s civil war, will not escalate or spread. The Russian president Vladimir Putin’s foreign policy may become more aggressive in response to challenges to his power at home, while Syria’s ongoing meltdown is destabilising Jordan, Lebanon and Turkey.

Third, geopolitical and political tensions are more likely to trigger global contagion when a systemic factor shaping the global economy comes into play. For example, the mini-perfect storm that roiled emerging markets earlier this year – even spilling over for a while to advanced economies – occurred when political turbulence in Turkey, Thailand, and Argentina met bad news about Chinese growth. China, with its systemic importance, was the match that ignited a tinderbox of regional and local uncertainty. Today – or soon – the situation in Hong Kong, together with the news of further weakening in the Chinese economy, could trigger global financial havoc. Or the Federal Reserve could spark financial contagion by exiting zero rates sooner and faster than markets expect. Or the eurozone could relapse into recession and crisis, reviving the risk of redenomination in the event that the monetary union breaks up.

The interaction of any of these global factors with a variety of regional and local sources of geopolitical tension could be dangerously combustible. So, while global markets arguably have been rationally complacent, financial contagion cannot be ruled out. A century ago, financial markets priced in a very low probability that a major conflict would occur, blissfully ignoring the risks that led to the first world war until late in the summer of 1914. Back then, markets were poor at correctly pricing low-probability, high-impact tail risks. They still are.

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He was initially sent home with antibiotics?! WTF?

• First Ebola Case Is Diagnosed in the US (Bloomberg)

The first case of deadly Ebola diagnosed in the U.S. has been confirmed in Dallas, in a man who traveled from Liberia and arrived in the U.S. on Sept. 20, the Centers for Disease Control and Prevention said. The man is being kept in isolation in an intensive care unit. He had no symptoms when he left Liberia, then began to show signs of the disease on Sept. 24, the CDC said yesterday. He sought medical care on Sept. 26, was hospitalized two days later at Texas Health Presbyterian and is critically ill, said Thomas Frieden, director of the CDC. Frieden said the agency is working to identify anybody who had contact with the man and track them down. “There is no doubt in my mind that we will stop it here,” he said at a press conference in Atlanta.

The CDC has a team of epidemiologists on the way to Texas, he said. The team will follow anyone who has had contact with the man for 21 days. If they develop any symptoms, they’ll immediately be isolated, and public health officials will trace their contacts. The diagnosis was first confirmed by a Texas lab based on samples of the man’s blood and confirmed by the CDC. The man was traveling to the U.S. to visit family here and was staying with them. He was exposed to only a “handful” of people during the time when he had symptoms, including family members and possibly some community members, according to Frieden, who said there was little risk to anyone on a flight with the man.

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Good article.

• In Less Than 2 Human Generations, 50% Of World Wildlife Is Gone (Bloomberg)

If animals were stocks, the market would be crashing. The chart below shows the performance of an index that tracks global animal populations over time, much like the S&P 500 tracks shares of the biggest U.S. companies. The Global Living Planet Index, updated today by the World Wildlife Foundation, tracks representative populations of 3,038 species of reptiles, birds, mammals, amphibians and fish. To say the index of animals is underperforming humans is an understatement. More than half of the world’s vertebrates have disappeared between 1970 and 2010. (In the same period, the human population nearly doubled.) The chart starts at 1, which represents the planet’s level of vertebrate life as of 1970.

It makes sense that the WWF is framing of biodiversity loss as an index that may look more familiar to financial analysts than environmentalists. The research group’s message is as much economic as environmental: Not only do animal populations represent valuable natural systems that economies rely on, in many cases they are actual tradable goods, like stocks of wild fish. “In less than two human generations, population sizes of vertebrate species have dropped by half,” writes WWF Director General Marco Lambertini. “We ignore their decline at our own peril.” Humans are currently drawing more from natural resources than the Earth is able to provide. It would take about 1.5 planet Earths to meet the present-day demands that humanity currently makes on nature, according to the WWF. If all the people of the world had the same lifestyle as the typical American, 3.9 planet Earths would be needed to keep up with demand.

The report reads like one of the “alarm bells” U.S. President Barack Obama referenced in his climate change speech last week. Unfortunately, according to the WWF, the effects of climate change are only starting to be felt; most of the degradation of the past four decades has other causes. The biggest drivers are exploitation (think overfishing) responsible for 37% of animal population decline, habitat degradation at 31%, and habitat loss at 13%. Global warming is responsible for 7.1% of the current declines in animal populations, primarily among climate-sensitive species such as tropical amphibians. Latin American biodiversity dropped 83%, the most of any region. But the toll from climate change is on the rise, the WWF says, and the other threats to animal populations aren’t relenting. For social and economic development to continue, humans need to take better account of our resources. Because right now, life on Earth is not a bull market.

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Debt Rattle Sep 19 2014: Scotland and the Spirit of Our Time

Sep 192014
 
 September 19, 2014  Posted by at 3:25 pm Finance Tagged with: , , , , ,  17 Responses »


Christopher Helin Star auto on steep grade, San Francisco 1922

The quote of the day today must be this one from Belgian EU Trade Commissioner Karel De Gucht in the aftermath of the Scottish rejection of independence: “A Europe driven by self-determination of peoples … is ungovernable … ”

I don’t think he understands the implications of what he says, and I’m quite sure he completely misses out on the mastodont sized problem he – quite accurately despite himself- describes.

Which is something along the lines of ‘Europeans should stop wanting to make their own decisions, because that makes it hard for us in Brussels to make those decisions for them’.

There are precious few voices in Brussels who view the EU project with a critical eye. Except for Nigel Farage and perhaps one or two others, they’re all convinced that the EU is an entity that does good, in the same way that people who work for the IMF, the World Bank and NATO – just to name a few – do.

And democratic values and proceedings can be pesky little nuisances in these ‘greater power for the greater good’ visions of society. After all, it was newly elected EU head Jean-Claude Juncker himself who stated a few years back that “When it becomes serious, you have to lie.” That, too, like De Gucht’s comment above, is a way to pervert democracy.

The people working at the EU, and most politicians in European capitals and elsewhere in the world, don’t understand the spirit of their time. Moreover, they don’t think they need to, because they’re convinced they can mold that spirit as they see fit.

The overriding idea is that there can be no question that centralized power is beneficial, and the more of it there is, the better it gets. And it’s admittedly true that more power will flow to Brussels as time goes by, i’s a process built into the entire very structure. But that doesn’t make it a good thing.

To date, there are no major parties in Europe where eurosceptics are elected to major positions; the system is quite foolproof when it comes to that. The rise of Beppe Grillo’s M5S, France’s Front National, and UKIP in Britain, are still no more than nuisances to the EU elite. As long as they can be kept out of their respective countries’ governments, all will be well, is the feeling.

And Brussels by now has plenty experience in influencing how governments are formed. It has inserted plenty technocrats in southern Europe, and played a questionable role in Kiev. From where they’re sitting, time is on their side, and they’re working hard to establish, for instance, a full banking union. Once that is done, the way back gets much harder, or so is their line of thinking.

But as I said, they don’t understand their time. They’ve fallen way behind the curve, and no, they can’t mold how people feel about the world they live in. They’re behind the curve because they refuse to accept the new economic reality that Europe not only faces, but is deeply mired in.

If they would accept that reality, their project would start to look very different, and certainly not grand, or modern, beneficial or benign. But why should they have such worries if absolutely everyone around them is absolutely convinced that the recovery is just around the corner?

Not even the Scots doubt that. That’s not why they wanted independence. For Yes! campaign leader Alex Salmond, it was about increasing wealth, not about making your own decisions in times of less wealth. Nigel Farage wants Britain out of the EU because he thinks that would make it richer.

The only one in politics – in his own way – that I know who doubts this mirage is Italy’s Grillo. And while the Italian economy is sinking further beyond salvation, ECB head Mario Draghi is jockeying for position to become Italy’s next leader, once PM Renzi has been tarred and feathered. No matter how deep their country sinks, they’ll do anything to keep any fundamental change from taking place. Never doubt the model.

A nice twist on all this is provided by Giovanni Dalla-Valle, an activist for Venetian independence, in an interview with RT:

In your opinion, how will the EU react to Veneto independency? Will they be interested in a new state in the union?

GDV: I suspect that Italy is bankrupt. So there will be an interest at some point for Europe to have a very productive and rich region like Veneto becoming a state, becoming a nation; it is a bit similar to what is happening to Bayern [Bavaria] or other areas with an independent spirit like Flanders or Catalonia… Basically, a nation that can actually help Europe, because it has got a GDP which is higher than in Romania, Hungary, for example, rather than have Italy, which is going bankrupt.

I must admit, I’m greatly amused by the notion that at some point Brussels may start encouraging separatists to move for independence, provided they live in rich regions. But it would be a political maze set in a quagmire, and it at least seems much easier for the EU to try make it impossible for anyone to secede.

Which would not work, since it’s against the spirit of our time, but Brussels doesn’t know that. Or recognize it. Still, that attitude is bound to run into huge legal complications, and that makes it look like a mere play for time.

Spain’s Mariano Rajoy this morning once again reiterated his point that a Catalunya referendum violates the Spanish constitution. But it’s exactly that constitution which the Catalans want to get rid of. So they prepare a law in their own parliament that says it’s legal. An exercise in circle jerk absurdity. If Brussels sides with Rajoy, it itself violates the UN charter that all people have the right to self-determination. And so does Rajoy himself, of course, constitution or not.

The Wall Street Journal suggests that the prospect and promise of a smooth Velvet Divorce transition into independence, while maintaining EU membership and other perks, may tempt European regions to go for it. But the EU can’t stand up to its biggest members, Spain, Italy, France, Germany, no matter how desolate some of their economies may be or become.

I had hoped that Scotland would have pulled the trigger on this, not even specifically because of the Scottish situation, but because the timing is (was) exactly right (though few will see that), and because it would have been a lightning rod example across Europe of how these things can move in a peaceful, civilized, and dignified. Not a minor point in any sense.

I fear things may proceed in different, – much – less friendly, ways now, but that won’t stop the call and desire for freedom. Neither freedom from the countries some regions are now part of, nor from the EU itself. The deteriorating economic situation makes that inevitable.

The spirit of our time is determined by decreasing wealth (not just decreasing growth, growth is long gone), and in that mindset de-centralization is as unavoidable as any force of nature. We would all do well to accept and recognize that.

But who am I kidding? Most of us won’t do nothing of the kind until those biblical (or is that another book?) 100,000 frogs start falling from the sky. We ourselves don’t grasp the spirit of our time.

• EU Relief At Scotland’s “No” Tinged With Fear Of Nationalism (Reuters)

European Union and NATO officials expressed undisguised relief on Friday at Scotland’s clear vote against independence from Britain, but some fretted that the genie of separatism may be out of the bottle in Europe. EU partners had mostly kept quiet in the run-up to Thursday’s referendum, lest their fears of a break-up of the United Kingdom leading to contagion elsewhere in Europe be seized upon as interference. But as soon as the Scottish “No” was secure, they voiced satisfaction and drew consequences for their own countries, for the 28-nation EU and for the Western alliance. NATO Secretary-General Anders Fogh Rasmussen congratulated British Prime Minister David Cameron and said he was sure the United Kingdom would continue to play a leading role in keeping the U.S.-led defence alliance strong.

Spain’s two mainstream national parties welcomed the outcome as showing that the northwestern region of Catalonia, expected to announce bitterly opposed plans on Friday for its own independence referendum, would be better off staying in Spain. In Brussels, the European Commission said the Scottish vote was good for a “united, open and stronger Europe” – a veiled message that EU officials hope the outcome will strengthen chances of Britain voting to stay in the bloc in a promised referendum in 2017. “The European Commission welcomes the fact that during the debate over the past years, the Scottish government and the Scottish people have repeatedly reaffirmed their European commitment,” Commission President Jose Manuel Barroso said.

Belgian EU Trade Commissioner Karel De Gucht, whose native Flanders region is in thrall to a growing nationalist movement, said a Scottish split would have been “cataclysmic” for Europe, triggering a domino effect across the continent. “If it had happened in Scotland, I think it would have been a political landslide on the scale of the break-up of the Soviet Union,” said De Gucht, a liberal who does not support demands from some of his fellow Flemings for their own state. “A Europe driven by self-determination of peoples … is ungovernable because you’d have dozens of entities but areas of policy for which you need unanimity or a very large majority,” he said, adding that “parts of former countries” might behave in very nationalistic ways.

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• European Integration Emboldens Europe’s Separatists (WSJ)

Scotland’s referendum has galvanized national movements across Europe. The irony is that this has been made possible in part by the European Union, for decades the driver of economic and political integration across a once war-torn continent. In the past week, Edinburgh has been like a magnet for politicians across Europe who regard their regions as nations. Representatives from Wales, the Basque Country, Flanders, Catalonia, Galicia, Corsica, Sardinia and Friesland visited the Scottish capital. They have been emboldened in part by the safety net that the EU is perceived to offer to small countries. The institution that was created to make national borders irrelevant may perversely play a role in creating new ones.

Even as voters in many European countries register growing dissatisfaction with the EU, membership offers smaller nationalities the hope of separation with a minimum of disruption. Today, “separatism has a spring in its step,” says Charles Grant, director of the London-based Centre for European Reform. Europe’s borders have already fractured in the last 20 years. With the exception of Czechoslovakia, which split in 1993, these changes have been born out of the violent breakup of the former Yugoslavia. What is seducing nationalists these days is what Michael Desch, professor of political science at the University of Notre Dame, calls the prospect of Velvet Divorce: a gentle segue into an independent state while preserving membership of institutions like the EU and the North Atlantic Treaty Organization and retaining the same currency.

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• Madrid Ready To Fight As Catalonia ‘Legalizes’ Vote (Local.es)

Spain’s central government will hold an extraordinary cabinet meeting on Saturday or Sunday if Catalonia’s regional parliament approves the “consultation” law on the referendum on Friday, a move it hopes will make a possible independence vote more legal. Although Catalan daily La Vanguardia has reported that Catalan president Artur Mas will not call the November 9th referendum on self-rule immediately after the “consultation” bill is passed, Madrid wants to have its appeal for the State Council and Constitutional Court ready as soon as possible. With this document, Spain’s ruling right-wing Popular Party hopes to strengthen its position vis-à-vis what it considers an attack on the country’s constitution. On the other hand, Artur Mas hopes the “consultation” bill expected to be passed by landslide in the Catalan parliament on Friday will make the November vote legal in the face of very strong opposition by the PP.

“Everyone in Europe thinks that these processes are hugely negative, financially and economically,” Spanish PM Mariano Rajoy told the Spanish parliament on Wednesday with regard to Scotland and Catalonia’s independence bids. Now that Scottish voters decisively voted to stay in the United Kingdom, the uncertainty over when Artus Mas will take his next step to Catalonia’s independence referendum has been magnified. “Today we approve the law, then we go over it and correct it, once it’s published the law comes into force and the President (Artur Mas) can sign the decree for the referendum,” Catalan parliamentary secretary Josep Rull told Spanish radio station RNE. Even though Mas has assured pro-separatist Catalans that the vote will be held, he has also hinted that the referendum may be cancelled if it doesn’t have the “full democratic guarantees” of Spain’s Constitutional Court.

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• ‘Independent Veneto Can Help EU’ (RT)

The EU would be interested in having independent Veneto because its GDP is higher than Romania’s or Hungary’s, while Italy is going bankrupt, Giovanni Dalla-Valle, an activist for Venetian independence, told RT.

RT: Recently we’re hearing about the willingness of different European regions to become independent. Why does the Veneto region, which is currently part of Italy, want to become independent from Italy?

Giovanni Dalla-Valle: They have got 4,000 years of history, they have never really accepted going under the rule of Italy. The original plebiscite in 1866 was a kind of cheat widely recognized. Then they suffered a lot because they are one of the areas that are most productive in Italy. They produce 140 billion euros of GDP per year and they have got provinces like Piacenza, Treviso that export as much as Portugal and Greece together. However, they are not treated fairly by Rome. They have got taxation that now has reached levels of nearly 70 percent of income for a corporation, for a company…They can`t cope anymore with this extreme level of exploitation that they get from the central government.

RT: What is Veneto uniqueness all about?

GDV: I guess all Italian peninsulas have got plenty of different people with different histories, very fascinating glorious histories. Italy has always been a group of different peoples; it has never been really a united nation. I think Veneto has got this pride about the Serenissima, the Republic of St. Marc that with more than 1,000 years of history were known internationally for being of a high level of civilization mainly in cultural, commercial, artistic aspects and exporting culture all over the world.

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Why keep up the pretense?

• Fresh Week Of Woes For France, Downgrade Looms (CNBC)

It’s been a difficult week for French president, Francois Hollande, and it might get worse as rumors and analysts suggest the country’s debt rating is about to be cut. Earlier this week, France’s reshuffled government got off to a shaky start after narrowly winning a confidence vote on key economic reforms, marked by growing discontent from Socialist ranks. And on Thursday, the president faced hundreds of journalists during his bi-annual press conference, once again overshadowed by his private life following the release of his former partner’s tell-all book “Thank You For This Moment”. To add a final nail in this week’s coffin, the French Opinion newspaper reported on Thursday that the government had been notified that credit rating agency Moody’s would downgrade the country’s rating; a report the government swiftly denied.

If Moody’s does downgrade its rating of France – to AA2 from AA1 – it will catch up with the other major credit ratings agencies S&P and Fitch who both downgraded their ratings in November and July 2013 respectively. A downgrade “would be warranted”, Jennifer McKeown, senior European economist at Capital Economics told CNBC. For Francois Cabau, European economist at Barclays, a Moody’s rating cut wouldn’t come as a surprise, “particularly in light of recent events”. France’s attempts to contain and bring its public deficit down to levels agreed by Brussels have repeatedly failed. The French finance minister, Michel Spain, announced on September 10 that the country would break its fiscal promise to bring deficit at or below 3% of gross domestic product by 2015. “With growth and inflation weak, the deficit reduction we are planning for 2015 will be limited with a deficit around 4.3% of gross domestic product in 2015 and coming under the three% threshold in 2017,” Sapin said at the time.

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Ouch!

• US Housing Starts Drop 14.4%, Multi-Family Units Plunge 31.5% (Zero Hedge)

One look at the August housing starts and permits data, and one will wonder just how is it possible that yesterday NAHB homebuilder confidence rose to a 9 year high, when according to the US Department of Commerce both Housing Start and Permits tumbled in the past month, with the housing “leading indicator” that is Permits sliding 5.6% from 1040K to 998K, and declining sequentially in every region of the US, with double digit drops in the Northeast and the Midwest, while Housing Starts tumbled by 14.4% from 1117K, to only 956K, wildly missing Wall Street expectations of “only” a 5.2% drop to 1037K.

But while single-family units remained roughly flat in their depressed state, which hasn’t moved much if at all since the start of 2013, it was multi-family units that were the most volatile on the margin once again, dropping from 396K to 343K, or 13.4% for permits, and a whopping 31.5% for starts. While one can doubt the veracity of such volatile data, one thing is clear: Wall Street is having trouble with clearing multi-family housing, which also means that builders are confused whether to start new multi-family units or just dump the whole theme, now that the PE firms are leaving the own-to-rent business entirely.

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Endless nothing: banks don’t want to borrow at 0.15%, not if they have to lend out the money.

• ECB Throws a Party, Nobody Shows Up (Bloomberg)

European Central Bank President Mario Draghi is a smart guy, with a career including stints at Goldman Sachs, the World Bank and the Bank for International Settlements. So there must be a reason he has created a bank-lending program that not many banks want to borrow from, and an asset-backed bond purchase program that I can’t find a single market participant to applaud. Here’s my take on Draghi’s tactics. He would like to unleash a full quantitative-easing program echoing the Federal Reserve and the Bank of England, but he can’t get it past the Bundesbank. By inching that way, however, with increasingly QE-style programs that are doomed to fail, he’s engaged in a slow Machiavellian seduction that will lead the German central bank into acquiescence. The ECB held the first of its so-called targeted longer-term refinancing operations today. Banks in the euro region borrowed just 82.6 billion euros ($106.5 billion) from the newfangled facility, falling short of the 100 billion euros to 300 billion euros predicted by economists in a Bloomberg survey.

The program is designed to funnel cash into the banking system, which in turn should make its way into the economy and boost investment, jobs and growth. European banks, however, are about to undergo scrutiny of the health of their balance sheets, with reviews of their asset quality and their liquidity coverage ratios. In the absence of companies beating down your door for loans, you would have to be a brave (or foolish) bank treasurer to play fast and loose with your balance sheet, no matter how generous the ECB’s lending terms. Draghi said in August that he was hoping commercial banks might line up for as much as 850 billion euros from the TLTRO cash trough. Earlier this month, he said the ECB wanted to “steer the size of our balance sheet toward the dimensions it used to have at the beginning of 2012,” meaning as much as 1 trillion euros in new assets. Today’s results suggest that might be a hard slog.

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• European Central Bank Gets Another Shove Toward QE (MarketWatch)

Try again, Mario. Eurozone banks turned up their nose Thursday at a new round of cheap, four-year loans provided by the European Central Bank. Known as targeted long-term refinancing operations, or TLTROs, banks borrowed just 82.6 billion euros ($16.9 billion) from the new facility. Anything below 100 billion euros was going to be viewed as a disappointment. The loans were announced in June alongside rate cuts and were touted by European Central Bank President Mario Draghi as a tool aimed at encouraging banks to use the cheap liquidity to provide loans to companies, alleviating a long-running credit crunch that has remained a drag on the region’s economic recovery. So why didn’t the banks take it up? There are some good reasons, and analysts stress that the outcome wasn’t completely surprising. The ECB’s tough bank stress tests – the Asset Quality Review – are due next month, which may have discouraged banks from adding to their balance sheets.

“No wonder banks are keeping their balance sheets as clean as possible and not engaging as anything that either makes them look like they are lending to risky borrowers, or that they are desperate and need cheap funds from the ECB to keep afloat,” said Kathleen Brooks, research director at Forex.com in London. “Thus, the ECB could have shot itself in the foot with the timing of this auction.” Thursday’s auction isn’t the last word. There are several more operations, and banks may be more eager to take advantage of the funds once the tests are complete. The ECB is also preparing to purchase asset-backed securities in coming weeks, as well, a form of lightweight quantitative easing that Draghi and company also hope will boost activity and help stave off the threat of deflation. But the bottom line may be that the ECB, which has continued to see its balance sheet shrink, will continue to feel pressure to eventually pull out all the stops.

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• Are Stock And Bond Traders Really Reading Fed Differently? (MarketWatch)

Bond traders look at Janet Yellen and see a central bank chief ready to raise rates next year at a slightly faster pace than previously imagined, while stock investors supposedly see a dove, more worried about a weak job recovery. In reality, the diverging market reactions are partly due to a question of timing. “From an equity perspective, the Fed is reacting to better economic data, which in theory should be better for stocks,” said Anthony Valeri, senior vice president of fixed-income research at LPL Financial. “Yes, the stock market gets nervous when the Fed hikes rates or gets close to hiking rates, but it’s still a long ways away,” and the language in the statement was balanced enough to reassure equity investors.

It’s a different story for bonds, which are directly affected by Fed rate hikes, particularly at the short end of the curve, he noted. Moreover, bond traders came into the Fed meeting already pricing in far less aggressive rate hikes than the Federal Open Market Committee had projected in its forecasts, known as the dot plot. In fact, even after the bond selloff, Treasurys are still well behind the Fed, which expects a Fed funds rate around 60 basis points higher than the 0.75% level predicted by Fed funds futures, he said. Bond market participants appeared to take the Federal Reserve’s Wednesday statement, and Fed Chairwoman Janet Yellen’s subsequent news conference, as a warning that rates may rise a little faster than had been anticipated when they come. Bonds extended their drop Thursday, pushing the yield on the 10-year Treasury note to its highest level since early July.

Stocks, meanwhile, rallied, with strategists offering the explanation that investors were comforted by the Federal Open Market Committee’s decision to maintain its pledge to keep rates low for a “considerable time,” while also emphasizing a “significant underutilization of labor resources.” Stocks resumed their march to the upside in Thursday’s session, propelling the Dow and the S&P 500 into record territory. Bank of America Merrill Lynch credit strategist Hans Mikkelsen said the divergence between bonds and “risk assets,” including equities, reflects the ability of the Fed, and Yellen in particular, to “masterfully” guide interest rates higher while simultaneously lowering rate-related uncertainty.

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Ans they knew it too.

• China Fines GlaxoSmithKline $489 Million, Jails Executives (Reuters)

A court in Changsha has also sentenced Mark Reilly, the former head of GSK in China, and other GSK executives to between two and four years in jail, Xinhua added. The verdict, handed out behind closed doors in a single-day trial according to Xinhua, is the culmination of a Chinese probe into the British drug maker which Chinese authorities made public in July last year. Chinese police said then that the firm had funnelled up to 3 billion yuan to travel agencies to facilitate bribes to doctors and officials.

GSK said in a statement on their website on Friday that the activities by the firm’s China unit were a “clear breach” of GSK’s governance and compliance procedures. “Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this,” GSK CEO, Andrew Witty, said in the statement.

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Anything for a bank.

• US Regulators Weigh Delay for Separating Banks’ Swaps Units (Bloomberg)

U.S. banks may get another year to shift some swaps trading from their government-insured units as regulators respond to demands to give them more time, according to two people familiar with the talks. A delay until July 2016 in applying the Dodd-Frank Act separation requirement is being weighed in discussions between bank lobbyists and officials from the Federal Reserve and Office of the Comptroller of the Currency, according to the people, who requested anonymity to talk about the matter. The provision was included in the 2010 law as a way to shield taxpayers from the kind of risky trading that helped fuel the 2008 credit crisis. Groups representing JPMorgan, Citigroup and Bank of America say the deadline should be delayed while rules are being completed.

Separating swaps units from banking operations is “one of the most important provisions of Dodd-Frank, and one of the ones the big banks fear the most,” Art Wilmarth, a George Washington University law professor, said in an interview. “They get huge cost advantages — including margin advantages — if they keep them inside the bank,” he said. Six years after the worst financial crisis since the Great Depression, the lobbying underscores the banking industry’s persistence in fighting rules crafted to prevent a repeat of 2008, when taxpayers rescued AIG after billions of dollars in losses at a swaps-trading unit. The industry groups have won concessions on Volcker Rule limits on banks’ proprietary trading and filed lawsuits that have delayed rules at the Securities and Exchange Commission and Commodity Futures Trading Commission.

Dodd-Frank requires banks to move certain equity, commodity and non-cleared credit swaps outside of bank units with deposit insurance and access to the Fed’s discount window. Blanche Lincoln, a former U.S. senator who led the Agriculture Committee in the run-up to the regulatory overhaul, sponsored the swaps provision. It originally applied to more types of derivatives before being scaled back amid objections from bank lobbyists, then-Fed Chairman Ben S. Bernanke and former Federal Deposit Insurance Corp. Chairman Sheila Bair. As a result, the banks don’t have to remove interest-rate swaps, the largest part of the market.

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Word! I’ve said this a 1000 times: “if you want to pursue idiots like the Fed doing crazy policies, and if you think you can get out in time, go for it.”

• “Stocks Are More Crash-Prone Than Ever”: Fleckenstein (Zero Hedge)

Infamous short-seller Bill Fleckenstein left a CNBC anchor questioning her faith in the status quo in this brief interview. As she pestered him with questions about ‘missing out on the rally’, Fleckenstein snapped back “so what? I don’t care, it doesn’t matter” asking rhetorically “when the market declines, how fast will it all be taken away from you?” Fleckenstein warned “I don’t think we will get through October without some accident,” adding that “the stock market is more crash-prone than ever.” When pressed again about sitting on the sidelines, Fleckenstein rebukes, “if you want to pursue idiots like the Fed doing crazy policies, and if you think you can get out in time, go for it. I don’t want to try to do that.” As CNBC notes, some traders might regret missing out on what may go down in history books as the bull market of a lifetime, but “I’m not kicking myself,” he said. “I don’t care, it doesn’t matter.” “I don’t have to play every day,” he added.

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There ain’t none.

• Why Global Growth Is So Disappointing (Epsilon)

There is one great mystery in the high falutin’ circles of the Fed, ECB, and IMF today. Why is global growth so disappointing? There are different variations on this theme – why aren’t businesses investing more? why aren’t banks lending more? – but it’s all one basic question. First the Fed, then the BOJ, and now the ECB have taken superheroic efforts to inflate financial asset prices in order to bridge the gap between the output shock of 2008 and a resumption of normal economic growth. They’ve done their part. Why hasn’t the rest of the world joined the party? The thinking was that leaving capital markets to their own devices in the aftermath of the Great Recession could result in a deflationary equilibrium, which is macroeconomic-speak for falling into a well, breaking your leg, at night, alone. It’s the worst possible outcome.

So the decision was made to buy trillions of dollars in assets, forcing all of us to take on more risk with our money than we would otherwise prefer, and to jawbone the markets (excuse me … “employ communication policy”) to leverage those trillions still further. All this in order to buy time for the global economic engine to rev back up and allow private investment activity to take over for temporary government investment activity. It was a brilliant plan, and as emergency intervention it worked like a charm. QE1 (and even more importantly TLGP) saved the world. The intended behavioral effect on markets and market participants succeeded beyond Bernanke et al’s wildest dreams, such that now the Fed finds itself in the odd position of trying to talk down the dominant Narrative of Central Bank Omnipotence. But for some reason the global economic engine never kicked back in.

The answer? We must do more. We must try harder. And so we got QE2. And QE3. And Abenomics. And now Draghinomics. We got what we always get in the aftermath of a global economic crisis – a temporary government policy intervention transformed into a permanent government social insurance program. But the engine still hasn’t kicked in. So now villains must be found. Now we must root out the counter-revolutionaries and Trotskyites and Lin Biao-ists and assorted enemies of progress. Because if the plan is brilliant but it’s not working, then obviously someone is blocking the plan. The structural villains per Stanley Fischer (who is rapidly becoming a more powerful Narrative voice and Missionary than Janet Yellen): housing, fiscal policy, and the European economic slow-down. Or if you’ll allow me to translate the Fed-speak: consumers, Republicans, and Germany. These are the counter-revolutionaries per the central bank apparatchiks. If only everyone would just spend more, why then our theories would succeed grandly.

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Grandma‘s dementia setting in?

• Janet Yellen Believes You Can Get Rich By Going Into Debt (Phoenix)

Janet Yellen’s latest talk was very telling. The title of her talk was: “The Importance of Asset Building for Low and Middle Income Households”. The title alone is very telling. Fed policies under Bernanke and Yellen have proven absymal at creating jobs or boosting incomes. The only thing the Fed has done is push housing and stock (asset) prices higher. Thus, for Yellen, the means of improving one’s lot in life has nothing to do with obtaining a higher paying job. The best way to move up in life is to own stocks… or a house… or preferably both. This is how the Fed thinks: in terms of asset prices and leverage. These are items that only the top 0.1% of Americans really benefit from. Indeed, the Fed’s very policies (low interest rates, plenty of liquidity) benefit the wealthiest the most because these individuals can use their wealth as collateral in order to leverage up and benefit from rising asset prices.

This is the very strategy Larry Ellison has been using for years to live beyond his even ample means: The multi-millionaire or billionaire can leverage up to invest in real estate or stocks… the average american cannot. Indeed, over 95% of Americans cannot buy a home in cash. So buying a home means going deeply in to debt, not generating wealth. Indeed, the only way of building wealth through real estate for most Americans would be if you bought a home and the home’s price increased substantially to the point that selling would actually turn a profit beyond closing costs, taxes (both capital gains and property taxes for the duration of your inhabiting the home), and moving. This means: 1) home prices have to increase dramatically, 2) you have to have a LOT of variables work out in your favor. The fact Yellen believes in this stuff is telling. You won’t hear the Fed talk about incomes or jobs because the Fed has no clue how to create either. But asset prices are easy to boost… just spent $3 trillion and you’ll get a roaring stock market.

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It’s all junk.

• Highly Indebted Chinese Firms Face Off With Ratings Agencies (Reuters)

Chinese companies hounded by debt obligations accrued over the past few years are grappling with a new adversary at what is a very inconvenient time: global ratings agencies. Standard & Poor’s and Fitch Ratings have slashed more ratings of Chinese companies in 2014 than a year earlier as towering debts weigh on corporate bottom-lines. The thumbs-down from the agencies will make it harder – and more costly – for companies to borrow at a time when their cash flows are taking a hit from a weakened economy. Analysts say big companies backed by the Chinese government are less likely to be at risk than smaller, independent firms that had binged on the easy credit springing from a round of government stimulus in 2008-2009.

On Monday, S&P cut the ratings of China Shanshui Cement and Guangzhou R&F Properties by a notch, plunging them deeper into junk status. Last week, fellow rating agency Moody’s downgraded steelmaker China Oriental, already wallowing in non-investment territory, also by a notch. “When the economy is deleveraging and credit is not growing as fast as before, they need extra cash to repay debt instead of refinancing it in the market, thereby creating pressure on balance sheets and in some cases on the ratings,” said Moody’s analyst Ivan Chung. Data released over the weekend showed factory output grew at its slackest pace in six years in August, stoking fears that China’s economy was sliding deeper into a downturn. Analysts say the steel, metals, chemicals sectors and real estate developers in some cities will find it difficult to raise cash as excess capacity heaps pressure on their credit profiles.

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Nomura doesn’t look terribly smart in this.

• Unsecured Loan, Missing CEO Add Red Flags To China Lending (Reuters)

Nomura Holdings and co-lenders spent nine months poring over the books, sizing up management and even checking out the factory floor at China’s Ultrasonic AG before deciding in August to give the Frankfurt-listed shoemaker a $60 million unsecured credit facility. The loan was unsecured in keeping with regulations in China at the time it was structured. Nomura, a Japanese bank, and its partner banks, however, felt they had done their homework. But within weeks, the 3-year loan had been drawn down in full and two of Ultrasonic’s top executives had disappeared – leaving the lenders in a situation that should ring alarm bells for foreign bankers exposed to China. “You couldn’t get onshore security for offshore loans,” said a person involved in the loan negotiations. “It was a common risk in offshore borrowing for Chinese companies.” The affair is a reminder for offshore banks of the risk of lending to small and mid-sized Chinese firms which have long struggled to access credit.

Local banks are more inclined to lend to larger, more established companies as economic growth slows, forcing smaller firms to seek expensive loans in the less-regulated shadow banking industry or from offshore lenders. Asia-Pacific banks had about $1.2 trillion worth of China-related exposure at the end of last year, including bank and non-bank lending, latest Fitch Ratings data show. “These mid-sized companies are getting hit the hardest by the slight slowdown in the economy, and that’s having an impact on how they view the future …,” said Kent Kedl, Shanghai-based managing director for Greater China and North Asia at consultancy Control Risks. “This isn’t to say that mid-sized companies have any more innately corrupt people in them than do large companies, but large companies can weather storms a little easier.”

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Big shift.

• Steel Industry On Life-Support As China Economy Slows (Reuters)

Subsidies accounted for four-fifths of the profits reported by Chinese steel companies in the first half of this year, a dramatic increase in reliance on state support that illustrates starkly the industrial weakness that is an increasing drag on the economy. The headwinds faced by China’s massive steel sector – falling profit margins and growing dependence on handouts – are shared by other key industrial and infrastructure-related sectors, including aluminium, cement and coal. A Reuters analysis of first-half financial statements from 77 listed Chinese steel, aluminium and cement companies revealed a sharp deterioration in profitability. For the first half of 2013, subsidies accounted for 22% of total profits posted by China’s listed steel mills, and reached 47% in the full year. In the first six months of 2014, the figure jumped to 80%, and, even then, the sector’s profit margin halved to just 0.3%.

The performance of the steel sector, which has been a major driver of China’s growth, underlines the massive challenge facing President Xi Jinping as Beijing tries to wean the economy off its dependence on external demand and investment spending. Data out at the start of the week showed China factory output grew at the weakest pace in nearly six years in August, raising fears that the economy may be at risk of a sharp slowdown unless Beijing implements fresh stimulus measures. The company statements also show rising accounts receivable – the accounting term for money owed by customers – in a sign that more Chinese manufacturers are falling behind on their payments as growth falters, posing an additional problem for firms with high credit costs and financing difficulties. Chinese leaders have repeatedly said they would use a period of anticipated slower growth to implement structural reform.

Growth was at its weakest in 18 months in the first quarter, but the level of support still being poured into companies suggests the re-tooling of the economy has a long way to go. A total of 2,235 firms, or 88% of Chinese listed companies, received government subsidies totaling 32.2 billion yuan ($5.24 billion) in the first half of 2014, according to data from information provider ChinaScope. Most of the subsidies – largely from local governments – were channeled to the steel, cement and property sector in the form of cash, tax rebates or support for loan repayments. The reasons given ranged from research and development to support for government environmental priorities. “There isn’t a lot of innovation happening in sectors such as steel or aluminium,” said Professor Wen Laicheng at Central University of Finance and Economics in Beijing. “The subsidies are clearly a lifeline to help the companies get through these tough times.”

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Vacuum cleaners, gay porn, bacon-flvored ice cream, we need to latch onto anything we can find.

• UK Retail Sales Boosted By Vacuum Cleaners (CNBC)

U.K. retail sales were up in 0.4% in August compared to the previous month and gained almost 4% year-on-year, with consumers flocking to buy high-powered vacuum cleaners ahead of an EU ban. The annual increase is now the 17th month of consecutive year-on-year growth according to data from the Office of National Statistics (ONS), which described the current retail climate as “one of growth.” Sales of household goods surged in August, jumping 12.7% when compared with the previous year. The ONS said it was the largest year-on-year increase since October 2001.

Furniture stores were the main contributor, seeing growth of over 23% when compared to the same period last year, making it the largest jump in sales in 26 years when records began in 1988. Electrical appliance stores also added to the increase in sales, with retailers suggesting consumers were rushing to buy high-powered vacuum cleaners before EU energy saving regulations came into force at the end of August. From 1 September, companies in the EU were banned from making or importing vacuum cleaners above 1600 watts. The recently introduced rules are part of the EU’s energy efficiency directive, designed to help tackle climate change.

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• Assange Says ‘Google A Privatized Version Of The NSA’ (RT)

WikiLeaks founder Julian Assange equated Google with the National Security Agency and GCHQ, saying the tech giant has become “a privatized version of the NSA,” as it collects, stores, and indexes people’s data. He made his remarks to BBC and Sky News. “Google’s business model is the spy. It makes more than 80 percent of its money by collecting information about people, pooling it together, storing it, indexing it, building profiles of people to predict their interests and behavior, and then selling those profiles principally to advertisers, but also others,” Assange told BBC. “So the result is that Google, in terms of how it works, its actual practice, is almost identical to the National Security Agency or GCHQ,” the whistleblower argued.

Google has been working with the NSA “in terms of contracts since at least 2002,” Assange told Sky News. “They are formally listed as part of the defense industrial base since 2009. They have been engaged with the Prism system, where nearly all information collected by Google is available to the NSA,” Assange said. “At the institutional level, Google is deeply involved in US foreign policy.” Google has tricked people into believing that it is “a playful, humane organization” and not a “big, bad US corporation,” Assange told BBC. “But in fact it has become just that…it is now arguably the most influential commercial organization.” “Google has now spread to every country, every single person, who has access to the internet,” he reminded.

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Chinas potential shale is in mountainous regions.

• Gas Hungry China Cuts Shale Goal By 50% (RT)

China has halved its 2020 goal for shale gas production. The country faces challenges ranging from difficult geology to shortage of technology in the area meant to quench its ever-growing energy needs. The country is only starting mass production of shale gas, which drastically changed the energy landscape in the US in recent years, with the extraction of 200 million cubic meters annually. In 2012, when Chinese shale gas production was virtually non-existent, Beijing eyed an ambitious goal of 60-80 billion cubic meters (bcm) by 2020, but the latest plans from the Ministry of Land and Resources on Wednesday lowered it to more conservative 30 bcm. A higher figure is possible, but conditional. “China aims to pump at least 30 billion cubic meters of shale gas by 2020. With proper drilling technology, output can increase to 40 to 60 billion cubic meters,” Che Changbo, deputy director of the ministry’s geological exploration department, said at a news conference in Beijing.

Short-term prospects for shale gas production are more optimistic, according to the ministry. It will surpass the old government 2015 target of 6.5 bcm next year and hit 15 bcm in 2017. China has carved out 54 shale gas blocks spanning 170,000 sq km. Producers have drilled 400 wells, including 130 horizontal. The ministry said the economies of scale and localization of drilling technology are making shale gas more commercially attractive in China. The cost of one well has fallen from 100 million yuan to 50 to 70 million yuan, while the drill time dropped from 150 days to between 46 and 70 days. But the industry is still hurdled by several problems, including complex geology, shortage of advanced technology and skilled personnel and regulation barriers. There is also the dominating position of two state-owned giants, PetroChina and Sinopec, which enjoy a privileged access to fields discouraging private investment.

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Big chnage in projections.

• World Population To Hit 11 Billion In 2100, 70% Chance Of Ever More (Guardian)

The world’s population is now odds-on to swell ever-higher for the rest of the century, posing grave challenges for food supplies, healthcare and social cohesion. A ground-breaking analysis released on Thursday shows there is a 70% chance that the number of people on the planet will rise continuously from 7bn today to 11bn in 2100. The work overturns 20 years of consensus that global population, and the stresses it brings, will peak by 2050 at about 9bn people. “The previous projections said this problem was going to go away so it took the focus off the population issue,” said Prof Adrian Raftery, at the University of Washington, who led the international research team. “There is now a strong argument that population should return to the top of the international agenda. Population is the driver of just about everything else and rapid population growth can exacerbate all kinds of challenges.”

Lack of healthcare, poverty, pollution and rising unrest and crime are all problems linked to booming populations, he said. “Population policy has been abandoned in recent decades. It is barely mentioned in discussions on sustainability or development such as the UN-led sustainable development goals,” said Simon Ross, chief executive of Population Matters, a thinktank supported by naturalist Sir David Attenborough and scientist James Lovelock. “The significance of the new work is that it provides greater certainty. Specifically, it is highly likely that, given current policies, the world population will be between 40-75% larger than today in the lifetime of many of today’s children and will still be growing at that point,” Ross said. Many widely-accepted analyses of global problems, such as the Intergovernmental Panel on Climate Change’s assessment of global warming, assume a population peak by 2050.

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“There’s a hard stop here.”

• Exxon, Rosneft Halt Arctic Oil Well Drilling on Sanctions (Bloomberg)

Exxon Mobil and Rosneft halted drilling on an offshore oil well intended as the first step in unlocking billions of barrels of crude in Russia’s remote Arctic, according to people familiar with the project. Work stopped just a few days after the U.S. and European Union barred companies from helping Russia exploit Arctic, deep-water or shale-oil fields, said three people with knowledge of the rig’s operations who asked not to be named since they weren’t authorized to speak about the project. The U.S. sanctions, meant to punish Russia for escalating tensions in Ukraine, gave American companies until Sept. 26 to stop all restricted drilling and testing services.

Exxon, Rosneft and Seadrill Ltd. North Atlantic Drilling unit are under the gun to finish or temporarily seal the $700 million well off Russia’s northern coast before the sanctions deadline, said Chris Kettenmann, chief energy strategist at Prime Executions Inc., a brokerage firm in New York. With just eight days left before sanctions require Exxon to stop all Arctic work with its Russian partner Rosneft, the project probably is on hold until next year at the earliest, he said. “This has been one of the most-watched wells in the industry, so this is a huge deal,” said Kettenmann, who has a sell rating on Exxon’s shares. “There’s a hard stop here.”

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