steel Archives - Page 3 of 5 - The Automatic Earth

U.S. corporate profits are expected to drop the most in 6 1/2 years in the first quarter, led by a wipeout in the embattled energy sector. Earnings for companies in the Standard & Poor’s 500 Index will fall 9.8% year-over-year, which would be the sharpest decline since the third quarter of 2009 and a fourth consecutive quarter of contraction, according to Bloomberg data. Results will be insufficient to justify current stock valuations, says Alex Bellefleur, head of global macro strategy and research at Pavilion Global Markets.

“The US is in for a full-blown end to the economic cycle.”

• Albert Edwards: Coming ‘Tidal Wave’ Will Throw The US Into Recession (BI)

A tidal wave is coming to the US economy, according to Albert Edwards, and when it crashes it’s going to throw the economy into recession. The Societe Generale economist, and noted perma-bear, believes that the profit recession facing American corporations is going to lead to a collapse in corporate credit. “Despite risk assets enjoying a few weeks in the sun our fail-safe recession indicator has stopped flashing amber and turned to red,” wrote Edwards in a note to clients on Thursday. He continued (emphasis added): “Whole economy profits never normally fall this deeply without a recession unfolding. And with the US corporate sector up to its eyes in debt, the one asset class to be avoided — even more so than the ridiculously overvalued equity market — is US corporate debt. The economy will surely be swept away by a tidal wave of corporate default.”

Edwards said that many economic researchers discredit profits as a measure of the business cycle, and it is one of the reasons why they are so bad at predicting recessions. Profits are on the decline for two reasons, according to Edwards. On the one hand, they are dropping because of margin pressure from rising labor costs. But this sort of decrease because of higher wages does not always signal a recession, like in 1986. Additionally, much like the mid-1980s decline, an oil-price crash is disproportionately dragging down profits. The second reason is because companies cannot pass on these increasing wage pressures to consumers through prices. In turn, they decrease spending and hiring, and the most vulnerable cannot make debt payments.

Edwards enumerated three reasons why this time around is a recessionary decrease, not a 1986-style aberration. They are:
• “When the oil price slumped in 1986 the economy was steaming ahead at a 4% pace and so withstood the downturn in business investment.”
• “In 1986 Fed Funds were cut from over 8% to less than 6% at a time when the consumer was re-leveraging, i.e. not debt averse as now.”
• “Finally, companies in 1986 were not up to their necks in debt as they currently are, and their solvency now is far more vulnerable to a profits downturn.”

So this time will not be a quick, oil-driven recovery. The US is in for a full-blown end to the economic cycle. Edwards did include some advice to investors on how to weather the coming wave, though. “And if I had to pick one asset class to avoid it would be US corporate bonds, for which sky high default rates will shock investors,” he wrote. You’ve been warned.

This will only lead to more stimulus until and unless financial markets start applying serious pressure.

• Asian Shares Drop As Banks Come Under Pressure (Reuters)

Asian shares extended losses to three-week lows on Friday, while the yen soared to a 17-month high against the dollar as investors bet Japan would be hard pressed to drive down its currency in the face of widespread foreign opposition. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5%, heading for a weekly drop of 1.8%. Japan’s Nikkei pared earlier losses to near-two-month lows to trade 0.6% lower, with financials under pressure. It’s on track for a decline of 3.1% for the week. China’s Shanghai Composite slid 0.9%, poised for a similar drop for the week. The CSI 300 was down 0.8%, set for a 1.2% weekly decline. Hong Kong’s Hang Seng slipped 0.7%, headed for 1.9% loss for the week.

Bank shares led losses in Europe and the U.S. markets on Thursday, amid talk of more layoffs and cutbacks planned by Europe’s major lenders as they struggle with zero rates. The U.S. S&P 500 lost 1.2%, with financial shares falling 1.9%. In Europe, the FTSE closed down 0.8%, hurt by a drop of more than 2% in financials. “When bank shares are making big falls and their CDS spreads are rising like this, obviously you would think something is afoot. If they keep falling in today’s session, that is going to be really worrying,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank. U.S. stock futures slipped about 0.1% further in Asian trade after Federal Reserve Chair Janet Yellen, in a conversation with former Fed chairmen, said the U.S. economy is on a solid course and still on track to warrant further interest rate hikes.

All vultures all the way.

• KKR’s Chilling Message about the ‘End of the Credit Cycle’ (WS)

After seven years of “emergency” monetary policies that allowed companies to borrow cheaply even if they didn’t have the cash flow to service their debts, other than by borrowing even more, has created the beginnings of a tsunami of defaults. The number of corporate defaults in the fourth quarter 2015 was the fifth highest on record. Three of the other four quarters were in 2009, during the Financial Crisis. At stake? $8.2 trillion in corporate bonds outstanding, up 77% from ten years ago! On top of nearly $2 trillion in commercial and industrial loans outstanding, up over 100% from ten years ago. Debt everywhere! Of these bonds, about $1.8 trillion are junk-rated, according to JP Morgan data. Standard & Poor’s warned that the average credit rating of US corporate borrowers, at “BB,” and thus in junk territory, hit a record low, even “below the average we recorded in the aftermath of the 2008-2009 credit crisis.”

The risks? A company with a credit rating of B- has a 1-in-10 chance of defaulting within 12 months! In total, $4.1 trillion in bonds will mature over the next five years. If companies cannot get new funds at affordable rates, they might not be able to redeem their bonds. Even before then, some will run out of cash to make interest payments. A bunch of these companies are outside the energy sector. They have viable businesses that throw off plenty of cash, but not enough cash to service their mountains of debts! Among them are brick-and-mortar retailers that have been bought out by private equity firms and have since been loaded up with debt. And they include over-indebted companies like iHeart Communications, Sprint, or Univsion.

The “end of the credit cycle” has dawned upon the markets. As credit tightens, companies that can’t service their debts from operating cash flows may be denied new credit with which to service existing debts. The recipe of new creditors’ bailing out existing creditors worked like a charm for the past seven years. But it isn’t working so well anymore. What follows is a debt restructuring — either in bankruptcy court or otherwise. Money is now piling up in funds run by private equity firms, to be deployed at the right moment to profit from this. But not by playing the entire market, or to bail out existing investors. No way. This money will be deployed at the expense of existing investors. One of the biggest players is PE firm KKR, which just raised $3.35 billion to take advantage of opportunities in “distressed assets.” Existing investors, brace yourself!

The west doesn’t stand a chance without protectionism.

• China Steel Exports Will Stay At High Levels For Years (BBG)

Exports of steel from China will remain at high levels as local demand shrinks for years, according to Li Xinchuang, president of the country’s Metallurgical Planning Institute, who said mills in developed markets including the U.K. are struggling because their competitiveness is weak. While export volumes won’t increase from last year’s record, they won’t decline significantly either, Li said. Steel overcapacity is a global problem and China is already playing its part with proposals to close as much as 150 million tons that will put more than half a million people out of work, Li said, speaking in an interview and at a conference. Steel shipments from China surged in 2015 as Asia’s largest economy slowed and domestic demand shrank, with the flood of cargoes boosting global competition, hurting prices and squeezing profits. Britain faces an industry crisis after India’s Tata Steel said last week it was considering selling its unprofitable U.K. division, jeopardizing about 15,000 jobs.

Some steelmakers in the U.K. and U.S. “can’t meet local demand and they can’t compete globally,” Li said on Wednesday, rejecting claims that shipments from China are traded unfairly. “China is competitive for three reasons: good price, good service, good quality.” Tata Steel’s plan to sell its British plants has led to U.K. calls for tougher trade measures against China, which accounts for half of global output. China is prepared to defend itself at the World Trade Organization, according to Li, who’s also deputy secretary general of the China Iron & Steel Association. Fortescue CEO Nev Power sees the country becoming more competitive. “The new steel mills that are being built in China are very efficient, very energy-efficient, very productive,” he said in a Bloomberg TV interview on Thursday. “China is setting itself up to be a very competitive supplier to other emerging economies throughout Asia.”

Sign of the times.

• US Politics Is Closing The Door On Free Trade (FT)

Donald Trump wants to slap punitive tariffs on China. Hillary Clinton opposes the 12-nation Trans-Pacific Partnership she once hailed as a gold standard for a new generation of free trade deals. Republicans are embracing Democrat demands for “fair” trade. The US, the architect of the open global system, is turning inwards. The rest of the world should sit up. This is about more than the raw political emotions stirred by a US presidential race. The WTO’s failed Doha Round saw the end of the multilateral trade liberalisation that gave us the globalised economy. The failure of the TPP would read the rites over the big plurilateral deals that promised an alternative. Free trade has been a powerful source of prosperity. It has lost political legitimacy. And not only in the US: European populists of left and right share the Trumpian disposition to throw up the barricades.

Optimists hope the protectionist turn in the US is cyclical. Things will get back to normal once the cacophony of the presidential contest subsides. Freed from the primary challenge of Bernie Sanders, Mrs Clinton, the most likely successor to President Barack Obama, will find a way to change her mind again. The TPP could yet be smuggled through Congress during the lame-duck interlude after November’s elections. Such is the line from Mr Obama’s White House and from a diminishing band of Republicans true to their free trade heritage. All the evidence points the other way. Globalisation has gone out of fashion. Shrewd Washington observers have concluded that, as one puts it, “ there is not a chance in hell” of the next president or the next Congress – of whatever colour – backing the TPP.

As for the mooted, and now being negotiated, Transatlantic Trade and Investment Partnership (TTIP) designed to integrate the US and European economies, dream on. Mr Trump has struck a powerful chord among his core constituency in blaming foreigners for America’s economic ills. The backlash against free trade, though, runs deeper than cheap populism. The middle classes have seen scant evidence of the gains once promised for past deals. Republicans, fearful that they have already lost the presidency, do not want to risk handing Congress to fair-trade Democrats. Some problems are specific to the TPP. The prospective wins for the US are heavily tilted towards technology businesses on the west coast.

Manufacturing America thinks it secures little in the way of better access to Asian markets and complains that the deal leaves US companies vulnerable to currency manipulation by overseas competitors. Many more Americans than would ever gift their votes to Mr Trump question whether they get anything out of trade deals. Free trade has always created losers, but now they seem to outnumber the winners. There is nothing populist about noticing that globalisation has seen the top 1% grab an ever-larger share of national wealth.

Time for shareholders.

• VW Managers ‘Refuse To Forego Bonuses’ (AFP)

Top executives at Volkswagen are refusing to forego their bonuses this year, despite prescribing belt-tightening for the carmaker’s workforce in the wake of the massive emissions-cheating scandal, the weekly magazine Der Spiegel reported on Thursday. Without naming its sources, the magazine said that shortly before a supervisory board decision that executive board members had made it clear they were willing to “accept a cut in their bonuses, but not forego them entirely”, even though they have repeatedly told the workforce that the crisis threatens the group’s very existence. VW’s former chief executive Martin Winterkorn received a bonus of more than €3 million a year ago. A company spokesman told AFP that the board pay would be published in VW’s annual report on April 28.

“The management board is determined to set an example when it comes to the adjustment in the bonuses,” he said, dismissing the Spiegel article as “pure speculation.” Winterkorn’s successor Matthias Mueller was parachuted in last year to steer the carmaker out of its deepest-ever crisis which erupted when VW was exposed as having installed emissions-cheating software into 11 million diesel engines worldwide. At the time, Mueller told the workforce that there would have to be “belt-tightening at all levels” from management down to the workers. But according to Der Spiegel, the former finance chief Hans-Dieter Poetsch, who was appointed to the head of the supervisory board in October, pocketed nearly €10 million as “compensation” for the lower pay he would receive as a result.

The scandal is expected to cost VW still incalculable billions of euros in fines and possible legal costs. Unions are concerned that the belt-tightening needed to cope with the fallout from the engine-rigging scandal could lead to job cuts. “We have the impression that the diesel engine scandal could be used as a backdoor for job cuts that weren’t up for discussion until a couple of months ago,” the works council wrote in a letter to the management of VW’s own brand and published on the website of the powerful IG Metall labour union.

“.. 90% of the world’s banks will have disappeared in the next 20 years..”

• It’s Time To Start Worrying About The Health Of European Banks (BBG)

European banks have lost their mojo. A toxic combination of negative interest rates, comatose economies and a regulatory backdrop that might euphemistically be described as challenging is wreaking havoc with bank business models. Their collective market value has dropped by a quarter so far this year. The smoke signals emanating from the European Central Bank in recent weeks suggest regulators aren’t blind to this. Daniele Nouy, who chairs the ECB’s bank supervisory board, said earlier this week that the central bank “is aware that the low-interest-rate environment is putting pressure on the profitability of European banks.” Regulators may respond by going easier when drafting new rules.

Bank-failure rules to prescribe how banks design their balance sheets to absorb potential losses may be eased, according to a European Commission discussion paper prepared last month. Meanwhile, a global panel of regulators will hold a meeting in London this month to let banks give additional feedback on proposed rules about how much capital they must set aside to back their trading activities. This comes none too soon. The drop in industry capitalization, which reflects investor unease about future profitability, is rearranging the pecking order in European finance. Deutsche Bank, for example, was the most active manager of European bond sales in 2014 with a market share approaching 6.5%; last year it slipped to third, and so far this year it ranks fourth. At the end of 2015 the German lender was Europe’s 14th biggest bank; now it’s 20th:

Deutsche Bank Chief Executive Officer John Cryan said last month that, burdened by restructuring and legal costs, he doesn’t expect his firm to be profitable this year. It’s far from the only one struggling; on Tuesday, Barclays warned that its first-quarter investment banking income will be worse than it was last year. In Italy, officials are scrambling to create a state-backed fund to prop up an industry burdened by more than €200 billion of the €1.2 trillion of bad loans hampering the euro zone’s recovery. No wonder ECB President Mario Draghi spent much of his press conference a month ago answering questions about the damage negative interest rates are doing to banks. They have to pay for the privilege of holding cash on deposit at the central bank, but can’t pass those costs onto their own depositors.

The current structure of the banking system is “unfeasible,” and 90% of the world’s banks will have disappeared in the next 20 years, Banco Bilbao Vizcaya Argentaria SA Chairman Francisco Gonzalez said in an interview published by El Pais newspaper last week. Banks that can’t cover their cost of capital aren’t viable, making industry consolidation inevitable, he said.

Subprime revisited. The weight will shift from borrowers to lenders.

• More Than 40% of Student Borrowers Aren’t Making Payments (WSJ)

More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, raising worries that millions of them may never repay. The new figures represent the fallout of a decadelong borrowing boom as record numbers of students enrolled in trade schools, universities and graduate schools. While most have since left school and joined the workforce, 43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1, according to a quarterly snapshot of the Education Department’s $1.2 trillion student-loan portfolio. About 1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt, meaning they had gone at least a year without making a payment.

Three million more owing roughly $66 billion were at least a month behind. Meantime, another three million owing almost $110 billion were in “forbearance” or “deferment,” meaning they had received permission to temporarily halt payments due to a financial emergency, such as unemployment. The figures exclude borrowers still in school and those with government-guaranteed private loans. The situation improved slightly from a year earlier, when the nonpayment rate was 46%, but that progress largely reflected a surge in those entering a program for distressed borrowers to lower their payments. Enrollment in those plans, which slash monthly bills by tying them to a small%age of a borrower’s income, jumped 48% over the year to 4.6 million borrowers as of Jan. 1.

Advocacy groups, some members of Congress and the federal Consumer Financial Protection Bureau fault loan servicers—companies the government hires to collect debt—for not doing enough to reach troubled borrowers to offer such payment options. “The servicers aren’t quite promoting them in the way they should be—I think some of it’s information failure,” said Rachel Goodman, a staff attorney at the American Civil Liberties Union.

Foot. Mouth.

• UK’s Cameron Admits He Profited From Father’s Offshore Fund (AFP)

British Prime Minister David Cameron admitted Thursday he had held a £30,000 stake in an offshore fund set up by his father, after days of pressure following publication of the so-called Panama Papers. Cameron sold the stake in the Bahamas-based trust in 2010, four months before he became prime minister, he said in an interview with television channel ITV. Downing Street have issued four statements on the affair this week following Sunday’s publication of the leaked Panama Papers, which showed how Panama-based law firm Mossack Fonseca had helped firms and wealthy individuals set up offshore companies. “We owned 5,000 units in Blairmore Investment Trust, which we sold in January 2010. That was worth something like £30,000,” Cameron said.

“I sold them all in 2010, because if I was going to become prime minister I didn’t want anyone to say you have other agendas, vested interests.” He insisted he had paid income tax on the dividends from the sale of the units, which he bought in 1997. Downing Street first dismissed the story as a private matter on Monday before saying Cameron had no offshore funds, then saying he and his wife and children did not benefit from any offshore funds. It later added that Cameron would not benefit from such funds in the future. The row is the latest headache for Cameron, who faces a tight race to ensure Britain stays in the European Union in a referendum due to be held on June 23.

The prime minister has been under intense pressure from the main opposition Labour party and media this week to come clean over his financial arrangements past and present. Labour’s deputy leader Tom Watson told Sky News that, while it was too early to say whether Cameron should quit, “he may have to resign over this but we need to know a lot more about what his financial arrangements have been”.

A wave of lost jobs.

• European Bankers Step Down as Panama Papers Pile on Pressure

European regulators pressed the region’s banks for details of their offshore business dealings, as two senior bankers resigned over allegations arising from the Panama document leak. Britain’s financial watchdog sent out letters asking banks and other financial companies to disclose any ties to Panama law firm Mossack Fonseca, said a person with knowledge of the situation. Swiss regulator Finma said it would also investigate “suspicious” connections unearthed by the Panama Papers. “The leaked database from Panama is just the latest proof of how money flows like water through multiple jurisdictions, sometimes for legitimate purposes, sometimes not,” Finma director Mark Branson told reporters in Bern on Thursday.

Media reports this week based on millions of documents leaked from Mossack Fonseca revealed how its lawyers, including a Geneva team, worked with Credit Suisse, UBS and other banks to create offshore shell companies for world leaders, athletes and other rich clients. On Thursday, ABN Amro announced the resignation of supervisory board member Bert Meerstadt after his name appeared in the leaked records. He said in a statement that he had already planned to leave but was now resigning immediately “to prevent any detrimental effects to the bank.” Meerstadt was a shareholder of a British Virgin Island-based entity in March 2001, Dutch newspaper Het Financieele Dagblad reported Thursday. ABN Amro CEO Gerrit Zalm said he had never heard of Mossack Fonseca before the leak and that he doesn’t know the facts of the case but considers it a private matter. In Austria, the chief executive officer of Vorarlberger Landes- und Hypothekenbank, resigned after the province-owned bank was mentioned in reports about offshore companies.

Michael Grahammer cited “biased” local media reports about offshore accounts linked to Gennady Timchenko, a Russian billionaire targeted by U.S. sanctions since 2014. “I’m still 100 percent convinced that the bank has at no time violated laws or sanctions,” Grahammer said. “At the end of the day, the media bias against Hypo Vorarlberg and myself that showed in the last few days was the main reason for me to take this step.” In its letters, the U.K. Financial Conduct Authority gave firms an April 15 deadline to disclose any connections to Mossack Fonseca. In Sweden, the government will consider tightening laws against money laundering and tax evasion. Financial Markets Minister Per Bolund said. He said authorities are investigating allegations that Nordea Bank, the biggest bank in Scandinavia, helped clients evade tax through shell companies in low-tax countries.

More signs of the times.

• Pirate Party Backed By Almost Half Of Iceland’s Voters (Ind.)

The Pirate Party would receive nearly half of voters’ support if Iceland held a general election now, new statistics have revealed. The anti-establishment party received 43% of the vote according to research by Icelandic media organisations Frettabladid, Stod 2 and Visir. The Progressive Party, currently in a coalition with the Independence Party, would only receive 7.9% support, Iceland Monitor reports. The rising popularity of the Pirate Party, which campaigns in favour of transparency and direct democracy, among people in Iceland is in response to the leak of the Panama Papers. The documents from Panamanian law firm Mossack Fonseca reportedly revealed that Sigmundur David Gunnlaugsson, who stood aside as Prime Minister for an unspecified amount of time earlier this week, owned an offshore company in the British Virgin Islands with his wife.

Mr Gunnlaugsson did not declare Wintris, which held millions in the bonds of failed Icelandic banks, when he entered parliament, according to the International Consortium of Journalists. He has denied any wrongdoing and says he sold his shares in the company to his wife. But MPs in the opposition have said it is a conflict of interest with his duties. The government has named Fisheries Minister Sigurdur Ingi Johannsson as Prime Minister and he is due to meet Iceland’s president Olafur Ragnar Grimsson on Thursday. However the opposition in planning on pursuing a vote of no confidence in the government in parliament. Earlier, Pirate Party member Helgi Hrafn Gunnarsson said: We will still push forward for a proposal to dissolve parliament and hold earlier elections. Elections have now been brought forward to autumn.

The EU will cause the deaths of many more people.

• Turkey Will Ditch Migrant Deal If EU Breaks Promises: Erdogan (AFP)

Turkish President Recep Tayyip Erdogan on Thursday warned the European Union that Ankara would not implement a key deal on reducing the flow of migrants if Brussels failed to fulfil its side of the bargain. Erdogan’s typically combative comments indicated that Ankara would not sit still if the EU fell short on a number of promises in the deal, including visa-free travel to Europe for Turks by this summer. Meanwhile, the Vatican confirmed that the pope would next week make a brief, unprecedented trip to the Greek island of Lesbos where thousands of migrants are facing potential deportation to Turkey under the deal. “There are precise conditions. If the European Union does not take the necessary steps, then Turkey will not implement the agreement,” Erdogan said in a speech at his presidential palace in Ankara.

The March 18 accord sets out measures for reducing Europe’s worst migration crisis since World War II, including stepped-up checks by Turkey and the shipping back to Turkish territory of migrants who land on the Greek islands. In return, Turkey is slated to receive benefits including visa-free travel for its citizens to Europe, promised “at the latest” by June 2016. Turkey is also to receive a total of €6 billion in financial aid up to the end of 2018 for the 2.7 million Syrian refugees it is hosting. Marc Pierini, visiting scholar at Carnegie Europe, described the visa-free regime as one of the “biggest benefits for Turkey” in the migrant deal. He told AFP that Turkey still has to fulfil 72 conditions on its side to gain visa-free travel to Europe’s passport-free Schengen zone and that the move would also have to be approved by EU interior ministers.

“We shall see if that is a realistic prospect,” he said. Turkey’s long-stalled accession process to join the EU is also supposed to be re-energised under the deal. But Pierini said there were many conditions still to be fulfilled here. “The worst reading of the EU-Turkey deal would be to imagine that Turkey is about to get a ‘discount’ on EU membership conditions just because of the refugees,” he said. Erdogan argued Turkey deserved something in return for its commitment to Syrian refugees, on whom it has spent some $10 billion since the Syrian conflict began in 2011. “Some three million people are being fed on our budget,” the president said. “There have been promises but nothing has come for the moment,” he added.

Europe’s true character is being revealed.

• Amnesty: ‘Serious Flaws’ Mar Greek Side Of EU-Turkey Migrants’ Deal (Reuters)

Migrants held on the Greek islands Lesbos and Chios live in “appalling” conditions with little access to legal aid or information about their fate under a European Union agreement that will send some back to Turkey, Amnesty International said on Thursday. Under a deal between the EU and Ankara in place since March 20, undocumented migrants who cross to Greek islands will be kept in holding centers until their asylum claims are processed. Those who do not qualify will be returned to Turkey. The first group of 202 migrants to be returned, most of them from Pakistan and Afghanistan, were sent back to Turkey on Monday.

“People detained on Lesbos and Chios have virtually no access to legal aid, limited access to services and support, and hardly any information about their current status or possible fate,” said Amnesty Deputy Director for Europe Gauri van Gulik. “The fear and desperation are palpable,” she said. In a report published Thursday, Amnesty said among those held in the centers are a small baby with complications after an attack in Syria, heavily pregnant women, people unable to walk, and a young girl with a developmental disability. Many refugees spoke about the lack of access to doctors or medical staff. Legal aid is scarce and inaccessible to the vast majority, and asylum procedures are expected to be rushed, it said. Refugees told Amnesty that they did not get enough information about what the asylum process will entail. Many have received no or incomplete documentation of their registration.

“It is likely that thousands of asylum seekers will be returned to Turkey despite it being manifestly unsafe for them,” Amnesty wrote. Monitors visited the islands this week. One Syrian woman told Amnesty she and her family signed several documents despite not having an interpreter present, and were not provided with copies. “I don’t need food, I need to know what is happening,” the woman was quoted as saying. “Serious and immediate steps must be taken to address the glaring gaps we’ve documented in Lesbos and Chios,” Amnesty’s van Gulik said. “They show that in addition to Turkey not being safe for refugees at the moment, there are also serious flaws on the Greek side of the EU-Turkey deal. Until both are fully resolved, no further returns should take place.”

Chaos is the MO.

• Questions Mount Over EU’s Role In Processing Greece Asylum Requests (IT)

Four days after the deportation by the EU border agency Frontex of the first group of migrants from Greece to Turkey following the signing of the EU-Ankara deal, questions are mounting as to the EU’s role in processing asylum applications from the thousands of people who have arrived on Greece’s islands since March 20th, when the agreement came into force. While no more deportations have taken place since Monday, almost 5,500 people are now in detention on four Greek islands, 3,100 of them in the Moria hotspot on Lesbos alone, including women, children and other vulnerable groups. According to Boris Cheshirkov of the UN’s refugee agency, the UNHCR, “close to everyone” in Moria has submitted an asylum application.

Under the new regime created by the EU-Turkey agreement, asylum applications from island detainees must be processed within two weeks, in a fast-tracked time frame that includes the appeal process. Previously, the Greek asylum service took an average of three months to adjudicate on each application. A key aspect sees the European Asylum Support Office (Easo), another EU agency, advise overburdened Greek asylum officials on the “admissibility” of each asylum seeker at the initial stage of processing. Easo spokesman Jean Pierre Schembri told the BBC: “This is a relatively short process involving our experts … accessing every applicant on his or her own merits. We then issue an opinion and the Greek authorities then issue the final decision.”

But human rights organisations fear the outcome of this truncated, two-step process, where Greek officials will essentially sign off on Easo recommendations, is predetermined to result in most applicants being returned to Turkey, a “safe third country” according to the agreement. Referring to Syrians, Schembri said Turkey “for one may be safe, but for the other it might not be”. Groups such as Amnesty International say that far too many questions remain about how Easo will make its recommendations. “You can’t have confusion or doubt around these procedures before you kick it off,” said Gauri van Gulik, Amnesty’s deputy director for Europe.

“The biggest question for us is what information and which criteria will be used to decide whether someone is or isn’t at risk in Turkey . . . In some cases, it is quite random how some people are targeted, so it’s not about the individual’s experience or how long they’ve lived in Turkey, alone. It’s also about Afghans not getting any status legally in Turkey if they go back. “The bottom line is that here is no permanent protection for anyone [in Turkey]. There’s only temporary protection status for Syrians and then there’s the practice of certain groups being tolerated for a certain while, which is very different to having protection, access to work and access to social services.”

After saying yesterday nothing would happen for 2 weeks…

• Greece Ferries Second Boat Of Migrants To Turkey Under EU Pact (Reuters)

A ferry carrying 45 migrants left the Greek island of Lesbos for Turkey on Friday, the second such journey carried out under a controversial EU deal to stem mass irregular migration to Europe. A second boat carrying a larger group was scheduled to leave the island later in the morning, state TV reported. Those who left early on Friday were from Pakistan, it said. The first group of 202 migrants to be returned, most of them from Pakistan and Afghanistan, were sent back to Turkey on Monday. At the port of Mytilene, at least two activists jumped into the water close to the small ferry, dangling from the heavy chain of the anchor and flashing the ‘v’ sign for victory. They were hoisted out of the water by the Greek coastguard.

The first group of 202 migrants to be returned, most of them from Pakistan and Afghanistan, were sent back to Turkey on Monday. Under the EU-Turkey deal, Ankara will take back all migrants and refugees, including Syrians, who enter Greece through irregular routes in return for the EU taking in thousands of Syrian refugees directly from Turkey and rewarding it with more money, early visa-free travel and progress in its EU membership negotiations.

No decency, no mercy, no nothing.

• Refugees In Greece Warn Of Suicides (G.)

Syrians and Afghans threatened with deportation from the Greek islands of Lesbos and Chios have said they would rather take their own lives than be expelled from the EU under its migration deal with Turkey. On Monday, 202 migrants were forcibly returned from Lesbos and Chios to the Turkish coast under the landmark deal aimed at halting “irregular” migration to Europe. But Souaob Nouri from Kabul, who is held in the high-security camp in Chios, said: “If they deport us, we will kill ourselves. We will not go back.” A man next to him warned of “terrible scenes” if Greek authorities insisted on pursuing policies that have already caused alarm among human rights groups.

“We are not terrorists,” said the man, who gave his name as Akimi. “We are refugees. The conditions here are very bad. There is no water. They hit pregnant women. Why do they treat us like this? All we want is asylum.” Similar threats of self harm were echoed on Lesbos this week. In a letter passed to the Guardian by aid volunteers on the island, inmates held in the Moria detention centre wrote that they would rather “accept death” than be deported to Turkey. “We will accept death but not return back,” the letter said, adding: “We will all commit suicide if they deport us.” The expulsions have been fraught with controversy.

Thirteen of the 66 deportees who were sent back across the Aegean Sea from Chios under armed guard are believed to have “expressed intent” to apply for asylum – enough, say UN officials, to have kept them in Greece until their requests were examined. “Between 20 March when the deal came into effect and 1 April when it was voted into legislation [by Greek MPs] we have seen limits in the ability of authorities to process claims,” said Katerina Kitidi with the UN refugee agency on Chios, an east Aegean island south of Lesbos. “There has been a definite lack of clarity.” The uncertainty has quickly fuelled tensions on the island. More than 800 inmates broke out of the vastly overcrowded detention facility last week in violent scenes that ultimately saw men, women and children march into Chios town.

Debt Rattle April 3 2016

Apr 032016

April 3, 2016 Posted by Raúl Ilargi Meijer at 9:38 am Finance Tagged with: chaos, EU, Greece, IMF, oil, recession, refugees, riots, steel, Trump, Turkey 4 Responses »

Jack Delano “Untitled” 1940

• Trump Predicts A ‘Very Massive Recession’ (WaPo)

• IMF Plots New “Credit Event” For Greece (Mason)

• Greece Wants IMF Explanations Over Wikileaks Report (AFP)

• IMF Weighing Exit From Greek Bailout (FT)

• Lenders Eye Start Of Greek Debt Relief Talks At Mid-April IMF Meetings (R.)

• As China Turns to Consumers, Australia Confronts End of Iron Age (BBG)

• China’s Zeal For Steel Casts Long Shadows At Home And Abroad (G.)

• The Dogmas Destroying UK Steel Also Inhibit Future Economic Growth (G.)

• Russian Oil Output Rises to Record as Production Freeze in Doubt (BBG)

• Cheap Oil ‘Too Much Of A Good Thing’ For US Economy: Goldman (CNBC)

• Fears Grow Over Refugee Safety With EU Returns Plan Set To Take Effect (Ind.)

• EU-Turkey Refugee Plan Could Be Illegal, Says UN Official (G.)

• Greece On Brink Of Chaos As Refugees Riot Over Forced Return To Turkey (G.)

• 129 Unaccompanied Children Missing Since Calais Camp Demolition (Ind.)

“..it’s a terrible time right now” to invest in the stock market..”

• Trump Predicts A ‘Very Massive Recession’ (WaPo)

Donald Trump said in an interview that economic conditions are so perilous that the country is headed for a “very massive recession” and that “it’s a terrible time right now” to invest in the stock market, embracing a distinctly gloomy view of the economy that counters mainstream economic forecasts. The New York billionaire dismissed concern that his comments – which are exceedingly unusual, if not unprecedented, for a major party front-runner – could potentially affect financial markets. “I know the Wall Street people probably better than anybody knows them,” said Trump, who has misfired on such predictions in the past. “I don’t need them.”

Trump’s go-it-alone instincts were a consistent refrain – “I’m the Lone Ranger,” he said at one point – during a 96-minute interview Thursday in which he talked candidly about his aggressive style of campaigning and offered new details about what he would do as president. The real estate mogul, top aides and his son Don Jr. gathered over lunch at a makeshift conference table set amid construction debris at Trump’s soon-to-be-finished hotel five blocks from the White House. Just before, he had met there with his foreign-policy advisers and just after he visited officials at the Republican National Committee – signs that, in spite of his Trump-knows-best manner, the political novice is making efforts to build a more well-rounded bid.

Over the course of the discussion, the candidate made clear that he would govern in the same nontraditional way that he has campaigned, tossing aside decades of American policy and custom in favor of a new, Trumpian approach to the world. In his first 100 days, Trump said, he would cut taxes, “renegotiate trade deals and renegotiate military deals,” including altering the U.S. role in NATO. He insisted that he would be able to get rid of the nation’s more than $19 trillion national debt “over a period of eight years.” Most economists would consider this impossible because it could require taking more than $2 trillion a year out of the annual $4 trillion budget to pay off holders of the debt.

Creating crisis.

• IMF Plots New “Credit Event” For Greece (Mason)

The IMF has been caught, red handed, plotting to stage a “credit event” that forces Greece to the edge of bankruptcy, using the pretext of the Brexit referendum. No, this is not the plot of the next Bond movie. It is the transcript of a teleconference between the IMF’s chief negotiator, Poul Thomsen and Delia Velculescu, head of the IMF mission to Greece. Released by Wikileaks, the discussion took place in Athens just before the IMF walked out of talks aimed at giving Greece the green light for the next stage of its bailout. The situation is: the IMF does not believe the numbers being used by both Greece and Europe to do the next stage of the deal.

It does not want to take part in the bailout. Meanwhile the EU cannot do the deal without the IMF because the German parliament won’t allow it. As they bicker about the numbers, Thomsen and Velculescu are heard mulling whether to suppress the IMF’s next report on whether Greek debt is sustainable. That’s important because the IMF will only sign up to a deal that involves debt relief, and the Germans will not.

Then Thomsen drops the bombshell:
THOMSEN: What is going to bring it all to a decision point? In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default. Right?
VELCULESCU: Right!
THOMSEN: And possibly this is what is going to happen again. In that case, it drags on until July, and clearly the Europeans are not going to have any discussions for a month before the Brexits and so, at some stage they will want to take a break and then they want to start again after the European referendum.
Velculescu says they should try and do something in April. Thomsen replies:
THOMSEN: But that is not an event. That is not going to cause them to… That discussion can go on for a long time. And they are just leading them down the road… why are they leading them down the road? Because they are not close to the event, whatever it is.
VELCULESCU: I agree that we need an event, but I don’t know what that will be.

So let me decode. An “event” is a financial crisis bringing Greece close to default. Just like last year, when the banks closed, millions of people faced economic and psychological catastrophe. Only this time, the IMF wants to inflict that catastrophe on a nation holding tens of thousands of refugees and tasked with one of the most complex and legally dubious international border policing missions in modern history. The Greek government is furious: “we are not going to let the IMF play with fire,” a source told me. But the issue is out of Greek hands. In the end, as Thomsen hints in the transcript, only the European Commission and above all the German government can decide to honour the terms of the deal it did to bail Greece out last July. The transcript, though received with fury and incredulity in Greece, will drop like a bombshell into the Commission and the ECB. It is they who are holding €300bn+ of Greek debt. It is the whole of Europe, in other words, that the IMF is conspiring to hit with the shock doctrine.

But won’t get any.

• Greece Wants IMF Explanations Over Wikileaks Report (AFP)

Greece on Saturday demanded “explanations” from the IMF after Wikileaks said the lender sought a crisis “event” to push the indebted nation into concluding talks over its reforms. IMF officials, in an internal discussion, allegedly voiced exasperation with Greece on its slow pace of reform, complaining Athens only moved decisively when faced with the peril of default, the website said. An “event” was thus needed to drive the threat of default and get the Greeks to act, one official purportedly says. The “event” is not described in the transcript placed on the Wikileaks website on Saturday. The official, assessing the state of the talks and the political calendar, predicts the EU will stop discussions “for a month” before Britain’s EU referendum on June 23.

The Greek government reacted strongly to the report, saying it wanted the IMF to clarify its position. “The Greek government is demanding explanations from the IMF over whether seeking to create default conditions in Greece, shortly ahead of the referendum in Britain, is the fund’s official position,” spokeswoman Olga Gerovassili said in a statement. The transcript purports to be that of a teleconference that took place on March 19. Those taking part were Iva Petrova and Delia Velculescu, who have been representing the IMF in the negotiations with Greece, and Poul Thomsen, director of the Fund’s European Department.

In it, Thomsen allegedly voices exasperation with the slow pace of talks on Greek reforms between Greece and its international lenders. “In the past there has been only one time when the decision has been made and then that was when (the Greeks) were about to run out of money seriously and to default,” he reportedly says. “I agree that we need an event, but I don’t know what that will be,” Velculescu allegedly replies later in the conversation.

Hubris.

• IMF Weighing Exit From Greek Bailout (FT)

The IMF is considering forcing Germany’s leadership to quickly grant wide-ranging debt relief for Greece or allow the Fund to exit Athens’ bailout programme after six years, according to a transcript of an internal IMF teleconference published by WikiLeaks. The teleconference, between the head of the IMF’s European operations and its top Greek bailout monitor, is the clearest sign to date that the Fund wants to leave Greece’s €86 billion ($97 billion) rescue to the European Union alone and wash its hands of a programme that has led to a torrent of criticism. During the call, which occurred just two weeks ago, Poul Thomsen, head of the IMF’s European bureau, notes that Berlin is under intense political pressure because of the refugee crisis and suggests confronting Angela Merkel, the German chancellor, to either agree to debt relief or allow the IMF to exit.

German officials have repeatedly said they could not participate in Greece’s bailout without the IMF on board, and senior members of the Bundestag have warned Ms Merkel they would reject new eurozone loans to Greece if only EU authorities were monitoring the programme. “Look, you Ms Merkel, you face a question, you have to think about what is more costly: to go ahead without the IMF? Would the Bundestag say, ‘The IMF is not on board’?” the transcript quotes Mr Thomsen as saying to his staff. “Or [does Ms Merkel] pick the debt relief that we think that Greece needs in order to keep us on board? Right? That is really the issue.” The IMF said it would not comment on “supposed reports of internal discussions.” But it noted that it has long pushed for “a credible set of reforms matched by debt relief from [Greece’s] European partners.”

One official involved in the talks said it accurately reflected Mr Thomsen’s private and publicly-stated views, albeit in “more direct and colourful language.” Many of the points raised by Mr Thomsen in the call have been made publicly on his IMF blog. Greek officials, however, reacted angrily to the revelation, arguing it was evidence the IMF was “blackmailing” Germany on the debt relief issue. “We will not allow anyone to play with fire and blackmail Greece or Germany or Europe,” said a senior Greek official. Alexis Tsipras, the Greek prime minister, was meeting with his cabinet on Saturday to decide how to respond and was expected to talk to Christine Lagarde, the IMF managing director, later in the day.The IMF teleconference came just days after Wolfgang Schäuble, the powerful German finance minister, publicly said he was opposed to Greek debt relief — despite the fact eurozone leaders agreed to restructuring last July at a high-drama EU summit that agreed to a third bailout programme.

Yada yada.

• Lenders Eye Start Of Greek Debt Relief Talks At Mid-April IMF Meetings (R.)

Euro zone finance ministers are likely to start discussing debt relief for Greece on the sidelines of the IMF’s spring meetings in mid-April, if there is a deal by then with Athens on a reform package, euro zone officials said. Representatives of Greece’s official lenders are to resume talks with the Greek government from Monday on how to tackle non-performing loans in the banking system and pension and income tax reforms. Negotiations on these reforms have been dragging on for months because they are politically very difficult for the left-wing government of Alexis Tsipras, elected on promises to end austerity. Yet these measures are crucial for Greece to reach a sizeable primary surplus in 2018, when lenders hope it will be able to manage its own finances and borrow from the market at sustainable rates.

Without an agreement on the measures, Athens cannot get the next tranche of loans from the euro zone bailout fund. It needs the money to pay back $4 billion to the IMF and the ECB in July. An agreement is also a crucial condition for any debt relief talks to start and a deal on debt relief is also a condition for the IMF to participate in the bailout program for Greece. “If the Greeks want to …have a disbursement well before July, there needs to be agreement on policies by around mid-April – and on 12 April everybody goes to Washington, so best before that,” one senior euro zone official said.

“Only then can one start discussing debt issues in earnest, and that will take some time. And then at the end everything has to come together simultaneously,” the official said. “For now everybody is working towards this – but the decisive factor is if the Greeks can pull their act together politically, there is no technically difficult issue anywhere,” the official said. Many euro zone finance ministers will participate in the spring meetings of the IMF in Washington on April 15-17, including all the biggest euro zone members, as well as top representatives of all the key euro zone institutions.

Down for the count.

• As China Turns to Consumers, Australia Confronts End of Iron Age (BBG)

Just as China’s industrialization helped reshape Australia’s economy, the Asian giant’s pivot toward consumer-led growth is challenging Down Under anew. Chinese demand for food and energy will only partly offset slowing growth in iron ore exports that funneled cash throughout Australia for more than a decade, according to the Reserve Bank of Australia. That means the nation must find new growth drivers at a time a housing boom falters and a resurgent currency compound difficulties posed by the slowdown in Australia’s biggest trading partner. Central bank Governor Glenn Stevens acknowledged last week it’s impossible to know how China’s transition will unfold given nothing on the scale has been tried before, signaling elevated risks ahead for the developed world’s most China-dependent economy.

Minutes from its March 1 board meeting – where interest rates were kept at a record low 2% – showed a bigger chunk of policy makers’ time was spent discussing China. “The Australian economy at the moment is being buoyed by the confidence that comes from extraordinarily low interest rates driving up asset prices,” said Andrew Charlton, director of consultancy AlphaBeta in Sydney and one-time adviser to former Prime Minister Kevin Rudd. The subsequent housing boom and wealth creation “have been temporary policy stimulus holding up what will be a long-term negative impact of the changing Chinese economy on Australia.” The stakes are high for Australia, with China accounting for about a third of its trade and earning the mineral-rich country about 5% of its GDP.

Furthermore, resources will still comprise a larger share of Australia’s commodity exports to China than food in the coming two decades, the RBA’s chief China specialist Ivan Roberts said in a research paper released March 18. The pressures aren’t restricted to Asia. China’s steel production could be materially cut by a European Union move to consider tougher steel-import tariffs amid concern that Chinese producers pose a threat to their continental counterparts, Fitch Ratings warned on March 24. That would inevitably flow onto Australia’s iron ore industry, where prices have already slumped about 75% in the last five years. While iron ore rebounded 23% in the first quarter to as high as $63.74, McKinsey & Co. predicts the steel making ingredient will snap back to between $45 and $50 this year as evidence of any real improvement in demand is scant.

Trade war is inevitable.

• China’s Zeal For Steel Casts Long Shadows At Home And Abroad (G.)

Until recently steel was a Chinese success story. Its steel industry kicked off in 1894 with a small victory against its historic rival, Japan, after the opening of the Hangyang Iron Works in Hubei province. Though it opened two years before Japan’s first steel plant, the factory was privatised in 1908 and was eventually bought by the Japanese. The first world war stimulated demand, and after a postwar decline in production, further Chinese steel plants saw the industry take off. When Mao Zedong took power in 1949 and the People’s Republic of China was established, self-sufficiency rather than global industry domination was the driving force in a diplomatically isolated country. Steel production expanded through the 1950s as Soviet-influenced heavy industrialisation kicked in.

Annual output was 158,000 tonnes when Mao took over; by 1976, the year before his death and the final year of the decade-long Cultural Revolution, it was 20.5 million tonnes. But in the 1980s, China imported more and more steel as it struggled to meet domestic demand. As the country’s economic clout grew, the government set a target of increasing crude steel production to 60 million tonnes by the end of 1990 and 80 million by 1995. Early signs of the recent, disastrous, overproduction were apparent as these targets were surpassed. In 1996, China overtook Japan to become the world’s biggest steel producer, churning out more than 101 million tonnes that year. The 2008 global recession failed to put the brakes on. While much of the developed world was mired in crisis, China boasted a 9% GDP growth rate in 2009.

Steel production was still rocketing, with output of 683 million tonnes in 2011. After 2014, China’s economic growth slowed, and so did domestic demand. China responded by increasing steel exports, which led to accusations of dumping. In 2015 exports increased by 20% to 107 million tonnes. Prices were slashed as Chinese steel companies battled to survive. The dumping cast a shadow over the UK steel industry, and has also meant shutdowns and layoffs at Chinese plants. Last month, before it became clear that 40,000 jobs were at risk in the UK, the Chinese government announced that 500,000 steel workers were to lose their jobs. All this is the result of China’s first annual steel industry contraction in a quarter of a century, announced last January. The government is aiming to cut steel production by 150 million tonnes by 2020.

Ayn Rand.

• The Dogmas Destroying UK Steel Also Inhibit Future Economic Growth (G.)

The elimination of Britain’s steel industry in a matter of weeks – the reality of Tata’s statement that it wants to close its UK operations – is, by any standards, shocking. There will be efforts to save something from the ruins, but the financial and trading truths are brutal. This has not happened, however, in a day, or even over the past few years. Rather the plight of British steel making is the culmination of 40 years of refusal to organise economic, financial and industrial policy to support the generation of value. This is done in the laissez-faire belief – contested even in economic theory – that any such attempt is self-defeating. Business secretary Sajid Javid personifies this view. In fact, he is surely the most ideologically driven and least practical politician to hold this key post since the war. The most generous interpretation is that this is creative destruction at work.

Steel was an integral element of an industrial economy now giving way to a new knowledge-based capitalism where know-how is more important than brawn. It is tragic for those whose livelihoods and skills are now redundant, but it was no less tragic for ostlers, sailmakers and coal miners in their day. The trouble is that Britain is very good at destruction, much less good at the creative part. Nor is it clear that steel’s days are over: its usage in a range of key functions – from transport to construction – remains fundamental and is growing. Rather, the economic behemoth China has monumentally over-invested in steel, for which there is too little domestic demand, and is now flooding world markets. Britain, with a systemically overvalued exchange rate, porous market, high energy costs and ideological refusal to join others in the EU to deter imports dumped below cost with higher tariffs, is uniquely exposed to the threat.

Now up to 40,000 workers directly and indirectly connected to steel production are about to lose their livelihoods. Beneath the specifics of the steel industry lie more deep-seated problems. The day after Tata’s announcement, the Office of National Statistics (ONS) disclosed that the country’s balance of payments deficit in the last quarter of 2015 climbed to a record 7% of GDP. Britain’s international accounts are more in the red than those of any other developed country. Imports of goods and services, which have steadily outstripped exports for decades, are now to be given an extra impetus by the closure of UK steel capacity. What’s more, the same weaknesses that plague the old also inhibit the growth of the new.

After the interventionism of the 1930s – or even the 1950s and 1960s – Britain could boast dozens of substantial companies representing industries as disparate as pharmaceuticals, chemicals, aerospace and electronics. Not so in 2016. Only two high-tech companies are represented in the FTSE 100 – ARM and Sage. Another 20 years of the laissez-faire framework Javid cherishes – he is a devotee of the wild philosopher of hyper-libertarianism Ayn Rand – and the economy will be eviscerated, with a current account deficit so large it cannot be conventionally financed. The consequences – on living standards, employment, inflation, interest rates and house prices – will be severe.

Not in doubt, but non-existent.

• Russian Oil Output Rises to Record as Production Freeze in Doubt (BBG)

Russia’s oil output set a post-Soviet high in March as the success of a proposed crude production freeze between OPEC members and other major producers appeared to be in doubt. Russian production of crude and a light oil called condensate climbed 2.1% in March from a year earlier to 10.912 million barrels a day, according to the Energy Ministry’s CDU-TEK unit. That narrowly beat the previous high of 10.910 million barrels in January. With most OPEC members, Russia and some others outside the group scheduled to meet in Doha this month to discuss an accord on capping output, Saudi Arabia’s Mohammed bin Salman signaled in an interview with Bloomberg that if any country raises output, the kingdom will also boost sales.

Prices on Friday sank more than 4% after the comments. Iran previously said it plans to boost production after the lifting of sanctions following a deal to curb its nuclear program. Saudi Arabia, Russia, Venezuela and Qatar in February first proposed an accord to cap oil output to reduce a worldwide surplus and boost prices. Brent prices in London have gained nearly 40% from the 12-year low reached in January. Russian oil exports rose 10% to 5.59 million barrels a day, according to the Energy Ministry data.

It was always blind to presume otherwise.

• Cheap Oil ‘Too Much Of A Good Thing’ For US Economy: Goldman (CNBC)

The U.S.’s embarrassment of oil riches may not have been that beneficial after all. Those are the findings of a recent Goldman Sachs report, in which the bank explained that the net effects of cheaper crude on growth have been “negative so far,” given the impact on oil producers who are now finding it hard to churn out more black gold while maintaining needed levels of capital expenditures. Although Goldman acknowledged a lift to consumer spending, the summary constituted an admission that the virtues of the boom that sent U.S. oil production skyrocketing, leaving world markets awash in inexpensive crude, may not have delivered the economic boost many observers had anticipated at its outset.

“While cheap oil has … become ‘too much of a good thing’ for growth, the employment impact of lower oil prices is likely still positive, reflecting the modest effect on employment of the capital-intensive energy sector,” Goldman wrote. Last year, the U.S. produced nearly 10 million barrels per day — the largest amount in decades and second only to Saudi Arabia. As a consequence of the massive buildup of supply that flooded world markets, oil prices slumped by more than half, placing intense pressure on domestic energy producers. In the research note released on Saturday, Goldman estimated that the level at which U.S. producers would need to breakeven is somewhere within a range of $45 to $80. On Friday, crude closed below $40 per barrel. Given current levels of crude, the crumbling of capital expenditures is a net drag on economic growth, Goldman notes.

It added that oil would need to climb back to $70 at least to give energy capital spending a second wind. “Adding up, we conclude that the net effect of cheap oil on growth has probably been negative so far, with the capex collapse outweighing the consumption boost,” analysts wrote. “But going forward, the net effect is likely to be neutral at worst under our $30 scenario, but would be moderately positive if oil prices rebound to $50 or $70, reflecting the outsized impact of price changes in this crucial range on energy capex and production,” it added. With that as a backdrop, energy companies are feeling the pinch of lower crude prices. Last year, ratings agency Standard & Poor’s warned that 50% of energy company bonds were now considered “distressed” and were at risk of default. In total, S&P estimates that $180 billion worth of debt falls in that category. Meanwhile, at least 50 different oil and gas companies have filed for bankruptcy since last year.

The deal will throw back Europe by decades in the eyes of the world.

• Fears Grow Over Refugee Safety With EU Returns Plan Set To Take Effect (Ind.)

Fears are growing that Greece will be unable to manage the task of sending back refugees to Turkey under the European Union’s controversial migrant transfer deal which is due to be enforced from Monday. Humanitarian aid groups have warned that the deal will be impossible for overwhelmed Greek and EU officials to implement. While a top UN official has said that the deal to send Syrian refugees back to Turkey en masse could be illegal, as Ankara is pushing them back over the border into the war zone. “Collective deportations without having regard to the individual rights of those who claim to be refugees are illegal,” Peter Sutherland, the UN Secretary General’s special representative for international migration and development told the BBC.

“Secondly, their rights have to be absolutely protected where they are deported to, in other words Turkey. There has to be adequate assurances they can’t be sent back from Turkey to Syria.” There has also been opposition to the move from within both Greece and Turkey. In the coastal Turkish town of Dikili, hundreds demonstrated on Saturday against the prospect of hosting people expelled from the nearby Greek islands, especially Chios and Lesbos. A plan to build a reception centre for returned migrants and refugees in Dikili is unpopular with locals. “We definitely don’t want a refugee camp in Dikili,” said the town’s mayor, Mustafa Tosun, according to the Associated Press. Demonstrators expressed concern over the impact the EU deal could have on the economy, tourism and security in their town.

It’s illegal on many fronts.

• EU-Turkey Refugee Plan Could Be Illegal, Says UN Official (G.)

The European Union’s plan to send refugees fleeing Syria’s civil war back to Turkey en masse could be illegal, a top UN official has warned, amid concerns that Greece lacks the infrastructure needed for the deal to take effect on Monday. Peter Sutherland, the UN secretary general’s special representative for international migration and development, said that deporting migrants and refugees without first considering their asylum applications would break international law. And, in light of claims by an NGO that Turkey had been pushing Syrians back over the border to their home country, he warned that none could be deported from Europe without guarantees that their rights would be protected. Sutherland spoke as Greece prepares to begin deporting migrants and refugees on Monday. Greek immigration officials have already warned they need more staff to implement the plan.

Asked during an interview on BBC Radio 4’s Today programme whether Europe’s scheme could be illegal, Sutherland replied: “Absolutely, and there are two fundamental reasons for this. “First of all, collective deportations without having regard to the individual rights of those who claim to be refugees are illegal. Now, we don’t know what is going to happen next week, but if there is any question of collective deportations without individuals being given the right to claim asylum that is illegal. “Secondly, their rights have to be absolutely protected where they are deported to, in other words Turkey. There has to be adequate assurances they can’t be sent back from Turkey to Syria, for example if they are Syrian refugees, or Afghanistan or wherever.”

European and Turkish leaders are set to implement a deal on Monday that will result in almost all asylum seekers being deported back to Turkey. In exchange for each person sent back, the EU has agreed to accept a refugee who has not tried to enter Europe illegally. But the success of the deal rests on both Greece’s ability to process thousands of people in a short space of time, and Turkey’s ability to prove itself a safe country for refugees. In theory, only those refugees who fail to claim asylum in Greece – usually because they are seeking to settle elsewhere in the EU – or whose claims are rejected will be deported. However, the most senior Greek asylum official, Maria Stavropoulou, on Friday told the Guardian she would need a 20-fold increase in personnel to handle expected claims.

However, unrest has already erupted among refugees and migrants in Greece who are anticipating the beginning of the deal. On the Greek island of Chios, hundreds of people ripped down a razor wire fence that had kept them imprisoned in a camp and fled. One told the BBC: “Deportation is a big mistake because we have risked a lot to come here especially during our crossing from Turkey to Greece. We were smuggled here from Turkey. We cannot go back. “We will repeat our trip again and again if need be because we are running away in order to save our lives.” Meanwhile, Amnesty International alleged that unaccompanied children were among hundreds of Syrians illegally expelled from Turkey since January. John Dalhuisen, Amnesty’s Europe and central Asia director, said: “In their desperation to seal their borders, EU leaders have wilfully ignored the simplest of facts: Turkey is not a safe country for Syrian refugees and is getting less safe by the day.”

This will not go well.

• Greece On Brink Of Chaos As Refugees Riot Over Forced Return To Turkey (G.)

The Greek government is bracing itself for violence ahead of the European Union implementing a landmark deal that, from Monday, will see Syrian refugees and migrants being deported back to Turkey en masse. Rioting and rebellion by thousands of entrapped refugees across Greece has triggered mounting fears in Athens over the practicality of enforcing an agreement already marred by growing concerns over its legality. Islands have become flashpoints, with as many as 800 people breaking out of a detention centre on Chios on Friday. “We are expecting violence. People in despair tend to be violent,” the leftist-led government’s migration spokesman, Giorgos Kyritsis, told the Observer. “The whole philosophy of the deal is to deter human trafficking [into Europe] from the Turkish coast, but it is going to be difficult and we are trying to use a soft approach. These are people have fled war. They are not criminals.”

Barely 24 hours ahead of the pact coming into force, it emerged that Frontex, the EU border agency, had not dispatched the appropriate personnel to oversee the operation. Eight Frontex boats will transport men, women and children, who are detained on Greek islands and have been selected for deportation, back across the Aegean following fast-track asylum hearings. But of the 2,300 officials the EU has promised to send Greece only 200 have so far arrived, Kyritsis admitted. “We are still waiting for the legal experts and translators they said they would send,” he added. “Even Frontex personnel haven’t got here yet.” Humanitarian aid also earmarked for Greece had similarly been held up, with the result that the bankrupt country was managing the crisis – and continued refugee flows – on very limited funds from the state budget.

On Saturday overstretched resources were evident in the chaos on Chios where detainees, fearing imminent deportation, had not only run amok, breaking through razorwire enclosing a holding centre on the island, but in despair had marched on the town’s port. In the stampede three refugees were stabbed as riot police tried to control the crowds with stun guns and teargas. The camp, a former recycling factory, had been ransacked, with cabins and even fingerprint equipment smashed. “This is what happens when you have 30 policemen guarding 1,600 refugees determined to get out,” said Benjamin Julian, an Icelandic volunteer speaking from the island. “I witnessed it all and I know that all the time they were chanting ‘freedom, freedom, freedom’ and ‘no Torkia, no Torkia’. That is what they want and are determined to get.”

In the mayhem that had ensued, panic-stricken local authorities had been forced to divert the daily ferry connecting the island with the mainland for fear it would be stormed. Similar outbreaks of violence had also occurred in Piraeus, Athens’ port city, where eight young men had been taken to hospital after riots erupted between rival ethnic groups on Wednesday. With tensions on the rise in Lesbos, the Aegean island that has borne the brunt of the flows, and in Idomeni on the Greek-Macedonia frontier where around 11,000 have massed since the border’s closure, NGOs warned of a timebomb in the making. Hopes of numbers decreasing following the announcement of the EU-Turkey deal have been dispelled by a renewed surge in arrivals with the onset of spring.

But who cares?

• 129 Unaccompanied Children Missing Since Calais Camp Demolition (Ind.)

More than a hundred unaccompanied children have gone missing since the southern section of the Calais “Jungle” was demolished last month. According to a census by Help Refugees UK, 129 unaccompanied minors from the camp have gone unaccounted for. The census found that since the demolition took place in March, 4,946 refugees are still living there, including 1,400 in the shipping containers set up by the French government. The refugee charity said it was “very concerned” at the findings. It wrote in a Facebook post: “This is simply not acceptable. We call on the French authorities to put systems in place immediately to register and safeguard the remaining 294 lone children in the camp.”

“No alternative accommodation was provided for unaccompanied minors during the evictions, no assessment was made by the French authorities of their needs and no systems put in place to monitor them or provide safeguarding. There is no official registration system for children in place In Calais or Dunkirk.” Help Refugees UK added it had shared this information with the UK children’s commissioner Anne Longfield and her French counterpart Genevieve Avenard. According to the EU police agency Europol, more than 10,000 unaccompanied child refugees have disappeared in Europe in the last two years. Aid workers are concerned at the deteriorating safety conditions and told The Independent teenage boys are being raped in the camp.

Libby Freeman, founder of grassroots campaign Calais Action, told The Independent the findings were “shocking”. Ms Freeman said: “Nobody knows where these vulnerable children have ended up. “Since the closure [and relocation] of the Women’s and Children’s centre, they have been uprooted. With so many children missing, it’s difficult not to think the worst. It’s more than irresponsible. “And many of the minors have a legal right to join their family in the UK. The government should stop [delaying] the law.”

Debt Rattle April 2 2016

Apr 022016

April 2, 2016 Posted by Raúl Ilargi Meijer at 9:56 am Finance Tagged with: Aramco, China, debt, Greece, IMF, refugees, steel, tariffs, trade war, Wikileaks 2 Responses »

Gottscho-Schleisner Fishing boat at Fulton Market Pier, NY 1933

• 2016: The End Of The Global Debt Super Cycle (PR)

• Saudi Arabia Plans $2 Trillion Megafund for Post-Oil Era (BBG)

• Defiant China Slaps Steel Tariffs On Britain, EU As Trade War Looms (AEP)

• Tata’s Pain Intensifies As China Imposes Hefty Tariffs On Hi-Tech Steel (Tel.)

• Anbang’s Starwood Retreat Is Setback For China’s M&A Campaign (Reuters)

• How People In China Afford Their Outrageously Expensive Homes (Forbes)

• Even Bankrupt US Shale Drillers Keep Pumping Oil (Reuters)

• Native American Tribes Mobilize Against Proposed North Dakota Oil Pipeline (G.)

• Solar-Energy Company SunEdison Preparing to File for Bankruptcy (WSJ)

• Greece Reacts To Wikileaks Claims About IMF Conversation On Bailout (Kath.)

• EU-Turkey Refugee Deal: Staff Shortages, Rights Concerns Pose Twin Threat (G.)

• Afghan Refugee Shot Dead Trying To Enter Bulgaria (AJ)

• Turkey Is No ‘Safe Haven’ For Refugees – It Shoots Them At The Border (G.)

Deflation. “Deflation destroys financial asset values like stocks and corporate bonds and hard assets like real estate. It also lowers incomes while making debt more expensive to service as debt to income ratios rise.”

• 2016: The End Of The Global Debt Super Cycle (PR)

[..] The credit markets are signaling that the debt fueled expansion that began in 2010 is turning to bust. This is the most precarious moment in financial market history because as the world slides into recession global central banks have no ability to soften the oncoming recession with debt creation. Globally interest rates are close to zero and even negative in Europe and Japan. Long term government bond yields are also extremely low. This is sending a very clear and ominous signal that the world cannot service more debt and in fact needs to deleverage and get on more solid financial footing. The last time the world deleveraged was during The Great Depression. The defining quality of The Great Depression was the destructive deflation that gripped the economy.

Deflation destroys financial asset values like stocks and corporate bonds and hard assets like real estate. It also lowers incomes while making debt more expensive to service as debt to income ratios rise. The world economy is on the precipice of another Great Depression. This state of affairs demands a dramatic repositioning of investment portfolios. Investors who choose to remain passive but want to preserve their wealth need to liquidate their investments in stocks and corporate bonds and hold cash only. Investors who are more opportunistic can hold a combination of cash and U.S. government bonds. U.S. government bonds have already begun to rally so buying at current levels is not quite as attractive as it was a month ago but we expect negative interest rates to eventually visit America so there is still considerable upside.

The more aggressive investor can find opportunities to earn high returns employing strategies that will benefit from a financial collapse and a severe, deflationary recession. These strategies include shorting stock index futures, getting long VIX futures, etfs, and options, getting long stock index option volatility via index etfs, and on a limited basis shorting individual company stocks whose business plans will be acutely affected by economic developments. We would not simply be short financial assets every day because we recognize that the markets will initially be quite volatile which means sharp bear market rallies in between dramatic declines in financial assets. We would initially be positioned to benefit from this two-way volatility and as the declines become more severe and investors begin to throw in the towel the fund will be more short oriented.

Selling off Aramco.

• Saudi Arabia Plans $2 Trillion Megafund for Post-Oil Era (BBG)

Saudi Arabia is getting ready for the twilight of the oil age by creating the world’s largest sovereign wealth fund for the kingdom’s most prized assets. Over a five-hour conversation, Deputy Crown Prince Mohammed bin Salman laid out his vision for the Public Investment Fund, which will eventually control more than $2 trillion and help wean the kingdom off oil. As part of that strategy, the prince said Saudi will sell shares in Aramco’s parent company and transform the oil giant into an industrial conglomerate. The initial public offering could happen as soon as next year, with the country currently planning to sell less than 5%. “IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil,” the prince said in an interview. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

Almost eight decades since the first Saudi oil was discovered, King Salman’s 30-year-old son is aiming to transform the world’s biggest crude exporter into an economy fit for the next era. As his strategy takes shape, the speed of change may shock a conservative society accustomed to decades of government handouts. The sale of Aramco is planned for 2018 or even a year earlier, according to the prince. The fund will then play a major role in the economy, investing at home and abroad. It would be big enough to buy Apple, Google parent Alphabet, Microsoft and Berkshire Hathaway – the world’s four largest publicly traded companies. PIF ultimately plans to increase the proportion of foreign investments to 50% of the fund by 2020 from 5% now, said Yasir Alrumayyan, secretary-general of the fund’s board.

The trade war is much further advanced than ‘looming’.

• Defiant China Slaps Steel Tariffs On Britain, EU As Trade War Looms (AEP)

China has thrown down the gauntlet in an escalating trade war over the global steel glut, imposing punitive tariffs of 46pc on hi-tech steel produced in Britain and the rest of the EU. The astonishing move came as the Prime Minister, David Cameron, confronted the Chinese leader Xi Jinping at a meeting in Washington, pleading for action to slow the flood of Chinese steel exports reaching Europe. The imminent demise of the Port Talbot steelworks and Tata’s wider steel operations in Britain has mushroomed within days into a full-blown national drama, calling into question the Government’s whole approach to China. The Chinese ministry of commerce said in a terse statement that it was slapping anti-dumping tariffs of 14.4pc to 46.3pc on companies from the EU, South Korea, and Japan, claiming that China had suffered “substantial damage” from trade abuses.

In a macabre twist, the measures target the Tata plant in Port Talbot, which produces the specialist flat-rolled electrical steel used in transformers. A tiny amount is exported to China. “If this is not a trade war, I don’t know what is,” said Gareth Stace, director of UK Steel. “We’re literally drowning in a flood of Chinese imports globally. We’re certainly not seeing a flood of European steel into China.” China’s share of global steel output has risen from 10pc to 50pc over the last twelve years, with the single province of Hebei now producing twenty times as much as Britain. China’s excess capacity 400m tonnes, double the size of the entire EU steel industry. The country can no longer absorb its own supply as the construction boom fades and the catch-up phase of breakneck industrial growth hits the limit.

A record 112m tonnes was exported last year but Chinese producers are also suffering huge losses. Anshan Iron and Steel announced today that it had lost $7bn over the last year and warned that the steel industry faces an “Ice Age that will force a brutal consolidation”. The US Trade Representative accused China of systematic trade abuse and illicit subsidies for its steel industry in a blistering report released today. “China’s trade policies and practices in several specific areas cause particular concern for the United States. Chinese government actions and financial support in manufacturing industries like steel and aluminium have contributed to massive excess capacity in China,” it said.

The US trade report said China’s steel capacity has continued to grow “exponentially” to 1.4bn tonnes – even higher than previously feared – despite weakening global demand. This now dwarfs the rest of the world’s combined output and is profoundly distorting the global steel market. It said China has no natural advantages in raw materials or energy costs to justify this, and claimed that it is the result of export subsidies, cheap credit, and an opaque regime of state support. “These practices have caused tremendous disruption, uncertainty, and unfairness in the global markets. To date, however, China has not made any movement toward the adoption of international best practices,” it said. It cited a long list of alleged violations, especially in “strategic emerging industries”, technology, intellectual property, and services, accusing Beijing of obstructing access its own markets.

Maybe China will buy Tata? There are no other buyers.

• Tata’s Pain Intensifies As China Imposes Hefty Tariffs On Hi-Tech Steel (Tel.)

China has levied huge new tarrifs on a type of steel produced by Britain despite David Cameron personally challenging the country’s president to help save UK steelmakers, it emerged yesterday. The Prime Minister used a dinner at the White House to confront President Xi Jinping over the possible extinction of the UK steel industry due to Chinese dumping. However it later emerged that China will levy a 46% duty on a type of high tech steel made by just 16 producers worldwide including Tata Steel’s Cogent subsidiary in Newport. China’s decision comes after the European Union imposed tariffs of up to 13% on steel from the country used to reinforce concrete earlier this year.

The development raised the pressure on Britain to better protect the country’s steel manufacturing amid fears 40,000 jobs could be lost as Tata Steel looks to sell off its UK business. It came amid reports Tata is pulling out of Britain in order to smooth a merger with German engineering conglomerate Thyssenkrupp. Credit Suisse analysts said Tata’s planned exit from the UK was a prerequisite to any potential deal with Thyssenkrupp. Sajid Javid, the Business Secretary, yesterday travelled to Port Talbot in South Wales to meet managers and face the anger of hundreds of workers over the government’s handling of the crisis. He appeared to indicate a deal is possible by saying there were “viable buyers” to take over Tata’s operations but said he could not go into details for commercial reasons. Mr Javid said steel remains “absolutely vital” to the British economy and addressed fears work could dry up within days by indicating he had secured more time for negotiations.

Credibility shot.

• Anbang’s Starwood Retreat Is Setback For China’s M&A Campaign (Reuters)

Anbang Insurance’s unexpected withdrawal this week of its $14 billion offer to acquire Starwood Hotels & Resorts Worldwide is a wider blow to the unprecedented drive by Chinese companies to acquire North American and European assets. From semiconductors and industrial equipment, to financial services and real estate, China’s insatiable appetite for Western companies has pushed the country’s outbound cross-border M&A to $101.1 billion year-to-date, nearly surpassing the full-year record of $109.5 billion set last year. Yet Anbang’s abrupt move, which came after Starwood said on Monday that the Chinese insurer’s latest offer was “reasonably likely” to be superior to a cash-and-stock deal with Marriott International, added fuel to concerns that many Chinese companies may not be able to deliver on their acquisition expectations.

“To succeed in the U.S., Chinese companies will have to adapt to American styles of governance and transparency. It will be difficult to close mega deals without a more open style, so we may see more modest deals until China changes,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. To be sure, the largest M&A deal of this year thus far globally is by a Chinese company: China National Chemical’s agreement to acquire Swiss seeds and pesticides group Syngenta for $43 billion. Several Chinese companies, however, are having trouble convincing Western peers that they are a credible M&A counterparty. Earlier this week, for example, U.S. gene-sequencing products maker Affymetrix rejected an offer by some of its former executives that was financed by a Chinese investment firm, even though they offered more money than an existing deal with Thermo Fisher Scientific, on the basis of financing and regulatory risks.

[..] Anbang said on Thursday that it withdrew its offer due to “market considerations”, without elaborating. One of Anbang’s private equity partners, Primavera Capital Ltd chairman Fred Hu, said Anbang walked away to avoid a protracted bidding war, even though Marriott had not disclosed a higher offer. “We have little independent insight into what happened, but based on what Starwood has told us, Anbang did not deliver the same kinds of undertakings or arrangements that would have allowed the Starwood board to conclude that they were credible at $82.75,” Marriott Chief Executive Arne Sorenson told investors and analysts on a conference call. Anbang became concerned that Starwood had no intention of declaring its latest offer superior and was stalling for time for Marriott to come in with a new offer, according a source close to Anbang’s consortium.

Sources close to Starwood, however, said Anbang did not deliver the assurances on financing its latest offer it had said it would on Monday, and had since had no communication with Starwood until its withdrawal on Thursday. Chinese financial magazine Caixin reported last month that China’s insurance regulator would likely reject a bid by Anbang to buy Starwood, since it would put the insurer’s offshore assets above a 15% threshold for overseas investments. “(Anbang) told us what they told the market, (that their withdrawal was due to) the market considerations,” Starwood Chief Executive Thomas Mangas told the same conference call.

Debt by another name.

• How People In China Afford Their Outrageously Expensive Homes (Forbes)

Before we can understand how people in China can afford to frolic in their country’s over-inflated housing market, we must look at where this market came from. Hardly 20 years ago China’s real estate market didn’t exist. It wasn’t until the mid-90s that a series of reforms allowed urban residents to own and sell real estate. People were then given the option to purchase their previously government-owned homes at extremely favorable rates, and most of them made the transition to being property owners. Now with a population provisioned with houses that they could sell at their discretion and the ability to buy homes of their choice, China’s real estate market was set to boom. By 2010, a little over a decade later, it would be the largest such market in the world.

When we talk about how people afford houses in China today, more often than not we’re not talking about individuals going out and buying property on their own — as is the general modus operandi in the West. No, we’re talking about entire familial and friend networks who financially assist each other in the pursuit of housing. At the inner-circle of this social network is often the home buyer’s parents. When a young individual strikes out on their own, lands a decent job, and begins looking to pursue marriage, getting a house is often an essential part of the conversation. Owning a home is virtually a social necessity for an adult in China, and is often a major part of the criteria for evaluating a potential spouse. As parents tend to move into their children’s homes in old age, this truly is a multi-generational affair.

So parents will often fork over a large portion of their savings to provision their children with an adequate house – oftentimes buying it years in advance. If parents are not financially able to buy their kids a house outright, they will generally help with the down payment, or at the very least provide access to their social network to borrow the required funds. Take for example the case of Ye Qiuqin, a resident of Ordos Kangbashi who owns two houses across the country in Guangdong province, where she is originally from. Together with her fiancé, she makes roughly US$3,200 per month from running a cram school. For her first home she made a down payment of roughly US$20,000; of which $3,300 came from her parents, $10,000 came in the form of loans from her sister and friends, and the rest came from her savings.

To decrease the amount of volatility in China’s often hot property market, there are very strict rules as to how much money people can borrow from the bank for purchasing real estate. Although this slightly varies by city and wavers in response to current economic conditions, for their first home a buyer must lay down a 30% down payment, for the second it’s 60%, and for any property beyond this financing isn’t available. So for people to buy homes in this country they need to step up to the table with a large amount of cash in hand. Why there is so much liquid cash available for these relatively large down payments is straight forward: the Chinese are some of the best savers in the world. In fact, with a savings rate that equates to 50% of its GDP, China has the third highest such rate in the world. As almost a cultural mandate, the Chinese stash away roughly 30% of their income, which is often called into use for such things as making a down payment on a home — which is the most important financial transaction that many Chinese will ever make.

Drilling zombies.

• Even Bankrupt US Shale Drillers Keep Pumping Oil (Reuters)

As oil prices nosedived by two-thirds since 2014, a belief took hold in global energy markets that for prices to recover, many U.S. shale producers would first have to falter to allow markets to rebalance. With U.S. oil prices now trading below $40 a barrel, the corporate casualties are already mounting. More than 50 North American oil and gas producers have entered bankruptcy since early 2015, according to a Reuters review of regulatory filings and other data. While those firms account for only about 1% of U.S. output, based on the analysis, that count is expected to rise. Consultant Deloitte says a third of shale producers face bankruptcy risks this year.

But a Reuters analysis has found that bankruptcies are so far having little effect on U.S. oil production, and a tendency among distressed drillers to keep their oil wells gushing belies the notion that deepening financial distress will prompt a sudden output decline or oil price rebound. Texas-based Magnum Hunter Resources, the second-largest producer among publicly-traded companies that have filed for bankruptcy, is a case in point. It filed for creditor protection last December, but even as the debt-laden driller scrambled to avoid that outcome, its oil and gas production rose by nearly a third between mid-2014 and late 2015, filings show.

Once in Chapter 11, its CEO Gary Evans said the bankruptcy, which injected new funds to ensure it would stay operational, could help to “position Magnum Hunter as a market leader.” The company did not respond to a request for comment for this story. However, John Castellano, a restructuring specialist at Alix Partners, said that all of the nearly 3,000 wells in which Magnum Hunter owns stakes have continued operations during its bankruptcy. Production figures can be hard to track post-bankruptcy, but restructuring specialists say that many bankrupt drillers keep pumping oil at full tilt. Their creditors see that as the best way to recover some of what they are owed. And as many bankrupt firms seek to sell assets, operating wells are valued more than idled ones.

“Oil companies in bankruptcy do not seem to automatically curtail production,” said restructuring expert Jason Cohen at the Bracewell firm in Houston. “Lenders are willing to let them continue to produce as long as economically viable.” For most companies in bankruptcy or considering it, maximizing near-term production does make economic sense. Day-to-day well operating costs in most U.S. shale fields remain well below $40 a barrel. Bankrupt firms are also eligible for new financing that can allow them to keep pumping for some time.

What need is there for a pipeline at this point int ime?

• Native American Tribes Mobilize Against Proposed North Dakota Oil Pipeline (G.)

Dozens of tribal members from several Native American nations took to horseback on Friday to protest the proposed construction of an oil pipeline which would cross the Missouri river just yards from tribal lands in North Dakota. The group of tribal members, which numbered around 200, according to a tribal spokesman, said they were worried that the Dakota Access Pipeline, proposed by a subsidiary of Energy Transfer Partners, would lead to contamination of the river. The proposed route also passes through lands of historical significance to the Standing Rock Lakota Sioux Nation, including burial grounds.“They’re going under the river 500 yards from my son’s grave, my father’s grave, my aunt who I buried last week,” said Ladonna Allard, a member of the Standing Rock nation and the closest landowner to the proposed pipeline.

“I really love my land, and if that pipeline breaks everything is gone.” “We must fight every inch of our lives to protect the water,” Allard said. A “spiritual camp” will be set up starting Saturday at the point where the proposed pipeline would cross the river, and the tribal members plan to stay and protest indefinitely. The group is composed of members of the Standing Rock nation as well as others from North and South Dakota nations, including the Cheyenne River Lakota and the Rosebud Sioux. They joined together to ride, run and walk from the Tribal Administration Building north to Cannonball, North Dakota, on the reservation’s northern edge.

The Missouri river is the primary source of drinking water for the tribal reservation, according to Doug Crow Ghost, a spokesperson for the Standing Rock Sioux and the director of the tribe’s water office, who joined the protest on Friday. Tribal members also fish in the river, he said. “Because we are going to be fighting this giant, all the rest of the nations came on horseback to say ‘we support you’,” said Allard. “That is why this horse ride is so important to us. Because we’re not alone in this fight. All of our nations are coming to stand with us, and all our allies and partners. This pipeline is illegal.”

Renewable bubble?!

• Solar-Energy Company SunEdison Preparing to File for Bankruptcy (WSJ)

Solar-energy company SunEdison plans to file for bankruptcy protection in coming weeks, a dramatic about-face for a company whose market value stood at nearly $10 billion in July. The company is preparing a chapter 11 filing and is in talks with two creditor groups to obtain a loan to fund its operations during the process, according to people familiar with the matter. Creditors are likely to take control of the company and its portfolio of power projects, the people said. SunEdison, whose stock has plunged in recent months, would rank among the largest financial collapses in recent years. The company, based about 20 miles outside St. Louis, used a combination of financial engineering and cheap debt to grow to be one of the country’s biggest developers of renewable-power plants.

But a proposed $1.9 billion takeover of residential-rooftop installer Vivint Solar, which was terminated last month, was unpopular with investors. Meanwhile, falling oil prices caused a broad selloff for energy stocks, and capital-market turbulence stoked concerns about SunEdison’s ability to continue financing acquisitions. SunEdison’s stock fell to fresh lows this past week on bankruptcy fears and news that the company is facing Securities and Exchange Commission and Justice Department investigations. Its market capitalization is now about $150 million, and it had long-term debt of about $7.9 billion as of Sept. 30, according to a regulatory filing.

Where Wikileaks meets the real world. Gov’t spokeswoman: “Greece demands to know whether the creation of bankruptcy conditions in Greece is official position of the IMF”

• Greece Reacts To Wikileaks Claims About IMF Conversation On Bailout (Kath.)

Prime Minister Alexis Tsipras was reportedly to chair an emergency meeting with key ministers on Saturday after the publication of a leaked transcript of a conversation that is alleged to have taken place between Poul Thomsen, the head of the IMF’s European department, and Delia Velculescu, the IMF mission chief for Greece. WikiLeaks, which made the revelation, said it obtained the details of the conversation, which took place last month, and in which the two leading IMF officials apparently discuss putting pressure on Germany over the eurozone’s position regarding Greece’s bailout review by threatening that the IMF will leave the program.

According to the WikiLeaks transcript, the two IMF officials discuss an “event” that would force the Europeans to accept the IMF’s position so the bailout review can be concluded. “What is going to bring it all to a decision point? In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default. Right?” Thomsen is claimed to have told Velculescu. “I agree that we need an event, but I don’t know what that will be,” Velculescu allegedly added a little later in the conversation. The transcript quotes Velculescu as saying: “What is interesting though is that [Greece] did give in … they did give a little bit on both the income tax reform and on the … both on the tax credit and the supplementary pensions”.

Thomsen’s view was that the Greeks “are not even getting close [to coming] around to accept our views”. Velculescu argued that “if [the Greek government] get pressured enough, they would … But they don’t have any incentive and they know that the commission is willing to compromise, so that is the problem.” A Greek official told the ANA-MPA news agency that the government “is not willing to allow games to be played to the detriment of the country.”

A tragedy in the making.

• EU-Turkey Refugee Deal: Staff Shortages, Rights Concerns Pose Twin Threat (G.)

Serious concerns have been raised about the viability and legality of the EU-Turkey refugee deal just three days before its implementation, after rights campaigners alleged that Ankara had been deporting hundreds of refugees back to Syria on a daily basis in recent weeks, and the Greek asylum service said it needed more staff to make the deal work. In a double blow to the deal, the most senior Greek asylum official, Maria Stavropoulou, called for a 20-fold increase in personnel – while Amnesty International alleged that unaccompanied children were among scores of Syrians illegally expelled from Turkey since January. Hours later, the UN refugee agency again called for a halt to the deal unless Turkey could guarantee refugees’ basic rights.

The news came as hundreds of people detained on a Greek island fled their camp en masse, and other refugees began to sail from mainland Greece to Italy for the first time since eastern European governments began to block their onward route through the Balkans last month. Seeking to block off a migration route that brought more than 800,000 refugees to Greece from Turkey last year, European and Turkish leaders are set to implement a deal on Monday that will see almost all asylum seekers deported back to Turkey. The success of the deal rests on both Greece’s ability to process thousands of people in a short space of time, and Turkey’s ability to prove itself a safe country for refugees.

Both factors were called into question on Friday, as the Greek parliament voted to begin deportations on Monday. Stavropoulou said her department did not have enough people to process the claims of the many people who, prior to the deal, would simply have passed through Greece on their way to Germany and other wealthier European countries. “I’m worried about very many things, but the main worry now is about having the capacity to process all these claims,” she said in an interview with the Guardian. “We have about 300 staff,” she said. “My estimate is that if we are asked to handle anything like half the flow of last year, then we need to have 20 times more capacity.”

First refugee shot dead in Europe?!

• Afghan Refugee Shot Dead Trying To Enter Bulgaria (AJ)

Bulgarian border guards have shot dead an Afghan asylum seeker after he crossed into the country from Turkey. The man was killed near the border with Turkey after police fired and struck him with a warning shot that ricocheted, Bulgarian authorities said on Friday. Interior Ministry chief of staff Georgi Kostov said: “A group of 54 people aged between 20 and 30, all from Afghanistan, were intercepted by border guards and a police officer after crossing into Bulgarian territory. “One of my colleagues used his personal weapon and fired.” The man was injured and died from his wounds en route to hospital.

The targeted group of refugees were seen by a patrol near the southeastern Bulgarian town of Sredets. The UNHCR said it was the first time an asylum seeker had been shot dead while trying to cross into Europe. “We, at UNHCR, are deeply shocked by this incident,” said Boris Cheshirkov, a spokesman for the UN refugee agency. “We deplore the death of an Afghan asylum seeker, trying to reach safety across the border. We call on the Bulgarian authorities to conduct an immediate, transparent and independent investigation. Seeking asylum is an universal human right and not a crime.” The other refugees were detained while an investigation was launched. The men carried no identification documents.

“.. recent deal that sees the world’s richest continent (population 500 million) corral a single Middle Eastern country (population 80 million) into caring for more Syrian refugees than the rest of the world combined.”

• Turkey Is No ‘Safe Haven’ For Refugees – It Shoots Them At The Border (G.)

It was beyond sad to read in the Times this week that Turkish border guards have allegedly shot dead Syrians trying to reach safety in Turkey. Sixteen refugees, including three children, have been killed trying to escape the battlegrounds of northern Syria in the past four months, according to the Syrian Observatory for Human Rights, a frequently cited watchdog. It is shocking to think of people fleeing the combined atrocities of Islamic State and Bashar al-Assad being gunned down just as they make their bid for safety. But what is perhaps most shocking of all is that we observers are still shocked by this. The shooting of Syrians on the border is not a new phenomenon. Refugees and rights groups have reported shootings of migrants on the Turkish-Syrian border since at least 2013.

These abuses are well-documented, and the reports widely circulated. So why, in the months following a shady European deal that forces Turkey to shoulder the biggest burden of the refugee crisis, are we still so appalled when Turkey continues to use deadly violence to stop that burden getting any bigger? A surge in border abuses is the logical result of a recent deal that sees the world’s richest continent (population 500 million) corral a single Middle Eastern country (population 80 million) into caring for more Syrian refugees than the rest of the world combined. We shouldn’t have expected any other outcome. But sadly, some did. And Europe’s leaders – including David Cameron – apparently still do. Turkey is in the process of being designated by the EU as a “safe third country” for refugees – a sobriquet that gives Greece the right to send back almost all of those who land on its shores from Turkey.

Leaders, including Cameron, have justified this with the claim that refugees are safe from mortal danger in Turkey. Border shootings show this is not always strictly true, as do well-substantiated allegations that Turkey has illegally returned some Syrians and Afghans to the danger of their home countries, even after they had safely settled on Turkish soil. An alarming new report by Amnesty International, released today, alleges that in recent weeks large groups of Syrians have been deported back to Syria from southern Turkey, as officials there attempt to reduce their refugee burden.

In Cameron’s favour, most refugees in Turkey are not at risk of death on a battlefield. But this is not what refugee advocates mean when they say that Turkey is an unsuitable place for refugees. Refugee rights extend far beyond the simple right to life: they include the right to education, to healthcare and to work. The point of giving people refugee status is to guarantee them all the opportunities that are extended to natural-born citizens of the country in which they now live.

Debt Rattle April 1 2016

Apr 012016

April 1, 2016 Posted by Raúl Ilargi Meijer at 8:32 am Finance Tagged with: asylum, bear market, Brexit, deficit, Greece, hack, refugees, retail, steel, Turkey 16 Responses »

William Henry Jackson Jupiter & Lake Worth R.R., Florida 1896

• Asia Stocks Head for Biggest Drop in 7 Weeks Amid Broad Declines (BBG)

• Hong Kong Retail Sales Plunge the Most in 17 Years (BBG)

• A Bear Market Is Now Underway And It’s Likely To Be A Painful One (Felder)

• Foreigners’ ‘Dumb Money’ Flees Japan Stocks (BBG)

• ‘Protectionist’ China Tax on Overseas Purchases Set to Kick In (WSJ)

• Global Steel Industry Facing ‘Ice Age,’ Top China Mill Warns (BBG)

• China’s Anbang Abandons $14 Billion Bid To Buy Starwood Hotels (Reuters)

• The UK Once Made 40% Of Global Steel. Soon It May Produce Almost None (BBG)

• Britain Courts Fate On Brexit With Worst External Deficit In History (AEP)

• A Plan To Turn The Euro From Zero To Hero (Andricopoulos)

• In Technology We Trust -Maybe- (Coppola)

• How To Hack An Election (BBG)

• Canada To Accept Additional 10,000 Syrian Refugees (Reuters)

• Greece, Turkey Take Legal Short-Cuts In Race To Return Migrants (Reuters)

• Amnesty Says Turkey Illegally Sending Syrians Back To War Zone (Reuters)

• Turkey ‘Shooting Dead’ Syrian Refugees As They Flee Civil War (Ind.)

• Greek Asylum System Under ‘Insufferable Pressure’ (IRIN)

Nikkei off 3.55%.

• Asia Stocks Head for Biggest Drop in 7 Weeks Amid Broad Declines (BBG)

Asian stocks headed for the biggest decline in seven weeks as Japanese corporate sentiment deteriorated and a broad-based selloff from consumer discretionary stocks to healthcare engulfed the region’s equities markets. The MSCI Asia Pacific Index slid 2.2% to 126.04 as of 1:49 p.m. in Tokyo. The gauge climbed 8.2% in March, the best month since October, to end a tumultuous quarter for global markets. Equities had rebounded from lows in February as the Federal Reserve reassured investors that it won’t rush to increase borrowing costs. A stellar performance in March was tested immediately on the first day of the second quarter. Japan’s Topix index lost 3.4%, the worst start to a quarter since 2008, after the Tankan index of confidence among large manufacturers missed economist estimates.

“After strong gains from their February lows, shares are overbought and vulnerable to a pullback,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd., which oversees about $122 billion. “March quarter Tankan business conditions and confidence readings were disappointing.” The Tankan index of sentiment among large manufacturers fell to a reading of 6 in the first quarter, the lowest level since mid-2013, from 12 in the previous three months, the Bank of Japan reported Friday. Economists had expected a reading of 8. A positive number means there are more optimists than pessimists among manufacturers. The Shanghai Composite Index lost 1.3% even after China’s official factory gauge showed improving conditions for the first time in eight months, suggesting the government’s fiscal and monetary stimulus is kicking in.

A jump in the official factory gauge was overshadowed by a cut in the nation’s credit rating by Standard & Poor’s. S&P cut the outlook for China’s credit rating to negative from stable, saying the nation’s economic rebalancing is likely to proceed more slowly than the ratings firm had expected. The reduction may not have much of an impact on the markets as it comes at a time when the nation’s stocks are rallying and the currency is stabilizing, according to Sinopac Securities.

Retail sales are getting bad in multiple locations.

• Hong Kong Retail Sales Plunge the Most in 17 Years (BBG)

Hong Kong’s retail sales in February have plunged the most since 1999 as fewer Chinese tourists visited the city during the Lunar New Year holiday. Retail sales dropped 21% in February to HK$37 billion ($4.8 billion) year on year, according to a statement from Hong Kong’s statistics department. Combining January and February, sales fell 14%. The monthly decline is the worst since January 1999 when sales were also down 21%. “Apart from the severe drag from the protracted slowdown in inbound tourism, the asset market consolidation might also have weighed on local consumption sentiment,” a government said in a statement on Thursday. “The near-term outlook for retail sales will still be constrained by the weak inbound tourism performance and uncertain economic prospects.”

The government will monitor closely its repercussions on the wider economy and job market, it said. Chow Tai Fook Jewellery, the world’s largest-listed jewelry chain, and Sa Sa International reported slumping sales over the holiday when mainland Chinese tourists to the territory dropped 12% during Feb. 7-13. The stock market rout and a slowing Chinese economy have affected consumer sentiment for luxury goods, Chow Tai Fook has said. Mainland China tourists “are unlikely to come back in the short term,” said Forrest Chan at CCB International Securities. Hong Kong residents are also consuming less due to stagnant property values and the weak stock market, he said. “Hong Kong’s retail market will continue to fall for the rest of 2016 as all the negative factors won’t be solved in the near term,” Chan said.

Margin debt. Next up is margin calls.

• A Bear Market Is Now Underway And It’s Likely To Be A Painful One (Felder)

NYSE margin debt fell again during the month of February. After the selloff in stocks that kicked off 2016, this should come as no surprise. Investors are usually forced to reduce leveraged bets during these sorts of episodes in the stock market. In fact, this forced selling can actually exacerbate the volatility. And because margin debt is only now beginning to come down from record highs, surpassing those seen at the 2000 and 2007 peak, this should be of concern to most equity investors. To fully appreciate this risk, I prefer to look at margin debt relative to overall economic activity. When leveraged financial speculation becomes large relative to the economy, it’s usually a sign investors have become far too greedy. As Warren Buffett would say, this is usually a good time to become more fearful, or conservative towards the stock market.

Not only did margin debt recently hit nominal record-highs, it hit new record-highs in relation to GDP, as well. In other words, over the past several decades, investors have never become so greedy as they did recently. And yes, this includes the dotcom bubble. One reason I prefer this measure is that it has a fairly high negative correlation with forward 3-year returns in the stock market. When investors become too greedy, returns over the subsequent 3 years are poor and vice versa. As of the end of February, the latest forecast implied by this measure is for a loss of about 35% over the next three years. While this measure is pretty good at forecasting 3-year returns that doesn’t help much for investors concerned with the next year or so. In this regard, it may be helpful to observe the trend of margin debt.

Where is the nominal level of margin debt relative to its 12-month moving average or simply its level from one year ago? Historically, when these indicators turn negative from such lofty levels, a bear market, as defined by at least a 20% drawdown, is already underway. Right now both of these measure are, in fact, negative. So margin debt right now is sending a very clear signal that investors have recently become very greedy. This suggests returns over the next several years should be very poor. Finally, the trend in margin debt also suggests that a new bear market is likely underway. If history is to rhyme, that means a decline of at least 20% in the S&P 500 is very likely to occur sometime soon. And because of the sheer size of the potential forced supply that could come to market in this sort of environment, that could easily be just the beginning.

Abenomics chapter 827-B.

• Foreigners’ ‘Dumb Money’ Flees Japan Stocks (BBG)

Brian Heywood, who oversees about $2 billion mostly in Japanese equities, is putting on a brave face as the market tumbles and many foreigners head for the exit. The CEO of Taiyo Pacific Partners says he welcomes the selling by overseas investors as it gives him a better chance to beat his benchmark. His logic is that many money managers invest indiscriminately in Tokyo, pushing up the entire Topix index and making stock-picking less effective. Heywood says his fund is outperforming the equity gauge this year, while declining to give details.

Foreign investors offloaded shares for 12 straight weeks, with net selling reaching a record earlier this month, as they lose faith in the Bank of Japan’s monetary policy and Prime Minister Shinzo Abe’s commitment to reviving the economy. The Topix is down 13% in 2016, and while Taiyo’s biggest holdings have posted strong gains, many others have fallen. “We don’t do well when there is a flood of money into Japan, because it’s dumb money,” Heywood, 49, said in an interview during a visit to Tokyo last week. “When the market punctures, there are companies that we want to add to. The market overreacts. We know the company. We’re at 3% and we’d like to be at 6%. We use it as an opportunity.”

We’re going to see a lot of ‘hidden’ protectionism going forward. Globalization is now turning against individual nations.

• ‘Protectionist’ China Tax on Overseas Purchases Set to Kick In (WSJ)

China is tightening its grip on cross-border e-commerce, imposing a new tax system on overseas purchases that form a growing business catering to Chinese consumers with an appetite for foreign goods. The changes, announced by the Finance Ministry last week, include raising the so-called parcel tax that is currently imposed on foreign retail products that e-commerce firms ship into China. Moreover, such goods sent directly to consumers will now be treated as imports and will be subject to tariffs and value-added and consumption taxes, whose rates vary depending on the type and value of goods. The ministry said the changes, which become effective April 8, are intended to put foreign and domestic products on an equal footing.

Industry analysts said the move seems designed to give a boost to “made-in-China” products and could dent a small, but growing, market for foreign goods sold by Alibaba, JD.com. and other e-commerce players. Those marketplaces feature nutritional supplements and food by brands such as Ocean Spray, as well as diapers and other baby and maternal products. They form a slice of the 5 trillion yuan ($773 billion) in sales by e-commerce firms in China last year, double the level of 2012, according to Beijing-based research firm Analysys International. The new levies could dampen some demand, just as an increasing number of retailers world-wide are hoping to sell into China, said Charles Whiteman, senior vice president of client services for MotionPoint, a technology company that helps international retailers sync their e-commerce websites across languages and currencies.

“Increases in prices always have the effect of driving demand down,” but the effect will be “modest,” Mr. Whiteman said. “It probably won’t be too noticeable for branded products,” for which consumers are willing to pay a premium. Chinese consumers have demonstrated a willingness to pay more for products such as cosmetics, infant formula and other baby products. Chinese e-commerce companies have said that such products form the vast majority of the imported products sold on their websites, because of product-safety concerns in China. Alibaba and JD.com said they expected robust demand from Chinese consumers for overseas products, especially high-quality ones, to continue, even with the changes in policy.

Yeah, that metaphor sort of works.

• Global Steel Industry Facing ‘Ice Age,’ Top China Mill Warns (BBG)

The crisis engulfing the global steel industry is so severe that one of China’s top producers has warned a new Ice Age has set in as mills confront overcapacity and rising competition that threaten their survival. “In 2015, China experienced a slowdown in economic growth and excess steel capacity, which caused the domestic and overseas steel industry to enter into an ‘Ice Age’,” Angang Steel said after posting a net loss of 4.59 billion yuan ($710 million) for last year. There are severe challenges, fierce competition and difficult survival conditions, it said. Steel demand in China is shrinking for the first time in a generation as growth slows and policy makers seek to steer the economy toward consumption.

Faced with declining sales at home, mills in the top producer – which accounts for half of global supply – have shipped record volumes overseas, heightening competition from Europe to the U.S. Tata Steel Ltd. in India said this week it’s planning to sell off its loss-making U.K. plants, prompting Prime Minister David Cameron to call crisis talks on Thursday. The steel industry is set for a “severe winter,” Angang said, describing the market that it and others faced as complex. Output of steel by the country’s fourth-biggest producer contracted 4.4% last year, and the company is seeking to reduce costs and boost efficiency, it said.

Benchmark steel prices sank 31% in China last year, pummeling mills’ margins and spurring the government to step up efforts to force the industry to shut overcapacity and shift workers to other jobs. While reinforcement bar has rebounded since November, Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group Ltd., forecasts the rally may not last. “The short-term rally we’ve seen in steel prices will give way to the longer-term dynamic of weaker steel consumption in China,” Hynes said by phone on Thursday. “I suppose the positive thing is that maybe the restructuring we’re seeing in the steel industry will speed up the rationalization of the market.”

This is becoming a curious case. Rumor has it Anbang couldn’t produce details on how they would finance the deal.

• China’s Anbang Abandons $14 Billion Bid To Buy Starwood Hotels (Reuters)

China’s Anbang Insurance said on Thursday it has abandoned its $14 billion bid for Starwood Hotels & Resorts Worldwide, paving the way for Marriott International to buy the Sheraton and Westin hotels operator. The surprise withdrawal marks an anticlimactic end to a bidding war that had pitted Marriott’s ambitions to create the world’s largest lodging company, with about 5,700 hotels, against Anbang’s drive to create a vast portfolio of U.S. real estate assets. It also represents a blow to corporate China’s growing ambitions to acquire U.S. assets. Anbang’s acquisition of Starwood would have been the largest takeover of a U.S. company by a Chinese buyer.

“We were attracted to the opportunity presented by Starwood because of its high-quality, leading global hotel brands, which met many of our acquisition criteria, including the ability to generate consistent, long-term returns over time,” Anbang said. “However, due to various market considerations, the consortium has determined not to proceed further,” Anbang added, referring to the joint bid it had put together with private equity firms J.C. Flowers and Primavera Capital. Anbang did not offer Starwood a reason for not following through on its raised offer of March 26, according to people familiar with the matter. They asked not to be identified disclosing confidential discussions. “The reason of withdrawal is simple – Anbang isn’t interested in a protracted bidding war,” Fred Hu, Chairman of Primavera, told Reuters..

What happens when all your priorities are short term.

• The UK Once Made 40% Of Global Steel. Soon It May Produce Almost None (BBG)

The U.K. once made nearly half the world’s steel. Soon it may produce almost none. Tata Steel plans to sell its U.K. business which include the country’s last blast furnace sites in Scunthorpe and Port Talbot. Used to turn iron ore into steel, these giant plants are the focus of the entire industry. They are also the assets that may prove the most difficult to unload, according to at least one potential buyer. Should Tata’s plants follow Redcar, shut last year, the U.K. would become the first member of the Group of Seven leading economies to operate no blast furnaces. It’s a far cry from its Victorian metal-bashing heyday when Britain produced about 40% of global supply. But beyond the immediate impact on employment, does it matter? Does a major industrial economy need to produce steel, a material vital to industries from construction to car making?

“They’re probably done for,” said Keith Burnett, vice-chancellor at the University of Sheffield, a place that won the moniker Steel City before the industry’s decline. “But if we accept that, it’s a really big step and the long-term consequences are to lose the capabilities to make our own railways, make our own weapon systems, make our own nuclear reactors.” The U.K. was already the industrial world’s laggard when it comes to steel, producing just 12.1 million tons in 2014, less than a third of what Germany makes each year and just over a tenth of Japan’s 110.7 million=ton output. China is the world’s biggest producer making about half the world’s 1.67 billion tons of steel.

British steelmaking has been in relative decline for more than a century, eclipsed by the by the U.S. by the start of World War I and later overtaken by Germany. In the 1970s and 1980s, inefficient and outdated plants led to production falling 64% to less than 10 million metric tons, and the country’s output slipped below France, Italy and Belgium. Still, manufacturing in steel-consuming industries is buoyant. U.K. car production hit a 10-year high last year with 1.6 million cars being made in Britain as overseas sales reached record numbers. The country employs 2.6 million people in manufacturing, much of it steel related, and it accounts for 44% of exports.

More of the same short term focus that will end up damaging Britain for decades to come.

• Britain Courts Fate On Brexit With Worst External Deficit In History (AEP)

Britain’s current account deficit is the worst ever recorded in peace-time since the Bank of England started collecting records in 1772 under the reign of George III. Even during the grimmest moments of the First World War it only slightly exceeded the eye-watering figure of 7pc of GDP racked up in the fourth quarter of last year. No other country in the OECD club is close to this. It has been getting worse for the last four years in a row. Excuses are running thin. The Government can no longer blame the double-dip recession in the eurozone, our biggest export market. Europe has been recovering for three years and is currently enjoying as much growth as it is ever likely to see. The UK deficit is prima facie evidence of a nation living beyond its means, reliant on foreign capital to fund consumption.

Global investors have so far chosen to overlook this chronic deterioration, accepting the stock assurance from London that it is a temporary blip caused by declines in investment income. This may change as the vote on Brexit draws near and the polls tighten. Most investors in Asia, the US, and the Middle East have treated the referendum as political pantomime, taking it for granted that British voters would (as the world sees it) make the “rational” choice. “Very few people have been focusing on the current account. Brexit is now bringing it firmly into focus. We are getting a lot more questions about this from clients in Europe,” said David Owen from Jefferies. The dawning realization that Britain might indeed opt for secession has clearly begun to rattle markets. Sterling has fallen 9pc against a trade-weighted basis since November. The spread between Gilts and German Bunds has been creeping up, an early warning sign of trouble.

The Bank of England’s Financial Policy Committee noted signs of stress in the sterling options market in a statement this week, and warned that it may become harder to the inflows of capital needed to cover the external deficit. Lena Komileva from G+Economics said the current account deficit is now so large that it leaves the country vulnerable to external shocks, amplifying the potential impact of Brexit. Britain’s credit-driven consumer credit is “plainly unsustainable”. The UK savings ratio has fallen to a record low of 3.8pc. Consumer credit has risen by 44pc over the last year to £1.3bn. “We are not very different from the structural fragility of the economy that we had prior to the 2007 global crash,” she said. The Office for Budget Responsibility warned earlier this month that households are running an “unprecedented” deficit of 3pc of GDP – worse than the pre-Lehman peak – with no improvement expected through to the early 2020s.

People are running through savings and taking on debt to fund their lifestyles and buy new cars. They are expected to spend £58bn more than they earn this year, rising to £68bn by the end of the decade. This roughly mirrors what was happening just before the 2007 financial crisis when people were treating their homes as a cash machine, drawing down £50bn a year in home equity. Events were to show brutally that this was not benign.

Well, one can dream, surely. But without -unacceptable to many- ‘transfers’ from north to south, can the euro survive at all?

• A Plan To Turn The Euro From Zero To Hero (Andricopoulos)

It is difficult to read the history of inter-war Europe and the US without feeling a deep sense of foreboding about the future of the Eurozone. What is the Eurozone if not a new gold standard, lacking even the flexibility to readjust the peg? For the war reparations demanded at Versailles, or the war debts owed by France and the UK to the US, we see the huge debts owed by the South of Europe to the North, particularly Germany. The growth model of the Eurozone now appears to be based largely on running a current account surplus. Competitive devaluation is required to make exports relatively cheap. While this may have been a very successful policy for Germany during a period of high economic growth in the rest of the world, it cannot work in the beggar-thy-neighbour demand-starved world economy of today.

As I’ve explained elsewhere, reasonably large government deficits are very important for sustainable economic growth. However, in the Eurozone this is prohibited both by the Stability and Growth Pact (SGP) and by the fear of losing market confidence in the national debt. At the same time credit growth for productive investment is constrained by weak banks and Basel regulation. And the Eurozone as a whole is already running a large current account surplus; the rest of the world will not allow much more export-led growth. Helicopter money would be a solution, but politically this is a long way away. Summing up, if economic growth cannot be funded by government deficits, private sector debt, export growth or helicopter money it is very difficult to see where nominal GDP growth can come from.

In a way, this can be seen as a Prisoner’s Dilemma. Every country knows (or should know) that if all states provided fiscal stimulus, the Eurozone would benefit from more economic growth. However, for any individual state, a unilateral fiscal boost would increase their own government debt whilst giving a fair amount of the GDP growth to other states (because some of the stimulus would go to increasing imports from the other nations). And if all others provide stimulus, then it is in an individual state’s interest to take the benefit of the other states’ stimulus, and become more competitive versus the rest.

We could do with more blockchain scrutiny.

• In Technology We Trust -Maybe- (Coppola)

David Andolfatto of the St. Louis Federal Reserve wonders if investors see Bitcoin as a “safe asset”. By this he means the sort of asset that investors run to when economic storm clouds gather and other asset classes start to look dangerous: “Loosely speaking, I’m thinking about an asset that people flock to in bad or uncertain economic times. In normal times, it’s an asset that is held despite having a relatively low rate of return, perhaps because of its use as a hedge, or because of its liquidity properties.” Like gold, in fact. In important respects, Bitcoin is indeed like gold. Digital gold. It is “mined”, with mining becoming more difficult and expensive as undiscovered supplies dwindle.

There is an absolute limit (21 million) on the number of bitcoins that can ever be mined: once all have been “discovered”, the supply is fixed, unless the Bitcoin community decides that the hard limit should be changed – which at present seems rather less likely than mining asteroids for gold. The gold-like nature of Bitcoin protects it from hyperinflationary collapse, believed by many goldbugs and Bitcoin geeks to be the inevitable future of today’s government-issued fiat currencies. And, importantly, it is not under the control of governments or central banks. Neither the political mafia nor the economics establishment have any say over how, when or if it is produced, nor over its market price. For people who believe that “GUBBMINT WILL STEAL YOUR MONEY”, Bitcoin is possibly even more secure than gold.

After all, in the 1930s the US government confiscated private sector gold holdings. But it has no means of confiscating Bitcoin holdings, since identifying exactly who holds them is costly and difficult, and they can easily be transferred out of reach anyway. Bitcoin is, after all, an international currency with its own highly efficient money transfer technology. Like gold, Bitcoin’s market price tends to be volatile. And like gold, its value also tends to be counter-cyclical. When the US economy weakens, or global risks rise, up goes gold…..and Bitcoin. The profiles of both vis-à-vis the US dollar since the end of 2013 look remarkably similar. We can perhaps say that investors run to gold when trust in government and its instruments fails. In God We Trust becomes In Gold We Trust. But where does Bitcoin fit in?

Bitcoin’s advocates claim that the system is a “trust-free system”, because there are no intermediaries. But for the system to work at all, there must be trust – trust that the technology will work. In Gold We Trust becomes In Technology We Trust. It is perhaps not surprising that Bitcoin use is highest among those with a background in computer science. But hang on. There’s a problem, isn’t there? After all, governments are human constructs. And so are cryptocurrencies. The coders behind Bitcoin are human. Why should anyone have more trust in a digital currency created by an anonymous group of coders accountable to no-one than in a democratically-elected government accountable to everyone? Why is an essentially feudal governance model “safer” than a democratic one?

The election hit man.

• How To Hack An Election (BBG)

It was just before midnight when Enrique Peña Nieto declared victory as the newly elected president of Mexico. Peña Nieto was a lawyer and a millionaire, from a family of mayors and governors. His wife was a telenovela star. He beamed as he was showered with red, green, and white confetti at the Mexico City headquarters of the Institutional Revolutionary Party, or PRI, which had ruled for more than 70 years before being forced out in 2000. Returning the party to power on that night in July 2012, Peña Nieto vowed to tame drug violence, fight corruption, and open a more transparent era in Mexican politics. Two thousand miles away, in an apartment in Bogotá’s upscale Chicó Navarra neighborhood, Andrés Sepúlveda sat before six computer screens.

Sepúlveda is Colombian, bricklike, with a shaved head, goatee, and a tattoo of a QR code containing an encryption key on the back of his head. On his nape are the words “” and “” stacked atop each other, dark riffs on coding. He was watching a live feed of Peña Nieto’s victory party, waiting for an official declaration of the results. When Peña Nieto won, Sepúlveda began destroying evidence. He drilled holes in flash drives, hard drives, and cell phones, fried their circuits in a microwave, then broke them to shards with a hammer. He shredded documents and flushed them down the toilet and erased servers in Russia and Ukraine rented anonymously with Bitcoins. He was dismantling what he says was a secret history of one of the dirtiest Latin American campaigns in recent memory.

For eight years, Sepúlveda, now 31, says he traveled the continent rigging major political campaigns. With a budget of $600,000, the Peña Nieto job was by far his most complex. He led a team of hackers that stole campaign strategies, manipulated social media to create false waves of enthusiasm and derision, and installed spyware in opposition offices, all to help Peña Nieto, a right-of-center candidate, eke out a victory. On that July night, he cracked bottle after bottle of Colón Negra beer in celebration. As usual on election night, he was alone.

Bright spot. Europe must study Canadian law.

• Canada To Accept Additional 10,000 Syrian Refugees (Reuters)

Canada will take in an additional 10,000 Syrian refugees, adding to the more than 25,000 already received in the last few months, said immigration minister John McCallum. McCallum told the Canadian Broadcasting Corp he was responding to complaints from Canadian groups who want to sponsor Syrian refugees but did not have their applications processed quickly enough to be among the government’s initial target of 25,000. “We are doing everything we can to accommodate the very welcomed desire on the part of Canadians to sponsor refugees,” McCallum said in a phone interview with CBC News from Berlin, where he is meeting with the German interior minister. The Liberal government won election in October 2015 pledging to bring in more Syrian refugees more quickly than the previous Conservative government.

Private groups including church, family and community organizations had lined up to sponsor Syrian families. The welcome contrasts sharply to Europe, where resettlement has sparked an anti-migrant backlash amid security fears. While there have been some delays finding permanent housing for refugees arriving in Canada, particularly in large cities like Toronto where the housing market is tight, the resettlement program has been mostly smooth. [..] . A total of 26,200 Syrian refugees had arrived in Canada as of 28 March, according to the immigration department. But nearly 16,000 more applications are in process or have been finalized, even though the refugees have not yet arrived, according to official figures.

Fast and loose.

• Greece, Turkey Take Legal Short-Cuts In Race To Return Migrants (Reuters)

Greece and Turkey are rushing through changes to their asylum rules in a race to implement a EU-Turkey agreement on the return of refugees and migrants from Greek islands to Turkey from next Monday, EU officials and diplomats said. Both Athens and Ankara must amend their legislation to permit the start of a scheme – denounced by the U.N. refugee agency and rights groups – to send back all migrants who crossed to Greece after March 20. The policy is meant to end the uncontrolled influx of refugees and other migrants in which more than a million people crossed into Europe last year, causing a political backlash and pitting EU countries against each other. Greece, which started evacuating hundreds of people stranded in Athens’ Piraeus port on Thursday, submitted to parliament an asylum amendment bill on Wednesday.

Brussels said it had assurances from Athens that it would be passed this week. But it does not explicitly designate Turkey as a “safe third country” – a formula to make any mass returns legally sound – and a senior official of the United Nations High Commissioner for Refugees said that change did not remove its concerns about protecting the rights of asylum seekers. “Our concerns regarding legal safeguards remain unchanged and we hope that the Greek authorities will take them fully into consideration,” UNHCR Europe director Vincent Cochetel said. The EU executive’s spokeswoman, Natasha Bertaud, was unable to say how exactly rejected asylum seekers would be removed from camps on Greek islands or transported back to Turkey, saying those details were still being worked out.

[..]The Greek bill does not name Turkey, but Bertaud said that was not essential provided rules were in place allowing people to be sent back to a “safe third country” or a “safe first country of asylum”, and each case was examined individually. EU officials said the formula was devised to get around unease among lawmakers in Greece’s ruling Syriza party at declaring Turkey safe when it is waging a military crackdown on Kurdish separatists and is accused of curbing media freedom and judicial independence. Asked why Turkey was not mentioned, Greece’s alternate minister for European affairs, Nikos Xydakis, told To Kokkino radio: “It cannot be in a law, because the examination of each application for asylum will be on a case by case basis. That is the safety trigger under international refugee law. Each person is a special case.”

“It is a deal that can only be implemented with the hardest of hearts and a blithe disregard for international law..”

• Amnesty Says Turkey Illegally Sending Syrians Back To War Zone (Reuters)

Turkey has illegally returned thousands of Syrians to their war-torn homeland in recent months, highlighting the dangers for migrants sent back from Europe under a deal due to come into effect next week, Amnesty International said on Friday. Turkey agreed with the EU this month to take back all migrants and refugees who cross illegally to Greece in exchange for financial aid, faster visa-free travel for Turks and slightly accelerated EU membership talks. But the legality of the deal hinges on Turkey being a safe country of asylum, which Amnesty said in its report was clearly not the case. It said it was likely that several thousand refugees had been sent back to Syria in mass returns in the past seven to nine weeks, flouting Turkish, EU and international law.

“In their desperation to seal their borders, EU leaders have wilfully ignored the simplest of facts: Turkey is not a safe country for Syrian refugees and is getting less safe by the day,” said John Dalhuisen, Amnesty International’s Director for Europe and Central Asia. Turkey’s foreign ministry denied Syrians were being sent back against their will. Turkey had maintained an “open door” policy for Syrian migrants for five years and strictly abided by the “non-refoulement” principle of not returning someone to a country where they are liable to face persecution, it said. “None of the Syrians that have demanded protection from our country are being sent back to their country by force, in line with international and national law,” a foreign ministry official told Reuters.

But Amnesty said testimonies it had gathered in Turkey’s southern border provinces suggested the authorities have been rounding up and expelling groups of around 100 Syrian men, women and children almost daily since the middle of January. Many of those returned to Syria appear to be unregistered refugees, though the rights group said it had also documented cases of registered Syrians being returned when apprehended while not carrying their papers. Amnesty also said its research showed the authorities had scaled back the registration of Syrian refugees in the southern border provinces. Those with no registration have no access to basic services such as healthcare and education. [..] “The large-scale returns of Syrian refugees we have documented highlight the fatal flaws in the EU-Turkey deal. It is a deal that can only be implemented with the hardest of hearts and a blithe disregard for international law,” Amnesty’s Dalhuisen said.

How can Europe continue with the Turkey deal under these conditions?

• Turkey ‘Shooting Dead’ Syrian Refugees As They Flee Civil War (Ind.)

Turkish security forces have shot dead refugees escaping from the Syrian conflict, according to reports. UK-based monitoring group the Syrian Observatory for Human Rights alleged 16 people seeking sanctuary in Turkey have been shot over the past four months. They said those killed included three children. Other examples compiled by the Syrian Observatory include the alleged killings of a man and his child at Ras al-Ain, at the eastern end of the Turkish-Syrian border. In the west of the country, two refugees were reportedly shot dead at Guvveci on 5 March. “It’s in all areas. It happens to people coming from Idlib, Aleppo, Isis areas, Kurdish areas,” a spokesman for the Syrian Observatory told The Independent.

Other sources, including a Syrian people smuggler based in Turkey and an officer of the UK-supported Free Syrian Police, told The Times they believed the number of refugees killed by Turkish forces was actually far higher. They said this was because people killed on the Syrian side of the border were buried in the conflict zone, where record keeping is much more difficult. The smuggler told the newspaper refugees attempting to cross the border would now “either be killed or captured”. Citing Turkey’s former open-door refugee policy, he added: “Turkish soldiers used to help the refugees across, carry their bags for them. Now they shoot at them.” It is not the first time Turkish authorities have faced criticism over their treatment of refugees. In March, the Turkish Coast Guard allegedly attacked a dinghy filled with migrants in the Aegean. The latest allegations are likely to cast further scrutiny on the EU migrant deal with Turkey.

“This is how true refugees are lost. Do we really think that a Somali woman who has been raped will sit down and merrily rattle off her experiences?”

• Greek Asylum System Under ‘Insufferable Pressure’ (IRIN)

As Greece prepares to deport an initial 500 migrants and refugees on Monday under a controversial agreement between the EU and Turkey, senior Greek officials say the pressure to process applications quickly has become too great, at the expense of legal and ethical standards. “Insufferable pressure is being put on us to reduce our standards and minimise the guarantees of the asylum process,” Maria Stavropoulou, who heads the Greek Asylum Service, told IRIN. “[We’re asked] to change our laws, to change our standards to the lowest possible under the EU directive [on asylum procedures].” Under the terms of the 18 March agreement, Greece must screen all new arrivals from Turkey as quickly as possible and return those deemed not in need of international protection on the basis that Turkey is a “safe third country” or “first country of asylum” where they were already protected.

Most of the pressure, according to Stavropoulou, is coming from “countries that are very invested in the deal with Turkey working.” Germany, which received more than one million asylum seekers last year, took a leading role in negotiations with Turkey during a tense two-day summit earlier this month. In addition to having to screen and return new arrivals, Greece is also dealing with high numbers of asylum applications from the more than 50,000 refugees and migrants who were already trapped inside Greece before the agreement with Turkey came into effect. An overland route through the western Balkans to Germany has been closed for a month and many of those who cannot afford to pay smugglers to find a new route to Western Europe are now applying for asylum in Greece. Authorities here expect to receive just under 3,000 applications in March, double the figure for January and three times last year’s monthly average.

But even as the numbers have mounted, so has the pressure for speedy processing. The Greek Asylum Service has just hired three dozen new personnel, bringing its total staff to 295. But it says it will need at least double that number to handle the expected caseload in the wake of the EU-Turkey agreement. The European Commission has estimated that some 4,000 personnel are likely to be needed in Greece and is sending reinforcements. Many of those slated to join the effort are coastguard officers, but some 800 are asylum experts and interpreters from other member states and from the European Asylum Support Office, the EU’s coordinating body for asylum matters. The first 60 are to arrive in Greece on Sunday.

[..] Some asylum experts believe that the pressure for rapid screening will mean that vital information for determining asylum claims is overlooked. “It always takes time,” said Spyros Kouloheris, head of legal research at the Greek Council for Refugees (GCR), the country’s most respected legal aid NGO. “Someone who is traumatised will speak in fits and starts. They appear not to be telling the truth. We’ve lost a lot of cases because we didn’t have the time, the information, the culture, the experience, to understand that the more broken up the narrative, the more likely it is that there is a background of torture and abuse. This is how true refugees are lost. Do we really think that a Somali woman who has been raped will sit down and merrily rattle off her experiences?”

Debt Rattle March 31 2016

Mar 312016

March 31, 2016 Posted by Raúl Ilargi Meijer at 8:40 am Finance Tagged with: asymmetrical, blockchain, bribe, China, fintech, income, pathocracy, refugees, spending, steel 5 Responses »

DPC Station at foot of incline, American Falls, Niagara Falls 1890

• Americans Are Spending Again – But With Less Income (WSJ)

• Britain Sacrifices Steel Industry To Curry Favour With China (AEP)

• China Produced More Steel In 2 Years Than The UK Did Since 1870 (Conway)

• China Ends This Quarter With The World’s Worst-Performing Stock Market (BBG)

• China Investment Bank Defaults On ‘Dim Sum’ Bond (FT)

• China’s Little Emperors Prop Up Aussie Housing Market (BBG)

• China’s Largest Banks Post Lowest Annual Profit In A Decade (WSJ)

• Saudi Aramco Expanding Oil and Gas Projects Even With Low Prices (BBG)

• The World’s Largest Public Oil And Gas Companies (Rapier)

• Bitcoin Technology’s Next Big Test: Trillion-Dollar Repo Market (WSJ)

• Growth Of Fintech Forecast To Spur Almost 2 Million Banking Job Cuts (FT)

• The Bribe Factory – How The West Corrupts The Middle East (SMH)

• Pathocracy: The Rise Of The Political Psychopath (Whitehead)

• Russia Vows ‘Totally Asymmetrical’ Response To US Troop Build-Up In Europe (RT)

• Sea Levels Set To ‘Rise Far More Rapidly Than Expected’

• Europe Is Too Important To Be Left To Its Clueless Rulers – Varoufakis (Tel.)

• Refugees Run For Rio Olympic Dream Team (AFP)

• Austria To Tighten Asylum Rules (P.)

• Refugee Arrivals To Greece Rise Sharply Despite EU-Turkey Deal (Reuters)

There’s one way left only in which spending today can increase: debt must increase too: “..in 2004, a typical household in the lower third had $1,500 left over after expenses. By 2014, such households were $2,300 in the red.”

• Americans Are Spending Again – But With Less Income (WSJ)

U.S. household spending has fully recovered since the latest recession, but income hasn’t, squeezing budgets and pushing many lower-income families into the red, according to a Pew Charitable Trusts report out Wednesday. “The lack of financial flexibility threatens low-income households’ financial security in the short term and their economic mobility in the long term,” the report said. Pew tracked inflation-adjusted expenditures and incomes of working-age Americans, ages 20 to 60, from 1996 to 2014. The results show the downturn and recovery for spending in the aftermath of the 2007-09 recession but also highlight stagnating incomes (including wages, government benefits and transfers, pensions, child support and other sources).

The study helps illustrate broader economic themes, including a slow recovery underpinned by steady job creation and rising consumer spending, alongside paltry wage growth and growing income inequality. Pew found that as of 2014, median income before taxes had fallen by 13% from a decade earlier, while expenditures had increased by nearly 14%. That left families across the income spectrum with fewer funds for savings and investment in things like education. Housing, transportation and food drove much of the rise in spending, leaving families with less financial wiggle room. Low-income families may not see much of an alternative to spending more on shelter, commuting costs and putting food on the table. Indeed, rent is now eating up nearly half of the income of low-income families, Pew found.

“That increase in the cost for shelter is a really important piece about why families at the bottom don’t feel financially stable,” said Erin Currier, director of the financial security and mobility project at Pew. “So many families are walking a financial tightrope—their core needs are getting more expensive and incomes aren’t rising to meet those costs.” That’s left many running a personal budget deficit despite spending less on restaurants, entertainment and other discretionary goods and services. Pew’s analysis found that in 2004, a typical household in the lower third had $1,500 left over after expenses. By 2014, such households were $2,300 in the red.

Cameron has to save face now because of the publicity on the topic.

• Britain Sacrifices Steel Industry To Curry Favour With China (AEP)

Britain’s special relationship with China is becoming more expensive by the day. It now threatens to destroy the British steel industry, a foundation pillar of our manufacturing economy. Britain is not alone. Most of Europe’s steel foundries are heading for annihilation under the current EU trade regime, with unthinkable consequences through the network of European and British supply chains. It is hard to pin down the exact moment when George Osborne’s love affair with China turned into a Faustian Pact. What we know is that the British government has for the last three years been blocking efforts by the EU to equip itself with the sort of anti-dumping weaponry used by Washington to confront China. The EU trade directorate has been rendered toothless by a British veto. So much for the canard that the UK has no influence in Brussels.

“The British are sacrificing an entire European industry to say thank you to China for signing up to the nuclear power project at Hinkley Point, and pretending it is about free trade,” said one official in Brussels bitterly. What they are blocking is a change to an EU regulation intended to beef up Europe’s ‘trade defence instruments’ (TDI), enabling it to respond much more quickly to Chinese dumping and too impose much tougher penalties. The British have cobbled together a blocking minority in the council, much to the annoyance of the French, Italians, Spanish, and Germans. The UK view is that the Commission mixed up good changes with bad changes, and that punitive tariffs merely hurt your own consumers, so you shoot yourself in the foot.

Yet the outcome is that it still takes Brussels 16 months to crank up full sanctions, twice as long as it takes the US. It is why the EU limits itself to a ‘Lesser Duty’ regime that often fails to reflects the full injury. While Washington has slapped penalties of 267pc on Chinese cold-rolled steel, the EU peashooter has so far managed just 13pc. Redcar has already paid the price for this ultra-free trade ideology, and Port Talbot is about to follow. There will eventually be little left if the current drift in trade policy is allowed to continue. China’s share of global steel output has risen from 10pc to 50pc over the last decade. It has installed capacity of 1.2bn tonnes a year that it can never hope to absorb as the construction boom deflates.

On OECD estimates it has built up 400m tonnes of excess capacity, twice the EU’s entire steel production. China’s unwanted steel is finding its way systematically into Europe, greased by export subsidies, tax breaks, cheap state credit, and the panoply of measures used by a mercantilist power to rig global trade. China has captured 45pc of the UK market for high fatigue rebar steel, from near zero four years ago. The price of hot rolled steel in Europe has fallen to $369 a tonne from an average of $650 from 2009 to 2013.

Are people ready to acknowledge the extent of China’s bubble? I doubt it.

• China Produced More Steel In 2 Years Than The UK Did Since 1870 (Conway)

Here’s a nugget that goes at least some of the way towards explaining the current woes of the British steel industry: in the past two years alone China has produced more steel than the total cumulative output of the UK since the industrial revolution. Or consider this: at today’s rate of production, it would take 68 years for Britain to generate the steel China churns out of its mills in a single year. Take a moment to digest these facts, because you simply cannot understand the pressures faced by the British, or for that matter every country’s steel industry without considering China. Steel is, of course the critical ingredient in modern manufacturing and construction. If you are making something – anything – chances are you will need steel to make it with, whether that’s a car, a rail line, a can of food or a skyscraper.

And to start with, China was a positive story for Britain’s steel industry. As it expanded over recent decades it initially didn’t produce enough steel of its own to satisfy its seemingly limitless domestic appetite for steel – from Chinese construction to Chinese cities desperate to expand, to Chinese manufacturers pumping out goods around the world. It became an important destination for UK exports. However, gradually the country has built its own steel industry – and what an industry. Since 1980 China has gone from producing 5% of the world’s steel to making more than half of it – just over 800m tonnes.

But of course, this being Bloomberg and all, here comes the silver lining.

• China Ends This Quarter With The World’s Worst-Performing Stock Market (BBG)

China’s Shanghai Composite Index is closing out the first quarter as the world’s worst-performing global measure, down 15%, with a rebound in March failing to compensate for a terrible start to the year. Here are some key metrics that may show this month’s 12% recovery may extend into April, including growth in margin lending, a jump in the number of new investors and easing volatility. Leverage is increasing, suggesting individual investors are slowly regaining confidence after getting burned last year. The value of outstanding margin loans, the fuel for the 2015 boom, is up about 6% to about 874 billion yuan ($135 billion) since touching a 15-month low on March 16. A state-backed agency restarted offering some loans to brokerages to fund clients’ borrowed bets, signaling a loosening of policies put in place to stem the market rout.

Volatility is receding. Thirty-day price swings in the Shanghai gauge have plunged since soaring to a four-month high in February. Volatility began to rise at the start of January, when regulators introduced a circuit-breaker system meant to reduce wild market movements. The circuit breakers had the opposite effect – trading was suspended twice in the first week due to steep declines before the mechanism was shelved altogether. The ChiNext index re-entered a bull market this month, rebounding 20% from a February low. The small-cap gauge, dominated by technology and consumer companies, has become a leading indicator for the Shanghai index. It entered a bull market in October, a month before the large-cap gauge did, and lapsed into a bear market a week before the Shanghai gauge followed suit.

The number of new stock investors rose to a nine-month high of 535,000 in the week ended March 25, as a rebound in margin trading and a market recovery led more people to open trading accounts. Retail investors account for 80% of stock trading. While the valuation of the Shanghai Composite is almost down 40% from a June high, it’s still 15% pricier than the MSCI Emerging Market index, according to data compiled by Bloomberg. Almost 60% of the 240 Shanghai-listed companies with full-year earnings estimates compiled by Bloomberg have missed projections so far.

So far it was oil, steel, gas firms; now the banks start?!

• China Investment Bank Defaults On ‘Dim Sum’ Bond (FT)

A unit of Guosen Securities, China’s eighth-largest investment bank, has defaulted on a Kong Kong-traded renminbi bond, according to a document seen by the Financial Times, marking the first debt breach by a state-owned enterprise in China’s offshore bond market in nearly two decades. The technical default by Guosen’s Hong Kong affiliate puts at risk a Rmb38m ($5.9m) coupon payment due April 24 on Rmb1.2bn in “dim sum” bonds sold in 2014. Missing that payment would set a precedent for the offshore units of Chinese SOEs, whose creditors widely assume the onshore parent will always stand behind its affiliates, according to analysts. The default was unexpected because Guosen’s onshore unit is by all appearances in rude health. With the city government of Shenzhen as its largest shareholder, Guosen Securities was fourth on the league table for stock and bond underwriting in 2015, according to AsiaMoney.

The Shenzhen-listed brokerage earned net profit of Rmb14.2bn in 2015, up 188% from a year earlier, according to a filing in January. It ranked eighth among mainland brokerages by assets at the end of 2014, according to industry association figures. Like other Chinese securities companies, Guosen benefited from a surge in stock trading commissions during China’s equity market roller coaster last year. But its offshore unit, Guosen Securities (HK) Financial Holdings, has struggled to gain a foothold in Hong Kong’s capital markets, where foreign and mainland banks compete on a more level playing field. A special purpose vehicle owned by Guosen (HK) issued the bonds in April 2014 at an interest rate of 6.4%.

It may already be too late to sell.

• China’s Little Emperors Prop Up Aussie Housing Market (BBG)

Han Fantong, an accountant, beat almost 60 other bidders to buy a three-bedroom home in Melbourne in November for A$930,000 ($709,000). He had an advantage – full funding from his parents back in China. Han, 32, an Australian permanent resident, bought the house on 688 square meters (7,400 square feet) of land in Ringwood East, about 30 kilometers (19 miles) east of Melbourne’s business district, after a five-month search. His parents sold a 23-year-old two-bedroom apartment in Beijing for 8.1 million yuan ($1.2 million) to help pay for the property, he said by phone. “It comes as a tradition in China to buy a home for a son to establish a family,” said Han who lives in the house with his 29-year-old wife Chen Junyang. “Without my parents, it would still be difficult for us to bear the large mortgage loans.”

Han is among scores of buyers who with the backing of relatives in China are underpinning a housing market in Australia that’s coming off the boil. More than half the buyers of Chinese origin are supported financially by relatives residing in the world’s second-largest economy, according to McGrath, Australia’s only listed real estate agency. The firm’s China desk has assisted in sales worth A$140 million since it was established in September 2013. Such demand, whether from permanent residents or overseas buyers, has triggered community concern that locals are being priced out of Australia’s property market. The government has responded to the unease with tighter scrutiny of foreign investment that critics say may deter much-needed offshore capital.

“Chinese buying in Sydney and Melbourne has stepped up from say where it was five years ago, but publicity around that has created a perception which has run ahead of reality,” said Shane Oliver at AMP Capital Investors in Sydney. “The Chinese demand – both from mainland China and Chinese Australians – is propping up the market and boosting construction.” [..] Purchases by foreigners, many with a connection to China, helped drive an almost 55% jump in home prices across Australia’s capital cities in the past seven years as mortgage rates dropped to five-decade lows. The median Sydney home price reached a record A$800,000 in October, according to research firm CoreLogic data. It has since fallen after a regulatory clampdown led to a slowdown in mortgages to landlords and the first increase in borrowing costs in five years.

And that’s just official numbers. As is 1.67% in bad loans, which “..could be as high as 8.1% this year; other analysts have projected even higher estimates.” That’s perspective.

• China’s Largest Banks Post Lowest Annual Profit In A Decade (WSJ)

China’s biggest banks posted their lowest annual profit growth in a decade, as bad loans mount in an ailing economy that is pushing lenders toward riskier avenues of expansion. Three major banks that reported 2015 results on Wednesday said they wrote off 142 billion yuan ($21.85 billion) in irrecoverable debt last year, 1.4 times the volume in 2014, an indication that their customers—many of them state-owned industrial companies—are struggling to repay loans. Profits for the three banks were nearly flat, compared with industry growth rates of close to 40% just three years ago. Banks are building ever-larger capital buffers to cover bad loans as Chinese companies flounder under a severe overhang of real-estate inventory and excess industrial capacity.

The prevalence of bad loans means booming business for asset-restructuring companies—state-owned “bad banks” set up to soak up and sell off soured debt—prompting conventional banks to explore ways to keep such deals for themselves. Net profit overall among commercial lenders rose 2.4% last year, compared with 9.6% a year earlier, according to figures put out recently by the China Banking Regulatory Commission. On Wednesday, China’s largest bank by assets, Industrial & Commercial Bank of China, posted 0.5% profit growth to 277.1 billion yuan ($42.65 billion) for 2015. “The operating results were achieved on top of a high base in light of mounting growth-related difficulties,” ICBC said in its annual report. “The larger the total profit, the harder the growth will be.”

[..] Industrywide, nonperforming loans rose to 1.67% of total loans last year from 1.25% in 2014, the China Banking Regulatory Commission said. Investment bank China International Capital estimated the true ratio could be as high as 8.1% this year; other analysts have projected even higher estimates. Credit is souring so fast that commercial lenders are having a hard time expanding capital provisions to keep pace. Two years ago, China Construction Bank was setting aside a buffer that was more than twice the size of its bad loans. Last year, that ratio had fallen to 1.5 times, it said Wednesday. Slowing profit growth has forced many Chinese banks, especially midsize lenders, to invest aggressively in shadow-banking assets such as trust and wealth-management products. Such holdings, termed “investment receivables,” are opaque cocktails of high-yield assets that could jeopardize liquidity should banks need to offload them if markets turn turbulent, analysts say.

They have no choice. No major or even minor oil producer does.

• Saudi Aramco Expanding Oil and Gas Projects Even With Low Prices (BBG)

Saudi Arabian Oil Co. is pressing ahead with an expansion of the Khurais oil field despite lower crude prices and plans to double its production of natural gas over the next 10 years, the company’s chief executive officer said. The world’s biggest oil exporter, known as Saudi Aramco, won’t cancel any oil, gas or refining projects, Amin Nasser told reporters during a conference in Al-Ahsa in eastern Saudi Arabia. Aramco is also studying a possible expansion of the country’s largest oil refinery, Ras Tanura, which has a capacity of 550,000 barrels a day, he said. “Until now all of our downstream and upstream projects are continuous,” Nasser said. “No project in our programs got canceled.”

[..][ Khurais oil field’s expansion is due to be complete in 2018, Nasser said. Aramco was seeking to add 300,000 barrels a day to the field’s production to reach a capacity of 1.5 million barrels a day, the company’s former CEO Khalid Al-Falih said in October 2013. Ghawar oil field, the world’s biggest, has been producing for 70 years and will keep pumping oil for “many years to come,” Nasser said at the conference. Sixty% of Saudi Arabia’s crude oil output comes from Ghawar, Abdul Latif Al-Othman, governor of the Saudi Arabian General Investment Authority, said at the same event. Aramco has made a “promising” shale gas discovery at the Jafurah field in the Al-Ahsa region and is assessing and appraising the area for future production, Nasser said. The company plans to double its gas production to 23 billion cubic feet a day over 10 years, he said. Aramco will also keep exploring for oil and gas in the Red Sea area, he said.

Anything our former Oil Drum colleague Robert Rapier writes is still worth a read.

• The World’s Largest Public Oil And Gas Companies (Rapier)

The past two years have been a wild ride for investors in the world’s biggest publicly traded oil companies. Compared with their high-water marks in mid-2014, Big Oil shares are down about 25% and earnings have collapsed. The big irony: even as oil prices have halved, Big Oil is still getting bigger. In July 2014 U.S. oil production was 8.75 million barrels per day, according to the Energy Information Administration. Nearly a year (and a 50% price dip) later, U.S. oil output had grown to 9.69 million bpd, its highest level in 45 years. U.S. production has since declined by more than half a million bpd to 9.07 million bpd, but global production continues to rise. From 92.4 million bpd in 2014, global oil production is up to 94.8 million bpd. A unique aspect of the recent surge is that most of the gains have not come from OPEC’s national oil companies.

While Saudi Arabia’s national oil company, Saudi Aramco, remains the world’s undisputed production leader, Western and Russian companies have added far more production over the past few years. The biggest contributor to new global oil production has been the U.S., where the shale oil boom added more than 4 million bpd of new production since 2010. In total, about two dozen countries expanded their oil production over the past five years, including Saudi Arabia, Canada, United Arab Emirates, Iraq, Kuwait and Russia. On a corporate basis, many of the companies responsible for the production increase are on our list of the World’s 25 Largest Public Oil and Gas Companies. Russian companies dominate the top of the list, which is based on the most recently published production data, accounting for more production than any other region.

Russia has been a major producer of oil and gas for decades, and when privatization took place in the 1990s a handful of extremely large companies were created that rival many of the world’s national oil companies. The U.S. has seven companies in the top 25, more than any other country, led by ExxonMobil, which is the world’s third largest public oil and gas producer. Many may not realize that China is among the world’s Top 5 oil producing countries. But PetroChina, which went public in 2007, produces almost as much oil as does ExxonMobil, and is but one of the three Chinese companies in the Top 25. European countries are well-represented on the list, as four of the world’s six integrated “supermajors” are headquartered in Europe. The largest of this group is BP , still ranked as the 5th largest oil and gas producer in the Top 25, despite its many divestments since the Deepwater Horizon disaster.

Where wicked witch of the west Blythe Masters enters the blockchain.

• Bitcoin Technology’s Next Big Test: Trillion-Dollar Repo Market (WSJ)

Depository Trust & Clearing Corp., a firm at the center of Wall Street’s trading infrastructure, is about to give the technology behind bitcoin a big test: seeing whether it can be used to bolster the $2.6 trillion repo market. DTCC said in a statement Tuesday that it will begin testing an application of blockchain, the digital ledger originally used to track ownership and payments of the cryptocurrency bitcoin, to help smooth over problems in the crucial but increasingly illiquid corner of short-term lending markets known as repurchase agreements, or “repos.” Repos play a critical role in the financial system by keeping cash and securities circulating among hedge funds, investment banks and other financial firms.

DTCC, an industry-owned utility that helps settle trades in the repo market and elsewhere, wants to apply blockchain technology to the market, so that lenders and borrowers can keep track of securities and cash flowing between firms in real time. To test blockchain’s ability to improve repo trading, DTCC has tapped Digital Asset Holdings, a startup run by former J.P. Morgan executive Blythe Masters. Earlier this year, DTCC invested in the firm focused on blockchain applications, along with a range of banks including J.P. Morgan, Goldman Sachs Group Inc., and others. Typically in repos, money-market funds lend cash to brokers in exchange for bonds and an agreement to buy back the securities later at an agreed-upon rate.

During the financial crisis however, problems in the repo markets were singled out for their role in the demise of Bear Stearns and Lehman Brothers. Now, big banks have been shying away from facilitating some repo trades due to new regulations that curtail the firms’ ability to take risks. Murray Pozmanter, managing director and head of clearing services at DTCC, said in an interview the new arrangement with Digital Asset should help because the ledger would provide a way for all firms to agree on trade terms more quickly. Currently, he said, traders have to process two legs of each trade separately: one for the borrower to deliver securities in exchange for cash, and the other in which DTCC unwinds the trade. While the trade is in motion but not yet completed, the banks involved can take on risk.

Banks will be robots. Is that a good thing?

• Growth Of Fintech Forecast To Spur Almost 2 Million Banking Job Cuts (FT)

European and US banks will cut another 1.7m jobs in the next decade as financial technology companies stalk profitable growth areas such as lending and payments, a new report by Citigroup has predicted. The 108-page Citi note takes a forensic look at where “fintech” companies are deploying their resources, how much business they have already won and the consequences for the traditional banking industry. The job cuts — equal to more than 30% of the staff the banks currently employ — come on top of the 730,000 jobs that Citi says US and European banks have already shed from their peak staffing levels. “Obviously the biggest take out will happen in countries that have been through a crisis or are tech savvy,” said Ronit Ghose, one of the authors of the report.

In the US, investment banks clearly have selectively cut a lot of people but US consumer banks haven’t cut as much … in Europe there s been little progress on branch headcount as well. The catalyst for the job cuts is twofold. One factor is the new technologies that enable banks to do more online and less in branches. The other is the financial imperative for banks to be leaner as they deal with an onslaught of new competition in their most profitable niches. High quality global journalism requires investment. Citi’s research found that lending stood out as a key battleground, accounting for 46% of the $19bn in private funding that flowed into fintech during the past six years. The next biggest was payments, accounting for 23% of the investment in fintech.

Lending and payments are both lucrative activities for banks, and losing out on market share is particularly painful when low interest rates are crippling banks’ profitability and low loan demand has made it almost impossible for them to increase revenue. “So far most of the market value in fintech has been created by companies that are embedded in the still relatively new ecosystem of ecommerce,” the report noted. “For banks in many countries, this is an opportunity lost rather than a loss of existing earnings.”

Very interesting investigation.

• The Bribe Factory – How The West Corrupts The Middle East (SMH)

A massive leak of confidential documents has for the first time exposed the true extent of corruption within the oil industry, implicating dozens of leading companies, bureaucrats and politicians in a sophisticated global web of bribery and graft. After a six-month investigation across two continents, Fairfax Media and The Huffington Post can reveal that billions of dollars of government contracts were awarded as the direct result of bribes paid on behalf of firms including British icon Rolls-Royce, US giant Halliburton, Australia’s Leighton Holdings and Korean heavyweights Samsung and Hyundai. The investigation centres on a Monaco company called Unaoil, run by the jet-setting Ahsani clan. Following a coded ad in a French newspaper, a series of clandestine meetings and midnight phone calls led to our reporters obtaining hundreds of thousands of the Ahsanis’ leaked emails and documents.

The trove reveals how they rub shoulders with royalty, party in style, mock anti-corruption agencies and operate a secret network of fixers and middlemen throughout the world’s oil producing nations. Corruption in oil production – one of the world’s richest industries and one that touches us all through our reliance on petrol – fuels inequality, robs people of their basic needs and causes social unrest in some of the world’s poorest countries. It was among the factors that prompted the Arab Spring. Fairfax Media and The Huffington Post today reveal how Unaoil carved up portions of the Middle East oil industry for the benefit of western companies between 2002 and 2012. In part two we will turn to the impoverished former Russian states to reveal the extent of misbehaviour by multinational companies including Halliburton. We will conclude the three-part investigation by showing how corrupt practices have extended deep into Asia and Africa.

The leaked files expose as corrupt two Iraqi oil ministers, a fixer linked to Syrian dictator Bashar al-Assad, senior officials from Libya’s Gaddafi regime, Iranian oil figures, powerful officials in the United Arab Emirates and a Kuwaiti operator known as “the big cheese”. Western firms involved in Unaoil’s Middle East operation include some of the world’s wealthiest and most respected companies: Rolls-Royce and Petrofac from Britain; US companies FMC Technologies, Cameron and Weatherford; Italian giants Eni and Saipem; German companies MAN Turbo (now know as MAN Diesal & Turbo) and Siemens; Dutch firm SBM Offshore; and Indian giant Larsen & Toubro. They also show the offshore arm of Australian company Leighton Holdings was involved in serious, calculated corruption.

A point I’ve written a lot about. All our major institutions select for sociopaths (a term I’m more comfortable with in the context than psychopath).

• Pathocracy: The Rise Of The Political Psychopath (Whitehead)

Twenty years ago, a newspaper headline asked the question: “What’s the difference between a politician and a psychopath?” The answer, then and now, remains the same: None. There is no difference between psychopaths and politicians. Nor is there much of a difference between the havoc wreaked on innocent lives by uncaring, unfeeling, selfish, irresponsible, parasitic criminals and elected officials who lie to their constituents, trade political favors for campaign contributions, turn a blind eye to the wishes of the electorate, cheat taxpayers out of hard-earned dollars, favor the corporate elite, entrench the military industrial complex, and spare little thought for the impact their thoughtless actions and hastily passed legislation might have on defenseless citizens.

Psychopaths and politicians both have a tendency to be selfish, callous, remorseless users of others, irresponsible, pathological liars, glib, con artists, lacking in remorse and shallow. Charismatic politicians, like criminal psychopaths, exhibit a failure to accept responsibility for their actions, have a high sense of self-worth, are chronically unstable, have socially deviant lifestyle, need constant stimulation, have parasitic lifestyles and possess unrealistic goals. It doesn’t matter whether you’re talking about Democrats or Republicans. Political psychopaths are all largely cut from the same pathological cloth, brimming with seemingly easy charm and boasting calculating minds. Such leaders eventually create pathocracies—totalitarian societies bent on power, control, and destruction of both freedom in general and those who exercise their freedoms.

Once psychopaths gain power, the result is usually some form of totalitarian government or a pathocracy. “At that point, the government operates against the interests of its own people except for favoring certain groups,” author James G. Long notes. “We are currently witnessing deliberate polarizations of American citizens, illegal actions, and massive and needless acquisition of debt. This is typical of psychopathic systems, and very similar things happened in the Soviet Union as it overextended and collapsed.” In other words, electing a psychopath to public office is tantamount to national hara-kiri, the ritualized act of self-annihilation, self-destruction and suicide. It signals the demise of democratic government and lays the groundwork for a totalitarian regime that is legalistic, militaristic, inflexible, intolerant and inhuman.

So why do we keep doing it over and over again? There’s no shortage of dire warnings about the devastation that could be wrought if any one of the current crop of candidates running for the White House gets elected. Yet where the doomsayers go wrong is by ignoring the damage that has already been inflicted on our nation and its citizens by a psychopathic government.

We should be thankful Russia has such patience.

• Russia Vows ‘Totally Asymmetrical’ Response To US Troop Build-Up In Europe (RT)

Russia’s envoy to NATO has vowed a “totally asymmetrical” response if the alliance stands by a plan to deploy new armored units to eastern Europe. Citing Russian “aggression” as a pretext, the US has announced “continuous troop rotations” starting 2017. “We are not passive observers, we consistently take all the military measures we consider necessary in order to counterbalance this reinforced presence that is not justified by anything,” Moscow’s permanent representative at the alliance Aleksandr Grushko said in an interview with TV channel Rossiya-24 on Wednesday. “Certainly, we’ll respond totally asymmetrically.” Grushko has not elaborated further on his statement, but said that Russia’s actions would correspond to its “understanding of the extent of the military threat, would not be extremely expensive, but also highly effective.”

“As of today, assessing as a whole what that the US and NATO are doing, the point at issue is a substantial change for the worse in the security situation,” he said. The comments from Russia’s NATO envoy fell shortly after the Pentagon announced a plan to increase its troop presence in “the European theater” of up to three fully-manned Army brigades by the end of 2017, one armored, one airborne and one Stryker brigade. “This Army implementation plan continues to demonstrate our strong and balanced approach to reassuring our NATO allies and partners in the wake of an aggressive Russia in Eastern Europe and elsewhere,” Air Force Gen. Philip M. Breedlove of the US European Command said. “This means our allies and partners will see more capability – they will see a more frequent presence of an armored brigade with more modernized equipment in their countries.”

The first such rotational armored brigade combat team would arrive in Europe in February next year. Each of the brigades will be on nine-month rotations and bring their own equipment to use for exercises across Europe. NATO also wants to enhance Europe’s current equipment and replace it with “the most modern the Army has to offer.” At the same time, the older gear would become a core of the earlier unveiled “Army pre-positioned stocks”, which NATO would keep in Belgium, the Netherlands and Germany. [..] “Reading these materials makes your hair stand on end, because of how some experts discuss with aplomb that if NATO had not taken measures, our [Russia’s] tanks would have already be in Tallinn and Riga,” Grushko said.

Positive feedback. Accelerating returns.

• Sea Levels Set To ‘Rise Far More Rapidly Than Expected’

Sea levels could rise far more rapidly than expected in coming decades, according to new research that reveals Antarctica’s vast ice cap is less stable than previously thought. The UN’s climate science body had predicted up to a metre of sea level rise this century – but it did not anticipate any significant contribution from Antarctica, where increasing snowfall was expected to keep the ice sheet in balance. According to a study, published in the journal Nature, collapsing Antarctic ice sheets are expected to double sea-level rise to two metres by 2100, if carbon emissions are not cut. Previously, only the passive melting of Antarctic ice by warmer air and seawater was considered but the new work added active processes, such as the disintegration of huge ice cliffs.

“This [doubling] could spell disaster for many low-lying cities,” said Prof Robert DeConto, at the University of Massachusetts Amherst, who led the work. He said that if global warming was not halted, the rate of sea-level rise would change from millimetres per year to centimetres a year. “At that point it becomes about retreat [from cities], not engineering of defences.” As well as rising seas, climate change is also causing storms to become fiercer, forming a highly destructive combination for low-lying cities like New York, Mumbai and Guangzhou. Many coastal cities are growing fast as populations rise and analysis by World Bank and OECD staff has shown that global flood damage could cost them $1tn a year by 2050 unless action is taken. The cities most at risk in richer nations include Miami, Boston and Nagoya, while cities in China, Vietnam, Bangladesh and Ivory Coast are among those most in danger in less wealthy countries.

The new research follows other recent studies warning of the possibility of ice sheet collapse in Antarctica and suggesting huge sea-level rises. But the new work suggests that major rises are possible within the lifetimes of today’s children, not over centuries. “The bad news is that in the business-as-usual, high-emissions scenario, we end up with very, very high estimates of the contribution of Antarctica to sea-level rise” by 2100, DeConto told the Guardian. But he said that if emissions were quickly slashed to zero, the rise in sea level from Antarctic ice could be reduced to almost nothing. “This is the good news,” he said. “It is not too late and that is wonderful. But we can’t say we are 100% out of the woods.” Even if emissions are slashed, DeConto said, there remains a 10% chance that sea level will rise significantly.

A good Yanis article.

• Europe Is Too Important To Be Left To Its Clueless Rulers – Varoufakis (Tel.)

It is eight months since Varoufakis resigned as Greece’s finance minister, in the wake of the historic referendum when the Greek people voted to reject the demands of the country’s creditors, the so-called ‘troika’. It was the result that Varoufakis and the Greek prime minster Alexis Tsipras had been campaigning for. But within 24 hours Tsipras had performed a volte-face, accepting the troika’s terms. Varoufakis resigned. A politician without office, Varoufakis now spends his time writing, giving speeches and campaigning to reform Europe from the grass roots up. In February he launched Diem25, a pan-European umbrella group, aiming to pull together left-wing parties, protest movements and ‘rebel regions’ from across the continent, with the object, as he puts it, to ‘shake Europe – gently, compassionately, but firmly’, and bring ‘democracy back to EU decision making.’

He has published a new book, And the Weak Suffer What They Must?, a detailed historical analysis of the origins of Europe’s financial crisis. Its basic thesis is that the eurozone is not the route to shared prosperity it was intended to be but “a pyramid scheme of debt with countries such as Greece, Ireland, Portugal and Spain at its bottom”. Its conclusion, put bluntly, is that Europe “is too important to be left to its clueless rulers”, and that the eurozone must be “fully recalibrated” if Europe is to avoid a “postmodern” repetition of the 1930s, with financial chaos, the rise of fascism, and the spectre of conflict.

He has recently returned from Abu Dhabi, talking to business leaders at the Global Financial Markets Forum. For every 15 lectures he gives for free, he gets paid for one, he says, ‘but that’s good enough’. And the self-described ‘erratic Marxist’ is a popular draw among bankers and financial institutions. ‘I say to them exactly what I say to a left-wing audience,’ he says. ‘For some reason bankers like my analysis of the euro and global crisis. They’ve had enough of people telling them what they think they want to hear, because that hasn’t worked very well for them in the last seven or eight years. The fact they want me to talk to them is a sign of how deep this crisis is.’

At least at first glance, a great story. Let’s hope they win some golds too.

• Refugees Run For Rio Olympic Dream Team (AFP)

High up in Kenya’s rugged Ngong Hills, refugees sprint around an athletics track in intensive training they hope will see them selected for a unique team for the Rio Olympics. Hand-picked from Kenya’s vast refugee camps – including Dadaab, the biggest in the world — to join the training camp just outside the capital Nairobi, the athletes here have their eyes set on racing in Rio de Janeiro in August. “It will be a very great moment for me and the rest of the refugees, who will be so proud for having produced one of their own who has gone to the Olympics,” said 22-year-old Nzanzumu Gaston Kiza, who fled Democratic Republic of Congo after his relatives were massacred in ethnic clashes. Here at Ngong, a high altitude running track some 2,400 meters (7,875 feet) above sea level, some 40 kilometres (25 miles) southwest of Nairobi, athletes from across eastern Africa are chasing the dream of the Olympics.

Amid a world record number of people forced from their homes and their countries, the International Olympic Committee (IOC) this month announced the creation and funding of Team Refugee Olympic Athletes (ROA) to compete in Rio under its flag. The team, expected to include between five to 10 athletes from across the world, is part of the IOC’s “pledge to aid potential elite athletes affected by the worldwide refugee crisis”. “Team ROA” will march just before the hosts Brazil enter the Olympic Stadium at the opening ceremony – carrying the Olympic flag and anthem – a position likely to be given enormous cries of support. While countries may field their own teams, the refugees are unable to return home safely to take part – and instead will run under the Olympic flag. “We want to send a message of hope for all refugees in our world,” IOC president Thomas Bach said when plans for the team were announced.

International law no longer has any meaning. Welcome to Europe.

• Austria To Tighten Asylum Rules (P.)

Austria is to introduce procedures at its borders to speed up asylum applications and limit the influx of refugees into the country, the government announced Wednesday. From May, authorities will determine “within hours” if an applicant can provide sufficient reason not to be sent back to a safe third country of origin, Austrian Interior Minister Johanna Mikl-Leitner and Defense Minister Hans Peter Doskozil said. “We will not accept any more asylum applications, unless we have to because of certain criteria like Article 8 of the human rights convention,” Mikl-Leitner said, referring to an article that grants asylum seekers, among other things, the right to stay in a country where they have a partner or children.

The announcement followed news that legal experts commissioned by the Austrian government found that a cap of 37,500 refugees allowed to apply for asylum per year, introduced by Vienna at the beginning of the year, was incompatible with international law. As of the end of March, 15,000 asylum applications had been submitted in Austria this year, according to the country’s interior ministry.

This will not stop. It may move from one spot to another, but it will continue no matter what. Such is the despair.

• Refugee Arrivals To Greece Rise Sharply Despite EU-Turkey Deal (Reuters)

Arrivals of refugees and migrants to Greece from Turkey rose sharply on Wednesday, just over a week since the European Union and Turkey struck a deal intended to cut off the flow. Greek authorities recorded 766 new arrivals between Tuesday morning and Wednesday morning, up from 192 the previous day. Most arrived on the northeastern Aegean island of Lesvos. Italy reported an even larger jump in arrivals on Tuesday, when officials there said 1,350 people – mostly from Africa – were rescued from small boats taking the longer migration route over the Mediterranean as the weather warmed up. The EU Commission said on Tuesday that the flows in the last week had reduced, with only 1,000 people arriving from Turkey on Greek islands, compared to an average of 2,000 a day in the last couple of months.

It was not clear why numbers had dropped, but the Aegean Sea had been hit with bad weather and gale force winds, making the journey from Turkey on small rubber boats even more dangerous. Under the deal in effect since March 20, migrants and refugees who arrive in Greece will be subject to being sent back once they have been registered and their individual asylum claim processed. The returns are to begin from April 4. More that 51,000 refugees and migrants, among those Syrians, Afghans, Iraqis and other fleeing conflict in the Middle East and Asia, are currently stranded in Greece following border closures across the Balkans. Nearly 6,000 people remain stuck at the country’s biggest port of Piraeus port near Athens, having arrived there on ferries from Greek islands close to Turkey before the deal.

Scores have found shelter in passenger waiting lounges while hundreds more sleep in the open, either in flimsy tents or on blankets spread on the dock. Queues for the few portable toilets are long, and scuffles have broken out in recent weeks over mobile phone chargers and food distribution. International rights group Human Rights Watch has described conditions at the port, including basic hygiene, as “abysmal” and says the situation is akin to a “humanitarian crisis.”

Debt Rattle March 30 2016

Mar 302016

March 30, 2016 Posted by Raúl Ilargi Meijer at 8:59 am Finance Tagged with: basic income, China, copper, Japan, refugees, steel, swaps, unrest, writedowns, Yellen 1 Response »

William Henry Jackson Tamasopo River Canyon, San Luis Potosi, Mexico 1890

• Yellen Is Worried About Global Growth – And Wall Street Loves It (MW)

• Yellen Says Caution in Raising Rates Is ‘Especially Warranted’ (BBG)

• The US Is in for Much Greater Civil Unrest Ahead (Dent)

• Steel Industry Dealt Hammer Blow As Tata Withdraws From UK (Tel.)

• Bonfire of the Commodities Writedowns is Just Starting (BBG)

• Japan Industrial Output Drops 6.2% In February, Most Since 2011 (BBG)

• China’s True Demand For Copper Is Only Half as Much as You Think (BBG)

• China’s Large Banks Wary on Beijing’s Plan for Bad Debt to Equity Swaps (BBG)

• Eurozone ‘Flying On One Engine’: S&P (CNBC)

• Europe’s Bond Shortage Means Draghi Is About to Shock the Market (BBG)

• Oil Explorers Face Challenge to Secure Financing as Oil Prices Fall (WSJ)

• The Rise and Fall of Goldman’s Big Man in Malaysia (BBG)

• New Student Loans Targeted Straight at Mom and Dad (WSJ)

• Free Lunch: Basic Welfare Policy (Sandhu)

• Always Attack the Wrong Country (Dmitry Orlov)

• European Border Crackdown Kickstarts Migrant-Smuggling Business (WSJ)

• UN Chief Urges All Countries To Resettle Syrian Refugees (Reuters)

The price we all will pay for this lousy piece of theater rises by the day.

• Yellen Is Worried About Global Growth – And Wall Street Loves It (MW)

Janet Yellen offered up her best impression of a dove Tuesday. In other words, the Federal Reserve chairwoman stressed her intent to gradually lift benchmark interest rates off ultralow levels. Unsurprisingly, Wall Street cheered the prospect of an ever slower approach to raising interest rates as she spoke at a highly anticipated speech at the Economic Club of New York. The Dow Jones and the S&P 500 both posted their highest settlements of 2016. The dollar turned south and yields for rate-sensitive Treasurys touched one-month lows. What is worth taking note of is Yellen’s increased focus on forces outside of the U.S. as she outlines a plan to gingerly normalize interest rates, reiterating an updated March policy statement and the Fed’s reduced expectations for rate increases in 2016 (two versus an earlier projection for four).

In a note, Deutsche Bank chief international economist Torsten Slok pointed out that Yellen & Co. have been more influenced by events in the rest of the world since late May. Mentions of China, the dollar and the term “global” have been more readily used by the Yellen as the emergence of negative interest rates in Japan and Europe have underscored consternation about the state of the world economy and. in particular, a slowdown by the world’s second-largest economy: China. Slok’s bar graph below illustrates the point. The Fed’s mandate, as Yellen reiterated Tuesday, is centered on the twin goals of maximum employment and stable prices, the latter of which the Fed defines as inflation at or near its 2% target level. But lately, fears that storms brewing abroad could wash ashore in the U.S. have come into greater focus, as the excerpt from Yellen’s Tuesday comments show:

“One concern pertains to the pace of global growth, which is importantly influenced by developments in China. There is a consensus that China’s economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it. These uncertainties were heightened by market confusion earlier this year over China’s exchange rate policy.”

How this is any different from interpreting the incoherent utterances of an oracle intoxicated by fumes, I don’t know.

• Yellen Says Caution in Raising Rates Is ‘Especially Warranted’ (BBG)

Federal Reserve Chair Janet Yellen said it is appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks. The speech to the Economic Club of New York made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate. “I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said Tuesday. “This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.” Fed officials left their benchmark lending rate target unchanged this month at 0.25% to 0.5% while revising down their median estimate for the number of rate increases that will be warranted this year to two hikes, from four projected in December.

U.S. Treasuries advanced following her remarks, while the dollar weakened and U.S. stocks erased earlier losses. The Standard & Poor’s 500 Index was up 0.5% to 2,046.90 at 1:52 p.m. in New York, after falling as much as 0.4%. “Yellen has doubled down on the dovishness from the March statement and press conference,” said Neil Dutta at Renaissance Macro Research. “Global economic developments are cited very prominently.” Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”

“While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed,” she said. Fed officials’ quarterly economic forecasts for the U.S. didn’t change much in March, while Yellen stressed in a post-FOMC meeting press conference on March 16 that their sense of risks from global economic and financial developments had mounted. Yellen mentioned two risks in her New York speech. Growth in China is slowing, she noted, and there is some uncertainty about how the nation will handle the transition from exports to domestic sources of growth. A second risk is the outlook for commodity prices, and oil in particular. Further declines in oil prices could have “adverse” effects on the global economy, she said.

“The politics are more polarized than even the Depression and more like the Civil War – and we have over 300 million guns in this country.”

• The US Is in for Much Greater Civil Unrest Ahead (Dent)

I made a confession to our Boom & Bust subscribers last month. While I generally advise against owning most real estate, I have a secluded property in the Caribbean. It’s the only property I own (I rent my home in Tampa) and I know for a fact that its value will likely depreciate in the great real estate shakeout I see ahead, although likely by half as much as a high-end property in Florida. The reason I own this property is because I see rising chances for civil unrest in the inevitable downturn ahead, especially in the U.S. I want a place to go if things get really bad, and it looks increasingly likely that they will. The evidence for that is piling up in this year’s presidential race… What we have now, surprising to most political analysts, is a genuine voter revolt against the rich and the establishment.

Trump is taking over the Republican Party, and Sanders is threatening Clinton beyond what almost anyone would have forecast a year ago, even if he can’t quite seem to win. And it doesn’t matter if Trump can back up most of his statements with facts, or if Sanders’ policies have any chance of being viable economically. They understand what the pundits don’t. The people are angry and they want change. When the U.S. came out of World War II, it emerged with the strongest and most successful middle class in the decades that followed. Never before had there been such a middle class emerge in all of history. We had a vibrant workforce with higher wages… a baby boom… startling innovation… But now we have led the decline of that middle class, with wage competition from Asia, Mexico and other emerging countries, and the rapid rise of the professional and speculative classes.

Meanwhile, many higher-paid manufacturing jobs have moved overseas, and even service jobs like call centers have moved to places like India. More immigrants have come in and competed as well. That’s why a silent “near” majority of Americans are anti-immigrant and free trade… Duh! But here’s the real rub. Higher incomes help you survive at a better standard of living, and real wages have only been declining since 2000. They’ve barely risen even back to 1970s levels. That’s enough to be mad about. The ability to live as you want, to retire longer term, and to have power in society comes more from wealth – and that is way more skewed towards the upper class. And that’s where the middle class in America has lost the most ground. Look at this chart from a recent study by Credit Suisse of the share of wealth held by the middle class. Look at how we compare to the rest of the top countries.

The U.S. is the worst! No wonder the middle class here feels the most dis-empowered! It explains why America’s electorate either wants to nominate a political outsider who talks tough and promises to restore our power in the world… or an avowed socialist to combat income and wealth inequality by attacking Wall Street and the top 1%. I have said for a long time that the two countries I most expect to have the worst potential for civil unrest are China… and the U.S. China because it created the greatest over-expansion and urbanization bubble in modern history. Now, it has 250 million unregistered migrant urban workers from rural areas that will be stuck without jobs (and nowhere to go) after they can’t keep building infrastructures for no one. But the U.S. has the most polarized politics of any major country, and the greatest income and wealth inequality in the developed world. The politics are more polarized than even the Depression and more like the Civil War – and we have over 300 million guns in this country.

A minister mentioned temp government ownership of the steel industry this morning. Like China, I guess?!

• Steel Industry Dealt Hammer Blow As Tata Withdraws From UK (Tel.)

The steel industry was dealt a hammer blow on Tuesday as it emerged that Tata plans to completely withdraw from its British operation, putting thousands of jobs at risk. The Indian conglomerate’s board decided to pull out of the UK after rejecting a turnaround plan for Port Talbot, the nation’s biggest steelworks. The South Wales plant employs around 4,000 who face an uncertain future as Tata now seeks a buyer for its British steel assets. Steelworks in South Yorkshire, Northamptonshire and County Durham are also set to be put up for sale. A Tata spokesman said: “The Tata Steel Board came to a unanimous conclusion that the [turnaround] plan is unaffordable… the assumptions behind it are inherently very risky, and its likelihood of delivery is highly uncertain.”

Tata said it had ordered its European steel subsidiary to “explore all options for portfolio restructuring including the potential divestment of Tata Steel UK, in whole or in parts”. The decision by Tata placed the Government under pressure to step in to save Britain’s steel industry. Anna Soubry, the industry minister, has said that “in the words of the Prime Minister, we are unequivocal in saying that steel is a vital industry”. As Tata’s decision emerged from Mumbai, officials were looking at options to secure the survival of British steel making under new owners. It is understood they could include similar measures to those taken by the Scottish government to facilitate the acquisition of two former Tata mills by the commodities investor Liberty House. Taxpayers footed the bill to keep workers on standby and the plants were even temporarily nationalised while the deal was finalised.

“For energy companies, the price-book ratio is about 31% below its 10-year average, while the discount for miners is 44%.”

• Bonfire of the Commodities Writedowns is Just Starting (BBG)

What does $13 billion of burning money smell like? Commodity investors are getting a nose for it. Japanese trading houses Mitsui, Mitsubishi, and Sumitomo have announced 767 billion yen ($6.8 billion) of writedowns on assets this year, including copper, nickel, iron-ore and natural-gas projects. PetroChina wrote 25 billion yuan ($3.8 billion) off the value of oil and gas fields that have “no hope” of making a profit at current prices, President Wang Dongjin said last week, while Citic posted a HK$12.5 billion ($1.6 billion) impairment on an Australian iron-ore mine. Cnooc’s annual results last Thursday count as a good news story against that backdrop, with impairments of 2.75 billion yuan that were lower than the previous year’s.

Investors might hope after all this that we’d be reaching the level where mining and energy assets have been written back to normal levels, allowing companies to start the hard work of rebuilding. It doesn’t look that way. There’s certainly been a reality check of late. The balance sheets of major mining and energy companies have shrunk by $856 billion over the past 12 months, putting the value of their total assets at their lowest level since 2011, according to data compiled by Bloomberg. That looks dramatic until you compare it to the performance of the Bloomberg Commodities index. Companies are still more asset-rich than they were in 2011, which was the peak of a once-in-a-generation commodities boom. This delayed response to lower prices isn’t surprising.

Non-financial companies should have a high bar for reassessing their asset values to prevent manipulation of earnings (revaluations upward count as income, just as writedowns count against profit). That means a degree of inertia: after the 2008 financial crisis, the value of assets in the S&P 500 index didn’t bottom out until June 2010. Even if you blame weak-kneed accountants for that delay, an analogous pattern can be seen in the real economy. Default rates in the U.S. tend to peak well after economic slowdowns begin. To some extent, equity investors are already taking this in their stride. Price-to-book ratios of the Bloomberg World Energy Index and the Bloomberg World Mining Index are at their lowest levels since at least 2003, suggesting the market doesn’t believe companies’ balance sheets are worth as much as they appear on paper. For energy companies, the price-book ratio is about 31% below its 10-year average, while the discount for miners is 44%.

And projections for elections indicate Abe could get a 2/3 majority. How weird is that?

• Japan Industrial Output Drops 6.2% In February, Most Since 2011 (BBG)

Japan’s industrial production dropped the most since the March 2011 earthquake as falling exports sapped demand and a steel-mill explosion halted domestic car production at Toyota. Output slumped 6.2% in February after rising in January, the trade ministry said on Wednesday. Economists surveyed by Bloomberg had forecast a 5.9% drop. The government projects output will expand 3.9% this month. The data underscores the weakness of Japan’s recovery from last quarter’s contraction, with overseas shipments dropping for the last five months and sluggish domestic demand. With pressure building on policy makers to bolster growth, Prime Minister Shinzo Abe said Tuesday that the government would front load spending after parliament passed a record budget for the 12 months starting April 1. He resisted calls for a supplementary fiscal package.

“The slump in industrial output in February suggests that manufacturing activity will contract this quarter,” Marcel Thieliant, senior Japan economist at Capital Economics, wrote in a note. This means there is a growing risk that the economy won’t expand this quarter after the contraction in the final three months of last year, Thieliant wrote. Junichi Makino, chief economist at SMBC Nikko Securities, was more upbeat about the outlook. Production plans for March and April are strong, and there are signs of stronger demand for cars, electrical equipment and machinery, he said in a note. The size of the drop in February was due to both the fall in production at Toyota and the lunar new year, according to Makino.

“For years, traders on the mainland have used copper as collateral to finance trades in which they borrowed foreign currencies and invested the proceeds in higher-yielding assets denominated in renminbi.”

• China’s True Demand For Copper Is Only Half as Much as You Think (BBG)

Virtually every aspect of the commodities bust has a China angle. Forecasts for China’s consumption of raw materials have proved wildly optimistic, while domestic production of certain resources have resulted in particularly severe gluts in commodities such as steel and coal. But in one respect, China has been putting an artificial degree of upward pressure on a select resource—copper—sparing it from the worst of the rout in commodities. For years, traders on the mainland have used copper as collateral to finance trades in which they borrowed foreign currencies and invested the proceeds in higher-yielding assets denominated in renminbi. This carry trade with Chinese characteristics allowed them to net a tidy profit.

(As an aside, however, the devaluation of yuan in August prompted analysts to wonder whether this trade has reached its best-before date—something that would have implications for the future global demand for copper, if true. Meanwhile, there have been persistent rumors of regulators cracking down on such trades.) This practice of warehousing copper to help engage in financial arbitrage “inflated demand, kept prices higher, and led miners to raise output,” according to Bloomberg Intelligence Analysts Kenneth Hoffman and Sean Gilmartin, who sought to identify the extent to which demand for copper has been buoyed by its use as collateral for such trades. The decline in Chinese copper demand for household appliances and electronics since 2011 doesn’t jibe with the headline demand statistics, the analysts note, which show the country’s total copper demand increased of 45% from 2011 to 2015.

Moreover, when benchmarked against cement—another material widely used for construction purposes—copper’s rapid rise in China looks particularly suspicious. While cement intensity, or percentage used per square meter, rose 11% in the time period, copper intensity surged an astounding 117%. Putting all this together, Hoffman and Gilmartin conclude that “real Chinese demand may be 54% lower than anticipated” after stripping out the demand for copper tied to the carry trade. That amounts to nearly 7 million metric tonnes of copper procured for use as collateral in 2015 alone, according to the pair’s calculations—equal to the mass of more than 30,000 Statues of Liberty.

The banks will be stuck with the smelly bits. Lots of them.

• China’s Large Banks Wary on Beijing’s Plan for Bad Debt to Equity Swaps (BBG)

China’s proposal to deal with a potential bad-loan crisis by having banks convert their soured debt into equity is meeting with unexpected resistance from some of the biggest potential beneficiaries of the plan – the country’s large banks. Asked about the plan at the Boao Forum last week, China Construction Bank Chairman Wang Hongzhang said he needs to think of his shareholders and wouldn’t want to see a plan that simply converted “bad debt into bad equity.” China Citic Bank’s Vice President Sun Deshun said at a press conference last week that any compulsory conversion of debt into equity would have to be capped. And Bank of China Chairman Tian Guoli said in Boao that it’s “hard to evaluate” how effective debt-equity swaps will be, as so much has changed in China since the tool was used to bail out the banking system during a previous crisis in the late 1990s.

Behind the caution is a lack of clarity about how exactly the government will proceed with the conversion of up to 1.27 trillion yuan ($195 billion) of bad debt owed to the banks mostly by the country’s lumbering state-owned enterprises, and – crucially – about the level of support that will be available from the state. Bank of Communications, the first of China’s large banks to report 2015 earnings, said Tuesday it nearly doubled its bad-debt provisions in the fourth quarter of last year to 7.5 billion yuan. Without backing from the government, in the form of cash injections or easier capital rules for the banks, any debt-equity swaps would simply shift the bad-loan problem from the SOEs to the banks, with potentially disastrous consequences for the stability of the nation’s lenders. On the other hand it will be politically impossible to repeat the approach used in 1999 and again in 2004, when Chinese taxpayers effectively underwrote the bailouts, leaving the banks unscathed.

“You can’t kill three birds with one stone,” said Mu Hua at Guangfa Securities, referring to the need to balance the need to fix bank and SOE bad loans while protecting the interests of Chinese taxpayers. “Voluntary swaps won’t scale up unless the government offers enough incentive, such as lowering the risk weighting or setting up a platform for banks to dump the stakes.” The discussion of debt-equity swaps comes as China’s policymakers scramble for ways to cut corporate leverage that has climbed to a record high, and to clean up the mounting tally of bad loans on the banks’ books. Premier Li Keqiang said at the National People’s Congress earlier this month that the country may use the swaps to cut the leverage ratio of Chinese companies and to mitigate financial risks.

Growth comes from household debt.

• Eurozone ‘Flying On One Engine’: S&P (CNBC)

The euro zone economy is “flying on one engine,” according to the chief European economist at ratings agency Standard and Poor’s, which trimmed its growth and inflation forecasts for the euro zone. In his latest report on Wednesday, S&P’s Chief European Economist Jean-Michel Six likened the 19-country euro zone to a plane “flying on one engine” and “fighting for altitude” and said that while there are reasons to hope that the economy will pick up altitude, a “pre-crisis flight path” of robust growth is not likely. Since the start of the year, Six noted that global market turmoil had caused a “nosedive in financial conditions…(which) had taken some wind out of the euro zone economy” and although regional conditions had since improved – particularly due to what he called a “well-received” set of more accommodative measures from the ECB – the eurozone relied too much on domestic consumption for growth.

While the euro zone had seen its recovery “gathering momentum” over the last two years, Six warned that the “the current upswing in the euro zone has been a one-engine, consumer recovery.” To illustrate his point, Six noted that consumption represents 55% of the region’s GDP and has accounted for a “whopping” 72% of economic growth since 2014. That dependence on consumption entailed risks, he said, although the euro zone might well get away with it. “A recovery that mainly relies on one cylinder is by definition suspicious: It could quickly grind to a halt, as it did in the previous cycle in 2010-2011. Or, it could be a flash in the pan, caused simply by a one-off drop in household energy bills.”

ECB leaves nothing for others to invest in.

• Europe’s Bond Shortage Means Draghi Is About to Shock the Market (BBG)

As ECB Governor Mario Draghi prepares to increase and broaden his bond-buying program, the shrunken market might be in for a shock. While policy makers will expand their asset-purchase plan by €20 billion a month at the start of April, corporate debt won’t be included until later in the quarter. That’s leaving investors to face even higher demand for government bonds with supply unable to keep up and some of Europe’s biggest banks are predicting yields are headed for even more record lows. “All of that is going to be in covered bonds, in govvies, in agencies,” Vincent Chaigneau at Societe Generale in London said in an interview. “That’s going to create a shock on supply-demand in Europe.”

The prospect of increased largess from the ECB has pushed government bonds higher, with the yield on German 10-year bunds headed for their biggest quarterly slide in almost five years. They dropped to 0.15% on Tuesday, half where they were when the ECB announced an increase to its quantitative-easing program on March 10. French bank Societe Generale predicts the bund yield will slide not only to the record low of 0.049% posted in April 2015, but to negative 0.05% by the end of the next quarter. The ECB cut its main interest rates, announced the increase to QE and revealed a new targeted-loan program earlier this month as it ramped up efforts to boost inflation in the 19-member currency bloc. A report on Thursday will show consumer prices in the currency zone probably fell for a second month in March, according to economists surveyed by Bloomberg.

The rate hasn’t touched policy makers’ near-2% goal since 2013.The ECB has said it’s confident it has an “adequate” universe of assets to buy. But even when corporate debt purchases start, some investors are skeptical the ECB will be able to purchase sufficient quantities to alleviate pressure on government securities. Peter Schaffrik at Royal Bank of Canada in London said the consensus is that officials will be able to buy about €5 billion of company bonds, leaving an additional €15 billion of government and agency securities to be acquired each month.

The defaults are delayed not because of energy firms, but because of their lenders.

• Oil Explorers Face Challenge to Secure Financing as Oil Prices Fall (WSJ)

Just a few years ago, when oil sold for about $100 a barrel, banks [in London] were lining up to give international oil explorers access to billions of dollars to finance new drilling and projects. But as oil prices stay mired in a funk, the money is drying up. Senior executives from companies such as Tullow Oil and Cairn Energy have been meeting with their bankers for a biannual review of the loans that allow them to keep drilling and building out projects. For many European companies, it has been a nail-biting experience, as banks worry about the growing pile of debt taken on by oil companies with little or no profits. Several companies said they expect their ability to tap credit lines to be diminished after the reviews. Some lenders have brought in teams that specialize in corporate restructuring to scrutinize companies’ balance sheets, spending and assets, though not at Tullow or Cairn.

In the past, the reviews were generally conducted solely by banks’ energy specialists. The new scrutiny in Europe comes as oil-company debt emerges as an issue across the world with prices for crude near $40 a barrel—down more than 60% from June 2014. Globally, the net debt of publicly listed oil and gas companies has nearly tripled over the past decade to $549 billion in 2015, excluding state-owned oil companies, according to Wood Mackenzie, the energy consultancy. Reviews of these loans have high stakes. If a bank decides a company has already borrowed more than it can afford, the reviews could trigger a repayment, more cost cuts or even a fire sale of assets to raise cash. “There isn’t anyone in the oil independent sector that will be very relaxed at the moment,” said Thomas Bethel at Herbert Smith Freehills.

Oil companies are facing a similar set of biannual reviews in the U.S., where many small and midsize companies borrowed heavily to expand during the shale boom. The number of energy loans deemed in danger of default is on course to breach 50% at several major U.S. banks, The WSJ reported last week. But some American firms have been able to raise cash by issuing new stock or selling new debt, while in recent years Europe-based explorers have come to rely more on bank lending as investors that once pumped up the industry are fleeing in droves. In Europe, the focus is on a specialized type of borrowing known as reserves-based lending that has mushroomed in recent years. Europe’s top 10 non-state-owned oil companies have taken on over $12 billion in such loans, which are particularly exposed to energy prices as they are secured against the value of a company’s petroleum reserves and future production.

What happens when you plant Goldman’s MO in fertile ground.

• The Rise and Fall of Goldman’s Big Man in Malaysia (BBG)

The prime minister of Malaysia had a message for the crowd at the Grand Hyatt San Francisco in September 2013. “We cannot have an egalitarian society – it’s impossible to have an egalitarian society,” Najib Razak said. “But certainly we can achieve a more equitable society.” Tim Leissner, one of Goldman Sachs’s star bankers, enjoyed the festivities that night with model Kimora Lee Simmons, who’s now his wife. In snapshots she posted to Twitter, she’s sitting next to Najib’s wife, and then standing between him and Leissner. Everyone smiled. The good times didn’t last. At least $681 million landed in the prime minister’s personal bank accounts that year, money his government has said was a gift from the Saudi royal family. The windfall triggered turmoil for him, investigations into the state fund he oversees and trouble for Goldman Sachs, which helped it raise $6.5 billion.

Leissner, the firm’s Southeast Asia chairman, left last month after questions about the fund, his work on an Indonesian mining deal and an allegedly inaccurate reference letter. Few corporations have mastered the mix of money and power like New York-based Goldman Sachs, whose alumni have become U.S. lawmakers, Treasury secretaries and central bankers. Leissner’s rise and fall shows how lucrative and fraught it can be when the bank exports that recipe worldwide. In 2002, when the firm made him head of investment banking in Singapore, it had just cleaned up a mess there after offending powerful families. It took only a few years before the networking maestro was helping the bank soar in Southeast Asia – culminating in billion-dollar deals with state fund 1Malaysia Development Bhd., also known as 1MDB. But if his links to the rich and powerful fueled his Goldman career, they also helped end it.

How to kill an entire education system in a few easy steps.

• New Student Loans Targeted Straight at Mom and Dad (WSJ)

As rising tuition costs pile ever-higher debts on students, lenders and colleges are pushing for an alternative: Heap more on their parents. An increasing number of private student lenders are rolling out parent loans, which allow borrowers to get funds to pay for their children’s education without putting the students on the hook. The loans mimic a similar federal program but don’t charge the hefty upfront fee levied by the government, which could make them cheaper and encourage more use. SLM Corp., the largest U.S. private student lender by loan originations and better known as Sallie Mae, will introduce its version of the loan next month. Parents will be able to borrow at interest rates ranging from about 3.75% to 13%, with 10 years to pay it off.

“There’s an opportunity to expand our reach,” said Charles Rocha, chief marketing officer at Sallie Mae. The lender joins banks like Citizens Financial Group, which started offering a similar loan last year. Online lender Social Finance, or SoFi, first rolled one out in 2014 at the request of Stanford University. Stanford spokesman Brad Hayward said the university initiated discussions about the loan to help parents who were looking for more financing options. Colleges including Stanford, Boston College and Carnegie Mellon University are referring parents to the loans through emails or by putting them on lists of preferred loan options. An official at Boston College also said the school approached lenders to create the loans.

Lenders see the new products as an area of growth in an otherwise sluggish lending environment. Colleges are helping push them in part because of a quirk in federal calculations. Unlike ordinary federal student loans, the parent loans don’t count on a scorecard in which the U.S. Education Department discloses universities’ median student debt at graduation. That can ease the pressure to keep tuition increases in check at a time when heavy student debt has become a political issue.

“..basic income could remove the need for a welfare state that is patronising and humiliating..”

• Free Lunch: Basic Welfare Policy (Sandhu)

There are ideas that refuse to die no matter how many times they are rejected. One such idea is Universal Basic Income. Basic income is the proposal to pay all citizens an unconditional regular amount sufficient for basic needs, and then leave them to seek their fortune as best they can in the market. Few trials have been held and those have not led to large-scale adoption, but the proposal keeps recurring in social policy debates. That is largely because it is an excellent idea. In the past century the attraction for thinkers on the left and the right has been that basic income could remove the need for a welfare state that is patronising and humiliating, creates perverse incentives against working, and whose complexity means it often fails to reach those truly in need of help while subsidising the middle class.

Today, with deepening anxiety that we will all be put out of work (or, alternatively, be enslaved) by robots, the appeal of basic income has returned to its roots. More than 200 years ago, Thomas Paine advocated it as a way to fairly distribute the “ground rent” generated by concentrated landholdings to the landless — the idea being that the earth was humanity’s common property. If technological change today means markets tilt the distribution of income towards capital owners and away from workers, a similar argument can be made for the redistribution of “rent” due to humanity’s technological ingenuity equally among every citizen.

“The reason to want to make problems worse is that problems are profitable..”

• Always Attack the Wrong Country (Dmitry Orlov)

There are numerous tactics available to those who aim to make problems worse while pretending to solve them, but misdirection is always a favorite. The reason to want to make problems worse is that problems are profitable—for someone. And the reason to pretend to be solving them is that causing problems, then making them worse, makes those who profit from them look bad. In the international arena, this type of misdirection tends to take on a farcical aspect. The ones profiting from the world’s problems are the members of the US foreign policy and military establishments, the defense contractors and the politicians around the world, and especially in the EU, who have been bought off by them. Their tactic of misdirection is conditioned by a certain quirk of the American public, which is that it doesn’t concern itself too much with the rest of the world.

The average member of the American public has no idea where various countries are, can’t tell Sweden from Switzerland, thinks that Iran is full of Arabs and can’t distinguish any of the countries that end in -stan. And so a handy trick has evolved, which amounts to the following dictum: “Always attack the wrong country.” Need some examples? After 9/11, which, according to the official story (which is probably nonsense) was carried out by “suicide bombers” (some of them, amusingly, still alive today) who were mostly from Saudi Arabia, the US chose to retaliate by attacking ~~Saudi Arabia~~ Afghanistan and Iraq. When Arab Spring erupted (because a heat wave in Russia drove up wheat prices) the obvious place to concentrate efforts, to avoid a seriously bad outcome for the region, was Egypt—the most populous Arab country and an anchor for the entire region. And so the US and NATO decided to attack ~~Egypt~~ Libya.

When things went south in the Ukraine, whose vacillating government couldn’t make up its mind whether it wanted to remain within the Customs Union with Russia, its traditional trading partner, or to gamble on signing an agreement with the EU based on vague (and since then broken) promises of economic cooperation, the obvious place to go and try to fix things was the Ukraine. And so the US and the EU decided fix ~~the Ukraine~~ Russia, even though Russia is not particularly broken. Russia was not amused; nor is it a country to be trifled with, and so in response the Russians inflicted some serious pain on the ~~Washington establishment~~ farmers within the EU.

Who was at fault exceedingly [became] clear once the Ukrainians that managed to get into power (including some very nasty neo-Nazis) started to violate the rights of Ukraine’s Russian-speaking majority, including staging some massacres, in turn causing a large chunk of it to hold referendums and vote to secede. (Perhaps you didn’t know this, but the majority of the people in the Ukraine are Russian-speakers, and there is just one city of any size—Lvov—that is mostly Ukrainian-speaking. Mind you, I find Ukrainian to be very cute and it makes me smile whenever I hear it. I don’t bother speaking it, though, because any Ukrainian with an IQ above bathwater temperature understands Russian.) And so the US and the EU decided to fix things by continuing to put pressure on ~~the Ukraine~~ Russia.

The exact opposite of what they -pretend to- want.

• European Border Crackdown Kickstarts Migrant-Smuggling Business (WSJ)

ATHENS—The leaders of 15 human-smuggling networks gathered behind the closed curtains of an Afghan restaurant here in late February, the air fragrant from grilled lamb and hookahs. It was time to celebrate a boost to their business, people present recall. Police in Macedonia had just stopped letting Afghans cross the border from Greece. Today, the entire human highway to Europe’s north, traveled by nearly a million refugees and other migrants last year, has been closed. The crackdown, complete with razor-wire fences guarded by riot police, has stranded about 50,000 migrants in Greece. Many are desperate to get out but too afraid to turn back. For those with cash left, smugglers are now the best hope.

The combination of closed borders and unrestrained migration has turned Athens’s Victoria Square and the nearby port city of Piraeus into the center of a barely disguised human-trafficking business. In grimy cafes, cheap hotels and dark alleys, business is booming for smugglers who arrange transit around closed borders and into relative safety. They say they even offer a money-back guarantee—most of the time. “If you stay here even for five minutes, you will see it. A human bazaar is taking place,” said Orestis Papadopoulos, owner of a kiosk on Victoria Square that sells cigarettes and magazines. “And when the police clear the square, they just go around the corner and come back minutes later.” One recent afternoon, Ali, who wouldn’t provide his last name, walked into the restaurant that hosted the February celebration. He said he is 33 years old, was born in Afghanistan and lives in Athens. He specializes in smuggling Afghans and Iraqis.

Followed by three associates, Ali grinned broadly, exposing a missing tooth. Then he hugged other men in the restaurant, including a passport forger. Thirty Afghan clients had just reached Germany, meaning Ali’s smuggling syndicate would get about €54,000 ($60,280). “I’m very happy today,” he said. Ali’s smartphone rang as he ate lamb with rice. A prospective customer wanted to reach Germany by plane, using a false passport. “It costs €4,700,” Ali said. He left the noisy restaurant to haggle. When Europe’s refugee crisis exploded last year, demand for smugglers fizzled once migrants had successfully crossed the Aegean Sea from Turkey. German Chancellor Angela Merkel ’s open-door policy for refugees largely made Ali and his rivals obsolete.

Since then, the Balkans and the EUhave clamped down on migration from Greece into the rest of the continent, threatening to turn the country into a giant, open-air refugee camp. The problem will likely be exacerbated by last week’s terrorist attacks in Brussels, which immediately led to toughened security at airports, train stations and borders. Europe is now even less likely to reopen its borders to legal transit for refugees and migrants. For smugglers, the job could get harder, but they can always push the prices they charge higher.

“If Europe were to welcome the same percentage of refugees as Lebanon in comparison to its population, it would have to take in 100 million refugees.”

• UN Chief Urges All Countries To Resettle Syrian Refugees (Reuters)

U.N. Secretary-General Ban Ki-moon called on all countries on Wednesday to show solidarity and accept nearly half a million Syrian refugees for resettlement over the next three years. Ban, kicking off a ministerial conference hosted by the U.N. refugee agency UNHCR in Geneva, said: “This demands an exponential increase in global solidarity.” The United Nations is aiming to re-settle some 480,000 refugees, about 10% of those now in neighboring countries, by the end of 2018, but has conceded it needs to overcome widespread fear and political manipulation. Ban urged countries to pledge new and additional pathways for admitting Syrian refugees, adding: “These pathways can include resettlement or humanitarian admission, family reunions, as well as labor or study opportunities.”

Filippo Grandi, U.N. High Commissioner for Refugees, said the refugees were facing increasing obstacles to find safety. “We must find a way to manage this crisis in a more humane, equitable and organized manner. It is only possible if the international community is united and in agreement on how to move forward,” Grandi said. The five-year conflict has killed at least 250,000 and driven nearly 5 million refugees abroad, mostly to neighboring Turkey, Lebanon, Jordan and Iraq. Grandi said: “If Europe were to welcome the same percentage of refugees as Lebanon in comparison to its population, it would have to take in 100 million refugees.” Ban, referring to U.N.-led efforts to end the war, said: “We have a cessation of hostilities, by and large holding for over a month, but the parties must consolidate and expand it into a ceasefire, and ultimately to a political solution through dialogue.”

Debt Rattle January 25 2016

Jan 252016

January 25, 2016 Posted by Raúl Ilargi Meijer at 10:48 am Finance Tagged with: Alibaba, China, commodities, Greece, oil, oversupply, plastics, racism, refugees, steel 4 Responses »

Harris&Ewing “Pennsylvania Avenue with snow, Washington, DC” 1918

• Oil Falls 4% On Swelling Oversupply

• Commodities Stocks Sink As Oil Resumes Downward Slide (FT)

• Oil Price Crash Is Completely Changing The Industry’s Landscape (BIA)

• US Short Sellers Target China’s Alibaba (BBG)

• China Pledges Steel, Coal Capacity Cuts in Supply-Side Reforms (BBG)

• China’s Migrants Go Home – And Stay There (BBG)

• China’s Central Bank Prioritizes Strong Yuan (WSJ)

• The East Knows The West Is Bankrupt (Holter)

• Don’t Forget the Irish When Looking at New Risks in Euro Region (BBG)

• There’s a Giant Elephant at the Bank of England (BBG)

• The End Of Economic Growth (Robert Gordon)

• One Year On, Syriza Has Sold Its Soul For Power (Lapavitsas)

• Greece On The Brink Of ‘Education Tragedy’ (EurActiv)

• We Produced Enough Plastics Since WWII To Cover The Entire Earth (Guardian)

• Racism ‘Is At The Heart Of The Australian Dream’ (Guardian)

• Merkel’s Party, Sliding In Polls, Weighs German ‘Border Centres’ (Reuters)

• Greek Islanders To Be Nominated For Nobel Peace Prize (Observer)

• Sealing Greek Sea Border Is Impossible (AP)

Recovery, anyone? The new slump has smoothed a bit as of now.

• Oil Falls 4% On Swelling Oversupply

Oil prices fell 4% on Monday as Iraq announced record-high oil production feeding into a heavily oversupplied market, wiping out much of the gain made in one of the biggest-ever daily rallies last week. Brent crude, the global benchmark, was down $1.35 at $30.83 a barrel at 0851 GMT, losing more than 4% from Friday’s closing price, when Brent surged 10%. U.S. crude traded $1.15 lower at $31.04 a barrel, regaining its unusual premium to Brent prices. Iraq’s oil ministry told Reuters on Monday oil output had reached a record high in December. Its fields in the central and southern region produced as much as 4.13 million barrels a day, the government said.

“The news that Iraq has probably hit another record builds on the oversupply sentiment,” said Hans van Cleef, senior energy economist at ABN Amro in Amsterdam. “The oversupply will keep markets depressed and prices low, and on the other hand short positions are in excessive territory,” he said. Indonesia’s OPEC governor said that support among OPEC for taking steps to prop up crude prices is slim, with only one OPEC country supporting an emergency meeting over the matter.

Bad Hair Groundhog Day.

• Commodities Stocks Sink As Oil Resumes Downward Slide (FT)

Oil prices are sinking again, fast, and miners and commodities stocks are once again finding themselves in that all-too familiar position at the bottom of the FTSE 100. As fastFT reported earlier, oil prices are once again heading south after a short-lived rally last week. Brent crude is falling 3.7% at publication time to $30.99 a barrel while WTI, the US benchmark, is down 3.91% at $30.93 a barrel. There had been hopes that the worst may be over for oil prices but clearly the market didn’t get the memo today. Miners and commodities stocks are once again having another bad today.

At publication time:
Anglo American is 3.4% lower at 219p
BHP Billiton is down 2.6% at 632.1p
Rio Tinto is losing 2.6% to £16.10
Copper miner Antofagasta is off 2.4% at 362.5p.
BP is dropping 2.4% to 344.2p.

A worldwide event.

• Oil Price Crash Is Completely Changing The Industry’s Landscape (BIA)

The crash in oil, which has seen the price of crude fall by more than 75% in the last 18 months, is fundamentally changing the landscape of the resources industry in the UK as big numbers of oil firms go into insolvency, or look to take advantage of rivals’ weaknesses and increase their M&A activity. A survey released by accountancy firm Moore Stephens this week showed that the number of UK-based oil and gas companies folding jumped by more than 55% in 2015, with 28 firms entering insolvency, compared to 18 over the course of 2014. In its report, Moore Stephens called the rise in failing oil and gas firms “an almost inevitable result” of the crash in the price of oil, and said that upwards of £140 billion ($200 billion) worth of projects are likely to have been cancelled thanks to the crash.

Moore Stephens’ head of restructuring and insolvency, Jeremy Willmont said: “Oil and gas service companies expanded their businesses over the last decade based on an oil price well above the current one.” “The pain caused by the oil price fall has translated into a rising tide of financial distress across the sector,” he added. The contrast between 2015, and 2010, when oil was on its way up from its last crash in 2008, is pretty stark. According to the research, just four oil and gas companies went under that year. Essentially, the number of oil companies going bust has increased by 600% in just five years. A separate survey, released by law firm Pinsent Mason, said that 90% of those who responded expect the number of M&A deals to rise in 2016, while 30% think that there’ll be a “major surge” and around two thirds believe that Britain’s oil and gas sector is a good area for acquisitions.

In the last year or so, the number of new oil projects has slowed significantly as fewer and fewer can be profitable thanks to the rock bottom price of the commodity. This is particularly true in Britain, where producing a barrel of oil now costs more than double its market price. 2015 was a record breaking year for mergers and acquisitions, with more than $5 trillion worth of deals taking place last year, largely driven by big healthcare deals, like the join up of pharma firms Pfizer and Allergan. One of the most prominent deals, which is set to be completed pretty soon, is the merger between BG Group and Shell, both FTSE100 listed oil and gas giants.

A very strong indicator of just how badly China is doing. Alibaba was supposed to be bigger than Apple, Amazon.

• US Short Sellers Target China’s Alibaba (BBG)

U.S. short sellers have pushed bets against Alibaba to the highest in more than 14 months on concern that China’s deepest economic slowdown since 1990 will only get worse. Short interest in China’s biggest online retailer surged to 7.5% of shares outstanding on Jan. 21, the highest since November 2014, according to data compiled by Markit and Bloomberg. That is more than double from a Dec. 1 low. Bearish bets on rival JD.com have hovered around 2% since last month. Pessimists are once again taking aim at Alibaba – a bellwether for U.S. investor sentiment on China – as mainland stocks entered a bear market last week. Those wagers are already starting to pay off as a selloff since the start of the year sent the American depositary receipts of Alibaba down more than 13%.

Investors see Alibaba as a stock that reflects the state of the Chinese economy, said Henry Guo at Summit Research, who has a buy rating on the stock. “With China’s economic outlook worsening, that’s just an easy way for people to have short China exposure,”
China’s top leadership has signaled it may accommodate more economic slackness as officials tackle delicate tasks such as reducing excess capacity. The world’s second-largest economy will slow to 6.5% this year and 6.3% next year, according to the median of economist estimates. At a corporate level, counterfeit products and accounting frauds of Alibaba are also on the mind of investors since the company’s record 2014 debut on the New York Stock Exchange. Kynikos Associates LP founder Jim Chanoswarned against the stock in November, according to a CNBC report. In December, Russian billionaire Alisher Usmanov said he has started to sell his stake in the e-commerce giant.

How to make trouble sound like ‘I meant to do that’.

• China Pledges Steel, Coal Capacity Cuts in Supply-Side Reforms (BBG)

China is targeting further cuts in crude steel production capacity by as much as 150 million tons and “large scale” reductions in coal output as part of supply-side measures aimed at curbing overcapacity and excess labor in state-owned industries. The country has lowered steel production by about 90 million tons “in recent years” and will push to cut a further 100 million to 150 million tons, while “strictly controlling” steel capacity increases and halting new coal mine approvals, according to a Sunday statement on the Chinese government’s website, citing a State Council meeting on Jan. 22 chaired by Premier Li Keqiang. No time line was mentioned.

China has vowed in the past to curb capacity in industries such as coal and steel as the world’s second-largest economy slows amid a shift towards consumer-led growth. Still, it has struggled to meet stated coal capacity limits spelled out in the 12th Five-Year plan that ended last year, according to Bloomberg Intelligence. Coal demand in the country is also declining with the government keen to curb pollution. The government plans to set up a fund to help coal miners and steelmakers reduce their workforce and dispose of bad assets, Li said during a meeting in Shanxi province, according to a Jan. 7 China Central Television report. The financial help is dependent on the companies cutting capacity, he said.

As part of re-balancing the economy towards domestic consumption, the country’s cabinet also pledged to ease conditions for rural-to-urban migration and expand “new urbanization” trials to more regions, the government said in Sunday’s statement. China will “more aggressively develop” small- and medium-sized cities and give more administrative authority to areas with populations of more than 100,000, the government said. China will also expand shantytown development in major cities, while reducing the barriers to entry to attract private capital investment in transportation, underground pipe networks and other forms of construction, according to the statement.

Manufacturing jobs are going going gone.

• China’s Migrants Go Home – And Stay There (BBG)

Every year, tens of millions of China’s 246 million migrants return home to celebrate the Chinese New Year. It’s the world’s biggest annual migration, and it typically goes off smoothly. This year, however, something’s amiss. Although the holiday doesn’t start until Feb. 8, millions of workers – especially in the construction and electrical-appliance industries – have already returned home due to the country’s slowing economy. For local governments across China, this is raising a tough question: What happens if these laborers don’t go back to work after the holiday? The concern isn’t a new one. In early 2009, 20 million unemployed migrants returned home for the holidays in the wake of the global financial crisis, raising fears of social unrest. Labor riots did, in fact, take place.

But most of the unemployed appear to have gotten back to work when China’s monster stimulus kicked in later that year. This time is notably different. Prospects for a 2009-style stimulus are slim. More important, China is on the cusp of a long-term trend of reverse migration back to the countryside. This week, the National Bureau of Statistics reported that the migrant population dropped by 5.68 million in 2015 – its first decline in about three decades. Some of that decline is simple demographics, and parallels China’s rapidly shrinking labor force. But much of it is attributable to a slump in the labor-intensive manufacturing sector, and a steady improvement in rural economies.

These trends haven’t caught authorities completely off-guard: Despite a long-term commitment to urbanization (in 1980, China was 19.6% urbanized; today the figure is more than 50%), the government has recently directed more attention and money to rural development projects, ranging from infrastructure improvement to credit support for the country’s hundreds of millions of farmers. This year, rural per-capita income is expected to exceed 10,000 yuan for the first time, surpassing urban income growth for the fifth straight year. But just as economics were never the sole reason for moving to the city, many migrants also have non-economic motives for moving back home, including a desire to care for aging parents left behind and a hunger for uncontaminated food.

“The migrant workers are rooted in the countryside,” said Yang Tuan, a prominent sociologist at the China Academy of Social Science, in a September interview. “They have feelings for the land.” She predicted that reverse migration might peak in the next five to 10 years.

It makes no difference what Beijing wants.

• China’s Central Bank Prioritizes Strong Yuan (WSJ)

China’s central bank faces a tough balancing act, trying to ease credit in the financial system without adding to pressures weakening the Chinese currency. Concerns about the yuan and the annual cash crunch ahead of next month’s Lunar New Year holiday dominated a meeting held by the People’s Bank of China on Tuesday, according to minutes of the meeting reviewed by the WSJ and to accounts from banking executives close to the PBOC. Central bank officials delayed using a traditional credit-easing tool for fear that it could add more downward pressure on the yuan, according to the minutes and the executives. Instead, to meet the rising cash needs from banks, the central bank turned to short-term and medium-term loan facilities to pump about 1.6 trillion yuan ($243 billion) of temporary liquidity into the banking system in the past week.

The decision highlights the bank’s deepening dilemma in helping to cushion the slowing Chinese economy. Just a year ago, the PBOC addressed preholiday cash demands by resorting to a more typical method—cutting the amount banks are required to keep in reserve. Since then, the economic slowdown and volatility in the stock markets have led to a flood of capital leaving China, as Chinese investors seek better returns abroad. The yuan, also known as the renminbi, has been battered harder than the central bank would like, even as it faces calls to keep easing credit and rekindle growth. “Currently, we need to put a high emphasis on maintaining the renminbi’s stability when managing liquidity,” Zhang Xiaohui, an assistant governor at the central bank, said at the Tuesday meeting, according to the minutes.

Ms. Zhang said cutting the reserve requirement would send “too strong an easing signal,” so the bank should turn to other tools. A reduction in so-called reserve-requirement ratio frees up funds for banks to lend on a permanent basis, while injecting liquidity through short-term and medium-term tools means the money can be taken back by the central bank when those loans expire. Ms. Zhang told officials at the meeting that the combination of cuts to interest rates and reserve requirements made by the central bank in late October contributed to the pressure on the yuan. “Because of the double reductions, there was too much liquidity and depreciation pressure on the renminbi,” she said.

Ahead of Tuesday’s meeting, China’s big banks called on the central bank to cut the reserve requirement in the lead-up to the holiday. But the central bank balked at doing that because of worries over the stability of the yuan, the banking executives close to the PBOC said. “They decided to put off the reserve-requirement cut until later,” one of the executives said. The executive said the central bank would have to make the cut “at some point” because the surge in money leaving China, as well as the PBOC’s efforts to buy yuan to prop up its value, are squeezing liquidity.

The west knows the east is bankrupt, too.

• The East Knows The West Is Bankrupt (Holter)

[..] what would the world look like the day following a “truth bomb” dropped by Mr. Putin and the Chinese. Would Americans even notice if he documented several false flags or frauds embedded in U.S. finance such as outright monetization of U.S Treasuries? No, most certainly not. Americans would however notice if financial markets collapsed or were shut down. Russia and China know full well the situation in the West. It is a bankruptcy waiting to happen as everything is fractional reserve and running on maximum margin while the underlying system is shrinking and no longer supplying enough liquidity. The way I see it, the stage is truly set for a financial attack on anything and everything American. Is it implausible for the Saudis to announce they will sell oil in yuan to China?

Or Iran to withdraw their funds from U.S. institutions and then bid for gold with these funds? If the East does in fact have jamming or hacking capability of Western technology, is it far fetched for them to show it very publicly in one or several situations? How would the “bookies” react if they saw a prize fighter enter one of the later rounds with his hands tied behind his back? You can laugh at the above speculation if you choose but it is all quite plausible and actually probable if you look at where things are and what posturing has already been done leading up to this. Western markets, ALL markets are a fraud. Our Treasury market is one where the biggest buyer is “our self” …the Fed and the ESF.

We have already seen $1 trillion of foreign reserves offloaded with no effect on yield nor the dollar itself and NO ACCOUNTING ANYWHERE as to “who” bought these offloaded central bank reserves. Accounting fraud and no rule of law here, nothing to see …please move along! You can laugh if you want and say Saudi Arabia will never move toward the East … Saudi Arabia is now in very dire straits financially, who do you think they will side with when Western markets melt down? Do you really believe they will go down trying to support our dollar?

The stage has already been set. The East knows the West has bankrupted. They know we have no gold left because they have it! They can see the finances of the various cities, states and federal government. They know the situation in derivatives is one giant mountain of dynamite waiting for a spark. They know our rule of law is gone and bail ins of depositor funds is next. We are monetizing their sales of Treasury securities. “We” are fooling no one except ourselves. And by “ourselves” I am talking about the vast majority of the population who have grown to rely on the government for everything. Everyone knows we are broke, yet ask anyone and the odds highly favor you will hear “the government will never let it happen”. Even if you are silly enough to believe this you must ask yourself, what are the ramifications when markets become “make believe”?

They’ll be picking them off one by one again. Bye, Draghi.

• Don’t Forget the Irish When Looking at New Risks in Euro Region (BBG)

Ireland gets to decide on its next government as early as next month, and if elections in other countries once at the heart of the European debt crisis are anything to go by, investors should be wary. Portugal’s vote on Oct. 4 produced an inconclusive result, leading to weeks of brokering before Socialist leader Antonio Costatook power with promises to put the brakes on austerity measures. Bond yields have jumped to the highest in six months since then. In Spain, Prime Minister Mariano Rajoy lost his majority last month after years of belt-tightening and the country still doesn’t have a new government.

Ireland is another European electorate jaded by budget cuts. Polls indicate that Prime Minister Enda Kenny’s ruling coalition will struggle to win a majority, though there’s no clear alternative. The country, European Central Bank President Mario Draghi’s model for economic recovery, saw its 10-year bond yields sink below 1% this month. But banks and brokers are already sounding warnings. “The ballot is the most important potential flash-point of the year,” said Dermot O’Leary, economist at Goodbody Stockbrokers in Dublin. “Investors got caught out by the inconclusive result in Spain, and so there is more focus now on Ireland.”

EU.

• There’s a Giant Elephant at the Bank of England (BBG)

It’s a new year and Bank of England officials have been sharing their views on the outlook for the U.K. and the risks. Well, some of the risks. So far in January, policy makers have spouted more than 20,000 words in three speeches and the minutes of their monthly meeting. They’ve cited a global slowdown, weak wage growth and a slump in oil as key issues for 2016. However, their official communications offer no guidance on what economists say is the top risk facing the U.K.: the forthcoming referendum on its membership in the European Union. Lawmakers could try to change that Tuesday – Governor Mark Carney appears in Parliament to talk about financial-stability risks, and they may well ask him about the elephant in the room.

“It’s such a hot issue, I’d be surprised if it didn’t come up,” said Chris Hare at Investec in London. “Carney would probably try to continue to tread a fine line on potential implications of “Brexit.” You might think they’d want to put some kind of downside skew in to their forecast, but if they really pile into those debates, they’d be criticized. They’ll probably try and stay coy.” It’s certainly on the mind of U.K. economists. They cited the buildup to the vote on EU membership and the potential for Britain to exit as the biggest risks in 2016, according to a Bloomberg News survey. Prime Minister David Cameron has yet to call a date, but it could happen as soon as June.

The absence of “Brexit” analysis from the BOE is getting conspicuous. Last October, Carney skirted the tense political battle with a speech that addressed the U.K.’s relationship with Europe, but offered no final conclusion on its merits. His remarks were accompanied by a 100-page report that assessed the issue but offered no judgment on the impact on the U.K. economy of a British exit. Carney went a step further last week, insisting that not only has he said nothing on “Brexit,” he’s not planning to, either. He told the Wall Street Journal: “We have said all we are going to say about that. We deal with the facts on the ground and the facts on the ground are the status quo. Our job is to make the status quo work as effectively as possible.”

Lapavitsas is one of the guys who left Syrixa, for the left.

• One Year On, Syriza Has Sold Its Soul For Power (Lapavitsas)

Today marks a year since a radical left government was elected in Greece; its dynamic young prime minster, Alexis Tsipras, promising a decisive blow against austerity. Yanis Varoufakis, his unconventional finance minister, arrived in London soon after and caused a media sensation. Here was a government that disregarded stuffy bourgeois conventions and was spoiling for a fight. Expectations were high. A year on, the Syriza party is faithfully implementing the austerity policies that it once decried. It has been purged of its left wing and Tsipras has jettisoned his radicalism to stay in power at all costs. Greece is despondent. Why did it end like this? An urban myth propagated in some media circles suggests that the radicals were stopped by a coup engineered by conservative politicians and EU officials, determined to eliminate any risk of contagion.

Syriza was overcome by the monsters of neoliberalism and privilege. Still, it fought the good fight, perhaps even sowed the seeds of rebellion. The reality is very different. A year ago the Syriza leadership was convinced that if it rejected a new bailout, European lenders would buckle in the face of generalised financial and political unrest. The risks to the eurozone were, they presumed, greater than the risks to Greece. If Syriza negotiated hard, it would be offered an “honourable compromise” relaxing austerity and lightening the national debt. The mastermind of this strategy was Varoufakis, but it was avidly adopted by Tsipras and most of Syriza’s leadership.

Well-meaning critics repeatedly pointed out that the euro had a rigid set of institutions with their own internal logic that would simply reject demands to abandon austerity and write off debt. Moreover, the European Central Bank stood ready to restrict the provision of liquidity to the Greek banks, throttling the economy – and the Syriza government with it. Greece could not negotiate effectively without an alternative plan, including the possibility of exiting the monetary union, since creating its own liquidity was the only way to avoid the headlock of the ECB. That would be far from easy, of course, but at least it would have offered the option of standing up to the catastrophic bailout strategies of the lenders. Unfortunately, the Syriza leadership would have none of it.

Dijsselbloem and Schäuble making sure Greece will never recover as long as it’s in the EU.

• Greece On The Brink Of ‘Education Tragedy’ (EurActiv)

The economic crisis has dramatically impacted the already struggling Greek education system, according to a trade union report published last week (19 January). EurActiv Greece reports. The report by the General Confederation of Labour in the area of Education and Lifelong learning ( KANEP-GSEE), examined the state of the Greek primary and secondary education system in the 2002-2014 period. “We are on the brink of an unprecedented education tragedy in recent decades,” the authors of the report warn, underlining that the issue is mainly “political”. “The image of the Greek primary and secondary education, compared to the European mainstream, causes deep concerns for the future of younger generations and for the future of Greece itself.”

The alarming report warned that Athens was a champion in underfunding and inequalities in its education system, as well as a laggard in innovation and learning results at the EU level. The report stressed that actual expenses did not reflect the amount of money earmarked in the annual budget of Greece. Eurostat, the EU’s statistics office, said that public expenditure on education accounted for 4.5% of GDP in 2013. However, it was just 3.2% of GDP, according to official statistics by the State General Accounting Office. “A 1.3% difference is excessively high […] and it cannot be accepted,” the report reads. The underfunding, in combination with the “ineffective study programmes”, resulted in low educational performance. Greek students are amongst the worst performers in basic subjects (mathematics, language, natural sciences).

And production is soaring.

• We Produced Enough Plastics Since WWII To Cover The Entire Earth (Guardian)

Humans have made enough plastic since the second world war to coat the Earth entirely in clingfilm, an international study has revealed. This ability to plaster the planet in plastic is alarming, say scientists – for it confirms that human activities are now having a pernicious impact on our world. The research, published in the journal Anthropocene, shows that no part of the planet is free of the scourge of plastic waste. Everywhere is polluted with the remains of water containers, supermarket bags, polystyrene lumps, compact discs, cigarette filter tips, nylons and other plastics. Some are in the form of microscopic grains, others in lumps. The impact is often highly damaging. “The results came as a real surprise,” said the study’s lead author, Professor Jan Zalasiewicz, of Leicester University.

“We were aware that humans have been making increasing amounts of different kinds of plastic – from Bakelite to polyethylene bags to PVC – over the last 70 years, but we had no idea how far it had travelled round the planet. It turns out not just to have floated across the oceans, but has sunk to the deepest parts of the sea floor. This is not a sign that our planet is in a healthy condition either.” The crucial point about the study’s findings is that the appearance of plastic should now be considered as a marker for a new epoch. Zalasiewicz is the chairman of a group of geologists assessing whether or not humanity’s activities have tipped the planet into a new geological epoch, called the Anthropocene, which ended the Holocene that began around 12,000 years ago.

Most members of Zalasiewicz’s committee believe the Anthropocene has begun and this month published a paper in Science in which they argued that several postwar human activities show our species is altering geology. In particular, radioactive isotopes released by atom bombs left a powerful signal in the ground that will tell future civilisations that something strange was going on. In addition, increasing carbon dioxide in the oceans, the massive manufacture of concrete and the widespread use of aluminium were also highlighted as factors that indicate the birth of the Anthropocene. Lesser environmental impacts, including the rising use of plastics, were also mentioned in passing.

But Zalasiewicz argues that the humble plastic bag and plastic drink container play a far greater role in changing the planet than has been realised. “Just consider the fish in the sea,” he said. “A vast proportion of them now have plastic in them. They think it is food and eat it, just as seabirds feed plastic to their chicks. Then some of it is released as excrement and ends up sinking on to the seabed. The planet is slowly being covered in plastic.”

“An Indigenous child is more likely to be locked up in prison than they are to finish high school.”

• Racism ‘Is At The Heart Of The Australian Dream’ (Guardian)

The veteran journalist and Wiradjuri man, Stan Grant, has told a Sydney audience that racism is “at the heart of the Australian dream,” as he delivered a sobering speech about the impact of colonisation and discrimination on Indigenous people and their ancestors. It has provoked a powerful reaction from Australians, going viral on Facebook with 850,000 views and 28,000 shares, and had been watched more than 50,000 times on YouTube by Sunday night. As part of the IQ2 debate series held by the Ethics Centre, Grant joined immigration lawyer Pallavi Sinha, Herald Sun columnist Rita Panahi and Australian actor Jack Thompson to argue for or against the topic “Racism is destroying the Australian dream”. The event was held last year, but the Ethics Centre only released the video online on Friday.

In his opening address, Grant, who is also Guardian Australia’s Indigenous affairs editor, argued that racism was at “the foundation of the Australian dream”. “The Australian dream,” Grant said. “We sing of it and we recite it in verse; ‘Australians all let us rejoice for we are young and free’. “My people die young in this country. We die 10 years younger than the average Australian, and we are far from free. We are fewer than 3% of the Australian population and yet we are 25% – one quarter – of those Australians locked up in our prisons. And if you’re a juvenile it is worse, it is 50%. An Indigenous child is more likely to be locked up in prison than they are to finish high school.”

He spoke of his Indigenous ancestors, including his grandmother and great-grandmother, who were among those institutionalised in missions, where Indigenous people were forced into unpaid labour and abused. He referenced the “war of extermination” against his ancestors. “I love a sunburned country, a land of sweeping plains, of rugged mountain ranges,” Grant said, referencing the famous poem, My Country, by the Australian writer Dorothea Mackellar. “It reminds me that my people were killed on those plains. We were shot on those plains, diseases ravaged us on those plains.

“Our rights were extinguished because we were not here according to British law, and when British people looked at us, they saw something subhuman. We were fly-blown, Stone-Age savages, and that was the language that was used. Captain Arthur Phillip, a man of enlightenment … was sending out raiding parties with the instruction; ‘bring back the severed heads of the black trouble-makers’.

What does this make me think of? Just because they don’t call them camps….

• Merkel’s Party, Sliding In Polls, Weighs German ‘Border Centres’ (Reuters)

A senior figure in Chancellor Angela Merkel’s conservative party has proposed setting up “border centres” along the frontier with Austria to speed up the repatriation of those asylum seekers deemed unqualified to stay. Julia Kloeckner, leader of Merkel’s Christian Democrats in the western state of Rhineland-Palatinate, was careful to style her proposal as a “Plan A2” rather than a “Plan B”, adding that the chancellor’s push for a European solution to a large influx of asylum seekers into the continent was still right. “We want to complement it,” she wrote in a paper setting out her position, a copy of which Reuters obtained. In the paper, Kloeckner proposed that: “On the German-Austrian border, border centres will be set up.”

The proposal, endorsed by the Christian Democrats’ (CDU) secretary general, highlights the frustration in Merkel’s party with the slow progress in achieving a European Union-wide solution to the refugee crisis, which is straining the infrastructure of many German municipalities. Germany attracted 1.1 million asylum seekers last year, leading to calls from across the political spectrum for a change in its handling of the number of refugees coming to Europe to escape war and poverty in Syria, Afghanistan and elsewhere. Growing concern about Germany’s ability to cope with the influx and worries about crime and security after assaults on women at New Year in Cologne are weighing on support for the CDU and its Bavarian sister party, the Christian Social Union (CSU). An Emnid poll for the newspaper Bild am Sonntag showed support for the CDU/CSU bloc down 2%age points at 36% from the previous week. The right-wing Alternative for Germany (AfD) gained 1 point to 10%. Merkel’s coalition partners, the Social Democrats (SPD), gained a point to 25%.

Should you really want an award that you share with Obama and Kissinger?

• Greek Islanders To Be Nominated For Nobel Peace Prize (Observer)

Greek islanders who have been on the frontline of the refugee crisis are to be nominated for the Nobel peace prize with the support of their national government. Of the 900,000 refugees who entered Europe last year most were received –scared, soaked and travelling in rickety boats – by those who live on the Greek islands in the Aegean Sea. The islanders, including fishermen who gave up their work to rescue people from the sea, are in line to be honoured with one of the world’s most esteemed awards. Eminent academics from the universities of Oxford, Princeton, Harvard, Cornell and Copenhagen are drafting a submission in favour of awarding the prize to the people of Lesbos, Kos, Chíos, Samos, Rhodes and Leros.

The nomination deadline is 1 February, but those behind the plan have already met the Greek minister for migration, Yiannis Mouzalas, who they say has offered his government’s full support. A petition on the website of the grassroots campaign group, Avaaz, in favour of the nomination has amassed 280,000 signatures. According to the petition: “On remote Greek islands, grandmothers have sung terrified little babies to sleep, while teachers, pensioners and students have spent months offering food, shelter, clothing and comfort to refugees who have risked their lives to flee war and terror.”

While the official nomination letter is yet to be finalised, it is understood the academics, whose identities will be revealed in the coming days, will implore the Nobel committee members to accept their nomination. They will say that it must be noted that a people of a country already dealing with its own economic crisis responded to the unfolding tragedy of the refugee crisis with “empathy and self-sacrifice”, opening their homes to the dispossessed, risking their lives to save others and taking care of the sick and injured. [..] One of the organisers of the Solidarity Networks, Matina Katsiveli, 61, a retired judge who lives on Leros, welcomed the move but said there was “reward enough in the smiles of the people we help”.

That was not clear?

• Sealing Greek Sea Border Is Impossible (AP)

Hour after hour, by night and by day, Greek coast guard patrols and lifeboats, reinforced by vessels from the European Union’s border agency Frontex, ply the waters of the eastern Aegean Sea along the frontier with Turkey. They are on the lookout for people being smuggled onto the shores of Greek islands – the front line of Europe’s massive refugee crisis. Although smugglers are often arrested, the task is mainly a search-and-rescue role. Hours spent on patrol shows the near-impossibility of sealing Europe’s sea borders as some have demanded of Greece, whose islands so near to Turkey are the most popular gateway into Europe. Some European countries – notably Hungary and Slovakia – have blasted Greece for being unable to secure its border, which also forms part of the external limits of Europe’s borderless Schengen area.

“We have been saying all along that if the Greeks are unable to protect the borders of their country, we should jointly go down south and protect them,” Hungarian Prime Minister Viktor Orban said in November, with his Slovak counterpart Robert Fico echoing the thought. But such calls ignore the realities at sea. No matter how many patrol boats are out in Greek waters, attempting to force a vessel of asylum-seekers back into Turkish waters is both illegal and dangerous, even in calm seas. So unless a Turkish patrol stops a migrant boat and returns it to Turkey, there is little Greek or Frontex patrols can do once it has entered Greek territorial waters but arrest the smugglers and pick up the passengers or escort the vessel safely to land.

“Greece is guarding the national and European borders,” Greek Alternate Foreign Minister Nikos Xydakis said in a statement Sunday. “What it cannot do and will not do … is to sink boats and drown women and children, because international and European treaties and the values of our culture forbid it.”

Debt Rattle January 22 2016

Jan 222016

January 22, 2016 Posted by Raúl Ilargi Meijer at 9:46 am Finance Tagged with: China, death, Draghi, EM, Greece, Japan, oil, refugees, short squeeze, steel, Treasuries Comments Off

DPC The steamer Cincinnati off Manhattan 1900

• Two Refugee Boats Sink off Greek Islands; At Least 21 Dead (GR)

• At Least 12 Refugees Killed In New Tragedy Off Turkey (AFP)

• Japanese Stocks Surge by Most in 4 Months In ‘Short Squeeze Galore’ (BBG)

• Japan Must Let Zombie Companies Die (BBG)

• China Shares Struggle Higher On Global Stimulus Hopes (Reuters)

• Draghi’s Groundhog Day Heralds Seven Weeks of ECB Market Dialog (BBG)

• A Scared World Is Taking Its Money And Running Back Home – and to the US (BBG)

• Battered Emerging Markets Race to Stem Outflows (WSJ)

• US Is Hiding -Saudi- Treasury Bond Data That’s Suddenly Become Crucial (BBG)

• Is Something Blowing Up In OIL? (ZH)

• Trillions Could Be Lost In British Housing Bubble Collapse (WMN)

• Hundreds Of Mountain Tops Leveled To Make Way For The New Silk Road (Forbers)

• Glory Days Of Chinese Steel Leave Behind Abandoned Mills And Broken Lives (G.)

• Italy Could Trigger Europe’s Next Financial Crisis (Stratfor)

• IMF Demands EU Debt Relief For Greece Before New Bailout (Guardian)

• Capital Controls Cut Greek Exports By €3.5 Billion In 6 Months (Kath.)

• Over 120,000 Greek Homes Close To Repossession (Kath.)

• One Third of Greeks Cannot Afford Heating Or Hot Water (KTG)

• Greece Demands That Refugees Declare Final EU Destination (Reuters)

• Germany Takes Refugees’ Valuables ‘To Pay For Their Stay’ (Local)

And these f**king clowns are partying in Davos?

• Two Refugee Boats Sink off Greek Islands; At Least 21 Dead (GR)

Two boats carrying refugees and migrants from Turkey to Greece have sunk in the Aegean, leaving 21 dead with six children among them. In two separate incidents off the Greek islands of Kalolymnos and Farmakonisi, at least 21 people lost their lives dead, while dozens were saved by the Hellenic Coast Guard. In the Kalolymnos island area, a boat carrying an unknown number of refugees and migrants sank, despite the good weather conditions. The coast guard rescue boats pulled 14 dead out of the water and managed to rescue 26 people so far.

According to survivors, more than 50 people were aboard the vessel. Rescue efforts continue. Earlier, on another similar incident off Farmakonisi island, seven refugees drowned with six of them being children. According to the coast guard, the refugees were aboard a wooden boat that crashed on rocks. As a result a woman and six children lost their lives. A Frontex boat and a Hellenic Coast Guard boat rushed on the spot and managed to rescue an underage girl. The remaining passengers had managed to reach the coast safely.

That’s a total of at least 33 deaths overnight.

• At Least 12 Refugees Killed In New Tragedy Off Turkey (AFP)

At least 12 migrants were killed and several more went missing Thursday when their boat sank while trying to cross the Aegean Sea from Turkey to EU member Greece, Turkish media reports said. The boat, carrying some 50 migrants, struck trouble after leaving the western Turkish resort of Foca in the Izmir region for the Greek island of Lesvos. Twenty-eight people were saved while up to dozen more are still feared missing, NTV television said.

Turkey, which is home to some 2.2 million refugees from Syria’s civil war, has become a hub for migrants seeking to reach Europe, many of whom pay people smugglers thousands of dollars for the risky crossing. Ankara reached an agreement with the EU in November to stem the flow of refugees heading to Europe, in return for financial assistance. Brussels vowed to provide €3 billion as well as political concessions to Ankara in return for its cooperation in tackling Europe’s worst migrant crisis since World War II. But onset of winter and rougher sea conditions do not appear to have deterred the migrants, with boats still arriving on the Greek islands daily.

Yeah, central banks offered some ‘hope’ too, but that‘s not it: some ‘barrier’ in the markets got triggered big time. Is it that Japan fell into bear territory yesterday?

• Japanese Stocks Surge by Most in 4 Months In ‘Short Squeeze Galore’ (BBG)

Japanese stocks surged by the most in four months as investors weighed prospects for central bank stimulus and bought back into a bear market to cover short positions. The Topix index jumped 5.6% to 1,374.19 at the close in Tokyo, the most since Sept. 9 and paring its worst monthly loss since October 2008. The Nikkei 225 Stock Average soared 5.9% to 16,958.53, also supported by a report the Bank of Japan is considering extra monetary easing. Global equities halted losses on the brink of a bear market as oil rallied and the ECB signaled it may boost stimulus. “We’re seeing short squeeze galore,” said Mikey Hsia at Sunrise Brokers. “Much of this is technical. Japan has had big moves for three days in a row now – it’s becoming common.”

All of the 33 Topix industry groups rose, led by developers, oil explorers and harbor transporters. Volume was 21% above the 30-day average. The index still closed down 2% for the week. [..] The Topix’s 14-day relative strength index closed at 21.29 Thursday, below the level of 30 that some traders say indicates shares will rise. When the measure slid to 24.4 on Jan. 12, the Topix jumped 2.9% the next day. Bearish bets on Tokyo’s stock exchange accounted for more than 40% of total trading value on Thursday. [..] The Japanese gauges fell into a bear a bear market on Wednesday. The Nikkei 225 previously entered a bear market in June 2013, after plunging 20% in less than a month. The gauge soon rebounded, rallying 31% from its low on June 13, 2013, through the end of that year.

FoxConn is reportedly preparing a bid for Sharp.

• Japan Must Let Zombie Companies Die (BBG)

[..] one day, in May 2015, you open your newspaper and see that Sharp has been bailed out by two of Japan’s largest banks, Mizuho Bank and Bank of Tokyo-Mitsubishi. These banks are themselves backed by government bailout guarantees, meaning that Sharp has been indirectly rescued by the government – a prime example of the zombie-firm phenomenon that economists have been complaining about for decades. With those cheap bank loans, the ailing Japanese giant can afford to keep putting out TVs at fire sale prices, making no profit but squeezing your own margins. But you soldier on. The bank bailout does nothing to improve Sharp’s corporate strategy — the company’s managers are content to drag out the status quo for as long as possible.

Eventually, you think, Sharp will quit, the market will become less crowded, and your innovative products and manufacturing processes will be rewarded with bigger profit margins. Then, in January 2016, the Japanese government steps directly into the fray. The Innovation Network Corp. of Japan offers to bail out Sharp with an injection of 200 billion yen (about $1.7 billion). INCJ, which is funded by industrial giants but backed by government guarantees, will keep Sharp’s struggling LCD division alive and merge it with a rival, Japan Display Inc., itself a consortium of large corporations. Faced with this kind of firepower, there is no way you can stay in the market. Nor can you expect a similar bailout – you employ only 100 people, while Sharp employs 50,000.

You fold your startup and move across the Pacific to Silicon Valley, following in the footsteps of other Japanese entrepreneurs. The story of this young Japanese entrepreneur is fictitious, though there are some real-world parallels. But the part about the Sharp bailouts – first by the banks and now by the government – is all too true. Japan Inc. looks dead set on keeping the flailing electronics giant alive. That will keep the market flooded with artificially cheap Sharp products – mobile phones, solar panels, air conditioners, printers, microwave ovens and a host of other items. Entrepreneurs looking to use the Japanese market as a launching pad for innovative products and processes will find themselves blocked by zombies.

Beijing needs to get cautious about its reassuring statements. It’s about credibility.

• China Shares Struggle Higher On Global Stimulus Hopes (Reuters)

China’s fragile shares rose modestly on Friday, showing only a muted response to hints of more policy stimulus in Europe and Japan, which prompted a rally in battered oil prices and global equities. The benchmark Shanghai Composite Index was up 0.6% in the early afternoon, recovering a little of Thursday’s sharp losses. The CSI300 index of the largest listed companies in Shanghai and Shenzhen was also up 0.6%. The indexes veered between positive and negative territory in the morning, with little volume behind the trading. Investors appear increasingly reluctant to risk their money on China’s fickle markets, which have slumped about 17-18% so far this year, and morning gains have often turned to losses by close of day as traders quickly take profits.

Highlighting the lack of faith in the markets, trading volumes in January have been about a third of typical levels last year, which only exaggerates price movements. On Thursday, Vice President Li Yuanchao sought to reassure investors that Beijing would use regulations to prevent volatility in a market that was “not yet mature”. “An excessively fluctuating market is a market of speculation where only the few will gain the most benefit when most people suffer,” Li, who is attending the World Economic Forum in Davos, said in an interview with Bloomberg. Measured by actions rather than words, regulators’ attempts to curb volatility, notably a new circuit breaker mechanism that was ditched after three days of violent falls, have conspicuously failed. The stock markets and China’s yuan currency have come under pressure as a raft of economic indicators have confirmed the country’s declining growth, putting the world’s second-largest economy at the top of global investors’ worry list along with plunging crude oil prices.

That stupid inflation focus is a killer.

• Draghi’s Groundhog Day Heralds Seven Weeks of ECB Market Dialog (BBG)

Once again, Mario Draghi has given himself a month and a half to convince investors he’ll do what’s needed to reignite consumer prices. This time he may hone the message more. The ECB president’s hint that policy makers will bolster stimulus on March 10 raises the prospect of the Governing Council delivering another expansion to its €1.5 trillion bond-buying program, including potentially taking it into new asset classes. Emphasizing the ECB’s ambition to reporters on Thursday, Draghi said that there are “no limits” to how far officials will go to safeguard their inflation goal. “It’s a bit like Groundhog Day,” said Carsten Brzeski at ING-Diba in Frankfurt, reminiscing about the 1993 Bill Murray comedy. “The only question is, will he fulfill the dreams of markets this time around, or will he disappoint again?”

Draghi’s comments herald seven weeks of expectation management as officials hope to better guide some investors stung by the result of the last meeting of 2015, when fresh stimulus fell short of predictions stoked at the previous decision. While the president didn’t elaborate on how he plans to better explain things this time round, he also didn’t exclude that officials had a role in an outcome that sent bond yields and the euro surging. “Communication is a two-way affair,” Draghi said. “It’s very hard to put the blame of some disappointment on one side only.” His challenge has become tougher. With an inflation rate that hasn’t been near the goal of just under 2% in three years, and China’s economic slowdown increasingly dragging on global trade and disrupting markets, the 25-member Governing Council risks being seen as too slow and cumbersome.

Long predicted: the USD is coming home.

• A Scared World Is Taking Its Money And Running Back Home – and to the US (BBG)

A tide of money went out to emerging markets for more than a decade, pushed by accommodative monetary policy in the U.S. and pulled by the promise of robust growth. Now that tide is coming back in as investors seek to repatriate funds or flock to U.S.-dollar denominated assets as a safe haven amid sluggish economic growth and global market turmoil. “There are around $47 trillion in private and official investment abroad and far too many that wish to retreat home or to the U.S.,” writes Deutsche Bank Macro Strategist Sebastien Galy in a report titled “The Retreat of Global Balance Sheets.” “These flows are triggered in good part by a recognition that emerging markets’ potential growth is slowing down structurally without enough compensating growth in developed economies.”

The broad implications of this is that liquidity will be starved in parts of the emerging markets but ample in advanced economies and that the U.S. dollar and euro should benefit, the latter more so from direct investments than from portfolio inflows. In some respects, emerging markets have become victims of their own success, notes Galy, who explains how we reached this point: “Growth is easier initially in an emerging economy as each additional unit of capital and labor offers a high return. As the economy grows their returns diminish as the relatively inefficient services sector grows relative to manufacturing. Intervening against currency appreciation accelerates this transition by importing easier Fed policy. But with a mispricing of capital, it typically leads to an over usage, inefficiencies and in some cases excessive domestic valuations. As growth slows down structurally, the promises of ever stronger growth fades leaving investors potentially with unsustainable debt levels.”

China, which has seen its marginal return on credit growth continue to shrink, is perhaps the poster child for the sequence Galy describes. This course of events has led Beijing to begin drawing down on its foreign reserves, which are primarily composed of U.S. debt, in a move that puts upward pressure on U.S. Treasury yields and has the opposite effect on the value of the dollar. This dynamic, however, is swamped by the appetite for Treasuries from the private sector, says the strategist. [..] Repatriation will be fueled primarily by portfolio outflows from riskier emerging market positions and sovereign wealth fund liquidations. Since U.S. investors have far and away the highest stock of foreign equity ownership, this trend is also conducive to more greenback strength.

In fact, Galy found that “during the rapid rise in the dollar in 2015, the foreign exchange hedging decision had a clear causal and feedback loop on the spot price.” That is, as the dollar rose, more investors chose to use hedged equity exchange-traded funds, which provided an impetus for further gains in the greenback.

But they can’t.

• Battered Emerging Markets Race to Stem Outflows (WSJ)

A number of emerging markets are taking a risky approach to dealing with growing pressure on their currencies: They’re trying to ban it. Oil-dependent Azerbaijan said this week it would slap a 20% tax on any transaction that takes money out of the country. Saudi Arabia told banks with branches there to stop allowing traders to make certain bets on further depreciation of its currency, the riyal. Nigeria recently halted imports of goods including rice and toothpicks and imposed spending limits on credit and debit cards denominated in foreign currency. The capital controls are aimed at deterring or slowing the outflow of money and reducing the downward pressure on currencies that traders are betting have farther to fall.

But they also risk exacerbating the problem by driving away foreign investors who bristle at limitations on the flow of capital and hurting businesses that need to hedge. “It’s a sign of economic weakness and a dramatic shift in terms of trade, and it also increases the risk premium because of the policy uncertainty,” said George Hoguet at State Street Global Advisors. How emerging markets will manage a massive outflow of capital, weakness in their currencies and a swollen debt burden is a major question hanging over the global economy. Trillions of dollars flowed into emerging markets in the years after the financial crisis. But slowing growth in China and a collapse in oil and other commodity prices has reversed the tide.

Emerging markets suffered record net outflows of $732 billion in 2015, with China accounting for the bulk of that, according to the Institute of International Finance. Their currencies, meanwhile, weakened an average 17.6% against the dollar last year, according to money manager Ashmore Group, and the trend has shown no signs of letting up. The Russian ruble, Mexican peso and Colombian peso all hit record lows against the dollar on Wednesday. Emerging-market currencies fell 3% in the first two weeks of 2016.

Bonkers.

• US Is Hiding -Saudi- Treasury Bond Data That’s Suddenly Become Crucial (BBG)

It’s a secret of the vast U.S. Treasury market, a holdover from an age of oil shortages and mighty petrodollars: Just how much of America’s debt does Saudi Arabia own? But now that question – unanswered since the 1970s, under an unusual blackout by the U.S. Treasury Department – has come to the fore as Saudi Arabia is pressured by plunging oil prices and costly wars in the Middle East. In the past year alone, Saudi Arabia burned through about $100 billion of foreign-exchange reserves to plug its biggest budget shortfall in a quarter-century. For the first time, it’s also considering selling a piece of its crown jewel – state oil company Saudi Aramco. The signs of strain are prompting concern over Saudi Arabia’s outsize position in the world’s largest and most important bond market.

A big risk is that the kingdom is selling some of its Treasury holdings, believed to be among the largest in the world, to raise needed dollars. Or could it be buying, looking for a port in the latest financial storm? As a matter of policy, the Treasury has never disclosed the holdings of Saudi Arabia, long a key ally in the volatile Middle East, and instead groups it with 14 other mostly OPEC nations including Kuwait, the United Arab Emirates and Nigeria. For more than a hundred other countries, from China to the Vatican, the Treasury provides a detailed breakdown of how much U.S. debt each holds. “It’s mind-boggling they haven’t undone it,” said Edwin Truman, the former Treasury assistant secretary for international affairs during the late 1990s. Because relations were rocky and the U.S. needed their oil, the Treasury “didn’t want to offend OPEC. It’s hard to justify this special treatment for OPEC at this point.”

For its part, the Treasury “aggregates data where more detailed reporting might disclose the positions of individual holders,” spokeswoman Whitney Smith said. While that position is consistent with the International Investment and Trade in Services Survey Act, which governs disclosures of investments made by foreign persons and governments, and shields individuals in countries where Treasuries are narrowly held, it hasn’t kept the Treasury from disclosing figures for a whole host of other countries – large and small. They range from the $3 million stake held by the Seychelles, to the $69.7 billion investment from the oil-producing economy of Norway, and those of China and Japan, which are both in excess of $1 trillion. Apart from the kingdom itself, only a handful of Treasury officials, and those at the Federal Reserve who compile the data on their behalf, have a clear picture of Saudi Arabia’s U.S. debt holdings and whether they’re rising or falling. For everyone else, it’s a guessing game.

“Even after [yesterday’s] drop, OIL is still at a roughly 20% premium to its underlying index.”

• Is Something Blowing Up In OIL? (ZH)

A week ago we warned of some insane movements and mysterious bid in OIL (the Barclays iPath oil tracking ETN) as it traded a stunning 36% rich to its underlying NAV. Well with oil resurgent today, as contracts roll, something just imploded in OIL…

As Barrons noted, the sharp performance divergence stems from the ETN’s massive price premium over the value of the index it tracks. Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, notes that OIL’s premium rose sharply in recent days and accelerated to 48% by Wednesday’s close. He told Barron’s that institutional traders noticed the extreme premium and are now betting against OIL on the premise that the unusually large premium will revert to normal.

Trading volume in OIL was already more than triple the average over the past month on Thursday with three hours left in the trading day. Even after today’s drop, OIL is still at a roughly 20% premium to its underlying index. Chintawongvanich says that it’s not too late for investors who own OIL to ditch it for USO: “You don’t want to be stuck holding the bag when this drops to NAV.” Simply put – retail moms and pops who piled into OIL without thinking about NAV or technical flows just got f##ked! As we concluded previously, The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.

Not could, will.

• Trillions Could Be Lost In British Housing Bubble Collapse (WMN)

It is interesting how the Brits’ fascination with property has evolved over time. At present prices, UK residential property is now ‘worth’ about £5 trillion (£5,000 billion) and about 65% is owner occupied. Commercial property, all those shops, factories, offices, plant is ‘only’ £400 billion. The London Stock Exchange, which includes multinational giants with most of their assets and income overseas, is only worth £2.25 trillion. British Government Bonds are £1.5 trillion. There is approximately £700 billion of cash on deposits held by individuals.

It is interesting how something in which we live – and costing us considerable upkeep – has become so significant in terms of our societal structure. I am very alarmed at the excessive price levels of the average ‘home’ but our governments must be concerned that so much of our economics are impacted by what is happening in housing – and the confidence of those who own it. We should all never forget that over-reliance upon one economic asset, a simple box in which to live, however pretty or comfortable, does not make it immune from irrational excess and frankly, the figures are all out of kilter regardless of the lack of enough new homes being built and the insatiable demand for them – apparently (but never forget that all the people here at the moment do have somewhere to live).

[..] the order of asset values should perhaps be: stock market (the base of all our commerce), residential property, commercial property, government bonds. You can see the model requires some considerable re-balancing but perhaps a doubling of the stockmarket is more unlikely than a halving of the value of homes (though the latter would still constitute significant ‘value’ though I shouldn’t wish even to countenance what that would mean for the economy and bad debts). Sadly though, this may be the necessary adjustment required to return to ‘normality’ so watch-out as each could indeed arise.

Man’s respect for his planet.

• Hundreds Of Mountain Tops Leveled To Make Way For The New Silk Road (Forbers)

“Four years ago, all mountains,” my local driver Li Wang said as we putted slowly forward in his diminutive, beaten and battered old Japanese car through the newly built-up downtown of Lanzhou New Area (LNA). This is a place where hundreds of mountain tops have been removed to make flat land for development — an initiative which surely ranks among the most extreme undertakings in the history of urbanization. Lanzhou, the 3.6 million person provincial capital of western China’s Gansu province, was once a big market town on the ancient Silk Road, and there is now a major movement underway to revive this historic relevance. Strategically located on the geographic and cultural cusps between the Chinese heartland and Central Asia, Lanzhou is again being utilized as a gateway to the west, and is being primed to be a major hub of the Silk Road Economic Belt.

The Silk Road Economic Belt is the land-based half of China’s One Belt One Road (OBOR) initiative that will facilitate the creation of a colossal network of new highways, rail lines, logistics and industrial zones, pipelines, power plants, sea ports, administrative centers, and new cities that will stretch from East Asia to Western Europe, spanning 60 countries and over half of the world’s GDP. I was on my way out to see where some of this New Silk Road infrastructure was going to be built, riding along the new six lane highway that extended over an expanse of perfectly flat land through the center of LNA. On both sides of the road were arrays of nearly identical 30-story high-rises packed neatly within their respective 500X500 meter plots. Dozens of these complexes were lined up in bunches, amounting to hundreds of towers and tens of thousands of new apartments.

This was a planned city, a giant grid branded onto the parched desert silt, devised by urban designers who seemed to deify the right angle, and built in a singular blast of development. Most of the buildings of this new city were still empty, but it was evident that life here was starting to simmer. Some of the apartment complexes had opened and residents had already moved in; there were people walking on the sidewalks and cars in the streets. Shops were beginning to open. Li Wang took great pride in pointing out the almost ridiculous amount of banks that lined the main drag. Sprinklers showered the bare desert in hopes that something would grow. An excessive amount of gigantic jumbotrons — mainstays in new Chinese cities — were switched on, blasting promotional videos from the development companies and the local government about the great things they were building here. Just a few years ago none of this existed; it was all mountains.

“China is blessed with the strong and long-term focused leadership of President Xi Jinping, the best leader in the world … With his leadership, we can deal with the inevitable risks and volatilities arising out of the transition.”

• Glory Days Of Chinese Steel Leave Behind Abandoned Mills And Broken Lives (G.)

A billboard on the motorway into China’s steel capital evokes the golden era of the country’s blistering economic rise. “Gathering great wealth!” it boasts. “Business wins the future!” But at the Fufeng steel plant on the outskirts of Tangshan, a once booming industrial hub about 200km south-east of Beijing, there is scant sign of those glory days. Since Fufeng’s owners declared bankruptcy early last year – laying off about 2,000 workers and sparking protests in the process – weeds and rust have begun to consume the steel mill’s industrial ruins. “There’s nobody here – just us,” said one of three security guards braving snow and sub-zero temperatures to watch over the dilapidated facility, which, like many others in the region, has been forced out of business by massive over-capacity and plummeting demand.

Tangshan, a city of about seven million inhabitants in Hebei, China’s steel-making heartlands, was levelled by a devastating 1976 earthquake that is said to have claimed 250,000 lives. But it rose from the ashes to become a heavy-industry powerhouse, propping up a massive Chinese construction boom and churning out more steel in 2014 than the United States. Those days now appear over, as concerns mount over the health of China’s economy and its possible impact on the rest of the world, and Beijing fights to reinvent the world’s second-largest economy and clear its smog-choked skies, in turn piling the pressure on heavily polluting steel plants.

Since China began ramping up efforts to slash steel over-capacity and transition to a more sustainable, consumption-led economic model, some corners of Tangshan’s once bustling industrial sprawl have taken on the appearance of ghost towns. [..] “Things are bleak,” said one retired mill worker who lives in Kua Number One village, just beside Fufeng. Another man, who works at the nearby Guofeng mill, which is still operating, but only just, claimed his monthly pay had been cut by 25%. “Life is really hard right now,” he complained. “Everything here is about steel. If it shuts down, it’s over. If our mill closes, we will have no land, no money and no work,” said the 52-year-old father of one, who declined to give his name.

This week, China announced that its economy last year grew at its slowest rate in 25 years, contributing to fears of an accelerated slowdown that could affect financial markets across the world. On Thursday, Fang Xinghai, a Stanford-educated top economic adviser to president Xi Jinping, attempted to reassure the world over his country’s ability to avoid a hard landing that would have severe consequences for the global economy. “China is blessed with the strong and long-term focused leadership of President Xi Jinping, the best leader in the world,” Fang, the former deputy head of the Shanghai Stock Exchange, told the Wall Street Journal. “With his leadership, we can deal with the inevitable risks and volatilities arising out of the transition.”

How will the ECB try to solve this with Hollande stating that France is in an economic emergency?

• Italy Could Trigger Europe’s Next Financial Crisis (Stratfor)

In the current period of uncertainty, Italy – particularly its banks – appears to be the victim of the moment. The Italian banking index is down 18% this year, and Italy’s third-largest and most historically troubled bank, Monte dei Paschi, has lost 50% of its value during the same period. The most dramatic drops have taken place this week. The Italian stock market regulator has deemed it necessary to ban short selling on Monte dei Paschi stock in an attempt to prevent speculators from benefiting by driving it lower, yet it continues to fall. As is so often the case with the markets, these actions are rooted in fact but with a layer of sentiment on top. Italy’s banks are indeed troubled; their non-performing loans amount to more than €200 billion, and Monte dei Paschi had an extremely weak balance sheet long before a 2013 derivatives scandal dealt it another blow.

But those non-performing loans have been growing ever since 2008, and that growth has slowed of late. Italy’s banking crisis has long been brewing, and the markets appear to be taking it seriously for the first time since ECB President Mario Draghi defused the last market panic by promising to do “whatever it takes to save the euro” in mid-2012. Either way, the market sell-off could seriously damage Italy’s economy. New regulations brought in at the start of the year heighten the risk of a bank run because investors and depositors must now bear the pain of an Italian bank going bust. This is a strong incentive for a bank’s depositors and investors to move their funds elsewhere if they believe the bank is in danger (sentiment plays a role again), and there are reports that Monte dei Paschi depositors are doing just that.

Italy and the European institutions must now look for ways to reverse the sentiment that is making Italian banks the victims and reassure the markets of the banks’ safety. The drastic way of achieving this would be a government bailout, but this is unlikely both because of the new rules and because bailouts typically occur when a crisis is in a more developed state. Another way would be persuading another Italian bank to buy Monte dei Paschi and take on its risky assets at a discount, thereby reassuring the market that Italy’s largest problem is now solved. This is possible in theory, though the travails of banks that bought their weaker peers in the crisis of 2008 might make it a hard sell for potential suitors.

And the EU won’t give it.

• IMF Demands EU Debt Relief For Greece Before New Bailout (Guardian)

The EU will need to provide significant debt relief for Greece if it is to persuade the IMF to put its financial clout behind the country’s third bailout package, the Washington-based organisation has said. After what was described as a cordial meeting between the IMF’s managing director, Christine Lagarde, and the Greek prime minister, Alexis Tsipras, on the sidelines of the World Economic Forum in Davos, the fund said it was only prepared to support the recession-ravaged eurozone country on a strings-attached basis. It said Greece had to be prepared to implement a tough package of economic reform and the country’s eurozone partners had to be willing to write down Greece’s debts.

The IMF took part in the first two Greek bailouts but is concerned that, at 175% of GDP, Greece’s debts are too burdensome and will prevent a lasting recovery. Lagarde told Tsipras the IMF regarded reform of Greece’s pension system, which accounts for 10% of GDP, as vital. The IMF said of the talks: “The managing director reiterated that the IMF stands ready to continue to support Greece in achieving robust economic growth and sustainable public finances through a credible and comprehensive medium-term economic programme. “Such a programme would require strong economic policies, not least pension reforms as well as significant debt relief from Greece’s European partners to ensure that debt is on a sustainable downward trajectory.” The Greek government said the talks had been sincere.

Earlier in the day, Tsipras told Davos he was committed to reforming the Greek economy, which lost 25% of its GDP through austerity programmes which sent jobless rates to twice the eurozone average. But he criticised Europe’s insistence on lowering budget deficits, saying: “We must all understand that, next to balanced budgets, we must also have growth … We need to be more realistic, and show more solidarity too.” The German finance minister, Wolfgang Schäuble, appeared unimpressed by Tsipras’s call for greater solidarity, and suggested he needed to deliver on the promises made to creditors. “My advice is, if we want to make Europe stronger we should implement what we agreed to implement. We can simply say, ‘implementation, stupid’,” Schäuble said.

The EU leaves behind only rubble.

• Capital Controls Cut Greek Exports By €3.5 Billion In 6 Months (Kath.)

From end-June to November 2015, the capital controls cost Greek exports, and therefore the economy in general, some €3.5 billion, or 2 %age points of the country’s GDP, according to an analysis of Bank of Greece data by the Panhellenic Exporters Association. In addition to the €1.88 billion net loss in takings in the first 11 months of last year compared with the year before, exports are believed to have missed out on another €1.65 billion as according to the course set in the first half of the year, the momentum would have seen exports swell considerably in 2015.

At the same time, the transactions terms between Greek enterprises and foreign partners (clients or suppliers) remain very tough, according to the exporters. Furthermore, foreign clients of Greek companies are delaying payments as the local firms are at a disadvantage and cannot exert pressure on them. In 2015 foreign companies extended the payment time for Greek exports by an average of 13 days compared to 2014. The ratio of payments to declared exports dropped to 96.27% in 2015, from 98.48% in 2014, the Bank of Greece data showed. The value of exported goods came to €23.6 billion last year while payments came to just €22.7 billion.

Who’s better off when all these people are evicted? BTW, you think Tsipras is going to throw them out on the street?

• Over 120,000 Greek Homes Close To Repossession (Kath.)

An estimated 122,700 households in Greece are facing the threat of losing their homes due to accumulated loan and tax obligations that they cannot pay, a survey by Marc research company for the Hellenic Confederation of Professionals, Craftsmen and Merchants showed on Thursday. Households’ fears are on the rise due to a change in the legislative framework concerning repossessions valid as of January 1 that has made the criteria for acquiring protection status stricter. A great number of households surveyed (36.3%) said that they live on up to €10,000 per year, which is the lowest income bracket. This is up from 34.4% in 2014 and 28.1% in 2013. Of particular concern is the finding that more than half of the households polled (51.8%) have a pension as their main source of income, up from 42.3% in 2012. Just 6.1% of respondents said they have a business activity as the main source of income, less than half of the share recorded in 2012 (12.6%).

Dire straits.

• One Third of Greeks Cannot Afford Heating Or Hot Water (KTG)

Residents in several underprivileged suburbs of Athens and Piraeus have seen their economic situation to have dramatically deteriorate and consequently also their living standards. According to a survey conducted by the Greek Ombudsman: one in five residents seeks soup kitchens and social groceries in order to get food. Three in ten have no heating and hot water. One in four living in apartment buildings have not turn on the radiators since 2010. The survey has been conducted in 2015 and in Kypseli, Ano Patisia and Agios Panteleimonas districts of Athens as well as in Nikaia-Rendis and Perama suburbs of Piraeus. 17% of the residents of these areas have experienced electricity and/or water outage due to unpaid bills. One in four had to make debt arrangements with the Power or Water company in order to gain again access to electricity and/or water.

Almost half (48.5%) said that in the last five years, they have faced difficulties in the repayment of debts to banks, credit cards, taxes, rents, building maintenance cost, tutor schools and schools. One in six (17%) said that they have experienced power/water outage and one in four (23.4%) said that they live in apartment buildings where the central heating does not operate for economic reasons. 80.2% said that their need for heating in winter and cooling in summer is not covered. 29.2% said that their needs for heating/cooling, cooking, hot water, refrigerator and electricity are not covered due to economic reasons. 35.03% use electricity for heating (electric radiator or A/C), 33.09% use heating oil, 9.04% use natural gas, 8.47% use firewood and 7.34% use LPG. 17% said that they had no telephone landline, 23.2 had no personal computer and 27.7% had no internet access.

All I can think is: poor people. Children freezing to death, caught between politicians playing a power game, who care nothing about human lives.

• Greece Demands That Refugees Declare Final EU Destination (Reuters)

Migrants and refugees arriving in Greece must state their final destination to travel further into the European Union, a Greek police source told Reuters on Thursday, following moves by neighbouring states to quell migrant flows. Serbia on Wednesday said it would deny migrants access to its territory unless they planned to seek asylum in Austria or Germany. “As of today, the final destination – as stated by the migrants – will be registered in the official documents,” the official said without disclosing the reason for the decision.

It was not clear whether the refugees would be banned from travelling further depending on their final destination. But most migrants were expected to state Austria or Germany, refugee agency officials said. Greece, a main gateway to Europe for migrants crossing the Aegean sea, has faced criticism from other EU governments who say it has done little to manage the flow of hundreds of thousands of people arriving from Turkey on its shores. Austria wants to cap the number of people it allowed to claim asylum this year at less than half last year’s figure, it said on Wendesday. It has said it would bar all migrants intending to pass through its northern neighbour Germany to other western European countries.

Sure, why not. They haven’t lost enough yet.

• Germany Takes Refugees’ Valuables ‘To Pay For Their Stay’ (Local)

Germany’s southern states are confiscating cash and valuables from refugees after they arrive, authorities in Bavaria confirmed on Thursday. “The practice in Bavaria and the federal rules set out in law correspond in substance with the process in Switzerland,” Bavarian interior minister Joachim Herrmann told Bild on Thursday. “Cash holdings and valuables can be secured [by the authorities] if they are over €750 and if the person has an outstanding bill, or is expected to have one.” Authorities in Baden-Württemberg have a tougher regime, where police confiscate cash and valuables above €350. The average amount per person confiscated by authorities in the southern states was “in the four figures,” Bild reported.

By confiscating valuables, the states are implementing federal laws, which require asylum seekers to use up their own resources before receiving state aid. “If you apply for asylum here, you must use up your income and wealth before receiving aid,” Aydan Özoguz, the federal government’s integration commissioner, told Bild. “That includes, for example, family jewellery. Even if some prejudices persist – you don’t have it any better as an asylum seeker as someone on unemployment benefit,” Özoguz added. [..] Only the Left party (Die Linke) criticized the confiscations, with MP Ulla Jelpke telling Der Tagesspiegel that “those who apply for asylum are exercising their basic rights [under the German Constititution]. “That must not – even if they are rejected – be tied up with costs,” she argued.

Debt Rattle January 19 2016

Jan 192016

January 19, 2016 Posted by Raúl Ilargi Meijer at 9:33 am Finance Tagged with: bonds, borders, China, derivatives, EU, GDP, oil, refugees, steel, stocks 4 Responses »

Ann Rosener Reconditioning spark plugs, Melrose Park Buick plant, Chicago 1942

• China GDP at 25-Year Low, Long Slog Increases the Pain (WSJ)

• China Stocks Surge As GDP Triggers Expectations Of Beijing Stimulus (MW)

• The Case for Chaos in Trying to Pick Bottom of US Equity Rout (BBG)

• Big US Banks Brace For Oil Loans To Implode (CNN)

• The Fed Responds To Zero Hedge: Here Are Some Follow Up Questions (ZH)

• The North Dakota Crude Oil That’s Worth Less Than Nothing (BBG)

• China’s Hot Bond Market Seen at Risk of Default Chain Reaction (BBG)

• Chinese Shipyards See New Orders Fall by Almost Half in 2015 (BBG)

• World’s Biggest Steel Industry Shrinks for First Time Since 1991 (BBG)

• Strong China Property Data Masks Big Problem of Unsold Homes (Reuters)

• Japan Makes Plans for Pension Fund to Invest in Stocks (WSJ)

• Italy Banks Lose $82 Billion of Cheap Financing From Savers (BBG)

• Italy PM Renzi Sharpens His Rhetorical Barbs At EU (FT)

• Hollande Says France In State Of Economic, Social Emergency (BBC)

• Russia Considers Suspending Loans to Other Countries (Moscow Times)

• Worse Than 1860 (Jim Kunstler)

• End Of Europe? Berlin, Brussels’ Shock Tactic On Migrants (Reuters)

• UN Seeks Mass Resettlement Of Syrians (AP)

• Davos Boss Warns Refugee Crisis Could Become Something Much Bigger (BBG)

• German Minister Urges Merkel To Prepare To Close Borders (Reuters)

Kudo’s to the WSJ for a bit of reflection. Just about all other outlets I’ve seen, parade analysts opining in hollow phrases.

• China GDP at 25-Year Low, Long Slog Increases the Pain (WSJ)

Whether or not one believes China’s GDP data, the news is depressing. There was little in the fourth quarter to indicate that gobs of monetary and fiscal easing are doing anything but cushioning the economy through an increasingly painful slog. China’s headline GDP grew 6.8% in the fourth quarter. But in nominal terms, it grew just under 6%, the slowest since last century. With debt in the economy still growing at twice that rate, this implies that a huge amount of new lending is going nowhere but to pay off old loans, not to stimulate the economy. It’s a vicious cycle that will be hard for China to escape. The reason nominal GDP was lower than headline GDP—it’s usually the other way around—was a negative price deflator, indicating overall deflation.

It was the third time in four quarters that China’s deflator has been negative, giving the headline number a boost. Some suspect that China is monkeying with the deflator; the larger it is, the more it improves the headline figure. Nor is the deflator the only figure that private economists suspect is distorting the GDP series. Oxford Economics points to industrial-output numbers that it calls overly optimistic. Adjusting for that, it said China’s GDP grew 6.1% in the fourth quarter. Capital Economics, using various proxy indicators, puts growth at 4.5%. Other indicators support the dour outlook. Industrial-production growth slowed to 5.9% in December from 6.2% in November. Services sustained the party, up 8.2% from a year earlier in the fourth quarter.

But even that is a slowdown from the previous two quarters, a sign of how much the stock-market crash and volatility in the financial-services industry are undermining the idea that China can seamlessly shift the economy from industrial output to services. The poor end to the year is especially depressing in light of the stimulus pumped into the economy over the past six months. How much worse would its performance have been without a sharp ramp-up in government spending, low interbank rates and multiple cuts in interest rates and reserve requirements? For investors who are spooked whenever China’s currency and stock markets plunge, the data are hardly reassuring. And the increasing outflows of yuan from the economy suggest locals are nervous, too.

When bad news gets so awful it must lead to something good. Something like that.

• China Stocks Surge As GDP Triggers Expectations Of Beijing Stimulus (MW)

China shares turned higher Tuesday, as investors weighed the likelihood of further stimulus from Beijing following data that the economy grew at its slowest pace in a quarter of a century. The Shanghai Composite Index traded up 2.8%, after flitting near the flat line and Australia’s S&P/ASX climbed 0.9%. Japan’s Nikkei closed up by 0.6% and South Korea’s Kospi rose 0.6%. The region’s markets were reacting to the latest batch of data from the world’s second largest economy. Growth slowed to 6.9% in 2015, compared to 7.3% in 2014. China also expanded by an annualized 6.8% during the fourth quarter alone, shy of 6.9% expected by economists surveyed by The Wall Street Journal. “It does suggest that more stimulus [from authorities] may be needed to push forth the pace of expansion,” said Niv Dagan at Peak Asset Management.

“Investors are happy to take a backward step and increase their cash weighting until things stabilize.” Investors have been reluctant to buy up the region’s shares, remaining nervous about how Chinese authorities will guide their markets and lower oil prices. Doubts linger about the ability of China’s central bank to curb yuan speculation, which was the initial trigger for selling in markets worldwide earlier this year. China’s Shanghai Composite Index, which has fallen nearly 17% this year, has dragged markets in Japan and Australia near bear market territory, defined as a 20% fall or more from a recent high. Efforts by authorities to talk up the underlying health of the Chinese economy this weekend may have helped calm some fears among investors and encouraged them to return to markets, said Angus Nicholson at IG. “Chinese markets have already suffered such a dramatic correction this year that I think some of these official assurances have helped bring a few buyers back to the table,” he said.

It has legs.

• The Case for Chaos in Trying to Pick Bottom of U.S. Equity Rout (BBG)

In a market bouncing up and down 2% a day, investor psychology is taking a beating in U.S. stocks. But nerves may need to fray further before the volatility abates. For all of last week’s twists, measures of investor anxiety sit well below levels from the last selloff, when shares plunged 11% in August. Twice last week the Chicago Board Options Exchange Volatility Index jumped more than 10% in a day, yet it ended 34% below its summer high. To those who monitor sentiment for clues to the market’s direction, these aren’t things that add up to capitulation, when bulls give up and prices fall to levels where calm is restored. While last week’s losses capped an 8% tumble that equaled the worst start to a year on record, they see enough optimism left to keep gyrations coming. “Wholesale panic” is what’s needed before the market turns, according to Scott Minerd at Guggenheim Partners.

“You start to see a huge surge in volatility because everybody is just trying to get through the exits, and they’re pushing prices down just to get out of the positions.” Ten days into 2016 and more than $2 trillion has been wiped from American stocks, with the Standard & Poor’s 500 Index careening to the lowest close since August. Alternating swings in the Dow Jones Industrial Average over the last three days were the wildest since S&P stripped the U.S. of its AAA credit rating in 2011. The Chicago Board Options Exchange Volatility Index, a gauge of trader trepidation tied to options on the S&P 500, ended the week at 27.02, more than 60% above its average level in 2015. At the same time, it sits 12% below its mean reading during the six-day rout that started Aug. 18 – and 34% below its highest close in that stretch.

In comes the Dallas Fed.

• Big US Banks Brace For Oil Loans To Implode (CNN)

Firms on Wall Street helped bankroll America’s energy boom, financing very expensive drilling projects that ended up flooding the world with oil. Now that the oil glut has caused prices to crash below $30 a barrel, turmoil is rippling through the energy industry and souring many of those loans. Dozens of oil companies have gone bankrupt and the ones that haven’t are feeling enough financial stress to slash spending and cut tens of thousands of jobs. Three of America’s biggest banks warned last week that oil prices will continue to create headaches on Wall Street – especially if doomsday scenarios of $20 or even $10 oil play out. For instance, Wells Fargo is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”

JPMorgan is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months. “The biggest area of stress” is the oil and gas space, Marianne Lake, JPMorgan’s chief financial officer, told analysts during a call on Thursday. “As the outlook for oil has weakened, we would expect to see some additional reserve build in 2016.” Citigroup built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.” If oil stays around $30 a barrel, Citi is bracing for about $600 million of energy credit losses in the first half of 2016. Citi said that figure could double to $1.2 billion if oil dropped to $25 a barrel and stayed there.

Interesting to see where this goes now that Kaplan has opened the door.

• The Fed Responds To Zero Hedge: Here Are Some Follow Up Questions (ZH)

Over the weekend, we gave the Dallas Fed a chance to respond to a Zero Hedge story corroborated by at least two independent sources, in which we reported that Federal Reserve members had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances. Moments ago the Dallas Fed, whose president since September 2015 is Robert Steven Kaplan, a former Goldman Sachs career banker who after 22 years at the bank rose to the rank of vice chairman of its investment bank group – an odd background for a regional Fed president – took the time away from its holiday schedule to respond to Zero Hedge. This is what it said.

We thank the Dallas Fad for their prompt attention to this important matter. After all, as one of our sources commented, “If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind.” Surely there is nothing that can grab the public’s attention more than a rerun of the mortgage crisis, especially if confirmed by the highest institution. As such we understand the Dallas Fed’s desire to avoid a public reaction and preserve semantic neutrality by refuting “such guidance.” That said, we fully stand by our story, and now that we have engaged the Dallas Fed we would like to ask several very important follow up questions, to probe deeper into a matter that is of significant public interest as well as to clear up any potential confusion as to just what “guidance” the Fed is referring to.

The world beyond spot prices. Still, a tad sensationalist.

• The North Dakota Crude Oil That’s Worth Less Than Nothing (BBG)

Oil is so plentiful and cheap in the U.S. that at least one buyer says it would need to be paid to take a certain type of low-quality crude. Flint Hills Resources, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it would pay -$0.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a list price posted on its website. That’s down from $13.50 a barrel a year ago and $47.60 in January 2014. While the negative price is due to the lack of pipeline capacity for a particular variety of ultra low quality crude, it underscores how dire things are in the U.S. oil patch. U.S. benchmark oil prices have collapsed more than 70% in the past 18 months and West Texas Intermediate for February delivery fell as low as $28.36 a barrel on the New York Mercantile Exchange on Monday, the least in intraday trade since October 2003.

“Telling producers that they have to pay you to take away their oil certainly gives the producers a whole bunch of incentive to shut in their wells,” said Andy Lipow, president of Lipow Oil in Houston. Flint Hills spokesman Jake Reint didn’t respond to a phone call and e-mail outside of work hours on Sunday to comment on the bulletin. The prices posted by Flint Hills Resources and rivals such as Plains All American Pipeline are used as benchmarks, setting reference prices for dozens of different crudes produced in the U.S. Plains All American quoted two other varieties of American low quality crude at very low prices: South Texas Sour at $13.25 a barrel and Oklahoma Sour at $13.50 a barrel. High-sulfur crude in North Dakota is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground, said John Auers at Turner Mason in Dallas. The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.

China 2016: Stock losses prompt money to flee into bonds and real estate. But for all the wrong reasons.

• China’s Hot Bond Market Seen at Risk of Default Chain Reaction (BBG)

China’s bond investors are raking it in as an equity rout scatters cash into fixed-income securities. But concerns are rising that spreading defaults and a sliding yuan will spark a selloff. Credit derivatives that are seen as a gauge of risk in the market have spiked 22 basis points since Dec. 31, the worst start to a year in data going back to 2008. The number of listed firms with debt double equity has jumped to 339 amid a weakening economy, from 185 in 2007. Traders surveyed by Bloomberg in December said note failures will spread. “2016 is a year when we will see systemic risks emerge in China’s credit market,” said Ji Weijie, credit analyst in Beijing at China Securities Co., the top arranger of bond offerings from state-owned and listed firms.

“There may be a chain reaction as more companies are likely to fail in a slowing economy and related firms could go down too.” The 18% tumble in China’s benchmark stock gauge this year has so far buoyed bonds, cutting yield premiums on local securities to record lows and on dollar debentures from the nation to the least in eight years. A reversal may be coming as the yuan’s slide spurs capital outflows that have forced the central bank to inject liquidity to hold down borrowing costs, a task it can’t manage indefinitely, according to First State Cinda. The weakest economic growth in a quarter century prompted onshore defaults to jump to at least seven in 2015 even as Premier Li Keqiang vowed to limit failures. Hua Chuang Securities said investors should avoid buying notes for now as surging supply also adds to risks that the hot onshore market will cool.

Such concerns have yet to be reflected in prices. The extra yield on top-rated local corporate debentures due in five years over similar-maturity government notes dropped 3.4 basis points since the start of the year to 57.3 basis points, near a record low. The premium on dollar securities from China is at 274 basis points, near the least since 2007, a Bank of America Merrill Lynch index shows. “The Chinese government wants to maintain a low domestic borrowing rate to support growth by injecting liquidity into the system,” said Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co. in Hong Kong. “CDS, on the other hand, is a proxy for global investors’ sentiment toward China and it can be speculative in nature.”

Steel can fall by half along with shipyards.

• Chinese Shipyards See New Orders Fall by Almost Half in 2015 (BBG)

New orders received by Chinese shipbuilders fell by nearly half last year from 2014, suggesting more consolidation is in order as the country’s appetite for raw materials wanes and shipping rates languish at multiyear lows. Shipbuilders in China received new orders amounting to 31.3 million deadweight tons last year, a world-leading 34% share of the global market, the Ministry of Industry and Information Technology said Monday. Backlog orders fell 12% to 123 million deadweight tons, or 36% of global market share. Chinese shipbuilders have sought government support as excess vessel capacity depresses shipping rates, leading to contracts being canceled.

South Korean and Singaporean shipyards are also feeling the pain, compounded by a bribery scandal in Brazil that has further affected orders. China Rongsheng Heavy Industries, once the country’s largest private shipyard, exited the sector last year amid heavy losses and changed its name to China Huarong Energy to reflect its new business focus. In early January, Zhoushan Wuzhou Ship Repairing & Building became China’s first state-owned shipbuilder to go bankrupt in a decade. In a sign of ongoing restructuring in the sector, the 10 leading shipbuilders on the mainland accounted for 53% of total orders completed and 71% of new orders received in 2015, the ministry said.

A big story for this year. The global steel glut is beyond proportions. Time for tariffs and protectionism.

• World’s Biggest Steel Industry (China) Shrinks for First Time Since 1991 (BBG)

Steel output in the world’s largest producer posted the first annual contraction in a quarter century. Mills in China, which make half of global supply, churned out less last year for the first time since at least 1991 as local demand dropped, prices sank and producers struggled with overcapacity. Crude steel production shrank 2.3% to 803.83 million metric tons, the statistics bureau said Tuesday. December output fell 5.2% to 64.37 million tons from a year earlier. Demand is weakening as policy makers seek to steer the economy away from investment toward consumption-led growth. The economy expanded 6.9% last year, the slowest full-year pace since 1990, data showed. Steel output will probably drop 2.6% this year, weakening the outlook for iron ore as global miners increase shipments, Citigroup has estimated.

“This marks the start of declining steel output in China as the economy slows,” Xu Huimin, an analyst at Huatai Great Wall Futures in Shanghai, said. “We’re likely to see more output cuts this year, though the magnitude of declines will be quite similar to 2015. Supply cuts in a glut are a long-drawn process as mills seek to maintain market share.” Crude-steel output in China surged more than 12-fold between 1990 and 2014, and the increase is emblematic of the country’s emergence as the world’s second-largest economy. Demand soared as policy makers built out infrastructure, shifted millions of people into cities and promoted consumption of autos and appliances.

“Shanghai, up a healthy 15.5%..” Pray tell what’s healthy about that.

• Strong China Property Data Masks Big Problem of Unsold Homes (Reuters)

For an economy facing its slowest economic growth in a quarter century, a 7.7% year-on-year rise in new home prices in December would seem to offer China some light at the end of the tunnel. But the headline number, published by the National Bureau of Statistics on Monday, masks China’s massive property problem – a vast amount of unsold apartments mainly in its smaller cities. Property prices were rising fast in mega cities like southern Shenzhen, where prices rocketed by nearly 47%, Shanghai, up a healthy 15.5%, and Beijing, which posted a respectable 8% gain over a year ago. But the recovery that began in October, after 13 months of straight decline, has only spread to just over half the 70 cities captured by official data, leaving others languishing far behind.

Wang Jianlin, China’s richest man and chairman of property and entertainment conglomerate Dalian Wanda Group, said on Monday that it could take four to five years for the market to digest the inventory in tier three and four cities. China has some 13 million homes vacant – enough to house the families of several small countries – and whittling down the excess is among Chinese policymakers top priorities for 2016. Dalian Wanda expects a significant decline in real estate income as it diversifies its business away from property. But, planning an initial public offering, Wang reckoned the market would manage so long as authorities took a gradual approach to the inventory issue. “Sales are highly concentrated in first- and second-tier cities, where 36 top cities account for three-quarters of the total sales value. So the portion from third- and fourth-tier cities is very low. As long as they destock slowly, there is no problem,” he told the Asia Financial Forum in Hong Kong.

Meantime, Wang said property investment in China’s first tier cities was the most risky due to high land costs, and his firm’s real estate focus is largely on the commercial sector in the lower-tier cities. Still, analysts reckon it will take a lot longer before the price recovery translates into growth in property investment that can help the overall economy regain momentum. “Property investment is expected to see a single-digit decline this year despite recovering home prices, so it will continue to weigh on GDP,” said Liao Qun, China chief economist at Citic Bank International in Hong Kong. That will hardly dull the pain for investors worried by a depreciation in the yuan currency and crumbling stock markets since the start of the year.

Imagine that were your pension money. Invested in a market that is grossly overvalued. Abe is a madman.

• Japan Makes Plans for Pension Fund to Invest in Stocks (WSJ)

Japan’s government is preparing legislation that would allow its $1.1 trillion public pension reserve fund to directly buy and sell stocks, a plan that is sparking divisions over the state fund’s role in private markets. The Government Pension Investment Fund currently entrusts its stock-investment money to outside managers. The welfare ministry plans to present a plan for direct investment to parliament this spring, though legislation might take until later in the year to pass, say politicians and government officials. The change would mark another step in the GPIF’s transformation from a conservative investor into one that resembles other global pension and sovereign-wealth funds. Prime Minister Shinzo Abe has encouraged the shift to reinvigorate Japan’s financial markets and improve corporate governance.

“GPIF could contribute more to Japan’s economy by constructively interacting not only with money managers, but also with corporations,” said GPIF chief investment officer Hiromichi Mizuno. “As Japan’s biggest asset owner, we can jump start a positive chain reaction of better governance between businesses and investors.” The plan has raised concerns among some business leaders and politicians who say the giant fund could distort markets with its stock picks or act as a tool for politicians to exert influence over companies. “I am most worried about political intervention,” said Keio Business School associate professor Seki Obata, who previously served on the GPIF’s investment advisory committee.

“In theory, I’m in support of in-house stock investing, but Japan is still the most immature country and society in terms of asset-management issues.” The Abe administration has already been criticized for using the GPIF to influence financial markets. In 2014, the fund said it was nearly doubling its allocation to equities, which some investors criticized as a “price-keeping operation”—an attempt to pump up the stock market. Criticism started again after the fund posted an ¥8 trillion loss in the third quarter of 2015, and further losses are likely in the current quarter if Japanese stocks continue their current slide. The Nikkei Stock Average has fallen more than 10% since the beginning of the year and fell 1.1% Monday.

Turning to junk. Shorting Banco Dei Paschi has already been banned.

• Italy Banks Lose $82 Billion of Cheap Financing From Savers (BBG)

Italian savers ditched €75 billion of bank bonds in the year ended September, further depriving lenders of a cheap source of funding. Retail holdings of the notes tumbled 27% in the period to €200 billion, extending declines since 2012, based on Bank of Italy data released on Monday. There was a €5 billion drop in the three months ended September, marking a slowdown from previous quarters. Savers are shunning bank bonds as losses at four small lenders in November have made more people aware that the investments are risky. The cash drain has contributed to a slump in prices for junior bonds, as lenders turn to more expensive wholesale financing and contend with tighter European Union rules on state aid.

“A lot of these banks have survived better thanks to retail funding,” Alberto Gallo at RBS, said before the data was released. “If you take out the retail-funding channel some banks may find it more expensive to fund.” A new EU bail-in regime, which forces lenders to impose losses on creditors before they can accept state aid, has driven declines in Italian bank bonds this year, Gallo said. Banca Popolare di Vicenza’s €200 million of 9.5% subordinated notes due September 2025 have dropped to 74 cents on the euro from 96 cents on Dec. 31, according to data compiled by Bloomberg. Banca Monte dei Paschi di Siena SpA’s€ 379 million of 5.6% September 2020 bonds have fallen to 72 cents from 95 cents.

Numbered days.

• Italy PM Renzi Sharpens His Rhetorical Barbs At EU (FT)

When Matteo Renzi visited Berlin last July he delivered a subtle warning to the assembled crowd at Humboldt university that a new deal was needed to save European integration. “A world that is changing so quickly needs a place that it can call home in terms of values, ideals, and passion – and that place is Europe,” the Italian prime minister said, weaving in references to Sophie Scholl, a symbol of German resistance to the Nazis, and Willy Brandt, the former chancellor. “We risk wasting it if we hand it over to bureaucrats and technocrats”. But the 41-year-old former mayor of Florence has now turned to much more pointed complaints, perhaps feeling that his delicate and vague admonitions of last summer were conveniently ignored.

Mr Renzi has sharply escalated his confrontational rhetoric towards the European Commission and the German government, triggering surprise and irritation in Brussels and Berlin. Italy’s increasingly bitter recriminations span a wide range of issues — from migration to energy, banking and budget policy — Mr Renzi feels that the EU is either applying its rules too rigidly, or is adopting double standards that often benefit Germany, to the detriment of Italy. “Europe has to serve all 28 countries, not just one,” he told the FT in an interview last month. Mr Renzi’s attacks on the EU — which have also made him an unlikely David Cameron sympathiser, if not an ally, ahead of Britain’s EU referendum — are undoubtedly a reflection of shifting public opinion in Italy over the past decade.

Whereas Italians used to be among the biggest supporters of European integration, years of economic stagnation and recession have brought a wave of disillusion with its outcomes, particularly when it comes to the euro. Mr Renzi, who took office nearly two years ago, saw his poll numbers drop substantially over the course of 2015, with the populist anti-euro Five Star Movement and Northern League consolidating their positions as Italy’s second and third largest political parties respectively. And Mr Renzi faces two key electoral tests this year: municipal elections in some of the largest Italian cities, including Rome and Milan, and a referendum on constitutional reforms to strip power from the Italian Senate that the prime minister has staked his political future on, threatening to resign should he lose.

Funny thing is, he’s the first one other than Le Pen to say it out loud. Still, €2 billion won’t get him anywhere.

• Hollande Says France In State Of Economic, Social Emergency (BBC)

President Francois Hollande has set out a €2bn job creation plan in an attempt to lift France out of what he called a state of “economic emergency”. Under a two-year scheme, firms with fewer than 250 staff will get subsidies if they take on a young or unemployed person for six months or more. In addition, about 500,000 vocational training schemes will be created. France’s unemployment rate is 10.6%, against a EU average of 9.8% and 4.2% in Germany. Mr Hollande said money for the plan would come from savings in other areas of public spending. “These €2bn will be financed without any new taxes of any kind,” said President Hollande, who announced the details during an annual speech to business leaders.

“Our country has been faced with structural unemployment for two to three decades and this requires that creating jobs becomes our one and only fight.” France was facing an “uncertain economic climate and persistent unemployment” and there was an “economic and social emergency”, he said. The president said recently that the country’s social emergency, caused by unemployment, was as serious as the emergency caused by terrorism. He called on his audience to help “build the economic and social model for tomorrow”. The president also addressed the issue of labour market flexibility. “Regarding the rules for hiring and laying off, we need to guarantee stability and predictability to both employers and employees. There is room for simplification,” he said.

“The goal is also more security for the company to hire, to adapt its workforce when economic circumstances require, but also more security for the employee in the face of change and mobility”. However, the BBC’s Paris correspondent Hugh Schofield said there was widespread scepticism that the plan would have any lasting impact. “Despite regular announcements of plans, pacts and promises, the number of those out of work continues to rise in France. “With a little over a year until the presidential election in which he hopes to stand for a second term, President Hollande desperately needs good news on the jobs front. But given the huge gap so far between his words and his achievements, there is little expectation that this new plan will bear fruit in time”, our correspondent said.

Russia can’t borrow in world markets. The upside of that is it has very little debt.

• Russia Considers Suspending Loans to Other Countries (Moscow Times)

Russia could suspend loans to foreign countries as the country’s budget continues to be strained by economic recession, the Interfax news agency reported Monday, citing Deputy Finance Minister Sergei Storchak. “The budget is strained, more than strained. I think we are in a situation where we are forced to take a break from issuing new loans,” Storchak was quoted by the news agency as saying. Given the current state of the national budget, the undertaking of new obligations involves increased risk, he added, according to Interfax.

Russia’s federal budget for this year, based on oil prices of $50 per barrel, will likely face problems as the oil price continues to drop dramatically. As of Monday morning, the price of Brent crude fell to $28 dollars per barrel following the lifting of sanctions against Iran, Interfax reported. Storchak also said that negotiations on Russia’s $5 billion loan to Iran were continuing and that no final decision had been taken yet. Last year, Iran requested a $5 billion loan from Russia for the implementation of joint projects, including the construction of power plants and development of railways.

As much as I want to stay out of US politics, Jim’s observations here warrant a thorough read.

• Worse Than 1860 (Jim Kunstler)

The Republican Party may be closer to outright blowup since the rank and file will never accept Donald Trump as their legitimate candidate, and Trump has nothing but contempt for the rank and file. If Trump manages to win enough primaries and collect a big mass of delegate votes, the July convention in Cleveland will be the site of a mass political suicide. The party brass, including governors, congressmen, senators and their donor cronies will find some device to deprive Trump of his prize, and the Trump groundlings will revolt against that move, and the whole nomination process will be turned over to the courts, and the result will be a broken organization. The Federal Election Commission may then have to appeal to Capital Hill to postpone the general election. The obvious further result will be a constitutional crisis.

Political legitimacy is shattered. Enter, some Pentagon general on a white horse. Parallel events could rock the Democratic side. I expect Hillary to exit the race one way or another before April. She comes off the shelf like a defective product that never should have made it through quality control. Nobody really likes her. Nobody trusts her. Nobody besides Debbie Wasserman Schultz and Huma Abedin believe that it’s her turn to run the country. Factions at the FBI who have had a good look at her old State Department emails want to see her indicted for using the office to gin up global grift for the Clinton Foundation. These FBI personnel may be setting up another constitutional crisis by forcing Attorney General Loretta Lynch either to begin proceedings against Clinton or resign.

Rumors about her health (complications from a concussion suffered in a fall ) won’t go away. And finally, of course, Senator Bernie Sanders is embarrassing her badly at the polls. The Democrats could feasibly end up having to nominate Bernie on a TKO, but in doing so would instantly render themselves a rump party peddling the “socialist” brand — about the worst product-placement imaginable, given our history and national mythos. In theory, the country might benefit from a partial dose of socialism such as single-payer Medicare-for-all — just to bust up the odious matrix of rackets that medicine has become — but mega-bureaucracy on the grand scale is past its sell-by date for an emergent post-centralized world that needs its regions to get more local and autonomous.

The last time the major political parties disintegrated, back in the 1850s, the nation had to go through a bloody convulsion to reconstitute itself. The festering issue of slavery so dominated politics that nothing else is remembered about the dynamics of the period. Today, the festering issue is corruption and racketeering, but none of the candidates uses those precise terms to describe what has happened to us, though Sanders inveighs against the banker class to some effect. Trump gets at it only obliquely by raging against the “incompetence” of the current leadership, but he expresses himself so poorly in half-finished sentences and quasi-thoughts that he seems to embody that same mental incapacity as the people he rails against.

“You can only imagine what happens when the weather improves,” he said.”

• End Of Europe? Berlin, Brussels’ Shock Tactic On Migrants (Reuters)

Is this how “Europe” ends? The Germans, founders and funders of the postwar union, shut their borders to refugees in a bid for political survival by the chancellor who let in a million migrants. And then — why not? — they decide to revive the Deutschmark while they’re at it. That is not the fantasy of diehard Eurosceptics but a real fear articulated at the highest levels in Berlin and Brussels. Chancellor Angela Merkel, her ratings hit by crimes blamed on asylum seekers at New Year parties in Cologne, and EU chief executive Jean-Claude Juncker both said as much last week. Juncker echoed Merkel in warning that the central economic achievements of the common market and the euro are at risk from incoherent, nationalistic reactions to migration and other crises.

He renewed warnings that Europe is on its “last chance”, even if he still hoped it was not “at the beginning of the end”. Merkel, facing trouble among her conservative supporters as much as from opponents, called Europe “vulnerable” and the fate of the euro “directly linked” to resolving the migration crisis – highlighting the risk of at the very least serious economic turbulence if not a formal dismantling of EU institutions. Some see that as mere scare tactics aimed at fellow Europeans by leaders with too much to lose from an EU collapse – Greeks and Italians have been seen to be dragging their feet over controlling the bloc’s Mediterranean frontier and eastern Europeans who benefit from German subsidies and manufacturing supply chain jobs have led hostility to demands that they help take in refugees.

Germans are also getting little help from EU co-founder France, whose leaders fear a rising anti-immigrant National Front, or the bloc’s third power, Britain, consumed with its own debate on whether to just quit the European club altogether. So, empty threat or no, with efforts to engage Turkey’s help showing little sign yet of preventing migrants reaching Greek beaches, German and EU officials are warning that without a sharp drop in arrivals or a change of heart in other EU states to relieve Berlin of the lonely task of housing refugees, Germany could shut its doors, sparking wider crisis this spring. With Merkel’s conservative allies in the southern frontier state of Bavaria demanding she halt the mainly Muslim asylum seekers ahead of tricky regional elections in March, her veteran finance minister delivered one of his trademark veiled threats to EU counterparts of what that could mean for them.

“Many think this is a German problem,” Wolfgang Schaeuble said in meetings with fellow EU finance ministers in Brussels. “But if Germany does what everyone expects, then we’ll see that it’s not a German problem – but a European one.” Senior Merkel allies are working hard to stifle the kind of parliamentary party rebellion that threatened to derail bailouts which kept Greece in the euro zone last year. But pressure is mounting for national measures, such as border fences, which as a child of East Germany Merkel has said she cannot countenance. “If you build a fence, it’s the end of Europe as we know it,” one senior conservative said. “We need to be patient.”

Call the assembly together then.

• UN Seeks Mass Resettlement Of Syrians (AP)

The new chief of the U.N. refugee agency said Monday the world should find a fairer formula for sharing the burden of Syria’s crisis, including taking in tens of thousands of refugees from overwhelmed regional host nations. Filippo Grandi, who assumed his post earlier this month, heads an agency grappling with mounting challenges as Syria’s five-year-old civil war drags on. Humanitarian aid lags more and more behind growing global needs, including those caused by the Syrian conflict. More than 4 million Syrians have fled their homeland, the bulk living in increasingly difficult conditions in neighboring countries such as Jordan and Lebanon, while hundreds of thousands have flooded into Europe. Grandi came to Jordan after a stop in Turkey. Later this week, he is due in Lebanon. He visited the Zaatari refugee camp in Jordan after meeting with King Abdullah II in the capital, Amman.

His agency, UNHCR, hopes to raise money for refugees at a London pledging conference in February, followed by an international gathering in March in Geneva where countries would commit to taking in more refugees. “I think we need to be much more ambitious” about resettling refugees, Grandi said. “We are talking about large numbers … in the tens of thousands.” “What is needed is a better sharing of responsibilities, internationally, for a crisis that cannot only concern the countries neighboring Syria,” he said. Hundreds of thousands of refugees entered Europe in 2015, often with the help of smugglers who ferried them across the Mediterranean in dangerous voyages. Grandi said it was time to create legal ways for some refugees to leave overburdened host countries.

Either stop bombing or face mass migration on a much larger scale than what we’ve already seen. At least it’s not complicated.

• Davos Boss Warns Refugee Crisis Could Become Something Much Bigger (BBG)

As the crash in commodities prices spreads economic woe across the developing world, Europe could face a wave of migration that will eclipse today’s refugee crisis, says Klaus Schwab, executive chairman of the World Economic Forum. “Look how many countries in Africa, for example, depend on the income from oil exports,” Schwab said in an interview ahead of the WEF’s 46th annual meeting, in the Swiss resort of Davos. “Now imagine 1 billion inhabitants, imagine they all move north.” Whereas much of the discussion about commodities has focused on the economic and market impact, Schwab said he’s concerned that it will also spur “a substantial social breakdown. That fits into what Schwab, the founder of the WEF, calls the time of “unexpected consequences” we now live in.

In the modern era, it’s harder for policy makers to know the impact of their actions, which has led to “erosion of trust in decision makers.” “First, we have to look at the root causes of this,” Schwab said. “The normal citizen today is overwhelmed by the complexity and rapidity of what’s happening, not only in the political world but also the technological field.” That sense of dislocation has fueled the rise of radical political leaders who tap into a rich vein of anger and xenophobia. For reason to prevail, Schwab said, “we have to re-establish a sense that we all are in the same boat.” The theme for this year’s meeting is the Fourth Industrial Revolution, which the WEF defines as a “fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.”

While that presents huge opportunities, Schwab warns that technological innovation may result in the loss of 20 million jobs in the coming years. Those job cuts risk “hollowing out the middle class,” Schwab said, “a pillar of our democracies.” At the same time, Schwab argues, trends like the sharing economy and the changes wrought by technology mean economists must adapt the tools they use to assess well-being. “Many of our traditional measurements do not work anymore,” he said. After decades watching the ebbs and flows of the global economy, Schwab said the current anxiety is “not new” for him. But he said that as the world gets ever more interconnected, the consequences of such turmoil could become more grave. This week’s WEF meeting, he said, will offer policy makers “the first opportunity after the markets have come down to look at the situation and coordinate.”

It’s been so long since I wrote there should an emergency UN meeting on refugees, I don’t even remember when. Let me renew that call. The EU must be afraid it wouldn’t like the outcome.

• German Minister Urges Merkel To Prepare To Close Borders (Reuters)

Chancellor Angela Merkel’s transport minister has urged her to prepare to close Germany’s borders to stem an influx of asylum seekers, arguing that Berlin must act alone if it cannot reach a Europe-wide deal on refugees. Alexander Dobrindt said Germany could no longer show the world a “friendly face” – a phrase used by Merkel as refugees began pouring into Germany last summer – and that if the number of new arrivals did not drop soon, Germany should act alone. “I urgently advise: We must prepare ourselves for not being able to avoid border closures,” Dobrindt, a member of the Bavarian Christian Social Union (CSU), told the Muenchner Merkur newspaper.

The CSU, the Bavarian sister party to Merkel’s conservative Christian Democrats (CDU), has ramped up pressure on the chancellor over her open-door refugee policy that saw 1.1 million migrants arrive in Germany last year alone. CSU leader Horst Seehofer told Der Spiegel magazine in a weekend interview that he would send the federal government a written request within the next two weeks to restore “orderly conditions” at the nation’s borders. Bavaria is the main entry point to Germany for refugees. “I would advise us all to prepare a Plan B,” Dobrindt said in an advanced release of an interview to run in the Muenchner Merkur’s Tuesday edition. Merkel has vowed to “measurably reduce” arrivals this year, but has refused to introduce a cap, saying it would be impossible to enforce without closing German borders.

Instead, she has tried to convince other European countries to take in quotas of refugees, pushed for reception centers to be built on Europe’s external borders, and led an EU campaign to convince Turkey to keep refugees from entering the bloc. But progress has been slow. Dobrindt rejected Merkel’s argument that closing borders would jeopardize the European project. “The sentence, the closure of the border would see Europe fail, is true in reverse. Not closing the border, just going on, would bring Europe to its knees,” he said.

Debt Rattle December 30 2015

Dec 302015

December 30, 2015 Posted by Raúl Ilargi Meijer at 9:12 am Finance Tagged with: bubble, collapse, debt, defaults, forex, oil, refugees, Saudi, steel, tax revenue 4 Responses »

DPC Boston and Maine Railroad depot, Riley Plaza, Salem, MA 1910

• US Companies Led the World in 2015 Debt Defaults (BBG)

• China’s Unprecedented Real Estate Bubble Is a Ticking Time Bomb (Dent)

• The Most Important China Chart Of 2015 (BI)

• China Suspends Foreign Banks’ Forex Business (Reuters)

• Oil Prices Become a Problem for US Steelmakers (BBG)

• Oil-Producing US States Battered as Tax-Gushing Wells Are Shut Down (BBG)

• Gulf States Forced To Empty Their Sovereign Wealth Funds (Reuters)

• Oil Price Rout Will Bring End To Era Of Saudi Arabian Largesse (Telegraph)

• Oil Crash Is Giving Ship Owners a Billion-Dollar Windfall (BBG)

• Puerto Rico’s Debt Trap (Simon Johnson)

• Marc Faber Seeing Recession Clashes With Yellen, Likes Treasuries (BBG)

• World’s Oldest Bank Sells Bad Loans To Deutsche (BBG)

• Italy’s Five Star Movement on the Rise (FT)

• In the Year of Trump, the Joke Was On Us (Matt Taibbi)

• Turkey’s Dangerous Game in Syria (WSJ)

• Ukraine Inflation Hits 44% Amid Economic Collapse (Telegraph)

• Frontex Sends 300 Guards In Migrant Mission To Greece (AFP)

• Heated Areas To Open To Homeless In Athens As Cold Snap Expected (Kath.)

• As Europe Turns Gray (Pantelis Boukalas)

“About 60% of this year’s global defaults have come from U.S. borrowers, Vazza wrote, up from 55% a year ago..”

• US Companies Led the World in 2015 Debt Defaults, S&P Says (BBG)

More U.S. companies have defaulted on their debt this year than issuers from any other country or region, S&P analysts led by Diane Vazza wrote in a Dec. 24 report. As of last week, 111 companies worldwide had defaulted on their obligations, the highest tally since 2009 when the the figure hit 242 for the same period. About 60% of this year’s global defaults have come from U.S. borrowers, Vazza wrote, up from 55% a year ago, when 33 of 60 defaulters were American. After the U.S., companies from emerging markets were the second-largest defaulters, accounting for 23% of the pool, which is a smaller share than last year, according to S&P data. Plummeting oil prices and speculation about how the Federal Reserve’s plan to tighten monetary policy would affect corporate borrowing costs has made companies more vulnerable, Vazza wrote.

“The current crop of U.S. speculative-grade issuers appears fragile, and particularly susceptible to any sudden, or unanticipated shock,” she wrote. Arch Coal was the most recent addition to the list, having its credit rating downgraded to “speculative default” by Standard & Poor’s last week after the coal producer missed about $90 million in interest payments and exercised a 30-day grace period with the holders of some of its notes. Looking ahead, S&P expects the U.S. corporate default rate will rise to 3.3% by September 2016 from 2.5% a year earlier. The bulk of the failures will come from companies in the oil and gas sector, which accounted for about a quarter of this year’s defaults. Since 1981, the average default rate for global speculative-grade companies is 4.3%, Vazza said.

The Chinese are buying into global bubbles. That’s going to hurt.

• China’s Unprecedented Real Estate Bubble Is a Ticking Time Bomb (Dent)

We woke up this morning to find oil prices weighing on the market… again… with China suffering the biggest losses. Oil prices have already kept stocks at bay in the best time of the year. Funny how this “Santa Claus” rally that I predicted wouldn’t happen this year, didn’t. The last time was in 2007 and 2008 – the last years the stock market crashed. I’ve been looking at how low oil prices will be the first trigger in the next crisis. Although it helps consumers a bit, low prices kill the $1 trillion QE-driven fracking industry that’s been such a stalwart of this bubble economy. And it’s already causing junk bonds to fall further in value, as energy-related bonds have been as high as 20% of that market recently. But the second and biggest trigger I’ve been warning about is China’s unprecedented real estate bubble collapsing…

Recall the Japanese at the top of their stock and real estate bubble in 1989. They were buying real estate hand-over-fist, from Pebble Beach to Rockefeller Center to London. Then, after bidding them up, they ended up selling those holdings at big losses. The Chinese make the Japanese look prudent! Chinese buyers are bidding up the high end of the top coastal cities in English-speaking countries like they’ll never go down and like they can’t get enough. We’re talking Sydney, Melbourne, Brisbane, Auckland, Singapore, San Francisco, L.A., Vancouver, Toronto, New York, London… These markets are considered “Teflon-proof.” They’re not! In fact, they’re some of the greatest bubbles that exist today. China’s leading cities – like Shanghai, Beijing and Shenzhen – are up 700% or more since 2000!

Guess what happens when the bubble wealth in real estate that has built up in China finally collapses? So does the capacity of the more affluent Chinese to buy real estate around the world. And these are the guys who have by-and-large been driving this global real estate bubble at the margin on the high end! Bear in mind that Chinese real estate has been slowing and prices falling for over a year. That is precisely why China’s stock market bubbled up 160% in less than one year. When Chinese investors realized they could no longer make easy money in the real estate bubble, they turned to stocks. And after the dumb money piled in, the Shanghai Composite stock index fell 42% in just 2.5 months!

China’s move towards a service economy is sure to fail. Xi cannot force his people to spend.

• The Most Important China Chart Of 2015 (BI)

Now that the year is almost over, it’s time to reflect on 2015. BI reached out to the brightest minds on Wall Street to get their thoughts on what just happened. Hopefully, they’ll help us get a better handle on what is about to happen in 2016. Charlene Chu, of Autonomous Research, is widely considered one of the most brilliant China analysts in the world. So we asked her to send us a chart that helped her make sense of the world in 2015. Naturally it’s about China. “The chart below highlights the growth problem China is grappling with. In our view, a broken growth model lies at the core of China’s financial sector issues,” she wrote in an email to Business Insider. “This chart comes directly from official data, which is not adjusted in any way. Secondary industry comprises about 40-45% of GDP. As the title says, nearly half of China’s economy is already experiencing a very hard landing. This will likely intensify in 2016, which will weigh on global growth and add to corporate debt repayment problems.”

CEIC and the National Bureau of Statistics; Charlene Chu, Autonomous Research

In China, GDP is classified into three industries, primary (agriculture), secondary (manufacturing and construction), and tertiary (services). This slowdown in the secondary industry is part of China’s intentional shift toward an economy focused on services and consumer consumption rather than manufacturing. Chu’s point is that it’s happening harder and faster than anyone thought it would. All of this became all too apparent in 2015. This year China experienced two mainland stock market crashes, it devalued its currency, and once booming sectors of the economy — like exports and property — slowed sharply. In response, the government loosened monetary policy and enacted stimulus measures. The measures have had a limited impact, however, indicating that more structural measures will be needed to remedy the situation. Chu expects this slowdown to continue through 2016, affecting markets around the world.

Trying to stop outflows. Ever since the IMF included the yuan in its basket, it’s been all downhill.

• China Suspends Foreign Banks’ Forex Business (Reuters)

China’s central bank has suspended at least three foreign banks from conducting some foreign exchange business until the end of March, three sources who had seen the suspension notices told Reuters on Wednesday. Included among the suspended services are liquidation of spot positions for clients and some other services related to cross-border, onshore and offshore businesses, the sources said. The sources, speaking on condition that the banks were not named, said the notices sent to the affected foreign banks by the People’s Bank of China (PBOC) gave no reason for the suspension. The sources said the banks might have been targeted due to the large scale of their cross-border forex businesses.

“This is part of the PBOC’s expedient means to stabilize the yuan’s exchange rate,” said an executive at a foreign bank contacted separately. China has taken a slew of steps to keep the yuan stable since it devalued the currency in August. The latest move comes just three months since the PBOC ordered banks to closely scrutinize clients’ foreign exchange transactions to prevent illicit cross-border currency arbitrage, which takes advantage of the different exchange rates the yuan fetches in offshore and onshore markets. The spread has been growing since the August devaluation, which makes it increasingly difficult for the bank to manage its currency and stem an outflow of capital from its slowing economy.

The yuan has come under renewed pressure since late November amid speculation that Beijing would permit more depreciation after the IMF announced the currency’s admission into the fund’s basket of reserve currencies. The onshore yuan traded in Shanghai has lost 1.44% of its value since the end of November, and has repeatedly hit 4-1/2 year lows. The offshore market has traced a similar pattern. The Hong Kong-traded offshore yuan hit an intraday low of 6.5965 on Wednesday morning, its weakest since late September 2011.

The oil industry is (was) a major purchaser of steel products.

• Oil Prices Become a Problem for US Steelmakers (BBG)

U.S. steelmakers battered by plunging prices have been quick to blame a flood of cheap Chinese shipments. But with imports nearing four-year lows, another culprit is emerging: the energy collapse. Foreign steel coming into the U.S. dropped 36% in November from a year ago, according to U.S. Census Bureau data. That’s with domestic prices at the weakest in at least nine years and new taxes on products from six countries deemed to be unfairly priced. Yet U.S. mills have idled the most capacity since the financial crisis, operating at just 61% in the week ending Dec. 21. Helping explain the capacity decline is a drop in demand for steel pipes and drill bits used in the energy industry after the price of oil plunged 66% in the past 18 months. Previously, sales of high-margin products to oil and gas companies had helped shield U.S. mills from sluggish growth in construction and other industries.

“I don’t think imports are the only problem,” domestic mills face, Timna Tanners at Bank of America said in an interview Tuesday. “Nobody really expected oil to stay as low as it did as long as it has.” An important result of the energy collapse for steel consumption is that inventories held by steel and energy companies take longer to deplete as demand falls, exacerbating the decline in consumption, Tanners said. “Domestic mills in 2014 charged a price that was much higher than the rest of the world and that drew imports,” she said. “The domestic mills can complain that it’s unfairly traded, but there are factors outside of that that have nothing to do with fairness.” The price of hot-rolled steel coil, a benchmark product, has dropped 38% this year, according to The Steel Index, a trade publication that surveys buyers and sellers.

Wait till home prices, and hence property tax revenues, go down as well.

• Oil-Producing US States Battered as Tax-Gushing Wells Are Shut Down (BBG)

In Kern County, California, one of the nation’s biggest oil producers, tumbling energy prices have wiped more than $8 billion from its property-tax base, forcing officials to tap into reserves and cut every department’s budget. It’s only getting worse. The county of 875,000 in the arid Central Valley north of Los Angeles may face another blow in January, when it reassess the oil-rich fields that line the landscape. Last year’s tax bills were based on crude selling for $54 a barrel. It finished Monday at less than $37.
“We may never go back to $99 a barrel, but we were good at $54,” said Nancy Lawson, assistant administrative officer of Kern County, which includes the city of Bakersfield. “If it keeps going down and stays down we may have to look at more cuts in the next budget.”

As the price of crude falls for a second year, marking the steepest decline since the recession, the impact is cascading through the finances of states, cities and counties, in ways big and small. Once flush when production boomed, some governments in major energy producing regions are facing a new era of unwelcome austerity as wells are shut – along with the tax-revenue gushers they spouted. Alaska, Louisiana and Oklahoma have seen tax collections diminished by the rout, which has put pressure on credit ratings and led investors to demand higher yields on some securities. In Texas, the largest producer, the state’s sales-tax revenue dropped 3% in November from a year earlier as the energy industry exerted a drag on the economy.

Further west, Colorado’s legislative forecasters on Dec. 21 estimated that the state’s current year budget will have a shortfall of $208 million, in part because of the impact of lower commodity prices. In North Dakota, tax collections have trailed forecasts by 9% so far for the 2015-2017 budget. “The longer it goes the more significant it gets,” said Chris Mier at Loop Capital Markets in Chicago.

“..these sheikhdoms – which pump about a fifth of the world’s oil – would almost drain their funds entirely by 2020.”

• Gulf States Forced To Empty Their Sovereign Wealth Funds (Reuters)

Oil-rich Gulf sheikhdoms are being forced to raid their sovereign wealth funds to shore up their budgets. With U.S. crude oil prices falling below $40 per barrel in December, they have no choice but to reach into these rainy-day savings. For now, they can hold on to some of their trophy assets, like strategic investments in Volkswagen or Barclays. But if crude prices keep tumbling, a fire sale will be hard to avoid. During the most recent energy boom, the six members of the Gulf Cooperation Council – including Saudi Arabia, Qatar and Kuwait – amassed sovereign funds worth more than $2.3 trillion. These assets have traditionally comprised a mix of debt and other securities, in addition to influential stakes in some of the world’s biggest companies such as Glencore, VW and Barclays.

Large chunks of this cash are now being repatriated back to the region to finance widening budget deficits, which this year are expected to be in the region of 13% of GDP in the GCC. Should oil prices average $56 per barrel next year, then GCC states would need to liquidate some $208 billion of their overseas assets, or just below 10% of their sovereign fund holdings, based on a Breakingviews analysis of their fiscal break-even costs. But if oil prices fall to $20 a barrel, as Goldman Sachs has warned, the GCC states may have to sell $494 billion worth of booty to make up the budgetary shortfalls based on forecast fiscal costs for their oil production in 2016. This is provided they maintain the lavish rates of public spending that the region’s populations have become accustomed to.

At that rate of divestment these sheikhdoms – which pump about a fifth of the world’s oil – would almost drain their funds entirely by 2020. The Saudi Arabian Monetary Agency – which also acts as the country’s central bank – has already started to sell down some of its foreign assets, while money managers are reporting growing redemptions from other funds in the region. Gulf rulers have so far resisted any temptation to jettison their most treasured assets, which in many cases have granted them board seats atop some of the world’s leading companies. As oil keeps falling, even these investment jewels will come up for grabs.

Saud will have to cut payments to its thousands of princes.

• Oil Price Rout Will Bring End To Era Of Saudi Arabian Largesse (Telegraph)

A global oil price rout will bring an end to the era of Saudi Arabian largesse, as crude prices have tumbled to 11-year lows. “The era of material overspending is likely firmly behind us”, said Jean-Michel Saliba, an economist at Bank of America. A brutal sell-off in commodity prices has taken its toll on the Gulf state, which has been dependent on oil for more than three-quarters of its revenues. “Fiscal space is likely tight,” Mr Saliba said, in the wake of a historic budget for the Saudi regime. Officials have been forced to report a record budget deficit of 367bn riyals (£66bn) this year, up from 54bn riyals the previous year. While the deficit was smaller than anticipated, at 15pc of Saudi’s GDP, rather than the 20pc anticipated by economists, Mr Saliba warned that the government’s official figures have been prone to revision in the past, and have “tended to be revised upwards mid-way through the following year”.

Policymakers now plan to slash the deficit to 327bn riyals in 2016, by cutting back spending from 975bn riyals to 840bn riyals. The budget “is a significant one for the Saudi Arabian economy,” explained Mr Saliba. The country’s leadership, painfully reliant on oil, have failed to diversify the Saudi economy. The kingdom’s 2016 budget “likely markets the end of material overspending practices given tighten controls”, as the price of a barrel of Brent crude has tumbled from $115 (£77) in July 2014 to just $36 in recent days. “Budget execution will now be paramount,” said Mr Saliba. The new Saudi budget revealed plans to throttle investment spending. However, officials intend “only to slow the growth in recurring expenditure”, the Wall Street bank explained, rather than planning to cut it outright. The small non-oil parts of the economy will find themselves constrained by plans to cut public spending growth, preventing Saudi Arabia from rebalancing away from the commodity that until now has kept it wealthy.

Don’t forget this is happening as everyone is producing at full blast. Storage space will be finite. And then?!

• Oil Crash Is Giving Ship Owners a Billion-Dollar Windfall (BBG)

The most destructive oil crash in a generation is giving ship owners a billion-dollar windfall. With OPEC abandoning output limits in a drive for market share, ships that carry as much as 2 million barrels a trip are in demand to haul crude from the Middle East to Asia and North America. While oil prices fell about 35% in 2015, average earnings for these carriers jumped to $67,366 a day, the most since at least 2009, according to Clarkson, the world’s largest shipbroker. “The stars are aligned for us right now,” Nikolas Tsakos, CEO of Tsakos Energy Navigation, said in an interview at Bloomberg’s New York offices, adding that falling oil prices will likely stimulate demand and cargoes next year. Tanker analysts are predicting the rate boom will persist for many of the same reasons oil forecasters are bearish.

OPEC shows no sign of reversing its market strategy, and Iran has outlined plans to ramp up its exports once economic sanctions against the country are lifted. At the same time, the U.S. just repealed a four-decades old limit on its exports. With on-land inventories already at record levels, this could mean more barrels will eventually be stored on ships, further increasing profit, said Tsakos. The biggest tanker operators who manage fleets from Europe are Euronav, based in Antwerp, Belgium, DHT, Frontline, which runs Norway-born billionaire John Fredriksen’s tanker fleet, and Tsakos Energy in Greece. All have seen their shares rise this year while most energy producers have fallen. “We are benefiting from what is currently a challenging environment for the energy sector,” said Svein Moxnes Harfjeld, joint CEO for DHT. “We expect 2016 to be a rewarding year.”

America’s very own Greece.

• Puerto Rico’s Debt Trap (Simon Johnson)

The Caribbean island of Puerto Rico — the largest United States “territory” — is broke, and a human calamity is unfolding there. Unless a constructive course of political action is found in 2016, Puerto Rican migration to the 50 states will rival the scale of the 1930s Dust Bowl exodus from Oklahoma, Arkansas, and other climate-devastated states. With public debt service (principal plus interest) projected to reach nearly 40% of government revenue in 2016, Puerto Rico needs a new set of economic policies. But austerity will not work; this must be an investment-led recovery, with official measures oriented toward boosting growth by reducing the cost of doing business. The question is whether Puerto Rico will have that option.

Much of its $73 billion debt has been issued by government corporations. But, though federal law allows such municipal debt to be restructured under Chapter 9 of the bankruptcy code in all 50 states, this does not apply to U.S. territories like Puerto Rico. As a result, a protracted series of confusing legal battles and selective defaults looms. The cost of essential infrastructure services — electricity, water, sewers, and transportation — will go up while quality declines. One response has been to demand further belt-tightening, for example, in the form of wage reductions and health care cuts. But residents of Puerto Rico are also U.S. citizens and they vote with their feet — the population has fallen from 3.9 million to 3.5 million in recent years as talented and energetic people have moved to Florida, Texas, and other parts of the mainland.

The more creditors insist on lower living standards and higher taxes, the more the tax base will simply leave the island — causing bondholders’ losses to rise. Disorganized defaults by public corporations will make it hard for any part of the private credit system to function. Leading conservatives in the U.S. — including at the Hoover Institution — have long argued in favor of using established bankruptcy procedures when large financial firms fail. The same logic applies here: A judge can remove any doubt that actual insolvency exists, while also ensuring that credit remains available during a restructuring. During that process, a judge can rely on precedent and ensure fairness across creditor classes based on the precise terms under which loans were obtained.

Oh good lord, Joe Stalwart Weisenthal…

• Marc Faber Seeing Recession Clashes With Yellen, Likes Treasuries (BBG)

Marc Faber recommends Treasuries and says the U.S. is at the start of an economic recession, clashing with Federal Reserve Chair Janet Yellen’s view that things are improving. “Ten-year U.S. Treasuries are quite attractive because of my outlook for a weakening economy,” Faber, the publisher of the Gloom, Boom & Doom Report, said on Monday. “I believe that we’re already entering a recession in the United States” and U.S. stocks will fall in 2016, he said. Yellen raised interest rates this month for the first time in almost a decade and said Americans should take the decision as a sign of confidence in the U.S. economy. Analysts differ over whether the Fed’s decision to increase its benchmark came at the right time because the inflation rate is stuck near zero even as gross domestic product expands.

The benchmark U.S. 10-year note yield rose 2 basis points, or 0.02 percentage point, to 2.25% as of 8:31 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.25% security due in November 2025 fell 6/32, or $1.88 per $1,000 face amount, to 99 31/32. Treasuries have returned 1.1% in 2015, down from 6.2% last year, based on Bloomberg World Bond Indexes. U.S. economic growth slowed to an annualized 2% rate last quarter from 3.9% in the previous three months, the Commerce Department said Dec. 22. The last time the economy was in a recession was December 2007 until June 2009, according to the National Bureau of Economic Research. “While things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement,” Yellen said Dec. 16 after the Fed increased its benchmark rate by a quarter percentage point.

Bank bailouts and bail-ins are Italy’s political powder keg.

• World’s Oldest Bank Sells Bad Loans To Deutsche (BBG)

Banca Monte dei Paschi di Siena agreed to sell non-performing loans with a book value of about €1 billion to Epicuro SPV, a company backed by affiliates of Deutsche Bank, as the world’s oldest bank seeks to shore up its finances. Most of the loans became non-performing before 2009, the Italian bank said in a statement on Monday. The deal will have a negligible impact on Monte Paschi’s earnings and be completed by the end of the year. The portfolio is composed of almost 18,000 borrowers. CEO Fabrizio Viola is bolstering the bank’s finances by reducing risk and divesting assets after tapping investors twice in less than two years. In June, Monte Paschi sold €1.3 billion of non-performing loans to Cerberus Capita and Banca Ifis.

The portfolio sale is consistent with Monte Paschi’s 2015 to 2018 business plan, which forecasts as much as €5.5 billion of NPL disposals, according to a note from brokerage Fidentiis, which has a sell rating on the bank’s shares. The Siena, Italy-based lender said Dec. 16 that it will restate its financial accounts to comply with a request from Italy’s stock-market watchdog Consob that the bank change how it booked a transaction with Nomura. Consob asked the bank to amend its 2014 and first-half accounts to reflect the deal dubbed Alexandria should be treated as a credit-default swap instead of a repurchase agreement.

Milan prosecutors found new information this year as they investigated the transaction, which the former management had used to hide losses, the bank said, citing Consob’s request. The restatement should have a positive impact of €714 million before taxes on 2015 results, while it will be neutral on capital. Monte Paschi has been engulfed by legal probes into former managers who had covered losses with the Nomura transaction and a similar deal with Deutsche Bank. The lender is now seeking a buyer to help restore profit as bad loans mount.

Can’t help wondering what Beppe is thinking right now. He never wanted M5S to get caught up in the poisonous Italian mainstream politics.

• Italy’s Five Star Movement on the Rise (FT)

When the populist Five Star Movement burst into Italian politics in 2009 during the financial crisis, it was defined by uncompromising protests and the burly, sardonic figure of its leader, the comedian Beppe Grillo. But the Five Star Movement is now attempting to change its face from that of one of Europe s most eccentric -even clownish political parties. The transformation aims to achieve what seemed like a fantasy only a year ago: to govern the country and challenge the centre-left government led by prime minister Matteo Renzi. Mr Grillo, 67, has removed his name from the party logo, signalling that he may soon step aside. His most likely heir is Luigi Di Maio, a 29-year-old smooth-talking Neapolitan with polished looks, tight-fitting dark suits and moderate tones.

The perception of the movement has changed, Mr Di Maio tells the FT. At the beginning there was the idea that this was a protest movement .. “But we crashed through that wall. We want to govern”. The odds of that happening are increasing. The Five Star Movement is now Italy s second party. After trailing Mr Renzi s Democratic party by nearly 20 percentage points a year ago, recent polls suggest the margin has shrunk to about 5 percentage points, 32% to 27%. The Five Star Movement is certainly in the best shape of all of Renzi’s challengers, and he is scared of them, says Gianfranco Pasquino, a professor of political science at SAIS-Europe in Bologna. That the Five Star Movement even has a shot at threatening Mr Renzi says much about the waning political momentum suffered by the 40-year former mayor of Florence, who took office in February 2014 amid high hopes that he could transform Italy.

The economy is growing again after years of stagnation and recession. But the gains have not been broadly felt. “People are discouraged, disappointed and still angry”, Roberto D Alimonte, a political-science professor at Luiss university in Rome, says. The recovery has not filtered down. Mr Di Maio has certainly been honing his message against the prime minister. “Renzi seemed like a new face but it didn’t take much to understand that he was moving in the direction of the same old way of governing this country”, he says. But convincing Italians that the Five Star Movement is a credible alternative remains a tall order since many still see it as a party of pure obstruction and opposition. Mr Grillo’s best known political slogan when he launched the movement was “vaffanculo”, an earthy expletive aimed at the establishment. And he has refused to consider being part of any coalition government.

I really don’t really want to spend time on Trump, or US politics in general, but Taibbi does a way above par analysis.

• In the Year of Trump, the Joke Was On Us (Matt Taibbi)

A pre-2015 Trump fantasy was probably something like romping with models after simultaneously winning the Nobel Prizes for Peace, Literature and Physics (they love me in Sweden – scientists were amazed by the size of my skyscraper!). He almost certainly would have been grossed out by a Ghost-of-Christmas-Future-style image of his 2015 self being feted by crowds of rifle-toting white power nerds. But shortly after Trump jumped into the race, he stumbled onto a secret: whenever he blurted out forbidden thoughts about race, ethnicity or gender, he was showered with the attention he always craved. A sizable portion of the country seemed appalled at the things he said. But at the same time he was suddenly attracting huge and adoring crowds at down-home sites like Bluffton, South Carolina and Mobile, Alabama, pretty much the last places you’d ever expect the Trump brand to take off.

Trump had spent his entire career lending his name to luxury properties that promised exclusivity and separation from exactly the sort of struggling Joes who turned out for these speeches. If you live in a Trump building in a place like the Upper West Side, it’s supposed to mean that you’re too cosmopolitan, stylish, and successful – too smart-set – to mix with the rabble. But the rabble – white, working-class, rural, despising exactly those big-city elites who live in Trump’s buildings – turned out to be Trump’s base. They’re the people who hooted and hollered every time he said something off-color about Muslims or Mexicans or Asians (“We want deal!” Trump snickered earlier this year, in a Chinese-waiter voice) or “the blacks.” It was a bizarre marriage, but it made sense from from a clinical point of view. Attention is attention.

Patient with narcissistic personality disorder discovers massive source of narcissistic supply, so he sets about securing its regular delivery. So one comment about Mexicans turned into another about Megyn Kelly’s “wherever,” which turned into a call for a Black Lives Matter protester to be “roughed up,” which turned into an insane slapstick routine about a Times reporter with arthrogryposis, and so on. By December, you had to check Twitter every few hours just to see which cultural taboo Trump was stomping on now. The presidential campaign Trump began as just the latest in a long line of zany self-promotional gambits has now turned into the long-delayed other shoe dropping from the American civil rights movement. This goofball billionaire mirror-gazer has unleashed a half-century of crackpot grievances about the post-civil rights cultural landscape that a plurality of seething white people felt they never had permission to air, until he came along.

“Turkey has gone from being viewed by Western government officials, media and academics as an influential, moderating force for regional stability and economic growth, to a tacit supporter, if not outright sponsor, of international terrorism.”

• Turkey’s Dangerous Game in Syria (WSJ)

When the Syrian civil war broke out in 2011, Turkey was one of the earliest countries to invest heavily in the overthrow of the Assad regime. Despite a decade of warming relations with Syria, President Recep Tayyip Erdogan was making a bid to become the region’s dominant power. The situation in Syria has since changed dramatically—but the Erdogan strategy has not. The result is that Turkey has become a barrier to resolving the conflict. It wages war on the Syrian Kurds, Islamic State’s most effective opponents. And the country now plays host to an elaborate network of jihadists, including ISIS. Early on, Turkey wanted to foster a Sunni majority government in Syria, preferably run by the local branch of the Muslim Brotherhood.

This would deprive Turkey’s two historical rivals, Russia and Iran, of an important client state, while allowing it to gain one of its own. The plan was simple and elegant. But the Assad regime proved more resilient than expected, and the West refused to intervene and deliver a coup de grâce. So-called moderate Syrian rebels have either been sidelined by Islamist militants, or revealed to have been Islamist militants themselves. Thanks to Islamic State, the war has spread to engulf half of Iraq. And yet, as a global consensus solidified about the importance of defeating ISIS, Turkey has continued to play the game as if it were 2011. This summer, for example, the Erdogan government came to an important agreement to let the U.S. use two of its air bases for strikes against ISIS.

Yet Turkey has used the same bases to attack Kurdish forces in Iraq and Syria. The Erdogan government remains more concerned with limiting the power of the Kurds in Syria than with defeating ISIS. Turkey has gone from being viewed by Western government officials, media and academics as an influential, moderating force for regional stability and economic growth, to a tacit supporter, if not outright sponsor, of international terrorism. It is also viewed as a dangerous ally that risks plunging NATO into an unwanted conflict with Russia. When Russian President Vladimir Putin labeled the Erdogan government “accomplices of terrorists” after its fighter planes downed a Russian jet on Nov. 24, he was bluntly rewording an accusation that has been made repeatedly, but more diplomatically, in the West.

The accusation: Turkey allows oil and artifacts looted by Islamic State to flow across its border in one direction, while foreign jihadists, cash and arms travel in the other. Speaking last year of the porous Turkey-Syria border, Vice President Joe Biden let slip, in a moment of candor, that the biggest problem the U.S. faced in confronting ISIS was its own allies. More recently, on Nov. 27, a senior Obama administration official described the situation to this newspaper as “an international threat, and it’s all coming out of Syria and it’s coming through Turkish territory.”

Throw in eye-watering corruption and you have a lot of misery. Thanks, Victoria Nuland!

• Ukraine Inflation Hits 44% Amid Economic Collapse (Telegraph)

Inflation will hit 44pc in Ukraine this year, as the embattled economy has seen prices soar amid economic collapse. Consumer prices have hit eye-watering levels in 2015, according to the country’s central bank governor. Inflation averaged 24.9pc in 2014. Valeria Gontareva, of the National Bank of Ukraine, said authorities were aiming to get inflation to around 5pc by 2019. The war-torn economy, which has been plunged into crisis following conflict with neighbouring giant Russia, will also start to gradually lift capital controls as it begins to receive disbursements of bail-out cash from international lenders, said Ms Gontareva. Ukraine is set to receive around $9bn in rescue cash in 2016, including $4.5bn from the IMF, $1.5bn from the EU, and $1bn loan guarantee from the United States, which will be released in the first quarter of next year.

The economy has also lumbered under capital controls which limit the purchasing of foreign exchange in a bid to protect the collapsing value of the hryvnia. Bail-out cash will also help boost Ukraine’s dwindling foreign exchange reserves, which have steadily grown over the last months to stand at $13.3bn in December. Ukraine has been locked in a stalemate with Moscow over the repayment of a $3bn bond. Kiev defaulted on the debt earlier this month after Russian authorities refused to take part in a private sector debt haircut. The issue has also stoked tensions with the IMF, which changed its lending rules to continue providing aid to governments who fall into arrears. But Ukraine’s central bank chief said there was now no “hindrance” to the release of IMF aid to the country in 2016. “The IMF mission has agreed everything, they don’t need to come to Kiev anymore.”

Frontex are the vanguard of an occupation force.

• Frontex Sends 300 Guards In Migrant Mission To Greece (AFP)

EU border agency Frontex said Tuesday it had started to deploy 293 officers and 15 vessels on Greek islands to help Athens cope with the massive influx of migrants to its shores. The guards “will assist in identifying and fingerprinting of arriving migrants, along with interpreters and forged document experts,” Frontex said in a statement. “The number of border guards deployed will gradually increase to over 400 officers as well as additional vessels, vehicles and other technical equipment,” it added. More than one million migrants and refugees have landed in Europe this year, with more than 800,000 coming via Greece. At least 3,692 have died attempting to reach Europe across the Mediterranean, according to the International Organization for Migration (IOM).

Topping off the misery. What everyone feared would happen. Kostas and his crew are handing out warm blankets like crazy.

• Heated Areas To Open To Homeless In Athens As Cold Snap Expected (Kath.)

Municipal authorities in Athens are bracing for a cold snap at the end of the week and are opening emergency shelters for the capital’s homeless. Heated halls will be open to vulnerable groups from 10 a.m. on Wednesday at 35 Alexandras Avenue and at the indoor gymnasium opposite 165 Pireos Street. They will remain open until the cold snap ends, which is expected to happen on the weekend. The National Meteorological Service on Tuesday said that temperatures in the capital are expected to drop on Thursday and Friday to nighttime lows of below 0 degrees Celsius (32 Fahrenheit), with a chance of snow in northern parts. The cold weather is also expected to grip other parts of the country, particularly in the north, where authorities are also taking steps to provide warm spaces for vulnerable groups.

F**king Amen, brother. “I was a stranger, and ye took me not in: naked, and ye clothed me not.”

• As Europe Turns Gray (Pantelis Boukalas)

While the religious leaderships of Christian Europe went to pains to remind their faithful in their Christmas messages that Christ and his family were also refugees, Europe’s political leadership did not appear particularly moved – even less so great chunks of the societies that shape the contradictory and self-seeking face of Europe. The fact is that gray is about the most hopeful color that this part of the bloc can be colored, and it has covered much of its area. This is evidenced by elections and public opinion polls in France, Austria, the Czech Republic, Slovakia, the Netherlands and of course Greece, where the rot of racism from the far-right part of those nations is marring the heartfelt expressions of solidarity from so many other members of their societies.

This is also confirmed by the spike in hate attacks: Molotov cocktails launched at refugee camps, anti-refugee rallies, attacks on foreigners, sacred sites and symbols of non-Christian religions, enthusiasm for fences and barricades etc. This gray rot is insidious and threatens to swallow up all that is bright and gives birth to the solidarity shown toward migrants and refugees by those who have chosen to take action in the face of intolerance: people who act in the proper Christian spirit even if they are atheists, agnostics or of another faith. In an atmosphere where consumption fever and the commercialized “Christmas spirit” leaves little room for the true spirit of giving without expecting anything in return to flourish, the symbol of Christ as the political refugee becomes inert.

You cannot use him as a paradigm because he too will become another irritating figure without a home, someone belonging to a bygone era, unwanted and shunned. The fugitive Christ is born and dies every day in the faces of the children that drown in the Aegean or in the waters off Italy, Spain and France. He dies every day in front of the walls of a West that knows how to create wave upon wave of refugees through its cold, calculating actions but is indifferent to helping the victims.

The human mind cannot predict divine will. But maybe it is not blasphemous to speculate that if the Son of God were at Stephansplatz in Vienna last week – during the time of the year meant to celebrate his birth – and seen the disgusting performance of hate staged by far-right “thespians” (men in hoods posing as jihadists, beheading Europeans holding signs welcoming refugees), he would have been unable not to utter the words: “I was a stranger, and ye took me not in: naked, and ye clothed me not.”

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