Jan 182016
 
 January 18, 2016  Posted by at 9:24 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »


DPC Chicago & Alton Railroad, Joliet, Illinois 1901

Asian Shares Drop To 2011 Levels As Oil Slump Intensifies (Reuters)
Oil Slides To Lowest Since 2003 As Iran Sanctions Are Lifted (Reuters)
Hedge Funds Are Betting The Commodities Collapse Isn’t Over Yet (BBG)
Gulf Stock Crash Wipes $38.5 Billion Off Markets As Iran Enters Oil War (Tel.)
Richest 1% Now Wealthier Than The Rest Of Humanity Combined (BBG)
Stock Market Crash Could Burst UK Property Bubble (Express)
It’s Not Time For Britain To Be ‘Intensely Relaxed’ Over Household Debt (Ind.)
China’s Securities Czar Casts Wide Blame for Market Turmoil (WSJ)
China To Clean-up ‘Zombie’ Companies By 2020 (Reuters)
The Problem With Getting Money Out Of China (China Law Blog)
Gloom Gathers Over The Challenges That Germany Faces (FT)
“Everything Has Come to a Standstill”: Politics Hits Business in Spain (WS)
Canadian Officials Under Pressure to Stimulate Economy (WSJ)
Shock Figures To Reveal Deadly Toll Of Global Air Pollution (Observer)
False Emissions Reporting Undermines China’s Pollution Fight (Reuters)
Weak EU Tests For Diesel Emissions Are ‘Illegal’ (Guardian)
66 Institutional Investors To Sue Volkswagen In Germany (FT)
Obama Declares Emergency In Flint, But Not Disaster (DFP)
When Peace Breaks Out With Iran… (Ron Paul)
Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation (ZH)
The Economics Of The Refugee Crisis Lay Bare Our Moral Bankruptcy (Guardian)

China contagion spreads.

Asian Shares Drop To 2011 Levels As Oil Slump Intensifies (Reuters)

Asian shares slid to their lowest levels since 2011 on Monday after weak U.S. economic data and a massive fall in oil prices stoked further worries about a global economic downturn. Spreadbetters expected a subdued open for European shares, forecasting London’s FTSE to open modestly higher while seeing Germany’s DAX and France’s CAC to start flat-to-slightly-weaker. Crude prices faced fresh pressure after international sanctions against Iran were lifted over the weekend, allowing Tehran to return to an already over-supplied oil market. Brent oil futures fell below $28 per barrel touching their lowest level since 2003. “Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get,” said Richard Nephew at Columbia University’s Center on Global Energy Policy.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell to its lowest since October 2011 and was last down 0.5%. Japan’s Nikkei tumbled as much as 2.8% to a one-year low. It has lost 20% from its peak hit in June, meeting a common definition of a bear market. The volatile Shanghai Composite index initially pierced through intraday lows last seen in August before paring the losses and was last up 1%. It was still down 17% this month. On Wall Street, S&P 500 hit a 15-month low on Friday, ahead of Monday’s market holiday. “The fact that U.S. and European shares fell below their August lows, failing to sustain their rebound, is significant,” said Chotaro Morita at SMBC Nikko Securities.

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They knew Iran was coming, so that’s not the main driver.

Oil Slides To Lowest Since 2003 As Iran Sanctions Are Lifted (Reuters)

Oil prices hit their lowest since 2003 in early trading on Monday, as the market braced for a jump in Iranian exports after the lifting of sanctions against the country at the weekend. On Saturday, the U.N. nuclear watchdog said Tehran had met its commitments to curtail its nuclear program, and the United States immediately revoked sanctions that had slashed the OPEC member’s oil exports by around 2 million barrels per day (bpd) since their pre-sanctions 2011 peak to little more than 1 million bpd. “Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get,” said Richard Nephew, program director for Economic Statecraft, Sanctions and Energy Markets at Columbia University’s Center on Global Energy Policy.

Iran is ready to increase its crude exports by 500,000 bpd, its deputy oil minister said on Sunday. International Brent crude fell to $27.67 a barrel early on Monday, its lowest since 2003, before recovering to $28.25, still down more than 2% from their settlement on Friday. U.S. crude was down 58 cents at $28.84 a barrel after hitting a 2003 low of $28.36 earlier in the session. “The lifting of sanctions on Iran should see further downward pressure on oil and commodities more broadly in the short term,” ANZ said on Monday. “Iran’s likely strategy in offering discounts to entice customers could see further downward pressure on prices in the near term,” it added. Iran’s potential new exports come at a time when global markets are already reeling from a chronic oversupply as producers pump a million barrels or more of crude every day in excess of demand, pulling down crude prices by over 75% since mid-2014 and by over a quarter since the start of 2016.

And although analysts expect Iran to take some time before being able to fully revive its export infrastructure, suffering from years of underinvestment during the sanctions, it does have at least a dozen Very Large Crude Carrier super-tankers filled and in place to sell into the market. The oil price rout is also hurting stock markets, with Asian shares set to slide to near their 2011 troughs on Monday, stoking further worries about a global economic downturn. “Growth keeps slowing … Lower commodity prices, including oil, partly reflect weakening demand itself. In addition, the downturn in mining capex and the declining income of commodity producers is weighing on exports from Asia,” said Frederic Neumann at HSBC, Hong Kong.

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Must be a crowded trade.

Hedge Funds Are Betting The Commodities Collapse Isn’t Over Yet (BBG)

The commodity meltdown that pushed oil to a 12-year low and copper to the cheapest since 2009 isn’t over yet. At least, that’s how hedge funds see it. Money managers increased their combined net-bearish position across 18 raw materials to the biggest ever, doubling the negative bets in just two weeks. A measure of returns on commodities last week slid to the lowest in at least 25 years. Metals, crops and energy futures all slumped amid supply gluts and an anemic outlook for the global economy. Market turmoil in China, the biggest commodity buyer, is adding to worries over consumption. A stronger dollar is also eroding the appeal of raw materials as alternative investments. While Goldman Sachs predicts that the prolonged slump will start to spur more supply cuts, the bank doesn’t expect prices to rebound until later this year.

“There’s fear in the marketplace,” said Lara Magnusen at Altegris Investments. People are “very concerned about slower economic growth and what’s going on with China and the contagion effect,” she said. With a strong U.S. dollar and the Federal Reserve considering more interest-rate increases, “there’s not a lot of places where you can put your money right now,” she said. “Short commodities is a pretty good place.” The net-short position across 18 U.S.-traded commodities expanded to 202,534 futures and options as of Jan. 12, according to U.S. Commodity Futures Trading Commission figures published three days later. That’s the largest since the government data begins in 2006 and compares with 164,203 contracts a week earlier.

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Add that to the low oil price losses.

Gulf Stock Crash Wipes $38.5 Billion Off Markets As Iran Enters Oil War (Tel.)

Stock markets across the Middle East saw more than £27bn ($38.5 billion) wiped off their value as the lifting of economic sanctions against Iran threatened to unleash a fresh wave of oil onto global markets that are already drowning in excess supply. All seven stock markets in Gulf states tumbled as panic gripped traders. Dubai’s DFM General Index closed down 4.65pc to 2,684.9, while Saudi Arabia’s Tadawul All Share Index, the largest Arab market, collapsed by 7pc intraday, before recovering marginally to end down 5.44pc at 5,520.41, its lowest level in almost five years. The Qatar stock exchange, fell 7.2pc to close at 8,527.75, and the Abu Dhabi Securities Exchange shed 4.24pc to finish at 3,787.4. The Kuwait market returned to levels not seen since May 2004 as it slid 3.2pc lower, while smaller markets in Oman and Bahrain dropped 3.2pc and 0.4pc respectively.

The Iranian stock index gained 1pc, making it one of the best performing markets in the world with gains of 6pc since the start of the year. The dramatic moves came following the historic report from the UN nuclear watchdog, which showed that Iran has met its obligations under the nuclear deal, clearing the way for the lifting of sanctions. The Vienna-based International Atomic Energy Agency issued the landmark document late on Saturday evening, sparking mayhem as markets opened on Sunday, the first day of trading in the Middle East. The stock markets in Dubai and Saudi Arabia have been plunged into a painful bear market, losing 42pc and 38pc respectively, ever since Saudi Arabia decided to ramp up oil production in November 2014.

Oil prices fell below $30 for the third time last week as traders prepared for the prospect of Iranian oil flooding global markets. The Islamic Republic has vowed to return its oil production to pre-sanction levels, with estimates suggesting Tehran will add a further 500,000 barrels a day (b/pd) to the world’s bloated stockpiles within weeks. Fears that the Islamic Republic could quickly ramp up production sent Brent crude falling by 3.3pc to $29.43 on Friday – matching lows last seen in 2004. West Texas Intermediate also slipped back to $29.60, a decline of 4.5pc.

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“..the wealth of the poorest 50% dropped by 41% between 2010 and 2015..”

Richest 1% Now Wealthier Than The Rest Of Humanity Combined (BBG)

The richest 1% is now wealthier than the rest of humanity combined, according to Oxfam, which called on governments to intensify efforts to reduce such inequality. In a report published on the eve of the World Economic Forum’s annual meeting in Davos, Switzerland, the anti-poverty charity cited data from Credit Suisse in declaring the most affluent controlled most of the world’s wealth in 2015. That’s a year earlier than it had anticipated. Oxfam also calculated that 62 individuals had the same wealth as 3.5 billion people, the bottom half of the global population, compared with 388 individuals five years earlier. The wealth of the most affluent rose 44% since 2010 to $1.76 trillion, while the wealth of the bottom half fell 41% or just over $1 trillion.

The charity used the statistics to argue that growing inequality poses a threat to economic expansion and social cohesion. Those risks have already been noted in countries from the U.S. to Spain, where voters are increasingly backing populist political candidates, while it’s sown tensions on the streets of Latin America and the Middle East. “It is simply unacceptable that the poorest half of the world’s population owns no more than a few dozen super-rich people who could fit onto one bus,” said Winnie Byanima, executive director of Oxfam International. “World leaders’ concern about the escalating inequality crisis has so far not translated into concrete action.” Oxfam said governments should take steps to reduce the polarization, estimating tax havens help the rich to hide $7.6 trillion. Politicians should agree on a global approach to ending the practice of using offshore accounts, it said.

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Or the other way around?

Stock Market Crash Could Burst UK Property Bubble (Express)

Property seems to be immune from the fear now gripping the global economy, but that may not always be the case. If the share price meltdown continues and the global economy slows, eventually the UK’s house of cards may collapse as well. Chinese stock markets have plunged since the start of the year, with the FTSE 100 falling 6.5% so far. There seems no end in sight to the share sell-off, but still property powers on. The latest figures from Halifax show that property prices in the final quarter of 2015 were almost 10% higher than one year earlier. The growth seems unstoppable, with new figures from estate agency Your Move showing the average property in England and Wales has leapt £18,000 in the last year to £292,077, a growth rate of an incredible £1,500 a month.

Many Britons suspect the property market is overvalued, with the average UK home now costing more than 10 times earnings. Given that most lenders will not grant mortgages worth more than three or four times your income, this looks unsustainable. Yet few property experts are willing to say openly that the market is in peril. Most remain deaf to warnings of contagion from the share price rout, even though it has scared the life out of some investment experts. Last week, Andrew Roberts, research chief at Royal Bank of Scotland, warned investors to “sell everything except high-quality bonds” because the stock market and oil price crash has only just begun. He is worried about the growing public and company debt burden, and British households have plenty to worry about on that score.

All-time low interest rates have fuelled a borrowing spree that has seen Britons rack up a mind-boggling debt of £40billion. The latest figures show family that household debt rose by 42% in the last six months alone, according to research from Aviva. The average family now owes £13,520 on credit cards, personal loans and overdrafts, up from £9,520 last summer. Throw in a 20% increase in average mortgage debt to £62,739 over five years and households are more vulnerable than ever. Worse, family incomes are falling and many have lost the savings habit as their finances are stretched.

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The entire issue is hugely distorted by insanely elevated home prices. Take those out, and you see how bad things truly are.

It’s Not Time For Britain To Be ‘Intensely Relaxed’ Over Household Debt (Ind.)

There seem to be three main arguments against the idea we should be concerned about household leverage. The first is that the official statistics belie the claim that the aggregate debt burden of UK households is rising and the recovery has been fuelled by borrowing. Second, we’re told UK household debt is mainly mortgage debt and reflects high domestic house prices. For each of these liabilities there is an asset, so we must look at the overall balance sheets of households, which are healthy. Plus, with interest rates still on the floor, aggregate debt-servicing costs are comfortable. Finally, we’re assured that as long as the supply of new homes remains severely restricted, high debt presents no serious financial threat because house prices are pretty unlikely to collapse.

To illustrate this final point, it is pointed out that the banks failed in 2008 because of their dodgy overseas lending, not because of their dodgy UK mortgage books. There are problems with all three arguments. Let’s take them in turn. Measured as a share of household incomes, it is true that household debt has not actually been growing. Since 2008, when the debt to income ratio peaked at 170%, households have been deleveraging. Yet at 140% of gross income, debt levels are still very high, both by historic and international standards. In the G7 only Canada has a higher household leverage ratio today. There is potential fragility here if another economic shock were to hit, as the Bank of England itself admits. To point to the UK’s deleveraging in recent years as a reason for relief is akin to a mountaineer getting halfway down Everest in a vicious storm and saying “job done”.

Debt has not been rising as a share of income but the aggregate household savings ratio, excluding pension rights, has fallen from a peak of 6% in 2010 to less than zero today. That change in household behaviour has certainly helped the economy recover. So not a recovery fuelled by debt, but a recovery fuelled by a lower savings ratio. Incidentally, there was no such savings collapse envisaged by the Office for Budget Responsibility (OBR) in 2010, reflecting how unbalanced the recovery has been relative to hopes six years ago. Moreover, the OBR today predicts that the debt to income ratio is going to race back close to pre-crisis levels over the coming five years. Why? Because the Treasury’s official forecaster expects house prices to rise faster than incomes and for people to keep buying houses. The OBR is very far from being omniscient. But that is surely one of the more plausible assumptions from Robert Chote and his team, given the dismal evolution of the housing market in recent years and decades.

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Lemme guess: anyone but Xi?!

China’s Securities Czar Casts Wide Blame for Market Turmoil (WSJ)

What’s wrong with China’s stock market? Just about everything, according to a statement from Xiao Gang, the country’s chief securities regulator, delivered at a national meeting of Chinese securities officials and posted on his agency’s website Saturday. In the statement, Mr. Xiao defended his handling of successive market meltdowns, blaming the “abnormal volatility” on “an immature market, inexperienced investors, imperfect trading system, flawed market mechanisms and inappropriate supervision systems.” The turmoil in China’s stock market—which on Friday entered “bear” territory of 20% below its recent peak—has cast a harsh light on the performance of Mr. Xiao, 57, a former central banker and chairman of the Bank of China before he was appointed chairman of the China Securities Regulatory Commission in 2013.

During the summer, when Chinese stocks tumbled more than 40%, Mr. Xiao oversaw a slew of measures to prop up the market that many investors criticized as heavy-handed and interventionist. Those ranged from banning certain kinds of short selling and share sales to approving the purchase of hundreds of billions of yuan in equities by government-affiliated funds. Two weeks ago, Mr. Xiao was forced to abandon a circuit-breaker mechanism he’d championed as a way to halt big trading swings, when it instead ended up fanning panic selling. In his Saturday statement, Mr. Xiao defended his efforts, saying they were a successful attempt to stave off a bigger crisis.

“The response to the abnormal volatility in the stock market was essentially crisis management,” Mr. Xiao said. Various departments “addressed market dysfunctions and prevented a potential systemic risk through joint efforts.” Mr. Xiao did admit there had been “supervision and management loopholes” and he promised to crack down on illegal activities, increase market transparency and better educate investors, although he didn’t outline specific proposals. He briefly touched on the detention of some top-ranking officials in the securities industry in relation to a police investigation on alleged violation of rules, but without naming his own agency. Mr. Xiao chastised listed companies for “exaggerated storytelling” to hype up stock prices, and urged market participants to cultivate a stronger sense of social responsibility and to “huddle together for warmth”—or cooperate in the greater interest—when times are bad.

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They want to take five years to do what should have been done already. Dangerous.

China To Clean-up ‘Zombie’ Companies By 2020 (Reuters)

China’s top state-owned asset administrator has vowed to clean-up the country’s so-called “zombie” industrial companies by 2020, the official Xinhua News Agency has reported. Zhang Yi, Chairman of the State-owned Assets Supervision and Administration Commission (SASAC), told a central and local enterprise work conference convened at the weekend that the agency will “basically” resolve the problem of unproductive “zombie” firms over the next three years. Dealing with “zombie companies” is very difficult, Zhang said, according to the report, but “officials need to… use today’s ‘small tremors’ to prevent a future earthquake.” The central government last September rolled out the most ambitious reform program in two decades to resolve the problems at its hugely inefficient public sector companies, encouraging the greater use of “mixed ownership” while promoting more mergers to create globally-competitive conglomerates.

Zhang Xiwu, deputy head of SASAC, told a news briefing at the time that China would work to reorganize state firms to centralize state-owned capital in key industries, while restricting investment in industries not in line with national policies. Zhang said that China would use stock exchanges, property exchanges and other capital markets to sell the assets of low performing state owned enterprises. Profits at China’s state firms dipped 9.5% in the first 11 months of 2015 from a year earlier, led by profits at SASAC-controlled firms, which fell 10.4%, the Ministry of Finance said in December. On Friday, SASAC told state media that the steep decline in profits for the sector had been curtailed, and that 99 of the 106 SASAC-controlled enterprise groups achieved profitability in 2015.

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Interesting angle via ZH.

The Problem With Getting Money Out Of China (China Law Blog)

Regular readers of our blog probably know that our basic mantra about getting money out of China is that if you have consistently follow all of China’s laws, it ought to be no problem. Not true lately. In the last week or so, our China lawyers have probably received more “money problem” calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not. So what has been going on lately? Well if there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars. We are hearing the following:

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much no questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

What are you seeing out there? No really, what are you seeing out there?

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You just wait till the German economy starts stumbling.

Gloom Gathers Over The Challenges That Germany Faces (FT)

This is going to be a difficult year for Germany, one in which the policies of the past may turn out to be unsustainable. The most unsustainable of all was Angela Merkel’s invitation to open the doors to Syrian refugees without limitation. The German chancellor must either have misjudged the effect or acted recklessly — or both. A few months and 1m refugees later, the discontent is growing inside the Christian Democratic Union, her party, and in the country at large. Gerhard Schröder, her Social Democratic predecessor, last week came out against the policy with exactly the same arguments as the right-wingers in Ms Merkel’s own party: Germany cannot absorb such a large number. More than 1m refugees arrived in the country in 2015. It could be twice as many this year and the same again next — more if you include family members who will eventually follow.

It is tempting to think of refugees and migrants as a new source of labour. But in this case this just is not true, at least not for now. The majority of those who arrive in Germany lack the skills needed in the local labour market. They will enter the low wage sector of the economy, and drive down wages, producing another deflationary shock. This is the last thing Germany and the eurozone need right now. I expect that this policy will change at some point this year. What I do not see, however, is a successful political coup against Ms Merkel from inside her own party. What protects her is the grand coalition with the Christian Social Union and the SPD. There is no majority to the right of her, or to the left for that matter.

The second challenge is the economic downturn in emerging markets. There are few large countries as dependent on the global economy as Germany, and few where there is so little awareness of that fact, at least in public debate. Germany has a current account surplus of 8% of gross domestic product. A global downturn tends to affect German industrial companies with a delay of one or two years because many operate in sectors like plant and machinery where multiyear contracts are customary. But eventually, the German and the global business cycles begin to synchronise once more. This will be the year when that starts to happen.

The third challenge for Germany in 2016 is the fallout from the Volkswagen emissions scandal. This could be the single biggest shock of all because Germany has been over-reliant on the car industry for far too long. Last week, suspicion fell on Renault, when the offices of the French carmaker were raided by the authorities. This is not the crisis of a single company, therefore, but of a whole industry. Nor is it just a German problem; it is a pan-European one. It appears that VW behaved more recklessly than the others, and it will pay a heavy price for its behaviour. Whether legal action in the US and in Germany will weaken VW or force it into outright bankruptcy is almost irrelevant, given the bigger picture.

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Political capital rules the EU.

“Everything Has Come to a Standstill”: Politics Hits Business in Spain (WS)

On Friday, Spain’s benchmark stock index, the Ibex 35, plumbed depths it had not seen since the worst days of 2013, the year that the country’s economy began its “miraculous” recovery. Of the 35 companies listed on the index, 15 (or 40%) are – to quote El Economista – “against the ropes,” having lost over a third of their stock value in the last 9 months. Only one of the 35 companies — the technology firm Indra — is still green for 2016. This doesn’t make Spain much different from other countries right now, what with financial markets sinking in synchronized fashion all over the world. What does make Spain different is that it has no elected government to try to navigate the country though these testing times, or at least take the blame for the pain.

Inevitable comparisons have been drawn with Belgium, which between 2011 and 2012 endured 541 days of government-free living. However, Spain is not Belgium: its democratic system of governance is younger, less firmly rooted, and more fragile, and its civil service is more politically compromised. To make matters worse, Spain’s richest region, Catalonia, which accounts for 20% of the country’s economy, bucked expectations last week by cobbling together a last-minute coalition government that seems intent on declaring independence within the next 15 months. Meanwhile, business confidence, the cornerstone of any economic recovery, is beginning to crumble. Spain’s leading index of business confidence, ICEA, just registered a drop of 1.3%, breaking a straight eleven-quarter run of positive results.

For the first time in almost three years more business leaders are pessimistic than optimistic about the economy’s outlook. This should come as little surprise in a country where unemployment is still firmly on the wrong side of the 20% mark, over a quarter of the new jobs created last year had a contract lasting less than one week, and public debt is higher than it’s ever been. And now that there’s no elected government in office, businesses that depend on public sector contracts, including the country’s heavily indebted construction and infrastructure giants, face weeks or perhaps even months of inertia. “Everything has come to a standstill,” a contact in a Madrid-based research consultancy told me. “No decisions are being made, no funds are being released. It’s a vacuum.”

For the moment, the political backdrop has had limited impact on the price of Spanish government debt. The 10-year yield is at 1.75%, below the 10-year US Treasury yield, though it’s up a smidgen since the general elections on December 20. In its latest update, S&P left Spain’s rating unchanged, predicting 2.7% growth for 2016, despite the prevailing mood of political and economic uncertainty. In a similar vein, Deutsche Bank has forecast growth of 2.5%, regardless of what happens within or beyond Spanish borders. In other words, every effort will be made to safeguard the economic order in Spain, including putting a ridiculously positive spin on a desperate situation. To paraphrase Europe’s chief financial alchemist, Mario Draghi: do not underestimate the amount of political capital that has been invested in the European project, in particular in the Eurozone’s fourth largest economy.

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“General sentiment is downright toxic in Canada..”

Canadian Officials Under Pressure to Stimulate Economy (WSJ)

Canadian policy makers are heading into a tough week as pressure mounts on them to revive an economy that has been among the hardest hit by the commodity rout. Prime Minister Justin Trudeau and his cabinet colleagues will convene in a seaside resort town on Canada’s east coast Monday amid more evidence growth may have stalled again after sputtering to life in last year’s third quarter. A recent string of dismal economic news—and a free-falling Canadian dollar—has led to calls for Mr. Trudeau’s government to move sooner rather than later on major infrastructure investments to stimulate growth.

On Wednesday, Bank of Canada Gov. Stephen Poloz will deliver his latest interest-rate decision, and economists are split not only on whether he will opt to cut rates, but whether such a move would do much to help the economy at this time. Analysts say the onus has shifted to Mr. Trudeau’s government to help mitigate the negative fallout from the oil-price rout. Last week the Canadian dollar hit near-13-year lows as prices for oil, a major Canadian export, continued to weaken. As of Friday, the currency has fallen 4.8% against the U.S. dollar since the start of the year and was down 17.8% year-to-year. The drop came as Canada’s stock market lost ground—it is now off 22.2% from its 2015 peak—and the central bank said Canadian companies’ investment and hiring intentions had recently weakened.

“General sentiment is downright toxic in Canada,” said Jimmy Jean, economist at Desjardins Capital Markets. Talk around Mr. Trudeau’s cabinet table likely will revolve around the appropriate response to an economic tailspin fueled by a fresh downturn in the price of crude. While the prime minister last week voiced optimism about Canada’s prospects despite disappointing growth, government officials have privately said they are very worried about the economy. Meanwhile, economists have told the government it should boost the amount of infrastructure spending planned for this year to help offset weak conditions.

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But we’ll keep driving along. Soon, in our new clean cars powered by coal plants.

Shock Figures To Reveal Deadly Toll Of Global Air Pollution (Observer)

The World Health Organisation has issued a stark new warning about deadly levels of pollution in many of the world’s biggest cities, claiming poor air quality is killing millions and threatening to overwhelm health services across the globe. Before the release next month of figures that will show air pollution has worsened since 2014 in hundreds of already blighted urban areas, the WHO says there is now a global “public health emergency” that will have untold financial implications for governments. The latest data, taken from 2,000 cities, will show further deterioration in many places as populations have grown, leaving large areas under clouds of smog created by a mix of transport fumes, construction dust, toxic gases from power generation and wood burning in homes. The toxic haze blanketing cities could be clearly seen last week from the international space station.

Last week it was also revealed that several streets in London had exceeded their annual limits for nitrogen dioxide emissions just a few days into 2016. “We have a public health emergency in many countries from pollution. It’s dramatic, one of the biggest problems we are facing globally, with horrible future costs to society,” said Maria Neira, head of public health at the WHO, which is a specialist agency of the United Nations. “Air pollution leads to chronic diseases which require hospital space. Before, we knew that pollution was responsible for diseases like pneumonia and asthma. Now we know that it leads to bloodstream, heart and cardiovascular diseases, too – even dementia. We are storing up problems. These are chronic diseases that require hospital beds. The cost will be enormous,” said Neira.

[..] According to the UN, there are now 3.3 million premature deaths every year from air pollution, about three-quarters of which are from strokes and heart attacks. With nearly 1.4 million deaths a year, China has the most air pollution fatalities, followed by India with 645,000 and Pakistan with 110,000. In Britain, where latest figures suggest that around 29,000 people a year die prematurely from particulate pollution and thousands more from long-term exposure to nitrogen dioxide gas, emitted largely by diesel engines, the government is being taken to court over its intention to delay addressing pollution for at least 10 years.

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Follow the money, that’s all there’s to it. All the rest is window dressing and lip service, for Beijing as much as for Volkswagen.

False Emissions Reporting Undermines China’s Pollution Fight (Reuters)

Widespread misreporting of harmful gas emissions by Chinese electricity firms is threatening the country’s attempts to rein in pollution, with government policies aimed at generating cleaner power struggling to halt the practice. Coal-fired power accounts for three-quarters of China’s total generation capacity and is a major source of the toxic smog that shrouded much of the country’s north last month, prompting “red alerts” in dozens of cities, including the capital Beijing. But the government has found it hard to impose a tougher anti-pollution regime on the power sector, with China’s energy administration describing it as a “weak link” in efforts to tackle smog caused by gases such as sulfur dioxide. No official data on the extent of the problem has been released since a government audit in 2013 found hundreds of power firms had falsified emissions data, although authorities have continued to name and shame individual operators.

“There is no guarantee of avoiding under-reporting (of emissions) at local plants located far away from supervisory bodies. Coal data is very fuzzy,” said a manager with a state-owned power company, who did not want to be named because he is not authorized to speak to the media. The manager said firms could easily exaggerate coal efficiency by manipulating their numbers. For example, power companies that also provided heating for local communities could overstate the amount of coal used for heat generation, which is not subject to direct monitoring, and understate the amount used for power. “Data falsification is a long-standing problem: China will not get its environmental house in order if it does not deal with this first,” said Alex Wang, an expert in Chinese environmental law at UCLA.

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Money trumps laws.

Weak EU Tests For Diesel Emissions Are ‘Illegal’ (Guardian)

Planned new ‘real driving emissions’ (RDE) test limits that would let cars substantially breach nitrogen oxide (NOx) standards are illegal under EU law, according to new legal analysis seen by the Guardian. The proposed ‘Euro 6’ tests would allow diesel cars to emit more than double the bloc’s ‘80 mg per km’ standard for NOx emissions from 2019, and more than 50% above it indefinitely from 2021. The UK supported these exemptions. But they contradict the regulation’s core objective of progressively scaling down emissions and improving air quality, according to an opinion by the European Parliament’s legal services, which the Guardian has seen. In principle, the exemptions and loopholes “run counter [to] the aims and content of the basic regulation as expressed by the Euro 6 limit values,” says the informal paper prepared for MEPs on the parliament’s environment committee.

“The commission has taken a political decision to favour the commercial interests of car manufacturers over the protection of the health of European citizens,” adds a second analysis by the environmental law firm ClientEarth, also seen by the Guardian. “The decision is therefore illegal and should be vetoed by the European Parliament,” the ClientEarth advice says. Catherine Bearder, a Liberal Democrat MEP on the environment committee, told the Guardian that as well as being morally unjustifiable, the agreement to water down the emissions limits was now “legally indefensible”. “This was a political decision, not a technical one, and so it should have been subject to proper democratic accountability,” she told the Guardian. “MEPs must veto this shameful stitch-up and demand a stronger proposal, based on the evidence and not on pressure from the car industry.”

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Might as well close it down.

66 Institutional Investors To Sue Volkswagen In Germany (FT)

Sixty-six institutional investors are to take legal action against Volkswagen in its German home market after the carmaker cheated emissions tests in the US. The first claim will be made within the next seven days. The legal action will heap further pressure on Volkswagen, which earlier this month said its annual sales fell last year for the first time in more than a decade. Klaus Nieding, a lawyer at Nieding and Barth, the German law firm, said a capital market model claim, which is similar to a collective lawsuit in the US, will be filed “within the next week” in Germany on behalf of a US institutional investor that has suffered a “big loss”. The other 65 institutional investors are expected to join that claim.

Investors have been nursing heavy losses after the US’s Environmental Protection Agency revealed last September that the world’s second-largest carmaker had cheated US emissions tests by fitting vehicles with “defeat devices” designed to bypass environmental standards. Billions of euros have been wiped off the value of Volkswagen as a result. Nieding and Barth is working with MüllerSeidelVos, a fellow German firm, and Robbins Geller Rudman and Dowd, a US law firm, to represent investors that have contacted DSW, a German shareholder protection association. Mr Nieding said the law firms collectively represent “many foreign institutional investors, primarily from the US, with claims of several hundred million euros”. He added: “We are representing, as far as we know, the largest number of claims and of shareholders [in Germany].”

Bentham Europe, a litigation finance group backed by Elliott Management, the US hedge fund, and Australian-listed IMF Bentham, is also expected to file a damages claim in Germany. Volkswagen is facing additional legal action outside its home market. Class actions against the carmaker, which allow one person to sue on behalf of a group of individuals or companies, have already been filed in the US and Australia. Last week, the Arkansas State Highway Employees Retirement System, a $1.4bn pension fund, was named the lead plaintiff in a class action against VW in the US. “We will be prosecuting the claims on behalf of the class vigorously,” said Jeroen van Kwawegen, a lawyer at Bernstein Litowitz Berger and Grossmann. The law firm is acting on behalf of investors who put money in Volkswagen’s American depositary receipts, a type of stock that represents shares in a foreign corporation.

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Snyder should be taken to court over his decisions that led to the mayhem. Instead, Wshington sends HIM the money to solve the issue.

Obama Declares Emergency In Flint, But Not Disaster (DFP)

President Barack Obama on Saturday declared a federal emergency in Flint, freeing up to $5 million in federal aid to immediately assist with the public health crisis, but he denied Gov. Rick Snyder’s request for a disaster declaration. A disaster declaration would have made larger amounts of federal funding available more quickly to help Flint residents whose drinking water is contaminated with lead. But under federal law, only natural disasters such as hurricanes and floods are eligible for disaster declarations, federal and state officials said. The lead contamination of Flint’s drinking water is a manmade catastrophe. The president’s actions authorize the FEMA to coordinate responses and cover 75% of the costs for much-needed water, filters, filter cartridges and other items for residents, capped initially at $5 million.

The president also offered assistance in finding other available federal assistance, a news release Saturday from the White House said. Snyder, who on Thursday night asked Obama for federal financial aid in the crisis through declarations of both a federal emergency and a federal disaster, said in a news release Saturday he appreciates Obama granting the emergency request “and supporting Flint during this critical situation.” “I have pledged to use all state resources possible to help heal Flint, and these additional resources will greatly assist in efforts under way to ensure every resident has access to clean water resources,” he said. U.S. Rep. Dan Kildee, D-Flint, welcomed the emergency declaration and issued a statement: “I welcome the president’s quick action in support of the people of Flint after months of inaction by the governor,” Kildee said.

“The residents and children of Flint deserve every resource available to make sure that they have safe water and are able to recover from this terrible manmade disaster created by the state.” On Friday, Kildee led a bipartisan effort in support of the request for federal assistance. Kildee had long called for Snyder to request federal aid. Typically, federal aid for an emergency is capped at $5 million, though the president can commit more if he goes through Congress. Snyder’s application said as much as $55 million is needed in the near term to repair damaged lead service lines and as much as $41 million to pay for several months of water distribution and providing residents with testing, water filters and cartridges.

In what’s become a huge government scandal, garnering headlines across the country and around the world, Flint’s drinking water became contaminated with lead after the city temporarily switched its supply source in 2014 from Lake Huron water treated by the Detroit Water and Sewerage Department to more corrosive and polluted Flint River water, treated at the Flint water treatment plant. The switch was made as a cost-cutting move while the city was under the control of a state-appointed emergency manager.

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Dr. Paul has been consistently on the case for years.

When Peace Breaks Out With Iran… (Ron Paul)

This has been the most dramatic week in US/Iranian relations since 1979. Last weekend ten US Navy personnel were caught in Iranian waters, as the Pentagon kept changing its story on how they got there. It could have been a disaster for President Obama’s big gamble on diplomacy over conflict with Iran. But after several rounds of telephone diplomacy between Secretary of State John Kerry and his Iranian counterpart Javad Zarif, the Iranian leadership – which we are told by the neocons is too irrational to even talk to – did a most rational thing: weighing the costs and benefits they decided it made more sense not to belabor the question of what an armed US Naval vessel was doing just miles from an Iranian military base. Instead of escalating, the Iranian government fed the sailors and sent them back to their base in Bahrain.

Then on Saturday, the Iranians released four Iranian-Americans from prison, including Washington Post reporter Jason Rezaian. On the US side, seven Iranians held in US prisons, including six who were dual citizens, were granted clemency. The seven were in prison for seeking to trade with Iran in violation of the decades-old US economic sanctions. This mutual release came just hours before the United Nations certified that Iran had met its obligations under the nuclear treaty signed last summer and that, accordingly, US and international sanctions would be lifted against the country. How did the “irrational” Iranians celebrate being allowed back into the international community?

They immediately announced a massive purchase of more than 100 passenger planes from the European Airbus company, and that they would also purchase spare parts from Seattle-based Boeing. Additionally, US oil executives have been in Tehran negotiating trade deals to be finalized as soon as it is legal to do so. The jobs created by this peaceful trade will be beneficial to all parties concerned. The only jobs that should be lost are the Washington advocates of re-introducing sanctions on Iran. Events this week have dealt a harsh blow to Washington’s neocons, who for decades have been warning against any engagement with Iran. These true isolationists were determined that only regime change and a puppet government in Tehran could produce peaceful relations between the US and Iran.

Instead, engagement has worked to the benefit of the US and Iran. Proven wrong, however, we should not expect the neocons to apologize or even pause to reflect on their failed ideology. Instead, they will continue to call for new sanctions on any pretext. They even found a way to complain about the release of the US sailors – they should have never been confronted in the first place even if they were in Iranian waters. And they even found a way to complain about the return of the four Iranian-Americans to their families and loved ones – the US should have never negotiated with the Iranians to coordinate the release of prisoners, they grumbled. It was a show of weakness to negotiate! Tell that to the families on both sides who can now enjoy the company of their loved ones once again!

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What they flee.

Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation (ZH)

While US intervention in its various forms has likely been ongoing for decades, March 2011 is often cited as the start of foreign involvement in the Syrian Civil War (refering to political, military and operational support to parties involved in the ongoing conflict in Syria, as well as active foreign involvement). Since then the nation has collapsed into chaos with an endless array of superlatives possible to describe the economic and civilian carnage that has ensued. However, while a picture can paint a thousand words, these four shocking images describe a canvas of US foreign policy “success” that few in the mainstream media would be willing to expose… Mission un-accomplished?

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I’m getting a bit antsy seeing people presenting arguments as new that I’ve made umpteen times in the past. We move far too slow.

The Economics Of The Refugee Crisis Lay Bare Our Moral Bankruptcy (Guardian)

The Germans want to introduce a pan-European tax to pay for the refugee crisis. The Danish want to pass a law to seize any jewellery worth more than £1,000 as refugees arrive – apart from wedding rings. That’s what marks you out as a civilised people, apparently, that you can see the romance in a stranger’s life and set that aside before you bag them up as a profit or a loss. In Turkey people smugglers are charging a thousand dollars for a place in a dinghy, $2,500 in a wooden boat, with more than 350,000 refugees passing through one Greek island – Lesbos – alone in 2015. The profit runs into hundreds and millions of dollars, and the best EU response so far has been to offer the Turkish government more money to either hold refugees in their own country or – against the letter and the spirit of every pledge modern society has made on refugees – send them back whence they came.

Turkey is a country of 75 million that has already taken a million refugees, accepting impossible and cruel demands from a continent of more than 500 million people that, apparently, can’t really help because of the threat to its “social cohesion”. Our own government has pledged to take 20,000 refugees but only the respectable ones, from faraway camps: the subtext being that the act of fleeing to Europe puts refugees outside the purview of human sympathy, being itinerant, a vagrant, on the take. Institutions and governments represent an ever narrower strain of harsh opinion. The thousands of volunteers in Greece, the Guardian readers who gave more at Christmas to refugee charities than to any appeal before, the grassroots organisations springing up everywhere to try and show some human warmth on this savage journey to imagined safety – none of these are represented, politically, in a discourse that takes as its starting point the need to make the swarms disappear, to trick them into going somewhere else.

It’s those neutral-sounding, just-good-economics ideas that give the game away: if a million people in any given European nation suffered a natural disaster, nobody would be talking about how to raise a tax so that help could be sent. We would help first and worry about the money second. When the EU wants to rescue a government, or the banks of a member state (granted, at swingeing cost for the rescued), it doesn’t first float a “rescue tax”. The suggestion that the current crisis needs its own special tax may well be an attempt to force individual governments to confront the reality of their current strategy, which is to have no strategy. Yet it sullies the underlying principle of the refugee convention: that anyone fleeing in fear for their life be taken in on that basis, not pending a whip-round.

To repudiate that is essentially to say that human rights are no longer our core business. But without that as an organising principle, the ties that bind one nation to another begin to fray: alliances must at the very least be founded on ideas you’re not ashamed to say out loud.

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Jan 162016
 
 January 16, 2016  Posted by at 9:46 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle January 16 2016


DPC Union Station, Worcester, Massachusetts 1906

US Stocks Post Worst 10-Day Start To A Year In History (MW)
What Goes Up, Comes Down Considerably Faster (ZH)
Wall Street Hemorrhages As Oil Tumbles And China Fears Deepen (Reuters)
Weak US Data Deluge Points To Sharply Slower Growth (Reuters)
A Recession Worse Than 2008 Is Coming (Michael Pento)
Looming Recession Shifts Fed Support From Equities To Dollar, Banks (Brodsky)
Global Earnings Downgrades Haven’t Been This Bad in Seven Years (BBG)
Retail Sales in U.S. Decrease to End Weakest Year Since 2009 (BBG)
Wal-Mart to Shut Hundreds of Stores (BBG)
A New Year Of Turmoil For China (WaPo)
Currency War Revival Seen After Yen, Euro Rally (BBG)
One Year On, ‘Franckenschock’ Still Hurts Swiss (CNBC)
America’s Student-Debt Crisis Is Only Getting Worse (MW)
MH-17’s Unnecessary Mystery (Robert Parry)
Toxic Chemicals In Scottish Waters Wiping Out Killer Whales (Scotsman)
Baby Found Dead On Greece Migrant Boat (AP)

History being written.

US Stocks Post Worst 10-Day Start To A Year In History (MW)

U.S. stocks closed sharply lower Friday, locking in the worst 10-day start to a calendar year ever, as oil prices plunged and investors worried about slowing growth in the U.S. During the course of the session, the S&P 500 broke below its Aug. 24 low—which several market strategists said would be tantamount to a major sell signal—to trade at its lowest level since October 2014. The Dow Jones Industrial Average was briefly down as much as 537 points. Oil appeared to be the main driver of concern. Both the U.S. and global benchmarks settled below $30 a barrel, as investors feared that supplies will continue to rise as Iran prepares to enter the market ad Russia continues pumping oil to help support its flagging economy.

”There’s not a lot of people willing to take their foot off the gas and prices are adjusting accordingly,” said David Meier, portfolio manager at Motley Fool Asset Management. “As a result of that you’re seeing fear just creep in.” The Dow slumped 390.97 points, or 2.4%, to 15,988.08, while the S&P 500 slid 44.85 points, or 2.3%, to 1,876.99, led lower by the financial, technology and energy sectors. The Nasdaq Composite tumbled 126.59 points, or 2.7%, to 4,488.42. All Dow components ended in negative territory, as were all 10 sectors on the S&P 500. Selling began in China after official data showed that new bank loans were lower than expected in December as lenders sharply curtailed activity amid worries about slowing growth and bad debt.

In a bid to boost liquidity, China’s central bank said it pumped $15 billion of funds into the market via a medium-term lending facility on Friday. The Shanghai Composite dropped 3.5% and is down 20% from a Dec. 22 high, which by one definition puts it in a bear market. All of this was exacerbated as options stopped trading ahead of their expiration on Saturday. Dave Lutz, head of ETFs at JonesTrading, said because of how the market was positioned, options dealers needed to sell more futures to hedge their positions as stocks fell.

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Yeah, those are real losses. Transitory is no longer a valid term.

What Goes Up, Comes Down Considerably Faster (ZH)

What goes up, comes down considerably faster. For global stocks, Bloomberg notes, the way down ($15 trillion lost in 7 months) has been much easier than the climb up ($30 trillion added in 4 years).

With markets from Asia to Europe entering bear markets this month, stocks worldwide have lost more than $14 trillion, or 20%, in value from a record last June amid worries over global growth and deepening oil declines. The pace of the drop has been so fast that it has already unraveled about half of the rally since a low in 2011. And here is a bonus chart from Bank of America, which looks at the S&P on an equal weighted basis, to avoid such aberrations as the collapsing market breadth phenomenon, also known as FANG. Spot the symmetry.

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“Initially when oil was down, the convenient line was ‘Well, it’s good for the other nine sectors’.. [..] Now, it’s contagion to Main Street and Wall Street.”

Wall Street Hemorrhages As Oil Tumbles And China Fears Deepen (Reuters)

Wall Street bled on Friday, with the S&P 500 sinking to its lowest since October 2014 as oil prices sank below $30 per barrel and fears grew about economic trouble in China. Pain was dealt widely, with the day’s trading volume unusually high and more than a fifth of S&P 500 stocks touching 52-week lows. The major S&P sectors all ended sharply lower. The Russell 2000 small-cap index dropped as much as 3.5% to its lowest since July 2013. The energy sector dropped 2.87% as oil prices fell 6.5%, in part due to fears of slow economic growth in China, where major stock indexes also slumped overnight. The energy sector has lost nearly half its value after hitting record highs in late 2014. “Initially when oil was down, the convenient line was ‘Well, it’s good for the other nine sectors’,” said Jake Dollarhide, CEO of Longbow Asset Management.

“That tune has changed. Now, it’s a contagion to the other nine sectors. It’s a contagion to Main Street and Wall Street.” The technology sector was the day’s biggest loser, sliding 3.15% as weak quarterly results from chipmaker Intel weighed heavily on chip stocks. The S&P 500 has fallen about 12% from its high in May, pushing it into what is generally considered “correction territory.” China’s major stock indexes shed over 3%, raising questions about Beijing’s ability to halt a sell-off that has now reached 18% since the start of the year. The Dow Jones industrial average dropped 2.39% to end at 15,988.08 and the S&P 500 fell 2.16% to 1,880.33. The Nasdaq Composite lost 2.74% to 4,488.42. For the week, the Dow fell 2.2%, the S&P 500 lost 2.2% and the Nasdaq dropped 3.3%. U.S. stock exchanges will be closed on Monday in observance of Martin Luther King Jr. Day, while China’s equity markets will be open.

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And this is news to whom, exactly?

Weak US Data Deluge Points To Sharply Slower Growth (Reuters)

U.S. retail sales fell in December as unseasonably warm weather undercut purchases of winter apparel and cheaper gasoline weighed on receipts at service stations, the latest indication that economic growth braked sharply in the fourth quarter. The growth picture was further darkened by other data on Friday showing industrial production fell in December, dragged down by cutbacks in utilities and mining output. Business inventories were also weak, posting their biggest drop in just over four years in November. Signs the economy has hit a soft patch – together with weak inflation, a stock market sell-off and faltering global growth – raises doubts on whether the Federal Reserve will raise interest rates again in March. The Fed lifted its benchmark overnight interest rate from near zero last month, the first rate hike in nearly a decade.

“The economy got hit from all sides in December. If these weak data keep going into 2016, the outlook is going to grow even dimmer given the recent financial market turbulence and the fears over what a slowdown in China means for the rest of the world,” said Chris Rupkey, chief economist at MUFG Union Bank in New York. The Commerce Department said retail sales slipped 0.1% after increasing 0.4% in November. For all of 2015, retail sales rose just 2.1%, the weakest reading since 2009, after advancing 3.9% in 2014. Retail sales excluding automobiles, gasoline, building materials and food services fell 0.3% after a 0.5% gain the prior month. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Though another report from the University of Michigan showed its consumer sentiment index rose to 93.3 early this month from a reading of 92.6 in December, households were less upbeat about current conditions, reflecting the recent equity market turmoil. Friday’s reports joined weak data on construction, manufacturing and export growth in suggesting that growth slowed abruptly in the final three months of 2015. They could raise fears that the malaise from manufacturing and export-oriented sectors was filtering to the rest of the economy.

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“Now that this debt bubble is unwinding, growth in China is going offline”

A Recession Worse Than 2008 Is Coming (Michael Pento)

The S&P 500 has begun 2016 with its worst performance ever. This has prompted Wall Street apologists to come out in full force and try to explain why the chaos in global currencies and equities will not be a repeat of 2008. Nor do they want investors to believe this environment is commensurate with the dot-com bubble bursting. They claim the current turmoil in China is not even comparable to the 1997 Asian debt crisis. Indeed, the unscrupulous individuals that dominate financial institutions and governments seldom predict a down-tick on Wall Street, so don’t expect them to warn of the impending global recession and market mayhem. But a recession has occurred in the U.S. about every five years, on average, since the end of WWII; and it has been seven years since the last one — we are overdue.

Most importantly, the average market drop during the peak to trough of the last 6 recessions has been 37%. That would take the S&P 500 down to 1,300; if this next recession were to be just of the average variety. But this one will be worse. A major contributor for this imminent recession is the fallout from a faltering Chinese economy. The megalomaniac communist government has increased debt 28 times since the year 2000. Taking that total north of 300% of GDP in a very short period of time for the primary purpose of building a massive unproductive fixed asset bubble that adds little to GDP. Now that this debt bubble is unwinding, growth in China is going offline.

The renminbi’s falling value, cascading Shanghai equity prices (down 40% since June 2014) and plummeting rail freight volumes (down 10.5% year over year), all clearly illustrate that China is not growing at the promulgated 7%, but rather isn’t growing at all. The problem is that China accounted for 34% of global growth, and the nation’s multiplier effect on emerging markets takes that number to over 50%. Therefore, expect more stress on multinational corporate earnings as global growth continues to slow. But the debt debacle in China is not the primary catalyst for the next recession in the United States. It is the fact that equity prices and real estate values can no longer be supported by incomes and GDP. And now that the Federal Reserve’s quantitative easing and zero interest-rate policy have ended, these asset prices are succumbing to the gravitational forces of deflation. The median home price to income ratio is currently 4.1; whereas the average ratio is just 2.6.

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An inevitable development that we’ve long predicted.

Looming Recession Shifts Fed Support From Equities To Dollar, Banks (Brodsky)

Investors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016. The Fed knows exactly what it’s doing. Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more. Clearly, investors see the equity markets as the leading indicator of Fed policy. We disagree.

The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. By raising rates, it increases the exchange value of the U.S. dollar. We have argued that global output growth would have to naturally decline given the extraordinary leverage already built into the global economy, leaving observers to acknowledge in 2016 that recession is near. We have argued further that the Fed is very aware of an imminent global slowdown, and that a logical strategy in such an environment would be for it to import global capital by keeping the dollar un-challenged as a store of value.

We would like to reiterate and refine our view: despite increasing discomfort among equity investors, we think the Fed will remain resolute in its effort to maintain or increase the interest rate differential between U.S. and foreign sovereign rates. The one thing that would change the Fed’s current policy would be if global growth shows signs of increasing – not decreasing. If the world economy were to strengthen then the Fed’s incentive to keep the dollar strong would fade. Investors should consider this meaningful shift in policy when deciding how to allocate across asset classes. As we noted in The Pain Trade last year, falling long-term Treasury yields are the last thing speculative (i.e., levered) investors expect. Following this week’s auctions, it may be time for them to cover shorts.

“Global equity markets are suffering so far in 2016 because the Fed’s primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries”

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Bubbles have limited lifespans.

Global Earnings Downgrades Haven’t Been This Bad in Seven Years (BBG)

Stocks are losing their last line of defense. Amid a selloff that erased more than two years of gains – about $14 trillion – from global stocks now on the brink of a bear market, at least earnings stood as a potential bright spot. Those hopes are fading: analyst profit downgrades outnumbered upgrades by the most since 2009 last week, according to monthly data from a Citigroup index that tracks such changes. Declines in oil and and other commodities, the withdrawal of Federal Reserve support, Europe’s fragile recovery and China slowdown fears are combining to jeopardize one of the few remaining stock catalysts after a global rally of as much as 156% since 2009. And profit growth estimates are still too high for this year and 2017, says Bankhaus Lampe’s Ralf Zimmermann.

“The momentum in the global economy is slowing down to such an extent that people are seriously talking about recession,” said Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “This is not just China, it’s far more widespread. There are few places to hide. Even defensives will feel the pain.” Economists’ projections for worldwide expansion in 2016 have dropped steadily in the past months to just 3.3%, with estimates for China and the U.S. falling since the summer. The biggest bears are getting more bearish – DoubleLine Capital’s Jeffrey Gundlach sees global growth slowing to just 1.9% in 2016, making it the worst year since the aftermath of the financial crisis in 2009.

This earnings season may not provide much reassurance, say strategists at JPMorgan. Analysts project a 6.7% contraction in fourth-quarter profits for Standard & Poor’s 500 Index members. For peers in Europe, estimates call for growth of just 2.7% for all of 2015, about half the pace predicted four months ago. Investors are also running for the door – they pulled about $12 billion from global stock funds last week.

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No, no, no ‘socking away’, they’re paying off debt: “Americans probably preferred to sock away the savings from cheaper fuel..”

Retail Sales in U.S. Decrease to End Weakest Year Since 2009 (BBG)

Sales at U.S. retailers declined in December to wrap the weakest year since 2009, raising concern about the momentum in consumer spending heading into 2016. The 0.1% drop matched the median forecast of 84 economists surveyed by Bloomberg and followed a 0.4% gain in November, Commerce Department figures showed Friday in Washington. For all of 2015, purchases climbed 2.1%, the smallest advance of the current economic expansion.

The slowdown, including electronics stores, clothing merchants and grocers, indicates Americans probably preferred to sock away the savings from cheaper fuel instead of splurging during the holiday season. While hiring has been robust in recent months, faster wage gains remain elusive, one reason household spending may have a tougher time accelerating as the new year gets under way. “There isn’t anything encouraging in this report,” said Thomas Simons at Jefferies in New York. “It’s very disappointing. The labor market is in good shape, which suggests the outlook is probably better than this.”

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“I think they need to exit some markets totally and close a lot more than they are closing.”

Wal-Mart to Shut Hundreds of Stores (BBG)

Wal-Mart plans to shutter 269 stores, the most in at least two decades, as it abandons its experimental small-format Express outlets and looks to streamline the chain. The move by the largest private employer in the U.S. will affect about 10,000 jobs domestically at 154 locations, according to a statement Friday. Overseas, the effort will eliminate 6,000 jobs and includes the closing of 60 money-losing stores in Brazil, a country where Wal-Mart has struggled. The plan will affect less than 1% of its total square footage and revenue, the company said. CEO Doug McMillon took the step after reviewing the chain’s 11,600 stores, evaluating their financial performance and fit with its broader strategy.

The move also marks the end of its pilot Wal-Mart Express program, a bid to create a network of small corner stores to compete with dollar-store chains and drugstores. Wal-Mart will continue its larger-size Neighborhood Markets effort, though 23 poor-performing stores in that chain also will be closed. The company is still expanding its footprint in the U.S., adding 69 new stores and 6,000 jobs in January alone. “We invested considerable time assessing our stores and clubs and don’t take this lightly,” McMillon said. “We are supporting those impacted with extra pay and support, and we will take all appropriate steps to ensure they are treated well.”

Wal-Mart shares fell 1.8% to $61.93 in New York as the broader market tumbled. They have lost 29% of their value over the past 12 months, dragged down by slow growth and profit declines. Some investors may be disappointed that the cuts aren’t deeper, said Brian Yarbrough, an analyst with Edward Jones. “I don’t think this is enough to move the needle,” he said. “I think they need to exit some markets totally and close a lot more than they are closing.”

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“The endgame of Chinese communist rule has now begun.”

A New Year Of Turmoil For China (WaPo)

A year ago, Chinese President Xi Jinping appeared to be living what he called the “Chinese Dream.” China’s economy seemed strong, its military power was growing and Xi was aggressively consolidating domestic political power. But Xi is off to a bad new year. The Chinese economy is slowing sharply, with actual gross domestic product growth last year now estimated by U.S. analysts at several points below the official rate of 6.5%. The Chinese stock market has fallen 15% this year, and the value of its currency has slipped. Capital flight continues, probably at the $1 trillion annual rate estimated for the second half of last year. But China’s economic woes are manageable compared with its domestic political difficulties. Xi’s anti-corruption drive has accelerated into a full-blown purge.

The campaign has rocked the Chinese intelligence service, toppled some senior military commanders and frightened Communist Party leaders around the country. Jittery party officials are lying low, avoiding decisions that might get them in trouble; the resulting paralysis makes other problems worse. “Xi is in an unprecedentedly powerful position. But because he has dismantled the tools of collective leadership that had been built up over decades, he owns this crisis,” said Kurt Campbell, who was the Obama administration’s top Asia expert until 2013. He worries that Xi will “double down” on his nationalistic push for greater power in Asia, which is one of the few themes that can unite the country. “To scale back shows weakness, which Xi can ill afford now,” Campbell said.

Chinese sometimes use historical parables to explain current domestic political issues. The talk recently among some members of the Chinese elite has been a comparison between Xi’s tenure and that of Yongzheng, the emperor who ruled China from 1722 to 1735. Yongzheng waged a harsh campaign against bribery, but he came to be seen by many Chinese as a despot who had gained power illegitimately. “A lot of historical events of that period are repeating in China today, from power conspiracy to corruption, from a deteriorating economy to an external hostility threat,” one Chinese observer said in an email. Xi’s political troubles illustrate the difficulty of trying to reform a one-party system from within.

Much as Mikhail Gorbachev hoped in the 1980s that reforms could revitalize a decaying Soviet Communist Party, Xi began his presidency in 2013 by attacking Chinese party barons who had grown rich and comfortable on the spoils of China’s economic boom. Many of Xi’s rivals were proteges of former President Jiang Zemin, which meant that Xi made some powerful enemies. David Shambaugh, a China scholar at George Washington University, was an outlier when he argued in March that Xi’s reform campaign would backfire. “Despite appearances, China’s political system is badly broken, and nobody knows it better than the Communist Party itself,” he wrote in the Wall Street Journal. “The endgame of Chinese communist rule has now begun.”

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The USD is the only possible winner.

Currency War Revival Seen After Yen, Euro Rally (BBG)

A flare-up in the global currency war is looming, as a resurgent yen and euro threaten to give policy makers in Japan and Europe an incentive to add monetary stimulus. Japan’s currency advanced versus the dollar for the third time in four weeks, while the euro climbed versus most of its peers. Hedge funds lifted bets on yen strength to the highest in more than three years, and pared wagers against the European common currency. The greenback suffered as sentiment cooled for further currency-supportive interest-rate increases in the U.S. amid sustained market volatility and weaker-than-forecast domestic economic data.

A growing divergence in U.S. growth and monetary policy versus the rest of the world has stalled amid signs the American economy can’t wholly escape a slowdown in China and a patchy recovery elsewhere. That’s weighing on the dollar, while stymieing the economic goals of the Bank of Japan and ECB, which benefit when their currencies depreciate. Further monetary easing is on the cards if the yen strengthens beyond 115 per dollar and the euro gains toward $1.15, according to Lee Ferridge, head of macro strategy for North America at State Street Global Markets. “The currency war is still alive and well,” Ferridge said. “If the dollar starts to suffer, then the ECB or the BOJ come back into play.”

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$23 billion lost in 2015. How much worse could not acting have been?

One Year On, ‘Franckenschock’ Still Hurts Swiss (CNBC)

The Swiss National Bank’s (SNB) decision to scrap its cap on the franc against the euro a year ago today shocked markets and sent the country’s currency rocketing 30%. One year on, the franc is still high, 10% up against the euro, and export-focused Switzerland is still feeling the pain. Looking back at the SNB’s shock move James Watson, MD for UK and Europe at ADS Securities, told CNBC “a lot of people were caught in the headlights.” Hashtags such as #Francogeddon and #Franckenschock were soon trending on Twitter. The decision to impose a maximum value on the franc – the cap had been in place at 1.20 franc per euro since 2011 when investors seeking a safe haven amid the turmoil created by the euro zone debt crisis pushed the franc higher – was made to help Swiss exporters compete.

Switzerland’s goods exports grew by 3.5% in 2014, exceeding the record set in 2008. After the cap was lifted, Swiss exports weakened in the first 11 months of 2015, down 3% according to Swiss Customs Office data, although they picked up to growth of 1% in November. Swiss watch sales – the country exports iconic luxury brands such as Hublot and LVMH’s Tag Heuer – remain depressed and recorded their worst November in five years. “I don’t think the SNB really thought about what the effect would be of what they did,” Watson said. The SNB argued that recent falls in the currency meant that maintaining the peg was no longer justifiable. Analysts have also argued the SNB removed the peg for political reasons. The expected introduction of quantitative easing by the ECB at the time also meant that defending the level against an even weaker euro would have required yet more intervention.

Watson believes the central bank took the approach of stimulating the economy, but “maybe they didn’t give it as much thought as they could have”. While it has been painful for exporters, the strong franc has also made imports cheaper. Inflation for 2015 is forecast at –1.1%. Domestic demand looks set to remain robust, according to the bank, which expects growth of approximately 1.5% this year. For 2015, the SNB anticipates growth of just under 1% in Switzerland. Unemployment stood at 4.9% in the third quarter of 2015, according to the ILO, still well below the 6.3% recorded in November in neighbor Germany. The central bank has also indicated that it is prepared to take measures to curb the strength of the franc. The currency, which has weakened in recent months to trade at about 1.09 euros, is still “considerably” overvalued according to the SNB. Vice chairman Fritz Zurbrügg said in speech earlier this week “business as usual is still a long way off”.

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Servitude.

America’s Student-Debt Crisis Is Only Getting Worse (MW)

It’s getting harder and harder to graduate college without taking on student loans. Nearly 70% of bachelor’s degree recipients leave school with debt, according to the White House, and that could have major consequences for the economy. Research indicates that the $1.2 trillion in student loan debt may be preventing Americans,from making the kinds of big purchases that drive economic growth, like house and cars, and reaching other milestones, such as having the ability to save for retirement or move out of mom and dad’s basement. This student debt crisis has become so huge it’s even captured the attention of presidential candidates who are searching for ways to make college more affordable amid an environment of dwindling state funding for higher education and rising college costs. But meanwhile, the approximately 40 million Americans with student debt have to find ways to manage it.

[..] A few numbers to consider (and some that bear repeating):
• The total outstanding student loan debt in the U.S. is $1.2 trillion, that’s the second-highest level of consumer debt behind only mortgages. Most of that is loans held by the federal government.
• About 40 million Americans hold student loans and about 70% of bachelor’s degree recipients graduate with debt.
• The class of 2015 graduated with $35,051 in student debt on average, according to Edvisors, a financial aid website, the most in history.
• One in four student loan borrowers are either in delinquency or default on their student loans, according the Consumer Financial Protection Bureau.

Over the past few decades a variety of factors coalesced to make student debt an almost-universal American experience. For one, state investment in higher education dwindled and colleges made up the difference by raising tuition. At the same time, financial aid hasn’t kept up with tuition growth. In the 1980s, the maximum Pell Grant — the money the federal money gives to low-income students to attend college — covered more than half the cost of a four-year public school, according to The Institute for College Access and Success, a think tank focused on college affordability. Now, it covers less than one-third the cost.

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18 months after MH-17 was shot down, it has become a full-tard propaganda tool for the west. There’s zero respect for the victims and their families.

MH-17’s Unnecessary Mystery (Robert Parry)

[..] despite the flimsiness of the “blame-Russia-for-MH-17” case in July 2014, the Obama administration’s rush to judgment proved critical in whipping up the European press to demonize President Vladimir Putin, who became the Continent’s bete noire accused of killing 298 innocent people. That set the stage for the EU to accede to U.S. demands for economic sanctions on Russia. The MH-17 case was deployed like a classic piece of “strategic communication” or “Stratcom,” mixing propaganda with psychological operations to put an adversary at a disadvantage. Apparently satisfied with that result, the Obama administration stopped talking publicly, leaving the impression of Russian guilt to corrode Moscow’s image in the public mind.

But the intelligence source who spoke to me several times after he received additional briefings about advances in the investigation said that as the U.S. analysts gained more insights into the MH-17 shoot-down from technical and other sources, they came to believe the attack was carried out by a rogue element of the Ukrainian military with ties to a hard-line Ukrainian oligarch. But that conclusion – if made public – would have dealt another blow to America’s already shaky credibility, which has never recovered from the false Iraq-WMD claims in 2002-03. A reversal also would embarrass Kerry, other senior U.S. officials and major Western news outlets, which had bought into the Russia-did-it narrative. Plus, the EU might reconsider its decision to sanction Russia, a key part of U.S. policy in support of the Kiev regime.

Still, as the MH-17 mystery dragged on into 2015, I inquired about the possibility of an update from the DNI’s office. But a spokeswoman told me that no update would be provided because the U.S. government did not want to say anything to prejudice the ongoing investigation. In response, I noted that Kerry and the DNI had already done that by immediately pointing the inquiry in the direction of blaming Russia and the rebels. But there was another purpose in staying mum. By refusing to say anything to contradict the initial rush to judgment, the Obama administration could let Western mainstream journalists and “citizen investigators” on the Internet keep Russia pinned down with more speculation about its guilt in the MH-17 shoot-down. So, silence became the better part of candor. After all, pretty much everyone in the West had judged Russia and Putin guilty. So, why shake that up?

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PCBs ware phased out decades ago.

Toxic Chemicals In Scottish Waters Wiping Out Killer Whales (Scotsman)

Killer whales could vanish from Scottish waters as a result of the lingering effects of toxic chemicals banned more than 30 years ago, according to new international research. Scientists say European seas are a global hotspot of contamination from man-made polychlorinated biphenyls (PCBs), which weaken the immune systems of whales and dolphins and seriously affect their reproduction. The seas around the Hebrides are home to the UK’s only known resident killer whales, known as the West Coast Community. Only eight are left in the pod, after a female died earlier this month. But experts at the international conservation charity, the Zoological Society of London (ZSL), say the group will go extinct in the future as no young have been recorded in more than 20 years.

And other killer whale and dolphin populations around Europe face the same fate. The researchers suggest a failure to breed could be down to high levels of man-made PCBs building up in the animals body fat. “The long life-expectancy and position as apex or top marine predators make species like killer whales and bottlenose dolphins particularly vulnerable to the accumulation of PCBs through marine food webs”, said Dr Paul Jepson, a wildlife vet at ZSL and lead author of the study. “Few coastal orca populations remain in western European waters. Those that do persist are very small and suffering low or zero rates of reproduction. The risk of extinction therefore appears high for these discrete and highly contaminated populations.”

“Without further measures, these chemicals will continue to suppress populations of orcas and other dolphin species for many decades to come.” Dr Jepson’s team will analyse samples taken from the West Coast killer whale known as Lulu, who died recently after entanglement in fishing gear. “This Scottish population feeds on seals, so PCB exposure through diet will be much higher than for killer whales that only eat fish”, he said. “I think the group will, very regrettably, become extinct. Like any animal population, once you stop reproducing you will eventually die out.” But killer whales are very long-lived animals -at least one adult female has lived to over 100 years old in the wild- so local extinction can still take a long time to play out.

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Why the EU must be disbanded.

Baby Found Dead On Greece Migrant Boat (AP)

Greek authorities say a baby has been found dead after a boat full of migrants reached the small eastern Aegean Sea island of Farmakonissi, while 63 people were picked up alive. The incident raises to four the number of deaths that Greek authorities recorded Friday, as migrants continue to make the short but dangerous sea crossing from nearby Turkey to Greeces Aegean islands despite the winter weather. Earlier, three children drowned and 20 people were rescued when another boat carrying migrants foundered off the islet of Agathonissi.

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Jan 142016
 
 January 14, 2016  Posted by at 9:34 am Finance Tagged with: , , , , , , , , , , ,  3 Responses »


DPC Oyster luggers along Mississippi, New Orleans 1906

Asia Stocks Extend Losses, Japan’s Nikkei Falls 3.67% (CNBC)
Oil and US Stocks Tumble Over Fears For Global Economy (Guardian)
China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)
Q4 Will Be Worst US Earnings Season Since Third Quarter Of 2009 (ZH)
The Real Price of Oil Is Far Lower Than You Realize (BBG)
Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners (BBG)
Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes (ZH)
Currency Swings Sap US Corporate Profits by Most in Four Years (BBG)
African Exports To China Fell By 40% In 2015 (BBC)
Money Leaving Emerging Markets Faster Than Ever Amid China Slump (BBG)
China Bond Yield Sinks To Record Low As Central Bank Injects $24 Billion (BBG)
China’s Better-Than-Expected Trade Numbers Raise Questions (WSJ)
Surging China-Hong Kong Trade Raises Doubts Over Recovery (BBG)
The Quiet Side of China’s Market Intervention (WSJ)
As China Dumps Treasuries, Other Buyers Expected To Step In (BBG)
Reporting Rule Adds $3 Trillion Of Leases To Balance Sheets Globally (FT)
EU Scientists In Bitter Row Over Safety Of Monsanto’s Round-Up (Guardian)
Thousands Of Farmer Suicides Prompt India Crop Insurance Scheme (Guardian)
Greece Said To Propose Return Trips For Illegal Migrants (AP)
Tighter Border Checks Leave Migrants Trapped In Greece (AP)
Refugee Influx To Greece Continues Unabated Through Winter (Reuters)
Europe Sees No Let Up in Refugee Crisis as January Arrivals Soar (BBG)

“In Japan, core machinery orders in November fell 14.4%..”

Asia Stocks Extend Losses, Japan’s Nikkei Falls 3.67% (CNBC)

[..] major Asian stock markets continued their downward slide, following a massive sell-off on Wall Street overnight, pressured by concerns over a global economic slowdown and low oil prices. After a late sell-off Wednesday afternoon, the Chinese markets opened in negative territory before trimming losses, with the Shanghai composite down some 1.05%, while the Shenzhen composite was flat. At market open, Shanghai was down 2.73% and Shenzhen saw losses of 3.37%. Hong Kong’s Hang Seng index was down 1.51%. Offering some sign of stability in a generally volatile market, the People’s Bank of China (PBOC) set Thursday’s yuan mid-point rate at 6.5616, compared with Wednesday’s fix of 6.5630. The dollar-yuan pair was nearly flat at 6.5777.

Japan’s Nikkei 225 erased all of Wednesday’s 2.88% gain and plunged 3.95%, weighed by commodities and machinery sectors, which were all down between 3 and 4%. Earlier, it fell as low as 4% before paring back some of the losses. South Korea’s Kospi traded down 1.45%. Down Under, the ASX 200 dropped 1.61%, with energy and financials sectors sharply down. All sectors were in the red except for gold, which saw an uptick of 3.71%. In Japan, core machinery orders in November fell 14.4% from the previous month, according to official data, down for the first time in three months. The data is regarded as an indicator of capital spending and fell more than market expectations for a 7.9% decline.

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Or is it just price discovery?

Oil and US Stocks Tumble Over Fears For Global Economy (Guardian)

US stocks fell heavily on Wednesday, with the Standard & Poor’s 500 falling 2.5% to take the index below 1,900 points for the first time since September, due to growing concerns about the falling oil price, which dipped below $30 a barrel for the first time in nearly 12 years. The S&P 500, which closed at 1,890 points, suffered its worst day since September and has fallen by 10% since its November peak taking it into “correction” territory, something that has not happened since August 2014. The Dow Jones industrial average dropped by 364 points, or 2.2%, to 16,151, and the Nasdaq composite dropped 159 points, or 3.4%, to 4,526. This deepened the New York stock exchange’s already worst start to a year on record.

Wednesday’s stock market declines were triggered by new figures showing US gasoline stockpiles had increased to record high, which caused Brent crude prices to fall as low as $29.96, their lowest level since April 2004, before settling at $30.31, a 1.8% fall. The oil price has fallen by 73% since a peak of $115 reached in the summer of 2014. Industry data showed that US gasoline inventories soared by 8.4m barrels and stocks of diesel and heating oil increased by more than 6m barrels – confirming the forecasts of many analysts that a huge oversupply of oil could keep prices low during most of 2016. Analysts said that growing fears of a weakening outlook for the global economy, made worse by falling oil prices, was behind the steep falls. Some oil analysts this week predicted that the price could fall as low as $10.

In recent days several analysts have warned that the global economy could suffer a repeat of the 2008 crash if the knock-on effects of a contraction in Chinese output pushes down commodity prices further and sparks panic selling on stock and bond markets. [..] Earlier in the day China’s stock market fell more than 2% after officials played down the significance of better-than-expected trade figures for December, saying exports could sink further before they find a floor.

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Looms?!

China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)

Chinese stocks headed for a bear market while government bond yields fell to a record as central bank cash injections and a stable yuan fixing failed to shore up confidence in the world’s second-largest economy. The Shanghai Composite Index sank as much as 2.8%, falling more than 20% from its December high and sinking below its closing low during the depths of a $5 trillion rout in August. Investors poured money into government bonds after the People’s Bank of China added the most cash through open-market operations since February 2015, sending the yield on 10-year notes down to 2.7%. While the central bank kept its yuan reference rate little changed for a fifth day, the currency dropped 0.5% in offshore trading and Hong Kong’s dollar declined to the weakest since March 2015.

The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990 “You can’t really find buyers in this environment,” said Ken Peng, a strategist at Citigroup Inc. in Hong Kong. “It’s a very, very fragile status quo China is trying to maintain.” The government faces a dilemma with the yuan, according to Samuel Chan at GF International.

On one hand, a weakening exchange rate would help boost exports and is arguably justified given declines in other emerging-market currencies against the dollar in recent months. The downside is that a depreciating yuan encourages capital outflows and makes it harder to keep domestic interest rates low. The monetary authority “doesn’t want the yuan to depreciate fast because it will push funds to leave China very quickly,” Chan said. The country saw capital outflows for 10 straight months through November, totaling $843 billion, according to an estimate from Bloomberg Intelligence. Foreign-exchange reserves, meanwhile, sank by a record $513 billion last year to $3.33 trillion, according to the central bank.

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Still sinking after all these years.

Q4 Will Be Worst US Earnings Season Since Third Quarter Of 2009 (ZH)

Couple of things: first of all, any discussion whether the US market is in a profit (or revenue) recession must stop: the US entered a profit recession in Q3 when it posted two consecutive quarters of earnings declines. This was one quarter after the top-line of the S&P dropped for two consecutive quarters, and as of this moment the US is poised to have 4 consecutive quarters with declining revenues as of the end of 2015. Furthermore, as we showed on September 21, when Q4 was still expected to be a far stronger quarter than it ended up being, in the very best case, the US would go for 7 whole quarters without absolute earnings growth (and even longer without top-line growth).

Then, as always happens, optimism about the current quarter was crushed as we entered the current quarter, and whereas on September 30, 2015, Q4 earnings growth was supposed to be just a fraction negative, or -0.6%, as we have crossed the quarter, the full abyss has revealed itself and according to the latest Factset consensus data as of January 8, the current Q4 EPS drop is now expected to be a whopping -5%. And just to shut up the “it’s all energy” crowd, of the 10 industries in the S&P, only 4 are now expected to post earnings growth and even their growth is rapidly sliding and could well go negative over the next few weeks. It gets even worse. According to Bloomberg, on a share-weighted basis, S&P 500 profits are expected to have dropped by 7.2% in 4Q, while revenues are expected to fall by 3.1%.

This would represent the worst U.S. earnings season since 3Q 2009, and a third straight quarter of negative profit growth. It’s no longer simply a recession: as noted above, the Q4 EPS drop follows declines of 3.1% in Q3 and 1.7% in Q2. it is… whatever comes next. As Bloomberg adds, the main driving forces behind drop in U.S. earnings are the rise in the dollar index (thanks Fed) and the drop in average WTI oil prices. However, since more than half of all industries are about to see an EPS decline, one can’t blame either one or the other. So while we know what to expect from Q4, a better question may be what is coming next, and according to the penguin brigade, this time will be different, and the hockey stick which was expected originally to take place in Q4 2015 and then Q1 2016 has been pushed back to Q4 2016, when by some miracle, EPS is now expected to grow by just about 15%.

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WTI/Brent prices are just a story.

The Real Price of Oil Is Far Lower Than You Realize (BBG)

While oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is even deeper. West Texas Intermediate futures, the U.S. benchmark, sank below $30 a barrel on Tuesday for the first time since 2003. Actual barrels of Saudi Arabian crude shipped to Asia are even cheaper, at $26 – the lowest since early 2002 once inflation is factored in and near levels seen before the turn of the millennium. Slumping oil prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said. The nation’s economic expansion faltered last year to the slowest pace in a quarter of a century. “You see a big destruction in the income of the oil and commodity producers,” Turner said. “That is having a major effect on their expenditure across the world.” The benefit for consumers from historically low oil prices is being blunted by changes in fuel taxation and a reduction in subsidies, according to Paul Horsnell at Standard Chartered in London. “But it certainly shows that current prices are very low by any description,” he said.

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“..$8.35 on Tuesday, down from as much as $80 less than two years ago.”

Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners (BBG)

Think oil in the $20s is bad? In Canada they’d be happy to sell it for $10. Canadian oil sands producers are feeling pain as bitumen – the thick, sticky substance at the center of the heated debate over TransCanada’s Keystone XL pipeline – hit a low of $8.35 on Tuesday, down from as much as $80 less than two years ago. Producers are all losing money at current prices, First Energy Capital’s Martin King said Tuesday at a conference in Calgary. Which doesn’t mean they’ll stop. Since most of the spending for bitumen extraction comes upfront, and thus is a sunk cost, production will continue and grow. Canada will need more pipeline capacity to transport bitumen out of Alberta by 2019, King said.

Bitumen is another victim of a global glut of petroleum, which has sunk U.S. benchmark prices into the $20s from more than $100 only 18 months ago. It’s cheaper than most other types of crude, because it has to be diluted with more-expensive lighter petroleum, and then transported thousands of miles from Alberta to refineries in the U.S. For much of the past decade, oil companies fought environmentalists to get the pipeline approved so they could blend more of the tar-like petroleum and feed it to an oil-starved world. TransCanada is mounting a $15 billion appeal against President Barack Obama’s rejection of Keystone XL crossing into the U.S. – while simultaneously planning natural gas pipelines from Alberta to Canada’s east coast to carry diluted bitumen. Environmentalists are hoping oil economics finish off what their pipeline protests started.

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Inventories are overflowing. How predictable.

Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes (ZH)

If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up ‘cheap’ oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China’s record crude imports have ceased). In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners. China’s crude imports last month was equivalent to 7.85 million barrels a day, 6% higher than the previous record of 7.4 million in April, Bloomberg calculations show.

China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher. But given the crash in tanker rates – and implicitly demand – that “boom” appears to be over.

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What neighbors can the US beggar?

Currency Swings Sap US Corporate Profits by Most in Four Years (BBG)

Volatility in the $5.3-trillion-a-day foreign exchange market is dragging down U.S. corporate earnings by the most since 2011, according to a report from FiREapps. Currency fluctuations eroded earnings for the average North American company by 12 cents per share in the third quarter, according to the Scottsdale, Arizona-based firm, which advises businesses and makes software to help reduce the effect of foreign-exchange swings. That’s the most in data going back at least four years, and is up from an average 3 cents per share in the second quarter. “This is the worst I’ve seen it,” FiREapps chief executive officer Wolfgang Koestersaid in a telephone interview. “Investors and analysts are taking a very close look at corporate results impacted by foreign exchange and recognize how material they are.”

A JPMorgan measure of currency volatility averaged 10.1 % during the third quarter, up from 6.3 % 12 months earlier. Last year, some of the biggest price swings came from unscheduled events, such as China’s August devaluation of the yuan, Switzerland’s decision to scrap its currency cap and plummeting commodity prices. Companies in North America lost at least $19.3 billion to foreign-exchange headwinds in the third quarter of 2015, FiREapps data showed. The losses grew by about 14 % from the second quarter. Of the 850 North American corporations that Fireapps analyzed, 353 cited the negative impact of currencies in their earnings, more than double the previous quarter. “That is the largest number of companies talking about currency impact that we’ve ever seen,” Koester said.

China’s yuan is garnering more attention from corporations amid concern that growth in the world’s second-largest economy is slowing, according to FiREapps. Yet North American firms remain most concerned about the effects of the euro, Brazilian real and Canadian dollar on their results. The currencies have fallen 8.3 %, 34 % and 16 % against the greenback over the past 12 months. The stronger U.S. dollar means higher, less-competitive prices for U.S. businesses seeking to sell their products overseas. Companies also take a hit when they account for revenue denominated in weaker overseas currencies, unless they hedged their exposure.

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That is a very big number.

African Exports To China Fell By 40% In 2015 (BBC)

African exports to China fell by almost 40% in 2015, China’s customs office says. China is Africa’s biggest single trading partner and its demand for African commodities has fuelled the continent’s recent economic growth. The decline in exports reflects the recent slowdown in China’s economy. This has, in turn, put African economies under pressure and in part accounts for the falling value of many African currencies. Presenting China’s trade figures for last year, customs spokesman Huang Songping told journalists that African exports to China totalled $67bn (£46.3bn), which was 38% down on the figure for 2014.

BBC Africa Business Report editor Matthew Davies says that as China’s economy heads for what many analysts say will be a hard landing, its need for African oil, metals and minerals has fallen rapidly, taking commodity prices lower. There is also less money coming from China to Africa, with direct investment from China into the continent falling by 40% in the first six months of 2015, he says. Meanwhile, Africa’s demand for Chinese goods is rising. In 2015 China sent $102bn worth of goods to the continent, an increase of 3.6%. Last year, South Africa hosted a China-Africa summit during which President Xi Jinping announced $60bn of aid and loans, symbolising the country’s growing role on the continent.

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And for now that’s still largely due to China.

Money Leaving Emerging Markets Faster Than Ever Amid China Slump (BBG)

Investors pulled more money from emerging markets in the three months through December than ever before as investors dumped riskier assets in China amid concern the country’s currency will weaken further, according to Capital Economics. Capital outflows from developing nations reached $270 billion last quarter, exceeding withdrawals during the financial crisis of 2008, led by an exodus from China as investors pulled a record $159 billion from the country just in December, Capital Economics’ economist William Jackson said in a report. Excluding outflows from the world’s second-largest economy, emerging markets would have seen inflows in the quarter, he said.

“This appears to reflect a growing skepticism in the markets that the People’s Bank can keep the renminbi steady,” Jackson said in the note, which was published Wednesday. “Given the fresh sell-off in EM financial markets and growing concerns about the level of the renminbi, it seems highly likely that total capital outflows will have increased” in January, he said. Investor skepticism increased last year as a surprise devaluation of China’s yuan roiled global markets and triggered a $5 trillion rout in the nation’s equity markets, casting doubt on the government’s ability to contain the selloff and support growth.

Chinese leaders have since then stepped up efforts to restrict capital outflows and prop up share prices despite pledges to give markets greater sway and allow money to flow freely across the nation’s borders within five years. The yuan traded in the mainland market declined 4.4% in 2015, the most since 1994. Outflows from emerging markets rose to a record $113 billion in December, Capital Economics said. Over 2015, investors pulled $770 billion from developing nations, compared with $230 billion a year earlier.

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“For local investors, there’s nothing to buy..”

China Bond Yield Sinks To Record Low As Central Bank Injects $24 Billion (BBG)

China’s government bonds advanced, pushing the 10-year yield to a record low, as the central bank stepped up cash injections and volatile stock and currency markets drove demand for safety. The offshore yuan traded in Hong Kong declined for the first time in six days on speculation a narrowing gap with the Shanghai rate will dissuade the People’s Bank of China from stepping into the market, while Chinese equities slid below the lowest levels of last year’s market selloff. “For local investors, there’s nothing to buy,” said Li Liuyang at Bank of Tokyo-Mitsubishi. “Equities are not performing well, so bonds become the natural investment target. The PBOC increased reverse repo offerings partly because it may be taking some preemptive measures before next month’s Lunar New Year holidays.”

The yield on debt due October 2025 fell as much as three basis points to 2.70%, the least for a benchmark 10-year note in ChinaBond data going back to September 2007. The previous low was 2.72% in January 2009, during the global financial crisis. The PBOC conducted 160 billion yuan ($24 billion) of seven-day reverse-repo agreements in its open-market operations on Thursday, up from 70 billion yuan a week ago. That’s the biggest one-day reverse repo offerings since February 2015, data compiled by Bloomberg show. The PBOC injected a net 40 billion yuan this week, taking its total additions to 230 billion yuan so far this month. “The PBOC wants to keep liquidity abundant onshore to bolster the economy,” said Nathan Chow at DBS Group. “It’s also trying to calm the currency market as the yuan declined significantly last week and caused high volatility. But in the long run, the yuan will depreciate as the fundamentals are still weak.”

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Fake invoices. It’s as simple as that.

China’s Better-Than-Expected Trade Numbers Raise Questions (WSJ)

China’s better-than-expected trade figures in December have sparked questions over whether trade flows have been inflated by investors evading capital controls and the extent of incentives being offered by government agencies to prop up exports. China reported Wednesday that exports in December declined 1.4% year on year. This was much better than the 8% drop expected by economists in a WSJ survey and compared with a 6.8% decline in November, allowing Beijing to end the trading year on a stronger note. Imports fell by 7.6% last month, better than the expected 11% decline, compared with an 8.7% drop in November. The December trade figures also were helped by favorable comparisons with year-earlier figures, economists said.

Of particular note was a 64.5% jump in China’s imports from Hong Kong, the strongest pace in three years, analysts said. This compared with a 6.2% decline for the January-November period. ”It really looks like capital flight,” said Oliver Barron with investment bank North Square Blue Oak. “This has artificially inflated the total import data.” China in recent months has struggled to adjust to massive capital outflows as Chinese investors seek better returns overseas. China saw its foreign exchange hoard drop 13.3% in 2015, or by $500 billion, to $3.3 trillion by the end of December. Under Beijing’s strict capital controls, consumers are only allowed to purchase $50,000 worth of U.S. dollars each calendar year. But manipulated foreign trade deals offer a way around tightening restrictions, say economists.

In an effort to stem the outflow, Beijing’s foreign exchange regulator announced stricter supervision starting January 1 to screen suspicious individual accounts and crack down on organized capital flight, according to an online statement. Bank customers also have reported more difficulty recently exchanging yuan into dollars, with some forced to wait four days to complete a transaction that normally takes one. And China has cracked down on illegal foreign-exchange networks, including a bust announced in November in Jinhua, a city of five million people in eastern Zhejiang province, allegedly involving eight gangs operating from over two dozen “criminal dens” that reportedly handled up to $64 billion in unauthorized transactions, according to state media and a detailed police report.

The official People’s Daily newspaper said 69 people had been criminally charged and another 203 people had been given administrative sanctions. ”Regulators have been trying really hard to close the loopholes,” said Steve Wang with Reorient Financial, adding that the market seems skeptical of Wednesday’s trade figures. The Shanghai Composite Index fell 2.4%. “I don’t think Hong Kong has been buying or selling any more from China. The December data is a huge question mark,” he added. An example of how a Chinese company might move capital abroad using trade deals would be to import 1 million widgets at $2 apiece from a Hong Kong partner or subsidiary company, paying the $2 million, analysts said. It then exports the same widgets at $1 apiece, receiving $1 million from the Hong Kong entity. The goods are back where they started, but $1 million has now moved offshore.

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“..the surprise gains may harken back to past instances of phony invoicing and other rules skirted to escape currency restrictions.”

Surging China-Hong Kong Trade Raises Doubts Over Recovery (BBG)

China exports to Hong Kong rose 10.8% from a year earlier for the biggest gain in more than a year, making the city the biggest destination for shipments last month and spurring renewed skepticism over data reliability and the broader recovery in the nation’s outbound trade. Exports to Hong Kong rose to $46 billion last month, according to General Administration of Customs data released Wednesday. That was the highest value in almost three years and the biggest amount for any December period in the last 10 years, customs data show. Imports from Hong Kong surged 65%, the most in three years, to $2.16 billion. Economists said the surprise gains may harken back to past instances of phony invoicing and other rules skirted to escape currency restrictions.

China’s government said in 2013 some data on trade with Hong Kong were inflated by arbitrage transactions intended to avoid rules, an acknowledgment that export and import figures were overstated. The increase in exports to Hong Kong and China’s imports from the city probably indicate “fake invoicing,” said Iris Pang at Natixis in Hong Kong. Invoicing of China trade should be larger in December because of the wider gap between the onshore yuan and the offshore yuan traded in Hong Kong, she said. China’s exports to the Special Administrative Region of more than 7 million people eclipsed the $35 billion tallies last month for both the U.S. and the EU, the data show. Exports to Brazil, Canada, Malaysia, Russia all dropped more than 10%.

The imports gain “points to potential renewed fake trade activities,” said Larry Hu at Macquarie. When the yuan rose in 2013, exports to Hong Kong were inflated artificially, he said, and “now it’s just the opposite.” China’s total exports rose 2.3% in yuan terms from a year earlier, the customs said, after a 3.7% drop in November. Imports extended declines to 14 months. The recovery in exports in December may prove to be a temporary one due to a seasonal increase at the end of the year, and it doesn’t represent a trend, a spokesman for customs said after the Wednesday briefing. A weak yuan will help exports, but that effect will gradually fade, the spokesman told reporters in Beijing. Morgan Stanley economists led by Zhang Yin in Hong Kong also said in a note Wednesday that the higher-than-expected trade growth may have been affected by currency arbitrage. Overall external demand remained weak, as shown by anemic export data reported by South Korea and Taiwan, he said.

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State firms buying/holding lousy paper.

The Quiet Side of China’s Market Intervention (WSJ)

As Chinese markets tanked last week, China Inc. appeared to be rallying to their support. At least 75 Chinese companies issued statements during the past week and a half, saying their biggest shareholders would be holding on to their stakes in order to protect investor interests. Officially, the companies were acting spontaneously. But privately, people close to Chinese regulators as well as some of the companies themselves said they were prompted to release the statements by exchange officials, who had called and asked them to issue expressions of support. In many cases, the statements contained similar or nearly identical language. The behind-the-scenes activity reflects the secretive, unofficial side to Chinese regulators’ attempts to bolster the country’s sagging stock markets.

The regulators’ varied arsenal includes tactics such as phone calls from exchange officials to big holders of shares, urging them not to sell, as well as pumping hundreds of billions of yuan into the markets through government-affiliated funds. The hand of the regulators was most apparent over the summer, when a 43% plunge in the Shanghai Composite Index over slightly more than two months was accompanied by dozens of declarations by brokerages and fund managers abjuring stock sales, as well as huge purchases of shares in bellwether Chinese stocks by a shadowy group of firms known as the “national team.” Brokers, company executives and people close to Chinese regulators say tactics have become more subtle during the current market downturn: The national team hasn’t been making the high-profile buys of half a year ago, and regulators have been less overt in their requests for cooperation.

An executive at one environmental technology firm listed on the Shenzhen exchange said that in July, the bourse sent a letter demanding the company release a statement saying its controlling shareholders wouldn’t unload stock. Last week, the exchange was more low key, he said, phoning up and urging the company to release another statement to set an example for other firms. But the flurry of companies declaring their support for the market in recent days shows that Chinese regulators still haven’t given up on behind-the-scenes efforts to guide the direction of stocks. “We issued the statement because the [Shenzhen] exchange encouraged listed firms to maintain shareholdings,” said an executive at LED device-maker Shenzhen Jufei who requested anonymity. “You can think of this as a concerted effort by listed firms to voluntarily stabilize the market.”

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The popularity of T-Bills is guaranteed.

As China Dumps Treasuries, Other Buyers Expected To Step In (BBG)

It might be easy to conclude China’s unprecedented retreat from Treasuries is bad news for America. After all, as the biggest overseas creditor to the U.S., China has bankrolled hundreds of billions of dollars in deficit spending, particularly since the financial crisis. And that voracious appetite for Treasuries in recent years has been key in keeping America’s funding costs in check, even as the market for U.S. government debt ballooned to a record $13.2 trillion. Yet for many debt investors, there’s little reason for alarm. While there’s no denying that China’s selling may dent demand for Treasuries in the near term, the fact the nation is raising hundreds of billions of dollars to support its flagging economy and stem capital flight is raising deeper questions about whether global growth itself is at risk.

That’s likely to bolster the haven appeal of U.S. debt over the long haul, State Street Corp. and BlackRock Inc. say. Any let up in Chinese demand is being met with record buying by domestic mutual funds, which has helped to contain U.S. borrowing costs. “You have China running down reserves and Treasuries are a big portion of reserves, but even with that we still think the weight of support” will boost demand for U.S. debt, said Lee Ferridge, the head of macro strategy for North America at State Street, which oversees $2.4 trillion. The question is “if China slows, where does growth come from. That’s what’s been worrying a lot of people coming into 2016.”

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And then the TBTFs will need rescue again?!

Reporting Rule Adds $3 Trillion Of Leases To Balance Sheets Globally (FT)

Companies around the world will be forced to add close to $3tn of leasing commitments to their balance sheets under new rules from US and international regulators — significantly increasing the debt that must be reported by airlines and retailers. A new financial reporting standard — the culmination of decades of debate over “off-balance sheet” financing — will affect more than one in two public companies globally. Worst hit will be retail, hotel and airline companies that lease property and planes over long periods but, under current accounting standards, do not have to include them in yearly reports of assets and liabilities. In these sectors, future payments of off-balance sheet leases equate to almost 30% of total assets on average, according to the International Accounting Standards Board, which collaborated with the US Financial Accounting Standards Board on the new rule.

Hans Hoogervorst, IASB chairman, said: “The new Standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off-balance-sheet lease financing is no longer lurking in the shadows”. As a result of the accounting change, net debt reported by UK supermarket chain Tesco would increase from £8.6bn at the end of August to £17.6bn, estimated Richard Clarke, an analyst from Bernstein. However, while the new standard would make Tesco look more indebted, Mr Clarke added that the assets associated with the leases would also come on to the company’s balance sheet, so “the net effect would be neutral.” Investors warned that the new standards could affect some groups’ banking covenants and debt-based agreements with lenders, but said they would make it easier to compare companies that uses leases with those that prefer to borrow and buy.

Vincent Papa, director financial reporting policy at the Chartered Financial Analysts Institute, which has been pushing for these changes since the 1970s, said: “Putting obligations on balance sheets enables better risk assessment. It is a big improvement to financial reporting.” For some airlines, the value of off-balance- sheet leases can be more than the value of assets on the balance sheets, the IASB noted. It also pointed out that a number of retailers that had gone into liquidation had lease commitments that were many times their reported balance sheet debt. [..] In 2005, the SEC calculated that US companies had about $1.25 trillion of leasing commitments that were not included in assets or liabilities on balance sheets. Six years later, the Equipment Leasing and Finance Foundation in the US said that “Capitalising operating leases will add an estimated $2 trillion and 11% more reported debt to the balance sheets of US-based corporations…and could result in a permanent reduction of $96bn in equity of US companies. ”

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“..used so widely that its residues are commonly found in British bread.”

EU Scientists In Bitter Row Over Safety Of Monsanto’s Round-Up (Guardian)

A bitter row has broken out over the allegedly carcinogenic qualities of a widely-used weedkiller, ahead of an EU decision on whether to continue to allow its use. At issue is a call by the European Food and Safety Authority (Efsa) to disregard an opinion by the WHO’s International Agency for Research on Cancer (IARC) on the health effects of Glyphosate. Glyphosate was developed by Monsanto for use with its GM crops. The herbicide makes the company $5bn (£3.5bn) a year, and is used so widely that its residues are commonly found in British bread. But while an analysis by the IARC last year found it is probably carcinogenic to humans, Efsa decided last month that it probably was not. That paves the way for the herbicide to be relicensed by an EU working group later this year, potentially in the next few weeks.

Within days of Efsa’s announcement, 96 prominent scientists – including most of the IARC team – had fired off a letter to the EU health commissioner, Vytenis Andriukaitis, warning that the basis of Efsa’s research was “not credible because it is not supported by the evidence”. “Accordingly, we urge you and the European commission to disregard the flawed Efsa finding,” the scientists said. In a reply last month, which the Guardian has seen, Andriukaitis told the scientists that he found their diverging opinions on glyphosate “disconcerting”. But the European Parliament and EU ministers had agreed to give Efsa a pivotal role in assessing pesticide substances, he noted. “These are legal obligations,” the commissioner said. “I am not able to accommodate your request to simply disregard the Efsa conclusion.”

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What’s Monsanto’s role in this?

Thousands Of Farmer Suicides Prompt India Crop Insurance Scheme (Guardian)

India’s government has approved a $1.3bn insurance scheme for farmers to protect against crop failures, saying it was intended to put a halt to a spate of suicides. Two successive years of drought have battered the country’s already struggling rural heartland, with farmer suicides in rural areas regularly hitting the headlines. More than 300,000 farmers have killed themselves in India since 1995. Under the new scheme, farmers will pay premiums of as little as 1.5% of the value of their crops, allowing them to reclaim their full value in case of natural damage, the government said. “The scheme will be a protection shield against instances of farmer suicides because of crop failures or damage because of nature,” home minister Rajnath Singh said on Wednesday after the cabinet approved the scheme.

The Prime Minister Crop Insurance Scheme is also an attempt by Narendra Modi’s government to woo the country’s powerful farming community after being beaten in two recent state elections. “This scheme not just retains the best features of past policies but also rectifies all previous shortcomings… This is a historic day,” Modi said in a tweet. Previous crop insurance schemes have been criticised by the agricultural community as being too complex or for having caps that prevented them from recouping the full commercial value in the case of damage. Take-up of existing schemes by farmers is as low as 23%, the agriculture minister Radha Mohan Singh said, adding that he hoped to increase coverage to 50%. The heavily subsidised scheme will come into effect in April, a major crop-sowing season.

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Priorities.

Greece Said To Propose Return Trips For Illegal Migrants (AP)

A senior Greek official has said the government will ask Europe’s border protection agency Frontex to help set up a sea deportation route to send migrants who reach the country illegally back to Turkey. The official told AP the plan would involve chartering boats on Lesvos and other Greek islands to send back migrants who were not considered eligible for asylum in the EU. The official spoke on condition of anonymity because Athens hasn’t yet formally raised the issue with other European governments. More than 850,000 migrants and refugees reached Greece in 2015 on their route through the Balkans to central Europe. But the EU is seeking to toughen and better organize procedures for asylum placements, while Balkan countries outside the EU have also imposed stricter transit policies.

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NIMBY.

Tighter Border Checks Leave Migrants Trapped In Greece (AP)

As twilight falls outside the Hellenikon shelter – a former Olympic field hockey venue currently housing about 280 people – Iranian men play volleyball, a red line on the ground serving as a notional net. Inside, migrants are coming to terms with their bleak future. “I can’t go back to Somalia,” said English teacher Ali Heydar Aki, who hoped to settle in Europe and then bring his family. “I have sold half my house” to fund the trip. While it’s unclear exactly how many are stuck in Greece, a comparison of arrivals there and in FYROM since late November leaves about 38,000 people unaccounted for. Greek immigration minister Ioannis Mouzalas’ best guess is “a few thousand.” “But (that’s) a calculation based on experience, not something else,” he said.

Syed Mohammad Jamil, head of the Pakistani-Hellenic Cultural Society, says about 4,000 Pakistanis could be stuck in Greece, mostly still on the islands, and about as many Bangladeshis. “Every day we get … phone calls from people in tears asking for help,” he said. “We can’t help – send them where? Germany, Spain, Italy, England? We can’t.” All now face two legal options: To seek asylum in Greece – which has 25% unemployment and a crumbling welfare system – or volunteer for repatriation. Greek authorities have recorded an increase in both since FYROM tightened controls. Karim Benazza, a Moroccan hotel worker in his 20s, has signed up to go home on Jan. 18.

“This is all I do now, smoke and smoke, but no money, no food,” he said, lighting a cigarette outside the International Organization for Migration building. “There is nothing for us in Greece, and the Macedonian border is closed.” Daniel Esdras, IOM office head in Greece, sees a steep increase in voluntary repatriations, which the IOM organizes. About 800 people registered in December and 260 have been sent home. “It’s one thing to return in handcuffs … and quite another to go as a normal passenger with some money in your pocket, because we give them each €400,” Esdras said.

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5,700 children in 12 days.

Refugee Influx To Greece Continues Unabated Through Winter (Reuters)

More than 1,000 migrants and refugees arrived at Greece’s biggest port of Piraeus near Athens on Wednesday as the influx of people fleeing conflict zones for Europe continued unabated into the winter months. More than 1 million refugees and migrants braved the seas in 2015 seeking sanctuary in Europe, nearly five times more than in the previous year, according to the United Nations’ refugee agency. Most entered through Greece’s outlying islands. So far this year, 31% of arrivals to Europe have been children, said medical aid group Medecins Sans Frontieres, which has been treating arrivals to the Greek islands. About 5,700 children crossed the narrow but dangerous sea passage between Greece and Turkey in just 12 days aboard rickety, overcrowded boats, it said.

“I leave my home, my country [because] there was violence, it was not safe,” said 18-year-old Idris, who left his home and family behind in Afghanistan three months ago, traveling alone through Turkey and hoping to reach Germany to study. As others disembarked from the ferry on Wednesday, volunteers passed out hot tea and fruit to help them get through the next leg of their journey, an eight-hour bus ride from Athens to Greece’s northern border with Former Yugoslav Republic of Macedonia [FYROM]. The ferry picked up a total of 1,238 migrants and refugees from the Eastern Aegean islands of Lesvos and Chios. Among those was 25-year-old Salam, from the Syrian city of Homs, who said he had lived in a number of different cities before the fighting led him and his friends to flee. “[They killed] women and children and men,” said Salam, who also hopes to reach Germany. [It was] very very very bad in Syria.”

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How blind is this? “Work must also step up on “returning those who have no right to international protection.” There are people who have no right to protection? Who gets to decide?

Europe Sees No Let Up in Refugee Crisis as January Arrivals Soar (BBG)

The number of refugees entering Europe in the first 10 days of 2016 is already three times the level in all of January 2015, signaling no let up in the pressure facing the region’s leaders amid the biggest wave of migration since World War II. The number of migrants crossing the Mediterranean Sea to the European Union from Turkey, the Middle East and North Africa reached 18,384 through Jan. 10, according to the United Nations Refugee Agency. That compares with 5,550 in January last year. “This year, these weeks, the coming months must be dedicated to delivering clear results in terms of regaining controls of flows and of our borders,” EC Vice President Frans Timmermans told reporters in Brussels on Wednesday after discussing the latest situation with EU commissioners.

Turmoil in Syria and across the Arab world triggered an influx of more than 1 million people arriving in the EU last year. Faced with migration in such unprecedented numbers, governments have reintroduced internal border checks, tried – and failed – to share refugees between one another and have been forced to defend their policies amid anger at violence allegedly perpetrated by the recent arrivals.

The number of refugees entering the EU increased month-on-month from January 2015 until hitting a peak of 221,374 in October, according to the agency. The level fell back to 118,445 last month as bad weather deterred people from making the journey. Almost a third of those arriving are children. So far this year 49 people have either died or are missing having attempted to cross into Europe. EU countries need to work together to tackle the “root causes” of the refugee influx, Timmermans said. Work must also step up on “returning those who have no right to international protection.”

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Jan 072016
 
 January 7, 2016  Posted by at 9:37 am Finance Tagged with: , , , , , , , , ,  1 Response »


Harris&Ewing Army Day Parade, Memories of the World War, Washington DC 1939

China Stock Markets Shuttered -Again- After Falling 7% (FT)
China Jolts Markets With Sharply Lower Yuan Fix (CNBC)
Offshore Yuan Rises From Five-Year Low as PBOC Puzzles Markets (BBG)
Global Oil Prices Hit 12-Year Low (Reuters)
Shanghai Fund Manager Dumps All Holdings in ‘Insane’ Market (BBG)
It’s All Bad News for Markets Buckling Under China, Fed, Economy (BBG)
George Soros Sees Crisis in Global Markets That Echoes 2008 (BBG)
Fears Mount Over Rise Of Sovereign-Backed Corporate Debt (FT)
A $500 Car Repair Bill Would Send Most Americans Scrambling (WSJ)
If A Basic Income Works For The Royal Family, It Can Work For Us All (Guardian)
Macy’s To Cut Jobs, Shut Stores Amid Weak Holiday Sales (Reuters)
Note To Joe Stiglitz: Banks Originate, Not Intermediate (Steve Keen)
BIS Says Central Banks’ Stimulus Strategy Is Based On A False Premise (AEP)
One Map That Explains the Dangerous Saudi-Iranian Conflict (Intercept)
Massive US Tax Grab Coming in 2016 at All Levels of Government (FRA)
Deal Paves Way For Thousands Of Cuban Immigrants Heading To US (CNN)
EU Fails to Defuse Passport-Free Clash in Northern Europe (BBG)
Drop In Refugees Due to Weather, Not Turkey’s Crackdown, Germany Says (Reuters)

This won’t stop until everyone who wants to sell, has. That’s the difference between markets and central control.

China Stock Markets Shuttered -Again- After Falling 7% (FT)

China’s entire equity market was shuttered within half an hour of opening after falling 7% on further currency weakness as government rescue efforts failed to deter the tide of sellers. China’s stock market meltdown and currency depreciation have spooked international investors in a replay of last summer’s rout that reverberated around the globe. So far this year — just four days — the bluechip CSI 300 index is down 12%. Newly minted circuit breakers, introduced and first tripped on Monday, kicked in again on Thursday after the CSI 300 fell 7%. Trading was halted for 15 minutes after the index lost 5%, but as stocks continued to fall the full-day closure was triggered. Investors were rattled by further weakening of the renminbi, said Wang Jun at China Securities in Beijing. “It was a panicked response to the forex market,” he said.

“Accelerating exchange-rate depreciation could lead to liquidity problems. Valuations can’t help but take a pounding.” The renminbi fell to its weakest level in nearly five years on Thursday, with capital outflow pressure still heavy even after more than a year of nearly uninterrupted outflows. The renminbi was 0.6% weaker on Thursday morning at 6.5928 per US dollar after falling by roughly the same amount on Wednesday. Policymakers appear uncertain about whether to wade back in to buy stocks with state funds or to stand back. On Tuesday, the “national team” of state-owned financial institutions appeared to re-enter the stock market after remaining on the sidelines since late August. Goldman Sachs estimated in September that the government had spent Rmb1.5tn ($234bn) to support the stock market in July and August, when the main index was down by as much as 45% from its late-June high.

The “national team” owned at least 6% of tradable market capitalisation in the Shanghai and Shenzhen exchanges at the end of the third quarter. On Wednesday, the stock market had clawed back some lost ground after state media said the securities regulator would extend a ban on share sales by large shareholders. After the trading halt on Thursday, the regulator published new permanent rules restricting share purchases by large shareholders, as well as by corporate management and directors. Starting January 9, large shareholders can sell a maximum of 1% of a company’s shares every three months. They also must disclose stake-cutting plans 15 days in advance. The China Securities Regulatory Commission said the new rules should help to stem panic-selling.

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Christine Lagarde will have to speak out.

China Jolts Markets With Sharply Lower Yuan Fix (CNBC)

China’s central bank guided the yuan lower on Thursday at the fastest pace since its shock devaluation in August, prompting a shuttering of mainland stocks and roiling markets elsewhere. The People’s Bank of China (PBOC) set the yuan reference rate at 6.5646 against the dollar, down 0.51% from Wednesday’s fix. That represents the largest daily change in the fix since August 13, according to Reuters data. The yuan had finished at 6.5554 on Wednesday. China’s central bank lets the yuan spot rate rise or fall a maximum of 2% against the dollar, relative to the official fixing rate. Thursday’s fix jolted markets, with the more freely-traded offshore yuan plunging to a record low of 6.7511 against the dollar before recovering to 6.6910 on suspected intervention. The onshore yuan rate fell to as much as 6.5932.

Equity markets in the region tumbled, with Chinese stocks closing for the day after the CSI 300 index fell more than 7%, triggering a circuit breaker. “The PBOC said the fix will be based on the previous day’s close and a softer fix is therefore not inconsistent with market forces,” said Vishnu Varathan, head of economics and markets strategy at Mizuho Bank’s Singapore office. “There is a sense in the market that the offshore market is getting carried away though and the PBOC would want to rein in excessively aggressive one-way bets,” he said. The currency moves have revived a litany of concerns in financial markets, from the health of the Chinese economy to the impact of a weaker yuan on capital outflows, which have accelerated in recent months. The more stocks fall on cues from a lower yuan, the more investors may be encouraged to yank funds out of China and park them overseas, in turn exerting further pressure on the yuan.

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Out of their hands.

Offshore Yuan Rises From Five-Year Low as PBOC Puzzles Markets (BBG)

The offshore yuan strengthened the most in two months amid speculation the central bank propped up the exchange rate after setting a weaker fixing that sent it into a tumble. The currency swung from a 0.3% gain to a 0.7% loss and back in the space of about 30 minutes, spurring intervention speculation and creating confusion about what the central bank is trying to achieve. The yuan turmoil sent mainland shares into a spiral, forcing an early trading halt for the second day this week. “China isn’t communicating its policy intentions in a clear manner,” said Sue Trinh at Royal Bank of Canada in Hong Kong. “It is sending confusing signals to the market. And it’s disappointing that their communication policy is less than transparent.”

The offshore yuan advanced 0.44% to 6.6837 a dollar as of 12:10 p.m. in Hong Kong, according to data compiled by Bloomberg, after reaching the weakest level since September 2010. The spot rate in Shanghai plunged 0.57% to a five-year low of 6.5923. The People’s Bank of China reduced its fixing, which restricts onshore moves to a maximum 2% on either side, by 0.51% to 6.5646, the lowest since March 2011. “We saw aggressive intervention in the offshore yuan market,” said Zhou Hao at Commerzbank in Singapore. “We don’t really understand the rationale behind the market movements in the past few days. Obviously, these movements have reminded us of the market rout last year.”

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Article says 11-year low, but reality caught up.

Global Oil Prices Hit 12-Year Low (Reuters)

Brent crude futures fell to a fresh 11-year low on Thursday as a sliding yuan and an emergency halt in China’s stock trading left Asian markets in a turmoil, while a huge supply overhang and near-record output levels also continued to drag on oil prices. China accelerated the devaluation of the yuan on Thursday, sending currencies across the region reeling and domestic stock markets tumbling, as investors feared the Asian giant was kicking off a virtual trade war against its competitors. Trading on its stock markets was suspended for the rest of the day, the second time this week, and China’s securities regulator intervened heavily by issuing rules to restrict share sales by listed companies’ major shareholders.

Tracking the weakness across financial markets, the global benchmark Brent fell to $33.09 per barrel, the weakest since 2004 and below the previous 11-year low from Wednesday. Prices, however, edged back to $33.42 by 0440 GMT. “With oil markets producing 1 million barrels a day in excess (of demand) and very little sign of any rational response from the supply side, it’s little wonder we’re seeing pressure again,” said Michael McCarthy at CMC Markets in Sydney. Global oil prices have crashed 70% since mid-2014 as near-record output from major producers such as OPEC, Russia and North America has left storage tanks brimming with supplies. Exacerbating the oil market woes is a weakening demand, especially in Asia, home to the world’s No.2 oil consumer, China, that is seeing the slowest economic growth in a generation.

“The Chinese economy actually contracted in December and that’s adding fire to fears of a more rapid slowdown in the world’s second biggest economy,” McCarthy said. Financial markets fear the yuan’s rapid depreciation may accelerate, which would mean China’s economy is even weaker than had been imagined. Offshore yuan fell to a fresh record low on Thursday since trading started in 2010. With the global economy looking shaky due to China’s slowdown, analysts said the outlook for oil remains for cheap prices for much of this year. “We think low $30’s (per barrel) is a floor, but once positioning gets so biased anything can happen,” said Virendra Chauhan at Energy Aspects in Singapore.

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China already did pre-empt the stock sale ban that was supposed to expire: “The CSRC capped the size of stakes that major investors are allowed to sell at 1% of a company’s shares for three months effective Jan. 9..”

Shanghai Fund Manager Dumps All Holdings in ‘Insane’ Market (BBG)

A Shanghai fund dumped all its holdings as Chinese shares tumbled and triggered a circuit-breaker that halted trading in the world’s second-biggest stock market. “This is insane,” Chen Gang, CIO at Shanghai Heqi Tongyi Asset Management, said in an interview on Thursday. “We were forced to liquidate all our holdings this morning,” said Chen, whose firm manages about 300 million yuan ($45.5 million). China’s CSI 300 Index plunged 7.2% before trading was halted by automatic circuit-breakers for the second time this week, after a weaker-than-estimated yuan fixing fueled concern that slowing economic growth is prompting authorities to guide the currency lower. Many private funds and hedge funds in China have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value.

Chinese regulators have imposed a limit on the amount of stock major corporate shareholders can sell as authorities move to curb the nation’s market rout. The CSRC capped the size of stakes that major investors are allowed to sell at 1% of a company’s shares for three months effective Jan. 9, the regulator said in a statement on Thursday. The restriction replaces an existing six-month ban on any secondary market stock sales that is due to expire Friday, it said. Chen, who commented before the CSRC announced its new caps, said he “won’t consider getting back into the market until that overhang is gone and CSRC improves its circuit-breaker system, for instance by extending the 15-minute break to half an hour.”

The Shanghai Heqi Tongyi manager, whose fund started mid-year in 2015, regretted the timing of its launch and said it “couldn’t be worse.” Chen isn’t alone in criticizing the circuit-breaker rule introduced Monday, which many say exacerbates a liquidity squeeze as investors rush for the exits before trading halts kick in. Under the new rule, a drop of 5% suspends trading for 15 minutes, while a decline of 7% halts the market for the rest of the day. “A trading break of 15 minutes or even longer wouldn’t ease their nerves or get them a clear picture of the fundamentals,” said Polar Zhang at BOC International. “On the contrary, it’s draining liquidity as everybody tries to get out of the door before the door is closed.”

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Deflation.

It’s All Bad News for Markets Buckling Under China, Fed, Economy (BBG)

New year, same fears. Except now they’re hitting all at once. For U.S. stocks it’s meant the worst start since the financial crisis, while volatility in Europe has exploded to levels not seen in a decade. From China’s weakening currency to the rout in oil to the withdrawal of Fed stimulus and gains in the cost of financing business, things that keep investors up at night are climbing out from under the bed again in 2016. While little of it is new, the persistence is troubling, especially when buffers such as valuations and central bank support are turning against bulls. The result has been one of the fastest retreats from risk ever by investors coming back from New Year’s holiday. Just days into 2016, Wall Street firms from Citigroup to Royal Bank of Canada have already scaled back bullish calls for American equities this year, while single-stock analysts forecast fourth-quarter profits will shrink by more than 6% after predicting an expansion in August.

“The market obviously rises on the wall of fear, but right now the fear is looking a little bit more realistic,” said Brad McMillan at Commonwealth Financial Network. Over three days, more than $2 trillion has been wiped from the value of global equities, volatility in the broadest stock gauges has jumped 13% or more, and more than 8% was shorn from the price of oil. China’s Shanghai Composite Index plunged almost 7% to start the year while everything from junk bonds to cocoa and coffee has tumbled. As has been true before, the proximate cause is China. Data showing weakness in manufacturing this week sparked a tumble in the CSI 300 Index. Markets were roiled Wednesday when the nation’s central bank unexpectedly set the yuan’s daily reference rate at the lowest level since April 2011, fueling concern over the strength of the world’s second-largest economy.

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“Almost $2.5 trillion was wiped from the value of global equities this year through Wednesday, and losses deepened in Asia on Thursday..”

George Soros Sees Crisis in Global Markets That Echoes 2008 (BBG)

Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros told an economic forum in Sri Lanka on Thursday. China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, Soros said in Colombo. A return to positive interest rates is a challenge for the developing world, he said, adding that the current environment has similarities to 2008. Global currency, stock and commodity markets are under fire in the first week of the new year, with a sinking yuan adding to concern about the strength of China’s economy as it shifts away from investment and manufacturing toward consumption and services.

Almost $2.5 trillion was wiped from the value of global equities this year through Wednesday, and losses deepened in Asia on Thursday as a plunge in Chinese equities halted trade for the rest of the day. “China has a major adjustment problem,” Soros said. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”

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Emerging markets will keep plummeting.

Fears Mount Over Rise Of Sovereign-Backed Corporate Debt (FT)

More than $800bn of emerging market sovereign debt is being camouflaged by the growing use of bonds that offer implicit state backing without always appearing on government balance sheets, according to new research. The stock of so-called quasi-sovereign bonds issued in dollars and other hard currencies by emerging markets has risen sharply in the past 12 months to overtake that of all external emerging market sovereign debt by the end of 2015. The growing use of such bonds suggests that developing countries are increasingly transferring debt obligations to third parties that have taken advantage of historically low interest rates to load up with cheap debt. Emerging markets are already under strain as the US dollar strengthens against the renminbi and other emerging market currencies, making the cost of servicing debt denominated in dollars harder to bear.

Although official debt-to-GDP levels of countries such as India, Russia and China remain low by global standards, the growth of less visible debt which they might still have to guarantee in a crisis underlines the potential scale of their liabilities. “This has been a source of worry for some time, in part because it does not always appear on government balance sheets.” said Lee Buchheit, a partner at Cleary Gottlieb and expert on sovereign debt default. “Emerging markets have benefited from interest rates at historic low levels and commodity prices at historic highs,” he said: “In the last year both of these have begun to unwind. If the resulting strains on a country compel a sovereign debt rearrangement of some kind, these contingent liabilities of the sovereign will need to be addressed.”

New figures from JPMorgan and Bond Radar show that issuance of quasi-sovereign bonds outpaced that of sovereign bonds in emerging markets last year, raising the stock of such debt from $710bn in 2014 to a record $839bn by the end of 2015. By comparison, the stock of all external emerging market sovereign debt stood at $750bn at the end of last year, according to JPMorgan. The cost of selling bonds with either an explicit or implicit guarantee of the government is lower than other corporate bonds. Quasi-sovereign borrowers include 100% state-owned entities such as Mexico’s Pemex, local governments in countries such as China, and entities in which the government owns more than 50% of the equity or has more than 50% of the voting rights — a description that encompasses Brazil’s Petrobras.

However, the treatment of such debt is not uniform. Bonds issued by Pemex are included in debt-to-GDP calculations for Mexico, but this is unusual, and only 19 of the 181 quasi-sovereign bonds tracked by JPMorgan carry an explicit sovereign guarantee. [..] Emerging markets’ quasi-sovereign bonds are now suffering from the same diminishing capital flows and rising borrowing costs plaguing the developing world, thanks to the strengthening US dollar, weakening commodity prices and fears of slowing Chinese growth. Poor performance has already hurt the credit ratings of countries that back them. Last year, Standard & Poor’s and Fitch, two of the world’s three big credit rating agencies, cut Brazil’s rating to junk in part because of the growing risks associated with Petrobras. “What can really break the dam is the quasi-sovereign element in EM external debt,” says Gary Kleiman of Kleiman International, an emerging market investment consultant. “People have always assumed there is an implicit backing, but that capacity has not been called into question explicitly.”

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Paycheck to paycheck.

A $500 Car Repair Bill Would Send Most Americans Scrambling (WSJ)

An unexpected car repair or medical bill would cause the vast majority of Americans to scramble because they lack the needed funds in their savings accounts. Only 37% of adults have the necessary savings to cover a $500 car repair or a $1,000 emergency room bill, according to a survey Bankrate.com released Wednesday. The finding is little changed from last year, when 38% said they didn’t have the cash on hand, despite a year of steady job creation and the unemployment rate falling to 5%. “Most Americans are ill-prepared for life’s inevitable curveballs,” said Sheyna Steiner, Bankrate.com’s senior investing analyst. She said that’s a concern because more than 40% of families experienced a similar unexpected cost during the past 12 months.

Without the savings, 23% of those surveyed said they would have to cut back on spending elsewhere, and 15% said they would turn to credit cards. The same share said they would have to borrow from friends or family. The data suggests that many households are still on uncertain financial footing more than six years after the recession ended. However, other figures indicate Americans are earning, and saving, more. The personal saving rate was 5.5% in November, the second-highest level since the start of 2013, the Commerce Department said last month. Lower gasoline prices and solid income gains in recent months are supporting savings. Wages increased 2.3% from a year earlier in November, the Labor Department said, even as consumer inflation held near zero.

The Bankrate survey found that preparedness for unexpected expenses varied widely by income level. Just 23% of those earning less than $30,000 annually had the needed savings, while 54% of those earning more than $75,000 annually said they would have the cash on hand.

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“In Britain we’ve already experimented with a system in which one group of people receive a guaranteed income with no obligation to work for it. But what if this was extended beyond the royal family?”

If A Basic Income Works For The Royal Family, It Can Work For Us All (Guardian)

My first response to the notion of a universal basic income (UBI) was: “Well, really. That is never going to happen! I mean, it’s completely unaffordable. I mean, it would be political suicide for any progressive party suggesting it.” And then I may have started to froth at the mouth slightly and ask if it would be paid to refugees. Yet this year will see a UBI paid to residents of Utrecht and 19 other Dutch municipalities. Everyone will get about £150 a week, whether working or not. The unemployed won’t find themselves penalised for finding work, and the hope is that the state will spend less money snooping on benefit claimants, moving on the homeless or locking up those driven to crime. Advocates of this radical idea are keen to quash any notion that recipients of free money will just use it to lie around all day getting stoned.

This is why it is being piloted in Holland. The idea is so refreshingly contrary to the petty conditionality that is killing the welfare state that it began to fill me with optimism that there may be a few people lying in this political gutter still looking at the stars. Once upon a time, universality was the underpinning principle of welfare. Every mother got child benefit; every child got free school milk, until that was snatched away by … Oh, I can’t remember – I’m not one to bear grudges. In Britain we’ve already experimented with a system in which one group of people receive a guaranteed income with no obligation to work for it. But what if this was extended beyond the royal family? Imagine now if everyone in the UK started out with a guaranteed minimal amount of money each week.

All other benefits would be done away with, along with the stigma and entrapment that came with the old system of welfare (and the expense of policing and administering it). The idea of the UBI is so contrary to everything that has been drummed into us about preventing the “something for nothing society”, it’s worth advocating it just to see the Daily Mail and Iain Duncan Smith implode with outrage. The predictable argument that will be rolled out is that it will turn the masses from “strivers into skivers”; it will lead to welfare dependency, a lack of initiative and lots of programmes on Channel 5 called Fat Ugly People Spending Your Money on Crisps and Big Tellies.

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Vanguard for a much bigger trend.

Macy’s To Cut Jobs, Shut Stores Amid Weak Holiday Sales (Reuters)

Macy’s said it will eliminate more than 2,000 jobs and consolidate operations after reporting weak holiday sales, highlighting a downturn in apparel demand that has likely taken a similar toll on other department stores and clothing chains. Macy’s said comparable sales at stores open for more than a year tumbled by 4.7% in November and December, far worse than what it had estimated in November, and it cut its earnings outlook for the second time in two months. Macy’s, which operates the upscale Bloomingdale’s chain as well as its namesake Macy’s department stores, estimated that 80% of the fall was due to unusually warm weather, which discouraged purchases of sweaters, coats and gloves. It also blamed the strong dollar for keeping tourists from visiting the United States and spending money at its flagship stores.

The company’s shares rose 2.8% to $37.15 in after-hours trading on Wednesday as investors cheered its plan to reduce costs by $400 million by consolidating regions and call-centers. The jobs to be eliminated include 3,000 store workers, though about half of those employees will be put in other positions, as well as hundreds of back-office and senior executive posts, the company said in a press release. “Macy’s is cutting the fat, becoming a leaner organization,” said Lisa Haddock, marketing lecturer at San Diego State University, of why the shares rose. But Haddock said Macy’s, like many other traditional bricks-and mortar retailers, faced an uncertain future as more and more consumer demand shifted online. “Macy’s doesn’t seem to have a unique spot in consumers’ minds,” she said.

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Essential: “..the banks have very good reasons not to “fulfil their purpose” today, because that purpose is not what Joe thinks it is. Banks don’t “intermediate loans”, they “originate loans”..”

Note To Joe Stiglitz: Banks Originate, Not Intermediate (Steve Keen)

I like Joe Stiglitz, both professionally and personally. His Globalization and its Discontents was virtually the only work by a Nobel Laureate economist that I cited favourably in my Debunking Economics, because he had the courage to challenge the professional orthodoxy on the “Washington Consensus”. Far more than most in the economics mainstream—like Ken Rogoff for example—Joe is capable of thinking outside its box. But Joe’s latest public contribution—“The Great Malaise Continues” on Project Syndicate—simply echoes the mainstream on a crucial point that explains why the US economy is at stall speed, which the mainstream simply doesn’t get. Joe correctly notes that “the world faces a deficiency of aggregate demand”, and attributes this to both “growing inequality and a mindless wave of fiscal austerity”, neither of which I dispute. But then he adds that part of the problem is that “our banks … are not fit to fulfill their purpose” because “they have failed in their essential function of intermediation”:

Between long-term savers (for example, sovereign wealth funds and those saving for retirement) and long-term investment in infrastructure stands our short-sighted and dysfunctional financial sector… Former US Federal Reserve Board Chairman Ben Bernanke once said that the world is suffering from a “savings glut.” That might have been the case had the best use of the world’s savings been investing in shoddy homes in the Nevada desert. But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing.

I’m the last one to defend banks, but here Joe is quite wrong: the banks have very good reasons not to “fulfil their purpose” today, because that purpose is not what Joe thinks it is. Banks don’t “intermediate loans”, they “originate loans”, and they have every reason not to originate right now. In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.

The argument that banks merely intermediate between savers and investors leads the mainstream to a manifestly false conclusion: that the level of private debt today is too low, because too little private debt is being created right now. In reality, the level of private debt is way too high, and that’s why so little lending is occurring. I can make the case empirically for non-economists pretty easily, thanks to an aside that Joe makes in his article. He observes that when WWII ended, many economists feared that there would be a period of stagnation:

Others, harking back to the profound pessimism after the end of World War II, fear that the global economy could slip into depression, or at least into prolonged stagnation.

In fact, the period from 1945 till 1965 is now regarded as the “Golden Age of Capitalism”. There was a severe slump initially as the economy changed from a war footing to a private one, but within 3 years, that transition was over and the US economy prospered—growing by as much as 10% in real terms in some years. The average from 1945 till 1965 was growth at 2.8% a year. In contrast, the average rate of economic growth since 2008 to today is precisely zero.

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“Schumpeterian creative destruction“: “The occurrence of a crisis greatly amplifies the impact of previous misallocations..”

BIS Says Central Banks’ Stimulus Strategy Is Based On A False Premise (AEP)

The world’s monetary watchdog has thrown down the gauntlet. It has challenged the twin assumptions of secular stagnation and the global savings glut that have possessed – some would say corrupted – the Western economic elites. It has implicity indicted the US Federal Reserve and fellow central banks for perverting the machinery of interest policy to conjure demand that may not, in fact, be needed, and ensnaring us in a self-perpetuating “debt-trap” with a diet of ever looser money. The Bank for International Settlements (BIS) – the temple of monetary orthodoxy in Switzerland – has been waiting for this moment, combing through the archives of economic history to mount an unanswerable assault. The BIS believes it has found the smoking gun in a study of recessions in 22 rich countries dating back to the late 1960s.

The evidence suggests that the long malaise of the post-Lehman era – and the strange episode that preceded it – can be explained almost entirely by the destructive effects of boom and bust on productivity growth. Credit bubbles are corrosive. They gobble up resources on the upswing, diverting workers into low-productivity sectors and building booms. In Spain the construction share of GDP reached 16pc at the height of the “burbuja” in 2007, when teenagers abandoned school en masse to earn instant money erecting ghost towns. Parasitical wastage creeps in. “Financial institutions’ high demand for skilled labour may crowd out more productive sectors,” said the paper, acidly. The bubbles leave a long toxic legacy after the bust hits. This takes eight years or so to clear.

“The occurrence of a crisis greatly amplifies the impact of previous misallocations,” said the paper, racily titled “Labour reallocation and productivity dynamics: financial causes, real consequences”. Crippled economies have to make the switch back to healthier sectors against the headwinds of a credit crunch and a broken financial system, and typically amid austerity cuts in public investment. The BIS has long argued that a key reason why the US recovered more quickly than others is because it tackled the bad debts of the banking system early, forcing lenders to raise capital. This averted a long credit squeeze. It cleared the way for Schumpeterian creative destruction. The Europeans dallied, prisoners of their bank lobbies. They let lenders meet tougher rules by slashing credit rather than raising capital.

Europe’s unemployed have paid a high price for this policy failure. Claudio Borio, the paper’s lead author and the BIS’s chief economist, said the “hysteresis” effect of lost productivity is 0.7pc of GDP each year. The cumulative damage from the boom-bust saga over the past decade is 6pc. This more or less accounts for the phenomenon of “secular stagnation”, the term invented by Alvin Hansen in 1938 and revived by former US Treasury Secretary Larry Summers. Loosely, it describes an inter-war Keynesian world of deficient investment and demand. The theory of the global savings glut propagated by former Fed chief Ben Bernanke falls away, and so does the Fed’s central alibi. It can longer be cited as the canonical justification for negative real rates. The alleged surfeit of capital in the world proves a mirage. So does the output gap. If the BIS hypothesis is correct, there is no lack of global demand. The world faces a supply-side problem, impervious to monetary stimulus. The entire strategy of global central banks is based on a false premise.

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“..the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.”

One Map That Explains the Dangerous Saudi-Iranian Conflict (Intercept)

The Kingdom of Saudi Arabia executed Shiite Muslim cleric Nimr al-Nimr on Saturday. Hours later, Iranian protestors set fire to the Saudi embassy in Tehran. On Sunday, the Saudi government, which considers itself the guardian of Sunni Islam, cut diplomatic ties with Iran, which is a Shiite Muslim theocracy. To explain what’s going on, the New York Times provided a primer on the difference between Sunni and Shiite Islam, informing us that “a schism emerged after the death of the Prophet Muhammad in 632” – i.e., 1383 years ago. But to the degree that the current crisis has anything to do with religion, it’s much less about whether Abu Bakr or Ali were Muhammad’s rightful successor and much more about who’s going to control something more concrete right now: oil.

In fact, much of the conflict can be explained by a fascinating map created by M.R. Izady, a cartographer and adjunct master professor at the U.S. Air Force Special Operations School/Joint Special Operations University in Florida. What the map shows is that, due to a peculiar correlation of religious history and anaerobic decomposition of plankton, almost all the Persian Gulf’s fossil fuels are located underneath Shiites. This is true even in Sunni Saudi Arabia, where the major oil fields are in the Eastern Province, which has a majority Shiite population. As a result, one of the Saudi royal family’s deepest fears is that one day Saudi Shiites will secede, with their oil, and ally with Shiite Iran.

This fear has only grown since the 2003 U.S. invasion of Iraq overturned Saddam Hussein’s minority Sunni regime, and empowered the pro-Iranian Shiite majority. Nimr himself said in 2009 that Saudi Shiites would call for secession if the Saudi government didn’t improve its treatment of them. As Izady’s map so strikingly demonstrates, essentially all of the Saudi oil wealth is located in a small sliver of its territory whose occupants are predominantly Shiite. (Nimr, for instance, lived in Awamiyya, in the heart of the Saudi oil region just northwest of Bahrain.) If this section of eastern Saudi Arabia were to break away, the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.


Map shows religious populations in the Middle East and proven developed oil and gas reserves. Click to view the full map of the wider region. The dark green areas are predominantly Shiite; light green predominantly Sunni; and purple predominantly Wahhabi/Salafi, a branch of Sunnis. The black and red areas represent oil and gas deposits, respectively. Source: Dr. Michael Izady at Columbia University, Gulf2000, New York

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Detailed and instructive article. Recommended reading.

Massive US Tax Grab Coming in 2016 at All Levels of Government (FRA)

The Financial Repression Authority sees the massive government tax grab already quietly underway accelerating in 2016 in most of the developed economies. This ‘grab’ will be a desperate political act driven by underfunded, and in a significant number of cases, unfunded public pension which will unfold at all three levels of government, Federal, State and City /Local government. It will be disguised by different focal emphasis and appear to evolve in an uncoordinated manner – but it will occur! To spot its telltale fingerprints we should expect the following words to become much more prevalent in the “public narrative” throughout 2016 and to see EACH of these which we explore in this article to increasingly and significantly extract money from taxpayer wallets:

• Capital Gains Tax,
• Property Tax,
• Global Wealth Tax (PFIC, FATCA, GATCA),
• Civil Forfeiture Fines,
• Means Testing,
• Licensing Fees,
• Usage, Tolls & Emergency Services Fees,
• Inspection Fees,
• Processing Fees,
• Fines (Police and Agency)
• Ticketing,
• School Activity, Equipment & Supply Fees,
• Inheritance Tax,
• Social Security Taxation Rate

The Wealth Effect is believed by the government to have pushed up taxpayer US Household Net Worth by $30 Trillion or 55% from the Financial Crisis low. The US government is coming after that money! They see it as a “Honey Pot” that can’t be resisted.

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Build a wall with Cuba?

Deal Paves Way For Thousands Of Cuban Immigrants Heading To US (CNN)

It’s a rare deal at a time when daily sparring over immigration is a worldwide reality. Five Central American countries and Mexico inked an agreement last week that will help thousands of stranded Cuban immigrants make their way to the United States. The group of Cubans, about 8,000 at the latest estimate, had been stuck in Costa Rica for weeks after Nicaragua closed its borders to them. Now a group of Central American countries say the Cubans will be flown to El Salvador, then transported on buses to Mexico. Then they’ll have a chance to cross into the United States. Officials have said they’ll start transporting the group of Cubans on flights this month. The first group of 180 will leave on a flight to El Salvador on Tuesday as part of a pilot program, Costa Rica’s foreign minister said Wednesday. It won’t be a free ride; the immigrants will have to pay about $550 to cover travel and visa costs, officials said.

The idea of 8,000 new immigrants showing up at America’s doorstep sounds like a large number. But experts say it’s in keeping with a trend they’ve observed. The number of Cubans coming to the United States has spiked dramatically, particularly after President Barack Obama’s announcement that relations between the United States and the island nation were on the mend. More than 43,000 Cubans entered the United States at ports of entry in the 2015 fiscal year, according to a recent Pew Research Center report, which cited U.S. Customs and Border Protection data. That represents a 78% increase over the previous year, according to Pew. Several factors are fueling the trend, said Marc Rosenblum, deputy director of the U.S. immigration policy program at the Migration Policy Institute.

These include the Obama administration’s 2009 decision to ease restrictions on Americans traveling to Cuba and sending money to families there, Cuba’s move in 2013 to relax exit controls on Cubans seeking to leave the island and – most importantly – the U.S. decision to normalize relations last year. Some fear the immigration policies that have welcomed Cubans into the United States could change now that relations between the countries are warming, Rosenblum said. “There is this concern that Cuba special privileges will be eliminated, so Cubans are trying to get out while the getting’s good,” he said. Not anymore. While the U.S. Coast Guard said last year it was seeing an increase in the number of Cubans trying to reach the United States in rafts, even more are taking a different route.

“Over the last several years, we’ve seen pretty sharp increases in the number of Cubans, especially traveling by land,” Rosenblum said. Until recently, many flew into Ecuador, which didn’t require a visa for Cubans until several months ago. From there, they trekked through Latin America until they reached the United States.

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Clueless.

EU Fails to Defuse Passport-Free Clash in Northern Europe (BBG)

German, Danish, Swedish and European officials blamed each other – and political leaders across the continent – for the refugee overruns that have led to the reintroduction of passport checks in northern Europe. A migration crisis session in Brussels on Wednesday ended with Germany identifying Greece’s lightly policed sea border as the cause of the problem, Denmark telling refugees to go elsewhere, Sweden confessing that it’s swamped and the EU’s head office appealing for “solidarity.” “Our problem at the moment in Europe is that we do not have a functioning border-control system, especially at the Greece-Turkey border,” German deputy interior minister, Ole Schroeder, told reporters afterward.

The latest threat to no-passport travel in much of the 28-nation EU started when Sweden began stopping traffic on its border with Denmark, leading to controls on the Danish-German frontier and prompting the bloc’s home affairs commissioner, Dimitris Avramopoulos, to plead for a “return to normal as soon as possible.” The scale of the challenge was dramatized by data showing that EU governments have rehoused only 272 of a pledged 160,000 refugees, leaving Germany, Sweden, Greece and Italy as the main interim hosts of people fleeing wars in the Middle East. Sweden renewed its call for the equitable distribution of refugees, as required by EU laws passed last year, and invoked the rule – widely seen as broken beyond repair – that refugees apply for asylum in the first EU country they reach.

“We cannot do everything, we have to share responsibility among all member states,” Swedish Justice Minister Morgan Johansson said. The largest movement of people since the dislocations after World War II has stirred tensions among commercially and culturally like-minded countries in Scandinavia. “We don’t wish to be the final destination for thousands and thousands of asylum seekers,” said Danish immigration minister, Inger Stoejberg. She said Denmark is ready “at very short notice” to sanction transport operators for bringing in illegal migrants.

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Still 4,000 a day arriving in Germany every day. Or 1.46 million per year. And that’s in winter.

Drop In Refugees Due to Weather, Not Turkey’s Crackdown, Germany Says (Reuters)


Migrant arrivals in Germany dropped significantly last month, but the reason was rough seas, not efforts by Turkey to crack down on illegal departures to Greece, German Interior Minister Thomas de Maiziere said on Wednesday. His remarks suggest that German efforts to stem the flow of arrivals with help from Turkey are not effective yet, which increases pressure on Chancellor Angela Merkel, whose popularity has fallen over her decision to welcome refugees. “Our impression is that the drop (in arrivals) is predominantly linked to the weather, namely a stormy sea in the Mediterranean,” de Maiziere, a member of Merkel’s Christian Democratic Union (CDU), told a news conference.

“We are also seeing efforts by Turkey to reduce the number of illegal migration departure from Turkey,” he said. “But we cannot confirm a sustainable, permanent, and visible reduction because of these activities and based on individual steps in December.” From 2,500 to 4,000 migrants entered Germany through Austria each day in December. That is far less than 10,000 daily arrivals recorded at the height of the crisis in autumn but still not low enough to silence Merkel’s critics. Most migrants reach Europe by making the short voyage from Turkey to Greece. Merkel wants Turkey to stem the flow and take back asylum seekers rejected by Europe.

In exchange, Turkey will get support for faster action on its bid to join the European Union and billions of euros in aid for Syrian refugees in border camps. The chancellor has rejected demands from members of her own conservatives to cap the number of refugees Germany is willing to take each year as well as calls to seal the border with Austria. Her multi-front approach to reducing the number of arrivals also includes providing aid to Syrian refugees in Lebanon and Jordan and distributing asylum seekers across the EU.

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Jan 052016
 
 January 5, 2016  Posted by at 10:20 am Finance Tagged with: , , , , , , , , , ,  1 Response »


DPC Broadway at night from Times Square 1911

The $289 Billion Wipeout That Blindsided US Bulls (BBG)
A Stock Market Crash Of 50%+ Would Not Be A Surprise (BI)
Bank of America Thinks The Probability Of A Chinese Crisis Is 100% (ZH)
China Injects $20 Billion Into Markets, Hints At Curbs On Share Sales (Reuters)
China Said to Intervene in Stock Market After $590 Billion Rout (BBG)
China Rail Freight Down 10.5% In 2015, Biggest Ever Annual Fall (Reuters)
China Could ‘Spook’ Global Markets Again in 2016: IMF Chief Economist (BBG)
Supermines Add to Supply Glut of Metals (WSJ)
Debt Payments Set To Balloon For Detroit Public Schools (DN)
New Year Brings Financial Headache For Millions Of British Families (Guardian)
Brazil Heads for Worst Recession Since 1901 (BBG)
Volkswagen Faces Billions In Fines As US Sues In Emissions Scandal (Reuters)
Portugal’s Bank Bail-In Sets a Dangerous Precedent (BBG)
Russia Stands Up To Western Threats, Pivots To East (Xinhua)
Will US Fall For Saudi’s Provocation In Killing Of Shia Cleric? (Reuters)
Pretend to the Bitter End (Jim Kunstler)
Fortress Scandinavia Sinks Into Blame Game Over Refugee Crisis (BBG)
Bodies Of Four Migrants Found In Eastern Aegean (Kath.)
Nine Drowned Refugees Wash Up On Turkish Beach (AP)

“A report in the U.S. showed manufacturing contracted at the fastest pace in more than six years..”

The $289 Billion Wipeout That Blindsided US Bulls (BBG)

As losses snowballed in U.S. stocks around midday, the best thing U.S. bulls had to say about the worst start to a year since 2001 was that there are 248 more trading days to make it up. “My entire screen is blood red – there’s nothing good to talk about,” Phil Orlando at Federated Investors said around noon in New York, as losses in the Dow Jones Industrial Average approached 500 points. “On days like today you need to take a step back, take a deep breath and let the rubble fall.” Taking a break and breathing helped: the Dow added almost 150 points in the last 30 minutes to pare its loss to 276 points.

Still, investors returning to work from holidays were greeted by the sixth-worst start to a year since 1927 for the Standard & Poor’s 500 Index, which plunged 1.5% to erase $289 billion in market value as weak Chinese manufacturing data unnerved equity markets. The selloff started in China and persisted thanks to a flareup in tension between Saudi Arabia and Iran. A report in the U.S. showed manufacturing contracted at the fastest pace in more than six years added to concerns that growth is slowing.

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50% seems mild.

A Stock Market Crash Of 50%+ Would Not Be A Surprise (BI)

By many, many historically predictive valuation meassures, stocks are overvalued to the tune of 75%-100%. In the past, when stocks have been this overvalued, they have often “corrected” by crashing (1929, 1987, 2000, 2007, for example) . They have also sometimes corrected by moving sideways and down for a long, long time (1901-1920, 1966-1982, for example). After long eras of over-valuation, like the period we have been in since the late 1990s (with the notable exceptions of the lows after the 2000 and 2007 crashes), stocks have also often transitioned into an era of undervaluation, often one that lasts for a decade or more. In short, stocks are so expensive on historically predictive measures that the annual returns over the next decade are likely to net out to about 0% per year.

How we get there is anyone’s guess. But… A stock-market crash of ~50% from the peak would not be a surprise. It would also not be the “worst-case scenario,” by any means. The “worst-case scenario,” which has actually been a common scenario over history, is that stocks would drop by, say 75% peak to trough. Those are the facts. Why isn’t anyone talking about those facts? Three reasons: First, as mentioned, no one in the financial community likes to hear bad news or to be the bearer of bad news when it comes to stock prices. It’s bad for business. Second, valuation is nearly useless as a market-timing indicator. Third, yes, there is a (probably small) chance that it’s “different this time,” and all the historically predictive valuation measures are out-dated and no longer predictive. The third reason is the one that everyone who is bullish about stocks these days is implicitly or explicitly relying on: “It’s different this time.”

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At least I’m not alone in my assessment of China.

Bank of America Thinks The Probability Of A Chinese Crisis Is 100% (ZH)

Some sobering words about China’s imminent crisis, not from your friendly neighborhood doom and gloom village drunk, but from BofA’s China strategist David Cui. Excerpted from “2016 Year-Ahead: what may trigger financial instability”, a must-read report for anyone interested in learning how China’s epic stock market experiment ends.

A case for financial instability – It’s widely accepted that the best leading indicator of financial instability is rapid debt to GDP growth over a period of several years as it’s a strong sign of significant malinvestment. Based on Bank of International Settlement’s (BIS) private debt data and the financial instability episodes identified in “This time is different”, a book by Reinhart & Rogoff, we estimate that once a country grows its private debt to GDP ratio by over 40% within a period of four years, there is a 90% chance that it may run into financial system trouble. The disturbance can be in the form of banking sector re-cap (with or without a credit crunch), sharp currency devaluation, high inflation, sovereign debt default or a combination of a few of these. As Chart 1 demonstrates, China’s private debt to GDP ratio rose by 75% between 2009 and 2014 (i.e., since the Rmb4tr stimulus), by far the highest in the world (we suspect a significant portion of the debt growth in HK went to China). At the peak speed, over four years from 2009 to 2012, the ratio in China rose by 49%.

Other than sovereign debt default, China has experienced all the other forms of financial instability since the open-door reform started in late 1970s, including a sharp currency devaluation in the early 1990s (Chart 3) and hyper-inflation in the late 1980s and early 1990s (Chart 4). China also needed to write-off bad debt and recap its banks every decade or so. Banking sector NPL reached some 40% in the late 1990s and early 2000s and the government had to strip off some 20% of GDP equivalent of bad debt from the banking system between 1999 and 2005.

When the debt problem gets too severe, a country can only solve it by devaluation (via the export channel), inflation (to make local currency debt worth less in real terms), writeoff/re-cap or default. We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem, particularly if the growth continues to be driven by debt-fueled investment in a weak-demand environment. We consider the most likely forms of financial instability that China may experience will be a combination of RMB devaluation, debt write-off and banking sector re-cap and possibly high inflation. Given the sizeable and unstable shadow banking sector in China and the potential of capital flight, we also think the risk of a credit crunch developing in China is high. In our mind, the only uncertainty is timing and potential triggers of such instabilities.

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“The economy is poor, stock valuation is still high, and the yuan keeps sliding. The market drop is overdue.”

China Injects $20 Billion Into Markets, Hints At Curbs On Share Sales (Reuters)

The Chinese authorities were battling to prop up the country’s stock markets on Tuesday after a surprise cash injection from the central bank failed to calm jitters among investors. The unexpected 130 billion yuan ($19.94 billion) injection by the central bank – the largest such move to encourage more borrowing since September – came after a 7% crash on Monday triggered a “circuit-breaker” mechanism to suspend trading for the day. The measures initially helped Chinese mainland indexes recover quickly from a steep initial fall but the selling gained the upper hand in the afternoon to leave the Shanghai Composite index down 2.16% at 5.30am GMT. Elsewhere in Asia Pacific, Japanese stocks fell for a second day in choppy trade to their lowest point since October. In Australia the ASX/S&P200 closed down 1.6% as the outlook for China continued to drag on the country’s resource-heavy market.

However, markets in Europe and the US were expected to open higher on Tuesday, according to futures trading. Beijing’s intervention on Tuesday appeared timed to reassure Chinese retail investors, who are always sensitive to liquidity signals, that the bank would support the market with cash. The People’s Bank of China offered the liquidity in the form of what are known as seven-day reverse repos at an interest rate of 2.25%, according to the statement. China’s securities regulator said it was studying rules to regulate share sales by major shareholders and senior executives in listed companies. This would address concerns that the end of a six-month lockup on share sales by major institutional investors timed for this Friday – and scheduled to free up an estimated 1.2 trillion yuan worth of shares for sale next Monday – would result in a massive institutional evacuation from stocks.

The PBOC also published nine new financial service standards that will come into effect on 1 June, to protect consumers. The China securities regulatory commission also defended the functioning of the new “circuit breaker” policy that caused Chinese stock markets to suspend trade on Monday, triggering the mechanism on the very first day it came into effect. While some analysts criticised the design of the circuit breaker, saying it inadvertently encouraged bearish sentiment, the regulator said the mechanism had helped calm markets and protect investors – although it said the mechanism needed to be further improved. Analysts and investors warned that the success of the interventions was not assured. Repeated and often heavy handed interventions by Beijing have kept stock valuations at what many consider excessively high given the slowing economy and falling corporate profits.

“We’ve been waiting for a market drop like this for a long time,” said Samuel Chien, a partner of Shanghai-based hedge fund manager BoomTrend Investment Management. “The economy is poor, stock valuation is still high, and the yuan keeps sliding. The market drop is overdue.”

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XI didn’t sleep well last night.

China Said to Intervene in Stock Market After $590 Billion Rout (BBG)

China moved to support its sinking stock market as state-controlled funds bought equities and the securities regulator signaled a selling ban on major investors will remain beyond this week’s expiration date, according to people familiar with the matter. Government funds purchased local stocks on Tuesday after a 7% tumble in the CSI 300 Index on Monday triggered a market-wide trading halt, said the people, who asked not to be identified because the buying wasn’t publicly disclosed. The China Securities Regulatory Commission asked bourses verbally to tell listed companies that the six-month sales ban on major stockholders will remain valid beyond Jan. 8, the people said.

The moves suggest that policy makers, who took unprecedented measures to prop up stocks during a mid-year rout, are stepping in once again to end a selloff that erased $590 billion of value in the worst-ever start to a year for the Chinese market. Authorities are trying to prevent volatility in financial markets from eroding confidence in an economy set to grow at its weakest annual pace since 1990. The sales ban on major holders, introduced in July near the height of a $5 trillion crash, will stay in effect until the introduction of a new rule restricting sales, the people said. Listed companies were encouraged to issue statements saying they’re willing to halt such sales, they said.

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Was already down 4.7% in 2014. Also: “The country’s top economic planner said last month that November rail freight volumes fell 15.6% from a year earlier.”

China Rail Freight Down 10.5% In 2015, Biggest Ever Annual Fall (Reuters)

The total volume of goods transported by China’s national railway dropped by a tenth last year, its biggest ever annual decline, business magazine Caixin reported on Tuesday, a figure likely to fan concerns over how sharply the economy is really slowing. Citing sources from railway operator National Railway Administration, Caixin said rail freight volumes declined 10.5% year-on-year to 3.4 billion tonnes in 2015. In comparison, volumes fell 4.7% in 2014. The amount of cargo moved by railways around China is seen as an indicator of domestic economic activity. The country’s top economic planner said last month that November rail freight volumes fell 15.6% from a year earlier.

Weighed down by weak demand at home and abroad, factory overcapacity and cooling investment, China is expected to post its weakest economic growth in 25 years in 2015, with growth seen cooling to around 7% from 7.3% in 2014. But some China watchers believe real economic growth is already much weaker than official data suggest, pointing to falling freight volumes and weak electricity consumption among other measures. Power consumption in November inched up only 0.6% from a year earlier. A private survey published on Monday showed that the factory activity contracted for the 10th straight month in December and at a sharper pace than in November, suggesting a continued gradual loss of momentum in the world’s second-largest economy.

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If this is only halfway true, Obstfeld just labeled himself, and the IMF, grossly incompetent: “Global spillovers from China’s slowdown have been “much larger than we could have anticipated..”

China Could ‘Spook’ Global Markets Again in 2016: IMF Chief Economist (BBG)

China could once again “spook” global financial markets in 2016, the IMF’s chief economist warned. Global spillovers from China’s slowdown have been “much larger than we could have anticipated,” affecting the global economy through reduced imports and weaker demand for commodities, IMF Economic Counselor Maurice Obstfeld said in an interview posted on the fund’s website. After a year in which China’s efforts to contain a stock-market plunge and make its exchange rate more market-based roiled markets, the health of the world’s second-biggest economy will again be a key issue to watch in 2016, Obstfeld said. “Growth below the authorities’ official targets could again spook global financial markets,” he said as global equities on Monday got off to a rough start to the year.

“Serious challenges to restructuring remain in terms of state-owned enterprise balance-sheet weaknesses, the financial markets, and the general flexibility and rationality of resource allocation.” Obstfeld, who took over as chief economist at the International Monetary Fund in September, said emerging markets will also be “center stage” this year. Currency depreciation has “proved so far to be an extremely useful buffer for a range of economic shocks,” he said. “Sharp further falls in commodity prices, including energy, however, would lead to even more problems for exporters, including sharper currency depreciations that potentially trigger still-hidden balance sheet vulnerabilities or spark inflation,” he said. With emerging-market risks rising, it will be critical for the U.S. Federal Reserve to manage interest-rate increases after lifting its benchmark rate in December for the first time since 2006, Obstfeld said.

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Q: who suffers the losses on the investments?

Supermines Add to Supply Glut of Metals (WSJ)

Cerro Verde, Peru – In this volcanic desert, a dusty moonscape patrolled by bats, snakes and guanacos, America’s biggest miner is piling on to the new force in industrial resources: supermines. It’s a strategy that could be driving miners into the ground. Freeport-McMoRan is completing a yearslong $4.6 billion expansion that will triple production at its Cerro Verde copper mine, turning a once-tiny, unprofitable state mine into one of the world’s top five copper producers. As Cerro Verde’s towering concrete concentrators grind out copper to be made into pipes and wires in Asia, it will add to production coming from newly built giant mines around the world, in a wave of supply that is compounding the woes of the depressed mining sector.

Slowing growth in China and other emerging markets has dragged metals prices into a deep downturn, just a few years after mining companies and their investors bet billions on a so-called supercycle, the seemingly never-ending growth in demand for commodities. Back then, miners awash in cheap money set out to build the biggest mines in history, extracting iron ore in Australia, Brazil and West Africa, and copper from Chile, Peru, Indonesia, Arizona, Mongolia and the Democratic Republic of Congo. They also expanded production of minerals such as zinc, nickel and bauxite, which is mined to make aluminum. Those giant mines are now giving the industry an extra-bad hangover during the bust.

The big mines cost so much to build and extract minerals so efficiently that mothballing them is unthinkable—running them generates cash to pay down debts, and huge mines are expensive to simply maintain while idle. But as a result, their scale means they are helping miners dig themselves even deeper into the price trough by adding to a glut. The prolonged price slump has forced miners to make painful cuts. In December, Anglo American, which recently completed a supermine in Brazil that went over budget by $6 billion, announced 85,000 new job cuts, asset sales and a suspended dividend. On the same day, Rio Tinto, which has built supermines in Western Australia, cut spending plans, while in September, Glencore suspended its dividend and raised $2.5 billion in stock as part of a plan to cut debt.

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Absolutely nuts.

Debt Payments Set To Balloon For Detroit Public Schools (DN)

The debt payments of Detroit Public Schools — already the highest of any school district in Michigan — are set to balloon in February to an amount nearly equal to the school district’s payroll and benefits as the city school system teeters on the edge of insolvency. Detroit Public Schools has to begin making monthly $26 million payments starting in less than a month to chip away at the $121 million borrowed this school year for cash flow purposes and $139.8 million for operating debts incurred in prior years. The city school system’s total debt payments are 74% higher from last school year. The debt costs continue to mount while Gov. Rick Snyder and the Legislature remain at odds over how to rescue Michigan’s largest school district.

A bankruptcy of the district could leave state taxpayers on the hook for at least $1.5 billion in DPS debt. The school district’s payroll and health care benefits are projected to cost $26.8 million in February — meaning the debt payments will be 97% of payroll. General fund operating debt payments that exceed 10% of payroll are “a major warning flag,” municipal bond analyst Matt Fabian said. “That’s extremely high,” said Fabian, managing director of Municipal Market Advisors in Concord, Massachusetts, who also followed the city of Detroit’s bankruptcy case. “That’s no longer, really, a normal school district. The school district has turned into a debt-servicing entity. It’s making its own mission impossible.” As a result, the Detroit district won’t have enough cash to pay any bills in four months.

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As a result of holiday spending?

New Year Brings Financial Headache For Millions Of British Families (Guardian)

More than 2.5 million families in England are being forced to cut back on essentials such as heating and clothing this winter to pay their rent or mortgage, according to housing charity Shelter. Its research also found that one in 10 parents were worried about whether they would be able to afford to meet their housing payments this month. The charity’s findings coincided with separate research from National Debtline showing that more than 5.5 million Britons said they were likely to fall behind with their finances in January as a result of Christmas spending. The two surveys underline the strain that many individuals and families are under as the new year begins, with some so worried about their situation that they sought online advice on Boxing Day.

As part of the Shelter research, YouGov questioned more than 4,500 adults during November, including around 850 parents with children aged 18 and under. It found that 27% of parents – the equivalent of almost 2.7 million people in England – said they had already cut back on either using energy to heat their home or buying warm clothing to help meet their rent or mortgage payments this winter. Around 10% of parents said they were worried about being able to afford to pay their monthly rent or mortgage, while 15% told the researchers they were already planning to cut back on buying festive food, or had used savings meant for Christmas presents to help meet their housing costs this winter. Shelter said a shortage of affordable homes had left many families struggling with “sky-high” housing costs, and was part of the reason why more than 100,000 people had sought advice on housing debt from its online, phone-based and face-to-face services in the past year.

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When will Brazil blow up? How on earth can the country host the Olympics?

Brazil Heads for Worst Recession Since 1901 (BBG)

Brazil’s economy will contract more than previously forecast and is heading for the deepest recession since at least 1901 as economic activity and confidence sink amid a political crisis, a survey of analysts showed. Latin America’s largest economy will shrink 2.95% this year, according to the weekly central bank poll of about 100 economists, versus a prior estimate of a 2.81% contraction. Analysts lowered their 2016 growth forecast for 13 straight weeks and estimate the economy contracted 3.71% last year. Brazil’s policy makers are struggling to control the fastest inflation in 12 years without further hamstringing a weak economy.

Finance Minister Nelson Barbosa, who took the job in December, has faced renewed pressure to moderate austerity proposals aimed at bolstering public accounts and avoiding further credit downgrades. Impeachment proceedings and an expanding corruption scandal have also been hindering approval of economic policies in Congress. “We’re now taking into account a very depressed scenario,” Flavio Serrano, senior economist at Haitong in Sao Paulo, said by phone. Central bank director Altamir Lopes said on Dec. 23 the institution will adopt necessary policies to bring inflation to its 4.5% target in 2017.

Less than a week later, the head of President Dilma Rousseff’s Workers’ Party, Rui Falcao, said Brazil should refrain from cutting investments and consider raising its inflation target to avoid higher borrowing costs. Consumer confidence as measured by the Getulio Vargas Foundation in December reached a record low. Business confidence as measured by the National Industry Confederation fell throughout most of last year, rebounding slightly from a record low in October. The last time Brazil had back-to-back years of recession was 1930 and 1931, and has never had one as deep as that forecast for 2015 and 2016 combined, according to data from national economic research institute IPEA that dates back to 1901.

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“..the automaker will seek to negotiate a lower penalty by arguing that the maximum would be “crippling to the company and lead to massive layoffs..”

Volkswagen Faces Billions In Fines As US Sues In Emissions Scandal (Reuters)

The U.S. Justice Department on Monday filed a civil lawsuit against Volkswagen for allegedly violating the Clean Air Act by installing illegal devices to impair emission control systems in nearly 600,000 vehicles. The allegations against Volkswagen, along with its Audi and Porsche units, carry penalties that could cost the automaker billions of dollars, a senior Justice Department official said. VW could face fines in theory exceeding $90 billion – or as much as $37,500 per vehicle per violation of the law, based on the complaint. In September, government regulators initially said VW could face fines in excess of $18 billion. “The United States will pursue all appropriate remedies against Volkswagen to redress the violations of our nation’s clean air laws,” said Assistant Attorney General John Cruden, head of the departments environment and natural resources division.

The Justice Department lawsuit, filed on behalf of the Environmental Protection Agency, accuses Volkswagen of four counts of violating the U.S. Clean Air Act, including tampering with the emissions control system and failing to report violations. The lawsuit is being filed in the Eastern District of Michigan and then transferred to Northern California, where class-action lawsuits against Volkswagen are pending. “We’re alleging that they knew what they were doing, they intentionally violated the law and that the consequences were significant to health,” the senior Justice Department official said. The Justice Department has also been investigating criminal fraud allegations against Volkswagen for misleading U.S. consumers and regulators. Criminal charges would require a higher burden of proof than the civil lawsuit.

The civil lawsuit reflects the expanding number of allegations against Volkswagen since the company first admitted in September to installing cheat devices in several of its 2.0 liter diesel vehicle models. The U.S. lawsuit also alleges that Volkswagen gamed emissions controls in many of its 3.0 liter diesel models, including the Audi Q7, and the Porsche Cayenne. Volkswagen’s earlier admissions eliminate almost any possibility that the automaker could defend itself in court, Daniel Riesel of Sive, Paget & Riesel P.C, who defends companies accused of environmental crimes, said. To win the civil case, the government does not need to prove the degree of intentional deception at Volkswagen – just that the cheating occurred, Riesel said. “I don’t think there is any defense in a civil suit,” he said. Instead, the automaker will seek to negotiate a lower penalty by arguing that the maximum would be “crippling to the company and lead to massive layoffs,” Riesel said.

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This can -re: will- happen all over the EU.

Portugal’s Bank Bail-In Sets a Dangerous Precedent (BBG)

As Europe belatedly gets around to repairing its weakest banks, investors who have lent to financial institutions by buying bonds face a brave new world. Their money can effectively be confiscated to plug balance-sheet holes. Recent events in Portugal suggest that the authorities should be wary of treating bondholders as piggybanks, or risk destroying a key source of future funds for the finance industry. Let’s begin with the “what” before we get to the “why.” Here’s what happened to the prices of five Portuguese bank bonds in the past few days: Picture the scene. You left the office on Dec. 29 owning Portuguese bank debt that was trading at about 94% of face value. In less than 24 hours, you lost 80% of your money. So what happened? Last year, Portugal divided Banco Espirito Santo, previously the nation’s largest lender, into a “good” bank and a “bad” bank.

If you owned any of those five bonds on Tuesday, you were owed money by Novo Banco, the good bank. On Wednesday, you were told that your bonds had been transferred to BES, the bad bank. The Portuguese central bank selected five of Novo Banco’s 52 senior bonds, worth about €1.95 billion, and reassigned them – thus backfilling a €1.4 billion hole in the “good” bank’s balance sheet that had been revealed in November by the ECB’s stress tests of the institution. At the time of those tests, the value of Novo Banco bonds rose because the capital shortfall was lower than some investors had feared, and the good bank was widely expected to be able to mend the deficit by selling assets. Instead, the Dec. 30 switcheroo means selected bondholders are footing that bill.

Here is where the shoe pinches. The documentation for senior debt typically stipulates that all such debt is what’s called “pari passu”; that is, all securities rank equally, and none should get preferential treatment. But by moving just five bonds off the healthy bank’s balance sheet, Portugal has destroyed the principle of equality between debt securities. There’s nothing inherently wrong with “bailing in” bondholders who’ve lent to a failing institution. It’s certainly preferable to the old solution of using taxpayers’ money to shore up failed banks, and it’s enshrined in the EU’s new Bank Resolution and Recovery Directive, which came into effect on Jan. 1. But the principle of equal treatment for ostensibly identical securities is a key feature of the bond market. If investors fear they’re at the mercy of capricious regulatory decisions in a restructuring, they’ll think more than twice before lending to banks.

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China’s take on Russia’s strategy document.

Russia Stands Up To Western Threats, Pivots To East (Xinhua)

Russia has updated a bunch of strategies to fight against threats to its national security, as demonstrated by the document “About the Strategy of National Security of the Russian Federation,” which President Vladimir Putin signed on New Year’s Eve. Amid ongoing clashes with the West over Ukraine and other fronts, leaders of the country have chosen to stand up to Western threats, while attaching growing importance to security cooperation across the Asia-Pacific. On the one hand, the West has shown substantial willingness, following visits to Moscow by leaders or senior representatives of major Western powers, to work with the Kremlin on a global anti-terror campaign and a political settlement of the protracted conflict in Syria.

On the other hand, one can hardly deny new friction and tensions would arise during this engagement, considering the fact that the West remains vigilant about a Russia that aspires to regain its global stature. Taking into account the enormous changes in the geopolitical, military and economic situation, the document, a revised version of the 2009 one, calls for the consolidation of “Russia’s status of a leading world power.” Russia believes it is now confronted with a host of threats, both traditional and new, such as the expansion of NATO, military build-up and deployment in its neighboring countries, a new arms race with the United States, as well as attempts to undermine the Moscow regime and to incite a “color revolution” in the country. Last year has witnessed repeated saber-rattling between Russia and NATO.

The expansion of the alliance, which saw a need to adapt to long-term security challenges with special interests in deploying heavy weapons in Eastern Europe and the Baltic countries, was blamed for the current military situation in the region and its cooling relationship with Moscow that has warned it would respond to any military build-up near Russian borders. At the same time, sanctions imposed by the United States and its allies over Moscow’s takeover of the Black Sea peninsula Crimea and its alleged role in the Ukraine crisis, together with the ongoing fall in oil prices, have once again drawn attention to Russia’s over-reliance on exports of raw materials and high vulnerability to the fluctuations in foreign markets, which the new document described as “main strategic threats to national security in the economy.”

Moreover, the daunting provocation and infiltration of the Islamic State terrorist group have just made Russia’s security concerns even graver. Domestically, Moscow has tightened security measures since Islamic extremists threatened attacks and bloodshed in the country. Globally, it has long been calling for a unified coalition, including collaboration with the United States, to double down on the anti-terror battle. As antagonism between Russia and the West currently shows little signs of receding, Moscow has begun to turn eastward, a strategic transition that is reflected by the national security blueprint. Mentioning specific relations with foreign countries, the document noted firstly that the strategic partnership of coordination with China is a key force to uphold global and regional stability. It then mentioned the country’s “privileged strategic partnership” with India.

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Can’t really discuss this without involving Russia.

Will US Fall For Saudi’s Provocation In Killing Of Shia Cleric? (Reuters)

There should be little doubt that Saudi Arabia wanted to escalate regional tensions into a crisis by executing Shi’ite cleric Nimr al-Nimr. On the same day, Riyadh also unilaterally withdrew from the ceasefire agreement in Yemen. By allowing protestors to torch the Saudi embassy in Tehran in response, Iran seems to have walked right into the Saudi trap. If Saudi Arabia succeeds in forcing the US into the conflict by siding with the kingdom, then its objectives will have been met. It is difficult to see that Saudi Arabia did not know that its decision to execute Nimr would cause uproar in the region and put additional strains on its already tense relations with Iran. The inexcusable torching of the Saudi embassy in Iran -Iranian President Hassan Rouhani condemned it and called it “totally unjustifiable,” though footage shows that Iranian security forces did little to prevent the attack- in turn provided Riyadh with the perfect pretext to cut diplomatic ties with Tehran.

With that, Riyadh significantly undermined U.S.-led regional diplomacy on both Syria and Yemen. Saudi Arabia has long opposed diplomatic initiatives that Iran participated in– be it in Syria or on the nuclear issue — and that risked normalizing Tehran’s regional role and influence. Earlier, Riyadh had successfully ensured Iran’s exclusion from Syria talks in Geneva by threatening to boycott them if Iran was present, U.S. officials have told me. In fact, according to White House sources, President Barack Obama had to personally call King Salman bin Abdulaziz Al Saud to force the Saudis to take part in the Vienna talks on Syria this past fall. Now, by having cut its diplomatic relations with Iran, the Saudis have the perfect excuse to slow down, undermine and possibly completely scuttle these U.S.-led negotiations, if they should choose to do so.

From the Saudi perspective, geopolitical trends in the region have gone against its interests for more than a decade now. The rise of Iran – and Washington’s decision to negotiate and compromise with Tehran over its nuclear program – has only added to the Saudi panic. To follow through on this way of thinking, Riyadh’s calculation with the deliberate provocation of executing Nimr may have been to manufacture a crisis — perhaps even war — that it hopes can change the geopolitical trajectory of the region back to the Saudi’s advantage. The prize would be to force the United States to side with Saudi Arabia and thwart its slow but critical warm-up in relations with Tehran. As a person close to the Saudi government told the Wall Street Journal: “At some point, the U.S. may be forced to take sides [between Saudi Arabia and Iran]… This could potentially threaten the nuclear deal.”

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“The coming crackup will re-set the terms of civilized life to levels largely pre-techno-industrial.”

Pretend to the Bitter End (Jim Kunstler)

Forecast 2016 There’s really one supreme element of this story that you must keep in view at all times: a society (i.e. an economy + a polity = a political economy) based on debt that will never be paid back is certain to crack up. Its institutions will stop functioning. Its business activities will seize up. Its leaders will be demoralized. Its denizens will act up and act out. Its wealth will evaporate. Given where we are in human history — the moment of techno-industrial over-reach — this crackup will not be easy to recover from; not like, say, the rapid recoveries of Japan and Germany after the brutal fiasco of World War Two. Things have gone too far in too many ways. The coming crackup will re-set the terms of civilized life to levels largely pre-techno-industrial. How far backward remains to be seen.

Those terms might be somewhat negotiable if we could accept the reality of this re-set and prepare for it. But, alas, most of the people capable of thought these days prefer wishful techno-narcissistic woolgathering to a reality-based assessment of where things stand — passively awaiting technological rescue remedies (“they” will “come up with something”) that will enable all the current rackets to continue. Thus, electric cars will allow suburban sprawl to function as the preferred everyday environment; molecular medicine will eliminate the role of death in human affairs; as-yet-undiscovered energy modalities will keep all the familiar comforts and conveniences running; and financial legerdemain will marshal the capital to make it all happen.

Oh, by the way, here’s a second element of the story to stay alert to: that most of the activities on-going in the USA today have taken on the qualities of rackets, that is, dishonest schemes for money-grubbing. This is most vividly and nauseatingly on display lately in the fields of medicine and education — two realms of action that formerly embodied in their basic operating systems the most sacred virtues developed in the fairly short history of civilized human endeavor: duty, diligence, etc. I’ve offered predictions for many a year that this consortium of rackets would enter failure mode, and so far that has seemed to not have happened, at least not to the catastrophic degree, yet.

I’ve also maintained that of all the complex systems we depend on for contemporary life, finance is the most abstracted from reality and therefore the one most likely to show the earliest strains of crackup. The outstanding feature of recent times has been the ability of the banking hierarchies to employ accounting fraud to forestall any reckoning over the majestic sums of unpayable debt. The lesson for those who cheerlead the triumph of fraud is that lying works and that it can continue indefinitely — or at least until they are clear of culpability for it, either retired, dead, or safe beyond the statute of limitations for their particular crime.

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The same people who criticized Balkan countries for doing the same.

Fortress Scandinavia Sinks Into Blame Game Over Refugee Crisis (BBG)

Gliding high above the Baltic Sea under pylons that stretch 669-feet into the air, the daily commute across Europe’s longest rail and road link was once a symbol of integration in the region. But for many of the 15,000 people who commute daily across the Oeresund Bridge between Malmoe, Sweden’s third-largest city, and Copenhagen, the trip to work and back just became a lot more difficult. On Monday, Sweden imposed identification checks on people seeking to enter by road, rail or ferry after the country was overwhelmed by a record influx of refugees. The development “doesn’t fit with anyone’s vision for the Oeresund region,” Ole Stavad, a former Social Democrat minister once in charge of Nordic cooperation, said in an interview. “This isn’t just about Oeresund, Copenhagen, Malmoe or Scania. It’s about all of Sweden and Denmark.”

He predicts economic pain for both countries “unless this issue is resolved.” If not even Sweden and Denmark can get along, that doesn’t bode well for the rest of Europe, which is now grappling with the ever-present threat of terrorism, a groundswell in nationalism and sclerotic economic growth. And the ripple effects are already starting. Twelve hours after the Swedish controls came into force, Denmark introduced spot checks on its border with Germany, threatening the passport-free travel zone known as Schengen. The move, which has yet to be approved by Schengen’s guardian, the EU, has not pleased Berlin. And mutual recriminations are flying in Scandinavia. The Danes say they were forced to impose their measures after Sweden enforced its controls.

The Swedes blame the Danes for not sharing the burden of absorbing refugees. Sweden received around 163,000 asylum applications in 2015, compared with Denmark’s 18,500. The controls are placing an unexpected burden on workers who had bought into the idea of an international business area of 3.7 million inhabitants. The Malmoe-based Oeresund Institute, a think-tank, estimates the daily cost of checks on commuters alone are 1.3 million kroner ($190,000). Denmark’s DSB railway says it costs it 1 million kroner in lost ticket sales and expenses for travel across a stretch made famous by the popular Scandinavian crime series “The Bridge.”

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“..in an advanced state of decomposition..” Makes you wonder what the real death toll is, as opposed to the official one.

Bodies Of Four Migrants Found In Eastern Aegean (Kath.)

Greek coast guard officers found the bodies of four people, thought to be migrants, in the sea near the islands of Fournoi in the eastern Aegean. The bodies, of three men and one woman, were found on Sunday in an advanced state of decomposition, according to authorities. The coast guard also rescued 160 migrants and arrested two traffickers off Samos on Sunday.

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And on and on.

Nine Drowned Refugees Wash Up On Turkish Beach (AP)

A Turkish news agency says the bodies of nine drowned migrants, including children, have washed up on a beach on Turkey’s Aegean coast after their boat capsized in rough seas. The Dogan news agency says the bodies were discovered early on Tuesday in the resort town of Ayvalik, from where migrants set off on boats to reach the Greek island of Lesvos. Turkish coasts guards were dispatched to search for possible survivors. Eight migrants were rescued. Dogan video footage showed a body, still wearing a life jacket, being pulled from the sea onto the sandy beach. There was no immediate information on the migrants’ nationalities.

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Jan 042016
 
 January 4, 2016  Posted by at 4:27 pm Finance Tagged with: , , , , , , ,  2 Responses »


Marion Post Wolcott Natchez, Mississippi, grocery window 1940

The Chinese stock markets broke through 2 circuit breakers today, breakers that were introduced only a few months ago in response to the market selloff, triggered by a surprise yuan devaluation, in August. The first breaker, at -5%, forced a 15-minute trading halt. The second one, at -7%, halted trading for the rest of the day.

For many people, today’s bust can’t have been a huge surprise, because it’s been known for some time that a ban on stock sales by parties holding a 5% or larger stake in a company, is set to expire on Friday. Beijing may panic again before that date, but it can’t force stakeholders to hold on to large portfolios forever either.

Xi and his crew should have stayed out of the markets from the start, but that’s not how they see the world. They still think like apparatchicks, and don’t understand that markets are opposed, at a 180º angle, to top down control. You can either have a market, or you can have central control.

They pumped up the housing market for all they could, and when that bubble blew they tricked their people into buying stocks. And now that one’s fixing to die too, and that didn’t take nearly as long as the housing bubble. The central control team is frantically looking for the next carnival attraction, but it won’t be easy.

They should have stayed out of all markets. Just like western central banks. All interference by governments and central banks can only make things worse, a fact at best temporarily hidden by the distortions they force upon markets.

And we shouldn’t forget that expectations for China as the world’s economic savior determined western central bank ‘thinking’ to a large extent over the past decade. Like so many others, central bankers too are incapable of spotting a Ponzi when it’s staring them in the face.

Now the Chinese bubble is bursting, and set to spill over into and over the global economy with dire consequences, we are all exposed to that much more than was ever necessary. All the PBoC, Yellen, Kuroda and Draghi managed to accomplish was a dran-out illusion, a slow-motion sleight of hand.

Here’s something I was writing over the weekend, prior to today’s market action:

China underlies all problems the world faces economically today. Since at least 2008, the global economy has been a one-dimensional one-way street, in which all hope was focused on China. Western companies and stock traders were so confident that China would lift the entire planet out of its recessionary doldrums, they leveraged themselves up the wazoo to bet on a China-based recovery. It was the only game in town, and it was merrily facilitated by central banks.

The People’s Bank of China threw some $25 trillion at the illusion, the Fed, ECB and BoJ combined for probably as much again. One way of looking at it is that if you weren’t sure on how bad the recession really was, now you know the numbers.

But today China is close to entering its own recession, whether Beijing will admit it or not. The official GDP growth goal of 6.5% looks downright silly when you see this graph that Charlene Chu sent to BI:


CEIC and the National Bureau of Statistics; Charlene Chu, Autonomous Research

From the article:

Secondary industry comprises about 40-45% of GDP. [..] 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.

The first line there is educative, the second is nonsense. Manufacturing in China is plunging because ‘we’ don’t buy their overcapacity and overproduction any longer. And neither do the Chinese themselves. Primary industry, agriculture, may grow a little bit, but certainly not much.

Tertiary industry, services, may also grow a bit, but Beijing can’t just flip a switch and get people to buy services on a scale that can make up for the decline in manufacturing. Neither can it retrain tens of millions of workers for jobs in that illusive services sector, let alone on short notice.

This decline will take years for the Chinese economy to absorb, since so much of it is based on overleveraged overcapacity and overproduction. The spectre of massive job losses hangs over the entire ‘adjustment’ process, both in China itself and in countries that -used to- supply it with commodities. Mass unemployment in China in turn raises the spectre of severe social unrest.

As I said in 2016 Is An Easy Year To Predict, China has got to be the biggest story going forward (rather than oil, for instance), and it would have been already, to a much larger extent than it has, if there were less denial involved. And less debt.

Like the west, China will have to deleverage its enormous debt burden before it can even start thinking of rebuilding its economy. Which is precisely what they all seek to deny, loudly and boisterously, not only as if a recovery were feasible without dealing with the debt, but even as if more debt could mean more recovery.

This debt deleveraging will involve such stupendous amounts of -largely virtual- money that the situation, the bottom, from which rebuilding will need to take place will be one at which today’s societies will be hardly recognizable anymore.

Debt deleveraging comes with deflation. Spending will plummet, unemployment will shoot up, production will grind to a halt. Power will shift from established political and economic parties to others.

Obviously, this will not be a smooth transition. The clarions of war sound in the distance already. What is crucial to realize is that none of it can be prevented, other than perhaps the warfare; the economic parts of the play must must be staged. All we can do is to make it as bearable as possible.

The people on the streets, as always, will bear the brunt of the downfall. We only need to look at Greece today to get a pretty good idea of how these things play out.

It won’t be all straight down from here, but the trend will be crystal clear. It didn’t start all of a sudden today, but China’s double circuit breaker is a useful sign, if not an outright red flag. One thing’s for sure: we’ll make the history books.

Jan 042016
 
 January 4, 2016  Posted by at 9:10 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


AP Refugee carries child in freezing waves off Lesbos 2016

China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)
China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)
China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)
Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)
Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)
Reserve Bank of Australia Index of Commodity Prices (RBA)
As Hedge Funds Go, So Goes The World (John Rubino)
Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)
UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)
UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)
Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)
New EU Authority Budgets For 10 Bank Failures In Four Years (FT)
Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)
Cash Burning Up For Shipowners As Finance Runs Dry (FT)
The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)
Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)
Sweden To Impose ID Checks On Travellers From Denmark (Guardian)
Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Great start to the year.

China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)

China halted trading in stocks, futures and options after a selloff triggered circuit breakers designed to limit swings in one of the world’s most volatile equity markets. Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7%, according to data compiled by Bloomberg. An earlier 15-minute halt at the 5% level failed to stop the retreat, with shares extending losses as soon as the market re-opened. The selloff, the worst-ever start to a year for Chinese shares, came on the first day the circuit breakers took effect. The $7.1 trillion stock market is starting the year on a down note after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders.

Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990. “Stay short, or go home,” said Mikey Hsia at Sunrise Brokers. “That’s all you can do.” The halts took effect as anticipated, without any technical issues, Hsia said. About 595 billion yuan ($89.9 billion) of shares changed hands on mainland exchanges before the suspension, versus a full-day average of about 1 trillion yuan over the past year, according to data compiled by Bloomberg.

Under the circuit breaker rules finalized last month, a move of 5% in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7% closes the market for the rest of the day. The CSI 300, comprised of large-capitalization companies listed in Shanghai and Shenzhen, fell as much as 7.02% before trading was suspended. Chinese shares listed in Hong Kong, where there is no circuit breaker, extended losses after the halt on mainland exchanges. The Hang Seng China Enterprises Index retreated 4.1% at 2:12 p.m. local time. “Investors are using Hong Kong to hedge their positions,” said Castor Pang at Core-Pacific Yamaichi. “The circuit breaker may increase selling pressure further.”

Read more …

China needs a big clean-up.

China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)

China’s factory activity shrank for a 10th straight month in December as surveys across Asia showed industry struggling with slack demand even as the policy cupboard is looking increasingly bare of fresh stimulus. Uncertainty over the economic outlook was exacerbated by a flare up in tensions between Saudi Arabia and Iran, that has sent investors scurrying from stocks to safe havens such as the Japanese yen. Japan’s Nikkei fell over 2% and Shanghai lost more than 3%. The Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) slipped to 48.2 in December, below market forecasts of 49.0 and down from November’s 48.6. That was the lowest reading since September and well below the 50-point level which demarcates contraction from expansion.

It followed a fractional increase in the official PMI to 49.7. There was a faint stirring of hope as PMIs in South Korea and Taiwan both edged above the 50 mark, though more thanks to a pick up in domestic demand than any revival in exports. Weighed down by weak demand at home and abroad, factory overcapacity and cooling investment, China is expected to post its weakest economic growth in 25 years in 2015, with the rate of expansion slipping to around 7% from 7.3% in 2014. “Absent vibrant external demand, we think it’s a consensus view that China’s GDP growth is poised to slow further to ‘about’ 6.5% in 2016,” ING said in a research note. The drag from industry comes as China makes gradual progress in its transformation to a more service-driven economy.

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Not so smart money: “More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014..”

China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)

Investors who poured billions into China’s homegrown technology companies scored big during 2015. But increasingly it looks like the easy money has been made and this year could prove tougher as China’s tech companies face high expectations from investors. Many Chinese privately held startups rewarded investors, as valuations more than doubled during 2015 and a wave of management buyout offers buoyed investors in U.S.-listed Chinese tech companies. More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014 according to data from CB Insights and Dealogic. Investors marked up their holdings in Chinese privately held startups during the year even as they put lower price tags on some of their Silicon Valley investments.

Most investors aren’t required to publicly disclose their valuations of startup holdings, which are often valued based on their most recent round of fundraising. But mutual fund Fidelity Blue Chip Growth Fund, which has marked down some of its Silicon Valley startup investments, instead increased the value ascribed to its January investment in the $15 billion Chinese shopping app Meituan.com by more than 20% through the end of November. Investors have seen their bet on Chinese ride-hailing company Didi Kuaidi Joint Co. nearly triple from a $6 billion valuation in February to $16 billion in September.

The higher valuations and cash-burning of many startups are giving some investors pause. In recent months, some have become more cautious about putting fresh cash into big startups, as China’s rocky domestic stock market put local initial public offerings on hold. “The huge swings in the public markets have spilled over into the later-stage venture investment market,” says Richard Ji, founder of All-Stars Investment, an investor in Chinese startups like $46 billion smartphone maker Xiaomi Corp. and ride-sharing company Didi Kuaidi Joint Co. “Valuations overall have softened and companies are offering better terms to investors.”

Read more …

Smashing US exports, emerging and commodities currencies in the process.

Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)

The dollar has an opportunity to make history. After three straight years of gains, strategists are forecasting the U.S. currency will be a world beater again in 2016, strengthening against seven of 10 developed-world peers by the end of the year, according to the median estimate in a Bloomberg survey. That outlook is backed by the Federal Reserve’s stated intent to continue raising interest rates while peers in the rest of the world keep them flat or lower. The rally that started during President Barack Obama’s second term is poised to join a category defined by only the biggest, most durable periods of dollar strength since the currency’s peg to gold ended in 1971.

Of the two other rallies that share that distinction, during the terms of Presidents Ronald Reagan and Bill Clinton, neither stopped at four years. “This is the third big dollar rally we’ve had,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. “The Obama dollar rally, I think, is being fueled by the divergence in monetary policy.” The U.S. currency will end 2016 higher against its major counterparts except the Canadian dollar, British pound and the Norwegian krone, posting its biggest gains against the New Zealand and Australian dollars and the Swiss franc, according to forecasts compiled by Bloomberg.

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“UK shares have steadily risen for more than 70 months..”

Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)

Investors face a rude awakening in 2016 as the return of risk brings an end to the era of unparalleled financial excess. Central bankers actions to save creditors by reducing borrowing costs to near zero created a Dorian Gray style economy that pursued returns without consequences. We are about to unveil the reality of those decisions after six years in a world devoid of financial responsibility.

[..] The realisation of losses is something that many in the cosseted world of investment will never have experienced. The collapse in high-yield bond prices is already causing paralysis. Third Avenue Management, a $800m high-yield mutual fund, was forced to halt redemptions in order to run down the fund in an orderly fashion as investors clamoured for the exit. The holders of certain bonds in Portuguese bank Novo Banco reacted with fury when they were informed they faced losses last week under a recapitalisation plan. The fact that an investor in the debt of a Portuguese bank is surprised that losses are even a possibility is laughable, if it wasn’t also deeply troubling. The return of risk will turn many of the investment decisions made during the past six years on their head.

Out will go unprofitable companies that relied on constant support from shareholders for stellar growth. In will come companies with solid profit track records that can generate enough cash to fund themselves. The lofty valuations in the technology sector are looking particularly exposed. When the world economy stumbled in 2008 it was only concerted action that pulled it back from the brink. The situation now is very different with the US pursuing monetary tightening, and China devaluing its currency to arrest the decline. Emerging markets have been crippled by a currency collapse and the drop in commodity prices has undermined the budgets of Canada, Norway, Australia, Venezuala and Saudi Arabia. The flow of funds out of developed Western equity markets is becoming alarming.

We enter 2016 as the bull run in the FTSE 100 is looking particularly long in the tooth. UK shares have steadily risen for more than 70 months. The goldilocks scenario of cheap debt and low wages is coming to and end and placing corporate profits under pressure. The Institute of Directors has already warned UK profits may be past their peak. This leaves investors in the FTSE 100 exposed with shares trading on 16 times forecast earnings, a premium to the long run average of 15. Even more worrying when you consider earnings have to increase by 14pc in 2016 to achieve that rating, if earnings remain flat in the year ahead the market is trading on more than 20 times earnings.

Read more …

Scary graph of the day.

Reserve Bank of Australia Index of Commodity Prices (RBA)

Preliminary estimates for December indicate that the index declined by 4.9% (on a monthly average basis) in SDR terms, after declining by 3.1% in November (revised). The decline was led by the prices of iron ore and oil. The base metals subindex declined slightly in the month while the rural subindex was little changed. In Australian dollar terms, the index declined by 6.0% in December. Over the past year, the index has fallen by 23.3% in SDR terms, led by declines in the prices of bulk commodities. The index has fallen by 17.1% in Australian dollar terms over the past year. Consistent with previous releases, preliminary estimates for iron ore, coking coal and thermal coal export prices are being used for the most recent months, based on market information. Using spot prices for these commodities, the index declined by 5.3% in December in SDR terms, to be 25.6% lower over the past year.

Read more …

John provides a slew of examples I have no space for here.

As Hedge Funds Go, So Goes The World (John Rubino)

How do you make money in a world where history is meaningless? The answer, for a growing number of big fund managers, is that you don’t. Hedge funds, generally the most aggressive species of money manager, do a lot of “black box” trading in which bets are placed on previously-identified patterns and relationships on the assumption that those patterns will repeat in the future. But with governments randomly buying stocks and bonds and bailing out/subsidizing everything in sight, old relationships are distorted and strategies that worked in the past begin to fail, as do the money managers who rely on them.

[..] Why should regular people care about the travails of the leveraged speculating community? Because these guys are generally considered to be the finance world’s best and brightest, and if they can’t figure out what’s going on, no one can. And if no one can, then risky assets are no longer worth the attendant stress. In response, a system that had previously embraced leverage and “alternative” asset classes will go risk-off in a heartbeat, and all those richly-priced growth stocks and trophy buildings and corporate bonds will find air pockets under their prices. And since pretty much everything else now depends on high asset prices, things will get ugly in the real world.

A case can be made that such a contagion is already underway but is being hidden from Americans by the recent strength of the dollar. According to Deutsche Bank, when measured in dollars the rest off the world is now deeply in recession and falling fast. In other words, Main Street is vulnerable to leveraged trading algorithms and Brazilian bonds because it’s not just exotica that is overleveraged. Virtually all governments have to refinance trillions of short-term debt each year. Corporations have borrowed record amounts of money in this expansion (and wasted much of it on share buy-backs). Pension funds (the last remaining leg of the middle-class stool for millions of Americans) are grossly underfunded and will have to slash benefits if their portfolios decline from here.

Risk-off, in short, is no longer just a temporary swing of the pendulum, guaranteed to reverse in a year or two. As amazing as this sounds, we’ve borrowed so much money that as hedge funds go, so goes the world.

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Desperation writ large.

Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)

Japan’s central bank, which dominates the domestic bond market, has begun to call the shots in the equity market as well – to the point where asset managers are looking to design investment funds with the Bank of Japan in mind. The bank has blazed a trail in global central banking by becoming something of an activist investor in pursuit of economic revival, using its influence as a mainly indirect owner of shares to support firms that spend more cash at home. The bank, which owns about $54 billion in exchange-traded funds (ETFs), is ramping up its purchases but has yet to give any detailed investment criteria, beyond a preference for firms with growing capital expenditure and investment in its staff.

“We’re willing and considering to add such a product,” said Kohei Sasaki at Mitsubishi UFJ Kokusai Asset Management. “We’ve already contacted index vendors on this matter.” Bank of Japan Governor Haruhiko Kuroda and Prime Minister Shinzo Abe have been calling on companies to raise capital expenditure and wages to spur the economy, after repeated monetary and fiscal stimulus over the past three years failed to lift it out of a funk of weak consumption and deflation. So far, their pleas have failed to prod companies into action, despite many of them making record profits on the back of the central bank’s zero interest rates and a weak yen.

Losing patience, Kuroda said last month the bank would buy 300 billion yen ($2.5 billion) a year of ETFs, in addition to 3 trillion yen it already assigns each year to ETFs. It said the extra purchases would target funds whose underlying firms were “proactively making investment in physical and human capital”. Though he did not go into detail, the comment was an invitation for asset managers and index compilers to come up with some “Abenomics” ETFs which would be full of listed firms doing their bit to revive consumption and the broader economy. “We’ve already started trying to develop some kind of solution to the demand,” said Seiichiro Uchi, managing director for index compiler MSCI in Tokyo.

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This is a policy thing, not some freak accident.

UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)

The 10 years between 2010 and 2020 are set to be the worst decade for pay growth in almost a century, and the third worst since the 1860s, according to new research. Research from the House of Commons Library shows that real-terms wage growth is forecast by the Office for Budget Responsibility to average at just 6.2% in this decade, compared with 12.7% between 2000 and 2010. The figures show that real-terms wage growth was lower only in the decades between 1920 and 1930 and between 1900 and 1910. Wage growth averaged at 1.5% in the 1920s and at 1.8% in the 1900s. Owen Smith, shadow work and pensions secretary, who commissioned the research, said that a “Tory decade of low pay” would see “workers’ pay packets squeezed to breaking point”.

“Even with this year’s increase in the minimum wage, the Tories will have overseen the slowest pay growth in a century and the third slowest since the 1860s,” he said. George Osborne has justified cuts to in-work benefits by arguing that the government is transitioning the UK from being “a low-wage, high-welfare economy to a high-wage, low-welfare economy”, a claim that Smith said was contradicted by wage-growth figures. In the autumn statement, the chancellor abandoned plans to cut £4bn from working tax credits, under pressure from the opposition and many backbench Tory MPs. However, Labour has pointed out there will be cuts to in-work benefit payments for new claimants put on the new universal credit system – championed by the work and pensions secretary, Iain Duncan Smith – which rolls at least six different benefits into one.

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Reasons given: weather and terrorism. Couldn’t be lack of spending money, could it?

UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)

Record-breaking discounts on offer in the post-Christmas sales have so far failed to attract a rush of bargain hunters to the high street, raising fears that Marks and Spencer, John Lewis and Next will be forced to report disappointing trading figures for the festive period. The number of high street shoppers from Monday 28 December to Friday 1 January was down 3% compared with the same period in 2014, according to research firm Springboard. A year ago, retailers had been celebrating a jump of 6.2%. Retail experts had predicted a stampede to the shops on Boxing day after retailers offered discounts topping last year’s average of more than 50%. They are desperate to clear cold-weather clothing that has remained on the shelves during record mild weather.

While Boxing Day had offered some hope of a pick-up in trade, the following week – which included a bank holiday – was poor. Shopper behaviour differed markedly in different parts of the country, with footfall down by almost 7% in Wales and by 5.8% in the West Midlands, but up in Scotland and the east of England by 11.3% and 4.5% respectively. In London and the south-east, the affluent engine of consumer spending, numbers were also in decline, dropping 4.5% and 3.3% respectively. But Springboard figures showed that some of this trade appeared to have migrated to shopping centres, where numbers were up 3.3% in Greater London and ahead by 8.8% in the south-east. As well as unexpectedly mild weather leaving little demand for winter clothing stock, shoppers are also thought to have been put off venturing out by heavy rainstorms and concerns about potential terrorist attacks.

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Will M&A’s be 2016 story?

Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)

With crude prices at 11-year lows, the world’s biggest oil and gas producers are facing their longest period of investment cuts in decades, but are expected to borrow more to preserve the dividends demanded by investors. At around $37 a barrel, crude prices are well below the $60 firms such as Total, Statoil and BP need to balance their books, a level that has already been sharply reduced over the past 18 months. International oil companies are once again being forced to cut spending, sell assets, shed jobs and delay projects as the oil slump shows no sign of recovery. U.S. producers Chevron and ConocoPhillips have published plans to slash their 2016 budgets by a quarter. Shell has also announced a further $5 billion in spending cuts if its planned takeover of BG Group goes ahead.

Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22% fall to $595 billion in 2015, according to the Oslo-based consultancy Rystad Energy. “This will be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments,” Bjoernar Tonhaugen, vice president of oil and gas markets at Rystad Energy, told Reuters. The activities that survive will be those that offer the best returns. But with the sector’s debt to equity ratio at a relatively low level of around 20% or below, industry sources say companies will take on even more borrowing to cover the shortfall in revenue in order to protect the level of dividend payouts.

Shell has not cut its dividend since 1945, a tradition its present management is not keen to break. The rest of the sector is also averse to reducing payouts to shareholders, which include the world’s biggest investment and pension funds, for fear investors might take flight. Exxon Mobil and Chevron benefit from the lowest debt ratios among the oil majors while Statoil and Repsol have the highest debt burden, according to Jefferies analyst Jason Gammel.

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Amounts look utterly useless.

New EU Authority Budgets For 10 Bank Failures In Four Years (FT)

The new EU authority that took over the job of winding up failing banks on January 1 has budgeted enough money to wind up 10 banks over the next four years, a tender sent to financial services firms shows. The tender, seen by the Financial Times, says the Single Resolution Board (SRB) is seeking €40m in “accounting advice, economic and financial valuation services and legal advice” to be used in the resolution of struggling eurozone banks from 2016-2020. Industry sources said such advice would cost between €4m and €5m per large case, so the SRB will be able to resolve eight to 10 banks. A spokeswoman for the SRB confirmed the tender’s details, but said the budget should not be interpreted as firm prediction of the number of banks the authority expects to resolve over the coming years.

“The SRB has made a reasonable estimation of the amount,” she said. “This estimation can be negotiated and adjusted.” In the aftermath of the 2008 financial crisis, which saw a series of chaotic and inconsistent collapses, eurozone leaders hammered out a complex protocol for handling bank failures. The goal is to be able to wind up even one of the region’s biggest banks over a single weekend under the guiding arm of the Brussels-based SRB and national resolution authorities. The authority is chaired by Elke König, a former president of the German regulator BaFin.

Many industry insiders and policy watchers are sceptical about whether an orderly wind-down in such a tight timeframe is really possible, especially in cases as complicated as the implosion of the Greek and Cypriot banking systems. As such, the first case the SRB handles will be closely watched. The SRB wants to have the best advice money can buy. The tender, which has not yet been awarded, is only open to large international firms; those offering accountancy or valuation advice must have annual sales of at least €5m the last three years, those offering legal advice must have at least €10m.

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Yeah. What are the odds? Which markets? China’s?

Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)

Federal Reserve Vice Chairman Stanley Fischer said it might be necessary for the central bank to increase interest rates if financial markets were overheating, though the first line of defense should be using regulatory tools to prevent bubbles from developing. “If asset prices across the economy – that is, taking all financial markets into account – are thought to be excessively high, raising the interest rate may be the appropriate step,” Fischer said in a speech at the annual American Economic Association meeting in San Francisco on Sunday. He suggested that might be particularly true in the U.S., where many of the so-called macro-prudential regulatory tools to tackle financial market excesses are either lacking or untested. Such tools would include, for example, adjusting lending rules to try to rein in borrowing.

Fischer did make clear that he thought “macro-prudential tools, rather than adjustments in short-term interest rates, should be the first line of defense” in tackling asset bubbles, while spelling out that “the real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macroeconomic.” Fischer didn’t address the current state of financial markets, although other policy makers, including Fed Chair Janet Yellen, have indicated that they do not see them, on the whole, as being overheated. Fischer was among three Fed policy makers who made public remarks at the AEA meeting on Sunday. San Francisco Fed President John Williams discussed estimates of long-run neutral rates, while Cleveland’s Loretta Mester delivered her outlook for the U.S. economy and explained why the Fed would not react to short-term swings in economic data.

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Baltic Drier.

Cash Burning Up For Shipowners As Finance Runs Dry (FT)

During stumbles in the market for shipping dry bulk commodities since the financial crisis, DryShips — the listed vehicle of George Economou, one of the industry’s best-known figures — has proved adept at dodging trouble. Diversification into owning oil-drilling rigs — through Ocean Rig, in which DryShips now holds only a minority stake — proved robustly profitable when oil prices were high. The company also diversified into oil tankers. However, slumps in earnings for dry bulk carriers and in oil prices have left the company scrabbling to stay afloat. On December 7, it announced an $820m loss for the third quarter after it was forced to take a $797m write-off for the value of its entire remaining fleet of dry bulk vessels, many of which it has been selling off. In October, the company announced that it was borrowing $60m from an entity controlled by Mr Economou.

The challenges facing DryShips are among the most acute of those facing nearly all dry bulk shipping companies after a slump in earnings drove most owners’ revenues well below their operating costs. Owners are haemorrhaging cash. Owners of Capesize ships — the largest kind — currently bring in around $3,000 a day less than the $8,000 they cost to operate. The losses for the many owners who have to service debts secured against vessels are far higher. Basil Karatzas, a New York-based corporate finance adviser, points out that in an industry that has already been making steady losses for 18 months, such substantial losses quickly mount up. “If you have 10 ships and you’re losing $3,000 to $4,000 per day per ship, that’s, let’s say, $40,000 per day, times 30 in a month, times 12 in a year,” he says. “You are losing some very serious money.” The question is how long dry bulk owners — and the private equity firms which have invested heavily in the companies — can survive the miserable market conditions.

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Odd take, but amusing.

The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)

If you want to pick a number for 2016, how about 20%? Look around the politics of the Western world, and you’ll see that a lot of once-unthinkable ideas and fringe candidates suddenly have a genuine chance of succeeding. The odds are usually somewhere around one in five – not probable, but possible. This “20% world” is going to set the tone in democracies on both sides of the Atlantic – not least because, as anybody who bets on horse racing will tell you, eventually one of these longshots is going to canter home. Start with President Donald Trump. Gamblers, who have been much better at predicting political results than pollsters, currently put the odds of the hard-to-pin-down-but-generally-right-wing billionaire reaching the White House at around 6-1, or 17%.

Interestingly, those are roughly the same odds as the ones offered on Jeremy Corbyn, the most left-wing leader of the Labour Party for a generation, becoming the next British prime minister. In France, gamblers put the likelihood of Marine Le Pen winning France’s presidency in 2017 at closer to 25%, partly because the right-wing populist stands an extremely good chance of reaching the runoff. Geert Wilders, another right-wing populist previously described as “fringe,” perhaps stands a similar chance of becoming the next Dutch prime minister. Other once-unthinkable possibilities could rapidly become realities. America’s version of Corbyn, Bernie Sanders, whom Trump recently described as a “wacko,” is currently trading around 5%, no worse than Jeb Bush.

Plus, Sanders has assembled the sort of Corbynite coalition of students, pensioners and public-sector workers that tends to outperform in primaries. If Hillary Clinton stumbles into another scandal, the Democrats could yet find themselves with a socialist contending for the national ticket. And it’s not just “wacko” candidates; some unthinkable events are also distinctly possible. This year, perhaps as early as June, Britain may vote to leave the European Union. Bookmakers still expect the country to go for the status quo, though most pundits are less certain about this than they were about the Scottish referendum in 2014, which turned out to be an uncomfortably close race for the British establishment.

Investors are used to the political world serving up surprises. These surprises, however, have usually involved one mainstream party doing much better or worse than expected – and things continuing as normal. Not this time. With Trump in charge, America would have a wall along the Rio Grande and could well be stuck in a trade war with China. Le Pen wants to take France out of the euro and renegotiate France’s membership in the EU. It’s hard to tell what would do more damage to the City of London: a Brexit that could lead to thousands of banking jobs moving to the continent; or a Corbyn premiership, which could include a maximum wage and the renationalization of Britain’s banks, railways and energy companies.

Moreover, in the 20% world, some nasty possibilities make others more likely. If Britain leaves the European Union, Scotland (which, unlike England, would probably have voted to stay in) might in turn try to leave Britain. If Le Pen manages to pull France out of the euro, the union’s chances of dissolution increase. And you can only guess what a President Trump would do to U.S. relations with Latin America and the Muslim world.

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How much longer for Tsipras?

Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)

Greek Prime Minister Alexis Tsipras has said his government “will not succumb to unreasonable demands” as it prepares to send the country’s creditors proposals on crucial reforms to the pension system this week. “The creditors have to know that we are going to respect the agreement,” Mr Tsipras said in an interview with Real News newspaper on Sunday, referring to reforms demanded in exchange for Greece’s €86bn bailout agreement last year. However, he pledged that Greece “won’t succumb to unreasonable and unfair demands” for more pension cuts. Mr Tsipras said that Greece will reform its pension system through measures targeting additional proceeds of about €600m in 2016, adding that “we have no commitment to find the money exclusively from pension cuts”.

On the contrary, “the agreement provides the option of equivalent measures”, he said, admitting however, that the pension system is “on the brink of collapse” and needs to be overhauled. Greece’s proposals are due to be sent to the creditors via email on Monday. The aim is to reach an agreement when the representatives of the creditors return to Athens later in January. The proposals include increases in employer insurance contributions by 1% and employee contributions by 0.5%. Taxes on banking transactions may also be introduced to secure the targeted €600m and avoid any further cuts. But creditors have indicated that further pension cuts are inevitable.

They have already expressed their scepticism about increasing the contributions paid by employers and workers, stressing the potential wider economic impact on struggling businesses. Mr Tsipras’s comments were echoed by the finance minister Euclid Tsakalotos, who warned of forthcoming difficulties in negotiations with creditors. “There will be victories and defeats,” he said in an interview with Kathimerini newspaper. The government is rushing to finalise and submit the new pension bill to parliament for voting by January 15 so that the first review of the bailout package can be completed and discussion on debt relief can begin. Mr Tsipras’ governing majority is expected to be sorely tested by any pension reform legislation. The government’s majority has slid from 155 seats to 153, only two seats from the required minimum.

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How much longer for the EU?

Sweden To Impose ID Checks On Travellers From Denmark (Guardian)

Sweden is set to drastically reduce the flow of refugees into the country by imposing strict identity checks on all travellers from Denmark, as Scandinavian countries compete with each other to shed their reputations as havens for asylum seekers. For the first time since the 50s, from midnight on Sunday travellers by train, bus or boat will need to present a valid photo ID, such as a passport, to enter Sweden from its southern neighbour, with penalties for travel operators who fail to impose checks. Passengers who fail to present a satisfactory document will be turned back.

“The government now considers that the current situation, with a large number of people entering the country in a relatively short time, poses a serious threat to public order and national security,” the government said in a statement accompanying legislation enabling the border controls to take place. The move marks a turning point for the Swedish ruling coalition of Social Democrats and Greens, which earlier presented itself as a beacon to people fleeing conflict and terror in Asia and the Middle East. “My Europe takes in people fleeing from war, my Europe does not build walls,” Swedish prime minister Stefan Löfven told crowds in Stockholm on 6 September. But three months and about 80,000 asylum seekers later, the migration minister told parliament: “The system cannot cope.”

[..] Critics of Sweden’s refugee crackdown fear it will cause a “domino effect” as countries compete to outdo each other in their hostility to asylum seekers. “Traditionally, Sweden has been connected to humanitarian values, and we are very worried that the signals Sweden is sending out are that we are not that kind of country any more,” said Anna Carlstedt, president of the Red Cross in Sweden, whose staff and volunteers have often been the first line of support for new arrivals in the country. Other Scandinavian countries have recently announced their intention to stem the flow of refugees. In his new year address, Denmark’s liberal PM Lars Løkke Rasmussen said the country was prepared to impose similar controls on its border with Germany, if the Swedish passport checks left large numbers of asylum seekers stranded in Denmark.

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The shame deepens still.

Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Parents were forced to hold their children above freezing January waves as they struggled to reach shore on the Greek island of Lesbos on Sunday. The group of migrants and refugees were helped to disembark by volunteers, although several were forced to wade to the beach after falling overboard. Photographs show one father struggling to reach shore as he tried to hold his tiny, terrified daughter above the waves. Another image shows a group gathered around a woman in tears, while in another photograph, a little girl cries as she sits wrapped in a giant, silver thermal blanket after the harrowing crossing from Turkey. Once on shore, the group were handed thermal blankets stamped with the logo of the UNHCR as they sat on the beach near the town of Mytilene.

It comes the day after charity workers created a giant peace sign out of thousands of life-jackets on the hills of the Greek island, in honour of those who have died while making the perilous crossing in the hope of reaching Europe. The onset of winter and rougher sea conditions do not appear to have deterred the asylum-seekers, with boats still arriving on the Greek islands daily. Elsewhere, Turkish coastguards rescued a group of 57 migrants and refugees, including children, after they were left stranded on a rocky islet in the Aegean Sea. The group was trying to reach Greece by making the perilous journey across the sea, but they hit trouble after leaving the Turkish resort of Dikili, in Izmir province.

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Dec 192015
 
 December 19, 2015  Posted by at 9:46 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle December 19 2015


John Vachon Auto of migrant fruit worker at gas station, Sturgeon Bay, Wisconsin Jul 1940

Rate Rally Fizzles as Dow Loses 621 Points in 2 Days (WSJ)
Explaining Today’s “Massive Stop Loss” Quad-Witching Market Waterfall (ZH)
Hedge Funds Cut Fees To Stem Client Exodus (FT)
History of Junk Bond Meltdowns Points to Trouble (BBG)
IEA Sees ‘Peak Coal’ As Demand For Fossil Fuel Crumbles In China (AEP)
Congress Slips Controversial CISA Law In With Sure-To-Pass Budget Bill (Wired)
US-Mexico Border: Arizona’s Open Door (FT)
Bundesbank’s Weidmann: Greek Debt Relief Is Not Urgent (Kath.)
Iceland Bank Collapse Nears End as Creditors Reach Last Accord (BBG)
Ukraine Debt Default and EU Sanctions Extension Anger Russia (IT)
Merkel Defends Russian Gas Pipeline Plan (WSJ)
The Unraveling Of The European Union Has Begun (MarketWatch)
‘Cameron’s Battle Against EU Is Like Grappling With A Jellyfish’ (RT)
‘Cancer of Europe’ – Russian Duma Speaker Calls For NATO Dissolution (RT)
135 Jobs In 2.5 Years: The Plight Of Spain’s New Working Poor (Guardian)
One Of Every 122 Humans Today Has Been Forced To Flee Their Home (WaPo)

The Dow doesn’t often lose over 2% in a day. “..on pace for its first negative year since 2008.”

Rate Rally Fizzles as Dow Loses 621 Points in 2 Days (WSJ)

In the two days after the Federal Reserve gave investors exactly what they expected, the Dow Jones Industrial Average posted its steepest loss since a late-August plunge. The back-to-back selloff erased 621 points from the blue chips—sending the Dow to its lowest level in two months and wiping out a three-session winning streak logged around the Fed’s liftoff for interest rates. The fizzled rally underscores the difficult backdrop across markets as investors prepare to close out what is shaping up to be worst year for U.S. stocks since the financial crisis. Investors are going into the holidays with grim news from the energy and mining sectors, uncertainty about the stability of markets for low-rated debt and worries about slowing economies overseas.

Meanwhile, public companies have struggled to post higher profits, and investors remain wary of buying stocks that look expensive compared with historical averages. “When you buy a share of stock you’re paying for a piece of future cash flows,” said David Lebovitz, global market strategist, at J.P. Morgan Asset Management, which has about $1.7 trillion under management. “If those cash flows aren’t materializing, it doesn’t make sense.” Investors had taken heart from stronger jobs data and the Fed’s signal that the U.S. economy is strong enough to begin returning rates to a more normal level. But optimism took a back seat at the end of the week. The Dow fell 367.29, or 2.1%, to 17128.55 on Friday, leaving it with a loss of 0.8% for the week. The index is down 3.9% so far in 2015, on pace for its first negative year since 2008.

The S&P 500 fell 1.8% to 2005.55. It ended the week down 2.6% for 2015, on track for first yearly decline since 2011 and its biggest fall since 2008. Both indexes had rallied broadly over the past six years, in part fueled by record-low interest rates. Weaker stocks and crude oil prices Friday added to demand for safe havens, sending investors into Treasurys. The yield on the benchmark 10-year Treasury note fell to 2.197% late Friday from 2.236% Thursday, as investors bid up the price. Yields on the note now aren’t much above where they started the year. “Shorting Treasury bonds which are a safe haven beneficiary when the economic and geopolitical risks are rising is foolhardy,’’ said Jonathan Lewis at Samson Capital Advisors.

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They kept the S&P500 neatly just above 2000, for a reason.

Explaining Today’s “Massive Stop Loss” Quad-Witching Market Waterfall (ZH)

One week ago, and again last night, we previewed today’s main event: an immensely important quad-witching expiration, the year’s last, one which as JPM’s head quant calculated will be the “largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050.” What is most important, is that the “pin risk”, or price toward which underlying prices may gravitate if HFTs are unleashed to trigger option stop hunts, is well below current S&P levels: as JPM notes, “clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.”

What does this mean? Considering that the bulk of the puts have been layered by the program traders themselves, including CTA trend-followers and various momentum strategist (which work in up markets as well as down), and since the vol surface of today’s market is well-known to everyone in advance, there is a very high probability the implied “stop loss” level will be triggered. Not helping matters will be the dramatic lack of market depth (thank you HFTs and regulators) and overall lack of liquidity, which means even small orders can snowball into dramatic market moves. “While equity volumes look robust, market depth has declined by more than 60% over the last 2 years. With market depth so low, the market does not have capacity to absorb large shocks. This was best illustrated during the August 24th crash.”

[..] the problem is that since over the past 7 years, the entire market has become one giant stop hunt, the very algos which “provide liquidity” will do everything they can to inflict the biggest pain possible to option holders – recall that for every put (or call) buyer, there is also a seller. As such, illiquid markets plus algo liquidity providers makes for an explosive cocktail at a time when the Fed is already worried whether the Fed may have engaged in “policy error.” So what does this mean in simple English? As Reuters again points out, levels to watch are the large imbalances in favor of puts in Dec SPX put contracts at 2050, 2000, 1950, 1900 strikes It further writes that “as SPX moves below these levels market makers who are short these puts would be forced to sell spot futures to hedge, which could exacerbate a market selloff.” In other words, selling which begets even more selling, which begets even more selling.

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They might as well close then.

Hedge Funds Cut Fees To Stem Client Exodus (FT)

Many hedge funds are cutting fees and negotiating with investors to trim some of their hefty costs and avert withdrawals after another mediocre year for returns. The industry has been shifting for several years away from its traditional model of charging 2% of assets and keeping 20% of profit. Some funds are already wooing customers with fees closer to 1% and 15%, people in the industry say. Now pressures are mounting on a wider range of fund managers, as a crowded sector copes with a middling year. The HFRI Fund Weighted Composite index is up 0.3% on the year and returned just under 3% in 2014, according to Hedge Fund Research. Management fees declined this year in every strategy except event driven, falling to a mean of 1.61% from 1.69%, according to JPMorgan’s Capital Introduction Group.

For performance fees, some strategies were impacted more than others, with the biggest declines in global macro, multi-strategy, commodity trading advisers and relative value. When Sir Chris Hohn founded The Children’s Investment Fund about a decade ago, he was an outlier. His $10bn fund charges management fees as low as 1%, depending on how long investors lock up their money. He recently referred to himself as “the antithesis of the classic hedge fund,” because he waived performance fees until the fund crossed a set return hurdle for the year. But others are following his lead in an effort to attract and retain clients amid tough competition.

There are now more than 10,000 hedge funds compared with 610 in 1990, HFR data show, and there are increasing benefits for the larger operators, including lower prime broker costs and better access to company management for research. The client base has also moved away from wealthy individuals, who were happy to take on significant risk in exchange for high returns. Now funds depend on institutional investors such as insurers and pension schemes, who cannot afford to miss minimum return targets and are themselves under pressure from boards that oversee investments. “Most [fund] managers prefer to haggle like rug-salesmen at a bazaar; institutional investors would rather shop at Ikea,” says Simon Ruddick, founder of consultant Albourne.

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Nothing new, but nothing learned either.

History of Junk Bond Meltdowns Points to Trouble (BBG)

The rout in junk bonds is intensifying and there’s blood in the water. After claiming some high-profile casualties – notably Third Avenue Management – the turmoil is raising fears of a larger meltdown in the markets, perhaps even a recession. In other words, is high-yield debt the canary in the credit mine? Academic work on the subject suggests that the difference in the rates for high-risk debt and rock-solid government securities – the so-called risk premium, or high-yield spread – often is a significant harbinger. A paper published in the Oxford Review of Economic Policy in 1999 concluded that the high-yield spread “outperforms other leading financial indicators,” such as the term spread and the federal funds rate. An International Monetary Fund staff paper published in 2003 offered a similar assessment, but added that “abnormally high levels of the high-yield spread have significant short-term predictive power.”

The trouble with these findings is that the pool of data is focused on very recent financial history, which makes it harder to draw broad conclusions. This limitation reflects the conventional wisdom that junk bonds are a recent invention cooked up by the likes of Michael Milken and company, and as a consequence, there are no comparable data sets before the late 1980s. But several economists at Rutgers – Peter Basile, John Landon-Lane and Hugh Rockoff – recently disputed that conclusion in an intriguing working paper that resurrected neglected data on high-yield securities from 1910 to 1955. These forerunners of today’s junk bonds initially merited Aaa or Baa ratings, but lost their appeal once they were downgraded to Ba or worse. Such speculative-grade bonds constituted, on average, approximately a quarter of the total book value of outstanding bonds before the end of World War II.

The authors of the study argue that although other kinds of spreads also have predictive power, “junk bonds may be a more sensitive indicator, perhaps a more sensitive leading indicator, of economic conditions than higher-grade bonds.” While their research opens all sorts of avenues for academic exploration – Was there a decline in lending standards in the late 1920s? Was there a liquidity trap in the late 1930s? – the most intriguing question it raises is about the predictive power of the spread between high-yield and high-quality debt. In theory, this power to predict turning points in the business cycle could manifest in two ways. The first would be a narrowing of the spread, which would mean that investors recognized the worst was over, a trough was imminent and a rebound was in offing. The second would be a spike in the spread, which means that investors anticipated that the economy had peaked and that a contraction was in the offing.

The authors found that a narrowing of the high-yield spread predicted a mere three of 10 troughs. But spikes were another matter: Exceptional bumps in the high-yield spread accurately predicted eight of 10 peaks (and the subsequent declines, most notably the downturn that began in August 1929 and turned into the Great Depression, as well as the recession that began in 1937 after the Fed prematurely hiked rates). It may be too early to read too much into these findings. But when combined with the research on the predictive capacity of the high-yield spread from the 1980s onward, this recent work suggests that the spread is a leading indicator worth watching.

And given the recent spike, something far worse than a junk bond meltdown may be brewing. How bad? In the three months before August 1929, the high-yield spread spiked by 47 basis points, and in the three months before May 1937, it shot up 85 basis points. In the past six weeks of 2015, it has spiked by about 120 basis points. That doesn’t mean we’re headed for disaster: There’s still an apples-and-oranges quality to comparisons of the two eras, despite the best efforts to create a commensurate set of data. But if the spread continues to widen, another downturn – or worse – could be ahead.

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Ambrose is blind: “Crucially, the switch is happening because the country is moving up the technology ladder and switching to a new growth model. ” No, coal use is tumbling because the Chinese economy is.

IEA Sees ‘Peak Coal’ As Demand For Fossil Fuel Crumbles In China (AEP)

China’s coal consumption has been falling for two years and may never recover as the moment of “peak coal” draws closer, the International Energy Agency (IEA) has said. The energy watchdog has slashed its 2020 forecast for global coal demand by 500m tonnes, warning that the industry risks unstoppable decline as renewable technologies and tougher climate laws shatter previous assumptions. In poignant symbolism, the peak coal report came as miners worked their final shift at Britain’s last surviving deep coal mine at Kellingley in North Yorkshire, closing the chapter on the British industrial revolution. Mines around the world are at increasing risk as prices slump to 12-year lows of $38 a tonne, and the super-cycle gives way to a pervasive glut. The IEA said the $40bn Galilee Basin project in Australia may never become operational.

There is simply not enough demand, even for cheap, open-cast coal. “The golden age of coal seems to be over,” said the IEA’s medium-term market report. “Given the dramatic fall in the cost of solar and wind generation and the stronger climate policies that are anticipated, the question is whether coal prices will ever recover.” “The coal industry is facing huge pressures, and the main reason is China,” said Fatih Birol, the agency’s director. The IEA reported that China’s coal demand fell by 2.9pc in 2014 and the slide has accelerated this year as the steel and cement bubble bursts. The country produced more cement between 2011 and 2013 than the US in the entire 20th century, according to one study. This will never happen again. Crucially, the switch is happening because the country is moving up the technology ladder and switching to a new growth model.

The link between electricity use and economic growth has completely broken down. The “energy intensity” of GDP fell by 4pc in 2014. Mr Birol said China’s coal consumption is likely to flatten out until 2020 before declining, but the definitive tipping point could happen much faster if president Xi Jinping carries out his economic reform drive with real vigour. Coal demand will drop by 9.8pc under the agency’s “peak coal scenario”. The shift is dramatic. China’s coal demand has tripled since 2000 to 3.920m tonnes – half of global consumption – and the big mining companies had assumed that it would continue. The market is now badly out of kilter. Rising demand from India under its electrification drive will not be enough to soak up excess supply or replace the lost demand from China.

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“They’ve got this bill that’s kicked around for years and had been too controversial to pass, so they’ve seen an opportunity to push it through without debate. And they’re taking that opportunity.”

Congress Slips Controversial CISA Law In With Sure-To-Pass Budget Bill (Wired)

Update 12/18/2015 12pm: The House and Senate have now passed the omnibus bill, including the new version of CISA.

Privacy advocates were aghast in October when the Senate passed the Cybersecurity Information Sharing Act by a vote of 74 to 21, leaving intact portions of the law they say make it more amenable to surveillance than actual security. Now, as CISA gets closer to the President’s desk, those privacy critics argue that Congress has quietly stripped out even more of its remaining privacy protections. In a late-night session of Congress, House Speaker Paul Ryan announced a new version of the “omnibus” bill, a massive piece of legislation that deals with much of the federal government’s funding. It now includes a version of CISA as well. Lumping CISA in with the omnibus bill further reduces any chance for debate over its surveillance-friendly provisions, or a White House veto.

And the latest version actually chips away even further at the remaining personal information protections that privacy advocates had fought for in the version of the bill that passed the Senate. “They took a bad bill, and they made it worse,” says Robyn Greene, policy counsel for the Open Technology Institute. CISA had alarmed the privacy community by giving companies the ability to share cybersecurity information with federal agencies, including the NSA, “notwithstanding any other provision of law.” That means CISA’s information-sharing channel, ostensibly created for responding quickly to hacks and breaches, could also provide a loophole in privacy laws that enabled intelligence and law enforcement surveillance without a warrant. The latest version of the bill appended to the omnibus legislation seems to exacerbate that problem.

It creates the ability for the president to set up “portals” for agencies like the FBI and the Office of the Director of National Intelligence, so that companies hand information directly to law enforcement and intelligence agencies instead of to the Department of Homeland Security. And it also changes when information shared for cybersecurity reasons can be used for law enforcement investigations. The earlier bill had only allowed that backchannel use of the data for law enforcement in cases of “imminent threats,” while the new bill requires just a “specific threat,” potentially allowing the search of the data for any specific terms regardless of timeliness. [..] Even in its earlier version, CISA had drawn the opposition of tech firms including Apple, Twitter, and Reddit, as well as the Business Software Alliance and the Computer and Communications Industry Association.

In April, a coalition of 55 civil liberties groups and security experts signed onto an open letter opposing it. In July, the Department of Homeland Security itself warned that the bill could overwhelm the agency with data of “dubious value” at the same time as it “sweep[s] away privacy protections.” That Senate CISA bill was already likely on its way to become law. The White House expressed its support for the bill in August, despite its threat to veto similar legislation in the past. But the inclusion of CISA in the omnibus package may make it even more likely to be signed into law in its current form. Any “nay” vote in the house—or President Obama’s veto—would also threaten the entire budget of the federal government. “They’re kind of pulling a Patriot Act,” says OTI’s Greene. “They’ve got this bill that’s kicked around for years and had been too controversial to pass, so they’ve seen an opportunity to push it through without debate. And they’re taking that opportunity.”

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Reality vs hubris.

US-Mexico Border: Arizona’s Open Door (FT)

Many people in the US today look towards the country’s border with Mexico and tremble. So great are the fears about illegal immigration and the possible infiltration of terrorists that Donald Trump has vaulted to the top of the Republican presidential field by vowing to build a wall between the two countries and make the Mexicans pay for it. So it may come as a surprise to learn about the economic ideas now emerging from Arizona, a solid red state — having voted Republican in 15 of the past 16 presidential elections – that sits cheek by jowl with the Mexican state of Sonora. Arizonan movers and shakers have started to think that bringing in more Mexicans is a good way to stimulate growth.

To make people from south of the border feel more welcome, county planning organisations, municipal officials and business leaders are lining up behind a proposal to transform their entire state into a “free-travel zone” for millions of better-off Mexicans with the money and wherewithal to qualify for a travel document that is widely used in the south-west, but little known elsewhere – a border-crossing card, or BCC. “Fear gets you nowhere. Chances get you somewhere,” says Dennis Smith, executive director of the Maricopa Association of Governments, planning body for the county that includes Phoenix, Arizona’s capital and biggest city. “What do we have to lose? Nothing.” BCC holders are currently allowed to go 75 miles into Arizona, which takes them as far as Tucson, the state’s second-largest city.

But Arizona officials are seeking a change in federal rules that would allow these people to roam across the state, hoping that if the visitors travel further, they will stay longer and spend more money at malls, restaurants and tourist attractions. The desired Mexicans are a far cry from the “murderers” and “rapists” of Mr Trump’s stump speeches. They can afford the $160 fee and offer the proof of employment and family ties back home that are required for a BCC, which is good for 10 years and enables Mexicans to remain in the US for up to 30 days at a time. To stay longer or travel further, they need more documentation. However, Arizona’s charm offensive illustrates the complexity of border politics as the 2016 presidential election approaches. In the US imagination, Mexico looms as both a menace and a market. People want to keep some kinds of Mexicans out — and encourage others to come in.

The impulses are often contradictory. For now, the emphasis in Arizona is shifting toward accommodation. Local planners speak excitedly of integrating the economies of Arizona and Sonora into an “Ari-Son” mega-region, in which cross-border trade will increase and more Mexicans will attend pop concerts or sports events in Phoenix, take family car trips to the Grand Canyon and ski in the state’s northern mountains. “This is vitally important to the state’s economic health,” says Glenn Hamer, chief executive of the Arizona Chamber of Commerce and a former executive director of Arizona’s Republican party. “On the business side, it is a great asset for the state to be close to a market that is growing and becoming more prosperous every single day.”

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Yes, it is.

Bundesbank’s Weidmann: Greek Debt Relief Is Not Urgent (Kath.)

Greece faces relatively low debt servicing needs in the coming years and further debt relief is not a matter of urgency, Greek financial daily Naftemporiki quoted ECB Governing Council member Jens Weidmann as saying on Thursday. “In 2014 interest payments as a percentage of GDP were lower in Greece than in Spain, Portugal and Italy,” Weidmann, head of Germany’s central bank, told the paper. “Taking into account the low refinancing needs for the next years, further debt relief does not seem to be an issue of particularly urgent interest.” Athens has been struggling to legislate reforms agreed with its eurozone partners in exchange for an €86 billion bailout, the third financial aid package to keep it afloat since its debt crisis exploded in 2010.

The government, however, wants some form of debt relief to allow for future growth. Weidmann said the most important task at hand was the full implementation of the agreed economic adjustment program of reforms. “This will not simply increase the ability to grow but also dissolve prevailing uncertainty which acts as a brake for investments,” he told the paper. Weidmann added it was up to the Greek government to decide when to lift capital controls it imposed in late June to stem a flight of deposits.

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And this is what can happen when you don’t have the EU to bully you.

Iceland Bank Collapse Nears End as Creditors Reach Last Accord (BBG)

A seven-year standoff between Iceland and the international creditors of its failed banks is nearing an end after a court approved the last remaining settlement. The agreement signed by the caretakers of LBI hf paves the way for creditor payments from the bank’s 455.6 billion kronur ($3.5 billion) estate. It follows similar deals involving Glitnir Bank hf and Kaupthing Bank hf. The three banks hold combined assets of $17.6 billion, according to their latest financial statements. The banks failed within weeks of each other in 2008 under the weight of $85 billion in debt. Iceland then resorted to capital controls to prevent a total collapse of its $15 billion economy. International creditors, among them the Davidson Kempner Capital Management, Quantum Partners and Taconic Capital Advisors hedge funds, have been unable to access the lenders’ assets.

Glitnir’s administrators said they planned to make the first payments to creditors on Friday. Theodor S. Sigurbergsson, a member of Kaupthing’s winding up committee, said in an interview this week that he expects “to start payments to creditors early next year.”
In June, the government offered creditors in Glitnir, Kaupthing and LBI the option of either paying a 39% exit tax on all their assets or making what it calls a stability contribution of as much as 500 billion kronur by the end of the year. To be eligible for the offer, creditors needed to complete settlements by Dec. 31. Parliament later extended that deadline to March 15. The island’s handling of the financial crisis has won praise from Nobel laureates and the IMF. The krona has strengthened about 8% this year and Iceland’s economy is now growing at a faster pace than the euro-zone average. With Glitnir having been granted an exemption from capital controls on Thursday, Iceland is expected to make a full return to the international financial community during the course of 2016.

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It’s a miracle Russia stays so quiet.

Ukraine Debt Default and EU Sanctions Extension Anger Russia (IT)

Ukraine and Russia are on a collision course over major trade and finance disputes, as the European Union prepares to extend sanctions against Moscow for annexing Crimea and fomenting a bloody conflict in eastern Ukraine. Kiev has refused to meet Sunday’s due date on a $3 billion loan that Moscow gave to authorities led by former Ukrainian president Viktor Yanukovich in December 2013, when they were rocked by huge street protests. Moscow has vowed to take Kiev to court over the disputed bond, which comes due just as Russia gets ready to scrap its free-trade zone with Ukraine in response to the planned January 1st launch of a landmark EU-Ukraine trade pact. “The government of Ukraine is imposing a moratorium on payment of the so-called Russian bond,” Ukrainian prime minister Arseniy Yatsenyuk said on Friday.

“I remind you that Ukraine has agreed to restructure its debt obligations with responsible creditors, who accepted the terms of the Ukrainian side. Russia has refused, despite our many efforts to sign a restructuring deal, to accept our offers.” Russian officials have threatened to launch legal action by the end of the year to reclaim the cash from Ukraine. “By announcing a moratorium on returning this sovereign debt, the Ukrainian side has, you could say, in fact admitted default,” said Kremlin press secretary Dmitry Peskov. Russia long argued that the unpaid debt should block future IMF funding for cash-strapped Ukraine, and Moscow was furious with the lender this week for changing its rules to allow aid to keep flowing to countries that are in arrears. The IMF agreed with Moscow, however, that the bond should be treated as sovereign debt, and told Kiev that it must negotiate with Russia “in good faith” to ensure continued access to a $17.5 billion aid package.

Ukraine relies on the IMF, United States and EU to prop up its ailing economy, and depends on the West to maintain diplomatic pressure on Russia. Diplomats say EU states have agreed to extend sanctions on Russia for another six months from Monday, due to its continuing failure to fulfil a deal aimed at ending an 18-month conflict in eastern Ukraine that has killed more than 9,000 people. “It was an expected decision, we heard nothing new, and it will have no effect on the economy of the Russian Federation, ” said Alexei Ulyukaev, Russia’s minister for economic development. Russia’s economy has been damaged by sanctions and above all by the plunge in the price of oil. The Kremlin has ordered the suspension of a free-trade agreement between Russia and Ukraine from January 1st, when a far-reaching trade deal is due to start between Ukraine and the EU.

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Gas is more important than Ukraine.

Merkel Defends Russian Gas Pipeline Plan (WSJ)

German Chancellor Angela Merkel found herself under pressure on Friday from other Europe Union leaders over her government’s support for a natural-gas pipeline from Russia that others fear could further undermine the economic and political stability of Ukraine. The planned expansion of PAO Gazprom’s Nord Stream pipeline, which ships Russian gas via the Baltic Sea to northern Germany, would add an extra 55 billion cubic meters of gas in capacity—about as much as the company currently transports through Ukraine. Officials in Brussels and Washington as well as Kiev have accused Moscow of using the project, dubbed Nord Stream 2, to deprive Ukraine of much of its remaining political leverage as well as much-needed revenues from transit fees. Ukrainian President Petro Poroshenko on Wednesday called Nord Stream 2 his country’s “greatest concern as of today.”

But Ms. Merkel defended the planned pipeline. “I made clear, along with others, that this is a commercial project; there are private investors,” Ms. Merkel said following talks with the other 27 EU leaders. During the discussion on Nord Stream, the chancellor’s position was attacked by Italian Prime Minister Matteo Renzi and Bulgaria’s Boyko Borisov, while she received some backing from Dutch Premier Mark Rutte. Gazprom holds a 50% stake in the Nord Stream 2 consortium. The other 50% are held in equal parts by Shell, Germany’s E.On and BASF, Austria’s OMV and France’s Engie. Despite the involvement of these private investors, several European Union and U.S. officials have questioned the commercial reasoning behind Nord Stream 2, arguing that existing transit routes from Russia, including the first Nord Stream pipeline and the Ukrainian lines aren’t used at full capacity.

In a recent interview, the U.S. special envoy for international energy affairs, Amos Hochstein, called Nord Stream 2 “an entirely politically motivated project” and warned European authorities against “rushing into” the project. Since relations with Moscow cooled over the conflict in eastern Ukraine, the EU has been working to reduce its dependence on Russian gas. Building Nord Stream 2, however, would concentrate 80% of the bloc’s gas imports from Russia onto a single route, according to the EU’s climate and energy commissioner, Miguel Arias Cañete. “In my perspective, Nord Stream does not help diversification nor would it reduce energy dependence,” said European Council President Donald Tusk, who presided over Friday’s discussions among the 28 EU leaders. He said, however, the EU must avoid politicizing this issue and check whether the pipeline would comply with EU rules, which block companies from controlling both a pipeline and its supply.

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“..the mantra of 28 states having the same ultimate objective … is officially dead.”

The Unraveling Of The European Union Has Begun (MarketWatch)

Whatever spin comes out of the Brussels summit this week, the European Union finds itself in the midst of an existential crisis after the bloc’s most challenging year since the launch of economic and monetary union in 1999. National leaders will continue to do what they do best — muddle through in a fog of obfuscation as they fail again to address the fundamental problems that have led to a string of financial, political and foreign policy crises from the Ukraine incursion through the Greek bailout to a flood of refugees. Even as British Prime Minister David Cameron tries to renegotiate his country’s terms of membership to avoid an exit from the EU, recent elections in Poland, France and Portugal reflect a shift in public opinion to question whether European integration on the current model is such a good idea after all.

Spain faces an election Sunday in which the conservative Popular Party, which has toed the Brussels line on austerity, is sure to lose its majority as voters are poised to create a new political landscape with four major parties and big questions about the future of the country. And Cameron himself is wrestling with a growing momentum in Britain favoring an exit from a Brussels regime that seems increasingly onerous or irrelevant. It is, of course, Cameron’s Conservative Party that historically has championed EU membership, and the EU itself is generally touted as a boon for business and the economy. So it is perhaps telling that recent commentary from a London-based think tank that generally mirrors the relatively conservative views of its central-banking and asset-management constituency is taking an increasingly critical view of Europe.

“There is a sense that the Union is drifting towards some form of calamity — the end of free movement of people, or the exit of Greece from the euro, or the departure of Britain from the Union itself,” John Nugée, a former Bank of England official who is a director of the Official Monetary and Financial Institutions Forum in London, wrote this week after meeting with officials in Asia, who have a pessimistic view of Europe’s situation. “The view from Asia is that the Union is struggling because it falls between two extremes of strength and weakness: It has neither a strong democratic regime nor a strong autocratic one,” Nugée writes in an OMFIF commentary. The EU is instead a “weak democracy” in this view. “The authorities have sufficient strength to try to rule without popular consent,” Nugée observes.

“But they are too weak to ignore the negative populist response such action inevitably incites and which, in turn, exacerbates their initial weakness.” The bottom line, according to this analyst, is that Europe’s leaders are simply overwhelmed. “The complexity of each individual issue seems to make the combined difficulties beyond the capacity of the political system to solve,” Nugée writes. In another OMFIF commentary this week, Antonio Armellini, a former Italian diplomat who represented his country in a number of foreign capitals and international organizations, argued that the British request for special terms “obliges everyone to recognize that the mantra of 28 states having the same ultimate objective … is officially dead.”

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“They [EU] have already made these decisions. They are not known for being democratic – [Jean-Claude] Juncker and [Donald] Tusk. There is no democracy in the EU. They pay lip service to democracy, they have decided, what is going to happen. ”

‘Cameron’s Battle Against EU Is Like Grappling With A Jellyfish’ (RT)

It’s unlikely that ‘lame duck PM’ David Cameron, would get any concessions over the UK’s EU membership, but he is still banging his head against that brick wall, says investigative journalist Tony Gosling. EU leaders have gathered in Brussels for a summit to partly determine Britain’s future within the union. Prime Minister David Cameron on Thursday pushed for changes to the terms of the country’s EU membership saying that “there is a pathway to a deal in February.” He also emphasized the importance of UK’s demand to constrain access to in-work benefits for EU migrants in Britain. RT: Would the EU be better to lose Britain altogether than sacrifice the main principles. Who’s going to win in this regard?

Tony Gosling: … You can almost pick a tramp from the streets of London – there are plenty more since Cameron came to power – and they probably would make a better job of this than David Cameron, because he first promised this referendum back in 2009, and still we’re waiting. Also we’ve got the situation back in May, when we had a general election that [François] Hollande and [Angela] Merkel made absolutely clear to Cameron – there would be no concessions, but he is still banging his head against that brick wall. No, I don’t think he is going to get these concessions. The battle is almost like he is grappling with a jellyfish, with the EU. They [EU] have already made these decisions. They are not known for being democratic – [Jean-Claude] Juncker and [Donald] Tusk. There is no democracy in the EU. They pay lip service to democracy, they have decided, what is going to happen.

Cameron’s real problem here is that he is looking for this four-year ban on benefits going to migrants coming into Britain. The problem being that four years is just not enough. Those benefits are keep going up to about 40 percent of everybody that comes into Britain’s pay packets. We’ve got a massive problem here with the working poor on benefits. He’s effectively saying that if migrants come to Britain, that they are going to be below the poverty line immediately… And of course, we can’t have that. Anybody in Britain that needs benefits is going to have to get them. We’ve already seen signs of this with things like tent cities springing up across the country…

RT: Are EU leaders growing tired of negotiating with the UK? TG: It almost seems we are the basket case of Europe, doesn’t it? And partly that is because we’ve stayed out of the euro and they wanted us in the euro. But we are in a similar position to many of the countries economically. We’ve got a massive property bubble. We’ve just heard here in Britain – it is so difficult to just to find somewhere to live. The house prices in Britain are now up to 300,000 pounds – that is $450,000 average to buy a house here in Britain. And that is what a classic bubble – massively over inflated house prices; no real market anymore.

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Just like Ron Paul does. And me.

‘Cancer of Europe’ – Russian Duma Speaker Calls For NATO Dissolution (RT)

State Duma Speaker Sergey Naryshkin has said that Russia is very concerned by continuing NATO expansion, adding that global security would benefit significantly from the dissolution of the military bloc. “My attitude to this organization is special – I see it as a cancerous tumor on the whole European continent. It would only be for the better if this organization is dissolved,” Naryshkin said during a meeting with Serbian lawmakers on Thursday. This dissolution could be conducted in several stages, the Duma speaker suggested. “First of all, the USA should be excluded from the bloc and after this it would be possible to painlessly disband the whole organization,” he said. “This would be a good step towards greater security and stability on the whole European continent.”

Naryshkin also told Serbian lawmakers that Russia was aware of the fact that large numbers of Montenegrin citizens, possibly even the majority of the country’s population, were resisting their nation’s potential entry into NATO. He noted that in late November the Russian State Duma called for the Montenegrin parliament to abandon plans to enter the military bloc, and expressed hope that Serbian politicians would offer some help in persuading Montenegro – which historically has been always close to Serbia – not to make this dangerous step. In early December NATO foreign ministers agreed to invite Montenegro to join the military alliance. In September, Montenegro’s parliament voted for a resolution to support the country’s accession to the military organization. The opposition called for a national referendum on the issue, but failed to push their initiative through the national legislature.

Moscow has promised that a response would follow if Montenegro joined NATO, but added that the details of any such steps are still under consideration. The head of the Russian Upper House Committee for Defense and Security, Viktor Ozerov, said that the step would force Russia to cut a number of joint projects with Montenegro, including military programs. In mid-December Russian Foreign Ministry spokesperson Maria Zakharova said the row over possible NATO membership had revealed deep divisions in Montenegrin society. “We think that the Montenegrin people should have their say in a referendum on this issue. This would be a manifestation of democracy that we call for,” Zakharova said.

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Election tomorrow.

135 Jobs In 2.5 Years: The Plight Of Spain’s New Working Poor (Guardian)

He has taken on stints as a stable hand, been a door-to-door salesman and set up stages for local concerts: rarely does David Pena turn down a job. “In the past two a half years, I’ve probably had about 135 contracts,” said Pena. Most of them last between one and three days. “It’s a bit tiresome not to ever have anything stable.” Tiresome is perhaps an understatement. The 33-year-old’s disjointed CV stands out as an extreme example of a growing section of Spanish society made up of those ousted from the workforce during the economic crisis and now struggling to land anything but precarious short-term contracts. On Sunday Spaniards will cast their ballots in one of the tightest races in the country’s recent history.

The result promises to offer a glimpse of the national mindset as Spain emerges from a prolonged economic downturn that sent unemployment soaring, triggered painful austerity measures and saw thousands of families evicted. The wide brush of corruption has sent Spaniards’ trust in politicians and institutions plunging in recent years, and given rise to a crop of national newcomers promising a better future. For many, however, the key issue in this campaign is jobs. Unemployment in Spain stands at 21.6% – the highest in the EU after Greece. Mariano Rajoy, the country’s current prime minister, has based his re-election campaign on the economy and its fragile recovery, pointing to more than 1m jobs created in the past two years and one of the fastest growth rates in the eurozone.

Polls suggest that his conservative People’s party (PP) will remain the largest party after Sunday’s election, even it looks likely to lose its majority. Rajoy’s critics point to the dire situation still facing many Spaniards, who, like Pena, have been forced to string together a salary from a series of low-paying contracts that offer scant benefits. Temporary workers now make up more than a quarter of the workforce in Spain. Far from just seasonal work, temporary contracts have become more common among hospital workers, teachers and other public servants. Statistics suggest that short-term work is the definitive feature of the new jobs being created, making up about 90% of the contracts signed this year so far in Spain, with about one in four lasting seven days or less.

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But arms sales are booming.

One Of Every 122 Humans Today Has Been Forced To Flee Their Home (WaPo)

The number of people who have been forced to flee their homes has reached a staggering level, with 2015 on track to break previous records, according to a United Nations report released Friday. People who have been forcibly displaced — including those who fled domestically as well as international refugees and asylum-seekers — has likely “far surpassed 60 million” for the first time, reads the U.N. High Commissioner for Refugees report. Last year, 59.5 million had been displaced. “In a global context, that means that one person in every 122 has been forced to flee their home,” the agency said in a statement. Forced displacement “is now profoundly affecting our times,” High Commissioner for Refugees António Guterres said in a statement.

“It touches the lives of millions of our fellow human beings – both those forced to flee and those who provide them with shelter and protection. Never has there been a greater need for tolerance, compassion and solidarity with people who have lost everything.” War in Syria has become the “single biggest generator worldwide of both new refugees and continuing mass internal and external displacement,” the agency said. More than 4 million Syrians are now refugees – compared t0 less than 20,000 in 2010. Following Syria, most refugees come from Afghanistan, Somalia and South Sudan. The report, which covers the first six months of 2015, found that by June, the world had 20.2 million refugees – nearly 1 million more than a year before.

An average of 4,600 people flee their homes daily, and nearly 1 million refugees and migrants have crossed the Mediterranean to get to Europe so far this year. Turkey, Pakistan and Lebanon host the most refugees. Such a massive flow of people from country to country has also put a strain on host nations, and left unmanaged, this “can increase resentment and abet politicization of refugees,” the report notes.

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Dec 122015
 
 December 12, 2015  Posted by at 10:17 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle December 12 2015


Banksy Steve Jobs, son of a Syrian immigrant 2015

Russia Calls Saudi Bluff, Plans $40 Oil For Seven Years (AEP)
December 16, 2015 – When The End Of The Bubble Begins (Stockman)
Stocks Are More Overvalued Now Than At 2000 And 2007 Peaks (MarketWatch)
As Commercial Real-Estate Prices Soar, Fed Weighs Consequences (WSJ)
Why The Junk Bond Selloff Is Getting Very Scary (MarketWatch)
Carl Icahn: Junk Bond Market A ‘Keg Of Dynamite’ (CNBC)
It Starts: Junk-Bond Fund Implodes, Investors Stuck (WS)
Gundlach Says ‘Never Just One Cockroach’ In Any Credit Meltdown (Reuters)
Third Avenue Redemption Freeze Sends Chill Through Credit Market (BBG)
Stone Lion Capital Partners Suspends Redemptions in Credit Hedge Funds (WSJ)
Bank of Canada Crushes Loonie, Creates Mother of All Shorts (WS)
China Property Firms’ Debt Issuance Jumps, More To Come (Reuters)
Even the Mafia Wants Out of Italy’s South (BBG)
New Superbug Resistant To All Antibiotics Linked To Imported Meat (Forbes)
Banksy Uses Steve Jobs Artwork To Highlight Refugee Crisis (Guardian)

It’s not a bluff, it’s desperation on all sides.

Russia Calls Saudi Bluff, Plans $40 Oil For Seven Years (AEP)

Russia is battening down the hatches for a Biblical collapse in oil revenues, warning that crude prices could stay as low as $40 a barrel for another seven years. Maxim Oreshkin, the deputy finance minister, said the country is drawing up plans based on a price band fluctuating between $40 to $60 as far out as 2022, a scenario that would have devastating implications for Opec. It would also spell disaster for the North Sea producers, Brazil’s off-shore projects, and heavily indebted Western producers. “We will live in a different reality,” he told a breakfast forum hosted by Russian newspaper Vedomosti. The cold blast from Moscow came as US crude plunged to $35.56, pummelled by continuing fall-out from the acrimonious OPEC meeting last week. Record short positions by hedge funds have amplified the effect.

Bank of America said there was now the risk of “full-blown price war” within Opec itself as Saudi Arabia and Iran fight out a bitter strategic rivalry through the oil market. Brent crude fell to $37.41, even though demand is growing briskly. It is the lowest since the depths of the Lehman crisis in early 2009. But this time it is a ‘positive supply shock’, and therefore beneficial for the world economy as a whole. The International Energy Agency said in its monthly market report that Opec has stopped operating as a cartel and is “pumping at will”, aiming to drive out rivals at whatever cost to its own members. Opec revenues will fall to $400bn (£263bn) this year if current prices persist, down from $1.2 trillion in 2012. This is a massive shift in global wealth.

The IEA said global oil stocks were already at nose-bleed levels of 2,971m barrels, and were likely to increase by another 300m over the next six months as “free-wheeling Opec policy” floods the market. The watchdog played down fears that the world was running out of sites to store the glut, citing 230m barrels of new storage coming on stream. Inventories in the US are still only at 70pc capacity. But this could change once Iranian crude comes on stream later next year. Russia’s $40 warning is the latest escalation in a game of strategic brinkmanship between the Kremlin and Saudi Arabia, already at daggers drawn over Syria. The Russian contingency plans convey a clear message to Riyadh and to Opec’s high command that the country can withstand very low oil prices indefinitely, thanks to a floating rouble that protects the internal budget.

Saudi Arabia is trapped by a fixed exchange peg, forcing it to bleed foreign reserves to cover a budget deficit running at 20pc of GDP. Russia claims to have the strategic depth to sit out a long siege. It is pursuing an import-substitution policy to revive its industrial and engineering core. It can ultimately feed itself. The Gulf Opec states are one-trick ponies by comparison. The deputy premier, Arkady Dvorkovich, told The Telegraph in September that Opec will be forced to change tack. “At some point it is likely that they are going to have to change policy. They can last a few months, to a couple of years,” he said. Kremlin officials suspect that the aim of Saudi policy is to force Russia to the negotiating table, compelling it to join Opec in a super-cartel controlling half the world’s production.

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“Wall Street margined the Fed’s gift of collateral, and did so over and over in an endless chain of rehypothecation.”

December 16, 2015 – When The End Of The Bubble Begins (Stockman)

They are going to layer their post-meeting statement with a steaming pile of if, ands & buts. It will exude an abundance of caution and a dearth of clarity. Having judged that a 25 bps pinprick is warranted, the FOMC will then plant itself firmly in front of the great flickering dashboard in the Eccles Building. There it will repose to a regimen of “watchful waiting”, scouring the entrails of the “incoming data” to divine its next move. Perhaps the waiting won’t be so watchful as all that, however. What is actually coming down the pike is something that may put the reader, at least those who have already been invited to join AARP, more in mind of that once a year hour-long special broadcast by Saturday morning TV back in the days of yesteryear; it explained how the Lone Ranger got his mask.

Memory fails, but either 12 or 19 Texas Rangers rode high in the saddle into a box canyon, confident they knew what was around the bend. Soon there was a lot of gunfire and then there was just one, and that was only because Tonto’s pony needed to stop for a drink. Yellen and her posse better pray for a monetary Tonto because they are riding headlong into an ambush in the canyons of Wall Street. To wit, they cannot possibly raise money market interest rates—-even by 75 bps—-without massively draining liquidity from the casino. Don’t they know what happened to the $3.5 trillion of central bank credit they have digitally printed since September 2008? Do they really think that fully $2.8 trillion of it just recycled right back to the New York Fed as excess bank reserves?

That is, no harm, no foul and no inflation? The monetary equivalent of a tree falling in an empty forest? To the contrary, how about recognizing the letter “f” for fungibility. What all that “excess” is about is collateral, not idle money. The $2.8 trillion needed an accounting domicile—so “excess reserves” was as good as any. But from a financial point of view it amounted to a Big Fat Bid for existing inventories of stocks and bonds. Stated more directly, Wall Street margined the Fed’s gift of collateral, and did so over and over in an endless chain of rehypothecation. So that’s why December 16th will be the beginning of the end of the bubble. If the Fed were to actually raise money market rates the honest way, and in the manner employed by central banks for a century or two, it would have to drain cash from the system; and it would have to do so in the trillions in order to levitate the vast sea of money it has pinned to the zero bound.

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What excess money will buy you.

Stocks Are More Overvalued Now Than At 2000 And 2007 Peaks (MarketWatch)

The stock market currently is even more overvalued than it was at the bull market peaks of both March 2000 and October 2007 — according to not just one, but two, valuation measures. That at least is the message of an analysis released earlier this week by Ned Davis Research, the quantitative research firm. What caught my eye in the firm’s analysis was that, unlike virtually all others that conclude that stocks are overvalued, this one was not based on the Shiller P/E — the cyclically-adjusted P/E ratio championed by Nobel laureate Robert Shiller. That’s noteworthy, since there would be nothing new in reporting that Shiller’s P/E shows stocks to be overvalued. That ratio has been giving this same message for several years now, and skeptics have found many ways of wriggling out from underneath its bearish implications.

But Ned Davis’s latest report focuses on something different: the median stock’s price/earnings and price/sales ratios. The median stock, of course, is the one for which exactly half have higher ratios and half have lower. By focusing on the median, Davis’s findings are immune from the charge that they are being skewed by outliers — such as the terrible earnings among energy companies. The chart at the top of this column summarizes what Davis found. Currently, according to his firm’s research, the median NYSE-listed stock has a price/earnings ratio of 25.6, when calculated based on trailing 12-month earnings. At the bull market peak in October 2007, for example, the comparable ratio was below 20; at the top of the Internet bubble in March 2000, it was even lower. In fact, according to Davis, the price/earnings ratio currently for the median NYSE stock is the highest it’s ever been since his data series began in 1980 — except for the bear-market lows of October 2002 and March 2009, when earnings were depressed by recessions.

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Fed mouthpiece Hilsenrath with an pretty astonishing tale: After creating the biggest bubble ever, “the central bank remained ill-equipped to quell [..] dangerous asset bubbles..”

As Commercial Real-Estate Prices Soar, Fed Weighs Consequences (WSJ)

Federal Reserve officials participating in a “war game” exercise this year came to a disturbing conclusion: Six years after the financial crisis ended, the central bank remained ill-equipped to quell the kind of dangerous asset bubbles that destabilized the savings-and-loan industry during the late 1980s, tech stocks in the 1990s and housing in the mid-2000s. The five officials—gathered at a conference table in Charlotte, N. C.—had to determine if hypothetical booms in commercial real estate and corporate borrowing risked collapse and damaging fallout for the broader economy. The group was asked what to do about it. Fed officials said afterward they saw they lacked clear-cut tools or a proper road map of regulatory measures to help stem the simulated booms.

They also disagreed on whether to use higher interest rates to stop bubbles, a blunt instrument affecting the entire economy. “I walked away more sure about the discomfort I originally had,” said Esther George, president of the Federal Reserve Bank of Kansas City and a participant in the June exercise. She and others believe the Fed’s low-rate policies might have played a role in booming asset prices. The worry has turned more concrete. Commercial real-estate prices are soaring and Fed officials face the conundrum of what, if anything, to do. “Signs of valuation pressures are emerging in commercial real-estate markets, where prices have been rising at a solid clip and lending standards have deteriorated, although debt growth has not yet accelerated notably,” Stanley Fischer, vice chairman of the Fed, said in a speech Thursday.

Central bank officials would feel an urgency to act only if they believed the commercial real-estate market could suffer a sharp reversal that destabilizes the financial system or hurts the U.S. economy. That isn’t clear. Commercial real estate is a relatively small segment of the overall economy, and unsustainable debt hasn’t emerged as a problem. But financial bubbles have been root causes of the past three recessions and is a consideration as the Fed nears a decision on interest rates. Officials have signaled they will raise short-term interest rates from near zero at their policy meeting next week with the economy and job market improving. For some officials, the commercial real estate boom—and other financial sector froth—could be an added incentive.

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“High-yield bonds have led previous big reversals in S&P 500..”

Why The Junk Bond Selloff Is Getting Very Scary (MarketWatch)

The junk bond market is looking more and more like the boogeyman for stock market investors. The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund dropped 2% on Friday to close at the lowest price since July 17, 2009. Volume 54.1 million shares, or nearly six times the 30-day average of 9.5 million shares, according to FactSet. While weakness in the junk bonds – bonds with credit ratings below investment grade – is nothing new, fears of meltdown have increased after high-yield mutual fund Third Avenue Focused Credit Fund on Thursday blocked investors from withdrawing their money amid a flood of redemption requests and reduced liquidity. This chart shows why stock market investors should care:

The MainStay High Yield Corporate Bond Fund was used in the chart instead of the iShares iBoxx ETF (HYG), because HYG started trading in April 2007. When investors start scaling back, and market liquidity starts to dry up, the riskiest investments tend to get hurt first. And when money starts flowing again, and investors start feeling safe, bottom-pickers tend to look at the hardest hit sectors first. So it’s no coincidence that when the junk bond market and the stock market diverged, it was the junk bond market that proved prescient.

There’s still no reason to believe the run on the junk bond market is nearing an end. As Jason Goepfert, president of Sundial Capital Research, points out, he hasn’t seen any sign of panic selling in the HYG, which has been associated with previous short-term bottoms. “Looking at one-month and three-month lows [in the HYG] over the past six years, almost all of them saw more extreme sentiment than we’re seeing now,” Goepfert wrote in a note to clients.

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Icahn likes Trump to ‘shake up the system’.

Carl Icahn: Junk Bond Market A ‘Keg Of Dynamite’ (CNBC)

Activist investor Carl Icahn renewed his warnings about the high-yield debt market Friday, criticizing a perceived lack of liquidity in junk bond funds. “The high-yield market is just a keg of dynamite that sooner or later will blow up,” he said on CNBC’s “Fast Money: Halftime Report.” Icahn’s comments echoed remarks he has made in recent months about the dangers of high-yield debt. They come as Third Avenue Management looked to block investors from withdrawing money from a nearly $1 billion junk bond fund that it is trying to liquidate. Third Avenue’s troubles could fuel concerns as markets await an interest rate decision next week from the Federal Reserve, another frequent Icahn target.

High-yield funds look perilous because “there’s no liquidity” behind them, Icahn contended. He voiced similar criticism of BlackRock this summer, saying some of its bond funds create an “extremely dangerous situation.” “The average person that goes into this should basically be warned,” he said Friday. Icahn stressed that financial support for some high-yield funds may prove shaky, and investors should be better informed about the risks. He noted that, while he does not support more government intervention, regulators may want to put increased attention on risks in the junk bond market.

Video from Icahn’s website, Sep 2015

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Wille the Fed end up bailing out junk bonds?

It Starts: Junk-Bond Fund Implodes, Investors Stuck (WS)

We have warned about “open-end” bond mutual funds, particularly those with a lot of high-yield bonds. We know some folks who got burned when Charles Schwab’s $13-billion bond fund SWYSX blew up during the financial crisis and lost 60% or so of its value before its data went offline. Schwab settled all kinds of class-action and individual lawsuits for cents on the dollar. It got in trouble over other bond funds. And other purveyors of bond funds got in trouble too. It works like this: When an “open-end” bond fund starts losing money, investors begin to sell it. Fund managers first use all available cash to pay investors. When the cash is gone, they sell the most liquid securities that haven’t lost much money yet, such as Treasuries. When they’re gone, they sell the most liquid corporate paper.

As they go down the line, they sell bonds that have already lost a lot of value. By now the smart money is betting against the fund, having figured out what’s happening. They’re shorting the very bonds these folks are trying to sell. The longer this goes on, the more money investors lose and the more spooked they get. It turns into a run. And people who still have that fund in their retirement account are getting cleaned out. Bond funds can be treacherous – especially if they hold dubious paper, which is never dubious until it suddenly is. And when they get in trouble, you want to be among the first out the door. The $1.8-trillion or so of US junk bonds are everywhere. Investors loved them because they have discernible yields in the Fed-designed zero-interest-rate environment. Junk bonds were hot, and so were the funds.

People went for them, with no idea that they were putting their nest egg in a fund larded with explosives. A significant part of Corporate America is junk rated, well-known names like Chrysler, Valeant Pharmaceuticals, or iHart Communications, yup, the LBO wunderkind owned by private equity firms and weighed down by $8.9 billion in debt that is now “distressed.” They issue debt because they’re cash-flow negative and need new money, or because they gorge on M&A, or have to fund share-buybacks and special billion-dollar dividends back to the private equity firms that own them. During the boom years of the credit bubble, nothing could go wrong. And now, as ever more junk bonds wither, crash, default, and cause their owners to tear out their hair – just then, a bond fund implodes. And the next crisis hasn’t even started yet.

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Gundlach stands to lose big.

Gundlach Says ‘Never Just One Cockroach’ In Any Credit Meltdown (Reuters)

Jeffrey Gundlach, the widely followed investor who runs DoubleLine Capital, warned Friday that crumbling credit markets could expose more fund debacles such as Third Avenue Management’s junk bond portfolio and the Federal Reserve should take note of deteriorating financial conditions. “I’d have to believe that if they met today that they wouldn’t raise rates,” Gundlach told Reuters in a telephone interview. “I mean, Wow. Look at the chart of JNK (The SPDR® Barclays High Yield Bond ETF). It’s accelerating to the downside.” Thursday, Martin Whitman’s Third Avenue Management said it was barring investor withdrawals while it liquidated its high-yield bond fund, an unusual move that highlights the dangers of loading up on risky assets that are hard to trade even in good times.

“There’s never just one cockroach” in any kind of credit meltdown, said Gundlach, who oversees $80 billion at the Los Angeles-based DoubleLine Capital. Investors have been on “credit overload,” in a reach for yield, Gundlach said. “People are too long credit and the credit is melting down and the stock market is whistling through the graveyard. It is so similar to 2007, it’s scary.” The junk-bond fund blowup comes ahead of next week’s Federal Reserve’s Open Market Committee meeting on December 15 and 16, at which time policy makers are expected to raise rates from near-zero levels for the first time in nearly a decade. Gundlach, who has been warning that the U.S. Federal Reserve should not tighten monetary policy next week, said: “They’re just hell-bent on raising rates. They talked that they would do it and they want to do it – and yet nominal GDP is lower than it was in September of 2012.” “Yet they did QE3 in September 2012,” Gundlach said.

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Cockroach no. 1. Or is it no. 2?

Third Avenue Redemption Freeze Sends Chill Through Credit Market (BBG)

Investors who piled into the riskiest corners of the credit markets during seven years of rock-bottom interest rates are getting a reminder of how hard it can be to cash out. With outflows from U.S. high-yield bond funds running at the fastest pace in more than a year, Martin Whitman’s Third Avenue Management took the rare step of freezing withdrawals from a $788 million credit mutual fund on Dec. 9. The firm’s assessment that meeting redemptions would be impossible without resorting to fire sales has put a spotlight on the dangers for junk-bond investors as the Federal Reserve prepares to lift interest rates as soon as next week. “It’s definitely a dark cloud over the market,” said Anthony Valeri at LPL Financial. Investor withdrawals “are driving the high yield market now more than anything.

Institutions – hedge funds and mutual funds – are being forced to get out and unfortunately that’s pressuring the entire market.” The selloff in riskier debt, fueled by tepid global economic growth and a collapse in earnings at commodity companies, deepened on Thursday as news of Third Avenue’s decision rattled investors. Yields on U.S. high-yield debt climbed to the highest in almost four years, putting the market on pace for its first annual loss since 2008, a Bank of America Merrill Lynch index shows. Growing tumult in credit markets comes eight years after BNP Paribas helped spark a global financial crisis by freezing withdrawals from three investment funds because it couldn’t “fairly” value their mortgage holdings.

While Third Avenue said its positions have the potential to deliver returns over a longer investment horizon, Berwyn Income Fund’s George Cipolloni said the similarities between today’s markets and those before the crisis are getting too big to ignore. “A lot of this looks like late 2007 or early 2008,” when the credit crunch began to take root, said Cipolloni, whose fund has outperformed 72% of peers tracked by Bloomberg over the past five years. “But instead of housing and mortgages, it’s energy and materials leading the decline.”

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Losers. Big losers.

Stone Lion Capital Partners Suspends Redemptions in Credit Hedge Funds (WSJ)

Stone Lion Capital Partners said it suspended redemptions in its credit hedge funds after many investors asked for their money back. The move, nearly unprecedented in the hedge-fund industry since the financial crisis, is the latest example of the sudden crunch facing traders across Wall Street looking to sell beaten-down positions. On Thursday, Third Avenue stunned investors with the announcement it was barring withdrawals while it liquidates a high-yield bond mutual fund, a move that intensified a selloff sweeping the junk-bond world. Stone Lion, founded in 2008 by Bear Stearns veterans Gregory Hanley and Alan Mintz, is in a similar malaise, facing heavy losses on so-called distressed investments including junk bonds, post reorganization equities and other special situations, people familiar with the matter said.

Its oldest set of credit funds, which manage $400 million altogether, received “substantial redemption requests,” precipitating the decision, the firm said in a statement. The firm didn’t give a time frame for when the money would be returned. A Stone Lion spokesman said suspending redemptions was the only way to “ensure fair and equitable treatment for all” investors. The firm continues to operate several other funds, including one that bets on Puerto Rico’s economic recovery. Stone Lion’s hedge funds were down about 7% through the end of July, when it cut off many prospective investors from receiving updates, people familiar said. In a midyear letter to investors, Messrs. Hanley and Mintz professed optimism in the “ultimate recovery figures underpinning our investment theses.” But the funds have suffered significant losses since then, the people said; investor documents indicate the funds manage 24% less now than they did at the end of July.

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Beggar thy neighbor. And thyself?

Bank of Canada Crushes Loonie, Creates Mother of All Shorts (WS)

The Canadian dollar swooned 1% against the US dollar on Friday, to US$0.7270, after having gotten hammered for the past six of seven trading days. It’s down 5% in November so far, 15.5% year-to-date, and 31% from its post-Financial Crisis peak of $1.06 in April 2011. It hit the lowest level since June 2004. The commodities rout would have been bad enough. Given the importance of commodities to the Canadian economy, the multi-year decline in the prices of metals, minerals, and natural gas, and then starting in mid-2014, the devastating plunge of the price of oil, would have been sufficient in driving down the loonie. That the Fed has tapered QE out of existence last year and has been waffling and flip-flopping about rate hikes ever since made the until then beaten-down US dollar, at the time the most despised currency in the universe, less despicable – at the expense of the loonie.

Those factors would have been enough to knock down the loonie. But it wasn’t enough, not for the ambitious Bank of Canada Governor Stephen Poloz. The man’s got a plan. He is in an all-out currency war. He’s out to crush the loonie beyond what other forces are already accomplishing. He’s out to pulverize it, and no one knows how far he’ll go, or where he’ll stop, or if he’ll ever stop. He has singlehandedly created the short of a lifetime. It should spook every Canadian with income and assets denominated in Canadian dollars and those wanting to buy a home in Canada (we’ll get to that bitter irony in a moment). Poloz has been in office since June 2013, and this is what he has accomplished so far:

One reason for pulverizing the Canadian dollar is to boost revenues and earnings of exporters. They get to translate their foreign-currency revenues into Canadian dollars on their financial statements. And analysts love that. It doesn’t matter how the bigger numbers got there, whether by inflation or devaluation, as long as they’re bigger. And Canadian stocks could use some help. Despite the destruction of the loonie, the Toronto Stock Exchange index TSX has plunged 18% since its peak in June 2014 and is now back where it had been in September 2013.

So Poloz is trying to get Canadian workers to be able to compete with workers in Mexico and China and Bangladesh, and with those beaten-down wages in the US. His tool is to pulverize the currency. Alas, the Mexican peso too has gotten crushed. But ironically, the Bank of Mexico is spinning in circles to halt the decline. It’s selling its limited dollar reserves and buying pesos to prop up its currency, even as Canadians watch helplessly as their own currency descends into banana-republic status – something the US dollar used to excel at when the Fed was on its path of total dollar destruction.

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Of course, more debt will solve everyhting.

China Property Firms’ Debt Issuance Jumps, More To Come (Reuters)

China’s real estate companies have sharply increased the amount of funds raised from debt so far this year compared with 2014 as borrowing costs hit historical lows, and they are planning to borrow more. Property developers have raised 495 billion yuan ($77 billion) from domestic Chinese bonds, almost double 2014 levels, Barclays Capital estimates. Goldman Sachs suggests property companies have issued more than 400 billion yuan ($62.5 billion) in domestic bonds, over seven times total issuance in 2014. It uses a different set of companies as the basis of its estimate. “Conditions are great for these developers who should take this opportunity to strengthen their balance sheets and deleverage in a disciplined manner, rather than leverage up,” said Dhiraj Bajaj at Lombard Odier Singapore.

After tightening regulations in recent years to dampen a hot property market, regulators have moved this year to make it easier for developers to raise debt in the hope a lift for the real estate market will boost the wider economy. The property sector drives about 15% of gross domestic product and could help support an economy that many analysts predict will grow this year at its slowest pace in more than two decades. Historically low interest rates are helping to fuel the rush. The central bank has cut its benchmark interest rates six times since November by 1.65%age points and reduced banks’ reserve requirements three times this year.

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Two nations under the same flag.

Even the Mafia Wants Out of Italy’s South (BBG)

A large portion of Italy is being left behind. The economic gap between Italy’s prosperous north and its depressed south has widened so much that the difference between Lombardy near the Swiss Alps and Calabria in the toe of the boot-shaped peninsula is wider than that between Germany and Greece. “With the latest recession, a whole chunk of the south’s productive structure has disappeared,” said Stefano Prezioso, head of forecasts at research institute Svimez, which seeks to promote industry in the south. “The process of decoupling that began in 2001 has quickened and it may now take many years to get back to a growth pace similar to the north.”

Italy has suffered through two recessions in seven years and its recovery is lagging behind other euro-area countries. That means a large part of the country’s population living in the south, known as Mezzogiorno, may not even see an improvement in economic conditions. Bank of Italy Director General Salvatore Rossi, who comes from the southern city of Bari, highlighted the issue in a Dec. 3 speech by saying the regional disparity is at a record and widening. Successful companies in northern Italy were increasingly subjected to “contamination” by organized-crime groups, including those from the south, as the businesses tried to weather the effects of the nation’s recession, Milan-based Assolombarda, the Lombardy industrialists’ association, said earlier this year. Prosecutors have also said the Mafia and other organized crime gangs are moving more of their operations to the north.

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“We’re One Giant Step Closer To The End Of Antibiotics..”

New Superbug Resistant To All Antibiotics Linked To Imported Meat (Forbes)

Just last month, Yi-Yun Liu’s team discovered the mcr-1 gene, which conveys resistance to colistin, an antibiotic of last resort. They were doing a surveillance project on E. coli bacteria from food animals in China. A whopping 15% of meat samples and 21% of animals tested between 2011 and 2014 also had bacteria that carried this gene. The researchers from South China also found this resistance gene in E. coli and Klebsiella pneumonia isolates from 16 hospitalized patients’ blood, urine or other sites. The isolates were all very resistant ESBL bacteria to begin with, so now were resistant to all antibiotics. It gets worse. This week, Frank Aarestrup’s team, from the Danish National Food Institute, reported that they also searched their collection of bacteria, looking for this new gene.

They found the mcr-1 gene in the blood of a patient and in 5 poultry samples that originated in Germany between 2012-14. The patient had not left the country and was believed to have become infected by eating contaminated meat. The genes found in the poultry were identical to those from the Danish patient and from China. Why is this important? The mcr-1 gene transfers resistance to E. coli, Klebsiella, Pseudomonas—common bacteria—by plasmids, small bits of DNA that can be transferred to different types of bacteria. Previously, colistin resistance was transferred on chromosomes, and therefore affected only those bacteria and their descendants. Plasmid-borne resistance genes are more likely to be rapidly spread widely, and can spread between species of bacteria. According to George Washington University’s Dr. Lance Price, it’s a bit less likely to be a problem with Salmonella for now, as “we don’t have those bordering on pan-resistance like E. coli.”

One of the problems is that colistin is widely used in China’s agriculture industry. Co-author Professor Jianzhong Shen explains, “The selective pressure imposed by increasingly heavy use of colistin in agriculture in China could have led to the acquisition of mcr-1 by E. coli.” The WHO called for limiting the use of colistin in 2012, calling it a critically important antibiotic. Yet most of the 12,000 tons of colistin fed to livestock each year is in China. In Europe, polymyxins (the colistin class) were the 5th most heavily used type of antibiotic in agricultural use in 2013. Colistin is not widely used in the U.S., but it is not prohibited either. Colistin is a nasty antibiotic. Until the past few years, when we were desperate for options for treating carbapenem resistant bacteria (CRE), it was not used due to its toxicity. I’ve had to use it a rarely, resulting in inevitable renal failure in the patients receiving it.

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Interesting artist.

Banksy Uses Steve Jobs Artwork To Highlight Refugee Crisis (Guardian)

Banksy has revealed a new artwork, sprayed on a wall in the Calais refugee camp called “the Jungle”, intended to address negative attitudes towards the thousands of people living there. The work depicts the late Steve Jobs, the founder of Apple, with a black bin bag thrown over one shoulder and an original Apple computer in his hand. The work is a pointed reference to Jobs’s background as the son of a Syrian migrant who went to America after the second world war. In a rare statement accompanying the work, Banksy said: “We’re often led to believe migration is a drain on the country’s resources but Steve Jobs was the son of a Syrian migrant. Apple is the world’s most profitable company, it pays over $7bn (£4.6bn) a year in taxes – and it only exists because they allowed in a young man from Homs.”

The graffiti is one of a series of works Banksy has created in response to the refugee crisis. During his trip to Calais, the artist covered several walls across the French port with related graffiti, including a riff on Theodore Gericault’s Raft of the Medusa, featuring a luxury yacht. This summer, his temporary “bemusement” park in Weston-Super-Mare featured an installation of boats filled with bodies. On the closing night of Dismaland, Banksy also invited Pussy Riot to debut their song criticising the global failure to help the migrants entering Europe. Since the park closed in September, the artist has been shipping leftover infrastructure from Dismaland to help build emergency housing for the 7,000 migrants, mainly from Syria, Eritrea and Afghanistan, now living on the site of a former rubbish tip in Calais.

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Dec 102015
 
 December 10, 2015  Posted by at 9:42 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


Unknown GMC truck Associated Oil fuel tanker, San Francisco 1935

If It Owns a Well or a Mine, It’s Probably in Trouble (NY Times)
Credit Card Data Reveals First Core Retail Sales Decline Since Recession (ZH)
America’s Middle Class Meltdown (FT)
Chinese Devaluation Is A Bigger Danger Than Fed Rate Rises (AEP)
China Swallows Its Mining Debt Bomb (BBG)
China’s Plan to Merge Sprawling Firms Risks Curbing Competition (WSJ)
Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (BBG)
Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck (WS)
Banks Buy Protection Against Falling Stock Markets (BBG)
Dividends Could Be the Next Victim of the Commodity Crunch (BBG)
Copper, Aluminum And Steel Collapse To Crisis Levels (CNN)
US Companies Turn To European Debt Markets (FT)
Italy Needs a Cure for Its Bad-Debt Headache (BBG)
Swiss to Give Up EVERYTHING & EVERYBODY (Martin Armstrong)
Trump’s ‘Undesirable’ Muslims of Today Were Yesteryear’s Greeks (Pappas)
It’s Too Late to Turn Off Trump (Matt Taibbi)
War Is On The Horizon: Is It Too Late To Stop It? (Paul Craig Roberts)
Greek Police Move 2,300 Migrants From FYROM Border To Athens (Kath.)

Good headline.

If It Owns a Well or a Mine, It’s Probably in Trouble (NY Times)

The pain among energy and mining producers worsened again on Tuesday, as one of the industry’s largest players cut its work force by nearly two-thirds and Chinese trade data amplified concerns about the country’s appetite for commodities. The full extent of the shakeout will depend on whether commodities prices have further to fall. And the outlook is shaky, with a swirl of forces battering the markets. The world’s biggest buyer of commodities, China, has pulled back sharply during its economic slowdown. But the world is dealing with gluts in oil, gas, copper and even some grains. “The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm.

“Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.” The pressure on prices has been significant. Prices for iron ore, the crucial steelmaking ingredient, have fallen by about 40% this year. The Brent crude oil benchmark is now hovering around $40 a barrel, down from more than a $110 since the summer of 2014. Companies are caught in the downdraft. A number of commodity-related businesses have either declared bankruptcy or fallen behind in their debt payments. Even more common are the cutbacks. Nearly 1,200 oil rigs, or two-thirds of the American total, have been decommissioned since late last year.

More than 250,000 workers in the oil and gas industry worldwide have been laid off, with more than a third coming in the United States. The international mining company Anglo American is pulling back broadly, with a goal to reduce the company’s size by 60%. Along with the layoffs announced on Tuesday, the company is suspending its dividend, halving its business units, as well as unloading mines and smelters.

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How bad will the holiday shopping season get?

Credit Card Data Reveals First Core Retail Sales Decline Since Recession (ZH)

While we await the government’s retail sales data on December 11, the last official economic report the Fed will see before its December 16 FOMC decision, Bank of America has been kind enough to provide its own full-month credit card spending data. And while a week ago the same Bank of America disclosed the first holiday spending decline since the recession, in today’s follow up report BofA reveals that if one goes off actual credit card spending – which conveniently resolves the debate if one spends online or in brick and mortar stores as it is all funded by the same credit card – the picture is even more dire. According to the bank’s credit and debit card spending data, core retail sales (those excluding autos which are mostly non-revolving credit funded) just dropped by 0.2% in November, the first annual decline since the financial crisis!

At this point, BofA which recently laid out its bullish 2016 year-end forecast which sees the S&P rising almost as high as 2,300, and is thus conflicted from presenting a version of events that does not foot with its erroenous economic narrative, engages in a desperate attempt to cover up the ugly reality with the following verbiage, which ironically confirms that a Fed hike here would be a major policy error and lead to even more downside once it is digested by the market.

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Not usual FT language: “..the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society.”

America’s Middle Class Meltdown (FT)

America’s middle class has shrunk to just half the population for the first time in at least four decades as the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society. The ranks of the middle class are now narrowly outnumbered by those in lower and upper income strata combined for the first time since at least the early 1970s, according to the definitions by the Pew Research Center, a non-partisan think-tank in research shared with the Financial Times. The findings come amid an intensifying debate leading up to next year’s presidential election over how to revive the fortunes of the US middle class.

The prevailing view that the middle class is being crushed is helping to feed some of the popular anger that has boosted the populist politics personified by Donald Trump’s candidacy for the Republican presidential nomination. “The middle class is disappearing,” says Alison Fuller, a 25-year-old university graduate working for a medical start-up in Smyrna, Georgia, who sees herself voting for Mr Trump. Pew used one of the broadest income classifications of the middle class, in a new analysis detailing the “hollowing out” of a group that has formed the bedrock of America’s postwar success. The core of American society now represents 50% or less of the adult population, compared with 61% at the end of the 1960s. Strikingly, the change has been driven at least as much by rapid growth in the ranks of prosperous Americans above the level of the middle class as it has by expansion in the numbers of poorer citizens.

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Exporting commodities and deflation: “The excess capacity is cosmic.”

Chinese Devaluation Is A Bigger Danger Than Fed Rate Rises (AEP)

The world has had a year to brace for monetary lift-off by the US Federal Reserve. A near certain rate rise next week will come almost as a relief. Emerging markets have already endured a dollar shock. The currency has risen 20pc since July 2014 in expectation of this moment, based on the Fed’s trade-weighted “broad” dollar index. The tightening of dollar liquidity is what caused a global manufacturing recession and an emerging market crash earlier this year, made worse by China’s fiscal cliff in January and its erratic, stop-start, efforts to wind down a $26 trillion credit boom. The shake-out has been painful: hopefully the dollar effect is largely behind us. The central bank governors of India and Mexico, among others, have been urging the Fed to stop dithering and get on with it. Presumably they have thought long and hard about the consequences for their own economies.

It is a safe bet that Fed chief Janet Yellen will give a “dovish steer”. She has already floated the idea that rates can safely be kept far below zero in real terms for a long time to come, even as unemployment starts to fall beneath the 5pc and test “NAIRU” levels where it turns into inflation. Her apologia draws on a contentious study by Fed staff in Washington that there is more slack in the economy than meets the eye. She argues that after seven years of drought and “supply-side damage” it may make sense to run the economy hotter than would normally be healthy in order to draw discouraged workers back into the labour market and to ignite a long-delayed revival of investment. There are faint echoes of the early 1970s in this line of thinking. Rightly or wrongly, she chose to overlook a competing paper by the Kansas Fed arguing the opposite.

Such a bias towards easy money may contain the seeds of its own destruction if it forces the Fed to slam on the brakes later. But that is a drama for another day. The greater risk for the world over coming months is that China stops trying to hold the line against devaluation, and sends a wave of corrosive deflation through the global economy. Fear that China may join the world’s currency wars is what haunts the elite banks and funds in London. It is why there has been such a neuralgic response to the move this week to let the yuan slip to a five-year low of 6.4260 against the dollar. Bank of America expects the yuan to reach 6.90 next year, setting off a complex chain reaction and a further downward spiral for oil and commodities. Daiwa fears a 20pc slide. My own view is that a fall of this magnitude would set off currency wars across Asia and beyond, replicating the 1998 crisis on a more dangerous scale.

Lest we forget, China’s fixed capital investment has reached $5 trillion a year, as much as in North America and Europe combined. The excess capacity is cosmic. Pressures on China are clearly building up. Capital outflows reached a record $113bn in November. Capital Economics says the central bank (PBOC) probably burned through $57bn of foreign reserves that month defending the yuan peg. A study by the Reserve Bank of Australia calculates that capital outflows reached $300bn in the third quarter, an annual pace of 10pc of GDP. The PBOC had to liquidate $200bn of foreign assets. Defending the currency on this scale is costly. Reserve depletion entails monetary tightening, neutralizing the stimulus from cuts in the reserve requirement ratio (RRR). It makes a “soft landing” that much harder to pull off.

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China is trying to find ways to hide debts and losses…

China Swallows Its Mining Debt Bomb (BBG)

Remember that Bugs Bunny scene where the Tasmanian Devil survives an explosion by eating the bomb? China’s government is trying to do that for its indebted miners. Rather than let the domestic mining industry be dragged down by its $131 billion of debts, the authorities are looking at setting up what amounts to a state-owned “bad bank” to segregate the worst liabilities and allow the remaining businesses to survive. China Minmetals, the metals trader and miner tasked with swallowing up China Metallurgical Group in a state-brokered merger, will be one taker, these people said. That should help with its net debt, which already stood at 136 billion yuan ($22 billion) in December 2014. There’ll be no shortage of others lining up for relief.

Seven of the 17 most debt-laden mining and metals companies worldwide are in China, and all are state-owned or -controlled. Western credit investors have become so chary of miners’ debts that you can pick up bonds with a 100% annual yield if you’re confident the companies will last the year. Anglo American is firing 63 percent of its workforce and selling at least half its mines to cut debt, while Glencore today announced plans to further decrease its borrowings. The political strategist James Carville once joked that he’d like to be reincarnated as the bond market so he could “intimidate everybody.” In China, things are considerably more relaxed. Chalco, one of the top five global aluminum producers, hasn’t generated enough operating income to pay its interest bills in any half-year since 2011. Over the four-year period, interest payments have exceeded earnings by about 29 billion yuan.

It’s a similar picture in China’s coal industry. China Coal Energy, Yanzhou Coal, and Shaanxi Coal, the second-, fourth-, and fifth-biggest domestic producers by sales, have collectively spent 3.3 billion yuan more on interest over the last 12 months than they’ve earned from their operations. This situation can’t go on. While Chalco still has about 47 billion yuan in shareholders’ equity on its balance sheet, it doesn’t have an obvious path back to profitability and most of its excess interest payments were made before aluminum prices started to really slump, back in May. There are also some worrying dates looming: The company has 13.6 billion yuan in bonds maturing next year, and another 20.9 billion yuan in the two years following

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Beijing is trying to centralize control.

China’s Plan to Merge Sprawling Firms Risks Curbing Competition (WSJ)

Already massive, China Inc. is about to get bigger—and that may not be good for the country’s economy or consumers. Beijing is considering combining some of its biggest state-owned companies in a move that would tighten its grip over key parts of the world’s No. 2 economy. The government said Tuesday it would merge two of the country’s largest metals companies. Already it has combined train-car makers and nuclear technology firms and is in the process of combining its two largest shipping lines. It is considering combining more companies in areas ranging from telecommunications to air carriers. In recent weeks, shares of major state-owned enterprises like mobile-phone service China Unicom (Hong Kong) and China Telecom and carriers China Southern Airlines and Air China have surged amid speculation they will be next.

China Telecom said it doesn’t comment on speculation, while the others said they haven’t received any information about mergers. Beijing hopes to form national champions that can better compete abroad. But experts say the moves will likely reduce competition, lead to higher prices for consumers and do little to clean up China’s sprawling and largely wasteful portfolio of state-owned enterprises. “China is throwing the gears of reform into reverse,” said Sheng Hong, director of the Unirule Institute of Economics in Beijing, an independent research group. “Unprofitable state-owned companies should be closed, rather than merged,” he said.

[..] Economists say state-owned enterprises are a drag on China’s economy. They enjoy cheap lands, government subsidies and easy access to bank loans. Private firms face barriers to entering sectors such as oil and banking, and state-run companies’ dominance allow them to keep prices high. However, the performance of SOEs has been deteriorating. According to Morgan Stanley, the gap of return-on-assets between SOEs and private enterprises is the widest since the late 1990s. China’s SOEs had an average return-on-assets rate of 4% in 2014, compared with private companies’ 10%, said Kelvin Pang, an analyst at the bank. State-run Economic Information Daily, a newspaper published by the official Xinhua News Agency, reported in April that Beijing was considering merging its biggest state-owned companies to create around 40 national champions from the existing 111.

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“The rule change will cut Chesapeake’s inventory by 45%..” Its market cap will fall right along with it.

Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (BBG)

In an instant, Chesapeake Energy will erase the equivalent of 1.1 billion barrels of oil from its books. Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel. Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects.

But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years. Time is up, prices are down, and the rule is about to wipe out billions of barrels of shale drillers’ reserves. The reckoning is coming in the next few months, when the companies report 2015 figures. “There was too much optimism built into their forecasts,” said David Hughes, a fellow at the Post Carbon Institute. “It was a great game while it lasted.” The rule change will cut Chesapeake’s inventory by 45%, regulatory filings show. Chesapeake’s additional discoveries and expansions will offset some of its revisions, the company said in a third-quarter regulatory filing.

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“The problem is the risk investors piled on over the past seven years, when they still believed in the Fed’s hype that risks didn’t matter..”

Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck (WS)

“We are looking at real carnage in the junk bond market,” Jeffrey Gundlach, the bond guru who runs DoubleLine Capital, announced in a webcast on Tuesday. He blamed the Fed. It was “unthinkable” to raise rates, with junk bonds and leveraged loans having such a hard time, he said – as they’re now dragging down his firm’s $80 billion in assets under management. “High-yield spreads have never been this high prior to a Fed rate hike,” he said – as the junk bond market is now in a precarious situation, after seven years of ZIRP and nearly as many years of QE, which made Grundlach a ton of money. When he talks, he wants the Fed to listen. He wants the Fed to move his multi-billion-dollar bets in the right direction. But it’s not a measly quarter-point rate hike that’s the problem. Bond yields move more than that in a single day without breaking a sweat.

The problem is the risk investors piled on over the past seven years, when they still believed in the Fed’s hype that risks didn’t matter, that they should be blindly taken in large quantities without compensation, and that rates would always remain at zero. Those risks that didn’t exist are now coming home to roost. They’re affecting the riskiest parts of the credit spectrum first: lower-rated junk bonds and leveraged loans. Grundlach presumably has plenty of them in his portfolios. Tuesday, the day Grundlach was begging the Fed for mercy, was particularly ugly. The average bid of S&P Capital IQ LCD’s list of 15 large and relatively liquid high-yield bond issues – the “flow-names,” as it calls them, that trade more frequently – dropped 181 basis points to about 87 cents on the dollar, for an average yield of 10%, the worst since July 23, 2009.

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Sign of things to come?!

Banks Buy Protection Against Falling Stock Markets (BBG)

For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks. The pricing anomaly is visible in a value known as skew that measures how much it costs to buy bearish options relative to those that appreciate when shares rise. In 2015, contracts betting on a 10% S&P 500 decline by February have traded at prices averaging 110% more than their bullish counterparts. That compares with a mean premium of 68% since the start of 2005, according to data compiled by Bloomberg.

While various explanations exist including simply nervousness following a six-year bull market, Deutsche Bank says in a Dec. 6 research report that the likeliest explanation may be that demand is being created for downside protection among banks that are subject to stress test evaluations by federal regulators. In short, financial institutions are either hoarding puts or leaving places for them in their models should markets turn turbulent. “Since so many banking institutions are facing these stress tests, the types of protection that help banks do well in these scenarios obtain extra value,” said Rocky Fishman, an equity derivatives strategist at Deutsche Bank. “The way the marketplace has compensated for that is by driving up S&P skew.”

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They already are…

Dividends Could Be the Next Victim of the Commodity Crunch (BBG)

As commodity prices tumble to the lowest since the global financial crisis, the dividends paid by the world’s largest oil producers and miners look increasingly hard to justify. Take the world’s largest 500 companies by sales. Of the 20 expected to pay the highest dividend yields over the next 12 months, 17 are natural resources companies, according to data compiled by Bloomberg. They include BHP Billiton Ltd., the world’s largest miner, with a yield – or dividend divided by share price – of more than 10% on its London shares. Plains All American Pipeline LP tops the list with a yield of 13.7%. Ecopetrol, Colombia’s largest oil producer, has a payout of 11.6%. That compares with an average among all 500 companies of 3.5%. “Investors are suggesting that dividend rates announced as recently as half-year results are generally not sustainable,” said Jeremy Sussman at Clarksons Platou Securities.

“The current environment is among the toughest we have seen across the resource space, putting increased pressure on management teams to deliver cost savings.” Miners Anglo American and Freeport-McMoran have suspended payments to preserve cash, following Glencore Plc earlier in the year. Eni SpA, Italy’s largest oil producer, and Houston-based pipeline owner Kinder Morgan have both reduced dividends. While other chief executive officers, especially at oil producers like Shell and Chevron have promised to keep paying, investors appear to be pricing in the likelihood of more cuts to come. “The fall in oil companies’ share prices and the increase in the dividend yield to historical levels is signaling that the market is fearing a cut,” Ahmed Ben Salem at Oddo & Cie in Paris, said by e-mail.

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They should have seen it coming when oil collapsed.

Copper, Aluminum And Steel Collapse To Crisis Levels (CNN)

It’s no secret that commodities in general have had a horrendous 2015. A nasty combination of overflowing supply and soft demand has wreaked havoc on the industry. But prices for everything from crude oil to industrial metals like aluminum, steel, copper, platinum, and palladium have collapsed even further in recent days. Crude oil crumbled below $37 a barrel on Tuesday for the first time since February 2009. The situation is so bad that this week the Bloomberg Commodity Index, which tracks a wide swath of raw materials, plummeted to its weakest level since June 1999. “Sentiment is horrendous. It’s the worst since the financial crisis – and it’s getting worse every day,” said Garrett Nelson, a BB&T analyst who covers the metals and mining industry.

There was fresh evidence of the sector’s financial stress from De Beers owner Anglo American. The mining giant said it was suspending its dividend and selling off 60% of its assets, which could lead to a reduction of 85,000 jobs. The commodities rout is knocking stock prices, with the Dow falling over 200 points so far this week. It’s also raising concerns about the state of the global economy. “Markets are in the midst of another global growth scare,” analysts at Bespoke Investment Group wrote in a recent report. Soft demand is clearly not helping commodity prices. China and other emerging markets like Brazil have slowed dramatically in recent quarters, lowering their appetite for things like steel, iron ore and crude oil.

More developed markets don’t look great either. Europe’s economy continues to underperform, Japan is barely avoiding recession and U.S. manufacturing activity contracted in November for the first time in three years. But the real driver of the recent commodity crash is on the supply side, compared to the collapse in demand during the Great Recession. Cheap borrowing costs and an inability to predict China’s slowdown led producers to expand too much in recent years. Now they’re flooding the market with too much supply. “There’s a lot of froth and excess production capacity that needs to go away permanently. It’s hard to imagine we’re not in a low-commodity price environment for a fairly long time,” said Nelson.

That means you should brace for more plant closure and announcements like the one announced by Anglo American. In the U.S., roughly 123,000 jobs have disappeared from the mining sector, which includes oil and energy workers, since the end of 2014, according to government statistics. It’s also likely some companies won’t survive the depressed pricing environment. Financial trouble for commodity companies have already lifted global corporate defaults to the highest level since 2009, according to Standard & Poor’s.

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Debt addicts getting their fix wherever they can.

US Companies Turn To European Debt Markets (FT)

US tyremaker Goodyear Dunlop sold a €250m eight-year euro-denominated bond on Wednesday – its first such deal in four years – as US companies raise record amounts in the eurozone. The sale was the latest example of a reverse Yankee — euro-denominated debt issued by US companies. US companies have been the biggest issuers of euro bonds by nationality this year. Last week Ball Corporation, an avionics and packaging company, issued euro and dollar bonds to fund its acquisition of Rexam, a UK drinks maker. “Given the recent [US] disruption, the European market looks more positive,” said Henrik Johnsson, head of the Emea debt syndicate at Deutsche Bank. Diverging monetary policy has reduced the cost of issuing debt in euros as the European Central Bank continues to ease while the Federal Reserve is expected to increase its main interest rate from near zero this month.

Previously companies would issue debt in euros and convert it back into dollars. But the strong dollar has increased the cost of doing this. Many reverse Yankee issuers have significant euro-denominated cash flows and so have a “natural hedge” against exchange rate movements. The sell-off in the debt of US commodity companies – particularly in the energy sector – had been damaging for dollar credit, said Mr Johnsson. “As a matter of investor psychology, you’re not seeing losses in significant portions of your portfolio every day in Europe. It’s the same with fund flows, Europe is consistently receiving inflows.” Market participants expect the trend to continue into next year as successful deals demonstrate the depth of Europe’s markets. US companies have also issued a record amount in dollars, however.

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“In the third quarter, for example, GDP was worth €409 billion while the banks were saddled with more than €200 billion of non-paying loans.”

Italy Needs a Cure for Its Bad-Debt Headache (BBG)

Italy’s economy dragged itself out of recession this year, posting annual growth in GDP of 0.8% in the third quarter. That, though, was only half the pace achieved by the euro zone as a whole. And unless the Italian government gets serious about tackling the bad debts that are crushing the nation’s banking system, its economy will continue to underperform its peers. Economists are only mildly optimistic about Italy’s prospects next year. The consensus forecast is that growth will peak at 1.3% this quarter, slowing for the first three quarters of next year before rallying back to that high by the end of the year. One of the biggest drags on the country’s growth is the sheer volume of non-performing loans, typically defined as debts that have been delinquent for 90 days or more.

Italy’s bad loans have soared to more than €200 billion, a fourfold increase since the end of 2008. Moreover, more and more borrowers have fallen behind even as the economic backdrop has improved. That’s in sharp contrast with Spain, where bad loans peaked at the start of 2014 and have since declined by almost a third. The figures for Italy are even more worrying when you compare them with the growth environment. The burden of bad debts is approaching half of what the economy delivers every three months. In the third quarter, for example, GDP was worth €409 billion while the banks were saddled with more than €200 billion of non-paying loans. If that trend continues, Italy will soon be in a worse position than Spain, even though its economy is 50% bigger.

Here’s the rub: If a euro zone country’s banks are weighed down with bad debts, the ECB’s attempt to boost growth and consumer prices by channeling billions of euros into the economy through its quantitative easing program are doomed to failure. And it’s pretty clear that domestic investment in Italy isn’t showing any evidence of recovery despite the ECB’s best efforts.

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“The Swiss should have joined the Euro. What is the point of remaining separate when you surrender all your integrity and sovereignty anyway?”

Swiss to Give Up EVERYTHING & EVERYBODY (Martin Armstrong)

As of January 1, 2016, Switzerland is handing over the names of everyone who has anything stored in its Swiss freeport customs warehouses. For decades, people have stored precious metals and art in Swiss custom ports — tax-free — as long as they did not take it into Switzerland. Now any hope on trusting Switzerland is totally gone. That’s right — the Swiss handed over everyone with accounts in its banks. Now, they must report the name, address, and item descriptions of anyone storing art in its tax-free custom ports. This also applies to gold, silver, and other precious metals along with anything else of value. Back in 1986, the FBI walked into my office to question me about where Ferdinand Marcos (1917–1989) stored the gold he allegedly stole from the Philippines.

Marcos had been the President of the Philippines from 1965 to 1986 and had actually ruled under martial law from 1972 until 1981. I told them that I had no idea. They never believed me, as always, and pointed out that Ferdinand Marcos was a gold trader before he became president and he made his money as a trader. They told me he was a client and that I had been on the VIP list for the grand opening of Herald Square in NYC, which he funded through a Geneva family. I explained that I never met him, and if he were a client, he must have used a different name. But the rumor was that the gold was stored in the Zurich freeport customs warehouse. His wife, Imelda, was famous for her extravagant displays of wealth that included prime New York City real estate, world-renowned art, outlandish jewelry, and more than a thousand pairs of shoes.

Reportedly, there is a diamond tiara containing a giant 150-carat ruby that is locked up in a vault at the Swiss central bank. Some have valued it at more than US$8 million. The missing gold that people have spent 30 years searching for will surface if there are mandatory reports on whatever is hidden in the dark corners of these warehouses. This action to expose whatever whomever has everywhere in Switzerland may cause many to just sell since they will be taxed by their governments for daring to have private assets. They will not be able to get it out once it sees the light of day for every government is watching.

The Swiss should have joined the Euro. What is the point of remaining separate when you surrender all your integrity and sovereignty anyway? This is what bureaucrats are for. They act on their own circumventing the people. Welcome to the New Age of hunting for loose change. Your sofa and car glove box are next. Oh yeah – what about gold or silver fillings in your mouth? Time to see the dentist?

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Good to know one’s history.

Trump’s ‘Undesirable’ Muslims of Today Were Yesteryear’s Greeks (Pappas)

There are some things you might not know about Greek immigration to the United States. This history becomes particularly relevant when watching today’s news and political candidates like Donald Trump, supported by huge and vociferous crowds, call for the complete ban of people from entering the United States based on their race or religion. This is nothing new. In fact– today’s “undesirable” Muslims (in Donald Trump’s eyes), were yesteryear’s Greeks. It’s a forgotten history— something that only occasionally comes up by organizations like AHEPA or the occasional historian or sociologist. In fact, many Greek Americans are guilty of not only perpetuating— but also creating— myths of our ancestors coming to this country and being welcomed with open arms.

A look back at history will prove that this usually wasn’t the case for the early Greek immigrants to the United States. Greeks, their race and religion, were seen as “strange” and “dangerous” to America and after decades of open discrimination, Greeks were finally barred— by law— from entering the United States in large numbers. The Immigration Act of 1924 imposed harsh restrictions on Greeks and other non-western European immigrant groups. Under that law, only one hundred Greeks per year were allowed entry into the United States as new immigrants. Much like today, when politicians and activists like Donald Trump use language against a particular ethnic group— like his call to ban all Muslims from entering the United States, the same was the case a hundred years ago. Except then, Greeks were one of the main targets.

There was a strong, loud and active “nativist” movement that was led by people who believed they were the “true Americans” and the immigrants arriving— mainly Greeks, Italians, Chinese and others who were deemed “different” and even “dangerous” to American ideals, were unfit to come to America. As early as 1894 a group of men from Harvard University founded the Immigration Restriction League (IRL), proponents of a United States that should be populated with “British, German and Scandinavian stock” and not by “inferior races.” Their biggest targets were Greeks and Italians and the group had a powerful influence with the general public and leaders in the U.S. government in their efforts to keep “undesirables” out of America.

The well-known cartoon “The Fool Pied Piper” by Samuel Erhart appeared in 1909 portraying Uncle Sam as the Pied Piper playing a pipe labeled “Lax Immigration Laws” and leading a horde of rats labeled “Jail Bird, Murderer, Thief, Criminal, Crook, Kidnapper, Incendiary, Assassin, Convict, Bandit, Fire Brand, White Slaver, and Degenerate” toward America. Some rats carry signs that read “Black Hand,” referring to the Italian Mafia. In the background, rulers from France, Russia, Germany, Italy, Austria-Hungary, Turkey and Greece celebrate the departure of the fleeing rats.

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“..Trump does have something very much in common with everybody else. He watches TV….”

It’s Too Late to Turn Off Trump (Matt Taibbi)

[..] in Donald Trump’s world everything is about him, but Trump’s campaign isn’t about Trump anymore. With his increasingly preposterous run to the White House, the Donald is merely articulating something that runs through the entire culture. It’s hard to believe because Trump the person is so limited in his ability to articulate anything. Even in his books, where he’s allegedly trying to string multiple thoughts together, Trump wanders randomly from impulse to impulse, seemingly without rhyme or reason. He doesn’t think anything through. (He’s brilliantly cast this driving-blind trait as “not being politically correct.”) It’s not an accident that his attention span lasts exactly one news cycle. He’s exactly like the rest of America, except that he’s making news, not following it – starring on TV instead of watching it.

Just like we channel-surf, he focuses as long as he can on whatever mess he’s in, and then he moves on to the next bad idea or incorrect memory that pops into his head. Lots of people have remarked on the irony of this absurd caricature of a spoiled rich kid connecting so well with working-class America. But Trump does have something very much in common with everybody else. He watches TV. That’s his primary experience with reality, and just like most of his voters, he doesn’t realize that it’s a distorted picture. If you got all of your information from TV and movies, you’d have some pretty dumb ideas. You’d be convinced blowing stuff up works, because it always does in our movies. You’d have no empathy for the poor, because there are no poor people in American movies or TV shows – they’re rarely even shown on the news, because advertisers consider them a bummer.

Politically, you’d have no ability to grasp nuance or complexity, since there is none in our mainstream political discussion. All problems, even the most complicated, are boiled down to a few minutes of TV content at most. That’s how issues like the last financial collapse completely flew by Middle America. The truth, with all the intricacies of all those arcane new mortgage-based financial instruments, was much harder to grasp than a story about lazy minorities buying houses they couldn’t afford, which is what Middle America still believes. Trump isn’t just selling these easy answers. He’s also buying them.

Trump is a TV believer. He’s so subsumed in all the crap he’s watched – and you can tell by the cropped syntax in his books and his speech, Trump is a watcher, not a reader – it’s all mixed up in his head. He surely believes he saw that celebration of Muslims in Jersey City, when it was probably a clip of people in Palestine. When he says, “I have a great relationship with the blacks,” what he probably means is that he liked watching The Cosby Show. In this he’s just like millions and millions of Americans, who have all been raised on a mountain of unthreatening caricatures and clichés. TV is a world in which the customer is always right, especially about hard stuff like race and class. Trump’s ideas about Mexicans and Muslims are typical of someone who doesn’t know any, except in the shows he chooses to watch about them.

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“Unless Russia can wake up Europe, war is inevitable.”

War Is On The Horizon: Is It Too Late To Stop It? (Paul Craig Roberts)

[..] Washington is not opposed to terrorism. Washington has been purposely creating terrorism for many years. Terrorism is a weapon that Washington intends to use to destabilize Russia and China by exporting it to the Muslim populations in Russia and China. Washington is using Syria, as it used Ukraine, to demonstrate Russia’s impotence to Europe— and to China, as an impotent Russia is less attractive to China as an ally. For Russia, responsible response to provocation has become a liability, because it encourages more provocation. In other words, Washington and the gullibility of its European vassals have put humanity in a very dangerous situation, as the only choices left to Russia and China are to accept American vassalage or to prepare for war.

Putin must be respected for putting more value on human life than do Washington and its European vassals and avoiding military responses to provocations. However, Russia must do something to make the NATO countries aware that there are serious costs of their accommodation of Washington’s aggression against Russia. For example, the Russian government could decide that it makes no sense to sell energy to European countries that are in a de facto state of war against Russia. With winter upon us, the Russian government could announce that Russia does not sell energy to NATO member countries. Russia would lose the money, but that is cheaper than losing one’s sovereignty or a war. To end the conflict in Ukraine, or to escalate it to a level beyond Europe’s willingness to participate, Russia could accept the requests of the breakaway provinces to be reunited with Russia.

For Kiev to continue the conflict, Ukraine would have to attack Russia herself. The Russian government has relied on responsible, non-provocative responses. Russia has taken the diplomatic approach, relying on European governments coming to their senses, realizing that their national interests diverge from Washington’s, and ceasing to enable Washington’s hegemonic policy. Russia’s policy has failed. To repeat, Russia’s low key, responsible responses have been used by Washington to paint Russia as a paper tiger that no one needs to fear. We are left with the paradox that Russia’s determination to avoid war is leading directly to war. Whether or not the Russian media, Russian people, and the entirety of the Russian government understand this, it must be obvious to the Russian military.

All that Russian military leaders need to do is to look at the composition of the forces sent by NATO to “combat ISIS.” As George Abert notes, the American, French, and British aircraft that have been deployed are jet fighters whose purpose is air-to-air combat, not ground attack. The jet fighters are not deployed to attack ISIS on the ground, but to threaten the Russian fighter-bombers that are attacking ISIS ground targets. There is no doubt that Washington is driving the world toward Armageddon, and Europe is the enabler. Washington’s bought-and-paid-for-puppets in Germany, France, and UK are either stupid, unconcerned, or powerless to escape from Washington’s grip. Unless Russia can wake up Europe, war is inevitable.

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Europe’s creating no man’s land.

Greek Police Move 2,300 Migrants From FYROM Border To Athens (Kath.)

Police on Wednesday rounded up some 2,300 migrants from a makeshift camp near the border with the Former Yugoslav Republic of Macedonia and put them on buses to Athens, where they are to be put up in temporary reception facilities, including two former Olympic venues. The police operation, which Greek authorities heralded last week, was carried out relatively smoothly following weeks of tensions along the border. A group of 30 migrants who initially resisted efforts by police to remove them from the camp on Wednesday morning were briefly detained before being put on a bus to the capital. A total of 45 buses were used to transfer the migrants from a makeshift camp in Idomeni and the surrounding area to the capital, according to a police statement which said most the migrants are from Pakistan, Somalia, Morocco, Algeria and Bangladesh.

The migrants are to be put up in former Olympic venues in Elliniko and Galatsi and in a temporary reception facility for immigrants that opened in Elaionas over the summer. Police officers on Wednesday were stopping buses heading toward Idomeni with more migrants from the Aegean islands and conducting checks. All migrants that are not from Iraq, Afghanistan and Syria – the nationalities that FYROM border guards are allowing to pass – were being taken off the buses and sent to Athens, the official said. Complicating matters, FYROM police were said to have started building a second fence on the Balkan country’s frontier with Greece in a bid to keep out migrants trying to slip through.

The crackdown on the Greek-FYROM border is expected to lead to a buildup of migrants in Greece and encourage traffickers to resort to new routes to Europe. The United Nations refugee agency (UNHCR) indicated on Wednesday that an alternative route traffickers are likely to favor could be via Albania, Montenegro, Croatia and Bosnia.

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