Mar 152017
 
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Otto Dix The Triumph of Death 1934

 

Yes, austerity really kills real people, and it kills the societies they live in. Let’s try and explain this in simple terms. It’s a simple topic after all. Austerity is a mere left-over from faith-based policies derived from shoddy economics, and economics is a shoddy field to begin with. The austerity imposed on and in several countries and their economies after 2008, and the consequences it has had in these economies, cannot fail to make you wonder what level of intelligence the politicians have who did the imposing, as well as the economists who advised them in the process.

We should certainly not forget that the people who make these decisions are never the ones affected by them. Austerity hurts the poor. For those who are living comfortably -which includes politicians and economists that “matter”-, austerity at worst means eating and living somewhat less luxuriously. For the poor, taken far enough, it will mean not eating at all, not being able to afford clothing, medical care, even housing. Doing without 10% of very little hits much harder than missing out on 10% of an abundance.

And even then there are differences, for instance between countries. The damage done to British housing, education and health care by successive headless chicken governments is very real, and it will require a huge effort to restore these systems, if that is possible at all. Still, if the British have any complaints about the austerity unleashed upon them, they should really take a look at Greece. As this graph of households having a hard time making ends meet makes painfully clear:

 

 

Britain ‘only’ suffers from economically illiterate politicians and economists. Greece, on top of that, has to cope with a currency it has no control over, and with the foreign -dare we say ‘occupying’?- powers that do. A currency that is geared exclusively to the benefit of the richer Eurozone nations. The biggest mistake in building the EU, and the Eurozone in particular, is that the possibility has been left open for the larger and richer nations to reign over the smaller and poorer almost limitlessly. These things only become clear when things get worse, but then they really do.

This ‘biggest mistake’ predicted the end of the ‘union’ from the very moment it was established; all it will take is time, and comprehension. Eurozone rules say a country’s public debt cannot exceed 60% and its deficit must remain less than 3%. Rules that have been broken left right and center, including by the rich, Germany, France, who were never punished for doing so. The poor are.

These limits are completely arbitrary. They come from the text books of the same clueless cabal of economists that the entire Euro façade is based on. The same cabal also who now demand a 3.5% Greek budget surplus into infinity, the worst thing that can happen to an already impoverished economy, because it means even more money must flow out of an entity that already has none.

But let’s narrow our focus to austerity itself, and what makes it such a disaster. And then after that, we’ll take it a step further. We can blame economists for this mess, and hapless politicians, but that’s not the whole story; in the end they’re just messenger boys and girls. First though, here’s what austerity does. Let’s start with Ed Harrison talking about some revealing data that Matt Klein posted on FT Alphaville about comparing post-2008 Greece to emerging economies:

Europe’s Delusional Economic Policies

Here’s how Matt put it: “Greece had a very different post-crisis experience: it never recovered. By contrast, all the other countries were well past their pre-crisis peak after this much time had elapsed. On average, Argentina, Brazil, Indonesia, Thailand, and Turkey have outperformed Greece by more than 40 percentage points after nine years.”

.. unlike those countries, Greece lacked the ability to use the exchange rate as a shock absorber. So while Brazil and Greece faced the same type of downturn in dollar terms – about 45% in GDP per person – Brazilian living standards only deteriorated about 2%, compared to 26% in Greece. The net effect is that Greece had a relatively typical crisis in dollars but an unprecedently painful one in the terms that matter most”.

[..] Greece doesn’t have its own currency so the currency can’t depreciate. Greece must use the internal devaluation route, which makes its labor, goods and services cheaper through a deflationary path – and that is very destructive to demand, to growth, and to credit.

[..] it’s not about reforms, people. It’s about growth. And the euro – and the policies tied to membership – is anti-growth, particularly for a country like Greece that is forced to hit an unrealistic 3.5% primary surplus indefinitely.

 

Another good report came from the WaPo at about the same time Ed wrote his piece, some 4 weeks ago. After Matt Klein showing how hard austerity hit Greece compared to emerging economies, Matt O’Brien shows us how austerity hit multiple Eurozone countries, compared to what would have happened if they had not cut spending (or introduced the euro). It is damning.

Austerity Was A Bigger Disaster Than We Thought

Cutting spending, you see, shouldn’t be a problem as long as you can cut interest rates too. That’s because lower borrowing costs can stimulate the economy just as much as lower government spending slows it down. What happens, though, if interest rates are already zero, or, even worse, you’re part of a currency union that means you can’t devalue your way out of trouble? Well, nothing good.

House, Tesar and Proebsting calculated how much each European economy grew — or, more to the point, shrank — between the time they started cutting their budgets in 2010 and the end of 2014, and then compared it with what actually realistic models say would have happened if they hadn’t done austerity or adopted the euro.

According to this, the hardest-hit countries of Greece, Ireland, Italy, Portugal and Spain would have contracted by only 1% instead of the 18% they did if they hadn’t slashed spending; by only 7% if they’d kept their drachmas, pounds, liras, escudos, pesetas and the ability to devalue that went along with them if they hadn’t become a part of the common currency and outsourced those decisions to Frankfurt; and only would have seen their debt-to-GDP ratios rise by eight percentage points instead of the 16 they did if they hadn’t tried to get their budgets closer to being balanced.

In short, austerity hurt what it was supposed to help, and helped hurt the economy even more than a once-in-three-generations crisis already had.

[..] the euro really has been a doomsday device for turning recessions into depressions. It’s not just that it caused the crisis by keeping money too loose for Greece and the rest of them during the boom and too tight for them during the bust. It’s also that it forced a lot of this austerity on them. Think about it like this. Countries that can print their own money never have to default on their debts – they can always inflate them away instead – but ones that can’t, because, say, they share a common currency, might have to.

Just the possibility of that, though, can be enough to make it a reality. If markets are worried that you might not be able to pay back your debts, they’ll make you pay a higher interest rate on them – which might make it so that you really can’t.

In other words, the euro can cause a self-fulfilling prophecy where countries can’t afford to spend any more even though spending any less will only make everything worse.

That’s actually a pretty good description of what happened until the ECB belatedly announced that it would do “whatever it takes” to put an end to this in 2012. Which was enough to get investors to stop pushing austerity, but, alas, not politicians. It’s a good reminder that you should never doubt that a small group of committed ideologues can destroy the economy. Indeed, it’s the only thing that ever has.

 

 

So those are the outcomes, But what’s the theory, where does the “small group of committed ideologues” go so wrong? Let’s go really basic and simple. Last week, Britsh economist Ann Pettifor, promoting her new book “The Production of Money: How to Break the Power of Bankers”, said this to Vogue:

Politicians who advocate for austerity measures—cutting spending—like to say that the government ought to run its budget the way women manage our households, but unlike us, the government issues currency and sets interest rates and so on, and the government collects taxes. And if the government is managing the economy well, it ought to be expanding the numbers of people who are employed and therefore paying income tax and tax on purchases—purchases that turn a profit for businesses which then hire more employees, and on and on it goes. That’s called the multiplier effect, and for 100 years or so, it’s been well understood. And it’s why governments should invest not in tax breaks for wealthy people, but in initiatives like building infrastructure.

Around the same time, Ann wrote in the Guardian:

[..] the public are told that cuts in spending and in some benefits, combined with rises in income from taxes will – just as with a household – balance the budget. Even though a single household’s budget is a) minuscule compared to that of a government; b) does not, like the government’s, impact on the wider economy; c) does not benefit from tax revenues (now, or in the foreseeable future); and d) is not backed by a powerful central bank. Despite all these obvious differences, government budgets are deemed analogous (by economists and politicians) to a household budget.

[..] If the economy slumps (as in 2008-9) and the private sector weakens, then like a see-saw the public sector deficit, and then the debt, rises. When private economic activity revives (thanks to increased investment, employment, sales etc) tax revenues rise, unemployment benefits fall, and the government deficit and debt follow the same downward trajectory. So, to balance the government’s budget, efforts must be made to revive Britain’s economy, including the indebted private sector.

In other words, when faced with economic hard times, a government should not cut spending, it should increase it -and it can-. Because cutting spending is sure to make things worse. At the same time of course, this is not an option available to Greece, because it has ceded control of its currency, and therefore its economy, to a largely unaccountable and faceless cabal that couldn’t care less what happens in the country.

All they care about is that the debts the banks in the rich part of the eurozone incurred can be moved onto someone else’s shoulders. Which is where -most of- Greece’s crisis came from to begin with. And so, yes, Germany and Holland and France are sitting sort of pretty, because they prevented a banking crisis from happening at home; they transferred it to Greece’s pensioners and unemployed youth. The ‘model’ of the Eurozone allows them to do this. Coincidence? Bug or feature?

 

 

Oh, and it’s not only Greece, though it’s by far the hardest hit. Read Roberto Centeno in the Express below. Reminds me of Greeks friends saying: “In 2010, we were told we had €160 billion or so in debt, and we needed a bailout. Now we have over €600 billion in debt, they say. How is that possible? What happened? What was that bailout for?”

‘Spain Is Ruined For 50 Years’

A leading Spanish economist has hit out at the ECB saying “crazy” loans will ruin the lives of the population for the next 50 years. And it is only a matter of time before the Government is forced to default as a debt bubble and low wages effectively forge the worst declines in “living memory”. Leading economist Roberto Centeno, who was an advisor to US president Donald Trump’s election team on hispanic issues, says the country has borrowed €603 billion that it cannot conceivably pay back. And he says Spanish politicians including Minister of Economy Luis de Guindos are “insulting their intelligence” after doing back door deals with the ECB. In a blog post Mr Centeno says there needs to be audits so the country can understand the magnitude of its debt mountain.

He said Spain was “moving steadily towards the suspension of payments which is the result of out of control public waste, financed with the largest debt bubble in our history, supported by the ECB with its crazy policy of zero interest rate expansion and without any supervision.” The expert added the doomed situation will “lead to the ruin of several generations of Spaniards over the next 50 years”. [..] He said the country is currently suffering from a “third world production model”. He added: “We have a third world production model of speculators and waiters, with a labour market where the majority of jobs created are temporary and with remunerations of €600, the largest wage decline in living memory. “And all this was completed with a broken pension system and an insolvent financial system.”

Forecasting an unprecedented shock to the European financial model, Mr Centento is calling for an immediate audit despite a recent revelation that the ECB is failing in its supervisory role over Europe’s banks. He also claimed the Spanish government and European Union leaders have been manipulating figures since 2008. Mr Centento said: “We will require the European Commission and Eurostat to audit and audit the Spanish accounting system for serious accounting discrepancies that may jeopardise stability. “The gigantic debt bubble accumulated by irresponsible governments, and that never ceases to grow, will be the ruin of several generations of Spaniards. “The Bank of Spain’s debt to the Eurosystem is the largest in Europe. “The day that the ECB minimally closes the tap of this type of financing or markets increase their risk aversion, the situation will be unsustainable.”

 

 

But then it’s time to move on, courtesy of Michael Hudson, prominent economist, who should be a guest of honor, at the very least, at every Eurogroup meeting. You know, to give Dijsselbloem and Schäuble a reality check. Michael shines a whole different additional light on European austerity policies. This is from an interview with Sharmini Peries:

Finance as Warfare: IMF Lent to Greece Knowing It Could Never Pay Back Debt

MICHAEL HUDSON: You said the lenders expect Greece to grow. That is not so. There is no way in which the lenders expected Greece to grow. In fact, the IMF was the main lender. It said that Greece cannot grow, under the circumstances that it has now. What do you do in a case where you make a loan to a country, and the entire staff says that there is no way this country can repay the loan? That is what the IMF staff said in 2015.

It made the loan anyway – not to Greece, but to pay French banks, German banks and a few other bondholders – not a penny actually went to Greece. The junk economics they used claimed to have a program to make sure the IMF would help manage the Greek economy to enable it to repay. Unfortunately, their secret ingredient was austerity.

[..] for the last 50 years, every austerity program that the IMF has made has shrunk the victim economy. No austerity program has ever helped an economy grow. No budget surplus has ever helped an economy grow, because a budget surplus sucks money out of the economy.

As for the conditionalities, the so-called reforms, they are an Orwellian term for anti-reform, for cutting back pensions and rolling back the progress that the labor movement has made in the last half century. So, the lenders knew very well that Greece would not grow, and that it would shrink.

 

So, the question is, why does this junk economics continue, decade after decade? The reason is that the loans are made to Greece precisely because Greece couldn’t pay. When a country can’t pay, the rules at the IMF and EU and the German bankers behind it say, don’t worry, we will simply insist that you sell off your public domain. Sell off your land, your transportation, your ports, your electric utilities.

[..] If Greece continues to repay the loan, if it does not withdraw from the euro, then it is going to be in a permanent depression, as far as the eye can see. Greece is suffering the result of these bad loans. It is already in a longer depression today, a deeper depression, than it was in the 1930s.

[..] when Greece fails, that’s a success for the foreign investors that want to buy the Greek railroads. They want to take over the ports. They want to take over the land. They want the tourist sites. But most of all, they want to set an example of Greece, to show that France, the Netherlands or other countries that may think of withdrawing from the euro – withdraw and decide they would rather grow than be impoverished – that the IMF and EU will do to them just what they’re doing to Greece.

So they’re making an example of Greece. They’re going to show that finance rules, and in fact that is why both Trump and Ted Malloch have come up in support of the separatist movement in France. They’re supporting Marine Le Pen, just as Putin is supporting Marine Le Pen. There’s a perception throughout the world that finance really is a mode of warfare.

Sharmini Peries: Greece has now said, no more austerity measures. We’re not going to agree to them. So, this is going to amount to an impasse that is not going to be resolvable. Should Greece exit the euro?

MICHAEL HUDSON: Yes, it should, but the question is how should it do it, and on what terms? The problem is not only leaving the euro. The problem really is the foreign debt that was bad debt that it was loaded onto by the Eurozone. If you leave the euro and still pay the foreign debt, then you’re still in a permanent depression from which you can never exit. There’s a broad moral principle here: If you lend money to a country that your statistics show cannot pay the debt, is there really a moral obligation to pay the debt? Greece did have a commission two years ago saying that this debt is odious. But it’s not enough just to say there’s an odious debt. You have to have something more positive.

[..] what is needed is a Declaration of Rights. Just as the Westphalia rules in 1648, a Universal Declaration that countries should not be attacked in war, that countries should not be overthrown by other countries. I think, the Declaration of International Law has to realize that no country should be obliged to impose poverty on its population, and sell off the public domain in order to pay its foreign creditors.

[..] the looming problem is that you have to pay debts that are so far beyond your ability to pay that you’ll end up like Haiti did after it rebelled after the French Revolution.

[..] A few years after that, in 1824, Greece had a revolution and found the same problem. It borrowed from the Ricardo brothers, the brothers of David Ricardo, the economist and lobbyist for the bankers in London. Just like the IMF, he said that any country can afford to repay its debts, because of automatic stabilization. Ricardo came out with a junk economics theory that is still held by the IMF and the European Union today, saying that indebted countries can automatically pay.

Well, Greece ended up taking on an enormous debt, paying interest but still defaulting again and again. Each time it had to give up more sovereignty. The result was basically a constant depression. Slow growth is what retarded Greece and much of the rest of southern Europe. So unless they tackle the debt problem, membership in the Eurozone or the European Union is really secondary.

There is no such question as “why did austerity fail ‘in a particular case'”?. Austerity always fails. You could perhaps come up with a theoretical example in which a society greatly overspends and toning down spending might balance some things, but other than that, and nothing in what we see today resembles such an example, austerity can only work out badly. And that’s before, as Michael Hudson suggests, austerity is used as a means to conquer people and countries in a financial warfare setting.

This is because our economies (as measured in GDP) are 60-70% dependent on consumer spending. Ergo, when you force consumer spending down through austerity measures, GDP must and will of necessity come down with it. And if you cut spending, stores will close, and then their suppliers will, and they will fire their workers, which will further cut consumer spending etc. It doesn’t get simpler than that.

There is a lot of talk about boosting exports etc., but exports make up only a relatively small part of most economies, even in the US, compared to domestic consumption. As still is the case in virtually every economy, more exports will never make up for what you lose by severely cutting wages and pensions while at the same time raising taxes across the board (Greek reality). The only possible result from this is misery and lower government revenues, in a vicious circle, dragging an economy ever further down.

Since this is so obvious a 5-year old can figure it out in 5 minutes, the reason for imposing the kind of austerity measures that the Eurogroup has unleashed upon Greece must inevitably be questioned in the way professor Hudson does. If someone owes you a substantial amount of money, the last thing you want to do is make sure they cannot pay it back. You want such a person to have a -good- job, a source of income, that pays enough so that they can pay you back. Unless you have your eyes on their home, their car, their daughters, their assets.

What the EU and IMF do with Greece is the exact opposite of that. They’re making sure that Greece gets poorer every day, and the Greeks get poorer, ensuring that the debt, whether it’s odious or not -and that is a very valid question-, will never be paid back. And then they can move in and snap up all of the country’s -rich- resources on the cheap. But in the process, they create a very unstable country, something that may seem to be to their benefit but will blow up in their faces.

It’s not the first time that I say the EU and the US would be well advised to ensure Greece is a stable society, but they all continue to forcibly lead the cradle of democracy in the exact opposite direction.

The best metaphor I can think of is: Austerity is like bloodletting in the Middle Ages, only with a lower success rate.

 

 

Feb 022017
 
 February 2, 2017  Posted by at 11:01 am Finance Tagged with: , , , , , , , , , ,  2 Responses »
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Pablo Picasso The Bull state VII 1945


200 Years of US Immigration Data Put Trump’s Ban Into Context (Stat)
Australia PM Turnbull Denies Trump ‘Hang Up’ (Sky)
Will Donald Trump Reverse The War On Cash? (IM)
Problems ‘Resolved’ For German Dual Citizens Under Trump’s Travel Ban (Loc.)
German Current Account Surplus To Hit Record, World’s Largest In 2016 (R.)
Switzerland’s Record Surplus Raises Questions Amid Trump Trade Agenda (WSJ)
Dutch Will Count All Election Ballots By Hand To Thwart Hacking (AFP)
Renegotiating NAFTA Is A Good Idea – For Mexico (Coppola)
Trump Is Being Sabotaged by the Pentagon (PCR)
US Veterans: Dakota Pipeline Won’t Get Completed. Not On Our Watch (CNBC)
Turkish Air Force Jets Violate Greek Air Space 138 Times In One Day (IBT)

 

 

Wonderful graph even like this. Click the link to see the larger interactive one.

200 Years of US Immigration Data Put Trump’s Ban Into Context (Stat)

President Trump’s temporary ban on immigration from seven Muslim-majority nations — Iran, Iraq, Libya, Somalia, Syria, Sudan, and Yemen — is big news right now. And its effects are being felt widely throughout the worlds of science and medicine. Observing the fervid debate as someone who has recently had firsthand experience with the immigration system, I was interested in seeing as much of the larger immigration trends as government data permitted. In the interactive data visualization below, each country or region of last residence is represented by color, in a stream whose thickness represents the number of people arriving from that area in a given year. Immediately, two things stand out: boom and bust in the immigration rate (it’s easy to assume that it has always been increasing) and the new diversity of immigrants after World War II.

Immigration collapsed after the 1924 Immigration Act, which restricted entrants from Southern and Eastern Europe, severely limited African immigration, and prohibited it from East Asia, India, and the Arab world. The Immigration and Nationality Act of 1965, which removed national origins quotas imposed by the 1924 act, led to the diversity of the immigrant population that we see to this day. That diversity is reflected in the data visualization in the flowering of a completely new range of colors directly after the act was passed. Regardless of the political moves ahead, nearly 200 years of immigration suggests that no one leader or piece of legislation is capable of staunching the diverse flow of immigrants to the US.

The x axis displays years, the y axis displays the number of immigrants (in millions), and each country or region of last residence is represented by its own color and stream whose thickness represents the number of people from that area becoming legal permanent residents in a given year.

Read more …

Oz media say Turnbull stood his ground. Lots of ‘reports’ by people who were not present.

Australia PM Turnbull Denies Trump ‘Hang Up’ (Sky)

Donald Trump has blasted as ‘dumb’ a refugee deal between Australia and the United States, but Prime Minister Malcolm Turnbull is confident the president won’t backflip on their agreement. An explosive tweet from Mr Trump has once again cast doubt on the deal, in which the US would take refugees currently held on Manus Island and Nauru in return for Australia accepting refugees from Central America. ‘Do you believe it? The Obama Administration agreed to take thousands of illegal immigrants from Australia. Why? I will study this dumb deal!’ the US president tweeted on Thursday. Mr Turnbull said despite the president’s tweet, he had received multiple assurances from Mr Trump, his press secretary and the US embassy the deal would be progressed. ‘This is not a deal that he would’ve done or that he would regard as a good deal,’ Mr Turnbull told Fairfax radio. ‘But the question is, will he commit to honour the deal? And he has given that commitment.’

The prime minister wouldn’t tell Sydney radio Macquarie Radio whether Mr Trump had labelled the deal dumb or otherwise in their phone conversation on Sunday, but has denied reports the call ended abruptly or in anger. ‘I want to make one observation about it, the report the president hung up is not correct, the call ended courteously,’ he said. The US president reportedly told Mr Turnbull he was ‘going to get killed’ politically and accused Australia of seeking to export the ‘next Boston bombers’, according to senior US officials quoted by The Washington Post. Mr Turnbull said the deal with the former president was always for the Americans to use their own vetting processes and determine how many of the people on Nauru and Manus Island would be resettled. ‘It wasn’t a commitment to take everybody sight unseen,’ he said. ‘It is possible they could take a smaller number or a larger number – it will depend on the assessments.’

Read more …

That would be a no. The discussion is more about globalism than Trump or cash.

Will Donald Trump Reverse The War On Cash? (IM)

Jason Burack : It seems that globalism may be on the retreat. What’s your opinion about that, in light of Brexit, Donald Trump winning, and the Italian referendum failing?
Nick Giambruno : I think you’re right, Jason. Right now globalism is on the decline. But let’s define “globalism” before I explain why. This word gets thrown around a lot. But most people don’t really know what it means. It’s very simple. Globalism is the centralization of power into a couple of global institutions: the EU, the United Nations, the IMF, the World Bank, NAFTA, NATO, and so on. It’s really just a polite way of describing world government, or what George H.W. Bush termed the New World Order. I think globalism and the centralization of power is always a bad thing. People who value individual freedom and economic freedom… really, freedom in general, should oppose it. It’s an interesting moment in history. Those three things you just mentioned—Brexit, Trump, and the failure of the Italian referendum—are clear signs that globalism is losing steam. Whether it’s a sort of one step back, two steps forward thing or the ideology of globalism is really on its way out remains to be seen.

[..] Italy hasn’t had any real economic growth since it joined the euro in 1999. That’s pretty profound. The Italian economy is in the same place it was 17 years ago. A lot of that is because the euro makes Italy uncompetitive with countries like Germany. The next Italian government could be a coalition of anti-EU populist parties. If that happens, there’s an excellent chance Italy could leave the euro. Keep in mind that Italy is a core member of the euro. If it leaves, France would probably leave, too. And if that happens, the euro is finished.

Jason : Without the euro, what’s left holding the EU together?
Nick Giambruno : Almost nothing. The euro is the main glue. Without it, the whole EU could unravel. We’re still early in the process. But it doesn’t look good for the globalists and the Eurocrats. I think historians will look back at the failure of the December 4 Italian referendum as a crucial tipping point. With globalism failing, I’m not sure what happens next. No one does. We could see a rise of nationalism, which wouldn’t be a good thing. Or political power could diffuse even further, which would be a better outcome. Decentralization is good for individual and economic freedom.

Read more …

Canada, Australia, Germany, who’s next?

Problems ‘Resolved’ For German Dual Citizens Under Trump’s Travel Ban (Loc.)

American President Donald Trump’s travel ban initially looked to block more than 100,000 German dual citizens from entering the US, but now the two allies say they have found a solution. Acting commissioner of US Customs and Border Protection, Kevin McAleenan, said on Tuesday that travelers would be evaluated based on the passport they present rather than their dual citizen status, even if they have citizenship in one of the seven predominantly Muslim countries with temporary blocks. This was the first clarification about what the bans mean for people with dual citizenship, after US embassies, including Berlin’s, issued statements indicating that dual citizens were included in the bans.

The update on Tuesday means that people who are citizens of one of the seven countries as well as another country not named in the ban will be able to enter the US. EU migration commissioner Dimitris Avramopoulos explained that this applies to people with European citizenship. “[I am] glad that issue of EU dual nationals is resolved,” Avramopoulos wrote on Twitter. Trump’s executive order issued on Friday suspends all refugee admissions into the United States for 120 days, bars all Syrians indefinitely, and blocks citizens of seven mostly Muslim countries for 90 days. German politicians were concerned about what it would mean for the more than 130,000 dual citizens, including the Green party’s German-Iranian representative Omid Nouripour, who is the vice chair of a German-American parliamentary group.

Read more …

The victims of this German economic imperialism are not in the US, but in southern Europe.

German Current Account Surplus To Hit Record, World’s Largest In 2016 (R.)

Germany’s current account surplus is expected to have hit a new record of $297 billion in 2016, overtaking that of China again to become the world’s largest, the Munich-based Ifo economic institute said on Monday. This would be equivalent to 8.6% of total output, which means it would once again breach the European Commission’s recommended upper threshold of 6%. In 2015 the current account surplus stood at $271 billion. The European Commission and the United States have urged Germany to lift domestic demand and imports to help reduce global economic imbalances and fuel global growth, including within the euro zone. Germany rejects such criticism, saying it already lifted domestic demand by introducing a national minimum wage in 2015 and agreeing on a strong hike in pension entitlements in 2016. In addition, the government has increased state spending on roads, digital infrastructure and asylum seekers while sticking to its goal of keeping a balanced budget.

Asked about Ifo’s estimate, a spokeswoman for the economy ministry said the government views the surplus as high but the imbalance was not excessive. “The federal government shares the view of the European Commission that the German current account surplus has to be assessed as high – but it doesn’t represent an excessive imbalance,” spokeswoman Tanja Alemany Sanchez de Leon said. She added that Germany’s current account surplus with other euro zone countries halved to some 2% of GDP in 2015 from roughly 4% in 2007. “That shows there is a reduction of trade imbalances within the euro zone,” the spokeswoman said, adding that 44% of Germany’s current account surplus was due to business relations with the United States and Britain. Ifo estimated China’s current account surplus at $245 billion last year due to weaker exports. By contrast, the United States is predicted to have the world’s largest capital imports, with a deficit of $478 billion for 2016, Ifo said.

Read more …

But Switzerland doesn’t count.

Switzerland’s Record Surplus Raises Questions Amid Trump Trade Agenda (WSJ)

Switzerland’s exports to the U.S. surged last year to a record high, pushing the trade surplus higher and putting the Alpine export powerhouse in a potentially uncomfortable position amid rising protectionist sentiment in the U.S. The figures come alongside heightened attention brought by President Donald Trump to bilateral trade balances and the policies countries have pursued to weaken their currencies against the dollar to gain a competitive edge. Switzerland has largely escaped much focus in the U.S. and is unlikely to be in the new administration’s crosshairs now, given its relatively small size. Still, its swelling surplus, and the Swiss National Bank’s multiyear efforts to weaken the franc, could at a minimum raise questions as to why the U.S. may treat some countries like China and Mexico more harshly than others down the road when it comes to trade.

Switzerland’s overall trade surplus was 37.5 billion Swiss francs ($37.6 billion) last year, the country’s customs office said Thursday, up one billion francs from 2015 and an all-time high. Nearly half of that surplus—17.2 billion francs—came from the U.S., as Swiss exports there jumped 15% to 31.5 billion francs. Switzerland ran smaller trade surpluses with Japan and the Middle East, while it had trade deficits with Germany and China. “Looking forward if this is truly Donald Trump’s agenda to level the playing field, Switzerland has to be on that list,” said Peter Rosenstreich at Swissquote Bank. [..] Switzerland’s current account surplus was 9% of GDP in 2016, according to IMF estimates, well above the 3%-of-GDP level the Treasury considers material. Meanwhile, Switzerland has in recent years engaged in one-way interventions to weaken the franc, thereby making Swiss exports more competitive in world markets. The Swiss National Bank has for years said the franc was significantly overvalued.

Read more …

There we go. The fear of Russia goes a long way.

Dutch Will Count All Election Ballots By Hand To Thwart Hacking (AFP)

Dutch authorities will count by hand all the votes cast in next month’s general elections, ditching “vulnerable” computer software to thwart any cyber hacking bid, a senior minister has said. “I cannot rule out that state actors may try to benefit from influencing political decisions and public opinion in the Netherlands,” interior minister Ronald Plasterk said in a letter to parliament on Wednesday. On 15 March, the Netherlands kicks off a year of crucial elections in Europe which will be closely watched amid the rise of far-right and populist parties on the continent. Dutch officials are already on alert for signs of possible cyber hacking following allegations by US intelligence agencies that Russia may have meddled in November’s US presidential polls to help secure Donald Trump’s victory.

Plasterk told parliament that fears over “the vulnerabilities of the software” used by the country’s election committee “had raised questions about whether the upcoming elections could be manipulated”. He insisted in a letter to MPs that “no shadow of a doubt should hang over the results” of the parliamentary polls, which some analysts predict could result in a five-party coalition. Therefore the interior ministry and the election committee had decided “to calculate the results based on a manual count”. Plasterk told broadcaster RTL that possible external actors included Russia. “Now there are indications that Russians could be interested, for the following elections we must fall back on good old pen and paper,” he said.

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NAFTA increased immigration.

Renegotiating NAFTA Is A Good Idea – For Mexico (Coppola)

[..] perhaps there just aren’t that many jobs going across the border. Certainly not enough to occupy all the Mexicans looking for work. Yet we know significant numbers of jobs HAVE relocated to Mexico: employment in automobile manufacture, for example, has quadrupled since 1994. Clearly something is very wrong. The figures just don’t make sense. Jobs have gone from the U.S. to Mexico, but people continue to migrate from Mexico to the US in search of work, though the rate has slowed dramatically in recent years. In fact Mexico has become somewhat dependent on its migrants: it now receives more foreign currency from migrant remittances than it does from exports of crude oil. This is mainly because of falling oil prices and production since 2014. But it also reflects a distorted and unhealthy economic relationship between Mexico and the U.S.

The truth is that NAFTA has been a rotten deal, not for the U.S. but for Mexico. Firstly, NAFTA did not establish a level playing field for agricultural production. It ended tariffs, but not subsidies. Mexico opened its borders to American agricultural exports, particularly corn. But America continued to subsidize the production of corn: between 1995-2014, corn subsidies totaled nearly $95bn. Coupled with America’s higher productivity, the subsidies made it impossible for Mexican farmers to compete. Agricultural employment dropped 19% between 1994 and 2007, a loss of about 2 million jobs, mostly in family farms. There was a corresponding increase in seasonal work, as agricultural production shifted to fruit and vegetable production, so the unemployment figures perhaps did not rise as much as might have been expected.

But Americans mourning the loss of steady well-paid manufacturing jobs surely should be the first to appreciate that seasonal work is no substitute for steady family farm employment. Unsurprisingly, Mexicans headed for the border. Between 1994 and 2000, emigration to the U.S. rose by 79%, though it slowed somewhat due to recession and increased border security after the 9/11 attacks. Secondly, NAFTA has rendered the Mexican economy entirely dependent on the U.S. Over 80% of Mexico’s exports go to the U.S., and about half of its imports come from there. Mexico is deeply integrated in U.S. supply chains, particularly manufacturing production. The IMF observes that Mexican and American industrial production are co-integrated and follow a common cycle. Increases in American economic output are transmitted one-for-one to Mexican output.

[..] Mexico is thus highly sensitive to changes in US policy and unable to protect itself from U.S.-generated economic shocks: the 2008 financial crisis in the US caused a shock to trade which knocked 6% out of the Mexican economy in 2009, though it bounced back quickly. Any attempt by the U.S. to decouple itself from Mexico through trade tariffs and impediments to financial flows would be likely to have a dramatic impact on the Mexican economy. This toxic dependence is to a large extent caused by NAFTA. Indeed, we might say that it was NAFTA’s primary purpose. And it unquestionably benefits the U.S. more than Mexico. Any small supplier to a giant corporation could tell you that being completely dependent on a single buyer is not a good situation. Diversification is strength. This is true for countries as much as businesses. By discouraging diversification, NAFTA has done Mexico no favors.

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By NATO.

Trump Is Being Sabotaged by the Pentagon (PCR)

President Trump says he wants the US to have better relations with Russia and to halt military operations against Muslim countries. But he is being undermined by the Pentagon. The commander of US forces in Europe, General Ben Hodges, has lined up tanks on Poland’s border with Russia and fired salvos that the general says are a message to Russia, not a training exercise. How is Trump going to normalize relations with Russia when the commander of US forces in Europe is threatening Russia with words and deeds? The Pentagon has also sent armored vehicles to “moderate rebels” in Syria, according to Penagon spokesman Col. John Dorrian. Unable to prevent Russia and Syria from winning the war against ISIS, the Pentagon is busy at work derailing the peace negotiations.

The military/security complex is using its puppets-on-a-string in the House and Senate to generate renewed conflict with Iran and to continue threats against China. Clearly, Trump is not in control of the most important part of his agenda—peace with the thermo-nuclear powers and cessation of interference in the affairs of other countries. Trump cannot simultaneously make peace with Russia and make war on Iran and China. The Russian government is not stupid. It will not sell out China and Iran for a deal with the West. Iran is a buffer against jihadism spilling into Muslim populations in the Russian Federation. China is Russia’s most important military and economic strategic ally against a renewal of US hostility toward Russia by Trump’s successor, assuming Trump succeeds in reducing US/Russian tensions.

The neoconservatives with their agenda of US world hegemony and their alliance with the military-security complex will outlast the Trump administration. Moreover, China is rising, while the corrupt and dehumanized West is failing. A deal with the West is worth nothing. Countries that make deals with the West are exposed to financial and political exploitation. They become vassals. There are no exceptions. Russia’s desire to be part of the West is perplexing. Russia should build its security on relations with China and Asia, and let the West, desirous of participating in this success, come to Russia to ask for a deal. Why be a supplicant when you can be the decider?

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They mean business. So does the other side.

US Veterans: Dakota Pipeline Won’t Get Completed. Not On Our Watch (CNBC)

A group of U.S. military veterans has vowed to block completion of the hotly disputed Dakota Access pipeline, despite the secretary of the Army giving the project the green light. “We are committed to the people of Standing Rock, we are committed to nonviolence, and we will do everything within our power to ensure that the environment and human life are respected. That pipeline will not get completed. Not on our watch,” said Anthony Diggs, a spokesman for Veterans Stand. Diggs added that the group hopes to raise enough funds “to have a larger, solid boots-on-the-ground presence.” The secretary of the Army instructed the U.S. Army Corps of Engineers to grant Energy Transfer Partners the easement it needs to complete the final stretch of its $3.7 billion pipeline, Sen. John Hoeven and Rep. Kevin Cramer, both of North Dakota, said Tuesday.

President Donald Trump last week signed executive actions to advance construction for Dakota Access and another disputed pipeline. Veterans Stand has raised $37,000 since launching a GoFundMe campaign last week. Part of that money will go to “basic transport of supplies and personnel,” Diggs told CNBC. The Standing Rock Sioux tribe also on Tuesday vowed to mount a legal challenge claiming the Corps lacks the statutory authority to stop an environment review and issue the easement. The tribe opposes construction, saying the pipeline passes beneath a source for its drinking water and construction would disrupt sacred land. Their campaign has drawn thousands of protesters to camps near Cannon Ball, North Dakota, in recent months. To abandon the study “would amount to a wholly unexplained and arbitrary change based on the president’s personal views and, potentially, personal investments,” the tribe said in a statement.

It’s difficult to argue that the secretary of the Army lacks the authority to grant the easement, said Bruce Huber, an associate professor of law at the University of Notre Dame who specializes in environmental law. However, any halt to the environmental study will face a high burden proof, he said. That’s because the Army’s assistant secretary for civil works is on the record as saying other routes should be explored and an environmental study is the best way to do that. In December, the Corps denied the easement and said the best path forward would be to consider alternative routes for the project by conducting an environmental review with public input and analysis. “That’s an unclear bit of law there, whether the process can simply be terminated,” Huber said. “You can bet your bottom dollar it will be litigated.”

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Merkel’s in Turkey today. She better put a stop to this while she has the chance. She cannot risk war in the region.

Turkish Air Force Jets Violate Greek Air Space 138 Times In One Day (IBT)

Greece intercepted 138 incursions into its air space by Turkish air forces on Wednesday (1 February) amid mounting tensions between the neighbouring countries. The unusually high number of incursions took place over islands in the central and southern Aegean and were condemned by Greek Defence Minister Panos Kammenos as reckless. “We want peace, we are not looking for a fight or for trouble in the Aegean, but there won’t be an aircraft which will not be intercepted,” Reuters quoted him as saying. Long-time regional rivals – notably over Cyprus – Greece and Turkey almost went to war in 1996 over two islets, Imia and Kardak, situated west of Bodrum and north of Kos in the Aegean Sea. On Wednesday (Feb 1) Kammenos flew over the area and threw a wreath in the sea to commemorate the death of three Greek officers in a helicopter crash in the 1996 incident.

The gesture followed Turkish military chiefs paying respects on Sunday (Jan 29). During the incident, a Turkish admiral reportedly refused to sink Greek ships. This time however a senior Turkish politician warned Turkey would respond with force if Greece started “playing games” over the disputed islets. According to Hurriyet, Justice and Development (AKP) Izmir deputy Hüseyin Kocabıyık warned: “I am warning Greece: You were saved owing to a cowardly [Turkish] admiral in 1996. Do not play the Kardak game with us. We will shoot you!”. The two countries are also at loggerheads over an asylum claim by eight Turkish military officers accused of involvement in the attempted coup in July 2016. A Greek court has blocked the extradition of the men back to Turkey, with Supreme Court judge Giorgos Sakkas ruling on Thursday (26 January) that they would not receive a fair trial in their homeland.

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Sep 042016
 
 September 4, 2016  Posted by at 9:58 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle September 4 2016
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NPC “Georgetown-Marines game” 1923


Dollar Hegemony Endures As Share Of Global Transactions Keeps Rising (AEP)
US Has 9.93 Million More Government Workers Than Manufacturing Workers (CI)
German Budget Surpluses Are Bad For The Global Economy (Economist)
ECB’s Mersch: Central Banking Based On “Mathematical Models”, Not Reality (ZH)
Europe’s Broken Banks Need the Urge to Merge (BBG)
Economic Czars Warn G-20 of Risk From Populist Backlash on Trade (BBG)
Chinese Consumers Take Credit For Boom In Car Loans (R.)
6 Steps To Avoiding All EU (Incl. Irish) And US Taxes Via Ireland (PP)
Rural France Pledges To Vote For Marine Le Pen As Next President (G.)
Shops Set For Christmas Price Hikes As Millions Of Shipments Stranded (Ind.)
Row On Tarmac An Awkward G20 Start For US, China (R.)
Barack Obama ‘Deliberately Snubbed’ By Chinese In Chaotic Arrival At G20 (G.)
Half The Forms Of Life On Earth Will Be Gone By 2050 (ZH)

 

 

It’s nice to be able to agree with Ambrose once in a while.

Dollar Hegemony Endures As Share Of Global Transactions Keeps Rising (AEP)

The US dollar is tightening its grip on the global financial system at the expense of the euro, entrenching American hegemony and rendering the US Federal Reserve more powerful than at any time in history. Newly-released data from the Bank for International Settlements (BIS) show that the dollar’s share of the $5.1 trillion in foreign exchange trades each day has continued rising to 87.6pc of all transactions. It is the latest evidence confirming the extraordinary resilience of the dollar-based international order, confounding expectations of US financial decline a decade ago. Roughly 60pc of the global economy is either in the dollar zone or closely tied to it through currency pegs or ‘dirty floats’, and the level of debt issued in dollars outside US jurisdiction has soared to $9 trillion.

This has profound implications for monetary policy. The Fed has become the world’s central bank whether it likes it or not, setting borrowing costs for much of the global system. The BIS data shows that the volume of transactions in which the euro was on one side of the trade has slipped to 31.3pc from 37pc in 2007. The dollar share has ratcheted up to 87.6pc over the same period. It is much the same picture for the foreign exchange reserves of central banks, a good barometer of global trust. The dollar share has recovered to 63.6pc, roughly where it was a decade ago. The euro share has tumbled over the last eight years from 28pc to 20.4pc, and is barely above Deutsche Mark share in the early 1990s.

“There are no foreseeable rivals to the dollar as a viable reserve currency,” said Eswar Prasad from Cornell University, author of “The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance”. “The US is hard to beat. The US has deep financial markets, a powerful central bank and legal framework the rest of the world has a great deal of trust in,” he said. The eurozone is crippled by the lack of a unified EU treasury, joint bond issuance, and a genuine banking union to back up the currency. It would require a change in the German constitution to open the way for fiscal union, an unthinkable prospect in the current political climate.

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Many years ago I dubbed it the ‘Bulgaria Model’.

US Has 9.93 Million More Government Workers Than Manufacturing Workers (CI)

The August jobs report was filled with some interest factoids, like there are now 9.93 million government workers than there are manufacturing workers. That is a ratio of 1.81 government workers for every manufacturing worker. Such was not always the case. But a variety of factors such as labor cost differentials, EPA regulations and taxes had led to manufacturing jobs to be sent overseas. Now a 1.81 government to manufacturing employment ratio is called OVERHEAD. And you wonder why high paying manufacturing jobs are fleeing to other countries?

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“German saving and Greek suffering are two sides of the same coin..”

German Budget Surpluses Are Bad For The Global Economy (Economist)

On August 24th Germans received news to warm any Teutonic heart. Figures revealed a larger-than-expected budget surplus in the first half of 2016, and put Germany on track for its third year in a row in the black. To many such excess seems harmless enough—admirable even. Were Greece half as fiscally responsible as Germany, it might not be facing its eighth year of economic contraction in a decade. Yet German saving and Greek suffering are two sides of the same coin. Seemingly prudent budgeting in economies like Germany’s produce dangerous strains globally. The pressure may yet be the undoing of the euro area. German frugality and economic woes elsewhere are linked through global trade and capital flows.

In recent years, as Germany’s budget balance flipped from red to black, its current-account surplus—which reflects net cross-border flows of goods, services and investment—has soared, to nearly 9% of German GDP this year. The connection between budgets and current accounts might not be immediately obvious. But in a series of papers published in 2011 IMF economists found evidence that cutting budget deficits is associated with reduced investment, greater saving and a shift in the current account from deficit toward surplus. Two IMF economists, John Bluedorn and Daniel Leigh, reckoned that a fiscal consolidation of one percentage point of GDP led to an improvement in the ratio of the current-account balance to GDP of 0.6 percentage points.

On that reckoning, the German government’s thriftiness accounts for a small but meaningful share of its growing current-account surplus; perhaps as much as three percentage points of GDP over the past five years.

That has helped to resurrect an old problem. Global imbalances were a scourge of the world economy before the financial crisis of 2007-08. Back then, China and oil-exporting economies accounted for the surplus side of the world’s trade ledger, which reached nearly 3% of the world’s GDP on the eve of the crisis. Other countries, notably America, ran correspondingly large current-account deficits, financed in part by flows of investment from surplus countries that flooded into the country’s overheating housing market. A similar dynamic played out in miniature within the euro area, as core economies like Germany ran current-account surpluses and peripheral countries like Spain ran deficits.

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Taking away their powers is the only solution. But … that’s not going to happen.

ECB’s Mersch: Central Banking Based On “Mathematical Models”, Not Reality (ZH)

At first (literally the day the Fed announced QE1) it was just “tinfoil fringe blogs” who predicted the failure of the central bank’s attempt to boost the economy by printing money, instead warning that all the Fed would do is unleash an unprecedented income and wealth divide that may culminate in civil war and hyperinflation. Then, gradually, analysts, pundits and even the mainstream press admitted the truth, i.e., that tin-foilers were right all along, until recently even the Fed’s own mouthpiece, Jon Hilsenrath, one day before the Jackson Hole meeting wrote that “Years of Fed Missteps Fueled Disillusion With the Economy and Washington”, an article which set the stage for the pivot to the US issuance of much more debt, because apparently $9 trillion in new debt under Obama is not considered enough “fiscal stimulus.”

However, with virtually everyone else now slamming central banks for fooling the world for the past 7 years that they knew what they were doing, now that even Yellen admitted she has no idea what will happen in just the next 3 years projecting a 70% confidence interval of the Fed Funds rate of between 0% and 5% by the end of 2018 (we wonder what a 100% confidence would look like)…

.. overnight central bankers themselves attacked central bank policies, when ECB board member Yves Mersch warned on Saturday against using “extreme [policy] measures [with] unacceptable side effects” to shore up the eurozone’s weak economy, which he said could undermine trust in the single currency, a warning aimed squarely at Mario Draghi. Mersch’s comments come amid a growing debate over whether central banks in Europe and Japan should bolster economic growth by turning to even more tools such as “helicopter money.” Even more ludicrous, as we reported yesterday, Reuters already lobbed a tentative trial balloon, hinting that the ECB may be “forced” to buy ETFs and equities having virtually run out of bonds to monetize. Still, despite all ongoing ECB deflationary counter-measures, eurozone inflation was just 0.2% in August, far below the ECB’s near-2% target. Investors are increasingly concerned that the central bank is running out of tools.

Surprisingly, at this point Mersch joined the Weidmann bandwagon, and cautioned against “academic proposals [that] seem to prefer sophisticated models to social psychology.” Or in other words, for the first time, a central banker has suggested that broken (which is a far more accurate definition that sophisticated) financial models should be ignored when dealing with reality. “We cannot fulfill our mandate with mathematical equations, but only with instruments that maintain trust in the currency,” Mersch said at an annual economic forum on the shores of Lake Como, Italy. Expanding his tongue in cheek criticism of Mario Draghi’s relentless crusade to hurt the euro and reflate asset prices at all costs, Mersch then said that “extreme measures or legal violations of our mandate aren’t among those instruments.”

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Restructure. Only way. And again, not going to happen.

Europe’s Broken Banks Need the Urge to Merge (BBG)

The recent flurry of excitement at the idea that Germany’s Deutsche Bank and Commerzbank contemplated a merger reinforces the view that the European finance industry is ripe for consolidation. Banking leaders themselves talk about the need for mergers in an overbanked market, but no one among the bigger banks seems to want to go first. If something doesn’t change soon, Europe won’t have a banking industry worthy of the name. The relentless collapse in bank share prices this year may speak to difficult market conditions, but they also suggest that Europe’s banking model is broken, amid a deadly combination of negative interest rates, anemic economic growth and a lack of clarity about the future regulatory outlook (albeit in large part because European banks have fought every line of every proposed rule change).

The region’s banks have lost almost a quarter of their value this year, according to the Stoxx 600 Banks index. As Germany has by far the least consolidated banking sector in the euro zone, it’s no surprise that both Commerzbank and Deutsche Bank have done even worse. Merger talk sparked a bit of a rally in the two German banks in recent days, even though the discussions, reported to have taken place over two weeks this summer, have been abandoned. With both banks embarking on major cost-cutting and restructuring projects, it may have been too early to talk of a merger.

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It’s all in the choice of terminology: populism, protectionism, they sound very negative, so they are what you read. But it makes no difference: without growth, centralization withers away all by itself.

Economic Czars Warn G-20 of Risk From Populist Backlash on Trade (BBG)

The heads of three world economic bodies warned of the risk to trade from the protectionist headwinds sweeping many developed nations as global leaders met in Hangzhou, China. In a panel session Saturday ahead of the Group of 20 summit, Christine Lagarde, Managing Director of the IMF, urged business chiefs to lobby governments to help keep trade flows up as she issued a warning about the outlook for growth into 2017. Her views were echoed by Roberto Azevedo, Director-General of the WTO. “Trade is way too low and has been way too low for a long time,” Lagarde said. “There is at the moment an undercurrent of anti-trade movement. It’s at the political level. It’s at the public opinion level” and also being reflected in policy, she added.

“If there is no international trade, if there is no cross-border investment, if services, capital, people and goods do not cross borders, then it’s less activity for you, it’s less jobs in whichever country you are headquartered,” she said. Lagarde’s comments come as momentum for ratifying the U.S.-led Trans-Pacific Partnership, which would link 12 nations making up about 40% of the world economy, falters in the final months of U.S. President Barack Obama’s term. Both presidential candidates have spoken against the deal, which does not include China, while progress on a U.S.-EU trade and investment deal, known as TTIP, has also stalled.

France’s trade minister Matthias Fekl said late last month that the U.S. hasn’t offered anything substantial in negotiations with the EU on the free-trade deal and that talks should come to an end. His comments followed those of German Economy Minister Sigmar Gabriel, who said discussions on the TTIP “have de-facto broken down, even if no one wants to say so.” Many Western nations are grappling with a mood of protectionism that is leading to calls for caution on free trade, and on foreign investment in things like property and utilities. Chinese companies recently were dealt a blow on prospective projects in both the U.K. and Australia.

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Let’s see: more debt AND more cars. It’s a win-win! Happy days!

Chinese Consumers Take Credit For Boom In Car Loans (R.)

Chinese households, traditional savers with an aversion to debt, are rapidly warming to the idea of borrowing to buy a car, as automakers push financing deals to boost sales and margins in an increasingly competitive market. Nearly 30% of Chinese car buyers bought on credit last year, up from 18% in 2013, according to analysts from Sanford C. Bernstein and Deloitte, helping a rebound in the car market after a sticky 2015. That is welcome news to China’s government, which wants consumers to borrow and spend more to shift its slowing economy away from heavy industry and investment-led growth. Beijing resident Wang Danian said he planned to buy his first car on credit, saying it was the smart move.

“I can use my cash to do other things,” the 28-year-old said. “If I use all my savings at once to buy a car, and then something happens, I can’t manage the risk.” Six consumers interviewed by Reuters said they would all consider loans, lured by low-fee and interest-free deals, with half saying they’d prefer to buy on credit and save cash for other items. “I’d estimate after the manufacturer came out with the low-interest deal that about 30% of potential cash buyers switched to buying on credit,” said a salesman at a Volkswagen dealership in eastern China’s Jiangsu province who gave his name as Mr. Zhao. That is still a far cry from the more than 80% of cars bought on loans in the United States, but Deloitte predicts China will reach 50% by 2020.

[..] China’s auto market struggled last year thanks to the slowest economic growth in 25 years and a stock market rout, but rebounded in October when the government cut sales tax on smaller cars. By July, vehicle sales were rising at their fastest monthly rate in three and a half years. “While the government’s tax reduction was the most obvious explanation for the rebound in Chinese car sales at the end of 2015, soaring auto financing penetration represented another, lesser noticed, driver of the boom,” Bernstein said in April.

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Excellent thread from The Property Pin. A lot more under the link.

6 Steps To Avoiding All EU (Incl. Irish) And US Taxes Via Ireland (PP)

1. Making the Intellectual Property (IP). Let’s say that Apple US spent $200m (validly) developing iOS (it’s iPhone operating system). What Apple does next is to “sell” a non-US version of iOS to an Apple Ireland entity (generic name), for c $500m. Apple US will then pay full US taxes on this gain of $300m. Easy so far. The US IRS is already starting to probe these “internal” sales.

2. Stepping up the IP value (when the “magic” happens). Specialist IP corporate finances (why Dublin accountancy firms have big corporate finance practices) make two discoveries. First, if the Apple device has no iOS software, it can’t function. iOS is the “secret sauce” (like a drug patent). They then show Apple Ireland that it has done an amazing deal at the expense of its parent, Apple US. They show that if the non-US version of iOS is converted in to 200 different languages (and local network formats), then Apple Ireland can sell devices all over the world (fancy that). The global commercial value is over €50bn (why many MNC jobs in Ireland are “localisation”, or language translation, jobs). Apple has the tax equivalent of “Alchemy”.

3. Avoiding tax on the IP step-up. A €50bn gain in Apple Ireland is going to incur tax (both Irish and US), and would distort Ireland’s National Accounts (our 2014 GDP was only €200bn). Apple, and the Irish State, worked a scheme to have Apple Ireland both resident in Ireland (essential so Apple Ireland can avail of EU TP (Transfer Pricing) rules; you can’t do EU TP from Cayman, or worse, “Stateless” locations), and non-resident in Ireland (to avoid Irish tax). The EU’s Apple report, proves the recent 26% increase in Irish GDP (“leprechaun economics”) was all Apple, forced to unwind it’s “dual” status (as EU report drew near). Apple paid a once-off tax on the transfer (€500m vs. €50bn gain), which increased our EU GDP levies by 380m. Per Annum.

4. Executing the TP of this IP into Europe. Before step 3., if Apple Ireland sold an iPhone in Germany for €500, Apple Germany would offset valid incurred cash costs (Apple China/Foxconn manufacturing costs of about €150, and Apple Germany marketing costs of about €50) giving a German profit of €300 on that iPhone. German Revenue would take €100 of this in German taxes, and €200 can go back to Ireland. EU TP rules allow EU resident companies, like Apple Ireland, to charge Apple Germany a share of their €50bn IP value, expressed as a royalty charge. Charging this royalty to Apple Germany wipes out all Apple’s German profits. Apple Germany pays no German taxes, and the full €300 goes back to Apple Ireland tax-free.

5. The Cherry on Top. EU challenged step 4. in 2011 (we will get to CCCTB), but the UK Veto stopped it (Osborne was turning Britain into an even bigger EU tax-haven than Ireland). Despite Ireland having the “golden ticket” of being INSIDE the EU’s TP system (why Apple Ireland had to be legally resident in Ireland), AND having the lowest EU corporate tax rate, that was not enough. In 2010, Apple Ireland’s tax rate collapsed from a tiny 0.5% to effectively 0%. Apple Ireland’s profits quadrupled (and doubled every year after). The Irish State had perfected a “straw” for Apple, stuck into the EU, allowing Apple to suck all its EU profits (Germany, France, Italy etc.), via Ireland, to offshore locations, free of EU, Irish and US taxes.

6. Locking it in. US tax law requires US MNCs to remit non-US profits back to the US for final taxing. US tax rate is high at 35% (even by EU standards). The Double Tax Treaty system allows the MNCs to get a credit for taxes paid in the countries in which the profits were made. If Apple pays 35% on German profits, no further US taxes apply. The US IRS allows MNCs to leave non-US profits outside of the US if these non-US profits are going to be re-invested in the non-US location. Apple claimed this right in their US 10K Returns (Margrethe showed how Apple violate this). That is how Apple built the largest offshore cash hoard of modern economic history. Profits from the EU, on which they have never paid EU, Irish or US taxes. Period.

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In France, as in UK and US and many other places, voters vote against someone, not for.

Rural France Pledges To Vote For Marine Le Pen As Next President (G.)

In the picturesque hamlet of Brachay, in scorching late summer heat, Marine Le Pen was preaching to the politically converted. “Marine, président”, they chanted. “On va gagner” (we’re going to win). A banner stretching the length of one of the stone buildings overlooking the village square read: “Marine: Save France.” Le Pen’s stump speech was the most closely watched and significant campaign launch of la rentrée, the national return to work after the long summer holidays, and the leader of France’s far-right Front National was welcomed like a conquering hero. Le Pen has been largely absent from the political scene for several weeks and has refrained from adding her 10 cents’ worth to the raging polemic over the burkini and rows about security following deadly attacks by Islamic fundamentalists, both fertile ground for her party.

In the meantime, the country’s governing Socialists and centre-right opposition Les Républicains have engaged in what one FN heavyweight described with schadenfreude as a “bloodbath, left and right”. The Parti Socialiste is bitterly split and in turmoil over whether François Hollande, with his calamitous popularity ratings will, or indeed should, stand for a second term. The alternative, to stand down, would be unprecedented for a serving leader. Emmanuel Macron, the finance minister who resigned last week, might be the rabbit that the party pulls out of the hat, but he is disliked by the PS’s leftwing, which is fielding its own candidates. In any case, Macron has not said whether he will even throw his hat into the presidential ring.

On the right, things are scarcely more harmonious. The deadline for Les Républicains candidates is Friday, and already former president Nicolas Sarkozy, mayor of Bordeaux Alain Juppé and former prime minister François Fillon have either announced they are standing or are expected to do so. Amid this political free-for-all, Le Pen is trying to throw off the party’s divisive reputation and market herself as a politician above and beyond the fray of the same-old-same-old French elite: a new, unifying, patriotic force who will break the shackles of Europe, end “mass immigration” and give France back to the French. Her slogan is La France apaisée – a soothed France.

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So if people have to spend more to buy the same stuff, that’s good for the economy, right?

Shops Set For Christmas Price Hikes As Millions Of Shipments Stranded (Ind.)

Summer is not yet over but Christmas could be about to get more expensive as millions of gifts including TVs and electrical gadgets could be stranded at sea for months. Retailers have been thrown into turmoil after one of the world’s largest shipping companies collapsed into bankruptcy. South Korean company Hanjin’s vessels have been seized at Chinese ports, while others have been banned from docking until unpaid fees are received. As a result, the cost of transporting goods from Asia to the US and Europe has jumped by more than half, threatening margins as retailers begin stocking up for Christmas. September marks the start of the busiest period of the year for transporting goods.

The US National Retail Federation, the world’s largest retail trade association, wrote to Penny Pritzker, secretary of commerce, on Thursday, urging them to work with the South Korean government, ports and others to prevent disruptions. The bankruptcy is having “a ripple effect throughout the global supply chain” that could cause significant harm to both consumers and the economy, the association wrote. “Retailers’ main concern is that there (are) millions of dollars’ worth of merchandise that needs to be on store shelves that could be impacted by this,” said Jonathan Gold, the group’s vice president for supply chain and customs policy.

“Some of it is sitting in Asia waiting to be loaded on ships, some is already aboard ships out on the ocean and some is sitting on US docks waiting to be picked up. It is understandable that port terminal operators, railroads, trucking companies and others don’t want to do work for Hanjin if they are concerned they won’t get paid.” With an estimated half a million 40-foot containers full of goods stuck at sea or in ports there appears to be little hope of a quick resolution to the issue. September marks the start of the busiest time of the year for transporting goods, but a Korean court on Thursday set a deadline of 25 November to submit a plan to resolve the dispute.

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Hilarious!

Row On Tarmac An Awkward G20 Start For US, China (R.)

A Chinese official confronted U.S. President Barack Obama’s national security adviser on the tarmac on Saturday prompting the Secret Service to intervene, an unusual altercation as China implements strict controls ahead of a big summit. The stakes are high for China to pull off a trouble-free G20 summit of the world’s top economies, its highest profile event of the year, as it looks to cement its global standing and avoid acrimony over a long list of tensions with Washington. Shortly after Obama’s plane landed in the eastern city of Hangzhou, a Chinese official attempted to prevent his national security adviser Susan Rice from walking to the motorcade as she crossed a media rope line, speaking angrily to her before a Secret Service agent stepped between the two.

Rice responded but her comments were inaudible to reporters standing underneath the wing of Air Force One. It was unclear if the official, whose name was not immediately clear, knew that Rice was a senior official and not a reporter. The same official shouted at a White House press aide who was instructing foreign reporters on where to stand as they recorded Obama disembarking from the plane. “This is our country. This is our airport,” the official said in English, pointing and speaking angrily with the aide. The U.S. aide insisted that the journalists be allowed to stand behind a rope line, and they were able to record the interaction and Obama’s arrival uninterrupted, typical practice for U.S. press traveling with the president.

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“.. the leader of the world’s largest economy, who is on his final tour of Asia, was forced to disembark from Air Force One through a little-used exit in the plane’s belly..”

Barack Obama ‘Deliberately Snubbed’ By Chinese In Chaotic Arrival At G20 (G.)

China’s leaders have been accused of delivering a calculated diplomatic snub to Barack Obama after the US president was not provided with a staircase to leave his plane during his chaotic arrival in Hangzhou ahead of the start of the G20. Chinese authorities have rolled out the red carpet for leaders including India’s prime pinister Narendra Modi, Russian president Vladimir Putin, South Korean president Park Geun-hye, Brazil’s president Michel Temer and British prime minister Theresa May, who touched down on Sunday morning. But the leader of the world’s largest economy, who is on his final tour of Asia, was forced to disembark from Air Force One through a little-used exit in the plane’s belly after no rolling staircase was provided when he landed in the eastern Chinese city on Saturday afternoon.

When Obama did find his way onto a red carpet on the tarmac below there were heated altercations between US and Chinese officials, with one Chinese official caught on video shouting: “This is our country! This is our airport!” “The reception that President Obama and his staff got when they arrived here Saturday afternoon was bruising, even by Chinese standards,” the New York Times reported. Jorge Guajardo, Mexico’s former ambassador to China, said he was convinced Obama’s treatment was part of a calculated snub. “These things do not happen by mistake. Not with the Chinese,” Guajardo, who hosted presidents Enrique Peña Nieto and Felipe Calderón during his time in Beijing, told the Guardian.

“I’ve dealt with the Chinese for six years. I’ve done these visits. I took Xi Jinping to Mexico. I received two Mexican presidents in China. I know exactly how these things get worked out. It’s down to the last detail in everything. It’s not a mistake. It’s not.” Guajardo added: “It’s a snub. It’s a way of saying: ‘You know, you’re not that special to us.’ It’s part of the new Chinese arrogance. It’s part of stirring up Chinese nationalism. It’s part of saying: ‘China stands up to the superpower.’ It’s part of saying: ‘And by the way, you’re just someone else to us.’ It works very well with the local audience. “Why [did it happen]?” the former diplomat, who was ambassador from 2007 until 2013, added. “I guess it is part of Xi Jinping playing the nationalist card. That’s my guess.”

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I am not optimistic.

Half The Forms Of Life On Earth Will Be Gone By 2050 (ZH)

Humanity should start saving nature and switch to 80% renewables by 2030, otherwise the Earth will keep losing species, and within 33 years around 800,000 forms of life will be gone, conservation biologist Reese Halter told RT’s News with Ed. Humans have changed the Earth so much that some scientists think we have entered a new geological age. According to a report in the Science Magazine, the Earth is now in the anthropocene epoch. Millions of years from now our impact on Earth will be found in rocks just like we see fossils of plants and animals which lived years ago – except this time scientists of the future will find radioactive elements from nuclear bombs and fossilized plastic.

RT: Tell us about this new age.
Reese Halter: Yes. There are three things that come to mind. First of all, imagine you’re back on the football field. Each year in America – America alone – we throw away the equivalent of one football field, a 100 miles deep. That is the first thing. The second thing, we’ve entered the age of climate instability. That means from burning subsidized climate altering fossil fuels our food security is in jeopardy. The third thing that is striking is we’re losing species a thousand times faster than in the last 65 million years. At this rate within 33 years, by midcentury – that means 800,000 forms of life, or half of everything we know will be gone. The only way we can reverse this is to two things: save nature now, our life support system, and we do this by switching to 80% renewables by 2030. It is a WWIII mentality. In America we have the technology; we have the blueprint. We lack the political will just right now. But in the next short while we will, because it is a matter of survival.

RT: We’ve just gone through the hottest month on record. There is plenty of data out there to suggest that we truly are entering something our world has never seen in our lifetime. To brand it as a new geological age, what impact is that going to have? RH: It’s got the impact that humans are here. As I said earlier, we’re talking a 160% more than mother Earth can sustain 7.4 billion people. The way to do it is to pull it back to 90%. If we were a big bathtub the ring will read: toxicity, toxicity, toxicity. We’ve got to peal that back, because what we do to the Earth, we do to ourselves.

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Aug 162016
 
 August 16, 2016  Posted by at 9:14 am Finance Tagged with: , , , , , , , , ,  1 Response »
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Harris&Ewing Army surplus 1919


Mining Giant BHP Slumps To Record Loss (BBC)
Chinese Traders Are Falling Out Of Love With Commodities (BBG)
China’s Fading Animal Spirits (BBG)
Germany Amassing Huge Surpluses – And Huge Risks (MW)
Bundesbank Floats Higher Retirement Age -69- in German Pension Debate (BBG)
Top UK Firms Paid Five Times More In Dividends Than Into Pensions (G.)
Pension Funds Are Driving The Biggest Bond Bubble In History (ZH)
Hedge Funds Bet Dollar Will Lose More Ground Versus Yen (BBG)
Krugman’s Arrow Theory Misses Target by Light Years (Mish)
A Government of Scoundrels, Spies, Thieves, And Killers (JW)
Jimmy Carter: The US Is an ‘Oligarchy With Unlimited Political Bribery’ (IC)
Burning Down the House (Jim Kunstler)
Sleeping Bear Of Debt Set To Wake (Herald Sun)
One-Third Of New Zealand Children Live Below The Poverty Line (G.)

 

 

No matter what anybody does, the overbuilding, overcapacity and overconsumption in China can no longer be extended. Infrastructure investment in other countries won’t be enough to pick up the slack.

Mining Giant BHP Slumps To Record Loss (BBC)

Mining giant BHP Billiton has reported a record loss for the past year following a mining disaster in Brazil and a slump in commodity prices. The Anglo-Australian commodities firm reported an annual net loss of $6.4bn (£5bn) for the year to 30 June. The global mining sector has seen years of weak demand attributed largely to slowing growth in China. BHP results were also hit by costs after the Samarco mining disaster in Brazil, which killed 19 people. The record losses come after the company had reported a $1.9bn net profit. “While commodity prices are expected to remain low and volatile in the short to medium term, we are confident in the long-term outlook for our commodities, particularly oil and copper,” chief executive Andrew Mackenzie said in a statement.

Underlying earnings for the past year, which strip out one-off costs, came in at $1.22bn. The financial fallout from the Samarco mining tragedy is still not clear though warns James Butterfill, head of research & investment strategy at ETF Securities. “There’s a huge uncertainty overhang,” he told the BBC. “The report hasn’t been published with regard to the Samarco dam collapse and there’s currently a $48bn lawsuit. It’s unrealistic to be that amount, but this is really BHP’s Macondo well incident theoretically that BP endured.”

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As consumption and investment falls, so will prices. Commodity producers worldwide are sitting on huge overcapacity. They must shrink their operations, but the first reaction is always to produce more to make up for falling revenue.

Chinese Traders Are Falling Out Of Love With Commodities (BBG)

Chinese traders are falling out of love with commodities. Aggregate volumes across the nation’s three biggest exchanges have shrunk to the lowest level in six months, a shadow of the fevered trading in March and April when retail investors charged into markets for everything from iron ore to cotton, driving up prices and stoking fears of a bubble. Chinese authorities brought an end to the frenzy by introducing curbs on excessive speculation and trading has failed to recover since. Flush with record credit and hunting for returns, investors piled into commodities in the first half of the year, spurred by bets that China’s economic stimulus and industrial reforms would lead to shortages of raw materials. Now, there’s just not much for traders to get excited about, according to Wei Lai, an analyst with Cofco Futures.

Industrial production and fixed-asset investment slowed in July and a measure of new credit expanded the least in two years, spurring concern over growth in the world’s second-largest economy. “Investors are reluctant as there isn’t much information to play around with in the market,”’ Shanghai-based Wei said in an e-mail. High prices for some commodities may also be deterring traders, Wei said. Combined aggregate volume across the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange slid to 23 million contracts as of Aug. 12, the lowest since February and compared with a peak of more than 80 million on April 22 when a total of $261 billion changed hands. Chinese exchanges double count trading volume and turnover.

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China will become known for the biggest misallocation of investment in history.

China’s Fading Animal Spirits (BBG)

The July wobble in China’s economy – like its multi-year slowdown – has much to do with the waning “animal spirits” of Chinese businesses caused by an historic shift in housing. That’s according to Chi Lo, greater China senior economist at BNP Paribas Investment Partners in Hong Kong. A property-led pick up in the first half lost momentum in July, suggesting the market is struggling to digest an overhang in supply of apartments. “In the past, the economic players expanded supply first and created jobs so as to create demand, but that is gone now,” Lo said in a telephone interview after Friday’s disappointing data. “It has to clean out the excess capacity, which means the supply-expansion model has to change.”

Another way of putting it: China’s build-it-and-they-will-come strategy needs to shift to one where demand, not supply, is in the drivers’ seat. It’s a change companies are struggling to come to terms with, leaving private investment in the doldrums. “Little attention has been paid to the underlying structural factor that is hurting private investment incentive,” Lo wrote in a research note ahead of the data last week. “This is the weakening of the final demand for output produced by the investment or capital-intensive sector in China. The key to understand this puzzle is China’s housing market.” That’s because it accounts for about half of all investment in China once spillovers into industries like metals and machinery are thrown in.

With such pervasive impact on everything from cement to cars, China’s property market was dubbed the most important sector in the universe back in 2011 by a UBS economist. BNP’s Lo says it’s unlikely to ever recapture the glory days of old. “China’s housing demand has likely passed its high-growth phase, with housing construction growth expected to go into a secular decline soon,” according to Lo. “This means that the capital-intensive sector, which has focused on producing all this housing units through the decades, is facing a structural decline in demand for its output.”

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One might be forgiven for thinking Berlin is blowing up the eurozone on purpose. What is needed are transfer payments to southern Europe, but there is too much resistance to those.

Germany Amassing Huge Surpluses – And Huge Risks (MW)

As one of the world’s largest exporters, Germany saw an important part of the political and economic rationale of entering European economic and monetary union in 1999 as lowering risks on its international commercial interactions. Nearly two decades later, Germany, more than ever, is an export champion. It is likely to register the world’s largest trade surplus this year, according to the OECD, at $324 billion (against China’s $314 billion), and will amass a record current-account surplus of 9.2% of gross domestic product. Yet, as a result of the large imbalances within EMU that these surpluses symbolize, Germany is a long way from insulating itself against foreign-currency risks.

The Bundesbank provides the strongest indicator of this change. The quintessentially hard-money central bank provided a role model for the ECB at the heart of the euro bloc. Yet the Bundesbank now confronts on its balance sheet a range of potential hazards that the euro’s founding fathers in the 1980s and 1990s would have regarded as inimical to economic stability and, for that reason, impossible to countenance. The Bundesbank’s balance sheet rose to €1.2 trillion in July from €222 billion when monetary union started in January 1999. Underlining the Bundesbank’s pivotal role in eurozone monetary operations, the German central bank’s balance sheet has expanded faster than that of the Eurosystem (the ECB and the constituent national central banks) as a whole.

The Bundesbank’s balance sheet now encompasses around 37% of Eurosystem assets of €3.3 trillion (computed on a net basis that strips out individual central banks’ claims and liabilities against each other under the Target-2 payments system), against 32% at the inception of EMU. The acceleration stands in marked contrast to the central bank’s stated desire, when monetary union started, to slim down its balance sheet and especially to economize on foreign-exchange reserves, held mostly in dollars. These have traditionally (together with gold) made up the lion’s share of the Bundesbank’s foreign assets, but have been cut from €45 billion to €50 billion when the euro was launched to only €30 billion to €35 billion in recent years.

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You’re not going to solve the problems by tweaking the age; that merely shifts the issue into the future. Can, road.

Bundesbank Floats Higher Retirement Age -69- in German Pension Debate (BBG)

Germany’s Bundesbank said raising the legal retirement age to 69 by 2060 could ease some of the pressure on the country’s state pension system as the population ages. Recent reforms won’t protect citizens from a drop in the level of pension payments from 2050, the central bank said in its monthly report published on Monday. Citizens who don’t opt for state-supported private insurance may face shortfalls a lot sooner. Low average interest rates could further reduce available provisions. While higher premiums could theoretically keep payouts stable, they would “raise the strain on those paying the contributions, and an increasing, high burden of payments overall has negative consequences on economic development,” the Bundesbank wrote. To avoid that, “the legal retirement age ultimately needs to be adjusted.”

The Bundesbank said the government’s current plans that include raising the retirement age to 67 by 2030 and increasing contributions don’t account for the fact that the ratio of retirees to contributors is set to widen further. Increasing life expectancy means retirees will draw from pension funds for a longer period of time, and a generation of baby boomers that retires post-2030 means there will be more pensioners to take care of per working adult, while birth rates remain low, according to the report. “Amid demographic change, the parameters of a contribution-based pension system can’t all be kept stable,” the Bundesbank said. “Confidence in pension insurance could be strengthened and uncertainty about financial stability at old age could be decreased if it were made clear how the parameters of retirement age, provision levels, and contribution rates can be adjusted in the long term.”

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Short termism perfected.

Top UK Firms Paid Five Times More In Dividends Than Into Pensions (G.)

Britain’s biggest companies paid five times more in dividends than they did pension contributions last year, according to a new report that highlights the pressure on retirement schemes. FTSE 100 companies paid £13.3bn towards their defined benefit pension schemes, compared with £71.8bn in payments to shareholders, according to the consultancy firm LCP’s annual study of pensions. The report has been published after Sir Philip Green was heavily criticised by a parliamentary investigation into the collapse of BHS for leaving the retailer with a £571m pension deficit, despite his family and other investors banking more than £400m in dividends. BHS’s 164 stores are all scheduled to close by 28 August, a week later than administrators planned last month as the retailer continues to sell its remaining stock.

Green remains locked in talks with the Pensions Regulator about a rescue deal for the BHS pension scheme. He has pledged to sort out the problems facing it, but the regulator has launched an investigation into whether the billionaire tycoon should be forced to make a financial contribution to fill the black hole. Other companies with large pension deficits could face action from the regulator if they are paying dividends, LCP says in its report. The 56 FTSE 100 companies that disclosed a pension deficit at the end of their 2015 financial year had a combined deficit of £42.3bn, but the same companies paid out dividends worth £53bn, 25% more than their pension contributions.

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“..a $1BN pension that is fully funded at prevailing interest rates would be nearly $700mm underfunded if interest rates declined 300bps and all of their assets were invested in 30-year treasury bonds.”

Pension Funds Are Driving The Biggest Bond Bubble In History (ZH)

We’ve frequently discussed the many problems faced by pension funds. Public and private pension funds around the globe are massively underfunded yet they continue to pay out current claims in full despite insufficient funding to cover future liabilities…also referred to as a ponzi scheme. In fact, we recently noted that the Central States Pension Fund pays out $3.46 in pension funds for every $1 it receives from employers. The pension problem is often attributed to low returns on assets. As Bill Gross frequently points out, low interest rates are the enemy of savers and pension funds have some of the biggest savings accounts around. That said, the impact of declining interest rates on the asset side of a pension’s net funded status is dwarfed by the much more devastating impact of declining discount rates used to value future benefit obligations.

The problem is one of duration. By definition, pension liabilities represent the present value of future benefit payments owed to retirees which is a virtually perpetual cash flow stream. Obviously, the longer the duration of a cash flow stream the larger the impact of interest rate swings on the present value of that stream. We created the chart below as a simplistic illustration of the pension “duration dilemma.” The chart graphs how a pension liability grows in a declining interest rate environment versus the value of 5-year and 30-year treasury bonds. As you can see, a $1BN pension that is fully funded at prevailing interest rates would be nearly $700mm underfunded if interest rates declined 300bps and all of their assets were invested in 30-year treasury bonds. The result is obviously even worse if the fund’s assets are invested in shorter duration 5-year treasuries.

Pension Duration

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How Abenomics gets strangled.

Hedge Funds Bet Dollar Will Lose More Ground Versus Yen (BBG)

Hedge funds and other large speculators increased net bets the dollar will weaken against the yen to the highest level in a month, according to Commodity Futures Trading Commission data as of Aug. 9. Traders will focus on the meetings of the Federal Reserve and the Bank of Japan next month for direction, after disappointing stimulus announced last month by the BOJ failed to halt yen strength.

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“Krugman would do himself a favor if he threw away what he thinks he knows about economics and went back for a nice 5th grade education.”

But the saddest part of course is that belugas are kept in an aquarium and learn tricks to amuse Japanese. Who are we?

Krugman’s Arrow Theory Misses Target by Light Years (Mish)

With full employment, roads paved and repaved to nowhere, and bubble blowing beluga whales, just what the hell is Japan supposed to waste money on? Curiously, Krugman says it doesn’t matter. He once proposed a fake aliens from outer space scare as the solution to stimulate the economy. But roads and bridges and bubble blowing blowing beluga whales are surely better than fabricating space aliens or paying people to dig ditches and others to fill them up again. The problem is, it’s hard arguing with economic illiterates like Krugman. He can (and will) say “spending wasn’t enough”.

One can never prove him wrong. The implosion of Japan would not do it. His built-in excuse would be Japan did too little, too late. Just once I would like Krugman to address in his model what happens when the stimulus stops. He cannot and he won’t because he has no answer. The average 5th grader understands it’s absurd to pay money for something guaranteed to be useless, but the average Keynesian economist doesn’t. Krugman would do himself a favor if he threw away what he thinks he knows about economics and went back for a nice 5th grade education.

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John Whitehead does not mince words.

A Government of Scoundrels, Spies, Thieves, And Killers (JW)

“There is nothing more dangerous than a government of the many controlled by the few.”—Lawrence Lessig, Harvard law professor

The U.S. government remains the greatest threat to our freedoms. The systemic violence being perpetrated by agents of the government has done more collective harm to the American people and our liberties than any single act of terror. More than terrorism, more than domestic extremism, more than gun violence and organized crime, the U.S. government has become a greater menace to the life, liberty and property of its citizens than any of the so-called dangers from which the government claims to protect us. This is how tyranny rises and freedom falls.

As I explain in my book Battlefield America: The War on the American People, when the government views itself as superior to the citizenry, when it no longer operates for the benefit of the people, when the people are no longer able to peacefully reform their government, when government officials cease to act like public servants, when elected officials no longer represent the will of the people, when the government routinely violates the rights of the people and perpetrates more violence against the citizenry than the criminal class, when government spending is unaccountable and unaccounted for, when the judiciary act as courts of order rather than justice, and when the government is no longer bound by the laws of the Constitution, then you no longer have a government “of the people, by the people and for the people.”

What we have is a government of wolves. Worse than that, we are now being ruled by a government of scoundrels, spies, thugs, thieves, gangsters, ruffians, rapists, extortionists, bounty hunters, battle-ready warriors and cold-blooded killers who communicate using a language of force and oppression. Does the government pose a danger to you and your loved ones? The facts speak for themselves. We’re being held at gunpoint by a government of soldiers—a standing army. While Americans are being made to jump through an increasing number of hoops in order to exercise their Second Amendment right to own a gun, the government is arming its own civilian employees to the hilt with guns, ammunition and military-style equipment, authorizing them to make arrests, and training them in military tactics.

Among the agencies being supplied with night-vision equipment, body armor, hollow-point bullets, shotguns, drones, assault rifles and LP gas cannons are the Smithsonian, U.S. Mint, Health and Human Services, IRS, FDA, Small Business Administration, Social Security Administration, National Oceanic and Atmospheric Administration, Education Department, Energy Department, Bureau of Engraving and Printing and an assortment of public universities. There are now reportedly more bureaucratic (non-military) government civilians armed with high-tech, deadly weapons than U.S. Marines. That doesn’t even begin to touch on the government’s arsenal, the transformation of local police into extensions of the military, and the speed with which the nation could be locked down under martial law depending on the circumstances. Clearly, the government is preparing for war—and a civil war, at that—but who is the enemy?

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2 weeks old, but highly relevant.

Jimmy Carter: The US Is an ‘Oligarchy With Unlimited Political Bribery’ (IC)

Former president Jimmy Carter said on the nationally syndicated radio show the Thom Hartmann Program that the United States is now an “oligarchy” in which “unlimited political bribery” has created “a complete subversion of our political system as a payoff to major contributors.” Both Democrats and Republicans, Carter said, “look upon this unlimited money as a great benefit to themselves.” Carter was responding to a question from Hartmann about recent Supreme Court decisions on campaign financing like Citizens United. Transcript: HARTMANN: Our Supreme Court has now said, “unlimited money in politics.” It seems like a violation of principles of democracy. … Your thoughts on that?

CARTER: It violates the essence of what made America a great country in its political system. Now it’s just an oligarchy, with unlimited political bribery being the essence of getting the nominations for president or to elect the president. And the same thing applies to governors and U.S. senators and congress members. So now we’ve just seen a complete subversion of our political system as a payoff to major contributors, who want and expect and sometimes get favors for themselves after the election’s over. … The incumbents, Democrats and Republicans, look upon this unlimited money as a great benefit to themselves. Somebody’s who’s already in Congress has a lot more to sell to an avid contributor than somebody who’s just a challenger.

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“..generate Money-Out-Of-Thin-Air (QE) for the purpose of allowing “liquidity” flows to end up in US equity and bond markets in order to paint a false picture of “recovery” so as to insure the election of Hillary Clinton.”

Burning Down the House (Jim Kunstler)

There’s a new feature to the Anything-Goes-and-Nothing-Matters economy: Nothing-Adds-Up. The magicians who pretend to measure the growth of GDP (Gross Domestic Product — the monetary value of all the finished goods and services) came up with a second quarter “adjusted” figure of 1.2 percent. That would have to be construed by anyone acquainted with basic econ stats as perfectly dismal. And yet the Bureau of Labor Statistics put out a sparkly Nonfarm Payroll Report of 255,000 for July, way above the forecast 180,000. There were so many ways to game the jobs number — between people forced to work more than one shit job and the notorious “birth/death model” used to just make up any old number for political purposes — that no one can take this information seriously.

Anyway, the GDP number was instantly forgotten and the jobs number launched the stock markets to previously uncharted record altitude. It’s that time of the year for the hedge fund boys, with their testosterone flowing, to start burning down their house rentals in the Hamptons. And it’s also the time of year for an ever more stressed financial system to go down in flames. And, of course, it’s a presidential election season. Even for one allergic to conspiracy theories, it’s not farfetched to imagine a coordinated effort by central banks — under government direction — to generate Money-Out-Of-Thin-Air (QE) for the purpose of allowing “liquidity” flows to end up in US equity and bond markets in order to paint a false picture of “recovery” so as to insure the election of Hillary Clinton.

I think that is exactly behind the recent money-printing activities by the Japanese and European Central Banks, and the Bank of England. Why would it end up in US markets? For bonds, because the Euro and Japanese bond sovereign yields are in sub-zero territory and the BOE just cut its prime rate lower than the US Federal Reserve’s prime rate; and for stocks, because the value of the other three currencies is sliding down and the dollar has been rising — so, dump your falling currency for the rising dollar and jam it into rising US stocks. It’ll work until it doesn’t.

Why do this for Hillary? Because she represents the continuity of all the current rackets being used to prop up belief in the foundering business model of western civilization. If she doesn’t get into the White House there may be no backstopping of the insolvent banks and bankrupt governments and a TILT message will appear in the sky.

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Australia is a private debt disaster. Public debt is much less important.

Sleeping Bear Of Debt Set To Wake (Herald Sun)

The great sleeping bear of Australia’s economic future – of your economic future – is the current account deficit and our foreign debt. They have completely disappeared from the front page – indeed, even from the business pages. Nobody seems to mention them. But they most certainly haven’t disappeared in reality. And in reality, they’ve never been bigger. The deficit, the CAD, in the latest March quarter was more than $20 billion. It will top $80 billion for the full 2015-16 year. The net foreign debt sits at a tad more than $1 trillion. To give you a sense of the scale, that’s more than half the size of the Australian economy; more than double the total of all federal tax revenues in a year.

The CAD is the difference between what we earn from exports and from our international investments each year and what we pay for imports and to foreign investors in Australia. That last bit includes the interest we pay on our existing foreign debt. And the deficit each year is mostly covered by borrowing more from foreigners. In recent years, the biggest borrowers have been our banks. So we have this merry-go-round. The bigger the foreign debt, the bigger the deficit tends to be because of the interest paid on the debt. Then, the bigger the deficit, the bigger the foreign debt gets. Sound familiar? Because it’s exactly the same as the merry-go-round with the Budget deficit and the national debt. The deficit increases the national debt; and the interest on the debt increases the next year’s deficit; and that deficit further increases the debt.

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“..as a society, are we really prepared to let our children grow up this way?”

One-Third Of New Zealand Children Live Below The Poverty Line (G.)

One-third of New Zealand children, or 300,000, now live below the poverty line – 45,000 more than a year ago. Unicef’s definition of child poverty in New Zealand is children living in households who earn less than 60% of the median national income – NZ$28,000 a year, or NZ$550 a week. The fact that twice as many children now live below the poverty line than did in 1984 has become New Zealand’s most shameful statistic. “We have normalised child poverty as a society – that a certain level of need in a certain part of the population is somehow OK,” said Vivien Maidaborn, executive director of Unicef New Zealand. “The empathy Kiwis are famous for has hardened. Over the last 20 years we have increasingly blamed the people needing help for the problem.

“If you can’t afford your children to have breakfast, you’re a bad budgeter. If you aren’t working you’re lazy. But our subconscious beliefs about some people ‘deserving’ poverty because of poor life choices no longer apply in today’s environment. We have to ask ourselves as a society, are we really prepared to let our children grow up this way?” For a third of New Zealand children the Kiwi dream of home ownership, stable employment and education is just that – a dream. For poor children in the developed South Pacific nation of 4.5 million illnesses associated with chronic poverty are common, including third world rates of rheumatic fever (virtually unknown by doctors in comparable countries like Canada and the UK), and respiratory illnesses.

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May 132016
 
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Jack Delano AT&SF Railroad locomotive shops, San Bernardino, CA 1943


Iron Ore Goes From Boom To Bust In Just Three Weeks (BBG)
With $100 Billion In Debt, Glencore Emerges As The Next Lehman (ZH)
China Bubble Set To Rock Global Markets (CNBC)
The Biggest Source Of Global Growth In 2016 Is About To Hit A Brick Wall (ZH)
Middle Class Shrinks In 9 Of 10 American Cities As Incomes Fall (AP)
Congressman X: ‘Screw The Next Generation’ (DM)
Nassim Taleb Compares Monetary Policy to Novocaine (BBG)
Yellen Says Won’t Completely Rule Out Negative Rates (R.)
Dear Homeowner, What Exactly Do You “Own”? (CH Smith)
IMF Under Pressure From Germany Over Greece (WSJ)
The German Current Account Surplus Requires Deficits Elsewhere (Harrison)
Ideas For Reducing The Debt Burden (Economist)
‘Death Awaits’: Africa Faces Worst Drought in Half a Century (Spiegel)
Europol To Send Experts To Greek Islands To ‘Identify Terrorists’ (Kath.)
EU Mission ‘Failing’ To Disrupt Mediterranean People-Smugglers (BBC)

So predictable one must wonder what Xi was/is thinking. A lot of money is being lost in China, and much of it by mom and pop. They’re not going to like it.

Iron Ore Goes From Boom To Bust In Just Three Weeks (BBG)

Don’t say there wasn’t any warning. Iron ore’s gone from boom to bust in the space of just three weeks, fulfilling predictions for a slump in prices that were jacked up to unsustainable levels by a short-lived speculative frenzy in China. The SGX AsiaClear contract for June settlement in Singapore sank as much as 3.5% to $48.64 a metric ton in Singapore [..] It’s collapsed 12% this week, the most since December, after losing 11% the week before. In Dalian, iron ore futures plunged on Friday to the lowest since February as steel in Shanghai headed for the biggest weekly loss on record.

Iron ore and steel are buckling once again after widespread predictions that the trading frenzy in China that had propelled prices upward in April wouldn’t endure as regulators clamped down and the rallies themselves induced higher production. Iron ore stockpiles at ports in China have expanded to near 100 million tons, while mills produced more steel than ever in March. Lower steel prices erode mills’ margins, cutting their ability to restock on iron ore, according to China Merchants Futures. “As steel profits have dropped sharply recently, the desire to replenish iron ore stocks is not strong,” said Zhao Chaoyue, an analyst at China Merchants, said in a note on Friday. “Supplies of steel are recovering as demand weakens. Steel prices remain vulnerable.”

Among those that foresaw a retracement, Goldman Sachs said on April 22 that iron ore’s rally was unsustainable, and a tight steel market in China was a “temporary distraction” from fundamentals. Days later, Fitch said the surge in steel prices wouldn’t last. And at the end of last month, Brazil’s Itau Unibanco said iron would soon drop by $10, describing the speculation as a short-term issue. Spot iron ore with 62% content delivered to Qingdao fell 0.9% to $55.05 a dry ton on Thursday, according to Metal Bulletin. Prices have sunk 22% since they peaked at more than $70 last month.

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China’s commodity casino starts to spread its losses…

With $100 Billion In Debt, Glencore Emerges As The Next Lehman (ZH)

One week ago, in a valiant attempt to defend the stock price of struggling commodity trading titan Glencore, one of the company’s biggest cheerleaders, Sanford Bernstein’s analyst Paul Gait (who has a GLEN price target of 450p) appeared on CNBC in what promptly devolved into a great example of just how confused equity analysts are when it comes to analyzing highly complex debt-laden balance sheets. In the clip below, starting about 2:30 in, CNBC’s Brian Sullivan gets into a heated spat with Gait over precisely how much debt Glencore really has, with one saying $45 billion the other claiming it is a whopping $100 billion. The reason for Gait’s confusion is that he simplistically looked at the net debt reported on Glencore’s books… just as Ivan Glasenberg intended.

However, since Glencore – like Lehman – is first and foremost a trading operation, one also has to add in all the stated derivative exposure (something we did ten days ago), in addition to all the unfunded liabilities, off balance sheet debt, bank commitments and so forth, to get a true representation of just how big, or rather massive, Glencore’s true risk is to its countless counterparties. Conveniently for the likes of equity analysts such as Gait and countless others who still have GLEN stock at a “buy” rating, Bank of America has done an extensive analysis breaking down Glencore’s true gross exposure. Here is the punchline:

“We consider different approaches to Glencore’s debt. Credit agencies, such as S&P, start with “normal” net debt, i.e. gross debt less cash and then deduct some share (80% in the case of S&P of “RMIs” – Readily Marketable Inventories. These are considered to be “cash like” inventories (working capital) in the marketing business. At the last results, RMIs were about US$17.7 bn. Giving full credit for RMIs plus a pro-forma for the equity raise and interim dividend we derive a “Glencore Adjusted Net Debt” of c. US$28 bn.

On the other hand, from discussions with our banks team, we believe the banks industry (and ultimately regulators) may look at the number i.e. gross lines available (even if undrawn) + letters of credit with no credit for inventories held. On this basis, we estimate gross exposure (bonds, revolver, secured lending, letters of credit) at c. $100 bn. With bonds at around $36 bn, this would still leave $64 bn to the banks’ account (assuming they don’t own bonds).”

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Never listen to people predicting black swans.

China Bubble Set To Rock Global Markets (CNBC)

For the moment, the following is the shock NOT heard ’round the world … at least not yet. Rampant speculation in China’s commodities markets could very well be the next “black swan” event that rocks global markets and possibly the global economy. Though very little attention has been paid to this recent action, speculative excesses in China’s commodity markets have taken traders and investors on a wild ride, which may likely soon spill over to the rest of the world. Trading volumes and volatility have been so extreme they make the recent swings in Shanghai and Shenzhen’s stock markets look mild by comparison. Chinese speculators have driven up, and then down, the prices of everything from iron ore to steel, and from soybeans to egg futures.

Prices in most of these commodities have fallen back to earth after massive, but relatively brief, spikes in prices. But, that’s not to say more damage hasn’t been done to China’s already fragile market system and economy. One truly astonishing feature of this bout of speculation is that the average holding period of a commodity futures contract was just three hours in April, according to Bloomberg. That makes other speculative trading episodes look like long-term investing. It also suggests a massive appetite for risk, which in and of itself, is potentially destabilizing, both in China and, by extension, elsewhere in the world. Why do we care? Well, first of all, the recent rebound in commodity prices, here at home, and the affiliated rebound in raw materials stocks, could have been driven, at least in part, by those very speculative excesses in China.

It also means that the rebound in inflation expectations could be a false signal, which on its face, reads as an indicator of a rebound in demand for raw materials, or a sign that the global economy could be stabilizing and re-accelerating. That’s the type of false signal that could convince the Fed that inflation is accelerating, causing them to mistakenly raise rates. While that hasn’t happened yet, it is a risk that bears watching. The “fake-out breakout” also could have suggested that supply of, and demand for, raw materials is coming back into balance in a world burdened by a commodity glut. That, too, appears to be have been a diversion. There is still more cotton, more copper, more steel and more soybeans than the world demands. The market-based signaling matrix appears to be broken thanks to this bout of speculative excess.

This is the Wild Wild East of markets these days. After speculating excessively in real estate a few years ago, in stocks last year, driven by heavy margin buying and then a crash, Chinese investors and traders have quickly moved on to commodities. These rolling bubbles are making the Chinese economy more and more unstable and more susceptible to a much-feared “hard landing” in the economy. That has implications for the Mild Mild West, where growth has been hard to come by and could be upended by another deceleration in Chinese economic activity.

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Yup. China again.

The Biggest Source Of Global Growth In 2016 Is About To Hit A Brick Wall (ZH)

After issuing a record $1 trillion in combined bank and shadow loans in the first quarter which just like during the financial crisis provided a short-term boost to global growth (while sending China’s debt/GDP to all time highs), China’s dramatic debt issuance binge is about to hit a brick wall. According to MarketNews, Chinese bank loan growth is expected to slow sharply in April compared with March as the pillar of bank lending, mortgage loans, slowed as the property market cooled. Citing bank officials, the news service said that robust first-quarter lending almost depleted their resources, making it difficult to find good targets to lend to, which also hurt loan growth. It also means that suddenly the credit impulse that drove both Chinese and global growth for the past two months is about to evaporate.

How big is the drop? Sources familiar with the loan number told MNI that combined new loans in April by the Big Four state-owned banks were more than halved from March’s level. As a reminder, the Big Four banks lent out CNY402 billion in March, according to the People’s Bank of China. While there is no preview of how bit (or small) the combined TSF number will be, it is safe to assume it will be a far smaller total than the CNY2.34 trillion in total social financing that flooded the Chinese economy in March. The slowdown mainly came from moderating mortgage growth, which has been the key driving force behind loan growth so far this year. In the city of Shanghai, mortgage loans hit a record high of CNY36.1 billion in March, beating the previous record of CNY34.6 billion set in January, according to PBOC data.

The PBOC said the country’s total outstanding mortgage loan was up 25.5% y/y at the end of March, much faster than the 14.7% of average outstanding loan growth. But that mortgage strength in the first quarter failed to continue into April as property sales growth slowed sharply on government tightening measures. According to Essence Securities, new residential house sales in tier one cities, namely Beijing, Shanghai, Guangzhou and Shenzhen, fell 21.2% on month in April and only edged up 0.5% from a year ago, including a 38.6% m/m and 30.8% y/y plunge in the city of Shenzhen, which leads the current round of property rebound. But if April was bad, May was a disaster: “it appears the situation is even worse into May. Shenzhen saw house sales in the first week of May plummet another 49% when compared with the previous week, dragging year-to-date sales into a 1% drop in terms of floor space.”

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More on the Rew report. It warrants attention, lots of it. It paints the real picture of America. And that’s with Pew’s perhaps somewhat distorting definition of ‘middle class’, which includes 3-person households with incomes of up to $125,000. This may be statistically correct if you try hard enough, but an awful lot of people living on $40,000 or less will not agree.

Middle Class Shrinks In 9 Of 10 American Cities As Incomes Fall (AP)

In cities across America, the middle class is hollowing out. A widening wealth gap is moving more households into either higher- or lower-income groups in major metro areas, with fewer remaining in the middle, according to a report released Wednesday by the Pew Research Center. In nearly one-quarter of metro areas, middle-class adults no longer make up a majority, the Pew analysis found. That’s up from fewer than 10% of metro areas in 2000. That sharp shift reflects a broader erosion that occurred from 2000 through 2014. Over that time, the middle class shrank in nine of every 10 metro areas, Pew found. The squeezing of the middle class has animated this year’s presidential campaign, lifting the insurgent candidacies of Donald Trump and Bernie Sanders.

Many experts warn that widening income inequality may slow economic growth and make social mobility more difficult. Research has found that compared with children in more economically mixed communities, children raised in predominantly lower-income neighborhoods are less likely to reach the middle class. Pew defines the middle class as households with incomes between two-thirds of the median and twice the median, adjusted for household size and the local cost of living. The median is midway between richest and poorest. It can better capture broad trends than an average, which can be distorted by heavy concentrations at the top or bottom of the income scale.

By Pew’s definition, a three-person household was middle class in 2014 if its annual income fell between $42,000 and $125,000. Middle class adults now make up less than half the population in such cities as New York, Los Angeles, Boston and Houston. “The shrinking of the American middle class is a pervasive phenomenon,” said Rakesh Kochhar, associate research director for Pew and the lead author of the report. “It has increased the polarization in incomes.”

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‘We spend money we don’t have and blithely mortgage the future with a wink and a nod. Screw the next generation..’ [..] ‘Nobody here gives a rat’s a** about the future and who’s going to pay for all this stuff we vote for. That’s the next generation’s problem. It’s all about immediate publicity, getting credit now, lookin’ good for the upcoming election.’

Congressman X: ‘Screw The Next Generation’ (DM)

A new book threatens to blow the lid off of Congress as a federal legislator’s tell-all book lays out the worst parts of serving in the House of Representatives – saying that his main job is to raise money for re-election and that leaves little time for reading the bills he votes on. Mill City Press, a small Minnesota-based ‘vanity press’ publisher describes ‘The Confessions of Congressman X’ as ‘a devastating inside look at the dark side of Congress as revealed by one of its own.’ ‘No wonder Congressman X wants to remain anonymous for fear of retribution. His admissions are deeply disturbing.’ The 84-page exposé is due in bookstores in two weeks, and Washington is abuzz with speculation about who may be behind it.

The book, a copy of which DailyMail.com has seen, discloses that the congressman is a Democrat – but not much else. The anonymous spleen-venter has had a lot to say about his constituents, however. Robert Atkinson, a former chief of staff and press secretary for two congressional Democrats, took notes on a series of informal talks with him – whoever he is – and is now publishing them with his permission. ‘Voters claim they want substance and detailed position papers, but what they really crave are cutesy cat videos, celebrity gossip, top 10 lists, reality TV shows, tabloid tripe, and the next f***ing Twitter message,’ the congressman gripes in the book. ‘I worry about our country’s future when critical issues take a backseat to the inane utterings of illiterate athletes and celebrity twits.’

Much of what’s in the book will come as little surprise to Americans who are cynical about the political process. ‘Fundraising is so time-consuming I seldom read any bills I vote on,’ the anonymous legislator admits. ‘I don’t even know how they’ll be implemented or what they’ll cost.’ ‘My staff gives me a last-minute briefing before I go to the floor and tells me whether to vote yea or nay. How bad is that?’ And on controversial bills, he says, ‘I sometimes vote “yes” on a motion and “no” on an amendment so I can claim I’m on either side of an issue.’ ‘It’s the old shell game: if you can’t convince ’em, confuse ’em.’

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“There is no evidence that 0% is better than 3%. Show me the evidence.”

Nassim Taleb Compares Monetary Policy to Novocaine (BBG)

Nassim Taleb, distinguished scientific advisor at Universa Investments and New York University professor of risk engineering, discusses monetary policy. He speaks with Erik Schatzker from the SALT Conference in Las Vegas, Nevada on “Bloomberg Markets.”

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As Taleb says in the video above, Yellen is a very smart person but one who’s only recently found out that she’s stuck.

Yellen Says Won’t Completely Rule Out Negative Rates (R.)

Fed Chair Janet Yellen said on Thursday that while she “would not completely rule out the use of negative interest rates in some future very adverse scenario,” the tool would need a lot more study before it could be used in the United States. Yellen, in responses to written questions from U.S. Congressman Brad Sherman following her February testimony on Capitol Hill, said the Fed plans to raise interest rates gradually, given its expectations that the economy will continue to strengthen and inflation will move back up to the Fed’s 2% goal. She also said that if the economy unexpectedly takes a turn for the worse, the Fed will adjust its stance. Central banks in Europe and Japan have used negative interest rates to try to stimulate their economies, and Yellen said the Fed is attempting to learn as much as it can from their experiences. Before using negative rates at home, she said, policymakers would need to consider a number of issues, “including the potential for unintended consequences.”

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Charles revisits a theme Nicole and I talked a lot about in the past: “.. in effect, anyone “owning” a home with high property taxes is leasing the property from the local government for the “right” to gamble that a new housing bubble is underway.” As Nicole puts it: “..renting is paying somone else to carry the risk of owning..”.

Dear Homeowner, What Exactly Do You “Own”? (CH Smith)

We’re constantly told ours is an ownership society in which owning a home is the foundation of household wealth. The concept of ownership may appear straightforward, but consider these questions: 1. If the house is mortgaged, what does the homeowner “own” when the bank has the senior claim to the property? 2. If the homeowner owes local government $13,000 a year in property taxes, what does the homeowner “own” once they pay $260,000 in property taxes over 20 years? The answer to the first question: the homeowner only “owns” the homeowners’ equity, the market value of the home minus the the mortgage and closing costs. In a housing bubble, homeowners’ equity can soar as the skyrocketing value accrues to the homeowner, as the mortgage is fixed (in conventional mortgages). But when bubbles pop and housing prices return to reality-based valuations, the declines also accrue to the homeowner’s equity.

If the price declines below the mortgage due the lender, the homeowners’ equity vanishes and the property is underwater. The property may still be worth (say) $400,000, but if the mortgage(s) total $400,000, the owner owns nothing but the promise to pay the mortgage and property taxes and the right to claim a tax deduction for the mortgage interest paid. To answer the second question, let’s consider an example. In areas with high property taxes (California, New Jersey, New York, Illinois, etc.), annual bills in excess of $10,000 annually are not uncommon. If we take $13,000 annually as a typical total property tax in these areas (property taxes can include school taxes, library taxes, and a host of special assessments on top of the “official” base rate), the homeowner “owns” the obligation to pay local tax authorities $130,000 per decade for the right to “own” the house.

In states without Prop 13-type limits on how much property taxes can be raised, there is no guarantee that property taxes won’t jump higher in a decade, but for the sake of simplicity, let’s assume the rate is unchanged. In 20 years of ownership, the homeowner will pay $260,000 in property taxes.Let’s compare that with the rise in their homeowners’ equity. Since home values are high in high-tax regions, let’s assume a $400,000 purchase price with an $80,000 down payment and a conventional 4% 30 year mortgage of $320,000. In 20 years of mortgage and tax payments, the homeowners paid about $197,500 in interest to the bank (deductible from their income taxes), and about $170,000 in mortgage principle, leaving them total homeowner’s equity of the $80,000 down payment and the $170,000 in principle, or a total of $250,000. Since they paid $260,000 in property taxes in the period, have they gained anything?

If we look at the property as merely leased from the local government for the annual fee of $13,000, then was “ownership” a good deal for the local government or for the homeowner? If the homeowner subtracts the lease fee (i.e. property taxes) from their equity, they are underwater by $10,000. The real estate industry answer is that “ownership” is great because the skyrocketing appreciation accrues to the homeowner. If the house doubles in value from $400,000 to $800,000 in a decade, who cares about the $130,000 in property taxes paid? If we subtract this $130,000 lease fee, the homeowner would still pocket a hefty profit: $800,000 sales price minus the $400,000 purchase price, the $130,000 in property taxes, the costs of 10 years of maintaining the home and the selling commission and closing fees. So in effect, anyone “owning” a home with high property taxes is leasing the property from the local government for the “right” to gamble that a new housing bubble is underway.

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Greece has a major payment to the ECB coming in July. Something will be found, but it will not be advantageous to Athens.

IMF Under Pressure From Germany Over Greece (WSJ)

In Europe’s battle with the IMF over Greece, Germany has a way to win. Germany, Europe’s dominant economic power, is leaning heavily on the IMF to accept hypothetical assurances that Greece’s debt burden will be addressed in the future if needed, rather than the definite and far-reaching debt relief that the IMF wanted, according to people familiar with the talks. Berlin believes the IMF will have to accept what’s on offer, even if IMF staff are unhappy about it, these people say. The IMF is also under heavy European pressure to accept Greek austerity policies that are less specific than the cuts the IMF wanted. An accord hasn’t been reached yet, and some warn it could take several weeks. The IMF’s Achilles’ heel: Its board is controlled by Germany, other European Union countries, and the U.S., none of whom want a new crisis over Greece.

That power reality weakens the IMF’s threat to pull out of the Greek bailout if it is unsatisfied. The EU currently faces multiple challenges that threaten to unravel the 60-year-old project of European integration, including the U.K.’s referendum on leaving the bloc, the migration crisis, and the rise of EU-skeptic populist parties. Germany and other European governments have no appetite for another round of brinkmanship over Greece like in 2015, and want a deal in coming weeks that settles Greece’s future—at least for now. Any deal is nevertheless likely to include some important concessions to the IMF. German Finance Minister Wolfgang Schäuble -who until recently adopted the hard-line stance in public that Greece needs no debt relief at all- has already permitted discussions to start this week about how eurozone loans to Greece might be restructured in the future.

A deal, which many European officials are now confident of reaching in late May or early June, is expected to include a promise by Germany and other eurozone countries to keep Greece’s debt burden below a certain threshold. That promise would entail easing the terms of Greece’s loans “if necessary.” Crucially for Berlin, however, any decision to restructure the loans would be delayed until 2018—after Germany’s 2017 elections. Mr. Schäuble and his boss, Chancellor Angela Merkel, are determined to avoid, for now, any material change to Greece’s bailout plan that would force them to hold an awkward debate in Germany’s parliament, the Bundestag, according to people familiar with their thinking.

An accord on Greek debt and austerity would allow Athens to stay afloat this summer, when large bonds fall due. But it is unlikely to resolve the country’s seven-year-old debt crisis. Participants in the troubled bailout are braced for further drawn-out negotiations in coming years about Greece’s fiscal and other overhauls. The main source of this year’s re-escalation of the Greek debt saga is Germany’s insistence that it cannot release any further bailout funds unless the IMF agrees to resume its own lending to Athens. IMF lending has been in limbo since last July, when IMF staff stated that “Greece’s public debt has become highly unsustainable.”

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One day perhaps more people will start to understand this. Germany is blowing up the eurozone. And the EU. The Q1 2016 growth announced today more than doubled, and that just makes it that much worse.

The German Current Account Surplus Requires Deficits Elsewhere (Harrison)

With the periphery’s downturn came austerity and internal devaluation. And this has meant two adjustments. First, the EU as a whole has moved from a roughly balanced external position to a net creditor position as the German and Dutch export-led model is forced onto the periphery via internal devaluation used to achieve export competitiveness. Second, the Germans and Dutch have been forced to turn elsewhere to maintain their mercantilist trading stance. And they have found willing buyers in Asia and the emerging markets writ large.

The thing to realize about multilateral trade is that the imbalances do not necessarily build up as bilateral imbalances between two countries. Rather, imbalances build multilaterally, with some countries – particularly the reserve-currency holding US – taking on the net debtor position. And we see that now, with the UK showing record trade deficits at the same time Germany is sporting huge surpluses. The IMF faults Germany for the surplus. Martin Wolf faults Germany for this too. Irrespective, there is no mechanism in the current global currency system to correct these imbalances except through balance of payments crisis and the rise of protectionist populist politicians.

And so my conclusion here is that these imbalances will only shift in a crisis – like the one we experienced within the eurozone. Except next time, the crisis will be global. It would be nice to think that world leaders would understand that dangerous imbalances are building that feed a populist and violent political response. Alas, there is no indication that the Germans or any other net surplus country gets this. And while the Swiss and the Dutch are small trading nations, Germany is a global behemoth. Like China, it will attract negative attention when the economy turns down. And the Germans will get the blame when the trade barriers go up. Right now, it seems only a matter of when not if.

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In which the Economist is found short of ideas.

Ideas For Reducing The Debt Burden (Economist)

DEBT levels grew spectacularly in the rich world from 1982 to 2007. When the financial crisis broke, worries about the ability of borrowers to repay or refinance that debt caused the biggest economic downturn since the 1930s. It could have been worse. The danger was that, as private-sector borrowers scrambled to reduce their debts, the resulting contraction in credit would drive the world into depression. Fortunately, this outcome was averted. First, the governments of rich countries allowed their debts to rise, offsetting the reduction in private debt. In addition, emerging markets (notably China) continued to borrow. So there was no global deleveraging; quite the reverse. Central banks also helped, slashing interest rates to zero and below.

Although lower policy rates have not always resulted in cheaper borrowing costs (in Greece, for example), debt-servicing costs have fallen in most developed countries. Although this approach has staved off disaster, it has not got rid of the problem, as a research note from Manoj Pradhan, an economist at Morgan Stanley, makes clear. “High debt forces interest rates to stay low, which encourages yet more debt,” Mr Pradhan writes. Central banks dare not push interest rates up too quickly for fear of causing another crisis; hence the stop-start nature of the Federal Reserve’s statements on monetary policy. The developed world seems stuck with sluggish growth and low rates. In health terms, the disease is chronic, not acute.

A lurch into another global crisis, Mr Pradhan reckons, would require three ingredients. First, the assets financed by the debt build-up would need to fall sharply in price or prove uneconomic. Second, the debtors would have to be concentrated in big, globalised economies. Lastly, global investors would have to be heavily exposed to the debt in question. All this was the case in 2007-08, as debt secured by American housing turned bad, raising doubts about the health of the Western banking system. This time round the debtors are in different places. Some of them are emerging-market governments and commodity producers. But, except for China, none of these is crucial to the world economy. And China’s debts are mainly in domestic hands, rather than widely dispersed in the portfolios of international banks, pension funds and insurance companies.

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“..more than 50 million people in Africa are acutely threatened by famine..”

‘Death Awaits’: Africa Faces Worst Drought in Half a Century (Spiegel)

Herdsman Ighale Utban used to be a relatively prosperous man. Three years ago, he owned around a hundred goats. Now, though, all but five of them have died of thirst at a dried-up watering hole, victims of the worst drought seen in Ethiopia and large parts of Africa in a half-century. Utban, a wiry man of 36 years, belongs to a nomadic people known as the Afar, who spend their lives wandering through the eponymously named state in northeastern Ethiopia. “This is the worst time I’ve experienced in my life,” he says. On some days, he doesn’t know how to provide for himself and his seven-member family. “We can no longer wander,” Utban says, “because death awaits out there.” For now, he’ll have to remain in Lii, a scattered little settlement in which several families have erected their makeshift huts. Lii means “scorching hot earth.”

Since time immemorial, shepherds have wandered with their animals through the endless expanses of the Danakil desert. They live primarily off of meat and milk, and it was always a meagre existence. But with the current drought, which has lasted for over a year, their very existence is threatened. “First the livestock die, then the people,” Utban says. The American relief organization USAID estimates that in Afar alone, over a half million cattle, sheep, goats, donkeys and camels have perished. Reservoirs are empty, pastures dried up, feed reserves nearly exhausted. With no rain, grass no longer grows. Many nomads are selling their emaciated livestock, but oversupply has led to a 50% decline in prices. Currently, millions of African farmers and herders are suffering similar fates to Utban’s. The UN estimates that more than 50 million people in Africa are acutely threatened by famine.

After years of hope for increased growth and prosperity, the people are once again suffering from poverty and malnutrition. The governments of Malawi, Mozambique, Zimbabwe, Lesotho and Swaziland have already declared states of emergency, and massive crop losses have caused food prices to explode in South Africa. Particularly hard stricken are the countries in the southern part of the continent as well as around the Horn of Africa, Somalia, Djibouti, Eritrea and especially Ethiopia. Meteorologists believe the natural disaster is linked to a climate phenomenon that returns once every two to seven years known as El Niño, or the Christ child, a disruption of the normal sea and air currents that wreaks havoc on global weather patterns. The El Niño experienced in 2015-2016 has been particularly strong.

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Summing it up. Europe doesn’t send help to relieve the conditions refugees live in. They send policemen instead. 200 of them.

Europol To Send Experts To Greek Islands To ‘Identify Terrorists’ (Kath.)

Europol, the European Union’s law enforcement agency, is soon to deploy 200 officers to refugee centers on the Greek islands and mainland to help identify potential terrorists. The officers, specially trained experts in immigration and terrorism, will not be in charge of border protection but will examine individuals deemed to be suspicious. After several weeks of reduced inflows of migrants from neighboring Turkey, Thursday saw an increase in arrivals with 130 people arriving on Greek shores in one day, amid growing concerns about the fate of an agreement between Turkey and the European Union to curb migration.

The total number of migrants in Greece on Thursday stood at 54,542, according to the spokesman for the government’s coordinating committee for refugees, Giorgos Kyritsis. Of this total, nearly 10,000 are living in squalid conditions at a makeshift camp near the village of Idomeni close to the border with the Former Yugoslav Republic of Macedonia. Kyritsis said the Idomeni camp would be evacuated but did not specify when. The situation at the camp is tense and local residents are running out of patience, with the head of the Idomeni community on Wednesday lodging a legal suit against Citizens’ Protection Minister Nikos Toskas for a “complete absence of state control” at the camp.

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Oh my, what a surprise.

EU Mission ‘Failing’ To Disrupt Mediterranean People-Smugglers (BBC)

The EU naval mission to tackle people smuggling in the central Mediterranean is failing to achieve its aims, a British parliamentary committee says. In a report, the House of Lords EU Committee says Operation Sophia does not “in any meaningful way” disrupt smugglers’ boats. The destruction of wooden boats has forced the smugglers to use rubber dinghies, putting migrants at even greater risk, the document says. Operation Sophia began in 2015. It was set up in the wake of a series of disasters in which hundreds of migrants died while trying to cross from Libya to Italy. The EU authorised its vessels to board, search, seize and divert vessels suspected of being used for people smuggling.

The report states that “the arrests made to date have been of low-level targets, while the destruction of vessels has simply caused the smugglers to shift from using wooden boats to rubber dinghies, which are even more unsafe”. It says that there are also “significant limits to the intelligence that can be collected about onshore smuggling networks from the high seas. “There is therefore little prospect of Operation Sophia overturning the business model of people smuggling,” the document concludes. It adds that the mission is still operating out in international waters, and not – as originally intended – in Libyan waters.

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 May 11, 2016  Posted by at 7:47 am Finance Tagged with: , , , , , , , ,  5 Responses »
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Jack Delano Engineer at AT&SF railroad yard, Clovis, NM 1943


‘Miracle’ Needed To Save The World, Because Central Banks Can’t (SMH)
“Anonymous Voice” Signals Big Policy Change In China (ZH)
The Triggers For A New Financial Crisis (Das)
US: Neglected Nation (FT)
Big Oil Abandons $2.5 Billion in US Arctic Drilling Rights (BBG)
Germany Posts Record Current-Account Surplus (BBG)
Germany is the Eurozone’s Biggest Problem (Wolf)
London Is Building More Offices Than Ever (BBG)
NATO Is Much Worse Than A Cold War Relic (FFF.Org)
Greece Faces Its Toughest Austerity Measures Yet (G.)

Make it easier to pay off debt and we’ll all go deeper into debt.

‘Miracle’ Needed To Save The World, Because Central Banks Can’t (SMH)

The Bank of Japan and the ECB are printing billions in a “useless” attempt at stimulating demand as a “crisis of confidence” erupts over central banks and their diminishing influence. And for the same reason, the Reserve Bank of Australia may find itself powerless in trying to defeat low inflation by cutting interest rates to fresh record lows. That is the view of Vimal Gor, who is head of income and fixed interest at BT Investment Management. Mr Gor is the latest expert to question the wisdom of RBA rate cuts. “The theory says yes, but in practice it’s unclear as RBA monetary policy has no influence over commodity prices or overcapacity in Chinese and Japanese markets. This takes us back to the question of central bank credibility in being able to deliver on their objectives,” he said.

“Take negative rates any further and central banks risk putting the financial system at risk.” Inflation expectations implied by long-dated inflation swaps suggest markets are not convinced that central banks can lift prices through easy policy settings. “It is clear markets are giving up on central banks to fulfil their mandate in the inflation fighting arena.” Helicopter money, which Mr Gor agrees is a “ridiculous” idea, might be tested, but there is another idea worth exploring. “The other option is to abandon the inflation targeting mantra which has been pervasive over the last 25 years,” he says. Instead, central banks could come up with “a per capita measure of economic activity”. This would limit the pressure to keep lowering interest rates.

“The reality remains that the world is overwhelmed with debt, so that would suggest that we would need to have low rates to make repayment easier, and to discourage saving. “Ironically low rates spur further adoption of debt because of asset prices that are shooting skywards, and actually encourage more saving because income levels from the existing savings pile are too small to live on.”

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Xi doesn’t have the guts to come out and say it.

“Anonymous Voice” Signals Big Policy Change In China (ZH)

Overnight the People’s Daily published an interview with “anonymous authorities” on the topic of China’s economy. It’s a very important article as the “anonymous authorities” is considered to be Mr. Liu He, who is the economy brain of President Xi Jinping. The interview sends strong signals that China policy will shift from its aggressive easing in Q1 to a conservative position which focus on structural reforms. People’s Daily also published the “anonymous authorities” interviews in May 2015 and Jan 2016, which led to the subsequent collapse in the China A share market, because Mr. Liu (and President Xi’s camp) has been promoting structure reforms and risk controls.

For a credit driven China economy and the associated highly leveraged equities/commodities/properties markets, these’re the bad news. The A share market and China domestic commodities market had a big fall last night. Many overseas investors may think last night’s chaos is driven by the weak April import/export data announced during the weekend. I can tell you that it’s not. The local Chinese take the “anonymous authorities” article seriously and his opinion will have much deeper impact for China in the coming quarters. In general, the interview denied the “demand driven” stimulus policy adopted by China in Q1. Like other governments in the world, the CCP party and Chinese government have different sub-parties internally holding different views of the economy.

They believe their own claims are the best for China and advocate their ideas when the reality cling to them. For example, when the economy is really bad, the pro-growth camp will have upper hands and is able to push for their demand driven policies. That’s why we see China swings between structural reform and demand stimulus in the last two years. China pumped $1tn credit in Q1 to stop the falling knife, and this really cross the line of structural reform camp, so that’s why we see the article comes out right now. As the Politburo economy meeting just finished in the end of April, I believe the article delivers the consensus message agreed in the meeting.

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One overriding trigger: debt.

The Triggers For A New Financial Crisis (Das)

There are a number of potential triggers to a new crisis. The first potential trigger may be equity prices. The US stock market runs into trouble. A stronger dollar affects US exports and foreign earnings. Emerging market weakness affects businesses in the technology, aerospace, automobile, consumer products and luxury product industries. Currency devaluations combined with excess capacity, driven by debt fuelled over-investment in China, maintain deflationary pressures reducing pricing power. Lower oil prices reduce earnings, cash flow and asset values of energy producers. Overinflated technology and bio-tech stocks disappoint. Earnings and liquidity pressures reduce merger activity and stock buybacks which have supported equity values. US equity weakness flows into global equity markets.

The second potential trigger may be debt markets. Heavily indebted energy companies and emerging market borrowers face increased risk of financial distress. According to the Bank of International Settlements, total borrowing by the global oil and gas industry reached US$2.5 trillion in 2014, up 250% from US$1 trillion in 2008. The initial stress will be focused in the US shale oil and gas industry which is highly levered with borrowings that are over three times gross operating profits. Many firms were cash flow negative even when prices were high, needing to constantly raise capital to sink new wells to maintain production. If the firms have difficulty meeting existing commitments, then decreased available funding and higher costs will create a toxic negative spiral.

A number of large emerging market borrowers, such as Brazil’s Petrobras, Mexico’s Pemex and Russia’s Gazprom and Rosneft, are also vulnerable. These companies increased leverage in recent years, in part due to low interest rates to finance significant operational expansion on the assumption of high oil prices. These borrowers have, in recent years, used capital markets rather than bank loans to raise funds, cashing in on demand from yield hungry investors. Since 2009, Petrobras, Pemex and Gazprom (along with its eponymous bank) have issued US$140 billion in debt. Petrobras alone has US$170 billion in outstanding debt. Russian companies such as Gazprom, Rosneft and major banks have sold US$244 billion of bonds. The risk of contagion is high as institutional and retail bond investors worldwide are exposed.

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A nation on its way to becoming a sinkhole.

US: Neglected Nation (FT)

The American Society of Civil Engineers yesterday projected a $1.44tn investment funding gap between 2016 and 2025, warning of a mounting drag on business activity, exports and incomes. Politicians are demanding action. Hillary Clinton, the Democratic frontrunner, has called for a $275bn spending blitz, including the creation of an infrastructure bank, recalling past glories such as the interstate highway system and Hoover Dam. Donald Trump, the presumptive Republican presidential nominee, is bucking anti-spending dogma within the party by promising major programmes to renew infrastructure and create jobs — albeit without putting forward any detail on how to pay for them.

Without radical surgery, the decay in tunnels, railways and waterways will cost the US economy nearly $4tn in lost GDP by 2025 as costs rise and productivity is impeded, according to estimates from the ASCE, dragging on a recovery in output that is the shallowest since the end of the second world war. Faced with crimped public resources, President Barack Obama’s administration and some states have tried to fill infrastructure gaps by luring in private investment, including from public-private partnerships or P3s. A number of states and municipalities have lifted petrol taxes to pay for roads and bridges, even as the federal petrol tax that serves as the backbone of transport spending nationwide has remained frozen since 1993. Many argue that the recent fall in oil prices presented the perfect moment to raise petrol taxes.

Even in the heart of Washington, Memorial Bridge, a symbolic link between the north and the south of the US, might have to be closed to traffic early in the next decade if major repairs are not carried out. Around the country more than 61,000 bridges were deemed structurally deficient in 2014. Last year US public capital investment, which includes infrastructure, was just 3.4% of GDP, or $611bn, according to the president’s Council of Economic Advisers — the lowest in more than 60 years. In the White House, the inability to do more to improve roads, bridges and other infrastructure is seen as one of the major policy failures since the crisis. Mr Obama last month bemoaned the absence of a major infrastructure programme from 2012 to 2014, when borrowing costs were low and the construction industry was short of jobs.

The administration included so-called shovel-ready infrastructure projects in its $800bn stimulus bill after Mr Obama took office, but the spending fell short of what was needed for repairs and to galvanise the economy. Critics see it as a squandered opportunity. However, Jason Furman, chairman of the council, says Mr Obama made repeated attempts to get more money into infrastructure and was rebuffed. “Congress has been unwilling to substantially expand infrastructure investment — it is as simple as that,” he says.

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Price discovery.

Big Oil Abandons $2.5 Billion in US Arctic Drilling Rights (BBG)

After plunking down more than $2.5 billion for drilling rights in U.S. Arctic waters, Royal Dutch Shell, ConocoPhillips and other companies have quietly relinquished claims they once hoped would net the next big oil discovery. The pullout comes as crude oil prices have plummeted to less than half their June 2014 levels, forcing oil companies to cut spending. For Shell and ConocoPhillips, the decision to abandon Arctic acreage was formalized just before a May 1 due date to pay the U.S. government millions of dollars in rent to keep holdings in the Chukchi Sea north of Alaska. The U.S. Arctic is estimated to hold 27 billion barrels of oil and 132 trillion cubic feet of natural gas, but energy companies have struggled to tap resources buried below icy waters at the top of the globe.

Shell last year ended a nearly $8 billion, mishap-marred quest for Arctic crude after disappointing results from a test well in the Chukchi Sea. Shell decided the risk is not worth it for now, and other companies have likely come to the same conclusion, said Peter Kiernan, the lead energy analyst at The Economist Intelligence Unit. “Arctic exploration has been put back several years, given the low oil price environment, the significant cost involved in exploration and the environmental risks that it entails,” he said. All told, companies have relinquished 2.2 million acres of drilling rights in the Chukchi Sea – nearly 80% of the leases they bought from the U.S. government in a 2008 auction. Oil companies spent more than $2.6 billion snapping up 2.8 million acres in the Chukchi Sea during that sale, on top of previous purchases in the Beaufort Sea.

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Bloomberg relates this to the US, but that’s not the point. It’s what the surplus does to the rest of the EU that counts.

Germany Posts Record Current-Account Surplus (BBG)

Germany posted a record current-account surplus just days after being placed on a U.S. watchlist for countries that may have an unfair foreign-exchange advantage. The current-account gap climbed to €30.4 billion in March, up from €21.1 billion the previous month, data from the Federal Statistics Office showed on Tuesday. The nation’s trade surplus, a narrower measure that only counts imports and exports of goods and services, widened to €26 billion, also a record. The U.S. put Germany, China, Japan, South Korea and Taiwan on a new currency watchlist on April 29, saying their foreign-exchange practices bear close monitoring to gauge whether they provide an unfair trade advantage over America. The economies met two of the three criteria used to judge unfair practices under a February law that seeks to enforce U.S. trade interests.

Meeting all three would trigger action by the president to enter discussions and seek potential penalties, including being cut off from some U.S. development financing and exclusion from U.S. government contracts. While Germany has no direct influence over the value of its currency, being just one member of the 19-nation euro area, it was cited because of its current-account and trade surpluses. Taiwan made the list because of its current-account surplus and persistent intervention to weaken the currency, according to the Treasury. Germany’s excess savings could be used to boost growth in the euro area, the Treasury said at the time. A report by the IMF on Monday said the current-account surplus will probably stay near record levels this year.

The euro weakened by more than 10% against the dollar in each of 2014 and 2015, though it has strengthened this year. The single currency traded at $1.1383 at 9:04 a.m. Frankfurt time. It was at almost $1.40 in mid-2014, before the European Central Bank started an unprecedented monetary-stimulus drive that includes negative interest rates and bond purchases.

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Germany and Holland prey on Europe’s poor.

Germany is the Eurozone’s Biggest Problem (Wolf)

Why is conventional German thinking on macroeconomics so peculiar? And does it matter? The answer to the second question is that it matters a great deal. A part of the answer to the first is that Germany is a creditor. The financial crisis has given it a dominant voice in eurozone affairs. This is a matter of might, not right. Creditors’ interests are important. But they are partial, not general, interests. Recent complaints have focused on the European Central Bank’s monetary policies, especially negative interest rates and quantitative easing. Wolfgang Schauble, Germany’s finance minister, even claimed that the ECB bore half of the responsibility for the rise of the Alternative for Germany, an anti-euro party. This is an extraordinary attack.

Criticism of ECB policies is wide-ranging: they make it unnecessary for recalcitrant members to reform; they have failed to reduce indebtedness; they undermine the solvency of insurance companies, pension funds and savings banks; they have barely kept inflation above zero; and they foment anger with the European project. In brief, ECB policy has become a big threat to stability. All this accords with a conventional German view. As Peter Bofinger, an heretical member of Germany’s council of economic experts argues, the tradition goes back to Walter Eucken, the influential father of postwar ordoliberalism. In this approach, ideal macroeconomics has three elements: a balanced budget at (almost) all times; price stability (with an asymmetric preference for deflation); and price flexibility.

This is a reasonable approach for a small, open economy. It is workable for a larger country, such as Germany, with highly competitive tradeable industries. But it cannot be generalised to a continental economy, such as the eurozone. What works for Germany cannot work for an economy three times as large and far more closed to external trade. Note that in the last quarter of 2015, real demand in the eurozone was 2% lower than in the first quarter of 2008, while US demand was 10% higher. This severe weakness in demand is missing from most of the German complaints. The ECB is rightly trying to prevent a spiral into deflation in an economy suffering from chronically weak demand. As Mario Draghi, ECB president, insists, the low interest rates set by the bank are not the problem. They are instead “the symptom” of insufficient investment demand.

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Following the MO of China’s ghost cities.

London Is Building More Offices Than Ever (BBG)

Developers started a record number of central-London office projects in the six months through March as they tried to capitalize on rising rents. Construction work began on 51 office buildings during the period, Deloitte LLP said in a report on Tuesday. About 14 million square feet (1.3 million square meters) of space is now under construction, 28% more than the previous six months and the highest since March 2008, according to the report. “In just 18 months, we have seen activity nearly double,” Deloitte said in the report, which it started publishing in 1996. “This is perhaps the first survey in a long time where we are able to point to the pendulum swinging away from landlords and back toward tenants.”

About 42% of the space under construction has already been leased and vacancy rates remain at a record low of less than 4%, Deloitte said. The “tight market conditions” are likely to continue for a few more years, according to Tim Leckie at JP Morgan. “There is a risk of the cycle turning first in the City from 2018 as new supply comes online,” he said in an e-mail.

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It’s war machine.

NATO Is Much Worse Than A Cold War Relic (FFF.Org)

Whatever else might be said about Donald Trump, the fact is that he has provided a valuable service in producing a national and international discussion of NATO, the old Cold War organization whose mission was to protect Western Europe from an attack from the Soviet Union, which had been America’s partner and ally during World War II. The obvious question arises: Given that NATO was a Cold War institution, why didn’t it go out of existence when the Cold War ended, as its counterpart, the Warsaw Pact, did? Indeed, let’s not forget that that’s precisely what U.S. officials assured Soviet officials would happen as the Cold War was ending. Shut down the Warsaw Pact and we’ll shut down NATO. But U.S. officials double-crossed the Russians. Even though the Warsaw Pact, which consisted of the Soviet Union and Eastern European countries, dismantled, NATO didn’t.

[Recently], the New York Times said reminded readers that former Defense Secretary Robert Gates had expressed a concern back in 2011 that young Americans would have no memory of the Cold War and would consider NATO to be just an artifact. If only NATO was only an artifact, one in which people just sat around collecting tax-funded paychecks. Instead, after double-crossing the Russians, it continued operating as if the Cold War had never ended, moving ever close to Russia’s border by absorbing former members of the Warsaw Pact. When NATO forces ultimately reached Ukraine, which is on Russia’s border, how could anyone be surprised over Russia’s reaction? The U.S. would have reacted the same way. In fact, it did in 1961, when the Soviets installed defensive missiles in Cuba.

There is no way U.S. national-security state officials could have been shocked over Russia’s reaction to NATO’s plan to absorb Ukraine. U.S. officials had to know from the get-go that Russia would never permit NATO to take control over its longtime military base in Crimea, which is precisely what would have happened if NATO had absorbed Ukraine. The same New York Times article quotes Gen. Philip M. Breedlove, former supreme allied commander for Europe: “The United States absolutely needs NATO — a NATO that is strong, resilient and united.” According to the article, “Five members of the Joint Chiefs of Staff made a similar set of arguments at the Council on Foreign Relations on Tuesday, also avoiding any mention of Mr. Trump’s name.”

Well, duh! Of course, they favor NATO! What better way to ignite more crises and more Cold War than with NATO? After all, what if Americans demand that U.S. troops come home from the Middle East, thereby eliminating any more threat of anti-American terrorism? What better new official enemy than the old Cold War official enemy, Russia? What better way to keep the entire national-security establishment in high cotton with ever-increasing budgets? The Times article also expressed the concern among many that Trump intends to establish good relations with Russian President Vladimir Putin. Heaven forbid! Why, that’s heresy to any advocate of the national-security state! Everyone knows that Putin is a former KGB official. Everyone knows that the KGB was composed of communists. Everyone knows that a communist can never be trusted. The war on communism is on, once again.

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Allegedly to make sure the country can rebuild its economy. But there’s nothing left to rebuild with.

Greece Faces Its Toughest Austerity Measures Yet (G.)

In his tiny shop in downtown Athens, Kostis Nakos sits behind a wooden counter hunched over his German calculator. The 71-year-old might have retired had he been able to make ends meets but that is now simply impossible. “All day I’ve been sitting here doing the maths,” he sighs, surrounded by the undergarments and socks he has sold for the past four decades. “My income tax has just gone up to 29%, my social security payments have gone up 20%, my pension has been cut by 50 euros; they are taxing coffee, fuel, the internet, tavernas, ferries, everything they can, and then there’s Enfia [the country’s much-loathed property levy]. Now that makes me mad. They said they would take that away!” A mild man in milder times, Nakos finds himself becoming increasingly angry.

So, too, do the vast majority of Greeks who walked through his door on Monday. “Everyone’s outraged, they’ve been swearing, insulting the government, calling [prime minister] Alexis Tsipras a liar,” he exclaims after parliament’s decision on Sunday night to pass yet more austerity measures. “And they’re right. Everything he said, everything he promised, was a fairy tale.” Until the debt-stricken country’s financial collapse, shops like this were the lifeblood of Greece. For small-time merchants, the pain has been especially vivid because, like everyone Nakos knows, he voted for Tsipras and his leftist Syriza party. Now the man who was swept to power on a platform to eradicate austerity has passed the toughest reforms to date – overhauling the pension system, raising taxes and increasing social security fund contributions as the price of emergency bailout aid.

As MPs voted inside the red-carpeted 300-seat chamber on Sunday, police who had blocked off a large part of the city centre deployed teargas and water cannon against the thousands of anti-austerity demonstrators amassed outside. It was a world away from the day the tieless, anti-austerity leftists first assumed office, tearing down the barricades outside the sandstone parliament building. The latest measures – worth €5.4bn (£4.3m) in budget savings – mark a new era. After nine months of wrangling with the international creditors keeping the country afloat, Athens must apply policies that until now had been abstract concepts for a populace who have suffered as unemployment and poverty rates have soared.

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Apr 192016
 
 April 19, 2016  Posted by at 9:37 am Finance Tagged with: , , , , , , , , , ,  2 Responses »
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G.G. Bain Pelham Park Railroad, City Island monorail, NY 1910


The Hole at the Center of the Rally: S&P Margins in Decline (BBG)
US Nonfinancial Debt Rises 3.5 Times Faster Than GDP (Mauldin)
Asia’s Rich Urged to Buy US Dollars (BBG)
It’s All Suddenly Going Wrong in China’s $3 Trillion Bond Market (BBG)
China Will Bring All The BRICS Tumbling Down (Forbes)
China March Home Prices Rise At Fastest Rate In Two Years (Reuters)
Why Obama Administration Tries to Keep 11,000 Documents Sealed (Matt Taibbi)
Obama Official: Seed Money That Created Al Qaeda Came From Saudi Arabia (P.)
Saudis Are Going For The Kill But The Oil Market Is Turning Anyway (AEP)
A New Map for America (NY Times)
No One Worries Enough About Black Swans (ZH)
Credit Suisse: Germany’s Large Surplus Is The Problem, Not the ECB (BBG)
Talks With Creditors To Resume But Athens Rejects Fresh Austerity (Kath.)
Every Move You Make Is Being Monitored (Whitehead)
The Elephant Cometh (Jim Kunstler)
Over 400 Migrants Drown On Their Way To Italy (Reuters)

“Without the Federal Reserve chipping in with quantitative easing, investors have to go back to valuations and earnings..”

The Hole at the Center of the Rally: S&P Margins in Decline (BBG)

Stocks are rising, the worst start to a year is a memory, and short sellers are getting pummeled. And yet something is going on below the surface of earnings that should give bulls pause. It’s evident in quarterly forecasts for the Standard & Poor’s 500 Index, where profits are declining at the steepest rate since the financial crisis relative to revenue. The divergence reflects a worsening contraction in corporate profitability, with net income falling to 8% of sales from a record 9.7% in 2014. Bears have warned for years that such a deterioration would sound the death knell for a bull market that is about two weeks away from becoming the second-longest on record even as productivity sputters and industrial output weakens.

While none of it has prevented stocks from advancing in seven of the last nine weeks, rallies have seldom weathered a decline in profitability as violent as this one – and the squeeze is often a bad sign for the economy, too. “Analysts have seen the string pull as far as it can go, and there is no way for it to go but to reverse for the moment,” said Barry James at James Investment Research in Xenia, Ohio. “Without the Federal Reserve chipping in with quantitative easing, investors have to go back to valuations and earnings, and both of those – one is high and the other is low – that’s not a very good recipe for stocks.” James said his firm is raising cash amid the recent rally in stocks.

While energy producers are expected to suffer the biggest contraction in margins because of plunging oil prices, with a 28% drop in sales accompanying a first-quarter loss, analyst predicted six of the other 10 S&P 500 industries will also report lower profitability. Financial and raw-materials companies will see income growth trailing sales by at least 12 percentage points.

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It’s just like China.

US Nonfinancial Debt Rises 3.5 Times Faster Than GDP (Mauldin)

In my recent Outside the Box, good friend Dr. Lacy Hunt of Hoisington Investment Management gave us more ammunition to take on those who just don’t seem to get that the endless piling up of debt is not a sustainable way to run an economy. The most striking feature of the US economy’s performance in 2015, according to Lacy, was a massive advance in nonfinancial debt that kept the economy stuck in the doldrums of subpar growth.

US nonfinancial debt rose 3.5 times faster than GDP last year. (Nonfinancial debt is the sum of household debt, business debt, federal debt, and state and local government debt. Lacy also points out unfavorable trends in each component of nonfinancial debt.

Household debt: Delinquencies in household debt moved higher even as financial institutions continued to offer aggressive terms to consumers, implying falling credit standards. Furthermore, the New York Fed said subprime auto loans reached the greatest%age of total auto loans in ten years. Moreover, they indicated that the delinquency rate rose significantly.

Business debt: Last year business debt, excluding off balance sheet liabilities, rose $793 billion, while total gross private domestic investment (which includes fixed and inventory investment) rose only $93 billion. Thus, by inference this debt increase went into share buybacks, dividend increases, and other financial endeavors…. When business debt is allocated to financial operations, it does not generate an income stream to meet interest and repayment requirements. Such a usage of debt does not support economic growth, employment, higher paying jobs, or productivity growth. Thus, the economy is likely to be weakened by the increase of business debt over the past five years.

Federal debt: US government gross debt, excluding off balance sheet items, gained $780.7 billion in 2015 or about $230 billion more than the rise in GDP…. The divergence between the budget deficit and debt in 2015 is a portent of things to come. This subject is directly addressed in the 2012 book The Clash of Generations, published by MIT Press, authored by Laurence Kotlikoff and Scott Burns. They calculate that on a net present value basis the US government faces liabilities for Social Security and other entitlement programs that exceed the funds in the various trust funds by $60 trillion. This sum is more than three times greater than the current level of GDP.

State and local government debt: State and local governments … face adverse demographics that will drain underfunded pension plans…. The state and local governments do not have the borrowing capacity of the federal government. Hence, pension obligations will need to be covered at least partially by increased taxes, cuts in pension benefits or reductions in other expenditures.

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The currency wars simmer on. Time for the vigilantes.

Asia’s Rich Urged to Buy US Dollars (BBG)

Money managers for Asia’s wealthy families are telling clients to buy U.S. dollars as a rally this year in regional currencies begins to sputter. Credit Suisse is advising its private-banking clients to bet the greenback will gain versus a basket of peers that includes the South Korean won, Taiwan dollar, Thai baht and Philippine peso. UBS said investors should buy the currency against the Singapore dollar and yen. Stamford Management, which oversees about $250 million for Asia’s rich, urged clients to buy the U.S. dollar each time it falls below S$1.35. The Monetary Authority of Singapore’s unexpected easing on April 14 has fueled speculation that other policy makers, concerned about a worsening global economic outlook, will follow suit.

A gauge of 10 Asian currencies excluding the yen has fallen 0.1% this month. The Bloomberg-JPMorgan Asia Dollar Index climbed 1.9% in the first three months of the year, the first gain in seven quarters, as traders adjusted bets on the timing of U.S. interest-rate increases. “We see good opportunity now to hedge against U.S. dollar strength after the strong rally in Asian currencies in the first quarter,” said Koon How Heng at Credit Suisse in Singapore. “There are risks that other Asian central banks may follow up with some more easing in the second half if their respective growth outlooks deteriorate further.” The prospect of renewed weakness in the Chinese yuan and two interest rate increases by the Federal Reserve in the second half of the year will boost the greenback, Heng said.

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“China’s aggregate financing – a broad measure of credit that includes corporate bonds – almost doubled from a year earlier to 2.34 trillion yuan [..] Yet even that wasn’t enough to save the seven Chinese companies that reneged on bond obligations this year.”

It’s All Suddenly Going Wrong in China’s $3 Trillion Bond Market (BBG)

The unprecedented boom in China’s $3 trillion corporate bond market is starting to unravel. Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have canceled 60.6 billion yuan ($9.4 billion) of bond sales in April alone, while Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003. While bond yields in China are still well below historical averages, a sustained increase in borrowing costs could threaten an economy that’s more reliant on cheap credit than ever before.

The numbers suggest more pain ahead: Listed firms’ ability to service their debt has dropped to the lowest since at least 1992, while analysts are cutting profit forecasts for Shanghai Composite Index companies by the most since the global financial crisis. “The spreading of credit risks is only at its early stage in China,” said Qiu Xinhong at First State Cinda Fund Management. “Many people have turned bearish.” China’s leaders face a difficult balancing act. On one hand, allowing troubled companies to default forces investors to pay more attention to credit risk and accelerates government efforts to curb overcapacity. The danger, though, is that investor panic leads to tighter credit conditions, dealing a blow to President Xi Jinping’s plan to keep the economy growing by at least 6.5% over the next five years.

Economic figures for March reveal a growing dependence on debt. China’s aggregate financing – a broad measure of credit that includes corporate bonds – almost doubled from a year earlier to 2.34 trillion yuan, exceeding all 24 forecasts in a Bloomberg survey as policy makers turned on the taps to support economic growth. Yet even that wasn’t enough to save the seven Chinese companies that reneged on bond obligations this year. Three of those were part-owned by China’s government, seen not long ago as a provider of implicit guarantees for bondholders. Dongbei Special Steel on April 13 missed a third payment since its chairman was found dead by hanging last month, while Chinacoal Group failed to make a distribution on April 6.

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And not just the BRICS.

China Will Bring All The BRICS Tumbling Down (Forbes)

The concept of the BRICs isn’t heard much these days beyond some cooperative institution building efforts. Originally a Goldman Sachs authored attempt to identify growth opportunities for investors (referring to Brazil, Russia, India and China), it was picked up by those countries to symbolise a hoped-for rotation in the world order: away from the old hierarchy of the West and the Rest, towards a more balanced configuration of global economic progress. For inclusiveness, the ‘s’ was eventually capitalised into ‘South Africa’ so that the African continent was not left out. With hindsight, it remains curious that the idea was ever taken seriously beyond the confines of investor advice. The nominated states have little in common, although the public diplomacy of developing economy cooperation has a lingering appeal.

The Russian economy was always based largely on hydrocarbons, and Brazil’s expansion was a broader commodity play. Each, therefore, nurtured an important relationship with China. Now, though, as commodity prices have sunk, China is the only buyer left and has no qualms about driving a hard bargain. Massive Chinese infrastructure investment created the temporary illusion of wealth while global debt levels grew relentlessly. The commodity curse then undermined real economic progress around the world, as elites chased diminishing surplus for patronage and popularity. This has left producers exposed; one – Venezuela – rapidly becoming a wasteland. In other countries, what limited democracy there was has been hollowed out, leaving Russia in a state of egregious industrial and demographic decline, and Brazil confirming stereotypes about Latin American corruption.

All because the orders are drying up and the money has run out. Both Brazil and Russia are facing the possibility of imminent collapse. India, by contrast, is its own story, a perpetual tale of slow promise that plays tortoise to China’s hare. The only real story behind the BRICs was always just the ‘C,’ as in China, and the huge investment boom that powered commodity prices towards the fantasy of a ‘super-cycle’ – another word we don’t hear much anymore – drove the whole world mad. There was money for social programs in Brazil to lift up the poor, money for Putin’s new model army in Russia to restore imperial prestige, and money for the Olympics and World Cup in both countries. Then there was money for London palaces, money for Panamanian bank accounts, money for small wars and some leftover for the supposed institutions of a ‘new world order,’ since deferred.

Now, China’s policy dilemma belongs to everyone. Having spent 15 years sucking consumption and investment from everywhere, China now has a productive capacity it cannot possibly sustain, and faces a world reluctant any longer to make up for the deficiencies in Chinese demand. It therefore confronts a build up of debts it will struggle to pay and investors who expect a return they may not receive.

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Beijing still can’t seem to see the danger.

China March Home Prices Rise At Fastest Rate In Two Years (Reuters)

China’s home prices in March gained at the fastest pace in almost two years but that growth may slow as local authorities tighten home purchase requirements in the two top performing cities on fears of a bubble forming. The southern city of Shenzhen continued to be the top performer, with home prices surging 61.6% from a year ago, followed by Shanghai with a 25% gain. Prices in the two cities were up 3.7% and 3.6% respectively from a month earlier. Average new home prices in 70 major cities rose 4.9% last month from a year ago, picking up from February’s 3.6% rise, according to Reuters calculations based on data released by the National Statistics Bureau (NBS) on Monday. March prices were up 1.1% compared to a month ago.

China’s housing market bottomed out in the second half of 2015 on a series of government support measures, but a strong rebound in prices in the biggest cities has sparked concerns that some markets may be overheating, driving Shanghai and Shenzhen’s authorities to tighten downpayment requirements for second homes and raising the eligibility bar for non-residents. While home sales in the two cities plunged as much as 52% after the tightening, prices eased only by single digit, according to data from China Real Estate Index System (CREIS). April’s official data, which will reflect the impact of the tightening measures, is due to be released in mid-May. Area of property sold in the first quarter grew 33.1% to a near three-year high, according to data from the National Bureau of Statistics (NBS) on Friday.

While property in China’s top-tier cities is booming, prices in smaller centers, where most of China’s urban population lives, are still sinking and complicating government efforts to spread wealth more evenly and arrest slowing economic growth. “(Monthly) price rises among cities still showed big differences. Cities with big rises were concentrated in the first-tier and, in part, the hot tier-two cities. Their growth is much faster than other cities, with the rest of the second-tier and third-tier cities relatively stable,” Liu Jianwei, a senior statistician at the NBS, said in a statement accompanying the data. The NBS data showed 40 of 70 major cities tracked by the NBS saw year-on-year price gains, up from 32 in February.

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Another A-class piece from Taibbi.

Why Obama Administration Tries to Keep 11,000 Documents Sealed (Matt Taibbi)

[..] Even after the state took over the companies in September of 2008, Fannie and Freddie continued to buy as much as $40 billion in bad assets per month from the private sector. Fannie and Freddie weren’t just bailed out, they were themselves a bailout, used to sponge up the sins of private firms. The original takeover mechanism was a $110 billion bailout, followed by a move to place Fannie and Freddie in conservatorship. In exchange, the state received an 80% stake and the promise of a future dividend. All told, the government ended up pumping about $187 billion into the companies. But now here’s the strange part. Within a few years after the crash, the housing markets improved significantly, to the point where Fannie and Freddie started to make money again. Lots of money. The GSEs became cash cows again, and in 2012 the government unilaterally changed the terms of the bailout.

Now, instead of taking a 10% dividend, the government decided that the new number it preferred was 100%. The GSE regulator, the Federal Housing Finance Agency (FHFA), explained the new arrangement. “The 10% fixed-rate dividend was replaced with a variable structure, essentially directing all net income to the Treasury,” the FHFA wrote. “Replacing the current fixed dividend in the agreements with a variable dividend based on net worth helps ensure stability [and] fully captures financial benefits for taxpayers.” “I’m not worried about Fannie and Freddie’s health,” said former House Financial Services Committee chair Barney Frank. “I’m worried that they won’t do enough to help out the economy.” Translation: We’re taking all your money, not just the money you owe. In court filings later on, the government offered a strange excuse for this sudden and dramatic change in the bailout terms. It explained that at the time, the GSEs “faced enormous credit losses” and “found themselves in a death spiral.”

The government claimed that the poor financial condition of the GSEs would force the Treasury to throw more money at the operations, increasing the total commitment of taxpayers and leading quickly to insolvency. It absolutely denied any foreknowledge that the firms were on the verge of massive profitability. It got weirder. Despite the fact that the GSEs went on to pay the government $228 billion over the next three years, or $40 billion more than they owed, none of that money went to paying off Fannie and Freddie’s debt. When Sen. Chuck Grassley asked aloud how it was that the company and its shareholders were not yet square with the government, the Treasury Department testily answered, in essence, that the bailout had not been a loan, but an investment. This was not a debt that could be paid back. Like a restaurant owner who borrows money from a mobster, the GSEs found themselves in an unseverable relationship.

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Obama visits SA on Wednesday…

Obama Official: Seed Money That Created Al Qaeda Came From Saudi Arabia (P.)

President Barack Obama’s deputy national security adviser said that the government of Saudi Arabia had paid “insufficient attention” to money that was being funneled into terror groups and fueled the rise of Al Qaeda. Ben Rhodes was speaking to David Axelrod in his podcast “The Axe Files” out Monday when he was asked about the validity of the accusation that the Saudi government was complicit in sponsoring terrorism. “I think that it’s complicated in the sense that, it’s not that it was Saudi government policy to support Al Qaeda, but there were a number of very wealthy individuals in Saudi Arabia who would contribute, sometimes directly, to extremist groups. Sometimes to charities that were kind of, ended up being ways to launder money to these groups,” Rhodes said.

“So a lot of the money, the seed money if you will, for what became Al Qaeda, came out of Saudi Arabia,” he added. “Could that happen without the government’s awareness?” Axelrod asked. Rhodes said he doesn’t believe the government was “actively trying to prevent that from happening.” But he said that certain people, within the government or their family members, were able to operate on their own which allowed for the money flows. “So basically there was, at certainly, at least kind of a insufficient attention to where all this money was going over many years from the government apparatus,” Rhodes said. The remarks from Rhodes come as Obama prepares to head to Saudi Arabia on Wednesday and confront the strained relations between the two allies.

The Saudis are still fuming over an Atlantic magazine article that described Obama’s frustrations with Saudi Arabia’s religious ideology, its treatment of women and its rivalry with Iran. Obama also suggested in the piece that Saudi Arabia and other Gulf Arab states are “free riders” who rely too much on the U.S. military. Friction has also been created by a push from relatives of people who died on 9/11 and a bipartisan group of lawmakers to allow U.S. courts to hold the Saudi government responsible if it is found to have played a role in the 2001 attacks.

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Ambrose is always hit and miss. This one is BIG miss: “The scare earlier this year was misguided. It is the next oil supply crunch we should fear most.” No, it’s demand.

Saudis Are Going For The Kill But The Oil Market Is Turning Anyway (AEP)

The collapse of OPEC talks with Russia over the weekend makes absolutely no difference to the balance of supply and demand in the global oil markets. The putative freeze in crude output was political eyewash. Hardly any country in the OPEC cartel is capable is producing more oil. Several are failed states, or sliding into political crises. Russia is milking a final burst of production before the depleting pre-Soviet wells of Western Siberia go into slow run-off. Sanctions have stymied its efforts to develop new fields or kick-start shale fracking in the Bazhenov basin. Saudi Arabia’s hard-nosed decision to break ranks with its Gulf allies at the meeting in Doha – and with every other OPEC country – punctures any remaining illusion that there is still a regulating structure in global oil industry.

It told us that the cartel no longer exists in any meaningful sense. Beyond that it was irrelevant. Hedge funds were clearly caught off guard by the outcome since net ‘long’ positions on the futures markets were trading at a record high going into the meeting. Brent crude plunged 7pc to $41 a barrel in early Asian trading, but what is more revealing is how quickly prices recovered. Market dynamics are changing fast. Output is slipping all over the place: in China, Latin America, Kazakhstan, Algeria, the North Sea. The US shale industry has rolled over, though it has taken far longer than the Saudis expected when they first flooded the market in November 2014. The US Energy Department expects total US output to drop to 8.6m barrels per day (b/d) this year from 9.4m last year.

China is filling up the new sites of its strategic petroleum reserves at a record pace. Its oil imports have jumped to 8m b/d this year from 6.7m in 2015, soaking up a large part of the global glut. Some is rotating back out again as diesel: most is being consumed in China. Goldman Sachs says the twin effect of rising demand and supply disruptions across the world is bringing the market back into balance, leading to a “sustainable deficit” as soon as the third quarter. The inflexion point could come sooner than almost anybody expects if a strike this week in Kuwait drags on as oil workers fight pay cuts. The outage is already costing 1.6m b/d. Kuwait’s woes are the first taste of how difficult it will be for the petro-sheikhdoms to impose austerity measures or threaten the cradle-to-grave social contracts that keep a lid on dissent across the Gulf.

There is little doubt that Mohammad bin Salman, the deputy-crown prince and de facto ruler of Saudi Arabia, wanted an excuse to sabotage the Doha deal. He added a fresh demand that non-OPEC Norway should also limit output – a non-starter – as well as hardening the Saudi objection to Iran’s full return to pre-sanctions output. The calculus is that his country has the deepest pockets and will ultimately stand to gain by shaking out weaker players. This is a gamble. Saudi Arabia is running through $10bn of foreign exchange reserves a month to plug its fiscal deficit. The fixed riyal peg makes it much harder to roll with the budgetary punches as Russia is able to do with the floating rouble. Saudi Arabia is not as rich as often supposed. Per capita income is the same as in Greece. Standard & Poor’s has cut its credit rating twice to A-, and for good reason. The Saudis never built up a proper sovereign wealth fund in good times. Their reserve coverage is two-thirds less than in Kuwait, or Abu Dhabi.

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Decentralization goes global.

A New Map for America (NY Times)

These days, in the thick of the American presidential primaries, it’s easy to see how the 50 states continue to drive the political system. But increasingly, that’s all they drive — socially and economically, America is reorganizing itself around regional infrastructure lines and metropolitan clusters that ignore state and even national borders. The problem is, the political system hasn’t caught up. America faces a two-part problem. It’s no secret that the country has fallen behind on infrastructure spending. But it’s not just a matter of how much is spent on catching up, but how and where it is spent. Advanced economies in Western Europe and Asia are reorienting themselves around robust urban clusters of advanced industry. Unfortunately, American policy making remains wedded to an antiquated political structure of 50 distinct states.

To an extent, America is already headed toward a metropolis-first arrangement. The states aren’t about to go away, but economically and socially, the country is drifting toward looser metropolitan and regional formations, anchored by the great cities and urban archipelagos that already lead global economic circuits. The Northeastern megalopolis, stretching from Boston to Washington, contains more than 50 million people and represents 20% of America’s gross domestic product. Greater Los Angeles accounts for more than 10% of G.D.P. These city-states matter far more than most American states – and connectivity to these urban clusters determines Americans’ long-term economic viability far more than which state they reside in. This reshuffling has profound economic consequences.

America is increasingly divided not between red states and blue states, but between connected hubs and disconnected backwaters. Bruce Katz of the Brookings Institution has pointed out that of America’s 350 major metro areas, the cities with more than three million people have rebounded far better from the financial crisis. Meanwhile, smaller cities like Dayton, Ohio, already floundering, have been falling further behind, as have countless disconnected small towns across the country. The problem is that while the economic reality goes one way, the 50-state model means that federal and state resources are concentrated in a state capital – often a small, isolated city itself – and allocated with little sense of the larger whole. Not only does this keep back our largest cities, but smaller American cities are increasingly cut off from the national agenda, destined to become low-cost immigrant and retirement colonies, or simply to be abandoned.

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Taleb’s take-down of Noah Smith on Twitter has been epic.

No One Worries Enough About Black Swans (ZH)

Over the weekend, Bloomberg View’s quasi-economist wrote his latest laughable article, one which supposedly “explained” how “Everyone Worries Too Much About ‘Black Swans'”, which in addition to being a rambling, meandering stream of consciousness that as is regularly the case with this particular author, made little sense, sparked a Twitter feud with the Nassim Taleb, the person who made the concept of a Black Swan into a household name. We were therefore very amused to note that none other than former FX trader and fund manager, Richard Breslow, who also writes for Bloomberg, seemingly had an epileptic fit upon reading the abovementioned drivel and wrote his own scathing reaction from the perspective of an actual trader, a rection which not only threw up on every argument of the so-called economist’s logic, but on everything else that now is passed off simply as, well, “the new normal.” Here is Richard Breslow:

No One Worries Enough About Black Swans

Trading is a hard business. The world is becoming a more complicated place: a number out of China may do more to the price of your U.S. shares in a retailer than, well, U.S. retail sales. Yet creeping, dangerously, into the investment advice dialog is the argument that buying and holding no matter what the event is the winning strategy. If you ever needed a “past results don’t guarantee…” disclaimer it’s especially true now. It’s not surprising that such shallow reasoning is becoming commonplace. Sure beats staying late at the office doing cash-flow analysis. Bad things happen and the Fed will cut rates. Worked time and again. Presto chango, that financial crisis was a buying event, stupid.

It’s gotten much worse post the latest financial crisis, as it’s assumed asset prices are the main (sole) focus of the all powerful central banks. To buy (pun intended) into this you have to presuppose that Black Swan events are easily controllable episodes that last short amounts of time. That the authorities have unlimited firepower to counteract every natural and man-made disaster. Equally scary, academics as well as analysts have taken to arguing that investors are overestimating the probability of crisis events. You don’t need to be a Taleb or Mandelbrot to calculate that we have been having once in a hundred year events on a regular basis for the last thirty years. Did a crisis happen, if you made money?

This flawed logic argues not only buy every dip, but why waste money on hedges? It assumes unlimited deep pockets and the nerve of a non-sentient computer. Just go “all in.” Looking more like today’s world all the time. Portfolio theory thrown right out the window. Perhaps Harry Markowitz will have his Nobel revoked. A portfolio built to only withstand stress thanks to central bank intervention is one destined to blow-up spectacularly. The embedded flaw in this new logic is that central banks give investors perfect foresight. And nothing can go wrong. Re-read the Investment Process section of those prospectuses.

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“His words sounded like a request of a bailout for his countries’ saving industry and savers, in an ironic twist from previous bailout requests coming from the periphery.”

Credit Suisse: Germany’s Large Surplus Is The Problem, Not the ECB (BBG)

Forget about Greek debt sustainability. Another part of the continent is in need of relief—and this time, it’s a part of the core, not the periphery. That’s how Credit Suisse analysts led by Peter Foley characterized comments from German Finance Minister Wolfgang Schaeuble earlier this month. “The German Finance minister said record low interest rates were causing ‘extraordinary problems’ for German financial institutions and pensioners and risked undermining voters’ support for European integration,” writes Foley. “His words sounded like a request of a bailout for his countries’ saving industry and savers, in an ironic twist from previous bailout requests coming from the periphery.” A common criticism of unconventional central bank policy is that the ultra-low interest rates are too onerous for savers. At present, the average German bund yield is barely above zero:

Some analysts have expressed more than a modicum of sympathy for Schaeuble’s position, indicating that the ECB’s policy represents a form of John Maynard Keynes’ prophesied ‘euthanasia of the rentier’ and is not justified by its positive side effects. But instead of blaming the ECB, Foley suggests that German fiscal policymakers should pull the levers at their disposal to help remedy this situation. “Germany has continued to run a large current account surplus, and has increased it further–from 5.7% of GDP in 2009 to 8.5% in 2015,” wrote the analyst, noting that this surplus constituted the largest imbalance among major economies by this metric. “In an environment short on aggregate demand, Germany’s surplus is a problem, both globally and to the rest of the euro area.”

Foley recommends that the German authorities move to more aggressively reduce financial imbalances by increasing public investment, support private demand in certain soft segments, and implement more structural reforms. This would support Germany’s growth as well as that of its European partners, and as an added bonus, would address Schauble’s concerns about the woes of savers all in one fell swoop, the analyst concludes, by lessening the ECB’s need to support the currency union with unconventional stimulus.

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I see a hot summer.

Talks With Creditors To Resume But Athens Rejects Fresh Austerity (Kath.)

With talks set to resume on Tuesday with Greece’s international creditors, Athens said on Monday it has no intention of implementing austerity measures beyond the commitments it signed on to in the third bailout last July and plans to seek “allies” among European countries that believe now is not the time create political instability in Greece. Government spokeswoman Olga Gerovasili said on Monday that Athens will abide by the commitments it made last July, “nothing more, nothing less.” Her comments came after the IMF and the EU, which overcame their differences at the weekend over Greece’s budgetary outlook, took the wind out of the government’s sails by seeking another package of austerity measures to the tune of more than €3 billion (or 2% of GDP) in case there are target shortfalls over the next three years as a “guarantee” that Greece will achieve a primary budget surplus of 3.5% of GDP in 2018.

The government’s apparent defiance on Monday is a departure from its initial response at the weekend, when it implied that it could be open to discussion over the new measures – which relate to 2018 – as long as it received reassurances that it will get debt relief. Failure to wrap up the review could see negotiations drag on into June, which would put a further strain on the SYRIZA-led coalition’s fragile government, already struggling to stay afloat with a very slim majority of three deputies in Parliament. However, the new turn of events could foil the government’s ambitions, which include reaching a staff level agreement by Friday’s Eurogroup meeting in Amsterdam, to unlock vital tranches of rescue funds and pave the way for debt relief talks – a key demand by Greece.

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“..Simply by liking or sharing this article on Facebook or retweeting it on Twitter, you’re most likely flagging yourself as a potential renegade, revolutionary or anti-government extremist—a.k.a. terrorist.”

Every Move You Make Is Being Monitored (Whitehead)

“The way things are supposed to work is that we’re supposed to know virtually everything about what [government officials] do: that’s why they’re called public servants. They’re supposed to know virtually nothing about what we do: that’s why we’re called private individuals. This dynamic – the hallmark of a healthy and free society – has been radically reversed. Now, they know everything about what we do, and are constantly building systems to know more. Meanwhile, we know less and less about what they do, as they build walls of secrecy behind which they function. That’s the imbalance that needs to come to an end. No democracy can be healthy and functional if the most consequential acts of those who wield political power are completely unknown to those to whom they are supposed to be accountable.” – Glenn Greenwald

 

Government eyes are watching you. They see your every move: what you read, how much you spend, where you go, with whom you interact, when you wake up in the morning, what you’re watching on television and reading on the internet. Every move you make is being monitored, mined for data, crunched, and tabulated in order to form a picture of who you are, what makes you tick, and how best to control you when and if it becomes necessary to bring you in line. Simply by liking or sharing this article on Facebook or retweeting it on Twitter, you’re most likely flagging yourself as a potential renegade, revolutionary or anti-government extremist—a.k.a. terrorist. Yet whether or not you like or share this particular article, simply by reading it or any other articles related to government wrongdoing, surveillance, police misconduct or civil liberties is enough to get you categorized as a particular kind of person with particular kinds of interests that reflect a particular kind of mindset that might just lead you to engage in a particular kinds of activities.

Chances are, as the Washington Post reports, you have already been assigned a color-coded threat score—green, yellow or red—so police are forewarned about your potential inclination to be a troublemaker depending on whether you’ve had a career in the military, posted a comment perceived as threatening on Facebook, suffer from a particular medical condition, or know someone who knows someone who might have committed a crime. In other words, you might already be flagged as potentially anti-government in a government database somewhere—Main Core, for example—that identifies and tracks individuals who aren’t inclined to march in lockstep to the police state’s dictates. The government has the know-how.

As The Intercept recently reported, the FBI, CIA, NSA and other government agencies are increasingly investing in and relying on corporate surveillance technologies that can mine constitutionally protected speech on social media platforms such as Facebook, Twitter and Instagram in order to identify potential extremists and predict who might engage in future acts of anti-government behavior. Now all it needs is the data, which more than 90% of young adults and 65% of American adults are happy to provide.

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“This will go on until it can’t, which is what discontinuity is all about.”

The Elephant Cometh (Jim Kunstler)

The elephant’s not even in the room, which is why the 2016 election campaign is such a soap opera. The elephant outside the room is named Discontinuity. That’s perhaps an intimidating word, but it is exactly what the USA is in for. It means that a lot of familiar things come to an end, stop, don’t work the way they are supposed to — beginning, manifestly, with the election process now underway in all its unprecedented bizarreness. One reason it’s difficult to comprehend discontinuity is because so many operations and institutions of daily life in America have insidiously become rackets, meaning that they are kept going only by dishonest means. If we didn’t lie to ourselves about them, they couldn’t continue.

For instance the automobile racket. Without a solid, solvent middle-class, you can’t sell cars. Americans are used to paying for cars on installment loans. If the middle class is so crippled by prior debt and the disappearance of good-paying jobs that they can’t qualify for car loans, well, the answer is to give them loans anyway, on terms that don’t really pencil out — such as 7-year loans at 0% interest for used cars (that will be worth next to nothing long before the loan expires). This will go on until it can’t, which is what discontinuity is all about. The car companies and the banks (with help from government regulators and political cheerleaders) have created this work-around by treating “sub-prime” car loans the same way they treated sub-prime mortgages: they bundle them into larger packages of bonds called collateralized loan obligations.

These, in turn, are sold mainly to big pension fund and insurance companies desperate for “yield” (higher interest) on “safe” investments that ostensibly preserve their principal. The “collateral” amounts to the revenue streams of payments that are sure to stop because the payers are by definition not credit-worthy, meaning it was baked in the cake that they would quit making payments — especially when they go “under water” owing ever more money for junkers that have lost all value. It’s easy to see how that ends in tears for all concerned parties, but we “buy into it” because there seems to be no other way to a) boost the so-called “consumer” economy and b) keep the matrix of car-dependant suburban sprawl in operation. We took what used to be a fairly sound idea during a now-bygone phase of history, and perverted it to avoid making any difficult but necessary changes in a new phase of history.

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There is a very strange silence in western media about this.

Over 400 Migrants Drown On Their Way To Italy (Reuters)

Somalia’s government said on Monday about 200 or more Somalis may have drowned in the Mediterranean Sea while trying to cross illegally to Europe, many of them teenagers, when the boat they were on capsized after leaving the Egyptian shore. Italian President Sergio Mattarella had said earlier on Monday that several hundred people appeared to have died in a new tragedy in the Mediterranean, after unconfirmed reports spoke of up to 400 victims of capsizing near Egypt’s coast. More than 1.2 million African, Arab and Asian migrants have streamed into the EU since the start of last year, many of them setting off from North Africa in rickety boats that are packed full of people and which struggle in choppy seas.

“We have no fixed number but it is between 200 and 300 Somalis,” Somali Information Minister Mohamed Abdi Hayir told Reuters by telephone when asked about possible Somali deaths in the latest incident. Another Somali government statement, which offered condolences, put the number at “nearly 200”, saying they were mostly teenagers. It said the boat they were on had capsized after leaving Egypt. “There is no clear number since they are not traveling legally,” the minister said, adding that he understood the boat might have been carrying about 500 people, of which 200 to 300 were Somalis “and most of them had died”. He did not give a precise timing for the incident.

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Mar 142016
 
 March 14, 2016  Posted by at 9:45 am Finance Tagged with: , , , , , , , , ,  2 Responses »
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John M. Fox WCBS studios, 49 East 52nd Street, NYC 1948


Marc Faber: Central Banks Will End Up Buying All Financial Assets (CNBC)
There’s Only One Buyer Keeping the S&P 500’s Bull Market Alive (BBG)
The Central Bankers Are Crazy & Public is Out Of Its Mind (Armstrong)
The Effects of a Month of Negative Rates in Japan (BBG)
Bank Of Japan Scrambles To Find Positives In Negative Rates (Reuters)
There Is A Limit To Draghi’s Negative Interest Rate Madness (Mish)
The European Central Bank Has Lost The Plot On Inflation (FT)
A Thought Experiment On Budget Surpluses (Steve Keen)
Central Banks Beat Bitcoin At Own Game With Rival Supercurrency (AEP)
China Debt Swap Could Leave Banks In Capital Hole (Reuters)
China’s Next Bubble? Iron Ore Surges As Speculators Weigh In (AFP)
China’s Growth Target Is the Next Test for Its Central Bank (BBG)
Goldman: 4 Reasons Why Yuan Will Weaken vs Dollar (CNBC)
Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales (WSJ)
Key Formula for Oil Executives’ Pay: Drill Baby Drill (WSJ)
Dairy Industry In Race To Ruin (NZH)
Why Monsanto’s GMO Business Isn’t Growing in India (WSJ)
February Breaks Global Temperature Records By ‘Shocking’ Amount (Guardian)
Anti-Refugee And Pro-Refugee Parties Both Win In German Elections (Guardian)
Bulgaria Pushes To Be Part Of EU-Turkey Refugee Deal (AFP)

Don’t know that you would call this socialism, but with the limits to negative rates, it sounds plausible.

Marc Faber: Central Banks Will End Up Buying All Financial Assets (CNBC)

Central banks around the globe are pursuing strategies that will put all financial assets into government hands, perma-bear Marc Faber, told CNBC’s Squawk Box. He also took the opportunity to endorse Donald Trump’s bid for the U.S. presidency. Faber said central bank policies are essentially monetizing debt, particularly in Japan, where he claims the Bank of Japan is buying all the government bonds the treasury is issuing. He expects that asset buying by global central banks will only increase, even though he believes those policies aren’t working to stimulate the economy. “The central banks aren’t interested in what works, they’re interested in their own prestige. And they are so deep into it already and it didn’t work. They will increase the medicine,” said Faber, the publisher of The Gloom, Boom & Doom Report.

“Eventually, they’ll buy all the government bonds; they’ll buy all the corporate bonds, all the shares outstanding. Afterwards the housing market goes down, they’ll buy all the homes and then the government will own everything.” That’s the road to socialism, he said. “I could see a situation where at the end the government owns all the corporations and all the government bonds and then we are back into socialism, into a planning economy,” said Faber. To be sure, the Bank of Japan does not buy Japan government bonds (JGBs) directly from the treasury; it only purchases them in the open market. Since some entities, such as banks and insurers, are required to hold JGBs in their reserves, the BOJ is unlikely to acquire all of the bonds outstanding. The BOJ does, however, use its quantitative easing program to purchase select exchange traded funds (ETFs) in the open market.

The U.S. Federal Reserve began tapering its quantitative easing program in 2013 and officially ended it in late 2014. But last week, the ECB announced further easing measures, including expanding the size of its bond-buying program to 80 billion euros ($89.23 billion) worth of assets a month, to include corporate bonds. Faber expects these programs will only expand. “The governments in my view, with their agents the Federal Reserve and other central banks and with the treasury department, they will do anything not to let asset prices go down,” said Faber. “If the stock markets go down, I’m convinced all the central banks will buy stocks. All of them,” he said, noting that this is not without precedent, citing Hong Kong’s purchase of stocks during the Asian Financial Crisis in the late 1990s.

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Beware.

There’s Only One Buyer Keeping the S&P 500’s Bull Market Alive (BBG)

Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever. While past deviations haven’t spelled doom for equities, the impact has rarely been as stark as in the last two months, when American shares lurched to the worst start to a year on record as companies stepped away from the market while reporting earnings.

Those results raise another question about the sustainability of repurchases, as profits declined for a third straight quarter, the longest streak in six years. “Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins at Wilmington Trust.. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’

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“I asked John if he slept with Karen and got his admittal!” “I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”

The Central Bankers Are Crazy & Public is Out Of Its Mind (Armstrong)

The central bankers are simply crazy, not evil. They are trying to steer the economy by utilizing this simpleton theory that if you make something cheaper, someone will buy it. Japanese and German cars managed to get a major foothold in the U.S. because the quality of U.S. manufacturers collapsed, thanks to unions. The socialist battle against corporations forgot something important – the ultimate decision maker is the consumer. The last American car I bought in the 1970s simply caught on fire while parked in my driveway. Another friend bought a brand-new American car and there was a terrible rattle. When they took the door panel off, there was an empty bottle of Coke inside. Cheaper does not always cut it. Gee, shall we cheer if the stock market goes down by 90%? It would be a lot cheaper. Why does the same theory not apply?

Then we have the trading public. If the central bankers have gone crazy with this whole negative interest rate theory, then the public is simply out of their minds. The euro rallied because Draghi cut rates further, extended the stimulus another year, increased the amount by another 33%, and then declared rates would stay there for years to come. And these insane traders cheer. Unbelievable! They are celebrating the public admission of Draghi that all his efforts to date have failed, so let’s do even more of the same. And they love this nonsense? Negative interest rates have become simply a tax on saving money and the stupid traders and media writers love it. The Fed tries to raise rates and they say – NO! This is a stunning combination of admission and stupidity that one would expect from a pretty but clueless girl and her drunk college boyfriend who can’t say no to any girl: “I asked John if he slept with Karen and got his admittal!” “I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”

All they see is that lower interest rates “should” stimulate but ignore the fact that they never do. They are too stupid to grasp the fact that raising taxes cannot be offset by lower interest rates. People judge everything by the bottom-line and not some crazy theory that’s just stupid. A simple correlation study by a high school student in math class would prove this theory does not correlate to the expected outcome. And we cheer this insanity confirming our own overall stupidity and one is left wondering who is crazier? I suppose it is just that central bankers are crazy and the public, as well as the media, are just out of their minds.

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Bank hits.

The Effects of a Month of Negative Rates in Japan (BBG)

The Bank of Japan shocked markets in January with negative rates. The policy had immediate effects on financial markets, even before it actually started on February 16. Although most analysts don’t expect a change on Tuesday, they are expecting the central bank eventually to cut the rate further. Here’s a look at some effects of negative rates:

About 70% of government bonds have a yield of zero or below, meaning investors are paying to hold the debt. Pushing the yield curve down to make borrowing less costly and to encourage lending is the aim of the new policy, according to Governor Haruhiko Kuroda. However, those actions are hurting the bond market, with 69% of traders in February saying market function has declined compared with three months ago, according to a BOJ survey.

A 10-year, fixed-rate home loan carried a 0.8% rate last week, down from 1.05% before the introduction of the negative rate, according to a speech by Kuroda. Japan’s three biggest banks cut their deposit rate to a record low of 0.001%, meaning you receive 10 yen (9 cents) in income on a deposit of 1 million yen. All 11 companies running money-market funds stopped accepting new investments, citing the BOJ stimulus. They plan to return money to investors, the Nikkei newspaper reported, and money from the funds is moving to deposits, according to analysts at Deutsche Bank. Deposit returns are still positive, if negligible.

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“Bank shares fell sharply.”

Bank Of Japan Scrambles To Find Positives In Negative Rates (Reuters)

Bank of Japan officials have been scurrying to commercial banks to explain and apologize for its surprise adoption of negative interest rates in January, while Prime Minister Shinzo Abe has distanced himself from a decision that is proving unpopular with the public. Some officials close to the premier say it could cause a rift in his once close relationship with BOJ Governor Haruhiko Kuroda, whose radical stimulus measures have so far failed to lift Japan clear of two decades of deflation and stagnation. A government press relations official said there was nothing to add beyond remarks made publicly by Chief Cabinet Secretary Yoshihide Suga that no such rift exists. With the economy shrinking again and prices flat, Abe has already announced he will set up a panel to consider fresh budget spending to provide the stimulus that monetary policy has struggled to achieve.

The controversy over the negative rates move, which unlike his previous eye-catching policy steps was not welcomed by Japan’s stock market, comes even as Kuroda is on the verge of gaining greater control of the bank’s nine-member board. Two skeptics of his stimulus program are stepping down in the coming months. The diminishing returns from his preferred modus operandi of market-shocking measures will leave him little option but to revert to the drip-feed easing he derided in his predecessor Masaaki Shirakawa if inflation fails to pick up, some analysts say. “Given the confusion caused by the January move, I don’t think the BOJ will be able to cut rates again for the time being,” said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.

“The BOJ may instead expand asset purchases in small installments. That would be returning to the incremental approach of easing Kuroda dismissed in the past as ineffective.” Mandated by Abe to transform the risk-shy BOJ, Kuroda delighted markets and silenced skeptics within the bank by deploying a massive money-printing program, dubbed “quantitative and qualitative easing” (QQE), in April 2013. The Tokyo stock market soared and the yen tumbled, giving exporters a boost, and Japanese growth and inflation registered a pulse. He struck again in October 2014 with a big expansion of QQE, though the market boost was smaller, price rises were already moderating and the economy was taking a step back for every step forward. But the late-January rates decision failed to reverse a rise in risk-aversion that was hitting stocks and forcing up the yen, traditionally a safe haven in times of market stress. Bank shares fell sharply.

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Very clear and simple explanation of what the limits are.

There Is A Limit To Draghi’s Negative Interest Rate Madness (Mish)

On Thursday, ECB president Mario Draghi lowered the deposit rate on money parked at the ECB to -0.4% from -0.3%. Draghi also cut the main refinancing rate by 5 basis points to 0%. How low can he go? Is there a limit? There is indeed a practical limit to negative interest rate madness, and it’s likely we have already hit that limit. Let’s investigate why. All hell would break loose if rates fell lower than -1.0%, and perhaps well before that. This has to do with Euribor. Euribor is the rate offered to prime banks on euro-denominated interbank term loans. It is based on the average interest rates of about 50 European banks that lend and borrow from each other. [..]

How does Euribor place a Limit? Millions of mortgages in Europe are based on Euribor. The vast majority of mortgage rates in Spain and Portugal are based on Euribor. A huge number in Italy are based on Euribor. The typical mortgage loan in many Eurozone countries is Euribor plus 1%age point. For those on 1-month Euribor, the interest banks collect is no longer 1%. Instead, banks collect 0.70%. Servicing fees eat into that profit. If Euribor fell below -1.0% banks would have to pay customers interest on their mortgages rather than collect interest! This has already happened in some instances, primarily related to the Swiss Franc where rates are even lower.

Low rates eat into bank profits. Such concerns place a floor on negative rates. This is why Draghi announced he is finished cutting rates. The practical limit on negative interest rates in Europe may very well be -0.4%, right where we are now. Perhaps Draghi has a buffer of another -0.20% or so, but he is reluctant to use it. If 12-month Euribor rates go any lower, it will affect bank profits on every Euribor-based mortgage loan. Loans based on 1-month and 6-month Euribor are already impacted. Draghi is unable or unwilling to go further down the interest rabbit hole, but there are still lots of rabbit hole possibilities regarding various QE measures. Corporate bonds still offer Draghi wide possibilities for more economic madness.

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“The only reason you would want to make a long-term investment at these rates is that you do not believe in the target.”

The European Central Bank Has Lost The Plot On Inflation (FT)

Better than expected. How often have we heard these three words after a policy decision by the European Central Bank? My advice is to stop reading immediately whenever you see them. After all, what the markets expect to happen is entirely in the control of the ECB. The only thing that matters is the policy decision itself: the extent to which it can help achieve a target in this case an inflation rate of just under 2%. It may have been better than expected. But was it sufficient? The components of the decision an≠nounced on Thursday by Mario Draghi, ECB president, were: cuts in the three official interest rates; an increase in the volume of asset purchases; and more generous terms on targeted longer-term refinancing operations, a liquidity facility for banks pegged to the quantity of loans on their balance sheet.

The deposit rate, at which banks park their reserves at the central bank, is down from -0.3 to -0.4%. Mr Draghi hinted that we should not expect further cuts in that rate. And that line was the really big news of the day. He did not so much cut the rates as end the rate cuts. This is why the euro first fell then rose when investors realised this rate cut was not what it seemed. There is nothing fundamentally wrong with any of the decisions except that the ECB missed a trick. It could have widened the spread between short-term and long-term interest rates or, in financial parlance, it could have steepened the yield curve. One method would have been to make a bigger cut in the deposit rate and a smaller increase in the size of asset purchases. Since asset purchases reduce long-term rates, a small increase in purchases would have reduced them by less.

There are big problems with a flat yield curve. It is a nightmare for the banks because their business consists of turning short-term savings into long-term loans. When long rates are similar to short rates, banks find it hard to make money. They have to find other ways to generate income. Think also about the deeper meaning of a flat yield curve with all interest rates near 0%. Assume you trust Mr Draghi’s commitment to the inflation target. Would you, as a private investor, buy a 10-year corporate bond that yields 0.5%? If inflation really were to reach 2% within two or three years, you would surely make a loss. The only reason you would want to make a long-term investment at these rates is that you do not believe in the target. Long-term rates are low because people believe the ECB has lost the plot on inflation. I, too, believe this.

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Government surpluses kill economies.

A Thought Experiment On Budget Surpluses (Steve Keen)

While conservative parties—like the USA’s Republicans, the UK’s Tories, and Australia’s Liberals,—are more emphatic on this point than their political rivals, there’s little doubt that all major political parties share the belief that the government should aim to have low government debt, to at least balance its budget, and at best to run a surplus. As the UK’s Prime Minister put it in 2013:

“Would you want a government that is not targeting a surplus in the next Parliament, that just said no, we’re going to run overdrafts all the way through the next parliament,” he told BBC political editor Nick Robinson. “I don’t think that would be responsible. So the other parties are going to have to answer this question, ‘Do you think it’s right to have a surplus?’ I do.” (David Cameron: It’s responsible to target budget surplus”, BBC October 1 2013)

So is it “right to run a surplus”? Let’s consider this via a little thought experiment. The numbers are far-fetched, but they’re chosen just to highlight the issue: Imagine an economy with an GDP of $100 per year, where the money supply is just $1—so that $100 of output each year is generated by that $1 changing hands 100 times in a year. And imagine that this country’s government has accumulated debt of $100—giving it a debt to GDP ratio of 100%—and it decides to reduce it by running a surplus that year of 1% of GDP. And imagine that it succeeds in its target. What will this country’s GDP the following year, and what will happen to the government’s debt to GDP ratio? The GDP will be zero, and the government’s debt to GDP ratio will be infinite.

Huh? The outcomes of this policy are the opposite of its intentions: a policy aimed at reducing the government’s debt to GDP ratio increased it dramatically; and what is perceived as “good economic management” actually destroys the economy. What went wrong? The target of running a surplus of 1% of GDP means that the government collects $1 more in taxes than it spends. This $1 surplus of taxation over spending takes all of the money in the economy out of circulation, leaving the population with no money at all. The physical economy is still there, but without money, no-one can buy anything, and the economy collapses. The government can pay its debt down by $1 as planned, but the GDP of the economy is now zero, so the government debt to GDP ratio has gone from $100/$100 or 100%, to $99/$0 or infinity.

As I noted, the numbers are far-fetched, but the principle is correct: a government surplus effectively destroys money. A government surplus, though it might be undertaken with the noble aim of reducing government debt, and the noble intention of helping the economy to grow, will, without countervailing forces from elsewhere in the economy, increase the government’s debt to GDP ratio, and make the economy smaller (if the rate of turnover of money—it’s so-called “velocity of circulation”—is greater than one). This little thought experiment illustrates the logical flaw in the conventional belief that running a government surplus is “good economic management”: it ignores the relationship between government spending and the money supply. Unless the public finds some other way to compensate for the effect of a government surplus on the money supply, the surplus will reduce GDP by more than it reduces government debt.

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Provocative. Let’s see how this unfolds.

Central Banks Beat Bitcoin At Own Game With Rival Supercurrency (AEP)

Computer scientists have devised a digital crypto-currency in league with the Bank of England that could pose a devastating threat to large tranches of the financial industry, and profoundly change the management of monetary policy. The proto-currency known as RSCoin has vastly greater scope than Bitcoin, used for peer-to-peer transactions by libertarians across the world, and beyond the control of any political authority. The purpose would be turned upside down. RSCoin would be a tool of state control, allowing the central bank to keep a tight grip on the money supply and respond to crises. It would erode the exorbitant privilege of commercial banks of creating money out of thin air under a fractional reserve financial system.

“Whoever reacts too slowly to these developments is going to take it on the chin. They will lose their businesses,” said Dr George Danezis, who is working on the design at University College London. “My advice is that companies should play very close attention to what is happening, because this will not go away,” he said. Layers of middlemen in payments systems face a creeping threat across the nexus of commerce, stockbroking, currency trading or derivatives. Many risk extinction over time. “Deep in the markets there are dark pools buying and selling shares, and entities that facilitate that foreign exchange. There are Visa, Master, and PayPal. These are the sorts of guys that we are going to disrupt,” he said. University College drafted the plan after being encouraged by the Bank of England last year to come up with a radical design for a secure digital currency.

The Bank itself has an elite four-man unit grappling with the implications of crypto-currencies and blockchain technology. Central banks at first saw Bitcoin as a rogue currency and a threat to monetary order, but they are starting to glimpse ways of turning the new technology to their advantage. The findings of the University College team were delivered to the Network and Distributed System Security Symposium (NDSS) in San Diego, revealing for the first time what may be in store. Dr Danezis said a national pilot project could be up and running within eighteen months if a decision were made to launch such a scheme. The RSCoin is deemed more likely to gain to mass acceptance than Bitcoin since the ledger would remain exclusively in the hands of the central bank, with the ‘trust’ factor of state authority. It would have the incumbency benefits of an established currency behind it.

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“..any bank that swaps a corporate loan for equity of the equivalent value will need at least four times as much capital for that exposure.”

China Debt Swap Could Leave Banks In Capital Hole (Reuters)

China’s mooted debt-for-equity swap could leave the country’s banks in a capital hole. New rules are being proposed that would allow lenders to exchange bad loans for shares. That could ease pressure on ailing companies. But it would also put pressure on bank capital ratios. In developed economies, it’s not unusual for creditors of troubled companies to accept shares in exchange for loans. In China, however, banks are restricted from investing in non-financial companies, limiting their scope for restructuring ailing borrowers. The regulations being prepared would remove that constraint, Reuters reported on March 10, potentially clearing the way for a wave of debt conversions. Some exchanges are already happening: Huarong Energy, a troubled shipbuilder, announced on March 8 it would give creditors a 60% stake in the company in return for forgiving debt worth $2.2 billion.

Yet while such swaps help overindebted Chinese companies, they are less positive for banks. True, the industry’s reported ratio of non-performing loans – which rose to 1.7% of total lending at the end of 2015 – will fall. But capital requirements will also rise as banks recognize more losses. Under China’s interpretation of international Basel rules, corporate loans typically attract a risk weighting of 100% for capital purposes. But the risk weighting for equity investments is at least 400%, and can be as high as 1250%, according to a 2013 assessment of Chinese regulations by the Bank for International Settlements. In other words, any bank that swaps a corporate loan for equity of the equivalent value will need at least four times as much capital for that exposure.

This calculation also assumes that banks have already written down troubled loans to their correct value. In reality, that’s unlikely to be the case. So-called “special mention” loans, which are wobbly but not yet officially classed as bad, accounted for a further 3.8% of overall lending at the end of last year. The true level of non-performing debt is probably much higher. The result is that any large-scale swap of debt-for-equity in the country will leave lenders short of capital. As the largest shareholder of Chinese banks, the government would have to step in. Though that might be one way to start solving China’s debt problem, other investors in the banks would feel the pain.

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Casino.

China’s Next Bubble? Iron Ore Surges As Speculators Weigh In (AFP)

With a huge global steel glut and slowing demand in China, an enormous recent spike in the price of iron ore has left analysts scratching their heads, with some even claiming a flower show might be to blame. But observers say the extraordinary movements for one of the world’s basic bulk commodities have been fuelled by something far more prosaic than daisies and daffodils – simple speculation. The spot price for iron ore – the key material for steel – jumped 20% on the Dalian Commodity Exchange on Monday. It closed at $57.35 per tonne on Friday, up nearly 33% so far this year. But the vast majority of trades on the exchange do not reflect real-world transactions: the iron ore futures volume on Wednesday alone represented an underlying 978 million tonnes of the commodity – more than China’s entire imports last year.

“Steel prices are in a crazy phase now. Everyone’s emotions are high and pushing up prices is the norm,” Chen Bingkun at Minmetals and Jingyi Futures told AFP. “The price rise is also caused by speculation.” Only part of the real global iron ore trade passes through exchanges such as Dalian or Singapore, the other main hub for derivatives based on the commodity. Instead, the business is dominated by a small group of producers, including Anglo-Australian giants Rio Tinto and BHP Billiton, Brazil’s Vale and Fortescue Metals of Australia. They all compete to sell to steelmakers in China and elsewhere on longer-term contracts, often priced according to indices calculated by specialist trade publications, leaving limited liquidity for the spot market and heightening its volatility.

Chinese analysts and industry officials have cited a mix of factors driving the speculation that fuelled the price surge, including hopes for higher government spending on steel-hungry infrastructure after the economy grew at its slowest pace in a quarter of a century last year. The beginning of warmer weather and the end of the Lunar New Year holiday have restarted construction projects and steel production. Even an upcoming flower show in the Chinese steel hub of Tangshan has been named as a factor, with local steel companies expected to suspend output to ensure blue skies for the event – which could prompt them to step up production before the halt. China produces more steel than the rest of the world combined, and in the long term, cuts of up to 150 million tonnes in its capacity over five years could ultimately support steel prices, although their impact on iron ore costs is less clear.

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“If market participants have been worried about China since June-July 2015, they have not seen the real thing yet.”

China’s Growth Target Is the Next Test for Its Central Bank (BBG)

China’s central bank chief oozed calm in an annual press briefing in Beijing Saturday, supported by weeks of composure in markets as investor anxiety over the nation’s currency policy eased. How long the lull lasts will depend on how policy makers manage a balancing act made tougher by a weaker-than-anticipated start to the year for the world’s No. 2 economy. After People’s Bank of China Governor Zhou Xiaochuan spoke at the country’s annual gathering of the legislature, data showed an “alarming” failure of growth to respond to recent stimulus, Bloomberg Intelligence analysts Tom Orlik and Fielding Chen concluded. The weakening momentum seen in industrial output and retail sales highlight skepticism about the Communist Party’s goal of achieving average growth of at least 6.5% in its five-year plan to 2020.

Gavekal Dragonomics calls the target “incredible.” JPMorgan says a sustainable pace is “much lower” than what officials are targeting for this year. The danger is that to meet the leadership’s objective, which for 2016 is an expansion of 6.5% to 7%, Zhou will need to loosen monetary policy faster and further. That could intensify depreciation pressures on the yuan, which has benefited in recent weeks from a drop in the dollar. Looser monetary policy, along with the expanded fiscal deficit pledged by Premier Li Keqiang’s cabinet, would quicken a buildup of debt that already amounts to almost 2.5 times GDP. “This is a risky target for the next five years as it means the continuation of super-loose monetary and fiscal policy,” said Chen Zhiwu, a finance professor at Yale University, and a former adviser to China’s State Council.

“If market participants have been worried about China since June-July 2015, they have not seen the real thing yet.” The data released Saturday showed industrial production rose 5.4% in the first two months of the year from a year before, the weakest reading since the 2009 global recession. That’s even before policy makers have much to show for a campaign to shut down excess capacity in the unproductive state-owned sector. Retail sales also slowed, while the value of homes soared versus a year ago with property sales in some mid-sized cities doubling. Fixed-asset investment exceeded economists’ estimates. Speaking hours before the data releases, Zhou, 68, warned banks about increased credit risk and rising real estate prices in the biggest cities. He sought to ease concerns over volatility in the stock and currency markets while saying meeting the five-year growth target would not require a big stretch.

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China is going to get called on its illusions.

Goldman: 4 Reasons Why Yuan Will Weaken vs Dollar (CNBC)

The Chinese yuan, the source of much anguish in financial markets from Sao Paulo to Singapore since last summer, is enjoying some respite. The currency, also known as renminbi, is currently trading near its best levels against the dollar this year at 6.5241, having slumped to 6.5800 earlier in 2016. Efforts by Chinese policymakers to shore up confidence in the economy have helped somewhat. Capital outflows, a big factor behind the weakness in the currency and the subsequent depletion of China’s foreign exchange reserves as the People’s Bank of China intervened to prevent the yuan from falling more, also appear to have eased. But Goldman Sachs still expects the currency to weaken to 7 against the greenback by the end of the year and has listed four reasons behind its call. Here they are:

Debt overhang The sharp surge in credit in recent years has led to an accumulation of debt in the economy that will likely imply interest rates will stay lower for longer, Goldman Sachs estimates. The softer monetary policy should add to depreciation pressures on the currency.

Economic slowdown China’s once-runaway export growth has slowed (shipments fell at their fastest pace since 2009 in February) as the currency has appreciated on a trade-weighted basis over many years. Overall economic growth was 6.9% in 2015, sturdy by global standards but the slowest pace in China in 25 years. Policymakers may now have to tweak the currency to counter the slowdown in the economy, Goldman reckons.

Preference for weaker currency According to Goldman Sachs, the managed depreciation of the yuan in December and the early weeks of 2016 suggests “a degree of bias” on the part of the authorities for a weaker currency. Goldman cites a recent interview given by PBOC Governor Zhou Xiaochuan to Caixin magazine, in which Zhou suggested that the current yuan level against the dollar did not represent a “reasonable and balanced” level for the currency.

Policy divergence Goldman’s U.S. team expects the U.S. Federal Reserve to raise interest rates three times this year, while forecasting economic growth to be above the trend level. An increase in U.S. interest rates coupled with a downward trend in Chinese monetary policy will imply outflow pressures and lead to yuan weakness, Goldman says. The trend for further softness in the yuan has raised speculation on policy options for the PBOC, including a one-off devaluation in the yuan or a more steady weakness. Goldman believes the second option is more likely as a chunky one-off devaluation would raise doubts over the credibility of Chinese policymakers and draw political attention at a sensitive time.

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This is going to go so wrong.

Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales (WSJ)

To understand how far the U.S. auto business has been reaching for new customers, consider the early performance of a bond issue called Skopos Auto Receivables Trust 2015-2. The bonds were built out of subprime auto loans and sold in November. Through February, about 12% of the underlying loans were at least 30 days past due, a third of which were more than 60 days delinquent. In another 2.6% of loans, borrowers had filed for bankruptcy or the vehicles had been repossessed. Those borrowers are at the outer fringe of the auto market. Still, the high level of missed payments for loans made so recently is a warning sign for an industry that needs every customer it can get to keep sales increasing at a record pace.

The early delinquency rates seen in the debt issue from Skopos Financial, a Dallas-based lender that specializes in loans to people with weak or no credit histories, are in line with those for several similar bond deals from other lenders around the same time. About 12% of the loans backing bonds sold in November by Exeter Finance, another Dallas-based subprime lender, were more than 30 days delinquent through February, according to the company. A spokeswoman said delinquency rates came down from the previous month. Loan payments have been slipping as well for the broader group of subprime borrowers who make up a big slice of the auto market. The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.

The rate of missed payments is higher for loans made in more recent years, a reflection of more liberal credit standards and the larger number of deals from lenders serving less creditworthy customers, according to Standard & Poor’s Ratings Services. Investors are becoming concerned. Flagship Credit Acceptance, another small lender, recently had to offer higher yields than expected to sell bonds backed by subprime auto loans. Flagship declined to comment. “What’s driving record auto sales is not the economy, but record auto lending,” said Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York and who has bearish bets on some auto lenders. He said demand for auto debt has led lenders to systematically loosen underwriting standards, which he predicts will result in higher loan delinquencies.

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Paid to harm your own company. Perfect.

Key Formula for Oil Executives’ Pay: Drill Baby Drill (WSJ)

Markets have been waiting for U.S. energy producers to slash output during a period of depressed crude prices. But these companies have been paying their top executives to keep the oil flowing. Production and reserve growth are big components of the formulas that determine annual bonuses at many U.S. exploration and production companies. That meant energy executives took home tens of millions of dollars in bonuses for drilling in 2014, even though prices had begun to fall sharply in what would be the biggest oil bust in decades. The practice stems from Wall Street’s treatment of such companies’ shares as growth stocks, favoring future prospects over profitability. It has helped drive U.S. energy producers to spend more unearthing oil and gas than they make selling it, energy executives and analysts say.

It has also helped fuel the drilling boom that lifted U.S. oil and natural-gas production 76% and 31%, respectively, from 2009 through 2015, pushing down prices for both commodities. “You want to know why most of the industry outspent cash flow last year trying to grow production?” William Thomas, CEO of EOG Resources, said recently at a Houston conference. “That’s the way they’re paid.” Lately, though, some shareholders are asking companies to reduce connections between pay and production, saying such incentives don’t make sense since abundant supplies have caused commodity prices to crash. Signs that oil production may finally be easing helped push up crude prices Friday to their highest levels of the year. The International Energy Agency said in a monthly report that output in some regions was falling faster than expected and that prices may have “bottomed out.”

A separate report said the number of rigs drilling for oil and natural gas in the U.S. fell to a record low. Still, CEO pay and production are likely to remain a flash point for investors because few wells are profitable even at these higher crude prices. The persistence of U.S. production in the face of such economics has been one of the biggest puzzles in the energy market. Members of the Organization of the Petroleum Exporting Countries have increased production, betting that U.S. energy producers would curtail drilling or be forced out of business. But even as oil prices began their plunge in the second half of 2014, many companies kept drilling.

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New Zealand is so toast. Land prices are doomed, and home prices will follow a swell as corporate defaults.

Dairy Industry In Race To Ruin (NZH)

Imagine being approached with an investment proposal that went something like this: how about you borrow almost $30 billion to invest in something that produces a commodity that swings in price by more than 50% over a two-year cycle? How about you invest in producing that commodity on the idea that demand has moved structurally higher, but pretty much ignores what other suppliers of that commodity might do? You would probably be more than a little sceptical. Yet that was the proposition New Zealand Inc essentially agreed to invest in over the past decade. This is the story of the dairy boom that has now bust, leaving dairy farmers holding debts of more than $40b and producing a commodity that is losing them $1.6b a year. Those debts are worth more than three times the income produced by that land and up from just $11.3b as recently as 2003.

The Reserve Bank has forecast that if this week’s payout cut to $3.90/kg is extended into next season, and then recovers only slowly, then 44% of those loans would be non-performing. That doesn’t necessarily mean the banks would kick 44% of farmers off their land – but it does mean the banks face profit drops. No other business leader in any other industry would borrow three times the income to build a business that produced something they couldn’t control the price of. Robert Muldoon was ridiculed and condemned for borrowing and betting big on a continued high price for oil when he invested in petro-chemical plants at Motonui, Waitara and Kapuni, and indirectly on the Clyde Dam and Tiwai Point expansion. This sort of investment decision makes no sense. Unless, of course, you weren’t actually borrowing the money purely to produce cashflow from the sale of that commodity.

It makes perfect sense if you are borrowing money to push up the value of land, the gains from which are tax-free. Most farmers would vehemently deny they are farming for tax-free capital gains, and most hold their land for multiple decades and often for multiple generations. But it is simply not credible to say that land value is irrelevant in their decision-making. It’s certainly relevant in the decision-making of the banks. Finance Minister Bill English put it best this week when he said it was time for farmers to be more like proper business investors. “This is an industry where they’ve had a focus on growing equity and growing land values for quite a long time now. It’s going to be a significant adjustment to getting back to the core business of effective farming for cash flow. “They are going to see land values drop. That is pretty much certain.”

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“Despite dozens of biotech-food-crop trials in India, the country has approved none for commercial cultivation.”

Why Monsanto’s GMO Business Isn’t Growing in India (WSJ)

Genetically modified organisms, or GMOs, grow in an estimated 97% of India’s cotton fields and have helped India by some measures become the fiber’s top global producer. But after a decade of Monsanto’s efforts with Mahyco to win Indian-government approval for biotech food crops, seeds for plants like Mr. Char’s remain in limbo, stymied by environmentalist opposition, farmer skepticism and bureaucratic inertia. Despite dozens of biotech-food-crop trials in India, the country has approved none for commercial cultivation. “What greater case study in terms of food security than a country that will soon have more people than any other country in the world?” said Robert Fraley, Monsanto’s chief technology officer. “To see a country that has the potential and intellectual ability to be a leader in these biotech advances, to be stymied politically, I think it’s a tragedy.”

India’s Agriculture Minister, Radha Mohan Singh, said the government was waiting for India’s Supreme Court to rule in a case opposing genetically modified food crops before deciding on their commercial cultivation. Meanwhile, Monsanto’s established cotton business in India faces new threats, including new government price controls around seed genetics and an antitrust probe into pricing practices, prompting Monsanto on March 4 to warn that it could withdraw its biotech crop genes from the country. Monsanto’s experience is part of a broader backlash against genetically engineered crops from a mix of environmentalists, consumer groups and nationalism thwarting the technology’s expansion after years of growth. Biotech-crop opponents say they can damage the environment, burden poor farmers with high-price seeds and potentially harm health.

GMO proponents reject such assertions, and the U.S. Food and Drug Administration, World Health Organization and European Commission have concluded GMOs are safe to eat. Yet pushback has swept the world. More than half of European Union countries have moved to bar GMO cultivation. Russia hasn’t approved any biotech crops. China, which allows cultivation of some, isn’t expected to approve new ones soon. In the U.S., where GMO crops are widespread, some food brands are stripping GMOs from their products. The backlash has slowed global-sales growth of genetically modified seeds. Sales grew 4.7% to $21 billion in 2014, compared with 8.7% growth in 2013 and average annual growth of 21% from 2007 through 2012, according to research firm PhillipsMcDougall.

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Looks insane.

February Breaks Global Temperature Records By ‘Shocking’ Amount (Guardian)

Global temperatures in February smashed previous monthly records by an unprecedented amount, according to Nasa data, sparking warnings of a climate emergency. The result was “a true shocker, and yet another reminder of the incessant long-term rise in global temperature resulting from human-produced greenhouse gases”, wrote Jeff Masters and Bob Henson in a blog on the Weather Underground, which analysed the data released on Saturday. It confirms preliminary analysis from earlier in March, indicating the record-breaking temperatures. The global surface temperatures across land and ocean in February were 1.35C warmer than the average temperature for the month, from the baseline period of 1951-1980.

The global record was set just one month earlier, with January already beating the average for that month by 1.15C above the average for the baseline period. Although the temperatures have been spurred on by a very large El Niño in the Pacific Ocean, the temperature smashed records set during the last large El Niño from 1998, which was at least as strong as the current one. The month did not break the record for hottest month, since that is only likely to happen during a northern hemisphere summer, when most of the world’s land mass heats up. “We are in a kind of climate emergency now,” Stefan Rahmstorf, from Germany’s Potsdam Institute of Climate Impact Research and a visiting professorial fellow at the University of New South Wales, told Fairfax Media. “This is really quite stunning … it’s completely unprecedented,” he said.

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Polarization

Anti-Refugee And Pro-Refugee Parties Both Win In German Elections (Guardian)

The anti-refugee party, Alternative für Deutschland (AfD), has shaken up Germany’s political landscape with dramatic gains at regional elections, entering state parliament for the first time in three regions off the back of rising anger with Angela Merkel’s asylum policy. But, in a sign of the increasingly polarised nature of Germany’s political debate, pro-refugee candidates also achieved two resounding victories in the elections – the first to take place in Germany since the chancellor embarked on her flagship open-doors approach to the migration crisis. Merkel’s Christian Democrat party suffered painful defeats to more left-leaning parties in two out of three states, one of them Baden-Württemberg, a region dominated by the CDU since the end of the second world war. News weekly Der Spiegel described the result as a “black Sunday” for the conservatives.

The CDU also failed to oust the incumbent Social Democrats in Rhineland-Palatinate. But it was the breakthrough of the AfD – a party that did not exist a little more than three years ago and last year was on the verge of collapse – that was arguably most striking. In Saxony-Anhalt in the former east Germany, the party with links to the far-right Pegida movement had gained 24.4%, according to initial exit polls, thus becoming the second-biggest party behind the CDU. In both Rhineland-Palatinate and Baden-Württemberg, it appeared to have gained 12% and 15%. Germany’s rightwing upstarts appeared to have benefited from an increased voter turnout across the country. In all three states, the AfD gained most of its votes from people who had not voted before, rather than disillusioned CDU voters. In Saxony-Anhalt, as many as 40% of AfD voters were previously non-voters, while 56% of AfD voters in the state said they had opted for the party because of the refugee crisis, according to one poll.

[..]If the AfD’s strong showing reflected deep hostility to Merkel’s plan, however, other results last night told a different story. [..] The politician who won in Baden-Württemberg’s, Green state premier Winfried Kretschmann, had passionately defended the German chancellor’s open-borders stance, stating in one day that he was “praying every day” for her wellbeing. With a centrist, pro-business party programme that defied orthodox ideas of what an environmental party should stand for, the Green party in Germany’s southwest managed to come top with 30.5% in a state. Remarkably, 30% of voters who had switched from Christian Democrat to Green in the state said they had done so because of the refugee debate. “In Baden-Württemberg we have written history”, Kretschmann told reporters after the first exit polls.

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More closed borders.

Bulgaria Pushes To Be Part Of EU-Turkey Refugee Deal (AFP)

Bulgarian Prime Minister Boyko Borisov pressed on March 12 to have his country’s borders protected as part of a proposed EU-Turkey deal aimed to stop the flow of migrants to Europe. Bulgaria has so far remained on the sidelines of the EU’s worst migration crisis since WWII after it built a 30-kilometre razor wire fence in 2014 and sent 2,000 border police to guard its 260-kilometre (160-mile) border with Turkey. But the EU member fears that it could become a major transit hub after countries along the main western Balkan migrant trail shut their borders this week. All countries on the frontline should be able to rely on support from the EU for protection of the EU’s external borders,” Borisov told visiting Austrian Interior Minister Johanna Mikl-Leitner and Austrian Defense Minister Hans Peter Doskozil in Sofia.

Borisov said he had sent a letter to that effect to EU President Donald Tusk on March 11. “Bulgaria insists that the talks between the EU and Turkey for solving the migration problem should also include Bulgaria’s land borders with Turkey and Greece as well as the Black Sea border between the EU and Turkey,” the letter read. [..] Bulgarian media reported on Saturday that Borisov was ready to block the deal if Turkey only agreed to stop the flow of migrants to the Greek islands in the Aegean Sea. Mikl-Leitner and Doskozil, who were due to visit the Bulgarian-Turkish border later on Saturday, expressed their “full support” for Borisov’s demands. “What applies to Greece also has to apply to Bulgaria,” Doskozil said. Mikl-Leitner meanwhile pledged to host a police conference on border security and human traffickers with the countries along the western Balkan migrant trail, including Germany and Greece.

Read more …

Feb 252016
 
 February 25, 2016  Posted by at 9:28 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle February 25 2016
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DPC “Ice fountain on Washington Boulevard, Detroit” 1906


China Does Not Have a Trade Surplus (Balding)
China Equities Plunge 6.4% as Volatility Reignites (BBG)
Rush of Corporate Bonds Inflames Worries About China’s Debt (WSJ)
PBOC Says China Can Handle Raising Budget Deficit to 4% (BBG)
Why China and the World Needs a New Plaza Accord (Barron’s)
Lew Says Don’t Expect ‘Crisis Response’ From G20 Meeting (BBG)
IMF Warns The Global Economy Is “Highly Vulnerable” (BBC)
Dear Janet, Mario, & Haruhiko – It’s Time For The ‘C’ Word (ZH)
Bundesbank Chief Warns Of Zero-Rate Impact On Banks (Reuters)
Oil Slump To Hit US Investment Banks’ Capital Market Revenue (BBG)
Biggest Wave Yet of U.S. Oil Defaults Looms as Bust Intensifies (BBG)
North Dakota’s Largest Oil Producer Suspends All Fracking (Reuters)
Big Banks and the White House Are Teaming Up to Fleece Poor People (FP)
Spanish Government Pact Dealt Fatal Blow Hours After Announcement (Reuters)
How America Made Donald Trump Unstoppable (Matt Taibbi)
Hungary To Hold Referendum On EU Plan For Migrant Quotas (Reuters)
German Government Expects Arrival Of 3.6 Million Refugees By 2020 (Reuters)
Greek Authorities Scramble To Find Shelter For Refugees (Kath.)
Tsipras: “We Will Not Allow Greece To Turn Into A Warehouse Of Souls” (Afp)

It’s all fake. Great piece.

China Does Not Have a Trade Surplus (Balding)

[..] Misinvoicing contributes a not entirely insignificant share to unrecorded capital inflows and outflows. However, Chinese authorities have become much more aware and concerned about these issues and gone through various waves of cracking down over this issue. Furthermore, the aggregate sums here are not enough to move the RMB and cause the currency pressures we are currently seeing. In fact, misinvoicing is merely the beginning of the financial flow problems in trade with Chinese innovation taking it a step further. China, as a country with strict currency controls, maintains records on international financial transactions sorted by a variety of categories. For instance, there is data on payment or receipt of funds by current or capital account, goods or service trade, and direct or portfolio investment.

For our purposes, this allows us to compare in a relatively straightforward manner, how international payments are flowing compared to the customs reported flow of goods. The differences in key data surrounding trade data is illustrative. Chinese Customs data reports goods exports valued at $2.27 trillion, with SAFE reporting goods exports of $2.14 trillion but Chinese banks report receipts of $2.37 trillion. In other words, funds received for exports of goods and services or about $100 billion higher than reported. At 4-11% higher than the Customs and SAFE reported values this is slightly elevated, but given expected discrepancies in the mid-single digits, this number is slightly elevated but not extreme. The differences between import and international payment data, however, is astounding.

Whereas Chinese Customs reports $1.68 trillion and SAFE report $1.57 in goods imports into China, banks report paying $2.55 trillion for imports. In other words, funds paid for imported goods and services was $870-980 billion or 52-62% higher than official Customs and SAFE trade data. This level of discrepancy is extreme in both absolute and relative terms and cannot simply be called a rounding error but is nothing less than systemic fraud. If we adjust the official trade in goods and services balance to reflect cash flows rather than official headline trade data as reported by both Customs and SAFE, the differences are even worse.

According to official Customs and SAFE data, China ran a goods trade surplus of $593 or $576 billion but according to bank payment and receipt data, China ran a goods trade surplus of only $128 billion. If we include service trade, the picture worsens considerably. China via SAFE trade data reports a $207 billion trade deficit in services trade. Payment data reported via SAFE actually reports about $42 billion smaller deficit of $165 billion. In other words, the supposed trade surplus of $600 billion has become a trade in goods and services deficit of $36 billion. Expand to the current, through a significant primary income deficit, and the total current account deficit is now $124 billion.

Read more …

It’s all about the yuan by now, I’m afraid.

China Equities Plunge 6.4% as Volatility Reignites (BBG)

China’s stocks tumbled the most in a month as surging money-market rates signaled tighter liquidity and the offshore yuan declined for a fifth day. The Shanghai Composite Index sank 6.4% at the close, with about 70 stocks falling for each that rose. Industrial and technology companies led losses. The overnight money rate, a gauge of liquidity in the financial system, climbed the most since Feb. 6. The plunge in equities underscores the challenge for China’s policy makers as they seek to project an image of stability in the nation’s financial markets as the economy slows.

Finance chiefs and central bankers from the Group of 20 will meet in Shanghai on Friday, while the annual meeting of the legislature begins in Beijing next week. The return of volatility is also a test for China’s new top securities regulator, who took over on the weekend after his predecessor was removed amid criticism of mismanagement. “The market is in a quite fragile state when everyone scrambles for an exit,” said Central China Securities Shanghai based strategist Zhang Gang.“None of the news in the market is sufficient enough to trigger such a slump.” Today’s declines almost erased a 10% rebound in the benchmark equity index from a January low. The Shanghai Composite has fallen 23% this year, the world’s worst performer after Greece. Volumes on the gauge were 43% above the 30-day average.

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The numbers are stunning.

Rush of Corporate Bonds Inflames Worries About China’s Debt (WSJ)

A surge of corporate bonds is adding to China’s already-high debt levels, amplifying risks to the economy as Beijing persistently encourages borrowing to fuel growth. The new rounds of corporate funding deepen anxieties among investors and analysts that China’s debt, already expanding at twice the pace of its gross domestic product, is feeding a nascent credit crisis that could further set back the country’s efforts to shift the economy to a slower, consumption-led model. Corporate debt now amounts to 160% of China’s gross domestic product, compared with 98% in 2008, according to Standard & Poor’s Ratings Services. The level in the U.S. is 70%. Outstanding corporate bonds in China last year surged 25% to 14.6 trillion yuan ($2.2 trillion), according to the central bank.

Worries over China’s rapid accumulation of credit, up 12.4% last year, are compounded by signs that not much of it is creating new wealth. State policy is directing the boom in corporate bonds, which can be 15% cheaper for borrowers than benchmark loans, meaning issuers can use them to favorably reschedule loans. The government says the push is part of a plan to have companies bear more direct risk as banks struggle with rising bad loans, and there is room for more. “This is in accordance with China’s reform direction,” Wang Yiming, vice minister at the Development Research Center of the State Council, the national cabinet’s think tank, said last week. “In the past, we’ve primarily relied on bank loans. We want to gradually increase direct financing.”

China has long sought to deepen its capital markets by developing debt and equity financing. Banks have traditionally accounted for about 70% of all lending in China. As souring loans began to pile up two years ago, regulators looked to the stock and bond markets to spread credit risk in the system, lower funding costs and expand financing channels for companies. Hopes to use equity markets as a key fundraising tool fell apart as stock prices collapsed last summer, but regulators still view the bond market as a viable channel to restructure risk. “In 2016, we want to adequately fulfill the financing function of the corporate bond market to further promote reform, steady growth and a bigger role for risk management,” the National Development and Reform Commission said in a statement on Wednesday.

Also on Wednesday, China’s central bank moved to make it easier for qualified foreign institutional investors to buy bonds on China’s interbank market, where issues from the Ministry of Finance and large government entities are traded. The move follows similar permission granted to some central banks and sovereign wealth funds last July and comes as China seeks to encourage use of the yuan to continue liberalizing its currency system. To accomplish its goal, analysts say, China needs to attract investment into its bonds, in particular by global institutional investors. [..] As the cost of debt servicing grows, capital is diverted from productive investment to interest payments. Research firm Gavekal Dragonomics estimates China now spends around 20% of its GDP just servicing its corporate and household debt.

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And why not…

PBOC Says China Can Handle Raising Budget Deficit to 4% (BBG)

China is able to increase its budget deficit to 4% of gross domestic product as the government seeks to cut corporate taxes, central bank officials wrote in an article on the Economic Daily’s website. Low levels of government debt, “relatively fast” economic growth and abundant state-owned assets give the country more capacity to sell more bonds, according to an article written by People’s Bank of China officials including Sheng Songcheng, head of the statistics department. China could maintain a debt-to-GDP ratio of up to 70% at end-2025 if the deficit were raised to 4%, the officials said.

China is looking to fiscal policy to help it grapple with the slowest growth since 1990. The deficit is likely to rise this year from 2.3% of GDP in 2015, the official Xinhua News Agency recently reported, citing a statement after a fiscal work conference. Vice Finance Minister Zhu Guangyao said last year the “red line” of 3% for the deficit-to-GDP ratio and 60% for the debt-to-GDP ratio should be revisited after lessons learned from the financial crisis. The article in the official Economic Daily publication comes ahead of a gathering of the nation’s top lawmakers early next month, when the year’s economic plans and targets will be agreed upon and announced.

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Doesn’t look like it’s going to happen, though. Unless they’re all just faking the denials.

Why China and the World Needs a New Plaza Accord (Barron’s)

Perhaps it’s time for a new Plaza Accord that focuses on Chinese imbalances in ways that calm world markets. The most obvious expression of those vulnerabilities is an overvalued yuan. Barclays speaks for many when it says the No. 2 economy needs a radical devaluation. Perhaps not in the 25%% neighborhood analysts Ajay Rajadhyaksha and Jian Chang suggest, but sizable enough to stimulate growth and keep pace with Beijing’s depleting currency-reserve holdings. Yet doing so could devastate jittery world markets – and President Xi Jinping knows it. The last thing Xi wants is to trigger Lehman Brothers 2.0. The Group of Seven nations could serve up a face-saving solution: a globally authorized yuan drop organized in a cooperative, transparent and orderly manner.

The model is what transpired 30 years ago in the New York hotel owned by U.S. presidential wannabe Trump. On Sept. 22, 1985, the then G-5 nations – France, Germany, Japan, the U.K. and the U.S. – plotted an unprecedented intervention in currency markets. One can argue Japan came out on the losing end of a deal to boost the yen, but traders marveled at the show the unity and relative competence of the moment. Arguably, it’s never been duplicated, even after the group expanded to include Canada and Italy to become the G-7. Of course, we live in more of a G-20 world nowadays – an admission that without Brazil, China, India, Saudi Arabia and Turkey at the table, many problems are intractable. But too many G-20 members fear retribution and won’t speak truth to Chinese power. That’s why the G-7 should quietly hatch a devaluation plan with Beijing.

If this sounds like a non-starter, consider the alternative: on an unsuspecting evening in the not-so-distant future, Beijing announces a 10% downshift, knocking the Dax, Dow Jones, FTSE, Nikkei and Shanghai Composite indexes several hundred points lower each. The yen surges, putting the final nail in the Abenomics coffin. Deutsche Bank executives call TV stations to insist, anew, their balance sheet is sound. Rumors of hedge-fund blowups ricochet around global markets. Politicians in London, Tokyo and Washington wonder how, of how, did this happen?

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They got one chance, and then announce beforehand it’s a no-go?!

Lew Says Don’t Expect ‘Crisis Response’ From G20 Meeting (BBG)

U.S. Treasury Secretary Jacob J. Lew downplayed expectations for an emergency response to global market turbulence when Group of 20 finance chiefs and central bankers meet this week in China, calling on nations to do more to boost demand without pursuing unfair currency policies. “Don’t expect a crisis response in a non-crisis environment,” Lew said in an interview broadcast Wednesday with David Westin of Bloomberg Television. “This is a moment where you’ve got real economies doing better than markets think in some cases.” Policy makers from the world’s biggest economies are unlikely to make the kind of detailed national commitments to restore growth they did to at the height of the global financial crisis, Lew said.

Instead, the group, which meets in Shanghai Feb. 26-27, may put more “meat on the bones” of the principles it has advocated in recent years, such as by strengthening the pledge that nations will refrain from competitive currency devaluations, he said. While the world economy isn’t in a moment of crisis, Lew said that “I don’t think it’s unreasonable to have the expectation that coming out of this will be a more stable understanding of what the future may look like.” Lew’s comments discount the prospect of a coordinated agreement to boost lackluster global growth and restore confidence after a selloff in world stocks to start the year. Some analysts and investors have called for a modern-day Plaza Accord, the 1985 deal among major economies to weaken the dollar and stabilize currency markets.

The world’s cloudy growth outlook and policy makers’ potential response will dominate the agenda in Shanghai, according to people familiar with the talks. It’s unlikely to produce the kind of action that came out of the G-20 meeting in London in April 2009, when countries collectively pledged more than $1.1 trillion in stimulus to rejuvenate a then-hobbled global economy.

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You don’t say.

IMF Warns The Global Economy Is “Highly Vulnerable” (BBC)

The IMF has said the global economy has weakened further and warned it was “highly vulnerable to adverse shocks”. It said the weakening had come “amid increasing financial turbulence and falling asset prices”. The IMF’s report comes before the meeting of G20 finance ministers and central bank governors in Shanghai later this week. It said China’s slowdown was adding to global economic growth concerns. China’s economy, the second-biggest in the world, is growing at the slowest rate in 25 years. “Growth in advanced economies is modest already under the baseline, as low demand in some countries and a broad-based weakening of potential growth continue to hold back the recovery,” the Washington-based IMF said.

“Adding to these headwinds are concerns about the global impact of China’s transition to more balanced growth, along with signs of distress in other large emerging markets, including from falling commodity prices.” The IMF also noted any future prospects for global growth “could be derailed by market turbulence, the oil price crash and geopolitical conflicts”. The agency has called on the G20 group to plan new mechanisms to protect the most vulnerable countries. Earlier this year, the IMF downgraded its forecast for global economic growth. It now expects economic activity to increase 3.4% this year followed by 3.6% in 2017.

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Them’s some graphs.

Dear Janet, Mario, & Haruhiko – It’s Time For The ‘C’ Word (ZH)

As policy errors pile up – just as they did in 2007/8 – around the world, we thought the following three charts might warrant the use of the most important word in modern central banking… "Contained"

 

Haruhiko, You Are Here…

 

Mario, You Are Here…

 

And Janet, You Are Here…

It does make one wonder, with all this carnage and so little action, whether "coordinated" inaction is the post-Davos decision – Don't just do something, stand there and jawbone!!

With the goal being a big enough catastrophe to warrant unleashing the war on cash, then NIRP, then the unlimited money drop… because as we stand, no matter what crazy policy has been imagined by the Keynesian "seers" – inflationary (well deflationary now) expectations have collapsed.

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Weidmann keeps taking the other side.

Bundesbank Chief Warns Of Zero-Rate Impact On Banks (Reuters)

Bank profits will shrink if rock-bottom interest rates stay in place for too long, the head of Germany’s central bank warned on Wednesday, signaling that he favors an eventual change in tack. The remarks from the Bundesbank’s influential president, Jens Weidmann, illustrate how seriously Germany is taking the fallout from years of low borrowing rates after a recent crash in bank stocks sucked in the country’s flagship Deutsche Bank. “The low interest-rate environment particularly weighs on banks’ earnings potential,” Weidmann told journalists, referring to the market slump. “The longer the low-interest-rate phase stays, the steeper interest rates fall, the … smaller banks’ profit,” said Weidmann, who also sits on the European Central Bank’s decision-taking Governing Council.

Early next month, ECB governors will meet to decide whether to loosen monetary policy further, for instance, by extending a €1.5 trillion money printing scheme to buy government bonds or by cutting interest rates further. A cut to the deposit rate, which translates into a charge on banks that park money with the ECB, would penalize banks. Weidmann referred to a survey of German banks that concluded they would see pre-tax profits shrivel by 25% by 2019 as a result. Should low interest rates remain in place until 2019, he said, profits could fall by up to half. Further cuts to borrowing rates during this time would make their results worse still.

The former adviser to German chancellor Angela Merkel, saying that he hoped interest rates would eventually rise again, played down any threat of deflation or falling prices and predicted that a modest economic recovery would continue. Falling price inflation is generally considered an economic alarm bell and is typically used as a trigger for ECB action. In talking down such a problem, Weidmann is also playing down the need for any action. He also voiced scepticism about the proposal to scrap the €500 note, saying that Germans still wanted to be free to pay in cash. “It would be fatal if the impression were to be created … that the discussion about the scrapping of the €500 note … was a step towards ending the use of cash generally.”

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I’m convinced the real numbers are much worse.

Oil Slump To Hit US Investment Banks’ Capital Market Revenue (BBG)

Revenue generated by U.S. investment banks through their capital markets businesses may “suffer” if oil and commodity prices stay low and the global economy slows further, Moody’s Investors Service has warned. While direct energy loan exposures for the largest U.S. banks look “manageable relative to earnings” and most of their exposures are to investment-grade borrowers, additional loss provisions will be necessary in some cases should oil remain subdued for an extended period, the credit assessor said in a report dated Feb. 24. Moody’s also warned that “lower-for-longer” oil prices presented a rising threat for lenders around the world.

JPMorgan Chase said this week its reserves for impaired energy loans would increase by about $500 million in the first quarter and it would have to add an additional $1.5 billion to the set-aside if oil prices held at $25 a barrel for about 18 months. Wells Fargo, the world’s largest bank by market value, said Wednesday in a filing soured energy loans climbed 49% in the last three months of 2015, while higher oil-and-gas provisions at Royal Bank of Canada crimped quarterly earnings. “Oil price volatility has contributed to increased market volatility, which could help boost trading activity and returns,” Moody’s said. “However, current weak sentiment in global equity and credit markets could work in the opposite direction, reducing trading volumes and banks’ related revenues.”

For U.S. global investment banks such as Bank of America, Citigroup and JPMorgan Chase, funded exposures to the oil and gas industry range from 1.5% to 5% and average 2.3% of total loans, according to Moody’s. The ratings company also underscored risks for banks in energy-exporting regions from the Middle East and Russia to Africa and Latin America. “Banks’ direct and indirect exposures to the drop in oil prices pose the potential for deterioration in asset quality, particularly in net oil-exporting countries,” Moody’s said. “While direct exposures appear broadly manageable from both a solvency and earnings perspective, low oil prices could still test the credit profiles of banks across our global rated portfolio.”

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The debt figures are incredible. “Companies spent more on drilling than they earned selling oil and gas, plugging the difference with other peoples’ money.”

Biggest Wave Yet of U.S. Oil Defaults Looms as Bust Intensifies (BBG)

In less than a month, the U.S. oil bust could claim two of its biggest victims yet. Energy XXI and SandRidge Energy, oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy. If the two companies fail in March, it would be the biggest cluster of oil and gas defaults in a month since energy prices plunged in early 2015. “We’re just beginning to see how bad 2016 is going to be,” said Becky Roof, managing director for turnaround and restructuring with consulting firm AlixPartners.

The U.S. shale boom was fueled by junk debt. Companies spent more on drilling than they earned selling oil and gas, plugging the difference with other peoples’ money. Drillers piled up a staggering $237 billion of borrowings at the end of September, according to data compiled on the 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. U.S. crude production soared to its highest in more than three decades. Oil prices have now fallen more than 70% from a 2014 peak, and banks and bondholders are fighting for scraps. Bond prices reflect investors’ fears. U.S. high yield energy debt lost 24% last year, the biggest fall since 2008, according to Bank of America Merrill Lynch U.S. High Yield Indexes.

Both Energy XXI and SandRidge could still reach an agreement with creditors that will give them time to turn their businesses around. SandRidge said last week that it missed a $21.7 million interest payment. The company owes $4.2 billion, including a fully-drawn $500 million credit line. Energy XXI, which owes $3.4 billion, said in a filing last week that it missed an $8.8 million interest payment. David Kimmel, a spokesman for SandRidge, said it has the money to make interest payments due in February, March and April. He wouldn’t comment on SandRidge’s options if it doesn’t make the interest payments by the end of the grace period.

Read more …

And its shares soar…

North Dakota’s Largest Oil Producer Suspends All Fracking (Reuters)

North Dakota oil producer Whiting Petroleum Corp said on Wednesday it will suspend all fracking and spend 80% less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices. Shares of Whiting jumped 7.7% to $4 per share in after-hours trading as investors cheered the decision to preserve capital. During the trading session, Whiting had slid 5.6% to $3.72. Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows. The cuts will have a big impact in North Dakota, where Whiting is the largest producer.

Denver-based Whiting said it will stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance. Rival producers Hess Corp and Continental Resources Inc have also slashed their budgets for the year, though neither has cut as much as Whiting. “We believe this conservative strategy should help us to maintain our liquidity position and leave us well positioned to capitalize on a rebound in oil prices,” Whiting CEO Jim Volker said in a statement. The cuts will drag down production and likely reverberate in the economy of North Dakota, the second-largest U.S. oil producing state after Texas, which currently pumps 1.1 million barrels per day.

Read more …

Excellent by Pedro da Costa.

Big Banks and the White House Are Teaming Up to Fleece Poor People (FP)

When Wall Street and its regulators talk about servicing the so-called “unbanked,” people who are generally disconnected from the banking sector, it often sounds like a mission to do God’s work — bank unto others as thou banketh for thyself. “Basic financial services are out of reach for one in four individuals on Earth,” U.S. Treasury Secretary Jack Lew, a former Citigroup banker, said at a December speech launching the White House’s latest initiative targeted at the unbanked, which involves a partnership with JPMorgan Chase and PayPal. A report co-sponsored by JPMorgan Chase in 2014 speaks of the problem in similarly biblical terms: “Roughly 75% of the world’s poor — 2.5 billion people — do not have a bank account or otherwise participate in the mainstream financial system.” The lack of access to “secure, affordable financial products and services severely limits the global poor’s financial security and opportunities.”

Yet when bankers and regulators debate the travails of the unbanked or underbanked — effectively euphemisms for poor and lower-middle-class Americans — they usually avoid two key questions: Why is this cross-section of society so marginally attached to the banking system in the first place? And who is behind the provision of “alternative” services — high-cost loan sharks, payday lenders, cash checking stores, pawnshops — the poor turn to instead of banks? In reality, it is the banks themselves that appear to have cut off and driven away the low-income consumer, not the other way around. Wall Street won’t make loans to the poor — at least not directly. But large banks, it turns out, are behind many of the predatory nonbank, high-cost lenders that notoriously prey on poor communities.

Most recently, the same JPMorgan Chase that’s working with the White House to reach the unbanked partnered with OnDeck Capital, an online lender that approves loans in a flash and charges eye-popping interest rates that averaged around 54% as of 2014. In other words, the big banks are already well-acquainted with the poor unbanked poor — and they’re fleecing them.In other words, the big banks are already well-acquainted with the poor unbanked poor — and they’re fleecing them. They’re simply doing it the clean, Wall Street way, through intermediaries and with little accountability. Some banks are willing to do the dirty work themselves.

This is how Wells Fargo advertises its Direct Deposit Advance Loan, which carries an annual percentage rate of 120%: “These short term loans … can assist you with getting through a short term financial crisis by providing you with options and flexibility…. [for example] a medical bill, car repair, or similar unplanned expense.” How sweet of them. Those who are already in the system don’t fare much better. Big banks push the poor into the more shadowy corners of consumer finance by charging those at the financial margins high and sometimes repeated and lofty overdraft fees, ATM charges, and checking account minimum balances. The poor often live in areas that lack bank branches, meaning that even after they open an account, they have to use a local ATM that charges them $3 on top of the $3 their own bank likely charges. So taking out a $20 bill could cost $6, a 30% surcharge.

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Ungovernable poster child for recovery.

Spanish Government Pact Dealt Fatal Blow Hours After Announcement (Reuters)

A government deal between Spain’s Socialists and liberal Ciudadanos was dealt a fatal blow hours after it was announced on Wednesday when both the Conservatives and anti-austerity Podemos refused to back it. Such is the fragmentation of Spain’s political landscape after an election last December that the Socialists and Ciudadanos, with only 130 seats in the 350-seat parliament between them, cannot govern alone. Podemos won 69 seats and the center-right People’s Party (PP) 123. Continued bickering between all sides means Spain could be without a government for several more months at a time when the economic recovery is still fragile and unemployment stubbornly high at over 20%. To be elected prime minister, socialist leader Pedro Sanchez needs an absolute majority on March 2 or a simple majority of seats in a second vote that would take place in parliament on March 5.

The pact with Ciudadanos could have gone through only if the PP or Podemos had backed it or at least abstained in the second vote, something they again ruled out. Podemos said it did not agree with the social and economic policies outlined in the deal, which includes tax reforms and measures to make government spending more efficient. The party also said it was suspending its own talks with the Socialists. “This is a deal that is incompatible with Podemos,” Inigo Errejon, a senior party member, told a news conference. Hours earlier, the leader of the PP, acting Prime Minister Mariano Rajoy, had also reiterated his party would vote against the pact which he called “misleading” because it fell way short of any majority.

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Long article. Do read it though. Matt’s in a class of his own.

How America Made Donald Trump Unstoppable (Matt Taibbi)

The first thing you notice at Donald Trump’s rallies is the confidence. Amateur psychologists have wishfully diagnosed him from afar as insecure, but in person the notion seems absurd. Donald Trump, insecure? We should all have such problems. At the Verizon Giganto-Center in Manchester the night before the New Hampshire primary, Trump bounds onstage to raucous applause and the booming riffs of the Lennon-McCartney anthem “Revolution.” The song is, hilariously, a cautionary tale about the perils of false prophets peddling mindless revolts, but Trump floats in on its grooves like it means the opposite. When you win as much as he does, who the hell cares what anything means? He steps to the lectern and does his Mussolini routine, which he’s perfected over the past months.

It’s a nodding wave, a grin, a half-sneer, and a little U.S. Open-style applause back in the direction of the audience, his face the whole time a mask of pure self-satisfaction. “This is unbelievable, unbelievable!” he says, staring out at a crowd of about 4,000 whooping New Englanders with snow hats, fleece and beer guts. There’s a snowstorm outside and cars are flying off the road, but it’s a packed house. He flashes a thumbs-up. “So everybody’s talking about the cover of Time magazine last week. They have a picture of me from behind, I was extremely careful with my hair … ” He strokes his famous flying fuzz-mane. It looks gorgeous, like it’s been recently fed. The crowd goes wild. Whoooo! Trump!

It’s pure camp, a variety show. He singles out a Trump impersonator in the crowd, tells him he hopes the guy is making a lot of money. “Melania, would you marry that guy?” he says. The future first lady is a Slovenian model who, apart from Trump, was most famous for a TV ad in which she engaged in a Frankenstein-style body transfer with the Aflac duck, voiced by Gilbert Gottfried. She had one line in that ad. Tonight, it’s two lines: “Ve love you, New Hampshire,” she says, in a thick vampire accent. “Ve, together, ve vill make America great again!” As reactionary patriotic theater goes, this scene is bizarre – Melania Knauss didn’t even arrive in America until 1996, when she was all of 26 – but the crowd goes nuts anyway. Everything Trump does works these days. He steps to the mic. “She’s beautiful, but she’s more beautiful even on the inside,” he says, raising a finger to the heavens. “And, boy, is she smart!”

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Outcome is guaranteed.

Hungary To Hold Referendum On EU Plan For Migrant Quotas (Reuters)

Hungary will hold a referendum on European Union plans to create a system of mandatory quotas for migrants, an initiative that Hungary’s government has rejected, Prime Minister Viktor Orban said on Wednesday. Orban has used harsh anti-migrant rhetoric since the migrant crisis escalated last year and gained notoriety for erecting a steel fence along Hungary’s southern border to keep out migrants – a policy now adopted by other Balkan countries. He said the plebiscite, the first of its kind in Europe, would be a major test of European democracy. The EU declined official comment, saying it was were trying to clarify what Orban was proposing.

Orban, who did not say when the vote might be held, has said the quotas would redraw the ethnic, cultural and religious map of Hungary and Europe. Under the plan, most EU nations would be obliged to accept a certain number of immigrants. “Nobody has asked the European people so far whether they support, accept, or reject the mandatory migrant quotas,” he said at a news conference. “The government is responding to public sentiment now: we Hungarians think introducing resettlement quotas for migrants without the backing of the people equals an abuse of power.” Orban said he was aware of potential wider ramifications of such a referendum, especially if Hungarians say “No” to quotas. “We had to think about the potential impact on European politics of such a proposal, but that was a secondary consideration,” he said.

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Late last year expectations were for 3 million in Europe this year alone. Still, more realistic than ‘we have to stop them all’.

German Government Expects Arrival Of 3.6 Million Refugees By 2020 (Reuters)

The German government expects a total influx of 3.6 million refugees by 2020, with an average of half a million people arriving each year, German media reported on Thursday, in a country that took in a record 1.1 million migrants last year. The calculations are based on internal estimates by the Economy Ministry in coordination with other ministries, German newspaper Sueddeutsche Zeitung said. In order to project economic development, the Economy Ministry created “an internal, purely technical estimate on migration in coordination with other government departments”. There is no official government estimate on how many refugees Europe’s biggest economy expects over the next years, as numbers are highly volatile.

But the unprecedented arrival of 1.1 million asylum seekers last year, included in the 3.6 million forecast, stretched public resources thin and put strains on German Chancellor Angela Merkel’s government. Merkel, whose open-door refugee policy has put her under much pressure, in recent months vowed to significantly reduce the number of people arriving this year. On Wednesday, German federal police said that they had only registered 103 migrants arriving on Tuesday, suggesting a sharp drop as a result of tighter controls along the Balkan route. At the start of the prior week, over 2,000 were arriving on a daily basis. Last autumn the daily arrivals sometimes totaled over 10,000.

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Things are intensifying fast here.

Greek Authorities Scramble To Find Shelter For Refugees (Kath.)

Government officials were on Wednesday night trying to find more places to host refugees and migrants as the number of people arriving continued to rise while limits on those leaving remained in place. Tens of thousands of migrants are thought to be in Greece at the moment, waiting to find a way out after border controls were stepped up north of the country. An official at the Migration Policy Ministry said that the government had made contingency plans for looking after 50,000 people. But these plans may prove inadequate as the Former Yugoslav Republic of Macedonia (FYROM) is only allowing a few hundred migrants to cross from Greece each day. In contrast, an average of around 3,000 people have been arriving on Greek islands each day this week.

On Wednesday, more than 1,700 migrants arrived at Piraeus on passenger ferries from the islands. Greek authorities are trying to find ways, including stopping coaches on the national highway, to prevent all the arrivals traveling to Idomeni, next to the border with FYROM, where some 3,000 people have already gathered. The migrants who have been stopped on their journey north are being housed in motels and sports centers. The transit centers at Schisto, Elaionas and Elliniko in Athens, as well as Diavata in Thessaloniki have filled up over the last few days. The camps at Schisto and Diavata are hosting around 2,000 people each. There are concerns that the lack of spaces will mean that migrants will start camping out in city squares. Some 300 people set up camp in Victoria Square, central Athens, on Wednesday.

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The talks will not be very friendly for much longer.

Tsipras: “We Will Not Allow Greece To Turn Into A Warehouse Of Souls” (Afp)

EU interior ministers hold fresh talks on migration on Thursday, seeking to reduce the flow of people through the Balkans and plan for what the bloc has warned is a looming humanitarian crisis. Ministers from non-EU members Serbia, Former Yugoslav Republic of Macedonia (FYROM) and Turkey will also be in Brussels as the European Union reaches outside the borders of the 28-nation bloc in a desperate attempt to deal with the stream of people. Ahead of the talks, Greek Prime Minister Alexis Tsipras threatened not to cooperate with future EU agreements on the migrant crisis if the burden was not fairly shared among member states.

Athens is seething over a series of border restrictions along the migrant trail to northern and western Europe that has caused a bottleneck in Greece, the main entry point to Europe. “Greece will no longer agree to any deal if the burdens and responsibilities are not shared proportionally,” Tsipras told the Greek parliament Wednesday, adding: “We will not allow our country to turn into a warehouse of souls.”

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Jun 262015
 
 June 26, 2015  Posted by at 10:14 am Finance Tagged with: , , , , , , , , , ,  5 Responses »
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NPC Dr. H.W. Evans, Imperial Wizard 1925


Yield-Starved Investors Drive Asset Prices To Dangerous Levels: OECD (Reuters)
What’s Gone Wrong For Germany Inc.? (Bloomberg)
Europe: Writing Off Democracy As Merely Decorative (Habermas)
The Beatings Will Continue Until Morale Improves (Irish Independent)
Bureaucrazies Versus Democracy (Steve Keen)
The Courage Of Achilles, The Cunning Of Odysseus (Jacques Sapir)
Cash-Starved Greek State Posts Surplus (Kathimerini)
IMF Would Be Other Casualty of Greek Default (El-Erian)
Breaking Greece (Paul Krugman)
The Upstarts That Challenge The Power In Beijing (FT)
With $21 Trillion, China’s Savers Are Set to Change the World (Bloomberg)
Shadow Lending Crackdown Looms Over China Stock Market (FT)
Hedge Funds Love Consumer Stocks the Way Cows Love a Trombone (Bloomberg)
UK Developers Play Flawed Planning To Minimise Affordable Housing (Guardian)
Indebted Shale Oil Companies See Rough Ride Ahead (Fuse)
Chief Justice John Roberts’ Obamacare Decision Goes Further Than You Think (MSNBC)
French Justice Minister Says Snowden And Assange Could Be Offered Asylum (IC)
Italy Rebukes EU Leaders As ‘Time Wasters’ On Migrants Plan (Reuters)
Why Do We Ignore The Obvious? (ZenGardner)
Robots Will Conquer The World and Keep Us As Pets – Wozniak (RT)

The by far biggest issue of our times. The world will never be the same. Ever.

Yield-Starved Investors Drive Asset Prices To Dangerous Levels: OECD (Reuters)

Encouraged by years of central bank easing, investors are ploughing too much cash into unproductive and increasingly speculative investments while shunning businesses building economic growth, the OECD warned on Wednesday. In its first Business and Finance Outlook, the Organisation for Economic Cooperation and Development highlighted a growing divergence between investors rushing into ever riskier assets while companies remain too risk-averse to make investments. It urged regulators to keep a close eye on investors as they piled into leveraged hedge funds and private equity and poured cash into illiquid assets like high-yield corporate bonds.

Meanwhile, judging by stock market returns, investors were rewarding corporate managers focused on share-buybacks, dividends, mergers and acquisitions rather than those CEOS betting on long-term investment in research and development. “Stock markets in advanced economies are punishing firms that invest,” OECD secretary general Angel Gurria said in a presentation of the report. “The incentives are skewed.” According to the OECD’s research, over the 2009-2014 period buying US shares in companies with a low investment spending while selling those with high capital expenditure would have added 50% to an investor’s portfolio.

Fidelity Worldwide chief investment officer for equities Dominic Rossi begged to differ with the OECD’s pessimism on corporate investment, saying that for every dollar of depreciation companies were reporting that 1.3 was invested. “Our own analysis would point to quite healthy levels of investment,” Rossi said, adding however that it was lower in the Unites States than in other countries.

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Can’t hurt to inject some humility there.

What’s Gone Wrong For Germany Inc.? (Bloomberg)

All is not well in corporate Germany. Be it Deutsche Bank or Deutsche Lufthansa, Siemens or RWE, the missteps plaguing the country’s flagbearers have helped turn the DAX into Europe’s worst-performing benchmark index this quarter and a laggard compared with U.S. gauges. Some of the biggest companies in Europe’s economic powerhouse are in upheaval and finding themselves playing catch-up as competitors adapt more quickly to disruptive technologies and new challengers. The problem: As European peers scale back fixed-income trading and other investment-bank activities, the bank that once boasted about making it through the financial crisis without state aid has pledged to gain market share as others retreat.

The plan hasn’t quite worked out as regulatory demands to rein in risk are shaving profit margins and prompting shareholders to question the bank’s strategy. The precedent: UBS Group. Deutsche Bank has appointed John Cryan to succeed Anshu Jain as co-CEO and become sole CEO next year as the bank prepares to carry out a strategic overhaul not unlike the one Cryan undertook about six years ago as finance chief at the bank’s Swiss rival. Siemens: The problem: Europe’s largest engineering company has frequently lagged the profitability of its biggest competitors. CEO Joe Kaeser’s response has been to shed fringe businesses such as home appliances with annual sales of about €11 billion and focus on energy generation and industrial processes.

That bet has proven ill-timed, with a slump in oil prices prompting even more job cuts. The precedent: General Electric. CEO Jeff Immelt started shedding the entertainment, finance and home appliances arms four years ago as he seeks to focus the Fairfield, Connecticut-based company on its industrial business.

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That’s not just in Europe.

Europe: Writing Off Democracy As Merely Decorative (Habermas)

The latest judgment of the European Court of Justice (ECJ) casts a harsh light on the flawed construction of a currency union without a political union. In the summer of 2012 all citizens owed Mario Draghi a debt of gratitude for uttering a single sentence that saved them from the disastrous consequences of the threat of an immediate collapse of their currency. By announcing the purchase if need be of unlimited amounts of government bonds, he pulled the chestnuts out of the fire for the Eurogroup. He had to press ahead alone because the heads of government were incapable of acting in the common European interest; they remained locked into their respective national interests and frozen in a state of shock. Financial markets reacted then with relief over a single sentence with which the head of the ECB simulated a fiscal sovereignty he did not possess.

It is still the central banks of the member states, as before, which act as the lender of last resort. The ECJ has not ruled out this competence as contrary to the letter of the European Treaties; but as a consequence of its judgment the ECB can in fact, subject to a few restrictions, occupy the room for manoeuvre of just such a lender of last resort. The court signed off on a rescue action that was not entirely constitutional and the German federal constitutional court will probably follow that judgment with some additional precisions. One is tempted to say that the law of the European Treaties must not be directly bent by its protectors but it can be tweaked even so in order to iron out, on a case by case basis, the unfortunate consequences of that flawed construction of the European Monetary Union.

That flaw – as lawyers, political scientists and economists have proven again and again over the years – can only be rectified by a reform of the institutions. The case that is passed to and from between Karlsruhe and Luxembourg shines a light on a gap in the construction of the currency union which the ECB has filled by means of emergency relief. But the lack of fiscal sovereignty is just one of the many weak spots. This currency union will remain unstable as long as it is not enhanced by a banking, fiscal and economic union. But that means expanding the EMU into a Political Union if we want to avoid even strengthening the present technocratic character of the EU and overtly writing off democracy as merely decorative.

Those dramatic events of 2012 explain why Mario Draghi is swimming against the sluggish tide of a short-sighted, nay panic-stricken policy mix. With the change of government in Greece he immediately piped up: “We need a quantum leap in institutional convergence…. We must put to one side a rules-based system for national economic policy and instead hand over more sovereignty to common institutions.” Even if it’s not what one expects a former Goldman Sachs banker to say, he even wanted to couple these overdue reforms with “more democratic accountability” (Süddeutsche Zeitung, March 17, 2015).

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“What do you think happened next? Yes, you got it; the mutiny on the Bounty.”

The Beatings Will Continue Until Morale Improves (Irish Independent)

Did you know that on the same day that Greece – home of the first openly gay city, Sparta – was forced to humiliate itself again at the feet of the EU’s creditor nations, the isolated island of Pitcairn became the smallest nation to legalise same-sex marriage, despite having only 48 inhabitants and no gay couples? While reading about Pitcairn, the expression attributed to Captain Bligh of the stricken HMS Bounty, against whom the mutineers revolted, came to mind. While flogging sailors for small misdemeanours, he is said to have declared: “The beatings will continue until morale improves.” When we see the torture of Greece by its creditors, I see that the EU has taken the same approach with one of its own family. The economic beatings of Greece will continue until its political morale improves.

Have you ever seen anything so stupid? The Greek crisis has gone on for the past five or six years now. It is a brilliant example of Einstein’s observation that the definition of insanity is repeating the same thing over and over again and expecting different results. Yesterday, Greece promised to raise a fresh €8bn in taxes from the rich in order to satisfy the EU creditors. The cycle has been more or less the same, year in year out. Every year, the Greek government cuts spending and raises taxes. This is followed by the economy collapsing, and so tax revenues fall and this means more austerity is demanded – and the process is repeated. All the while, the economy shrinks. It is 25pc smaller than it was in 2009 and wages are down by 35pc. As activity and wages fall, so too does demand.

The EU response is to repeat the beatings. Every time, the EU imposes a creditors’ levy in the form of higher taxes. The people of Greece, knowing that the taxes won’t go to paying for Greek education or health but will line the pockets of rich creditors, try to find ways to avoid paying the creditors’ levy. So what does the EU do? It imposes more taxes on a problem that was in part due to the inability of the government to raise taxes on the rich in the first place. What do you think will happen now? Do you think the Greeks will give in, and say ‘take our money’? Of course they won’t. The rule of the world is the higher the personal tax, the higher the tax evasion. Did we not learn that in our tax amnesties of the 1980s and 1990s?

The Greeks will just find different ways of getting their money out of the country because they know that the money isn’t being raised for Greece, but for Germany. What would you do if you had the ability? So this latest EU solution will fail spectacularly and we will be back at square one. What then? Repeat the beatings until Greek morale improves? [..] What do you think happened next? Yes, you got it; the mutiny on the Bounty.

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Steve and I are on the same page. And we both know it too.

Bureaucrazies Versus Democracy (Steve Keen)

The most recent of the almost daily “Greek Crises” has made one thing clear: the Troika of the IMF, the EU and the ECB is out to break the government of Greece. There is no other way to interpret their refusal to accept the Greek’s latest proposal, which accepted huge government surpluses of 1% of GDP in 2015 and 2% in 2016, imposed VAT increases, and further cut pensions which are already below the poverty line for almost half of Greece’s pensioners. Instead, though the Greeks offered cuts effectively worth €8 billion, they wanted different cuts worth €11 billion. Syriza, which had been elected by the Greek people on a proposal to end austerity, is being forced to continue imposing austerity—regardless of the promises it made to its electorate.

There are many anomalies in Greece—which its creditor overlords are exploiting to the hilt in their campaign against Syriza—but these anomalies alone do not explain Greece’s predicament. If they did, then Spain would be an economic heaven, because none of those anomalies exist there. But Spain is in the same economic state as Greece, because it is suffering under the same Troika-imposed austerity program. The willingness of the Troika to point out Greece’s failures stands in marked contrast to its unwillingness to discuss its own failings too—like, for example, the IMF’s predictions in 2010 of the impact of its austerity policies on Greece. The IMF predicted, for example, that by following its program, Greece’s economy would start growing by 2012, and unemployment would peak at under 15% the same year.

Instead, unemployment has exceeded 25%, and the economy has only grown in real (read “inflation-adjusted”) terms in the last year because the fall in prices was greater than the fall in nominal GDP. That is, measured in Euros, the Greek economy is still shrinking, four years after the IMF forecast that it would return to growth. A huge part of Greece’s excessive government debt to GDP ratio is due to the collapse in GDP, for which the Troika is directly responsible. This trumpeting of Greece’s failures, and unwillingness to even discuss its own, is the hallmark of a bully. And it makes transparently obvious that the agenda underlying the EU itself is fundamentally anti-democratic. Obviously the overthrow of democracy was not the public agenda of the EU—far from it. The core political principles of the EU were always about escaping from Europe’s despotic past, of moving from its conflictual history and the horrors of Nazism towards a collective brotherhood of Europe.

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Sapir’s been writing a good series.

The Courage Of Achilles, The Cunning Of Odysseus (Jacques Sapir)

The latest adventures in the negotiations between the Greek government and its creditors shines a light against the grain of many commentators. They assume that the Greek government “can only give” or “will inevitably give way” and consider each tactical concessions made by the Greek government as “proof” of its future capitulation, or that it regrets the promises of their vows. From this point of view, there is a strange and unhealthy synergy between the most reactionary commentators and others who want to pass for “radicals” who deliberately fail to take into account the complexity of the struggle led by the Greek government. The latter fights with the courage of Achilles and the cunning of Odysseus. Let us note today that all those who had announced the “capitulation” of the Greek government were wrong. We must understand why.

In fact, although the Greek government made significant concessions from the month of February, all these concessions are conditional on a general agreement on the issue of debt. Be aware that it is the burden of repayments that is forcing the Greek government to be in the dependence of its creditors. The tragedy of Greece is that it has made considerable budgetary effort but only to the benefit of creditors. Investment, both tangible and intangible (education, health) has been sacrificed on the altar of creditors. In these circumstances it is hardly surprising that the productive apparatus of Greece is deteriorating and that she regularly loses competitiveness. It is this situation that the current government of Greece, born of the alliance between SYRIZA and ANEL, seeks to reverse. The Greek Government did not request additional money from its creditors. It asked that the money that Greece produces can be used to invest in both the private and public sectors, both in tangible and intangible investments. And on this point, it is not ready to compromise, at least until now.

The creditors of Greece, meanwhile, continue to demand a full refund – despite knowing perfectly weII that this is impossible – so as to maintain the right to take money from Greece via debt interest payments. Everyone knows that no State has repaid all its debt. From this perspective the discourses that are adorned with moral arguments are completely ridiculous. But, it is appropriate to maintain the fiction of the inviolability of debt if we want to maintain the reality of Greece’s flow of money to the creditor countries. When on June 24, Alexis Tsipras noted the failure to reach an agreement, which he summarized in a tweet into two parts, he pointed to this problem.

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But no surplus will ever be enough.

Cash-Starved Greek State Posts Surplus (Kathimerini)

The Greek economy is at its worst point since entering the bailout process over five years ago, as reflected in the data on the execution of the state budget. The result for the first five months may show a surplus, but this is misleading. The shortfall in tax revenues in the year to end-May exceeded €1.7 billion, while, apart from salaries and pensions, the state is not paying its obligations within the country, as expenditure was €2.6 billion less than that provided for in the budget. Had the government not decided to freeze all payments in a bid to secure cash for the timely payment of salaries and pensions, the primary budget balance would have shown a deficit of €1 billion, against the €1.5 billion primary surplus it showed in the January-May period, according to the official data.

However, the cash reserves have now run dry, as according to sources there will not even be enough for the payment of salaries and pensions at the end of June unless the social security funds and local authorities contribute their own reserves. The figures released on Thursday by the Finance Ministry showed that tax revenues were lagging €1.74 billion in the year to end-May, as in direct tax revenues not a single euro has yet been collected from taxpayers and companies in the form of 2015 income tax. Meanwhile, Alternate Finance Minister Nadia Valavani on Thursday issued a decision extending the deadline for the submission of income tax declarations from June 30 to July 27, with the exception of companies that have to file their statements by July 20.

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The IMF should be dismantled, along with the EU. These clubs only hurt people.

IMF Would Be Other Casualty of Greek Default (El-Erian)

All sides are working hard to prevent Greece from defaulting on its debt obligations to the IMF – and with good reason: Such an outcome would have dire consequences not only for Greece and Europe but also for the international monetary system. The IMF’s “preferred creditor status” underpins its ability to lend to countries facing great difficulties (especially when all other creditors are either frozen or looking to get out). Yet that capacity to act as lender of last resort is now under unprecedented threat. Preferred creditor status, though it isn’t a formal legal concept, has translated into a general acceptance that the IMF gets paid before almost any other lender.

And should debtors fail to meet payments, they can expect significant pressure from many of the fund’s other 187 member countries. That’s why instances of nations in arrears to the fund have been limited to fragile and failed states, particularly in Africa. The IMF has been able to act as the world’s firefighter, willing to walk into a burning building when all others run the other way. Time and again, its involvement has proved critical in stabilizing national financial crises and limiting the effects for other countries. Not long ago, it would have been improbable for the IMF to engage in large-scale lending to advanced European economies (the last time it did so before the euro crisis was in the 1970s with the U.K.). And it would have been unthinkable for the fund to worry about not getting paid back by a European borrower.

Yet both are happening in the case of Greece. Moreover, compounding the unprecedented nature of the Greek situation, other creditors (such as the European Central Bank and other European institutions) are in a position to help provide Greece with the money it needs to repay the IMF. Yet that would only happen if an agreement is reached on a policy package that is implemented in a consistent and durable fashion. If Greece defaults to the IMF, it would find its access to other funding immediately and severely impacted, including the emergency liquidity support from the ECB that is keeping its banks afloat. The resulting intensification of the country’s credit crunch would push the economy into an even deeper recession, add to an already alarming unemployment crisis, accelerate capital flight, make capital controls inevitable and, most probably, force the country to abandon Europe’s single currency.

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I know, I know, quoting Krugman. Got to get used to that yet.

Breaking Greece (Paul Krugman)

I’ve been staying fairly quiet on Greece, not wanting to shout Grexit in a crowded theater. But given reports from the negotiations in Brussels, something must be said — namely, what do the creditors, and in particular the IMF, think they’re doing?
This ought to be a negotiation about targets for the primary surplus, and then about debt relief that heads off endless future crises. And the Greek government has agreed to what are actually fairly high surplus targets, especially given the fact that the budget would be in huge primary surplus if the economy weren’t so depressed. But the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts. So we’re still in the business of dictating domestic policy.

The supposed reason for the rejection of a tax-based response is that it will hurt growth. The obvious response is, are you kidding us? The people who utterly failed to see the damage austerity would do — see the chart, which compares the projections in the 2010 standby agreement with reality — are now lecturing others on growth? Furthermore, the growth concerns are all supply-side, in an economy surely operating at least 20% below capacity. Talk to IMF people and they will go on about the impossibility of dealing with Syriza, their annoyance at the grandstanding, and so on. But we’re not in high school here. And right now it’s the creditors, much more than the Greeks, who keep moving the goalposts.

So what is happening? Is the goal to break Syriza? Is it to force Greece into a presumably disastrous default, to encourage the others? At this point it’s time to stop talking about “Graccident”; if Grexit happens it will be because the creditors, or at least the IMF, wanted it to happen.

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Alibaba for president!

The Upstarts That Challenge The Power In Beijing (FT)

There is an overarching force in China with tentacles reaching deep into almost everybody’s life. That force is not the Communist party, whose influence in people’s day-to-day affairs — though all too real — has waned and can appear almost invisible to those who do not seek to buck the system. The more disruptive force to be reckoned with these days is epitomised by the three large internet groups: Baidu, Alibaba and Tencent, collectively known as BAT, which have turned much of China upside down in just a few short years. Take the example of Ant Financial. Last week, it completed fundraising that values the company at $45bn to $50bn. It operates Alipay, an online payments system that claims to handle nearly $800bn in e-transactions a year, three times more than PayPal, its US equivalent.

That system, an essential part of China’s financial and retail architecture, and one familiar to almost every Chinese urbanite, is no brainchild of the Communist party. Instead it was the creation of Jack Ma, the former English teacher who founded Alibaba. Mr Ma established the system a decade ago as the backbone for Taobao, his consumer-to-consumer business. The name literally means “digging for treasure”, something that Mr Ma, one of China’s richest people, has clearly found. Alibaba handles 80% of China’s ecommerce, according to iResearch, a Beijing-based consultancy. That is a monopolistic position that even the Communist party, with its 87m members out of a population of 1.3bn, can only dream about.

True, the Communist party still regulates where people live (in the city or the countryside), what they publish (though less what they say) and how many children they have (though the one-child policy is fast fading). China’s internet companies, on the other hand, hold ever greater sway on how people shop, invest, travel, entertain themselves and interact socially. The BAT companies, which dominate search, ecommerce and gaming/social media, together with other upstarts, such as Xiaomi, a five-year-old company that has pioneered the $50 smartphone, are upending how people live.

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Sounds cute, but will happen when Chinese stock markets crash?

With $21 Trillion, China’s Savers Are Set to Change the World (Bloomberg)

Few events will be as significant for the world in the next 15 years as China opening its capital borders, a shift that economists and regulators across the world are now starting to grapple with. With China’s leadership aiming to scale back the role of investment in the domestic economy, the nation’s surfeit of savings – deposits currently stand at $21 trillion – will increasingly need to be deployed overseas. That’s also becoming easier, as Premier Li Keqiang relaxes capital-flow regulations. The consequences ultimately could rival the transformation wrought by the Communist nation’s fusion with the global trading system, capped by its 2001 World Trade Organization entry. That stage saw goods made cheaper across the world, boosting the purchasing power of low-income families at the cost of hollowed-out industries.

Some changes are easy to envision: watch out for Mao Zedong’s visage on banknotes as the yuan makes its way into more corners of the globe. China’s giant banks will increasingly dot New York, London and Tokyo skylines, joining U.S., European and Japanese names. Property prices from California to Sydney to Southeast Asia already have seen the influence of Chinese buying. Other shifts are tougher to gauge. International investors including pension funds, which have had limited entry to China to date, will pour in, clouding how big a net money exporter China will be. Deutsche Bank is among those foreseeing mass net outflows, which could go to fund large-scale infrastructure, or stoke asset prices by depressing long-term borrowing costs.

“This era will be marked by China shifting from a large net importer of capital to one of the world’s largest exporters of capital,” Charles Li of Hong Kong Exchanges & Clearing, the city’s stock market, wrote in a blog this month. Eventually, there will be “fund outflows of historic proportions, driven by China’s needs to deploy and diversify its national wealth to the global markets,” he wrote. The continuing opening of China’s capital account will also promote the trading of commodities in yuan, and boost China’s ability to influence their prices, according to an analysis by Bloomberg Intelligence. As was the case with China’s WTO entry, where many of the hurdles had been cleared in the years leading up to 2001, policy makers in Beijing have been easing restrictions on the currency, the flow of money and interest rates for years.

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China will fall to bits if there’s a real crackdown.

Shadow Lending Crackdown Looms Over China Stock Market (FT)

China’s shadow banks, increasingly wary of lending into a slowing economy, have turned to the stock market, fueling a surge in unregulated margin lending that has driven the market’s dizzying gains over the past year. Now regulators are cracking down on shadow lending to stock investors, a campaign analysts say is partly to blame for last week’s 13% fall in the Shanghai Composite Index — the largest weekly drop since the global financial crisis in 2008. “The price of funds has increased, the flow has shrunk, and transaction structures are getting more complicated,” says a Chongqing-based shadow banker who provides grey-market loans to stock investors.

“We’re no longer in a growth period. It’s more like, feed the addiction until you die, earn fast money. No one treats this as their main career.” China officially launched margin trading by securities brokerages as a pilot project in 2010. It expanded the program in 2012 with the creation of the China Securities Finance, established by the state-backed stock exchanges specifically to provide funds for brokerages to lend to clients. Official margin lending totaled Rmb2.2 trillion ($354 billion) as of Wednesday’s close, up from Rmb403 billion a year earlier, according to stock exchange figures. Yet this officially sanctioned margin lending, which is tightly regulated and relatively transparent, is only the tip of the iceberg for Chinese leveraged stock investing.

For standardized margin lending by brokerages, only investors with cash and stock worth Rmb500,000 in their securities accounts may participate. Leverage is capped at Rmb2 in loans for every Rmb1 of the investor’s own funds, and only certain stocks are eligible for margin trading. In the murky world of grey-market margin lending, however, few rules apply. Leverage can reach 5:1 or higher, and there are no limits on which shares investors can bet on. The money for these leveraged bets comes mainly from wealth management products sold by banks and trust companies. WMPs, a form of structured deposit that banks market to customers as a higher-yielding alternative to traditional savings deposits, also spurred China’s original shadow banking boom beginning in 2010.

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Can’t go wrong with a headline t like that.

Hedge Funds Love Consumer Stocks the Way Cows Love a Trombone (Bloomberg)

There’s a mesmerizing video making the rounds on Facebook of a guy who takes a trombone out into an empty cow pasture, sits down in a lawn chair and plays the song “Royals” by the New Zealand singer Lorde. Before he even gets to the first chorus, cows begin hustling over the hill toward the sound of the music. By the end of the video, he has a whole herd crowded together in front of him and they all wag their tales and moo their approval for the trombonist. What on Earth, you may ask, does this Facebook video have to do with the stock market? Great question, thanks for asking! Returns have been a lot like these cows – individual stocks over the last few years have appeared to be moving together like a herd of cows mesmerized by the same trombonist.

Market pundits have lamented this lack of return dispersion again and again and tried to wish it away, without much success. It’s hard to know – without access to a herd of cattle, a trombone and a lot of free time – whether it’s the specific song or the moo-like sound of the instrument itself that has enthralled the cattle. Similarly, it’s not 100% obvious what’s caused the herding in the stock market – maybe it’s the sweet music of low interest rates played by the Federal Reserve that has caused fixed-income cows to march into the stocks pasture, or maybe it’s the growth in popularity of index funds that makes the whole market look like a field of grass rather than a buffet table covered with an assortment of treats.

Yet, there’s an interesting surprise lurking amid all this herding in returns: dispersion among performance of equity hedge funds is actually increasing. The spread between the top fourth and bottom fourth of long-short strategy returns in the Credit Suisse Hedge Fund Index has widened from 10% to as high as 20% over the last year. That type of contrast is usually only seen during very volatile periods, not the calm markets we’ve seen this year, according to Mark Connors, Credit Suisse’s global head of risk advisory.

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A great take on UK housing. Don Corleone would be proud.

UK Developers Play Flawed Planning To Minimise Affordable Housing (Guardian)

Golden towers emerge from a canopy of trees on a hoarding in Elephant and Castle, snaking around a nine-hectare strip of south London where soon will rise “a vibrant, established neighbourhood, where everybody loves to belong”. It is a bold claim, given that there was an established neighbourhood here before, called the Heygate Estate – home to 3,000 people in a group of 1970s concrete slab blocks that have since been crushed to hardcore and spread in mounds across the site, from which a few remaining trees still poke. Everybody might love to belong in Australian developer Lend Lease’s gilded vision for the area, but few will be able to afford it.

While the Heygate was home to 1,194 social-rented flats at the time of its demolition, the new £1.2bn Elephant Park will provide just 74 such homes among its 2,500 units. Five hundred flats will be “affordable” – ie rented out at up to 80% of London’s superheated market rate – but the bulk are for private sale, and are currently being marketed in a green-roofed sales cabin on the site. Nestling in a shipping-container village of temporary restaurants and pop-up pilates classes, the sales suite has a sense of shabby chic that belies the prices: a place in the Elephant dream costs £569,000 for a studio, or £801,000 for a two-bed flat.

None of this should come as a surprise, being the familiar aftermath of London’s regenerative steamroller, which continues to crush council estates and replace them with less and less affordable housing. But alarm bells should sound when you realise that Southwark council is a development partner in the Elephant Park project, and that its own planning policy would require 432 social-rented homes, not 74, to be provided in a scheme of this size – a fact that didn’t go unnoticed by Adrian Glasspool, a former leaseholder on the Heygate Estate.

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No ride at all.

Indebted Shale Oil Companies See Rough Ride Ahead (Fuse)

There has been a lot of speculation about how deeply and how quickly U.S. shale production would contract in the low price environment. The industry has proven resilient, with rig counts having fallen by more than half since October 2014 but actual production not exhibiting a corresponding precipitous decline. That could soon change. Shale companies drastically cut spending and drilling programs following the collapse in oil prices. For example, Continental Resources, a prominent producer in the Bakken, slashed capital expenditures for 2015 from $5.2 billion to $2.7 billion. Whiting Petroleum, another Bakken producer, gutted its capex by half. The list goes on. To be sure, exploration companies are achieving a lot of efficiency gains in their drilling operations.

After years of pursuing a drill-anywhere strategy, many are now approaching the shale patch with more forethought and cost-saving technologies. Oil field service companies are also dropping their rates, allowing for drilling costs to decline. That will allow U.S. companies to squeeze more oil out of shale while spending less. However, the improved productivity could be temporary. Much of the cost reductions have come in the form of layoffs rather than fundamental gains in the cost of operations. If drilling activity picks up in earnest, costs could rise again as workers will need to be rehired. The tumbling “breakeven” costs for producing a barrel of oil could be a bit of a mirage.

If oil prices remain relatively weak, or even drop further in the second half of the year, the problems could start to mount. Shale wells suffer from steep decline rates after an initial rush of output. That means that unless enough new wells are drilled to offset natural decline, overall output could drop precipitously. Add to that the fact that the companies are bringing in 40% less per barrel than they were last year because of lower oil prices, and falling revenues start to become a problem for weaker companies.

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Has it really been such a disaster?

Chief Justice John Roberts’ Obamacare Decision Goes Further Than You Think (MSNBC)

Chief Justice John Roberts did more than simply save Obamacare by ruling for the administration on Thursday – he etched the president’s signature policy into American law for a generation or more. And in a bitter irony for the political right, Robert’s ruling actually puts Obamacare on firmer ground than it would have been if conservatives never brought the suit in the first place. A narrow decision could have simply upheld today’s health care subsidies by accepting the Obama administration’s interpretation of the health law’s tax rules. Roberts’ decision in King v. Burwell goes further, however, in a way many policymakers and critics have yet to fully grasp.

The ruling not only upholds current healthcare subsidies – the first big headline on Thursday – it also establishes an expansive precedent making it far harder for future administrations to unwind them. That is because Roberts’ opinion doesn’t simply find today’s subsidies legal. It holds that they are an integral, essentially permanent part of Obamacare. In other words, for the first time, the Supreme Court is ruling that because Congress turned on this spigot for national health care funding, only Congress can turn it off. That is bad news for potential Republican presidents, who may have hoped that down the road they might hinder Obamacare by executive action. Now their only apparent route to dialing back the policy is by controlling the White House, the House, and a 60-vote margin in the Senate.

Roberts establishes this precedent by essentially wresting power from the White House, and handing it back to Congress. While that might sound like a good thing for Republicans, who control Congress now, the case attacked the statute’s original meaning, so Roberts hands that power to the Democratic Congress that enacted Obamacare. That legal reasoning is the crucial backdrop for one of the most striking lines in the opinion, Roberts’ closing flourish that Congress passed the ACA “to improve health insurance markets, not to destroy them.”

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Still a good idea.

French Justice Minister Says Snowden And Assange Could Be Offered Asylum (IC)

French Justice Minister Christiane Taubira thinks National Security Agency whistleblower Edward Snowden and WikiLeaks founder Julian Assange might be allowed to settle in France. If France decides to offer them asylum, she would “absolutely not be surprised,” she told French news channel BFMTV on Thursday (translated from the French). She said it would be a “symbolic gesture.” Taubira was asked about the NSA’s sweeping surveillance of three French presidents, disclosed by WikiLeaks this week, and called it an “unspeakable practice.”

Her comments echoed those in an editorial in France’s leftist newspaper Libération Thursday morning, which said giving Snowden asylum would be a “single gesture” that would send “a clear and useful message to Washington,” in response to the “contempt” the U.S. showed by spying on France’s president. Snowden, who faces criminal espionage charges in the U.S., has found himself stranded in Moscow with temporary asylum as he awaits responses from two dozen countries where he’d like to live; and Assange is trapped inside the Ecuadorian Embassy in London to avoid extradition to Sweden. Taubira, the chief of France’s Ministry of Justice, holds the equivalent position of the attorney general in the United States.

She has been described in the press as a “maverick,” targeting issues such as poverty and same-sex marriage, often inspiring anger among French right-wingers. Taubira doesn’t actually have the power to offer asylum herself, however. She said in the interview that such a decision would be up to the French president, prime minister and foreign minister. And Taubira just last week threatened to quit her job unless French President François Hollande implemented her juvenile justice reforms.

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Explode that union. Get it over with. People are getting killed.

Italy Rebukes EU Leaders As ‘Time Wasters’ On Migrants Plan (Reuters)

Italian Prime Minister Matteo Renzi rebuked fellow EU leaders on Thursday for failing to agree a plan to take in 40,000 asylum-seekers from Italy and Greece, saying they were not worthy of calling themselves Europeans. EU leaders are divided over a growing migrant crisis in the Mediterranean and have largely left Italy and Greece to handle thousands of people fleeing war and poverty in Africa and the Middle East. “If you do not agree with the figure of 40,000 (asylum seekers) you do not deserve to call yourself Europeans,” Renzi told an EU summit in Brussels. “If this is your idea of Europe, you can keep it. Either there’s solidarity or don’t waste our time,” he said.

Another official described the debate as “controversial”. Much of the tension appeared to be about ensuring that the migration plan was voluntary, not mandatory as the European Commission had initially suggested. Stung by deaths this year of almost 2,000 migrants trying to reach Europe by boat, the European Union has promised an emergency response but not national quotas for taking people. According to a draft final summit communique, governments would agree to relocation over two years from Italy and Greece to other member states of 40,000 people needing protection. It said all member states will participate.

As EU leaders tackled the issue over dinner, some eastern and central European countries, which are reluctant to take refugees, sought guarantees that the system be temporary and voluntary. “We have no consensus on mandatory quotas for migrants, but … that cannot be an excuse to do nothing,” said Donald Tusk, president of the European Council who chairs summits. “Solidarity without sacrifice is pure hypocrisy.”

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It’s all in the design. No escaping that.

Why Do We Ignore The Obvious? (ZenGardner)

I have a hard time with people not being willing to recognize what’s obviously in front of their faces. It’s a voluntary mind game people play with themselves to justify whatever it is they think they want. This is massively exacerbated by an array of social engineering tactics, many of which are to create the very mind sets and desires people so adamantly defend. But that’s no excuse for a lack of simple conscious recognition and frankly makes absolutely no sense. We can’t blame these manipulators for everything. Ultimately we all have free choice. Plainly seeing what’s right in front of our noses, no matter how well sold or disguised, is our human responsibility. That people would relinquish this innate right and capability totally escapes me.

The Handwriting On the Wall Actually, it’s much more obvious than even that. Pointless wars costing millions of innocent lives, poisoned food, air and water, demolished resources, manipulated economies run by elitist bankers who nonchalantly lend money with conditions for “interest”, corporate profiteering at any cost to humanity, a medical system built on sickness instead of health, media mindmush poisoning children and adults alike, draconian clampdowns for any reason, and on and on. Why is this not obvious to people that something is seriously wrong, and clearly intended to be just the way it is? Do they really think it’s gonna iron itself out, especially with clearly psychopathic power mad corrupt maniacs in charge? That’s what they’ll tell you. “Give it time, we’re just going through a hiccup. Everything works out…” yada yada. Why? Because that’s what they want to believe. And the constructed world system is waiting with open arms to reinforce that insanity. And “Heck, if millions of others feel the same as me I can’t possibly be wrong.”

Fear of Drawing Conclusions That’s pretty much the bottom line. Acceptance for seeming security. However, if even one of these inroads of control vectors becomes clear to people then their whole world threatens to turn upside down. When two or more start appearing then the discomfort becomes quite intense, and that’s when the decision takes place. Either they keep pursuing this line of awakened thought or they shut it down. It’s all about comfort. And what a deceptive thing that is! Call it sleepwalking to oblivion or what have you, it’s endemic to today’s dumbed-down society. This is why the education system was their primary target since way back, conditioning humanity from childhood to not think analytically but to simply repeat whatever is in their carefully sculpted curriculum. But most of all do not question authority.

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And have a yearly man-eating fest?!

Robots Will Conquer The World and Keep Us As Pets – Wozniak (RT)

Apple co-founder Steve Wozniak, who used to be gloomy about a distant future dominated by artificial intelligence, now believes it would be good for humanity in the long run. Super smart robots would keep us as pets, he believes. “They’re going to be smarter than us and if they’re smarter than us then they’ll realize they need us,” Wozniak told an audience of 2,500 people at the Moody Theater in Austin, Texas, on Wednesday. The speech was part of the Freescale Technology Forum 2015. “They’ll be so smart by then that they’ll know they have to keep nature, and humans are part of nature. So I got over my fear that we’d be replaced by computers. They’re going to help us. We’re at least the gods originally,” he explained.

The timetable for humans to be reduced from the self-crowned kings of Earth to obsolete sentient life forms sustained by their own creations is measured in hundreds of years, Woz soothed the audience. And for our distant descendants life won’t really be bad. “If it turned on us, it would surprise us. But we want to be the family pet and be taken care of all the time,” he said. “I got this idea a few years ago and so I started feeding my dog filet steak and chicken every night because ‘do unto others,'” he quipped. Wozniak, who invested some $10 million into an IA firm, used to refer to artificial intelligence as “our biggest existential threat.” The concern is shared by some leading IT experts, inventors and scientists, including Elon Musk, Bill Gates and Stephen Hawking.

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