Jan 312018
 


Paul Gauguin Farm in Brittany 1894

 

Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3% (BBG)
Forget Stocks, Look At EU Bonds – They Are The Real Problem (Luongo)
The Ticking Time Bomb in the Municipal-Bond Market (Barron’s)
UK Interest-Only Mortgagees Are at Risk of Losing Their Homes
US National Debt Will Jump by $617 Billion in 5 Months (WS)
Trump Urges Congress To Pass $1.5 Trillion In Infrastructure Spending (R.)
Trump Joins Bezos, Dimon, Buffett In Pledge To Stop Soaring Drug Prices (MW)
Trump Says ‘100%’ After He’s Asked to Release GOP Memo (BBG)
Saving Rate Drops to 12-Year Low As 50% of Americans Don’t Have Savings (WS)
U.S. Regulators Subpoena Crypto Exchange Bitfinex, Tether (BBG)
Customer Lawsuits Pummel Spanish Banks (DQ)
Britons Ever More Deeply Divided Over Brexit (R.)
The GDP of Bridges to Nowhere (Michael Pettis)

 

 

If central banks and governments have really lost control over bonds, find shelter.

Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3% (BBG)

It’s getting harder and harder to quarantine the selloff in Treasuries from equities and corporate bonds. The benchmark 10-year U.S. yield cracked 2.7% on Monday, rising to a point many forecasters weren’t expecting until the final months of 2018. For over a year, range-bound Treasuries helped keep financial markets in a Goldilocks state, with interest rates slowly rising due to favorable forces like stronger global growth and the Federal Reserve spearheading a gradual move away from crisis-era monetary policy. Yet the start of 2018 caught many investors off guard, with the 10-year yield on pace for its steepest monthly increase since November 2016. It’s risen 30 basis points this year and reached as high as 2.73% in Asian trading Tuesday.

Suddenly, they’re confronted with thinking about what yield level could end the good times seen since the presidential election. For many, 3% is the breaking point at which corporate financing costs would get too expensive, the equity market would lose its luster and growth momentum would fade. “We are at a turning point in the psyche of markets,” said Marty Mitchell, a former head government bond trader at Stifel Nicolaus & Co. and now an independent strategist. “A lot of people point to 3% on the 10-year as the critical level for stocks,” he said, noting that higher rates signal traders are realizing that quantitative easing policies really are on the way out.

U.S. stocks have set record after record, buoyed by strong corporate earnings, President Donald Trump’s tax cuts and easy U.S. financial conditions. The S&P 500 Index has returned around 6.8% this year, once reinvested dividends are taken into account, and the U.S. equity benchmark is already higher than the level at which a Wall Street strategists’ survey last month predicted it would end 2018. What often goes unsaid in explaining the equity-market exuberance is that Treasury yields refused to break higher last year. Instead, they remained in the tightest range in a half-century, allowing companies to borrow cheaply and forcing investors to seek out riskier assets to meet return objectives.

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It’s all bonds, not even just sovereign bonds. Investors will move from equities into bonds all over the place.

Forget Stocks, Look At EU Bonds – They Are The Real Problem (Luongo)

While all the headlines are agog with stories about the Dow Jones dropping a couple hundreds points off an all-time high, German bunds are getting killed right before our eyes. The Dow is simply a market overdue for a meaningful correction in a primary bull market. And it’s a primary bull market brought on by a slow-moving sovereign debt crisis that will engulf Europe. It’s not the end of the story. Hell, the Dow isn’t even a major character in the story. In fact, similar stories are being written in French 10 year debt, Dutch 10 year debt, and Swiss 10 year debt. These are the safe-havens in the European sovereign debt markets. Meanwhile, Italian 10 year debt? Still range-bound. Portuguese 10 year debt? Near all-time high prices. The same this is there with Spain’s debt. All volatility stamped out. Why? Simple. The ECB.

The ECB’s quantitative easing program and negative interest rate policy (NIRP) drove bond yields across the board profoundly negative for more than a year. [..] the ECB is trapped and cannot allow rates to rise in the vulnerable sovereign debt markets — Italy, Portugal, Spain — lest they face bank failures and a real crisis. The problem with that is, the market is scared and so they are selling the stuff the ECB isn’t buying – German, French, Dutch, Swiss debt. In simple terms, we are seeing the flight into the euro intensify here as investors are raising cash. The euro and gold are up. The USDX continues to be weak even though capital is pouring into the U.S. thanks to fundamental changes to tax and regulatory policy under President Trump. In the short term Dow Jones and S&P500 prices are overbought. Fine. Whatever. But, the real problem is not that. The real problem is the growing realization in the market that governments and central banks do not have an answer to the debt problem.

[..] The U.S. economy is about to be unleashed by Trump’s tax cut law. It will be able to absorb higher interest rates for a while. Yield-starved pension funds, as Armstrong rightly points out, will be bailed out slightly forestalling their day of reckoning. And in doing so, higher rates in the U.S. are driving core-rates higher in Europe. An overly-strong euro is crushing any hope of further economic recovery in the periphery, like Italy. The debt load on Italy et.al. has increased relative to their national output by around 20% since the end of 2016. This will put the ECB at risk of a massive loss of confidence when Italian banks start failing, Italy’s budget deficit starts expanding again and hard-line euroskeptics win the election in March. As capital is drained out of Europe into U.S. equities, the dollar, gold and cryptocurrencies, things should begin to spiral upwards rapidly.

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See? More bonds. Meredith Whitney was 10 years early.

The Ticking Time Bomb in the Municipal-Bond Market (Barron’s)

There’s a looming disaster in the market for municipal debt. Every market participant knows about it, and there isn’t much any of them can do about it. Many state and local governments, even more than corporations, have promised generous pensions they can’t afford. The promises may have looked plausible in the past, especially during the dot-com boom, when money that pension funds put in the markets was doubling. When the market crashed, so did their returns—and, a few years later, the global financial crisis took out another substantial chunk. And with interest rates at historic lows, bonds have failed to deliver the income the funds relied on. While governments delay dealing with the problem as long as they can, analysts and researchers are wondering if we have reached the point of no return. For investors in municipal bonds, it could mean future defaults and losses.

“We are increasingly wary of high pension exposure, especially among state and local credits,” the Barclays muni-research team wrote this month, citing “inflated return targets, low funded ratios, growing obligations, perhaps heavy allocations to equities and compressed tax revenues make for especially adverse conditions.” What’s more, “short-term investment gains won’t be sufficient to plug liability gaps.” Yet many pensions still assume they will be able to generate the returns they saw in the past. New Jersey’s pension and the California Public Employees’ Retirement System have lowered their assumed rate of return to 7%. But with the 30-year Treasury yielding less than 3% and stocks already at record highs, it’s unclear how public markets can generate 7%—which is why many pensions have turned to higher-risk, lower-liquidity strategies, such as private equity.

Muni investors, for their part, are increasingly sensitive to pensions’ widening gap. After the financial crisis and the ensuing recession, they suddenly became interested in pension finances. A report late last year by the Center for Retirement Research at Boston College found that, as pension liabilities grew, spreads between state and local municipal bonds and Treasuries also increased. When such issuers came to issue new debt, they discovered the market was charging them more to borrow. “Pensions have become increasingly relevant to the municipal bond markets and can have a meaningful impact on the borrowing costs of a municipality,” the report says.

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Rising bond yields mean higher mortgage rates. Australia is overflowing with interest only loans. Plenty other countries have loads of it too.

UK Interest-Only Mortgagees Are at Risk of Losing Their Homes

Some borrowers with interest-only mortgages may lose their homes as a result of shortfalls in repayment plans, the U.K.’s Financial Conduct Authority warned. The FCA has identified three peaks in interest-only mortgage repayments, the first of which is currently underway. Defaults are less likely in the present wave of maturities because the homeowners are approaching retirement and have higher incomes. The next two peaks, from 2027 through 2028 and in 2032, are more at risk of shortfalls, the regulator said. Customers are reluctant to discuss with their lenders how they’ll pay off the loans, limiting their options, the FCA found. Almost 18% of outstanding mortgages in the U.K. are interest-only or involve only partial payment of the capital, according to the statement.

“Since 2013, good progress has been made in reducing the number of people with interest-only mortgages,” Jonathan Davidson, executive director of supervision retail and authorization at the regulator, said in a statement. “However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.” The FCA reviewed 10 lenders representing about 60% of the interest-only mortgage market for the study. The supervisor also urged lenders to review and improve their own strategies regarding repayment of the loans.

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Now add some infrastructure.

US National Debt Will Jump by $617 Billion in 5 Months (WS)

While everyone is trying to figure out how to twist the new tax cut to their advantage and save some money, the US Treasury Department just announced how much net new debt it will have to sell to the public through the second quarter to keep the government afloat: $617 billion. That’s what the Treasury Department estimates will be the total amount added to publicly traded Treasury securities — or “net privately-held marketable borrowing” — through the end of the second quarter. This will be the net increase in the US debt through the end of Q2. By quarter: During Q1, the Treasury expects to increase US public debt by $441 billion. It includes estimates for “lower net cash flows.” During Q2 – peak tax seasons when revenues pour into the Treasury – it expects to increase US public debt by $176 billion.

It also “assumes” that with these increases in the debt, it will have a cash balance at the end of June of $360 billion. So over the next five months, if all goes according to plan, the US gross national debt of $24.5 trillion currently – which includes $14.8 trillion in publicly traded Treasury securities and $5.7 trillion in internally held debt – will surge to about $25.1 trillion. That’s a 4% jump in just five months. Note the technical jargon-laced description for this (marked in green on the chart). The flat lines in 2013, 2015, and 2017 are a result of the prior three debt-ceiling fights. Each was followed by an enormous spike when the debt ceiling was lifted or suspended, and when the “extraordinary measures” with which the Treasury keeps the government afloat were reversed. And note the current debt ceiling, the flat line that started in mid-December.

In November, Fitch Ratings said optimistically that, “under a realistic scenario of tax cuts and macro conditions,” the US gross national debt would balloon to 120% of GDP by 2027. The way things are going right now, we won’t have to wait that long. Back in 2012, gross national debt amounted to 95% of GDP. Before the Financial Crisis, it was at 63% of GDP. At the end of 2017, gross national debt was 106% of GDP! Over the next six month, the debt will grow by about 4%. Unless a miracle happens very quickly, the debt will likely grow faster over the next five years due to the tax cuts than over the past five years. But over the past five years, the gross national debt already surged nearly 25%, or by $4.1 trillion. So that’s a lot of borrowing, for an economy that is growing at a decent clip.

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Coverage of SOTU proves my point: Moses split the nation.

As for infrastructure, they will go for what provides most short term gain. That is, make people pay. For roads, not public transport, for instance.

Trump Urges Congress To Pass $1.5 Trillion In Infrastructure Spending (R.)

President Donald Trump called on the U.S. Congress on Tuesday to pass legislation to stimulate at least $1.5 trillion in new infrastructure spending. In his State of the Union speech to Congress, Trump offered no other details of the spending plan, such as how much federal money would go into it, but said it was time to address America’s “crumbling infrastructure.” Rather than increase federal spending massively, Trump said: “Every federal dollar should be leveraged by partnering with state and local governments and, where appropriate, tapping into private-sector investment.” The administration has already released an outline of a plan that would make it easier for states to build tollways and to privatize rest stops along interstate highways.

McKinsey & Company researchers say that $150 billion a year will be required between now and 2030, or about $1.8 trillion in total, to fix all the country’s infrastructure needs. The American Society of Civil Engineers, a lobbying group with an interest in infrastructure spending, puts it at $2 trillion over 10 years. Trump said any infrastructure bill needed to cut the regulation and approval process that he said delayed the building of bridges, highways and other infrastructure. He wants the approval process reduced to two years, “and perhaps even one.” Cutting regulation is a top priority of business lobbying groups with a stake in building projects and the U.S. Chamber of Commerce.

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Just the kind of folk you want in charge of your health. With your medical needs standing in the way of their profits.

Trump Joins Bezos, Dimon, Buffett In Pledge To Stop Soaring Drug Prices (MW)

President Trump pledged to bring down drug prices. “One of my greatest priorities is to reduce the price of prescription drugs,” Trump said during his State of the Union address on Tuesday evening. “In many other countries, these drugs cost far less than what we pay in the United States and it’s over, very unfair. That is why I have directed my administration to make fixing the injustice of high drug prices one of our top priorities for the year.” Mark Hamrick, Washington, D.C. bureau chief at Bankrate.com, said the president has made that promise before. “Will his choice of a former drug industry executive, Alex Azar, now the head of Health and Human Services, deliver results on that front?” he said. “I’d prefer to place my bet on the partnership just announced by Berkshire Hathaway, J.P. Morgan Chase and Amazon.”

Earlier Tuesday, Amazon, Berkshire Hathaway and JP Morgan Chase, three of the biggest companies in the U.S., surprised the health-care industry on Tuesday with a plan to form a company to address rising health costs for their U.S. employees. They said it will be “free from profit-making incentives and constraints.” Health-care costs have skyrocketed over the last 60 years, according to the Kaiser Family Foundation, a nonprofit, private foundation based in Washington, D.C. In 1960, hospital costs cost $9 billion. In 2016, they cost $1.1 trillion. In 1960, physicians and clinics costs were $2.7 billion, but ballooned to $665 billion. Prescription drug prices soared from $2.7 billion in 1960 to $329 billion. U.S. health-care spending reached $3.3 trillion, or $10,348 per person in 2016.

The Trump administration has pledged to roll back the 2010 Affordable Care Act, perhaps Barack Obama’s signature achievement as U.S. president. Roughly 1 million people will lose their insurance under Trump’s plans, according to the Congressional Budget Office. Berkshire Hathaway chairman and CEO Warren Buffett didn’t hold back in excoriating the health-care industry. “The ballooning costs of health care act as a hungry tapeworm on the American economy,” Buffett said. Amazon founder CEO Jeff Bezos and J.P. Morgan Chase chairman and CEO Jamie Dimon were more measured in their remarks. “Amazon, Chase and Berkshire Hathaway think they can do it better than the insurance companies,” said Jamie Court, president of Consumer Watchdog. “There’s a lot of frustration with the high cost of health insurance, yet government’s offering almost no systemic solutions. It’s as big a change as I have seen in the market in years.”

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Just do it?! Perhaps it makes sense not to release it before SOTU, it would have been the only talking point.

Trump Says ‘100%’ After He’s Asked to Release GOP Memo (BBG)

President Donald Trump was overheard Tuesday night telling a Republican lawmaker that he was “100%” planning to release a controversial, classified GOP memo alleging bias at the FBI and Justice Department. As he departed the House floor after delivering his State of the Union address, C-SPAN cameras captured Representative Jeff Duncan, a South Carolina Republican, asking Trump to “release the memo.” Republican lawmakers say the four-page document raises questions about the validity of the investigation into possible collusion between Trump’s campaign and Russia, now led by Special Counsel Robert Mueller. “Oh yeah, don’t worry, 100%,” Trump replied, waving dismissively. “Can you imagine that? You’d be too angry.”

Republicans in the House moved to release the memo, authored by House Intelligence Chairman Devin Nunes, in a party-line vote on Monday. The move has been opposed by Democrats, who argue the memo gives an inaccurate portrayal of appropriate actions undertaken by law enforcement, and by the Justice Department, which has said it should remain classified. Releasing the memo has become a cause for conservative congressional Republicans, who say the FBI and the Justice Department pursued the investigation of possible Russian ties to the Trump presidential campaign under false pretenses. Trump has as many as five days to review the document for national security concerns, and White House officials insisted earlier Tuesday he hadn’t yet seen the document.

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Talk about your American Dream: “..households are living paycheck-to-paycheck even if those paychecks are reasonably large and even if life is comfortable at the moment.”

Saving Rate Drops to 12-Year Low As 50% of Americans Don’t Have Savings (WS)

In terms of dollars, personal saving dropped to a Seasonally Adjusted Annual Rate of $351.6 billion, meaning that at this rate in December, personal savings for the whole year would amount to $351.6 billion. This is down from the range between $600 billion and $860 billion since the end of the Financial Crisis. But who is – or was – piling up these savings? Numerous surveys provide an answer, with variations only around the margins. For example, the Federal Reserve found in its study of US households: Only 48% of adults have enough savings to cover three months of expenses if they lost their income. An additional 22% could get through the three-month period by using a broader set of resources, including borrowing from friends and selling assets. But 30% would not be able to manage a three-month financial disruption. 44% of adults don’t have enough savings to cover a $400 emergency and would have to borrow or sell something to make ends meet.

Folks who had experienced hardship were more likely to resort to “an alternative financial service” such as a tax refund anticipation loan, pawn shop loan, payday loan, auto title loan, or paycheck advance, which are all very expensive. Similarly, Bankrate found that only 39% of Americans said they’d have enough savings to be able to cover a $1,000 emergency expense. They rest would have to borrow, sell, cut back on spending, or not deal with the emergency expense. All these surveys say the same thing: about half of Americans have little or no savings though many have access to some form of credit, including credit cards, pawn shops, payday lenders, or relatives. So what does it mean when the “saving rate” declines?

Many households spend more than they make. For them, the personal saving rate is a negative number. This negative personal saving rate translates into borrowing, which explains the 5.7% year-over-year surge in credit card debt, and the 5.5% surge in overall consumer credit. It boils down to this: most of the positive saving rate, with savings actually increasing, takes place at the top echelon of the economy – at the top 40%, if you will – where households are flush with cash and assets and where the saving rate is very large. But the growth in borrowing for consumption items (the negative saving rate) takes place mostly at the bottom 60%, where households are living paycheck-to-paycheck even if those paychecks are reasonably large and even if life is comfortable at the moment.

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Peculiar: $2.3 billion ‘worth’ of a dollar-pegged ‘currency’, backed by nothing much in proof.

U.S. Regulators Subpoena Crypto Exchange Bitfinex, Tether (BBG)

U.S. regulators are scrutinizing one of the world’s largest cryptocurrency exchanges as questions mount over a digital token linked to its backers. The U.S. Commodity Futures Trading Commission sent subpoenas on Dec. 6 to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it’s pegged to the dollar, according to a person familiar with the matter, who asked not to be identified discussing private information. The firms share the same chief executive officer. Tether’s coins have become a popular substitute for dollars on cryptocurrency exchanges worldwide, with about $2.3 billion of the tokens outstanding as of Tuesday.

While Tether has said all of its coins are backed by U.S. dollars held in reserve, the company has yet to provide conclusive evidence of its holdings to the public or have its accounts audited. Skeptics have questioned whether the money is really there. “We routinely receive legal process from law enforcement agents and regulators conducting investigations,” Bitfinex and Tether said Tuesday in an emailed statement. “It is our policy not to comment on any such requests.” Bitcoin, the biggest cryptocurrency by market value, tumbled 10% on Tuesday. It fell another 3.2% to $9,766.41 as of 9:19 a.m. in Hong Kong, according to composite pricing on Bloomberg. The virtual currency hasn’t closed below $10,000 since November.

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Who’s aiding Spain in keeping its problems hidden? 30,000 complaints in 9 months, and the ECB is silent?!

Customer Lawsuits Pummel Spanish Banks (DQ)

Following a succession of consumer-friendly rulings, bank customers in Spain are increasingly taking their banks to court. And many of them are winning. Last year an unprecedented wave of litigation against banks forced the Ministry of Justice to set up dozens of courts specialized in mortgage matters to prevent the collapse of the rest of the national judicial system. The Bank of Spain, according to its own figures, received 29,957 complaints from financial consumers between January and September 2017 — already double that of the previous year and by far the highest number of complaints registered since 2013, a record year when investors and customers were desperately trying to claw back the money they’d lost in the preferred shares that issuing banks had pushed on their own customers as savings products.

In 2017, eight out of 10 complaints related to one key product: mortgages, and in particular the so-called “floor clauses” contained within them. These floor clauses set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages, even if the Euribor dropped far below that figure. This, in and of itself, was not illegal. The problem is that most banks failed to properly inform their customers that the mortgage contract included such a clause. Those that did, often told their customers that the clause was an extreme precautionary measure and would almost certainly never be activated. After all, they argued, what are the chances of the Euribor ever dropping below 3.5% for any length of time? At the time (early 2009), Europe’s benchmark rate was hovering around the 5% mark.

Within a year it had crashed below 1% and has been languishing at or below zero ever since. As a result, most Spanish banks were able to enjoy all the benefits of virtually free money while avoiding one of the biggest drawbacks: having to offer customers dirt-cheap interest rates on their variable-rate mortgages. But all that came to a crashing halt in May 2013 when Spain’s Supreme Court ruled that the floor clauses were abusive and that the banks must reimburse all the funds they’d overcharged their mortgage customers — but only from the date of the ruling! Then, on December 21, 2016, the European Court of Justice (ECJ) delivered a further hammer blow when it acknowledged the right of homeowners affected by “floor clauses” to be reimbursed money dating back to when the mortgage contract was first signed. Since the ECJ ruling, law firms are now so confident of winning floor-clause cases that they’re even offering no win, no-fee deals.

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US and UK suffer from the exact same problem.

Britons Ever More Deeply Divided Over Brexit (R.)

The social divide revealed by Britain’s 2016 vote to leave the European Union is not only here to stay but deepening, according to academic research published on Wednesday. Think tank The UK in a Changing Europe said Britons were unlikely to change their minds about leaving the EU, despite the political and economic uncertainty it has brought, because attitudes are becoming more entrenched. “The (Brexit) referendum highlighted fundamental divisions in British society and superimposed a leave-remain distinction over them. This has the potential to profoundly disrupt our politics in the years to come,” said Anand Menon, the think tank’s director.

Britain is negotiating a deal with the EU which will shape future trade relations, breaking with the bloc after four decades, but the process is complicated by the divisions within parties, society and the government itself. Menon said the research, based on a series of polls over the 18-month period since Britain voted to leave the European Union, showed 35% of people self-identify as “Leavers” and 40% as “Remainers”. Research also found that both sides had a tendency to interpret and recall information in a way that confirmed their pre-existing beliefs which also added to the deepening of the impact of the vote. The differences showed fragmentation was more determined by age groups and location than by economic class.

Polls have shown increasing support for a second vote on whether or not to leave the European Union once the terms of departure are known, but such a vote would not necessarily provide a different result, a poll by ICM for the Guardian newspaper indicated last week. The report also showed that age was a better pointer to how Britons voted than employment. Around 73% of 18 to 24-year-olds voted to stay in the EU, but turnout among that group was lower than among older voters. “British Election Study surveys have suggested that, in order to have overturned the result, a startling 97% of under-45s would have had to make it to the ballot box, as opposed to the 65% who actually voted,” the report said.

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How China hides debt through swaps. As US and EU have done for ages now.

The GDP of Bridges to Nowhere (Michael Pettis)

In most economies, GDP growth is a measure of economic output generated by the performance of the underlying economy. In China, however, Beijing sets annual GDP growth targets it expects to meet. Turning GDP growth into an economic input, rather than an output, radically changes its meaning and interpretation. On January 18, 2018, China’s National Bureau of Statistics announced that the country’s GDP grew by 6.9% in 2017. A day earlier, the People’s Bank of China (PBoC) announced that total social financing (TSF) in 2017 had increased to 19.44 trillion renminbi.

[..] I was recently part of a discussion on a listserv that brings together Chinese and foreign experts to exchange views on China-related topics. What set off this discussion was a claim that the Chinese economy began to take deleveraging seriously in 2017. Everyone agreed that debt in China is still growing far too quickly relative to the country’s debt-servicing capacity, but the pace of credit growth seems to have declined in 2017, even as real GDP growth held steady and, more importantly, nominal GDP growth increased. I was far more skeptical than some others about how to interpret this data. It is not just the quality of data collection that worries me, but, more importantly, the prevalence in China of systemic biases in the way the data is collected. Not all debt is included in TSF figures. The table above, for example, indicates a fall in TSF in 2015, but this did not occur because China’s outstanding credit declined.

[..] in 2015 there was a series of debt transactions (mainly provincial bond swaps aimed at reducing debt-servicing costs and extending maturities) that extinguished debt that had been included in the TSF category and replaced it with debt not included in TSF. The numbers are large. According to the China Daily, there were 3.2 trillion renminbi worth of bond swaps in 2015, plus an additional 600 billion renminbi of new bonds issued. If we adjust TSF by adding these back, rather than indicate a decline of 6.4%, we would have recorded an increase of 15.7%. [..] The point is that the deceleration in credit growth implied by TSF data might indeed reflect the beginning of Chinese deleveraging, but it could also reflect the surge in regulatory concern. In the latter case, this would mean that China has experienced not the beginnings of deleveraging, but rather a continuation of the trans-leveraging observers have seen before.

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Sep 282017
 
 September 28, 2017  Posted by at 8:38 am Finance Tagged with: , , , , , , , , ,  6 Responses »


Juan Gris Man in the café 1912

 

The Illusion of Prosperity (Lebowitz)
Trump Tax Plan Economic Outcomes Likely Disappointing (Roberts)
The Top 1% Of Americans Now Control 38% Of The Wealth (CNBC)
This Chart Defines the 21st Century Economy (CHS)
China’s Traders Have an Excuse to Take the Rest of Year Off
China’s Mortgage Debt Bubble Raises Spectre Of 2007 US Crisis (SCMP)
Debt Boom In India And China Threatens New Financial Crisis – WEF (Tel.)
Japan Downgrade Risk Seen Rising as Default Swaps Climb (BBG)
JPMorgan Ordered To Pay Over $4 Billion To Widow And Family (ZH)
The Courage to Normalize Monetary Policy (Stephen Roach)
German Finance Minister Wolfgang Schäuble To Be Bundestag Speaker (G.)

 

 

The future wants its future back.

The Illusion of Prosperity (Lebowitz)

For the last 50 years, the consumer, that means you and me, have been the most powerful force driving the U.S. economy. Household spending now accounts for almost 70% of economic growth, about 10% more than it did in 1971. Household spending in the U.S. is also approximately 10-15% higher than most other developed nations. Currently, U.S. economic growth is anemic and still suffering from the after-shocks of the financial crisis. Importantly, much of that weakness is the result of growing stress on consumers. Using the compelling graph below and the data behind it, we can illustrate why the U.S. economy and consumers are struggling.

The blue line on the graph above marks the difference between median disposable income (income less taxes) and the median cost of living. A positive number indicates people at the median made more than their costs of living. In other words, their income exceeds the costs of things like food, housing, and insurance and they have money left over to spend or save. This is often referred to as “having disposable income.” If the number in the above calculation is negative, income is not enough to cover essential expenses. From at least 1959 to 1971, the blue line above was positive and trending higher. The consumer was in great shape. In 1971 the trend reversed in part due to President Nixon’s actions to remove the U.S. dollar from the gold standard.

Unbeknownst to many at the time, that decision allowed the U.S. government to run consistent trade and fiscal deficits while its citizens were able to take on more debt. Other than rampant inflation, there were no immediate consequences. In 1971, following this historic action, the blue line began to trend lower. By 1990, the median U.S. citizen had less disposable income than the median cost of living; i.e., the blue line turned negative. This trend lower has continued ever since. The 2008 financial crisis proved to be a tipping point where the burden of debt was too much for many consumers to handle. Since 2008 the negative trend in the blue line has further steepened. You might be thinking, if incomes were less than our standard of living, why did it feel like our standard of living remained stable? One word – DEBT.

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Lance has a lot of detail in his assessment. Worth a read.

Trump Tax Plan Economic Outcomes Likely Disappointing (Roberts)

Do not misunderstand me. Tax rates CAN make a difference in the short run particularly when coming out of a recession as it frees up capital for productive investment at a time when recovering economic growth and pent-up demand require it. However, in the long run, it is the direction and trend of economic growth that drives employment. The reason I say “direction and trend” is because, as you will see by the vertical blue dashed line, beginning in 1980, both the direction and trend of economic growth in the United States changed for the worse. Furthermore, as I noted previously, Reagan’s tax cuts were timely due to the economic, fiscal, and valuation backdrop which is diametrically opposed to the situation today.

“Importantly, as has been stated, the proposed tax cut by President-elect Trump will be the largest since Ronald Reagan. However, in order to make valid assumptions on the potential impact of the tax cut on the economy, earnings and the markets, we need to review the differences between the Reagan and Trump eras.

[..] Of course, as noted, rising debt levels is the real impediment to longer-term increases in economic growth. When 75% of your current Federal Budget goes to entitlements and debt service, there is little left over for the expansion of the economic growth. The tailwinds enjoyed by Reagan are now headwinds for Trump as the economic “boom” of the 80’s and 90’s was really not much more than a debt-driven illusion that has now come home to roost. Senator Pat Toomey, a Pennsylvania Republican who sits on the finance committee, said he was confident that a growing economy would pay for the tax cuts and that the plan was fiscally responsible. “This tax plan will be deficit reducing,”

The belief that tax cuts will eventually become revenue neutral due to expanded economic growth is a fallacy. As the CRFB noted: “Given today’s record-high levels of national debt, the country cannot afford a deficit-financed tax cut. Tax reform that adds to the debt is likely to slow, rather than improve, long-term economic growth.” The problem with the claims that tax cuts reduce the deficit is that there is NO evidence to support the claim. The increases in deficit spending to supplant weaker economic growth has been apparent with larger deficits leading to further weakness in economic growth. In fact, ever since Reagan first lowered taxes in the ’80’s both GDP growth and the deficit have only headed in one direction – lower.

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The economy lost its balance. It will tip over.

The Top 1% Of Americans Now Control 38% Of The Wealth (CNBC)

America’s top 1% now control 38.6% of the nation’s wealth, a historic high, according to a new Federal Reserve Report. The Federal Reserve’s Surveys of Consumer Finance shows that Americans throughout the income and wealth ladder posted gains between 2013 and 2016. But the wealthy gained the most, driven largely by gains in the stock market and asset values. The top 1% saw their share of wealth rise to 38.6% in 2016 from 36.3% in 2013. The next highest nine% of families fell slightly, and the share of wealth held by the bottom 90% of Americans has been falling steadily for 25 years, hitting 22.8% in 2016 from 33.2% in 1989. The top income earners also saw the biggest gains. The top 1% saw their share of income rise to a new high of 23.8% from 20.3% in 2013. The income shares of the bottom 90% fell to 49.7% in 2016.

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I smell danger.

This Chart Defines the 21st Century Economy (CHS)

One chart defines the 21st century economy and thus its socio-political system: the chart of soaring wealth/income inequality. This chart doesn’t show a modest widening in the gap between the super-wealthy (top 1/10th of 1%) and everyone else: there is a veritable Grand Canyon between the super-wealthy and everyone else, a gap that is recent in origin. Notice that the majority of all income growth now accrues to the the very apex of the wealth-power pyramid. This is not mere chance, it is the only possible output of our financial system. This is stunning indictment of our socio-political system, for this sort of fast-increasing concentration of income, wealth and power in the hands of the very few at the top can only occur in a financial-political system which is optimized to concentrate income, wealth and power at the top of the apex.

[..] the elephant in the room few are willing to mention much less discuss is financialization, the siphoning off of most of the economy’s gains by those few with the power to borrow and leverage vast sums of capital to buy income streams–a dynamic that greatly enriches the rentier class which has unique access to central bank and private-sector bank credit and leverage. Apologists seek to explain away this soaring concentration of wealth as the inevitable result of some secular trend that we’re powerless to rein in, as if the process that drives this concentration of wealth and power wasn’t political and financial. There is nothing inevitable about such vast, fast-rising income-wealth inequality; it is the only possible output of our financial and pay-to-play political system.

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China just took two giant steps back from being a functioning economy.

China’s Traders Have an Excuse to Take the Rest of Year Off

Financial markets in the world’s second-largest economy are set to turn listless in the fourth quarter as party officials keep a lid on volatility around a seminal Communist Party gathering. That’s the finding of Bloomberg surveys of market participants. The benchmark Shanghai Composite Index is projected to end the year 0.3% higher than Wednesday’s close. The yuan will be at 6.64 per dollar, unchanged from the current level, while the 10-year sovereign bond yield is expected to slip to 3.59% from 3.63%. “I don’t expect any big swings,” said Ken Chen, Shanghai-based analyst with KGI Securities Co. “Regulators would want to ensure the markets are stable for the 19th Party Congress.”

Authorities have stressed the need for stability in the lead-up to what will be China’s most important political event in years. The twice-a-decade party congress, which starts on Oct. 18, is expected to replace about half of China’s top leadership and shape President Xi Jinping’s influence into the next decade. The China Securities Regulatory Commission has ordered local brokerages to mitigate risks and ensure stable markets before and during the event, people familiar with the matter have said. The CSRC has also banned brokerage bosses from taking holidays or leaving the country from Oct. 11 until the congress ends, according to the people.

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Why that forced low volatility is so dangerous. No price discovery.

China’s Mortgage Debt Bubble Raises Spectre Of 2007 US Crisis (SCMP)

Young Chinese like Eli Mai, a sales manager in Guangzhou, and Wendy Wang, an executive in Shenzhen, are borrowing as much money as possible to buy boomtown flats even though they cannot afford the repayments. Behind the dream of property ownership they share with many like-minded friends lies an uninterrupted housing price rally in major Chinese cities that dates back to former premier Zhu Rongji’s privatisation of urban housing in the late 1990s. Rapid urbanisation, combined with unprecedented monetary easing in the past decade, has resulted in runaway property inflation in cities like Shenzhen, where home prices in many projects have doubled or even tripled in the past two years. City residents in their 20s and 30s view property as a one-way bet because they’ve never known prices to drop. At the same time, property inflation has seen the real purchasing power of their money rapidly diminish.

“Almost all my friends born since the 1980s and 1990s are racing to buy homes, while those who already have one are planning to buy a second,” Mai, 33, said. “Very few can be at ease when seeing rents and home prices rise so strongly, and they will continue to rise in a scary way.” The rush of millions young middle-class Chinese like Mai into the property market has created a hysteria that eerily resembles the housing crisis that struck the United States a decade ago. Thanks to the easy credit that has spurred the housing boom, many young Chinese have abandoned the frugal traditions of earlier generations and now lead a lifestyle beyond their financial means. The build-up of household and other debt in China has also sparked widespread concern about the health of the world’s second largest economy.

[..] Mai and Wang have been playing it fast and loose to deal with their debts. Mai has lent 600,000 of the 800,000 yuan he got from a bank after using his first flat as collateral to a money shark promising an annualised return of 20 per cent. Wang gave the bank fake documents showing her monthly income was 18,000 yuan – about 1.6 times her actual salary. It did not ask any questions. Neither see any problem, because the value of their underlying assets, the flats, have risen. The value of Mai’s two flats rose from 3.8 million yuan last year to 6.4 million yuan last month, while the value of Wang’s unit is now 2.93 million yuan, up from 2.6 million yuan. “I think I made a smart and successful decision to leverage debt,” Mai said.

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Watch India.

Debt Boom In India And China Threatens New Financial Crisis – WEF (Tel.)

Banks across the world are more vulnerable to a crisis now than they were in the build up to the credit crunch, the World Economic Forum has warned. Bad loans in India have more than doubled in the past two years, while in China’s financial system “business credit is building up similarly to the United States pre-crisis, and could be a new source of vulnerability.” China’s credit boom has been the subject of several warnings from global finance groups and regulators in recent months. Last week the Bank of International Settlements warned that higher interest rates in the US could have a knock on effect in the world’s second-largest economy, forcing rates higher in China, making the debt mountain more expensive to maintain and hitting the economy hard.

Britain, the US and other developed economies have taken major steps to shore up their banking systems as they were at the heart of the financial crisis, but the global financial system as a whole faces new and growing risks. Other parts of the financial system are taking risks instead, such as fund managers in the so-called shadow banking sector. The eurozone banks have still not fully recovered from the crash either. “In general, there is still too much debt in parts of the private sector, and top global banks are still ‘too big to fail’,” the WEF’s Global Competitiveness Report said. “The largest 30 banks hold almost $43 trillion in assets, compared to less than $30 trillion in 2006, and concentration is continuing to increase in the US, China, and some European countries. “In Europe, banks are still grappling with the consequences of 10 years of low growth and the enduring non-performance of loans in many countries.”

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Abe’s power gamble.

Japan Downgrade Risk Seen Rising as Default Swaps Climb (BBG)

Japan’s credit rating could be in the cross hairs after Prime Minister Shinzo Abe indicated the nation may abandon its goal of covering key expenditures through taxes. The cost of insuring Japan’s government debt against default rose to a 15-month high on Tuesday, with policy uncertainty adding to concerns about tensions with North Korea. On Monday, Abe said he would dissolve parliament later this week and he’d pay for economic measures with funds from a consumption-tax increase originally intended to rein in the nation’s swollen debt. Japanese government bonds extended declines Wednesday after S&P Global Ratings said it expects “material” fiscal deficits to continue through 2020.

S&P’s ratings assume fiscal improvements will be gradual over the next few years, sovereign analyst Craig Michaels said. “The prospect for extra revenue to be spent rather than being used to pay down Japan’s debt is a factor of higher bond yields,” said Shuichi Ohsaki, chief rates strategist for Japan at Bank of America Merrill Lynch. “There also appears to be some speculation that such a policy move will lead to a sovereign downgrade.” Yield on Japan’s five-year note added 2.5 basis points to minus 0.090% Wednesday, which would be the steepest increase since March 9. The benchmark 10-year yield climbed 2.5 basis points to 0.055%, a level unseen since early August.

The challenges in meeting the long-standing objective of achieving a primary balance surplus, add to concerns about Japan’s debt load, which is the world’s heaviest. Getting to that goal would allow the government to pay for programs including social security and public works projects from tax revenue, rather than through new debt financing. Abe is betting he can crush a weak opposition in next month’s election, which he has framed in part as a vote on his plans to use revenue from the upcoming consumption-tax hike to fund an $18 billion economic package aimed at tackling the challenges of an aging society.

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It’s the mob. One question. Who’s going to end up paying?

JPMorgan Ordered To Pay Over $4 Billion To Widow And Family (ZH)

A Dallas jury ordered JPMorgan Chase to pay more than $4 billion in damages for mishandling the estate of a former American Airlines executive. Jo Hopper and two stepchildren won a probate court verdict over claims that JPMorgan mismanaged the administration of the estate of Max Hopper, who was described as an airline technology innovator by the family’s law firm. The bank, which was hired by the family in 2010 to independently administer the estate of Hopper, was found in breach of its fiduciary duties and contract. In total, JP Morgan Chase was ordered to pay at least $4 billion in punitive damages, approximately $4.7 million in actual damages, and $5 million in attorney fees.

The six-person jury, which deliberated a little more than four hours starting Monday night and returned its verdict at approximately 12:15 a.m. Tuesday, found that the bank committed fraud, breached its fiduciary duty and broke a fee agreement, according to court papers. “The nation’s largest bank horribly mistreated me and this verdict provides protection to others from being mistreated by banks that think they’re too powerful to be held accountable,” said Hopper in a statement. “The country’s largest bank, people we are supposed to trust with our livelihood, abused my family and me out of sheer ineptitude and greed. I’m blessed that I have the resources to hold JP Morgan accountable so other widows who don’t have the same resources will be better protected in the future.” “Surviving stage 4 lymphoma cancer was easier than dealing with this bank and its estate administration,” Mrs. Hopper added.

Max Hopper, who pioneered the SABRE reservation system for the airline, died in 2010 with assets of more than $19 million but without a will and testament, according to the statement. JPMorgan was hired as an administrator to divvy up the assets among family members. “Instead of independently and impartially collecting and dividing the estate’s assets, the bank took years to release basic interests in art, home furnishings, jewelry, and notably, Mr. Hopper’s collection of 6,700 golf putters and 900 bottles of wine,” the family’s lawyers said in the statement. “Some of the interests in the assets were not released for more than five years.”

The bank’s incompetence caused more than just unacceptably long timelines; bank representatives failed to meet financial deadlines for the assets under their control. In at least one instance, stock options were allowed to expire. In others, Mrs. Hopper’s wishes to sell certain stock were ignored. The resulting losses, the jury found, resulted in actual damages and mental anguish suffered by Mrs. Hopper. With respect to Mr. Hopper’s adult children, the jury found that they lost potential inheritance in excess of $3 million when the Bank chose to pay its lawyers’ legal fees out of the estate account to defend claims against the Bank for violating its fiduciary duty.

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“A world in recovery”, Stephen?

The Courage to Normalize Monetary Policy (Stephen Roach)

Central banks’ unconventional monetary policies – namely, zero interest rates and massive asset purchases – were put in place in the depths of the 2008-2009 financial crisis. It was an emergency operation, to say the least. With their traditional policy tools all but exhausted, the authorities had to be exceptionally creative in confronting the collapse in financial markets and a looming implosion of the real economy. Central banks, it seemed, had no choice but to opt for the massive liquidity injections known as “quantitative easing.” This strategy did arrest the free-fall in markets. But it did little to spur meaningful economic recovery. The G7 economies (the United States, Japan, Canada, Germany, the United Kingdom, France, and Italy) have collectively grown at just a 1.8% average annual rate over the 2010-2017 post-crisis period.

That is far short of the 3.2% average rebound recorded over comparable eight-year intervals during the two recoveries of the 1980s and the 1990s. Unfortunately, central bankers misread the efficacy of their post-2008 policy actions. They acted as if the strategy that helped end the crisis could achieve the same traction in fostering a cyclical rebound in the real economy. In fact, they doubled down on the cocktail of zero policy rates and balance-sheet expansion. And what a bet it was. According to the Bank for International Settlements, central banks’ combined asset holdings in the major advanced economies (the US, the eurozone, and Japan) expanded by $8.3 trillion over the past nine years, from $4.6 trillion in 2008 to $12.9 trillion in early 2017. Yet this massive balance-sheet expansion has had little to show for it.

Over the same nine-year period, nominal GDP in these economies increased by just $2.1 trillion. That implies a $6.2 trillion injection of excess liquidity – the difference between the growth in central bank assets and nominal GDP – that was not absorbed by the real economy and has, instead been sloshing around in global financial markets, distorting asset prices across the risk spectrum. Normalization is all about a long-overdue unwinding of those distortions. Fully ten years after the onset of the Great Financial Crisis, it seems more than appropriate to move the levers of monetary policy off their emergency settings. A world in recovery – no matter how anemic that recovery may be – does not require a crisis-like approach to monetary policy. Monetary authorities have only grudgingly accepted this. Today’s generation of central bankers is almost religious in its commitment to inflation targeting – even in today’s inflationless world. While the pendulum has swung from squeezing out excess inflation to avoiding deflation, price stability remains the sine qua non in central banking circles.

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Chaos looms in Germany. Merkel will be forced to accept a FinMin she doesn’t want. Greece will be squeezed even more. And Italy, Spain etc.

German Finance Minister Wolfgang Schäuble To Be Bundestag Speaker (G.)

Wolfgang Schäuble, a man revered and reviled in equal measure for his tenacious austerity economics, is to relinquish his powerful role as Germany’s finance minister and instead become the speaker of the parliament, his party has announced. Schäuble, 75, was asked to take on the role by the chancellor, Angela Merkel, who is keen on someone with authority and experience to steer future debate in the Bundestag after the success in Sunday’s election of the rightwing radical Alternative für Deutschland (AfD). The AfD is due to take up 94 seats in the house, having secured 12.6% of the vote, and its leadership has pledged to shake up the debating culture in the Bundestag, making it considerably rowdier than the calm and consensus-based mood that has characterised it in the past.

The role of speaker has been empty since Norbert Lammert, a veteran CDU MP, recently announced he would retire at the end of the last parliamentary term. In terms of protocol it ranks second only to that of federal president, and ahead of the chancellor, but in reality it is considerably less powerful than his current post. Schäuble, a lawyer by training, is the longest-serving MP in the Bundestag, having been elected in 1972. Once one of Merkel’s staunchest rivals, he has since become one of her closest confidantes as well as the most experienced and high-profile minister in her cabinet. He has been finance minister since 2009 and is held in high regard in Germany, particularly by the conservative base, who revere him for acting in Germany’s interests as the dogged protector of austerity economics in the eurozone.

He is also admired at home for his insistence – some would say obsession – with a balanced budget or the “black zero”. Germany today has a record budget surplus. But elsewhere he is a hugely controversial figure, particularly in Greece and in Ireland, where he has often faced criticism for his handling of the euro crisis that has dominated almost his entire time as finance minister. Schäuble has yet to respond to the reports of his new appointment, but it was confirmed on Wednesday afternoon by Volker Kauder, the chairman of the CDU parliamentary bloc.

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Sep 182017
 
 September 18, 2017  Posted by at 9:15 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


Pablo Picasso The old fisherman 1895

 

Muted Inflation A Trillion-Dollar Puzzle – BIS (R.)
Global Debt Underreported By $14 Trillion – BIS (ZH)
World’s Central Banks Can’t Ignore the Bitcoin Boom – BIS (BBG)
Dogecoin Creator On Cryptocurrencies: “Very Bubble. Much Scam. So Avoid.” (NYT)
The Future Of Cryptocurrency Is Not As It Seems (Eric Peters)
China’s $40 Trillion Banking System: “Largest Imbalances I’ve Ever Seen” (ZH)
Stockman: Trump’s Now ‘Blowing Kisses to Janet Yellen’
Spain’s Prosecutor Warns Over Catalonia Referendum As Leaflets Seized (R.)
After Single Payer Failed, Vermont Embarks On Big Health Care Experiment (WP)
Greek Government Told To Begin Online Auctions Or Face A Bank Bail-In (K.)
In Greece, Full-Time Work Is Not The Norm It Once Was (K.)
Hurricane Maria Heading For Caribbean (AFP)

 

 

Debt is the answer. They want you to think they don’t know that.

Muted Inflation A Trillion-Dollar Puzzle – BIS (R.)

The conundrum of stubbornly low inflation despite a pick-up in global growth and continued monetary stimulus is a “trillion dollar” question, the umbrella body for the world’s leading central banks said on Sunday. The Bank for International Settlements (BIS) said in its latest quarterly report that cheap borrowing rates and the rare simultaneous expansion of advanced and developing economies are driving financial markets higher, with signs of “exuberance” starting to re-emerge. U.S. corporate debt is much higher than before the financial crisis and a drop in the premiums investors demand for riskier lending has boosted sales of so-called covenant-lite bonds offering high yields. The BIS said this raises a question over the potential for another crisis if there is a significant rise in interest rates.

The body has called for a gradual return to higher rates, though central banks are being tentative because of persisting low inflation. “It feels like ‘Waiting for Godot’,” said Claudio Borio, the head of the monetary and economic department of the BIS, referring to a play in which the main characters wait for someone who never arrives. But the BIS says no one has yet worked out why inflation has remained so subdued while economies have approached or surpassed estimates of full employment and central banks have provided unprecedented stimulus. “This is the trillion-dollar question that will define the global economy’s path in the years ahead and determine, in all probability, the future of current policy frameworks,” Borio said. “Worryingly, no one really knows the answer.”

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The BIS is surprised by lack of inflation, or does it pretend that? And it’s also surprised by swaps and forwards? Really?

Global Debt Underreported By $14 Trillion – BIS (ZH)

In its latest annual summary published at the end of June, the IIF found that total nominal global debt had risen to a new all time high of $217 trillion, or 327% of global GDP…

… largely as a result of an unprecedented increase in emerging market leverage.

While the continued growth in debt in zero interest rate world is hardly surprising, what was notable is that debt within the developed world appeared to have peaked, if not declined modestly in the latest 5 year period. However, it now appears that contrary to previous speculation of potential deleveraging among EM nations, not only was this conclusion incorrect, but that developed nations had been stealthily piling on just as much debt, only largely hidden from the public eye, in the form of swaps and forwards.

According to a just released analysts by the Bank of International Settlements, “FX swaps and forwards: missing global debt?” non-banks institutions outside the United States owe large sums of dollars off-balance sheet through instruments such as FX swaps and forwards. The BIS then calculates what balance sheets would look like if borrowing through such derivative instruments was recorded on-balance sheet, as functionally equivalent repo debt, and calculates that the total “is of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet dollar debt”, potentially as much as $13-14 trillion.

[..] “Every day, trillions of dollars are borrowed and lent in various currencies. Many deals take place in the cash market, through loans and securities. But foreign exchange (FX) derivatives, mainly FX swaps, currency swaps and the closely related forwards, also create debt-like obligations. For the US dollar alone, contracts worth tens of trillions of dollars stand open and trillions change hands daily. And yet one cannot find these amounts on balance sheets. This debt is, in effect, missing.”

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Who says they’re ignoring it? They’re frantically looking to control it.

World’s Central Banks Can’t Ignore the Bitcoin Boom – BIS (BBG)

The world’s central banks can’t sit back and ignore the growth in cryptocurrencies as it could pose a risk to the stability of the financial system, according to the Bank for International Settlements. It said central banks will need to figure out whether to issue a digital currency and what its attributes should be, though the decision is most pressing in countries like Sweden where cash use is dwindling. Institutions need to take into account of not only privacy issues and efficiency gains in payment systems, but also economic, financial and monetary policy repercussions, the BIS said in its Quarterly Review. The analysis comes at the end of a rough week for digital currencies, with JPMorgan CEO Jamie Dimon calling bitcoin a “fraud” and China moving to crack down on domestic trading of cryptocurrencies.

But with bitcoin and others gaining in popularity as payment systems go mobile and investors pour in money, central banks are beginning to delve into them and their underlying blockchain technology, which promises to speed up clearing and settlements. At the Bank of England, Mark Carney has cited cryptocurrencies as part of a potential “revolution” in finance. To better understand the system, the Dutch central bank has created its own cryptocurrency, albeit for internal use only. U.S. officials are exploring the matter too, though in March Federal Reserve Governor Jerome Powell said there were “significant policy issues” that needed further study, including vulnerability to cyber-attack, privacy and counterfeiting.

According to the BIS, one option for central banks might be a currency available to the public, with only the central bank able to issue units that would be directly convertible with cash and reserves. There might be a greater risk of bank runs, however, and commercial lenders might face a shortage of deposits. Another question to be resolved would be the question of privacy.

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“It’s going to be like the dot-com bust, but on a much more epic scale.”

Dogecoin Creator On Cryptocurrencies: “Very Bubble. Much Scam. So Avoid.” (NYT)

Jackson Palmer no longer thinks it’s funny to imitate Doge, the internet meme about a Shiba Inu dog whose awe-struck expressions and garbled syntax (e.g. “Wow. So pizza. Much delicious.”) made him a viral sensation several years ago. But if he did, he might channel Doge to offer a few cautionary words for investors who are falling for cryptocurrency start-ups, Silicon Valley’s latest moneymaking craze: Very bubble. Much scam. So avoid. Mr. Palmer, the creator of Dogecoin, was an early fan of cryptocurrency, a form of encrypted digital money that is traded from person to person. He saw investors talking about Bitcoin, the oldest and best-known cryptocurrency, and wanted to find a way to poke fun at the hype surrounding the emerging technology. So in 2013, he built his own cryptocurrency, a satirical mash-up that combined Bitcoin with the Doge meme he’d seen on social media.

Mr. Palmer hoped to use Dogecoin to show the absurdity of wagering huge sums of money on unstable ventures. But investors didn’t get the joke and bought Dogecoin anyway, bringing its market value as high as $400 million. Along the way, the currency became a magnet for greed and attracted a group of scammers and hackers who defrauded investors, hyped fake products, and left many of the currency’s original backers empty-handed. Today, Mr. Palmer, 30, is one of the loudest voices warning that a similar fate might soon befall the entire cryptocurrency industry. “What’s happening to crypto now is what happened to Dogecoin,” Mr. Palmer told me in a recent interview. “I’m worried that this time, it’s on a much grander scale.”

[..] Mr. Palmer, a laid-back Australian who works as a product manager in the Bay Area and describes himself as “socialist leaning,” was disturbed by the commercialization of his joke currency. He had never collected Dogecoin for himself, and had resisted efforts to cash in on the currency’s success, even turning down a $500,000 investment offer from an Australian venture capital firm. [..] Mr. Palmer worries that the coming reckoning in the cryptocurrency market — and it is coming, he says confidently — will deter people from using the technology for more legitimate projects. “The bigger this bubble goes, the bigger negative connotation it’s going to have,” he said. “It’s going to be like the dot-com bust, but on a much more epic scale.”

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Peters is the CIO at One River Asset Management. “Once private markets perfect cryptocurrency technology, governments will commandeer it, killing today’s pioneers. Then with every cryptodollar, yen, euro and renminbi registered on their servers, they’ll have complete dominion over money, laundering, taxation.”

The Future Of Cryptocurrency Is Not As It Seems (Eric Peters)

“Any other thoughts on the matter?” he asked. We’d spent quite some time discussing Bitcoin, Ethereum, and copycat cryptocurrencies popping up faster than North Korean nukes. I mostly listened, he knew far more about the subject; blockchain, distributed ledgers, mining, halving, hash rates. Unlike the S&P 500 realized volatility’s collapse to 8%, these new creations are realizing at 90%. Which makes them attractive to day-traders, adrenaline junkies, who launched 100 crypto hedge funds just last month. It’s the millennial’s wild west. Like all generations, they’ve discovered a new frontier, with few rules, seedy saloons, gunfights, corpses. As our earthly unknowns disappear, we find new ones in the ether. Which is where money belongs; it’s not real, it’s an abstraction, an age-old illusion.

As a golden myth captured mankind’s imagination, we built our societies upon a rare yellow metal. For 2,500 years we fought, killed, conquered. Until governments tired of the arbitrary spending constraints imposed upon them by a scarce element. So they invented today’s fiction, a printed promise, fiat currency. Seigniorage is the difference between that currency’s market value and its cost of production – that spread is a source of vast wealth and power. And in all human history, not a single government has willingly forfeited such a thing. Nor will one ever. Only after a hyperinflationary depression, confronted with revolution, do governments sometimes relinquish their power to print (Zimbabwe most recently).

Consequently, the future of cryptocurrency is not as it seems. Once private markets perfect cryptocurrency technology, governments will commandeer it, killing today’s pioneers. Then with every cryptodollar, yen, euro and renminbi registered on their servers, they’ll have complete dominion over money, laundering, taxation. They’ll track every transaction. Imposing negative interest rates in an instant. There will be no hiding, no mattresses. And in a deflationary panic, they’ll instantaneously add an extra zero to every account, their own especially.

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“..we’re on a $40 trillion credit system on $2 trillion of equity on maybe $1 trillion of liquid reserves.”

China’s $40 Trillion Banking System: “Largest Imbalances I’ve Ever Seen” (ZH)

KB: We’re in the such late stages of a game that is the largest global imbalance I’ve ever seen in my life. When you look at on balance sheet and off balance sheets, you look at on balance sheet in the banks, you look in the shadow banks. The number of total credit in the system, China is right at $40 trillion. Think about the number I just said. $40 trillion. And that’s using an exchange rate of call it 6.7 to the dollar, right? So it’s grown 1,000% in a decade. And we’re on a $40 trillion credit system on $2 trillion of equity on maybe $1 trillion of liquid reserves.

RP: Where do you get the equity and liquid reserves from?

KB: Well, it’s the amount of equity in the banks of China. It’s right at about $2 trillion. So that’s kind of a stated number. The reserves is my own calculation, right? The Chinese magically have leveled their reserves out around $3 trillion, which happens to be the minimum level of IMF reserve adequacy as defined by the IMF rule.

RP: So what have they been doing now? So, they were under pressure, and then everything kind of eased off, I guess, as the dollar started weakening a bit.

KB: Yeah. Actually, they’ve done three things. Well, so four things have caused this, quote, easing off that you refer to. Three have been driven by SAFE and the PBOC, one that’s been driven by our illustrious Trump. So the first three are, number one, they essentially halted all cross-border M&A. So if you look at the parabola of M&A coming out of China from 2012 to 2016, it reached dizzying heights in 2016. In 2017, it’s like 15% of the 2016 number and no new deals being announced. Now, they’ll always be some outbound M&A that’s driven by really policy at the Communist Party level, right?

They’ll always buy copper mines in Uganda. They’ll always invest in ports in Greece. They’ll always do things that are from a strategic perspective and a policy perspective. The things that the Communist Party needs to procure resources for its people over the long-term. But when you look at the rampant M&A of money leaving China, they just put a halt to it in November of 2016. And the second thing they did was they made it impossible for multinational corporations to get their profits and or working capital out of China. And that’s something that has been a problem for a lot of the multinationals that do business in China.”

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Perma bear.

Stockman: Trump’s Now ‘Blowing Kisses to Janet Yellen’

Stockman: Trump’s ‘Done Nothing in Nine Months’ and Is Now ‘Blowing Kisses to Janet Yellen’ (Fox Business, September 15, 2017)

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EU, UN, US, nobody stands up for democracy. Revealing.

Spain’s Prosecutor Warns Over Catalonia Referendum As Leaflets Seized (R.)

Spanish authorities on Sunday pursued efforts to block an independence vote in Catalonia, seizing campaign materials as the chief prosecutor said jailing the region’s top politician could not be ruled out. The government in the northeastern region is intent on holding a referendum on October 1 that will ask voters whether they support secession from Spain, a ballot Madrid has declared illegal. In a raid on a warehouse in the province of Barcelona on Sunday, police confiscated around 1.3 million leaflets and other campaign materials promoting the vote issued by the Catalan government. The haul was the largest in a series of similar raids, the Interior Ministry said in a statement.

Spanish prosecutors, who have ordered police to investigate any efforts to promote the plebiscite, said last week that officials engaged in any preparations for it could be charged with civil disobedience, abuse of office and misuse of public funds. More than 700 Catalan mayors gathered in Barcelona on Saturday to affirm their support for it. Asked if arresting regional government head Carles Puigdemont was an option if preparations continued, Spain’s chief public prosecutor said in an interview: ”We could consider it because the principal objective is to stop the referendum going ahead. “I won’t rule out completely the option of seeking jail terms… It could happen under certain circumstances,” Jose Manuel Maza was quoted as also telling Sunday’s edition of newspaper El Mundo.

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Promising.

After Single Payer Failed, Vermont Embarks On Big Health Care Experiment (WP)

Doug Greenwood lifted his shirt to let his doctor probe his belly, scarred from past surgeries, for tender spots. Searing abdominal pain had landed Greenwood in the emergency room a few weeks earlier, and he’d come for a follow-up visit to Cold Hollow Family Practice, a big red barnlike building perched on the edge of town. After the appointment was over and his blood was drawn, Greenwood stayed for an entirely different exam: of his life. Anne-Marie Lajoie, a nurse care coordinator, began to map out Greenwood’s financial resources, responsibilities, transportation options, food resources and social supports on a sheet of paper. A different picture began to emerge of the 58-year-old male patient recovering from diverticulitis: Greenwood had moved back home, without a car or steady work, to care for his mother, who suffered from dementia. He slept in a fishing shanty in the yard, with a baby monitor to keep tabs on his mother.

This more expansive checkup is part of a pioneering effort in this New England state to keep people healthy while simplifying the typical jumble of private and public insurers that pays for health care. The underlying premise is simple: Reward doctors and hospitals financially when patients are healthy, not just when they come in sick. It’s an idea that has been percolating through the health-care system in recent years, supported by the Affordable Care Act and changes to how Medicare pays for certain kinds of care, such as hip and knee replacements. But Vermont is setting an ambitious goal of taking its alternative payment model statewide and applying it to 70% of insured state residents by 2022 which — if it works — could eventually lead to fundamental changes in how Americans pay for health care.

“You make your margin off of keeping people healthier, instead of doing more operations. This drastically changes you, from wanting to do more of a certain kind of surgery to wanting to prevent them,” said Stephen Leffler, chief population health and quality officer of the University of Vermont Health Network. Making lump sum payments, instead of paying for each X-ray or checkup, changes the financial incentives for doctors. For example, spurring the state’s largest hospital system to invest in housing. Or creating more roles like Lajoie’s, focused on diagnosing problems with housing, transportation, food and other services that affect people’s well-being.

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The Troika is in Athens to turn on the thumbscrews.

Greek Government Told To Begin Online Auctions Or Face A Bank Bail-In (K.)

The possibility that banks will need for a fresh recapitalization grows with every day the delay in the implementation of online property transactions drags on. This might lead to a deposit haircut, along with generating a major crisis in relations between the government and the country’s creditors. Creditor representatives are accusing the government of delay tactics, for party political purposes, in starting electronic auctions. This puts the sustainability of the credit system at risk as it denies them a crucial tool in efforts to tackle the problem of nonperforming loans (NPLs).

The creditors have explicitly warned Athens about the prospect of a new recapitalization and the risk of a bail-in for banks and their depositors unless the auctions proceed quickly, as their representatives told notaries and banks in Greece during the presentations of the auctions’ online platform, according to the president of the Notaries’ Association, Giorgos Rouskas. The creditors reacted strongly when told that the first online auctions would not take place before early 2018 even though during the second bailout review Athens had committed to start the auctions on September 1. The government claimed the system is in place but the law provides for a period of two months between the submission of an auction request and its realization.

Seeing that the government is again trying to renege on its commitments, the creditors put fresh pressure on Athens, which backed down and said the system may open in the coming days for banks, so that the first online auctions can take place by end-November. In an interview with Kathimerini, Rouskas stressed that “the online platform is ready and all technical tests have been completed.” The onus is therefore on the banks now, which Rouskas explains have to register the repeat auctions or any new ones in the system, being the party initiating the auctions. They will then get a date based on the new system. “We have prepared the platform. It is now up to the lender, be that a bank or a private individual, to issue a request for an online auction scheduling, which notaries are forced to follow. This has not happened yet, but I believe we are very close to its implementation,” said Rouskas.

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Why Greece will not recover. Money supply way down, money velocity way way down.

In Greece, Full-Time Work Is Not The Norm It Once Was (K.)

Official data by the Hellenic Statistical Authority point to an increase in employment by about 250,000 jobs in the last three years (from the second quarter of 2014 to this year’s Q2), but that is only part of the truth. The figures also reveal a constant decline in average salaries, an ongoing increase in the percentage of employed workers who earn less than 500 euros a month – at least one in four gets less than that amount – soaring temporary work (either due to project-specific hirings, subsidies being paid for a restricted period, or time contracts), and a rise in the rate of part-time employment.

Senior and top officials are no longer offered such handsome pay packages, the primary sector is being abandoned and any new enterprises that are being set up are mostly in the field of restaurants, hotels and retail stores. Greeks can only find jobs such as waiters, cleaners, maids or sales assistants, which as a rule are of a seasonal character and fetch a low salary. The 40-hour working week concerns ever fewer workers nowadays, and without the subsidies handed out by the Manpower Organization (OAED) and the increase in tourism flows the unemployment rate probably wouldn’t have declined at all.

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The season is far from over.

Hurricane Maria Heading For Caribbean (AFP)

Maria became a hurricane Sunday as it headed toward the storm-staggered eastern Caribbean with 75 mile (120 kilometer) per hour winds, the US National Hurricane Center said. Storm warnings and watches went up in many of the Caribbean islands still reeling from the destructive passage of Hurricane Irma earlier this month. As of 2100 GMT, Maria was a Category One hurricane, the lowest on the five point Saffir-Simpson scale, located 140 miles (225 kilometers) northeast of Barbados, the NHC said, bearing west-northwest at 15 miles (24 kilometers) an hour. “On the forecast track, the center of Maria will move across the Leeward Islands Monday night and then over the extreme northeastern Caribbean Sea on Tuesday,” it said.

Hurricane warnings were triggered for St Kitts, Nevis and Montserrat, while lesser ‘watches’ were issued for the US and British Virgin Islands where at least nine people were killed during Irma. A warning is typically issued 36 hours before the first occurrence of tropical storm-force winds while watches are issued 48 hours in advance. Tropical storm warnings were, meanwhile, issued for Martinique, Antigua and Barbuda, Saba and St Eustatius and St Lucia. Barbuda was decimated by Hurricane Irma September 5-6 when it made its first landfall in the Caribbean as a top intensity Category Five storm. The NHC said Maria could produce a “dangerous storm surge accompanied by large and destructive waves” that will raise water levels by four to six feet (1.2 to 1.8 meters) when it passes through the Leeward Islands.

Read more …

Aug 212017
 
 August 21, 2017  Posted by at 9:28 am Finance Tagged with: , , , , , , , ,  7 Responses »


Elliott Erwitt Waiting for a Streetcar in Downtown Pittsburgh 1950

 

Ron Paul: 50% Stock Market Plunge ‘Conceivable,’ But Not Trump’s Fault (CNBC)
Zombies Propped Up As China’s Debt Swaps Surpass $100 Billion (BBG)
China’s Plunge Protection Team Claims “State Meddling” Stabilizes Markets (ZH)
House Of Cards: Lending Culture Is Leaving Australians Vulnerable (Abc)
Diesel Scandal Is A Risk To German Economy, Says Ministry (R.)
Britain and EU Clash Over Brexit Timetable for Trade Deal (BBG)
NAFTA Negotiations Start in Secrecy. Lobbying Heats Up (WS)
Beware the “The Cultural Civil War” Narrative (CHS)
Rob Ford, Donald Trump and the New Direction of Political Polarization (Towhey)
When Exactly Will the Eclipse Happen? (Wolfram)

 

 

Paul’s just guessing on the numbers, but the risks are obvious. And Trump will be blamed anyway.

Ron Paul: 50% Stock Market Plunge ‘Conceivable,’ But Not Trump’s Fault (CNBC)

Ron Paul’s sell-off prediction just got more severe. The former Republican Congressman from Texas believes escalating dysfunction in Washington will create even more pain for Wall Street. “A 50% pullback is conceivable,” Paul said on “Futures Now” recently. “I don’t believe it’s ten years off. I don’t even believe it’s a year off. ” According to his calculations, it would cut the S&P 500 Index in half, to 1212, and the blue-chip Dow Jones Industrial Average would collapse to 10,837. Paul noted that there’s a lot of chaos in Washington right now, with an “unpredictable president” and those who are inclined to “tear him apart” but if the market takes that big of a tumble, he doesn’t see it as Trump’s fault.

“It’s all man-made. It’s not the fault of Donald Trump in the last week. If the market crashes tomorrow and we have a great depression, he didn’t do it in six months. It took more like six or ten years to cause all these problems that we’re facing,” he said. What’s more, it would come at the expense of businesses who are counting on reforms such as tax cuts and fewer regulations, according to Paul. Paul, who is also known for his presidential runs, originally made his case for a somewhat more benign 25% downturn on June 29 on “Futures Now.” He argued Wall Street is overestimating the strength of the economy, and the Federal Reserve kept interest rates too low for too long. He said the situation for stocks could turn ugly as soon as October. Stocks will try to bounce back on Monday from multiple losing weeks in a row. The Nasdaq just saw its fourth consecutive week of losses. Meanwhile, the Dow & S&P 500’s losing streak now sits at two weeks.

Read more …

China’s way of propping up coal and steel. Too big to fail.

Zombies Propped Up As China’s Debt Swaps Surpass $100 Billion (BBG)

Almost a year after China rolled out steps to rein in soaring corporate leverage, concerns are rising that undeserving companies are benefiting while households are getting saddled with risks. China unveiled guidelines for debt-to-equity swaps in October, part of measures to trim the world’s biggest corporate debt loads. The idea was that healthy firms would use the program to cut interest-bearing borrowings, while bloated companies would be shunned. But it hasn’t always worked out that way, even as the total value of swaps reached 776 billion yuan ($116 billion) in the second quarter when volumes jumped to a record, according to Natixis. While China’s State Council said in October that zombie firms may not take part, 55% of the swaps last quarter were in the coal and steel industries, which are plagued by overcapacity, Natixis says.

The stakes are high for lenders and even individual investors, some of whom buy wealth management products repackaged from the swaps. The absence of a clear definition of “zombie” is part of the problem, according to Fitch Ratings. Views vary on whether further guidelines on the program released this month by the banking regulator will help address these issues. The program is attracting bad companies because they see debt-to-equity swaps as a way to get a bailout, said Chi Lo, Greater China senior economist at BNP Paribas Asset Management. “You can imagine the zombie companies will be just like cancer cells that eat into the system.”

The swaps generally work like this: A bank agrees to take over a company’s debt from its original lenders. The bank sets up a unit which has other shareholders that help share risk. The unit assumes the debt and conducts a transaction with the company to convert it into equity. It can then dispose of the stake. In the most recent draft guidelines released earlier this month by the China Banking Regulatory Commission, a bank is required to own no less than a 50% stake in the unit conducting the swaps. The guidelines also say that the units can sell bonds and borrow from the interbank market.

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That’s the same claim the Fed and ECB make, just in other words.

China’s Plunge Protection Team Claims “State Meddling” Stabilizes Markets (ZH)

It was two years ago, in June of 2015, when just as the Shanghai Composite was flirting with 5,000 and when literally the local banana stand guy was trading stocks, that the Chinese stock bubble burst, unleashing an unprecedented selling spree, a 40% drop in just two months, and Beijing’s nationalization of the stock market, courtesy of the domestic plunge protection team, the China Securities Regulatory Commission also known as the “National Team”. The decision by local authorities to effectively shut down price discovery had a huge confidence crushing impact on local investor confidence. As Gavekal Research put it overnight, “the lack of trust was crystallized by the decision in the summer of 2015 to “shut down” the equity markets for a while and stop trading in any stock that looked like it was heading south.

That decision confirmed foreign investors’ apprehension about China and in their eyes set back renminbi internationalization by several years, if not decades.” Understandably, with the realization that China (or any other nation for that matter), no longer has a an efficient, discounting stock market, but merely a policy tool meant to inspire confidence on the way up, and punish short sellers and “speculators” on the way down, the China Securities Regulatory Commission kept a low profile: after all why remind traders and investors that the local market only exists in the imaginations of several Beijing bureaucrats who sit down every day to decide the “fair value” of all market-traded equities. That changed last week, when for the first time in years, the Chinese Plunge Protection Team broke its silence and said that “state meddling has successfully stabilized China’s US$7 trillion stock market by curbing volatility and steering valuations to rational levels.”

For those stunned by the idiocy in the circular statement above, don’t worry it’s not just you: China indeed just said that the local market has become more efficient as a result of more manipulation. What is far more shocking, however, is that most central bankers around the world would agree with this statement.

Read more …

The banking system will fall with real estate, exposure to mortgage debt is 60%. And Australian banks own New Zealand banks.

House Of Cards: Lending Culture Is Leaving Australians Vulnerable (Abc)

A decade of housing price rises, low interest rates and relatively easy credit has left Australians carrying the second-highest level of household debt in the world. And despite efforts to tighten lending and to address problems in the lending culture, the ABC’s Four Corners program has learnt bank staff and mortgage brokers are still required to meet tough lending targets and some staff are threatened with dismissal if they do not meet the banks’ requirement to sign up more mortgages. The problems in the lending culture were acknowledged by the banks themselves earlier this year in a review conducted by the former public service chief, Stephen Sedgwick. Incentive payments and lending targets are still a primary motivator for bank staff. Internal performance expectations for Westpac bank lenders, obtained by Four Corners, include targets of six-to-nine home-finance requests a week and between two and three home-loan drawdowns a week.

Another economist who has raised the alarm is former banker Satiyajit Das. He said the 60% exposure to mortgage debt in Australia’s banks was “extremely high”. That figure “is at least 20% higher than Norway, and also higher than Canada, which is a very comparable economy to Australia”, he said. Australia’s feverish housing market has contributed but Mr Das said other countries that had experienced rapid house price rises did not have the same potentially dangerous exposure. “One of the biggest housing bubbles in the world is Hong Kong, but the Hong Kong banks have only got exposure to the housing market of around 15%,” he said. Exposure to housing debt at Australian levels, Mr Das said, would leave banks more vulnerable in the case of any housing downturn. “If there is a downturn then obviously the losses will build up quite quickly,” he said.

[..] Gerard Minack, the former head of developed market strategy at Morgan Stanley, said Australia had been led down this path by current tax arrangements and lenders who had been increasingly willing to leverage up borrowers. This, he said, had created “a massive affordability problem” that will exacerbate the pain associated with any downturn. Australia now has a household-debt-to-income ratio of 190%. “For every $1 of household income, there’s [nearly] $2 of debt,” Mr Minack said.

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Preparing Germans for a lenient attitude by their government (ahead of the Merkel re-election). Sorry guys, but carmakers are too big to fail. Can’t blame Angela…

Diesel Scandal Is A Risk To German Economy, Says Ministry (R.)

The emissions scandal ensnaring German carmakers is a risk to Europe’s largest economy, the finance ministry said on Monday. In its monthly report, the ministry named the issue, which broke out almost two years ago after Volkswagen admitted to cheating US diesel emissions tests, as a threat to Germany along with Britain’s decision to leave the European Union and protectionist trade policies by the US government. But it has said it was impossible to put a figure on the potential damage it could cause. The car industry is Germany’s biggest exporter and provides about 800,000 jobs. “Risks linked to how Brexit will shape out and future US trade policies remain,” the ministry said. “In addition, the so-called diesel crisis should be classified as a new risk to the German economy even though its effects are not possible to quantify at the moment.”

Strong household and state spending provided most of the impulse for the German economy in the second quarter when growth was measured at 0.6%. Weaker net foreign trade dampened growth, as exports grew strongly less than imports. The ministry said it expected the industrial sector to continue its upswing also in the third quarter, pointing to robust orders and strong business sentiment indicators. But the diesel crisis could cloud the German growth outlook, it said, adding: “Given the importance of the automotive industry [the diesel crisis) must be classified in the medium term as a risk to the overall economic development.” German politicians and car bosses agreed earlier in August to overhaul engine software on 5.3m diesel cars to cut pollution and try to repair the industry’s battered reputation.

EU antitrust regulators are also investigating allegations of a cartel among a group of German carmakers, a measure that could result in hefty fines for the companies. In April, Volkswagen was ordered to pay a $2.8bn criminal penalty in the United States for cheating on emissions tests. The company is also paying $1.5bn in a civil case brought by the US government and spending $11bn to buy back cars and offer other compensation. Back in Europe, German carmakers VW, Audi, Porsche, Mercedes and BMW face questions over whether they colluded to bring down the cost of components – including some used to control diesel emissions.

Read more …

How is it possible that just one party does these negotiations?

Britain and EU Clash Over Brexit Timetable for Trade Deal (BBG)

Britain and the European Union are at odds over how soon the Brexit talks can pivot towards a trade deal just a week before negotiations are set to resume. Adopting a provocative posture, U.K. Prime Minister Theresa May’s government declared at the weekend that it’s “stepping up pressure” on the bloc to shift the discussions away from the terms of separation as soon as October. The use of fighting words in the past has not budged the EU and in a sign the U.K. will be disappointed, Slovenian Prime Minister Miro Cerar told the Guardian that “the process will definitely take more time than we expected.”

Signs of fresh discord may unnerve investors after the pound last week under-performed all of its Group of 10 counterparts. By giving out more details of where it stands and spelling out its demands, the U.K. wants to change the narrative that it’s been too vague, and by doing so jolt the EU into talking trade sooner. With the clock ticking down to the U.K.’s March 2019 departure, and the two sides clashing over many key issues, Brexit Secretary David Davis seems bent on reviving a debate over whether talks should run in parallel rather than in the strict order the EU has laid out.

Such an ambition will draw short shrift from the EU. Its chief negotiator, Michel Barnier, last week reiterated that the other 27 governments won’t allow trade talks to start until “sufficient progress” has been made resolving residency rights, the U.K.’s exit bill and the border with Ireland. The original hope was to reach this milestone in October – in time for a summit of EU leaders – but that is now in doubt amid criticism within the EU of sluggish progress and a lack of detail from the British. “There are so many difficult topics on the table, difficult issues there, that one cannot expect all those issues will be solved according to the schedule made in the first place,” Slovenia’s Cerar told the Guardian. “What is important now is that the three basic issues are solved in reasonable time.”

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The NAFTA talks may well end up being as tough as the Brexit ones.

NAFTA Negotiations Start in Secrecy. Lobbying Heats Up (WS)

The first round of re-negotiating the North American Free Trade Agreement between the US, Canada, and Mexico began on Wednesday and is scheduled to last through Sunday. And the one thing we know about it is this: Despite promises in March by US Trade Representative Robert Lighthizer (USTR) that the negotiations would be transparent, the USTR now considers the documents and negotiations “classified” and they’ll be cloaked in secrecy. But corporate lobbyists have access. And they’re all over it. The Electronic Frontier Foundation put it this way: “Once again, following the failed model of the Trans-Pacific Partnership (TPP), the USTR will be keeping the negotiating texts secret, and in an actual regression from the TPP will be holding no public stakeholder events alongside the first round. This may or may not set a precedent for future rounds, that will rotate between the three countries every few weeks thereafter, with a scheduled end date of mid-2018.”

But during his confirmation hearing in March, Lighthizer had promised to make the negotiations transparent and to listen to more stakeholders and the public. The EFF reported at the time that in response to Senator Ron Wyden question – “What specific steps will you take to improve transparency and consultations with the public?” – Lighthizer replied in writing: “If confirmed, I will ensure that USTR follows the TPA [Trade Promotion Authority, aka. Fast Track] requirements related to transparency in any potential trade agreement negotiation. I will also look forward to discussing with you ways to ensure that USTR fully understands and takes into account the views of a broad cross-section of stakeholders, including labor, environmental organizations, and public health groups, during the course of any trade negotiation.

He said that “we can do more” to ensure that we “have a broad and vigorous dialogue with the full range of stakeholders in our country.” Senator Maria Cantwell tried to have Lighthizer address the skewed Trade Advisory Committees that currently advise the USTR, by asking: “Do you agree that it is problematic for a select group of primarily corporate elites to have special access to shape US trade proposals that are not generally available to American workers and those impacted by our flawed trade deals?” Lighthizer replied: “It is important that USTR’s Trade Advisory Committees represent all types of stakeholders to ensure that USTR benefits fully from a diverse set of viewpoints in considering the positions it takes in negotiations.”

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You’re being played.

Beware the “The Cultural Civil War” Narrative (CHS)

The play is as old as civilization itself: conjure up extremists (paying them when necessary), goad the formation of opposing extremists, then convince the populace that these extremists have been normalized, i.e. your friends and neighbors already belong to one or the other. This normalization then sets up the relentless demands to choose a side – the classic techniques of misdirection and false choice. Just as you’re sold a triple-bacon cheeseburger or a hybrid auto, you’re being sold a completely fabricated cultural civil war. There have always been extremists on every edge of the ideological spectrum, just as there have always been religious zealots. In a healthy society, these fringe pools of self-reinforcing fanaticism are given their proper place: they are outliers, representing self-reinforcing black holes of confirmation bias of a few.

In times of social, political and financial stress, such groups pop up like mushrooms. In times of media saturation, a relative handful can gain enormous exposure and importance because the danger they pose sells adverts and attracts eyeballs/viewers. Add a little fragmentation, virtue-signaling, demands for ideological conformity and voila, you get a deeply fragmented and deranged populace that is incapable of recognizing the dire straits it is in or recognizing the structural sources of its impoverishment and powerlessness. In other words, you get an easily mallable populace at false war with itself.

There is always common ground for those who dare to seek it. The Powers That Be are blowing up the bridges as fast as they can, whipping up fear and hatred of the Other, fanning the flames of extremism and claiming extremists are now normalized and everywhere. All of this is false. Would you buy an entirely manipulated cultural civil war if it was advertised as such? If not, then don’t buy into the false (but oh so useful to the ruling elites) narrative of an “inevitable cultural Civil War.”

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Excellent piece by G. Mark Towhey, “a key player on the team that helped elect Rob Ford as mayor of Toronto”.

Rob Ford, Donald Trump and the New Direction of Political Polarization (Towhey)

You are not a typical American. Not even close. The typical American doesn’t read lengthy articles in policy journals. The typical American gets up far too early in the morning, after too little sleep, works too hard for too long in a job that pays too little, before heading home, feeding the kids, cleaning the house, and collapsing into bed far too late. He or she has precious little time to consume news: a fleeting glimpse of pithy headlines, maybe a two-minute newscast on the radio if they drive to work or a few minutes of local TV news—mostly weather and sports scores. It is through this lens that typical Americans view the world beyond their personal experience and that of friends and family. It’s through this lens that they assess their government and judge their politicians.

These are the typical Americans who elected Donald Trump. They weren’t alone in voting for Trump, and they didn’t cast their ballots by mistake. They chose Trump because, out of the available alternatives, he best represented their view of the world. I am not a typical American, either. In fact, I’m a Canadian. I was a key player on the team that helped elect Rob Ford as mayor of Toronto—North America’s fourth largest city. I helped him craft a campaign platform that resonated with typical Torontonians and, later, helped him translate that platform into an actionable governing agenda. I helped him get things done. Three years later, Ford fired me as his chief of staff when I insisted that he go to rehab to address the personal demons that were destroying both him and his mayoralty. My experience with Ford has given me an unusual perspective on the recent presidential election, the Trump phenomenon, and the rise of a new and powerful political force that favors unorthodox candidates.

No, you and I are not typical at all. We have time to read (and, apparently, to write) long-form articles in policy journals. We can pause our breadwinning labor and child-rearing duties long enough to consider hypotheticals and to ruminate, now and then, on an idea or two. We may not recognize this as a luxury in our modern world, but we should. Amid all that rumination, however, we rarely stop to think that what motivates us does not necessarily excite typical Americans, the people who elected Donald Trump some six years after their northern cousins elected Rob Ford in Toronto. Almost by mistake, this bloc of typical citizens—overstressed, under-informed, concerned more with pragmatic quality of life issues than idealistic social goals—has become a powerful political movement. And we didn’t see them coming. Conventional political leaders seem to completely misunderstand them, and even their own champions often appear to disrespect them. They do so at their peril.

In 2010, Rob Ford was a dark horse candidate in the race to be mayor of Toronto. He later became internationally notorious for his very public battles with drug addiction and frequent appearances as a punch line in late-night television monologues. But his 2010 campaign was based on his understanding of the struggles typical residents endured and their limited time for politics. Ford boiled his campaign down to “Respect for Taxpayers” and “Stop the Gravy Train.” His message was concise and understandable. It fit on a bumper sticker. It could be passed by word of mouth from one person to the next without loss of meaning or impact. That it meant something different to everyone was not a weakness but a strength—no matter what you thought the “gravy train” was, everyone wanted it stopped.

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In case you want to know Absolutely Everything about the eclipse, here’s Stephen Wolfram.

When Exactly Will the Eclipse Happen? (Wolfram)

A total solar eclipse occurs when the Moon gets in front of the Sun from the point of view of a particular location on the Earth. And it so happens that at this point in the Earth’s history the Moon can just block the Sun because it has almost exactly the same angular diameter in the sky as the Sun (about 0.5° or 30 arc-minutes). So when does the Moon get between the Sun and the Earth? Well, basically every time there’s a new moon (i.e. once every lunar month). But we know there isn’t an eclipse every month. So how come? Well, actually, in the analogous situation of Ganymede and Jupiter, there is an eclipse every time Ganymede goes around Jupiter (which happens to be about once per week). Like the Earth, Jupiter’s orbit around the Sun lies in a particular plane (the “Plane of the Ecliptic”).

And it turns out that Ganymede’s orbit around Jupiter also lies in essentially the same plane. So every time Ganymede reaches the “new moon” position (or, in official astronomy parlance, when it’s aligned “in syzygy”—pronounced sizz-ee-gee), it’s in the right place to cast its shadow onto Jupiter, and to eclipse the Sun wherever that shadow lands. (From Jupiter, Ganymede appears about 3 times the size of the Sun.) But our moon is different. Its orbit doesn’t lie in the plane of the ecliptic. Instead, it’s inclined at about 5°. (How it got that way is unknown, but it’s presumably related to how the Moon was formed.) But that 5° is what makes eclipses so comparatively rare: they can only happen when there’s a “new moon configuration” (syzygy) right at a time when the Moon’s orbit passes through the Plane of the Ecliptic.

Read more …

Oct 132016
 
 October 13, 2016  Posted by at 8:39 am Finance Tagged with: , , , , , , , , ,  2 Responses »


G. G. Bain 100-mile Harkness Handicap, Sheepshead Bay Motor Speedway, Brooklyn 1918

China September Exports Plunge 10%, Imports Down 1.9% (R.)
Wave Of China Property Tightening Hits Home Sales During Holiday Week (R.)
Chinese Firms Unveil Debt Swaps As Beijing Struggles To Reduce Leverage (R.)
US Mortgage Applications Down 6%, Rates Rise (CNBC)
Where Will All the Money Go When All Three Market Bubbles Pop? (CHSmith)
If Europe Insists On A Hard Brexit, So Be It (AEP)
Brexit Means Whatever The EU Says It Means (Luyendijk)
ECB Says Greece Needs Clarity on Debt to Regain Market Access (BBG)
Steve Keen: A Renegade Economist Has A Plan For Reducing Global Debt (RV)
Pension Benefits In Tiny California Town Slashed As ‘Ponzi Scheme’ Exposed (ZH)
Dumped Apartment Projects ‘Groundhog Day’ To Global Financial Crisis (NZ Herald)
Wells Fargo CEO John Stumpf Steps Down, Walks Away With $120 Million (WSJ)
Moscow Officials Told To Immediately Bring Back Children Studying Abroad (ZH)
Putin Ally Tells Americans: Vote Trump Or Face Nuclear War (R.)
“We Are At War And You Are The Front-line Troops In This War” (I’Cept)
The Global Seed And Chemical Industry Is Undergoing A Rapid Realignment (BBG)
Monsanto Dismisses ‘People’s Tribunal’, ‘Moral Trial’ As A Staged Stunt (G.)
Cut Funds To EU States That Turn Away Refugees, Italy Urges (R.)

 

 

All you need to know about the state of world trade.

China September Exports Plunge 10%, Imports Down 1.9% (R.)

China’s September exports fell 10% from a year earlier, far worse than expected, while imports unexpectedly shrank 1.9% after picking up in August, suggesting signs of steadying in the world’s second-largest economy may be short-lived. That left the country with a trade surplus of $41.99 billion for the month, the General Administration of Customs said on Thursday. Analysts polled by Reuters had expected imports to rise 1%, after unexpectedly advancing 1.5% in August for the first time in nearly two years on stronger demand for coal as well as other commodities such as iron ore which are feeding a construction boom.

Exports had been expected to fall 3%, slightly worse than in August as global demand for Asian goods remains stubbornly weak. Analysts had expected the trade surplus to expand to $53 billion in September from August’s $52.05 billion. The September import reversal raises questions over the strength of the recent recovery in domestic demand, Julian Evans-Pritchard at Capital Economics said in a note after the data. “The data we have so far suggests that a drop in import volumes of a number of key commodities, including iron ore and copper, are partly responsible,” he said.

Read more …

Xi continues to do two opposite things: blow bubbles and deflate them at the same time. My guess is there’s a time limit on that game.

Wave Of China Property Tightening Hits Home Sales During Holiday Week (R.)

A wave of restrictions imposed on housing markets in major Chinese cities last week have unnerved some buyers and developers, cutting the area of new homes sold in places such as Beijing and Shenzhen by more than half. More than 20 cities have imposed measures, including higher mortgage downpayments, to cool hot property markets that have raised official alarm in Beijing and fresh concerns about China’s ballooning debt. Last week was a public holiday to mark National Day, traditionally a high season for property sales. Property agents said prices of new homes sold in the southern city of Shenzhen and in Beijing dropped 20% last week to entice buyers, compared with the previous week.

“The new tightening measures are quite stringent,” said Alan Cheng, general manager of realtor Centaline Shenzhen. “It’s a blow to confidence and people are worried that prices will drop, so they are observing from the sidelines now.” The latest restrictions varied from city to city, but included higher mortgage downpayments for second and third-time home buyers, in a bid to stem the flow of cash into the red-hot property market. China’s home prices rose 9.2% in August from a year earlier, official data shows. But in Shenzhen, they increased almost 37%, in Beijing more than 23% and in Shanghai topped 30%. Such hefty price rises have been common all year in these so-called Tier 1 cities. The rally has prompted a frenzy among some buyers. In some cases, couples divorced to find a way around buying restrictions.

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How to make debt go away. Transfer it from state-owned firms to state-owned banks. Yeah, that should work..

Chinese Firms Unveil Debt Swaps As Beijing Struggles To Reduce Leverage (R.)

Chinese firms are moving rapidly to announce debt restructuring plans following the release of government guidelines on Monday, as policymakers experiment with ways to rein in the country’s ballooning corporate debt. China Construction Bank, the nations’ second-largest lender by assets, has been reported in two deals to help big, debt-laden state companies in as many days, and other Big Four banks are expected to follow soon. Chinese companies sit on $18 trillion in debt, equivalent to about 169% of GDP, according to the most recent figures from the Bank for International Settlements. Most of it is held by state-owned firms. Construction Bank will conduct a debt-to-equity swap with Yunnan Tin Group, the world’s biggest tin producer and exporter, to cut its debt and financing costs, Xinhua reported on Wednesday.

Separately, the bank on Tuesday announced the launch of a 24 billion yuan ($3.60 billion) debt restructuring fund to help struggling Wuhan Iron and Steel. Although the statement from CCB did not specify the planned operations of the fund, official media reported that the debt reduction would be accomplished primarily through debt-to-equity swaps. CCB will give Yunnan Tin 2.35 billion yuan next week in its first round of investment to swap some high-interest debt, Xinhua reported, without spelling out further details of the deal. The guidelines for debt-to-equity swaps, mooted as one solution to China’s growing corporate debt overhang, have been in development for months. However, some senior bankers and analysts have been outspoken critics of the idea, saying it risks saddling banks with ownership stakes in weak companies which Beijing sees as too big or too sensitive to fail [..]

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Actual rates are starting to creep up no matter what central banks do. Sign of the times.

US Mortgage Applications Down 6%, Rates Rise (CNBC)

As pumpkins pop up on front porches across the nation, the highest interest rates in a month are scaring consumers away from the mortgage market. Total mortgage application volume fell 6% on a seasonally adjusted basis for the week ended Oct. 7, compared to the previous week, according to the Mortgage Bankers Association. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 3.68%, from 3.62%, with points increasing to 0.35 from 0.32 (including the origination fee) for 80% loan-to-value ratio loans.

“As incoming economic data reassured investors regarding U.S. growth, and financial markets returned to viewing a December Fed hike as increasingly likely, mortgage rates rose to their highest level in a month last week,” said Michael Fratantoni, chief economist at the MBA. “Total and refinance application volume dropped to their lowest levels since June as a result.” Applications to refinance a home loan, which are highly rate-sensitive, have been falling for weeks, and took another 8% dive last week, seasonally adjusted. Mortgage applications to purchase a home fell a smaller 3% for the week and are 27% higher than one year ago. Comparisons to last year may be skewed, however, as new mortgage rules went into effect last October that pulled demand forward and then delayed mortgage processing.

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Charles asks: “Where will the money fleeing deflating bubbles go?”. But doesn’t add that much of it will simply evaporate. That’s what happens when bubbles pop.

Where Will All the Money Go When All Three Market Bubbles Pop? (CHSmith)

Everyone who’s not paid to be in denial knows stocks, bonds and real estate are in bubbles of one sort or another. Real estate is either an echo bubble or a bubble that exceeds the previous bubble, depending on how attractive the market is to hot-money investors.

Here’s a look at the inflation-adjusted S&P 500 (SPX) and margin debt: yep, a bubble.

With the Fed funds rate pinned to near-zero, bonds are in a bubble as well.

[..] Where will the money fleeing deflating bubbles go? Since the stock, bond and real estate markets are all correlated, it’s a question with no easy answer. What would $10 trillion seeking safe haven do to small asset classes such as precious metals, bitcoin, and tradable (liquid) sectors of the commodities markets? If the bubbles in bonds, stocks and real estate all pop, what markets will be left that can absorb trillions of hot money sloshing around? the short answer is: none. The chaos that will arise as trillions of dollars, yen, yuan and euros, etc. try to crowd through the fire exits as the asset bubbles pop will be monumental, and the the spikes in small asset class prices as the hot money floods in will be equally monumental.

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At least Ambrose doesn’t whine as much as many Brits do. “What [Hollande] is also admitting – à son insu – is that the union is held together only by fear. He might as well write its epitaph.” He’s writing his own epitaph, too.

If Europe Insists On A Hard Brexit, So Be It (AEP)

There may be serious economic trials ahead as we extract ourselves from the EU after more than forty years, but the slump in sterling is not one of them. The devaluation is necessary and desirable. The pound is now near ‘fair value’ based on the real effective exchange rate used by the IMF. All that has happened is a correction of the extreme over-valuation of sterling before Brexit, caused by capital inflows. This left the country with the worst current account deficit in peace-time since records began in the 18th Century. The fall is roughly comparable to the devaluation from 2007 to 2008 – though the same financial elites who talk so much of Armageddon today played it down on that occasion, mindful that their own banking crisis was the trigger. We can argue over how much the 2008 devaluation helped but it clearly acted as shock absorber at a crucial moment.

It was in any case a far less painful way to restore short-term competitiveness than the ‘internal devaluations’ and mass unemployment suffered by the eurozone’s Club Med bloc. But there is a deeper point today that is often overlooked. Central banks across the developed world are caught in a deflationary trap. The ‘Wicksellian’ or natural rate of interest has been falling ever lower with each economic cycle and is now at or below zero in half the global economy, a full seven years into the expansion. This paralyses monetary policy and has dark implications for the next downturn. It is why central banks are desperately trying to drive down their currencies to gain a little breathing room, or in the case of the US Federal Reserve to stop the dollar rising. By the accident of Brexit, Britain has pulled off a Wicksellian adjustment that eludes others.

With luck, the economy may even generate a few flickers of inflation, enough to let the Bank of England raise interest rates and start to restore ‘intertemporal’ equilibrium. Personally, I have been in favour of a “soft Brexit” that preserves unfettered access to the single market and passporting rights for the City, but not at any political cost – and certainly not if it means submitting to the European Court, which so cynically struck down our treaty opt-out on the Charter in a grab for sweeping jurisdiction. But what has caused me to harden my view – somewhat – is the open intimidation by a number of EU political leaders. “There must be a threat,” said French president Francois Hollande. “There must be a price… otherwise other countries or other parties will want to leave the European Union.”

These are remarkable comments in all kinds of ways, not least in that the leader of a democratic state is threatening a neighbouring democracy and military ally. What he is also admitting – à son insu – is that the union is held together only by fear. He might as well write its epitaph.

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Yet another example of why Britain should be delighted to leave the EU. But isn’t.

Brexit Means Whatever The EU Says It Means (Luyendijk)

If you still believe Britain will get a sweet deal out of Brexit because “the EU needs the UK more than vice versa”, ask yourself: why don’t we hear European politicians pleading with Britain “not to punish the EU over Brexit”? Why is the pound plunging against the euro and not the other way around? Why do we not hear of companies escaping from the EU to “free-trading Britain” while there is almost a traffic jam in the other direction? Why do EU leaders look rather relaxed when Brexit comes up, even cracking the odd joke or two about sending the British foreign minister, Boris Johnson, a copy of the Lisbon treaty so he can read up on reality? The negotiating cards with the EU are “incredibly stacked our way”, the Brexit minister, David Davis, told the House of Commons on Monday.

The cards certainly are “incredibly stacked” – but not in the way Davis imagines. To understand why, get a map of the EU and find Slovenia, a nation of 2 million people. No, that is Slovakia, with 5.4 million, almost three times bigger. Next look up Lithuania (population: 3.3 million), Latvia (2 million), Estonia (1.3 million) and Luxembourg (500,000). Now repeat after me: all these EU members, as well as the other 21, hold veto power over whatever deal the UK (65 million) manages to negotiate with the EU (population: 508 million). That is right, 1.2 million Cypriots can paralyse the British economy by blocking a deal, and the same holds true for Malta (400,000). Did I mention the Walloon parliament in Namur (get that atlas out again) has veto power too? And then there is, of course, the European parliament in Strasbourg.

Brexiteers argue that the EU takes ages to conclude trade deals so Britain is better off striking them on its own. The former is certainly true. Consider the Walloons currently threatening to derail an EU trade deal with Canada. But how does EU institutional sluggishness square with the Brexiteers’ promise that the EU is even capable of concluding a swift Brexit deal with the UK, even if it wanted to do? It doesn’t. And this is true even before we look at whether the EU would have an interest in making things easy for Britain. Remember how, before the EU referendum, David Cameron went to Brussels threatening to support leave unless he was given a range of “concessions”? Well, two can play that game, now that the tables have turned – except the EU has 27 nations. That is a lot of scope for blackmail à l’anglaise.

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A new torture technique. It’s a Good Cop Bad Cop set-up, but with three parties: EU, ECB and IMF, who keep on blaming both each other and the suspect, who may be innocent but is never released.

ECB Says Greece Needs Clarity on Debt to Regain Market Access (BBG)

Greece won’t regain stable access to international bond markets unless creditors ease repayment terms on the country’s bailout loans, ECB Executive Board member Benoit Coeure said. The country cannot gain “solid and long-lasting market access without the clarity about the sustainability of Greek debt,” Coeure told European Parliament lawmakers on Wednesday, adding that the IMF should stay fully involved in the Greek bailout to ensure fair treatment in Greek debt talks. “There are serious concerns about the sustainability of Greek public debt,” the Frenchman said during the hearing. “We are looking forward to a solution that can reassure markets, restore confidence in the dynamics of public debt, allow the full involvement of the IMF in the program – which would enhance the program’s credibility – and restore market access for Greece ahead of the end of the program in July 2018.”

The IMF is at loggerheads with Greece’s European creditors as the Washington-based lender insists on concrete and quantified relief measures before extending any more loans to the continent’s most-indebted state. While the institution acknowledges that a nominal haircut on Greek bailout loans is implausible, it has demanded more concessionary repayment terms, including extensions of maturities and a cap on interest rates. Wolfgang Schaeuble has said the source of Greece’s woes is a lack of competitiveness, not elevated debt levels, and reiterated calls earlier this week for the IMF to contribute to Greek bailout loans. The ECB “very much” believes that the IMF should be on board when devising a solution for Greek debt, Coeure said. The ECB has excluded Greek government bonds from its asset-purchase program, pending “an additional level of safeguards and clarity on debt sustainability.”

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Bit hard to find the best part. There’s a RealVision interview connected to it.

Steve Keen: A Renegade Economist Has A Plan For Reducing Global Debt (RV)

What he is really focused on is here is reducing the debt burden and is inspired by US philanthropist Richard Vague, who started two US credit card companies, First USA and Juniper Financial — and now campaigns against excessive debt. “We have to cope with the residue, and it’s created this enormous pile of elephant dung of debt. We have to get rid of it. I’m simply being practical about how do we get rid of it,” Keen said. “He’s a totally realistic man (Vague), totally feet-on-the-ground personality. And he said, when you look at history, there has never been a successful episode of de-leveraging by growing out of it. It’s been debt write offs every last time. Somehow debts have been written off whether it’s being done at the individual scale by individual bankruptcies or some sort of collective action.

“We can’t get rid of it by market mechanisms, and we can’t grow our way out of it. “So we’ve got this pile of elephant dung we need to get rid of. Let’s work out a way of doing it. Richard’s way is to let the banks write debt off over like a 30-year amortization period. So you have somebody who has got a $1million dollar mortgage, you write it down to half a million, in one year, that half a million loss by the bank would wipe the bank out. You let them out of that over 30 years. That why they can cope with it, and you get a recovery that way. “Mine is to say let’s use the state’s capacity to create money to do the cancellation. But whatever way you go about it, you’ve got to reduce that pile of elephant dung we call accumulated private debt.”

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Tidings of things to come.

Pension Benefits In Tiny California Town Slashed As ‘Ponzi Scheme’ Exposed (ZH)

For the tiny little town of Loyalton, California, with a population of only 700, a failure of city council members to understand the difference between the calculation of a regular everyday pension liability and a “termination liability” has left 4 residents at risk of losing their pensions from Calpers. According to the New York Times, the town of Loyalton decided to drop out of Calpers back in 2012 in order to save some money but what they got instead was a $1.6mm bill which was more than their annual budget. For those who aren’t familiar with pension accounting, we can shed some light on the issue faced by Loyalton. There are two different ways to calculate the present value of pension liabilities. One methodology applies to “solvent”, fully-functioning pension funds (we call this the “Ponzi Methodology”) and the other applies to pensions that are being terminated (we call this one “Reality”).

Under the “Ponzi Methodology,” pension funds, like Calpers, discount their future liabilities at 7.5% in order to keep the present value of their liabilities artificially low. That way, pension funds can maintain the illusion that they’re solvent and the Ponzi scheme can continue on so long as there are enough assets to cover annual benefit payments. Now, the managers of the pension funds aren’t actually dumb enough to believe that the “Ponzi Methodology” accurately reflects the true present value of future liabilities because they know that, particularly in light of current Central Banking policies around the world, their actual long-term returns will be much lower than 7.5%. Therefore, they have a completely separate, special calculation that applies when towns, like Loyalton, want to exit their plan.

This “termination liability”, or what we refer to as “Reality”, uses a discount rate closer to or even below risk-free rates which means the present value of the future liabilities is much higher. As a quick example, lets just assume that Loyalton’s 4 pensioners draw $225,000 per year, in aggregate pension benefits, and enjoy a 2% annual inflation adjustment. Assuming a 7.5% discount rate, the present value of that liability stream is about $2.9mm. However, if the discount rate drops to 2%, the present value of those liabilities surges to $4.5mm…hence the $1.6mm bill sent to the Loyalton City Council.

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And so it begins (again).

Dumped Apartment Projects ‘Groundhog Day’ To Global Financial Crisis (NZ Herald)

The collapse of property developments in Auckland as banks refuse to fund projects due to blowouts in construction and labour costs, is “almost groundhog day” to the run-up of the global financial crisis in 2007/2008 says John Kensington, the author of KPMG’s Financial Institutions Performance Survey. The most recent development to be cancelled is the Flo apartment project in Avondale. Buyers’ 10% deposits were refunded this week as the developer cited funding and construction cost issues. Speaking to BusinessDesk, Kensington said exactly the same thing was happening at the start of the GFC. “Banks were looking at property development opportunities back then, and going, ‘we’ve got a record rise in prices, we’ve got shortages of materials, we’ve got shortages of labour, we don’t think this property development has been correctly analysed, we don’t think it’s going to work’, so they declined to fund it.”

Kensington said this year was different because the finance companies were diminished and no longer in a position to take up the slack. “The money went to finance companies [before the GFC] who, having got the money, had to find a home and probably invested in the very things the banks had said no to. At least this time round there is not as strong a property finance company sector there to take up the slack when the banks said no. I’m sure if there was, they would happily bank some of this.” He added that there was a “real strain on the construction industry, labour costs are blowing out, and there are some shortages of building materials”. Prime Minister John Key yesterday told the Herald he stood by comments that young people should be looking to buy apartments as their first home.

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So go after him, I dare you.

Wells Fargo CEO John Stumpf Steps Down, Walks Away With $120 Million (WSJ)

Wells Fargo Chairman and CEO John Stumpf, under fire for the bank’s sales-tactics scandal and his own handling of its fallout, is stepping down from both roles, effective immediately, the bank said Wednesday. Mr. Stumpf will be replaced as head of the third-largest U.S. bank by assets by President and COO Timothy J. Sloan, who was widely seen as his heir apparent. Mr. Stumpf won’t receive a severance package, the bank said. The board, at Mr. Stumpf’s own recommendation, had previously decided he should relinquish $41 million in unvested equity, one of the biggest-ever forfeitures of pay by a bank chief. He still retires with tens of millions of dollars earned during roughly 35 years at the bank. Mr. Stumpf’s departure comes after he was subjected to two grillings on Capitol Hill in which he was attacked by both Democrats and Republicans.

The bank also faces numerous federal and state inquiries into its sales-practices issues, including from the Justice Department. The toppling of Mr. Stumpf, 63 years old and just shy of his 10th year as CEO, marks a stunning comedown for a firm that largely passed through the financial crisis unscathed and which was seen as a reliable Main Street lender. That reputation was shattered by the sales-tactics scandal, which revealed that bank employees had opened as many as two million accounts without customers’ knowledge. The bank has said it regrets the improper behavior, has ended sales goals for retail-bank employees and has been refunding customers improperly charged.

The problems came to light Sept. 8 when Wells Fargo agreed to a $185 milion fine and enforcement action with regulators. That settlement also brought to light that the bank had fired 5,300 employees over a five-year period for improper behavior. This underscored the breadth of problems related to a hard-charging sales culture that pushed bankers to sell multiple products to individual customers.

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Curious report.

Moscow Officials Told To Immediately Bring Back Children Studying Abroad (ZH)

In Europe, when it gets serious, you have to lie… at least if you are an unelected bureaucrat like Jean-Claude Juncker. In Russia, however, when it gets serious, attention immediately turns to the children. Which is why we read a report in Russian website Znak published Tuesday, according to which Russian state officials and government workers were told to bring back their children studying abroad immediately, even if means cutting their education short and not waiting until the end of the school year, and re-enroll them in Russian schools, with some concern. The article adds that if the parents of these same officials also live abroad “for some reason”, and have not lost their Russian citizenship, should also be returned to the motherland. Znak cited five administration officials as the source of the report.

The “recommendation” applies to all: from the administration staff, to regional administratiors, to lawmakers of all levels. Employees of public corporations are also subject to the ordinance. One of the sources said that anyone who fails to act, will find such non-compliance to be a “complicating factor in the furtherance of their public sector career.” He added that he was aware of several such cases in recent months. It appears that the underlying reason behind the command is that the Russian government is concerned about the optics of having children of the Russian political elite being educated abroad, while their parents appear on television talking about patriotism and being “surrounded by enemies.”

While we doubt the impacted children will be happy by this development, some of the more patriotic locals, if unimpacted, are delighted. Such as Vitaly Ivanov, a political scientist who believes that the measure to return children of officials from studying abroad, is “long overdue.” According Ivanoc, the education of children of the Russian elite abroad is subject to constant ridicule and derision against the ruling regime. “People note the hypocrisy of having a centralized state and cultivating patriotism and anti-Western sentiment, while children of government workers study abroad. You can not serve two gods, one must choose.”

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“..if they vote for Hillary it’s war. It will be a short movie. There will be Hiroshimas and Nagasakis everywhere.”

Putin Ally Tells Americans: Vote Trump Or Face Nuclear War (R.)

Americans should vote for Donald Trump as president next month or risk being dragged into a nuclear war, according to a Russian ultra-nationalist ally of President Vladimir Putin who likes to compare himself to the U.S. Republican candidate. Vladimir Zhirinovsky, a flamboyant veteran lawmaker known for his fiery rhetoric, told Reuters in an interview that Trump was the only person able to de-escalate dangerous tensions between Moscow and Washington. By contrast, Trump’s Democratic rival Hillary Clinton could spark World War Three, said Zhirinovsky, who received a top state award from Putin after his pro-Kremlin Liberal Democratic Party of Russia (LDPR) came third in Russia’s parliamentary election last month.

Many Russians regard Zhirinovsky as a clownish figure who makes outspoken statements to grab attention but he is also widely viewed as a faithful servant of Kremlin policy, sometimes used to float radical opinions to test public reaction. “Relations between Russia and the United States can’t get any worse. The only way they can get worse is if a war starts,” said Zhirinovsky, speaking in his huge office on the 10th floor of Russia’s State Duma, or lower house of parliament. “Americans voting for a president on Nov. 8 must realize that they are voting for peace on Planet Earth if they vote for Trump. But if they vote for Hillary it’s war. It will be a short movie. There will be Hiroshimas and Nagasakis everywhere.”

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Nice country to live in.

“We Are At War And You Are The Front-line Troops In This War” (I’Cept)

“That’s the next wave in the militarization of police,” Atkinson told The Intercept in an interview. “What we found was a whole slew of retired military officers now in the private sector now selling the exact same surveillance technology that they just got back from Iraq and Afghanistan with to local law enforcement for small money on the dollar.” The intent of “Do Not Resist,” Atkinson said, is to provide a glimpse inside the realities of American policing, challenge the policing-for-profit model that has caused departments in economically depressed communities to treat their citizens as walking ATM machines, call out a warrior culture that divides law enforcement from the public they’re sworn to serve, and flag the dangers of war-zone technologies being applied domestically.

[..] All told, the team traveled to 19 states, went on roughly 20 police ride-a-longs, observed half a dozen raids, and interacted with hundreds of police officers. The hope was to be on-hand for an incident in which a SWAT team’s use of heavy weapons would be unquestionably warranted. “I thought the whole time I would be able to show something that would kind of reflect the entire scope of what a SWAT officer might go through sometimes, where you actually do need the equipment,” Atkinson explained.

Instead, the filmmaker repeatedly found himself watching police with military-grade weaponry executing dubious search warrants. The frequency of the raids was particularly shocking, with one of the officers in the film claiming his team does 200 such operations a year. By comparison, Atkinson notes, his father performed a total of 29 search warrant raids over his entire 13 years in SWAT – according to some estimates, SWAT teams now carry out between 50,000 to 80,000 raids across the country annually. “The search warrants, we’re told, are always used for massive drug dealers and kingpins, and then we run in these homes and we never found anything,” Atkinson said.

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The real problem is that such a thing as a ‘seed and chemical industry’ exists at all. That agriculture has been just about fully taken over by 100+ year-old chemical companies that started out supplying death and now seek to control life, control our food to sell their chemicals, which our food doesn’t need.

The Global Seed And Chemical Industry Is Undergoing A Rapid Realignment (BBG)

The global seed and chemical industry is undergoing a rapid realignment, with three massive deals in less than a year. Last month, Bayer clinched a bid to buy Monsanto, the world’s biggest seed company, for $66 billion, ending a months-long chase. DuPont and Dow Chemical plan a $59 billion merger of equals, while China National Chemical waits to complete its $43 billion takeover of Swiss seed maker Syngenta. While the dominant players get bigger, some independents look for advantages in research and development. About two-thirds of Stine’s employees work in R&D using traditional breeding techniques to improve corn and soybean genetics. The company sells these improved seeds to farmers and also licenses them to bigger companies like Monsanto that, as part of the bargain, give Stine Seed priority access to the newest genetically modified traits that help farmers control weeds and bugs.

Closely-held companies account for about 20% of U.S. sales in corn seed and 22% in soybeans, according to Todd L. Martin, executive director of the Independent Professional Seed Association, which has 118 regular members. The bulk of Stine Seed profit comes from licensing its genetics research to bigger rivals. But customer backlash from the big mergers means the company’s revenue from its retail sales could “easily double,” Stine said. The company declined to provide sales figures. Smaller companies also may find an edge over pricier biotech products, said Jason Miner, an analyst at Bloomberg Intelligence. The market for seeds with multiple traits to control different types of insects and to withstand multiple weed killers may have reached a saturation point, he said. “Traditional breeding may actually be on the rise,” Miner said. “Farmers are less interested in speculating on high-cost, potential yield boosters. They want cost-effective solutions.”

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Get farmers to stop buying the stuff.

Monsanto Dismisses ‘People’s Tribunal’, ‘Moral Trial’ As A Staged Stunt (G.)

International judges will take evidence from 30 witnesses and “victims” of US agri-business Monsanto in an attempt by hundreds of grassroots groups to hold the company accountable for what they allege are human rights violations, crimes against humanity, and “ecocide”, or widespread environmental damage. High-profile witnesses, including former UN special rapporteur on the right to food Olivier De Schutter, will give evidence alongside Argentine doctors, Mexican beekeepers and toxicologists and scientists from 15 countries. The five judges will deliver what is expected to be a lengthy advisory legal opinion. The three-day peoples’ tribunal, which will be held in The Hague this weekend, will adopt the format of the UN’s international court of justice but will have no standing in law.

Organisers have described the hearing as a “moral trial” and “a test of international law”. “It aims to assess the allegations of harm made against Monsanto as well as the human health and environmental damages caused by the company throughout its history,” said a spokeswoman in London. The agro-chemical company, which is the subject of a £51bn takeover by German conglomerate Bayer, has declined to take part, or to defend its history at the tribunal. The company, which manufactured hundreds of thousands of tonnes of Agent Orange for use as a chemical weapon in the Vietnam war, is the world’s biggest genetically modified seed corporation. Monsanto developed toxic polychlorinated biphenyls and also makes glyphosate, the primary ingredient in Roundup, a widely used but controversial herbicide.

The firm’s accusers in The Hague will hold it and other major chemical companies primarily responsible for developing an unsustainable system of farming. “Monsanto promotes an agro-industrial model that contributes at least one-third of global anthropogenic greenhouse gas emissions; it is also largely responsible for the depletion of soil and water resources, species extinction and declining biodiversity, and the displacement of millions of small farmers worldwide. This is a model that threatens peoples’ food sovereignty by patenting seeds and privatising life”, said the spokeswoman.

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Everyone’s happy to saddle Italy with the problem, same as Greece. It’s what the EU stands for.

Cut Funds To EU States That Turn Away Refugees, Italy Urges (R.)

Eastern states that continue to refuse to take in refugees to help frontline countries in Europe’s migration crisis should have their EU funding cut, Italian Prime Minister Matteo Renzi said on Wednesday. Italy is the main destination for the waves of migrants fleeing violence and poverty in Africa. It is housing 160,000 asylum seekers out of more than 460,000 refugees who have reached its shores from North Africa since the start of 2014. Of 39,600 refugees due to be relocated from Italy under an EU quota plan, so far only 1,300 have been moved, according to the European Commission. While outlining his priorities for the EU’s next summit meeting on Oct. 20-21 in Brussels, Renzi told parliament: “It’s necessary that Italy be the promoter of a very tough position toward those countries that have received a lot of money for belonging to the bloc to relaunch their territories, and who are shirking their commitments to relocate immigrants.”

Poland, Hungary and other formerly communist states are firmly opposed to relocation quotas for refugees and say immigration, especially from the Muslim cultures of the Middle East, would disrupt their homogeneous societies. They also object to paying penalties for not taking people in. The financial transfers to less-developed areas of the EU from which they benefit, and which Renzi was referring to in his comments, absorb a large portion of the current €1 trillion EU long-term budget. The proposal for the next EU budget, for the 2021-27 period, is supposed to be completed by the end of next year. “The positive aspects of belonging to the EU must be balanced by the duties that come with membership,” Renzi said.

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Jul 162016
 
 July 16, 2016  Posted by at 9:18 am Finance Tagged with: , , , , , , , ,  2 Responses »


Jack Delano Main street intersection, Norwich, Connecticut 1940

Brexit Or Not, The Pound Will Crash (EvBB)
BOE Chief Economist Haldane Calls For Big Post-Brexit Stimulus (G.)
Philip Hammond Promises ‘Whatever Measures’ To Stabilise Economy (Ind.)
Dow Extends Record Streak as US Stocks Post Weekly Gains (WSJ)
EU Plays Catch-Up on Swaps Collateral Under US Pressure (BBG)
$35 Billion Pension Bomb Shows Who Really Has Power in Poland (BBG)
EU Commission Has Known for Years about Diesel Manipulation (Spiegel)
Economics Is For Everyone! (Chang)

 

 

“Few have lived as high on the hog as the Brits have.”

Brexit Or Not, The Pound Will Crash (EvBB)

Status quo, as our generation know it, established in 1945 has plodded along ever since. It is true that it have had near death experiences several times, especially in August 1971 when the world almost lost faith in the global reserve currency and in 2008 when the fractional reserve Ponzi nearly consumed itself. While the recent Brexit vote seem to be just another near death experience we believe it says something more fundamental about the world. When the 1945 new world order came into existence, its architects built it on a shaky foundation based on statists Keynesian principles. It was clearly unsustainable from the get-go, but as long as living standards rose, no one seemed to notice or care. The global elite managed to resurrect a dying system in the 1970s by giving its people something for nothing.

Debt accumulation collateralized by rising asset values became a substitute for productivity and wage increases. While people could no longer afford to pay for their health care, education, house or car through savings they kept on voting for the incumbents (no, there is no difference between center left and right) since friendly bankers were more than willing to make up the difference. It is clear for all to see but the Ph.Ds. that frequent elitist policy circles that the massive misallocation and consumption of capital such a perverted system enables will eventually collapse on itself. Debt used to be productive, id est. self-liquidating, but now it is used for consumption backed by future income projections based on historical experience.

However, one should not extrapolate future income streams from a historical regime when the new one is fundamentally different. The promised incomes obviously never materialized and the world reached peak debt. The credit Ponzi is dead. Consider the following chart that depicts decennial change in average real earnings for the UK worker. It shows an unprecedented development. Not since the 1860s have the UK worker experienced falling real earnings over a ten-year period. Such dramatic change obviously does something to the so-called social contract people have been tricked into. People no longer believe in a brighter future and there is nothing more detrimental to a human being than that.

No longer vested in the status quo, people opt for radical change, hence; Brexit, Trump, Le Pen, Lega Nord, M5S. Old rules does not apply anymore. Over the next couple of years, we will experience a torrent of sea change, a lot of it unpleasant, but it will come nonetheless. In the social contract, immigration is OK when jobs are plentiful and people’s houses are worth more every year. Not so much when they are unemployed and without a house or even prospects of ever owning one. Corruption in the higher echelons of society is grudgingly accepted when the elite allegedly runs a system where incomes and productivity constantly moves upwards, but will not be tolerated as blue collar jobs are moved offshore.

[..] So what does this mean for the UK specifically? Few have lived as high on the hog as the brits have. Their current account deficit at 6 per cent of GDP is reminiscent of countries heading into depressions. In the mid-1970s, the IMF had to bail them out and in the early 1990s, the infamous ERM regime collapsed as Soros made his billion. The pound got a pounding on the Brexit vote, but it was destined to fall anyways. The adjustment needed to correct this imbalance is not over and we should all expect a far weaker pound in the months and years ahead. Brexit only triggered what was already baked into the cake in the first place.

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Stuck in BAU.

BOE Chief Economist Haldane Calls For Big Post-Brexit Stimulus (G.)

The Bank of England’s chief economist has called for a big package of measures to support the UK’s post-Brexit economy, stressing the need for a prompt and robust response to the uncertainty. Andy Haldane made it clear the Bank’s monetary policy committee would do more than merely cut interest rates from their already record low of 0.5% when it meets in August. The Bank’s chief economist used a speech to warn that decisive action was required at a time when confidence had been dented by the shock referendum result. “In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn.

“Given the scale of insurance required, a package of mutually complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August inflation report round.” The Bank surprised the City when it left interest rates on hold at its July meeting held this week, but the minutes of the MPC’s discussions said most of its nine members thought an easing of policy would be required in August.

The tone and content of Haldane’s speech suggest that the MPC will use public appearances to make the case for strong action in August. Options include cutting interest rates to 0.25% or lower, restarting the Bank’s £375bn quantitative easing scheme and providing cut price loans to banks under the funding for lending scheme. [..] In a reference to the prison movie The Shawshank Redemption Haldane said: “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption. And yes I know Andy did eventually escape. But it did take him 20 years. The MPC does not have that same ‘luxury’.”

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This headline somehow seems to perfectly capture UK politics today. Whatever.

Philip Hammond Promises ‘Whatever Measures’ To Stabilise Economy (Ind.)

Philip Hammond, the UK’s newly appointed chancellor of the exchequer, said the vote to leave the EU had “rattled confidence” and that he will take “whatever measures” needed to shore up the British economy. “The number one challenge is to stabilise the economy, send signals of confidence about the future, the plans we have for the future to the markets, to business, to international investors,” Hammond said in a Sky News interview. Hammond’s comments came ahead of a meeting later on Thursday of Bank of England policy makers who will debate whether to reduce the key interest rate for the first time since 2009.

The Bank’s governor, Mark Carney, is seeking to stave off further turmoil after the pound plunged and consumer confidence dropped to a 21-year low in the wake of last month’s decision to quit the EU. The chancellor, appointed to the role late on Wednesday by new prime minister, Theresa May, will meet Carney on Thursday morning “to make an assessment of where the economy is,” he said in a BBC TV interview. He added: “I think the governor of the Bank of England is doing an excellent job.”

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It’s embarrassing to watch.

Dow Extends Record Streak as US Stocks Post Weekly Gains (WSJ)

The Dow Jones Industrial Average hit its fourth consecutive closing high on Friday, rising 10.14 points, or less than 0.1%, to 18516.55. For the week, it gained 2%. The S&P 500’s rally put the index above the mean average of year-end targets from 18 analysts tracked by Birinyi Associates. Collectively, those analysts predicted, as of July 6, that the S&P 500 would finish this year at 2153. The index closed above that level on Friday, at 2161.74, despite slipping 0.1% after four record closes in a row. Analysts revise their year-end targets throughout the year. In mid-January, the average year-end target was 2198, according to Birinyi Associates.

Markets elsewhere rallied for the week. Japan’s Nikkei Stock Average rose 9.2% over five sessions, its best performance in 6 1/2 years. The Stoxx Europe 600 rose 3.2% in the week. “The market is showing us, if nothing else, its resilience,” said Jason Browne, chief investment officer of FundX Investment Group in San Francisco. Investors began to put money back into riskier assets such as stocks, an encouraging sign to those who had worried about the stream of money leaving equity funds this year. In the seven days to July 13, investors poured a net $7.8 billion into U.S. equity funds, according to data provider Lipper. It was the first weekly inflow since late April.

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I could see Brexit having a role here.

EU Plays Catch-Up on Swaps Collateral Under US Pressure (BBG)

European Union regulators are considering ways to speed the implementation of collateral requirements for derivatives as the bloc’s failure to meet a global deadline threatens to fracture the $493 trillion market. The European Commission said last month it wouldn’t meet a Sept. 1 global deadline. In a draft letter addressed to the main EU regulators, the bloc’s executive arm is now proposing to adapt its plans to “align with the internationally agreed timelines as closely as possible.” Previously, the commission said it would finish EU technical rules on margins for non-centrally cleared over-the-counter derivatives by year-end and have them take effect before mid-2017. That prompted a backlash from regulators in Washington and Tokyo, who said they intended to impose the rules on schedule, while leaving the door open to a delay.

The regulations will apply billions of dollars in collateral demands to swaps traded by the world’s largest banks, including JPMorgan Chase, Barclays and Deutsche Bank. The financial industry has called for global regulators to enforce the requirements at the same time to avoid creating the potential for regulatory arbitrage between jurisdictions. The Basel Committee on Banking Supervision, which includes regulators from around the world, helped set the international deadlines that start taking effect for the biggest banks in September and ratchet up starting in March 2017. The over-the-counter swap market is estimated at $493 trillion by the Bank for International Settlements. In the undated draft letter seen by Bloomberg, the commission proposed that the requirements would take effect one month after the EU’s technical rules enter into force.

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The age of the strongman is upon us. This one takes pensions.

$35 Billion Pension Bomb Shows Who Really Has Power in Poland (BBG)

It took up less than a minute of a one-hour speech, but led to an unexpectedly busy weekend for the Polish Ministry of Development in Warsaw. At the governing Law & Justice Party’s congress on the first Saturday of this month, leader Jaroslaw Kaczynski spelled out his vision for the country. He mentioned briefly that Poland should do more with the money parked in its retirement funds. At Kaczynski’s ministry of choice for economic policy, senior officials swiftly rounded up colleagues to work through Sunday so that at 8:30 a.m. the next day – before financial markets opened – an overhaul of the $35 billion pension industry could be unveiled. Investment companies were incredulous and the stock market dropped, though it came as little surprise to the people close to the real power in Poland.

Kaczynski, 67, holds no office beyond his role as lawmaker – he’s not the prime minister, president and doesn’t even run a department. His drumbeat of mistrust for both Russia and western Europe, the them-and-us attacks on Poland’s post-communist elite and his courting of the Catholic church give him enough of a devoted following that he needs no title. “Politically, he’s a sort of commander in chief or a first secretary we knew from the times of communism,” said Marek Migalski at Silesian University in Katowice. A former Law & Justice lawmaker in the European Parliament, he was ostracized by the party for criticizing Kaczynski in 2010. “I’d say that for his supporters, he’s even more than Moses. It’s not just a notion that Kaczynski is doing only good things, it’s the conviction that things that are done by Kaczynski are good.”

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Anyone ever doubted this?

EU Commission Has Known for Years about Diesel Manipulation (Spiegel)

Since at least 2010, the European Commission has been in possession of concrete evidence that automobile manufacturers were cheating on emissions values of diesel vehicles, according to a number of internal documents that SPIEGEL ONLINE has obtained. The papers show that emissions cheating had been under discussion for years both within the Commission and the EU member state governments. The documents also show that the German government was informed of a 2012 meeting on the issue. The scandal first hit the headlines in 2015 when it became known that Volkswagen had manipulated the emissions of its diesel vehicles. The records provide a rough chronology of the scandal, which reaches back to the middle of the 2000s.

Back then, European Commission experts noticed an odd phenomenon: Air quality in European cities was improving much more slowly than was to be expected in light of stricter emissions regulations. The Commission charged the Joint Research Centre (JRC) – an organization that carries out studies on behalf of the Commission – with measuring emissions in real-life conditions. To do so, JRC used a portable device known as the Freeway Performance Measurement System (PeMS), which measures the temperature and chemical makeup of emissions in addition to vehicle data such as speed and acceleration. This technology, which was later used to reveal VW emissions manipulation in the United States, was largely developed by the JRC.

JRC launched their PeMS tests in 2007 and quickly discovered that nitrogen oxide emissions from diesel vehicles were much higher under road conditions than in the laboratory. The initial results were published in a journal in 2008 and they came to the attention of the Commission. On Oct. 8, 2010 – roughly three years after the JRC tests – an internal memo noted that it was “well known” that there was a discrepancy between diesel vehicle emissions during the type approval stage (when new vehicle models are approved for use on European roads) and real-world driving conditions. The document also makes the origin of this discrepancy clear: It is the product of “an extended use of certain abatement technologies in diesel vehicles.”

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Wow. A feast for the eye and the mind. Don’t miss it.

Economics Is For Everyone! (Chang)

‘Economics is for everyone’, argues legendary economist Ha-Joon Chang in our latest mind-blowing RSA Animate. This is the video economists don’t want you to see! Chang explains why every single person can and SHOULD get their head around basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel. Arm yourself with some facts, and get involved in discussions about the fundamentals that underpin our day-to-day lives.

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Mar 302016
 
 March 30, 2016  Posted by at 8:59 am Finance Tagged with: , , , , , , , , ,  1 Response »


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

Yellen Is Worried About Global Growth – And Wall Street Loves It (MW)
Yellen Says Caution in Raising Rates Is ‘Especially Warranted’ (BBG)
The US Is in for Much Greater Civil Unrest Ahead (Dent)
Steel Industry Dealt Hammer Blow As Tata Withdraws From UK (Tel.)
Bonfire of the Commodities Writedowns is Just Starting (BBG)
Japan Industrial Output Drops 6.2% In February, Most Since 2011 (BBG)
China’s True Demand For Copper Is Only Half as Much as You Think (BBG)
China’s Large Banks Wary on Beijing’s Plan for Bad Debt to Equity Swaps (BBG)
Eurozone ‘Flying On One Engine’: S&P (CNBC)
Europe’s Bond Shortage Means Draghi Is About to Shock the Market (BBG)
Oil Explorers Face Challenge to Secure Financing as Oil Prices Fall (WSJ)
The Rise and Fall of Goldman’s Big Man in Malaysia (BBG)
New Student Loans Targeted Straight at Mom and Dad (WSJ)
Free Lunch: Basic Welfare Policy (Sandhu)
Always Attack the Wrong Country (Dmitry Orlov)
European Border Crackdown Kickstarts Migrant-Smuggling Business (WSJ)
UN Chief Urges All Countries To Resettle Syrian Refugees (Reuters)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bonfire of the Commodities Writedowns is Just Starting (BBG)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Growth comes from household debt.

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

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

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

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ECB leaves nothing for others to invest in.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Free Lunch: Basic Welfare Policy (Sandhu)

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

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

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

Always Attack the Wrong Country (Dmitry Orlov)

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

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

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

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

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

European Border Crackdown Kickstarts Migrant-Smuggling Business (WSJ)

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

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

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

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

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

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

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

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

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Nov 122015
 
 November 12, 2015  Posted by at 10:32 am Finance Tagged with: , , , , , , , ,  14 Responses »


DPC North approach, Pedro Miguel Lock, Panama Canal 1915

Interest Rate Swaps Indicate Big Banks Safer Than US Government (Bloomberg)
World’s Biggest Bond Bubble Continues To Burst As China Defaults Rise (ZH)
China Credit Growth Slows As Tepid Economy Erodes Loan Demand (Bloomberg)
China Coal Bubble: 155 Coal-Fired Power Plants To Be Added To Overcapacity (GP)
China Warns WTO Its Cheap Exports Will Soon Be Harder To Resist (Reuters)
Germany’s ‘Wise Men’ Call ECB Policies Risk To Financial Stability (Reuters)
‘Sick Man Of Europe’ Finland Agonises Over Austerity (Reuters)
Syriza Faces Mass Strike In Greece (Guardian)
Why Owning A House Is Financial Suicide (Altucher)
Major Oil Companies Have Half-Trillion Dollars to Fund Takeovers (Bloomberg)
US Energy Default Alarms Get Louder as Pain Seen Lasting Into 2016 (Bloomberg)
Saudi Arabia Risks Destroying OPEC And Feeding The ISIL Monster (AEP)
Germany Cites Signs of More Elevated Diesel Pollution in Probe (Bloomberg)
The Melting Arctic Is Like ‘Discovering A New Africa’ (CNBC)
Europe’s Leaders Struggle To Save Floundering Migrant Policy (FT)
EU Leaders Court Turkey in Bid to Stem Flow of Refugees (Bloomberg)
EU’s Deep Dilemmas Over Refugees Laid Bare At Malta Summit (Guardian)
Tiny Slovenia Tries To Stem Massive Migrant Surge Across Balkans (AP)

“..derivatives contracts may become more liability than protection..”

Interest Rate Swaps Indicate Big Banks Safer Than US Government (Bloomberg)

Could big banks be safer than the U.S. government? In an unusual twist, the multitrillion-dollar interest-rate swaps market, which investors often turn to for protection against swings in Treasury yields, is sending just such a signal. That obviously can’t be right, so the more likely explanation is that an important market is malfunctioning. And it’s more than just a curiosity. Investors are facing greater exposure to new risks and less insulation from fluctuations in Treasuries, just as the Federal Reserve prepares to inject more volatility into the market. The problem is that the derivatives aren’t tracking the U.S. government rates as reliably as they once did. When the market is functioning normally, investors essentially pay banks a fee to compensate them in the case of rising benchmark rates.

The implied yield on the derivative would normally be higher than on comparable cash bonds because investors are taking on an additional risk of a big bank counterparty going belly up. But that has reversed and the swaps have effectively been yielding less than the actual bonds for contracts of five years and longer, and this month the swap rate plunged to the lowest ever compared with Treasury yields. Again, that’s only logical if investors think that big Wall Street banks are more creditworthy than the U.S. government. There are a host of likely reasons for this phenomenon. The main one is it has become cheaper from a regulatory standpoint for big banks to bet on Treasuries by selling protection against rising yields than just owning the cash bonds. Analysts don’t expect this relationship to revert to its historical state anytime soon because the rules aren’t going away, and the effect of this is significant.

Corporate-bond investors who want to eliminate their risk tied to changing Treasury rates may not be able to hedge as well as they think through interest-rate swaps. In fact, at times, their derivatives contracts may become more liability than protection, as they were at times in the past few months. “Fixed-income investors should care because their most popular hedging tool isn’t working as well,” said Priya Misra at TD Securities. And it’s kind of bad timing: the Fed is preparing to depart from its zero-rate policy for the first time in almost a decade by raising benchmark borrowing costs as soon as next month.

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“..even if Beijing intends to perpetuate things by continuing to engineer bailouts, that will only add to the deflationary supply glut that’s the root cause of the problem in the first place..“

World’s Biggest Bond Bubble Continues To Burst As China Defaults Rise (ZH)

Once China began to mark an exceptionally difficult transition from a smokestack economy to a consumption and services-led model, those who were aware of how the country had gone about funding years of torrid growth knew what was likely coming next. Years of borrowing to fund rapid growth had left the country with a sprawling shadow banking complex and a massive debt problem and once commodity prices collapsed – which, in a bit of cruel irony, was partially attributable to China’s slowdown – some began to suspect that regardless of how hard Beijing tried to keep up the charade, a raft of defaults was inevitable. Sure enough, the cracks started to show earlier this year with Kaisa and Baoding Tianwei and as we documented last month, if you’re a commodities firm, there’s a 50-50 chance you’re not generating enough cash to service your debt:

There’s only so long this can go on without something “snapping” as it were because even if Beijing intends to perpetuate things by continuing to engineer bailouts (e.g. Sinosteel), that will only add to the deflationary supply glut that’s the root cause of the problem in the first place and ultimately, Xi’s plans to liberalize China’s capital markets aren’t compatible with ongoing bailouts so at some point, the Politburo is going to have to choose between managing its international image and allowing the market to purge insolvent companies. On Wednesday we get the latest chapter in the Chinese defaults saga as cement maker China Shanshui Cement said it won’t be paying some CNY2 billion ($314 million) of bonds due tomorrow. Oh, and it’s also going to default on its USD debt and file for liquidation. Here’s Bloomberg with more:

“On Wednesday, the creditors got their answer. Shanshui, reeling from China’s economic slowdown and a shareholder campaign to oust Zhang, said it will fail to pay 2 billion yuan ($314 million) of bonds due on Nov. 12, making it at least the sixth Chinese company to default in the local note market this year. Analysts predict it won’t be the last as President Xi Jinping’s government shows an increased willingness to allow corporate failures amid a drive to reduce overcapacity in industries including raw-materials and real estate.

Shanshui’s troubles – it will also default on dollar bonds and file for liquidation – reflect the fallout from years of debt-fueled investment in China that authorities are now trying to curtail as they shift the economy toward consumption and services. In the latest sign of that transition, data Wednesday showed the nation’s October industrial output matched the weakest gain since the global credit crisis, while retail sales accelerated. “Debt wasn’t a problem during the boom years because profits kept growing,” Zhang said last month. “But it’s not sustainable when the economy slows.” Shanshui’s total debt load as of June 30 was four times bigger than in 2008.”

China has between $25 and $30 trillion notional in financial and non-financial corporate credit (in China, where everything is government backstopper, there isn’t really much of a difference), about 5 times greater than the market cap of Chinese stocks (and orders of magnitude greater than their actual float), and 3 times greater than China’s official GDP, which also makes it the biggest bond bubble in the world, even bigger than the US Treasury market.

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But … credit is what built China.

China Credit Growth Slows As Tepid Economy Erodes Loan Demand (Bloomberg)

China’s broadest measure of new credit fell in October, adding to evidence six central bank interest-rate cuts in a year haven’t spurred a sustained pick up in borrowing. Aggregate financing was 476.7 billion yuan ($75 billion), according to a report from the People’s Bank of China on Thursday. That compared to a projection by economists for 1.05 trillion yuan and September’s reading of 1.3 trillion yuan. The data underscore the government’s challenge to spur an economic recovery even after boosting fiscal stimulus and continued monetary easing. Authorities have said they won’t tolerate a sharp slowdown in the next five years. “Policy makers are serious about 7%, but will not over-stimulate,” Larry Hu, head of China Economics at Macquarie Securities in Hong Kong, wrote in a recent note, referring to the 2015 growth target.

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Inertia. “China has essentially spent four years building 300 large coal power plants it doesn’t use.”

China Coal Bubble: 155 Coal-Fired Power Plants To Be Added To Overcapacity (GP)

China has given the green light to more than 150 coal power plants so far this year despite falling coal consumption, flatlining production and existing overcapacity. According to a new Greenpeace analysis, in the first nine months of 2015 China’s central and provincial governments issued environmental approvals to 155 coal-fired power plants — that’s four per week. The numbers associated with this prospective new fleet of plants are suitably astronomical. Should they all go ahead they would have a capacity of 123GW, more than twice Germany’s entire coal fleet; their carbon emissions would be around 560 million tonnes a year, roughly equal to the annual energy emissions of Brazil; they would produce more particle pollution than all the cars in Beijing, Shanghai, Tianjin and Chongqing put together; and consequently would cause around 6,100 premature deaths a year.

But they’re unlikely to be used to their maximum since China has practically no need for the energy they would produce. Coal-fired electricity hasn’t increased for four years, and this year coal plant utilisation fell below 50%. It looks like this trend will continue, with China committing to renewables, gas and nuclear targets for 2020 — together they will cover any increase in electricity demand. What looks to have triggered this phenomenon is Beijing’s decision to decentralise the authority to approve environmental impact assessments on coal projects starting in March of this year. But it’s been a problem years-in-the-making, driven by the Chinese economy’s addiction to debt-fuelled capital spending. Almost 50% of China’s GDP is taken up by capital spending on power plants, factories, real estate and infrastructure.

It’s what fuelled the country’s enormous economic growth in recent decades, but diminishing returns have fast become massive losses. Recent research estimated that the equivalent of $11 trillion (more than one year’s GDP) has been spent on projects that generated no or almost no economic value. Since the country’s power tariffs are state controlled, energy producers still receive a good price despite the oversupply. And boy is it a huge oversupply: China’s thermal power capacity has increased by 60GW in the last 12 months whilst coal generation has fallen by more than 2% and capacity utilisation has fallen by 8%.

With thermal power generation this year is equal to what it was in 2011, China has essentially spent four years building 300 large coal power plants it doesn’t use. Total spend on the upcoming projects would be an estimated $70 billion, with the 60% controlled by the Big 52 state-owned groups potentially adding 40% to company debt without any likely increase in revenue.

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Steel and aluminum industries are dead around the globe.

China Warns WTO Its Cheap Exports Will Soon Be Harder To Resist (Reuters)

China has served notice to World Trade Organization members including the EU and US that complaints about its cheap exports will need to meet a higher standard from December 2016, a Beijing envoy said at a WTO meeting. Ever since it joined the WTO in 2001, China has frequently attracted complaints that its exports are being “dumped”, or sold at unfairly cheap prices on foreign markets. Under world trade rules, importing countries can slap punitive tariffs on goods that are suspected of being dumped. Normally such claims are based on a comparison with domestic prices in the exporting country.

But the terms of China’s membership stated that – because it was not a “market economy” – other countries did not need to use China’s domestic prices to justify their accusations of Chinese dumping, but could use other arguments. China’s representative at a WTO meeting on Tuesday said the practice was “outdated, unfair and discriminatory” and under its membership terms, it would automatically be treated as a “market economy” after 15 years, which meant Dec. 11, 2016. All WTO members would have to stop using their own calculations from that date, said the Chinese envoy. Dumping complaints are a frequent cause of trade disputes at the WTO, and dumping duties are even more frequently levied on Chinese products.

In September alone, the WTO said it had been notified of EU anti-dumping actions on 22 categories of Chinese exports, from solar power components to various types of steel products and metals, as well as food ingredients such as aspartame, citric acid and monosodium glutamate. The EU was also slapping duties on Chinese bicycles, ring binder mechanisms and rainbow trout. From the end of next year, such lists would need to be based on China’s domestic prices “to avoid any unnecessary WTO disputes”, the Chinese representative said. More than 20% of the 500 disputes brought to the WTO in its 20 year history have involved dumping, including several between China and the EU or the United States in the last few years.

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But Draghi doesn’t seem to listen.

Germany’s ‘Wise Men’ Call ECB Policies Risk To Financial Stability (Reuters)

The German government’s panel of economic advisers said on Wednesday the ECB’s low interest rates were creating substantial risks, and Finance Minister Wolfgang Schaeuble warned of a “moral hazard” from loose monetary policy. The double-barrelled message came after Reuters reported on Monday that a consensus is forming at the ECB to take the interest rate it charges banks to park money overnight deeper into negative territory at its Dec. 3 meeting. The ECB raised the prospect last month of more monetary easing to combat inflation which is stuck near zero and at risk of undershooting the ECB’s target of nearly 2% as far ahead as 2017 due to low commodity prices and weak growth.

But Schaeuble, who solidified his cult status within the conservative wing of Chancellor Angela Merkel’s party with his tough stance on the Greek crisis, said loose monetary policies risked creating false incentives and eroding countries’ willingness to reform their economies. “I have great respect for the independence of the central bank,” he said at an event in Berlin on European integration. “But I tell the central bankers again and again that their monetary policy decisions also have a moral-hazard dimension.” Earlier, the German government’s panel of economic advisers said the ECB’s low interest rates were creating substantial risks for financial stability and could ultimately threaten the solvency of banks and insurers. The euro zone central bank embarked on a trillion-euro-plus asset-buying plan in March to combat low inflation and spur growth, and is widely expected to expand or extend the scheme next month. But the advisers urged it not to ease policy again.

“There are no grounds to force the loose monetary policy further,” Christoph Schmidt, who heads the group, told a news conference. With regard to the ECB’s bond-buying programme, he added: “We have come to the conclusion that a slowdown in the pace is called for. At least, the ECB should not do more than planned.” The council of economic experts, presenting its annual report, criticised the policies of the ECB in unusually stark language, saying it was creating “significant risks to financial stability”. “If low interest rates remain in place in the coming years and the yield curve remains flat, then this would threaten the solvency of banks and life insurers in the medium term,” the council noted in the report.

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6 months after chastizing Greece.

‘Sick Man Of Europe’ Finland Agonises Over Austerity (Reuters)

Finland was one of the toughest European critics of Greece during its debt crisis, chastising it for failing to push through reforms to revive its economy. Now the Nordic nation is struggling to overhaul its own finances as it seeks to claw its way out of a three-year-old recession that has prompted its finance minister to label the country the “sick man of Europe”. Efforts by new Prime Minister Juha Sipila to cut holidays and wages have been met with huge strikes and protests, while a big healthcare reform exposed ideological divisions in his coalition government that pushed it to the brink of collapse last week. There have even been calls from one of Sipila’s veteran lawmakers for a parliamentary debate over whether Finland should leave the euro zone to allow it to devalue its own currency to boost exports – a sign of the frustration gripping the country.

In the latest manifestation of the difficulties of cutting spending in euro zone states, Sipila is walking a political tightrope. He must push through major reforms to boost competitiveness and encourage growth, while placating labour unions to avoid further strikes and costly wage deals next year – and carrying his three-party coalition with him. Unemployment and public debt are both climbing in a country hit by high labour costs, the decline of flagship company Nokia’s phone business and a recession in Russia, one of its biggest export markets. And with a rapidly-ageing population, economists say the outlook is bleak for Finland, which has lost its triple-A credit rating and is experiencing its longest economic slump since World War II. Sipila – who has warned Finland could be the next Greece – is pushing for €10 billion of annual savings by 2030, including €4 billion by 2019.

As part of this the government, in power for five months, plans to overhaul healthcare, local government and labour markets to boost employment and export competitiveness. But the premier’s call for a “common spirit of reform” was met with uproar when he proposed cutting holidays in the public sector and reducing the amount of extra pay given to employees working on Sunday to lower unit labour costs by 5%. About 30,000 protesters rallied in Helsinki in September in the county’s biggest demonstration since 1991, and strikes halted railroads, harbours and paper mills. The government soon backtracked, saying it would find savings from other benefits. The average Finn works fewer hours a week than any other EU citizens, according to the Finnish Business and Policy Forum think-tank.

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Government supports strike against itself.

Syriza Faces Mass Strike In Greece (Guardian)

Greece’s leftist-led government will get a taste of people power on Thursday when workers participate in a general strike that will be the first display of mass resistance to the neoliberal policies it has elected to pursue. The country is expected to be brought to a halt when employees in both the public and private sector down tools to protest against yet more spending cuts and tax rises. “The winter is going to be explosive and this will mark the beginning,” said Grigoris Kalomoiris, a leading member of the civil servants’ union Adedy. “When the average wage has already been cut by 30%, when salaries are already unacceptably low, when the social security system is at risk of collapse, we cannot sit still,” he said. Schools, hospitals, banks, museums, archaeological sites, pharmacies and public services will all be hit by the 24-hour walkout.

Flights will also be disrupted, ferries stuck in ports and news broadcasts stopped as staff walk off the job. “We are expecting a huge turnout,” Petros Constantinou, a prominent member of the anti-capitalist left group Antarsya told the Guardian. “This is a government under duel pressure from creditors above and the people below and our rage will be relentless. It will know no bounds.” The general strike – the 41st claim unionists since the debt-stricken nation was plunged into crisis and near economic collapse in 2010 – will increase pressure on prime minister Alexis Tsipras, the firebrand who first navigated his Syriza party into power vowing to eradicate austerity. On Monday eurozone creditors propping up Greece’s moribund economy refused to dispense a €2bn rescue loan citing failure to enforce reforms.

Snap elections in September saw Tsipras win a second term, this time pledging to implement policies he had once so fiercely opposed in return for a three-year, €86bn bailout clinched after months of acrimony between Athens and its partners. But Tsipras himself said he did not believe in many of the conditions attached to the lifeline, the third to be thrown to Greece in recent history. In a first for any sitting government, Syriza also threw its weight behind the strike exhorting Greeks to take part in the protest. The appeal – issued by the party’s labour policy division and urging mass participation “against the neoliberal policies and the blackmail from financial and political centres within and outside Greece” – provoked derision and howls of protest before the walkout had even begun.

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Nide read.

Why Owning A House Is Financial Suicide (Altucher)

Owning your own house is as much the Australian dream as the American dream, and it’s one that feels increasingly out of reach for many. But when one user on Quora pondered whether it was ultimately better to rent or own your own home, blogger and investor James Altucher penned this highly controversial response: I am sick of me writing about this. Do you ever get sick of yourself? I am sick of me. But every day I see more propaganda about the American Dream of owning the home. I see codewords a $15 trillion dollar industry uses to hypnotise its religious adherents to BELIEVE. Lay down your money, your hard work, your lives and loves and debt, and BELIEVE! But I will qualify: if someone wants to own a home, own one. There should never be a judgment. I’m the last to judge.

I’ve owned two homes. And lost two homes. If I were to write an autobiography called: “My life – 10 miserable moments” owning a home would be two of them. I will never write that book, though, because I have too many moments of pleasure. I focus on those. But I will tell you the reasons I will never own a home again. Maybe some of you have read this before from me. I will try to add. Or, even better, be more concise. Everyone has a story. And we love our stories. We see life around us through the prism of story. So here’s a story. Mum and Dad bought a house, say in 1965, for $30,000. They sold it in 2005 for $1.5 million and retired. That’s a nice story. I like it. It didn’t happen to my mum and dad. The exact opposite happened. But … for some mums I hope it went like that. Maybe Mum and Dad had their troubles, their health issues, their marriage issues. Maybe they both loved someone else but they loved their home.

Here’s a fact: The average house has gone up 0.2% per year for the past century. Only in small periods have housing prices really jumped and usually right after, they would fall again. The best investor in the world, Warren Buffett, is not good enough to invest in real estate. He even laughs and says he’s lost money on every real estate decision he’s made. There’s about $15 trillion in mortgage debt in the United States. This is the ENTIRE way banks make money. They want you to take on debt. Else they go out of business and many people lose their jobs. So they say, and the real estate agents say, and the furniture warehouses say, and your neighbours say, “it’s the American dream”. But does a country dream? Do all 320 million of us have the same dream? What could we do as a society if we had our $15 trillion back? If maybe banks loaned money to help people build businesses and make new discoveries and hire people?

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What happens when you stop investing.

Major Oil Companies Have Half-Trillion Dollars to Fund Takeovers (Bloomberg)

The world’s six largest publicly traded oil producers have more than a half-trillion dollars in stock and cash to snap up rival explorers. Exxon Mobil tops the list with a total of $320 billion for potential acquisitions. Chevron is next with $65 billion in cash and its own shares tucked away, followed by BP with $53 billion. Merger speculation was running high after Anadarko said Wednesday it withdrew an offer to buy Apache for an undisclosed amount. Apache rebuffed the unsolicited offer and wouldn’t provide access to internal financial data, Anadarko said. Both companies are now takeover targets, John Kilduff, a partner at Again Capital said. Royal Dutch Shell has $32.4 billion available, almost all of it in cash.

That said, The Hague-based company is unlikely to go hunting for large prey given plans announced in April to take over BG Group for $69 billion in cash and stock. At the bottom of the pack are ConocoPhillips with $31.5 billion and Total SA with $30.5 billion. More than 90% of ConocoPhillips’ stockpile is in the form of shares held in its treasury. Total’s arsenal is 85% cash. Even with its lowest cash balance in at least a decade, Exxon still wields a mighty financial stick. The Irving, Texas-based company has $316 billion of its own shares stockpiled in the company treasury that it could use for an all-stock takeover. The world’s biggest oil company by market value made its two largest acquisitions of the last 20 years with stock – the $88 billion Mobil deal in 1999 and the $35 billion XTO transaction in 2010.

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If prices remain at current levels, this will start cascading in early 2016.

US Energy Default Alarms Get Louder as Pain Seen Lasting Into 2016 (Bloomberg)

Eleven months of depressed oil prices are threatening to topple more companies in the energy industry. Four firms owing a combined $4.8 billion warned this week that they may be at the brink, with Penn Virginia, Paragon Offshore, Magnum Hunter Resources and Emerald Oil. saying their auditors have expressed doubts that they can continue as going concerns. Falling oil prices are squeezing access to credit, they said. And everyone from Morgan Stanley to Goldman Sachs is predicting that energy prices won’t rebound anytime soon. The industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. Barclays analysts say that will cause the default rate among speculative-grade companies to double in the next year.

Marathon Asset Management is predicting default rates among high-yield energy companies will balloon to as high as 25% cumulatively in the next two to three years if oil remains below $60 a barrel. “No one is putting up new capital here,” said Bruce Richards, co-founder of Marathon, which manages $12.5 billion of assets. “It’s been eerily silent in the whole high-yield energy sector, including oil, gas, services and coal.” That’s partly because investors who plowed about $14 billion into high-yield energy bonds sold in the past six months are sitting on about $2 billion of losses, according to data compiled by Bloomberg. And the energy sector accounts for more than a quarter of high-yield bonds that are trading at distressed levels, according to data compiled by Bloomberg.

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Ambrose thinks climate will be a big financial deal.

Saudi Arabia Risks Destroying OPEC And Feeding The ISIL Monster (AEP)

The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry. Algeria’s former energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country’s Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. “Why remain in an organisation that no longer serves any purpose?” he asked. Saudi Arabia can, of course, do whatever it wants at the Opec summit in Vienna on December 4. As the cartel hegemon, it can continue to flood the global the market with crude oil and hold prices below $50.

It can ignore desperate pleas from Venezuela, Ecuador and Algeria, among others, for concerted cuts in output in order to soak the world glut of 2m barrels a day, and lift prices to around $75. But to do so is to violate the Opec charter safeguarding the welfare of all member states. “Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff. There could be a total blow-out in Vienna,” said Helima Croft, a former oil analyst at the US Central Intelligence Agency and now at RBC Capital Markets. The Saudis need Opec. It is the instrument through which they leverage their global power and influence, much as Germany attains world rank through the amplification effect of the EU.

The 29-year-old deputy crown prince now running Saudi Arabia, Mohammad bin Salman, has to tread with care. He may have inherited the steel will and vaulting ambitions of his grandfather, the terrifying Ibn Saud, but he has ruffled many feathers and cannot lightly detonate a crisis within Opec just months after entangling his country in a calamitous war in Yemen. “It would fuel discontent in the Kingdom and play to the sense that they don’t know what they are doing,” she said. The International Energy Agency (IEA) estimates that the oil price crash has cut Opec revenues from $1 trillion a year to $550bn, setting off a fiscal crisis that has already been going on long enough to mutate into a bigger geostrategic crisis. Mohammed Bin Hamad Al Rumhy, Oman’s (non-Opec) oil minister, said the Saudi bloc has blundered into a trap of their own making – a view shared by many within Saudi Arabia itself.

“If you have 1m barrels a day extra in the market, you just destroy the market. We are feeling the pain and we’re taking it like a God-driven crisis. Sorry, I don’t buy this, I think we’ve created it ourselves,” he said. The Saudis tell us with a straight face that they are letting the market set prices, a claim that brings a wry smile to energy veterans. One might legitimately suspect that they will revert to cartel practices when they have smashed their rivals, if they succeed in doing so. One might also suspect that part of their game is to check the advance of solar and wind power in a last-ditch effort to stop the renewable juggernaut and win another reprieve for the status quo. If so, they are too late. That error was made five or six years ago when they allowed oil prices to stay above $100 for too long.

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More cars, more brands, but also more fines and lawsuits?

Germany Cites Signs of More Elevated Diesel Pollution in Probe (Bloomberg)

Germany’s diesel pollution probe in the wake of the Volkswagen cheating scandal has found signs of elevated emissions in some cars, authorities said in initial results of tests planned for more than 50 car models. Regulators and carmakers are in talks about “partly elevated levels of nitrogen oxides” found in raw data from some of the cars in the probe, the Federal Motor Transport Authority, or KBA, said in a statement Wednesday. Vehicles were chosen for testing based on new-car registration data as well as “verified indications” from third parties and were evaluated on test beds as well as on the streets.

German authorities are about two-thirds finished with the review they started in late September, when the Volkswagen scandal prompted a deeper look at real-world diesel emissions. Volkswagen admitted to rigging the engines of about 11 million cars with software that could cheat regulations by turning on full pollution controls only in testing labs, not on the road. The scandal has since spread to include carbon dioxide emissions labels in another 800,000 vehicles, including one type of gasoline engine. Other major automakers, including BMW and Daimler, have said they didn’t manipulate emissions tests.

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Sealing the fate of mankind: profit from destruction.

The Melting Arctic Is Like ‘Discovering A New Africa’ (CNBC)

Governments and the private sector are positioning to develop the Artic, where the wealth of resources is akin to a “new Africa,” according to Iceland’s president. The melting of the Arctic is an ongoing phenomenon: In October, about 7.7 million square kilometers (about 3 million square miles) of Arctic sea ice remained, around 1.2 million square kilometers less than the average from 1981-2010, according to calculations by Arctic Sea Ice News & Analysis that was published by researchers at the National Snow and Ice Data Center. One effect of the melting ice has been newly opened sea passages and fresh access to resources. “Until 20 or so years ago, (the Arctic) was completely unknown and unmarked territory,” Iceland’s President Olafur Grimsson told an Arctic Circle Forum in Singapore on Thursday.

“It is as if Africa suddenly appeared on our radar screen.” Grimsson cited resources that included rare metals and minerals, oil and gas, as well as “extraordinarily rich” renewable energy sources such as geothermal and wind power. Developing the Arctic to access these resources “doesn’t only have grave consequences,” he said, noting that shipping companies had found new, faster sea routes through the area. Grimsson cited Cosco’s trial Northern sea journey a couple years ago with a container ship, which was able to travel from Singapore to Rotterdam in 10 fewer days than the normal route, saving on fuel and other costs. China’s state-owned Cosco announced last month that it would begin a regular route through the Arctic Ocean to Europe.

Singapore, which due to its key location in global shipping lanes has punched above its weight in the maritime industry for nearly 200 years, is watching the development of the Arctic closely. “The Northern Sea Route, traversing the waters north of Russia, Norway and other countries of the Arctic, could reduce travel time between Northeast Asia and Europe by a third,” Singapore’s Deputy Prime Minister Teo Chee Hean said at the forum. He noted that divisions of government-linked Keppel Corp, a conglomerate with interests in rig building, had already built and delivered 10 ice-class vessels and was working with oil companies and drillers to develop a “green” rig for the Arctic. Teo quoted a 2012 Lloyd’s of London report that estimated companies would invest as much as $100 billion in the Arctic over the next decade.

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As long as the wrong people stay in charge, things can only get worse.

Europe’s Leaders Struggle To Save Floundering Migrant Policy (FT)

The image of beaming Syrian and Iraqi children waving from the gangway of an Aegean Airlines plane in Athens was supposed to show the EU at last getting to grips with its migrant crisis. They were six families of refugees who had been selected to be flown from Greece to Luxembourg to illustrate the EU’s flagship relocation policy, in which member states have agreed to divide up some 160,000 asylum-seekers. Greek prime minister Alexis Tsipras called it a “trip to hope”. Martin Schulz, the president of the European Parliament, made the hop from Brussels to see them off last week. But the image of grinning politicians loading refugees on to a jet to one of Europe’s richest nations rankled some senior EU officials, who have been hoping the bloc might discourage migrants by communicating the message that a trip to Europe is no free lunch.

“It did not look great,” one EU official groaned while others described it as a disaster. The controversial photo opp is but one issue on the agenda when EU leaders meet today for the sixth time in seven months — this time in Malta’s capital Valletta — to try to right what has been a foundering response to the crisis. While the setting has changed, the problems and disagreements remain the same. With up to 6,000 people pouring into Greece each day, EU leaders will rake over what has gone wrong with the bloc’s response and how to cut a deal with Turkey, which has become the main stopping-off point for people trying to enter Europe. The much-vaunted plan to contain asylum-seekers in Italy and Greece before distributing 160,000 across the bloc has been sluggish. Despite months of planning, only 147 have been relocated since it was approved in September.

The scheme was the subject of bitter political argument between Germany, which backed it, and its eastern neighbours, who opposed it. Now it is being hindered by everything from the reluctance of national capitals to provide the places, IT failures on the ground and even asylum-seekers’ point-blank refusal to take part. (Last week’s flight to Luxembourg was the second attempt after a previous group turned down transit to the Grand Duchy). The policy looks set to become even more contentious. In a bid to kick-start it, leaders will now discuss methods of forcing migrants to be fingerprinted so that their asylum claims can be processed in the country where they land. Ministers from across the EU agreed on Monday to allow countries to detain asylum-seekers who refuse to have prints taken. “The migrants themselves have their own agenda,” said one official. “They know when they arrive where they want to go.” (Not Luxembourg, apparently).

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They’re planning to throw €3 billion at Erdogan now. Will that help the refugees in any sense at all?

EU Leaders Court Turkey in Bid to Stem Flow of Refugees (Bloomberg)

European Union governments will solicit Turkey’s help in stemming the flow of refugees by offering financial aid, visa waivers for Turkish travelers and the relaunch of Turkey’s membership bid. EU leaders will debate the incentives package for Turkey at a summit in Valletta, Malta, on Thursday, before the bloc’s top officials meet Turkish President Recep Tayyip Erdogan at the Group of 20 summit starting Sunday. Chancellor Werner Faymann of Austria, one of the refugees’ main destinations, said the EU has to move faster to seal an agreement to step up aid for Turkey as the price for Erdogan’s cooperation in halting the refugee tide. “When are we going to pick up the pace?” Faymann told reporters Wednesday in Valletta.

EU courtship of Turkey came as the bloc’s internal dissension over refugees intensified with Sweden, another magnet for asylum seekers, announcing temporary border controls as of midday Thursday. EU-Turkey ties have frayed since Turkey started entry talks in 2005, as Erdogan’s governments strayed from EU civil rights standards and the bloc’s economic woes dimmed its interest in further expansion. Those strains flared up on Tuesday, when the European Commission criticized the Turkish government for intimidating the media and cracking down on domestic dissent. Turkey responded that the EU’s reproaches were unjust. The EU at first weighed €1 billion to help Turkey lodge Syrian war refugees and prevent them from going on to Europe, but Turkey has driven up the price.

Now a figure as high as €3 billion is under discussion. Britain, a fan of Turkey’s entry bid until U.K. Prime Minister David Cameron’s government turned against EU enlargement, plans to make a separate contribution of 275 million pounds ($418 million) over two years, a British official told reporters in Valletta. Turkey is also pushing for the restart of its stalled entry negotiations and for European governments to waive visa requirements on Turkish visitors, a step that would be popular with young people especially. “Turkey isn’t just looking for just a financial commitment from Europe, but also for a political commitment,” Maltese Prime Minister Joseph Muscat said in an interview.

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Schengen with razor wire.

EU’s Deep Dilemmas Over Refugees Laid Bare At Malta Summit (Guardian)

The two-day Valletta summit is a lavish event, bringing together more than 60 European and African leaders, with the EU carrying a mixed bag of sticks and carrots, including a €1.8bn “trust fund” in an attempt to cajole African governments into taking migrants back and stopping them from coming to Europe in the first place. Many of them are disenchanted with an EU containment strategy that they feel resembles a form of blackmail. “They say it’s all about Europe externalising and outsourcing its own problems,” said the diplomat, who has been liaising with the African governments. “The Europeans are not exactly visionaries,” another international official taking part in Malta said. “And they don’t realise that they are no longer the centre of the world.”

The African meetings are to be followed on Thursday by another emergency EU summit called by Donald Tusk, the president of the European council, who increasingly takes a pro-Orbán line on the crisis. His entourage is predicting that Tusk will push for “drastic and radical action” by the EU, which translates as partial border closures in Europe’s Schengen area, both externally and internally. Given its size and geography, and the number of people involved, Germany is Europe’s shock absorber in the refugee crisis. It is expected to take in a million newcomers this year. At a meeting with Balkan leaders two weeks ago, Merkel was repeatedly asked to clarify her policy. “Many of them did not like that they were summoned by Germany to be told what to do. But the problem is that the Germans don’t know what to do,” said the senior diplomat.

The signals from Berlin have been very mixed over the past week. Merkel’s interior and finance ministers, both in the same party, regularly contradict her. On Friday the interior ministry announced an abrupt U-turn, saying Syrians would no longer qualify for full asylum in Germany. That was then retracted amid coalition cacophony. On Tuesday, the same ministry said Berlin was ending the open-door policy on Syrians and would now return them to the country where they entered the EU, albeit not Greece. This amounts to a tightening of the German border, with alarming knock-on effects for EU countries such as Croatia and Slovenia, which will only let tens of thousands of migrants in if they are in transit. The same applies to non-EU countries on the Balkan route, such as Serbia and Macedonia. “Merkel was asked if she would close the border, and told the other leaders very clearly ‘I will never do that’,” said another senior EU policymaker. “If you close the German border, you end European integration. You cannot do that.”

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“..we have nowhere to return. Our country and our homes are destroyed and we are in Europe to stay.”

Tiny Slovenia Tries To Stem Massive Migrant Surge Across Balkans (AP)

German Chancellor Angela Merkel has been under increased domestic pressure to reconsider her welcoming policy for migrants and reduce the arrivals. Germany, which is expected to take up to 1.5 million people by the new year, has already tightened its refugee policy by saying that Afghans should not seek asylum and that only Syrians have a chance. With both Germany and Austria reconsidering their free-flow policies, the worst-case scenario of tens of thousands of migrants, many with young children, stranded in the Balkans in a brutal winter looks more and more likely. “If Austria or Germany shut their borders, more than 100,000 migrants would be stuck in Slovenia in few weeks,” Cerar said. “We can’t allow the humanitarian catastrophe to happen on our territory.”

But analysts warn that shutting down borders would only trigger more havoc in the Balkans, the main European escape route from war and poverty in the Middle East, Asia and Africa. “The closure of the borders in not a solution, it only passes the problem to another country,” said Charlie Wood, an American humanitarian worker looking to help migrants in their journey across Slovenia. “If Slovenia closes its border, Croatia will close its border and then Serbia will do the same … and so on. That does not stop babies from dying in cold.” Slovenian refugee camps once planned to handle a few hundred people a day. Now they struggle to provide shelter and food for an average of 6,000 a day.

The Slovenian government has warned that the figure could soon reach 30,000 a day as the onset of cold weather has not stopped the surge. Last week, thousands of people crammed into a refugee camp at Sentilj on the border with Austria, many angry about the speed of their transit and hurling insults at machine-gun-toting Slovenian policemen patrolling outside a wire fence with sanitary masks over their faces. “We haven’t eaten or had water for over 12 hours,” said Fahim Nusri from Syria, who had to spend a night in the camp in cold and foggy weather together with his wife and two small children before they were allowed into Austria. “Me and my wife are not a problem, but what about our children?”

When Hungary closed its border with Croatia in mid-October, thousands turned to Slovenia instead, many of them marching through cold rivers, desperate to continue their journey westward before the weather gets even colder. Croatia and Slovenia later negotiated a deal to transport migrants and refugees across their border in trains, which led to a more orderly transit. But, with Slovenia now placing barriers, the chaotic surge could resume. “If someone thinks that border fences will stop our march, they are really wrong,” said Mohammed Sharif, a student from Damascus, as he tried to keep warm by a bonfire in the Sentilj camp. “It will just make our trip more dangerous and deadly, but we have nowhere to return. Our country and our homes are destroyed and we are in Europe to stay.”

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Nov 112015
 
 November 11, 2015  Posted by at 10:24 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle November 11 2015


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

We’re in the Early Stages of Largest Debt Default in US History (Stansberry)
It’s Not The Record High US Corporate Debt That Is The Biggest Risk (ZH)
US Banks Said To Hold $10 Trillion Of Risky Trades (FT)
US Banks Are Not “Sound”, Fed Report Finds (Simon Black)
Chinese Defaults Spread as Cement Maker to Miss Bond Payment (Bloomberg)
China Factory Output, Investment Sluggish As Old Economy Slows (Bloomberg)
Goldman Sachs Says Corporate America Has Quietly Re-Levered (Tracy Alloway)
Credit Suisse CEO Sees ‘Traumatic’ Event If Rates Increase (Bloomberg)
Oil Prices Drop On Rising Stockpiles, Slowing Asian Economies (Reuters)
ECB Faces Three Suits Over Quantitative Easing in Germany (Bloomberg)
VW Only Carmaker Found Cheating By US Regulator (Reuters)
Minsky, Financial Instability, Great Depression & GFC (Steve Keen)
Bitcoin’s Place In The Long History Of Pyramid Schemes (FT)
Abortions Up 50% In Greece Since Start Of The Crisis (Kath.)
More Misery Ahead For Greeks As Economy Set To Shrink Again (Reuters)
EU Fears Greek Debt Deal Would Unleash Mass Write-Off Calls In Spain (Telegraph)
Germany May Need €21 Billion To House And Educate Refugees (Reuters)
No One Is Really In Charge Of The Refugee Crisis (Reuters)
Germany Sends Syrians Back To EU Borders (Local.de)
Austria Calls For Greece, Italy Border Controls (AP)
Refugee Boat Sinks Off Western Turkey, 14 Dead, 7 Children (AA)

“A massive, unprecedented intervention in the markets by the Federal Reserve stopped the default cycle in its tracks. As a result, trillions of dollars in risky debt did not enter default and were not written off…”

We’re in the Early Stages of Largest Debt Default in US History (Stansberry)

We are in the early stages of a great debt default – the largest in U.S. history. We know roughly the size and scope of the coming default wave because we know the history of the U.S. corporate debt market. As the sizes of corporate bond deals have grown over time, each wave of defaults has led to bigger and bigger defaults. Here’s the pattern. Default rates on “speculative” bonds are normally less than 5%. That means less than 5% of noninvestment-grade, U.S. corporate debt defaults in a year. But when the rate breaks above that threshold, it goes through a three- to four-year period of rising, peaking, and then normalizing defaults. This is the normal credit cycle. It’s part of a healthy capitalistic economy, where entrepreneurs have access to capital and frequently go bankrupt. If you’ll look back through recent years, you can see this cycle clearly…

In 1990, default rates jumped from around 4% to more than 8%. The next year (1991), default rates peaked at more than 11%. Then default rates began to decline, reaching 6% in 1992. By 1993, the crisis was over and default rates normalized at 2.5%. Around $50 billion in corporate debt went into default during this cycle of distress. Six years later, in 1999, the distress cycle began to crank up again. Default rates hit 5.5% that year and jumped again in 2000 and 2001 – hitting almost 8.7%. They began to fall in late 2002, reaching normal levels by 2003. Interestingly, the amount of capital involved in this cycle was much, much larger: Almost $500 billion became embroiled in default. The growth in risky lending was powered by the innovation of the credit default swap (CDS) market. It allowed far riskier loans to be financed. As a result, the size of the bad corporate debts had grown by 10 times in only one credit cycle.

The most recent cycle is the one you’re most familiar with – the mortgage crisis. Six years after default rates normalized in 2003, they suddenly spiked up to almost 10% in 2009. But thanks to a massive and unprecedented government intervention, featuring trillions of dollars in credit protection, default rates immediately returned to normal in 2010. As a result, only about $1 trillion of corporate debt went into default during this cycle. You should know, however, that the regular market-clearing process of rising, peaking, and normalizing default rates did not occur in the last cycle. A massive, unprecedented intervention in the markets by the Federal Reserve stopped the default cycle in its tracks. As a result, trillions of dollars in risky debt did not enter default and were not written off.

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EBITDA= earnings before interest, tax, depreciation and amortization

It’s Not The Record High US Corporate Debt That Is The Biggest Risk (ZH)

[..] even Goldman has admitted that rising leverage and the soaring buybacks are, “like a bad dream”, the major problem for corporate imbalances, the truth is that surging debt is not the full story, nor is it the scariest aspect of this story. The real risk is that while debt is rising on both a relative and an absolute basis, EBITDA, or cash flow, of both junk companies as well as Investment Grades, has been declining for at least one year. Or rather, while junk-rated companies have seen their EBITDA decline consistently over the past 5 years, the big inflection point came in early 2014 when IG EBITDA also plateaued, and has been declining since.

It is this ongoing decline in actual cash flows, which tracks the third consecutive quarter of declining Y/Y revenues (the decline in EPS is far slower as hundreds of billions in shares have been removed from the market, keeping the EPS ratio higher than where it would be) that is the biggest risk to both the S&P500 and the market, if such a thing still existed. Even Goldman is unable to provide a counterfactual case:

Now, the counter-argument one hears is that the cost of this debt has never been this cheap with the average interest rate paid dropping from close to 6% to 4% in 2015. Put another way, as debt has more than doubled, the amount of interest expense has only gone up by 40%. This is all good until you normalize EBITDA. Indeed, if EBITDA was at “normalized levels” (which we define as median NTM EBITDA from 1Q07-2Q15), leverage would move to 1.75X, over 30% higher than the average over the last 10 years.

But here is the real kicker: with even Goldman admitting that buybacks as a shortcut to creating “engineered” earnings will no longer work and instead may be punished by investors, companies refuse to accept this. Certainly don’t tell that to McDonalds, which earlier today defied S&P to announce a major debt increase to boost shareholder returns, even if it meant its A rating would be lost as it was downgraded to BBB+. Contrary to Goldman’s take, it was rewarded by shareholders. So even as cash flows continue to decline, companies will engage in this one and only line of defense against sellers and shorters as in a world where 2% growth is the new norm (and that with the benefit of $13 trillion in central bank liquidity). And instead of investing in the future, replenishing their asset base, this asset stripping of corporations to reward shareholders will continue.

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“..4.4% of all outstanding derivatives contracts at those institutions..”

US Banks Said To Hold $10 Trillion Of Risky Trades (FT)

The repeal of part of the Dodd-Frank financial reforms has left big US banks holding $10tn of risky derivatives trades on their books, according to an investigation by Democrats. Senator Elizabeth Warren, a liberal Wall Street foe, said the repeal -which sparked a firestorm when it was slipped into a budget bill in December 2014- had left federally insured banks exposed to dangerous swaps trades. The rollback of the relevant rule, which followed almost no congressional debate, sparked stinging criticism of Wall Street and cemented perceptions of the pernicious influence of bank lobbyists on Capitol Hill. The rule would have required banks to push out swaps trades to entities that are not insured with taxpayer funds.

But on Tuesday Ms Warren cited figures from bank regulators indicating that about $10tn of those contracts remained on banks books, the first such estimates. The furore over the repeal helped set the stage for Wall Street regulation to feature in the 2016 presidential race with Hillary Clinton and Bernie Sanders, the Democratic contenders, jousting over how to rein in banks risk taking. Sheila Bair, former chair of the Federal Deposit Insurance Corporation and now president of Washington College in Maryland, told the FT earlier this year before she joined the school that the swaps repeal was a ‘classic backroom deal’. “There’s no way this would have passed muster if people had openly debated it, so [the banks] had to sneak it on to a must-pass funding bill. For an industry that purports to want to regain public trust, it was an extraordinary thing to do”.

Swaps trades enable institutions to exchange streams of payments, typically to reduce their interest rate or currency risks. Banks want to keep the trades on their books simply because their margins are higher that way, Ms Bair said, noting that counterparties would demand more collateral from a non-insured affiliate. Ms Warren and Elijah Cummings, a senior Democrat in the House of Representatives, cited an estimate from the FDIC that 15 banks registered as swap dealers currently hold up to $9.7tn of the affected swaps. It said they represented 4.4% of all outstanding derivatives contracts at those institutions. The total comprises $6.1tn in credit derivatives, $1tn in commodity derivatives and $2.6tn in equities derivatives. In letters published on Tuesday the two lawmakers also took aim at bank regulators, saying they had compounded the risks to taxpayers by failing to introduce new capital margin requirements on swap trades.

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“..if even a small number of customers suddenly wanted their money back, and especially if they wanted physical cash, banks would completely seize up.”

US Banks Are Not “Sound”, Fed Report Finds (Simon Black)

Late last week, a consortium of financial regulators in the United States, including the Federal Reserve and the FDIC, issued an astonishing condemnation of the US banking system. Most notably, they highlighted “continuing gaps between industry practices and the expectations for safe and sound banking.” This is part of an annual report they publish called the Shared National Credit (SNC) Review. And in this year’s report, they identified a huge jump in risky loans due to overexposure to weakening oil and gas industries. Make no mistake; this is not chump change. The total exceeds $3.9 trillion worth of risky loans that US banks made with your money. Given that even the Fed is concerned about this, alarm bells should be ringing. Bear in mind that, in banking, there are three primary types of risk, at least from the consumer’s perspective.

The first is fraud risk. This ultimately comes down to whether you can trust your bank. Are they stealing from you? MF Global was once among the largest brokers in the United States. But in 2011 it was found that the firm had stolen funds from customer accounts to cover its own trading losses, before ultimately declaring bankruptcy. It’s unfortunate to even have to point this out, but risk of fraud in the Western banking system is clearly not zero.

The second key risk is solvency. In other words, does your bank have a positive net worth? Like any business or individual, banks have assets and liabilities. For banks, their liabilities are customers’ deposits, which the bank is required to repay to customers. Meanwhile, a bank’s assets are the investments they make with our savings. If these investments go bad, it reduces or even eliminates the bank’s ability to pay us back. This is precisely what happened in 2008; hundreds of banks became insolvent in the financial crisis as a result of the idiotic bets they’d made with our money.

The third major risk is liquidity risk. In other words, does your bank have sufficient funds on hand when you want to make a withdrawal or transfer? Most banks only hold a very small portion of their portfolios in cash or cash equivalents. I’m not just talking about physical cash, I’m talking about high-quality liquid assets and securities that banks can sell in a heartbeat in order to raise cash and meet their customer needs to transfer and withdraw funds. For most banks in the West, their amount of cash equivalents as a%age of customer deposits is extremely low, often in the neighborhood of 1-3%. This means that if even a small number of customers suddenly wanted their money back, and especially if they wanted physical cash, banks would completely seize up.

Each of these three risks exists in the banking system today and they are in no way trivial. Very few people ever give thought to the soundness of their bank, ignoring the blaring warning signs that are right there in front of them. Every quarter the banks themselves send us detailed financial statements reporting both their low levels of liquidity and the accounting tricks they use to disguise their losses. Now we have a report from Fed and the FDIC, showing their own concern for the industry and foreshadowing the solvency risk I discussed above.

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Overleveraged malinvestment defines the Chinese economy.

Chinese Defaults Spread as Cement Maker to Miss Bond Payment (Bloomberg)

China is headed for its latest corporate default amid slowing economic growth, as a cement maker said it will fail to pay bond investors and will file for liquidation. China Shanshui Cement “will be unable to obtain sufficient financing on or before” a Thursday maturity date on its 2 billion yuan ($314 million) of 5.3% securities, it said in a statement Wednesday. The company, which is incorporated in the Cayman Islands, has decided to file a winding up petition and application for appointment of provisional liquidators with the courts there, it said. That “will also constitute an event of default” on its $500 million 7.5% dollar bonds due 2020, according to the filing.

Investors have been scarred by defaults from Chinese firms this year in industries including property and commodities, as President Xi Jinping shifts toward greater reliance on services to drive growth amid the weakest economic expansion in a quarter century. Shanshui would be at least the sixth company to renege on obligations in the nation’s onshore bond market this year, after Shanghai Chaori Solar Energy became the first in 2014. “For offshore creditors, recovering value from Shanshui’s dollar bonds will be a long process given that onshore creditors will be all over the company first in the case of liquidation,’’ said Zhi Wei Feng at Standard Chartered in Singapore.

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Nonsense: “Fixed-asset investment increased 10.2% in the first 10 months, while retail sales climbed 11% in October..”

China Factory Output, Investment Sluggish As Old Economy Slows (Bloomberg)

China’s industrial production and investment slowed further in October, showing the government’s pro-growth measures are yet to revive the nation’s old economic engines. Retail sales defied the weakness, rising more than economists forecast. Industrial output rose 5.6% in October from a year earlier, the National Statistics Bureau said on Wednesday (Nov 11), below the 5.8% median estimate of economists surveyed by Bloomberg and compared with September’s 5.7%. Fixed-asset investment increased 10.2% in the first 10 months, while retail sales climbed 11% in October. China’s leaders are seeking to transition from an investment-driven, manufacturing-dominated economy to a more consumption and services-led one in the next five years while maintaining growth of at least 6.5% a year.

With the real estate sector stalling, manufacturing deteriorating, and inflation muted, policy makers are under pressure to step up stimulus as new growth drivers aren’t picking up the slack quickly enough. The better-than-expected economic growth figure last quarter “did not alleviate downside risks facing the economy,” Liu Li-Gang at Australia & New Zealand Banking wrote in a note ahead of the data. Mr Liu wrote that the central bank “will remain accommodative and keep market interest rates steadily low.” The retail sales result compared with a median economist projection of 10.9%. Wednesday is an annual e-commerce shopping bonanza known as Singles’ Day in China.

Transactions on this year’s event passed 57.1 billion yuan (S$12.8 billion) before midday, eclipsing the 2014 mark with another 12 hours still to go. China’s consumer inflation waned in October while factory- gate deflation extended a record streak of negative readings, data Tuesday showed. That followed a tepid trade report suggesting the world’s second-biggest economy isn’t likely to get a near-term boost from global demand as overseas shipments dropped 6.9% in October in dollar terms from a year earlier.

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Quietly?!

Goldman Sachs Says Corporate America Has Quietly Re-Levered (Tracy Alloway)

You might choose to whisper it softly, but the balance sheets of U.S. companies are yelling it loudly, while wielding a baseball bat: Corporate leverage is now at its highest level in a decade, according to a new analysis from Goldman Sachs. Years of low interest rates and eager investors have encouraged Corporate America to go on a shopping spree. On its list are share buybacks and dividend hikes to reward equity investors, as well as a series of merger and acquisition deals, all funded through a generous bond market. Since cash flow has not kept up with the boom in bond sales, the splurge has left Corporate America with its highest debt load in about 10 years, according to the bank.

“Companies in the United States have taken advantage of low interest rates to issue record levels of debt over the past few years to fund buybacks and M&A,” Goldman analysts led by Robert Boroujerdi wrote in the note. “This has driven the total amount of debt on balance sheets to more than double pre-crisis levels.” While much of that could be attributed to the energy sector, in which exploratory oil and gas firms have relied on friendly capital markets to fund growth, the trend appears widespread. Goldman points out that even after stripping out the besieged energy sector, net debt to earnings is at its highest point since the crisis.

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Traumatic events will happen regardless.

Credit Suisse CEO Sees ‘Traumatic’ Event If Rates Increase (Bloomberg)

Credit Suisse CEO Tidjane Thiam said he sees the risk of a “traumatic event” in global markets once the current period of low interest rates comes to an end. “Frankly, it’s quite likely that there will be at the end of all this period a relatively traumatic event,” Thiam, 53, said in an interview with Bloomberg Television on Tuesday in New York. “It’s quite likely that interest rates will rise and there will be impacts in the real economy, the real world, so as a financial-services company, we have to position ourselves quite defensively.” Speculation about the Federal Reserve’s rate outlook has prompted swings in securities markets as investors assess whether the global economy is strong enough to withstand a U.S. rate increase.

Futures markets show that there’s a 66% chance the Fed will raise borrowing costs for the first time in nine years on Dec. 16, while ECB President Mario Draghi has all but pledged to boost stimulus to bolster growth across the euro area. Earlier expectations for a delay until March had to be trimmed after Fed Chair Janet Yellen told U.S. lawmakers that action next month remains a “live possibility,” a case later bolstered by American job gains. “Every time you see in markets, when you go from a high-rate environment to a low-rate environment or from a low to a high-rate environment, experience shows that a number of people are caught unprepared,” Thiam said. “That is likely to happen again.”

The comments were part of an interview in which Thiam discussed the opportunity for the bank to expand in managing money for wealthy clients across Asia and the strengths of the firm’s securities unit. The CEO last month announced a plan to reorganize Credit Suisse along geographical lines, cut as many as 5,600 jobs and focus more on wealth management while shrinking and splitting up the investment bank. “Why do we want to be in wealth management? Because the world is getting wealthier,” said Thiam, who replaced Brady Dougan in July. “That’s a huge opportunity.” The second-largest Swiss bank after UBS remains “very focused” on emerging markets including China, where “we have been underweight,” Thiam said. Credit Suisse needs the investment bank to help Asian billionaires with illiquid assets who need access to financing, he said.

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No kidding: “The weakness of global manufacturing activity is … putting pressure on energy demand..”

Oil Prices Drop On Rising Stockpiles, Slowing Asian Economies (Reuters)

Crude oil prices fell on Wednesday after industry data showed an increase in U.S. stockpiles, while China’s factory output slowed and fears emerged that Japan’s economy may have fallen into recession added to demand woes. Benchmark U.S. crude futures slipped to a two-week low at $43.55 a barrel in early trading before edging back up to $43.72 a barrel by 0652 GMT, still down almost half a dollar from their last close. The price drops came on the back of rising stockpiles in North America and slowing economies in Asia. U.S. crude stocks jumped by 6.3 million barrels in the week to Nov. 6 to 486.1 million barrels, data from industry group the American Petroleum Institute showed late on Tuesday, compared with analyst expectations for an increase of 1 million barrels.

On the demand side, confidence among Japanese manufacturers fell in November for a third straight month to levels unseen in more than two years, a Reuters poll showed on Wednesday, reflecting fears that a China-led slowdown in overseas demand may have pushed Asia’s second-biggest economy into recession. “The weakness of global manufacturing activity is … putting pressure on energy demand,” JBC Energy said, adding that it expected a significant drop in oil demand growth in 2016. In China, factory output grew slower than expected at an annual 5.6% in October, data showed on Wednesday, slightly below analyst forecasts of 5.8% and down from 5.7% in September. China’s oil demand rose 0.9% in October from a year earlier to 10.14 million barrels per day (bpd), with many analysts expecting a further slowdown.

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“This program is economic policy and first and foremost serves private banks from which the ECB purchases problematic loans. It is turning itself into the bad bank of Europe.”

ECB Faces Three Suits Over Quantitative Easing in Germany (Bloomberg)

German politicians who failed in previous attempts to have courts derail EU policy filed lawsuits at the country’s top court challenging the ECB’s €1.1 trillion asset-purchase program. Three suits were filed over the last six months, according to Michael Allmendinger, a spokesman for the Federal Constitutional Court in Karlsruhe. Bernd Lucke, the head of political party ALFA, brought a case in September. Ex-lawmaker Peter Gauweiler said in an e-mailed statement that he also filed a complaint last month. “With its euphemistically so-called Quantitative Easing policy, the ECB is seeking to inflame inflation by printing huge amounts of money,” said Gauweiler, who was behind a case that resulted in a ruling from the EU’s top court earlier this year.

“This program is economic policy and first and foremost serves private banks from which the ECB purchases problematic loans. It is turning itself into the bad bank of Europe.” Nine months into the bond-buying program, the main goal of spurring inflation toward the ECB’s goal of close to but below 2% remains elusive with price increases still largely absent from the 19-nation euro region. With the economy at risk of cooling amid weaker growth in China and a slowdown in global trade, ECB President Mario Draghi has held out the prospect of more stimulus next month, when new consumer-price and growth forecasts will be published.

The cases are separate from a complaint attacking the ECB’s 2012 Outright Monetary Transactions program. That action was dealt a setback when the EU’s highest tribunal in June largely approved the OMT. The German judges still have to make a final ruling in that litigation. In his new suit, Gauweiler argues that Draghi may have been biased and shouldn’t have participated in decisions potentially affecting the refinancing efforts by Italy or Greece. Draghi used to work for the Italian finance ministry, so there are “serious indications” he may have have been in part responsible for the countries’ high level of debt and “financial manipulations” allowing Italy to enter the euro zone, said Gauweiler.

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All the others managed to do what VW couldn’t, build engines that conform to the standards? That’s hard to swallow. It makes VW look too stupid to believe.

VW Only Carmaker Found Cheating By US Regulator (Reuters)

Volkswagen is the only carmaker whose diesel engines have been found so far by a U.S. regulator to be using illicit emissions-control software, German magazine Wirtschaftswoche reported. “Up until now we have found no fraudulent defeat device in vehicles of other brands,” the magazine quoted Mary Nichols, chair of the California Air Resources Board (CARB), as saying in an interview published on Tuesday. The CARB has been testing diesel models of brands other than VW since the U.S. Environmental Protection Agency said in September that the German group used software for diesel VW and Audi cars that deceived regulators measuring toxic emissions. “Our tests of diesel vehicles will continue,” Nichols said. Separately, Nichols said the CARB would also look into VW’s Nov. 3 admission of manipulating carbon dioxide emissions, though added the carmaker’s latest malfeasance would probably not spark a new testing cycle.

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Lesson no. 6.

Minsky, Financial Instability, Great Depression & GFC (Steve Keen)

I explain Minsky’s Financial Instability Hypothesis-why he developed it, what were his inspirations, how well it fits the empirical record, and how it can be modeled easily using system dynamics methods. For some reason my webcam froze for the 1st half of the lecture; I start moving in the second half…

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Contentious. Discuss.

Bitcoin’s Place In The Long History Of Pyramid Schemes (FT)

The cryptocurrency was invented by an anonymous mathematician in 2008, and championed in the years that followed for its technology. At a time when many were unsettled by the actions of central banks after the financial crisis, bitcoin offered an alternative way to manage a currency, through mathematical rules rather than a metaphorical printing press. It also fit the vogue for technological innovation. Bitcoins are created by computers solving mathematical problems, with the total number that can be calculated into existence over time limited. An open ledger allows the community to track the distribution of coins. At a time when small start-ups were earning multibillion-dollar valuations for their power to disrupt industries, anyone with a good idea and a neat bit of software could make a fortune.

As bitcoin attracted more attention, its price rose, attracting more money and attention. Early adopters got rich quick, or bemoaned how they would have done had their bitcoin hoard not gone in the bin aboard a discarded hard drive. Bitcoins could be used to buy goods and services in the real world, although not usually without a third party intermediating. The attention and limited supply meant that by December 2013 bitcoins traded for more than $1,200 each. However, in 2014 the cryptocurrency lost three quarters of its value after running into an old world problem, the failure of an overextended broker. Mt Gox, a prominent bitcoin exchange, collapsed. Then the seizure of the Silk Road, a popular website for trading bitcoins for drugs and other frowned on goods and services, prompted a crash in the price to almost $100.

Such big swings in price undermine the case for bitcoin’s use as a currency. “It’s value is so volatile it’s not likely to serve as a medium of exchange”, says Eugene Fama, the Nobel Prize winning economist. He pointed to examples such as Zimbabwe. “When a currency has a variable value, the people just switch to a different currency, or to barter.” Bitcoin also lacks another feature of currencies: the balance sheet of a central bank standing behind it. They might be intangible, but a balance sheet has two sides to it, lists of assets and liabilities. The bitcoin ledger, by comparison, is just a glorified list of liabilities, keeping track of where the bitcoins are located. Furthermore, while the number of bitcoins is limited, the number of times the cryptocurrency can be replicated is not. There are a host of imitators, including Doge coin, started as a joke in 2013 at the height of alt-coin fever.

The inherent flaw of pyramid schemes is that they must always suck in new converts to avoid collapse, and the exponential growth in users is impossible to sustain. Bitcoin shares some of these features. It requires constant evangelism because its value derives from its use. The limited supply of bitcoins then becomes a fatal constraint. The more people use it, the greater the price must rise, dissuading its use as a currency. Bobby Lee, head of BTCC, the largest bitcoin exchange in China, argues its use for everyday transactions makes it a currency, and is frank about its price, saying: “The reason bitcoin has value today is scarcity, that is all.” He also agrees bitcoin has the character of a pyramid scheme, but compares it with bubbles in housing markets, which might also appear pyramidical. He adds: “It all comes down to what we think of a pyramid scheme. Is that a good thing, or a bad thing?”

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Thanks, Schäuble.

Abortions Up 50% In Greece Since Start Of The Crisis (Kath.)

The number of abortions carried out in Greece has risen 50% since the start of the crisis and miscarriages have doubled. Births at public hospitals, meanwhile, have dropped 30% in the same period and assisted pregnancies by 20%. These are but some of the findings that were presented on October 17-18 in Athens at the 7th Panhellenic Conference of Family Planning organized by the Greek Society for Family Planning, Birth Control and Reproductive Health. According to the experts, the crisis has affected women across all age groups and socioeconomic strata, as well as the behavior of young people and teenagers in particular.

Greece has become an abortion leader. Ten years ago, there were 200,000 abortions a year among a population of 11 million, while today this figure has risen to 300,000, according to the figures presented at the conference. It is estimated that 140 in 1,000 pregnancies end in abortion. This usually concerns women who already have one or two children. At the Alexandra Maternity Hospital, the biggest public institution of its kind in Greece and the benchmark for the study, births have dropped 30% since the start of the crisis. “A prenatal care package for an uninsured woman at a public hospital costs just under €500, while a caesarian section costs €1,000. The cost is higher for migrant women, who may pay as much as €1,500 for a C-section,” says Constantinos Papadopoulos, an obstetrician/gynecologist (OB/GYN). “And if you add the cost of raising a child, then you understand why women take such decisions.”

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Things are already very bad in Greece, but apparently not enough yet.

More Misery Ahead For Greeks As Economy Set To Shrink Again (Reuters)

Any Greeks hoping their days of economic pain are over following the latest bailout agreement with international lenders should look to the dire projections from Europe’s three main institutional forecasters for a reality check. The European Commission, the OECD and the EBRD all say Greece is heading into recession again this year and next, sinking back into the mire after last year’s positive reading ended a six-year depression. The light at the end of the tunnel, all three say, may be some growth returning during next year – but it is highly dependent on economic and banking reform. There will be arguments about why Greece remains in such a state – from accusations in Athens that lender-imposed austerity has crushed the life out of the economy to gripes from Brussels that Alexis Tsipras’s leftists wasted what improvements had been achieved.

The two sides are again at loggerheads – albeit possibly temporarily – over reforms and bailout cash, with the added complexity that Tsipras does not want to see indebted Greeks lose their homes while the country is providing food and housing for thousands of asylum-seekers. But there is no disagreement among the forecasters about the direction the Greek economic is heading. Both the Commission and the OECD see a 1.4% contraction this year, while the EBRD (the European Bank for Reconstruction and Development) sees 1.5%. This is particularly severe given the first half of the year saw growth of 1%, put down to Greeks running out to buy durable goods ahead of a threatened “Grexit” from the eurozone.

There is more divergence among the forecasters about next year. The Commission and OECD see a contraction of 1.3% and 1.2%, respectively. The Commission reckons much of this will be carry-over effects from this year’s political and economic turmoil, which included a failure to complete the previous bailout program, a referendum on austerity, a bitter fight with lenders, and the introduction of capital controls, many of which remain. The EBRD, however, expects a decline of 2.4%. Its mere involvement is significant, given that it only added Greece to its bailiwick of mainly poor, emerging economies this year.

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And then there’s this.

EU Fears Greek Debt Deal Would Unleash Mass Write-Off Calls In Spain (Telegraph)

Greece’s creditor powers have delayed talks over reducing the country’s debt mountain for fear of emboldening anti-austerity forces in the southern Mediterranean, the country’s finance minister has claimed. Euclid Tsakalotos said EU lenders would not discuss the question of Greece’s debt burden, which stands at 200pc of GDP, until after the Spanish elections are held in the new year. “The promise was that we would have a discussion on debt immediately after the first [bail-out] review and have deal before Christmas,” he told an audience at the London School of Economics on Tuesday night. “But we won’t have a deal because Spain has an election and [creditors] don’t want … to encourage the wrong people.”

Spain is due to hold its first post-crisis elections on December 20. The current conservative government of prime minister Mariano Rajoy has been fighting off anti-austerity forces in the opposition Socialist party and the grassroots Podemos movement, in a bid to become the first bail-out government to ever be re-elected in the eurozone. Wiping out some portion of Greece’s debt mountain has been a key demand of the Syriza government. Athens had been told talks could begin when the government had successfully passed its first round of laws in return for a release of bail-out cash. This review is due to be complete in the coming weeks but has hit stumbling blocks. And Mr Tsakalotos, an Oxford-educated economist, hinted at the continuing tensions between the newly elected government and its lenders.

He said many of Syriza’s negotiators “had wanted the Left to fail” in order to make an example of the country, and dissuade radical forces from similar demands to tear up austerity deals in Portugal and Spain. The IMF has called for a bold programme of debt write-offs and moratoriums on repayments for up to 40 years. The Fund has refused to take part in a new €86bn bail-out until a debt write-off has been agreed. EU creditors, however have resisted opening up the question of haircuts or repayment extensions until Athens has managed to “front-load” most of its austerity reforms. Mr Tsakalotos’s comments suggest creditors fear they will unleash a new wave of debt relief calls in former bail-out countries.

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Wait till the 3 million refugees expected next year in Europe are added in.

Germany May Need €21 Billion To House And Educate Refugees (Reuters)

Germany faces costs of more than €21bn this year to house, feed and educate hundreds of thousands of refugees, the Munich-based Ifo institute said on Tuesday. The new estimate, which assumes 1.1 million people will seek asylum in Germany in 2015, represents a sharp increase on a previous projection from late September which put the cost at €10bn. That estimate had assumed 800,000 arrivals and did not include costs related to education and training, which the Ifo said were necessary to ensure refugees, many of them fleeing war in the Middle East, were successfully integrated. “Training and access to the labour market are key in terms of both costs and integration,” Gabriel Felbermayr of the Ifo institute said.

The German government has not published an official estimate for how much the influx of refugees would cost it this year, but it has boosted funding to the country’s 16 regional states by €4bn. For next year, German states and towns have said they could face costs of up €16bn. The finance minister, Wolfgang Schäuble, has said the federal government would invest roughly €8bn in 2016 to shelter and integrate asylum seekers. Ifo also reiterated its call for a flexible interpretation of Germany’s minimum wage, saying a majority of businesses saw the €8.50 floor as a hindrance to employing refugees. Some members of chancellor Angela Merkel’s conservative camp have also called for flexibility on the minimum wage, but her coalition partner, the Social Democrats, have ruled out changes to one of its flagship reforms.

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The UNHCR leaves all the hard work to volunteers, has just 20 people on Lesbos where at least 125,000 refugees landed in October alone, and then blames the resulting chaos on the Greek government.

No One Is Really In Charge Of The Refugee Crisis (Reuters)

What sets this humanitarian crisis apart is the centrality of volunteers. On Lesbos alone, they number well into the hundreds. They are lifeguards from Spain, doctors from Holland, trauma counselors from the West Bank, nurses from Australia, a cook from Malaysia, and all manner of ordinary people pitching in however they can. Many come on their own dime, taking time off from work or pausing their lives indefinitely. They fill in critical gaps created by a perfect storm of political weakness and limits to aid: a Greek government in severe economic distress and without capacity to take control; a European Union strangled by politics as it struggles to define a uniform migration policy; and international aid groups that have been slow to move in because they do not normally operate in industrialized nations — and have to start their operations from scratch in a place like Lesbos.

Meanwhile, the boats keep coming, and grassroots volunteer efforts have grown increasingly sophisticated. A group called O Allos Anthropos, Greek for “The Other Person,” cooks and hands out free meals for thousands of refugees daily. A Drop in the Ocean runs its own camp for just-arrived refugees, particularly families with small children, where it provides food, tents and donated clothing. Yet another group, the Starfish Foundation, set up a central bus station for refugees in the parking lot of Oxy, a cliffside nightclub with stunning sea views. Volunteers there give out handmade bus tickets to the two official camps in the island’s south. But as winter sets in and the sea crossing grows more dangerous, the lack of an officially coordinated emergency response could lead to higher death tolls.

Though volunteers have tried organizing themselves in recent months — they now hold weekly meetings with aid workers from international organizations such as the IRC, United Nations High Commissioner for Refugees (UNHCR), and Doctors Without Borders (MSF) — most are not trained in crisis management. They vastly outnumber aid workers on the island, but for many, it’s their first experience with a humanitarian disaster. And because they’re in Greece temporarily, on hiatus from paid jobs back home, the high turnover means many must leave the island just as they are beginning to understand their roles.

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On/off.

Germany Sends Syrians Back To EU Borders (Local.de)

Germany is once again sending Syrian refugees back to the EU country where they first arrived, in line with the so-called Dublin regulations, the government confirmed on Tuesday. In August it emerged that for Syrian refugees, Germany had stopped following the Dublin rules, which stipulate that refugees must apply for asylum in the EU state where they first enter the 28-member union. The move was in part to alleviate the burden on countries like Italy and Greece where hundreds of thousands of migrants have been arriving by boat. But a spokesman for the Interior Ministry confirmed on Tuesday that Germany is now applying the Dublin procedure for all countries of origin and all member states at which migrants arrive – except Greece. This has been the case “for Syrian nationals, since October 21st”, he confirmed.

At the beginning of October, Chancellor Angela Merkel called the Dublin rules “obsolete” as they put the burden on EU states where migrants first arrive to process claims for refugee status. Still, of the refugees currently arriving in the country, few have actually been registered in another EU country before arriving in Germany. The Federal Office for Migration and Refugees (BAMF) reported that in October 1,777 people were sent back to other EU countries due to the Dublin rules – 5.6% of all decisions on refugee status made that month. Out of all asylum decisions made so far this year, just 8.5% – 17,410 – have been to send people back under the Dublin rules. In October, 181,166 refugees arrived in Germany, of which 88,640 were Syrian.

Interior Minister Thomas de Maizière and his office have been pushing for tighter controls on refugees recently, causing serious fractures within Germany’s coalition government. De Maizière unexpectedly announced on Saturday that Syrians would no longer be awarded three years’ residency in Germany and that they could no longer bring their families with them at a later point. But it quickly became clear that his comments did not have the backing of more senior figures in the government, who said the asylum process for Syrian refugees would not be changed. However the interior minister received backing from powerful figures in the conservative Christian Democratic Union (CDU), putting pressure on Merkel to revise her policy towards Syrian refugees.

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This is getting so out of hand fighting becomes inevitable.

Austria Calls For Greece, Italy Border Controls (AP)

Austria’s chancellor said establishing controls on the borders of Italy and Greece must be a priority to stem the influx of migrants into the EU. Werner Faymann said border controls inside the EU are less effective because refugee flows can “only be shifted” once the refugees have traveled thousands of kilometers (miles) in hopes of a safe haven. Faymann on Tuesday also urged quick completion of an agreement with Turkey offering Ankara billions of euros in aid for incentives to migrants to remain in Turkey instead of leaving for the EU. He said making sure that people fleeing war and hardship from regions in Asia and the Mideast can survive in Turkey is the “only sensible way.”

Meanwhile, Greek authorities said more than 10,000 refugees and economic migrants have crossed from Greece into Former Yugoslav Republic of Macedonia (FYROM) since Monday morning, on their long trek toward wealthier western and northern European countries. FYROM border police were letting groups of 50 across at regular intervals Tuesday. But large bottlenecks formed due to increased flows toward the border crossing at Idomeni after migrants were stranded on the Greek islands for days by a ferry strike.

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While this continues.

Refugee Boat Sinks Off Western Turkey, 14 Dead, 7 Children (AA)

Fourteen people drowned off Turkey’s western coast when a boat packed with refugees sank in the early hours of Wednesday, the Turkish Coast Guard said. The incident is the latest tragedy to affect refugees trying to reach Greek islands from Turkey in often unseaworthy vessels. A Coast Guard patrol found the sinking boat off the coast of Ayvacik district in Canakkale province – around 10 kilometers (4 miles) from Lesbos – at around 2 a.m. local time (0000GMT). Among the dead were seven children. The Coast Guard was able to rescue 27 people from the stricken vessel. It is not known why the boat sank. The casualties’ nationalities are yet to be released. Coast Guard divers are searching the area around the site of the disaster.

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Sep 262015
 
 September 26, 2015  Posted by at 9:27 am Finance Tagged with: , , , , , , , , ,  4 Responses »


Russell Lee Dillon, Montana, trading center for prosperous cattle and sheep country 1942

VW’s Systematic Fraud Threatens To Engulf The Entire Industry (Economist)
Volkswagen Scandal Spreads Throughout Europe’s Credit Markets (Bloomberg)
EU Warned On Devices At Centre Of VW Scandal Two Years Ago (FT)
VW Bungles Restart With New CEO From Old Guard (Reuters)
More Volkswagen Engines May Be Implicated, German Minister Says (Bloomberg)
Did -Political- Privilege Enable Volkswagen’s Diesel Deception? (Bloomberg)
Problems at Volkswagen Start in the Boardroom (NY Times)
Boehner Resigns From Congress: ‘House Leadership Turmoil Would Do Harm‘ (CNBC)
It’s All ‘Perverted’ Now as U.S. Swap Spreads Tumble Below Zero (Bloomberg)
Junk-Debt Investors Fight for Scraps as US Shale Rout Deepens (Bloomberg)
Wall Street Braces For Grim Third Quarter Earnings Season (Reuters)
It’s Carnage Out There For Emerging Markets (CNBC)
Emerging Markets Are Facing a Big Foreign FX Debt Bill (Tracy Alloway)
Bill and Melinda Gates Foundation Sues Petrobras, Auditor for Fraud (WSJ)
How Much Longer Can Consumers Underpin Canada’s Economy? (Reuters)
British Spies Track “Every Visible User On The Internet” (Intercept)
Industrial Farming Is One Of The Worst Crimes In History (Guardian)
Europe’s Refugees Are Modern-Day Pioneers (McArdle)
EU To Use Warships To Curb Human Traffickers (Al Jazeera)

“Hidden within the German firm is a big finance operation that makes loans to car buyers and dealers and also takes deposits, acting as a bank.”
“..more than half Europe’s claimed gains in efficiency since 2008 have been “purely theoretical”, says T&E.”

VW’s Systematic Fraud Threatens To Engulf The Entire Industry (Economist)

Class-action lawsuits from aggrieved motorists will arrive at the speed of a turbocharged Porsche. On September 22nd VW announced a €6.5 billion provision to cover the costs of the scandal but that is likely to prove too little. By that stage the company’s value had fallen €26 billion. The financial damage could go further. Hidden within the German firm is a big finance operation that makes loans to car buyers and dealers and also takes deposits, acting as a bank. Its assets have more than doubled in the past decade and make up 44% of the firm’s total. And it may be vulnerable to a run. In previous crises “captive-finance” arms of industrial firms have proven fragile. After the Deepwater Horizon disaster BP’s oil-derivative trading arm was cut off from long-term contracts by some counterparties.

General Motors’ former finance arm, GMAC, had to be bailed out in 2009. With €164 billion of assets in June, VW’s finance operation is as big as GMAC was six years ago, and it appears to be more dependent on short-term debts and deposits to fund itself. Together, VW’s car and finance businesses had €67 billion of bonds, deposits and debt classified as “current” in June. This means—roughly speaking—that lenders can demand repayment of that sum over the next 12 months. The group also has a big book of derivatives which it uses to hedge currency and interest-rate risk and which represented over €200 billion of notional exposure at the end of 2014. It is impossible to know if these derivatives pose a further risk, but if counterparties begin to think VW could be done for they might try to wind down their exposure to the car firm or demand higher margin payments from it.

If depositors, lenders and counterparties were to refuse to roll over funds to VW, the company could hang on for a bit. It has €33 billion of cash and marketable securities on hand, as well as unused bank lines and the cashflow from the car business. The German government would lean on German banks to prop up their tarnished national champion, 20% of which is owned by the state of Lower Saxony. So far the cost of insuring VW’s debt has risen, but not to distressed levels. Still, unless the company convinces the world that it can contain the cost of its dishonesty, it could yet face a debt and liquidity crisis.

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The losses accelerate.

Volkswagen Scandal Spreads Throughout Europe’s Credit Markets (Bloomberg)

A week after it admitted to cheating on U.S. emissions tests for years, Volkswagen’s pain is beginning to spread throughout Europe’s credit markets. The Bank of France stopped trading two securities backed by Volkswagen auto loans on Friday, while executives of parts supplier Schaeffler AG find themselves fielding questions about their biggest customer as they drum up support for an initial public offering, according to people familiar with the matters. Since Volkswagen admitted Sept. 18 that it had cheated on U.S. air pollution tests since 2009, the chief executive officer resigned, the company became the target of a joint investigation by 27 U.S. states and the stock price tumbled 28%. Matthias Mueller, the former Porsche chief who was appointed Volkswagen’s CEO Friday, said his most urgent task is to win back trust for the company.

“Under my leadership, Volkswagen will do everything it can to develop and implement the most stringent compliance and governance standards in our industry,” he said in a statement. The two Volkswagen-related securities weren’t in an updated list the Bank of France distributed on Friday after being included in the original version sent to investors earlier this week, said the people, who asked not to be identified because they aren’t authorized to discuss the matter publicly. The Paris-based bank is buying asset-backed securities under a ECB purchase program designed to help boost lending in the euro area. Volkswagen Financial Services has €22.8 billion of outstanding asset-backed debt, according to a September presentation on its website.

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Everyone knew. And everyone was involved.

EU Warned On Devices At Centre Of VW Scandal Two Years Ago (FT)

EU officials had warned of the dangers of defeat devices two years before the Volkswagen emissions scandal broke, highlighting Europe’s failure to police the car industry. A 2013 report by the European Commission’s Joint Research Centre drew attention to the challenges posed by the devices, which are able to skew the results of exhaust readings. But regulators then failed to pursue the issue — despite the fact the technology had been illegal in Europe since 2007. EU officials said they had never specifically looked for such a device themselves and were not aware of any national authority that located one. The technology is at the heart of a scandal that exploded last Friday when US regulators revealed Volkswagen had used it to rig emissions tests, potentially laying itself open to criminal charges and substantial fines.

The Environmental Protection Agency said the defeat devices turn on emissions controls when vehicles are being tested but turn them off during regular driving. This means that while on the road, the cars are able to emit up to 40 times the amount of nitrogen oxides that US environmental standards allow. Initially the focus was exclusively on cars sold by Volkswagen into the US market. But Germany has now said that the company cheated in the same way in Europe as well. The inability of regulators across the EU to expose this deceit has shone a spotlight on the lobbying power of the European motor industry, which has made a huge gamble on diesel. Some 53% of new car sales in the EU are diesels, up from just more than 10% in the early 1990s.

Meanwhile the British government came under fire on Friday from the opposition Labour party after it admitted receiving evidence nearly a year ago that some diesel cars were fitted with equipment to rig emissions tests. The Department for Transport received evidence in October 2014 that there was a “real world nitrogen oxides compliance issue” for diesel passenger cars. The evidence was contained in a 60-page report by the International Council on Clean Transportation. It tested 15 vehicles and found they produced an average of seven times the legal limit for the deadly gas. One car produced 25 times the limit. The DfT said the report demonstrated the shortcomings in the old testing system and that ministers had been pushing for the EU to accelerate the introduction of a real-driving emissions test.

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Defense!

VW Bungles Restart With New CEO From Old Guard (Reuters)

Matthias Mueller is the wrong chief executive for Volkswagen. The scandal-hit German carmaker on Sept. 25 appointed the 62-year-old CEO of its brand Porsche to replace Martin Winterkorn, who resigned days earlier after VW admitted tampering with its cars to falsify regulatory emissions tests. Just as with new chair Hans Dieter Poetsch, it has chosen an insider when it should have looked beyond its Wolfsburg base. Mueller knows the gigantic carmaker inside out, and has what it takes to fix operational woes. But having been at the group since the late 1970s, he is also a deeply entrenched member of the Wolfsburg old guard. His insider status suggests he is an imperfect investigator of the scandal. From 2007 and 2010, he was the group’s head of product management, responsible for all vehicle projects of the Volkswagen brand.

The company started to fit diesel cars with so-called “defeat devices” that manipulated emission tests in 2009. VW’s supervisory board has stressed that the new CEO is personally untainted by the wrongdoing. Investors have no choice but to take its word. But given VW’s investigation is in its early days, it still seems an unnecessary risk, especially as a well-versed auto manager with no Wolfsburg history was readily available. Herbert Diess, the new head of VW’s passenger-car group, was poached from rival BMW earlier this year. The scope of the misconduct is massive, and the scandal is still evolving. This week, Volkswagen has admitted 20% of all its passenger cars sold from 2009 to 2014 might be affected by the emissions manipulations.

On Sept. 25, Germany’s transport minister Alexander Dobrindt said VW falsified emission data of light commercial vehicles too. Switzerland banned the sale of affected models. And Bloomberg reported on the same day that executives in Wolfsburg controlled key aspects of the rigged emissions tests, referring to three unnamed people familiar with the company’s U.S. operations. Winterkorn’s speedy exit was the right move. But the departed CEO is still around, as chief executive of Porsche SE, the holding company that owns 50.7% of VW voting shares. The group as a whole urgently needed a proper restart to cope with the emission scandal. For now, it does not look like it is getting one.

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Of course there are.

More Volkswagen Engines May Be Implicated, German Minister Says (Bloomberg)

Volkswagen may also have used software to fake diesel-emission tests in 1.2-liter engines, widening the number of vehicles under scrutiny, German Transportation Minister Alexander Dobrindt said. “There’s also discussion now about 1.2-liter cars being affected,” Dobrindt said in a speech to parliament in Berlin on Friday. “At least for now we believe that possible manipulations can come to light here, too. That’s being further investigated in the current talks with Volkswagen.” So far, the “illegal” tampering with emission controls affects about 2.8 million Volkswagen vehicles in Germany with 1.6-liter and 2-liter diesel engines, including light utility vans, Dobrindt said.

Germany’s motor-vehicle certification bureau has asked VW for “a binding statement on whether the company can redress the technical manipulations it has acknowledged so the vehicles can be returned to a condition that meets technical regulations,” said Dobrindt, who set up a government investigating commission this week after Volkswagen’s actions came to light. Volkswagen “has pledged full support for the commission’s work and to cooperate in the investigation,” he said.

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“..’das VW-Gesetz,’ the Volkswagen Law.”

Did -Political- Privilege Enable Volkswagen’s Diesel Deception? (Bloomberg)

In Italy, the privilege is called potere speciale; in France, action spécifique; in the U.K., it’s a “golden share.” Those are all different names for an ownership stake that gives a government—be it national or local—special powers above any other shareholder. That makes a crucial difference in running a business. Governments, for example, have good reason to prevent jobs from moving to more competitive labor markets. A golden share can help with that. In Europe, most golden shares are held in utilities and telecoms, companies that were state monopolies before being privatized. For more than a decade, the European Union, as it expanded and liberalized its common open market, has been trying to undo the persistence of state control. But there is one golden share that has endured, a German law so breathtakingly exceptional it can only be called what it is in fact called—“das VW-Gesetz,” the Volkswagen Law.

It is explicitly designed for a single company. Germany has managed to defend its golden share against the EU because VW had built a reputation as a force for good: responsible corporate citizen, pioneer in environmental progess. That reputation has just run out of Fahrvergnügen. Regulators in the U.S., France, South Korea, Italy, and now Germany have announced investigations into whether Volkswagen purposely designed software so its diesel engines could defeat emissions tests. The company will recall 11 million cars, and its stock has fallen as much as 30% on the news. The company quickly set aside $7.3 billion to cover costs related to the scandal, a figure that may fall short of the mark. On Sept. 21, Martin Winterkorn, Volkswagen’s chief executive officer, apologized, looking panicked.

A metallurgist with a Ph.D. who used to run technical development for Volkswagen, Winterkorn has a reputation as an engineer’s engineer. But there was no easy fix here. On Sept. 23 he offered his resignation to the company’s supervisory board. The board quickly accepted. “The damage done,” said a board member at a press conference in Braunschweig, “cannot be measured.” The same day, Stephan Weil, prime minister of Lower Saxony, the state where Volkswagen is headquartered, announced that “whoever’s responsible would be aggressively sued.” He spoke at the same press conference—and on behalf of the company. Weil sits on Volkswagen’s supervisory board, because Lower Saxony owns 20% of the company.

Per the Volkswagen Law, Saxony has a controlling interest with virtual veto power—the golden share. Weil is both government minister and owner. This is a coziness that is exceptional even in consensus-driven Germany. Publicly held German companies have two boards. Executives sit on the management board. They are in turn controlled by the supervisory board, which includes shareholders and labor leaders. Broadly, Germany’s dual-board structure preserves executive independence. Yet at Volkswagen, labor has an extra friend on the top board: the state. “You have the voice of the government present in the shareholder meetings,” says Carsten Gerner-Beuerle at the London School of Economics. “That is not something you’d see in any other board.”

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“It’s been a soap opera ever since it started.”

Problems at Volkswagen Start in the Boardroom (NY Times)

There is a long tradition of scandal and skulduggery in the auto industry, but few schemes appear as premeditated as Volkswagen’s brazen move to use sophisticated software to circumvent United States emissions standards. That such a thing could happen at Volkswagen, Germany’s largest company and the world’s largest automaker by sales — 202.5 billion euros last year — has mystified consumers and regulators around the world. But given Volkswagen’s history, culture and corporate structure, the real mystery may be why something like this didn’t happen sooner. “The governance of Volkswagen was a breeding ground for scandal,” said Charles M. Elson, professor of finance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “It was an accident waiting to happen.”

The company, founded by the Nazis before World War II, is governed through an unusual hybrid of family control, government ownership and labor influence. Even by German standards, “Volkswagen stands apart,” said Markus Roth, a professor at Philipps-University Marburg and an expert in European corporate governance. “It’s been a soap opera ever since it started.” Volkswagen’s recent history — a decades-long feud within the controlling Porsche family, a convoluted takeover battle and a boardroom coup — has dominated the German financial pages and tabloids alike. This week, the German newspaper Süddeutsche Zeitung compared Volkswagen’s governance to that of North Korea, adding that its “autocratic leadership style has long been out of date.” It said “a functioning corporate governance is missing.”

Until a forced resignation this spring, the company was dominated by Ferdinand Piëch, 78, the grandson of Ferdinand Porsche and the father of 12 children. He reigned over Volkswagen’s supervisory board and directed a successful turnaround at the luxury brand Audi before taking the reins at its parent, Volkswagen, in 1993. Mr. Piëch set the goal of Volkswagen’s becoming the world’s largest automaker by sales, a goal the company achieved this past year. He stepped down as chairman in April after unsuccessfully trying to oust the company’s chief executive, Martin Winterkorn, who himself was forced out this week. One measure of Mr. Piëch’s influence: In 2012, shareholders elected his fourth wife, Ursula, a former kindergarten teacher who had been the Piëch family’s governess before her marriage to Ferdinand, to the company’s supervisory board.

Although many shareholders protested her lack of qualifications and independence, they have little or no influence. Porsche and Piëch family members own over half the voting shares and vote them as a bloc under a family agreement. Labor representatives hold three of the five seats on the powerful executive committee, and half the board seats are held by union officials and labor. Of the remaining seats, two are appointed by the government of Lower Saxony, the northwestern German state that owns 20% of the voting shares. Two are representatives of Qatar Holding, Qatar’s sovereign wealth fund, which owns 17% of Volkswagen’s voting shares. Members of the Piëch and Porsche families hold three more seats, and a management representative holds another. Outside views rarely penetrate. “It’s an echo chamber,” Professor Elson said.

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“I know this, I’m doing this for the right reasons and you know what, the right things will happen as a result.”

Boehner Resigns From Congress: ‘House Leadership Turmoil Would Do Harm‘ (CNBC)

House Speaker John Boehner, under fire from conservatives over a looming government shut down, said Friday he will resign from Congress at the end of October. “Prolonged leadership turmoil would do irreparable damage to the institution,” he said. In an afternoon news conference, Boehner became emotional when expressing gratitude to his family and constituents, and said he was proud of what he’s accomplished. However, Boehner said he plans to get as much work done as he can on outstanding fiscal issues before he leaves Congress at the end of October. He said although he doesn’t know what he will do in the future, “I know this, I’m doing this for the right reasons and you know what, the right things will happen as a result.”

Boehner, 65, told House Republicans of his decision earlier in the morning. Later, he left a meeting and answered a reporter’s shouted question about how he felt with, “It’s a wonderful day.” President Barack Obama said he was taken by surprise by Boehner’s decision, adding that he called the Republican leader after hearing the news. “John Boehner is a good man. He is a patriot. He cares deeply about the House, an institution in which he has served for a long time. He cares about his constituents and he cares about America,” Obama told reporters at a joint press conference with China’s president.

“We have obviously had a lot of disagreements, and politically we’re at different ends of the spectrum, but I will tell you he has always conducted himself with courtesy and civility with me,” Obama said. House Majority Leader Kevin McCarthy of California will likely be Boehner’s successor, political observers told CNBC. Boehner said that although the choice of the next speaker is up to members of Congress, he thinks McCarthy would make an “excellent speaker.”

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“.. it theoretically signals that traders view the credit of banks as superior to that of the U.S. government..”

It’s All ‘Perverted’ Now as U.S. Swap Spreads Tumble Below Zero (Bloomberg)

At the height of the financial crisis, the unprecedented decline in swap rates below Treasury yields was seen as an anomaly. The phenomenon is now widespread. Swap rates are what companies, investors and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields – the spread between the two being negative – is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. Back in 2009, it was only negative in the 30-year maturity, a temporary offshoot of deleveraging and market swings following the credit crisis. These days, swap spreads are near or below zero across maturities.

The shift is a result of a confluence of events, says Aaron Kohli, an interest-rate strategist in New York at BMO Capital Markets. It’s a ripple effect of regulations spawned by the credit crunch, combined with large-scale selling of Treasuries and surging corporate issuance.
“All of these effects have been pushing swap spreads the same way – lower,” Kohli said. “If this doesn’t go away after quarter-end, it could be the fact that a lot of the structural changes that have taken place in the marketplace are now manifesting. And this might then be one of the most visceral examples.”

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Take your losses and pull the plug.

Junk-Debt Investors Fight for Scraps as US Shale Rout Deepens (Bloomberg)

It’s every U.S. shale investor for himself as the worst oil rout in almost 30 years drags down its latest victims. Investors in $158.2 million of Goodrich Petroleum’s debt agreed to take 47 cents on the dollar in exchange for stock warrants for some note holders and a lien on Goodrich’s oil acreage, according to a company statement today. That puts them second in line if the Houston-based company liquidates its assets in bankruptcy and pushes the remaining holders of $116.8 million in original bonds to the back of the pack. “In the industry it’s called ‘getting primed,’” said Spencer Cutter, a credit analyst with Bloomberg Intelligence. “It’s every man for himself. They’re trying to get in and get exchanged, and if you can’t you’re getting left out in the cold.”

Wildcatters attracted billions of dollars during the boom after years of near-zero interest rates sent investors hunting for returns in riskier corners of the market. U.S. high-yield debt has more than doubled since 2004 to $1.3 trillion while the amount issued to junk-rated energy companies has grown four-fold to $208 billion, according to Barclays. Most of the companies spent money faster than they made it even when oil was $100 a barrel and are struggling to stay afloat with prices at $45. Goodrich didn’t name the bondholders who participated in the swap. The largest holder was Franklin Resources, which owned about 24% of the bonds, according to data compiled by Bloomberg. Franklin has invested in the debt of other distressed drillers, including Halcon Resources, SandRidge Energy and Linn Energy.

This was Goodrich’s second exchange this month. Three weeks ago, the company swapped $55 million on convertible notes for bonds worth half as much. To sweeten the deal, it lowered the share price at which investors can turn their notes into stock to $2. Investors who didn’t participate in Goodrich’s earlier exchange took another hit with today’s swap because it put holders of the new bonds ahead of them in liquidation. Prices fell four cents to 18 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

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Caterpillar is set to drag down a wide swath of shares.

Wall Street Braces For Grim Third Quarter Earnings Season (Reuters)

Wall Street is bracing for a grim earnings season, with little improvement expected anytime soon. Analysts have been cutting projections for the third quarter, which ends on Wednesday, and beyond. If the declining projections are realized, already costly stocks could become pricier and equity investors could become even more skittish. Forecasts for third-quarter S&P 500 earnings now call for a 3.9% decline from a year ago, based on Thomson Reuters data, with half of the S&P sectors estimated to post lower profits thanks to falling oil prices, a strong U.S. dollar and weak global demand. Expectations for future quarters are falling as well. A rolling 12-month forward earnings per share forecast now stands near negative 2%, the lowest since late 2009, when it was down 10.1%, according to Thomson Reuters I/B/E/S data.

That’s further reason for stock investors to worry since market multiples are still above historic levels despite the recent sell-off. Investors are inclined to pay more for companies that are showing growth in earnings and revenue. The weak forecasts have some strategists talking about an “earnings recession,” meaning two quarterly profit declines in a row, as opposed to an economic recession, in which gross domestic product falls for two straight quarters. “Earnings recessions aren’t good things. I don’t care what the state of the economy is or anything else,” said Michael Mullaney, chief investment officer at Fiduciary Trust in Boston.

The S&P 500 is down about 9% from its May 21 closing high, dragged down by concern over the effect of slower Chinese growth on global demand and the uncertain interest rate outlook. The low earnings outlook adds another burden. China’s weaker demand outlook has also pressured commodity prices, particularly copper. This week, Caterpillar slashed its 2015 revenue forecast and announced job cuts of up to 10,000, among many U.S. industrial companies hit by the mining and energy downturn. Also this week, Pier 1 Imports cut its full-year earnings forecast, while Bed Bath & Beyond gave third-quarter guidance below analysts’ expectations.

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The continuing story. Getting worse by the day.

It’s Carnage Out There For Emerging Markets (CNBC)

It’s been another week of bloodshed in emerging markets, with the Brazilian real, South African rand and Turkish lira all pummelled to record lows as China growth concerns and uncertainty about U.S. rate hikes continue to bite. Remarks by Fed Chair Janet Yellen late Thursday suggesting the central bank could still raise rates this year sparked fresh selling on Friday, with the Malaysian ringgit and Indonesian rupiah falling to their lowest levels since the Asian financial crisis in 1998. “EM currencies are being squeezed between concerns about the severity of China’s economic slowdown and increasing uncertainty regarding U.S. monetary policy,” Nicholas Spiro at Spiro Sovereign Strategy, told CNBC.

“Country-specific vulnerabilities, notably in Brazil and Turkey, are also weighing on sentiment – indeed more so than external factors in the case of many EMs,” he said. A rout in Brazil’s currency – what has shed almost 10% this month and almost 60% this year – against a backdrop of a political crisis and an economy mired in recession, has also soured sentiment towards other emerging markets. “In short, the world is not falling apart. Yet for EM, Brazil is vital,” analysts at Standard Bank said in a note. “Too big to fail but not big to save. IMF, would you please step in and save us all?” To stem the slide, Brazil’s central bank on Thursday warned it would use its foreign exchange reserves to defend the currency.

These strong words bought some respite to the real, which bounced more than 5% and off a record low of about 4.248 per dollar hit earlier on Thursday. Brazil isn’t the only country bank taking action to shore up a battered currency. Indonesia’s central bank on Friday said it will announce new steps to increase onshore supply of dollars – part of a move to support the rupiah, which has shed about 20% of its value this year.

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Brazil will soon need capital controls. Like Greece. And like Greece, it needs debt retsructuring.

Emerging Markets Are Facing a Big Foreign FX Debt Bill (Tracy Alloway)

The extent of emerging markets’ foreign-currency borrowing binge is laid bare in new number-crunching from CreditSights. With EM currencies down a collective 15% since the start of the year, the cost of repaying debt and loans denominated in foreign currencies, such as the U.S. dollar and the euro for EM countries, is likely to increase. With that scenario in mind, CreditSights analysts Richard Briggs and David Watts have analyzed cross-border lending data from the Bank for International Settlements and corporate bond index data from Bank of America Merrill Lynch to try to figure out just how big EM’s foreign debt bill could be.

First up are the BIS data on cross-border lending, scaled against a country’s foreign currency revenue (i.e. exports). Bank figures range from a mere 6% in South Korea to a whopping 56% in Brazil. Next up are corporate bonds, via BofAML’s hard-currency, emerging-market corporate bond index, as a% of foreign-currency revenue. Brazil dominates again, with a big chunk of its foreign FX bonds having been sold by energy companies. Combine cross-border lending, plus foreign FX corporate bonds, then add a smattering of government debt, and you get the CreditSights chart below, showing total hard-currency borrowing by country Brazil is the standout, followed by Turkey and Colombia.

It’s not a pretty chart, and unfortunately, as the CreditSights analysts note, the real picture of emerging markets’ foreign-currency borrowing is probably even uglier. (When it comes to corporate bonds, for instance, the BofAML index excludes dollar or euro-denominated debt that exceeds certain thresholds.)

We have tried to capture as much of the hard currency debt as we can reliably get for a cross country comparison using BIS and the bond index data but the actual total will almost certainly be higher given that only BIS reporting banks are included and the bond debt only includes the index eligible deals.

Oh dear.

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Isn’t Gates just getting what he deserves for his large fossil fuel investments?

Bill and Melinda Gates Foundation Sues Petrobras, Auditor for Fraud (WSJ)

The Bill and Melinda Gates Foundation is suing Brazil’s Petróleo Brasileiro SA and its auditor in a New York court, claiming a vast corruption scheme centered on the state-run oil company caused the charitable organization to lose tens of millions of dollars. The foundation, started by the billionaire co-founder of Microsoft and his wife, joins a long list of plaintiffs seeking to recoup money they lost as the scandal hammered the value of their investments in Petrobras shares. It is just the latest bad news for the troubled oil company, which is scrambling to restore its reputation, rebuild investor confidence and pay down ballooning debt amid a global slump in oil prices.

Petrobras has long maintained it was a victim of a yearslong bid-rigging and bribery ring that Brazilian prosecutors say was cooked up by suppliers and a few crooked insiders who fleeced the oil company for at least $2 billion. The Gates lawsuit, filed against Petrobras and the Brazilian unit of PricewaterhouseCoopers LLP or PwC, alleges that corruption at the oil company was so widespread as to be “institutional” and that wrongdoing was “willfully ignored” by its auditor. “The depth and breadth of the fraud within Petrobras is astounding. By Petrobras’s own admission, the kickback scheme infected over $80 billion of its contracts, representing approximately one-third of its total assets,” the lawsuit said.

“Equally breathtaking is that the fraud went on for years under PwC’s watch, who repeatedly endorsed the integrity of Petrobras’ internal controls and financial reports. This is not a case of rogue actors. This is a case of institutional corruption, criminal conspiracy, and a massive fraud on the investing public.” The Gates Foundation filed the lawsuit late Thursday in the Southern District Court of New York. A co-plaintiff in the lawsuit is WGI Emerging Markets Fund, LLC, which managed investments for the Gates Foundation. The Gates Foundation held more than $27 million in Petrobras shares as of 2013, according to a tax filing.

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Must. Get. Rid. Of. Harper.

How Much Longer Can Consumers Underpin Canada’s Economy? (Reuters)

The Bank of Canada is hoping the average Canadian continues to do the heavy lifting for the economy and gets it out of its rut from the first half of the year, even with dangerously high household debt levels. That may be a big ask. Canada’s average household debt-to-income ratio is back at a record high of 164.6% in the second quarter, driven by mortgages, after inching lower in the previous two quarters. Since the financial crisis Canadian household debt has increased at the second-fastest pace among developed nations, according to a recent McKinsey Global Institute study. Greece topped the list. Citing figures from Ipsos Reid, a 2014 Bank of Canada report concluded that 40% of all household debt was held by borrowers who had a total debt-to-income ratio greater than 250%, compared to the average of 162.3%.

This segment of heavily indebted borrowers rose to about 12% in 2014 from around 6% in 2000. Consumer spending – primarily related to the housing market – has been the main driver of the Canadian economy over the past five years. It buoyed and boosted Canada through the worst of the global financial crisis, even as the U.S. housing market and economy crashed. But now Canada’s economy has taken a sharp turn for the worse. The jobless rate hit a one-year high of 7% in August as sharp falls in oil prices took their toll. Even U.S. Federal Reserve Chair Janet Yellen cited the slowdown in Canada, an important U.S. trade partner, in its concerns about the global economy that led it to hold off yet again on its first rate rise in nearly a decade.

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Because they can.

British GCHQ Spies Track “Every Visible User On The Internet” (Intercept)

There was a simple aim at the heart of the top-secret program: Record the website browsing habits of “every visible user on the Internet.” Before long, billions of digital records about ordinary people’s online activities were being stored every day. Among them were details cataloging visits to porn, social media and news websites, search engines, chat forums, and blogs. The mass surveillance operation — code-named KARMA POLICE — was launched by British spies about seven years ago without any public debate or scrutiny. It was just one part of a giant global Internet spying apparatus built by the United Kingdom’s electronic eavesdropping agency, Government Communications Headquarters, or GCHQ.

The revelations about the scope of the British agency’s surveillance are contained in documents obtained by The Intercept from National Security Agency whistleblower Edward Snowden. Previous reports based on the leaked files have exposed how GCHQ taps into Internet cables to monitor communications on a vast scale, but many details about what happens to the data after it has been vacuumed up have remained unclear. Amid a renewed push from the U.K. government for more surveillance powers, more than two dozen documents being disclosed today by The Intercept reveal for the first time several major strands of GCHQ’s existing electronic eavesdropping capabilities. One system builds profiles showing people’s web browsing histories. Another analyzes instant messenger communications, emails, Skype calls, text messages, cell phone locations, and social media interactions.

Separate programs were built to keep tabs on “suspicious” Google searches and usage of Google Maps. The surveillance is underpinned by an opaque legal regime that has authorized GCHQ to sift through huge archives of metadata about the private phone calls, emails and Internet browsing logs of Brits, Americans, and any other citizens — all without a court order or judicial warrant. Metadata reveals information about a communication — such as the sender and recipient of an email, or the phone numbers someone called and at what time — but not the written content of the message or the audio of the call. As of 2012, GCHQ was storing about 50 billion metadata records about online communications and Web browsing activity every day, with plans in place to boost capacity to 100 billion daily by the end of that year.

The agency, under cover of secrecy, was working to create what it said would soon be the biggest government surveillance system anywhere in the world. The power of KARMA POLICE was illustrated in 2009, when GCHQ launched a top-secret operation to collect intelligence about people using the Internet to listen to radio shows. The agency used a sample of nearly 7 million metadata records, gathered over a period of three months, to observe the listening habits of more than 200,000 people across 185 countries, including the U.S., the U.K., Ireland, Canada, Mexico, Spain, the Netherlands, France, and Germany.

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“The animals suffer greatly, yet they live on and multiply. Doesn’t that contradict the most basic principles of Darwinian evolution?”

Industrial Farming Is One Of The Worst Crimes In History (Guardian)

At first sight, domesticated animals may seem much better off than their wild cousins and ancestors. Wild buffaloes spend their days searching for food, water and shelter, and are constantly threatened by lions, parasites, floods and droughts. Domesticated cattle, by contrast, enjoy care and protection from humans. People provide cows and calves with food, water and shelter, they treat their diseases, and protect them from predators and natural disasters. True, most cows and calves sooner or later find themselves in the slaughterhouse. Yet does that make their fate any worse than that of wild buffaloes? Is it better to be devoured by a lion than slaughtered by a man? Are crocodile teeth kinder than steel blades?

What makes the existence of domesticated farm animals particularly cruel is not just the way in which they die but above all how they live. Two competing factors have shaped the living conditions of farm animals: on the one hand, humans want meat, milk, eggs, leather, animal muscle-power and amusement; on the other, humans have to ensure the long-term survival and reproduction of farm animals. Theoretically, this should protect animals from extreme cruelty. If a farmer milks his cow without providing her with food and water, milk production will dwindle, and the cow herself will quickly die. Unfortunately, humans can cause tremendous suffering to farm animals in other ways, even while ensuring their survival and reproduction.

The root of the problem is that domesticated animals have inherited from their wild ancestors many physical, emotional and social needs that are redundant in farms. Farmers routinely ignore these needs without paying any economic price. They lock animals in tiny cages, mutilate their horns and tails, separate mothers from offspring, and selectively breed monstrosities. The animals suffer greatly, yet they live on and multiply. Doesn’t that contradict the most basic principles of Darwinian evolution? The theory of evolution maintains that all instincts and drives have evolved in the interest of survival and reproduction. If so, doesn’t the continuous reproduction of farm animals prove that all their real needs are met? How can a cow have a “need” that is not really essential for survival and reproduction?

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“They have had enough to fear. Now they have hope.”

Europe’s Refugees Are Modern-Day Pioneers (McArdle)

“They lose everything when their boats overturn – everything from their cell phones to their babies,” the Belgian nurse told me. He said it in a matter-of-fact tone that I recognized from my days giving tours of the cleaned-up Ground Zero site. It is not the sound of people who don’t care; it is the sound of people who have been living in the middle of horror for so long that they cannot keep stopping to cry. I cried when I got on the boat to leave the island of Lesbos, walking past the tent city that has sprung up at the docks. I cried all over again when my mother called to ask how my trip to Greece had been. But the refugees weren’t crying. So many of them looked happy, sitting under makeshift tents put together out of reams of netting and whatever cloth they could find.

Some smiled as they walked down the road with a backpack or a garbage bag that contained everything they had in the world. Others smiled as they walked down the road without one. Children laughed, men waved, mothers grinned shyly. “They’re safe now,” said one of the doctors at Kara Tepe, the temporary camp where refugees, largely from Syria, wait for passage to the European mainland. “They’re happy because they’re safe.”

[..] These hundreds of thousands survived the Taliban, the Islamic State, the Syrian civil war. They survived a perilous crossing, clinging to their children in a flimsy raft. They have finally arrived on safe shores. Where will these refugees go? America is willing to eventually take 100,000 Syrians a year. Where will these refugees go? Europe is squabbling over the distribution of 120,000 people over the next two years. Where will these refugees go? Mostly, no one knows. There is no plan for most of the estimated 4 million who have fled Syria so far, or for the thousands who are still coming every day. Where will these refugees go? The few I was able to talk to had no answer, but they were not afraid. They have had enough to fear. Now they have hope.

Europe and the U.S. have seen these people as a problem to be solved, or at best an obligation to be fulfilled. Take another look: These people are pioneers. Future citizens, teachers, engineers, P.T.A. dads, entrepreneurs, valedictorians, doctors. They are following in the footsteps of the immigrants who built the United States: the ones who chose to strike out for unknown territory, heading west with not much more than a knapsack. The modern-day pioneers striving toward Europe shouldn’t have to beg for a chance to build productive lives in Germany or Britain or the U.S. We should be going out to invite them in. We should have started much sooner.

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Criminally insane.

EU To Use Warships To Curb Human Traffickers (Al Jazeera)

The EU will use warships to catch and arrest human traffickers in international waters as part of a military operation aimed at curbing the flow of refugees into Europe, the bloc’s foreign affairs chief has said. “The political decision has been taken, the assets are ready,” Federica Mogherini said on Thursday at the headquarters of the European Union’s military operation in Rome. The first phase of the EU operation was launched in late June. It included reconnaissance, surveillance and intelligence gathering, and involved speaking to refugees rescued at sea and compiling data on trafficker networks. The operation currently involves four ships – including an Italian aircraft carrier – and four planes, as well as 1,318 staff from 22 European countries.

Beginning on October 7, the new phase will allow for the seizure of vessels and arrests of traffickers in international waters, as well as the deployment of European warships on the condition that they do not enter Libyan waters. “We will be able to board, search, seize vessels in international waters, [and] suspected smugglers and traffickers apprehended will be transferred to the Italian judicial authorities,” Mogherini said. “We have now a complete picture of how, when and where the smugglers’ organisations and networks are operating so we are ready to actively dismantle them,” she said. The new measures come at a time when Europe is enduring the largest refugee crisis since World War II.

An estimated 13.9 million people became refugees in 2014, while an average of 42,500 were displaced from their homes each day due to conflict and persecution, according to the UN refugee agency. Europe has already received more than 700,000 asylum applications in 2015. The Organisation for Economic Co-operation and Development predicts that number will exceed one million by the end of the year. Expanding the operation into Libyan waters is still pending the approval of the EU’s security council and the Libyan government. “We have a lot to do in high seas, and in the meantime we are continuing to work on the legal framework that could make it possible for us to operate also in Libyan territorial waters,” she added.

Gerry Simpson, a senior researcher at Human Rights Watch’s refugee programme, described the operation as “lawful but misguided”. “EU officials are misguided when they treat smugglers and traffickers as the root of the refugee problem,” he told Al Jazeera. “The roots of the problem are the violence in their home countries, as well as the conditions in the first countries where they take refuge – Egypt, Libya, Turkey [and] Sudan.” “Instead of wasting tax payers money on tackling smugglers who will always find a way to bring their clients to Europe, officials should pressure or support those first countries of asylum to properly protect and help refugees,” Simpson said.

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