Aug 282015
 
 August 28, 2015  Posted by at 11:10 am Finance Tagged with: , , , , , , , , ,  4 Responses »


Dorothea Lange Resettlement project, Bosque Farms, New Mexico Dec 1935

Real Chinese GDP Growth Is -1.1%, According to Evercore ISI (Zero Hedge)
BofA: China Stock Rout To Resume As Intervention Ends (Bloomberg)
Money Pours Out of Emerging Markets at Rate Unseen Since Lehman (Bloomberg)
What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse (ZH)
Global Equity Funds Witness Biggest-Ever Exodus (CNBC)
PBOC Uses Derivatives to Tame Yuan Fall Expectations (WSJ)
China Local Govt Pension Funds To Start Investing $313 Billion ‘Soon’ (Reuters)
Chinese Banking Giants: Zero Profit Growth as Bad Loans Pile Up (Bloomberg)
The Great Wall Of Money (Hindesight)
China Will Respond Too Late to Avoid -Global- Recession: Buiter (Bloomberg)
China’s Ongoing FX Trilemma And Its Possible Consequences (FT)
China Has Exposed The Fatal Flaws In Our Liberal Economic Order (Pettifor)
Albert Edwards: “99.7% Chance We Are Now In A Bear Market” (Zero Hedge)
Who Will Be the Bagholders This Time Around? (CH Smith)
Now’s The Right Time For Yellen To Kill The ‘Greenspan Put’ (MarketWatch)
The Emperor Is Naked; Long Live The Emperor (Fiscal Times)
IMF Could Contribute A Fifth To Greek Bailout, ESM’s Regling Says (Bloomberg)
Yanis Varoufakis: ‘I’m Not Going To Take Part In Sad Elections’ (Reuters)
For Those Trying to Reach Safety in Europe, Land can be as Deadly as Sea (HRW)

That sounds more like it.

Real Chinese GDP Growth Is -1.1%, According to Evercore ISI (Zero Hedge)

With Chinese data now an official farce even among Wall Street economists, tenured academics, and all others whose job obligation it is to accept and never question the lies they are fed, the biggest question over the past year has been just what is China’s real, and rapidly slowing, GDP – which alongside the Fed, is the primary catalyst of the global risk shakeout experienced in recent weeks. One thing that everyone knows and can agree on, is that it is not the official 7% number, or whatever goalseeked fabrication the communist party tries to push to a world that has realized China can’t even manipulate its stock market higher, let alone its economy.

But what is it? Over the past few months we have shown various unpleasant estimates, the lowest of which was 1.6% back in April. Today we got the worst one yet, courtesy of Evercore ISI, which using its own GDP equivalent index – the Synthetic Growth Index (SGI) – gets a vastly different result from the official one, namely Chinese growth of -1.1% annually. Or rather, contraction. To wit, from Evercore:

Our proprietary Synthetic Growth Index (SG!) fell 1.1% mim in July, and was also down 1.1% y/y. No wonder global commodities are so weak. The most recent 18 months have been much weaker than the 2011-13 period. Even if we adjust our SG I upward (for too-little representation of Services — lack of data), we believe actual economic growth in China is far below the official 7.0% yly. And, it is not improving, Most worrisome to us; the ‘equipment’ portion of Plant & Equipment spending is very weak, a bad sign for any company or country. Expect more monetary and fiscal steps to lift growth.

And here is why the world is in big trouble.

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With confidence gone, is there another option left?

BofA: China Stock Rout To Resume As Intervention Ends (Bloomberg)

The rebound in China’s stocks will be short-lived because state intervention is too costly to continue and valuations aren’t justified given the slowing economy, says Bank of America. “As soon as people sense the government is withdrawing from direct intervention, there will be lots of investors starting to dump stocks again,” said David Cui at Bank of America in Singapore. The Shanghai Composite Index needs to fall another 35% before shares become attractive, he said. The Shanghai gauge rallied for a second day on Friday amid speculation authorities were supporting equities before a World War II victory parade next week that will showcase China’s military might. The government resumed intervention in stocks on Thursday to halt the biggest selloff since 1996.

China Securities Finance, the state agency tasked with supporting share prices, will probably end direct market purchases within the next month or two, Cui said. While the benchmark gauge trades 47% above the levels of a year earlier, data from industrial output to exports and retail sales depict a deepening slowdown. China’s first major growth indicator for August showed the manufacturing sector is at the weakest since the global financial crisis. Profits at the nation’s industrial companies fell 2.9% in July, data Friday showed. Equities on mainland bourses are valued at a median 51 times reported earnings, according to data compiled by Bloomberg. That’s the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor’s 500 Index. Even after tumbling 37% from its June 12 peak, the Shanghai gauge is the best-performing equity index worldwide over the past year.

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This is going to be seminal.

Money Pours Out of Emerging Markets at Rate Unseen Since Lehman (Bloomberg)

This week, investors relived a nightmare. As markets from China to South Africa tumbled, they pulled $2.7 billion out of developing economies on Aug. 24. That matches a Sept. 17, 2008 exodus during the week Lehman Brothers went under. The collapse of the U.S. investment bank was a seminal moment in the timeline of the global financial crisis. The retreat from risky assets, triggered by concern over a slowdown in China and higher interest rates in the U.S., has taken money outflows from emerging markets to an estimated $4.5 billion in August, compared with inflows of $6.7 billion in July, data compiled by Institute of International Finance show. It’s lower stock prices that people are most worried about.

Equity outflows from developing nations increased to $8.7 billion this month, the highest level since the taper tantrum of 2013 when the prospect of higher rates in the U.S., making riskier assets less attractive, first shook emerging markets. Debt inflows softened this month while remaining positive at $4.2 billion, the IIF says. “Emerging market investors have been spooked by rising uncertainty about China, and stress has been exacerbated by a combination of fundamental concerns about EM economic prospects and volatility in global financial markets,” Charles Collyns, chief economist at the IIF, said.

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Interconnections.

What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse (ZH)

Earlier today, Bloomberg – citing the ubiquitous “people familiar with the matter” – confirmed what we’ve been pounding the table on for months; namely that China is liquidating its UST holdings. As we outlined in July, from the first of the year through June, China looked to have sold somewhere around $107 billion worth of US paper. While that might have seemed like a breakneck pace back then, it was nothing compared to what would transpire in the last two weeks of August. Following the devaluation of the yuan, the PBoC found itself in the awkward position of having to intervene openly in the FX market, despite the fact that the new currency regime was supposed to represent a shift towards a more market-determined exchange rate.

That intervention has come at a steep cost – around $106 billion according to SocGen. In other words, stabilizing the yuan in the wake of the devaluation has resulted in the sale of more than $100 billion in USTs from China’s FX reserves. That dramatic drawdown has an equal and opposite effect on liquidity. That is, it serves to tighten money markets, thus working at cross purposes with policy rate cuts. The result: each FX intervention (i.e. each round of UST liquidation) must be offset with either an RRR cut, or with emergency liquidity injections via hundreds of billions in reverse repos and short- and medium-term lending ops.

It appears that all of the above is now better understood than it was a month ago, but what’s still not well understand is the impact this will have on the US economy and, by extension, on US monetary policy, and furthermore, there seems to be some confusion as to just how dramatic the Treasury liquidation might end up being. Recall that China’s move to devalue the yuan and this week’s subsequent benchmark lending rate cut have served to blow up one of the world’s most popular carry trades. As one currency trader told Bloomberg on Tuesday, “it’s a terrible time to be long carry, increased volatility – which I think we’ll stay with – will continue to be terrible for carry. The period is over for carry trades.”

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Negative records being set all over.

Global Equity Funds Witness Biggest-Ever Exodus (CNBC)

Investors yanked $29.5 billion out of global equity funds in the week that ended August 26, the biggest single-week outflow on record as markets around the world over went into meltdown mode, according to data from Citi. On a regional basis, U.S. funds suffered the highest level of outflows at $12.3 billion, followed by Asia funds, which saw $4.9 million in redemptions. Citi’s records go back to 2000. European funds, which broke their chain of 14 weeks of inflows, witnessed $3.6 billion in outflows for the week.

Concerns around the outlook for the Chinese economy and jitters around the U.S. Federal Reserve’s impending rate hike have sent global markets into a tailspin over the past week. The MSCI World Index and MSCI Emerging Market Index both slid over 7% between August 19 and August 26. China, the market at the heart of the global selloff, saw losses of a far higher magnitude. The notoriously volatile benchmark Shanghai Composite tumbled 22% over this period, leading to outflows of $1.2 billion from China and Greater China funds during the week.

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Yeah, sure, add more leverage…

PBOC Uses Derivatives to Tame Yuan Fall Expectations (WSJ)

China’s central bank used an unusual and complex financial tool Thursday to tame growing expectations for the yuan to fall, three people familiar with the matter said. The People’s Bank of China intervened in the market for U.S. dollar-yuan foreign-exchange swaps, causing their price to fall sharply, a movement that implies a stronger Chinese currency and lower interest rates in the world’s No. 2 economy in the future, said the people. The move came after waves of sharp selloffs in the Chinese currency in offshore markets, such as Hong Kong’s, where the yuan trades freely, following Beijing’s surprise nearly 2% yuan devaluation on Aug. 11.

Thanks to what each of the three people described as “massive” orders from a few commercial banks acting on the PBOC’s behalf, the so-called one-year dollar-yuan swap spread—in rough terms, a measure of the implied future differential between Chinese and U.S. interest rates—plunged to 1200 points from 1730 points Wednesday. In the offshore market, the spread dropped to 1950 points from 2310 points Tuesday, following the onshore move. A drop in the spread for dollar-yuan swaps, which consist of a spot trade and an offsetting forward transaction, would also imply a weaker spot exchange rate at a predetermined future date.

The currency derivatives are typically used by investors seeking to hedge against exchange-rate and interest-rate fluctuations. “The central bank chose a rarely used tool this time—the FX swaps—to intervene and it did so via a couple of midsize banks, instead of the usual big state lenders that serve as its agent banks,” one of the people said.

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Desperation. Again, remember when pensions were limited to AAA rated assets?

China Local Govt Pension Funds To Start Investing $313 Billion ‘Soon’ (Reuters)

China’s local pension funds will start investing 2 trillion yuan ($313.05 billion) as soon as possible in stocks and other assets, senior government officials said on Friday, in a bid to boost the investment returns of such funds. China said last weekend that it would let pension funds under local government units to invest in the stock market for the first time, a move that might channel hundreds of billions of yuan into the country’s struggling equity market. Up to 30 percent can be invested in stocks, equity funds and balanced funds. The rest can be invested in convertible bonds, money-market instruments, asset-backed securities, index futures and bond futures in China, as well as major infrastructure projects.

“We will actively make early preparations… we will formally start investment operations as soon as possible,” Vice Finance Minister Yu Weiping told a briefing. But the timing of investment will depend on preparations as the National Social Security Fund (NSSF), the manager of local pension funds, will entrust professional investment firms to make actual investments, Yu told reporters after the briefing. “When they (investment firms) will enter the market, the government will not intervene,” Yu said. You Jun, vice minister of human resources and social security, told the same news conference that pension investment will benefit the economy and the country’s capital market, but he downplayed any attempt to support the ailing stock market. “Supporting the stock market or rescuing the stock market is not the function and responsibility of our funds,” You said.

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The crucial point becomes how much of this can be kept hidden.

Chinese Banking Giants: Zero Profit Growth as Bad Loans Pile Up (Bloomberg)

The first two Chinese banking giants to report earnings this week have two things in common: zero profit growth and bad loans piling up at more than twice the pace of a year earlier. Industrial & Commercial Bank of China posted a 31% increase in bad loans in the first half, while Agricultural Bank of China had a 28% jump, their stock-exchange statements showed on Thursday. At a press briefing in Beijing, ICBC President Yi Huiman indicated that the lender may have to abandon a target of keeping its nonperforming loan ratio at 1.45% this year, citing “severe” conditions. The level at the end of June was 1.4%.

The economic weakness and $5 trillion stock-market slump that prompted the central bank to cut interest rates and lenders’ reserve requirements this week may make it harder for China’s banks to revive earnings growth and attract investors. For now, the biggest banks are trading below book value. “We are nowhere near the end of this down cycle, not with the economy wobbling like now,” said Richard Cao at Guotai Junan Securities. ICBC’s profit was little changed at 74.7 billion yuan ($11.7 billion) in the quarter ended June 30, based on an exchange filing, almost matching 74.8 billion yuan a year earlier. That compared with the 75.7 billion yuan median estimate of 10 analysts surveyed by Bloomberg. Nonperforming loans jumped to 163.5 billion yuan, the company said.

Agricultural Bank reported a profit decline of 0.8% to 50.2 billion yuan and bad loans of 159.5 billion yuan, including debt in the construction and mining industries. For ICBC, the biggest increases in nonperforming credit in the first half were in China’s western region, where coal businesses are struggling, the Yangtze River Delta and the Bohai Rim. ICBC, Agricultural Bank and another of China’s large lenders to report on Thursday, Bank of Communications, all reported declines in net interest margins, a measure of lending profitability. The rural lender had the biggest fall, a slide of 15 basis points from a year earlier to 2.78%.

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Bretton Woods.

The Great Wall Of Money (Hindesight)

China is in severe trouble and that trouble has already been reverberating around EM exporters for a number of years. It is just one of many dollar currency peg countries that have experienced tightening conditions because of higher US interest rate guidance and dollar strength. An unwelcome addition to their own domestic issues, but always a circular outcome, as they are inextricably linked to the US by their Bretton Woods II relationship. By devaluing and thus de-stabilising the ‘nominal’ anchor for Asian exchange rates, they will crush the growth engine of the developed countries on whose consumption they so rely on.

Since 2009, we have forecast and documented the unwinding of the Bretton Woods II currency system. Financialisation of our economies and markets, which escalated post-2008 at the instigation of governments and central bankers, is going to go into full reverse for all asset classes. Economies and markets are so entwined that a drop in asset classes will lead the world back into recession. In 2013, we believed the odds had tilted firmly towards increasing debt deflation at the hands of China. Large current account deficits had led to unsustainable debt creation, and as a consequence the trade deficit countries were the first to experience a severe financial crisis. However, on the other side of the equation, the surplus countries were now experiencing their reaction to the crisis.

In November 2013, we wrote: “The deleveraging process which began in 2008 has been a slow burner but is likely now in full swing. The deflationary risks are very high. China is the driver. All eyes on China.” We conceive that this slow-burner of deleveraging, which has occurred since the 2008 crisis, is potentially about to engulf all asset prices. We are beginning to think the unthinkable – that just maybe asset prices will back up 20 to 30% and fast and that through the autumn we could experience even greater price depreciation. Almost 8 years on from the GFC, the Dow Jones Industrials are perched on the edge of a sharp drop.

Will the Ghost of 1937 revisit us eight years on from the Great Crash of 1929, when U.S. stocks and the world economy got roiled all over again? This is already unfolding as we speak. The Yuan movement may well send more Chinese capital floating across the globe into financial assets and real estate, but it will be short-lived. The debt deleveraging which has been engulfing Emerging Markets has just begun to turn into a ranging inferno, which will eventually burn down all, especially overpriced, global assets. Since the GFC, ‘The Great Wall of Money’ that Bretton Woods II has furnished via its vendor-financing relationship, has masked the deleveraging of our world economy. The Great Wall is about to collapse and fall.

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Not too late, but too little. Because too little is all that is left.

China Will Respond Too Late to Avoid -Global- Recession: Buiter (Bloomberg)

China is sliding into recession and the leadership will not act quickly enough to avoid a major slowdown by implementing large-scale fiscal policies to stimulate demand, Citigroup’s top economist Willem Buiter said. The only thing to stop a Chinese recession, which the former external member of the Bank of England defines as 4% growth on “the mendacious official data” for a year, is a consumption-oriented fiscal stimulus program funded by the central government and monetized by the People’s Bank of China, Buiter said. “Despite the economy crying out for it, the Chinese leadership is not ready for this,” Buiter said in a media call hosted Thursday by the Council on Foreign Relations in New York. “It’s an economy that’s sliding into recession.”

Premier Li Keqiang is seeking to defend a 7% economic growth goal at a time when concern over slowing demand in China is fueling volatility in global markets. The true rate of expansion “is probably something closer to 4.5% or less,” Buiter said. Li has repeatedly pledged to avoid stimulus similar to the one following the global financial crisis in 2008 that led to a surge in debt for local governments and corporations. Some economists and investors have long questioned the accuracy of China’s official growth data. When Li was party secretary of Liaoning province in 2007, he said that figures for gross domestic product were “man-made” and therefore unreliable, according to a diplomatic cable published by WikiLeaks in 2010.

“They will respond but they will respond too late to avoid a recession, which is likely to drag the global economy with it down to a global growth rate below 2% – which is in my definition a global recession,” said Buiter.

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“..open capital account, independent monetary policy, and stable tightly managed exchange rate”

China’s Ongoing FX Trilemma And Its Possible Consequences (FT)

From UBS’s Tao Wang on what, post China’s surprise revaluation, is now an oft used phrase, the impossible trinity — AKA the corner China finds itself in:

“The impossible trinity says that a country cannot simultaneously have an open capital account, independent monetary policy, and stable tightly managed exchange rate. Some academics argue that since capital controls are no longer as effective in the current day world, complete monetary policy independence is still not possible without some degree of exchange rate flexibility, even without a fully open capital account – or impossibly duality. Regardless of whether it is an impossible trinity or duality, the fact is that in recent years, as a result of substantial capital controls relaxation, China has found it increasingly difficult to manage independent monetary policy while simultaneously maintaining a fixed exchange rate.

Since last year, the PBOC has had to repeatedly inject liquidity and use the RRR to offset capital outflows – its efforts to ease monetary policy have been less effective because of FX leakages, while at the same time rate cuts are reducing arbitrage opportunities to add further downward pressures on the currency. As China’s government has announced and seems to be committed to fully opening the capital account soon, these challenges will only become greater. Therefore, it is the right thing to do to break the RMB’s dollar peg and move to materially increase its flexibility. At the moment, China’s weak domestic demand and deflationary pressures necessitate further interest rate cuts, which may further fan capital outflows and depreciation pressures.

Meanwhile, not only is the RMB’s recent effective appreciation still hurting China’s tradable goods sector, but the central bank’s defence of the exchange rate is also draining substantial domestic liquidity that necessitates constant replenishing, both of which is undermining the effectiveness of overall monetary policy easing. With a more flexible exchange rate, the RMB can be weakened by outflows and depreciation pressures without draining domestic liquidity, and domestic assets will become relatively cheaper and thus more attractive than foreign assets – which may ultimately alter market expectations to reduce capital outflows.

In addition, a weaker RMB should improve China’s current account balance to also alleviate depreciation pressures. Conversely, if China’s exchange rate is allowed to appreciate along with capital inflows and appreciation pressures, it will make domestic assets more expensive and less attractive, to ultimately worsen China’s current account balance.”

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“The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy.”

China Has Exposed The Fatal Flaws In Our Liberal Economic Order (Pettifor)

How can we make sense of volatile global stock markets? Economists explained this week’s dramatic falls by pinning responsibility on China. They are at pains to assure us this is not 2008 all over again. I beg to disagree. Even though data is not reliable, it appears that China is slowing down. By 2009, the Chinese authorities were embracing the Western economic model that had just brought down much of Western capitalism. Undeterred, they launched a massive credit-fuelled investment programme. Growth soared at 10% per annum. Investment recently peaked at an extraordinary 49% of GDP. Total debt (private and public) rocketed to 250% of GDP – up 100 points since 2008, according to the IMF. Property and other asset markets boomed, as did consumption.

The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy. China’s stimulus helped keep the global economy afloat in the years following. But there are economic, ecological, social and political limits to a developing country like China continuing to support richer economies. And there are limits to Beijing’s willingness to abandon control and adopt in full the Western neoliberal economic model; the Communist Party has begun intervening. It is this intervention, we are led to believe, that spooked global markets. Yet the real reason for global weakness lies elsewhere – in the Western neoliberal economic model itself, which lay behind the global financial crisis of 2007-9.

Financial and trade liberalisation, privatisation of taxpayer-financed assets, excessive private indebtedness and wage repression constituted an explosive economic formula and blew up the Western banking system. That model has not undergone even superficial change since 2009. On the contrary: economists and financiers used the “shock and awe” generated by the crisis to buttress the model. The crisis had its origins in banks suffering severe bouts of debt intoxication. Like alcohol addicts, they could not be treated effectively until admitting to the problem: the flawed liberal, financial and economic order. Yet neither the private finance sector nor central bankers and their political friends were willing to admit to the cause of the disease. Instead, central bankers rushed to offer life support in the form of QE to private banking systems in the UK, Japan and the US.

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“Although I am a bear of very little brain one thing I have learned is that most investors only realise the economy is in a recession well after it has begun. ”

Albert Edwards: “99.7% Chance We Are Now In A Bear Market” (Zero Hedge)

Over the years, SocGen’s Albert Edwards has repeatedly expressed his skepticism of both the economy and the market (the longest US equity “bull market” since 1945) both propped up by generous central banks injecting liquidity by the tens of trillions (at this point nobody really knows the number now that the ‘black box’ that is China has entered the global “plunge protection” game) and yet never did he have as “conclusive” a call as he does today. As the following note reveals, when looking at one particular indicator, Edwards is now convinced: ‘we are now in a bear market.” First, Edwards looks east, where he finds nothing short of China’s central bank succumbing to the “wealth effect” preservation pressures of its western peers:

After holding firm last weekend and resisting pressure to give the market what it wanted namely a cut in interest rates and the reserve requirement ratio – the PBoC caved in, unable to endure the riot in the equity markets. In giving the markets what they want China is indeed acting like a fully paid up member of the international financial community. I am not thinking here about freeing up their capital account and allowing the renminbi to be more market determined. I?m thinking instead of China?s replicating the failed US policies of ramping up the equity market to boost economic growth, only to then open the monetary flood gates as equity investors turn nasty.

We disagree modestly with this assessment because as we described first on Tuesday, the RRR-cut had much more to do with unlocking $100 billion in much needed funding so that China could continue to intervene in the FX market by dumping a comparable amount of US Treasurys since its August 11 devaluation, something which as we reported earlier today, China itself has also now admitted. But the reason why we do agree, is that while the RRR-cut may have had other “uses of funds”, today’s dramatic intervention by the PBOC in both the stock market, leading to a 5.5% surge in the last hour of trading, as well as a dramatic intervention in the FX market, it is quite clear that the PBOC will do everything in its power once again to prevent any market drops. Edwards, then goes on to observe something which is sure to anger the Keynesians and monetarists out there: no matter how many trillions central banks inject, they will never replace, or override, the most fundamental thing about the economy: the business cycle.

Despite deflation fears washing westward and US implied inflation expectations diving to levels not seen since the 2008 Great Recession, there remains a touching faith that the US is resilient enough to withstand further renminbi devaluation. And if it isn’t, why worry anyway, because QE4 will be around the corner. But let me be as clear as I can: the US authorities CANNOT eliminate the business cycle, however many QE helicopters they send up. The idea that developed economies will decouple from emerging market turmoil is as ridiculous as was the reverse in the first half of 2008. Remember EM and commodities had then de-coupled from the west’s woes until they too also crashed.

Which brings us to the key point – the state of the market, and why for Edwards the signal is already very clear – the bear market has arrived:

Although I am a bear of very little brain one thing I have learned is that most investors only realise the economy is in a recession well after it has begun. The same is true of an equity bear market. We need help before it is too late to react. Hence when Andrew Lapthorne shows that one of his key predictors of a bear market registers a 99.7% probability that we are already in a bear market, there might still be time to act!

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Just about everyone will.

Who Will Be the Bagholders This Time Around? (CH Smith)

Once global assets roll over for good, it’s important to recall that somebody owns these assets all the way down. These owners are called bagholders, as in “left holding the bag.” Those running the rigged casino have to select the bagholders in advance, lest some fat-cat cronies inadvertently get stuck with losses. In China, authorities picked who would be holding the bag when Chinese stocks cratered 40%: yup, the poor banana vendors, retirees, housewives and other newly minted punters who borrowed on margin to play the rigged casino. Corrupt Chinese officials, oil oligarchs and everyone else who overpaid for flats in London, Manhattan, Vancouver, Sydney, etc. will be left holding the bag when to-the-moon prices fall to Earth.

Anyone buying Neil Young’s 2-acre estate in Hawaii for $24 million will be a bagholder. (If nobody buys it at this inflated price, Neil may end up being the bagholder.) Bond funds that bought dicey emerging market debt (Mongolian bonds, anyone?) and didn’t sell at the top are bagholders. Everyone with bonds and stocks in the oil patch who didn’t sell last summer is a bagholder. Everyone holding yuan is a bagholder. Everyone who bought euro-denominated assets when the euro was 1.40 is a bagholder at euro 1.12. Everyone with 401K emerging market equities mutual funds who didn’t sell last summer is a bagholder. Everyone who reckons “buy and hold” will be the winning strategy going forward will be a bagholder.

Anyone buying anything with borrowed money is a bagholder. Leveraging up to buy risk-on assets like Mongolian bonds and homes in vancouver is brilliant in bubbles, but not so brilliant when risk-on turns to risk-off. As the asset’s value drops below the amount borrowed to buy it, the owner becomes a bagholder. Anyone betting China’s GDP is really expanding at 7% and the U.S. economy will grow by 3.7% next quarter is angling to be a bagholder.

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One of many views. My own notion is that too many people believe the Fed is looking out for the US economy, whereas they really look out for banks.

Now’s The Right Time For Yellen To Kill The ‘Greenspan Put’ (MarketWatch)

The Federal Reserve says the timing of its first interest rate hike in nine years depends on the data, but that doesn’t mean the Fed will be digging through the jobs, growth and inflation reports for the all-clear signal. Instead, the Fed will be doing what millions of people have been doing for the past couple of weeks: Watching the stock market. Many investors have assumed that the recent selloffs in markets from Shanghai to New York meant that the Fed definitely won’t pull the trigger on a rate hike at its Sept. 16-17 meeting. Many prominent talking heads – from Suze Orman to Jim Cramer – are explicitly begging the Fed to hold off on higher interest rates as a way to protect stock prices.

It seems they still fervently believe in the “Greenspan put.” They assume that the Fed will always come riding to the rescue of the markets, as Fed Chair Alan Greenspan did so many times. You can’t blame them for believing that, because from 1987 to today, the Fed has reacted to nearly every market hiccough and tantrum by flooding markets with liquidity and reassurances. They’ve given the markets rate cuts, quantitative easing and promises that easy-money policies will continue for a long time, if not forever. This “Greenspan put” means investing in the stock market is a one-way bet. On Wednesday, New York Fed President Bill Dudley seemed to close the door on a September rate hike when he said that, “at this moment,” a rate hike next month no longer seemed as “compelling” as it once did.

Traders in federal funds futures lowered the odds of an increase in September to about 24%, down from about 50% just before the global market selloff intensified last week. But Dudley didn’t take September off the table, as many people have assumed. Indeed, he explicitly said that a September rate hike “could become more compelling by the time of the meeting as we get additional information.” And what sort of additional information would make a rate hike more compelling? Dudley said the Fed is looking at more than the economic data, widening its scope to examine everything that might impact the economic outlook. They are looking at the value of the dollar, the price of commodities, the risk of contagion from Europe, from China, and from emerging markets. And, above all, the U.S. stock market.

I believe the market selloff has made a September rate hike even more compelling than it was before, because it gives Fed Chair Janet Yellen the opportunity she needs to kill the “Greenspan put” once and for all.

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Great pic.

The Emperor Is Naked; Long Live The Emperor (Fiscal Times)

Over at Barclays, economists Michael Gapen and Rob Martin pushed back their rate hike forecast to March 2016. They admit Fed policymakers are “market dependent” and won’t tighten policy in the maw of a stock correction, even as they see “economic activity in the U.S. as solid and justifying modest rate hikes.” Should the market turmoil continue, the rate hike could be pushed past March. Alberto Gallo, head of credit research at RBS, is more direct: “Policymakers responded to the financial crisis with easy monetary policy and low interest rates. The critics — including us — argued against ‘solving a debt crisis with more debt.’ Put differently, we said that QE was necessary, but not sufficient for a recovery. We are now coming to the moment of reckoning: central bankers look naked, and markets have nothing else to believe in.”

Gallo believes an overreliance on excess liquidity has actually hindered capital investment — as companies have focused on debt-funded share buybacks and dividend hikes instead — limiting the global economy’s potential growth rate. Now, contagion from China — lower commodity prices, lower demand, currency volatility — has revealed the structural vulnerabilities. More stimulus, in his words, “could be self-defeating without fiscal and reform support.” As for Fed hike timing, Gallo sees the odds of a September liftoff at just 30%, down from 36% last week, based on futures market pricing. December odds are at 60%. The open question is: Should the Fed delay its rate hike and the People’s Bank of China ease, will stocks actually rebound? Or has the Pavlovian reaction function been broken by a loss of confidence? We’re about to find out.

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The IMF would have to do a 180 on its own sustainability assessment.

IMF Could Contribute A Fifth To Greek Bailout, ESM’s Regling Says (Bloomberg)

The IMF will probably join Greece’s third bailout and might contribute almost a fifth to the €86 billion program, the head of Europe’s financial backstop said. Speaking to reporters in Berlin on Thursday, European Stability Mechanism Managing Director Klaus Regling said “it would make sense” for the fund to use the 16 billion euros it didn’t pay out to Greece during the second bailout, which expired at the end of June. “Up to 16 billion is something I could imagine,” Regling said. “I assume with a large probability that the IMF will contribute,” though less than the third it contributed to Greece’s bailout five years ago, he said.

Regling is expressing optimism on the IMF’s participation even after Managing Director Christine Lagarde said debt relief for cash-strapped Greece must go “well beyond what has been considered so far.” The IMF has accepted the euro-region view that Greece’s debt load as a percentage of its economy isn’t a proper debt sustainability gauge as long as bond redemptions and interest payments are largely suspended thanks to the financial support, Regling said. Greece’s gross financing need will be below 15% of GDP for a decade, he said. Maturities on outstanding Greek debt can be extended and interest rates lowered to a “certain” degree to achieve the debt easing demanded by the IMF, while a nominal haircut for public creditors is not on the agenda, Regling said. One “needn’t do a whole lot” to help Greece meet the revised debt sustainability requirement, he said.

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Europe-wide will not get you anywhere.

Yanis Varoufakis: ‘I’m Not Going To Take Part In Sad Elections’ (Reuters)

Yanis Varoufakis will not take part in “sad” elections expected next month in Greece and will instead focus on setting up a new movement to “restore democracy” across Europe, the former Greek finance minister told Reuters on Thursday. The combative, motorbike-riding academic was sacked as finance minister last month after alienating euro zone counterparts with his lecturing style and divisive words, hampering Greece’s efforts to secure a bailout from partners. The one-time political rock star has since steadily attacked the bailout programme that prime minister Alexis Tsipras subsequently signed up to and the austerity policies that go with it, rebelling against his former boss in parliament.

“I’m not going to take part in these sad elections,” Mr Varoufakis told Reuters by telephone when asked about the vote likely to be held on September 20th. Mr Tsipras’s Syriza party, which hopes to return to power with a strengthened mandate, says it will not allow Mr Varoufakis and others who voted against the bailout to run for parliament under the Syriza ticket anyway. “Not only him but other lawmakers who did not back the bailout will not be part of the ticket,” a party official said. Mr Tsipras has poured scorn on Mr Varoufakis, telling Alpha TV on Wednesday that he had realised in June that “Varoufakis was talking but nobody paid any attention to him” at the height of Greece’s negotiations with IMF and EU lenders.

“They had switched off, they didn’t listen to what he was saying,” Mr Tsipras said. “He didn’t say anything bad but he had lost his credibility among his interlocutors.” Mr Varoufakis, in turn, likened Mr Tsipras to the mythical Sisyphus condemned to push a rock uphill only to have it roll back down, telling Australia’s ABC Radio the prime minister had embarked on “pushing the same rock of austerity up the hill” against the laws of economics and ethical principles. The 54-year-old Mr Varoufakis has already dismissed speculation that he would join the far-left Popular Unity party that broke away from Syriza last week, telling ABC that he had “great sympathy” but fundamental differences with them and considered their stance “isolationist”.

Instead, he told Reuters he wanted to set up a European network aimed at restoring democracy that could eventually become a party, but at the moment was just an idea that he had seen a lot of support for. “Instead of having national parties that run on a national level it will be a European network which is active on a national level,” he said. “It’s not something immediate. It’s something slow-burning … something that gradually grows roots across Europe.”

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Hunderds die every day now. Blame Brussels.

For Those Trying to Reach Safety in Europe, Land can be as Deadly as Sea (HRW)

More gruesome details will undoubtedly emerge, but we already know enough to be horrified: Up to 50 people died in what were surely agonizing deaths, locked in a truck parked on an Austrian highway, leading to Vienna. That so many should die in a single episode, so close to a European capital where ministers are meeting to discuss migration in the Western Balkans, has made this international news. But the land route into the European Union trekked by migrants and asylum seekers has claimed thousands of victims over the years. In March, two Iraqi men died of hypothermia at the border between Bulgaria and Turkey. In April, 14 Somalis and Afghans were killed by a high-speed train in Macedonia as they walked along the tracks. Last November, a 45-day-old baby died with his father on those same tracks.

While deaths in the Mediterranean capture much of the attention, the list of those who have died of suffocation, dehydration, and exposure to the elements at land borders is unconscionably long. One count puts the overall death toll at EU borders at more than 30,000 since 2000. The smugglers directly responsible for deaths and abuse should be brought to justice. Ill-treatment by border guards and police in Macedonia and Serbia adds to the perils of the journey. But there’s lots of blame to spread around. Failed EU policies, which place an unfair burden on countries at its frontiers, and Greece’s inability to handle the numbers of migrants, have contributed to the crisis at EU borders.

Instead of erecting fences, as Hungary is, the EU should expand safe and legal alternatives for people seeking entry, especially those fleeing persecution and conflict. This means increasing refugee resettlement, facilitating access to family reunification, and developing programs for providing humanitarian visas. It also requires EU governments to meet their legal obligations to provide access to asylum and humane conditions for those already present. EU countries should step up to alleviate the humanitarian crisis in debt-stricken Greece, where 160,000 migrants have arrived since the start of the year. The umbrella group European Council on Refugees and Exiles (ECRE) has called for EU countries to relocate 70,000 asylum seekers from Greece within a year, double the insufficient relocation numbers agreed by governments for both Greece and Italy in July.

Many of those traveling along the Western Balkans route and into Austria are from Syria, Somalia, Iraq, and Afghanistan – countries experiencing war or generalized violence. Others are hoping to improve their economic prospects and the lives of their children. None of them deserve to be exploited, abused, or to die.

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Dec 222014
 
 December 22, 2014  Posted by at 12:05 pm Finance Tagged with: , , , , , , , ,  5 Responses »


Russell Lee Secondhand store in Council Bluffs, Iowa Dec 1936

Age of Plenty Seen Over for Gulf Arabs as Oil Tumbles (Bloomberg)
Ready for $20 Oil? (A. Gary Shilling)
Houston Suddenly Has A Very Big Problem (Feroli via ZH)
Saudis Insist Oil Supply Cuts Are Not Needed (Independent)
Oil Crash Wipes $11.7 Billion From Buyout Firms’ Holdings (Bloomberg)
North Sea Oil Summit Announced By Aberdeen City Council (BBC)
Southwest’s Oil Swap Trade Waiver Raises CFTC Questions (Reuters)
US Gas Prices Fall To Lowest Since May 2009 (Reuters)
Rosneft Repays $7 Billion and Says Has No Need to Buy Dollars (Bloomberg)
China Offers Russia Help With Currency Swap Suggestion (Bloomberg)
China Investigates Possible Stock-Price Manipulation (WSJ)
China Stock Connect Scheme Scorecard Throws Up Surprises (Reuters)
The Fallacy of Keynesian Macro-Aggregates (Ebeling)
Europe in Wonderland Wants Russia to Bail Out Ukraine (Mish)
Greek Premier Makes Offer In Bid To Avoid Snap Elections (WSJ)
Greece’s Radical Left Could Kill Off Austerity In The EU (Guardian)
Rising Price Of Olive Oil Is A Pressing Matter (FT)
Leaked CIA Docs Teach Operatives How To Infiltrate EU (RT)

Tall building syndrome?!

Age of Plenty Seen Over for Gulf Arabs as Oil Tumbles (Bloomberg)

The boom that adorned Gulf Arab monarchies with glittering towers, swelled their sovereign funds and kept unrest largely at bay may be over after oil prices dropped by almost 50% in the last six months. The sheikhdoms have used the oil wealth to remake their region. Landmarks include man-made islands on reclaimed land, as well as financial centers, airports and ports that turned the Arabian desert into a banking and travel hub. The money was also deployed to ward off social unrest that spread through the Middle East during the Arab Spring. “The region has had 10 years of abundance,” said Simon Williams, HSBC chief economist for central and eastern Europe, the Middle East and North Africa. “But that decade of plenty is done. The drop in oil prices will hurt performance in the near term, even if the Gulf’s buffers are powerful enough to ensure there’s no crisis.”

Brent crude, which has averaged $102 a barrel since the end of 2009, plunged to about $60 by the end of last week. The slump accelerated after the Organization of Petroleum Exporting Countries, whose top producer is Saudi Arabia, decided in November to keep output unchanged. At $65 a barrel, the six nations of the Gulf Cooperation Council, which hold about a third of the world’s crude reserves, would run a combined budget deficit of about 6% of gross domestic product, according to Arqaam Capital, a Dubai-based investment bank. Cheaper oil “will force a reassessment of the ambitious infrastructure investment program” in the region, Qatar National Bank said in a report. One exception is likely to be Qatar, which is spending on infrastructure to host the 2022 soccer World Cup final, QNB said. The oil-price drop has already prompted economists to cut next year’s growth estimates for Saudi Arabia, the United Arab Emirates and Kuwait, according to data compiled by Bloomberg.

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Complex political games.

Ready for $20 Oil? (A. Gary Shilling)

When the U.S. Federal Reserve ended its quantitative-easing program in October, it also ended the primary driver of U.S. stocks during the past six years. So long as the central bank kept flooding the markets with money, investors had little reason to worry about a broader economy limping along at 2% real growth. Now investors face more volatile markets and securities that no longer move in lock-step. At the same time, investors must cope with slower growth in China, minuscule growth in the euro area and negative growth in Japan. Such widespread sluggish demand – along with ample supplies of oil and most everything else – is the reason commodity prices are falling. They have been since early 2011, but many people failed to notice until recently, when crude oil prices nosedived.

Normally, less demand and a supply glut would lead OPEC, beginning with Saudi Arabia, to cut production. As the de facto cartel leader, the Saudis would often reduce output to prevent supply increases from driving down prices. Of course, this also cost the Saudis market share and encouraged cheating by OPEC members. Saudi leaders must grind their teeth over the last decade’s unchanged demand for OPEC oil, while all the global growth has been among non-OPEC suppliers, principally in North America. That may explain why, while Americans were enjoying their Thanksgiving turkeys, OPEC surprised the world. Pressed by the Saudis and other rich Persian Gulf producers, it refused to cut output despite a 38% drop in the price of Brent crude, the global benchmark, since June.

OPEC, in effect, is challenging other producers to a game of chicken. Sure, the wealthier producers need almost $100 a barrel to finance bloated budgets. But they also have huge cash reserves, which they figure will outlast the cheaters and the U.S. shale-oil producers when prices are low. The Saudis also seized the opportunity to damage their opponents, especially Iran and what they see as Iran-dominated Iraq, in the Syria conflict. They also want to help allies Egypt and Pakistan reduce expensive energy subsidies as prices fall.

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“.. the four states where oil is more important to the local economy than Texas have a combined GSP that is only 16% of the Texas GSP.”

Houston Suddenly Has A Very Big Problem (Feroli via ZH)

The well-known energy renaissance in the US has occurred in both the oil and natural gas sectors. Some states that are huge natural gas producers have limited oil production: Pennsylvania is the second largest gas producing state but 19th largest oil producer. The converse is also true: North Dakota is the second largest crude producer but 14th largest gas producer. However, most of the economic data as it relates to the energy sector, employment, GDP, etc, often lump together the oil and gas extraction industries. Yet oil prices have collapsed while natural gas prices have held fairly steady. To understand who is vulnerable to the decline in oil prices specifically we turn to the EIA’s state-level crude oil production data.

The first point, mentioned at the outset, is that Texas, already a giant, has become a behemoth crude producer in the past few years, and now accounts for over 40% of US production. However, there are a few states for which oil is a relatively larger sector (as measured by crude production relative to Gross State Product): North Dakota, Alaska, Wyoming, and New Mexico. For two other states, Oklahoma and Montana, crude production is important, though somewhat less so than for Texas. Note, however, that these are all pretty small states: the four states where oil is more important to the local economy than Texas have a combined GSP that is only 16% of the Texas GSP. Finally, there is one large oil producer, California, which is dwarfed by such a huge economy that its oil intensity is actually below the national average, and we would expect it, like the country as a whole, to benefit from lower oil prices.

As discussed above, Texas is unique in the country as a huge economy and a huge oil producer. When thinking about the challenges facing the Texas economy in 2015 it may be useful, as a starting point, to begin with the oil price collapse of 1986. Then, like now, crude oil prices collapsed around 50% in the space of a few short months. As noted in the introduction, the labor market response was severe and swift, with the Texas unemployment rate rising 2.0%-points in the first three months of 1986 alone. Following the hit to the labor market, the real estate market suffered a longer, slower, burn, and by the end of 1988 Texas house prices were down over 14% from their peak in early 1986 (over the same period national house prices were up just over 14%). The last act of this tragedy was a banking crisis, as several hundred Texas banks failed, with peak failures occurring in 1988 and 1989.

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Chances they’ll do anything shrink by the day.

Saudis Insist Oil Supply Cuts Are Not Needed (Independent)

Gulf states yesterday insisted that oil prices will recover without intervention from the OPEC cartel, arguing that current prices will boost global economic growth. Crude oil prices have plummeted as global demand has eased and new supplies such as US shale oil have come on to the market. The cost of benchmark Brent crude has nearly halved from $115 a barrel in June to below $60 last week. But although oil producers and explorers from Aberdeen to Alberta are struggling to operate at a profit, OPEC has refused to cut supply in order to lift prices. Ali al-Naimi, the Saudi oil minister, yesterday said he was “100% not pleased” with current prices, but insisted: “I am confident the oil market will improve.” He added: “Current prices do not encourage investment, but they stimulate global economic growth, leading ultimately to an increase in global demand and a slowdown in the growth of supplies.”

Saudi Arabia, OPEC (and the world’s) largest oil exporter, has been the “swing supplier” in the past, cutting or increasing production in order to stabilise global oil prices at around $100 a barrel. The Gulf state blames the current price slump on speculators and a lack of co-operation from producers outside OPEC, and Mr Naimi said the kingdom would not act this time. “If they [non-OPEC oil producers] want to cut production they are welcome,” he told reporters on the sidelines of the 10th Arab Energy Conference in the United Arab Emirates. “Certainly Saudi Arabia is not going to cut.” Attempts to get non-OPEC producers such as Russia to sign up to output reductions before last month’s meeting of the oil cartel failed. “I don’t think we [OPEC] need to cut,” Kuwait’s oil minister told Reuters yesterday. “We gave a chance to others, they were not willing to do so.”

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“It’s been a really volatile period, and frankly that’s how Saudi Arabia wants it,” [..] “This is a battle of endurance.”

Oil Crash Wipes $11.7 Billion From Buyout Firms’ Holdings (Bloomberg)

Oil’s plunge makes energy a great investment for the coming years, according to Blackstone’s Stephen Schwarzman and Carlyle’s David Rubenstein. For private equity firms, it’s also been painful. More than a dozen firms – including Apollo Global , Carlyle, Warburg Pincus and Blackstone – have lost a combined $11.7 billion in 27 publicly traded oil producers since June, when crude prices reached this year’s peak before beginning their six-month slide, according to data compiled by Bloomberg. Stocks of buyout firms with exposure to energy have slumped, and bond prices suggest some closely held oil producers may struggle to pay for their debt. “It’s been a really volatile period, and frankly that’s how Saudi Arabia wants it,” said Francisco Blanch, head of global commodity research at Bank of America. “This is a battle of endurance.”

Brent crude oil slumped 47% to about $61 late last week from its high this year of $115 a barrel, dragging down energy stocks, as the Organization of Petroleum Exporting Countries sought to defend market share amid a U.S. shale expansion that’s adding to a global glut. The group, responsible for 40% of the world’s supply, will refrain from curbing output, U.A.E. Energy Minister Suhail al-Mazrouei said on Dec. 14. Kosmos Energy, Antero Resources, EP Energy, Laredo Petroleum and SandRidge Energy, each of which is backed by a buyout firm as its largest shareholder, fell by an average of 50% in U.S. trading from oil’s peak through Dec. 19 in New York. Warburg Pincus is the top stakeholder in Kosmos, Antero and Laredo; Apollo is the largest investor in EP Energy; and Carlyle, with a partner, owns the biggest piece of SandRidge, according to data compiled by Bloomberg.

Apollo has $5 billion invested in energy debt and equity, including companies that are closely held. Carlyle has directed 10% of its $203 billion in assets into the industry. Blackstone, the second-biggest shareholder in Kosmos, has backed drilling projects off Ghana’s coast and in the Gulf of Mexico. The deals highlight private equity’s role in the debt-fueled shale push, as hydraulic fracturing in search of oil and gas leads to higher production. After investing billions of dollars, the firms are preparing to step in with more cash to fund development when prices stabilize.

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More consequences.

North Sea Oil Summit Announced By Aberdeen City Council (BBC)

A plan for a summit to look at the challenges facing the North Sea oil industry has been announced by Aberdeen City Council. Council leader Jenny Laing said the UK and Scottish governments, trade unions and industry bodies needed “to get round the table as soon as possible”. The Labour councillor said a “strategic plan” was required to save jobs as the price of oil continued to fall. Labour called on Nicola Sturgeon and David Cameron to attend the summit. It comes after a warning that the UK’s oil industry is in “crisis”. On Thursday, Robin Allan, chairman of the independent explorers’ association Brindex, told the BBC that the industry was “close to collapse”. He claimed almost no new projects in the North Sea were profitable with oil below $60 a barrel. However, Sir Ian Wood, another leading industry figure, said Mr Allan’s warning was “well over-the-top and far too dramatic”. Sir Ian predicted conditions would begin to recover next year.

Ms Laing said Aberdeen was the oil capital of Europe and as such it was her job, as leader of the city council, to work with the governments in Edinburgh and Westminster and the oil industry to ensure jobs in the city were protected and companies remained based there. She said: “I have today instructed Angela Scott, our chief executive, to arrange a summit between senior politicians, government officials, industry representatives, trade unions, and local politicians. “The aim will be to ensure an agreement to develop a strategic plan to ensure job losses are either avoided or kept to a minimum. “It must concern us all that the price of oil has dropped so heavily in such a short space of time and we need to agree a strategy to deal with fluctuations that undermine confidence in the North Sea.” Ms Laing said the council chief executive would write to various politicians within both the UK and Scottish governments, as well as UK Oil and Gas, other industry leaders and trade unions to encourage them to take part in the summit.

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Dangerous development.

Southwest’s Oil Swap Trade Waiver Raises CFTC Questions (Reuters)

Last month’s move by the U.S. commodities regulator to let Southwest Airlines Co keep its multibillion-dollar oil trades secret for 15 days offered the world’s biggest low-cost carrier a break it has been seeking for three years. However, the decision to grant the airline an exemption from rules calling for greater derivatives transparency raised concerns about its market impact and sparked a debate among regulators, according to people familiar with the approval process. All other swap trades except Southwest’s must be reported “as soon as technologically practicable.” The Dallas-based airline has argued that its deals are so specific that immediate disclosure could cause the market to move against it, adding tens of millions of dollars to its costs. For years, that argument was not enough to sway the Commodity Futures Trading Commission and its former chairman, Gary Gensler. One concern was that granting an exemption to just one company is unusual and could hurt others in a similar position.

Also, the waiver could set a precedent that would encourage others to seek similar special treatment, restoring a veil over bigger parts of derivative markets. The agency is already looking into problems the Mexican government is facing in its vast oil hedging program after news organizations, including Reuters, reported on the country’s trades using publicly available swaps trading data, said one person familiar with the agency’s procedures. A CFTC spokesman said Tim Massad, Gensler’s successor, had issued the waiver to Southwest after his staff had done proper analysis to confirm the company’s claims, and the relief was a lot narrower than what the company had originally requested. But the person familiar with the approval process said the decision caused “a big stink” within the agency.

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Still happy?

US Gas Prices Fall To Lowest Since May 2009 (Reuters)

The average price of a gallon of gasoline in the United States fell 25 cents in the past two weeks, tumbling to its lowest level in more than five-and-a-half years, according to the Lundberg survey released Sunday. Prices for regular-grade gasoline fell to $2.47 a gallon in the survey dated Dec. 19, down 25 cents since the previous survey on Dec. 5. The recent drop has taken prices down more than $1.25 a gallon since a recent peak in May of this year.

“This is mostly driven by crude oil prices, and absent a sudden spike we very well may see a drop of a few pennies more,” said the survey’s publisher, Trilby Lundberg. “That said, demand is up at these low prices.” U.S. crude futures have been sharply weaker of late, dropping for four straight weeks, as well as in 11 of the past 12 weeks. Crude prices fell 14.2% over the past two weeks, though they rose 5.1% on Friday, settling at $57.13 per barrel. The highest price within the survey area in 48 U.S. states was recorded in Long Island at $2.82 per gallon, with the lowest in Tulsa, at $2.06 per gallon.

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Wonder if Russia stress tests its companies.

Rosneft Repays $7 Billion and Says Has No Need to Buy Dollars (Bloomberg)

Rosneft repaid $7 billion in debt and said it is generating enough dollars to meet the obligations taken on to buy TNK-BP last year and become the world’s largest traded oil producer. The state-led company, hit by sanctions from the U.S. and EU limiting access to capital markets, said it has settled $24 billion this year in line with credit agreements. Rosneft has sufficient foreign currency to cover debt, Chief Executive Officer Igor Sechin said in a statement. “To service debt the company does not need to enter the currency market, because it generates enough foreign currency earnings,” Sechin said. The latest repayment doesn’t mean the end of financial pressure on Rosneft however.

The oil producer has to grapple with the slump in oil prices, sanctions that bar it from international capital markets and a Russian economy at risk of sliding into recession. Rosneft is scheduled to repay another bridge loan of $7.1 billion on Feb. 13, the first part of $19 billion in debt repayments scheduled for next year, according to data compiled by Bloomberg. Sechin, who denied speculation last week the company had been selling rubles to buy dollars, said today that the company may get state support from Russia’s state Wellbeing Fund. The money would be used to develop oil projects at home, he said.

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“For the sake of national interests, China should deepen cooperation with Russia when such cooperation is in need.”

China Offers Russia Help With Currency Swap Suggestion (Bloomberg)

Two Chinese ministers offered support for Russia as President Vladimir Putin seeks to shore up support for the ruble without depleting foreign-exchange reserves. China will provide help if needed and is confident Russia can overcome its economic difficulties, Foreign Minister Wang Yi was cited as saying in Bangkok in a Dec. 20 report by Hong Kong-based Phoenix TV. Commerce Minister Gao Hucheng said expanding a currency swap between the two nations and making increased use of yuan for bilateral trade would have the greatest impact in aiding Russia, according to the broadcaster. The ruble strengthened 4.1% against the dollar today amid the signs of willingness by China, the world’s second-largest economy, to prop up its neighbor.

Russia, the biggest energy exporter, saw its currency tumble as much as 59% this year as crude oil prices slumped and U.S. and European sanctions hurt the economy. President Xi Jinping last month called for China to adopt “big-country diplomacy” as he laid out goals for elevating his nation’s status. “Many Chinese people still view Russia as the big brother, and the two countries are strategically important to each other,” said Jin Canrong, Associate Dean of the School of International Studies at Renmin University in Beijing, referring to the Soviet Union’s backing of Communist China in its first years. “For the sake of national interests, China should deepen cooperation with Russia when such cooperation is in need.”

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Still corrupt to the bone.

China Investigates Possible Stock-Price Manipulation (WSJ)

China is investigating possible stock-price manipulation amid the recent run-up in the country’s equity market, according to officials with direct knowledge of the matter, a move that serves as a stark reminder of the problems that have long haunted Chinese stocks. The probe launched by the China Securities Regulatory Commission comes as stocks traded in mainland China rallied to their highest level in three years on Monday despite the country’s weakening economic growth. Much of the surge, analysts and officials say, has been triggered by short-term speculators betting on looser monetary conditions as opposed to investors with long-term belief in China’s economy. The securities commission is focusing its investigation on a practice that involves groups of investors pumping up prices of certain targeted stocks. Such practices were common during the early and mid-2000s when China’s stock market boomed along with the country’s breathtaking economic growth.

The market peaked in 2007 and started to plummet a year later as the global financial crisis weighed on China’s growth. The practice, which was common in China’s previous market boom, “is making a comeback,” one of the officials said. The securities agency said on Friday that it had launched investigations into 18 stocks, but didn’t explain the reasons for the probe at the time. Most of the stocks targeted are those of small-cap companies, such as a maker of automobile tires in eastern China’s Shandong province and a government-controlled hydroelectric power company in central China’s Hunan province. Shares in larger companies are harder to manipulate because the volumes are bigger. The probes mainly focus on the “individuals and institutions” who recently bought into the stocks, and the companies themselves aren’t the target, the officials said.

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“.. early trade volumes in the program launched in mid-November were completely dominated by hedge funds and banks’ proprietary trading desks ..”

China Stock Connect Scheme Scorecard Throws Up Surprises (Reuters)

A month after China opened up its equity markets in a landmark trading link with Hong Kong, demand has been subdued and the bulk of activity has come from short-term speculative investors. The authorities had hoped mutual and pension funds and private banks would form the bedrock of the Shanghai-Hong Kong stock connect. But early trade volumes in the program launched in mid-November were completely dominated by hedge funds and banks’ proprietary trading desks, according to five traders at some of the biggest brokerages participating in the scheme. Regulatory hurdles have kept out a large swathe of the investment community – and the steady business the financial industry and regulators had hoped they would bring – despite a sizzling stock market rally on the mainland.

Market players say it could take months for long-term investors to eventually trickle into the program, as they devise ways to cope with its peculiarities. “We are not participating in the scheme yet because of the operational issues that have yet to be resolved and we prefer to access the mainland markets via exchange traded funds,” Robert Cormie, Asia CEO of BMO Private Bank, told Reuters. Edmund Yun, executive director of investment at the same wealth management firm, agreed, citing a number of prohibitive issues. These include beneficial ownership, tax and trading settlement. Hedge funds use banks’ prime brokerages, which help them more deftly manage those regulatory constraints.

Stock portfolios of hedge funds are often held by the prime brokers themselves to facilitate quick trading decisions so they are unaffected by ownership constraints. For example, under the scheme, funds wanting to sell holdings of Shanghai-listed shares have to deliver the shares to brokers a day before they are to be sold, a peculiarity that exists in no other major stock market. While regulators have looked for ways to encourage long-term funds, including fast-tracking applications for products benchmarked under the stock connect scheme, industry officials say that persuading pension funds to participate could take months.

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“.. there are no such things as “aggregate demand,” or “aggregate supply,” or output and employment “as a whole.” These are statistical creations constructed by economists and statisticians ..”

The Fallacy of Keynesian Macro-Aggregates (Ebeling)

A specter is haunting the world, the specter of two% inflationism. Whether pronounced by the U.S. Federal Reserve or the European Central Bank, or from the Bank of Japan, many monetary central planners have declared their determination to impose a certain minimum of rising prices on their societies and economies. One of the oldest of economic fallacies continues to dominate and guide the thinking of monetary policy makers: that printing money is the magic elixir for the creating of sustainable prosperity. In the eyes of those with their hands on the handle of the monetary printing press the economic system is like a balloon that, if not “fully inflated” at a desired level of output and employment, should be simply “pumped up” with the hot air of monetary “stimulus.”

The fallacy is the continuing legacy of the British economist, John Maynard Keynes, and his conception of “aggregate demand failures.” Keynes argued that the economy should be looked at in terms of series of macroeconomic aggregates: total demand for all output as a whole, total supply of all resources and goods as a whole, and the average general levels of all prices and wages for goods and services and resources potentially bought and sold on the overall market. If at the prevailing general level of wages, there is not enough “aggregate demand” for output as a whole to profitably employ all those interested and willing to work, then it is the task of the government and its central bank to assure that sufficient money spending is injected into the economy. The idea being that at rising prices for final goods and services relative to the general wage level, it again becomes profitable for businesses employ the unemployed until “full employment” is restored.

Over the decades since Keynes first formulated this idea in his 1936 book, The General Theory of Employment, Interest, and Money, both his supporters and apparent critics have revised and reformulated parts of his argument and assumptions. But the general macro-aggregate framework and worldview used by economists in the context of which problems of less than full employment continue to be analyzed, nonetheless, still tends to focus on and formulate government policy in terms of the levels of and changes in output and employment for the economy as a whole. In fact, however, there are no such things as “aggregate demand,” or “aggregate supply,” or output and employment “as a whole.” These are statistical creations constructed by economists and statisticians, out of what really exists: the demands and supplies of multitudes of individual and distinct goods and services produced, and bought and sold on the various distinct markets that comprise the economic system of society.

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“.. the EC wants Russia to bail out Ukraine while accusing Russia of invading Ukraine. Icing on the wonderland-cake is the Russian Ruble has plunged nearly 50% this year, but Ukraine needs money from Russia to fight Russia. Is this complete lunacy or what?”

Europe in Wonderland Wants Russia to Bail Out Ukraine (Mish)

Ukraine’s president, speaking a day after the nation’s junk credit rating was cut further, said next year’s budget mustn’t cut corners on military spending and should account for the possibility of an invasion. “The war made us stronger, but has crushed the economy,” Poroshenko said. “There’s one article of spending that we won’t save on and that’s security. Ukraine is finalizing next year’s fiscal plan amid a new cease-fire in the conflict that’s ravaged its industrial heartland near Russia’s border. As its economy shrinks and reserves languish at a more than 10-year low, it’s also racing to secure more international aid to top up a $17 billion rescue.

Standard & Poor’s said Dec. 19 that a default may become inevitable, downgrading Ukraine’s credit score one step to CCC-. With official forecasts putting this year’s contraction at 7%, the government needs $15 billion on top of its bailout to stay afloat, according to the European Union. The European Union and the U.S. are discussing $12 billion to $15 billion in aid to Ukraine and “there needs to be a Russian contribution to the package,” Pierre Moscovici, the 28-nation bloc’s economy commissioner, said at a Bloomberg Government event this week in Washington. A decision is needed in January, he said.

Ukraine president says “War has made us stronger“. That lie is so stupid my dead grandmother knows it from the grave. The evidence is a CCC- debt rating, a step or so above above default, with default imminent. The story gets even stranger. To avoid default, Ukraine needs a “Russian contribution to the package” according to Pierre Moscovici, the economic policy commissioner for the European Commission. Europe and the US have crippling sanctions on Russia for the conflict in Ukraine, yet the EC wants Russia to bail out Ukraine while accusing Russia of invading Ukraine. Icing on the wonderland-cake is the Russian Ruble has plunged nearly 50% this year, but Ukraine needs money from Russia to fight Russia. Is this complete lunacy or what?

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“Once we are shielded economically and politically, we can find the appropriate schedule for national elections, even by the end of 2015 ..”

Greek Premier Makes Offer In Bid To Avoid Snap Elections (WSJ)

Greek Prime Minister Antonis Samaras reached out to lawmakers Sunday, offering a set of compromises to resolve an impasse over the selection of Greece’s future head of state and to avoid snap elections early next year. Speaking in an unscheduled televised address, the Greek premier called for consensus over the government’s presidential candidate. In return, he offered to hold general elections by the end of 2015 – before the term of the current government expires – but only after Greece concluded negotiations with its international creditors and passed political and constitutional reforms. “Once we are shielded economically and politically, we can find the appropriate schedule for national elections, even by the end of 2015,” Samaras said.

“We cannot enter into a period of uncertainty as soon as we finish another one. The problems of the country cannot stagnate in a permanent election campaign.” Samaras also offered to reshuffle his cabinet to include ministers who would be appointed by other political parties, a move aimed at winning over undecided lawmakers from smaller parties in parliament. Elected to a four-year term in mid-2012, the country’s current coalition government — composed of the conservative New Democracy and the socialist Pasok parties — isn’t due to face elections again until June 2016. But it faces an uphill struggle convincing a supermajority of lawmakers to back its candidate for head of state, a largely ceremonial role.

The opposition Syriza party is blocking the election of the government’s candidate in the hopes of forcing early elections. Under Greece’s constitution, parliament has three tries to elect a president — a first vote took place last week, a second is due on Tuesday and the last tentatively scheduled for Dec. 29. If it fails, parliament would be dissolved and fresh elections called within a month. In the first two rounds, the president must be elected by a two-thirds majority of the 300 lawmakers in parliament, but that threshold falls to 180 votes in the third and final round.

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” .. It has conjured up the example of a European debt conference to wipe away a portion of the debt, as happened with Germany in 1953.”

Greece’s Radical Left Could Kill Off Austerity In The EU (Guardian)

What misery has been inflicted on Greece. One in four of its people are out of work; poverty has surged from 23% before the crash to 40.5%; and research has demonstrated how key services such as health have been hammered by cuts, even as demand has risen. No wonder the country has experienced a political polarisation that has prompted comparisons with Weimar Germany. The neo-Nazi Golden Dawn – which makes other European rightist movements look like fluffy liberals – at one point attracted up to 15% in the polls; though still a menace, its support has thankfully subsided to half that.

But unlike many other European societies – with the notable exceptions of Spain and Ireland – fury and despair with austerity has been channelled into the ranks of the populist left. After years on the fringes of Greek politics, Syriza only became a fully fledged party in 2012, and yet it won Greece’s elections to the European parliament earlier this year. The latest opinion polls give Syriza a substantial lead over the governing centre-right New Democracy party. A radical leftwing government could well assume power for the first time in the EU’s history. After years of social ruin, Syriza is offering Greeks that precious thing: hope. Although it has shifted from demanding an immediate cancellation of debt, it is demanding a negotiated solution.

It has conjured up the example of a European debt conference to wipe away a portion of the debt, as happened with Germany in 1953. Syriza’s manifesto proposes that repayment of debt could come through economic growth, rather than from budget cuts. It wants a European new deal backed up by an investment bank; an all-out war against the tax avoidance endemic in Greek society; an emergency employment programme; a raised minimum wage; and the restoration of collective bargaining. In alliance with anti-austerity forces such as Spain’s surging Podemos party, Syriza wants the EU to abandon crippling austerity policies in favour of quantitative easing and a growth-led recovery.

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Getting worse.

Rising Price Of Olive Oil Is A Pressing Matter (FT)

Never mind the shale revolution, or OPEC’s deliberations. Some oil producers are enjoying the highest prices in six years. A severe drought in Spain and a fruitfly infestation in Italy have caused a surge in the price of olive oil. The two countries normally account for just under 70% of output, and the Madrid-based International Olive Oil Council forecasts that production will drop next year by 27%. “Production in Spain is very, very short,” Rafael Pico Lapuente, director-general of Asoliva, the Spanish Olive Oil Exporters Association, said. The shortage has been pushing up wholesale prices for months. Premium-quality extra virgin olive oil rose to $4,282 a tonne last month, the highest since 2008, according to the International Monetary Fund. The civil war in Syria has also hit production there. Most Syrian output is consumed domestically, but some argue that this is providing further psychological support for prices.

Vito Martielli, analyst at Rabobank, said higher costs might further hit consumption in southern Europe, traditionally the largest market. The economic crisis in 2008 hit olive oil demand in Spain, Italy and Greece, and appetite has been waning as shoppers have turned to cheaper substitutes. Favorable weather in most parts of the world this year has meant that harvests of oilseed crops have been plentiful and prices have been falling. The price of soya oil has fallen 20% so far this year; palm oil has declined 17%, and rapeseed oil is down 5%. “We are in a situation where there are cheaper alternatives in Europe,” Mr Martielli said. The IOC expects olive oil consumption in 2015 to fall 7% to 2.8 million tonnes. Italy, the largest consumer of olive oil, is forecast to see a fall of 16% to 520,000 tonnes, Spain is expected to see a 3% decline to 515,000 tonnes, while Greece’s consumption is expected to fall 6% to 160,000 tonnes.

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That’s what friends are for.

Leaked CIA Docs Teach Operatives How To Infiltrate EU (RT)

Wikileaks has released two classified documents instructing CIA operatives how best to circumvent global security systems in international airports, including those of the EU, while on undercover missions. The first of the documents, dated September 2011, advises undercover operatives how to act during a secondary airport screening. Secondary screenings pose a risk to an agent s cover by focusing significant scrutiny on an operative via thorough searches and detailed questioning. The manual stresses the importance of having a “consistent, well-rehearsed, and plausible cover,” in addition to cultivating a fake online presence to throw interrogators off track. Meanwhile, the second document, dated January 2012, presents a detailed overview of EU Schengen Border Control procedures. The overview outlines the various electronic security measures, including the Schengen Information System (SIS) and the European fingerprint database EURODAC, used by border control and the dangers these measures may pose to agents on clandestine missions.

WikiLeaks’ chief editor Julian Assange explains that these documents show that under the Obama administration the CIA is still intent on infiltrating European Union borders and conducting clandestine operations in EU member states.” The document also demonstrates the CIA s increasing concern over the risks to operatives’ assumed identities posed by biometric databases the very same systems the US pushed for after 9/11. On Friday, WikiLeaks released a CIA report suggesting that though targeted killing programs, including drone strikes, may be effective in some cases, there is also a risk that the programs may backfire. For example, targeted strikes may prompt local populations to sympathize with insurgents or further radicalize remaining militants.

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Dec 132014
 
 December 13, 2014  Posted by at 11:42 am Finance Tagged with: , , , , , , ,  1 Response »


Marjory Collins “Italian girls watching US Army parade on Mott Street, New York” Aug 1942

The Federal Reserve’s Language Lessons (Reuters)
After Years Of Doubts, Americans Turn More Bullish On Economy (Reuters)
Oil Seen Dropping to $55 ($45?) Next Week as Price Rout Deepens (Bloomberg)
US Stocks Tumble to Cap Dow’s Worst Week Since 2011 (Bloomberg)
Oil Rot Spreading in Credit (Bloomberg)
We Have Just Escaped The Earth’s Gravity And Are Now In Space Orbit (Zero Hedge)
U.S. Oil Rigs Drop Most in Two Years, Baker Hughes Says (Bloomberg)
Don’t Vote ‘Wrong’ Way, EU’s Juncker Urges Greeks (Reuters)
Albert Edwards: China Deflation Risks Sparking A Eurozone Break-Up (CNBC)
Would Global Deflation Really Be That Bad? (CNBC)
Falling Oil Threatens Canada’s Bulletproof Banking System (MarketWatch)
How Elizabeth Warren Led The Great Swaps Rebellion of 2014 (Bloomberg)
$303 Trillion In Derivatives US Taxpayers Are Now On The Hook For (Zero Hedge)
Venezuela’s Got $21 Billion. And Owes $21 Billion (Bloomberg)
Japan’s Lemmings March Toward The Cliff Chanting “Abenomics” (David Stockman)
Putin 2000 – 2014, Midterm Interim Economic Results (Awara)
Only ‘Minimal’ Risk Of Default: Ukrainian Official (CNBC)
Ukraine’s Chocolate King President Not Sweet On Keeping Promise (Reuters)
Australia’s Once-Vibrant Auto Industry Crashes in Slow Motion (NY Times)
Did A European Spacecraft Detect Dark Matter? (Christian Science Monitor)
The Chinese Mystery Of Vanishing Foreign Brides (FT)

The financial world caught behind the oil curve: they listen only to Yellen.

The Federal Reserve’s Language Lessons (Reuters)

“Will they or won’t they?” is the question on investors’ minds as the Federal Reserve policy-setting committee meets next week for the last time this year. Markets have followed Fed speakers closely in recent weeks for clues on whether the U.S. central bank will change key language in its post-meeting statement regarding how long it will keep benchmark interest rates near zero. Some expect the Fed to remove the reference to “considerable time” when setting a time frame for near-zero rates and maybe replace it, as it did ahead of the 2004-2005 monetary policy tightening cycle, with a nod to being “patient”. But that belief has been complicated somewhat by the slump in oil prices that has pulled inflation expectations lower and caused the S&P stock index to post its first negative week in eight on Friday.

The expectation of lower inflation could prevent the Fed from changing its current stance. Client notes from Goldman Sachs, Citi and Bank of America/Merrill Lynch this week deal with expectations for the removal of the wording, roughly agreeing that however close the call is, it is more likely than not that the phrase will go away. “They are going to remove it; I don’t think (Fed Chair Janet Yellen) is going to keep it in there just because of what we are seeing with the energy sector,” said Sean McCarthy, regional chief investment officer for Wells Fargo Private Bank in Scottsdale, Arizona. “All the other data has been strong, whether you are looking at construction, at the ISM numbers, and especially the jobs data that she cares about most.”

Indeed, recent statements from Fed officials suggest the language could be changed. Goldman Sachs, in a note, pointed to “widespread use of the word ‘patient'” as a signal that “some participants would prefer to revise the current language.” The lack of consensus on the Fed’s move all but guarantees that whatever the Federal Open Market Committee’s statement says on Wednesday the stock market will be volatile, as it usually is on Fed decision days. “The goal,” said the BofA/Merrill note, “will be to smooth the market’s reaction. The Fed does not intend to signal a fundamental shift in policy, and we expect chair Yellen’s press conference remarks to reinforce this point.”

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While Americans are not just behind the curve, they positively confirm a top has been reached. If ever you needed a sign, this is it: “Their expectations run quite counter to recent price data.”

After Years Of Doubts, Americans Turn More Bullish On Economy (Reuters)

Pessimism and doubt have dominated how Americans see the economy for many years. Now, in a hopeful sign for the economic outlook, confidence is suddenly perking up. Expectations for a better job market helped power the Thomson Reuters/University of Michigan index of consumer sentiment to a near eight-year high in December, according to data released on Friday. U.S. consumers also saw sharp drops in gasoline prices as a shot in the arm, and the survey added heft to strong November retail sales data that has showed Americans getting into the holiday shopping season with gusto. “Surging expectations signal very strong consumption over the next few months,” said Ian Shepherdson, an economist at Pantheon Macroeconomics.

While improvements in sentiment haven’t always translated into similar spending growth, consumers at the very least are feeling the warmth of several months of robust hiring, including 321,000 new jobs created in November. When asked in the survey about recent economic developments, more consumers volunteered good news than bad news than in any month since 1984, said the poll’s director, Richard Curtin. Moreover, half of all consumers expected the economy to avoid a recession over the next five years, the most favorable reading in a decade, Curtin said. The data bolsters the view that the U.S. economy is turning a corner and that worker wages could begin to rise more quickly, laying the groundwork for the Federal Reserve to begin hiking its benchmark interest rate to keep inflation from eventually rising above the Fed’s 2% target.

Overall, the sentiment index rose to a higher-than-expected 93.8, mirroring levels seen in boom years like 1996 and 2004. Many investors see the Fed raising rates in mid-2015, and policymakers will likely debate at a meeting next week whether to keep a pledge that borrowing costs will stay at rock bottom for a “considerable time.” Consumers see faster inflation ahead. Over the next year, they expect a 2.9% increase in prices, up from 2.8% in November, according to the sentiment survey. Their expectations run quite counter to recent price data. The Labor Department said separately its producer price index dropped 0.2% last month, brought lower by falling gasoline prices. Prices were soft even excluding the drag from gasoline.

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“The market hasn’t seen the response they’re looking for on the supply side yet ..”

Oil Seen Dropping to $55 ($45?) Next Week as Price Rout Deepens (Bloomberg)

Benchmark U.S. oil prices are poised to test $55 a barrel after a six-month rout pushed crude to the lowest in five years. West Texas Intermediate crude ended below $58 today for the first time since May 2009 after the International Energy Agency cut its global demand forecast for the fourth time in five months. Prices are down 46% from this year’s highest close of $107.26 on June 20. “By taking out $58, oil is moving towards the next target $55,” said Phil Flynn, senior market analyst at Price Futures. “It’s such an emotional selloff, and the even numbers are going to be the magic numbers.” WTI for January delivery dropped $2.14, or 3.6%, to $57.81 a barrel today on the New York Mercantile Exchange. Brent slid $1.83 to $61.85 on the London-based ICE Futures Europe exchange, the lowest since July 2009.

Both benchmarks have collapsed about 20% since Nov. 26, the day before OPEC agreed to leave its production limit unchanged at 30 million barrels a day. U.S. output, already at a three-decade high, will continue to rise in 2015, according to the IEA, which reduced its estimate for oil demand growth in 2015 by 230,000 barrels a day. “We could definitely see $55 next week,” said Tariq Zahir, commodity fund manager at Tyche Capital. “We are probably going to see some violent trading.” Skip York, vice president of energy research at Wood Mackenzie, said the next price target is $45. “The market hasn’t seen the response they’re looking for on the supply side yet,” York said. “We’re now in this environment where I think prices are going to keep drifting down until the market is convinced, until the signal that production growth needs to slow has been received and acted on by operators.”

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“At first it was just oversupply of oil. But now it’s that, plus fear of a world economy that’s growing too slow.”

US Stocks Tumble to Cap Dow’s Worst Week Since 2011 (Bloomberg)

U.S. stocks sank, with the Dow Jones Industrial Average capping its biggest weekly drop in three years, as oil continued to slide and Chinese industrial data raised concern over a global economic slowdown. Materials stocks declined the most in the Standard & Poor’s 500 Index, losing 2.9% as a group, while energy shares dropped 2.2%. IBM, DuPont and Exxon Mobil sank at least 2.9% to lead declines in all 30 Dow stocks. The S&P 500 lost 1.6% to 2,002.33 at 4 p.m. in New York, extending losses in the final hour to cap a weekly drop of 3.5%. The Dow sank 315.51 points, or 1.8%, to 17,280.83. The Dow slid 3.8% for the week, its biggest decline since November 2011. “Clearly the oil situation is driving things,” Randy Warren at Warren Financial said. “At first it was just oversupply of oil. But now it’s that, plus fear of a world economy that’s growing too slow. Those fears are definitely outweighing the positive signs we’re seeing domestically.”

The selloff picked up speed in the final hour as the Dow average plunged more than 100 points and the S&P 500 ended about 2 points above its average price for the last 50 days, a level monitored by technical analysts. At about 2:50 p.m., March futures on the benchmark gauge for U.S. equities slipped below 2,000 for the first time since Nov. 4. More than $1 trillion was erased from the value of global equities this week as oil prices tumbled, raising concern over the strength of the global economy. Oil extended losses today amid speculation that OPEC’s biggest members will defend market share against U.S. shale producers. The IEA cut its forecast for global oil demand for the fourth time in five months.

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“Everyone is trying to squeeze through a very small door.”

Oil Rot Spreading in Credit (Bloomberg)

Credit investors are preparing for the worst. They’re cleaning up their portfolios, selling riskier debt that’s harder to trade in bad times and hoarding longer-term government bonds that do best in souring markets. While investors have pruned energy-related holdings in particular as oil prices plunge, they’re also getting rid of other types of corporate bonds, causing yields to surge to the highest in more than a year. “We believe the pervasive nature of the sell-off is more reflective of overall liquidity concerns in the cash market than of fundamental deterioration,” Barclays analysts Jeffrey Meli and Bradley Rogoff wrote in a report today. “The weakness, while certainly most pronounced in the energy sector, has been broad based.”

Rather than waiting around for a trigger to escalate this month’s selloff, investors are pulling out of dollar-denominated corporate debt now, causing a 0.8% decline in the notes this month, according to a Bank of America Merrill Lynch index that includes investment-grade and junk-rated securities. This would be the first month of losses since September. Yields on the debt have surged to 2.21 percentage points more than benchmark rates, the highest premium in 14 months. While the biggest driver of the selling is plummeting oil prices, the selling extends beyond just energy. Bonds of wireless provider Verizon have fallen 1% this month and debt of HCA, a hospital operator, has dropped 1.2%, Bank of America Merrill Lynch index data show.

Even though the global speculative-grade default rate is less than half its historical average at 2.2%, investors are getting ready for sentiment to turn. When that happens, it may be all the more difficult to get out as hoards of other investors try to sell in a market where trading hasn’t kept pace with the growth of outstanding debt. There’s “very little liquidity” in corporate bonds, especially in lower-rated debt, Bill Gross, who joined Janus Capital in September, said today in a Bloomberg Surveillance interview with Tom Keene. “Everyone is trying to squeeze through a very small door.”

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Just take one look at that energy junk bond chart.

We Have Just Escaped The Earth’s Gravity And Are Now In Space Orbit (Zero Hedge)

Houston, we have a serious problem… With only 20% of US Shale regions remaining economic at these oil price levels, it should not be surprising that the credit risk of the US Energy sector is exploding to near 1000bps… and contagiously infecting the broad HY market… Credit risk in the energy sector is starting to infect the broad HY market – HYG at 2-year yield highs and HYCDX near 15-month wides…

Which signals considerable pain to come for US Energy stocks..

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“It’s starting ..”

U.S. Oil Rigs Drop Most in Two Years, Baker Hughes Says (Bloomberg)

U.S. oil drillers idled the most rigs in almost two years as they face oil trading below $60 a barrel and escalating competition from suppliers abroad. Rigs targeting oil dropped by 29 this week to 1,546, the lowest level since June and the biggest decline since December 2012, services company Baker Hughes said on its website yesterday. As OPEC resists calls to cut output, U.S. producers including ConocoPhillips and Oasis Petroleum have curbed spending. Chevron put its annual capital spending plan on hold until next year. Rigs targeting U.S. oil are sliding from a record 1,609 after a $50-a-barrel drop in global prices, threatening to slow the shale-drilling boom that has propelled domestic production to the highest level in three decades.

“It’s starting,” Robert Mackenzie, oilfield services analyst at Iberia Capital, said. “We knew this day was going to come. It was only a matter of time before the rig count was going to respond. The holiday is upon us and oil prices are falling through the floor.” ConocoPhillips said Dec. 8 that would cut spending next year by about 20%. The Houston-based company is deferring investment in North American plays including the Permian Basin of Texas and New Mexico and the Niobrara formation in Colorado. Oasis, an exploration and production company based in Houston, said Dec. 10 that it’s cutting 2015 spending 44%.

“Our capex will be lower,” Roger Jenkins, chief executive officer of Murphy Oil, an Arkansas-based exploration company, said during a presentation Dec. 10. “I think this idea of lowering capex around 20% is going to be pretty common in the industry.” Even as producers cut budgets and lay down rigs, domestic production is surging, with the yield from new wells in shale formations including North Dakota’s Bakken and Texas’s Eagle Ford projected to reach records next month, Energy Information Administration data show. Oil output climbed to 9.12 million barrels a day in the week ended Dec. 5, the highest in EIA data going back to 1983, and is projected to increase to 9.3 million barrels a day next year.

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“I won’t express my own opinion…”

Don’t Vote ‘Wrong’ Way, EU’s Juncker Urges Greeks (Reuters)

The European Union’s chief executive has given Greeks a stark and unusual warning of major problems if they vote the “wrong” way and radicals win an early parliamentary election. Jean-Claude Juncker, the president of the European Commission, stressed in remarks carried late on Thursday by Austrian broadcaster ORF that he was not trying to insert himself into the Greek political process. In general, EU officials take pains to avoid accusations of interference and Juncker’s remarks went beyond the normal reticence. As the government in Athens faces a possible election and defeat by an untried left-wing party that opposes the terms the EU has set on Greece’s financial bailout, Juncker said he was not averse to seeing “familiar faces” remaining in charge. Prime Minister Antonis Samaras said on Thursday that Greece risked a “catastrophic” return to financial crisis if his government fell as a result of a parliamentary vote he has called for this month to elect a head of state.

Juncker, who was closely involved in managing the euro zone debt crisis when he was prime minister of Luxembourg, said he was sure Greek voters understood the risks of an election that polls show could bring to power the left-wing Syriza party. “I assume that the Greeks – who don’t have an easy life, above all the many poor people – know very well what a wrong election result would mean for Greece and the euro zone,” he said. “I won’t express my own opinion. I just wouldn’t like extremist forces to take the wheel. “I would like Greece to be governed by people with an eye on and a heart for the many little people in Greece – and there are many – and also understand the necessity of European processes.” He said he did not view market ructions in Greece of late as a sign that a new Greek crisis was breaking out.

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“.. the euro zone cannot withstand another full scale recession and will ultimately fracture despite the best efforts of the ECB.”

Albert Edwards: China Deflation Risks Sparking A Eurozone Break-Up (CNBC)

Societe Generale’s uber-bearish strategist Albert Edwards believes that investors are slowly waking up to the idea that the Chinese have a “major deflation problem” and its transition into a more consumer-led economy won’t be a smooth one. Traditionally the country is known for its cheap exports that compete strongly with domestically produced goods around the world. That model is unlikely to change soon, according to Edwards. “The realization that China will be exporting more deflation helps to explain why U.S. inflation expectations continue to plunge despite recent stronger than expected real economy data,” he said in a note on Thursday.

He continues to warn that weakness in emerging markets could seriously impact Germany, the traditional powerhouse for the euro bloc. Germany sees China as one of the biggest buyers of its goods. Edwards said that Germany will eventually have to “walk the walk” and aggressively cut spending as it falls into recession next year. “My own view is that the euro zone cannot withstand another full scale recession and will ultimately fracture despite the best efforts of the ECB,” he said.

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“I am just not perceiving the global economy on the verge of a boom…the risks look to the downside – especially as the effects of lower oil are factored in.”

Would Global Deflation Really Be That Bad? (CNBC)

The collapse in oil process may only be a few months old, but economists are already debating its long-term effects: will the world be gripped in growth-sapping Japanese-style deflation or will the world economy benefit from a period of lower prices? Deflation is classed as when consumer prices turn negative with the theory being that buyers would hold off from making purchases in the hope of further falls. This raises the fear of a prolonged deflationary spiral with the slump becoming so entrenched that it impacts growth and does little for the potential of wage increases. The price of oil has seen a dramatic 40% fall since June and has weighed on headline inflation figures and is likely to continue to do so next year. Consultancy Capital Economics estimate that the energy component of inflation in advanced economies will fall temporarily to around minus 10% next year. Some consumers see little price reductions at the pump as their governments subsidize the commodity, but in the U.S. many have been cheering the drop in oil which has put more money in their pocket.

Bill Blain, a fixed income strategist at Mint Partners argues that lower oil prices does not necessarily translate into growth, however. “Oil price declines are initially hailed as positive growth drivers – but in an already recessionary environment, perhaps they have become a soporific too far?,” he said in a morning note on Friday. “I am just not perceiving the global economy on the verge of a boom…the risks look to the downside – especially as the effects of lower oil are factored in.” Consumer prices in November rose 0.3% for the euro zone, compared to the year before, and the European Central Bank has regularly downgraded its prospects for the next year as 2015 approaches. In the U.S., annual inflation still remains below the 2% goal given by the Federal Reserve. The Bank of England is expecting the U.K.’s inflation rate to fall below 1% next year and China’s number currently sits at a five-year low.

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“In this context, the risk to Canadian banks doesn’t stem necessarily from a narrow view of loans to oil companies, but more from a broad macro risk perspective.”

Falling Oil Threatens Canada’s Bulletproof Banking System (MarketWatch)

While the U.S. financial system – as well as many international banks – has gotten hopped up on a wide assortment of financial opiates and stumbled through more than a dozen bank-fueled crises through the decades, Canada boasts a stellar track record of banking sobriety. However, a spectacular death spiral in crude-oil futures – West Texas Intermediate settled Thursday at $59.95, a more than five-year low – threatens to deliver a serious shock to the banking system of the U.S.’s northern neighbor, according a research note published Thursday by Pavilion Global Markets. Canada ranks as one the world’s five largest energy producers and a net exporter of oil, according to the U.S. Energy Information Administration. So, a big drop in oil would pose several risks to Canada’s oil-dependent economy.

“The drop in oil prices, as mentioned above, will have wide-ranging implications on the Canadian economy,” Pavilion strategists Pierre Lapointe and Alex Bellefleur said in the note. It’s not just that Canada’s banks will find themselves saddled with souring loans from underwater energy producers. The problem, Pavilion argues, is that Canada’s employment rate could suffer as oil-related businesses are forced to close. Here’s how they put it: “In this context, the risk to Canadian banks doesn’t stem necessarily from a narrow view of loans to oil companies, but more from a broad macro risk perspective. As employment in the oil industry declines, a negative income and wealth shock to many households will take place, impacting a variety of loans (credit card, mortgage) on Canadian bank balance sheets.”

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It’s insane what goes on here. Banks get to write laws, and now out in the open.

How Elizabeth Warren Led The Great Swaps Rebellion of 2014 (Bloomberg)

John Carney couldn’t understand why the vote was so close. The Delaware congressman, a Democratic member of the House Financial Services Committee, had been there when a reform to the Dodd-Frank “swaps push-out” passed—in a 55-6 landslide. He’d joined a veto-proof majority, 292-122, to back the reform in a House bill that was throttled by the Democratic Senate. The bank-friendly Democrat had not expected the reform’s quiet return, as a rider in the must-pass “Cromnibus” spending package, to kick off a revolt. “This passed with nearly 300 votes,” said Carney on Thursday night, after the House had voted on the Cromnibus, and as legislators of both parties congratulated him or wished him Merry Christmas. “It would have been more than 300, like some of the other bills we’ve done, if there wasn’t this toxic description of what it might do. Unfortunately, the world we live in, the political world, is one of perception. I try to deal with the facts.”

“Sometimes that’s at odds with the way we do work here, where you get these political narratives that take on a larger than life part of the discussion.” Put it this way: Carney was not Ready for Warren. For the better part of two days, most of his fellow Democrats approached the Cromnibus—which did not de-fund the president’s immigration order, or the bulk of the Affordable Care Act—as a sell-out of cosmic proportion. This started when Massachusetts Senator Elizabeth Warren gave a Wednesday floor speech challenging her colleagues to restore swaps push-out, which prohibited banks from booking derivatives in their own subsidiaries. “The financial industry spent more than $1 million a day lobbying Congress on financial reform, and a lot of that money went to former elected officials and government employees,” said Warren. “And now we see the fruits of those investments. This provision is all about goosing the profits of the big banks.”

The backlash should have been predictable. As Carney recalled, the original bill to change the swaps rule lost some votes after critical media coverage. More specifically, the New York Times reporters Eric Lipton and Ben Protess noticed that Citigroup had practically written the swaps language; its “recommendations were reflected in more than 70 lines of the House committee’s 85-line bill.” Yet it didn’t become “toxic” until the fight over the “Cromnibus.” Warren made the swaps language infamous. In the House, she found an impromptu whip team led by Illinois Representative Jan Schakowsky and the party’s ranking member on the Financial Services Committee, California Representative Maxine Waters. She found an ally in the Minority Leader, California Representative Nancy Pelosi, who took the floor on Thursday to warn that the swaps rule was exactly the sort of time-bomb that could create another financial crisis in the pattern of 2008.

This rattled the Democrats’ appropriators, some of whom were heading for the exits. Virginia Representative Jim Moran spent a good part of Thursday telling reporters that Warren was “running for president” and drowning Democrats in her ambition. “She obviously has a lot of influence,” said Moran after the votes. “The media listens to everything she says.”

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Here’s what Warren doesn’t like.

$303 Trillion In Derivatives US Taxpayers Are Now On The Hook For (Zero Hedge)

Courtesy of the Cronybus(sic) last minute passage, government was provided a quid-pro-quo $1.1 trillion spending allowance with Wall Street’s blessing in exchange for assuring banks that taxpayers would be on the hook for yet another bailout, as a result of the swaps push-out provision, after incorporating explicit Citigroup language that allows financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp, explicitly putting taxpayers on the hook for losses caused by these contracts. Recall:

Five years after the Wall Street coup of 2008, it appears the U.S. House of Representatives is as bought and paid for as ever. We heard about the Citigroup crafted legislation currently being pushed through Congress back in May when Mother Jones reported on it. Fortunately, they included the following image in their article:

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And the CIA once again thinks it’s in control of toppling a government.

Venezuela’s Got $21 Billion. And Owes $21 Billion (Bloomberg)

Of all the financial barometers highlighting the crisis in Venezuela, this may be the one that unnerves investors the most as oil sinks: The country’s foreign reserves only cover two years of bond payments. The government and state-run oil company owe $21 billion on overseas bonds by the end of 2016, an amount equal to about 100% of reserves. Those figures explain why derivatives traders aren’t only betting that a default is almost certain but that it will most likely happen within a year. The 48% collapse in crude in the past six months stripped President Nicolas Maduro of the one thing – windfall profits for the country’s No. 1 export – that was preventing a full-blown crisis.

Even before oil started sinking, the OPEC member had depleted 30% of its international reserves in the past six years, the result of billions of dollars of capital flight triggered by the socialist push implemented by Maduro’s mentor and predecessor, the late Hugo Chavez. “These are panic capitulation levels,” Kathryn Rooney Vera, an economist at Bulltick Capital Markets, said in an e-mailed response to questions. “Oil’s continued price decline is ratcheting up risk aversion to exporters, and even more so for an economy already as distorted as that of Venezuela.” The cost to insure Venezuelan debt against non-payment over the next 12 months surged to about 6,928 basis points yesterday in New York, according to CMA data, widening the price gap over five-year protection to a record.

The upfront cost of one-year contracts implies a 65% probability of default by December 2015. Swaps prices show a 94% chance of non-payment by 2019. Venezuela’s benchmark bonds due 2027 have fallen for seven straight days, reaching 41.22 cents on the dollar as of 12:02 p.m. in New York today, the lowest in 16 years. Maduro said Dec. 10 that the government is doing everything it can to boost the price of oil, which he says should be about $100 a barrel. The country advocated unsuccessfully for production cuts at November’s meeting of members OPEC. Yesterday, Maduro said the country could export cement to bring more dollars into the country.

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” .. there is no evidence or honest economic logic to support the proposition that – over any reasonable period of time – a nation can become richer by making its people poorer ..”

Japan’s Lemmings March Toward The Cliff Chanting “Abenomics” (David Stockman)

According to Takahiro Mitani, trashing your currency, destroying your bond market and gutting the real wages of domestic citizens is a sure fire ticket to economic success. Yes, that’s what the man says, “I have no doubt that the economy is in a recovery trend if you look at the long run….” After two years of hoopla and running the BOJ’s printing presses red hot, however, there is not a shred of evidence that Abenomics will lead to any such thing. In fact, after the recent markdown of Q3 GDP even deeper into negative territory, Japan’s real GDP is no higher now than it was the day Abenomics was launched in early 2013; and, in fact, is no higher than it was on the eve of the global financial crisis way back in 2007.

In the meanwhile, the Yen has lost 40% of its value and teeters on the brink of an uncontrolled free fall. Currency depreciation, of course, is supposedly the heart of the primitive Keynesian cure on which Abenomics is predicated, but there is no evidence or honest economic logic to support the proposition that – over any reasonable period of time – a nation can become richer by making its people poorer. That’s especially true in the case at hand, which is to say, a Pacific archipelago of barren rocks. Japan imports virtually 100% of every BTU and every ton of metals and other raw materials consumed by its advanced $5 trillion industrial economy.

Yet thanks to the mad money printer who Prime Minister Abe seconded to the BOJ, Hiroki Kuroda, import prices are up by a staggering 30% since 2012. Even with oil prices now collapsing, the yen price of crude oil imports is still higher than it was two years back. Not surprisingly, input costs for Japan’s legions of small businesses have soared, and the cost of living faced by its legendary salary men has risen far faster than wages. Accordingly, domestic businesses that supply the home market—and that is the overwhelming share of Japan’s output—are being driven to the wall, bankruptcies are at record highs and the real incomes of Japan’s households have now shrunk for 16 consecutive months and are down by 6% compared to 2 years ago.

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A view of Russia we don’t often see here in the west.

Putin 2000 – 2014, Midterm Interim Economic Results (Awara)

A study released today by Awara Group, a Russia-based consulting firm, shows that Russia’s economy is not as dependent on oil and gas as is commonly claimed. Having researched the development of key indicators of the economy from 2000 to 2013, the authors of the study want to debunk the media story that Russia’s governments under Putin have been supposedly exclusively relying on an economic model based on oil and gas rents while neglecting the need to modernize and diversify the economy. It turns out that quite the opposite is true.

The crisis-torn economy battered by years of robber capitalism and anarchy of the 1990’s, which Putin inherited in 2000, has now reached sufficient maturity to justify a belief that Russia can make the industrial breakthrough that the President has announced. “The Russian economy is much more diversified and modernized than critics claim. The contention that it is only about oil and gas is total nonsense”, says Jon Hellevig, chief researcher for the study. “This is why Russia will not only stay afloat under the conditions of sanctions, but actually will make the industrial breakthrough that President Putin has announced”, Hellevig continues. The study reveals a range of impressive indicators on the development of the economy between 2000 and 2013 and the health of the Russian economy:

  1. The share of natural resources rents in GDP (oil, gas, coal, mineral, and forest rents) more than halved between 2000 to 2012 from 44.5% to 18.7%. The actual share of oil and gas was 16%.
  2. Russian industrial production has grown more than 50% while having undergone a total modernization at the same time.
  3. Production of food has grown by 100% in 2000 – 2013.
  4. Production of cars has more than doubled at the same time that all the production has been totally remodeled.
  5. Russian exports have grown by almost 400%, outdoing all major Western countries.
  6. Growth of exports of non-oil & gas goods has been 250%.
  7. Russia’s export growth has more than doubled compared with the competing Western powers.
  8. Oil & gas does not count for over 50% of state revenues as has been claimed, but only 27.4%. Top revenue source is instead payroll taxes.
  9. Russia’s total tax rate at 29.5% is among lowest of developed countries, non-oil & gas total tax rate is half that of the Western countries.
  10. Russia’s GDP has grown more than tenfold from 1999 to 2012.
  11. Public sector share of employment in Russia is not high in comparison with developed economies. State officials make up 17.7% of Russia’s total work force, which situates it in the middle of the pack with global economies.
  12. Russia’s labor productivity is not 40% of the Western standards as is frequently claimed, but rather about 80%.

Far from “relying” on oil & gas, the Russian government is engaged in massive investments in all sectors of the economy, biggest investments going to aviation, shipbuilding, and manufacturing of high-value machinery and technological equipment. Totally contrary to these facts, the Western media, financial analysts, and even leaders such as U.S. President Obama keep parroting the refrain that “Russia only relies on oil and gas” and “Russia does not produce anything”. Clearly, Barack Obama has not been analyzing the Russian economy, so this must mean that those whose job it is to do so are misleading the President.

We strongly believe that everyone benefits from knowing the true state of Russia’s economy, its real track record over the past decade, and its true potential. Having knowledge of the actual state of affairs is equally useful for the friends and foes of Russia, for investors, for the Russian population – and indeed for its government, which has not been very vocal in telling about the real progress. I think there is a great need for accurate data on Russia, especially among the leaders of its geopolitical foes. Correct data will help investors to make a profit. And correct data will help political leaders to maintain peace. Knowing that Russia is not the economic basket case that it is portrayed to be would help to steer the foes from the collision course with Russia they have embarked on.

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Translation: we’re about to go broke.

Only ‘Minimal’ Risk Of Default: Ukrainian Official (CNBC)

Ukraine is at “minimal” risk of defaulting on its debt repayments, according to an official in the country’s recently-appointed government, despite a currency in freefall and an apparent $15-billion black hole in its bailout from the IMF. “We do have economic difficulties, but that is something that is going into the debate with the IMF,” Dmytro Shymkiv, deputy head of presidential administration, told CNBC. “The risk of default is minimal,” he added, arguing that 95% of the country was not suffering as a result of the military conflict in the east of Ukraine. A further $15 billion may be needed to bailout the struggling country, on top of the $17-billion loan package the IMF worked out for the troubled country, and Prime Minister Arseny Yatseniuk appealed for Western help to stop a default on Thursday.

Ukraine’s currency, the hryvnia, has lost over 90% of its value against the U.S. dollar to date this year, as conflict raged on its borders. Inflation is spiralling, and the country is facing a future without cheap gas supplies from neighbor Russia, after their fallout over the deposition of former Ukrainian President Viktor Yanukovych and subsequent emergence of a more pro-European government in Ukraine. The economies of Donetsk and Luhansk, the areas where fighting between the Ukrainian army and pro-Russian separatists is worst, have ground to a halt – but these account for close-to a fifth of the country’s economy, according to Yatseniuk.

There is some hope that negotiations to resolve the conflict may re-open soon, with President Petro Poroshenko saying Friday morning that the country had experienced its first 24 hours of proper ceasefire in seven months. Shymkiv, the former head of Microsoft Ukraine who is now tasked with implementing much-needed administrative, social and economic reforms in the country, said: “We’re trying to bring our knowledge and experience to the development of the country. That’s the only way we can bring it out of the mis-development of the economy.” Asked about potential conflict between Yatseniuk and Poroshenko, he said: “There aren’t conflicts between President and Prime Minister. We have no time to have disputes.”

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He didn’t say he was willing to take any losses …

Ukraine’s Chocolate King President Not Sweet On Keeping Promise (Reuters)

The Chocolate King is finding it difficult to relinquish his throne. Petro Poroshenko, one of Ukraine’s richest men and owner of a sweets empire, made an unusual promise last spring while campaigning to be president – if elected, he would sell most of his business assets. “As president of Ukraine, I only want to concern myself with the good of the country and that is what I will do,” he told an interviewer. Poroshenko won the election, but he hasn’t succeeded yet at keeping his campaign promise. With his country at war with Russian-backed separatists in the east, the economy faltering and its currency weakening, Ukraine’s 49-year-old president hasn’t sold any of his assets, including his most valuable one: a majority stake in Roshen Confectionery Corp, Ukraine’s biggest sweets maker. His promise appears to be a victim of the very problems that face him as president.

Executives at the two financial firms that Poroshenko has hired to help sell his assets caution that deals, particularly in former Soviet republics and eastern Europe, can often take a year or more. But they also concede that their client’s timing is terrible. “It’s clearly not a good time to sell,” said Giovanni Salvetti, managing director of Rothschild CIS, which is trying to sell Roshen. “I hope the situation will improve in the first or second quarter” of 2015. Makar Paseniuk, a managing director at ICU in Kiev, which acts as Poroshenko’s financial adviser, said there is an agreement to sell one of his other assets. He declined to identify it but said the deal has not closed and it’s not clear when or if it will. Besides Roshen, Poroshenko’s portfolio includes numerous other assets, including real estate and investments in a bank, an insurance company and a shipyard in Crimea. He also owns a Ukrainian television station that he has said he will keep.

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Nice little history lesson. Must read, certainly if you don’t know what a ute is.

Australia’s Once-Vibrant Auto Industry Crashes in Slow Motion (NY Times)

There has been a car industry in Australia for about as long as there have been cars. But within two or three years, the last of the continent’s auto plants will go dark. At the turn of the 20th century, while visionaries in the United States and Europe labored on horseless carriages, Australians were also creating them. In 1896 in Melbourne, Herbert Thomson built a steam car for sale using Dunlop pneumatic tires made in Australia. In 1901, Harley Tarrant began selling cars made mostly from Australian parts. Over the next century, American automakers including General Motors, Ford and Chrysler came to dominate the market, turning out cars from factories set up in nearly every Australian state. Toyota, Nissan and Mitsubishi later joined them.

But the end is nigh. Auto plants have been closing, one by one, over five decades. The three remaining carmakers here — Toyota, Ford and the Holden subsidiary of G.M. — are shutting their manufacturing operations over the next few years. Government policy has played a large role in the contraction; the Australian market has gone from one of the world’s most protected to possibly the least-protected among auto-manufacturing nations. The Australian car industry had always benefited from barriers to imported vehicles. Those who bought early Thomson steam cars and gasoline-powered Tarrants were industrialists, wealthy ranchers, bankers and politicians who saw merit in protecting the home industry.

So early adopters in the 1900s who wanted foreign-made cars, and there were plenty of them, could only import the chassis complete with engine, transmission, axles and wheels — and the hood and the grille. The rest of the car had to be manufactured, mostly by hand, by body builders who generally evolved from outfits that had made coaches and buggies for the horse trade. Holden started in the leatherwork and saddlery business in 1856, but by the early 20th century was making motorcycle sidecars and car bodies for chassis from G.M. In 1931, G.M. bought Holden Motor Builders and plans were laid for a distinctly Australian car, which finally arrived after World War II, in 1948.

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If confirmed, this is the biggest discovery in eons.

Did A European Spacecraft Detect Dark Matter? (Christian Science Monitor)

Astronomers may finally have detected a signal of dark matter, the mysterious and elusive stuff thought to make up most of the material universe. While poring over data collected by the European Space Agency’s XMM-Newton spacecraft, a team of researchers spotted an odd spike in X-ray emissions coming from two different celestial objects – the Andromeda galaxy and the Perseus galaxy cluster. The signal corresponds to no known particle or atom and thus may have been produced by dark matter, researchers said. “The signal’s distribution within the galaxy corresponds exactly to what we were expecting with dark matter – that is, concentrated and intense in the center of objects and weaker and diffuse on the edges,” study co-author Oleg Ruchayskiy, of the École Polytechnique Fédérale de Lausanne (EPFL) in Switzerland, said in a statement.

“With the goal of verifying our findings, we then looked at data from our own galaxy, the Milky Way, and made the same observations,” added lead author Alexey Boyarsky, of EPFL and Leiden University in the Netherlands. Dark matter is so named because it neither absorbs nor emits light and therefore cannot be directly observed. But astronomers know dark matter exists because it interacts gravitationally with the “normal” matter we can see and touch. And there is apparently a lot of dark matter out there: Observations of star motion and galaxy dynamics suggest that about 80% of all matter in the universe is “dark,” exerting a gravitational force but not interacting with light.

Researchers have proposed a number of different exotic particles as the constituents of dark matter, including weakly interacting massive particles (WIMPs), axions and sterile neutrinos, hypothetical cousins of “ordinary” neutrinos (confirmed particles that resemble electrons but lack an electrical charge). The decay of sterile neutrinos is thought to produce X-rays, so the research team suspects these may be the dark matter particles responsible for the mysterious signal coming from Andromeda and the Perseus cluster. If the results — which will be published next week in the journal Physical Review Letters — hold up, they could usher in a new era in astronomy, study team members said. “Confirmation of this discovery may lead to construction of new telescopes specially designed for studying the signals from dark matter particles,” Boyarsky said. “We will know where to look in order to trace dark structures in space and will be able to reconstruct how the universe has formed.”

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Weird. Just plain weird.

The Chinese Mystery Of Vanishing Foreign Brides (FT)

Police in central China have launched an investigation into the disappearance of more than 100 Vietnamese women who married local bachelors and had been living in villages around the city of Handan. The women all disappeared at the same time in late November, along with a Vietnamese woman who married a local villager 20 years ago and had introduced most of the brides to local men in recent months in exchange for a fee. Faced with severe gender imbalances as a result of China’s decades-old one-child policy and a traditional preference for male children, many Chinese men are unable to find suitable brides and resort to paying for wives from poorer Asian countries such as Vietnam.

Particularly in more traditional rural parts of China, marriage is highly transactional and men are increasingly expected to provide a house, car, electrical appliances and a steady income before a woman or their family will consider him eligible for marriage. For those who cannot afford the expensive requirements of Chinese brides, paying for a bride from Vietnam or elsewhere in the region can be a much cheaper option. As a consequence of the demand for cheap foreign brides, China has an enormous problem with human trafficking. “My brother worked outside the village and was too poor to afford a local wife so my family paid Rmb100,000 to get a wife from Vietnam through that old Vietnamese woman who came here 20 years ago,” said the brother of Bai Baoxing, a local man whose Vietnamese wife disappeared with the others barely a month after they were married.

Mr Bai’s brother said the new bride spoke decent Mandarin Chinese and he and his family were now wondering whether she was even Vietnamese. Chinese media reports identified the absconded Vietnamese marriage broker as Wu Meiyu. After living in a village on the outskirts of Handan for 20 years, she started offering introductions to Vietnamese brides for a fee at the start of this year. An officer in the local Handan city police office told the Financial Times that provincial police were now handling the case and they could not comment on the ongoing investigation. Chinese media are filled with cases of women from poor rural areas who are abducted and sold into marriage, as well as cases involving foreign brides.

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