Dec 032018
 
 December 3, 2018  Posted by at 10:30 am Finance Tagged with: , , , , , , , , , ,  


Jules Adler Panorama de Paris vu du Sacré Coeur 1935

 

How Trump’s Bashing Of The New York Times and CNN Has Benefited All (F24)
Dow Futures Surge After Trump And Xi Agree To Pause Trade War (CNBC)
China Agrees To ‘Reduce And Remove’ Tariffs On US Cars: Trump (AFP)
UK Faces Constitutional Crisis Over Brexit Legal Advice – Labour (BBC)
Qatar To Withdraw From OPEC, Focus On LNG Exports (R.)
Macron Tells PM To Hold Talks, Mulls State Of Emergency (R.)
France’s Meltdown, Macron’s Disdain (Milliere)
Deutsche Bank Takeover Speculation Intensifies (ZH)
Merkel Protege Suggests Reducing Gas Flow Through Nord Stream 2 Pipeline (R.)
EU Delays Euro Zone Budget, Deposit Insurance Plans (R.)
World Bank Promises $200 Billion In 2021-25 Climate Cash (AFP)

 

 

A topic I’ve addressed a lot. It’s just that I would say “The New York Times and CNN’ Bashing of Trump”, not the other way around., After all, who started? Read the whole thing, it shows how smart Trump is when it comes to media.

“Concluding his December 2017 interview with The New York Times, Trump said: “Another reason that I’m going to win another four years is because newspapers, television, all forms of media will tank if I’m not there because without me, their ratings are going down the tubes […] So they basically have to let me win.“

How Trump’s Bashing Of The New York Times and CNN Has Benefited All (F24)

Although Donald Trump has an antagonistic relationship with The New York Times and CNN, the ‘Trump bump’ has been a business boon to these outlets, while the US president has been keen to use them to pursue publicity and legitimacy. While Trump often rails against the US media generally – most notably as “enemies of the people” – the country’s foremost newspaper of record, The New York Times, and its oldest 24-hour news network, CNN, are frequently singled out for opprobrium as “The Failing New York Times” and “Fake News CNN”. The acrimony between Trump and CNN reached its zenith on November 8 when the White House revoked the press access of its reporter Jim Acosta after a rancorous post-midterm news conference – only for his press pass to be restored thanks to judicial review three days later.

Meanwhile the vitriolic rhetoric from the White House has provoked considerable alarm amongst the press. New York Times’ publisher A.G. Sulzberger warned on July 30 that Trump’s increasingly splenetic attacks on the news media “will lead to violence”, before its sister paper The Boston Globe led the way in launching the #EnemyofNone campaign against the president’s relentless attacks on the American press. Despite these tensions, The New York Times – like CNN – is far from failing. On the contrary, both outlets are enjoying booming subscription and viewer figures thanks to Trump’s presidency. From Trump’s election on November 8, 2016 until the end of that month, The New York Times saw an increase of 132,000 in paid subscriptions – 10 times the growth rate in November 2015.

This trajectory has continued. “NYT has well surpassed initial expectations for subscriber growth […] following the ‘Trump bump’,” JP Morgan analyst Alexia Quadrani wrote to clients in April 2018. The New York Times Company’s share price outperformed those of Apple, Amazon and Facebook between Trump’s election in 2016 and the end of June 2018, soaring by 141 percent. “When I talked to the [executive] editor of The New York Times [Dean Baquet], he told me with a smile on his face that Donald Trump has done at least one good thing – and that is that he has boosted the circulation of The New York Times,” Marvin Kalb, a senior fellow at The Brookings Institution in Washington D.C. and author of “Enemy of the People”, a book on Trump’s hostile regard towards the US media, told FRANCE 24.

“People who subscribe to and read [The New York] Times are for the most part people who oppose Trump, who do not think it is fake news,” explained Robert Shapiro, a professor of political science at Columbia University, whose area of expertise includes the relationship between mass media and US politics, in an interview with FRANCE 24. The paper has “used the facts of the Trump presidency to draw attention to the bad things that he is doing, and that’s attracted readers who want to get information to use against Trump”, Shapiro continued.

Read more …

Anything to buy and sell some more.

Dow Futures Surge After Trump And Xi Agree To Pause Trade War (CNBC)

U.S. stock market futures surged after U.S. President Donald Trump and Chinese President Xi Jinping agreed to a 90-day ceasefire in the trade war that has weighed heavily on global stock markets for most of 2018. Futures on the Dow Jones Industrial Average jumped 488 points as of 11:31 p.m. ET Sunday. The advance implied a 471.54 point gain for the Dow at Monday’s open. Meanwhile, S&P 500 futures added around 1.71 percent, while futures on the Nasdaq-100, home of many technology companies which sell to China, jumped about 2.75 percent. Futures on oil and copper jumped on hopes a possible new China-U.S. trade agreement would boost global economic growth.

The two leaders, who met for dinner on Saturday at the G-20 summit in Argentina, agreed to hold off on additional tariffs on each other’s goods at the start of the new year to allow for talks to continue. The U.S. agreed to leave tariffs on more than $200 billion worth of Chinese products at 10 percent. If after 90 days the two countries are unable to reach an agreement, that rate will be raised to 25 percent, according to the White House. Trade negotiations will address forced technology transfer and intellectual property. “The explicit delay in tariffs is on the positive end of expectations,” said Helen Qiao, China and Asia economist with Bank of America Lynch, in a note to clients. “In contrast to the fear — especially in Asia —that the hawks in US administration would make impossible demands, evidence of President Trump working towards a trade deal with China has emerged.”

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Something tells me they’ll want something in return.

China Agrees To ‘Reduce And Remove’ Tariffs On US Cars: Trump (AFP)

China has agreed to scale back tariffs on imported US cars, President Donald Trump said Sunday, one day after agreeing with Xi Jinping to a ceasefire in the trade war between the world’s top two economies. Asia stocks had rallied on the news that Washington and Beijing would not impose any new tariffs during a three-month grace period, during which the two sides are meant to finalize a more detailed agreement. “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40 percent,” Trump said on Twitter. On Saturday, Trump and Xi agreed to put a stop to their tit-for-tat tariffs row, which had roiled world markets for months.

The Republican president called their agreement – which Washington hopes will help close a yawning trade gap with the Asian giant and help protect US intellectual property – an “incredible” deal. Trump agreed to hold off on his threat to slap 25 percent tariffs on $200 billion worth of Chinese goods from January 1, leaving them at the current 10% rate. In return, China is to purchase “very substantial” amounts of agricultural, energy, industrial and other products from the US. In July, China reduced auto import duties from 25 percent to 15 percent, a boon for international carmakers keen to grow sales in the world’s largest auto market. But as trade tensions ratcheted up with the US this summer, Beijing retaliated by slapping vehicles imported from the US with an extra 25 percent tariff, bringing the total tariff rate to 40%.

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May’s worst crisis to date. Parliament first votes on December 11.

UK Faces Constitutional Crisis Over Brexit Legal Advice – Labour (BBC)

The UK faces a “constitutional crisis” if Theresa May does not publish the full legal advice on her Brexit deal on Monday, Labour has warned. The PM says the advice is confidential. but some MPs think ministers do not want to admit it says the UK could be indefinitely tied to EU customs rules. Ex-foreign secretary Boris Johnson has joined calls for its publication, which critics say could sink the PM’s deal. Attorney General Geoffrey Cox will make a statement about it on Monday. He is set to publish a reduced version of the legal advice – despite calls from MPs from all parties to publish a full version.

His statement to the House of Commons will be followed by five days of debate on the deal. MPs say the statement from the attorney general does not respect a binding Commons vote last month, which required the government to lay before Parliament “any legal advice in full”. Labour is planning to join forces with other parties, including the DUP, who keep Mrs May in power, to initiate contempt of Parliament proceedings unless the government backs down. Shadow Brexit secretary Sir Keir Starmer told Sky News: “If they don’t produce [the advice] tomorrow (Monday) then we will start contempt proceedings. This will be a collision course between the government and Parliament.”

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Reuters manages to do an entire article on this without mentioning the Saudi-led Qatar boycott even once. Well done!

Qatar To Withdraw From OPEC, Focus On LNG Exports (R.)

Qatar said on Monday it was quitting OPEC from January 2019 but would attend the oil exporter group’s meeting this week, saying the decision meant Doha could focus on cementing its position as the world’s top liquefied natural gas (LNG) exporter. Doha, one of the smallest oil producers in OPEC, is locked in a diplomatic dispute with the group’s de facto leader Saudi Arabia but said the move to leave OPEC was not driven by politics. Minister of State for Energy Affairs Saad al-Kaabi told a news conference that Qatar, which he said been a member of OPEC for 57 years, would still attend the group’s meeting on Thursday and Friday this week, and would abide by its commitments.

“Qatar has decided to withdraw its membership from OPEC effective January 2019 and this decision was communicated to OPEC this morning,” the minister said. “For me to put efforts and resources and time in an organization that we are a very small player in and I don’t have a say in what happens … practically it does not work, so for us it’s better to focus on our big growth potential,” he said. [..] Qatar has oil output of only 600,000 barrels per day (bpd), compared with the 11 million bpd produced by Saudi Arabia, the group’s biggest oil producer and world’s biggest exporter. But Doha is an influential player in the global LNG market with annual production of 77 million tonnes per year, based on its huge reserves of the fuel in the Gulf.

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Perhaps the best indicator of where Macron finds himself are the policemen taking off their helmets to show solidarity with the gilets jaunes.

Macron Tells PM To Hold Talks, Mulls State Of Emergency (R.)

Riot police on Saturday were overwhelmed as protesters ran amok in Paris’s wealthiest neighborhoods, torching dozens of cars, looting boutiques and smashing up luxury private homes and cafes in the worst disturbances the capital has seen since 1968. The unrest began as a backlash against fuel tax hikes but has spread. It poses the most formidable challenge yet to Macron’s presidency, with the escalating violence and depth of public anger against his economic reforms catching the 40-year-old leader off-guard and battling to regain control.

After a meeting with members of his government on Sunday, the French presidency said in a statement that the president had asked his interior minister to prepare security forces for future protests and his prime minister to hold talks with political party leaders and representatives of the protesters. A French presidential source said Macron would not speak to the nation on Sunday despite calls for him to offer immediate concessions to demonstrators, and said the idea of imposing a state of emergency had not been discussed. Arriving back from the G20 summit in Argentina, Macron had earlier rushed to the Arc de Triomphe, a revered monument and epicenter of Saturday’s clashes, where protesters had scrawled “Macron resign” and “The yellow vests will triumph”.

The “yellow vest” rebellion erupted out of nowhere on Nov. 17, with protesters blocking roads across France and impeding access to some shopping malls, fuel depots and airports. Violent groups from the far right and far left as well as youths from the suburbs infiltrated Saturday’s protests, the authorities said. Government spokesman Benjamin Griveaux had indicated the Macron administration was considering imposing a state of emergency. The president was open to dialogue, he said, but would not reverse policy reforms.

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A president with a low enough approval rating and etractors that are sufficiently organized will always have a hard time.

France’s Meltdown, Macron’s Disdain (Milliere)

On November 11th, French President Emmanuel Macron commemorated the 100th anniversary of the end of World War I by inviting seventy heads of state to organize a costly, useless, grandiloquent “Forum of Peace” that did not lead to anything. He also invited US President Donald Trump, and then chose to insult him. In a pompous speech, Macron – knowing that a few days earlier, Donald Trump had defined himself as a nationalist committed to defending America – invoked “patriotism”; then defined it, strangely, as “the exact opposite of nationalism”; then called it “treason”. In addition, shortly before the meeting, Macron had not only spoken of the “urgency” of building a European army; he also placed the United States among the “enemies” of Europe.

This was not the first time Macron placed Europe above the interests of his own country. It was, however, the first time he had placed the United States on the list of enemies of Europe. President Trump apparently understood immediately that Macron’s attitude was a way to maintain his delusions of grandeur,as well as to try to derive a domestic political advantage. Trump also apparently understood that he could not just sit there and accept insults. In a series of tweets, Trump reminded the world that France had needed the help of the USA to regain freedom during World Wars, that NATO was still protecting a virtually defenseless Europe and that many European countries were still not paying the amount promised for their own defense.

Trump added that Macron had an extremely low approval rating (26%), was facing an extremely high level of unemployment, and was probably trying to divert attention from that. Trump was right. For months, the popularity of Macron has been in free fall: he is now the most unpopular French President in modern history at this stage of his mandate. The French population has turned away from him in droves. Unemployment in France is not only at an alarmingly high level (9.1%); it has been been alarmingly high for years. The number of people in poverty is also high (8.8 million people, 14.2% of the population). Economic growth is effectively non-existent (0.4% in the third quarter of 2018, up from 0.2% the previous three months). The median income (20,520 euros, or $23,000, a year,) is unsustainably low. It indicates that half the French live on less than 1710 euros ($1946) a month. Five million people are surviving on less than 855 euros ($973) a month.

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Deutsche is the archetypical too big to fail hot potato. The Fed must help, and so does Merkel. But to what end?

Deutsche Bank Takeover Speculation Intensifies (ZH)

Since taking over troubled German lender Deutsche Bank back in April, Christian Sewing has watched the recidivist lender’s troubles go from bad to worse. On Friday, the bank’s shares reached an all-time low; they’re now down 50% YTD, making Deutsche the worst performer in a poorly performing index of the world’s largest global banks. The latest selloff was inspired by the Frankfurt prosecutor’s office deciding to raid six Deutsche buildings, including the bank’s headquarters The raid, which continued for two days, doubled as the first public revelation about the latest criminal scandal involving Europe’s biggest bank by assets, which has already paid $18 billion in legal penalties since the financial crisis.

Prosecutors revealed that they were investigating at least two employees in the bank’s wealth management unit (part of the division overseen by Sewing before he took the CEO job) for allegedly helping customers set up accounts in offshore tax shelters and helping criminals launder their ill-gotten gains – allegations that prosecutors said were inspired by the infamous ‘Panama Papers’ leak. During their raid, prosecutors searched the offices of five senior Deutsche executives, including the bank’s chief compliance officer, who was rumored to be leaving the bank in a report published just days before nearly 200 police officers, tax inspectors and prosecutors showed up outside Deutsche’s international headquarters and demanded that everybody step away from their computers.

Given the abysmal week the bank just had, it’s hardly surprising that the financial media has published a barrage of negative stories featuring anonymously sourced quotes from Deutsche “investors” effectively demanding that, if Sewing can’t get his shit together in the next quarter or two, he will need to abandon the “strategic alternatives” (cost-cutting, shifting the bank’s investment strategy to emphasize growth in wealth management) that he championed as a road toward salvation (alongside cost-cutting, of course) and seriously consider a sale.

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Nordstream2 would bankrupt Ukraine. Hence the anti-Russia desperation.

Merkel Protege Suggests Reducing Gas Flow Through Nord Stream 2 Pipeline (R.)

Germany must answer urgent, growing political concerns about the planned Nord Stream 2 gas pipeline project given Russia’s seizure of three Ukrainian ships and their crew off the coast of Crimea, a senior German conservative said on Sunday. Annegret Kramp-Karrenbauer, a top candidate to replace Chancellor Angela Merkel as leader of the Christian Democrats, told public broadcaster ARD it would be “too radical” to withdraw political support for the project, but Berlin could reduce the amount of gas to flow through the pipeline. Russia is resisting international calls to release three Ukrainian ships seized last weekend in the Kerch Strait near the Crimea region that Moscow illegally annexed from Ukraine in 2014.

Moscow has accused the 24 sailors of illegally crossing the Russian border, which Ukraine denies. After meeting with Russian President Vladimir Putin, Merkel on Saturday called on Russia to release the sailors and allow free shipping access to the Sea of Azov, but stopped short of endorsing any additional sanctions against Moscow. Kramp-Karrenbauer is a close Merkel ally but has taken a firmer stance on Russia’s actions in recent days. On Friday, she told Reuters the EU and the US should consider banning from their ports Russian ships originating from the Sea of Azov in response to the incident. She told ARD on Sunday that it was time to draw a firmer line against Russian actions, including its annexation of Crimea and its support for separatists in eastern Ukraine.

[..] Her suggestion of banning Russian ships from European ports triggered criticism from some Social Democrats, including former foreign minister Sigmar Gabriel, who urged calm and accused Ukraine of trying to drag Germany into a war with Russia.

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They’re still dead set on more Europe.

EU Delays Euro Zone Budget, Deposit Insurance Plans (R.)

EU finance ministers will agree on Monday to give the euro zone bailout fund new responsibilities, but they will delay decisions on the euro zone budget and a deposit guarantee scheme after failing to reach agreement, a draft document showed. The ministers will discuss deeper economic integration of the 19 countries sharing the euro, to prepare the single currency bloc for the next potential crisis. However, after a year of negotiations, fraught with political difficulties, little of the original ambition, championed by French President Emmanuel Macron, remains.

The two flagship ideas – a separate budget for euro zone countries to help stabilize their economies and a deposit guarantee scheme to make all euro zone bank deposits safe – are too controversial and will be worked on further until June 2019, according to the draft document, seen by Reuters. In the case of the deposit guarantee scheme, mistrust among euro zone countries is so great that they could not even agree on a roadmap for beginning political negotiations on EDIS (European Deposit Insurance Scheme), as mandated by EU leaders. “Further technical work is still needed to agree on a roadmap. We will establish a High-level working group with a mandate to work on next steps. The High-level group should report back by June 2019,” said the draft report by EU finance ministers.

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Advice: don’t support anything the World Bank is involved in. They are not your friends.

World Bank Promises $200 Billion In 2021-25 Climate Cash (AFP)

The World Bank on Monday unveiled $200 billion in climate action investment for 2021-25, adding this amounts to a doubling of its current five-year funding. The World Bank said the move, coinciding with a UN climate summit meeting of some 200 nations in Poland, represented a “significantly ramped up ambition” to tackle climate change, “sending an important signal to the wider global community to do the same.” Developed countries are committed to lifting combined annual public and private spending to $100 billion in developing countries by 2020 to fight the impact of climate change — up from 48.5 billion in 2016 and 56.7 billion last year, according to latest OECD data.

Southern hemisphere countries fighting the impact of warming temperatures are nonetheless pushing northern counterparts for firmer commitments. In a statement, the World Bank said the breakdown of the $200 billion would comprise “approximately $100 billion in direct finance from the World Bank.” Around one third of the remaining funding will come from two World Bank Group agencies with the rest private capital “mobilised by the World Bank Group.” “If we don’t reduce emissions and build adaptation now, we’ll have 100 million more people living in poverty by 2030,” John Roome, World Bank senior director for climate change, warned. “And we also know that the less we address this issue proactively just in three regions – Africa, South Asia and Latin America – we’ll have 133 million climate migrants,” Roome told AFP.

Read more …

Nov 292017
 
 November 29, 2017  Posted by at 10:06 am Finance Tagged with: , , , , , , , , , ,  


Claude Monet The Manneporte (Étretat) 1883

 

VIX – From Fear Index To Greed Index (Tchir)
When VIX Trade Finally Blows Up, It Could Get Ugly All Over (MW)
DB’s “2018 Credit Outlook” – Bearish Not Benign Conclusion (ZH)
The GOP Tax Bill: Fuggedaboutit! (Stockman)
Number Of US Store Closings Triples From Last Year (Snyder)
Trump Deserves Some Credit for the Rally in Stocks (A. Gary Shilling)
Fed Chair Nominee Jerome Powell Says Too Big To Fail Is Over (BI)
Britain Close To Deal On Brexit Bill With EU (R.)
Former New Zealand PM John Key Lied About Mass Surveillance Program (NZH)
Senior Saudi Prince Freed In $1 Billion Settlement Agreement (R.)
Europe Needs a Way to Prevent the Next Greek-Style Debt Crisis (BBG)
Controversial Glyphosate Weedkiller Wins New 5-Year Lease In Europe (G.)
New Zealand Fault Line Wakes Up: “We Must Think Japan 2011 Ruptures” (SHTF)
Libya “Chose” Freedom, Now It Has Slavery (CP)
The EU Created Libya’s Migrant Abuses, Now It Must Address Them (CP)

 

 

The crazy idea of ultra low risk will be found out.

VIX – From Fear Index To Greed Index (Tchir)

We have all heard the VIX or volatility index referred to as the Fear Index or Fear Gauge. Rising VIX was meant to signal fear in the markets. That is how most investors have historically thought about VIX and traded it (directly or through Exchange Traded Products). I have gone back in time and combined the total assets under management of XIV and SVXY (two short VIX products) and UVXY and VXX (the two largest long VIX products). There are others and it doesn’t account for the fact that UVXY incorporates leverage, but the point is the same. The funds that in theory helped investors ‘hedge’ their portfolios went from being the dominant species to those that enable investors to sell volatility.


Short VIX Funds are Larger than Long VIX Funds (source Bloomberg)

This has rarely been the case. Typically investors had more interest in hedging their portfolios despite the evidence that the long VIX ETFs and ETNs had to continually perform reverse splits as their share prices drifted lower (some would argue “raced” lower is a more accurate description). While the products looking to benefit on a volatility spike still attract inflows (otherwise their assets under management would be even lower), they have lost the competition to the VIX sellers. The only other gap of similar size and duration was in late August 2015 – AFTER the market sold off and volatility spiked. This time, it is occurring as stock markets are near all-time highs and VIX is still close to the all-time low it set just a few weeks ago (VIX is only calculated since 1990). [..] A spike in volatility could be far more problematic than the market is prepared for as even a small spike could turn into a larger problem with so many people positioned the other way.

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“.. it has the potential to destabilize the entire financial system on its own.”

When VIX Trade Finally Blows Up, It Could Get Ugly All Over (MW)

Bitcoin’s face-melting rally toward $10,000 is the talk of financial circles these days. But if the digital currency is, indeed, the dangerous bubble many believe it to be, its inevitable implosion will pale in comparison to the potential damage caused by the demise of one of the best trades the Wall Street has ever seen: Shorting the VIX. You’d have to be living under a rock — or maybe just a normal person who doesn’t fixate on the stock market — to not notice the incredible lack of volatility in this bull run. This persistent trend has lined the pocket of any investor who’s been savvy/lucky enough to bet against the VIX. Count Seth Golden, a former Target manager, among those fortunate to be on the right side of it. He told the Times this summer his net worth exploded from $500,000 to $12 million in about five years thanks to his VIX shorts. This chart shows insane it’s been:

But all good things come to an end, and when this historic trend finally reverses, the fallout could be devastating. In our call of the day, Kevin Muir of the Macro Tourist blog warns that these people face getting completely “wiped out” when volatility returns to this market. And it won’t end there. “A VIX spike is dangerous not only for everyone that is playing in the VIX square, but for all market participants,” he explained in a recent blog post. “Given the size of the VIX complex, it has the potential to destabilize the entire financial system on its own. If the move is abrupt and large enough, it will not only bankrupt many different parties, but will cause a ripple effect in other markets.”

Muir went on to warn the real worry here is not just that those who have made enormous sums on shorting the VIX are about to give it all back. No, he believes they, as well as many others, stand to lose a whole lot more. “Shorting VIX, at these low levels, in the size they are doing, is not only dumb, but crazily dangerous, not only to the parties trading it, but also to the stability of the entire financial system,” he said.

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How can the VIX remain low in the face of this?

DB’s “2018 Credit Outlook” – Bearish Not Benign Conclusion (ZH)

Heading into 2018, Reid characterises risk assets as a tightrope walker who’s successfully negotiated a hire wire since the 2008 crisis. However, the confidence of our risk asset funambulist was always fortified by the knowledge that there was a huge safety net direct beneath him in the shape of the central bank put. In Reid’s own words. “The best analogy for our view on 2018 is that risk assets are like a highly skilled but still relatively inexperienced tightrope walker. Our tightrope walker started his career immediately after the GFC and earned his apprenticeship in very difficult conditions with lots of crosswinds but with the knowledge that a huge safety net existed beneath him. This allowed him to walk across the narrow line with slow but ever-increasing confidence, skill and aplomb. In our analogy the safety net is the central bank put that has continued to help financial markets’ confidence over the last several years in spite of very challenging conditions.”

As the tightrope walker steps from December 2017 into January 2018, he’s going to notice a disconcerting change in his safety net. “However in 2018 our tightrope walker will have to move onto the next phase of his career where the structural support of the safety net will likely be slowly weakened. Every time he looks down he’ll figuratively see a central banker loosen or take away a supporting rope. As such his skills and confidence are likely to be tested more than in recent years.” Reid is specifically referring to the growth in the size of the big four DM central bank balance sheets, i.e. the Federal Reserve, ECB, Bank of Japan and the Bank of England. At the end of 2017, the combined size of the big four’s balance sheets is estimated to reach about $14.9 trillion, an increase of about $1.8 trillion on the end of 2016. That’s about to change radically, as he notes. “Assuming fairly neutral and consensus assumptions, central bank balance sheet growth will fall sharply over the next 12-24 months from the near peak levels currently seen.”

The chart below shows that on a rolling twelve-month basis, growth will fall sharply, beginning in 2Q 2018. By the end of 2018, DM estimates that the rolling twelve-month growth will have declined about 75% from its 2017 level to about $450 billion. By August 2019, growth will have declined to zero according to DB’s estimate.

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Hope the GOP reads these missives.

The GOP Tax Bill: Fuggedaboutit! (Stockman)

The GOP has become so politically desperate that they might as well enact a two-word statute and be done with it. It would simply read: Tax Bill! Actually, that’s not far from where they are in the great scheme of things. The Senate Finance Committee’s bill is a dog’s breakfast of K-Street/Wall Street pleasing tax cuts, narrowly focused revenue raisers that will be subject to withering attack on the Senate floor, nonsensical vote-driven compromises and outrageous fiscal gimmicks – the most blatant of which is the sun-setting of every single individual tax provision after 2025. This latter trick is designed to shoe-horn the revenue loss into the $1.5 trillion 10-year allowance in the budget reconciliation instruction and also comply with the Senate’s “Byrd Rule” which allows a point of order to strike down a reconciliation bill that increases the deficit after year 10.

Save for these gimmicks, the actual 10-year cost of the Senate bill would be $2.2 trillion including interest on the added deficits. Nevertheless, this and other sunset gimmicks also underscore how threadbare the whole undertaking has become. To wit, the bill provides interim, deficit-financed tax relief of $1.38 trillion during 2018-2025 before these budget gimmicks kick-in, which is not a big number in the scheme of things: it amounts to just 4.2% of current law revenue collections during the eight year period, and only 0.8% of GDP. Since the bill doesn’t even really cut marginal rates during this interim period (the top bracket drops from 39.6% to 38.5%), its hard to see how a mere 0.8% “stimulus” to GDP is going to incite a tsunami of growth and jobs.

As we have frequently pointed out, the Reagan tax cut of 1981 – which had no measureable effect on the trend rate of economic growth – slashed marginal rates from 70% to 50% and as a total package paled the current Senate Plan into insignificance: It reduced the Federal revenue base by 26%, not 4.2%; and it amounted to 6.2% of GDP, not 0.8%, when fully effective in the later 1980s. Moreover, the “fully effective” part is especially salient because the Senate bill’s impact does not widen with time, as do most permanent tax cuts which require phase-in periods, but, instead, shrinks into virtual insignificance. Thus, the bill’s net tax cut amounts to $225 billion or 1.1% of GDP in 2019, but by 2022 the net cut shrinks to $199 billion and 0.9% of GDP – and then to just $145 billion or 0.6% of GDP in 2025 when the sunset gimmick kicks in.

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Changing the landscape.

Number Of US Store Closings Triples From Last Year (Snyder)

Did you know that the number of retail store closings in 2017 has already tripled the number from all of 2016? Last year, a total of 2,056 store locations were closed down, but this year more than 6,700 stores have been shut down so far. That absolutely shatters the all-time record for store closings in a single year, and yet nobody seems that concerned about it. In 2008, an all-time record 6,163 retail stores were shuttered, and we have already surpassed that mark by a very wide margin. We are facing an unprecedented retail apocalypse, and as you will see below, the number of retail store closings is actually supposed to be much higher next year. Whenever the mainstream media reports on the retail apocalypse, they always try to put a positive spin on the story by blaming the growth of Amazon and other online retailers.

And without a doubt that has had an impact, but at this point online shopping still accounts for less than 10% of total U.S. retail sales. Look, Amazon didn’t just show up to the party. They have been around for many, many years and while it is true that they are growing, they still only account for a very small sliver of the overall retail pie. So those that would like to explain away this retail apocalypse need to come up with a better explanation. [..] Of course the truth is that the economy is not doing well. The U.S. economy has not grown by at least 3% in a single year since the middle of the Bush administration, and it isn’t going to happen this year either. Overall, the U.S. economy has grown by an average of just 1.33% over the last 10 years, and meanwhile U.S. stock prices are up about 250% since the end of the last recession.

The stock market has become completely and utterly disconnected from economic reality, and yet many Americans still believe that it is an accurate barometer for the health of the economy. [..] So far this year, more than 300 retailers have filed for bankruptcy, and we are currently on pace to lose over 147 million square feet of retail space by the end of 2017. Those are absolutely catastrophic numbers. And some analysts are already predicting that as many as 9,000 stores could be shut down in the United States in 2018.

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Deregulation.

Trump Deserves Some Credit for the Rally in Stocks (A. Gary Shilling)

Reducing government regulation is tough. It’s resisted by all those who benefit, including government employees who administer the many programs. Every president since Jimmy Carter has attempted to lower the cost of regulation. At best, any cuts have been tiny and mostly centered on trimming paperwork. But less regulation is one campaign promise made by Donald Trump that is coming true. With tax and health-care reform problematic and given the president’s protectionist leanings, deregulation is probably a major driver of the stock market rally. The size and scope of the federal government give the president immense powers. In relation to gross domestic product, federal spending rose from 16% in 1946 to 22% in the 2017 fiscal year. Executive orders give the chief executive, in effect, legislative powers.

President Barack Obama issued many in his waning days, especially affecting power plants and oil pipelines. The Competitive Enterprise Institute last year found regulation cost American businesses $1.9 trillion, dwarfing the $344 billion in corporate taxes. About 56% of CEOs see overregulation as a major threat to their organization, more than cybersecurity (50%), rising taxes (41%) or even protectionism (27%). Whenever a new regulation is made or changed, it must be chronicled in the Federal Register. In the last years of the Obama administration, regulatory activity went parabolic, hitting almost 97,000 pages in a year. The annualized pace under Trump through July 31 was 61,330 pages, the fewest since the 1970s.

This year through June, the federal government had made 1,731 preliminary, proposed or final rules, the least since 2000 and down 40% from the 2011 peak under Obama. Many actions taken under Trump are reversals of earlier rules made under Obama. Of 66 completed actions at the Environmental Protection Agency, a third were rule withdrawals. Shares of banks have benefited, as those with more than $50 billion in assets are now able to merge without increased scrutiny. Scaling back the Volcker Rule would allow big banks to resume proprietary lending. The delay and likely alterations of the fiduciary requirement would aid brokers and insurers. The House has already approved a widespread rewrite of Dodd-Frank.

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I think he meant it.

Fed Chair Nominee Jerome Powell Says Too Big To Fail Is Over (BI)

Jerome Powell, Donald Trump’s nominee to replace Janet Yellen as Federal Reserve Chair, just made a frightening statement that suggests he is far too sanguine about risks in the US and global financial systems. During his confirmation hearing at the Senate on Tuesday, when pressed on the issue of whether any US banks are still considered too big to fail, Powell said simply: “No.” It’s the kind of blind optimism that could come back to haunt him during his tenure, which begins in February. Too big to fail, of course, is the financial crisis-era term for banks that the US government would be forced to bail out in a crisis because they might take the entire system down with them. Think of Citigroup, JPMorgan Chase, and Goldman Sachs. They underpin too much of our financial network to be allowed to falter.

“Dodd-Frank did a lot of things, but ending Too Big To Fail can’t be listed among its accomplishments,” Isaac Boltansky, director of policy research at Compass Point, told Business Insider. “The system is far safer given the capital and liquidity rules, and new mandates such as living wills and orderly liquidation authority should blunt panic in a crisis, but I doubt anyone in Washington or on Wall Street truly believes the federal government would stand idly by in the event of another systemic banking crisis,” he said. Democratic Senator Elizabeth Warren also took issue with Powell’s opening statement, which talked about “easing the burden” of regulation for banks.

“I’m troubled that you believe the biggest problem with bank regulations is that they are too tough,” Warren said during the hearing, arguing that it was that kind of mindset that led to the financial crisis of 2007-2008. At that time, many large investment banks were rescued by the Treasury and the Federal Reserve after their investments in housing soured quickly as a historic boom turned to bust. Treating the banks as victims of burdensome rules — rather than perpetrators of a historic crisis in need of deeper and more constant supervision — could lay the groundwork for a repeat. When it comes, Powell is going to regret that he didn’t have more to say about this.

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The pound surged on this news, but without solving the Irish border issue, none of it is worth a thing.

Britain Close To Deal On Brexit Bill With EU (R.)

Britain has offered to pay much of what the European Union was demanding to settle a Brexit “divorce bill”, bringing the two sides close to agreement on a key obstacle to opening talks on a future free trade pact, EU sources said on Tuesday. The offer, which British newspapers valued at around 50 billion euros, reflected the bulk of outstanding EU demands that include London paying a share of post-Brexit EU spending on commitments made before Britain leaves in March 2019 as well as funding of EU staff pensions for decades to come. A British government official said they “do not recognize” this account of the talks going on ahead of a visit by Prime Minister Theresa May to Brussels this coming Monday.

EU officials close to the negotiations stressed that work was still continuing ahead of May’s talks with European Commission President Jean-Claude Juncker and his chief Brexit negotiator Michel Barnier. But EU diplomats briefed on progress said the British offer was promising and that, on the financial settlement, the two sides were, as one said, “close to a deal”. Nonetheless, others cautioned that Britain had yet to make a fully committed offer and that essential agreement from the other 27 member states could not yet be taken for granted. The EU set the condition of “significant progress” on three key elements of a withdrawal treaty before it would accede to London’s request for negotiations on a free trade pact that could keep business flowing after Brexit in 16 months.

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See you in court.

Former New Zealand PM John Key Lied About Mass Surveillance Program (NZH)

Sir John Key’s story of how and why he canned a “mass surveillance” programme are at odds with official papers detailing development of the “Speargun” project. The issue blew up in the final days of the 2014 election with Key claiming the programme was long-dead and had been replaced by a benign cyber-security system called Cortex. Key always claimed the Speargun project to tap New Zealand’s internet cable was stopped in March 2013. But new documents show development of Speargun continued after the time he had said he ordered a halt – apparently because the scheme was “too broad”. Instead, they show Speargun wasn’t actually stopped until after Key was told in a secret briefing that details were likely to become public because they could be in the trove of secrets taken by NSA whistleblower Edward Snowden.

With days to go until voting in 2014, Key found himself accused by some of the world’s most high-profile and outspoken surveillance critics of secretly developing a mass surveillance system with the United States’ National Security Agency. It was high stakes for Key, also Minister of the GCSB, as he had previously promised the public he would resign as Prime Minister if there was ever mass surveillance of New Zealanders At the Kim Dotcom-organised “Moment of Truth” event, journalist Glenn Greenwald and Snowden claimed our Government Communications Security Bureau spy agency had developed the “Speargun” project to tap New Zealand’s internet cable and suck out masses of data.

Key denied it, saying Speargun had been canned in March 2013 because it was too intrusive. He said: “We made the call as government and I made the call as the Minister and as Prime Minister, that actually it was set too broadly. “What we ultimately did, when it comes to Speargun, in my opinion, I said it’s set too far. I don’t even want to see the business case.” The NZ Herald has found – after three years of refusals and information going missing – that the former Prime Minister’s version of events doesn’t match that of documents created at the time.

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As if MbS is any different.

Senior Saudi Prince Freed In $1 Billion Settlement Agreement (R.)

Senior Saudi Prince Miteb bin Abdullah, once seen as a leading contender to the throne, was freed after reaching an “acceptable settlement agreement” with authorities paying more than $1 billion, a Saudi official said on Wednesday. Miteb, 65, son of the late King Abdullah and former head of the elite National Guard, was among dozens of royal family members, ministers and senior officials who were rounded up in a graft inquiry partly aimed at strengthening the power of Crown Prince Mohammed bin Salman. The official, who is involved in the anti-corruption campaign, said Miteb was released on Tuesday after reaching “an acceptable settlement agreement”. The amount of the settlement was not disclosed but the official said it is believed to be the equivalent of more than $1 billion.

“It is understood that the settlement included admitting corruption involving known cases,” the official said. According to a Saudi official, Prince Miteb was accused of embezzlement, hiring ghost employees and awarding contracts to his own firms including a $10 billion deal for walkie talkies and bulletproof military gear worth billions of Saudi riyals. The allegations against the others included kickbacks, inflating government contracts, extortion and bribery.

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Easy: let the banks take the losses, not the people.

Europe Needs a Way to Prevent the Next Greek-Style Debt Crisis (BBG)

If there was ever a textbook example of how not to handle a sovereign debt crisis, it was Greece. Nearly a decade since Athens first asked for help from its euro zone partners and the IMF, the Greek economy is still struggling to recover. Even after a steep restructuring, sovereign debt remains unsustainable. If Greece is not to be crippled by its debt load, European governments will have to accept further debt-reducing measures, on top of the maturity extensions and the cut in interest rates they have already agreed to. So it’s no surprise that one of the key debates on the future of the euro zone relates to how sovereign debt restructuring should be made easier. There is little doubt that forcing losses on creditors at an earlier stage, as some propose, would increase the chance that a program of financial assistance is successful.

However, the euro zone should be wary of automatic triggers; they risk bringing on the very crisis they are designed to avert. The debate on the future of debt restructuring in the euro zone largely involves two positions. The first, which is widely shared in Germany, sees an orderly debt restructuring mechanism as an essential next step for the currency union. When a country applies for financial help from the European Stability Mechanism (ESM), creditors should face some form of debt restructuring immediately. This would ensure a better distribution of risks between debt-holders and the ESM. The threat of a haircut will make investors more discerning in their lending, contributing to fiscal discipline within the euro zone.

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Because Bayer is a German chemical company with very deep roots in Berlin, and it’s buying Monsanto. Ironically, the only party that can stop that purchase is the EU… German media say Merkel was angry at the German representative for going it alone on Germany’s decision to support this stance. So let’s see her reverse it.

Controversial Glyphosate Weedkiller Wins New 5-Year Lease In Europe (G.)

Glyphosate, the key ingredient in the world’s bestselling weedkiller, has won a new five-year lease in Europe, closing the most bitterly fought pesticide relicensing battle of recent times. The herbicide’s licence had been due to run out in less than three weeks, raising the prospect of Monsanto’s Roundup disappearing from store shelves and, potentially, a farmers’ revolt. Instead, an EU appeal committee voted on Monday to reauthorise the substance despite a petition by 1.3 million EU citizens last week calling for a ban. In 2015, the World Health Organisation’s cancer agency, the IARC, famously declared glyphosate “probably carcinogenic to humans,” although several international agencies, including Efsa, subsequently came to opposite conclusions. Monsanto insists glyphosate is safe.

The EU health commissioner Vytenis Andriukaitis said: “Today’s vote shows that when we all want to, we are able to share and accept our collective responsibility in decision making.” However, the approval falls far short of the 15-year licence the commission had originally sought and Conservative MEPs lashed out at what they called “an emotional, irrational but politically convenient fudge”. Ashley Fox, the Conservative party’s delegation leader in the European parliament, said that the vote “simply prolongs the uncertainty for our farmers, who are being badly let down. They cannot plan for the future without long term assurances about the availability of substances they rely on.”

A re-run of the struggle to reauthorise glyphosate will now begin again in two years’ time, with a new safety assessment by the European Food Safety Authority (Efsa). Greenpeace EU food policy director, Franziska Achterberg, commented: “The people who are supposed to protect us from dangerous pesticides have failed to do their jobs and betrayed the trust Europeans place in them.” The Green party called it “a dark day for consumers, farmers and the environment”.

[..] Traces of glyphosate are routinely found in tests of foodstuffs, water, topsoil, and human urine in amounts way above safe limits set by regulators. Ben & Jerry’s recently introduced a new line of organic ice cream, in a bid to sate public concern. Campaigners say Monsanto ghostwrote research papers for regulators, enlisted EPA officials to block a US government review of glyphosate and formed front groups to discredit critical scientists and journalists, citing documents revealed in a US lawsuit by non-Hodgkin’s lymphoma sufferers. More than 280 similar lawsuits are now pending against Monsanto, according to the US right to know campaign.

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A tad scary?!

New Zealand Fault Line Wakes Up: “We Must Think Japan 2011 Ruptures” (SHTF)

The devastating Kaikura earthquake in 2016 has resurrected the Hikurangi subduction zone where two tectonic plates clash and one is pushed down. Geologists are now warning that this trench could cause a massive earthquake on the ocean floor, and could trigger other 9.0 magnitude earthquakes and tsunamis that will reach the western coast of the islands in just seven minutes. The Australian plate is heading north while the Pacific plate is heading west, and the combination of these motions means that the Pacific plate, which includes much of the South Island, is moving relative to the Australian plate at a rate of about 40millimeters each year in a southwesterly direction. Ursula Cochran, from the science firm GNS, told The Marlborough Express: “We need to think Japan 2011 basically, because if our whole plate boundary ruptured it would be a magnitude-9 earthquake.”

The Great East Japan Earthquake and resulting tsunami smashed through the country’s north-eastern coast killing almost 16,000 people and destroying the lives of thousands more. It also triggered a major ongoing crisis at the Fukushima nuclear plant. “One of the biggest hazards of that kind of earthquake is the tsunami that is triggered by a fault rupture offshore.,” Cochran added. “We know from tsunami modeling from a hypothetical earthquake from the Hikurangi subduction zone that the travel times could be very short to the coast, so seven minutes for some of the south Wairarapa coast.” One year after it struck, scientists are also warning that the Kaikoura quake was not the “big one” for the Hikurangi subduction zone. The quake on the Hikurangi subduction zone was devastating. The magnitude 7.8 that destroyed houses, lifted the Kaikoura seabed by 2m, tore apart farmland, and wrecked kilometers of State Highway 1, may be minor compared to what could come, Cochran said.

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Has the west ever ended slavery?

Libya “Chose” Freedom, Now It Has Slavery (CP)

NATO’s military intervention in Libya in 2011 has justifiably earned its place in history as an indictment of Western foreign policy and a military alliance which since the collapse of the Soviet Union has been deployed as the sword of this foreign policy. The destruction of Libya will forever be an indelible stain on the reputations of those countries and leaders responsible. But now, with the revelation that people are being sold as slaves in Libya (yes, you read that right. In 2017 the slave trade is alive and kicking Libya), the cataclysmic disaster to befall the country has been compounded to the point where it is hard to conceive of it ever being able to recover – and certainly not anywhere near its former status as a high development country, as the UN labelled Libya 2010 a year prior to the ‘revolution’.

Back in 2011 it was simply inconceivable that the UK, the US and France would ignore the lessons of Iraq, just nine years previously in 2003. Yet ignore them they did, highlighting their rapacious obsession with maintaining hegemony over a region that sits atop an ocean of oil, despite the human cost and legacy of disaster and chaos which this particular obsession has wrought. When former UK Prime Minister David Cameron descended on Benghazi in eastern Libya in the summer of 2011, basking in the glory of the country’s victorious ‘revolution’ in the company of his French counterpart Nicolas Sarkozy, he did so imbued with the belief he had succeeded in establishing his legacy as a leader on the global stage. Like Blair before him, he’d won his war and now was intent on partaking of its political and geopolitical spoils.

Cameron told the crowd, “Your city was an inspiration to the world, as you threw off a dictator and chose freedom.” The destruction of Libya by NATO at the behest of the UK, the US and France was a crime, one dripping in the cant and hypocrisy of Western ideologues for whom the world with all its complexities is reduced to a giant chessboard upon which countries such as Libya have long been mere pieces to be moved around and changed at their pleasure and in their interests – interests which are inimical to the people of the countries they deem ripe for regime change.

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Europe’s politicians care only about their careers.

The EU Created Libya’s Migrant Abuses, Now It Must Address Them (CP)

Revelations into Libya’s awful migrant detention centres showed the humanitarian emergency that occurs within them. The international community – particularly the European Union, has not only failed to address this problem, but is responsible for causing it. After Libya descended into chaos following long-time leader Muammar Gaddafi’s fall in 2011, the nation became a major hub of slavery and migrant-trafficking. For the hundreds of thousands of those fleeing war-torn areas in Sub-Saharan Africa, Libya serves as a strategic point to reach the safe havens of Europe. However, those who fail to reach Europe face equally dire circumstances to their homeland after being detained by Libyan authorities, as part of an EU-deal with the Libyan Government of National Accord (GNA) penned in February.

This deal entails the Libyan coastguard stopping migrant vessels leaving Libya. It was quite rightly slammed as ‘inhumane’ by the UN recently. Due to lack of protections for migrants from in this deal, migrants are either brutally tortured, abused and even sexually assaulted by Libyan authorities in camps, or are sold into slavery by unscrupulous smugglers. A CNN investigation showed the true horrors of human-trafficking. Migrants are treated like cattle, sold for as little as four hundred dollars, and sometimes moved from one slave master to another. Others on the scene report migrants in camps showing signs of torture, burns, lashings, and other abuses. An Italian doctor Pietro Bartolo slammed them as ‘concentration camps’. “You must realise that in Libya, black people are not considered human beings, they’re seen as inferior, you can do whatever you want to them,” Bartolo told Euro News.

Observers foresaw the humanitarian consequences soon after the deal with Libya was agreed. German foreign minister Sigmar Gabriel warned in April that thousands of men, women and children would face “catastrophic conditions”. It turns out Gabriel and other’s predictions were correct. The EU must therefore accept the blame for creating this crisis, for backing these unregulated, barbaric camps with the Libyan authorities. However, Europe has a clear geopolitical aim: to contain migrants, rather than help them – even if their suffering is enhanced. In doing so it uses Libya – a frail nation itself, as a dumping ground, to rid itself of the migrant issue. It has no regard for the human rights of those in detention centres.

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Oct 062016
 
 October 6, 2016  Posted by at 9:19 am Finance Tagged with: , , , , , , , ,  


Lewis Wickes Hine 12-year-old newsie, Hyman Alpert, been selling 3 years, New Haven CT 1909

World Is Swimming In Record $152 Trillion In Debt: IMF (R.)
Australia Private-Sector Debt Rises Faster Than Almost Anywhere Else (Aus.)
One-Third Of European Banks Fail IMF Stress Test: (WSJ)
EU Readies Plan for Derivatives Clearing Crisis, the New Too-Big-to-Fail (BBG)
The Noose Is Tightening Quickly On The Global Economy (Alt-M)
Fed’s Fischer Says Low Neutral Rate A Sign Of Potential Economic Trouble (R.)
Goldman Warns Of “Upward Shock” To Rates, Hints At Trillions In Losses (ZH)
Stiglitz Sees Italy, Others Leaving Euro Zone In Coming Years (R.)
Two Thirds Of Young American Adults Live With Their Parents (ZH)
The Math of Escaping From Syria (R.)
Nearly Half Of All Children In Sub-Saharan Africa Live In Extreme Poverty (G.)

 

 

Never mind public debt. $100 trillion in private debt is the big number.

World Is Swimming In Record $152 Trillion In Debt: IMF (R.)

The world is swimming in a record $152 trillion in debt, the IMF said on Wednesday, even as the institution encourages some countries to spend more to boost flagging growth if they can afford it. Global debt, both public and private, reached 225% of global economic output last year, up from about 200% in 2002, the IMF said in its new Fiscal Monitor report. The IMF said about two thirds of the 2015 total, or about $100 trillion, is owed by private sector borrowers, and noted that rapid increases in private debt often lead to financial crises. While debt profiles vary by country, the report said that the sheer size of the debt could set the stage for an unprecedented private deleveraging that could thwart a still-fragile economic recovery.

“Excessive private debt is a major headwind against the global recovery and a risk to financial stability,” IMF Fiscal Affairs Director Vitor Gaspar told a news conference. “Financial recessions are longer and deeper than normal recessions.” While the United States has de-leveraged since the 2008-2009 financial crisis, the report cited the buildup of private debt in China and Brazil as a significant concern, fueled in part by a long era of low interest rates. The report comes as IMF managing director Christine Lagarde is urging the Fund’s 189 member governments that have “fiscal space” – the ability to sustainably borrow and spend more – to do so to boost persistently weak growth.

The Fund’s call for targeted fiscal support for consumer demand comes is accompanied by calls for continued accommodative monetary policy and accelerated structural reforms aimed at boosting countries’ economic efficiency. If a major deleveraging of private debt were to occur, the IMF report recommends that fiscal policy should include targeted interventions to restructure private debt or repair bank balance sheets to mininize damage to the overall economy.

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An Australian take on the IMF debt report, which singles out the country along with Canada.

Australia Private-Sector Debt Rises Faster Than Almost Anywhere Else (Aus.)

Private-sector debt is rising faster in Australia than almost anywhere else in the world, according to the IMF, which is concerned record debt globally may be setting the stage for a future downturn. The fund estimates that total debt levels have kept climbing since the global financial crisis, and are now equivalent to 225% of global GDP, up from 200% before the crisis. “Excessive private debt is a major headwind against the global recovery and a risk to financial stability”, said the head of the fund’s fiscal department, Vitor Gaspar, releasing the fund’s latest review of government finances. The IMF says private-sector debt in most advanced countries reached a peak in 2012 and started coming down, with the biggest reductions recorded in countries such as Ireland and Slovenia that entered the financial crisis with elevated debts.

The IMF says private-sector debt in most advanced countries reached a peak in 2012 and started coming down, with the biggest reductions recorded in countries such as Ireland and Slovenia that entered the financial crisis with elevated debts. In some cases, however, private debt has continued to accumulate at a fast pace-notably, Australia, Canada, and Singapore, the fund says. The IMF estimates that, since 2013, private debt has risen as a share of GDP by 15 percentage points, more than in any other advanced nation. Private debt in Australia has risen from 188% of GDP to 225% since the global financial crisis, mostly driven by lending to households. Mr Gaspar said the risk was not just that private debt could revert to the government in a crisis, as occurred when many advanced country governments had to take over banks during the financial crisis.

“Rapid increases in private debt often end up in financial crises and financial recessions are longer and deeper than normal recessions”, he said. The fund says even without a financial crisis, high private-sector debt will hamper growth because highly indebted borrowers eventually cut back their consumption and investment. It says there is no consensus about the threshold at which debt levels start affecting growth, but says the longer that debt keeps rising, the greater becomes the sensitivity of the economy to any unexpected shocks. The IMF report shows that Australia s federal and state government debt remains one of the lowest in the advanced world, projected to peak at 21.6% of GDP in 2018, compared with an average of 80.5% for the advanced countries in the G20.

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Why Draghi said there are too many banks in Europe. M&A can hide a lot of debt, or have taxpayers shoulder it.

One-Third Of European Banks Fail IMF Stress Test: (WSJ)

Historic debt levels and dwindling policy ammunition risk derailing the meager recovery forecast for next year. Anemic global growth is “setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown,” the emergency lender warned. The IMF lays out three major risks to the financial system. First, European banks are facing a chronic profitability crisis. Many haven’t been able to clear the legacy debt off their balance sheets and investors are increasingly skeptical they’ll be remain profitable based on their current structures. But it’s not just market perceptions. The IMF estimates that the recent plunge in bank equity price could curb lending until 2018.

It also conducted a survey of more than 280 banks covering most of the banking systems in the U.S. and Europe to see if an economic recovery would be enough to propel them into long-term profitability. While a large majority of U.S. banks passed, nearly one-third of Europe’s banking system flunked. “A cyclical recovery helps but is not enough,” Mr. Dattels says. Those banking duds—representing $8.5 trillion in assets—remain weak and unable to generate sustainable profits even if growth picks up in the fund’s stress test. “Banks and policy makers need to tackle substantial structural challenges to survive in this new era.” Banks need to first resolve the massive stock of nonperforming loans. That requires banking authorities to fix their insolvency rules, a problem the IMF has been bugging Europe about for years. If officials could finally resolve that problem, it could turn a net capital cost to European banks of €85 billion to a net gain of €60 billion, the fund estimates.

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One goal in mind: save large financial institutions. Not citizens.

EU Readies Plan for Derivatives Clearing Crisis, the New Too-Big-to-Fail (BBG)

The EU plans to give authorities sweeping powers to tackle ailing derivatives clearinghouses to prevent their failure from wreaking havoc throughout the financial system. Draft EU legislation seen by Bloomberg sets out rules on saving or shuttering clearinghouses that would apply to firms such as London-based LCH. The proposals cover everything from the creation of resolution authorities to the powers they would have when winding a company down, including writing down shares, debt and collateral. Having forced most clearing to go through central counterparties to manage risk in the financial system, the EU will come out with recovery and resolution proposals by year-end. Clearing has come into focus after emerging as a pawn in the post-Brexit battle for London’s financial-services industry.

“If we are going to rely more on CCPs, we need to have a clear system in place to resolve them if things go wrong,” Valdis Dombrovskis, the EU’s financial-services chief, said last month. Governments around the world were spooked by the damage inflicted by derivatives trades that went awry during the financial crisis. Since then, they’ve taken steps to ensure trading in the contracts is reported and centrally cleared. Clearinghouses stand between the two sides of a derivative wager and hold collateral, known as margin, from both in case a member defaults. Many transactions were previously conducted directly between traders without a third party requiring collateral. Swaps trading, when it was largely unregulated, amplified the 2008 meltdown and prompted a $182 billion U.S. rescue of AIG.

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“The very system they are built around is a corrupt and unsustainable model, and I hold that this is by design.”

The Noose Is Tightening Quickly On The Global Economy (Alt-M)

The supposed “catalyst” for the 2008 crash is primarily attributed to the fall of Lehman Brothers. I highly recommend any of the “bullish” economists out there arguing today that the central banks intend to prolong a stock rally indefinitely examine the statements made in the mainstream about Lehman and by Lehman leading up to their eventual death rattle. Then, absorb and really think on some of the recent statements and tactics used by Deutsche Bank. Specifically, note Lehman’s use of accounting and derivatives gimmicks and the cycling of funds through various accounts in order to make the company appear solvent. Then, take a look at revelations coming out of places like Italy that Deutsche Bank has been using the same model of false accounts and market manipulation, once again, with derivatives as a main tool for fraud.

Also notice the same outright dismissals of all pertinent evidence that Deutsche Bank might be suffering a capital shortfall, as CEO John Cryan blames “speculators” for the companies losses. Lehman’s Dick Fuld and Bear Stearns’ Jimmy Cain both blamed “speculators” and “rumors and conspiracies” for the fall of their companies during the derivatives debacle eight years ago. It would seem that history doesn’t just rhyme, it sometimes repeats exactly. Below is a rather revealing chart from the folks at Zero Hedge comparing the collapse of Lehman Brothers stock value to the steady decline of Deutsche Bank. To be clear, Lehman was no catalyst. It was only a litmus test for a system completely devoid of tangible value and drowning in toxic debt. Lehman was a part of a much larger problem, it was not the cause of the problem. The same is true for Deutsche Bank.

The panic growing around Germany’s second largest financial institution, Commerzbank, as it moves to lay off nearly 10,000 employees and suspend its dividend is another crisis indicator separate from Deutsche Bank. The clear solvency issues in Italy’s major banks, including Monte dei Paschi, are yet another explosive element.

Keep in mind that when these edifices begin to crumble and Europe enters a state of financial emergency, the mainstream media and numerous governments will continue to blame speculators. They will also claim that the entire disaster was set in motion through a “domino effect”; the first domino probably being Deutsche Bank. This will be a lie. There is no line of dominoes. One bank will not be bringing down the other banks — yes, there is terrible interdependency, but the real issue is that ALL of these banks are falling due to their own cancerous behaviors. The very system they are built around is a corrupt and unsustainable model, and I hold that this is by design.

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Wow, he presents what has long been obvious as some sort of epiphany: “We could be stuck in a new longer-run equilibrium characterized by sluggish growth.”

Fed’s Fischer Says Low Neutral Rate A Sign Of Potential Economic Trouble (R.)

Evidence that the so-called natural rate of interest has fallen to low levels could mean the economy is stuck in a low-growth rut that could prove hard to escape, Federal Reserve Vice Chair Stanley Fischer said on Wednesday. Speaking to a central banking seminar in New York, the Fed’s second-in-command said he was concerned that the changes in world savings and investment patterns that may have driven down the natural rate could “prove to be quite persistent…We could be stuck in a new longer-run equilibrium characterized by sluggish growth.” As a result, he said, central bankers may face a future where the short-term interest rates set by policymakers never get far above zero, and the unconventional tools used during the financial crisis become a “recurrent” fact of life.

“Ultralow interest rates may reflect more than just cyclical forces,” Fischer said, but “be yet another indication that the economy’s growth potential may have dimmed considerably.” Fischer’s remarks did not address current Fed policy or interest rate plans. It is not the first time a Fed official has openly expressed concerns about an underlying decline in U.S. economic potential, or fretted that the crisis shifted savings and investment patterns in a damaging way. Over the past year in particular there has been a vigorous debate, backed up by fresh research, about the “natural” rate of interest. Sometimes referred to as a neutral or equilibrium rate, it is in many ways an abstraction – not a rate that is set by the Fed or used in transactions, but an estimate of the underlying rate that would keep the price level stable while the economy grows at potential.

A number of developments have led many at the Fed to conclude that the natural rate is currently very low, and that its decline may reflect a loss of economic potential. There are immediate implications for the Fed: a low natural rate means the Fed could not move its short-term federal funds rate very high before policy becomes too tight.

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Nothing new here either.

Goldman Warns Of “Upward Shock” To Rates, Hints At Trillions In Losses (ZH)

[..] “The total face value of all US bonds, including Treasuries, Federal agency debt, mortgages, corporates, municipals and ABS, is $40 trillion (Securities Industry and Financial Markets Association). The Barclays US aggregate is a smaller number, $17 trillion, as the index excludes some categories of debt, such as money markets, with low duration. To end up with a more palatable number, Goldman uses the Barclays measure of debt outstanding, although it admits this may lead to an understatement of the total loss potential. Using either measure, total debt outstanding has grown by over 60% in real Dollars since 2000.”

[..] Doing the math, and combining a duration estimate of 5.6 years with the SIFMA total estimated notional exposure of $40trn, and current Dollar price of bonds of $105.6, indicates that, to first order, a 100bp shock to interest rates would translate into a market value loss estimate would be $2.4 trillion. That is the part Garzarelli forgot to write about. Which is ironic, because in trying to paint a bullish picture, the Goldman strategist in effect admitted that not just the Fed, but the entire world is trapped: should the global economy continue to contract, global bond yields will continue to sink, with trillions more bonds going negative yield, leading to even more debt issuance, and resulting in a ZIRP (and NIRP) trap from which there is no escape.

On the other hand, if – as Goldman hopes – inflation does materialize, however briefly, the resultant MTM loss will be staggering. Keep in mind that $2.4 trillion is only in the US. Now add tens of trillions of record low yielding global debt, including some $10.5 trillion in negative yield bonds around the globe, and one can make the case that the global MTM hit from an even 1% rise in rates would be somewhere between $5 and $8 trilion dollars! So, according to Goldman, here is the rather unpleasant choice facing the world: continue slowly sinking into a deflationary singularity, coupled with ever greater systemic leverage which makes escape from the ZIRP/NIRP trap impossible as social unrest builds up and ultimately spills over into the streets, or unleash an inflationary impulse, one which crushes countless debt holders, leads to trillions in losses, and requires yet another consolidated bailout…. oh, and also more social unrest.

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If Italy leaves, there’s no EU left.

Stiglitz Sees Italy, Others Leaving Euro Zone In Coming Years (R.)

Nobel Prize-winning economist Joseph Stiglitz predicted in a interview out on Wednesday that Italy and other countries would leave the euro zone in coming years, and he blamed the euro and German austerity policies for Europe’s economic problems. Europe lacks the decisiveness to undertake needed reforms such as the creation of a banking union involving joint bank deposit guarantees, and also lacks solidarity across national boundaries, Stiglitz was quoted as saying by Die Welt newspaper. “There will still be a euro zone in 10 years, but the question is, what will it look like? It’s very unlikely that it will still have 19 members. It’s difficult to say who will still belong,” the paper quoted Stiglitz as saying. “The people in Italy are increasingly disappointed in the euro.”

“Italians are starting to realize that Italy doesn’t work in the euro,” he added. He said Germany had already accepted that Greece would leave the euro zone, noting that he had advised both Greece and Portugal in the past to exit the single currency. Concerns about the euro zone have escalated in Germany in recent months amid growing concern about a shift away from austerity in southern Europe, the loose money policies of the ECB and the rise of the right-wing Alternative for Germany party. Stiglitz told the paper the euro and austerity policies in Germany were at fault for Europe’s economic malaise. The break-up of the single currency or the division into a north euro and a south euro were the only realistic options for reviving Europe’s stalled economy, the paper quoted him as saying.

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‘Target groups’ may be somewhat confusing: one survey looks at 15-29 year-olds, the other at 18-34 year-olds. But the trends are clear enough.

Two Thirds Of Young American Adults Live With Their Parents (ZH)

As part of its periodic report on “Society at a Glance” which looks at how youth across member states are faring in terms of several social indicators, such as employment, poverty, marriage and health, the OECD also provided a unique glimpse into modern household composition, namely the%age of young adults, those aged 15-29, living at home. What it found is that since the Great Recession, there have been significant shifts worldwide in the number of young adults living at home. From 2007 to 2014, the number of youth living at home in countries belonging to the OECD increased by 0.7%, rising to 59.4%.

As expected, the nations hit hardest by the global economic slowdown such as Italy, Slovenia and Greece had the highest%age of youth living at home with their parents, at 80.6%, 76.4% and 76.3%, respectively. In itself, that is hardly surprising, since countries like Greece and Italy were not only among the harfest hit by the recession, and have a culture of young adults living longer at home, but also have some of the highest unemployment rates for young people. In fact, as the chart below shows, some 15% of young adults in OECD countries, or a whopping 40 million, were what the report classifies as NEET: not in employment, education or training, with both Italy and Greece at the very top, just behind Turkey.

On the other end of the spectrum, Canada had the lowest%age of youth living with parents, with just 30% of the country’s youth still living at home. The Nordic countries, including Denmark, Sweden, Finland and Norway, also had low numbers of young adults living at home. In terms of deterioration, France was by far the leader, with the number of young people cohabitating with their parents rising 12.5% to 53.5% from 2007 to 2014. Report authors attribute the increase in part to the high numbers of young adults in France who are not in the workforce or in education. In France, some 16.6% of young adults were not in a job or education institution in 2015, also a notable an increase over the previous few years.

Cited by US News, Claire Keane, an economist with the OECD’s social policy division said that “we really think this is a crisis story,” In France, she says, many benefits flow through families to reach young people. “They are relying on parents for financial support.” As for the US, there has been a 3.9% increase in the proportion of youth living with their parents from 2007 to 2014, significantly higher than the OECD average. As a result, today, about 66.6% of American 15- to 29 year-olds live with their parents as opposed to on their own or with a roommate, compared to around 62.8% before the crisis.

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Syria was a relatively wealthy country not long ago. So was Libya. Guess what happened?

The Math of Escaping From Syria (R.)

– Duration of Syrian Civil War: 5 years, 6 months, approximately. – Number of refugees through Oct. 1: 302,975. – Number of refugees drowned en route to Europe: 3,502 We’ve seen the pictures. We’ve read the stories. The numbers are stark. A single boat crossing on the Mediterranean cost $2,200 per passenger in the summer of 2015, up from an average $1,500 a year earlier, according to refugees’ accounts. For Syrians, as with most migrants seeking asylum, money is scarce; a report by the Syrian Economic Forum showed average monthly income for a citizen of Aleppo was around $80 last year. So if you’re a refugee, you face the prospect of spending as much as two years of your wages for a journey on which 1 of 87 refugees have drowned.

How bad is the economy you’re leaving behind? Let’s take the Great Recession of 2007 to 2009 in the U.S. as a comparison. GDP decreased at an average annual rate of 3.5%. Unemployment reached a high of 10% in Oct. 2009. In that year, 14.3% of the U.S. were living below the poverty line. In Syria, GDP fell 30% in 2013 and another 36% in 2014; 82% of the population lives below the poverty line; unemployment is at 60%. And 2016 looks pretty bleak as well. And that’s leaving aside falling bombs, chemical weapons and woefully inadequate medical care. Also connecting with international aid groups takes time, as many Syrians are located in hard to reach areas.

And let’s not forget you are probably a kid. More than 50% of refugees are under the age of 18 – and haven’t had educational access for years; not to mention the added trauma of witnessing extreme violence. So spending up to two years of your wages and risking your life to get to a safe haven, versus staying in a country where it’s likely you will die a violent death suddenly seems like a remarkably sound decision.

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How many billions have been spent on ending world hunger? Or maybe we should ask how many have been spent on warfare.

Nearly Half Of All Children In Sub-Saharan Africa Live In Extreme Poverty (G.)

Nearly half of all children in sub-Saharan Africa are living in extreme poverty, according to a joint Unicef-World Bank report released on Tuesday, with figures showing that almost 385 million children worldwide survive on less than $1.90 (£1.50) a day, the World Bank international poverty line. Extreme poverty leads to stunted development, limited future productivity as adults, and intergenerational transmission of poverty, the report (pdf) says. The figures – based on data from 89 countries, and representing 84% of the developing world’s population – indicate that much work will be needed to meet the sustainable development goal of eradicating extreme poverty by 2030.

Children are disproportionately affected by extreme poverty – they make up just a third of the population studied, but comprise half of the extreme poor. They are twice as likely as adults to be living on less than $1.90 a day, the report claims, with 19.5% of children in developing countries living in extremely poor households, compared to just 9.2% of adults. “It’s almost a double blow – firstly, that children are twice as likely as an adult to live in extreme poverty, but also that children are much less likely than an adult to be able to cope with extreme poverty because of stunting, infant mortality, and early childhood development,” said Unicef’s deputy executive director, Justin Forsyth. “Extreme poverty can either kill you, or ruin your potential for the rest of your life.”

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Jan 232016
 
 January 23, 2016  Posted by at 10:22 am Finance Tagged with: , , , , , , , , ,  


DPC Cab stand at Madison Square, NY 1900

Nearly $8 Trillion Wiped Off World Stocks In January (Reuters)
Dow Could Fall 5,000 Points And Still Not Be ‘Cheap’ (MW)
Mario Draghi Denies The ECB Bazooka Is Empty (AEP)
Felix Zulauf: The Era Of QE Is Over (FuW)
The ‘Recovery’ Was Built On Bubbles (Chang)
China’s Banking Stress Looms Like Banquo’s Ghost In Davos (AEP)
The EU Prioritizes The Old And The Rich (FT)
Will The TBTF Banks Break Themselves Up? (Forbes)
Moody’s Just Put $540 Billion In Energy Debt On Downgrade Review (ZH)
North Sea Drilling Sinks to Record Low (BBG)
Aberdeen: Once-Rich Oil City Now Relying On Food Banks (Guardian)
Oil Services Giant Schlumberger Axes 10,000 Jobs (Guardian)
UK Treasury ‘To Count £139 Million Of Made Up Money’ As Foreign Aid (Ind.)
VW Blames Emissions Scandal on EU’s ‘Vague Testing Requirements’ (Ind.)
VW Probe Finds Manipulation Was Open Secret In Department (Reuters)
DEFEAT IS VICTORY (Dmitry Orlov)
Top UN Official Says Mass Migration ‘Unavoidable Reality’ (AFP)
Europe’s Refugee Crisis Claims At Least Another 46 Lives In Aegean (AP)

And January’s not over. 11 more months like that and we might land at a nice round number.

Nearly $8 Trillion Wiped Off World Stocks In January (Reuters)

World stock market losses are approaching $8 trillion so far this year and investors last week poured the most money into government bond funds in a year, suggesting they fear the global economy could tip into recession, Bank of America Merrill Lynch said on Friday. The bank’s U.S. economists also said on Friday that the likelihood of the world’s largest economy entering a recession in the coming year has risen to 20% from 15%. While a repeat of the 2008-09 great recession “is a big stretch” and even the one-in-five chance of a normal recession remains low, they cut their 2016 growth forecast to 2.1% from 2.5%. Reflecting the increasingly bearish sentiment engulfing world markets, some $7.8 trillion was wiped off the value of global stocks in the three weeks to Jan. 21, BAML said.

“We cannot rule out a recession in the next year. Accidents will happen, and we are concerned about the lack of policy ammunition to deal with a major shock,” economists Ethan Harris and Emanuella Enenajor said in a note on Friday. “However, when markets are in such a fragile state there is a temptation to lose sight of the economic fundamentals. To us, the economy is okay and recession risks are low,” they said. Stocks around the world have had one of their worst Januarys on record, with slumping oil prices, deepening concern over China, and the Federal Reserve’s first interest rate hike in a decade all spooking investors. A recession is typically defined as two consecutive quarters of economic contraction.

The U.S. economy ground to a virtual standstill in the fourth quarter of last year, according to many estimates, and the manufacturing sector is already in recession. Earlier this week, economists at Citi said the risk of a global recession was rising, Morgan Stanley put the probability at 20% in a worst case scenario, and French bank Societe Generale said it was 10% and rising.

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Not that hard to believe at all.

Dow Could Fall 5,000 Points And Still Not Be ‘Cheap’ (MW)

Hard to believe, but the Dow Jones Industrial Average could fall by another 1,000 to 5,000 points and still not be “cheap” compared with long-term stock-valuation measures. That’s the stark conclusion from an analysis comparing current stock prices to underlying measures such as per-share revenue, earnings and corporate net worth. And it suggests that even if we are now overdue for a short-term bounce or rally of some kind, buying heavily into the latest sell-off isn’t the kind of one-way bet that value investors crave. Stocks are certainly much cheaper than they were a few weeks ago. After the worst start to a new year in Wall Street history, the Dow Jones Industrial Average is down about 10% since Jan. 1. Small-company stocks are now deep in a bear market after falling more than 20% from last spring’s highs.

But cheaper doesn’t necessarily mean cheap. Even after the sell-off, U.S. stocks are valued at around 1.4 times annual per-share revenue. FactSet says the average since 2001, when it began tracking the data, is 1.3 times revenue. So the Dow could fall another 7%, or over 1,000 points, and still be no lower than its modern-day average. And the picture looks even worse when you also add in those companies’ soaring debts. According to the Federal Reserve, nonfinancial corporations have increased their total debts since 2007 from $6.3 trillion to over $8 trillion. As FactSet says, total shares plus total debts — the so-called “enterprise value” — of U.S. public companies are now 2.4 times annual per-share revenue, compared with an average of 2.1 times since 2001.

Data from the U.S. Federal Reserve, meanwhile, say U.S. nonfinancial corporate stocks are now valued at about 90% of the replacement cost of company assets, a metric known as “Tobin’s Q.” But the historic average, going back a century, is in the region of 60% of replacement costs. By this measure, stocks could fall by another third, taking the Dow all the way down toward 10,000. (On Wednesday it closed at 15,767.) Similar calculations could be reached by comparing share prices to average per-share earnings, a measure known as the cyclically adjusted price-to-earnings ratio, commonly known as CAPE, after Yale finance professor Robert Shiller, who made it famous.

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Draghi has made himself irrelevant.

Mario Draghi Denies The ECB Bazooka Is Empty (AEP)

The ECB has ample ammunition to fight a fresh global downturn and is ready to act decisively to stave off deflation if necessary, Mario Draghi has assured nervous investors in Davos. The ECB’s president sought to play down the violent market squall of recent weeks, insisting that Europe’s economic recovery is well on track and may even accelerate as the refugee crisis leads to a surge of fiscal spending. “We have plenty of instruments. We have the determination, and the willingness of the governing council to act and deploy these instruments,” he said, speaking at the World Economic Forum. Signs that the ECB is preparing a fresh blast of stimulus have halted the increasingly ominous slide in global equities, but there are fears that the bounce of the last two days may soon fade.

Monetary experts fear that the law of diminishing returns for quantitative easing is setting in and that ever-more extreme measures by central banks are creating insidious new risks. Axel Weber, the former Bundesbank chief and now head of UBS, said the balance of advantage had already turned negative. “There is a very clear limit to what the ECB can achieve. The problem is that monetary policy has largely run its course,” he said in Davos. “The side effects of the medicine are getting stronger and stronger: the curative effects are getting weaker and weaker,” he said, adding that the current turmoil in the markets is the first taste of the hangover, evidence of the price we may have to pay. Mr Weber said the ECB was likely to keep pushing interest rates deeper in negative territory but this could backfire: “There is a big risk that it may actually drive cash out of the economy.”

Benoit Coeure, France’s member of the ECB executive, insisted that the latest stimulus measures have been a success. “QE is working. We’ve seen a tremendous improvement on European capital markets. Borrowing costs for companies have come down by 80 basis points, and 140 points for Italy,” he said. “We’re mindful of the consequences of monetary policy. But we’re not going to have a conversation next month on tapering or exiting the low-rates policy because that is in the best interest of Europe.” Mr Draghi said a mix of monetary stimulus, cheap oil, and the end of fiscal austerity was finally powering a lasting pick-up in European growth. “All these drivers should ensure a continuation of the recovery. I don’t think there is any reason to think things have changed,” he said.

The great unknown is whether the refugee crisis mushrooms out of control and further destroys confidence in Europe, or whether it acts as a ‘positive economic shock’ and a catalyst for change. “It could turn out to be the largest public expenditure we’ve had for a number of years. Our society will be changed by this. In which direction, we can only guess,” he said. There are already signs of a tectonic shift. Wolfgang Schauble, Germany’s finance minister, called for a multi-billion euro “Marshall Plan” to blanket the North Africa and most vulnerable areas of the Middle East with investment. He also called for a “coalition of the willing” to confront the migrant crisis head on before it causes the European project to unravel. “We can no longer wait for Brussels,” he said.

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“China is the epicenter of the looming crisis. China in today’s cycle is what US housing was during the financial crisis in 2008.” “Since one and a half years China is doing everything wrong. It started with the government trying to prop up the stock market. China wanted to attract money from abroad in order to stem the capital outflows. However, this was contrary to the fundamentals as company earnings were falling during the entire bull market. That’s why it collapsed under its own weight in the end.”

Felix Zulauf: The Era Of QE Is Over (FuW)

According to macro strategist Felix Zulauf, founder and president of Zulauf Asset Management and Vicenda Asset Management in Zug, the almost seven-year-old bull market is over. China is to the current cycle what the US housing market was for the Global Financial Crisis in 2008. It will take years to correct the excesses that were built up in China.

Mr. Zulauf, the markets had a terrible start into the new year. Is the almost seven-year old equity bull market over? Yes, the bull market came to an end last spring. A new bear market has begun. The coming downturn will be proportional to the excesses that were built up during the boom years. The bull market lasted for a very long time and was primarily fuelled by monetary excesses. And these excesses will now be corrected. And bear in mind, there is no longer any backstop for markets.

What do you mean? In the past, investors could count on the Fed to bail them out – the Greenspan and Bernanke Put, if you will. Now, however, the US central bank – and it’s still the world’s most important central bank – is keen on raising interest rates. It wants to normalize monetary policy and to end quantitative easing. As a consequence, a sudden about-turn in the Fed’s policy is unlikely.

How big a correction do you expect? A typical bear market in the US since the Second World War was about 23%. However, this time around I expect a more vicious downdraft. I expect the S&P 500 to drop to a range of 1200 to 1400 – right now the index stands at about 1870. Compared to its all-time high that’s a correction of almost 50%. The German Dax could fall to around 7000, while the Swiss Market Index will see a similar down-leg. There is a real chance of a bigger correction than many investors realize. This is particularly true when there is a weak economy – which I expect.

Do you think the Fed will continue to raise interest rates? Hardly. I think that the December rate hike will remain the only increase in this cycle and that there will be no additional moves. Depending on how severe the impact of the falling stock market will be on the economy, the Fed might even reverse their rate hike. That could happen towards the end of this year or at the beginning of 2017. The US economy could cool much more rapidly than many expect.

What makes you think that? Right now, inventories both in the US but also in many Asian economies are much higher than usual. If sales do not increase materially from current levels – and that is my base case – companies are forced to slash production. As a consequence, data from the manufacturing sector are bound to disappoint in the months ahead. At the same time the Fed balance sheet is shrinking slightly, whereas in China it is falling precipitously, while in Europe we have the situation that Mario Draghi’s verbal interventions might no longer work. We are at the end of an era.

The end of the era of quantitative easing? Exactly, the era of QE is over or at least nearing its end. Central banks and economists have learned that printing money does not solve any economic problems and does not lead to stronger growth. It did not even help to push inflation higher. The Fed’s interventions during the financial crisis in 2008 were crucial and the right thing to do. Everything that followed, however, was a mistake. In light of the lessons learned over the past years, I do not expect central banks to resort to quantitative easing again anytime soon.

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“Their governments and financial sectors talked up anaemic recovery as an impressive comeback, propagating the myth that huge bubbles are a measure of economic health.”

The ‘Recovery’ Was Built On Bubbles (Chang)

Those who put forward the narrative are now trying to blame China in advance for the coming economic woes. George Osborne has been at the forefront, warning this month of a “dangerous cocktail of new threats” in which the devaluation of the Chinese currency and the fall in oil prices (both in large part due to China’s economic slowdown) figured most prominently. If our recovery was to be blown off course, he implied, it would be because China had mismanaged its economy. China is, of course, an important factor in the global economy. Only 2.5% of the world economy in 1978, on the eve of its economic reform, it now accounts for around 13%. However, its importance should not be exaggerated. As of 2014, the US (22.5%) the eurozone (17%) and Japan (7%) together accounted for nearly half of the world economy. The rich world vastly overshadows China.

Unless you are a developing economy whose export basket is mainly made up of primary commodities destined for China, you cannot blame your economic ills on its slowdown. The truth is that there has never been a real recovery from the 2008 crisis in North America and western Europe. According to the IMF, at the end of 2015, inflation-adjusted income per head (in national currency) was lower than the pre-crisis peak in 11 out of 20 of those countries. In five (Austria, Iceland, Ireland, Switzerland and the UK), it was only just higher – by between 0.05% (Austria) and 0.3% (Ireland). Only in four countries – Germany, Canada, the US and Sweden – was per-capita income materially higher than the pre-crisis peak. Even in Germany, the best performing of those four countries, per capita income growth rate was just 0.8% a year between its last peak (2008) and 2015.

The US growth rate, at 0.4% per year, was half that. Compare that with the 1% annual growth rate that Japan notched up during its so-called “lost two decades” between 1990 and 2010. To make things worse, much of the recovery has been driven by asset market bubbles, blown up by the injection of cash into the financial market through quantitative easing. These asset bubbles have been most dramatic in the US and UK. They were already at an unprecedented level in 2013 and 2014, but scaled new heights in 2015. The US stock market reached the highest ever level in May 2015 and, after the dip over the summer, more or less came back to that level in December. Having come down by nearly a quarter from its April 2015 peak, Britain’s stock market is currently not quite so inflated, but the UK has another bubble to reckon with, in the housing market, where prices are 7% higher than the pre-crisis peak of 2007.

Thus seen, the main causes of the current economic turmoil lie firmly in the rich nations – especially in the finance-driven US and UK. Having refused to fundamentally restructure their economies after 2008, the only way they could generate any sort of recovery was with another set of asset bubbles. Their governments and financial sectors talked up anaemic recovery as an impressive comeback, propagating the myth that huge bubbles are a measure of economic health.

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“A major Chinese devaluation would be a global earthquake, transmitting a wave of deflation through a world economy already uncomfortably close to a deflation-trap.”

China’s Banking Stress Looms Like Banquo’s Ghost In Davos (AEP)

Bad debts in the Chinese banking system are four or five times higher than officially admitted and pose a mounting risk to the country’s financial stability, the world’s leading expert on debt has warned. Harvard professor Ken Rogoff said China is the last big domino to fall as the global “debt supercycle” unwinds. This is likely to expose the sheer scale of malinvestment that has built up during the country’s $26 trillion credit bubble. Prof Rogoff said the official 1.5pc rate of non-performing loans held by banks is fictitious. “People believe that as much as they believe the GDP data,” he told the World Economic Forum in Davos. The real figure is between 6pc and 8pc. He warned that unexpected problems can come “jumping out of the woodwork” once a debt denouement unfolds in earnest.

Banks are disguising the damage by rolling over bad loans and pretending all is well, with the collusion of regulators, but this draws out the agony and ultimately furs up the financial arteries. Ray Dalio, founder of Bridgewater, said the worry is that credit in China is still growing faster than the economy even at this late stage, storing up greater problems down the road. The efficiency of credit has collapsed. It now takes four yuan of extra debt to generate a single yuan of economic growth, compared to a ratio of almost one to one a decade ago. China’s foreign reserves have dropped by $700bn to $3.3 trillion as capital flight overwhelms the inflows from the country’s trade surplus. Mr Dalio said the historical pattern is that falls of this magnitude are typically followed by 25pc devaluation.

“It is not always easy for governments to maintain clear control over the currency,” he said. A major Chinese devaluation would be a global earthquake, transmitting a wave of deflation through a world economy already uncomfortably close to a deflation-trap. Fang Xinghai, a top financial adviser to Chinese president Xi Jinping, said his country is absolutely committed to the defence of its new trade-weighted currency basket. “It is the decided policy of China,” he said. Analysts say the central bank (PBOC) spent roughly $140bn defending the yuan in December, clear evidence that they have pinned their colours to the mast. Mr Fang admitted that the switch from a crawling dollar peg to the new regime had been badly handled. “We’re learning. We have to do a better job. Our system is not able to communicate seamlessly with the markets,” he said.

Yet he insisted that the yuan has been been basically stable on basket-basis for several months and stressed that the country is a net creditor with little reliance on foreign funding.”We have a sizeable current account surplus. There really is no basis for China to depreciate the currency,” he said. Mr Fang said a devaluation goes against the whole thrust of policy and the Communist Party’s strategic switch to consumption-led growth. “China is different from other developing countries. Our growth is largely fueled by domestic savings and capital. That gives us confidence to deal with whatever risks come out of financial markets,” he said. “If China was relying largely on foreign capital, you bet, any major financial risk could derail our growth. But China is different and this is a fact that a lot of people need to pay attention to,” he said.

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The entire world does.

The EU Prioritizes The Old And The Rich (FT)

A longer-term assessment would start with the founders of (western) European co-operation in the late 1940s. They did not contemplate integration as a way to supersede nation-states; rather they welcomed the revival of nation-states and saw co-operation as a way to help them flourish. Integration was not only unprecedented but also modest in scope. Economies flourished: growth was high, unemployment low and exchange controls curtailed cross-border capital flows, enabling governments to support managed capitalism through fiscal policy and strategic investment. It was in this era, so different in its core values from today, that the political capital was laid down for Europe, which the union is now spending so fast This phase ended in the mid-1970s. In the past 30 years, European institutions and law expanded even faster than membership.

The European Communities (later the EU) acquired a flag, and began to worry about political legitimacy. New institutions such as the Court of Justice and the European Central Bank acquired sweeping powers with little public discussion. The driving events were German reunification and a new conception of democracy, in which national parliaments were carefully monitored by judges and central bankers as supposedly independent guarantors of fiscal probity. The creation of a common currency, the euro, intensified this mistrust of parliaments, but nobody cared much before 2008 because growth was good and there was enough to go round. Now the money has dried up, what can the EU’s defenders say? That it provides peace? Voters take that for granted. That the euro remains strong? A great political project will never flourish on monetary stability alone.

That the EU encourages growth? Hardly. Democracy? Not when Europe is identified with a fiscal regime enforced by constitutional lawyers and central bankers that sees millions forever consigned to joblessness: an EU with an inflation rate of 0.1% and a youth unemployment rate of over 20% is a body that, to put it crudely, prioritises the old and the rich. No dream there unless something changes fast. It is no longer in supporting the union but in proposing resistance to it that nationalist politicians see the chance to burnish their democratic credentials. The union faces a deep crisis of institutional legitimacy. It is now commonly acknowledged that monetary policy has shot its bolt. That border controls are unenforceable, too. But it is the underlying legitimacy problem that awaits a change of heart on the part of the elites.

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Interesting angle. But it begs the question who’s really in power.

Will The Big Banks Break Themselves Up? (Forbes)

[..] midway through a half-hour conversation, Thomas B. Michaud, CEO of Keefe, Bruyette & Woods, begins to sound as if he’s an organizer of the Bernie Sanders campaign, not a CEO who’s contributed thousands to Jeb Bush’s Right To Rise PAC, and sees a lot of sense in (R-Ala.) Richard Shelby’s effort to give lenders relief from the Dodd Frank Act. “JPMorgan Chase is a trillion dollars bigger after the crisis than it was before the crisis. That’s almost unfathomable. You’ve got these big banks that were too-big-to-fail and their response was to get bigger,” Michaud says. He collects his thoughts and then lobs another bomb at the titans atop his industry. “My opinion is when you have a few big banks that dominate the market like they do, it can be anti-competitive. What we learned in the crisis is that the government will bail out the biggest banks… Not only is it dangerous to the tax payer, it is dangerous to the global economy,” he says.

A day earlier, it was Sanders who was in midtown Manhattan making these pronouncements, during an hour-long rally that caused #BreakEmUp to begin trending on Twitter. Sanders vowed to re-instate the Glass-Steagall Act, thus separating commercial banking from investment banking. “Within one year, my administration will break these institutions up so that they no longer pose a grave threat to the economy,” Sanders bellowed, to raucous applause. Michaud isn’t going to be stumping with Sanders on the campaign trail anytime soon. While Sanders vowed to invoke Section 121 of the Dodd Frank Act to break up the big banks, Michaud believes market forces may do that work before a new President even takes office. “The reality is we are not going to get a Glass Steagall re-enactment,” he says before adding, “the regulators are going to force the boards of directors to make that decision on their own because it is in the best interest of their shareholders.”

New rules are punitive enough that too-big-to-fail banks will have no choice but to trim down. The leverage that once gave megabanks their competitive advantage – and the ability to make money in virtually every corner of the market – is gone. CEOs are increasingly finding it hard justify many of their businesses to impatient shareholders. “The regulatory drumbeat is going to cause the biggest banks to disaggregate,” Michaud says, pointing out that General Electric divested most of its financial services operations last year because simply wasn’t as lucrative. He adds, “I have a lot of respect for Citigroup’s current management team. But they sell a business almost every few weeks I didn’t even know they owned.”

Michaud hasn’t invited FORBES to his offices just to wax about Wall Street’s biggest firms, but he sees their challenges as an opportunity for a different group of lenders – a crop of regional banks between $5 billion-to-$50 billion in assets such as Bank of the Ozarks in Arkansas, Columbia Banking System in the northwest, Pinnacle Financial in Nashville, and Eagle Bancorp in Maryland — which are taking market share and growing far-faster than the Citi’s and the JPMorgan’s of the world. “It used to be pre-crisis that the nation’s largest banks were the most profitable. That has dramatically changed,” Michaud says. The best profits and stock performance comes from mid-sized banks, not the trillion-dollar firms that get the attention of regulators, the media and presidential candidates.

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“..the effect of slowing growth in China indicates a fundamental change..”

Moody’s Just Put $540 Billion In Energy Debt On Downgrade Review (ZH)

One week ago, in the aftermath of the dramatic downgrade to junk of Asian commodity giant Noble Group, we showed readers the list of potential “fallen angel” companies, those “investment “grade companies (such as Freeport McMoRan whose CDS trades at near-default levels) who are about to be badly junked, focusing on the 18 or so US energy companies that are about to lose their investment grade rating. Perhaps inspired by this preview, earlier today Moody’s took the global energy sector to the woodshed, placing 175 global oil, gas and mining companies and groups on review for a downgrade due to a prolonged rout in global commodities prices that it says could remain depressed indefinitely. The wholesale credit rating warning came alongside Moody’s cut to its oil price forecast deck.

In 2016, it now expects the Brent and WTI to average $33 a barrel, a $10 drop for Brent and $7 for WTI. Warning of possible downgrades for 120 energy companies, among which 69 public and private US corporations, the rating agency said there was a “substantial risk” of a slow recovery in oil that would compound the stress on oil and gas firms. As first reported first by Reuters, the global review includes all major regions and ranges from the world’s top international oil and gas companies such as Royal Dutch Shell and France’s Total to 69 U.S. and 19 Canadian E&P and services firms. Notably absent, however, were the two top U.S. oil companies ExxonMobil and Chevron.

Moody’s said it was likely to conclude the review by the end of the first quarter which could include multiple-notch downgrades for some companies, particularly in North America, in other words, one of the biggest event risks toward the end of Q1 is a familiar one: unexpected announcements by the rating agencies, which will force banks to override their instructions by the Dallas Fed and proceed to boost their loss reserves dramatically. What Moody’s admitted is something profound, and which not even the equity holders of many energy companies have realized, namely that “Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows,” it said.

This means far less value going to equity as the companies lurch ever deeper into financial distress, unless of course oil does rebound back to $100, which paradoxically can only happen – if only briefly – after a massive default wave (which ultimately will lower the all in cost of production). Worse, Moody’s also said that it sees “a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall further.” But the most dire warning from the rating agency which is suddenly showing far more perceptiveness than is typical, is the admission that China, as a source of global debt-funded demand, is no more: “Moody’s believes that this downturn will mark an unprecedented shift for the mining industry. Whereas previous downturns have been cyclical, the effect of slowing growth in China indicates a fundamental change that will heighten credit risk for mining companies.”

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Might as well stop altogether.

North Sea Drilling Sinks to Record Low (BBG)

The pace of drilling in the North Sea, the center of U.K. oil production for the past 40 years, has sunk to a record as crashing energy prices force explorers to abandon costly projects. Just 63% of oil and gas rigs in the U.K. North Sea were being used as of Jan. 19, according to data provider RigLogix. That’s the lowest since the Houston-based company started tracking their operation in 2000. In the Norwegian North Sea, the 71% rate is also the worst on record. Producers in the region, home of the Brent benchmark, boosted output the past two years as projects approved in the era of $100 oil came on stream. Yet crude’s subsequent plunge has forced many to shelve growth plans as they reduce spending and staff.

BP intends to eliminate 600 North Sea positions over the next two years, adding to more than 90,000 jobs the industry has cut in the area since the start of 2014. “In the U.K. North Sea, you’re looking anywhere between $15 and $45 a barrel for operating costs,” according to Kate Sloan, a Macquarie Group Ltd. analyst who said many older fields are at the top end of that range since they need specialized drilling to prolong their lives. “I wouldn’t expect anyone to be doing that kind of work so that takes quite a few of the rigs out of the market.” Drilling off Norway also has been expensive historically. A 2012 government-commissioned report showed drilling costs there were the highest in the world, as much as 45% higher than in the U.K. While companies operating off Norway can claim a portion of their costs back from the state, they’ve still put projects on hold.

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There are many towns around the world like Aberdeen.

Aberdeen: Once-Rich Oil City Now Relying On Food Banks (Guardian)

Former oil workers are queuing up to use food banks in Aberdeen, formerly one of the UK’s most prosperous cities, as 12-year lows in the price of crude this week propel the North Sea industry deeper into crisis. Hundreds of staff are being laid off every week as producers, drillers and service companies slash their spending in moves which are hurting local businesses, from estate agents to hoteliers and taxi drivers. Those claiming out of works benefits in the north-east of Scotland rocketed by 72% in December and the total number of UK oil-related jobs lost could already be 70,000, with some predicting 200,000 out of 400,000 could eventually go. Dave Simmers, who leads the Aberdeen Food Banks partnership, said demand for free access had soared in a city which is so dependent on oil and gas.

“The number of food parcels delivered in 2015 was double the number in 2014 and we are seeing increases all the time. People can be used to earning good money in the oil industry but when the pay checks stop the problems start,” Simmers added. “We had a man draw up in a Porsche outside and come in here. His house was going to be repossessed and the car was on credit and going to be handed back. Whoever you are, you can be two or three wage slips away from a hole.” Simmers said the social enterprise he runs, Community Food Initiatives North East, lead partner in the Aberdeen Food Banks partnership, has also lost a huge amount of revenue because it used to supply much more paid fruit to the industry – including to crews on offshore vessels anchored in the harbour just yards away.

Jake Molloy, a former oil worker and now Scottish regional officer for the Rail, Maritime, Transport (RMT) union said he has personally been made aware of more than 250 job losses in the last four days alone. “Every day I see HR1s [statutory redundancy notices] like these,” he said, shuffling sheets of paper and reading out: “150 at Petrofac, 90 at Sparrows, 70 at Gulfmark, 60 at ConocoPhillips … ” Molloy said that along with those actually losing their livelihoods, almost everyone is having their terms and conditions changed. “Offshore workers are being made to work an extra 320 hours a year for no extra pay, pension arrangements are being slashed and travel allowances removed in some cases.” His worst nightmare is that there is a growing backlog of maintenance work as oil companies cut spending, which could affect safety.

He is also worried that decommissioning of platforms will hasten an early end to some fields. Britain is one of the highest cost producers of oil in the world at around $60(£42) a barrel, not a good situation when the global price is about half that.

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10,000 is just a start. Schlumberger employs over 100,000 people.

Oil Services Giant Schlumberger Axes 10,000 Jobs (Guardian)

The world’s largest oilfield services company Schlumberger has lost more than $1bn and cut a further 10,000 jobs. Like others in the industry, Schlumberger has been hard hit by the fall in energy prices and the downturn in the sector. It warned on Thursday that it does not expect a turnaround in the near future. Schlumberger said it streamlined costs and cut 10,000 jobs during the last three months of 2015 to prepare for weaker business in early 2016. The company, which has principal offices in Paris, Houston, London and The Hague, had announced at least 20,000 job cuts earlier in 2015. It currently employs about 105,000 people. Amid an oil glut, crude prices are down about 38%, with natural gas prices down about 27% from a year ago.

The downturn has led energy companies to cut thousands of jobs over the past year. Earlier on Thursday, Southwestern Energy, the third-largest natural gas producer in the US, said it would cut 1,100 jobs, about 44% of its workforce. The Schlumberger chairman and CEO, Paal Kibsgaard, noted that the number of rigs exploring on land for oil and gas in the US fell to fewer than 700 at the end of 2015, down 68% from the 2014 peak. “The decrease in land activity was the sharpest seen since 1986,” he said, adding that “massive over-capacity in the land services market offers no signs of pricing recovery in the short to medium term.” Schlumberger’s fourth-quarter results were hurt by a 39% drop in revenue and huge accounting charges, producing a loss of $1.02bn.

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Gee, what a surprise.

UK Treasury ‘To Count £139 Million Of Made Up Money’ As Foreign Aid (Ind.)

The UK Treasury will count £139 million of “made up money” as overseas aid, according to debt campaigners. The UK Government enshrined in law a commitment to spend 0.7% of national income, or around £12 billion, on aid in 2015, finally meeting a target set by the UN in 1970. Under an agreement with Cuba on its debt to the UK, the Treasury is to count £139 million of cancelled late interest payments towards this target, or around 1.2% of the projected £12 billion spend. Debt campaigners have called the debt “made up money” that was never expected to be paid. The loans were backed by UK Export Finance, a Government arm that lends money to fund the purchase of UK Exports.

“British people think UK aid money should be used to reduce poverty and inequality around the world. But too often it is driven by the interests of British companies at the expense of increased poverty and inequality,” said Tim Jones, policy officer at the Jubilee Debt Campaign. The amount of interest to be written off is more aid that the UK gave to Kenya in total in 2014, according to data from Statista. Cuba defaulted on the original £42 million debt in 1987 and has since accrued £139 million in late interest payments at an annual interest rate of 11%. This money will be counted as Overseas Development Assistance in line with OECD rules over an 18-year repayment term, the Treasury said. “Debt cancellation has always been part of Britain’s development assistance and related aid targets, and is totally consistent with the internationally recognised definition of aid monitored by the OECD”, a Government spokesperson said.

Cuba reached a debt agreement with 14 Western governments last year. Under the agreement, $2.6 billion of late interest payments will be cancelled, all of which is likely to be counted as aid in the respective countries, Jubilee said. Cuba has agreed to repay the UK the £42 million that was lent originally, plus £21 million of contractual interest. If Cuba does not pay international lenders by October 31 each year, it will be charged 9% interest until payment, plus late interest for the portion in arrears, Reuters reported. “Government policy, which is the same for all countries, is to seek to recover as much debt as possible. The agreement to restructure Cuba’s debt is an important step for the Cuban economy,” the Treasury said. But debt campaigners said that the high annual interest rate charged to Cuba is higher than the interest rate the UK Government pays and that there was no expectation that it would ever be paid.

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When in a hole… Look, emissions were like 20-40 times over limit. Nothing vague about that. But if VW feels like antagonizing both Europe AND the US, go right ahead.

VW Blames Emissions Scandal on EU’s ‘Vague Testing Requirements’ (Ind.)

European carmakers have pleaded for time and understanding after the European Parliament announced a special inquiry into the Volkswagen emissions scandal that erupted last year. A cross-party committee of 45 MEPs will spend 12 months examining how VW was able to rig emissions tests with so-called “defeat devices” – software that cosmetically cut nitrogen oxide (NOx) exhaust emissions during regulators’ examinations. It will also look at whether the German car company was given political cover by the European Commission and national governments in the EU. But Dieter Zetsche, the chairman of Daimler and head of Mercedes-Benz Cars, said that the industry was committed to cleaner cars.

“Let me be clear: we fully accept our responsibility to bring down emissions,” he said in Brussels. “But rushing new measures will fail to bring the intended results.” Mr Zetsche – who is also the president of the European Automobile Manufacturers’ Association (ACEA) – blamed the scandal on the vague testing requirements. “We recognise what has gone wrong,” he added. “By definition, by physics, you get more emissions by full acceleration and a full load, at low temperatures and climbing a hill, than on a flat autobahn.” Up to 11 million VW diesel vehicles worldwide are thought to have been fitted with software to mask NOx emissions. The European Parliament’s inquiry will also look into whether governments knew about the defeat devices before the scandal emerged and why there were no defined penalties in place to deter such cheating.

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Getting hard to mount any defense.

VW Probe Finds Manipulation Was Open Secret In Department (Reuters)

Volkswagen’s development of software to cheat diesel-emissions tests was an open secret in the company department striving to make its engines meet environmental standards, Germany’s Sueddeutsche Zeitung newspaper said on Friday, citing results from VW’s internal investigation. Many managers and staff dealing with emissions problems in the engine-development department knew of or were involved in developing the “defeat devices”, said the newspaper, which researched the matter with regional broadcasters NDR and WDR. A culture of collective secrecy prevailed within the department, where the installation of the defeat software that would cause the carmaker’s biggest ever corporate crisis was openly discussed as long ago as 2006, Sueddeutsche said.

But it said there were exceptions: a whistleblower, who was himself involved in the deception and has been giving evidence to investigators hired by Volkswagen, alerted a senior manager outside the department in 2011. This manager, however, did not react, the newspaper said. Volkswagen has said that to the best of its knowledge only a small circle of people knew about the manipulation, which Europe’s biggest carmaker admitted to U.S. environmental authorities in September last year. It has said it is not aware of any involvement by top management or supervisory board members in the affair, which toppled its chief executive last year and is likely to cost billions of dollars for recalls, technical fixes and lawsuits.

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“What they have produced is endless war financed by runaway debt which is leading to economic ruin. But ignorance helps a lot here.”

DEFEAT IS VICTORY (Dmitry Orlov)

On the wall of George Orwell’s Ministry of Truth from his novel 1984 there were three slogans: WAR IS PEACE FREEDOM IS SLAVERY IGNORANCE IS STRENGTH. It occurred to me that these apply just a little bit too well to the way the Washington, DC establishment operates. War certainly is peace: just look at how peaceful Iraq, Afghanistan, Yemen, Libya, Syria and the Ukraine have become thanks to their peacemaking efforts. The only departures from absolute peacefulness which might be taking place there have to do with the fact that there are some people still alive there. This should resolve itself on its own, especially in the Ukraine, where the people now face the prospect of surviving a cold winter without heat or electricity.

Freedom is indeed slavery: to enjoy their “freedom,” Americans spend most of their lives working off debt, be it a mortgage, medical debt incurred due to an illness, or student loans. Alternatively, they can also enjoy it by rotting in jail. They also work longer hours with less time off and worse benefits than in any other developed country, and their wages haven’t increased in two generations. And what keeps it all happening is the fact that ignorance is indeed strength; if it wasn’t for the Americans’ overwhelming, willful ignorance of both their own affairs and the world at large, they would have rebelled by now, and the whole house of cards would have come tumbling down. But there is a fourth slogan they need to add to the wall of Washington’s Ministry of Truth. It is this: DEFEAT IS VICTORY.

The preposterous nature of the first three slogans can be finessed away in various ways. It’s awkward to claim that American involvements in Iraq, Afghanistan, Yemen, Libya, Syria or the Ukraine have produced “peace,” exactly, but various lying officials and assorted national teletubbies still find it possible to claim that they somehow averted worse (totally made-up) dangers like Iraqi/Syrian “weapons of mass destruction.” What they have produced is endless war financed by runaway debt which is leading to economic ruin. But ignorance helps a lot here.

Likewise, it is possible, though a bit awkward, to claim that slavery is freedom—because, you see, once you have discharged your duties as a slave, can go home and read whatever crazy nonsense you want on some blog or other. This is of course silly; you can stuff your head with whatever “knowledge” you like, but if you try acting on it you will quickly discover that you aren’t allowed to. “Back in line, slave!” You can also take the opposite tack and claim that freedom is for layabouts while we the productive people have to rush from one scheduled activity to another, and herd our children around in the same manner, avoiding “unstructured time” like a plague, and that this is not at all like slavery. Not at all. Not even close. Nobody tells me what to do! (Looks down at smartphone to see what’s next on today’s to-do list).

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How is this not obvious? “It is impossible to stop. Those who believe in some way that we can erect fences and stop migration are living in Cloud Cuckoo Land..”

Top UN Official Says Mass Migration ‘Unavoidable Reality’ (AFP)

Mass cross-border migration is an “unavoidable reality” and it is “impossible to stop” the flow of refugees in need of sanctuary, the United Nations’ top official in charge of migration said during a visit to Bangladesh. In an interview with AFP in Dhaka, Peter Sutherland, the UN’s special representative for migration, said the world needed to accept millions of people fleeing conflicts in Syria and elsewhere and find ways to live together. Sutherland is visiting Bangladesh for the Global Forum on Migration and Development in Dhaka where he said he would discuss the plight of Rohingya refugees in Bangladesh. The refugees, fleeing ongoing persecution in Myanmar – which Naypyidaw denies – have been living in Bangladeshi camps or jungle hideouts, some for generations, often without access to basic food or shelter.

The forum in Dhaka takes place as Europe is facing its biggest migration crisis since World War II, with more than a million asylum seekers arriving in Germany alone in 2015 – triggereing a fierce backlash. “We must find ways to be living together. Today (migration) is an unavoidable reality, we are living in the era of globalisation,” Sutherland said in the Bangladeshi capital late on Thursday. “It is impossible to stop. Those who believe in some way that we can erect fences and stop migration are living in Cloud Cuckoo Land,” he said. Turkey is currently hosting 2.2 million Syrian refugees, while between 2,000 and 3,000 people arrive daily in the main European landing point of Greece, although many die making the journey.

Sutherland criticised world leaders who stoke xenophobia for political gain and link refugees with a heightened terror threat. “They represent the world of yesterday, a world of conflict and not a world of consensus. They represent a world which creates division rather than harmony,” he said. “Humanity demands responsibility and care for those who need sanctuary.” The European Union’s passport-free Schengen area has come under huge strain from the migrant influx, with wealthier countries including Denmark and Sweden introducing border controls to deal with the flow of people.

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No, it’s long since failed. About 800 human lives ago. “A manageable crisis has become a moral test that Europe is in danger of failing dismally..”

Europe’s Refugee Crisis Claims At Least Another 46 Lives In Aegean (AP)

The death toll in Europe’s migration crisis rose Friday when two overcrowded smuggling boats foundered off Greece and at least 46 people drowned — more than a third of them children — as European officials remained deeply divided on how to handle the influx. More than 70 people survived, and a large air and sea search-and-rescue effort was underway off the eastern islet of Kalolimnos, the site of the worst accident. It was unclear how many people were aboard the wooden sailboat that sank there indeep water, leaving at least 35 dead. Coast guard divers were due to descend to the sunken wreck early Saturday, amid fears that more people had been trapped below deck.

At least 800 people have died or vanished in the Aegean Sea since the start of 2015, as a record of more than 1 million refugees and economic migrants entered Europe. About 85% of them crossed to the Greek islands from nearby Turkey, paying large sums to smuggling gangs for berths in unseaworthy boats. Rights groups said the deaths highlight the need for Europe to provide those desperate to reach the prosperous continent’s shores with a better alternative to smuggling boats. European policy toward its worst immigration crisis since World War II has diverged wildly so far. Germany — where most are heading — has welcomed those it considers refugees. Other countries, led by Hungary, have blocked or restricted them from entering and resisted plans to share the burden of refugees.

“These deaths highlight both the heartlessness and the futility of the growing chorus demanding greater restrictions on refugee access to Europe,” said John Dalhuisen, Amnesty International’s Europe and Central Asia program director. “A manageable crisis has become a moral test that Europe is in danger of failing dismally,” he said. The U.N. refugee agency said daily arrivals on the Greek islands have surged to more than 3,000 in the past two days, and it cited refugee testimony that smugglers have recently halved their rates amid deteriorating weather conditions. “It is tragic that refugees, including families with young children, feel compelled to entrust their lives to unscrupulous smugglers in view of lack of safe and legal ways for refugees to find protection,” said Philippe Leclerc of UNHCR Greece.

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Jun 012015
 
 June 1, 2015  Posted by at 10:26 am Finance Tagged with: , , , , , , , , , , ,  


Lewis Wickes Hine Whole family works, Browns Mills, New Jersey 1910

QE For The People: Monetary Policy For The Next Recession (Bloomberg)
The Liquidity Timebomb – Monetary Policies Create Dangerous Paradox (Roubini)
Bond Dealers Enfeebled as Liquidity Breakdown Boosts Derivatives (Bloomberg)
Top US Fund Managers Attack Regulators (FT)
Banks Are Not Intermediaries Of Loanable Funds – And Why This Matters (BoE)
Alexis Tsipras: The Bell Tolls for Europe (The Automatic Earth)
Defiant Tsipras Threatens To Detonate Crisis Rather Than Yield To Creditors (AEP)
Greece’s Creditors’ Crazy Commands (KTG)
The Key Reason Why Euro’s Future Is Uncertain (Ivanovitch)
Draghi Deflation Relief Means Little With Greek Threat Unsolved (Bloomberg)
Shale Oil’s House of Cards (TheStreet)
China Considers Doubling Its Local Bond-Swap Program (Bloomberg)
China $550 Billion Stock Wipeout Reminds Traders of 2007 Catastrophe (Bloomberg)
Hedge Fund Activists Are Japan’s Best Friend (Pesek)
Sydney And Melbourne Are ‘Unequivocally’ In A House Price Bubble (Guardian)
Czech Finance Minister Proposes Referendum on the Euro (WSJ)
Prime Minister Renzi Bruised In Italy’s Regional Elections (Politico)
Over 5,000 Mediterranean Migrants Rescued Since Friday (Reuters)

“Nobody, so far as I’m aware, is arguing that it wouldn’t be effective. What, then, is the objection?”

QE For The People: Monetary Policy For The Next Recession (Bloomberg)

By pre-crash standards, the big central banks have made and continue to make amazing efforts to support demand and keep their economies running. Quantitative easing would once have been seen as reckless. The official term of art – unconventional monetary policy – tacitly acknowledged that. But QE isn’t unconventional any longer. It mostly worked, the evidence suggests. The world avoided another Great Depression. Yet even in the U.S., this is a seriously sub-par recovery; growth in Europe and Japan has been worse still. Now imagine a big new financial shock. It’s quite possible that all three economies would fall back into recession. What then?

According to your economics textbook, the obvious answer is fiscal policy. But bringing fiscal expansion to bear in a sustained and effective way proved difficult after 2008. Next time round, the politics might be harder still, because public debt has grown and concerns about government solvency (warranted or otherwise) will be greater. Sooner rather than later, attention therefore needs to turn to a new kind of unconventional monetary policy: helicopter money. One thing’s for sure: The idea needs a blander name. Milton Friedman, who argued that central banks could always defeat deflation by printing dollars and dropping them from helicopters, did nothing to make the idea acceptable. Put it that way and most people think the notion is crazy.

How about “QE for the people” instead? It has a nice populist ring to it – suggesting a convergence of financial excess and the Communist Manifesto. The problem is, it isn’t bland. It sounds even bolder than helicopter money. “Overt monetary financing” is closer to what’s required, but something even duller would be better. Whatever you call it, the idea is far from crazy. Lately, more economists have been advocating it, and they’re right. The logic is simple. If central banks need to expand demand – and interest rates can’t be cut any further – let them send a check to every citizen. Much of this money would be spent, boosting demand just as Friedman said. Nobody, so far as I’m aware, is arguing that it wouldn’t be effective. What, then, is the objection?

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“..the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets.”

The Liquidity Timebomb – Monetary Policies Create Dangerous Paradox (Roubini)

A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. Unconventional monetary policies have created a massive overhang of liquidity. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity. Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the US, quadrupling relative to the pre-crisis period. This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds).

And yet investors have reason to be concerned. [..] though central banks’ creation of macro liquidity may keep bond yields low and reduce volatility, it has also led to crowded trades (herding on market trends, exacerbated by HFTs) and more investment in illiquid bond funds, while tighter regulation means that market makers are missing in action. As a result, when surprises occur – for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up – the re-rating of stocks and especially bonds can be abrupt and dramatic: everyone caught in the same crowded trades needs to get out fast.

Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales. This combination of macro liquidity and market illiquidity is a timebomb. So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices. But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets. As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases. This is the paradoxical result of the policy response to the financial crisis. Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse.

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Risk where it doesn’t belong.

Bond Dealers Enfeebled as Liquidity Breakdown Boosts Derivatives (Bloomberg)

As Wall Street retreats from its traditional role as the bond market’s middle man, investors frustrated by sudden gyrations and a lack of liquidity are turning to derivatives – in a big way. In the world’s biggest debt markets, including the U.S., Europe and Japan, the number of futures contracts on government debt reached a post-crisis high in May after doubling since 2009. Trading of German bund options and Italian futures also hit records. While some are using derivatives to hedge against higher U.S. interest rates, Pioneer Investment Management and BlackRock Inc. are also shifting into more obscure corners of the fixed-income world as rules to limit bank risk-taking have made it harder to trade at a moment’s notice. Since October 2013, dealers that trade with the Fed have slashed U.S. debt inventories by 84%.

“Liquidity risk is a big challenge,” said Cosimo Marasciulo, the Dublin-based head of fixed income at Pioneer, which oversees $242 billion. “And it’s now affecting an asset that was once considered most liquid – government bonds.” Derivatives, contracts based on underlying assets that can provide the same exposure without tying up as much capital, have become a popular option after central banks started to purchase bonds as a way to boost growth following the financial crisis, which has sapped supply and increased volatility. Over that time, bond buying by major central banks has inundated economies with at least $10 trillion of cheap cash, according to Deutsche Bank. [..]

The shift into derivatives has accelerated as the world’s biggest banks scale back their bond-trading businesses to comply with higher capital requirements imposed by Basel III, which went into effect this year. For Treasuries, the share of transactions by primary dealers has dwindled by more than half to 4% since the end of 2008, according to the Institute of International Finance, a lobbying group for banks. And in the past year, JPMorgan, Morgan Stanley, Credit Suisse and RBS have have either cut back their fixed-income trading desks or are weighing reductions in those businesses. That’s made getting the bonds you want at the price you need more difficult, especially when markets are moving.

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Are the biggest funds TBTF?

Top US Fund Managers Attack Regulators (FT)

US fund managers have launched a new attack on global regulators as they fight a rearguard action against possible rules that would treat groups such as Fidelity and BlackRock as threats to the financial system. The Financial Stability Board, a global watchdog chaired by Mark Carney, governor of the Bank of England, is exploring whether to designate the biggest asset managers as “systemically important” and hit them with tougher rules and heightened scrutiny. But Fidelity said the FSB’s approach was “irredeemably flawed” and told regulators in a letter that regulating a fund manager as systemically important “would be counterproductive and destructive”.

Fund managers argue that they do not pose systemic dangers to financial stability because they do not take deposits, guarantee returns or face the risk of sudden failure like a bank. But regulators have other concerns. Last month Mr Carney highlighted the risk on investor runs on “funds that offer on-demand redemptions but invest in less liquid assets”. The watchdogs are also looking at the stability impact of securities lending by asset managers, and the complexity of fund businesses structured as holding companies, which bear a growing resemblance to banks. Empowered by the leaders of the G20 top economies, the FSB has already designated 30 banks and 9 insurers as global institutions that require tighter regulation because of their potential to cause systemic contagion.

Next in its sights are asset managers, although the FSB, which is based in Basel, Switzerland, is debating whether it makes more sense to regulate entire institutions or particular products and activities. Fidelity and the Securities Industry and Financial Markets Association (Sifma), a US trade group, accused the FSB of ploughing ahead while ignoring an avalanche of empirical studies and previous industry comments.

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Not the first time BoE people address this, but still somewhat surprising from a central bank. Central to the Steve Keen vs Krugman debate.

Banks Are Not Intermediaries Of Loanable Funds – And Why This Matters (BoE)

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy

Since the Great Recession, banks have increasingly been incorporated into macroeconomic models. However, this literature confronts many unresolved issues. This paper shows that many of them are attributable to the use of the intermediation of loanable funds (ILF) model of banking. In the ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. But in the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor. The bank therefore creates its own funding, deposits, in the act of lending, in a transaction that involves no intermediation whatsoever.

Third parties are only involved in that the borrower/depositor needs to be sure that others will accept his new deposit in payment for goods, services or assets. This is never in question, because bank deposits are any modern economy’s dominant medium of exchange. Furthermore, if the loan is for physical investment purposes, this new lending and money is what triggers investment and therefore, by the national accounts identity of saving and investment (for closed economies), saving. Saving is therefore a consequence, not a cause, of such lending. Saving does not finance investment, financing does. To argue otherwise confuses the respective macroeconomic roles of resources (saving) and debt-based money (financing).

The paper shows that this financing through money creation (FMC) description of the role of banks can be found in many publications of the world’s leading central banks. What has been much more challenging is the incorporation of the FMC view’s insights into dynamic stochastic general equilibrium (DSGE) models that can be used to study the role of banks in macroeconomic cycles. DSGE models are the workhorse of modern macroeconomics, and are a key tool in macro-prudential policy analysis. They study the interactions of multiple economic agents that optimise their utility or profit objectives over time, subject to budget constraints and random shocks. The key contribution of this paper is therefore the development

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My post yesterday of Tsipras’ integral text for Le Monde.

Alexis Tsipras: The Bell Tolls for Europe (The Automatic Earth)

Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim. To some, this represents a golden opportunity to make an example out of Greece for other countries that might be thinking of not following this new line of discipline. What is not being taken into account is the high amount of risk and the enormous dangers involved in this second strategy. This strategy not only risks the beginning of the end for the European unification project by shifting the Eurozone from a monetary union to an exchange rate zone, but it also triggers economic and political uncertainty, which is likely to entirely transform the economic and political balances throughout the West.

Europe, therefore, is at a crossroads. Following the serious concessions made by the Greek government, the decision is now not in the hands of the institutions, which in any case – with the exception of the European Commission- are not elected and are not accountable to the people, but rather in the hands of Europe’s leaders. Which strategy will prevail? The one that calls for a Europe of solidarity, equality and democracy, or the one that calls for rupture and division? If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”.

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Ambrose acknowledges what I wrote quite some time ago: “The matter has moved to a higher level and is at this point entirely political.”

Defiant Tsipras Threatens To Detonate Crisis Rather Than Yield To Creditors (AEP)

The Greek prime minister has accused Europe’s leaders of ‘issuing absurd demands’. Greek premier Alexis Tsipras has accused Europe’s creditor powers of issuing “absurd demands” and come close to warning that his far-Left government will detonate a pan-European political and strategic crisis if pushed any further. Writing for Le Monde in a tone of furious defiance after the latest set of talks reached an impasse, Mr Tsipras said the eurozone’s dominant players were by degrees bringing about the “complete abolition of democracy in Europe” and were ushering in a technocratic monstrosity with powers to subjugate states that refuse to accept the “doctrines of extreme neoliberalism”.

“For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim,” he said. The Greek leader, head of the radical-Left Syriza government, issued a stark warning that his country will not submit to these demands and will instead take action “to entirely transform the economic and political balances throughout the West.” Alexis Tsipras made his thoughts known in a piece for Le Monde, the French newspaper “If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”,” he said.

The words originally come from John Donne’s Meditation XVII, with its poignant reminder that the arrogant can be blind to their own demise. “Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him,” it reads. Mr Tsipras’s article is a thinly-disguised warning that Greece may choose to default on roughly €330bn of debt in the biggest sovereign default ever, and pull out of the euro, rather than breech its key red lines. The debts are mostly to European official creditors and the European Central Bank. The situation has become critical after depositors withdrew €800m from Greek banks in two days at the end of last week, heightening fears that capital controls may be imminent.

Mr Tsipras’s choice of words also implies that Greece may turn its back on the Western security system, presumably by shifting into the orbit of Russia and China. The article comes as Panagiotis Lafanzanis, the energy minister and head of Syriza’s powerful Left Platform, returns from Moscow after securing a provisional deal with Gazprom to build part of the “Turkish Stream” gas pipeline through Greece. The Russian energy minister, Alexander Novak, said over the weekend that the project has been agreed in principle. ” We are now discussing technical details,” he said. Greek officials have told The Telegraph that Russia is offering up to €2bn in up-front credit to sweeten the arrangement, though it will not be a state-to-state transaction.

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Greek banks’ holdings of Greek bonds got a 53.5% haircut in a Private Sector Involvement scheme in 2012.

Greece’s Creditors’ Crazy Commands (KTG)

Creditors command and demand, Greece is willing but … some red lines cannot be set aside. Apart from that, creditors’ commands are anything but logical as their demands could be only described as crazy. Furthermore the creditors seem divided as to what they demand from Greece with the logical consequence that the negotiations talks have ended into a deadlock. According to Greek media reports, “While the European Commissions wants austerity measures worth €4-5 billion for the second half of 2015 and the 2016, the IMF raises the lot to €7 billion for 2016. The all-inclusive austerity package should include among others €2.7 billion cuts in pensions.

The Pensions Chapter is one of the thorns among the negotiation partners, and Greece would love to postpone it for after the provisional agreement with the creditors. While it is not clear whether it is the IMF or the EC or both, it comes down to the command that “Pensions should not be higher of 53% of the salary due to the financial situation of the social security funds.” Pension for a civil servant (director, 37 years of work) should come down to €900 from €1,386 today after the pension cuts during the austerity years. Pension for private sector – IKA insurer (37 years of work, 11,000 IKA stamps) and salary €2,300 should come down to €1,250 from €1,452 today after the austerity cuts. (examples* via here)

Of course, with the PSI in March 2012, Greece’s social security funds suffered a huge slap in their deposits in Greek bonds. According to the Bank of Greece report of 2012, social security funds were holding Greek bonds with nominal value €18.7 billion euro. The PSI gave them a new look with a nice hair cut of 53.5%. Guess, how many billions euros were left behind. If one adds the loss of contributions due to high unemployment, part-time jobs, uninsured jobs and the disappearance of full time jobs in the last 3-4 years, the estimations concerning the money available at the Greek social insurance funds are … priceless!

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Everyone hesitates when push comes to shove.

The Key Reason Why Euro’s Future Is Uncertain (Ivanovitch)

The need to consider technical aspects of investment options in a currency of an allegedly very uncertain future is a permanent challenge for the euro area portfolio analysis. In spite of that, the region’s political leaders seem oblivious to the widely held view that the common currency is just a flimsy and provisional political structure. If they understood that reality, their loose talk about the “euro crisis” and the euro’s “doubtful long-term viability” would never be uttered, because without their currency the Europeans would not even have a customs union that was laboriously built and implemented ever since the Treaty of Rome came into effect on January 1, 1958. Indeed, like Caesar’s wife, the permanence of the euro should be above any suspicion.

Sadly, the unbearable lightness of the euro area politicians gives no confidence in their resolve to rally around their single currency – an epochal achievement and a unique symbol of European unity. The serious and continuing degradation of the political situation in France is the main reason for my euro pessimism. France has been the country that originated and carried most of the policies and institutions designed to bring a hostile and divided continent back together. France, unfortunately, seems in no position to play that noble role anymore. France is mired in a deep economic and fiscal crisis, and its leader is one of the country’s most unpopular acting presidents ever. An opinion poll, published May 30, shows that 77% of the French people don’t want President François Hollande to run for re-election in 2017.

His main rival, the former President Nicholas Sarkozy, fares no better: more than 70% of the French would not support his presidential candidacy two years from now. That leaves Germany’s Chancellor Angela Merkel (representing two close center-right parties) alone in a leadership position, despite credibility problems caused by destabilizing spying scandals and a fraying governing coalition with Social Democrats. It, therefore, should not be surprising that there is no political decision on Greece’s legitimate demand to renegotiate unreasonable austerity conditions imposed upon its deeply impoverished population. The French and German leaders seem paralyzed, even though they know that forcing Greece out of the monetary union would spell the end of the euro – with incalculable damages to the European and world economies.

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Deflation is here because people don’t spend. That’s a far wider issue than just Greece.

Draghi Deflation Relief Means Little With Greek Threat Unsolved (Bloomberg)

With a solution to the Greek crisis still out of reach, Mario Draghi can count on at least one piece of good news this week: euro-area consumer prices are rising again. Economists in a Bloomberg survey forecast that the inflation rate rose to 0.2% in May from zero in April. The report, due on Tuesday, would follow improving data from Spain and Italy and mark the first price increase in six months. While the European Central Bank president can take comfort from the fading deflation risk, he and his fellow policy makers will be distracted by a looming Greek loan repayment that could make or break months of negotiations aimed at funding the country and preventing a splintering of the currency bloc.

As the economy stutters through its recovery, concerns about the debt crisis are putting the reins on consumer and business sentiment across the region. “There’s not a huge uncertainty about the economic outlook, there’s more uncertainty about Greece,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. The return of inflation is “good news for the ECB,” he said. “In the months ahead, while we might get a setback, the tendency is upward.” The improving inflation backdrop partly reflects a rebound in oil prices since falling to a six-year low in January. ECB policy makers may also see it as a sign their €1.1 trillion stimulus is working. Draghi said last month that the unconventional actions “have proven so far to be potent, more so than many observers anticipated.” Governing Council member Patrick Honohan said that price inflation is “getting back up.”

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“..it was undeniable proof that as a nation, we had completely bolloxed this once-in-a-lifetime opportunity.”

Shale Oil’s House of Cards (TheStreet)

I knew that the conventional wisdom on the drop in oil prices after the OPEC meeting in November, 2014 was going to be ascribed solely to the Saudis, a conclusion that was far too simple to explain the massive collapse. No, something else, something even more important was going on. The Saudi reticence to cut production was just a catalyst. The bigger theme was an already overdue bust that was happening in U.S. shale oil. This oil bonanza had been built on a house of cards, ready at any moment to topple over. The list of fragile flaws in the system was long. Each state had its own set of regulations and oversights on leases and operations, with no consistent framework for oil shale fracking.

Despite (or because of) the complete freedom in oversight, fracking for oil from shale had grown at a frightening and undisciplined pace. As prices declined, it became clear that much of this breakneck activity had been financed by very risky and highly leveraged capital investments that mirrored some of the worst pyramiding schemes I had ever seen. But because prices had been high, many of the shortcomings had been conveniently overlooked: Oil was being taken out of the ground as quickly as it could be drilled. The months following the OPEC announcement showed me just how rickety the entire structure for retrieving shale oil had become. Oil companies that had been the darlings of Wall Street not one year earlier were now losing 70 to 80% of their share value, as their corporate bonds, which were already poorly rated, risked complete default.

Virtually every company involved in shale production was forced to slash development budgets, hoping to ride out what they prayed was a temporary dip in the price of oil. Yet projected production numbers from all of these players continued to rise, almost insuring that prices would stay cheap. What had been a universally optimistic industry not 6 months prior had changed overnight into a frightened group playing a collective game of chicken, as oil producers hunkered down with reduced budgets and hoped like mad that the “other guy” would go broke first. That shale oil had folded like a cheap suitcase so quickly and completely was incredible to witness and, I thought, incredibly important: it was undeniable proof that as a nation, we had completely bolloxed this once-in-a-lifetime opportunity.

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“An expansion would signal officials are confident in the template..” No, it means things are not going as planned, and that is due to debt to shadow banks.

China Considers Doubling Its Local Bond-Swap Program (Bloomberg)

Chinese policy makers are considering plans to as much as double the size of a clean-up program for shaky local government finances, according to people familiar with the discussions. In what would be the second stage of the program, a further 500 billion yuan ($81 billion) to 1 trillion yuan of local-government loans would be authorized to be swapped into bonds issued by provinces and cities, the people said, asking not to be named because the talks are private. The first stage of the bond swap, currently under way, is 1 trillion yuan.

An expansion would signal officials are confident in the template they’ve crafted for reducing risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The complex process – which includes inducements for banks to buy new, longer-maturity, lower yielding bonds — is alleviating a funding crunch among provinces that had threatened to deepen the economy’s slowdown. “It’s solving the cash-flow issue at the local governments and ensuring that infrastructure projects this year aren’t delayed,” said Nicholas Zhu at Moody’s, referring to the initial 1 trillion-yuan program. He said any additional quota probably would be for debt swaps in 2016.

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Much more of this to come.

China $550 Billion Stock Wipeout Reminds Traders of 2007 Catastrophe (Bloomberg)

The rout wiped out about $350 billion of market value in a week on the Shanghai and Shenzhen exchanges. It so traumatized traders that eight years later they still refer to the decline by the date it began: the 5/30 catastrophe. The milestone for the modern Chinese stock market, which began in 1990, started on midnight, May 30, 2007, with Hu Jintao’s government unexpectedly announcing it would triple a tax on stock trading. The plunge sparked by the pronouncement had followed a breathless rally, making it eerily similar to last week’s events. On Thursday, stocks erased almost $550 billion in value after surging 143% on the Shanghai Composite Index over the past year. Traders could be forgiven for a wave of deja vu mixed with a dollop of dread: In 2007, stocks recovered from their May losses only to drop more than 70% over the next 12 months from an October peak. Here’s a look at the similarities and differences between China’s markets then and now. What’s similar:

* Timing of declines: Both selloffs followed rallies that sent the benchmark index up more than 100% in just months. Thursday’s tumble in Chinese stocks came after brokerages tightened lending restrictions and the central bank drained cash from the financial system. The Shanghai Composite shed 6.5% and fell another 0.2% in volatile trading on Friday. On May 30, 2007, the Shanghai gauge also tumbled 6.5% after the government raised the stamp tax to 0.3% from 0.1%. The measure aimed to cool the stock market after it doubled in about six months and almost quadrupled from the end of 2005. By June 4, the benchmark had lost 15%. The market then started to stabilize and rose another 66% to an all-time high in October 2007 before tanking again as the global financial crisis raged.

* Rookie traders: The two stock rallies were fueled by record amounts of new investors, increasing fluctuations. About 29 million new stock accounts have opened this year through May 22, almost as many as in the previous four years combined, according to the China Securities Depository & Clearing Corp. Margin debt on the Shanghai exchange has soared more than 10-fold in the past two years to a record 1.35 trillion yuan ($220 billion) on Thursday. In the first five months of 2007, more than 20 million stock accounts opened, four times the amount in all of 2006. Margin trading, or investing with funds borrowed from brokerages, wasn’t allowed then.

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” Japan remains 30 years behind its peers in how its companies are run..”

Hedge Fund Activists Are Japan’s Best Friend (Pesek)

Japan has New York hedge fund manager Daniel Loeb to thank for its biggest stock market surge since 1988. Investors have been taking inspiration from Loeb’s surprising success with the Japanese robot maker Fanuc. When Loeb bought a stake in the notoriously opaque company earlier this year and started demanding changes, few in corporate Japan believed he would get anywhere. It’s not just that Fanuc was known for its insularity; foreign activist investors had a long history of failure when dealing with corporate Japan. So when Fanuc President Yoshiharu Inaba started heeding Loeb’s demands – inviting journalists to the company’s campus near Mt. Fuji, opening a shareholder relations department and doubling the %age of profit the company pays out to shareholders – other foreign investors took note.

They began flocking to the Nikkei stock exchange in hopes of getting at the trillions of dollars sitting on Japan’s corporate balance sheets. (It’s estimated that executives are hoarding cash that amounts to half the country’s annual $4.9 trillion of output.) But the stock surge doesn’t represent a broader vote of confidence in Prime Minister Shinzo Abe’s economic program – nor should it. Abe has failed to carry out the bold structural reforms – lowered trade barriers, less red tape for startups and loosened labor markets – that he promised would enliven growth and boost corporate profits. Investors are aware that Japan’s latest economic data isn’t very good: Household spending is weak (down 1.3% in April), 340,000 people have given up on the labor market and inflation is back at zero.

But if Abe is wise, he will leverage the uptick in foreign investment to reignite his reform program. After all, Japan’s new foreign investors are a demanding and vocal crowd, and their goals are broadly in alignment with Abe’s. “They tend to speak out in ways that locals won’t, adding to the pressure on management to change,” says Jesper Koll, former JPMorgan, and adviser to Japan’s government. “That’s something to be supported in the current environment, not silenced.” Abe has already started leading a charge for more stringent corporate governance standards. Last year, Tokyo implemented a stewardship code urging investors to shame underperforming CEOs and introduced an index of 400 Japanese companies doing a good job of providing returns on investment.

Last week, Abe unveiled a code of conduct for executives along with requests that companies increase the number of outside directors. But Chicago money manager David Herro says that for all Abe’s efforts, Japan remains 30 years behind its peers in how its companies are run. Corporate Japan still indulges in cross-shareholdings and permits itself male-dominated boards, and the country’s timid media does little to hold it to account. “Japan has gone from zero to two,” Herro told Bloomberg News last week. “It’s improving. But we need to get to eight, nine or 10.”

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A discussion like climate change: denied until it’s too late.

Sydney And Melbourne Are ‘Unequivocally’ In A House Price Bubble (Guardian)

Sydney and parts of Melbourne are “unequivocally” experiencing a house price bubble, according to Treasury secretary John Fraser. Speaking at Senate estimates in Canberra on Monday, Fraser said he was concerned about the amount of money being poured into the housing market with interest rates at a record low of 2%. “It does worry me that the historically low level of interest rates are encouraging people to perhaps overinvest in housing,” Fraser said. As Sydney saw an auction clearance rate of 87.4% at the weekend, Fraser said: “When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney.” It was also “certainly the case in higher priced areas in Melbourne”, he said, but elsewhere in Australia the evidence was “less compelling”.

Fraser’s comments give an insight into his role as a member of the Reserve Bank of Australia board, which has voted twice this year to cut interests rates, including at its May meeting. If his concerns reflect a wider view on the board, it suggests Tuesday’s monthly meeting of the board will not see another rate cut. However, his remarks will be tempered by figures released on Monday which showed that home prices dipped in May for the first time in six months, with Sydney’s booming property market losing a bit of steam. Home values in Australia’s capital cities fell by 0.9%, with drops recorded everywhere except Darwin and Canberra, the latest CoreLogic RP Data home value index showed.

Sydney’s home values fell 0.7%, with Melbourne down 1.7% and Hobart posting the biggest fall with a 2.7% slide. For the year to 31 May, home values were up by 9%, with the average property priced at $570,000. It came as approvals for the construction of new homes fell 4.4% in April, which was much worse than market expectations of a 1.5% fall. Over the 12 months to April, building approvals were up 16.6%, the Australian Bureau of Statistics said on Monday. Approvals for private sector houses rose 4.7% in the month, and the “other dwellings” category, which includes apartment blocks and townhouses, was down 15%.

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Europe and democracy remains an uneasy relationship.

Czech Finance Minister Proposes Referendum on the Euro (WSJ)

The Czech finance minister on Sunday proposed letting the public have a say in whether the country should adopt the euro through a nonbinding referendum. The proposal caused disagreement in the Czech Republic cabinet. Roughly two-thirds of the population in the European Union country are against giving up the national currency, the koruna. After meeting the prime minister, the central bank governor and the country’s president at a special gathering to discuss the Czech position toward Europe’s common currency, Finance Minister Andrej Babis said he proposes holding a nonbinding public referendum in 2017—in conjunction with expected general elections—on whether to adopt the euro.

The purpose of holding a referendum would be “so that citizens can express themselves, like they’ve done in Sweden,” said Mr. Babis, who himself hasn’t yet taken a position on the currency issue and is widely considered a top candidate for the premier’s post after the next elections. In a 2003 referendum, Swedish voters rejected switching to the euro. Sweden continues to use the krona despite having a treaty obligation to switch to the euro at some point. Such a referendum in the Czech Republic wouldn’t break treaties but would serve as a gauge of public opinion before politicians embark on the potentially treacherous task of surrendering the national currency.

Prime Minister Bohuslav Sobotka dismissed the idea, saying while there is no deadline by which the country must adopt the euro, the Czech Republic—like the 12 other countries that have joined the bloc since 2004—is bound by accession treaties to the European Union to adopt the common currency, and so there is no need for any referendums. Despite the urging of President Milos Zeman, who seeks deeper ties with Russia but is nevertheless calling for politicians to work to integrate the country monetarily with the neighboring eurozone—officials agreed that the fate of the national currency will be left for a future government.

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Eroding power base.

Prime Minister Renzi Bruised In Italy’s Regional Elections (Politico)

Prime Minister Matteo Renzi’s party suffered a blow in Sunday’s regional and local elections, casting his political strength into doubt as he takes on major electoral and economic reforms.The center-left Democratic party won in five of the seven regions up for grabs, but the opposition made noteworthy gains in key areas. The outcome was not the triumph that Renzi saw during last year’s European elections.Renzi’s candidates won in central Italy, Tuscany, Marche, and Umbria, as well as in the south, in Puglia and in Campania, a region so far governed by the center right. The euroskeptic Northern League prevailed, with a wide margin, in its stronghold in Veneto. In the key Liguria region, long governed by the left, a candidate of Silvio Berlusconi’s party has won.

The anti-establishment and anti-euro 5Star movement, bolstered by disappointment with mainstream parties and corruption scandals, also made gains. So far, the movement has performed well in general elections but not in local ballots. On Saturday, Renzi downplayed the vote, saying it would not be a a judgment on his tenure. “Regional elections have a local meaning, there will no consequence for the government,” Renzi said in a public meeting in Trento. After Renzi’s party dominated last year’s elections for the European Parliament, pundits dubbed him Italy’s strong man. The fragility of that reputation came into focus in the elections. His power in Brussels is also at stake. A poor showing could slow down the pace of the changes to Italy’s moribund economy that the European Commission is seeking.

“Renzi has enjoyed a honeymoon … that is now over,” said before the elections pollster Nando Pagnoncelli, who said that trust in him had dropped in polls to 40% from 60% in September. Only one Italian out of two has gone to vote. Turnout, at 52.2% is much lower than 58.6% at the European elections. “Those disillusioned voters, who once used to vote for the center right and then chose Renzi [at the European elections], are not returning to vote for the right, they will simply stay home,” he said. The vote followed a series of tough parliamentary battles over Renzi’s reform agenda. With a staggering debt at 132% of the GDP, the second highest ratio after Greece, Brussels and the European Central Bank have pushed for a major economic overhaul.

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Note the press playing up the suggestion it’s now a pan-European effort.

Over 5,000 Mediterranean Migrants Rescued Since Friday (Reuters)

The corpses of 17 migrants were brought ashore in Sicily aboard an Italian naval vessel on Sunday along with 454 survivors as efforts intensified to rescue people fleeing war and poverty in Africa and the Middle East. More than 5,000 migrants trying to reach Europe have been saved from boats in distress in the Mediterranean since Friday and operations are in progress to rescue 500 more, European Union authorities said on Sunday. In some of the most intense Mediterranean traffic of the year, migrants who left Libya in 25 boats were picked up by ships from Italy, Britain, Malta and Belgium, assisted by planes from Iceland and Finland, the EU’s border control agency Frontex said.

Naval and merchant vessels involved in rescue operations also came from countries including Germany, Ireland and Denmark. The 17 corpses found on one of the boats arrived in the Sicilian port of Augusta aboard the Italian navy corvette Fenice. Italian prosecutors are investigating how they died. Frontex is coordinating an EU rescue mission in the Mediterranean known as Triton, which was stepped up after around 800 migrants drowned off Libya in April in the Mediterranean’s most deadly shipwreck in living memory. “This is the biggest wave of migrants we have seen in 2015,” Frontex Executive Director Fabrice Leggeri said in a written statement. “The new vessels that joined operation Triton this week have already saved hundreds of people.”

Italy has so far borne the brunt of Mediterranean rescue operations. Most of the migrants depart from the coast of Libya, which has descended into anarchy since Western powers backed a 2011 revolt that ousted Muammar Gaddafi. Calm seas are increasingly favoring departures as warm spring weather sets in. The migrants saved over the weekend are all being disembarked at nine ports on the Italian islands of Lampedusa, Sicily and Sardinia and on its southern mainland regions of Calabria and Puglia. The latest wave of more than 5,000 arrivals will take the total of those reaching Italy by boat across the Mediterranean this year to more than 40,000, according to estimates by the United Nations refugee agency.

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 November 11, 2014  Posted by at 11:07 am Finance Tagged with: , , , , , , , , , ,  


Dorothea Lange Country filling station, Granville County, NC July 1939

Is ‘Too Big To Fail’ For Banks Really Coming To An End? (BBC)
Banks Poised to Settle With Derivatives Regulator in FX-Rigging Cases (BW)
Bond Swings Draw Scrutiny (WSJ)
China, Japan And An Ugly Currency War (Steen Jakobsen)
Subprime Credit Card Lending Swells (CNBC)
Why Iron Ore’s Meltdown Is Far From Over (CNBC)
It’s Time to Put Juncker on the Hot Seat (Spiegel Ed.)
The Ghosts of Juncker’s Past Come Back to Haunt Him (Spiegel)
The Return Of The US Dollar (El-Erian)
Fears Of German Recession As Moment Of Truth Looms (CNBC)
Russia Ends Dollar/Euro Currency Peg, Moves To Free Float (RT)
Police Use Department Wish List When Deciding Which Assets to Seize (NY Times)
Alleged Sarkozy Plot Rocks French Political Establishment (FT)
Nearly A Third Of Indian Cabinet Charged With Crimes (Reuters)
Energy Is Europe’s ‘Big Disadvantage’: Deutsche Bank Co-Ceo (CNBC)
Rich Nations Subsidize Fossil Fuel Industry By $88 Billion A Year (Guardian)
The Real Story Of US Coal: Inside The World’s Biggest Coalmine (Guardian)
Angry Canary Islanders Brace For An Unwanted Guest: The Oil Industry (Guardian)
Fukushima Radiation Found in Pacific Off California Coast (Bloomberg)
The Fate of the Turtle (James Howard Kunstler)

Make that a no.

Is ‘Too Big To Fail’ For Banks Really Coming To An End? (BBC)

Interviewing Alistair Darling in 2011, three years after the financial crisis during which he was chancellor, his most striking answer to me was not about the fear that Britain’s economic system was on the point of collapse. It wasn’t even his worry that ATMs up and down the country might simply stop functioning. Those answers were of course chilling. But they were symptoms of a wider disease. Mr Darling’s most striking answer was the “absolute astonishment” he felt when he asked Britain’s largest banks to account for the risks contained in their businesses – and they were unable to come up with a coherent answer. This total lack of knowledge – coupled with the hubris of profit-taking built on lax credit – went to the heart of the financial crisis. Regulators appeared similarly non-plussed.

Such was the global complexity and lack of governance in the international financial system, when it came to rescuing the banks from having to eat their own sick, the UK government – and many other governments around the world – initially had no idea how large the bill would be. And neither did the banks. The only funding avenues large enough to contain such unquantifiable risks were those provided by central banks and the taxpayer. The alternative was financial meltdown. The numbers turned out to be astronomical. A National Audit Office report in August this year suggested the value of the UK government’s total support for the financial system alone exceeded £1.1tn at its height. Many tens of billions of pounds worth of capital was directly injected into failing banks and building societies.

The rest of that dizzying £1.1tn was the total value of liability insurance – the government guaranteeing banks’ security as lender of last resort. Put simply, the taxpayer had become the guarantor of the global financial system and the banks that are the essential plumbing of that system. In direct capital the UK government (the taxpayer) ultimately had to find over £100bn. More than £66bn was used to rescue the Royal Bank of Scotland (still 80% owned by the government) and Lloyds Bank (still 25% owned by the government). Of that, the sale of two chunks of Lloyds since the last election in 2010 has raised the princely sum of £7.4bn.

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For rigging a $5.300.000.000.000 a day market, banks are fined $300.000.000. Remove a few zeroes and it’s like being fined $300 for rigging a $5.300.000 million market. Sounds profitable.

Banks Poised to Settle With Derivatives Regulator in FX-Rigging Cases (BW)

Banks suspected of rigging the $5.3 trillion-a-day currency market are preparing to reach settlements as early as this week with the main U.S. derivatives regulator, according to a person with knowledge of the cases. The Commodity Futures Trading Commission may levy fines of about $300 million against each firm, depending on the level of their involvement, said the person, who spoke on condition of anonymity because deals haven’t been announced. It’s unclear how many firms may settle with the CFTC as U.K. and U.S. bank regulators prepare to levy related penalties this week, the person said. There was no immediate response to an e-mailed request for comment from the CFTC after normal business hours. The New York Times reported late yesterday on the talks with the agency.

Investigations are under way on three continents as authorities probe allegations that dealers at the world’s biggest banks traded ahead of clients and colluded to rig benchmarks used by pension funds and money managers to determine what they pay for foreign currencies. The U.K. Financial Conduct Authority is poised to reach settlements as soon as this week with six banks, which together have set aside about $5.3 billion in recent weeks for legal matters including the currency investigations, people with knowledge of those talks have said. Barclays, Citigroup, HSBC, JPMorgan, Royal Bank of Scotland and UBSare in settlement talks with the FCA, people with knowledge of the situation have said.

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How many years is the investigation going to take?

Bond Swings Draw Scrutiny (WSJ)

The day’s trading was just hitting its stride in New York on the morning of Oct. 15 when bond investors, traders and strategists were stunned by an unusual move in the $12 trillion U.S. Treasury market playing out on their computer screens. The yield on the 10-year Treasury note took a sharp dive below 2% within minutes, and few could understand exactly why. Some dealers immediately pulled the plug on automated trading systems that provided price quotes to customers. Fund managers rushed to convene meetings. Many investors scrambled to pinpoint the reason behind the accelerating decline. “It starts moving faster and faster, and you can’t point to anything,” recalled Mark Cernicky, managing director at Principal Global Investors , which oversees $78 billion. Now, investors and regulators are burrowing into the causes of the plunge in yields to try to understand whether electronic trading and new regulations are fueling sudden price swings in a market that acts as a key benchmark for interest rates, investments and U.S. home loans.

At the time, bond-market analysts attributed the fall in yields to weak U.S. economic data, shaky European markets and hedge funds scrambling to cover wrong-way bets. But many investors felt that didn’t fully explain why the yield on the 10-year Treasury note tumbled to its biggest one-day decline since 2009. When yields fall, prices rise. Regulators and other experts are examining deep-seated shifts in trading since the financial crisis, which could help explain the unusual size of the move in a market many investors rely on for its relative stability. “What happened on Oct. 15 is the result of things that had been building for a while,” said Alex Roever, a strategist at J.P. Morgan Chase & Co. who follows the government-bond market. The Federal Reserve, Treasury and Commodity Futures Trading Commission are looking at that day’s trading activity, according to people familiar with the situation. One focus is the role of high-speed electronic trading in the bond market, although regulators haven’t yet drawn any conclusions, these people said.

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More trouble for Tokyo.

China, Japan And An Ugly Currency War (Steen Jakobsen)

There’s increasing risk we’ll soon see a “significant paradigm shift” from China in its attitude to the strength of its currency. So says Saxo Bank’s Chief Economist, Steen Jakobsen. He says we’re about to see a full-scale currency war, notably between China and Japan, two of the world’s greatest exporting countries. There are a number of important world meetings over the coming few weeks and the Chinese will be “very vocal”, says Steen, as it’s getting increasingly worried about its loss of growth momentum. The yuan has strengthened significantly in recent weeks while the yen has declined substantially. The country’s determined, he says, to refocus and maintain its export share of total growth.

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And Washington just sits by and lets it happen all over again.

Subprime Credit Card Lending Swells (CNBC)

Consumers with dinged credit are back in a borrowing mood, and lenders are more than happy to give them new credit cards, according to new data. Since the Great Recession ended five years ago, consumers have been gradually taking on more debt and lenders have been accommodating them, easing up on tighter standards. Much of the growth has been in so-called non-revolving credit, especially car loans, thanks to record low interest rates. But revolving credit—mainly in the form of credit cards—is picking up. And the biggest growth in new credit cards is coming from so-called subprime borrowers whose credit scores are less than 660, according to the latest Equifax data.

Through July of this year, banks handed out cards to 9.8 million subprime consumers, a six-year high and an increase of 43% from the same period last year. Another 7.8 million cards have been issued to subprime borrowers by retailers this year, up 13% from 2013 to an eight-year high. Lenders are also giving subprime borrowers higher credit limits. Bank-issued card limits jumped to $12.7 billion for the first seven months of the year—up 4% from the same period a year ago to a six-year high. Retailers lifted their card limits by 16% to $6.8 billion, an eight-year high. Part of the growth is the result of an easing of the tighter standards that followed the 2008 credit bust after the boom of the early-2000s. Now that banks have repaired the damage from billions of dollars in bad debts, they’re better able to take on more risk. A stronger job market is also putting more consumers in a borrowing mood, according to economists at Wells Fargo.

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Chinese fake numbers have distorted the market for years.

Why Iron Ore’s Meltdown Is Far From Over (CNBC)

Iron ore prices have dived an eye-watering 44% this year and there’s no respite ahead for the metal, according to Citi, which forecasts double-digit declines in 2015. The bank on Tuesday slashed its price forecasts for the metal to average $74 dollars per ton in the first quarter of next year, before moving down to $60 in the third quarter. It previously forecast $82 and $78, respectively. “We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness,” Ivan Szpakowski, analyst at Citi wrote in a report, noting that prices could briefly dip into the $50 range in the third quarter. The price of spot iron ore fell $75.50 this week, its lowest level since 2009, according to Reuters.

Price declines in the first half of this year were driven by rapid growth in export supply, which has slowed in the second half of the year. In recent months, deteriorating Chinese steel demand and deleveraging by traders and Chinese steel mills has dragged the metal. Iron ore is an important raw material for steel production. However, iron ore supply growth will return in the first half of next year, Citi said, as industry heavyweights Rio Tinto, BHP Billiton and Vale rev up expansions and Anglo American’s Minas-Rio iron ore project in Brazil ramps up. Meanwhile, demand out of China – the world’s biggest buyer of iron ore – will remain under pressure due subdued steel demand. Demand for steel is being compressed due to tighter credit conditions and an uncertain export outlook.

“Chinese manufacturing exports have improved in recent months, helping to boost steel demand for machinery, metal products, etc. However, with European growth having slowed such positive momentum is unlikely to continue,” Szpakowski said. ANZ also substantially downgraded its 2015 price forecast for iron ore this week. However, it was not quite as bearish as Citi. The bank, in a report published on Monday, said the metal will not breach $100 a ton again, forecasting prices to average $78 next year, 22% lower than its previous estimate. “Recent trip to China highlights that demand conditions are more challenging than we thought,” ANZ said.

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I bet he thinks he’s awfully smart.

The Ghosts of Juncker’s Past Come Back to Haunt Him (Spiegel)

Jean-Claude Juncker’s first public appearance as the new European Commission president was a symbolic one. Early this month, he traveled to Frankfurt to present former German Chancellor Helmut Kohl’s new book in the luxury hotel Villa Kennedy. Called “Aus Sorge um Europa” – “Out of Concern for Europe” – the book warns that the pursuit of national interests represents a danger to the European ideal. And Juncker is quick to endorse Kohl, a man he calls “a friend and role model.” “Kohl is right in deploring the fact that we are increasingly sliding down the slope toward reflexive regionalism and nationalism,” Juncker said. It is certainly not the first time Juncker has uttered such a sentence. Indeed, his delivery of the message has often been even more direct. “I’ve had it,” he erupted during an EU summit in December of 2012, for example. “80% of the time, only national interests are being presented. We can’t go on like this!”

Such sentiments have served Juncker well throughout his career and have helped transform the politician from tiny Luxembourg into a well-known defender of Europe. Now, though, at the apex of his European career, Juncker and his beloved European Union are facing a significant problem. And it is one that has led even advisors close to Juncker to wonder whether he may soon have to step down from his new position, despite having taken office only recently. Last week, several media outlets, including the Munich-based Süddeutsche Zeitung, published the most detailed accounts yet of the tricks used – and the eagerness brought to bear – by Luxembourg officials to help companies avoid paying taxes. The strategies were often developed together with company leaders and served to entice multinationals to set up shop in Luxembourg. The tiny country on Germany’s western border, for its part, benefited from tax revenues it wouldn’t otherwise have seen. It was, in short, a reciprocal relationship.

But it was also a relationship that was disadvantageous for Luxembourg’s EU partners – and for European cooperation itself. Many of the companies that set up shop in Luxembourg, after all, no longer paid taxes in their home countries where they produced or sold the lion’s share of their products.

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But with the Spiegel editorial board turning against him, how long can Jean-Claude last?

It’s Time to Put Juncker on the Hot Seat (Spiegel Ed.)

Can the European Commission be led by a man who transformed his own country into a tax oasis? [..] The European Union has a problem – and a serious one at that. On the surface, the issue is about the tax avoidance schemes in Luxembourg that were engineered during former Prime Minister Jean-Claude Juncker’s tenure. And about the billions of euros in revenues lost by other EU countries as a result. But the true problem in this affair actually runs a lot deeper. At issue is just how seriously we take the new European democracy that Juncker himself often touts. The criticism of Juncker came less than a week after he took office. Leaked tax documents released last Wednesday by the International Consortium of Investigative Journalists showed how large corporations have taken advantage of loose policies in Luxembourg to evade paying taxes. At a time of slow economic growth and tight national budgets, sensitivity has grown in large parts of the EU over countries that facilitate legal tax evasion.

Juncker is fond of pointing out proudly that he was Europe’s first “leading candidate,” and the first to be more-or-less directly elected as president of the European Commission. Across Europe, many celebrated it as the moment when more democracy came to the EU. Unfortunately, optimism blinded people to one salient fact: European politicians themselves never took this newfound democracy particularly seriously. In contrast to the United States, where getting to know the candidates is a matter of course, the EU never had any intent of truly introducing its leading politicians to the people. This has created a situation in which a person like Juncker can effectively lead two lives. One as an (honest) proponent of the EU and the other as a cunning former leader of an EU member state who promoted Luxembourg’s self-interest by blocking treaties that would have forced the country to adopt stricter tax policies.

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Mo talks his book.

The Return Of The US Dollar (El-Erian)

The US dollar is on the move. In the last four months alone, it has soared by more than 7% compared with a basket of more than a dozen global currencies, and by even more against the euro and the Japanese yen. This dollar rally, the result of genuine economic progress and divergent policy developments, could contribute to the “rebalancing” that has long eluded the world economy. But that outcome is far from guaranteed, especially given the related risks of financial instability. Two major factors are currently working in the dollar’s favour, particularly compared to the euro and the yen. First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so – owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.

Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one. Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as “quantitative easing” (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs. In fact, ECB President Mario Draghi signalled a willingness to expand his institution’s balance sheet by a massive €1 trillion ($1.25 trillion). With higher US market interest rates attracting additional capital inflows and pushing the dollar even higher, the currency’s revaluation would appear to be just what the doctor ordered when it comes to catalysing a long-awaited global rebalancing – one that promotes stronger growth and mitigates deflation risk in Europe and Japan.

Specifically, an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets, while moderating some of the structural deflationary pressure in the lagging economies by causing import prices to rise. Yet the benefits of the dollar’s rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response. Furthermore, sudden large currency moves tend to translate into financial-market instability.

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Not looking good.

Fears Of German Recession As Moment Of Truth Looms (CNBC)

Just days before Germany’s much anticipated third quarter gross domestic product (GDP) data is released, business leaders and policy makers warn that the euro zone’s largest economy has lost its competitiveness and is on the brink of a recession. The chair of the German Banking Association, Juergen Fitschen, told CNBC on Monday that it was “undeniable that we have slowed down recently.” “We cannot insulate ourselves against the factors that have contributed to the current state of affairs…But, also, [thereis a] slow recovery in some of our neighboring countries and also a lack o fdemand to finance infrastructure projects in Germany itself,” he said. Speaking to CNBC on the sidelines of a press conference held by the association, he said: “We have to remind ourselves that we have not spared continuing efforts to renew our competitiveness and that is something that applies obviously to our neighboring countries as well,” he continued.

Fitschen’s comments came amid other severe critiques of the German economy and outlook, just days before the release of the GDP data on Friday. Second quarter data in August showed data showed Germany’s economy had lost momentum, contracting for the first time in over a year. Quarter-on-quarter, GDP contracted 0.2%. If the economy contracts again in the third quarter, Germany will technically be in recession. The head of Germany’s influential Ifo economic research institute said that was a distinct possibility on Monday.Speaking to Reuters, Hans-Werner Sinn said that Germany was teetering on the brink of a recession due to weakness in major emerging trading partners. “It is going to be really close,” Sinn warned, saying that surveys by the Ifo institute pointed more towards a recession.

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Flipping the west the bird.

Russia Ends Dollar/Euro Currency Peg, Moves To Free Float (RT)

The Bank of Russia took another step towards a free float ruble by abolishing the dual currency soft peg, as well as automatic interventions. Before, the bank propped up the ruble when the exchange rate against the euro and dollar exceeded its boundaries. “Instead, we will intervene in the currency market at whichever moment and amount needed to decrease the speculative demand,” the bank’s chairwoman, Elvira Nabiullina, said in an interview with Rossiya 24 Monday. The move is edging towards a floating exchange rate, which the bank hopes to attain by 2015. “Effective starting November 10, 2014, the Bank of Russia abolished the acting exchange rate policy mechanism by cancelling the allowed range of the dual-currency basket ruble values (operational band) and regular interventions within and outside the borders of this band,” the bank said in a statement Monday.

“As a result of the decision the ruble exchange rate will be determined by market factors, which should promote efficiency of the monetary policy of the Bank of Russia and ensure price stability,” the central bank said. Foreign exchange intervention is still at the bank’s disposal, and is ready to use in the case of “threats to financial stability,” according to the statement. Propping up the ruble can cost the Central Bank of Russia billions of dollars per day, coming out of the country’s reserve fund. In October alone, the bank was forced to spend $30 billion to defend the weakening ruble. On November 5, the bank announced it had limited the reserves it is willing to spend to inflate the ruble to $350 million per day in order to slash speculation and volatility. The decision triggered a 3-day plunge for the Russian currency. On Monday, the ruble recovered slightly after Russian President Vladimir Putin assured speculative drops would cease in the near future.

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Welcome to the third world.

Police Use Department Wish List When Deciding Which Assets to Seize (NY Times)

The seminars offered police officers some useful tips on seizing property from suspected criminals. Don’t bother with jewelry (too hard to dispose of) and computers (“everybody’s got one already”), the experts counseled. Do go after flat screen TVs, cash and cars. Especially nice cars. In one seminar, captured on video in September, Harry S. Connelly Jr., the city attorney of Las Cruces, N.M., called them “little goodies.” And then Mr. Connelly described how officers in his jurisdiction could not wait to seize one man’s “exotic vehicle” outside a local bar. “A guy drives up in a 2008 Mercedes, brand new,” he explained. “Just so beautiful, I mean, the cops were undercover and they were just like ‘Ahhhh.’ And he gets out and he’s just reeking of alcohol. And it’s like, ‘Oh, my goodness, we can hardly wait.’ ”Mr. Connelly was talking about a practice known as civil asset forfeiture, which allows the government, without ever securing a conviction or even filing a criminal charge, to seize property suspected of having ties to crime.

The practice, expanded during the war on drugs in the 1980s, has become a staple of law enforcement agencies because it helps finance their work. It is difficult to tell how much has been seized by state and local law enforcement, but under a Justice Department program, the value of assets seized has ballooned to $4.3 billion in the 2012 fiscal year from $407 million in 2001. Much of that money is shared with local police forces. The practice of civil forfeiture has come under fire in recent months, amid a spate of negative press reports and growing outrage among civil rights advocates, libertarians and members of Congress who have raised serious questions about the fairness of the practice, which critics say runs roughshod over due process rights. In one oft-cited case, a Philadelphia couple’s home was seized after their son made $40 worth of drug sales on the porch.

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Politicians caught up in their own lies and denials. It shows you what France is made of. Marine Le Pen’s popularity doesn’t come out of nowhere.

Alleged Sarkozy Plot Rocks French Political Establishment (FT)

Leading figures from France’s two traditional parties have been enmeshed in a fresh political scandal involving former president Nicolas Sarkozy, complicating their attempts to halt voter defection to the far-right National Front. The latest “affair” to rock France’s political establishment involves the chief of staff of President François Hollande, who is already struggling with the lowest popularity ratings of any French leader since the second world war. It also touches François Fillon, a leading figure in the country’s centre-right UMP party and a former prime minister who has stated his determination to run for the presidency in 2017.

The scandal centres on a lunch in June during which Mr Fillon reportedly asked Jean-Pierre Jouyet, Mr Hollande’s chief of staff, to speed up judicial investigations into an alleged UMP cover-up of illegal overspending during the 2012 presidential re-election campaign of Mr Sarkozy, the UMP’s then candidate. “Hit him quickly,” Mr Fillon is alleged to have said to Mr Jouyet, referring to Mr Sarkozy. “If you don’t hit him quickly, you will see him come back.” Mr Sarkozy recently announced his return to French politics, and is campaigning to become head of his party in elections at the end of the month. The move is seen widely as the first step in a longer-term goal of competing for the presidency in 2017. Mr Fillon has vehemently denied the conversation about campaign financing with Mr Jouyet, which was first reported by two journalists at Le Monde, the French daily newspaper.

“I can only see in these incredible attacks an attempt at destabilisation and a plot,” Mr Fillon said on Sunday. He threatened the two Le Monde journalists with legal action and then turned his wrath on Mr Jouyet, accusing him of lying and threatening to take him to court. Mr Jouyet, a close personal friend of Mr Hollande but who also served in the previous centre-right government of Mr Sarkozy, on Sunday admitted he had discussed the alleged illegal overspending issue during the lunch with Mr Fillon – though stopped short of confirming Mr Fillon’s alleged request to speed up the judicial investigations against Mr Sarkozy. Mr Jouyet’s admission, reported by France’s AFP, came just a few days after he had told the news agency that the subject of the UMP campaign financing had not come up during the June lunch with Mr Fillon.

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Almost funny: “At least five people in the cabinet have been charged with serious offences such as rape and rioting. Finance Minister Arun Jaitley said any suggestions there were criminals in the cabinet were “completely baseless. “These are cases arising out of criminal accusations, not cases out of a crime .. ”

Nearly A Third Of Indian Cabinet Charged With Crimes (Reuters)

Attempted murder, waging war on the state, criminal intimidation and fraud are some of the charges on the rap sheets of ministers Indian Prime Minister Narendra Modi appointed to the cabinet on Sunday, jarring with his pledge to clean up politics. Seven of 21 new ministers face prosecution, taking the total in the 66-member cabinet to almost one third, a higher proportion than before the weekend expansion. At least five people in the cabinet have been charged with serious offences such as rape and rioting. Finance Minister Arun Jaitley said any suggestions there were criminals in the cabinet were “completely baseless. “These are cases arising out of criminal accusations, not cases out of a crime,” he told reporters on Monday, adding that Modi had personally vetted the new ministers. Ram Shankar Katheria, a lawmaker from Agra, was appointed junior education minister yet has been accused of more than 20 criminal offences including attempted murder and promoting religious or racial hostility.

The inclusion of such politicians does not sit easily with Modi’s election promise to root out corruption, and has led to criticism that he is failing to change the political culture in India where wealthy, tainted politicians sometimes find it easier to win votes. “It shows scant respect for the rule of law or public sentiment,” said Jagdeep Chhokar, co-founder of the Association for Democratic Reforms (ADR) which campaigns for better governance. “Including these people in the cabinet is a bad omen for our democracy.”Modi won the biggest parliamentary majority in three decades in May with a promise of graft-free governance after the previous government led by Congress party was mired in a series of damaging corruption scandals.

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” ..High energy prices and resistance to fracking are two key reasons why Europe’s economic recovery has lagged the U.S.”

Energy Is Europe’s ‘Big Disadvantage’: Deutsche Bank Co-Ceo (CNBC)

High energy prices and resistance to fracking are two key reasons why Europe’s economic recovery has lagged the U.S., the joint head of Germany’s largest bank by assets told CNBC. Jürgen Fitschen, co-chief executive of Deutsche Bank, said bureaucracy, education and productivity partially explained Europe’s difficulties, but laid much of the blame on the cost of energy in the region. “It is undeniable that Europe overall faces one very big disadvantage: that is cost of energy,” Fitschen, who is also head of the German Bankers Association, told CNBC in Frankfurt on Monday. “That (low energy prices) has been one of the factors that have stimulated the euphoria and the growth momentum in the States. That is something that cannot be replicated easily in Europe.”

Including taxes, domestic U.S. gas prices fell by 2.2% in 2013 on the previous year to 2.18 U.K. pence (3 U.S. cents) per kilowatt hour (kWh), according to the International Energy Agency. By comparison, Spanish domestic prices rose by 7.8% to 6.93 pence and British prices rose by 7.7% to 4.90 pence respectively. Fitschen said that the shale gas revolution helped explain why U.S. energy prices had fallen. The U.S. has embraced fracking—or hydraulic fracturing—for shale, which has helped lead a revival in some manufacturing industries and helped the country become less reliant on oil and gas imports. However, the process has met with far more opposition in Europe, due to environmental concerns relating to possible seismic tremors and a risk to water supplies.

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” .. an extraordinary “merry-go-round” of countries supporting each others’ companies. The US spends $1.4bn a year for exploration in Columbia, Nigeria and Russia, while Russia is subsidising exploration in Venezuela and China, which in turn supports companies exploring Canada, Brazil and Mexico. ”

Rich Nations Subsidize Fossil Fuel Industry By $88 Billion A Year (Guardian)

Rich countries are subsidising oil, gas and coal companies by about $88bn (£55.4bn) a year to explore for new reserves, despite evidence that most fossil fuels must be left in the ground if the world is to avoid dangerous climate change. The most detailed breakdown yet of global fossil fuel subsidies has found that the US government provided companies with $5.2bn for fossil fuel exploration in 2013, Australia spent $3.5bn, Russia $2.4bn and the UK $1.2bn. Most of the support was in the form of tax breaks for exploration in deep offshore fields. The public money went to major multinationals as well as smaller ones who specialise in exploratory work, according to British thinktank the Overseas Development Institute (ODI) and Washington-based analysts Oil Change International. Britain, says their report, proved to be one of the most generous countries. In the five year period to 2014 it gave tax breaks totalling over $4.5bn to French, US, Middle Eastern and north American companies to explore the North Sea for fast-declining oil and gas reserves.

A breakdown of that figure showed over $1.2bn of British money went to two French companies, GDF-Suez and Total, $450m went to five US companies including Chevron, and $992m to five British companies. Britain also spent public funds for foreign companies to explore in Azerbaijan, Brazil, Ghana, Guinea, India and Indonesia, as well as Russia, Uganda and Qatar, according to the report’s data, which is drawn from the OECD, government documents, company reports and institutions. The figures, published ahead of this week’s G20 summit in Brisbane, Australia, contains the first detailed breakdown of global fossil fuel exploration subsidies. It shows an extraordinary “merry-go-round” of countries supporting each others’ companies. The US spends $1.4bn a year for exploration in Columbia, Nigeria and Russia, while Russia is subsidising exploration in Venezuela and China, which in turn supports companies exploring Canada, Brazil and Mexico.

“The evidence points to a publicly financed bail-out for carbon-intensive companies, and support for uneconomic investments that could drive the planet far beyond the internationally agreed target of limiting global temperature increases to no more than 2C,” say the report’s authors. “This is real money which could be put into schools or hospitals. It is simply not economic to invest like this. This is the insanity of the situation. They are diverting investment from economic low-carbon alternatives such as solar, wind and hydro-power and they are undermining the prospects for an ambitious UN climate deal in 2015,” said Kevin Watkins, director of the ODI. [..] “The IPCC is quite clear about the need to leave the vast majority of already proven reserves in the ground, if we are to meet the 2C goal. The fact that despite this science, governments are spending billions of tax dollars each year to find more fossil fuels that we cannot ever afford to burn, reveals the extent of climate denial still ongoing within the G20,” said Oil Change International director Steve Kretzman.

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” .. It’s not for the United States. They want to sell it overseas, and I want to see that stopped.”

The Real Story Of US Coal: Inside The World’s Biggest Coalmine (Guardian)

In the world’s biggest coalmine, even a 400 tonne truck looks like a toy. Everything about the scale of Peabody Energy’s operations in the Powder River Basin of Wyoming is big and the mines are only going to get bigger – despite new warnings from the United Nations on the dangerous burning of fossil fuels, despite Barack Obama’s promises to fight climate change, and despite reports that coal is in its death throes. At the east pit of Peabody’s North Antelope Rochelle mine, the layer of coal takes up 60ft of a 250ft trough in the earth, and runs in an interrupted black stripe for 50 miles. With those vast, easy-to-reach deposits, Powder River has overtaken West Virginia and Kentucky as the big coalmining territory. The pro-coal Republicans’ takeover of Congress in the mid-term elections also favours Powder River.

“You’re looking at the world’s largest mine,” said Scott Durgin, senior vice-president for Peabody’s operations in the Powder River Basin, watching the giant machinery at work. “This is one of the biggest seams you will ever see. This particular shovel is one of the largest shovels you can buy, and that is the largest truck you can buy.” By Durgin’s rough estimate, the mine occupies 100 square miles of high treeless prairie, about the same size as Washington DC. It contains an estimated three billion tonnes of coal reserves. It would take Peabody 25 or 30 years to mine it all. But it’s still not big enough. On the conference room wall, a map of North Antelope Rochelle shows two big shaded areas containing an estimated one billion tonnes of coal. Peabody is preparing to acquire leasing rights when they come up in about 2022 or 2024. “You’ve got to think way ahead,” said Durgin.

In the fossil fuel jackpot that is Wyoming, it can be hard to see a future beyond coal. One of the few who can is LJ Turner, whose grandfather and father homesteaded on the high treeless plains nearly a century ago. Turner, who raises sheep and cattle, said his business had suffered in the 30 years of the mines’ explosive growth. Dust from the mines was aggravating pneumonia among his Red Angus calves. One year, he lost 25 calves, he said. “We are making a national sacrifice out of this region,” he said. “Peabody coal and other coal companies want to keep on mining, and mine this country out and leave it as a sacrifice and they want to do it for their bottom line. It’s not for the United States. They want to sell it overseas, and I want to see that stopped.”

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There’s a pattern here: ” .. the Madrid government contrived to have the plebiscite banned as unconstitutional”.

Angry Canary Islanders Brace For An Unwanted Guest: The Oil Industry (Guardian)

In most places the news that you’ve struck oil would be cause to crack open the champagne. But not in the Canary Islands where Spain’s biggest oil company Repsol is due to begin drilling off Lanzarote and Fuerteventura. “Our wealth is in our climate, our sky, our sea and the archipelago’s extraordinary biodiversity and landscape,” the Canary Islands president, Paulino Rivero, said. “Its value is that it’s natural and this is what attracts tourism. Oil is incompatible with tourism and a sustainable economy.” Rivero, a former primary school teacher, is on a crusade against oil and he is not alone. Protest marches have drawn as many as 200,000 of the islands’ 2 million inhabitants on to the streets. The regional government planned to consolidate public opinion with a referendum on 23 November. Voters were to be asked: “Do you believe the Canaries should exchange its environmental and tourism model for oil and gas exploration?”

As with the weekend’s scheduled referendum on Catalan independence, the Madrid government contrived to have the plebiscite banned as unconstitutional and Rivero has now commissioned a private poll he hopes will demonstrate the strength of public opinion. “The banning of the referendum reveals a huge weakness in the system,” said Rivero. “You have to listen to the people. There’s a serious discrepancy between what people here want and what the Spanish government wants. You are allowed to hold consultations under the Spanish constitution and what we wanted to do was completely legal. The problem we have is that some government departments have too close a relationship with Repsol.” Repsol is flush with cash after settling a long dispute with Argentina and is keen to develop what may be the country’s biggest oilfield after winning permission to drill in August. The company believes the fields may contain as much as 2.2bn barrels of oil and is investing €7.5bn to explore two sites about 40 miles (60km) east of Fuerteventura.

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Don’t worry be happy, nuke style.

Fukushima Radiation Found in Pacific Off California Coast (Bloomberg)

Oceanographers have detected isotopes linked to Japan’s wrecked Fukushima nuclear plant off California’s coast, though at levels far below those that could pose a measurable health risk. Volunteer ocean monitors collected the samples that tested positive for trace amounts of the isotope cesium-134 about 100 miles (160 kilometers) west of Eureka, California, the Massachusetts-based Woods Hole Oceanographic Institution said yesterday on its website. Tepco’s Fukushima Dai-Ichi plant, which released “unprecedented levels” of radioactivity during the March 2011 accident, was the only conceivable source of the detected isotopes, Woods Hole oceanographer Ken Buesseler said in the release.

Explosions during the accident, during which three reactors suffered meltdowns, sent a burst of radioactivity into the atmosphere, while water used to cool overheating fuel rods flowed into the ocean in the weeks after the disaster. Lower levels of radiation have continued to trickle into the ocean via contaminated groundwater. The radioactivity detected off the California coast was at levels deemed by international health agencies to be “far below where one might expect any measurable risk to human health or marine life,” according to Woods Hole. It’s also more than 1,000 times lower than acceptable limits in drinking water set by the U.S. Environmental Protection Agency, the organization said.

Read more …

” .. the background reality is too difficult to contemplate: an American living arrangement with no future.”

The Fate of the Turtle (James Howard Kunstler)

Anybody truly interested in government, and therefore politics, should be cognizant above all that ours have already entered systemic failure. The management of societal affairs is on an arc to become more inept and ineffectual, no matter how either of the current major parties pretends to control things. Instead of Big Brother, government in our time turns out to be Autistic Brother. It makes weird noises and flaps its appendages, but can barely tie its own shoelaces. The one thing it does exceedingly well is drain the remaining capital from endeavors that might contribute to the greater good. This includes intellectual capital, by the way, which, under better circumstances, might gird the political will to reform the sub-systems that civilized life depends on. These include: food production (industrial agri-business), commerce (the WalMart model), transportation (Happy Motoring), school (a matrix of rackets), medicine (ditto with the patient as hostage), and banking (a matrix of fraud and swindling).

All of these systems have something in common: they’ve exceeded their fragility threshold and crossed into the frontier of criticality. They have nowhere to go except failure. It would be nice if we could construct leaner and more local systems to replace these monsters, but there is too much vested interest in them. For instance, the voters slapped down virtually every major ballot proposition to invest in light rail and public transit around the country. The likely explanation is that they’ve bought the story that shale oil will allow them to drive to WalMart forever. That story is false, by the way. The politicos put it over because they believe the Wall Street fraudsters who are pimping a junk finance racket in shale oil for short-term, high-yield returns. The politicos want desperately to believe the story because the background reality is too difficult to contemplate: an American living arrangement with no future. The public, of course, is eager to believe the same story for the same reasons, but at some point they’ll flip and blame the story-tellers, and their wrath could truly wreck what remains of this polity. When it is really too late to fix any of these things, they’ll beg someone to tell them what to do, and the job-description for that position is ‘dictator’.

Read more …

Oct 242014
 
 October 24, 2014  Posted by at 7:42 pm Finance Tagged with: , , , , , , ,  


Russell Lee Sharecropper mother teaching children in home, Transylvania, LA. Jan 1939

Europe is fast turning into a freak comedy show. Very fast. Or maybe we should say it’s always been one, and it’s just that the Larry, Curly and Moe moves are only now coming out in droves. Or maybe, what do I know, we’re just starting to understand how much talent for farce and slapstick the boys from Brussels have always had.

Just Wednesday, I wrote in 40% of Eurozone Banks Are In Bad Shape about a Reuters report based on Spanish source Efe, that claimed 12 banks would fail the ongoing stress tests, results of which are due this Sunday at 12pm CET (their daylight savings time will be over by then). I noted how the indignation expressed over the leaked data by Brussels seemed odd, since in 2014 everything leaks.

Then, I cited Pimco’s global banking specialist, Philippe Bodereau, saying he thought 18 banks would fail, and moreover, almost a third would narrowly pass. Something that according to several sources was important than who actually failed. Because all banks have had many many months to shore up their capital positions, and if they’re now still below or just above the dividing line today, that’s suspect at best.

130 banks were supposed to have been tested, and ‘almost a third’ of that is some number north of 40. Add the 12 to 18 sure failures, and you’re north of 40%.

But today Bloomberg reports on a new draft they have obtained, which raises the numbers even further.

ECB Set to Fail 25 Banks in Review, Draft Document Shows

25 lenders in the European Central Bank’s euro-area bank health check are set to fail the regulator’s Comprehensive Assessment, according to a draft communique of the final results, seen by Bloomberg News. 105 banks are shown passing the review, according to the draft statement. Of the lenders that failed, about 10 will still face capital shortfalls they need to plug, according to a person with knowledge of the matter, who asked not to be identified…

If 25 fail, and ‘almost a third’, i.e. at least 40, narrowly make it, 50% or more of Europe’s banks are in trouble. And that’s after they’ve been given ample time to borrow, sell assets, do whatever it takes to pass. More than half of all banks. And sure, Europe has scores of ‘systemic’ or Too Big To Fail banks, and they’ll never be put in the corner with the dunce hat on. But that’s not as great as it may seem, it just means we’re not allowed to know what shape they’re really in, and if they threaten to topple over, taxpayers will need to pay up.

And that’s still not all. Catherine Boyle explains a few things at CNBC about the stress tests:

What’s Missing From The EU Bank Stress Tests

The EBA stress tests involve running banks’ books through shocks like a 14% drop in house prices from current predictions. However, they do not involve deflation, or a sustained period with higher or lower prices for commodities such as oil – both of which the euro zone is potentially facing.

If ‘shocks’ like these are the worst case scenario of the tests, and half of the banks fail that, you might want to speak of a systemic problem. Many housing markets are still very expensive, let’s see interest rates go up to any historic average of your choosing and then see what happens to home prices. No review of what havoc deflationary pressures or oil and gas prices might do to banks sounds hardly serious either.

There is also disagreement over how certain assets may be classed. In weaker economies like Portugal, Greece, Spain and Italy, the governments have passed laws allowing banks to convert deferred tax assets (DTAs), which are tax payment deferrals generally awarded during times of weaker profitability, into more capital-enhancing deferred tax credits (DTCs).

Translation: local accounting tricks are still alive and well. Deferred tax credits are just one example, obviously.

Oliver Burrows, senior analyst at Rabobank, told CNBC: “European banks have actually done quite a lot in terms of balance sheet repair and capital raising. To give it additional credibility, you need to have some victims, and those are going to be quite predictable. Another fear is that if there is a rush of these weaker “victims” to raise more capital, there may not be much demand for it – and that could weaken the sector further. “Who would want to support or buy new equity in these banks?” Burrows asked.

That’s it right there: they’ve done a lot, and still fail. So where are they going to get the rest of the investments they need?

And then the EU comes this morning with a new stunt worthy of Larry, Curly and Moe. They’ve sent new calculations about members’ economic data, and the contributions they need to send to Brussels based on those data, around, and it’s a shame all the news is about how Britain is told to pay a billion and a half or so extra. Holland must fork over much more per capita, for one thing.

But what makes it even better is that Greece has been told to pay more, and that can go straight to Germany, which is set to receive a billion. Explain that. Italy has to pay extra, France receives.

The problem is of course, Brussels feels it doesn’t have to explain anything it does. They put the data on some webpage before even informing the member nations, as per the Dutch finance minister. Who, like Cameron, had no idea where the numbers came from. Brussels thinks: you don’t have the guts to break up the EU, anyway. So what are you going to do about it? Well, Cameron feels Nigel Farage breathing down his neck, that’s what.

The best part is that everyone’s falling over one another to assure us that the new accounting methods, which include drugs and prostitution, have nothing to do with this madness. But isn’t it just great to ponder that Britain has to fork over an additional billion only because the French have cheaper hookers?

Someone finish off that inane union before it starts to do real serious harm. Because it will.

Oct 142014
 
 October 14, 2014  Posted by at 8:39 pm Finance Tagged with: , , , ,  


Dorothea Lange Drought-stricken farmer and family near Muskogee, OK Aug 1939

With the US mid-term elections just 3 weeks away, of course there won’t be any sudden interest rate hikes or other major moves directly traceable to, or even remotely suspected to be from, the Federal Reserve and its Wall Street and/or global central bank chums. But I’ll explain once more why I think those hikes are coming – just not before November 4 – on the back of a Bloomberg piece today.

Mark October 26 as well, by the way: ECB stress test results and Ukraine elections without east Ukraine. And if you’re interested, you can read back what I said before about those rate hikes in This Is Why The Fed Will Raise Interest Rates (Aug 29) and Why The Fed WILL Raise Rates (Sep 30).

Actually, there’s two Bloomberg pieces today that are relevant to my point. Here’s the first:

Too-Big-to-Fail Banks Face Up to $870 Billion Capital Gap

Too big to fail is likely to prove a costly epithet for the world’s biggest banks as regulators demand they increase debt securities to cover losses should they collapse. The shortfall facing lenders from JPMorgan to HSBC could be as much as $870 billion, according to estimates from AllianceBernstein, or as little as $237 billion forecast by Barclays. The range is so wide because proposals from the Financial Stability Board outline various possibilities for the amount lenders need to have available as a portion of risk-weighted assets.

With those holdings in excess of $21 trillion at the lenders most directly affected, small changes to assumptions translate into big numbers. “The direction is clear and it is clear that we are talking about huge amounts,” said Emil Petrov at Nomura in London. “Regulatory timelines will stretch far into the future but how quickly will the market demand full compliance?”

A hard question to answer given that the Fed et al have been the market for a long time now. Them and the HFT robots. Webster’s should really redefine the term markets. But then, I understand there’s been some pick-up from ultra-low volumes recently as the VIX rises with human nerves.

The FSB wants to limit the damage the collapse of a major bank would inflict on the world economy by forcing them to hold debt that can be written down to help recapitalize an insolvent lender. For senior bonds to suffer losses under present rules the institution has to enter bankruptcy, a move that would inflict huge damage on the financial system worldwide if it happened to a global bank. That’s what happened when Lehman collapsed in 2008.

The FSB, which consists of regulators and central bankers from around the world, will present its draft rules to a G-20 summit in Brisbane, Australia, next month. Its proposals call for 27 of the world’s largest banks to hold loss-absorbing debt and equity equivalent to 16% to 20% of their risk-weighted assets to take losses in a failure …

Under the plans, these lenders will also have to meet buffer rules set by the Basel Committee on Banking Supervision, another group of global regulators. These can amount to a further 5% of risk-weighted assets, taking banks’ requirements to as much as 25% of holdings.

All the numbers and percentages don’t matter much, because they could all just as well have been invented on the spot. What makes this piece, and those ECB stress test results, relevant, is that they point out the how big banks are still far from healthy, no matter the profits and bonuses they report and dole out. No surprise there if you’ve been paying attention the past decade. No amount of free money will ever nurse them back to health. But it can keep them slugging along, replete with lots of green goo, empty sockets and tombstones.

It gets more interesting in the next bit, where you need to read between the lines a little. I took the liberty of bolding the juiciest bites:

No Stock Salvation Seen in Bank Results as VIX Surges

Options traders are skeptical this week’s bank earnings will deliver calming news to a stock market enduring its worst losses in two years. U.S. stocks have fallen for the past three days on concerns about global growth, the future of interest rates and the spread of Ebola. With companies from JPMorgan to Goldman Sachs and Bank of America scheduled to report this week, demand for bearish options on the largest U.S. financial firms has increased to the highest since May 2013.

Even though banks have escaped the worst losses in the recent selloff, the companies will struggle to boost profits if the Federal Reserve keeps interest rates near zero. Analyst projections tracked by Bloomberg show financial companies in the S&P 500 Index increased earnings 3.1% in the third quarter and 1.6% in the fourth. “There’s an anticipation that a significant percentage of earnings are going to lower forward guidance relatively significantly, including some of the big banks,” Jeff Sica at Sica Wealth Management said by phone.

“That’s going to have a very negative impact on the stock market.” JPMorgan, Citigroup and Wells Fargo are scheduled to provide quarterly results this morning. Bank of America, Goldman Sachs and Morgan Stanley report later in the week. Low interest rates have crimped lending profits for banks, which benefit from higher loan yields. Net interest margins, the difference between what a firm pays in deposits and charges for loans, were a record-low 3.1% in the second quarter…

Fed Vice Chairman Stanley Fischer said during the weekend that U.S. rate increases could be delayed by slowing growth elsewhere. The central bank should be “exceptionally patient” in adjusting monetary policy, Chicago Fed President Charles Evans said yesterday.

Wait, that’s not what Fisher implied, at least not as MarketWatch reported it:

Fed’s Fischer Says Rate Hike Won’t Damage Global Economy

The Federal Reserve’s eventual rate increase, the first since 2006, will not damage the global economy, Federal Reserve Vice Chairman Stanley Fischer said on Saturday. While there could be “further bouts of volatility” in international markets when the Fed first hikes, “the normalization of our policy should prove manageable for the emerging market economies,” Fischer said in a speech at the IMF’s annual meeting.

[..] Since last year, Fischer said, the Fed has “done everything we can, within limits of forecast uncertainty, to prepare market participants for what lies ahead.” The Fed has been as clear as it can be about the future course of its policy course, and markets understand, Fischer said. “We think, looking at market interest rates, that their understanding of what we intend to do is roughly correct … ”

There’s a veiled message in there that’s very different from Chuck Evans’ “The central bank should be “exceptionally patient” in adjusting monetary policy.” Fisher says it won’t make any difference, because everybody already knows what will come. Which is a load of male bovine, because many of the emerging nations that are neck deep in dollar denominated debt have nowhere to turn. And besides, the Fed doesn’t serve market participants, or the real economy, or Americans, and certainly not enmerging markets, The Fed serves banks. Still, for now the confusing messages work miracles (we return to that 2nd Bloomberg piece):

Federal fund futures show the likelihood of a September 2015 rate increase fell to 46%, from 56% on Oct. 10, and 67% two months ago, according to data compiled by Bloomberg.

Wow, that’s a lot of behinds risking a severe burn. You better hope your pension fund manager is just a tad less complacent.

“If you get rates rising, you can price that into loans,” Peter Sorrentino at Huntington Asset Advisors, said. “We haven’t seen much shift in the yield curve, even though people thought this would be the year for it because of the Fed easing on QE. There’s a disappointment that we haven’t seen better margin growth this year.”

That’s all you need to know. Wall Street banks are still ‘down on their luck’ (I know I’m funny), they’re no longer making real money with interest rates scraping zero, and the answers to their ‘sorrows’ are right there in the hands of the people they own: the Fed. There have been a few years of free cash and zero rates which were profitable, but that has put all market parties in the same boat, so the real money, nay, the only money, is now in being on the other side of that boat, that bet, that trade. The trade, and the emotion, has shifted singnificantly. 90º, 180º, take your pick.

Increased volatility will boost trading revenues for the financials, according to Arjun Mehra of JPMorgan. [..] “For the first time in over a year, the largest U.S. banks are expected to get a boost from their trading business, which stands in stark contrast to press reports heading into the second quarter that called for the death of trading,” Mehra wrote. The VIX, a gauge of S&P 500 derivatives prices, jumped 41% last quarter for its biggest increase in three years. Bank of America Merrill Lynch’s MOVE Index, which measures implied volatility on U.S. Treasuries, climbed 22%.

Everyone’s gotten complacent, everyone follows Yellen’s lips, everyone thinks the same. There’s no money in that, and Wall Street needs money, badly. The money is now in volatility, not the lack thereof. So we will have volatility, it’s already rising.

“There are two things banks need to work: higher rates and credit expansion,” Mark Freeman at Westwood Holdings said. “Just as the outlook for growth is getting called into question, the outlook for higher rates is being called into question, and that’s been a headwind for the group as of late.”

The higher rates will be there, and not as late as September 2015. No profit in that. Credit expansion comes to an end, in a sense, with the tapering of QE. But guess what? A significantly higher dollar works the exact same way. It expands ‘credit’ in all – or most – other currencies, and in commodities.

Understand the make-up of the system, the role of the Fed and other central banks, and their relationship with the major commercial/investment banks, and it becomes obvious what their next moves will – must – be. The beast must be Fed.