Trumponomics Archives - The Automatic Earth

The policy debate in Greece and the EU is burdened with hysteria over the issue of budget deficit and public debt. The proposition is that the less the governments borrow the better and, therefore, the main policy has been to put pressure on the State to curtail as far as possible all capital expenditure, without concern on how productive and desirable that is in itself. The idea is that cuts in government expenditures are not to be used by the government to tax the general population less but to borrow less on the assumption that if the government borrows less the private sector necessarily borrows more, though taxing less the highest rungs of the income distribution might be desirable as it is considered as an incentive to investment.

Second, led by the belief that the main thrust of policy should be internal devaluation, a program of cutbacks in expenditures, decrease in deficits and debts and wage and income restraint is pursued even in a time of recession. The idea is that if producers have reduced costs of production they will produce more and the prices of the produced goods will fall as much as wages. However, as Keynes pointed out that there is no reason to expect that any reduction of purchasing power will be offset by increases in other directions. Certainly, this reduction of purchasing power may cause a reduction of domestic expenditures on imports, which may improve the trade balance. It may also reduce savings, as public employees and others whose salaries are cut and those who lost their jobs may save less or draw on their passed savings to maintain their habitual standard of life.

However, producers will find that the expenditures of consumers (public employees, pensioners, unemployed) are reduced. Consequently, they can only match this reduction of revenue by either cutting down their own expenditure or making redundant some of their employees or both. As a necessary consequence of reduced incomes and profits there should be an increase in unemployment and a decrease in government tax revenues. Importantly, as Keynes noticed, deflation of wages, incomes and prices transfers wealth from the rest of the public to the rentiers and to those who hold titles to money. In effect, internal devaluation redistributes wealth as it transfers money from borrowers to lenders. The real assets in the country constitute the wealth of its citizens. Such real assets are buildings, stocks of commodities, goods in the process of production and the like. As is the usual practice, owners of these assets frequently purchase them by borrowing money.

Don’t forget, it’s not Greece that’s being bailed out.

• After Seven Years Of Bailouts, Greeks Sink Yet Deeper In Poverty (R.)

Greek pensioner Dimitra says she never imagined a life reduced to food handouts: some rice, two bags of pasta, a packet of chickpeas, some dates and a tin of milk for the month. At 73, Dimitra – who herself once helped the hard-up as a Red Cross food server – is among a growing number of Greeks barely getting by. After seven years of bailouts that poured billions of euros into their country, poverty isn’t getting any better; it’s getting worse like nowhere else in the EU. “It had never even crossed my mind,” she said, declining to give her last name because of the stigma still attached to accepting handouts in Greece. “I lived frugally. I’ve never even been on holiday. Nothing, nothing, nothing.” Now more than half of her €332 ($350) monthly income goes to renting a tiny Athens apartment. The rest: bills.

The global financial crisis and its fallout forced four euro zone countries to turn to international lenders. Ireland, Portugal and Cyprus all went through rescues and are back out, their economies growing again. But Greece, the first into a bailout in 2010, has needed three. Rescue funds from the EU and IMF saved Greece from bankruptcy, but the austerity and reform policies the lenders attached as conditions have helped to turn recession into a depression. Prime Minister Alexis Tsipras, whose leftist-led government is lagging in opinion polls, has tried to make the plight of Greeks a rallying cry in the latest round of drawn-out negotiations with the lenders blocking the release of more aid. “We must all be careful towards a country that has been pillaged and people who have made, and are continuing to make, so many sacrifices in the name of Europe,” he said this month.

Much of the vast sums in aid money has simply been in the form of new debt used to repay old borrowings. But regardless of who is to blame for the collapse in living standards, poverty figures from the EU statistics agency are startling. Greece isn’t the poorest member of the EU; poverty rates are higher in Bulgaria and Romania. But Greece isn’t far behind in third place, with Eurostat data showing 22.2% of the population were “severely materially deprived” in 2015. And whereas the figures have dropped sharply in the post-communist Balkan states – by almost a third in Romania’s case – the Greek rate has almost doubled since 2008, the year the global crisis erupted. Overall, the EU level fell from 8.5% to 8.1% over the period. The reality of such statistics becomes clear at places like the food bank run by the Athens municipality where Dimitra collects her monthly handouts.

Here, dozens more Greeks waited solemnly with a ticket in hand to get their share. All are registered as living below the poverty line of about €370 a month. “The needs are huge,” said Eleni Katsouli, a municipal official in charge of the center. Figures for the food bank, which serves central Athens, show a similar trend on a local scale to the wider Eurostat data. About 11,000 families – or 26,000 people – are registered there, up from just 2,500 in 2012 and 6,000 in 2014, Katsouli said. About 5,000 are children.

Delusional theoretics: “..a greater emphasis on growth..”

• Greece’s Creditors Dash Hopes For Quick Deal (Tel.)

Greece’s creditors have dashed hopes of a quick resolution to the country’s looming cash crunch, even as talks paved the way for debt inspectors to return to Athens. Jeroen Dijsselbloem, the head of the Eurogroup, told reporters that there had been a “clear shift” in creditor demands following a meeting of finance ministers in Brussels on Monday. Yields on Greek government bonds fell sharply after he announced that representatives from the European Commission and IMF would return to Athens to thrash out an “additional package of structural reforms” to support long term growth and debt sustainability. Greece needs around €7bn in fresh rescue funds before July in order to cover substantial debt repayments to the ECB and private creditors. The Dutch finance minister said new measures would be “designed and agreed on the ground” in Athens, with a greater emphasis on growth.

“At face value, that means less tax rises and spending cuts and deep reforms to the country’s tax system, pensions and labour laws,” Mr Dijsselbloem told reporters. However, he played down reaching a solution before Dutch elections next month or even the French presidential election in May and said creditors were “looking towards the summer” for an agreement. “There is still a lot of work to do, a lot of issues to discuss and calibrate so I want to temper expectations,” he said. “There is no need for a disbursement in March, April or May.” Mr Dijsselbloem also signalled that differences remained between Greece, Brussels and the IMF over the reforms needed to unlock the next loan tranche and secure the institution’s participation in Greece’s third, €86bn rescue package.

Speaking after the meeting, a Greek government official said Athens was prepared to implement reforms beyond 2019. The official added: “The agreement includes the inviolable condition that was set by the Greek side for not even one euro more of austerity.” However, Pierre Moscovici, European Commissioner for economic and financial affairs, signalled that structural reforms, including pension cuts as well as tax and labour reforms would be required before pro-growth measures could be sanctioned. “I think that one word was forgotten [in the Greek official’s statement]. That was ‘net’,” he said.

This one may be hard for Tsipras to explain. What’s the use of red lines if they mean nothing?

• Greek Government In Damage Control Mode After Giving In To Troika, Again (K.)

After the government backed down on its vow not to take new measures at Monday’s Eurogroup, its number one priority now is damage control. In the runup to Monday’s meeting of eurozone finance ministers, Athens had insisted it had drawn its “red lines,” but it left Brussels having promised its EU partners that it will legislate measures after the current bailout program expires in 2018, in exchange for the return of technical experts to Athens in the bid to conclude the second review of the country’s third bailout. Faced with the challenge of explaining its turnaround and agreement to take new measures to an increasingly disillusioned electorate and lawmakers of ruling SYRIZA and Independent Greeks (ANEL), the government is using the term “neutral fiscal balance” in an attempt to sweeten the pill.

According to government sources, the term essentially means that for every euro saved from the new measures, there will be equivalent reductions in value-added, corporate or property taxes. In other words, the government’s narrative is that even though new measures will be implemented, these will be neutral as their burden will be canceled out by tax relief. Senior government officials were also busy laying the groundwork last week, saying that the government may have to accept new measures “for the good of the country” as the protracted negotiations to conclude the review were having a negative impact on the prospects of the country’s economic recovery.

Nice legal twist.

• Mr Draghi, What Are You Afraid Of? Release #TheGreekFiles! (DiEM25)

Deep in a vault in the headquarters of the European Central Bank (ECB) lie #TheGreekFiles, a legal opinion about the ECB’s actions towards Greece in 2015 that could send shockwaves across Europe. As a European taxpayer, you paid for these documents. But the ECB’s boss, ex-Goldman Sachs head Mario Draghi, says you can’t see them. So former Greek Finance Minister Yanis Varoufakis and MEP Fabio de Masi, together with a broad alliance of politicians and academics (below), have announced they will file a mass freedom of information request to the ECB to uncover #TheGreekFiles once and for all. If Mario says no, they’ll take the campaign to the next level, and consider all options – including legal action – to make this vital information public. Support their request to release critical documents you paid for by signing this petition now!

What are #TheGreekFiles? In June 2015, the newly-elected Greek government was locked in tense negotiations with its creditors (the ‘Troika’ – the ECB, EC and IMF), doing what it had been voted in to do: renegotiate the country’s public debt, fiscal policy and reform agenda, and save its people from the hardship of the most crushing austerity programme in modern history. The Troika knew they needed to make a drastic move to force the Greek government to capitulate. And that’s just what they did: through the ECB, they took action to force Greece’s banks to close, ultimately driving the Greek government – against its democratic mandate – to accept the country’s third ‘bailout’, together with new austerity measures and new reductions in national sovereignty.

But in their haste, their zeal to crush the Greek government’s resistance, the ECB feared their actions might be legally dubious. So they commissioned a private law firm to examine whether those decisions were legal. The legal opinion of this law firm is contained in #TheGreekFiles. In July 2015, the German MEP Fabio De Masi asked Mario Draghi to release the legal opinion. Mario refused, hiding behind ‘attorney-client privilege’. Clearly #TheGreekFiles contain something he doesn’t want you to see. One of the foremost experts on European Law, Professor Andreas Fischer-Lescano, examined whether the ECB was right to refuse to release #TheGreekFiles. His detailed conclusion leaves no room for doubt: the ECB has no case for withholding from MEPs and the citizens of Europe the legal opinion the ECB secured (and paid for using your money) regarding its own conduct.

“..lost in a hall of mirrors with the lights off..” Building infrastructure for a world that’s gone, strip malls etc.

• Fumbling Towards Collapse (Jim Kunstler)

[..] the real issue hidden in plain sight is how America — indeed all the so-called “developed” nations — are going to navigate to a stepped-down mode of living, without slip-sliding all the way into a dark age, or something worse. By the way, the Ole Maestro, Alan Greenspan, also chimed in on the “productivity” question last week to equally specious effect in this Business Insider article. None of these celebrated Grand Viziers knows what the fuck he’s talking about, and a nation depending on their guidance will find itself lost in a hall of mirrors with the lights off. So, on one side you have Trump and his trumpets and trumpistas heralding the return of “greatness” (i.e. a booming industrial economy of happy men with lunchboxes) which is not going to happen; and on the other side you have a claque of clueless technocrats who actually believe they can “solve” the productivity problem with measures that really only boil down to different kinds of accounting fraud.

You also have an American public, and a mass media, who do not question the premise of a massive “infrastructure” spending project to re-boot the foundering economy. If you ask what they mean by that, you will learn that they uniformly see rebuilding our highways, bridges, tunnels, and airports. Some rightly suspect that the money for that is not there – or can only be summoned with more accounting fraud (borrowing from our future). But on the whole, most adults of all political stripes in this country think we can and should do this, that it would be a good thing. And what is this infrastructure re-boot in the service of? A living arrangement with no future. A matrix of extreme car dependency that has zero chance of continuing another decade. More WalMarts, Target stores, Taco Bells, muffler shops, McHousing subdivisions, and other accoutrement of our fast-zombifying mode of existence? Isn’t it obvious, even if you never heard of, or don’t understand, the oil quandary, that we have shot our wad with all this? That we have to start down a different path if we intend to remain human?

It’s not hard to describe that waiting world, which I’ve done in a bunch of recent books. We’re going there whether we like it or not. But we can make the journey to it easier or harsher depending on how much we drag our heels getting on with the job. History is pretty unforgiving. Right now, the dynamic I describe is propelling us toward a difficult reckoning, which is very likely to manifest this spring as the political ineptitude of Trump, and the antipathy of his enemies, leaves us in a constitutional maelstrom at the very moment when the financial system comes unglued. Look for the debt ceiling debate and another Federal Reserve interest rate hike to set off the latter. There may be yet another converging layer of tribulation when we start blaming all our problems on Russia, China, Mexico, or some other patsy nation. It’s already obvious that we can depend on the Deep State to rev that up.

US manufacturing is inferior.

• Why Trumponomics Will Fail Spectacularly (Robert Reich)

When Donald Trump gave a speech last Friday at Boeing’s factory in North Charleston, South Carolina – unveiling Boeing’s new 787 “Dreamliner” – he congratulated Boeing for building the plane “right here” in South Carolina. It’s pure fantasy. I’ll let you know why in a moment. Trump also used the occasion to tout his “America First” economics, stating “our goal as a nation must be to rely less on imports and more on products made here in the U.S.A.” and “we want products made by our workers in our factories stamped by those four magnificent words, ‘Made in the U.S.A.’” To achieve this goal Trump would impose “a very substantial penalty” on companies that fired their workers and moved to another country to make a product, and then tried to sell it back to America. The carrot would be lower taxes and fewer regulations “that send our jobs to those other countries.” Trump seems utterly ignorant about global competition – and about what’s really holding back American workers.

Start with Boeing’s Dreamliner itself. It’s not “made in the U.S.A..” It’s assembled in the United States. But most of it parts come from overseas. Those foreign parts total almost a third of the cost of the entire plane. For example: The Italian firm Alenia Aeronautica makes the center fuselage and horizontal stabilizers. The French firm Messier-Dowty makes the aircraft’s landing gears and doors. The German firm Diehl Luftfahrt Elektronik supplies the main cabin lighting. The Swedish firm Saab Aerostructures makes the cargo access doors. The Japanese company Jamco makes parts for the lavatories, flight deck interiors and galleys. The French firm Thales makes its electrical power conversion system. Thales selected GS Yuasa, a Japanese firm, in 2005 to supply it with the system’s lithium-ion batteries. The British company Rolls Royce makes many of the engines. A Canadian firm makes the moveable trailing edge of the wings.

Notably, these companies don’t pay their workers low wages. In fact, when you add in the value of health and pension benefits – either directly from these companies to their workers, or in the form of public benefits to which the companies contribute – most of these foreign workers get a better deal than do Boeing’s workers. (The average wage for Boeing production and maintenance workers in South Carolina is $20.59 per hour, or $42,827 a year.) They also get more paid vacation days. These nations also provide most young people with excellent educations and technical training. They continuously upgrade the skills of their workers. And they offer universally-available health care. To pay for all this, these countries also impose higher tax rates on their corporations and wealthy individuals than does the United States. And their health, safety, environmental, and labor regulations are stricter.

Not incidentally, they have stronger unions. So why is so much of Boeing’s Dreamliner coming from these high-wage, high-tax, high-cost places?

Yeah, big cuts, remember?

• Saudi Arabia Breaks Records on Oil Exports and Output for (BBG)

Saudi Arabia boosted oil exports and production last year to the highest monthly averages on record as the global crude market endured oversupply. Exports climbed to 7.65 million barrels a day on average last year, from 7.39 million barrels a day a year earlier, according to Joint Organisations Data Initiative monthly data compiled by Bloomberg. Production rose to 10.46 million barrels a day from 10.19 million, on average, over the same period. Saudi Arabia led the push by global producers to end a crude glut by cutting output as of Jan. 1. JODI data indicate that the kingdom’s exports surged to more than 8 million barrels a day in November and December right before the cuts were due to start. Shipments in November were the highest since May 2003, JODI data show.

“Whenever there was no agreement with others, Saudi Arabia was running after expanding its market share,” said Mohamed Ramady, an independent analyst in London. Saudi Arabia pumped 10.2 million barrels to 10.67 million barrels a day in the first 10 months as producers discussed output cuts without making an agreement. It reined in production in January following the deal between the Organization of Petroleum Exporting Countries and non-OPEC nations to reduce output by 1.8 million barrels a day, according to data compiled by Bloomberg.

This is just a part of the shadow banking sector, the part that’s held by official banks.

• Chinese Banks’ Off-Book Wealth Products Exceed $3.8 Trillion (BBG)

Chinese banks had more than 26 trillion yuan ($3.8 trillion) of wealth-management products held off their balance sheets at the end of December, a 30% increase from a year earlier, according to the central bank. The expansion of this form of shadow banking, with money eventually being diverted to quasi-loans and bonds, outpaced the 10% growth for normal lending during the same period, raising risks for the broader economy and undermining the country’s “deleveraging” efforts, the People’s Bank of China said Friday in its quarterly monetary policy report. The central bank is including off-balance sheet WMPs in its so-called macro prudential assessment framework starting this quarter to better gauge the expansion of credit and potential risks in the financial system.

The move will probably lead to banks reporting higher credit growth and may require them to take steps to maintain sufficient capital reserves to limit risks posed by the investment products. Since late 2014, the China Banking Regulatory Commission has been tightening rules on WMPs, most of which are non-principal guaranteed, meaning they can reside off banks’ balance sheets. The products are a key reason behind the growth of shadow banking in China, and have been used by some financial institutions as a way to extend funds to risky borrowers and evade capital requirements. The investment vehicles are asset-management products by nature and therefore investors should shoulder any risks by themselves, the central bank said in its report. More work is needed to solve problems such as the real amount of capital banks should hold to cover WMPs, risk segmentation, regulatory arbitrage, and the perception of an implicit guarantee of repayment, the PBOC said.

Tax addiction.

• Why Toronto (and Other Cities) Inflate Housing Bubbles to the Bitter End (WS)

“Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal (BMO) Chief Economist Doug Porter told clients in a note last week. Many have called it “housing bubble” for a while, but now it’s official, according to BMO. In January, the benchmark price and the average price were both up 22% year-over-year, with the average price of detached homes up 26%, of semi-detached homes 28%, of townhouses 27%, and of condos 15%. Double-digit price increases have become the rule in recent years. But this jump was “the fastest increase since the late 1980s – a period pretty much everyone can agree was a true bubble – and a cool 21 percentage points faster than inflation and/or wage growth,” Porter explained in his note, cited by BNN.

Home prices in Greater Toronto have become “dangerously detached” from economic fundamentals and are soaring simply on the belief that they will continue to soar, he wrote. “The market is far too hot for comfort.” BNN: “The often-cited mantra that Toronto’s real estate market is being driven largely by a lack of supply is wearing thin, he argues. Housing starts in Toronto and Vancouver recently hit an all-time high of 70,000 units per year and overall Canadian starts are above demographic demand at 200,000 units in the past year, according to BMO.” The “massive price gains” are not driven by lack of supply, but “first and foremost by sizzling hot demand, whether from ultra-low interest rates (negative in real terms), robust population growth, or non-resident investor demand.”

“Toronto and any city that is remotely within commuting distance are overheating, and perhaps dangerously so,” he said. But don’t expect the city of Toronto to do anything other than inflate the bubble further. It has to – unless it wants to fall into a fiscal and financial sinkhole. This became apparent last week, when the city councilors approved Toronto’s operating and capital budgets. What a mess!

The tax-supported operating budget is now expected to grow by 4.4% in 2017, to C$10.5 billion. So more taxes must be extracted from the hapless folks in Toronto. Among sundry fees, taxes, and levies, the councilors approved a 3.29% increase in the residential property tax and raised the municipal land transfer tax. Under the new budget, property taxes would provide 38% of the revenues, and the land transfer tax 7%, for a total of 45% of the C$10.5 billion in taxes, or C$4.7 billion. Just how dependent the funding for Toronto’s ballooning operating budget has become on the house price bubble – and the property-related taxes it generates – is made clear in this chart by Warren Lovely, Head of Public Sector Research & Strategy at National Bank Financial, Toronto:

A most curious difference.

• Refugee Claimants From US Strain Canada’s Border Resources (R.)

Canadian police said on Monday they had bolstered their presence at the Quebec border and that border authorities had created a temporary refugee center to process a growing number of asylum seekers crossing from the United States. The Canada Border Services Agency, or CBSA, said at a news conference that it had converted an unused basement into a refugee claimant processing center. Both the border agency and the Royal Canadian Mounted Police are reassigning staff from other locations in the province, as needed, to accommodate rising demand. The CBSA said the number of people making refugee claims at Quebec-U.S. border crossings more than doubled from 2015 to 2016. Last month, 452 people made claims in Quebec compared with 137 in January 2016, the agency said.

The influx is straining police, federal government and community resources from the western prairie province of Manitoba, where people arrive frostbitten from hours walking in freezing conditions, to Quebec, where cabs drop asylum seekers off meters away from the Quebec-U.S.border, the border agency said. A Reuters reporter on Monday saw RCMP officers take in for questioning a family of four – two men, a woman and a baby in a car seat – who had walked across the snowy gully dividing Roxham Road in Champlain, New York, from Chemin Roxham in Hemmingford, Quebec. “Please explain to her that she’s in Canada,” one Canadian officer told another officer.

Police take people crossing the border in for questioning at the border agency’s office in Lacolle, Quebec, which is the province’s biggest and busiest border crossing. Police identify them and ensure they are not a threat or carrying contraband. They are then transferred to the CBSA for fingerprinting and further questions. If people are deemed a threat or flight risk, they are detained. If not, they can file refugee claims and live in Canada while they wait for a decision “It’s touching, and we are not insensitive to that,” Bryan Byrne, the RCMP’s Champlain Detachment commander, told reporters near the border. “Some of these people had a long journey. Some are not dressed for the climate here.”

Asylum seekers cross illegally because Canada’s policy under the Canada-U.S. Safe Third Country Agreement is to turn back refugees if they make claims at border crossings. But as U.S. President Donald Trump cracks down on illegal immigrants, Amnesty International and refugee advocacy groups are pressuring the Canadian government to abandon the agreement, arguing the United States is no safe haven. On Monday, Montreal, Canada’s second most populous city, voted to declare itself a “sanctuary city,” making it the fourth Canadian city to protect illegal immigrants and to provide services to them.

European governments criticizing Trump’s refugee policies have no credibility. But the people still can.

• ‘Casa Nostra, Casa Vostra’ (K.)

Thousands of people marched through the streets of downtown Barcelona on Saturday shouting the slogan “Casa nostra, casa vostra” (Our home, your home). Barcelona had prepared its plan for welcoming Syrian and Iraqi refugees back in September 2015. It put its municipal services on standby and organized an army of volunteers, whose generosity inspired residents in Madrid and Valencia to open their own cities to refugees. In the meantime, much of the rest of Europe was busy building walls, fencing itself in, warding inflows off, hardening its laws and ignoring not just the plight of the refugees themselves, but also the difficulties faced by Greece and Italy, Lesvos and Lampedusa. This amazing show of solidarity – not rhetorical but actual and tangible – from the Catalans convinced the Spanish government to raise its commitment for taking in refugees trapped in Greece and Italy from the 2,749 it had initially agreed to up to 17,680.

But numbers often suffer the same fate as words, dying out without leaving a single political or moral trace. Up until February 2016, just 18 refugees had been relocated to Spain, a number that makes sense when you consider that of the 160,000 relocations agreed on by the countries of the European Union, just 600 had actually taken place by that time. This failure to live up to commitments prompted Barcelona Mayor Ada Colau at this precise time last year to lash out against the Spanish government and the strategy centers in Brussels, which seem happy to confine their action to the deal made between the European Union and Turkey, even though this has been condemned by every respected humanitarian organization.

Colau’s protests fell on deaf ears, so on August 1, 2016, authorities in Barcelona placed a “counter of shame” on the city’s most popular beach, recording daily how many people are lost at sea in their effort to escape war or extreme poverty. We don’t know whether the counter triggered any feelings of guilt, but it certainly failed to awaken any sense of responsibility. When it was inaugurated, the number of victims stood at 3,034. By the end of the year, and according to official data from Europe, ever the passive observer, this surpassed 5,000. And as far as relocations to Spain go, these barely came to more than 1,000 last year. This, in general terms, is the background of that very encouraging rally we saw in Barcelona on Saturday. Whether the people who took to the streets were motived by their feelings or by their ideological beliefs is a question that only means something to those who think ideology is a fixation and feelings a sign of immaturity.

Debt Rattle December 9 2016

Dec 092016

December 9, 2016 Posted by Raúl Ilargi Meijer at 9:42 am Finance Tagged with: Draghi, euro, M5S, OPEC, refugees, Shiller, Trump, Trumponomics, Tulip Bubble 4 Responses »

Arthur Rothstein Migratory fruit pickers’ camp in Yakima, Washington Jul 1936

• Trumponomics Will Collapse Under a Mountain of Debt (Stockman)

• Shiller CAPE Ratio Signals ‘Overvaluation On A Very Grand Scale’ (CNBC)

• The American Dream Is Fading And May Be Very Hard To Revive (WSJ)

• Europe’s Comfort Blanket Is Being Pulled Away (AEP)

• Albert Edwards’ ‘Most Frightening Chart’ (MW)

• Australia Property Market Mirrors Tulip Bubble, Says Former Bank CEO (ND)

• Top Official In Italy’s M5S Increases Call For Referendum On Euro (G.)

• It Is Almost Certain There Will Be Another Euro Crisis In 2017 (McWilliams)

• OPEC Deal Won’t Be Enough to Drain Oil Stockpiles (BBG)

• UK Sells Majority Stock In Gas Infrastructure To China, Qatar (Ind.)

• UK Village Unleashes Anger With Syrian Refugees: £600 Worth Of Jumpers (Ind.)

• Relations With Ankara Sour As Turkey Disputes Greek Sovereignty (Kath.)

• Electric Cars Are Only As Clean As Their Power Supply (G.)

Right back to the poisoned chalice I wrote about on the morning of election day.

• Trumponomics Will Collapse Under a Mountain of Debt (Stockman)

Financial markets are heading straight into a perfect storm of central bank failure, bond market carnage, a worldwide recession and a spectacular fiscal bloodbath in Washington. Investors should be heading for the hills with all deliberate speed. What is going to stop Trumponomics cold is debt — roughly $64 trillion of it. That’s what is crushing the American economy, and until the mechanics of its relentless growth are stopped and reversed, the odds of achieving and sustaining the 3–4% real economic growth that Trump’s economics team is yapping about is somewhere between slim and none. Here’s the newsflash. The nation’s monumental debt problem wasn’t newly created by the Obama Administration or the fact that Nancy Pelosi never met a spending program she couldn’t embrace.

The last eight years have surely made the problem far worse and the Democrats are culpable without question. But quite frankly the debt problem is a thoroughly bipartisan creation that is completely immune to the fact that the White House and both sides of Capitol Hill are now under GOP control. In fact, the nation’s debt affliction actually goes back to August 1971 when Nixon closed the gold window and launched the world on the current destructive experiment with massive central bank driven credit expansion. However, it was after 1980 that the wraps really started coming off the debt monster that was spawned by the world’s unshackled central banks. In that context, Paul Volcker was the last honest central banker, and with Ronald Reagan’s acquiescence he did break the back of the virulent commodity and consumer goods inflation that had been unleashed by his immediate predecessors during the 1970s.

Yet Volcker’s great handiwork was for naught because of two other developments – the breakdown of fiscal rectitude and the final destruction of sound money by Alan Greenspan – that also occurred on the Gipper’s watch. In fact, the gigantic Reagan deficits — which nearly tripled the national debt from $930 billion to $2.7 trillion during his eight years in office — is exactly what led Greenspan to crank up the printing press at the Fed after the stock market crash in October 1987.

What Stockman said, but now in a graph.

• Shiller CAPE Ratio Signals ‘Overvaluation On A Very Grand Scale’ (CNBC)

While the S&P 500 is reaching all-time highs on optimism over Donald Trump’s economic agenda, some Wall Street strategists are increasingly worried about a widely followed valuation measure that’s reached levels that preceded most of the major market crashes of the last 100 years. “The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November. Newman said even if the market’s earnings increase by 10% under Trump’s policies “we’re still dealing with the same picture,.”

The Shiller “cyclically adjusted price-to-earnings ratio” (CAPE) is calculated using price divided by the index’s average historical 10-year earnings, adjusted for inflation. Yale economics professor Robert Shiller’s research found future 10-year stock market returns were negatively correlated to high CAPE ratio readings on a relative basis. He won the Nobel Prize in economics in 2013 for his work on stock market inefficiency and valuations.

Barely half of US 30-year-olds earn more than their parents did at that age..

• The American Dream Is Fading And May Be Very Hard To Revive (WSJ)

Barely half of 30-year-olds earn more than their parents did at a similar age, a research team found, an enormous decline from the early 1970s when the incomes of nearly all offspring outpaced their parents. Even rapid economic growth won’t do much to reverse the trend. Economists and sociologists from Stanford, Harvard and the University of California set out to measure the strength of what they define as the American Dream, and found the dream was fading. They identified the income of 30-year-olds starting in 1970, using tax and census data, and compared it with the earnings of their parents when they were about the same age. In 1970, 92% of American 30-year-olds earned more than their parents did at a similar age, they found. In 2014, that number fell to 51%.

“My parents thought that one thing about America is that their kids could do better than they were able to do,” said Raj Chetty, a prominent Stanford University economist who emigrated from India at age 9 and is part of the research team. “That was important in my parents’ decision to come here.” Although there are many definitions of the American Dream—the freedom to speak your mind, for instance, or the ability to rise from poverty to wealth—the economists chose a measure that they said was possible to define precisely. The percentage of young adults earning more than their parents dropped precipitously from 1970 to about 1992, to 58%, found Mr. Chetty et al.

Draghi says two or more completely contradictory things all in one breath. It’s what they pay him the big bucks for.

• Europe’s Comfort Blanket Is Being Pulled Away (AEP)

The long-feared moment of bond tapering in the eurozone has arrived. The comfort blanket is being pulled away – gently – for the first time since the region first crashed into a debt crisis. The ECB has tried to cushion the blow with dovish rhetoric and a glacially slow exit but there is no denying that monetary policy has reached a critical turning point. “The ECB has delivered an unwelcome surprise,” said Luigi Speranza from BNP Paribas. Europe’s incipient tightening has begun just as the US Federal Reserve prepares to raise interest rate next week, probably the first of several rises over the next twelve months as the incoming Trump administration launches a fiscal boom. It comes as China takes action to choke off a property bubble and rein in shadow banking. The world’s three big monetary blocs will all be draining liquidity at the same time.

The ECB will wind down quantitative easing from €80bn to €60bn a month when the current programme expires in March. Societe Generale says that this is just the start, predicting more tapering of €10bn in June, and then further cuts of €10bn at each meeting – a truly drastic outlook. Doves at the ECB warned that it would be dangerous to start any tapering at this delicate juncture, given that there has been no flicker of life in core inflation – still stuck at 0.8pc – and given that imported monetary tightening from the US has already led to a doubling of Italian 10-year yields over the last three months. The doves were over-ruled. It is clear that a German-led bloc on the ECB’s governing council blocked efforts to roll over the existing QE structure for another six months.

Bond purchases will carry on for longer instead. The new €60bn regime will run for nine months until the end of 2017. The ultimate stock of ECB bonds will be higher. You could call it a compromise. But despite appearances – and logical inference – these are not an equivalent forms of stimulus. The stormy saga of bond tapering by the Fed shows that investors react more to the monthly “flow” of QE than they do to the “stock” of bonds held – the balance sheet syndrome that looms large in the theoretical models of central banks. [..] Mario Draghi, the ECB’s president, was at pains to insist that there is no tightening whatsoever coming next year. “The presence of the ECB on the markets will be there for a long time. The key message is that there is no tapering in sight,” he said. Nothing is on auto-pilot and the volume of QE could rise again if need be. “It can go back to €80bn,” he said.

“..a ghoulish quest to harvest bad news with a forceful sweep of my scythe..”

• Albert Edwards’ ‘Most Frightening Chart’ (MW)

Albert Edwards, a global strategist at Société Générale, has been steadily beating the doomsday drum for decades. But despite the perma-bear’s repeated warnings about an impending economic disaster, investors are still likely to take notice when he gleefully shares the “most frightening chart” he’s seen in a while — especially when the stupendous postelection rally in U.S. stocks has stoked fears that a correction might be just around the corner. “I sometimes feel like ‘The Grim Reaper,’ scouring the research savannah in a ghoulish quest to harvest bad news with a forceful sweep of my scythe. Imagine then my perverse delight when our credit team produced what is one of the scariest charts I have seen for a very long time,” writes Edwards in his report. The chart by Guy Stear, head of emerging markets and credit research at Société Générale, shows credit spreads holding steady even as political uncertainty spikes to an unprecedented level.

According to Edwards, that cognitive dissonance is all wrong. “Markets shrugged off the Brexit vote in a couple of days. They shrugged off Donald Trump’s election in a single day. They shrugged off the Italian referendum result in a couple of hours. Heck, in this mood they would shrug off an alien invasion of planet Earth,” he said. “But global political risk is now at such elevated levels that investors must surely be on another planet.” The graph is based on the economic policy uncertainty index developed by three U.S. professors — Scott Baker, Nick Bloom and Steven Davis. This is the original chart that shows the EPU index at 282, significantly above 201 in 2008 and 218 in 2011, two previous periods of panic:

Really?: “If the economy tracks along okay, it might turn out that this thing sorts itself out.”

• Australia Property Market Mirrors Tulip Bubble, Says Former Bank CEO (ND)

Australia’s property market now mirrors one of the worst speculative manias in human history, according to a former Commonwealth Bank CEO. In a televised interview that drew little media attention, David Murray warned that the entire economy is “vulnerable” because of overvalued house prices in Sydney and Melbourne. “All the signs of a bubble are there. Many of the signs are the same as the Dutch tulips,” Mr Murray told Sky News on December 1. Starting in 1634, the Dutch bid up the price of tulip bulbs to extraordinarily high levels. Then, in 1637, the price collapsed, turning the craze into a byword for speculative insanity. Since 2009, Sydney dwelling prices have risen by 95% and Melbourne by 85%, according to CoreLogic, a prominent property analysis firm.

Mr Murray, who chaired a recent inquiry into the health of Australia’s financial sector, said we may yet avoid a Dutch-style price plunge. It is a risk, not a certainty. “If the economy tracks along okay, it might turn out that this thing sorts itself out. But when those risks are there, something needs to be done about it in a regulatory sense, and the Reserve Bank and APRA need to stay on it.” In recent years, APRA has imposed tougher lending policies on the big banks, including forcing them to hold more capital as a buffer against mortgage defaults. This was a recommendation made by Mr Murray during his financial sector review. The former bank boss has been warning of a property bubble since at least last year.

The fact that prices in Melbourne and Sydney have not corrected already is a further cause for concern, he said in his latest interview. “When we get a momentum in a market like this, when you get these self-amplifying price spirals, the fact they keep going on and on longer than expected is another sign that it’s not very healthy.” The crash, if it eventuates, would be triggered by a large number of landlords being forced to sell their investment properties all at once, thereby driving down prices, Mr Murray said. “We have more investors in the market than we’ve had historically and those investors typically, even people on lower incomes, own multiple properties and those properties are often collateralised in the system. So they’re the people who become forced sellers, and that’s the risk to the system.”

Now President Mattarella is rumored to have asked Renzi to form a new government?!

• Top Official In Italy’s M5S Increases Call For Referendum On Euro (G.)

A top official in the Italian anti-establishment Five Star Movement (M5S) is ratcheting up his party’s call for a referendum on the euro, signalling that Italy’s possible exit from the single currency could become a central issue in the next election. Alessandro Di Battista, 38, who is a prime contender to represent M5S in the next poll, said in an interview with German newspaper Die Welt that he did not support an exit from the EU but did support a referendum on the euro. “The euro and Europe are not the same thing. We only want for Italians to decide on the currency,” he said. Asked whether the party had considered the repercussions of leaving the euro, which most economists believe would carry big risks for Italy and the global markets, Di Battista said he “understood well the consequences of the introduction of the euro”.

The single currency, he said, had shrunk Italians’ buying power and earnings and caused higher unemployment and “social deprivation”. “If Europe does not want to implode you must accept that you can not go on like this,” he said. M5S’s opposition to the euro is not new, but the remarks are important in the wake of the departure of the centre-left prime minister Matteo Renzi, who submitted his resignation to Sergio Mattarella, the Italian president, on Wednesday evening. Mattarella is meeting the leaders of all the major political parties over the next few days in the hope they can agree on an interim prime minister. Renzi resigned after he was trounced in a referendum on Sunday, with nearly 60% of Italians opposing constitutional reforms he backed. Even if the parties agree on the next prime minister an early election is expected to be called in 2017.

[..] The chances of M5S winning the next election are fairly strong, according to most analysts. But its ability to hold a referendum would depend on whether the party could win strong majorities in both chambers of parliament. That rests on the fate of a controversial electoral law that is under legal review and will dictate how parliamentary seats will be allocated in the next election. Italy’s constitutional court is due to rule on the electoral law on 24 January. Even if M5S wins the next election, Italy’s exit from the euro would be complicated. Italy’s constitution sets a high threshold for the country to abandon an international treaty via a popular vote. M5S would have to pass an amendment before calling a referendum, which would then require winning two-thirds majorities in both chambers of parliament. Even if a referendum passed, the issue could come up for review by the constitutional court.

Oh, no, not almost.

• It Is Almost Certain There Will Be Another Euro Crisis In 2017 (McWilliams)

It is almost certain that there will be another euro crisis in 2017. The last time we had a euro crisis, the focus of attention was Greece; today the vortex is Italy. Italy is not Greece. Italy is the third-largest economy in the Eurozone. Italy is the second-largest manufacturing nation in the EU after Germany. Italy is the largest debtor in Europe. The third-largest Italian bank is irredeemably bankrupt. Italy has no government and the people who are likely to win the next election want to take Italy out of the euro and replace the euro with their own currency, the lira. These are the facts. Our Finance Minister has said there is no problem in the Eurozone. I really don’t know what planet he is living on. Unfortunately for the EU, if Greece was a tricky issue to deal with, Italy is — in economic terms — a massive Greece.

Unlike Greece when it was going bust, Italy can’t be patronised, isolated and vilified by the likes of Slovakia, Finland and – shamefully – our own Government. Italy is a country of close to 60 million people and unlike the British, who were always semi-detached Europeans, the Italians are founding members of the EU and original signatories of the Treaty of Rome, which is 60 years old in March. By March, it is likely that Marine Le Pen will be the frontrunner in the French presidential election. Could she win? Of course she could. And if she wins, the euro is toast. There is already a massive capital flight from Italy. This flight of money will extend to France in the months ahead. The euro is the problem and if the EU wants to save itself, it may have to abandon the euro.

Quite what that looks like is anyone’s guess, but here are the political facts: the two main Italian opposition parties, the people who won on Sunday, want Italy to hold a referendum on leaving the euro. Furthermore, Le Pen has explicitly stated that the day she wins, if she does, she will pull France out of the euro and reinstate the French franc. Le Pen currently has 40pc of the electorate. All she needs is the same type of momentum that propelled Brexit, Donald Trump, and the vote in Italy, where the government lost — not by a few%, but by a whopping 60pc to 40pc.

Not even close.

• OPEC Deal Won’t Be Enough to Drain Oil Stockpiles (BBG)

OPEC is likely to bring the oil market into balance by the middle of next year, but its production cut looks set to fall short of its stated goal of draining the stockpiles that are depressing prices. The oil market will rebalance “toward the middle of next year,” according to Nigeria’s Minister of State for Petroleum Emmanuel Kachikwu, bringing an end to more than three years when supply exceeded demand. However, Bloomberg News calculations based on OPEC data show that across the whole of 2017 there will be little overall reduction in record oil inventories – even if the group convinces non-members to join supply curbs at a meeting on Saturday. “Even with 100% compliance from both OPEC and non-OPEC producers global stocks are unlikely to fall in the first half of 2017,” said Tamas Varga at PVM Oil Associates in London. “That should keep oil prices in check.”

Crude prices could rise to $60 to $70 a barrel if the OPEC succeeds in bring inventories back to a normal level, Venezuelan Oil Minister Eulogio del Pino said last week, echoing a widely held view within the group, from Saudi Arabia to Iran. The portents for achieving this are mixed. OPEC’s track record shows the group only delivers 80% of promised cuts. While Russia has pledged to come to the party and lower output by 300,000 barrels a day in the first half of 2017, other non-OPEC producers, such as Mexico, Azerbaijan and Colombia, are likely to dress up involuntary production declines, already factored in by traders, as cuts. That scenario would leave largely unchanged the 300 million-barrel global stockpile surplus Del Pino and his colleagues are targeting.

OPEC has said its agreement will accelerate the decline of global stockpiles and an optimistic Bloomberg scenario shows the call on the group’s supply exceeding its output by 1.2 million barrels a day in third quarter. That depends on full compliance by OPEC members and for Russia to make good on its pledge, even as other non-OPEC producers make little contribution. The analysis of the market re-balancing by Bloomberg News is based on OPEC’s own estimates and projections of crude supply and demand adjusted for potential scenarios of cooperation from Russia and other non-OPEC countries. Other consultancies and agencies have different views. The International Energy Agency expects the re-balancing will happen early next year, while consultants at Rystad Energy expect a 1.26 million barrels-a-day deficit in the first quarter of next year if Russia is the only non-OPEC country to join the effort.

You should take your government to court for this, guys. Let them prove this is beneficial to the country.

• UK Sells Majority Stock In Gas Infrastructure To China, Qatar (Ind.)

National Grid has agreed to sell a majority stake in the UK’s gas pipe network to a team of investors, including the Chinese and Qatari states. The UK’s power network operator confirmed it is offloading the 61% shareholding to a consortium led by Australian investment bank Macquarie in a deal that values the unit at around £13.8bn. The division controls an important part of the country’s infrastructure, which delivers gas to 11 million homes through 82,000 miles of pipeline, and its sale will reignite concerns about the ownership of critical national assets by foreign investors. In August Theresa May said such deals would face tighter regulation as she gave the green light to the French and Chinese-funded Hinkley Point nuclear reactor.

National Grid said it would distribute a £150m voluntary payment to benefit British energy customers, while some £4bn of the proceeds will be returned to the company’s shareholders. It will keep 31% of the business but said it could potentially sell another 14% stake to the consortium under the terms of the deal. The sale, which is set to complete before the end of March next year, comes as part of a move to rebalance National Grid’s business towards higher growth areas and create extra value for shareholders. Dave Prentis, Unison union general secretary, said: “The experience of Thames Water customers when Macquarie was running the show should have been a red flag to ministers and regulators as how unsuitable this company is to be in charge of the UK’s gas supply. ”Macquarie has poor form already – in building up huge company debt, repatriating massive dividends to the southern hemisphere and charging customers more for a much poorer service.

Lovely. And funny.

• UK Village Unleashes Anger With Syrian Refugees: £600 Worth Of Jumpers (Ind.)

Last week I was in Torrington, North Devon, the village that’s been in the news because local people organised a massive collection of clothes and toys, for Syrian refugees placed in the area. Hundreds took part in the collection, and the local theatre was filled with provisions. It’s a story that would make any reasonable person look at those children’s faces and say, “What a bunch of do-gooding whining liberals, this is typical of the metropolitan elites in their cosy London boroughs such as North Devon.” North Devon obviously isn’t in Devon, because a law of modern life is that in the real neglected England that no one ever talks about, real proper people think all immigrants are thieving dogs, and they understand these matters because they’ve never seen a mango.

So it’s lucky the Daily Mail was able to report, “Fury as refugees are settled in Devon”, and another paper told us the refugees “faced anger” from the community. Because when the mayor, local theatre and hundreds of residents organised the collections, and arranged meetings to welcome the refugees, you could at first sight see this as motivated slightly by kindness. But these newspapers weren’t fooled, and understand it’s tradition in North Devon to express your anger by buying a room full of clothes and arranging them in a hall. Whatever you do when you’re in South Molton, don’t shout at a tractor driver to move out of your way, or they’ll lose their temper and collect six hundred pounds worth of jumpers and line them up in their kitchen, insisting you take the lot. Because a lifetime of working on the land makes them vicious.

Five national newspapers told the story of this rage against the refugees, all quoting one man who said: “We’re receiving 50 to 70 refugees, and 50 to 70 is a huge number in an area with restricted public transport.” There’s no doubt 50 to 70 would create a problem for local public transport, if all 50 to 70 of them were housed on one bus. The 7.15am from St Mary’s Church to Barnstaple would be a dreadful crush, so it’s no wonder this man was annoyed, and you can see why the newspapers regard him as the spokesman for the entire region, rather than the hundreds of people who provided all the clothes, who represent no one but themselves.

But it gets worse, because every newspaper covering the story told how refugee children “annoyed locals” by “relaxing playing basketball on a basketball court”. That’s just taking the piss, isn’t it? How dare children play sports in an area specially designated for that specific sport? They should reward our hospitality by playing sports in the wrong areas, such as basketball on a chess board, or skiing on a snooker table.

Here’s an issue the EU does need to speak up about. But doesn’t.

• Relations With Ankara Sour As Turkey Disputes Greek Sovereignty (Kath.)

Greek Foreign Minister Nikos Kotzias and his Turkish counterpart Mevlut Cavusoglu met Thursday on the sidelines of the annual OECD Summit in Hamburg amid escalating tensions brought on by the nationalistic rhetoric coming out of Ankara and Defense Minister Panos Kammenos’s reference to President Recep Tayyip Erdogan as a “ruthless dictator” who “at this moment is threatening our country.” “If they [Turkey] threaten our country, they will meet with our response and they will know that we shall not make concessions in the name of diplomacy on issues of national sovereignty,” Kammenos said in a radio interview Thursday, referring to recent remarks by Erdogan questioning the 1923 Treaty of Lausanne that set the borders between Greece and Turkey, as well as by other Turkish politicians who have disputed Greek sovereignty over a string of islets in the eastern Aegean.

The remarks by Kammenos, the leader of junior coalition partner Independent Greeks, followed strong statements by Turkey’s Deputy Parliament Speaker Tugrul Turkes, who described his country as the guarantor power of the whole of Cyprus, rather than just the breakaway state in the north, while a lawmaker of the opposition CHP, Tanju Ozcan, upped the ante even further, saying he would raise the Turkish flag on 18 Greek islands. “I will go to the islands and if need be I myself will raise the Turkish flag. Then I will fold the Greek one and send it to the Greek government with a courier,” he told the Turkish Parliament. The latest acrimonious rhetoric comes as tensions also simmer over the outcome of Turkey’s extradition request for eight officers who landed in Greece in July in the aftermath of a botched coup attempt in the neighboring country.

But ‘green’ sells, and delivers votes. Still: “Charging an electric car for 100 miles of travel could use about 30kwh – roughly the same amount of energy an average US home uses in three or four days.”

• Electric Cars Are Only As Clean As Their Power Supply (G.)

Electric cars have never been closer to the mainstream, the market pushed ahead by California subsidies for electric car buyers, and a wide array of new models from established car firms such as Toyota and Chevy. Tesla’s focus on luxury, high-performance vehicles has also broadened their appeal; electric cars are no longer purely an environmental statement, but a tech status symbol too. Yet the “zero emissions” claim grates on some experts, who have continued to argue over whether electric cars are really more environmentally friendly than gas guzzlers, once the manufacturing process for the vehicles and their batteries are taken into account.

Electric cars rely on regular charging from the local electricity network. The power plants providing that energy aren’t emission-free; even in California, 60% of electricity came from burning fossil fuels in 2015, while solar and wind together made up less than 14%. “I couldn’t bear to hear them say the words ‘zero emissions vehicle’ one more time,” says Joshua Graff Zivin, who advised one of California’s three main utilities, San Diego Gas & Electric, on electric cars. Graff Zivin is a professor of economics and public policy at the University of California, San Diego. [..] “All of the action is in the hourly,” says Graff Zivin. It’s not only the region that an electric vehicle plugs into that matters. The hour of the day is equally critical. “The cheapest power is not the greenest power.”

In California, the cheapest power is produced at night, mostly from natural gas, hydroelectric dams and nuclear. Night is when many people will charge their electric cars. However, the greenest power gets generated during the day, when solar power can feed the grid; solar doesn’t work in the dark, windmills stop spinning if there’s no wind and, in today’s grid, there is almost the capacity to store solar and wind-generated electricity to use later. Grid storage is slowly expanding, but most electricity has to be used as it is produced. Units of electricity also can’t be tagged according to where and how they were generated, so nobody can verify whether the electricity they use is from a sustainable source – unless they plug directly into their own solar panel or windmill.

[..] Graff Zivin, along with economics researchers Matthew Kotchen and Erin Mansur, waded into this contentious territory in a 2014 paper. Zivin concluded that a plug-in electric vehicle, such as the Nissan Leaf, always produces less carbon dioxide emissions than a hybrid electric- and gas-powered car – but only in selected regions that rely on less coal, like the western United States and Texas. Charging from the coal-dependent grid in the upper midwest of the US at night could generate more emissions than an average gasoline car. And, in some US regions, plugging in at different times of day could even double an electric car’s emissions impact. Charging an electric car for 100 miles of travel could use about 30kwh – roughly the same amount of energy an average US home uses in three or four days.