underwater Archives - The Automatic Earth

In 1933, when FDR took power, global banking was essentially non-functional. Bankers had committed widespread fraud on top of a rickety and poorly structured financial system. Herbert Hoover, who organized an initial bailout by establishing what was known as the Reconstruction Finance Corporation, was widely mocked for secretly sending money to Republican bankers rather than ordinary people. The new administration realized that trust in the system was essential. One of the first things Roosevelt did, even before he took office, was to embarrass powerful financiers. He did this by encouraging the Senate Banking Committee to continue its probe, under investigator Ferdinand Pecora, of the most powerful institutions on Wall Street, which were National City (now Citibank) and JP Morgan.

Pecora exposed these institutions as nests of corruption. The Senate Banking Committee made public Morgan’s “preferred list,” which was the group of powerful and famous people who essentially got bribes from Morgan. It included the most important men in the country, like former Republican President Calvin Coolidge, a Supreme Court Justice, important CEOs and military leaders, and important Democrats, too. Roosevelt also ordered his attorney general “vigorously to prosecute any violations of the law” that emerged from the investigations. New Dealers felt that “if the people become convinced that the big violators are to be punished it will be helpful in restoring confidence.” The DOJ indicted National City’s Charles Mitchell for tax evasion.

This was part of a series of aggressive attacks on the old order of corrupt political and economic elites. The administration pursued these cases, often losing the criminal complaints but continuing with civil charges. This bought the Democrats the trust of the public. When Roosevelt engaged in his own broad series of bank bailouts, the people rewarded his party with overwhelming gains in the midterm elections of 1934 and a resounding re-election in 1936. Along with an assertive populist Congress, the new administration used the bailout money in the RFC to implement mass foreclosure-mitigation programs, create deposit insurance, and put millions of people to work. He sought to save not the bankers but the savings of the people themselves.

Neil Barofsky on Twitter: “No need to write a retrospective on the bailouts, @mtaibbi has got it all covered here.”

Taibbi’s reply: “Wow. Can I unpublish so you will write one? (Neil wrote the definitive book on the subject)”.

(Barofsky was the SIGTARP, the Special United States Treasury Department Inspector General overseeing the Troubled Assets Relief Program from late 2008 till early 2011)

• Ten Years After the Crash, We’ve Learned Nothing (Taibbi)

Too Big To Fail shows Fuld on a rant: “People act like we’re crack dealers,” Fuld (James Woods) gripes. “Nobody put a gun to anybody’s head and said, ‘Hey, nimrod, buy a house you can’t afford. And you know what? While you’re at it, put a line of credit on that baby and buy yourself a boat.” This argument is the Wall Street equivalent of Reagan’s famous Cadillac-driving “welfare queen” spiel, which today is universally recognized as asinine race rhetoric. Were there masses of people pre-2008 buying houses they couldn’t afford? Hell yes. Were some of them speculators or “flippers” who were trying to game the bubble for profit? Sure. Most weren’t like that – most were ordinary working people, or, worse, elderly folks encouraged to refinance and use their houses as ATMs – but there were some flippers in there, sure.

People pointing the finger at homeowners are asking the wrong questions. The right question is, why didn’t the Fulds of the world care if those “nimrods” couldn’t afford their loans? The answer is, the game had nothing to do with whether or not the homeowner could pay. The homeowner was not the real mark. The real suckers were institutional customers like pensions, hedge funds and insurance companies, who invested in these mortgages. If you had a retirement fund and woke up one day in 2009 to see you’d lost 30 percent of your life savings, you were the mark. Ordinary Americans had their remaining cash in houses and retirement plans, and the subprime scheme was designed to suck the value out of both places, into the coffers of a few giant banks.

“As of June 30, nearly one in 10 American homes with mortgages were “seriously” underwater..”

• Millions Of Americans Trapped In Underwater Homes 10 Years After Crisis (R.)

School bus driver Michael Payne was renting an apartment on the 30th floor of a New York City high-rise, where the landlord’s idea of fixing broken windows was to cover them with boards. So when Payne and his wife Gail saw ads in the tabloids for brand-new houses in the Pennsylvania mountains for under $200,000, they saw an escape. The middle-aged couple took out a mortgage on a $168,000, four-bedroom home in a gated community with swimming pools, tennis courts and a clubhouse. “It was going for the American Dream,” Payne, now 61, said recently as he sat in his living room. “We felt rich.” Today the powder-blue split-level is worth less than half of what they paid for it 12 years ago at the peak of the nation’s housing bubble.

Located about 80 miles northwest of New York City in Monroe County, Pennsylvania, their home resides in one of the sickest real estate markets in the United States, according to a Reuters analysis of data provided by a leading realty tracking firm. More than one-quarter of homeowners in Monroe County are deeply “underwater,” meaning they still owe more to their lenders than their houses are worth. The world has moved on from the global financial crisis. Hard-hit areas such as Las Vegas and the Rust Belt cities of Pittsburgh and Cleveland have seen their fortunes improve. But the Paynes and about 5.1 million other U.S. homeowners are still living with the fallout from the real estate bust that triggered the epic downturn.

As of June 30, nearly one in 10 American homes with mortgages were “seriously” underwater, according to Irvine, California-based ATTOM Data Solutions, meaning that their market values were at least 25 percent lower than the balance remaining on their mortgages.

And he just signed up to oversee it till 2020.

• No-Deal Brexit Could Lead To Financial Crisis As Bad As 2008 – Carney (Ind.)

A no-deal Brexit could lead to a financial crisis as bad as the crash in 2008, the governor of the Bank of England has warned. Mark Carney told Theresa May and senior ministers that not getting a deal with the European Union would lead to a number of negative economic consequences. It is also understood that Mr Carney warned house prices could fall by up to 35 per cent over three years in a worst case scenario, an event that could cause the value of sterling to plummet and force the bank to push up interest rates. His bleak prognosis came as France said it could halt flights and Eurostar trains from the UK if there was no agreement when Britain leaves the EU in March 2019.

The Bank of England declined to comment on Mr Carney’s briefing to ministers. Following the three-and-a-half hour meeting of the cabinet, a Downing Street spokesman said ministers remained confident of securing a Brexit agreement, but had agreed to “ramp up” their no-deal planning.

So what changes now?

• Europe’s Top Rights Court Rules Against Britain Over Mass Surveillance (AFP)

Europe’s top rights court ruled Thursday that Britain’s programme of mass surveillance, revealed by whistleblower Edward Snowden as part of his sensational leaks on US spying, violated people’s right to privacy. Ruling in the case of Big Brother Watch and Others versus the United Kingdom, the European Court of Human Rights in Strasbourg, France, said the interception of journalistic material also violated the right to freedom of information. The case was brought by a group of journalists and rights activists who believe that their data may have been targeted. The court ruled that the existence of the surveillance programme “did not in and of itself violate the convention” but noted “that such a regime had to respect criteria set down in its case-law”.

They concluded that the mass trawling for information by Britain’s GCHQ spy agency violated Article 8 of the European Convention on Human Rights regarding the right to privacy because there was “insufficient oversight” of the programme. The court found the oversight to be doubly deficient, in the way in which the GCHQ selected internet providers for intercepting data and then filtered the messages, and the way in which intelligence agents selected which data to examine. It determined that the regime covering how the spy agency obtained data from internet and phone companies was “not in accordance with the law”.

China needs money, badly. Or it wouldn’t open up like this.

• S&P Sees Major Opportunity In China’s $11 Trillion Bond Market (CNBC)

Financial services and ratings giant S&P Global is honing in on China’s $11 trillion bond market, a move that may spell good news for international investors in search of more reliable ratings for bonds. Speaking to CNBC on Friday, S&P Global Chief Financial Officer Ewout Steenbergen explained that it’s a good time to enter China as Asia’s largest economy has lifted foreign ownership restrictions for credit ratings agencies. Elaborating on the company’s plan to offer ratings services for the bond market there, Steenbergen said that S&P Global intends to start a new entity for its mainland business.

“We are expanding our market intelligence business in China, very specific local content, for example for Chinese private company data … But the most attractive opportunity we have is in the ratings business,” he said on CNBC’s “Squawk Box.” “It is the third-largest domestic bond market in the world, we think it will overtake Japan soon to become the second-largest domestic bond market,” added Steenbergen, who is also an executive vice president at S&P Global. [..] Steenbergen said he hopes that S&P Global’s move to enter that market can create more confidence. “Today, Chinese domestic bonds, 2 percent are bought by international investors, 98 percent only by Chinese investors. And I think (how) we can help with the market is to create more maturity, more confidence.

Another way to protest tariffs.

• China Says World Trade System Not Perfect, Needs Reform (R.)

The current world trade system is not perfect and China supports reforms to it, including to the World Trade Organization, to make it fairer and more effective, Beijing’s top diplomat said. China is locked in a bitter trade war with the United States and has vowed repeatedly to uphold the multilateral trading system and free trade, with the WTO at its center. But speaking late on Thursday to reporters after meeting French Foreign Minister Jean-Yves Le Drian, Chinese State Councillor Wang Yi said some reforms could be good. While certain doubts have been raised about the current international trading system, China has always supported the protection of free trade and believes that multilateralism with the WTO at its core should be strengthened, Wang added.

[..] China will not buckle to U.S. demands in any trade negotiations, the major state-run China Daily newspaper said in an editorial on Friday, after Chinese officials welcomed an invitation from Washington for a new round of talks. The official China Daily said that while China was “serious” about resolving the stand-off through talks, it would not be rolled over, despite concerns over a slowing economy and a falling stock market at home. “The Trump administration should not be mistaken that China will surrender to the U.S. demands. It has enough fuel to drive its economy even if a trade war is prolonged,” the newspaper said in an editorial.

Brussels still feels superior.

• ‘Little Mussolinis’: EU Chief Angers Italy With Comment On Far Right (R.)

The EU’s top economic official has voiced fears that “little Mussolinis” might be emerging in Europe, drawing a furious response from Italy’s far-right interior minister who accused him of insulting his country and Italians. Pierre Moscovici, a Frenchman who is the European Union’s economics affairs commissioner, said the current political situation, with populist, far-right forces on the rise in many nations, resembled the 1930s when Germany’s Adolf Hitler and Italian fascist chief Benito Mussolini were in power. “Fortunately there is no sound of jackboots, there is no Hitler, (but maybe there are) small Mussolinis. That remains to be seen,” he told reporters in Paris, speaking in a jocular fashion.

Moscovici, a former French finance minister, mentioned no names, but Matteo Salvini, who is a deputy prime minister and heads Italy’s anti-immigrant League, took it personally. “He should wash his mouth out before insulting Italy, the Italians and their legitimate government,” Salvini said in a statement released by his office in Rome. Salvini took advantage of the spat to set out once again his grievances with France, which he accuses of not doing enough to help deal with migrants from Africa and of having plunged Libya into chaos by helping to oust former strongman Muammar Gaddafi. “EU commissioner Moscovici, instead of censuring his France that rejects immigrants … has bombed Libya and has broken European (budget) parameters, attacks Italy and talks about ‘many little Mussolini’ around Europe,” Salvini said.

Yeah. Not going to happen.

• Third Of Earth’s Surface Must Be Protected To Prevent Mass Extinction (Ind.)

Two leading scientists have issued a call for massive swathes of the planet’s land and sea to be protected from human interference in order to avert mass extinction. Current levels of protection “do not even come close to required levels”, they said, urging world leaders to come to a new arrangement by which at least 30 per cent of the planet’s surface is formally protected by 2030. Chief scientist of the National Geographic Society Jonathan Baillie and Chinese Academy of Sciences biologist Ya-Ping Zhang made their views clear in an editorial published in the journal Science.

They said the new target was the absolute minimum that ought to be conserved, and ideally this figure should rise to 50 per cent by the middle of the century. “This will be extremely challenging, but it is possible,” they said. “Anything less will likely result in a major extinction crisis and jeopardise the health and wellbeing of future generations.” Most current scientific estimates have the amount of space needed to safeguard the world’s animals and plants at between 25 and 75 per cent of land and oceans.

Nervous weekend ahead. In the Philippines too.

• Hurricane Florence Deluges Carolinas Ahead Of Landfall (R.)

Heavy rain, wind gusts and rising floodwaters from Hurricane Florence swamped the Carolinas early on Friday as the massive storm crawled toward the coast, threatening millions of people in its path with record rainfall and punishing surf. Florence was downgraded to a Category 1 storm on the five-step Saffir-Simpson scale on Thursday evening and was moving west at only 6 mph (9 km/h). The hurricane’s sheer size means it could batter the U.S. East Coast with hurricane-force winds for nearly a full day, according to weather forecasters. Despite its unpredictable path, it was forecast to make landfall near Cape Fear, North Carolina, at midday on Friday.

Debt Rattle April 30 2016

Apr 302016

April 30, 2016 Posted by Raúl Ilargi Meijer at 8:52 am Finance Tagged with: Apple, China, debt, deflation, manipulation, oil, refugees, tiger, underwater, weasel, Zero Hedge Comments Off

Byron Street haberdashery, New York 1900

• US Puts China, Japan on New Watch List for FX Practices (BBG)

• US Chides Five Economic Powers Over Policies (WSJ)

• UK Consumers Borrow At Fastest Rate In Over A Decade (R.)

• Apple Stock Suffers Worst Week Since 2013 (R.)

• Chinese Cities Dive Back Into Debt To Fuel Growth Even As Defaults Rise (R.)

• China’s Stocks, Bonds, Yuan Are a Triple Losing Bet This Month (BBG)

• Hong Kong Underwater Mortgages Jump 15-Fold in Q1 as Prices Drop (BBG)

• Derivatives Houses To Open Accounts With Federal Reserve (FT)

• Draghi Challenge Seen As Consumer Prices Fall More Than Forecast (BBG)

• Fighting Deflation With Unconventional Fiscal Policy (VoxEu)

• Oil Market Deja Vu Triggers Predictions of a Return to $30 (BBG)

• Pipelines: The Next Devastating Phase Of The Oil Bust (Forbes)

• More Tigers Poached In India So Far This Year Than In All Of 2015 (AFP)

• Small Mammal Shuts Down World’s Most Powerful Machine (NPR)

• The Full Story Behind Bloomberg’s Attempt To “Unmask” Zero Hedge (ZH)

• Turkey PM: Denying Visa-Free Travel Means Collapse Of EU Refugee Deal (DS)

Very funny. But the one country that has seen its currency gain global advantage of late is the US itself.

• US Puts China, Japan on New Watch List for FX Practices (BBG)

The U.S. put economies including China, Japan and Germany on a new currency watch list, saying their foreign-exchange practices bear close monitoring to gauge whether they provide an unfair trade advantage over America. The inaugural list also includes South Korea and Taiwan, the Treasury Department said Friday in a revamped version of its semi-annual report on the foreign-exchange policies of major U.S. trading partners. The five economies met two of the three criteria used to judge unfair practices under a February law that seeks to enforce U.S. trade interests. Meeting all three would trigger action by the president to enter discussions with the country and seek potential penalties.

The new scrutiny of some of the world’s biggest economies comes amid a bruising presidential campaign in which candidates from both the Democratic and Republican parties have questioned the merits of free trade. Republican front-runner Donald Trump has promised to declare China a currency manipulator, and the latest report may fail to appease critics in Congress who say China’s practices have cost American manufacturing jobs. “We will continue to watch this process closely to ensure that the president squarely addresses currency manipulation and stands up for the American people,” House Ways and Means Chairman Kevin Brady, a Texas Republican, said in a statement on the Treasury report. The Treasury had already been monitoring countries for evidence of currency manipulation under a 1988 law.

In the latest report, the department concluded that no major trading partner qualified as a currency manipulator; the last country it labeled as such was China, in 1994. Under the new law, Treasury officials developed three criteria to decide if countries are being unfair: an economy having a trade surplus with the U.S. above $20 billion; having a current-account surplus amounting to more than 3% of its GDP; and one that repeatedly depreciates its currency by buying foreign assets equivalent to 2% of output over the year. China, Japan, Germany and South Korea were flagged as a result of their trade and current-account surpluses, the department said. Taiwan made the list because of its current-account surplus and persistent intervention to weaken the currency, according to the Treasury. If a country meets all three criteria, it could eventually be cut off from some U.S. development financing and excluded from U.S. government contracts.

But then again, the idea is probably that attack is the best defense…

• US Chides Five Economic Powers Over Policies (WSJ)

The Obama administration delivered a shot across the bow to Asia’s leading exporters and Germany for their economic policies and warned that a number of major economies around the globe could face intense pressure to engage in currency interventions to counter slow growth. The U.S. Treasury Department, in its semiannual currency report to Congress, called out China, Japan, South Korea, Taiwan and Germany for relying on policies it says threaten to damage the U.S. and the global economy. The countries are cited in a new name-and-shame list that can trigger sanctions against offending trade partners under fresh powers Congress granted last year to address economic policies that threaten U.S. industries.

U.S. officials are increasingly concerned other countries aren’t doing enough to boost demand at home, relying too heavily on exports to bolster growth. Counting on cheap currencies as a shortcut to boosting exports can create risks across the global economy, as nations fight to stay ahead of their competitors. Over the past two decades, for example, many U.S. officials have accused China of using an undervalued currency to bolster its manufacturing sector. A cheaper currency makes products cheaper overseas. Although China has moved to address some of those worries, tension over currency policy more broadly has heightened in recent years, amid an unprecedented era of easy-money policies, weak global growth and rising exchange-rate volatility.

The failure of many countries to overhaul their economies after the financial crisis has prompted economists to slash global growth forecasts. Amplifying those worries, a 20% surge in the dollar’s value against a basket of major currencies over the past two years has slowed U.S. growth, as American products became more expensive to international buyers. The Obama administration said in its new report that the economic and currency policies of China, Japan, Korea, Taiwan and Germany are adding to the global economy’s problems. Absent stronger efforts by those countries to boost domestic demand, “global growth has suffered and will continue to suffer,” the Treasury Department said.

This is not good. This is very bad.

• UK Consumers Borrow At Fastest Rate In Over A Decade (R.)

British mortgage approvals fell for the first time in six months in March shortly before a new tax took effect, but consumers borrowed at the fastest rate in over a decade, Bank of England data showed. Mortgage approvals for house purchases numbered 71,357 in March, down from 73,195 in February. Analysts in a Reuters poll had forecast 74,500 mortgage approvals were made in March. British finance minister George Osborne announced in November that he would add a surcharge on the purchase of buy-to-let properties and second homes from April 1, in a move aimed to boost home ownership by first-time buyers. The news spurred an increase in buying of such properties in recent months before March’s slowdown as the deadline approached.

Net mortgage lending, which lags approvals, rose by £7.435 billion last month, the biggest increase since October 2007, before the global financial crisis hit and above all forecasts in the Reuters poll. Figures released earlier this week by the British Bankers’ Association, which are less comprehensive than those of the BoE, also showed a fall in mortgage approvals in March accompanied by a rise in mortgage lending as previously approved deals were carried out. The BoE said consumer credit grew by £1.883 billion last month, the strongest increase since March 2005 and a long way above the median forecast for an increase of £1.3 billion in the Reuters poll of economists. The rise was not a one-off: in the first quarter as a whole, consumer credit rose by an annualised 11.6%, the strongest increase since the first three months of 2015.

The narrative: “..progress [in China] has been a let-down..”. But a 26% plunge in revenue is not just a ‘let-down’.

• Apple Stock Suffers Worst Week Since 2013 (R.)

Apple on Friday ended its worst week on the stock market since 2013 as worries festered about a slowdown in iPhone sales and after influential shareholder Carl Icahn revealed he sold his entire stake. Shares of Apple, a mainstay of many Wall Street portfolios and the largest component of the Standard & Poor’s 500 index, have dropped 11% in the past five sessions. That shrank the technology behemoth’s market capitalization by $65 billion. Confidence in the company has been shaken since posting its first-ever quarterly decline in iPhone sales and first revenue drop in 13 years on Tuesday, although Apple investors pointed to the stock’s relatively low valuation as a key reason to hold onto the stock. “If you’re going to buy Apple, you have to buy it for the long term, because the next year or two are going to be very tough,” said Michael Yoshikami, chief executive of Destination Wealth Management.

Faced with lackluster sales of smartphones in the United States, Apple has bet on China as a major new growth engine, but progress there has been a let-down. Revenue from China slumped 26% during the March quarter and its iBooks Stores and iTunes Movie service in China were shut down last week after the introduction of new regulations on online publishing. Pointing to concerns that Beijing could make it difficult for Apple to conduct business in China, long-time Apple investor Carl Icahn told CNBC on Thursday that he had sold his stake in the company he previously described as a “no brainer” and undervalued. The selloff has left Apple trading at about 11 times its expected 12-month earnings, cheap compared to its average of 17.5 over the past 10 years. S&P 500 stocks on average are trading at 17 times expected earnings.

China is fast becoming a one-dimensional nation.

• Chinese Cities Dive Back Into Debt To Fuel Growth Even As Defaults Rise (R.)

With a nod from Beijing, China’s local governments have embarked on a massive new round of off-balance sheet debt financing, underpinning a fragile pick up in the economy but raising red flags on financial stability. The increased borrowing for an economy already swimming in debt adds to concerns about growing bubbles in certain major asset classes, such as real estate and commodities, and a bond market seeing a rise in corporate defaults. Economists say increasing public sector investment – most of it financed locally with debt – is behind improvements in China’s economy. First-quarter GDP rose at the weakest pace in seven years, but other data suggested growth was picking up in March. “With new infrastructure projects effectively all funded by debt and more consumer mortgages, the leverage problem and risks on the financial sector are rising,” Credit Suisse analysts wrote in a research report.

Local government financing vehicles (LGFVs), which Chinese cities use to circumvent official spending limits, raised at least 538 billion yuan ($83 billion) in bonds in the first quarter, up 178% from a year earlier and the highest quarterly issuance since June 2014, Everbright Securities said, quoting figures from privately held financial data provider WIND. Issuance in March alone was a monthly record of 287 billion yuan ($44.3 billion). China’s planning agency, the National Development and Reform Commission, declined to comment on the sharp rise in LGFV issuance. Most of the LGFV debt in the first quarter was made up of so-called enterprise bonds, which the NDRC oversees. Beijing had been trying to move LGFV debt on to municipal balance sheets via the 2014 creation of a municipal bond market. But policymakers retreated from this in the middle of 2015, easing borrowing restrictions as economic growth stumbled.

Consequently, LGFV issuance in the first quarter of 2016 was nearly 60% as large as the municipal bond issuance meant to replace it, up from just 37% in the fourth quarter of 2015, central clearinghouse and brokerage data shows. “In the second half of last year, the government raised the%age of project financing that can be funded with debt,” said Yang Zhao, chief China economist at Nomura in Hong Kong, helping spark the flurry of LGFV deals. “If they continue on, the debt-to-GDP ratio could actually go up quite rapidly. I don’t think the policy is sustainable, and you’ll see policymakers slow down the pace of (credit) easing in a quarter or two.”

“..Your return is too low for your risk in China.”

• China’s Stocks, Bonds, Yuan Are a Triple Losing Bet This Month (BBG)

For the first time in two years, China’s stocks, bonds and currency are all a losing proposition. The Shanghai Composite dropped 2.2% in April, the yuan fell 0.6% versus the dollar, while government and corporate bonds tumbled, with the five-year sovereign yield rising 27 basis points. Even a sudden revival in the nation’s commodities markets is looking fragile after frenzied speculation prompted exchanges to take measures to cool trading. The declines mark a reversal from March, when the benchmark equities gauge jumped 12% and the yuan rallied the most since 2010 as new credit surged. Improving data from industrial output to retail sales have led traders to pare back bets for more stimulus, while rising credit defaults are fueling the biggest selloff in junk debt since the data became available in 2014.

Deutsche Bank is one bull looking to reduce holdings of Chinese stocks on bets the economy will fail to reach the government’s growth targets and yuan declines will accelerate. “Clearly there was a turn in China,” said Sean Taylor, CIO for Asia Pacific for Deutsche Bank’s wealth-management unit in Hong Kong. “You’ve seen money in the A-share market going to property and commodities. We’ve been adding risk in the last few months and coming into the summer, we will take it away and wait for opportunities to add again. We are not yet ready for China’s structural story because earnings haven’t come through.” Investor interest in the world’s second-largest equity market is waning, with turnover on the Shanghai Stock Exchange falling to levels last seen regularly in 2014 and a gauge of volatility dropping to a 12-month low. Investments in stock-market funds fell by 89 billion yuan ($13.7 billion) in April.

[..] Government bonds are coming under pressure as inflation increased to the highest since mid-2014, while corporate notes are slumping amid a spate of defaults and a surprise move by state-owned China Railway Materials to halt its bond trading this month because of what the company called “repayment issues.” “We will definitely see more defaults and difficulties for corporates in issuing new bonds,” said David Gaud at Edmond de Rothschild Asset Management in Hong Kong. “Credit costs will go up and credit spreads will widen. Your return is too low for your risk in China.”

Small potatoes for now, but at the same time there’s nothing in sight that could reverse the trend.

• Hong Kong Underwater Mortgages Jump 15-Fold in Q1 as Prices Drop (BBG)

The number of Hong Kong homeowners with apartments worth less than their mortgages surged 15 times in the first quarter, according to the Hong Kong Monetary Authority. The number of negative-equity mortgages rose to 1,432, with a total value of HK$4.9 billion ($634 million), for the three months ended March, from 95 such home loans worth HK$418 million in the previous quarter, the city’s de facto central bank said on its website Friday.

Property prices in Hong Kong, which reached a record last year, have been sliding and sales tumbled to a 25-year low in February amid economic uncertainty. Home prices in the city slumped 13% from September to March, according to data compiled by Centaline Property Agency. The government is determined to tackle the housing problem and maintain a healthy development of the market, the city’s Rating and Valuation Department said in a report on Friday, while maintaining that it has no intention to withdraw demand-side property curbs.

The one word that comes to mind: incestuous: “..The switch has been made possible by clearing houses’ designation as systemically-important utilities..”

• Derivatives Houses To Open Accounts With Federal Reserve (FT)

Derivatives brokers choosing where to park their margin money will now have the option of the world’s most powerful central bank. The Federal Reserve Bank of Chicago has authorised three of the US’s largest clearing houses, run by CME Group and Intercontinental Exchange, and the Options Clearing Corporation, to open an account at the central bank. ICE’s permit is for its US credit derivatives clearing house. The change at the CME applies only to house cash belonging to brokers, its executives said on a conference call on Thursday. Margin posted by their customers will continue to be walled off and held by commercial banks or in US Treasury bonds, they confirmed.

The switch has been made possible by clearing houses’ designation as systemically-important utilities, which recognised the dangers to the financial system if they failed and gave them access to the Fed’s cash in an emergency. Tougher regulation of markets means they must now handle billions of dollars of futures and swaps trades every day. Traders who use derivatives must safeguard their deals against defaults with margin and collateral. For clearing brokers whose business has been damaged by years of low interest rates, keeping cash at the Fed could yield better returns. New market rules also authorised a regional Fed bank to maintain an account for designated clearing houses and pay earnings on any balance, as it already does for US banks subject to Fed oversight.

“When effective, we expect to pass a higher rate to clearing members for their house positions than we do today,” John Pietrowicz, CME’s chief financial officer, told analysts. Mr Pietrowicz said the accounts would open in the “next month or so”. While the majority of the returns would be passed back to clearing members, CME would also be able to “earn more” as cash balances increased. CME applied for access to a Fed account in 2014, a spokeswoman said, and would direct funds into an omnibus account for collateral and settlement services. The derivatives industry and its regulator have argued in recent years that tougher banking laws have hurt the brokerage business by making clearing uneconomical. “The resulting industry consolidation would increase systemic risk by concentrating derivatives clearing activities in fewer clearing member banks,” Walt Lukken, chief executive of the FIA industry association, testified to a US House agriculture subcommittee on Thursday.

It might be best to ignore these numbers. Whatever BBG’s economist panel predicts is always wrong. Growth numbers are always manipulated. One good thing to take away is that consumer prices do not equal inflation.

• Draghi Challenge Seen As Consumer Prices Fall More Than Forecast (BBG)

Mario Draghi’s policy challenge was highlighted once again on Friday, with the fastest economic growth in a year overshadowed by a renewed drop in consumer prices. The euro-area inflation rate fell to minus 0.2% in April, a worse out-turn than the 0.1% decline forecast by economists in a Bloomberg survey. It wasn’t all bad news for the ECB president however, with the economy expanding 0.6% in the first quarter and unemployment declining in March to the lowest since 2011. Draghi has said the situation in the 19-nation region is slowly improving, but that hasn’t assuaged his concerns about the inflation outlook. Policy makers cut interest rates and ramped up other stimulus last month, and the ECB president has signaled he’s willing to do even more to revive price growth. “Draghi has to be on alert – despite the solid growth momentum, inflation is not picking up,” said Michael Schubert at Commerzbank.

“The ECB will have to do more in the future, an extension of QE being most likely, but for the time being we’ll have to be patient.” Eurostat released the euro-area growth data about two weeks earlier than usual as it tries to make figures on output more timely, which could help inform the ECB’s policy-making. The new timing brings the region into line with the U.S. and U.K., which also publish first estimates within about a month of the end of the quarter. Based on the latest data, the euro area grew faster than both countries in the January-March period, with the U.K. expanding 0.4% and the U.S. by 0.5% on an annualized basis. National euro-zone data on Friday also provided some positive news, with both the French and Spanish economies expanding faster than expected. Growth in France accelerated to 0.5% from 0.3%, helped by investment and consumer spending, while Spain shrugged off a political deadlock that’s left it facing new elections to grow 0.8%.

More economists entirely clueless on the link between debt and deflation. There’s tons of them, and they’re on ‘both sides of the debate’. And it doesn’t matter one iota how many ‘equations’ from their school books they can quote. Suggesting that increasing VAT rates -in incremental steps- will make people spend more ignores the reason why they don’t spend now: debt. In fact, VAT increases will make things more expensive, and that will result in less spending, not more. That’s what Japan has been showing us for 20 years.

• Fighting Deflation With Unconventional Fiscal Policy (VoxEu)

In his Marjolin lecture on 4 February 2016, Mario Draghi asserted that “there are forces in the global economy that are conspiring to hold inflation down” (Draghi 2016). Eurostat confirmed that in February 2016 the annual inflation rate for the Eurozone was -0.2% (Eurostat 2016). On 10 March 2016, the ECB board agreed upon a set of largely unexpected monetary policy measures, with the aim of boosting inflation and growth in the Eurozone. These measures were inspired, among others, by thoughts in Bernanke (2010) and Blanchard et al. (2010).

The conundrum the Eurozone faces is finding a recipe to support inflation and ultimately consumption and economic growth in a setting in which traditional monetary policy measures are not viable, and governments cannot support growth with fiscal spending because of their large debt-to-GDP ratios. In this column, we discuss an alternative to monetary interventions, which we call unconventional fiscal policy. • Unconventional fiscal policy aims to increase growth and inflation in a budget neutral fashion, while keeping constant the tax burden on households.

Feldstein (2002) introduced the notion of unconventional fiscal policy measures at times of liquidity traps. Among several possible interventions Feldstein proposed: “A series of pre-announced increases in the value-added tax (VAT) to generate consumer price inflation, and hence increase private spending via intertemporal substitution.” In his words: “This [VAT] tax-induced inflation would give households an incentive to spend sooner rather than waiting until prices are substantially higher.” The intuition for this proposal is based on a simple logic: announcing higher prices in the future will increase current inflation expectations. Higher inflation expectations at times of fixed nominal interest rates should reduce real interest rates (Fisher equation), and lower real interest rates should increase households’ incentives to consume rather than save (Euler equation).

Because imposing higher VAT reduces households’ wealth – especially poorer households’ wealth – and might affect households’ labour supply, lower income taxes (or transfers for those households that do not pay any income tax) should accompany the increase in VAT. Designed this way, the policy measure would be budget-neutral for the government, as well as for households. It would incentivise households to consume immediately, jump-start the economy, and hence help the economy exit the slump. In his presidential address to the 2011 American Economic Association Annual Meeting, Bob Hall (2011) reiterated Feldstein’s ideas, and encouraged further research to understand the viability and effects of unconventional fiscal policy, both theoretically and empirically.

Clueless: “..the current recovery could boost industry activity and slow the decline..”

• Oil Market Deja Vu Triggers Predictions of a Return to $30 (BBG)

Oil’s climb above $45 a barrel is reassuring influential figures from BP to the IEA that the industry is finally recovering from the worst slump in a generation. Others say the market is about to fall into the same trap as last year. There’s a sense of deja vu at Commerzbank, BNP Paribas and UBS, who say crude’s gain of about 70% from a 12-year low in January resembles the recovery that took hold this time last year – only to sputter out by May as the supply glut endured. Prices will sink back towards $30 a barrel in the coming weeks, BNP and UBS warn. “There are dangerous parallels to 2015,” said Eugen Weinberg at Commerzbank. “The market already appears overheated and a correction is overdue.”

Last year, Brent crude rose 45% from January to almost $68 in May as traders anticipated a rapid decrease in U.S. output as drilling rigs were idled. The rally reversed when production kept rising, peaking at 9.61 million barrels a day in June 2015, a year after the price slump began. While drilling cutbacks eventually took their toll and the nation’s output slipped to 8.9 million barrels a day last week, the current recovery could boost industry activity and slow the decline.

At least something’s trickling down…

• Pipelines: The Next Devastating Phase Of The Oil Bust (Forbes)

When oil and natural gas prices began their swan dive in 2014 and continued their descent in 2015, the casualties seemed obvious. Exploration and production companies would need to file for bankruptcy protection and restructure en masse. Banks that financed these companies would need to write down bad loans and noteholders that invested in their high yield debt would be left holding the bag, or at least, the equity securities of the reorganized producers. The damage would also extend to the so-called “midstream” companies that transport oil and gas from wells to processing facilities and end-users downstream. It was thought that the damage to such midstream companies would be substantial, but manageable.

However, an ongoing legal tussle in the Sabine Oil and Gas bankruptcy proceeding in New York threatens to devastate an important corner of the $500 billion midstream industry and set off a new and entirely unexpected phase of the energy crisis. The dispute started in September 2015, when Sabine filed a motion in its bankruptcy case seeking authority to reject contracts it had entered into with two separate midstream operators that provided gas gathering and other services. Rejecting contracts and walking away from pre-bankruptcy obligations is commonplace for bankrupt debtors, but in the oil and gas industry many midstream companies thought their arrangements were protected from this risk.

That is because such gathering contracts “dedicate” the relevant oil and gas mineral interests and surrounding acreage to the midstream companies, which is intended to create a property interest known as a “real covenant” that “runs with the land.” Under longstanding bankruptcy principles, conveyances of real property—and certain associated rights—are not contracts that can be “rejected.” If the midstream companies prevailed in the argument that contractual dedications could create real covenants, then if a producer filed for bankruptcy protection or if its mineral rights were transferred to a new owner, the midstream company would retain its exclusive property right to gather oil and gas produced from the land and receive a fee for such services.

This argument seemed a strong one. However, after examining the applicable Texas property law at issue, on March 8, 2016, Judge Chapman issued a non-binding bench ruling holding that the legal requirements for treating these arrangements as real property interests were not satisfied and that they could be invalidated in bankruptcy through the contract rejection process. This ruling rocked the midstream world. It also came when similar attempts to reject gathering agreements were underway in the Quicksilver Resources and Magnum Hunter Resources bankruptcy cases in Delaware, leading to a sense that the midstream industry was under assault.

We’re fast losing the conditions that gave us life. But we lack the intelligence to understand this. Which makes it only fitting. If you’re not smart enough to survive, then you won’t.

• More Tigers Poached In India So Far This Year Than In All Of 2015 (AFP)

More tigers have been killed in India already this year than in the whole of 2015, a census showed Friday, raising doubts about the country’s anti-poaching efforts. The Wildlife Protection Society of India, a conservation charity, said 28 of the endangered beasts had been poached by April 26, three more than last year. Tiger meat and bones are used in traditional Chinese medicine and fetch high prices. “The stats are worrying indeed,” said Tito Joseph, programme manager at the group. “Poaching can only be stopped when we have coordinated, intelligence-led enforcement operations, because citizens of many countries are involved in illegal wildlife trade. It’s a transnational organised crime.”

Poachers use guns, poison and even steel traps and electrocution to kill their prey. India is home to more than half of the world’s tiger population with 2,226 in its reserves according to the last count in 2014. The figures come after a report by the WWF and the Global Tiger Forum said the number of wild tigers in the world had increased for the first time in more than a century to an estimated 3,890. The report cited improved conservation efforts, although its authors cautioned that the rise could be partly attributed to improved data gathering.

“Nor are the problems exclusive to the LHC: In 2006, raccoons conducted a “coordinated” attack on a particle accelerator in Illinois. It is unclear whether the animals are trying to stop humanity from unlocking the secrets of the universe. Of course, small mammals cause problems in all sorts of organizations. Yesterday, a group of children took National Public Radio off the air for over a minute before engineers could restore the broadcast.”

• Small Mammal Shuts Down World’s Most Powerful Machine (NPR)

A small mammal has sabotaged the world’s most powerful scientific instrument. The Large Hadron Collider, a 17-mile superconducting machine designed to smash protons together at close to the speed of light, went offline overnight. Engineers investigating the mishap found the charred remains of a furry creature near a gnawed-through power cable. “We had electrical problems, and we are pretty sure this was caused by a small animal,” says Arnaud Marsollier, head of press for CERN, the organization that runs the $7 billion particle collider in Switzerland. Although they had not conducted a thorough analysis of the remains, Marsollier says they believe the creature was “a weasel, probably.” (Update: An official briefing document from CERN indicates the creature may have been a marten.)

The shutdown comes as the LHC was preparing to collect new data on the Higgs Boson, a fundamental particle it discovered in 2012. The Higgs is believed to endow other particles with mass, and it is considered to be a cornerstone of the modern theory of particle physics. Researchers have seen some hints in recent data that other, yet-undiscovered particles might also be generated inside the LHC. If those other particles exist, they could revolutionize researcher’s understanding of everything from the laws of gravity, to quantum mechanics. Unfortunately, Marsollier says, scientists will have to wait while workers bring the machine back online. Repairs will take a few days, but getting the machine fully ready to smash might take another week or two. “It may be mid-May,” he says.

These sorts of mishaps are not unheard of, says Marsollier. The LHC is located outside of Geneva. “We are in the countryside, and of course we have wild animals everywhere.” There have been previous incidents, including one in 2009, when a bird is believed to have dropped a baguette onto critical electrical systems. Nor are the problems exclusive to the LHC: In 2006, raccoons conducted a “coordinated” attack on a particle accelerator in Illinois. It is unclear whether the animals are trying to stop humanity from unlocking the secrets of the universe. Of course, small mammals cause problems in all sorts of organizations. Yesterday, a group of children took National Public Radio off the air for over a minute before engineers could restore the broadcast.

Though they have every right to defend themselves, something makes me wish Tyler Durden had counted to 10 before writing this. They could have limited it to: “Zero Hedge admits to having hired an unstable writer”, and left it at that. That’s all the Bloomberg attempt at smut warrants. As is, Zero Hedge poebably killed the secrecy as much as Bloomberg did.

• The Full Story Behind Bloomberg’s Attempt To “Unmask” Zero Hedge (ZH)

Over the years, Zero Hedge has proven to be a magnet for media attention. It started years ago with a NY Magazine article published in September 2009 which first “unmasked” the people behind Zero Hedge with the “The Dow Zero Insurgency: The nothing-can-be-believed chaos of the financial crisis created a golden opportunity for a blog run by a mysterious ex-hedge-funder with a dodgy past and conspiracy theories to burn” in which we were presented as a bunch of “conspiracy theory” tin foil hat paranoid loons. We are ok with being typecast as “conspiracy theorists” as these “theories” tend to become “conspiracy fact” months to years later.

Others, such as “academics who defend Wall Street to reap rewards” had taken on a different approach, accusing the website of being a “Russian information operation”, supporting pro-Russian interests, which allegedly involved KGB and even Putin ties, simply because we refused to follow the pro-US script. We are certainly ok with being the object of other’s conspiracy theories, in this case completely false ones since we have never been in contact with anyone in Russia, or the US, or any government for that matter. We have also never accepted a dollar of outside funding from either public or private organization – we have prided ourselves in our financial independence because we have been profitable since inception. Which brings us to the latest “outing” of Zero Hedge, this time from none other than Bloomberg which this morning leads with “Unmasking the Men Behind Zero Hedge, Wall Street’s Renegade Blog” in which it makes the tacit admission that “Bloomberg LP competes with Zero Hedge in providing financial news and information.”

To an extent we were surprised, because while much of the “information” Bloomberg claims it reveals could have been discovered by anyone with a cursory 30 second google search, this time the accusation lobbed at Zero Hedge by Bloomberg was a new one: that we are capitalists who seek to generate profits and who have expectations from our employees. This comes from a media organization which caters to Wall Street and is run by one of the wealthiest people in the world. Underlying the entire Bloomberg article is disclosure based on a former employee at Zero Hedge. Traditionally we don’t reply to such media stories but in this case we’ll make an exception as there is a substantial amount of information Bloomberg has purposefully failed to add.

Brussels will never be able to push through visa-free travel for nearly 80 million Turks. It’s simply not going to happen, not in a democratic way. Greece should be very afraid.

• Turkey PM: Denying Visa-Free Travel Means Collapse Of EU Refugee Deal (DS)

Prime Minister Ahmet Davutoglu said on Thursday evening that there are disappointments and the EU has un-kept promises in recent Turkish-EU relations and that Turkey will stop implementing the recent readmission agreement if the EU does not keep its word and grant visa-free travel to Turkish citizens. Speaking to a group of journalist who accompanied his visit to Qatar on Thursday, Davutoglu said that Turkey is successfully implementing the EU-Turkey deal from March 18 and that the deal has ended illegal migration to Europe.

“Last October there were 6,800 illegal migrants passing over to Europe from Turkey every day. This figure went down to 3,000 in January after we started to implement the terms of the November deal with EU. We made a game changing move with the March 18 deal and this figure is now about 25 per day. Moreover, in April there have been some days on which no migrant passed to Europe,” Davutoglu said, and asked: “Have you heard about the death of a migrant in the Aegean Sea since April 4?” Asserting that Turkey will fulfill all EU criteria for visa-free travel on Monday, Davutoglu said that Ankara will stop implementing the readmission agreement if the EU does not grant visa-free travel.

“These two issues are linked to each other and are part of the deal with the EU. This is a test for everyone. We think that we have passed our test,” Davutoglu said, and added that it is now time for the EU to fulfill its obligations. “[The EU] promised to invest €1 billion for refuges until end of July. We will see whether they keep their promise or not. We have experienced disappointment in the past. We will react negatively if these experiences reoccur,” Davutoglu said, adding that in 2004 the EU had promised to lift restrictions on Turkish Cypriots if they vote for the Annan Plan, but it did not keep its promise afterward.

Debt Rattle March 21 2015

Mar 212015

March 21, 2015 Posted by Raúl Ilargi Meijer at 6:53 am Finance Tagged with: austerity, carry trade, EU, Greece, Monsanto, oil glut, Roundup, Ukraine, underwater, wages 3 Responses »

Jack Delano Freight operations on the Indiana Harbor Belt railroad 1943

• Wages Haven’t Been This Crucial to US Economy in 50 Years (Bloomberg)

• American Underwater Homeowners “Here To Stay” Zillow Says (Zero Hedge)

• Here’s the Next Biggest Threat to Global Crude Oil Prices (Bloomberg)

• Global Oil Glut Set To Grow As China Slows Crude Imports (Reuters)

• Debt Is Oil Patch’s Four-Letter Word (Bloomberg)

• Shocking Austerity: Greece’s Poor Lost 86% Of Income, Rich Only 17-20% (KTG)

• Of Greeks and Germans: Re-Imagining Our Shared Future (Yanis Varoufakis)

• Legal Experts: Greece Has Grounds for WWII Reparations (Greek Reporter)

• It Really Looks Like Greeks Are Hiding Cash Under the Mattress (Bloomberg)

• EU Offers Funds In Return For Urgent Greek Reforms (Guardian)

• EC Head Juncker Offers $2 Billion In Unused Funds To Greece (RT)

• EU Bank’s Lack Of Transparency ‘Like A John Le Carré Novel’ (Guardian)

• Japan Pensions Sell Record $46 Billion Bonds to Buy Stocks (Bloomberg)

• The Central Banks Will Not Be Able to Control the Dollar Carry Trade (Phoenix)

• US Sets First Fracking Standards in More Than 30 Years (Bloomberg)

• Ukraine Sends Request For Proposals For US Taxpayer-Guaranteed Bond (Reuters)

• US ‘Aggressively’ Threatened Germany Over Snowden Aylum (Glenn Greenwald)

• Inhofe’s Snowball Fight With NASA, US Navy, CEOs And The Pope (Paul B. Farrell)

• Monsanto Weedkiller Roundup Is Probably Carcinogenic, WHO Says (Bloomberg)

• The Lion Hugger (BBC)

Why? Because people refuse to go deeper into debt: “In an environment where credit is not being used in a material way, the fate of wages matters..” But that still sounds far too much like it’s a voluntary thing. It’s not.

• Wages Haven’t Been This Crucial to US Economy in 50 Years (Bloomberg)

When it comes to U.S. economic growth, wages may never have been this important. The link between earnings and consumer spending has been tighter in this expansion than in any other since records began in the 1960s, according to calculations by Tom Porcelli at RBC Capital Markets. Wages have become even more critical as households, still shaken after being caught with too much debt when the recession hit, remain unwilling or unable to tap home equity or let credit-card balances balloon to buy that new television or dishwasher. By not overextending themselves again, Americans are only spending as much as their incomes will allow, meaning that 70% of the economy is riding on how fast pay rises.

“In an environment where credit is not being used in a material way, the fate of wages matters,” Porcelli said. “They’re doing all of the driving from a consumption perspective.” The correlation between growth in wages and consumer spending adjusted for inflation stands at 0.93 since June 2009, when the recovery began, according to Porcelli. A reading of 1 means they move in the same direction all the time, zero means there is little relationship and minus 1 means they continually diverge. Porcelli tracked wages through the index of aggregate weekly payrolls for private production workers, which takes into account hourly earnings, the length of the workweek and changes in employment for about 80% of the labor force. Records go back to 1964, longer than the measure for all employees that includes supervisors, which dates back only to 2006.

“The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us..”

• American Underwater Homeowners “Here To Stay” Zillow Says (Zero Hedge)

A few weeks back we commented on the rather disturbing news that repeat foreclosures jumped in January: “According to Black Knight Financial, both new and repeat foreclosures hit a 12-month high during the first month of the year with repeats (i.e. the borrower was rescued but has since entered the foreclosure process again) jumping 11% M/M. More troubling is the trend in repeat foreclosures which accounted for only 15% of total foreclosures during the crisis but now make up a startling 51%.” Here’s what the trend looks like:

Now, a new report from Zillow seems to offer further evidence that the US housing market may not be the picture of health after all (as if we needed more proof after housing starts cratered 17% in February). The%age of homeowners underwater in the US was flat from Q3 to Q4 which doesn’t sound all that terrible until you consider that this figure had fallen for 10 consecutive quarters. Things look particularly bad in Florida and the midwest where Zillow notes more than 25% of borrowers are sitting in a negative equity position. Here’s more:

In the fourth quarter of 2014, the U.S. negative equity rate – the%age of all homeowners with a mortgage that are underwater, owing more on their home than it is worth – stood at 16.9%, unchanged from the third quarter. Negative equity had fallen quarter-over-quarter for ten straight quarters, or two-and-a-half years, prior to flattening out between Q3 and Q4 of last year… More than a quarter of mortgaged homes are underwater in some markets in Florida and the Midwest…

Zillow goes on to note that we have entered a new era in the US housing market: the era of the underwater homeowner. Even better, the report goes on to note that in a number of cases, borrowers will likely be “in negative equity forever”:

…this represents a major turning point in the housing market. The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us, and a new normal has arrived. Negative equity, while it may still fall in fits and spurts, is decidedly here to stay, and will impact the market for years to come.

In fact, some homeowners trapped very deeply underwater may essentially be in negative equity forever. And those homeowners are much more likely to own America’s least expensive homes. Making matters worse, many homeowners in the bottom home value tiers are not only underwater, but very far underwater. Consider, for example, homeowners of the least expensive homes in the Detroit metro area. These homeowners are 29 times more likely to owe twice as much than their house is worth compared to a homeowner at the high end of the market.

Darn! Trumped by teapots again!

• Here’s the Next Biggest Threat to Global Crude Oil Prices (Bloomberg)

The next big threat to oil prices isn’t from OPEC or Bakken shale. It’s Russian samovars, or teapots. Simple refineries that process crude into fuel oil are scaling back, because when oil prices slump, the government reduces the discount that these refiners – known as teapots to those in the industry – get for exporting fuel. They use less crude, freeing it up for sale abroad, which in turn adds to the global glut. Russia may increase oil exports by as much as 250,000 barrels a day this year, according to James Henderson, a senior research fellow at the Oxford Institute for Energy Studies who’s followed the country’s energy industry for more than 20 years. That would equate to 5% growth in shipments, the most in at least a decade.

“The pain Russia is feeling from low oil prices has made more crude available for export,” Henderson said by phone March 18. “Quite a few of Russia’s simple refineries could reduce their runs.” Rising shipments from Russia, which ranks with Saudi Arabia and the U.S. as the world’s biggest oil producers, would put more pressure on crude, already down more than 50% from last year. Falling energy prices and U.S. and European Union sanctions imposed last year in response to the Ukraine crisis have pushed Russia to the brink of recession, damping demand for refined fuel products in the country. Crude loadings from Russian ports are 9.5% higher in the first quarter year over year, according to shipment schedules obtained by Bloomberg.

Teapot refineries processed as much as 800,000 barrels of crude a day last year, Igor Dyomin, a spokesman for Russia’s state-run pipeline operator, Transneft, said by phone March 19. A teapot refinery is one that produces mostly fuel oil rather than more premium fuels, according to Dyomin. Seven simple plants with a combined capacity of 1.2 million barrels a day are most at risk in the current price environment, according to Henderson.

As seen from a mile away.

• Global Oil Glut Set To Grow As China Slows Crude Imports (Reuters)

A global oversupply of oil is set to rise as China pauses in the build-up of its strategic reserves and Asian refineries slow crude imports ahead of the spring maintenance season, putting more downward pressure on prices. China’s purchases to fill its strategic petroleum reserves (SPR) had been one of the main drivers of Asian demand since August of last year, with the No.2 oil consumer taking up cheap crude to fill its tanks despite slowing economic growth. Yet China could pause its reserve purchases soon as tank sites reach their limits and new space only becomes available later this year. Little is known about China’s SPR levels.

The government seldom issues data, but its plan is to reach around 600 million barrels, about 90 days’ worth of imports. Most estimates put the SPR stocks currently to be 30-40 days’ worth. “I don’t think there is much (SPR) space left to fill,” a Chinese storage executive said under the condition of anonymity. In the Zhoushan area of Zhejiang province – site of two SPR bases and major commercial storage facilities – tanks are brimming, the executive said. “They are so full that one VLCC tanker owned by a state refiner has had to wait for almost 15 days to discharge,” he said. Adding to downward pressure is the expectation that Chinese refiners could process less crude oil in the second quarter as demand is dented by tax hikes and an economy growing at its slowest in 25 years.

Thomson Reuters data also shows that Asian imports overall have fallen 5% since peaking in December, when China’s purchases hit an all-time high at 7.2 million barrels per day. In India and Japan, crude imports for the most recent month are down 20% and 11% from a year ago, respectively, mainly due to the approach of the spring refinery maintenance season.

“Just as fracking helped production soar in America’s oil fields, the debt boom is now magnifying the slump in prices..”

• Debt Is Oil Patch’s Four-Letter Word (Bloomberg)

The 60 percent plunge in crude oil prices since mid-2014 isn’t just about increased production and slower global growth. Debt may be the four-letter word when it comes to explaining the extent of the energy sector’s collapse, a paper in the Bank for International Settlement’s Quarterly Review shows. While production has certainly increased and consumption cooled, current estimates of both are little changed from previous forecasts. This stands in contrast to the last two periods of similar oil-price declines in 1996 and 2008, which were attributed to big reductions in demand and/or a surge in production, according to the paper.nThis time, low borrowing costs, a product of easy Federal Reserve monetary policy, are a new wrinkle.

Cheap financing has made it easier for exploration and production (E&P) companies to finance operations and expand rapidly as the era of hydraulic fracturing kicked into high gear. Debt in the global oil and gas industry reached $2.5 trillion in 2014, 2 1/2 times what it was eight years earlier, according to the BIS paper. Just as fracking helped production soar in America’s oil fields, the debt boom is now magnifying the slump in prices as E&Ps boost current and future sales of crude to make sure they can fulfill their debt obligations. The direct effect on the economy is a sharp cutback in capital spending plans, already evidenced by plummeting rig counts.

At the same time, production continues to march higher. Deteriorating balance sheets encourage companies to keep pumping from existing wells even as the value of the assets (the oil) backing those securities declines. That explains the blowout in spreads between high-yield energy bonds and risk-free counterparts. “A sell-off of oil company debt could spill over to corporate bond markets more broadly if investors try to reduce the riskiness of their portfolios,” the BIS authors write. “The fact that debt of oil and gas firms represents a substantial portion of future redemptions underlines the potential system-wide relevance of developments in the sector.”

Just to show you what Samaras and the Troika did to the country. And what the EU etc. want to continue doing.

• Shocking Austerity: Greece’s Poor Lost 86% Of Income, Rich Only 17-20% (KTG)

Greece’s unbalanced austerity and drastic increase of poverty. The poorest households in the debt-ridden country lost nearly 86% of their income, while the richest lost only 17-20%. The tax burden on the poor increased by 337% while the burden on upper-income classes increased by only 9% !!! This is the result of a study that has analyzed 260.000 tax and income data from the years 2008 – 2012.

According to the study commissioned by the German Institute for Macroeconomic Research (IMK) affiliated with the Hans Böckler Foundation:
– The nominal gross income of Greek households decreased by almost a quarter in only four years.
– The wages cuts caused nearly half of the decline.
– The net income fell further by almost 9%, because the tax burden was significantly increased
– While all social classes suffered income losses due to cuts, tax increases and the economic crisis, particularly strongly affected were households of low- and middle-income. This was due to sharp increase in unemployment and tax increases, that were partially regressive.
– The total number of employees in the private sector suffered significantly greater loss of income, and they were more likely to be unemployed than those employed in the public sector.
-From 2009 to 2013 wages and salaries in the private sector declined in several stages at around 19%. Among other things, because the minimum wage was lowered and collective bargaining structures were weakened. Employees in the public sector lost around a quarter of their income.

“In 2010, Greece should have borrowed not one euro before entering into debt restructuring procedures and partially defaulting to its private sector creditors.”

• Of Greeks and Germans: Re-Imagining Our Shared Future (Yanis Varoufakis)

Any sensible person can see how a certain video[1] has become part of something beyond a gesture. It has sparked off a kerfuffle reflecting the manner in which the 2008 banking crisis began to undermine Europe’s badly designed monetary union, turning proud nations against each other. When, in early 2010, the Greek state lost its capacity to service its debts to French, German and Greek banks, I campaigned against the Greek government’s quest for an enormous new loan from Europe’s taxpayers. Why?

I opposed the 2010 and 2012 ‘bailout’ loans from German and other European taxpayers because:
• the new loans represented not a bailout for Greece but a cynical transfer of losses from the books of the private banks to the weak shoulders of the weakest of Greek citizens. (How many of Europe’s taxpayers, who footed these loans, know that more than 90% of the €240 billion borrowed by Greece went to financial institutions, not to the Greek state or its citizens?)
• it was obvious that, at a time Greece could not repay its existing loans, the austerity conditions for giving Greece the new loans would crush Greek nominal incomes, making our debt even less sustainable
• the ‘bailout’ burden would, sooner or later, weigh down German and other European taxpayers once the weaker Greeks buckled under their mountainous debts (as moneyed Greeks had already shifted their deposits to Frankfurt, London etc.)
• misleading peoples and Parliaments by presenting a bank bailout as an act of ‘solidarity to Greece’ would turn Germans against Greeks, Greeks against Germans and, eventually, Europe against itself.
In 2010 Greece owed not one euro to German taxpayers. We had no right to borrow from them, or from other European taxpayers, while our public debt was unsustainable. Period!

That was my ‘controversial’ point in 2010: In 2010, Greece should have borrowed not one euro before entering into debt restructuring procedures and partially defaulting to its private sector creditors. Well before the May 2010 ‘bailout’, I urged European citizens to tell their governments not to even think of transferring private losses to them. To no avail, of course. That transfer was effected soon after[2] with the largest taxpayer-backed loan in economic history given to the Greek state on austerity conditions that have caused Greeks to lose a quarter of their income, making it impossible to repay private and public debts, and causing a hideous humanitarian crisis. That was then, in 2010. What should we do now, in 2015, that Greece remains in crisis and our people, the Greeks and the Germans, have, regrettably but also predictably, descended into a mutual ‘blame game’?

First, we should work towards ending the toxic ‘blame game’ and the moralising finger-pointing which benefit only the enemies of Europe. Secondly, we need to focus on our joint interest: On how to grow and to reform Greece rapidly, so that the Greek state can best repay debts it should never have taken on while looking after its citizens as a modern European state ought to do. In practical terms, the 20th February Eurogroup agreement offers an excellent opportunity to move forward. Let us implement it immediately, as our leaders have urged in yesterday’s informal Brussels meeting. Looking ahead, and beyond current tensions, our joint task is to re-design Europe so that Germans and Greeks, along with all Europeans, can re-imagine our monetary union as a realm of shared prosperity.

“Greece was not asked, so the claims have not gone away.” “The German government’s argument is thin and contestable. It is not permissible to agree to a treaty at the expense of a third party, in this case Greece..”

• Legal Experts: Greece Has Grounds for WWII Reparations (Greek Reporter)

A growing number of legal experts are supporting Greece’s demands over the German war reparations from the country’s brutal Nazi occupation during World War II. Despite the official German refusal to address the issue, legal experts say now Athens has ground for the case. The hot issue is expected to be brought up by Greece’s newly elected Prime Minister Alexis Tsipras during his official visit to Berlin on Monday, where he is scheduled to hold a meeting with the German Chancellor Angela Merkel. The tension between the two countries have recently rose to unexpected levels and a series of events with the Finance Ministers of Greece and Germany, Yanis Varoufakis and Wolfgang Schaeuble respectively, and the war reparations issue — mainly by the Greek side — has significantly affected the already negative climate.

The Greek leftist-led coalition government has repeatedly raised the issue causing Germany’s firm reaction as expressed by German Finance Minister Wolfgang Schaeuble, who recently warned Athens to forget the war reparations, underlining that the issue has been settled decades ago. Central to Germany’s argument is that 115 million deutschemarks have been paid to Greece in the 1960s, while similar deals were made with other European countries that suffered a Nazi occupation. At the same time, though, lawyers from Germany and other countries have said the issue is not wrapped up, as Germany never agreed a universal deal to clear up reparations after its unconditional surrender.

The German answer on that is that in 1990, before its reunification, the “Two plus Four Treaty” agreement was signed with the United Kingdom, the United States, the former Soviet Union and France, which renounced all future claims. According to Berlin, this agreement settles the issue for other states too. “The German government’s argument is thin and contestable. It is not permissible to agree to a treaty at the expense of a third party, in this case Greece,” international law specialist Andreas Fischer-Lescano said, as cited by the Reuters. Mr. Lescano’s opinion finds several other experts in agreement. One of them, the Greek lawyer Anestis Nessou, who works in Germany highlighted that “there is a lot of room for interpretation. Greece was not asked, so the claims have not gone away.”

Obviously. But still, that money did not leave the country.

• It Really Looks Like Greeks Are Hiding Cash Under the Mattress (Bloomberg)

It is no secret that banks in Greece have been losing deposits in recent months. The question that is somewhat open, though, is where Greeks have been moving their deposits to. Have they been transferring the cash to other banks, or have they been squirreling it away under the mattress—and under bathroom tiles? At first glance, data from the Bank of Greece seem to point to the deposit transfer option rather than the cash-under-mattress option as the “banknotes in circulation” line item on its balance sheet hasn’t shown any big spike in recent months. This, however, does not tell the full story. The banknotes in circulation item on the Bank of Greece balance sheet only shows the amount of cash Greece has been allocated under its share of overall euro-area banknote circulation.

Any extra cash needs of the Greek economy are accounted for elsewhere on the Bank of Greece balance sheet under the rather drab headline of “net liabilities related to the allocation of euro banknotes within the Eurosystem.” This extra cash was zero before the start of the Greek crisis in 2009, climbed above €22 billion in the months leading to the 2012 Greek political crisis, and had been falling steadily since. Until December of last year, that is, when the Greek political crisis reemerged following the collapse of the Samaras administration. We can now clearly see there has been a €10 billion increase in cash in Greece in the three months to the end of February 2015. That is a lot of mattresses.

Impossible conditions: “only on condition that Tsipras’s left-wing government had persuasively shown it was committed to enforcing austerity..” That directly contradicts its mandate.

• EU Offers Funds In Return For Urgent Greek Reforms (Guardian)

Greece’s eurozone creditors are considering bringing forward a financial lifeline for Athens by a few weeks after Alexis Tsipras, the Greek prime minister, told EU leaders the country would be insolvent by the end of April without assistance. In a key three-hour meeting in Brussels that ended in the early hours of Friday, Tsipras informed his creditors if they wait until the end of April before releasing funds, it will be too late for Greece. According to an account of that meeting policymakers are now discussing whether they can supply emergency funding earlier than previously agreed. Tsipras was also advised to treat the Eurocrats working in Athens with more respect and ensure their safety. Under the terms of an agreement on Greece’s bailout last month, some €7.2bn in rescue funds were not to be disbursed until the end of April and only on condition that Tsipras’s left-wing government had persuasively shown it was committed to enforcing austerity in the country.

Chancellor Angela Merkel of Germany concluded a two-day EU summit in Brussels on Friday by stressing Tsipras had to present a “comprehensive” reform package urgently and this would need to be endorsed by the Eurogroup of finance ministers before Greece could access any of the funds. Merkel’s remarks came after the crucial meeting, that ran until 2am on Friday, when Tsipras came face-to-face for the first time with the leaders of his key creditors – Merkel and Mario Draghi, the president of the European Central Bank. The other five present at the crisis talks were the French president, François Hollande; the presidents of the European Commission and Council, Jean-Claude Juncker and Donald Tusk; Jeroen Dijsselbloem, head of the committee of eurozone finance ministers; and Uwe Corsepius, a senior eurocrat who has just been appointed Merkel’s EU adviser.

Tsipras had requested the meeting and had been confrontational in the days preceding it. According to an authoritative account of what took place, he started the negotiations by making it clear he expected urgently needed bailout funds released without giving very much in return. According to the account, he was disabused of that notion within 10 minutes and the meeting then ran smoothly, except for an episode where the new Greek leader was upbraided by Draghi, who is furious at the way senior EU officials monitoring the terms of the Greek bailout are being treated in Athens. According to senior officials in Brussels, the Tsipras government has been orchestrating a campaign of intimidation against the eurocrats in Athens, frustrating their work and refusing all access.

Visiting Athens this week, they were confined to a luxury hotel and denied access to government ministries. Their whereabouts were leaked to the media and “aggressive” demonstrations were staged outside the hotel. One of the top officials needed two bodyguards. Draghi was said to have read Tsipras the riot act, while the others demanded cooperation with the creditors. Merkel was said to have soothed things by telling Tsipras that, when International Monetary Fund officials go to Berlin, they are granted access to everything they need, even when it is a little humiliating.

Narrative: it’s for the poor.

• EC Head Juncker Offers $2 Billion In Unused Funds To Greece (RT)

The European Commission has made $2 billion of unused funds available to Greece to help the country avert a cash crunch, EC head Jean-Claude Juncker says. The offer was made a day after crisis talks between Greece’s new Prime Minister Alexis Tsipras and European leaders on Greece’s EU-IMF bailout. Greek authorities said on Friday they were gradually moving towards meeting the requirements of international creditors on a more detailed reform plan, after Prime Minister Tsipras said his coalition would intensify work to avert the country’s bankruptcy. Austerity policies have been the focus of a standoff between Greece and its troika of creditors.

Promises to end the era of drastic cuts helped Tsipras win power two months ago, but since then his stance has weakened. Greece’s western creditors have been insisting the country needs to reform its economy and start cutting its own expenses, if it wants to get new money for its ailing economy. Austerity policies have been the focus of a standoff between Greece and its Troika of creditors. Promises to end the era of drastic cuts helped Tsipras win power two months ago, but since then his stance has weakened. Greece’s western creditors have been insisting the country needs to reform its economy and start cutting its own expenses, if it wants to get new money for its ailing economy.

The Troika of creditors said in February they were ready to extend the current bailout program until June 2015, but a general agreement hasn’t been reached yet. Tsipras has sharply criticized the Troika methods calling them arm-twisting. He blames them for his country’s unprecedented recession. Greece received two bailouts from the EU in 2010 and 2014 totaling €240 billion. Having taken on austerity measures, Greece saw its economy losing a quarter of its value, with a third of Greeks living below the poverty line and unemployment exceeding 30%. Experts say the money Greece has now will only last till the end of March.

Bizarre story.

• EU Bank’s Lack Of Transparency ‘Like A John Le Carré Novel’ (Guardian)

The EU watchdog has accused the union’s bank of flouting its own transparency rules and hiding what it knows about allegations of tax avoidance by a Zambian mining firm largely owned by the Swiss commodity trader Glencore. On Tuesday, Emily O’Reilly, the European ombudsman, said she was not satisfied with the European Investment Bank’s claims that, despite an internal investigation, it had been unable to establish whether Mopani Copper Mines had avoided paying local tax running into tens of millions. Ten years ago, the EIB – which is owned by EU member states – loaned Mopani $50m (£30m) for the renovation of a smelter to reduce sulphur dioxide emissions.

Six years later, after a leaked audit report suggested that Mopani had avoided paying tens of millions of dollars in local tax, the bank announced an investigation into the company. It also halted loans to Glencore because of “serious concerns” about its corporate governance. Glencore has always denied the allegations, which it maintains are based on “fundamental factual errors”. Mopani repaid the EIB loan in full in 2012.

After the EIB refused to release the findings of its investigation, the charity Christian Aid referred the bank to the European ombudsman, who was granted access to the internal report. In her ruling, O’Reilly disputed the bank’s assertion that “it was not possible to comprehensively prove or disprove the allegations” made in the leaked audit report. She said: “The ombudsman considers that this statement does not adequately reflect the information contained in the [EIB] investigation report on this issue.”

Someone should stop Abe and Kuroda. This will be a huge disaster.

• Japan Pensions Sell Record $46 Billion Bonds to Buy Stocks (Bloomberg)

Japan’s public pension funds, which include the world’s biggest, accelerated their push to dump local bonds and invest the money abroad to a record pace. The $1.1 trillion Government Pension Investment Fund and its smaller peers almost doubled net sales of Japanese government bonds to 5.56 trillion yen ($46 billion) in the fourth quarter, the most in Bank of Japan figures dating back to 1998. They bought an unprecedented 2.39 trillion yen of foreign stocks and bonds. Selling of JGBs and buying of overseas securities has continued for six straight quarters.

GPIF posted its largest investment gain in almost two years last quarter after shifting more money into stocks from Japanese bonds, as it came under government pressure to boost returns to cover payouts for the world’s fastest-aging population. The Federation of National Public Service Personnel Mutual Aid Associations, last month said it will boost its investments in foreign stocks and bonds and cut exposure to domestic debt, matching the plan by GPIF. “It seems like three other civil service funds have yet to move,” Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan, said referring to data from the BOJ and and GPIF. “That means there is still some room left for the shift to take place.”

Japan’s public pension funds raised domestic stock holdings for a fifth quarter, adding a net 1.73 trillion yen, the most since 2009. They held 5.6% of a record 1.023 quadrillion yen of outstanding JGBs at the end of December. The biggest holder, the BOJ, owned 25% of the total as of then, it said Wednesday in Tokyo. GPIF hired four external managers of domestic and overseas stocks as it moves to boost equities to half its assets. It made a 5.2% return in the fourth quarter, the most since the period ended March 2013, according to a statement last month. Domestic shares returned 6.2% in the quarter, while local debt returned 1.9%. Foreign bonds returned 9.4%, and overseas stocks gained 10%.

” The US Dollar carry trade is north of $9 trillion… literally bigger than the economies of Germany and Japan COMBINED..”

• The Central Banks Will Not Be Able to Control the Dollar Carry Trade (Phoenix)

The biggest issue facing the finacial system today is the US Dollar rally. The Fed and other Central Banks are trying to maintain the illusion that they have everything in control by talking about interest rates, but the reality is that the US Dollar carry trade is ABOVE $9 trillion in size. That is almost as big as ALL of the money printing that occurred between 2009 and 2013. And it’s imploding as we write this. Globally, the world is awash in borrowed money… most of it in US Dollars. The US Dollar carry trade is north of $9 trillion… literally bigger than the economies of Germany and Japan COMBINED. When you BORROW in US Dollars you are effectively SHORTING the US Dollar. So when the US Dollar rallies… you have to cover your SHORT or you blow up.

And the US Dollar has been rallying… HARD. Indeed, the move that began in July 2014 is already larger par in scope with that which occurred during the 2008 meltdown. Moreover, this move has occurred with little to no rest. The US Dollar barely corrected 2% after rallying a stunning 16+% in a matter of months before beginning its next leg up. You only get these sorts of moves when the stuff hits the fan. CNBC and the others are babbling about the Fed’s FOMC changes, but all of that is just a distraction from the fact that a $9+ trillion carry trade, arguably the largest carry trade in history, has begun to blow up. Rate hikes, QE, all of this stuff is minor in comparison to the carnage the US Dollar is having on the financial system. Take a look at the impact it’s having on emerging market currencies.

It’s all about timing.

• US Sets First Fracking Standards in More Than 30 Years (Bloomberg)

The Obama administration issued the first federal regulations for fracking since the drilling technique fueled a domestic energy boom, requiring extensive disclosures of the chemicals used on public land. After years of debate and delay, the Bureau of Land Management on Friday said drillers on federal lands must reveal the chemicals they use, meet well construction standards and safely dispose of contaminated water used in fracking. The rule had been highly anticipated by drillers, who oppose added regulation, and by environmentalists who have raised alarms about water contamination. Both sides had complaints with the outcome: groups representing the oil and gas industry sued to block its implementation and an environmental group said the regulation favored industry over public health.

“This rule will move our nation forward as we ensure responsible development while protecting public land resources,” Interior Secretary Sally Jewell said on a call with reporters. “As we continue to offer millions of acres of America’s public lands – your lands – for oil and gas development, it is critical that the public has confidence that robust safety and environmental protections are in place.” Domestic production from more than 100,000 wells on public lands accounts for about 11% of U.S. natural-gas production and 5% of oil production. Fracking, or hydraulic fracturing, is a technique in which water, chemicals and sand are shot underground to free oil or gas from rock. It is used for about 90% of the wells on federal lands.

The rule, which is set to take effect in three months, triggered criticism from environmental groups, which said the regulations put industry interests ahead of public health, and from congressional Republicans the oil and gas industry. The Independent Petroleum Association of America and the Western Energy Alliance filed a lawsuit against the Interior Department, saying the regulations are the product of “unsubstantiated concerns,” and lack evidence necessary to sustain them. The group asked in a lawsuit filed Friday in a U.S. court in Wyoming to have the new rules declared invalid.

Can it get any crazier?

• Ukraine Sends Request For Proposals For US Taxpayer-Guaranteed Bond (Reuters)

The Republic of Ukraine has sent out a request for proposals (RFP) to banks for a new US government-guaranteed bond, according to three sources. This is the second time the US government has thrown its financial backing behind a Ukrainian international bond issue. In May 2014, the US guaranteed a US$1bn Ukrainian bond maturing in 2019 through the US Agency for International Development. That bond was given a credit rating in line with the US sovereign at Aaa by Moody’s, AA+ by Standard & Poor’s and AAA by Fitch. This is a far cry from Ukraine’s credit rating, which stands at Caa3, CCC and CC with the same three agencies.

The RFP comes just over a week after Ukraine agreed a new four-year US$17.5bn bailout facility with the IMF. As part of the IMF agreement several institutions – including the EU, World Bank and US – have agreed to provide around US$7.5bn between them, according to analyst estimates, to the war torn country. It is not clear whether the US-backed bond forms part of the US contribution. Meanwhile, Ukraine is obligated under the IMF agreement to restructure at least US$15.3bn of outstanding debt. Ukraine’s finance minister Natalia Yaresko confirmed during an investor call last week that bondholders will see haircuts to principal, as well as maturity extensions and changes to interest payment.

Russia, which holds US$3bn of Ukrainian debt that comes due in December this year, will not be exempt from the cuts, Yaresko said. A clause in the debt owed to Russia allows it to accelerate bond payments if Ukraine’s debt-to-GDP ratio breaches 60% – a number that has been passed largely because Ukraine’s industrial power centre Donbass has ground to a halt under sustained conflict. Russia has repeatedly said that it would not accelerate the debt.

Not surprised.

• US ‘Aggressively’ Threatened Germany Over Snowden Aylum (Glenn Greenwald)

German Vice Chancellor Sigmar Gabriel (above) said this week in Homburg that the U.S. government threatened to cease sharing intelligence with Germany if Berlin offered asylum to NSA whistleblower Edward Snowden or otherwise arranged for him to travel to that country. “They told us they would stop notifying us of plots and other intelligence matters,” Gabriel said. The vice chancellor delivered a speech in which he praised the journalists who worked on the Snowden archive, and then lamented the fact that Snowden was forced to seek refuge in “Vladimir Putin’s autocratic Russia” because no other nation was willing and able to protect him from threats of imprisonment by the U.S. government (I was present at the event to receive an award).

That prompted an audience member to interrupt his speech and yell out: “Why don’t you bring him to Germany, then?” There has been a sustained debate in Germany over whether to grant asylum to Snowden, and a major controversy arose last year when a Parliamentary Committee investigating NSA spying divided as to whether to bring Snowden to testify in person, and then narrowly refused at the behest of the Merkel government. In response to the audience interruption, Gabriel claimed that Germany would be legally obligated to extradite Snowden to the U.S. if he were on German soil.

Afterward, however, when I pressed the vice chancellor (who is also head of the Social Democratic Party, as well as the country’s economy and energy minister) as to why the German government could not and would not offer Snowden asylum — which, under international law, negates the asylee’s status as a fugitive — he told me that the U.S. government had aggressively threatened the Germans that if they did so, they would be “cut off” from all intelligence sharing. That would mean, if the threat were carried out, that the Americans would literally allow the German population to remain vulnerable to a brewing attack discovered by the Americans by withholding that information from their government.

“..if it’s really God’s plan, does He also pay the bill?”

• Inhofe’s Snowball Fight With NASA, US Navy, CEOs And The Pope (Paul B. Farrell)

The Tulsa World newspaper recently reran a heated Washington Post editorial headlined: “Sen. Jim Inhofe embarrasses GOP and U.S.” The Senate’s top climate-science denier’s snowball throwing stunt in the Senate chambers was more offensive to his Senate colleagues and the liberal media than his official denier’s bible he wrote calling it “The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future.” But what if Oklahoma Sen. Inhofe is right? What if “God really is in charge” of the global warming mess? And what if “humans cannot change climate,” as he warns America? Get it? Humans cannot reverse the climate damage. The biggest “hoax is that there are some people who are so arrogant to think that they are so powerful.”

But humans can’t change climate. Humans are powerless to change it, not RiskyBusiness.org nor 350.org, not Big Oil nor the GOP. And if God is in solely responsible, humans are just bit players in a grand drama, but can’t affect the outcome one way or another, either accelerating it or halting it. And no matter what capitalists or environmentalists do, or plan, or legislate, or oppose, or spend, God’s plan is “The Plan,” and we may just make matters worse, and waste a lot of money … $60 trillion. Economic shocker. A ScientificAmerican team did a research study on the cost of fixing the global warming and climate-change problem. Bottom line: $60 trillion. That’s one helluva price tag. A whopping $60 trillion on our planet – where the total global GDP is only $75 trillion.

And if it’s really God’s plan, does He also pay the bill? Now add this to the economic equation: Is Inhofe speaking for God? He’s hardly neutral, a huge chunk of Oklahoma’s state revenue is generated by Big Oil. And he’s received well over a million bucks in campaign donations from fossil-fuel interests. Worse, no states, nations nor businesses, nobody has a master plan for dealing with climate change … yes, lots of conflicting, piecemeal technologies … but no tested, reliable grand solution … no guarantees anything will work.

Monsanto has more clout than the WHO.

• Monsanto Weedkiller Roundup Is Probably Carcinogenic, WHO Says (Bloomberg)

Monsanto’s best-selling weedkiller Roundup probably causes cancer, the World Health Organization said in a report that’s at odds with prior findings. Roundup is the market name for the chemical glyphosate. A report published by the WHO in the journal Lancet Oncology said Friday there is limited evidence that the weedkiller can cause non-Hodgkin’s lymphoma and lung cancer and convincing evidence it can cause cancer in lab animals. The report was posted on the website of the International Agency for Research on Cancer, or IARC, the Lyon, France-based arm of the WHO. Monsanto, which invented glyphosate in 1974, made its herbicide the world s most popular with the mid-1990s introduction of crops such as corn and soybeans that are genetically engineered to survive it.

The WHO didn t examine any new data and its findings are inconsistent with assessments from the U.S., EU and elsewhere, Monsanto said. We don t know how IARC could reach a conclusion that is such a dramatic departure from the conclusion reached by all regulatory agencies around the globe, Philip Miller, Monsanto vice president for global regulatory affairs, said in a statement. The evidence in humans is from studies of exposures, mostly agricultural, in the USA, Canada, and Sweden published since 2001, the WHO said in the report. In addition, there is convincing evidence that glyphosate also can cause cancer in laboratory animals. The WHO said exposure by the general population is generally low.

Feel good story.

• The Lion Hugger (BBC)

In 2012 Valentin Gruener rescued a young lion cub and raised it himself at a wildlife park in Botswana. It was the start of an extraordinary relationship. Now an astonishing scene is repeated each time they meet – the young lion leaps on Gruener and holds him in an affectionate embrace. “Since the lion arrived, which is three years now, I haven’t really left the camp,” says Gruener. “Sometimes for one night I go into the town here to organise something for the business, but other than that I’ve been here with the lion.” The lion he has devoted himself to is Sirga – a female cub he rescued from a holding pen established by a farmer who was fed up of shooting animals that preyed on his cattle. “The lions had killed the other two or three cubs inside the cage, and the mother abandoned the remaining cub. She was very tiny, maybe 10 days old,” Gruener says.

The farmer, Willy de Graaf, asked Gruener to try to save her and so he took her to a wildlife park financed by de Graaf and became her adoptive mother, “feeding her and taking care of her”. “You have this tiny cute animal sitting there and it’s already quite feisty,” he says. “It will become about 10 times that size and you will have to deal with it.” She’s much bigger now, but when Gruener opens her cage she still rushes to greet him – ecstatically throwing her paws around his neck. “That happens every time I open the door. It is an amazing thing every time it happens, and it’s such a passionate thing to do for this animal to jump and give me a hug,” says Gruener. “But I guess it makes sense. At the moment she has no other lions with her in the cage and I guess for her I’m like her species. So I’m the only friend she’s got. Lions are social cats so she’s always happy to see me.”

Debt Rattle May 21 2014: Drowning in the American Dream

May 212014

May 21, 2014 Posted by Raúl Ilargi Meijer at 1:25 pm Finance Tagged with: foreclosure, housing, underwater 27 Responses »

Toni Frissell Fashion model in dolphin tank, Marineland, Florida 1939

According to a new Zillow report, 40% of all US mortgage holders can’t afford to sell their homes. That is 20 million Americans homeowners, 10 million who are downright underwater and another 10 million who are so close to being there that they don’t have the money to cover the cost of selling. And those are still numbers across the spectrum; things are far towards the bottom. ‘30% of homes in the bottom price tier are in negative equity, while 18.1% of homes in the middle tier and 10.7% in the top tier are underwater’. If we assume that at the bottom, like across the spectrum, as many people are close to being submerged as those who already are, that would mean 60% of bottom tier borrowers are too poor to sell their homes (i.e. have less than 20% equity).

Pretty stunning numbers when you realize that this comes after 7-9 million homes were already foreclosed on (RealtyTrac lists 16.5 million foreclosure filings from 2006 through 2013), and millions more are still stalled in one or another step of the foreclosure process because banks don’t want to be forced to put the losses on their books. It also comes after 6 years in which many trillions of dollars were pumped into the top of the financial system to prevent it from crumbling. The problem is, of course, that those trillions were absorbed by the top. and never reached the bottom. It’s like watering a severely parched parcel of land.

A perhaps unexpected consequence of all this is that – potential – starters, a group already severely hindered by skyrocketing student loans and high levels of unemployment, find the starter home they might be able to afford remains occupied by people the market until recently would have penciled in for a move higher up the ladder. The US housing market is seriously congested. It could be opened with much lower prices, but that would significantly raise the number of underwater owners. As David Stockman writes: “Monetary central banking is an economy wrecker.” Just to make sure the market is eligible for awards in the absurd theater category, median prices have gone up by 11% since 2012. It should be obvious that such a market place in inherently self-defeating. Or should we really say American Dream-defeating?

Here’s what the Wall Street Journal takes away from the report:

Mortgage, Home-Equity Woes Linger

• At the end of the first quarter, some 18.8% of U.S. homeowners with a mortgage – 9.7 million households – were “underwater” on their mortgage, according to a report scheduled for release Tuesday by real-estate information site Zillow Inc. Z -3.19% While that is an improvement from 19.4% at the end of last year and a peak of 31.4% 2012, those figures understate the problem.

• In addition to the homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult for them to sell their homes without dipping into their savings. Most move-up homeowners typically use their home equity to cover broker fees, closing costs and a down payment for their next home. Without those funds, many homeowners can’t sell.

• “It’s a sobering appreciation that negative equity is going to be with us for a while to come,” said Stan Humphries, Zillow’s chief economist. “Negative equity is central to understanding a lot of the distortions in the marketplace right now.”

• … prices have risen about 11% over the past two years, and several times that in rebounding markets like Las Vegas, Phoenix and much of California. Rising prices, combined with higher mortgage rates, have given sticker shock to buyers looking for a deal. This has been particularly hard on first-time home buyers who are usually in the market for a lower-priced home.

• Many underwater homeowners have gone into foreclosure or executed a short sale, where they sell the home for a loss. But many aren’t budging. “There are people who still have their jobs and they’re not late on their payment, but they can’t move,” said Vita Deveaux, a real-estate agent at Keller Williams Realty First Atlanta.

That’s essentially still just a bunch of numbers. But it’s not as if they’re some freak result of immaculate conception or spontaneous combustion. Therefore, David Stockman provides a wider perspective:

The Greenspan Housing Bubble Lives On: 20 Million Homeowners Can’t Trade-Up Because They Are Still Underwater

One of the most deplorable aspects of Greenspan’s monetary central planning was the lame proposition that financial bubbles can’t be detected, and that the job of central banks is to wait until they crash and then flood the market with liquidity to contain the damage. In fact, after the giant housing bubble crashed and left millions of Main Street victims holding the bag, Greenspan evacuated the Eccles Building, and then spent nearly a whole chapter in his memoirs explaining how this devastation wasn’t his fault.

Instead, he blamed Chinese peasant girls who came by the millions to the east China export factories where they lived a dozen at a time cramped in tiny dormitory rooms working 14 hour days. According to the Maestro, they “saved” too much, thereby enabling American’s to overdo it on the mortgage borrowing front. Yes, in so many words he said exactly that! Lets see. The Maestro was allegedly a data hound. Did he not notice that housing prices in the US rose for 111 straight months from late 1994 to 2006, and during that period increased by nearly 200% on average across US neighborhoods. How in the world could this giant aberration have escaped the notice of the money printers around Greenspan in the Eccles Building?

How in the world could any adult thinker blame this on factory girls in China – that is, a policy regime that caused excessive savings? In fact, it is plainly evident that the People’s Printing Press of China attempted to protect its exchange rate from appreciating against the flood of dollars emitted from the Eccles Building. It did this in mercantilist fashion by pegging the RMB exchange rate and thereby accumulating a massive hoard of US treasury notes and Fannie/Freddie paper. In short, China didn’t “save ” America into a housing crisis; the Greenspan Fed printed America into a cheap debt binge that ended up impairing the residential housing market for years to come. So the problem with central bank inflation of financial bubbles is that when they burst the damage is extensive, capricious and long-lasting.

It is no great mystery that historically trade-up borrowers have been the motor force that drove the US housing market. Selling their existing home for a better castle, trade-up buyers vacated the bottom-end of the market so that first time buyers could find a foothold. Now thanks to Washington’s eternal conviction that debt it the magic elixir of economic growth, first time buyers are few and far between because they are buried in student debt – about $1.1 trillion to be exact. Each graduating class has more students with loans to carry forward, and in higher and more onerous amounts. Fully 70% of the class of 2014 has student loans, and they average of about $30,000 each. Both figures are triple what they were just a decade ago.

As prices rise, and millions of homeowners and their families are drowning in the American dream, housing is a perfect reflection of what America has become: a nation in which the less affluent working men and women, those who were once known as the middle class, are sinking deeper, albeit slowly for the time being, along with the millions who abandoned the dream of homeownership as time went by.

That makes America already a radically different nation from what it once was, with only one way to go, but how many people fully acknowledge that change? I’m pretty sure most still think their dreams will return, and be fulfilled, at some point in the future. But that’s not going to happen, because all the credit that props up the top tier of society today was largely borrowed from the bottom tier, so things can only get worse when payback time comes. And it will, when interest rates rise. They can’t go any lower, unlike the fast growing contingent of less affluent Americans. Interest rates can only go up from here, and at some point it won’t matter anymore how skilled a swimmer you are.

• 9.7 Million Americans Still Have Underwater Homes, Zillow Says (Forbes)

A total of 9.7 million American households still have “underwater” mortgages, meaning they owe more on the home than it is currently worth. Homes in the lowest price tier are most affected, according to data released today from Zillow. 30% of homes in the bottom price tier are in negative equity, while only 18.1% of homes in the middle tier and 10.7% in top tier are underwater, according to Zillow’s Negative Equity Report. Homes are defined as top, middle, or bottom tier based on their estimated value compared to the median home price for that area. (Nationally, the median price in the top tier is $306,700; middle tier, $163,400; bottom, $98,400.) Overall, 18.8% of homeowners were underwater during the first quarter of 2014. And more than one-third of all homeowners with a mortgage were “effectively” underwater, meaning they have less than 20% equity in their home.

Zillow’s figures for homes with negative equity are higher than other recent reports looking at the same problem. This is in part because the Zillow report captures the current amount a homeowner owes on a mortgage via data from Transunion, while other reports estimate the current loan balance based on public records. But there are also differences in the way various data companies estimate a home’s current value. Different methodologies lead to different findings. For example, CoreLogic’s most recent report shows far fewer homes with negative equity than Zillow’s: nearly 6.5 million homes (13.3% of mortgaged propertes) were in negative equity at the end of 2013, according to CoreLogic. That’s 3 million less than the negative equity homes Zillow is counting.

What’s particularly significant about the Zillow report is that it underscores a reason for the low prevalence of first-time homebuyers in the market: many owners of less expensive homes can’t afford to sell. “The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow Chief Economist Dr. Stan Humphries via a release. “It’s hard to overstate just how much of a drag on the housing market negative equity really is, especially at the lower end of the market, which represents those homes typically most affordable for first-time buyers. Negative equity constrains inventory, which helps drive home values higher, which in turn makes those homes that are available that much less affordable.”

• 20 Million Homeowners Can’t Trade-Up Because They’re Underwater (Stockman)

Here we are 96 months after the housing peak, yet there are still 20 million households which are either underwater on their mortgages or do not have enough embedded equity to cover the transaction costs and down payment needed to move. Since there are only 50 million households with mortgages, that means that as a practical matter 40% of mortgage borrowers are precluded from trading-up. It is no great mystery that historically trade-up borrowers have been the motor force that drove the US housing market. Selling their existing home for a better castle, trade-up buyers vacated the bottom-end of the market so that first time buyers could find a foothold.

Now thanks to Washington’s eternal conviction that debt it the magic elixir of economic growth, first time buyers are few and far between because they are buried in student debt—-about $1.1 trillion to be exact. Each graduating class has more students with loans to carry forward, and in higher and more onerous amounts. Fully 70% of the class of 2014 has student loans, and they average of about $30,000 each. Both figures are triple what they were just a decade ago. In any event, for those Millennials who do manage to accumulate a down payment by the time they are in their early 30s there is precious little starter home inventory available. The Greenspan mortgage debt serfs from the previous generation are blocking the way.

• Mortgage, Home-Equity Woes Linger (WSJ)

Nearly 10 million U.S. households remain stuck in homes worth less than their mortgage and a similar number have so little equity they can’t meet the expenses of selling a home, trends that help explain recent sluggishness in the housing recovery. At the end of the first quarter, some 18.8% of U.S. homeowners with a mortgage—9.7 million households—were “underwater” on their mortgage, according to a report scheduled for release Tuesday by real-estate information site Zillow Inc. While that is an improvement from 19.4% at the end of last year and a peak of 31.4% 2012, those figures understate the problem. In addition to the homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult for them to sell their homes without dipping into their savings.

Most move-up homeowners typically use their home equity to cover broker fees, closing costs and a down payment for their next home. Without those funds, many homeowners can’t sell. “It’s a sobering appreciation that negative equity is going to be with us for a while to come,” said Stan Humphries, Zillow’s chief economist. “Negative equity is central to understanding a lot of the distortions in the marketplace right now.” Those distortions include the inventory of homes for sale, which, while rising, is low by historical standards. It also helps explain why first-time home buyers are having such a hard time cracking the market. Real estate is in some ways like a ladder, Mr. Humphries notes, so when underwater homeowners don’t trade up it makes it harder for newcomers to get in.

• Blackrock CEO Says US Housing “Structurally More Unsound” Now (Bloomberg)

BlackRock CEO Laurence D. Fink said the U.S. housing market is “structurally more unsound” today than before the financial crisis because it depends more on government-backed mortgage companies such as Fannie Mae and Freddie Mac. “We’re more dependent on Fannie and Freddie than we were before the crisis,” Fink said today at a conference held by the Investment Company Institute in Washington, noting that he was one of the first Freddie Mac bond traders on Wall Street. Fink, who has built New York-based BlackRock into a $4.4 trillion money manager, said today that with strong underwriting standards, ownership of affordable homes can again become a foundation for American families.

The U.S. Senate Banking Committee is working to overhaul the housing-finance system, after casting a narrow vote this month to advance a bill that would wind down Fannie Mae and Freddie Mac. Current shareholders of Fannie Mae and Freddie Mac would be in line behind the U.S. for compensation from the wind-down. Restructuring the mortgage market is the largest piece of unfinished U.S. business from the 2008 credit crisis, when regulators seized Fannie Mae and Freddie Mac as they neared insolvency. The companies, which buy mortgages and package them into securities, were bailed out with $187.5 billion from the Treasury and backed a growing share of mortgages as private capital dried up.

Traders asleep at the wheel?

• An Incredible Explanation For The Relentless Stock Rally (Yahoo!)

Cal Ripken’s 2,632 consecutive starts. DiMaggio’s 56 straight games with a hit. Those streaks pale in comparison to what’s happening in the market right now. That’s because the S&P has gone 468 days since experiencing a correction of 10% or more. That’s the fourth longest streak on record, according to Newedge. Still not impressed? How about this: The S&P hasn’t closed below its 200-day moving average in over 18 months. Waiting for the correction has become an absurdist activity, the financial equivalent of “Waiting for Godot.” “We’ve been above trend for far too long. It’s been four years since we’ve had a close below the 150-day moving average. We have to go back to 2003 – 2007 to find a similar run,” said Rich Ross of Auerbach Grayson. “The stage is set for a serious 10% correction. Maybe even 20%”.

Of course, identifying the catalyst for said correction has been a near impossible task for most market participants. But some are starting to point to the composition of the recent leg of the run as a warning sign. “We’ve had a defensive rally all year long,” said Chantico Global’s Gina Sanchez. “Defensive stocks continue to be the better bets, and the rotation continues into value. I don’t know what will be the straw that breaks the camel’s back, but the pace of earnings can’t continue to be stronger than the pace of the economic recovery.” Still, just because history or logic says something should happen doesn’t mean it will. And to some investors, there could be a simpler explanation for this decade’s unstoppable rally.

“As more portfolios become passive in nature, less attention is paid to the daily ups and downs for the news cycle for a given asset class. Suppression of volatility is a symptom of this,” wrote Josh Brown, CEO of Ritholtz Wealth Management. “People who attribute this purely to the Fed probably have it half wrong.” According to Brown, assets under fee-based accounts have swelled to $1.3 trillion in 2013 from $200 billion in 2005. Most of this money is not being actively managed and is being put to work in a methodical, passive fashion each month. This provides a constant bid to the market as wealth managers become less incentivized to jump in and out of stocks and more rewarded to buy, and buy more. “This means a bias toward buying equities every day and almost never selling,” wrote Brown. “It means adding to stocks sheepishly on up days and voraciously on the (rarely occurring) down ones.”

No, really?

• Bank of England’s Bean Says Stimulus Exit May Be Difficult (Bloomberg)

Bank of England Deputy Governor Charlie Bean said policy makers face potential “potholes” when it comes to exiting the extraordinary stimulus measures they implemented during the recession, many of which put central banks into uncharted territory. “I do not expect central banks’ collective management of the exit from the present exceptionally stimulatory monetary stance will be easy,” Bean said in a speech in London yesterday. “Market interest rates are bound to become more volatile along the exit path, however well central banks communicate their intentions.”

The challenge of how and when to remove stimulus is one that Bean won’t have to face, as he retires at the end of next month after a 14-year career at the BOE. Governor Mark Carney said last week that while the U.K. is moving closer to a point that it will need tighter policy, the inflation outlook and the need to use up more spare capacity in the economy weigh against an immediate increase in the key interest rate. With the benchmark at record-low 0.5% and the recovery strengthening, U.K. policy makers are battling rate-increase expectations. Bean echoed language the BOE used in its Inflation Report last week, saying that when it comes time to begin rate increases, the Monetary Policy Committee will move “gradually.”

Zzzzz.

• Germany Finance Watchdog Finds Evidence Of Forex Manipulation (Reuters)

Germany’s financial watchdog has discovered clear evidence that market participants attempted to manipulate reference currency rates, widening the probe to include many more banks and saying international investigations into the matter were far from over. Regulators globally are looking at traders’ behaviour on key benchmarks, spanning interest rates, foreign exchange and commodities. Eight financial firms have been fined billions of dollars for manipulating reference interest rates, and the probe into the largely unregulated $5.3 tn-a-day foreign exchange market could prove even costlier. The head of banking supervision at German watchdog Bafin, Raimund Roeseler, said the latest discoveries in the forex probe were worrying and it was “much, much bigger” than the investigation into benchmark interest rates, such as Libor.

“There were clearly attempts to manipulate prices, that’s what was disturbing,” Roeseler said on Tuesday at the regulator’s annual news conference. Market participants had attempted to manipulate daily fixing rates for a number of different currencies, he said without specifying what evidence had been gleaned. “It’s not the really big currencies, not the dollar/euro, but several currencies were involved,” he said, noting the Mexican peso was one of the currencies involved. More than 30 foreign exchange traders at many of the world’s biggest banks have already been put on leave, suspended or fired as forex probes in various countries expand.

The Germans are not entirely blinded yet. But they have 27 other nations they must lead.

• Bundesbank Warns Market Calm Hides Risks Of Low Interest Rates (Bloomberg)

New risks to financial stability could emerge from the combination of generous central bank policies and investors’ search for yield in a low-interest rate environment, Bundesbank board member Andreas Dombret said. “We do see risks, despite the fact that the markets are calm,” Dombret said in an interview in Frankfurt yesterday. “Real-estate markets in some European countries are pretty high, corporate bond valuations seem stretched and high. The low volatility leads to market participants thinking that they don’t need to hedge.”

Record-low yields on debt from Spain to Ireland are adding to evidence that investors are leaving the euro area’s debt crisis behind them, and Germany’s DAX Index of stocks is near an all-time high. Even so, consumer prices are proving slow to pick up, prompting the European Central Bank to consider adding yet more stimulus as soon as next month. A risk measure that that uses options to forecast fluctuations in equities, currencies, commodities and bonds fell to its lowest level in almost seven years last week. Bank of America Corp.’s Market Risk Index dropped to minus 1.22 on May 14, the lowest level since June 2007. The measure was at minus 1.19 yesterday.

Dombret, 54, will this month take charge of banking and financial supervision at Germany’s Bundesbank, after previously leading the financial stability department. His new role gives him a seat on the ECB’s Supervisory Board, which will be responsible from November for overseeing about 130 euro-area banks. A challenge facing the ECB is bringing order to the array of models for assessing risk deployed by the region’s lenders. Dombret said regulators shouldn’t attempt completely to harmonize those models. “If we unify risk models this could lead to herd behavior, with all those negative effects, and would also exclude the institute-specific measures, which are important for diversity,” he said. “I am a big believer in continuing to use risk models, and counter-checking them with leverage ratios.”

Europe’s faking it all the way.

• Europe’s Debt Time Bomb (Bloomberg)

One of the consequences of the European debt crisis is that some of the region’s biggest borrowers will face big debt repayments sooner than they might have otherwise. In simple terms, Spain and Italy found it easier and cheaper to take out short-term loans, rather than longer-term funding. The result, though, is a repayment hump in 2015 that will need to be financed with fresh debt sales. Here’s a chart of the how the average length of time until Italy’s debts come due has changed year by year:

In the first quarter of 2011, Italy had an average of 7.25 years to repay its debts. As it sold more debt with shorter maturities, that average has dropped to 6.27 years.

Here’s the same chart for Spain:

In the first quarter of 2010, Spain had an average of 6.51 years to repay its debts. That figure is down to 5.76 years.

Could get nice if the elections this week turn sour.

• Are European Bonds Signaling Trouble? (CNBC)

The quick move higher in the yields of Europe’s weakest sovereigns from historic lows may be just the beginning and on the edges it could start to affect other low-rated credits where investors have hunted for yield—such as U.S. junk bonds. Driven by speculation about the European Central Bank and selling by major investors, the prices of peripheral European bonds have been weakening since last week. As a result, the yields of sovereigns—Spain, Italy, Greece, Portugal and Ireland—have all moved higher, while the core German bund yield has edged just slightly higher. The 10-year Spanish bond, for instance, was yielding 3.008% Tuesday, after reaching a low of 2.832% last Thursday, its lowest level in 20 years. As investors sell, Greece’s 10-year yield is creeping back toward 7%, after making a four-year low of 5.85% in April.

“I think this has more room to go. It’s been about a year in the making. We’ve barely seen much of it yet,” said Marc Chandler, chief currency strategist at Brown Brothers Harriman. “Some large funds like BlackRock have indicated they are beginning to take profits on it. Then the EU and IMF expressed concern that those bond market rallies were not going to be sustainable.” Trader chatter has increased about the fact the selloff in Europe could lead to more caution about risk exposure in other areas of global fixed-income markets. “While there’s not been wholesale selling and aggregate index performance has turned in solid results, underlying trends suggest a consolidation in risk exposure,” said Adrian Miller, director fixed-income strategy at GMP Securities.

• Moody’s Turns Negative On China Property (CNBC)

Moody’s joined the drumbeat of pessimism on China’s property industry, cutting its outlook to negative from stable, but it still expects most rated developers’ finances will remain on an even keel. “We expect a significant slowdown in residential property sales growth, high inventory levels and weakening liquidity over the coming 12 months,” Moody’s said in a report Wednesday. “A differentiation in the credit quality of developers will become more apparent.” Concerns that China’s property market is a popping bubble recently moved to the front burner, with home sales in the four months ended April down 9.9%, after slumping 7.7% in the first quarter. Property is estimated to account for around 20% of the mainland’s gross domestic product (GDP).

• Money Won’t Come Cheap For China Banks’ $120 Billion Funding Spree (Reuters)

Chinese banks are poised to raise a record $120 billion in the next two years to shore up their balance sheets in the face of slowing growth and rising bad debts, but the funds could prove expensive and hurt earnings as investors demand a premium. For the first time, banks will raise capital by issuing preference shares and other so-called hybrid securities, a funding technique that avoids the need for issuing ordinary shares into a badly hit stock market. Just in the past two weeks, Agricultural Bank of China and Bank of China announced plans to raise about $29 billion in preferred shares between them. As growth slows and bad debts build up, the banks are rushing to replenish their balance sheets to meet new global capital rules known as Basel III.

The Chinese government has been rigorously enforcing these regulations in its efforts to ward off a financial crisis following a huge run-up in debt since 2008 and a marked slowdown in the economy. Analysts say the flood of regulatory capital will help investors diversify their portfolio, but they are expected to drive a hard bargain given the concerns about transparency in China’s opaque financial system and the worrying rise of toxic debt in recent years. “Given the size of the proposed capital issues and the concerns about transparency in the Chinese banking system, it may be hard to price aggressively versus the western structures currently out there,” said Ivan Vatchkov, chief investment officer of Algebris Investments (Asia).

The first few deals should give banks an idea of returns that investors will demand on hybrid capital securities. China CITIC Bank International, a Hong Kong-based affiliate of China CITIC Bank , in April sold capital securities in the offshore market at an interest rate about 100 basis points over the same bank’s subordinate bonds. Benchmark five-year subordinate debt from China’s top-rated banks currently trades at a yield of 5.25%, suggesting banks will have to price yields at around 6.3% for preferred shares to lure investors – a side effect of an economy growing at its slowest pace in decades. Some analysts warn that forcing banks to pay hefty yields on new hybrid capital instruments would not only pressure their profitability, but also threaten their ability to continue lending aggressively as bad loans rise in a slowing economy. Chinese banks’ non-performing loan figures rose to a two-year high at the end of 2013, according to official data.

The amount means nothing. Trading restrictions are the clincher.

• BNP Falls as US Probe Said to Cost More Than $5 Billion (Bloomberg)

BNP Paribas fell to a seven-month low in Paris on concern U.S. authorities will seek more than $5 billion from the bank to settle a probe into alleged violations of U.S. sanctions. The stock fell as much as 3% and was down 2.7% at 50.39 euros as of 9:03 a.m., the lowest since Oct. 1. U.S. authorities are seeking the penalty to settle federal and state investigations into the lender’s dealings with countries including Sudan and Iran, according to a person with knowledge of the matter. The amount sought has escalated and now far exceeds the $2.6 billion that Credit Suisse agreed to pay in a settlement with the U.S. for helping Americans evade taxes. Discussions are continuing and the final number could change, the person said.

Last week, four people with knowledge of the matter told Bloomberg News that U.S. authorities were asking for at least $3.5 billion to settle the BNP case. As they did with Credit Suisse, U.S. prosecutors are seeking a guilty plea from BNP, which said last month it may need more than the $1.1 billion it has set aside to settle the case. The settlement, which would be the largest penalty for sanctions violations, could be announced as soon as next month, said the person, who asked not to be identified because a final decision hasn’t been made.

Wall Street getting rid of the competition?

• BNP Paribas Risks Client Flight as Ban on Transfers Looms (Bloomberg)

Credit Suisse Group emerged from a guilty plea this week relatively unscathed. The punishment that prosecutors are now holding over BNP Paribas’s head could have more severe consequences. A temporary ban on transferring money into and out of the U.S., floated by New York’s Superintendent of Financial Services Benjamin Lawsky, would be in addition to more than $5 billion in fines and a guilty plea to criminal charges for violating U.S. sanctions, according a person with knowledge of the talks. No similar punishment targeting a business was imposed when Credit Suisse’s main bank subsidiary admitted helping U.S. citizens evade taxes.

Regulators haven’t determined how harsh the BNP Paribas prohibition would be, according to one of the people who asked not to be identified because the negotiations are private. If the French lender isn’t allowed to pay another bank to provide the service, it could push some customers to competitors. “When your client has to go to a rival bank to get the most basic banking service, even for a few months, you’ll lose them,” said Fred Cannon, New York-based head of research at Keefe, Bruyette & Woods Inc. “Not all, but some will take their business completely to that rival and not come back.”

• German Unease With ECB Simmers as Anti-Euro Party Gains (Bloomberg)

Lawmakers from Chancellor Angela Merkel’s party are criticizing European Central Bank policies as a German anti-euro party gains support before elections across Europe this week. Misgivings by Finance Minister Wolfgang Schaeuble about the ECB’s threat of unlimited bond-buying and Merkel’s warning of “deceptive calm” in financial markets are the latest signs that German policy makers and economists don’t want to discount the lingering risk to taxpayers from the debt crisis.

As polls suggest the anti-euro Alternative for Germany may win as much as 7% of the German vote for the European Parliament on May 25, members of Merkel’s Christian Democratic Union in the Bundestag, or lower house, questioned the underpinnings of ECB President Mario Draghi’s pledge in July 2012 to do “whatever it takes” to save the euro. “The Bundestag would certainly have major concerns to clear the way for unlimited bond purchases by the ECB,” Norbert Barthle, the budget spokesman for the Christian Democrats in parliament, said by phone. “I said back then that the ECB is making itself strongly dependent on political decisions” because lawmakers in Berlin would have a say in the process if the central bank ever decided it wants to buy a euro-area country’s bonds as part of an aid package, he said.

This is presented as a good sign?!

• Lower Consumer Spending, Imports Shrink Japan Trade Deficit (Bloomberg)

Japan’s trade deficit shrank in April as imports rose the least in 16 months after the first sales-tax increase in 17 years crimped consumer spending. Inbound shipments rose 3.4% from a year earlier, the Ministry of Finance said today in Tokyo. Exports increased 5.1%, leaving a deficit of 808.9 billion yen ($8 billion), down 7.8% from a year earlier. Reductions in the nation’s trade deficits, which extended their record run to 22 months, would help Prime Minister Shinzo Abe’s efforts to drive a sustained economic recovery and an exit from deflation. So far, the nation’s export gains have been limited, even with a 17% slide in the yen against the dollar since he took office in December 2012.

“Imports boosted by front-loaded demand before the sales-tax hike dropped off in April,” Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo, said before the report. “We have to wait for exports to recover strongly before we will see a real drop in the trade deficit and that situation is still way out of sight,” said Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg. [..] Abe increased the sales levy to 8% in April from 5%, as he tries to contain the world’s biggest debt burden. An environmental tax on energy, which also took effect from April 1, undercut imports of oil and coal, according to Nomura Holdings Inc. economists led by Minoru Nogimori, writing in a research report before the data.

What if Chinese demand plunges?

• Russia, China Sign Long Awaited $400 Billion Mega Gas Deal (Reuters)

Russia’s state-controlled Gazprom signed a long-awaited gas supply agreement with energy-hungry China today. There were no pricing details on the deal, which is believed to involve Russia supplying 38 billion cubic metres of gas per year to China via a new eastern pipeline linking the countries. It has been unofficially valued at over US$400 billion. Alexey Miller, chief executive officer of OAO Gazprom, Russia’s biggest company, signed the contract with Chinese officials in Shanghai during a two-day visit to China by President Vladimir Putin, according to a Bloomberg report. The move comes as Moscow diversifies away from the European market – but the price for the deal has been a sticking point. In return, it would help to ease Chinese gas shortages and heavy reliance on coal.

Talks on the proposed 30-year contract between Gazprom and state-owned China National Petroleum Corporation began more than a decade ago. A tentative agreement signed in March last year calls for Gazprom to deliver the 38 billion cubic metres per year of gas beginning in 2018, with an option to increase that to 60 billion cubic metres. Analysts have previously said the agreement would give advantages for both sides and tie the two countries closer together. The gas deal would mean China would be in a “de facto alliance with Russia”, according to Vasily Kashin, a China expert at the Centre for Analysis of Strategies and Technologies in Moscow. In exchange, Moscow might lift restrictions on Chinese investment in Russia and on exports of military technology, Kashin said. “In the more distant future, full military alliance cannot be excluded.”

As I said. 1000 times.

• Green Cars Won’t Save the Planet(Bloomberg)

A massive polar ice cap seems to be melting. What are we going to do to stop it? The answer, as I’ve often posited in this space, is “likely nothing.” Oh, I don’t mean literally “nothing”; I’m sure people will continue to write angry editorials and buy “green” consumer products. But I don’t think we’re likely to do much in the way of actually reducing greenhouse-gas emissions, which contribute to the climate change that is melting the ice caps. A few weeks back, this drew a censorious e-mail from a longtime commenter who noted that he was making a serious commitment to emissions reduction by, among other things, buying a Chevrolet Volt. My response to him is that “buying a Volt” does not constitute getting serious about carbon emissions. The idea that we can save the planet while barely changing our consumption patterns is one of the reasons that we are not going to actually “get serious” about global warming.

Shell’s desperate defense from reality. Well, it’s a cover up mostly. Climate rules don’t matter, they’re simply running out of reserves.

• Shell Hits Back At ‘Carbon Bubble’ Claims (Guardian)

Shell has hit back at claims that its multi-billion dollar investments in tar sands, fracking and other unconventional oil and gas exploration will create a “carbon bubble” which may backfire catastrophically because of expected global climate change legislation. Previous research by economists, campaigners, and MPs has suggested that the majority of coal, oil and gas reserves of publicly listed companies, including Shell, are “unburnable” if the world is to have a chance of not exceeding global warming of 2C, the level governments have agreed to limit rises to. That is leading to a so-called carbon bubble, an overvaluation of oil companies’ financial value, they have said. But in a 20 page response to its shareholders who are meeting on Tuesday in The Hague, Netherlands, for the company’s annual meeting, Shell strongly refutes the criticism that it is vulnerable to such a bubble.

“Shell believes that the risks from climate change will continue to rise up the public and political agenda. We are already taking steps to minimise our emissions and we are preparing the company for when legislation and markets will support a more significant action to mitigate CO2,” said JJ Traynor, vice president of investor relations at Royal Dutch Shell. “We do not believe that any of our proven reserves will become stranded. While the ‘stranded asset’ notion may appear to be strong and thought-through, it does have some fundamental flaws and there is a danger that some interest groups use it to trivialise the important societal issue of rising levels of CO2 in the atmosphere,” he wrote.

Shell claimed that the methodology used by its critics was wrong because it failed to acknowledge that global energy demand was likely to increase with population growth and with increasing global prosperity. “As GDP rises in China and India… energy demand will increase on this journey,” said Traynor. “Energy demand growth, in our view, will lead to fossil fuels continuing to play a major role in the energy system – accounting for 40-50% of energy supply in 2050 and beyond. The huge investment required to provide energy is expected to require high energy prices and not the drastic price drop envisaged for hydro carbons in the carbon bubble concept”.

Nice piece.

• Just Imagine… If Russia Had Toppled The Canadian Government (RT)

Just imagine if the democratically-elected government of Canada had been toppled in a Russian-financed coup, in which far-right extremists and neo-Nazis played a prominent role. That the new unelected ‘government’ in Ottawa cancelled the law giving the French language official status, appointed a billionaire oligarch to run Quebec and signed an association agreement with a Russian-led trade bloc. Just imagine… If Russia had spent $5 billion on regime change in Canada and then a leading Canadian energy firm had appointed to its board of directors the son of a top Russian government politician.

Just imagine… If the Syrian government had hosted a meeting in Damascus of the ‘Friends of Britain’- a group of countries who supported the violent overthrow of David Cameron’s government. That the Syrian government and its allies gave the anti-government ‘rebels’ in Britain millions of pounds and other support, and failed to condemn ‘rebel’ groups when they killed British civilians and bombed schools, hospitals and universities. That the Syrian Foreign Minister dismissed next year’s scheduled general election in the UK as a ‘parody of democracy’ and said that Cameron must stand down before any elections are held.

Just imagine… If in 2003, Russia and its closest allies had launched a full-scale military invasion of an oil-rich country in the Middle East, having claimed that that country possessed WMDs which threatened the world and that afterwards no WMDs were ever found. That up to 1 million people had been killed in the bloodshed that followed the invasion and that the country was still in turmoil over 10 years later. That Russian companies had come in to benefit from the reconstruction and rebuilding work following the ‘regime change’.

Cool!

• Santa Cruz Becomes First California County To Ban Fracking (RT)

Santa Cruz County has become the first county in California to implement a “permanent” ban on hydraulic fracturing, or fracking, in addition to all other onshore oil and gas development. The county’s Board of Supervisors voted 5 to 0 on Tuesday to pre-emptively outlaw fracking in the county. “Some would say this is a symbolic gesture,” said Supervisor Bruce McPherson, according to KQED. “But I think it’s a message that needs to be sent out and listened to, especially on our quality of life and particularly about the impact it might have on our water supply, whether it occurs inside this county or in adjacent counties.”

Injection wells used to dispose of highly-toxic fracking wastewater have contributed to heightened earthquake activity across the nation. The wastewater – riddled with hazardous and often undisclosed chemicals and contaminants – has been linked to a host of human and environmental health concerns. A recent study found that some of the most drought-ravaged areas of the US are also heavily targeted for oil and gas development using fracking, which exacerbates water shortages. In California, 96 percent of new fracking wells were found to be located in areas where competition for water is high. A drought emergency for the entire state – which has traditionally dealt with water-sharing and access problems – was declared in January. The city of Santa Cruz instituted mandatory water rationing for residents last month.

Oh mother …

• French Rail Company Orders 2,000 Trains Too Wide For Platforms (Reuters)

France’s national rail company SNCF said on Tuesday it had ordered 2,000 trains for an expanded regional network that are too wide for many station platforms, entailing costly repairs. A spokesman for the RFF national rail operator confirmed the error, first reported by satirical weekly Canard Enchaine in its Wednesday edition. “We discovered the problem a bit late, we recognize that and we accept responsibility on that score,” Christophe Piednoel told France Info radio. Construction work has already begun to reconfigure station platforms to give the new trains room to pass through, but hundreds more remain to be fixed, he added.

The mix-up arose when the RFF transmitted faulty dimensions for its train platforms to the SNCF, which was in charge of ordering trains as part of a broad modernization effort, the Canard Enchaine reported. The RFF only gave the dimensions of platforms built less than 30 years ago, but most of France’s 1,200 platforms were built more than 50 years ago. Repair work has already cost €80 million ($110 million). Transport Minister Frederic Cuvillier blamed an “absurd rail system” for the problem, referring to changes made by a previous government in 1997. “When you separate the rail operator (RFF) from the user, SNCF, it doesn’t work,” he told BFMTV.