May 062020
 


Saul Leiter Phone call c1957

 

Don’t worry, we’re still talking virus, just from a slightly different angle. I was going to do something completely different, but then I saw an article at the South China Morning Post (SCMP) today that made me think “I don’t think that’s true”, realizing that at the same time many people would think it is.

Foreign holdings of US Treasuries are a misty environment for perhaps not just many, but most people. What triggered the SCMP piece is Trump’s threat, if it was ever meant to be one, to default on US dollar-denominated debt owned by China. Which by one estimate consists for about 70% of Treasuries.

And there are entire choirs full of voices willing to tell us that China can simply start dumping the -estimated- $1.2 trillion in Treasuries it holds, and threaten if not end the USD reserve currency status that way, if the US doesn’t “behave”. There’s little doubt that China would want this, but that doesn’t make the idea any more realistic.

What should give that away is, how easy can we make it for you, that it hasn’t done so yet. And now a conflict over the origin of a virus would trigger this? On a side note: if that origin is somewhere in China, even if it’s unintentional, how could Beijing possibly “admit” to it? How could it ever settle the lawsuits that would ensue?

No, the US cannot default on China’s holdings of its Treasuries. That alone would be a larger threat to the reserve currency status than anything anybody else could do, other then nuclear war. But at the same time, China cannot dump its Treasury holdings. because that would hurt … China.

And don’t forget that China and the US are in a symbiotic relationship of chief seller and chief buyer. Drastic changes in that relationship would -almost- certainly lead to consequences that neither can fully oversee, and that could hurt either or both tremendously.

Where are the US going to buy what they now buy from China? Who is China going to sell to what they today sell to the US? The countries are for all intents and purposes Siamese twins. Whatever can change, can only do so gradually. And even then.

No matter how much I read about it (a lot), this particular field is still not my expertise. But when I read the SCMP piece, it reminded me right off the bat of something that Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets, wrote on May 28 2019, in an update of an article he wrote in January 2018 (all pre-virustime).

I liked Michael’s take from the moment it was published, because I learned a lot. I think you might too. I can’t do this without some elaborate quotes, but at least that will make me shut up a little. Please bear with me. I don’t find the SCMP piece all that interesting, but it’s good as a failing counterweight to Pettis.

With all that in mind, let’s take the SCMP piece first:

 

China Could Cut US Debt Holdings In Response To White House COVID19 Compensation Threats

[..] White House officials have debated several measures to offset the cost of the coronavirus outbreak, including cancelling some or all of the nearly US$1.1 trillion debt that the United States government owes China. While analysts added that the US was highly unlikely to take the “nuclear option”, the mere fact that the idea has been discussed could well prompt Beijing to seek to insulate itself from the risk by reducing its US government debt holdings.

That, in turn, could spell trouble for the US government bond market at a time when Washington is significantly ramping up new issuance to pay for a series of programmes to combat the pandemic and the economic damage it is causing. “It’s such a crazy idea that anyone who has made it should really have their fitness for office reconsidered,” said Cliff Tan, East Asian head of global markets research at MUFG Bank. “We view this as largely a political ploy for [Donald Trump’s] re-election and a cynical one because it would destroy the financing of the US federal budget deficit.”

[..] any move to cancel the debt owed to China – effectively defaulting on it – would be counterproductive to US interests because it would likely destroy investors’ faith in the trustworthiness of the US government to pay its bills [..] The US Treasury two-year yield continued to trade near record low levels this week, suggesting market traders and fund managers are largely shrugging off what is widely seen as a far-fetched idea that the US could cancel some or all of China’s debt.

The whole idea that the US would default on its own Treasury debt is nonsensical. Why write about it? Is that only because you don’t understand what’s involved? And your editor doesn’t either?

Nevertheless, the news that the idea was discussed by top US officials is likely to raise concerns among Chinese leaders about the growing risks of holding a large amount of US government debt at a time when relations appear to be deteriorating rapidly, analysts said. Iris Pang, Greater China chief economist at ING Bank, said unless it had no choice, China would want to avoid quickly offloading its US government debt without first considering other punitive measures against the US.


[..] China could trigger a crash in the US dollar and financial markets by flooding the market with US Treasuries for sale, which would push down US bond prices and cause yields to spike. But that would also ignite a global financial catastrophe, hurting China as well. Instead, China could cut back or stop buying new US Treasury issues, which would gradually reduce its holdings of US government securities as old ones expire and are not replaced. “In the coming months, [China could] halt its Treasury purchases to send a clear signal of its intentions,” said Pang. “If it decides to do that, it could make actual sales [of its other holdings] at a later date.”

This is my central point here. The article says: “China could trigger a crash in the US dollar and financial markets by flooding the market with US Treasuries..”, and I don’t think that’s true. Yeah, they can do tariffs or buy less US soybeans, but then again, those have been linked by Trump to US purchases from China.

In the meantime, China may consider imposing tariffs of its own, or reducing its US agricultural purchases. China has agreed to buy an additional US$200 billion worth of US products and services over the next two years compared to 2017 levels as part of the phase one trade deal signed in January. [..] There have always been calls for China to diversify its US$3 trillion in foreign exchange reserve holdings, around one-third of which are held in US Treasuries. According to the latest US Treasury Department report, China’s holdings slipped to US$1.09 trillion in February from a peak of US$1.32 trillion in November 2013.


[..] “There’s a strong urge for countries like China, and Russia, to move away from US dollar settlements. This is simply because the US dollar can be weaponised by the US government,” said Xu Sitao, chief economist at Deloitte China, referring to the recent practise by the US government of cutting off foreign individuals, companies and governments from the global US dollar financial transaction settlement system, greatly complicating their ability to conduct business. “Clearly there’s more willingness for certain countries just to diversify and move away from US dollar settlements.”

Sure, but that’s old stuff, as old as the petrodollar. Still, the article supposedly deals with -life-during-and-after-COVID19. Has nothing changed? Well, perhaps not. But then why the article?

[..] David Chin, the founder of Basis Point Consulting, said China could be forced to toughen up its act if it no longer earned US dollars from its exports to the US because of a significant US-China decoupling. If that were to happen, China could sell its US Treasury holdings for yuan, seeking to engineer a collapse in the US dollar to end its status as the ruling currency. “Its ‘I die, you die harder’,” Chin said. “With no US export market, China would go the other way and rely on internal consumption, trade with Belt and Road countries and the rest of the world in their local currencies, and prepare to ‘eat bitter’ as local conditions worsen.”

If China doesn’t have the US as an export market, both go down, so I’m not sure why a news outlet would want to discuss this without providing the proper news “environment”. And anyway, it’s just not true. Here’s Michael Pettis very methodically putting the final nail in that coffin, and showing why the whole notion is just a load of crock.

 

China Cannot Weaponize Its US Treasury Bonds

China cannot sell off its holdings of U.S. government bonds because Chinese purchases were not made to accommodate U.S. needs. Rather, China made these purchases to accommodate a domestic demand deficiency in China: Chinese capital exports are simply the flip side of the country’s current account surplus, and without the former, they could not hold down the currency enough to permit the latter.

To see why any Chinese threat to retaliate against U.S. trade intervention would actually undermine China’s own position in the trade negotiations, consider all the ways in which Beijing can reduce its purchases of U.S. government bonds:

1) Beijing could buy fewer U.S. government bonds and more other U.S. assets, so that net capital flows from China to the United States would remain unchanged.

2) Beijing could buy fewer U.S. government and other U.S. assets, but other Chinese entities could then in turn buy more U.S. assets , so that net capital flows from China to the United States would stay unchanged.

3) Beijing and other Chinese entities could buy fewer U.S. assets and replace them with an equivalently larger amount of assets from other developed countries , so that net capital flows from China to the United States would be reduced, and net capital flows from China to other developedcountries would increase by the same amount.

4) Beijing and other Chinese entities could buy fewer U.S. assets and replace them with an equivalently larger amount of assets from other developing countries , so that net capital flows from China to the United States would be reduced, and net capital flows from China to other developing countries Beijing and other Chinese entities could buy fewer U.S. assets and not replace them by purchasing an equivalently larger amount of assets from other countries, so that net capital flows from China to the United States and to the world would be reduced.

These five paths cover every possible way Beijing can reduce official purchases of U.S. government bonds: China can buy other U.S. assets, other developed-country assets, other developing-country assets, or domestic assets. No other option is possible. The first two ways would change nothing for either China or the United States. The second two ways would change nothing for China but would cause the U.S. trade deficit to decline, either in ways that would reduce U.S. unemployment or in ways that would reduce U.S. debt.

Finally, the fifth way would also cause the U.S. trade deficit to decline in ways that would likely either reduce U.S. unemployment or reduce U.S. debt; but this would come at the expense of causing the Chinese trade surplus to decline in ways that would either increase Chinese unemployment or increase Chinese debt. By purchasing fewer U.S. government bonds, in other words, Beijing would leave the United States either unchanged or better off, while doing so would also leave China either unchanged or worse off. This doesn’t strike me as a policy Beijing is likely to pursue hotly, and Washington would certainly not be opposed to it.

I always thought this was a crystal clear explanation of what lies behind the threats that are continually uttered from both sides. One half of a Siamese twin can stab or poison the other, but what would be the outcome of that? And Pettis has more, and then much more at the link.

[..] Even if Beijing forced institutions like the People’s Bank of China to purchase fewer U.S. government bonds, such a step cannot credibly be seen as meaningful retaliation against rising trade protectionism in the United States. As I have showed, Beijing’s decision would have no impact at all on the U.S. balance of payments, or it would have a positive impact.

It would have almost no impact on U.S. interest rates, except to the extent perhaps of a slight narrowing of credit spreads to balance a slight increase in riskless rates. It would also have no impact on the Chinese balance of payments in the case that it leaves the U.S. balance of payments unaffected. To the extent that it would result in a narrower U.S. trade deficit, there are only three possible ways this might affect the Chinese balance.

First, China could export more capital to developed countries, in which case the decision would have no immediate impact on China’s overall balance of payments, but it would run the risk of angering its trade partners and inviting retaliation. Second, China could export more capital to developing countries, in which case the decision would have no immediate impact on China’s overall balance of payments, but it would run the very high risk of increasing its investment losses abroad. Or third, China could simply reduce its capital exports abroad, in which case it would be forced into running a lower trade surplus, which could only be countered, in China’s case, with higher unemployment or a much faster increase in debt.

The US cannot default on its debt because its reserve currency status would be shot. Trump knows that and still throws it out there. So what do you do as a serious journalist? Repeat that without as much as a question mark?

In the same vein, China cannot sell its USD-denominated assets, or at least not at any meaningful kind of pace. So what do you do as a serious journalist? You claim that it can?

 

 

 

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Mar 192020
 


DPC Cab stand at Madison Square, NY c1900

 

‘A Generation Has Died’ (G.)
Scientists Say Mass Tests In Italian Town Have Halted COVID-19 (G.)
Japanese Flu Drug ‘Clearly Effective’ Against Coronavirus, But.. (G.)
UK Failures Over COVID-19 Will Increase Death Toll, Says Leading Doctor (G.)
Asian Nations Face Second Wave Of Imported Cases (BBC)
Dollar Resumes Ascent As Investors Panic, Scramble For Cash (R.)
Cash Is King As Emergency Stimulus Fails To Stop Market Panic (R.)
Misunderestimate: Banks Are Going To Drown In An Ocean Of Defaults (Black)
Airline Industry Turmoil Deepens As Coronavirus Pain Spreads (R.)
The COVID-19 Crisis Is A Chance To Do Capitalism Differently (Mazzucato)
Russia Coronavirus Disinformation Designed To Sow Panic In West – EU (R.)
‘Putin’s Chef’ Threatens To Sue US Over Charges Of 2016 Election Meddling (G.)
Ghislaine Maxwell Sues Jeffrey Epstein’s Estate Over Legal Fees (BBC)

 

 

 

Cases 221,934 (+ 19,664 from yesterday’s 202,270)

Deaths 8,999 (+ 987 from yesterday’s 8,012)

 

From Worldometer yesterday evening (before their day’s close)

 

 

From Worldometer -NOTE: mortality rate briefly touched 10% –

 

 

From SCMP: (Note: the SCMP graph was useful when China was the focal point; they are falling behind now)

 

 

From COVID2019.app: (New format lacks new cases and deaths)

 

 

I wanted to show you how widespread the virus has become. Worldometer keeps a constantly updated record of new cases and deaths every day. Here is the harvest of just the past 10 hours; I left out the sources, go to their site for those.

• 1 new case in Sweden
• 5 new cases in Sri Lanka
309 new cases and 7 new deaths in Belgium
• 12 new cases in Bahrain
• 35 new cases in Norway
756 new cases and 3 new deaths in Germany
• 10 new cases in Tunisia
• 245 new cases and 2 new deaths in Spain
• 10 new cases in Peru
• 22 new cases in Pakistan
• 12 new cases in Armenia
• 104 new cases and 2 new deaths in Switzerland
• 2 new cases in Lithuania:
• 28 new cases in Finland
• 3 new cases in Tanzania
• 3 new cases in the State of Palestine
• 4 new cases in Bangladesh
• 4 new cases in Guam
• 5 new cases in Brunei Darussalam
• 1 new death in Greece
• 13 new cases and 1 new death in Croatia
• 4 new cases in Morocco
• 6 new cases in Bosnia and Herzegovina
• 15 new cases in the Philippines
• 7 new cases and 1 new death in Algeria
75 new cases and 2 new deaths in Denmark
• 2 new cases in Ghana
113 new cases in Australia (NSW), including a 6-year-old child
• 6 new cases in Slovakia
• 7 new cases in the DR Congo
• 6 new cases in Lebanon
96 new cases in Israel
• 132 new cases and 2 new deaths in Luxembourg

• 15 new cases in Latvia
• 50 new cases in Czechia
1st death in Russia
• 110 new cases in Malaysia

• 14 new cases in Faeroe Islands
• 6 new cases in Kuwait
• 1 new case in Cuba: a Canadian citizen
60 new cases in Thailand
• 82 new cases and 6 new deaths in Indonesia

• 18 new cases in Poland
• 8 new cases in Kazakhstan
1st death in Mexico
• 197 new cases and 1 new death in Austria

• 3 new cases in Bangladesh
• 8 new cases in Serbia
• 2 new cases in Sri Lanka
• 5 new cases in India
• 15 new cases in Hungary
• 2 new cases in Georgia
• 8 new cases in Taiwan
• 2 new cases and 1 new death in Bulgaria
• 5 new cases in Uzbekistan
• 5 new cases in Armenia
205 new cases and 5 new deaths in the United States
• 9 new cases and 3 new deaths in Japan
• 3 new cases in Honduras
• 2 new cases in Trinidad and Tobago
• 1 new case in French Polynesia
• 1 new death in Argentina
1st case in Nicaragua
• 1st case in El Salvador
• 1st case in Fiji

• 1 new death in Curaçao.
• 9 new cases in Colombia
152 new cases and 7 new deaths in South Korea
• 8 new cases in New Zealand
• 34 new cases, 8 new deaths (all in Hubei) in China

 

 

Time to wonder about mental health as well.

‘A Generation Has Died’ (G.)

Coffins awaiting burial are lining up in churches and the corpses of those who died at home are being kept in sealed-off rooms for days as funeral services struggle to cope in Bergamo, the Italian province hardest hit by the coronavirus pandemic. As of Wednesday, Covid-19 had killed 2,978 across Italy, all buried or cremated without ceremony. Those who die in hospital do so alone, with their belongings left in bags beside coffins before being collected by funeral workers. In Bergamo, a province of 1.2 million people in the Lombardy region, where 1,640 of the total deaths in the country have taken place, 3,993 people had contracted the virus by Tuesday. The death toll across the province is unclear, but CFB, the area’s largest funeral director, has carried out almost 600 burials or cremations since 1 March.

“In a normal month we would do about 120,” said Antonio Ricciardi, the president of CFB. “A generation has died in just over two weeks. We’ve never seen anything like this and it just makes you cry.” There are about 80 funeral companies across Bergamo, each receiving dozens of calls an hour. A shortage of coffins as providers struggle to keep up with demand and funeral workers becoming infected with the virus are also hampering preparations. Hospitals have adopted more stringent rules regarding the handling of the dead, who need to be placed in a coffin straight away without being clothed due to the risk of infection posed by their bodies. “Families can’t see their loved ones or give them a proper funeral, this is a big problem on a psychological level,” said Ricciardi. “But also because many of our staff are ill, we don’t have as many people to transport and prepare the bodies.”

For those who die at home, the bureaucratic process is lengthier as deaths need to be certified by two doctors. The second is a specialist who would ordinarily have to certify the death no later than 30 hours after a person has passed away. “So you have to wait for both doctors to come and at this time, many of them are also ill,” added Ricciardi. Stella, a teacher in Bergamo, shared the story of one of the deceased with the Guardian. “Yesterday, an 88-year-old man died,” she said. “He’d had a fever for a few days. There was no way to call an ambulance because the line was always busy. He died alone in his room. The ambulance arrived an hour later. Obviously, nothing could be done. And since no coffins were available in Bergamo, they left him on the bed and sealed his room to keep his relatives from entering until a coffin could be found.”

Adding to the torment is the fact that relatives cannot visit their loved ones in hospital, or give them proper funerals. “Usually you would be able to dress them and they would stay one night in the family home. None of this is happening,” said Alessandro, whose 74-year-old uncle died in Codogno, the Lombardy town where the outbreak began. “You can’t even see them to say goodbye, this is the most devastating part.” The harrowing impact of the virus on Bergamo can be gleaned from the obituary section of the local newspaper L’Eco di Bergamo. On Friday, reader Giovanni Locatelli shared online footage comparing the newspaper’s obituary section on 9 February, when listings took up just one page, to a copy dated 13 March, when 10 pages were needed to commemorate the dead.

Read more …

Test? Where do I get one?

Scientists Say Mass Tests In Italian Town Have Halted COVID-19 (G.)

The small town of Vò, in northern Italy, where the first coronavirus death occurred in the country, has become a case study that demonstrates how scientists might neutralise the spread of Covid-19. A scientific study, rolled out by the University of Padua, with the help of the Veneto Region and the Red Cross, consisted of testing all 3,300 inhabitants of the town, including asymptomatic people. The goal was to study the natural history of the virus, the transmission dynamics and the categories at risk. The researchers explained they had tested the inhabitants twice and that the study led to the discovery of the decisive role in the spread of the coronavirus epidemic of asymptomatic people.

When the study began, on 6 March, there were at least 90 infected in Vò. For days now, there have been no new cases. “We were able to contain the outbreak here, because we identified and eliminated the ‘submerged’ infections and isolated them,” Andrea Crisanti, an infections expert at Imperial College London, who took part in the Vò project, told the Financial Times. “That is what makes the difference.” The research allowed for the identification of at least six asymptomatic people who tested positive for Covid-19. ‘‘If these people had not been discovered,” said the researchers, they would probably have unknowingly infected other inhabitants.

“The percentage of infected people, even if asymptomatic, in the population is very high,” wrote Sergio Romagnani, professor of clinical immunology at the University of Florence, in a letter to the authorities. “The isolation of asymptomatics is essential to be able to control the spread of the virus and the severity of the disease.” [..] the problems of mass tests are not only of an economic nature (each swab costs about 15 euros) but also at a organisational level. [..] Massimo Galli, professor of infectious diseases at the University of Milan and director of infectious diseases at the Luigi Sacco hospital in Milan, warned carrying out mass tests on the asymptomatic population could however prove to be useless. “The contagions are unfortunately constantly evolving,” Galli told the Guardian. “A man who tests negative today could contract the disease tomorrow.”

Read more …

Every day brings new stories of miracles. And then you read them.

Japanese Flu Drug ‘Clearly Effective’ Against Coronavirus, But.. (G.)

Medical authorities in China have said a drug used in Japan to treat new strains of influenza appeared to be effective in coronavirus patients, Japanese media said on Wednesday. Zhang Xinmin, an official at China’s science and technology ministry, said favipiravir, developed by a subsidiary of Fujifilm, had produced encouraging outcomes in clinical trials in Wuhan and Shenzhen involving 340 patients. “It has a high degree of safety and is clearly effective in treatment,” Zhang told reporters on Tuesday. Patients who were given the medicine in Shenzhen turned negative for the virus after a median of four days after becoming positive, compared with a median of 11 days for those who were not treated with the drug, public broadcaster NHK said.


In addition, X-rays confirmed improvements in lung condition in about 91% of the patients who were treated with favipiravir, compared to 62% or those without the drug. Fujifilm Toyama Chemical, which developed the drug – also known as Avigan – in 2014, has declined to comment on the claims. Shares in the firm surged on Wednesday following Zhang’s comments, closing the morning up 14.7% at 5,207 yen, having briefly hit their daily limit high of 5,238 yen. Doctors in Japan are using the same drug in clinical studies on coronavirus patients with mild to moderate symptoms, hoping it will prevent the virus from multiplying in patients. But a Japanese health ministry source suggested the drug was not as effective in people with more severe symptoms. “We’ve given Avigan to 70 to 80 people, but it doesn’t seem to work that well when the virus has already multiplied,” the source told the Mainichi Shimbun.

Read more …

Not the first time we mention Richard Horton, editor-in-chief of the Lancet.

UK Failures Over COVID-19 Will Increase Death Toll, Says Leading Doctor (G.)

A “collective failure” to appreciate the enormity of the coronavirus pandemic and enact swift measures to protect the public will lead to unnecessary deaths, according to a leading doctor, who said the UK ignored clear warning signs from China. Richard Horton, editor-in-chief of the Lancet, rounded on politicians and their expert advisers for failing to act when Chinese researchers first warned about a devastating new virus that was killing people in Hubei eight weeks ago. The team from Wuhan and Beijing reported in January that “the number of deaths was rising quickly” as the virus spread in China. They urged the global community to launch “careful surveillance” in view of the pathogen’s “pandemic potential”.


But writing in the Guardian, Horton said the warning was met with complacency in Britain, where for unknown reasons, medical and scientific advisers watched and waited. At the time, scientists advising ministers appeared to believe it could be treated like influenza, and that a “controlled epidemic” would generate “herd immunity” that would help protect the most vulnerable against the infection. The scenario called for upwards of 60% of the population to contract the virus. The government’s strategy changed dramatically on Monday when the prime minister announced that new modelling from Imperial College London demonstrated that more draconian measures were needed to slash the estimated death toll from 260,000 to about 20,000. Without those measures, which have transformed society, the NHS would be overwhelmed, leading to a situation that has driven a brutal death toll in Italy.

Read more …

Excuse me, but why do they let it happen? Once you’ve been through Wave 1, shouldn’t you know better than to let people travel abroad and come back?

Asian Nations Face Second Wave Of Imported Cases (BBC)

South Korea, China and Singapore are among the Asian countries facing a second coronavirus wave, spurred by people importing it from outside. China, where the virus first emerged, reported no new domestic cases on Thursday for the first time since it started recording numbers in January. But it reported 34 new cases among people recently returned to China. South Korea saw a jump in new cases on Thursday with 152, though it is not clear how many were imported. A new cluster there is centred on a nursing home in Daegu, where 74 patients have tested positive. On Wednesday, Singapore reported 47 new infections – of which 33 were imported, including 30 residents who had been infected abroad and brought the infection back.


In China, there were eight more deaths, all in the central province of Hubei and most of them in Wuhan. All three countries had been showing success in controlling domestic cases, but there is concern that increases elsewhere could unravel their progress. Much of the focus has now shifted to Europe and the US, but the new numbers signal that the outbreak is far from over in Asia. Malaysia’s senior health office on Wednesday begged people to “stay at home and protect yourself and your family. Please”. The country has tallied 710 people with the virus, many of them linked to one religious event in the capital, Kuala Lumpur, in February. “We have a slim chance to break the chain of COVID-19 infections,” Noor Hisham Abdullah, director general of Health Malaysia, said on Facebook. “Failure is not an option here. If not, we may face a third wave of this virus, which would be greater than a tsunami, if we maintain a ‘so what’ attitude.”

Read more …

Far as I can see, the dollar sold of a lot recently. But now people need dollars to pay off their losses.

Dollar Resumes Ascent As Investors Panic, Scramble For Cash (R.)

The dollar resumed its relentless climb against major currencies on Thursday as wild financial market volatility and worries over tightening liquidity triggered by the coronavirus pandemic sparked an investor flight into cash. Sterling teetered near the lowest since at least 1985 against the greenback. The Australian dollar skidded to a 17-year low, while the New Zealand dollar crashed to an 11-year low as investors dumped riskier assets. The euro briefly rose against the dollar and the pound after the European Central Bank announced a €750 billion asset-purchase programme in response to the coronavirus outbreak, but even this effort was overwhelmed by a stampede into the dollar.


Investors are selling what they can to keep their money in dollars due to the unprecedented amount of uncertainty caused by the virus epidemic, which threatens to paralyse large swaths of the global economy. “This is similar to what happened during the global financial crisis in that investors are even selling what are normally considered safe-haven assets,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo. “The logic is the biggest hedge against risk is holding your money in cash, so the dollar is being bought. Investor uncertainty is about as high as it can get.” [..] In some cases investors are unloading Treasuries and gold in order to keep their money in dollars. This has confounded many analysts because investors normally buy government debt and precious metals during times of uncertainty.

Read more …

Same as above. “We’re in this phase where investors are just looking to liquidate their positions..” We’re in the phase where they have to pay their gambling debts. “Investor” just sounds better than “gamblig addict”.

Cash Is King As Emergency Stimulus Fails To Stop Market Panic (R.)

The dollar surged and everything else was blown away on Thursday as emergency central bank measures in Europe, the United States and Australia failed to halt a fresh wave of panic selling. “There’s no buyers, there’s not much liquidity and everyone is just getting out,” said Chris Weston, head of research at Melbourne brokerage Pepperstone. Stocks, bonds, gold and commodities fell as the world struggles to contain coronavirus and investors and businesses scramble for hard cash. U.S. stock futures were a hair’s breadth from hitting session down limits. The growth-sensitive Australian dollar was crushed 4% to a more than 17-year low. Nearly every stock market in Asia was down and circuit breakers were hit in Seoul, Jakarta and Manila.

Traders reported huge strains in bond markets as distressed funds sold any liquid asset to cover losses in stocks and redemptions from investors. Benchmark 10-year sovereign bond yields in Australia, New Zealand, Malaysia, Korea and Singapore and Thailand surged as prices tumbled. Gold fell 1% and copper hit its downlimit in Shanghai. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 5% to a four-year low, with Korea and Hong Kong leading losses. The Nikkei fell nearly 1%, the ASX 200 nearly 3%, while the Kospi lost 8% and the Hang Seng 5%. “We’re in this phase where investors are just looking to liquidate their positions,” said Prashant Newnaha, senior interest rate strategist at TD Securities in Singapore.

[..] J.P. Morgan economists forecast the U.S. economy to shrink 14% in the next quarter, and the Chinese economy to drop more than 40% in the current one, one of the most dire calls yet as to the scale of the fallout. “There is no longer doubt that the longest global expansion on record will end this quarter,” they said in a note. “The key outlook issue now is gauging the depth and the duration of the 2020 recession.”

Read more …

We could all write this by now.

Misunderestimate: Banks Are Going To Drown In An Ocean Of Defaults (Black)

On November 6, 2000, then US presidential candidate George W. Bush told a crowd of cheering supporters, “they misunderestimated me.” [..] ‘Misunderestimate’ seems to be a conflation of the words ‘misunderstand’ and ‘underestimate’. And while that was utterly hysterical 20 years ago when Bush first said it, ‘misunderestimate’ may be the most appropriate word of today. The entire world has completely ‘misunderestimated’ the Corona Virus. Banks are about to drown in an ocean of defaults. I’ll talk about this a lot more in the coming days, but briefly:

• There’s $250 TRILLION in global debt right now– mortgages, credit card debt, business loans, government debt, etc.
• And banks own a large portion of that debt.
• This virus crisis is going to trigger a wave of defaults from consumers, businesses, and even governments.
• Think about it: tourism alone makes up 10% of global GDP. Revenue in that entire sector– hotels, airlines, cruise ships, etc. has collapsed, and many of those companies aren’t going to survive.
• The crash in oil prices is going to wipe out countless oil companies.
• Many large retail chains, which were already struggling in the age of e-commerce, will likely declare bankruptcy.
• Countless businesses around the world have ‘temporarily’ closed due to public health policies, and many of them will go out of business entirely.
• MOST of these businesses owe lots of money to the banks, whether it’s a small business working line, or the $34 billion in debt that American Airlines owes. So the defaults are going to be massive.
• On top of that, millions of people are going to lose their jobs and be unable to make payments on their credit card debt, auto loans, and even mortgages.
• Again, there’s $250 trillion in global debt right now. Total bank capital worldwide is less than $10 trillion.
• So if the coming defaults trigger a mere 4% loss in total debt, it will exceed the entirety of global bank capital.
• And this doesn’t even take into consideration the impact of the $1 QUADRILLION derivatives exposure.

Misunderestimate? Absolutely.

Read more …

Why save something so bloated?

Airline Industry Turmoil Deepens As Coronavirus Pain Spreads (R.)

Airline industry turmoil deepened on Thursday as Qantas told most of its 30,000 employees to take leave and India prepared a rescue package of up to $1.6 billion to aid carriers battered by coronavirus, government sources said. The U.N.’s International Civil Aviation Organization called on governments to ensure cargo operations were not disrupted to maintain the availability of critical medicine and equipment such as ventilators, masks, and other health and hygiene items that will help reduce the spread of the coronavirus pandemic. Passenger operations have collapsed at an unprecedented rate as the virus spreads around the world, with Delta Air parking more than 600 jets, cutting corporate pay by as much as 50%, and scaling back its flying by more than 70% until demand begins to recover.

Shares in U.S. airlines fell sharply on Wednesday after Washington proposed a rescue package of $50 billion in loans, but no grants as the industry had requested, to help address the financial impact from the deepening coronavirus crisis. The Trump administration’s lending proposal would require airlines to maintain a certain amount of service and limit increases in executive compensation until the loans are repaid. American Airlines in a memo to staff rebuffed criticism that it had rewarded its shareholders with too many dividends and stock buybacks in better times, leaving it with less cash to manage the crisis. “Unfortunately, this is no ordinary rainy day,” said Nate Gatten, American’s senior vice president global government affairs. “These are extraordinary circumstances, and additional support is necessary to protect jobs and ensure that the flying public can continue to rely on our industry after the crisis ends.”

[..] Air Canada said it was gradually suspending the majority of its international and U.S. transborder flights by March 31. India is poised to join a growing list of countries offering aid to its aviation industry. The Finance Ministry is considering a proposal worth up to $1.6 billion that includes temporary suspension of most taxes levied on the sector, according to two government sources who have direct knowledge of the matter. New Zealand on Thursday outlined the first tranche of a NZ$600 million ($344 million) aviation relief package, including financial support for airlines to pay government passenger charges and cover air traffic control fees.

Read more …

Mariana Mazzucato is professor of economics at University College London.

I understand the temptation to theorize and wax enthusiastically about underlying systems, but isn’t it more useful to talk about how we can have 1 million tests per day by tomorrow morning?

The COVID-19 Crisis Is A Chance To Do Capitalism Differently (Mazzucato)

Since the 1980s, governments have been told to take a back seat and let business steer and create wealth, intervening only for the purpose of fixing problems when they arise. The result is that governments are not always properly prepared and equipped to deal with crises such as Covid-19 or the climate emergency. By assuming that governments have to wait until the occurrence of a huge systemic shock before they resolve to take action, insufficient preparations are made along the way. In the process, critical institutions providing public services and public goods more widely – such as the NHS in the UK, where there have been cuts to public health totalling £1bn since 2015 – are left weakened.

The prominent role of business in public life has also led to a loss of confidence in what the government can achieve alone – leading in turn to the many problematic public-private partnerships, which prioritise the interests of business over the public good. For example, it has been well documented that public-private partnerships in research and development often favour “blockbusters” at the expense of less commercially appealing medicines that are hugely important to public health, including antibiotics and vaccines for a number of diseases with outbreak potential. On top of this, there is a lack of a safety net and protection for working people in societies with rising inequality, especially for those working in the gig economy with no social protection.

But we now have an opportunity to use this crisis as a way to understand how to do capitalism differently. This requires a rethink of what governments are for: rather than simply fixing market failures when they arise, they should move towards actively shaping and creating markets that deliver sustainable and inclusive growth. They should also ensure that partnerships with business involving government funds are driven by public interest, not profit. First of all, governments must invest in, and in some cases create, institutions that help to prevent crises, and make us more capable to handle them when they arise. The UK government’s emergency budget of £12bn for the NHS is a welcome move. But equally important is a focus on long-term investment to strengthen health systems, reversing the trends of recent years.

Second, governments need to better coordinate research and development activities, steering them towards public health goals. Discovery of vaccines will necessitate international coordination on a herculean scale, exemplified by the extraordinary work of the Coalition for Epidemic Preparedness Innovations (CEPI).

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Unbelievable. More harmful than the virus. Or rather a virus in itself, one that kills slowly.

Russia Coronavirus Disinformation Designed To Sow Panic In West – EU (R.)

Russian media have deployed a “significant disinformation campaign” against the West to worsen the impact of the coronavirus, generate panic and sow distrust, according to a European Union document seen by Reuters. The Kremlin denied the allegations on Wednesday, saying they were unfounded and lacked common sense. The EU document said the Russian campaign, pushing fake news online in English, Spanish, Italian, German and French, uses contradictory, confusing and malicious reports to make it harder for the EU to communicate its response to the pandemic. “A significant disinformation campaign by Russian state media and pro-Kremlin outlets regarding COVID-19 is ongoing,” said the nine-page internal document, dated March 16…

“The overarching aim of Kremlin disinformation is to aggravate the public health crisis in Western countries…in line with the Kremlin’s broader strategy of attempting to subvert European societies,” the document produced by the EU’s foreign policy arm, the European External Action Service, said. An EU database has recorded almost 80 cases of disinformation about coronavirus since Jan. 22, it said, noting Russian efforts to amplify Iranian accusations online, cited without evidence, that coronavirus was a U.S. biological weapon. Most scientists believe the disease originated in bats in China before passing to humans. Kremlin spokesman Dmitry Peskov pointed to what he said was the lack in the EU document of a specific example or link to a specific media outlet.

“We’re talking again about some unfounded allegations which in the current situation are probably the result of an anti-Russian obsession,” said Peskov. The EU document cited examples from Lithuania to Ukraine, including false claims that a U.S. soldier deployed to Lithuania was infected and hospitalized. It said that on social media, Russian state-funded, Spanish-language RT Spanish was the 12th most popular news source on coronavirus between January and mid-March, based on the amount of news shared on social media. The European Commission said it was in contact with Google, Facebook, Twitter and Microsoft. An EU spokesman accused Moscow of “playing with people’s lives” and appealed to EU citizens to “be very careful” and only use news sources they trust.

[..] Russian media in Europe have not been successful in reaching the broader public, but provide a platform for anti-EU populists and polarize debate, analysis by EU and non-governmental groups has shown. The EEAS report cited riots at the end of February in Ukraine, a former Soviet republic now seeking to join the EU and NATO, as an example of the consequences of such disinformation. It said a fake letter purporting to be from the Ukrainian health ministry falsely stated here were five coronavirus cases in the country. Ukrainian authorities say the letter was created outside Ukraine, the EU report said. “Pro-Kremlin disinformation messages advance a narrative that coronavirus is a human creation, weaponized by the West,” said the report, first cited by the Financial Times.

It quoted fake news created by Russia in Italy – which is suffering the world’s second most deadly outbreak of coronavirus – alleging that the 27-nation EU was unable to effectively deal with the pandemic, despite a series of collective measures taken by governments in recent days.

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$50 billion.

‘Putin’s Chef’ Threatens To Sue US Over Charges Of 2016 Election Meddling (G.)

A businessmen allied with Vladimir Putin has said he will sue the US for $50bn (£41bn) in damages after prosecutors dropped charges of meddling in the 2016 elections. Yevgeny Prigozhin, often dubbed “Putin’s chef,” claimed in a statement on Tuesday that he had been “wrongfully persecuted” by US prosecutors who said his company Concord had funded an internet troll factory that had promoted Donald Trump’s candidacy during the US elections. The charges, which were filed by special counsel Robert Mueller following his nearly two-year investigation into Russian meddling, were abruptly dropped on Monday, a month before trial. Prosecutors said the Russian company had “no exposure to meaningful punishment” and that the prosecution risked exposing investigative sources and methods.


A day later, Prigozhin went on the attack, saying the dropped charges showed that the US government “feared publicity and just court proceedings”. “This means that the allegations that ‘Prigozhin interfered in the US presidential election,’ ‘Concord interfered in the US presidential election,’ or ‘Russia interfered in the US presidential election’ are mendacious and false,” said Prigozhin, according to the statement released by his company. Prosecutors had previously complained that documents they had provided to the defence had ended up online, and had been hesitant to deliver more sensitive information to Concord’s defence team. It is not clear whether the plans to file a lawsuit are serious, where the lawsuit will be filed, and why Prigozhin values the damages against him at $50bn. The company’s press office declined to give any more information about Prigozhin’s plans on Tuesday.

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Threats on her life. But not from the FBI.

Ghislaine Maxwell Sues Jeffrey Epstein’s Estate Over Legal Fees (BBC)

Ghislaine Maxwell, the former girlfriend of Jeffrey Epstein, is suing the late US financier’s estate seeking reimbursement for legal fees and security costs, court documents say. Ms Maxwell’s complaint states that she “had no involvement in or knowledge of Epstein’s alleged misconduct” and that he had promised to cover her costs. She also “receives regular threats to her life and safety”, it adds. [..] Ms Maxwell, a long-time friend of Epstein, has not been accused by the authorities of wrongdoing. Ms Maxwell’s lawsuit, which is dated 12 March but was made public on Wednesday, claims that “extensive global coverage” of the investigation resulted in her having to “hire personal security and find safe accommodation”. It adds that she “formed a legal and special relationship” with Epstein that obligated the estate to compensate her, and that “assurances” were made but later ignored after she filed a reimbursement claim in November.

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Aug 072019
 
 August 7, 2019  Posted by at 9:15 am Finance Tagged with: , , , , , , , , , , , , , ,  11 Responses »


Pablo Picasso Portrait of Dora with bun 1937

 

The Future Of Britain Is In The Hands Of Unelected Svengali Cummings (Oborne)
No-Deal Brexiteers Are Winning Because They Want It More (Sky)
UK Too Desperate To Secure US Trade Deal – Larry Summers (G.)
Brexit: Michael Gove Accuses ‘Wrong And Sad’ EU Of Intransigence (G.)
Met Police Examine Vladimir Putin’s Role In Salisbury Attack (G.)
China State Banks Seen Supporting Yuan In Forwards Market (R.)
Forget China, The Fed Has A Much Bigger Problem On Its Hands (ZH)
Papua New Guinea Asks China To Refinance Its National Debt (G.)
Chinese Port Plans Put Pacific Back In Play (R.)
Pentagon Set to Prevent “Unacceptable” Turkish Invasion Of Northern Syria (ZH)
The Mainstream Media Wants the Mifsud Story to Just Go Away (ET)
Epstein’s Mysterious Manhattan Apartment Building On East 66th Street (BI)

 

 

Conservative journalist/editor Peter Oborne says the exact same thing I said a few days ago in A Tale of Two Cummings. Boris Johnson is just a figurehead.

Nigel Farage is complaining that the Tories want him and his Brexit party to step aside, but that’s Cummings and his polls that show Farage is too unpopular.

The Future Of Britain Is In The Hands Of Unelected Svengali Cummings (Oborne)

Cummings is no longer in the shadows, operating behind the scenes — this Svengali is out in the open. Indeed, he seems to relish being seen in public, striding ostentatiously into Downing Street every morning. Now, we are all familiar with his shaven head, scruffy T-shirts, crumpled appearance and contemptuous and appraising eyes, his newspapers and bundles of documents carried in a Vote Leave bag. According to some papers, and many ministers and civil servants I have spoken to recently, this is the man who is truly running Britain. It’s Cummings who oversees the No 10 grid which controls the timing of announcements and public events. It’s in this capacity that he dispatches the PM up and down Britain, photographed in hospitals, sharing selfies with nurses, and on construction sites wearing a hard hat.


It is also Cummings, not Johnson, who determines political strategy — hence the huge public spending announcements on health, extra police and other issues. Indeed, it looks very much as if Johnson has become the public face of Cummings. And this, I am afraid, is profoundly disturbing. No one ever voted for Cummings, he has little experience of life outside politicking yet he has been given unprecedented power at a moment of immense crisis in the national fortunes. Within hours of Johnson becoming Tory leader two weeks ago, newly anointed special adviser Cummings called ‘his’ staff together in the magnificent Downing Street first-floor state room. He told them that he plans to deliver Brexit ‘by any means necessary’.

Read more …

Quoting Michael Jordan: “Some people want it to happen. Some wish it to happen. Others make it happen.”

No-Deal Brexiteers Are Winning Because They Want It More (Sky)

Consider this: we now have a prime minister and a government, buttressed by a not inconsiderable rump of the Conservative party, who have made it clear that there is not a convention they are not willing to break, an institution they are not willing to smash, a precedent they are not willing to burn, in the pursuit of their goal. The PM and his coterie have said that they would prorogue parliament because it might stand in their way; that they are willing to schedule an election far in excess of the usual time limits because it would ensure our exit on the 31 October. In so doing they would therefore go against yet more precedent in pursuing a highly tendentious policy during an election period (where normally a caretaker administration would do little of controversy).


And now, we have news that the prime minister would squat in Number 10 after he loses a confidence vote in the House of Commons. He is even willing to do so, apparently, if the Commons coalesces around an alternative prime minister, despite the fact the Cabinet Manual (the closest we have to a constitution) makes it clear that this is quite unacceptable and that it would risk the neutrality of the Queen. All of this would be constitutional vandalism. Brexit then, “whatever the cost”, as Dominic Cummings has said. It is a nihilistic vision of politics and indeed, a most unusual one for self-described “Conservatives” but it is, relentless and clear-sighted. Indeed, its recklessness has imbued this administration with a strange purpose and energy.

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Larry craves attention.

UK Too Desperate To Secure US Trade Deal – Larry Summers (G.)

The former US treasury secretary Larry Summers has said he does not believe that a “desperate” UK would manage to secure a post-Brexit trade deal with Washington, as Dominic Raab, the new foreign secretary, heads to the US to scope out the potential for such an agreement. Summers, who was a senior official under Bill Clinton and Barack Obama, said the UK was in a weak position when it came to negotiating with trade partners. He told BBC Radio 4’s Today programme on Tuesday: “Britain has no leverage, Britain is desperate … it needs an agreement very soon. When you have a desperate partner, that’s when you strike the hardest bargain.”


Despite warm words from Donald Trump about a trade deal, Summers said: “We have economic conflict with China and, even on top of that, the deterioration of the pound is going to further complicate the negotiating picture. “We will see it as giving Britain an artificial comparative advantage and make us think about the need to retaliate against Britain, not to welcome Britain with new trade agreements.” Even if the two countries could come to an agreement, Summers said, the UK was in a weak negotiating position. “Britain has much less to give than Europe as a whole did, therefore less reason for the United States to make concessions,” he said. “You make more concessions dealing with a wealthy man than you do dealing with a poor man.”

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The UK says the EU doesn’t want to talk, and vice versa. The demand to take the backstop out is a perfect dealbreaker. It can only lead to a no-deal Brexit. Re: Cummings.

Brexit: Michael Gove Accuses ‘Wrong And Sad’ EU Of Intransigence (G.)

Michael Gove has accused the European Union of intransigence over Brexit talks, calling it “wrong and sad”, as divisions between the UK and Brussels became further entrenched with the government seemingly intent on a no-deal departure. Gove, who is in charge of no-deal preparations, reiterated Boris Johnson’s position that the only route to progress would be the EU starting again with withdrawal negotiations, something Brussels has repeatedly and consistently ruled out. Adding to the impression of Johnson’s hardening position, newly released government read-outs of the prime minister’s phone calls with a series of EU leaders over recent days showed he delivered the same uncompromising message to them.

While the Irish prime minister, Leo Varadkar, insisted on Tuesday that a no-deal departure was not inevitable, both he and the country’s finance minister, Paschal Donohoe, warned of a significant and long-term change to relations between the countries if it did happen. Downing Street has increasingly pushed the message that Brexit will happen on 31 October under any circumstances – even intimating that No 10 believes the mandate of the 2016 Brexit referendum would overrule even a blocking vote in parliament.

There is increasing worry among some MPs that Johnson could try to force through a no-deal Brexit against the will of the Commons, with his de facto chief of staff, Dominic Cummings, reportedly threatening No 10 staff with the sack if they dissent. The government’s official position is still that it is seeking a formalised departure, albeit only if Brussels ditches the Irish backstop border insurance policy and reopens the withdrawal agreement.

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And of course Britain is anxious to keep the Skripal narrative going. In reality, all it would take is to present the man.

Met Police Examine Vladimir Putin’s Role In Salisbury Attack (G.)

Scotland Yard has examined the role of the Russian president, Vladimir Putin, in the novichok nerve agent attack in Salisbury, it has been revealed. Putin is assessed by UK intelligence agencies as having been “likely” to have approved of the attack in March 2018 on Sergei Skripal, a former Russian military officer, and his daughter, both of whom were left seriously ill but survived. Dawn Sturgess later died after coming across a discarded perfume bottle used by two Russian intelligence agents to carry the military grade nerve agent. Two Russian agents have been charged over the attack, and Britain wants them extradited and has issued a European arrest warrant (EAW) and Interpol red notice for their detention.


The Metropolitan police assistant commissioner Neil Basu, the head of UK counter-terrorism policing, said the investigation into the attack was continuing. Basu said the issues involved in bringing charges over the attack were complex. “You’d have to prove he [Putin] was directly involved,” he said. “In order to get an EAW, you have to have a case capable of being charged in this country. We haven’t got a case capable of being charged. “We’re police officers, so we have to go for evidence. There has been a huge amount of speculation about who is responsible, who gave the orders, all based on people’s expert knowledge of Russia. I have to go with evidence.”

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“The movement in forward points may reflect a tightening in USD (dollar) liquidity..”

China State Banks Seen Supporting Yuan In Forwards Market (R.)

China’s state banks have been active in the onshore yuan forwards market this week, using swaps to tighten dollar supply and support the Chinese currency, four sources with knowledge of the matter told Reuters. The spot value of the yuan has fallen sharply this week against the dollar as tensions between China and the United States escalated and prompted fears that their trade war could shift into a currency war. The sources said banks had conducted significant amounts of buy-sell swaps in the onshore market on Tuesday. Buy-sell swaps help to reduce the supply of dollars that the market can access to short-sell the yuan. “Yesterday big banks were all selling one-year onshore forward swaps, then in the afternoon the spot dollar-yuan fell,” said a trader at a foreign bank in Shanghai.


One state bank also was seen active in offshore forward swaps, two traders at foreign banks with knowledge of the matter said. On Wednesday, one-year onshore dollar-yuan forwards were at 175 points, down from 321 points on Monday, according to Refinitiv data. One-year offshore dollar-yuan forwards were at 459 points, down from 640 points on Monday. “The movement in forward points may reflect a tightening in USD (dollar) liquidity when some market participants need to buy spot dollars and sell them back in forwards. Meanwhile, the spot and outright moves were also partly due to a stabilization in RMB (yuan) sentiment on Tuesday,” said Frances Cheung, head of macro strategy for Asia at Westpac in Singapore.

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Liquidity.

Forget China, The Fed Has A Much Bigger Problem On Its Hands (ZH)

The Fed may have launched its first easing cycle since 2007 and liquidity-sapping quantitative tightening may finally be over, but Powell may have a much bigger problem on his hands – one which has nothing to do with China, and everything to do with a dramatic drain of liquidity in the market over the next two months.

We first hinted at this last week when we noted that as part of the recently completed debt ceiling deal, instead of taking its time in replenishing the cash balance (green line in the chart below), the US Treasury will scramble to rebuild its cash balance up to $350 billion, from today’s level of $133 billion (gray line), a process which as we said last Wednesday will “significantly tighten up liquidity in the banking system and potentially result in turmoil in funding and money markets as the world is flooded with an issuance of T-Bills” as the Treasury seeks to fill the $217 billion cash hole, which will lead to a substantial liquidity withdrawal from the broader financial system as shown in the following Nordea chart.

The problem, in a nutshell, is that traditionally such a rapid liquidity withdrawal leads to weaker risk appetite, a far stronger USD and lower treasury yields, while widening the LIBOR/OIS spread and further depressing the already negative EURUSD cross-currency basis. While we cautioned about all this last week (even before the FOMC announcement), it appears that our appreciation of just how severe this problem may be for the Fed and capital markets was overly optimistic, because according to a new analysis by Bank of America’s Mark Cabana, the Fed may have no choice but to resume Quantitative Easing and start expanding its balance sheet again – potentially as early as 4Q – in order to ease funding pressures expected during the coming wave of Treasury supply.

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Debt denominated in dollars by any chance?

Papua New Guinea Asks China To Refinance Its National Debt (G.)

Papua New Guinea has asked China to refinance its entire government debt in a blow to Australia’s attempts to counter China’s influence in the region. The request marks a “significant shift” in regional politics and PNG’s allegiances, according to Pacific experts. Australia has traditionally been the largest aid donor and most important ally of PNG, but in recent years ties between China and PNG have strengthened. PNG’s prime minister, James Marape, visited Australia two weeks ago at the invitation of his counterpart, Scott Morrison, in his first international visit since becoming the Pacific nation’s leader at the end of May.

In a speech during his visit, Marape said he wanted PNG to move away from an “aid-donor” relationship with Australia within 10 years, and step up alongside its neighbour as a leader in the Pacific region. However, on Tuesday, after a meeting with Xue Bing, the Chinese ambassador in Port Moresby, Marape requested that China refinance its debts of A$11.8bn (27bn kina, or US$7.95bn). PNG’s debt sits at around 32.8% of its GDP. “[The prime minister] requested the ambassador to inform Beijing on a bid to assist the government of PNG refinance its existing country’s K27bn debt,” said Marape’s office in a statement seen by the Guardian.

“He suggested that both the Bank of PNG and [China’s] People’s Bank will take the lead with the department of treasury in ensuring that consultations are under way,” the statement continued. “It suggest a significant shift in the relationship between Australia and Papua New Guinea and Papua New Guinea and China,” says Matthew Clarke, professor of international development at Deakin University. “In the past Australia would have been the natural country to turn to for this sort of refinancing, but now we see China’s place in the region shift and it becomes potentially a much more dominant player in the donor relationship.”

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“The United States, and allies including Japan, Australia and New Zealand, are actively expanding their diplomatic postings in the Pacific to counter China’s influence..”

Chinese Port Plans Put Pacific Back In Play (R.)

Early in the morning, before sunrise, low tide on the Samoan island of Savai’i reveals the remnants of an old American airstrip, washed away by decades of erosion, cyclones and tsunamis. The World War II site in Asau, which also hosts a 1960s-era concrete wharf in its well-protected natural harbor, is being considered for a new port to be developed by China, according to the Samoan government and the area’s highest ranking chief, Masoe Serota Tufaga. The proposed construction of a facility that could be turned into a military asset in hostile times has worried the United States and its regional allies, which have dominated international influence in the vast waters of the South Pacific since 1945.

Sitting at his coconut and cocoa plantation on the hills above the port site, Tufaga told Reuters he would abide by any government deal for a Chinese-developed port even though he was concerned about Beijing’s growing influence. “The government and China came here to look at it – they offered it,” said 71-year-old Tufaga, who has the final say over land-use agreements affecting Asau. “If China wants to operate this, it’s too hard for us to say to the government, no, we can not allow China here. The people are looking for some jobs. “That’s right – it’s money. It’s money.”

The United States, and allies including Japan, Australia and New Zealand, are actively expanding their diplomatic postings in the Pacific to counter China’s influence, and warning island nations that Beijing-funded projects needed to make financial sense. China is using “predatory economics” to destabilize the Indo-Pacific and the United States is working with its partners to address the region’s pressing security needs, U.S. Defence Secretary Mark Esper said in Sydney on Sunday.

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Erdogan bluff. I hope.

Pentagon Set to Prevent “Unacceptable” Turkish Invasion Of Northern Syria (ZH)

Turkey has for days been poised to unilaterally invade northern Syria over US objections, which Ankara officials say is to establish a 32 kilometer (20 mile) zone inside the war torn country, giving Turkey complete control of a region where the Syrian Kurdish YPG operates (People’s Protection Units). Turkey has long considered the US-backed group, which forms the core of the Syrian Democratic Forces (SDF), to be a terrorist extension of the outlawed PKK. The Pentagon has condemned the impending Turkish unilateral move, with US Defense Secretary Mark Esper telling reporters early Tuesday that it would be unacceptable and thwarted by Washington, though it’s unclear how far the Pentagon would be willing to go.

“What we’re going to do is prevent unilateral incursions that would upset, again, these mutual interests that the United States, Turkey and the SDF share with regard to northern Syria,” Esper said. Crucially, according to ABC News, US officials “have made clear that an invasion is an extremely risky venture that could threaten the safety of U.S. forces working with the SDF…”. On Sunday Turkish President Recep Tayyip Erdogan said that his forces would launch an operation in Syria east of the Euphrates River at an unspecified start date, and noted that the US and Russia had been notified. In ongoing negotiations this summer the US and Turkey have clashed over just such a “safe zone,” given Turkey wants the area completely clear of Kurdish armed groups, which the Pentagon simultaneously backs.

Turkish defense officials have lately threatened their “patience is limited” as the army builds up its forces along the border. The Foreign Ministry on Friday warned, “We won’t let this process be dragged out. If our expectations aren’t met, we are fully capable of taking whatever measures [are needed] to ensure our national security.”

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If Mifsud is an FBI asset, there are zero Russians left in the story.

The Mainstream Media Wants the Mifsud Story to Just Go Away (ET)

John Solomon of The Hill is reporting that an audiotape containing professor Joseph Mifsud’s deposition has been given to both U.S. Attorney John Durham’s investigators and to the Senate Judiciary Committee. “I can report absolutely that the Durham investigators have now obtained an audiotape deposition of Joseph Mifsud, where he describes his work, why he targeted George Papadopoulos, who directed him to do that, what directions he was given, and why he set that entire process of introducing Papadopoulos to Russia in motion in March of 2016, which is really the flashpoint the starting point of this whole Russia collusion narrative,” Solomon told Fox News’ Sean Hannity.

“I can also confirm that the Senate Judiciary Committee has also obtained the same deposition,” he said. Mifsud, who I have written about extensively in previous columns, is the key that turns the lock to the lid of this Pandora’s box that we refer to as “Spygate.” So I’m wondering why Solomon appears to be the only mainstream reporter pursuing this Mifsud story. I suspect it’s because many DNC Media outlets, after having fallen deeply and passionately in love with the Trump-Russia collusion hoax, are reluctant to call attention to something that would be the final nail in its coffin. The last thing the mainstream media wants right now would be for Mifsud to go on the record with both Durham’s investigative team and with Congress to say he was working for the FBI and was only pretending to be a Russian agent.

If Mifsud was an FBI asset sent to entrap Papadopoulos, then there are no real Russian agents anywhere in this entire Trump-Russia collusion story. Ponder what that means for a minute. You can’t save the Russian collusion narrative, if you can’t find any real Russians anywhere in the story. The FBI under James Comey will then be seen as having engaged in an operation to entrap people, and “Russian agents” turn out to be fakes working for the FBI and who were making fake offers of Russian help to the Trump campaign.

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But nobody knew a thing.

Epstein’s Mysterious Manhattan Apartment Building On East 66th Street (BI)

Before his extended stay in New York’s Metropolitan Correctional Center began in July, disgraced sex offender Jeffrey Epstein dwelled in some of the city’s most exclusive real estate, laying his head in a palatial Upper East Side townhouse and conducting his mysterious business out of a landmarked mansion on Madison Avenue. But it hasn’t been all private islands and 7,000-acre ranches for the half-billionaire. For decades Epstein has run some of his operations quietly out of a squat Second Avenue residential building owned by his brother, Mark Epstein, and frequently visited by the former Israeli Prime Minister Ehud Barak. According to property records and court filings, Jeffrey Epstein has long housed girlfriends, associates, employees, and businesses in a handful of units at 301 East 66th St.

There are 200 units at the address, and the majority of them are owned on paper by his brother’s development firm, Ossa Properties. While Ossa nominally owns the units connected to Jeffrey Epstein, the aforementioned records and filings show that Epstein effectively controls them. The postwar white-brick high-rise sits atop a nail salon, a coffee shop, and an Italian restaurant along a traffic-choked stretch of Second Avenue. Topped by a green canopy, the front door opens to a doorman guarding a hallway that leads to a light-filled lobby decorated with two couches and an armchair. Though the building shares a ZIP code with Epstein’s townhouse, its share of the neighborhood east of Park Avenue is less upscale, catering more to families and young professionals than foreign heads of state.

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Aug 172018
 
 August 17, 2018  Posted by at 9:37 am Finance Tagged with: , , , , , , , , , , ,  5 Responses »


Pablo Picasso Brick factory at Tortosa 1909

 

Emerging Markets and US Treasuries (Albert Edwards)
Asia the Next Source of Downside Systemic Risk for Financial Markets (WS)
Trump Says US ‘Will Pay Nothing’ To Turkey For Release Of Detained Pastor (R.)
Lira Rallies As Turkey Pledges Spending Cuts To Avoid IMF Bailout (G.)
Turkish Tremors Will Cause Shocks In Britain (Times)
$125,000: The Pension Debt Each Chicago Household Is On The Hook For (WP)
Russian Oil Industry Would Weather US ‘Bill From Hell’ (R.)
NATO Repeats the Great Mistake of the Warsaw Pact (SCF)
Italy’s NATO Racket… A Bridge Too Far (SCF)
Google Staff Tell Bosses China Censorship Is “Moral And Ethical” Crisis (IC)
Jury in Paul Manafort’s Case Asks Judge to Redefine ‘Reasonable Doubt’ (BBG)

 

 

From an email sent to Mish.

Emerging Markets and US Treasuries (Albert Edwards)

Turkey has discovered that high and rising foreign-denominated debt never sits well with a huge current account deficit and a reluctance to raise interest rates. The problem though is that this is not about Turkey or even EM. It is as always, about the Fed. When the most important person in the free world starts lobbing macro hand-grenades in an effort to drain the swamp, the financial markets will always eventually react badly. No, I am not talking about President Trump with his tweets about imposing tariffs on Turkey. I am actually talking about Fed Chair Jerome Powell draining the global liquidity swamp.

Make no mistake, whatever the macro-idiosyncrasies of Turkey, the key to the current turmoil that is spreading into EM generally, is Fed tightening and the strong dollar. As we have repeated ad infinitum, since 1950 there have been 13 Fed tightening cycles, 10 of them ended in recession and the others usually saw the EM blow up – such as the 1994 collapse in the Mexican peso. The Fed always tightens until something breaks. It is usually its own economy, but sometimes it is the EM’s. And when the liquidity tide goes out we always find out who is swimming naked. If it hadn’t been Turkey it would eventually have been someone else.

To be sure the unfolding EM crisis has been building for many years. And just as investors ignored the naysayers in the run-up to the Global Financial Crisis (GFC), they have ignored the IMF and BIS, who have been cautioning for some years about the explosive build-up in EM debt and especially dollar-denominated debt. According to the BIS, total dollar-denominated debt outside the U.S. reached $10.7 trillion in the first quarter of 2017, and about a third of this debt is owed by the EM nonfinancial sector. EM specialists, the Institute of International Finance (IIF), have also warned about this build-up in EM foreign-denominated debt. They too note that the EM corporate sector has been leading the explosion of debt, with Turkey standing out for the increase in its exposure since the GFC. Turkey has never managed to escape membership of ‘The Fragile Five’ EM country club.

 

Read more …

Dollar shortages.

Asia the Next Source of Downside Systemic Risk for Financial Markets (WS)

“Except for an expected short-term reprieve, we expect these tighter USD conditions to remain in place for the rest of the year,” the strategists write. “That is unless policy makers react soon to stimulate financial markets with liquidity.” “Southeast Asia stands out again as in 1997/8, with a large amount of USD denominated debt outstanding,” the write. “The only difference is then Asia had fixed exchange rates and now they are floating! We believe Asia will be the next source of downside systemic risk for financial markets.” The chart below shows dollar-denominated debt in the EMs, in trillion dollars. This does not include euro-denominated debt which plays a large role in Turkey. The fat gray area represents Asia without China:

Asia’s dollar-denominated debt, relative to its foreign exchange reserves and exports, has risen significantly since 2009, they note. The chart below shows the ratio between dollar-denominated debt and foreign exchange reserves in Asia, with China (green line) and without China (black dotted line). Values over 50% mean that there is more dollar-debt than foreign exchange reserves:

“This leaves these nations susceptible to a shortage in USDs,” they write: “Notably, the Asian nations that have amassed record amounts of USD debt are also home to the largest technology companies i.e. Tencent (China), Alibaba (China), TSNC (Taiwan), Samsung (South Korea). The tech sector is now 28% of the MSCI EM index. The rally in the US Dollar, dented global growth prospects, credit growth in China slowing down and escalating political tensions from the US leaves these nations very exposed to a shortage in USDs.”

Read more …

More sanctions. Yesterday’s relief is gone.

Trump Says US ‘Will Pay Nothing’ To Turkey For Release Of Detained Pastor (R.)

U.S. President Donald Trump said on Thursday the United States “will pay nothing” to Turkey for the release of detained American pastor Andrew Brunson, who he called “a great patriot hostage.” “We will pay nothing for the release of an innocent man, but we are cutting back on Turkey!” Trump said on Twitter. The U.S. warned Turkey on Thursday to expect more economic sanctions unless it hands over Brunson, as relations between the two countries took a further turn for the worse. U.S. Treasury Secretary Steven Mnuchin assured Trump at a Cabinet meeting that sanctions were ready to be put in place if Brunson was not freed. “We have more that we are planning to do if they don’t release him quickly,” Mnuchin said during the meeting.

The United States and Turkey have exchanged tit-for-tat tariffs in an escalating attempt by Trump to induce Turkish President Tayyip Erdogan into giving up Brunson, who denies charges that he was involved in a coup attempt against Erdogan two years ago. “They have not proven to be a good friend,” Trump said of Turkey during the Cabinet meeting. “They have a great Christian pastor there. He’s an innocent man.” Trump’s national security adviser, John Bolton, had issued a blunt warning to Turkish ambassador Serdar Kilic when he met him on Monday at the White House, an administration official said on Thursday. When Kilic sought to tie conditions to Brunson’s release, Bolton waved them aside and said there would be no negotiations.

Read more …

But that was yesterday. Today, the lira’s lost 4% already.

Lira Rallies As Turkey Pledges Spending Cuts To Avoid IMF Bailout (G.)

Turkey’s finance minister sparked a recovery in the lira after he addressed thousands of international investors, pledging to protect beleaguered local banks and cut public spending to prevent the country defaulting on its loans. Berat Albayrak, who has faced criticism for failing to tackle the country’s growing financial crisis, spoke to around 6,000 investors on a conference call to rebuff concerns that a funding squeeze on Turkey’s banks and a damaging trade war with the US would force him to seek a rescue bailout from the IMF. Albayrak, who was appointed as finance minister last month by his father-in-law, president Recep Tayyip Erdogan, said Turkey will not hesitate to provide support to the banking sector, which was capable of accessing funds itself during the current turmoil in financial markets.

He added that deposit withdrawals by panicked investors remained low and manageable. “We are experiencing unfavourable conditions but we will overcome,” he said. The Turkish lira was up 4% against the US dollar following the conference call and after reassuring words from the French president, Emmanuel Macron, and Germany’s chancellor, Angela Merkel, that Turkey’s stability was important. However, Albayrak’s attempt to shore up confidence in the lira was quickly undermined by the US Treasury secretary, Steve Mnuchin, who reportedly told president Donald Trump in a cabinet meeting that he was preparing further sanctions against Ankara. The lira slipped back to settle at just 1% up on the previous day.

Read more …

It’s not Spain or Italy. It’s Britain.

Turkish Tremors Will Cause Shocks In Britain (Times)

There are many strange things about Recep Tayyip Erdogan, but one of the oddest is his pet theory about interest rates. The Turkish president believes that high borrowing costs produce high inflation. “The interest rate is the cause and inflation is the result,” he said a few months ago. “The lower the interest rate is, the lower inflation will be.” No, you didn’t misread that. In defiance of economic orthodoxy (not to mention centuries of experience) which says that high interest rates tend to reduce inflation, President Erdogan believes the opposite. As one economist put it, this is a little like believing that umbrellas cause rain.

The Turkish president’s eccentric attitude towards monetary policy is not the only reason his country is now facing an economic crisis, but it is at least part of the explanation. Over the past decade or so, Turkey became one of the great bubbles of the modern era. Housing bubble? Check. Debt binge? Check. Yawning current account deficit? Check. Runaway inflation? Check. These traits alone qualified the Turkish economy for crisis candidacy some time ago. But as always, saying a country is due a crunch is far simpler than predicting when and how. And Turkey may well have muddled through a little longer were it not for four critical ingredients.

[..] Who is most exposed to this looming crisis? Conventional wisdom says Spain and Italy, whose banks have Turkish subsidiaries. However, this slightly misses the point, since much of that lending is in lira. Those banks should be able to survive even the loss of their stakes. The real question is: who has been lending Turkish companies all this foreign exchange debt? That brings us to the sting in the tail. For when you dig through Turkish treasury data, as the Deutsche Bank economist Oliver Harvey has, you discover that the country that lent most to Turkey, both short and long term, was the UK. That’s right: Britain, or more specifically the City of London, is by far the most exposed to a collapse in the Turkish economy.

Read more …

Creative accounting 101.

$125,000: The Pension Debt Each Chicago Household Is On The Hook For (WP)

Chicagoans have no idea how much pension debt Illinois politicians have saddled them with. Officially, Windy City residents are on the hook for $70 billion in total pension shortfalls from the city and its sister governments plus a share of Cook County and state pensions. But listen to Moody’s Investors Service, the rating agency that’s been most critical of Chicago’s finances, and you’ll get a different picture. Moody’s pegs the total pension debt burden for Chicagoans at $130 billion, nearly double the official numbers. (Yes, by chance the number is eerily similar to the official shortfall of $129 billion facing the five state-run pension funds. But don’t confuse the two.)

That’s scary news for Windy City residents. Barring real reforms, concessions from the unions or bankruptcy, Chicagoans can expect to be hit with whatever series of tax hikes politicians will try to enact to reduce that debt. That $130 billion is the total Moody’s calculates when adding up the direct pension debt owed by the city government, Chicago Public Schools, the park district and Chicago’s share of various Cook County governments and the five state pension funds. Moody’s takes a more realistic approach to investment assumptions than the city and county governments take.

Read more …

Russia’s had time to prepare.

Russian Oil Industry Would Weather US ‘Bill From Hell’ (R.)

Stiff new U.S. sanctions against Russia would only have a limited impact on its oil industry because it has drastically reduced its reliance on Western funding and foreign partnerships and is lessening its dependence on imported technology. Western sanctions imposed in 2014 over Russia’s annexation of Crimea have already made it extremely hard for many state oil firms such as Rosneft to borrow abroad or use Western technology to develop shale, offshore and Arctic deposits. While those measures have slowed down a number of challenging oil projects, they have done little to halt the Russian industry’s growth with production near a record high of 11.2 million barrels per day in July – and set to climb further.

Since 2014, the Russian oil industry has effectively halted borrowing from Western institutions, instead relying on its own cash flow and lending from state-owned banks while developing technology to replace services once supplied by Western firms. Analysts say this is partly why Russian oil stocks have been relatively unscathed since U.S. senators introduced legislation to impose new sanctions on Russia over its interference in U.S. elections and its activities in Syria and Ukraine. The measures introduced on Aug. 2, dubbed by the senators as the “bill from hell”, include potential curbs on the operations of state-owned Russian banks, restrictions on holding Russian sovereign debt as well as measures against Western involvement in Russian oil and gas projects.

Read more …

Too expensive.

NATO Repeats the Great Mistake of the Warsaw Pact (SCF)

Through the 1990s, during the terms of US President Bill Clinton, NATO relentlessly and inexorably expanded through Central Europe. Today, the expansion of that alliance eastward – encircling Russia with fiercely Russo-phobic regimes in one tiny country after another and in Ukraine, which is not tiny at all – continues. This NATO expansion – which the legendary George Kennan presciently warned against in vain – continues to drive the world the closer towards the threat of thermonuclear war. Far from bringing the United States and the Western NATO allies increased security, it strips them of the certainty of the peace and security they would enjoy if they instead sought a sincere, constructive and above all stable relationship with Russia.

It is argued that the addition of the old Warsaw Pact member states of Central Europe to NATO has dramatically strengthened NATO and gravely weakened Russia. This has been a universally-accepted assumption in the United States and throughout the West for the past quarter century. Yet it simply is not true. In reality, the United States and its Western European allies are now discovering the hard way the same lesson that drained and exhausted the Soviet Union from the creation of the Warsaw Pact in 1955 to its dissolution 36 years later. The tier of Central European nations has always lacked the coherence, the industrial base and the combined economic infrastructure to generate significant industrial, financial or most of all strategic and military power.

[..] When nations such as France, Germany, the Soviet Union or the United States are seen as rising powers in the world, the small countries of Central Europe always hasten to ally themselves accordingly. They therefore adopt and discard Ottoman Islamic imperialism. Austrian Christian imperialism, democracy, Nazism, Communism and again democracy as easily as putting on or off different costumes at a fancy dress ball in Vienna or Budapest. As Russia rises once again in global standing and national power, supported by its genuinely powerful allies China, India and Pakistan in the Shanghai Cooperation Organization, the nations of Central Europe can be anticipated to reorient their own loyalties accordingly once again.

Read more …

Case in point: the cost of NATO and Russiagate.

Italy’s NATO Racket… A Bridge Too Far (SCF)

What should be a matter of urgent public demand is why Italy is increasing its national spending on military upgrades and procurements instead of civilian amenities. As with all European members of the NATO alliance, Italy is being pressured by the United States to ramp up its military expenditure. US President Donald Trump has made the NATO budget a priority, haranguing European states to increase their military spending to a level of 2 per cent of GDP. Trump has even since doubled that figure to 4 per cent. Washington’s demand on European allies predates Trump. At a NATO summit in 2015, when Barack Obama was president, all members of the military alliance then acceded to US pressure for greater allocation of budgets to hit the 2 per cent target.

The alleged threat of Russian aggression has been cited over and over as the main reason for boosting NATO. Figures show that Italy, as with other European countries, has sharply increased its annual military spending every year since the 2015 summit. The upward trend reverses a decade-long decline. Currently, Italy spends about $28 billion annually on military. That equates to only about 1.15 per cent of GDP, way below the US-demanded target of 2 per cent of GDP. But the disturbing thing is that Italy’s defense minister Elisabetta Trenta reportedly gave assurances to Trump’s national security advisor John Bolton that her government was committed to hitting its NATO target in the coming years. On current figures that translates roughly into a doubling of Italy’s annual military budget. Meanwhile, the Italian public have had to endure years of economic austerity from cutbacks in social spending and civilian infrastructure.

Read more …

But the company’s become a secret service.

Google Staff Tell Bosses China Censorship Is “Moral And Ethical” Crisis (IC)

Google employees are demanding answers from the company’s leadership amid growing internal protests over plans to launch a censored search engine in China. Staff inside the internet giant’s offices have agreed that the censorship project raises “urgent moral and ethical issues” and have circulated a letter saying so, calling on bosses to disclose more about the company’s work in China, which they say is shrouded in too much secrecy, according to three sources with knowledge of the matter. The internal furor began after The Intercept earlier this month revealed details about the censored search engine, which would remove content that China’s authoritarian government views as sensitive, such as information about political dissidents, free speech, democracy, human rights, and peaceful protest.

It would “blacklist sensitive queries” so that “no results will be shown” at all when people enter certain words or phrases, leaked Google documents disclosed. The search platform is to be launched via an Android app, pending approval from Chinese officials. The censorship plan – code-named Dragonfly – was not widely known within Google. Prior to its public exposure, only a few hundred of Google’s 88,000 employees had been briefed about the project – around 0.35 percent of the total workforce. When the news spread through the company’s offices across the world, many employees expressed anger and confusion. Now, a letter has been circulated among staff calling for Google’s leadership to recognize that there is a “code yellow” situation – a kind of internal alert that signifies a crisis is unfolding.

The letter suggests that the Dragonfly initiative violates an internal Google artificial intelligence ethical code, which says that the company will not build or deploy technologies “whose purpose contravenes widely accepted principles of international law and human rights.” The letter says: “Currently we do not have the information required to make ethically-informed decisions about our work, our projects, and our employment. That the decision to build Dragonfly was made in secret, and progressed with the [artificial intelligence] Principles in place, makes clear that the Principles alone are not enough. We urgently need more transparency, a seat at the table, and a commitment to clear and open processes: Google employees need to know what we’re building.”

Read more …

Don’t be surprised if he’s aquitted.

Jury in Paul Manafort’s Case Asks Judge to Redefine ‘Reasonable Doubt’ (BBG)

A Virginia jury deliberating the fraud charges against President Donald Trump’s former campaign manager Paul Manafort sent a note with four questions to the judge in the case. Near the end of the first day of deliberations on Thursday, the jury asked whether a report of foreign bank and financial accounts, known as an FBAR, needed to be filed by a person with less than a 50 percent ownership. Manafort is charged with four counts of failing to file FBARs for offshore companies. The jury also asked about the definition of a shelf company.

U.S. District Judge T.S. Ellis III replied that the jurors should rely on their collective memory. The jury also requested that the judge redefine “reasonable doubt.” Ellis replied that the government wasn’t required to prove its case beyond “all doubt,” just to the extent that a person would consider reasonable. Finally, the jury asked if the exhibit list could be amended to include the indictment. The jury was excused for the day and is to return Friday to continue deliberations.

Read more …

Jan 242018
 
 January 24, 2018  Posted by at 3:59 pm Finance Tagged with: , , , , , , , , , , , ,  11 Responses »


Rembrandt van Rijn The Storm on the Sea of Galilee 1633
On March 18, 1990, the painting was stolen by thieves disguised as police officers. They broke into the Isabella Stewart Gardener Museum in Boston, MA, and stole this painting, along with 12 other works. The paintings have never been recovered, and it is considered the biggest art theft in history. The empty frames still hang in their original location.

 

 

This is an article written by Dr. D, who last month wrote a series at the Automatic Earth entitled Bitcoin Doesn’t Exist.

It shouldn’t surprise you that bitcoin plays a cameo in his Modest -but actually quite grand- Plan as well.

 

 

Dr. D: With all the talk about the bubble market, people are once again saying Donald Trump is a fool, he should never have taken credit for a Dow that’s about to collapse. In addition, how does he think he can get away with claiming we have a great economy made greater? He said in the election the economy was terrible and the Dow was a bubble, that’s why he won.

But hold on: you have to remember, they’re politicians; they may be dishonest but they’re not stupid. Let’s try a scenario to see what they’re thinking:

We have a situation in the U.S. where 100 million people are out of the workforce, the real economy is on life-support, debt is crushing, and monetary velocity is at an all-time low. The Fed’s every effort at market-rigging, lowering rates and pumping in money, bailing out the banks and giving unearned interest for Fed deposits have run up both the housing market and the stock market, neither of which is their legal mandate. If either one goes higher, they’ll pop as workers, particularly millennials, have no income to buy houses, and stocks are levitating on just 5 insider-paid FAANG stocks.

It’s untenable. However, if either falls, the collateral that upholds the whole system will fail, margins will be called, the housing market will fall, and there will be an instant Depression… You know, more than the 100 million out of work Depression we already have. A Depression that makes Congressmen and government workers lose their profits and 401k’s instead of just turning students to open prostitution, and mass opioid death, and starving people in Oklahoma – you know, a Depression that finally hurts someone who matters.

Since this is self-evident and unsustainable, isn’t Trump just stepping in it by pushing all the same policies as Obama? Not necessarily. Look at what matters to him. A tax plan, and barely, not one he liked, but look at what he settled for: return of foreign profits abroad. Why? Large as it is – and it’s already creating long-withheld bonuses – that’s not enough to turn the dial. But that’s a card he wanted. Tax policy and a high stock market. What else?

Well, we have a crippling high debt, easily 100% even 200% of GDP. With that weight, nothing can move, no way to win. Pensions also are nearly dead, along with insurance companies; the high Dow is all that’s saving them from bankruptcy. What else? Well he was interested in health reform but was willing to let it remain for now. He wrote deferrals but not pardons for 5 banks showing he’d like to keep them functioning for the moment. He wanted to increase the military.

Certainly the only other promise was to create jobs and economies again, in a way saying the few protected industries: Finance, Health Care, and Military would have to become a smaller % of GDP, so those dollars could be returned back to Main Street. But we just said those three aren’t happening.

So. What if instead of pulling money from intractable lobbying groups he got new investment money from abroad? We saw this initially with Carrier and Ford and more recently with Japan. But it’s not enough and he knows all this; they all do. How do you solve the problem? How do you get more?

Calling all 1st year econ students: how do you attract capital to your country? With higher rates. As the US 10-year breaks out above 2.6% you’d have to think that’s attractive. Attractive investing in a bankrupt nation that’s barely moving? It does if you’re a company that must maintain legal investment ratios and you’re getting 0% in Japan, and negative rates in Europe, both with economies as bad or worse.

But aren’t rising rates bad? The Fed model raises rates to clamp down on the economy. Money will leave the stock market and go to bonds. Housing prices will fall as the monthly cost increases. Cats and Dogs living together….except it isn’t true.

 

Let’s go down the list:

 

1. Trump starts with plausible seed corn, a billboard sign: a tax cut and a few trillion overseas to start economic motion.

2. If the Fed raises rates, that will draw in trillions of world capital Trump wants, enough to turn the dial and really matter.

3. Enough money flowing into the U.S. will create demand for the US$, and the US$ will rise. This part has to work. Be flashy, attract attention. Go big or go home.

4. The US$ rising will attract foreign buyers into U.S. investment and together the stock market will counterintuitively rise.

5. The Fed will detect overheating and raise rates again and again in a reinforcing cycle, drawing capital to only the U.S. and suffocating the world.

6. The massive investment re-industrializes the U.S. to some extent while the high US$ gives some relief to Main Street.

7. Foreign buying, better jobs, and low exchange rates hold off the housing collapse, while all the mortgage bonds are also sold overseas.

8. Emerging markets are hammered by the high US$ and fail, driving ever-more capital to safe havens like the US.

9. Ultimately, the U.S. does what all reserve currencies do and fails LAST.

 

See why they think they can get away with this? The U.S. can still ravage the world, and Trump can, in fact, call it his “success.” …Just like all the Presidents since Nixon.

But this is history, and it never ends there.

 

10. The whole world, strangled by the US and its dollar have no choice but to reject the US system entirely in private contracts and move to an alternative.

11. We now have at least three alternatives: the CIPS/Yuan banking bloc, gold, and cryptocurrencies. They aren’t exclusive: the most likely outcome is a gold-backed trading note priced in Yuan on a blockchain, perhaps in the Shanghai Exchange.

12. Being entirely too high the US$ ultimately cripples the U.S. as well, but the alternative currency the world creates becomes the lifeboat to escape. Let’s be simple and say it’s Bitcoin (it won’t be): Bitcoin hits John McAfee’s $1 million. What do you call it when a currency rapidly becomes worth 1/10th, 1/100th, 1/1,000,000th of the standard? Isn’t that hyperinflation?

13. The U.S., like every nation since Adam Smith, defaults on its $20T in $ debt – and all its internal consumer, corporate, and pension debt – using “hyperinflation” of the dollar. New twist is that, instead of gold, it hyperinflates vs. cryptos or the new world exchange standard as planned in 1971 and publicized in 1988.

14. The reset occurs, no one dies (in the U.S.), supply chains are maintained, oil flows, and the economy stops being a feral, diabolical means of theft and control and returns to being a fair, voluntary exchange. For now.

 

That’s not to say they’ll succeed, but this is why they think they can go this way and win at it. What does the Trump world look like?

 

1. Stock market rose, like he said.

2. Manufacturing returns, reindustrializing a hollow nation and allowing the country to catch up to the stock prices, like he said.

3. Unemployment drops, like he said.

4. Crime is reduced and the cities are improved, like he said.

5. This helps win the black vote, snatching the rest of the Democratic base and locking them out for years, like Bannon said.

6. Economic growth normalizes the banking/medical oversize, like he wanted.

7. Free, untracked money for bribes and illegal cover end and law and order returns with fair exchange, like he said.

8. The U.S. is unwelcome overseas, and the breaking of bonds re-sets the multipolar world, where the U.S. is just one trading nation among many, like he said.

9. Without the money of empire the military returns home, like he said.

10. The world is pretty mad at us and that renewed military came in handy. That’s okay, they’ll be consoled that the economy now works and the U.S. can no longer start wars and act terribly.

 

What does the world look like after? A lot more like it was before 1945. You know, back when we were great and before we got terrible.

Again, not to say this WILL happen, but you can see that it CAN happen, and they are now in control of most of the levers required. From their rhetoric, you can see the glass darkly that this is what they find a priority, a possibility, and therefore a doorway out. In addition, downsizing and re-establishing honesty will not allow their opponents to wiggle out and reverse it.

Why wasn’t this done before? My guess is that a) previous planners thought with a little more effort they could take over the world, as seen in the Arab Spring plan that would culminate in the capture of Iran, the only remaining oilfields on the planet, and b) given the world’s first entirely fiat financial system, it was too complex and disruptive to return to a gold standard.

Without a lighting fast crypto base, banking and trade would fail and millions would die. Only when the one was burned out and the other made available could this move be attempted. Watch and see.

 

 

Jun 262017
 
 June 26, 2017  Posted by at 9:29 am Finance Tagged with: , , , , , , , , , ,  3 Responses »


Pablo Picasso Etude Pour Mercure 1924

 

The Next Global Crash Could Arrive ‘With A Vengeance’ – BIS (CNBC)
Push On With The ‘Great Unwinding’, BIS Tells Central Banks (R.)
Japanese Banks at Risk as Borrowing in Dollars Doubles – BIS (BBG)
Four Pronged Proposal to End Japanese Deflation (Mish)
Japan’s Bond Market Grinds To A Halt (ZH)
“It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day Of The Next Crash (ZH)
A Stock Market Crash Scenario (CH Smith)
The Fed Is Going to Cause a Recession (James Rickards)
US Dollar Will Strengthen on Fed Hikes – Credit Agricole (CNBC)
The $1.5 Trillion US Business Tax Change Flying Under the Radar (WSJ)
Two Failed Italian Banks Split Into Good And Bad Banks, Taxpayers Pay (G.)
Investors Call For Greece To Accelerate Reforms (K.)
Germans Fearing China’s World Order? Worry About The EU Instead (CNBC)
China’s Hydropower Frenzy Drowns Sacred Mountains (AFP)

 

 

“..the end may come to resemble more closely a financial boom gone wrong..”

The Next Global Crash Could Arrive ‘With A Vengeance’ – BIS (CNBC)

A new financial crisis is brewing in the emerging economies and it could hit “with a vengeance”, an influential group of central bankers has warned. Emerging markets such as China are showing the same signs that their economies are overheating as the US and the UK demonstrated before the financial crisis of 2007-08, according to the annual report of the Bank for International Settlements (BIS). Claudio Borio, the head of the BIS monetary and economic department, said a new recession could come “with a vengeance” and “the end may come to resemble more closely a financial boom gone wrong”. The BIS, which is sometimes known as the central bank for central banks and counts Bank of England Governor Mark Carney among its members, warned of trouble ahead for the world economy.

It predicted that central banks would be forced to raise interest rates after years of record lows in order to combat inflation which will “smother” growth. The group also warned about the threat poised by rising debt in countries like China and the rise in protectionism such as in the US under Donald Trump, City AM reported. Chinese corporate debt has almost doubled since 2007, now reaching 166% of GDP, while household debt rose to 44% of GDP last year. In May, Moody’s cut China’s credit rating for the first time since 1989 from A1 to Aa3 which could potentially raise the cost of borrowing for the Chinese government. The BIS’s credit-to-GDP gap indicator also showed debt, which is seen as an “early warning indicator” for a country’s banking system, is rising far faster than growth in other Asian economies such as Thailand and Hong Kong.

Read more …

“The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.”

Push On With The ‘Great Unwinding’, BIS Tells Central Banks (R.)

Major central banks should press ahead with interest rate increases, the Bank for International Settlements said on Sunday, while recognizing that some turbulence in financial markets will have to be negotiated along the way. The BIS, an umbrella body for leading central banks, said in one of its most upbeat annual reports for years that global growth could soon be back at long-term average levels after a sharp improvement in sentiment over the past year. Though pockets of risk remain because of high debt levels, low productivity growth and dwindling policy firepower, the BIS said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the “great unwinding” of quantitative easing programs and record low interest rates.

New technologies and working practices are likely to be playing a roll in suppressing inflation, it said, though normal impulses should kick in if unemployment continues to drop. “Since we are now emerging from a very long period of very accommodative monetary policy, whatever we do, we will have to do it in a very careful way,” BIS’s head of research, Hyun Song Shin, told Reuters. “If we leave it too late, it is going to be much more difficult to accomplish that unwinding. Even if there are some short-term bumps in the road it would be much more advisable to stay the course and begin that process of normalization.” Shin added that it will be “very difficult, if not impossible” to remove all those bumps. The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.

Read more …

The death of the dollar has been greatly exaggerated.

Japanese Banks at Risk as Borrowing in Dollars Doubles – BIS (BBG)

Japanese banks have more than doubled their borrowing and lending in dollars since 2007, leaving them vulnerable to funding shocks such as those that exacerbated the last financial crisis, the Bank for International Settlements warned in a report released Sunday. Assets denominated in dollars on the balance sheets of Japanese banks surged to about $3.5 trillion by the end of 2016, the coordinating body for the world’s central banks said in its annual report about the global economy. Those exceed liabilities in dollars by about $1 trillion, creating a massive so-called long position in the currency. The report also cited Canadian lenders for following a similar trend, almost doubling their dollar exposure since the crisis. Their net long positions reached almost $200 billion, the BIS said.

European firms, by contrast, have reduced exposure to dollars since the crisis, the report said. German banks, which had among the highest net dollar positions in 2007, now have matching assets and liabilities denominated in the currency after cutting dollar assets by about half. During the financial crisis, European banks’ net dollar exposures, which peaked at $2 trillion, ended up causing several firms to collapse when funding sources dried up and their efforts to dump U.S. mortgage-related assets led to huge losses. Even as post-crisis regulation has strengthened banks’ capital resources to cope with such losses and some funding has shifted to more stable sources, risks haven’t been completely eliminated, according to the Basel, Switzerland-based group.

[..] the biggest portion of dollar funding for non-U.S. banks – $4.1 trillion – now comes from deposits outside the U.S., according to BIS data. That shift toward offshore dollar deposits also presents risks because the Federal Reserve’s funding backstop during the 2008 crisis wouldn’t be present in non-U.S. jurisdictions if dollar funds became scant, the BIS said. The Fed provided $538 billion of emergency loans to European banks that lost dollar funding from U.S. sources during the 2008 crisis ..

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Is Mish missing out on confidence as a factor? You can lead a horse to water, but…

Four Pronged Proposal to End Japanese Deflation (Mish)

Negative Sales Taxes People hoard cash, especially the miserly wealthy. We need to unlock that cash and put it to work. To free up this money, I propose negative sales taxes. The more you spend, the more money you get back as a direct tax credit against income taxes. I leave specific details to economists Larry Summers and Paul Krugman. What can possibly go wrong?

One Percent Tax Per Month on Government Bonds Negative interest rates are in vogue. However, all negative interest rates have done is to get those with money to hoard bonds. Bond buyers effectively bet on capital gains of still more negative rates. Phooey! Just yesterday I noted Bank of Japan Corners 33% of Bond Market: All Japanese Bonds, 40 Years and Below, Yield 0.3% or Less. 33% cornering of the bond market is truly inadequate as this sentiment implies: Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Bank’s securities unit in Tokyo said “There are investors who have no choice but to buy.” We need to end this “no choice” hoarding sentiment right here, right now. I have just the solution. Tax government bonds at the rate of 1% per month.

No one will want them. Hedge funds and pension plans will dump sovereign bonds en masse. This will allow governments to buy every bond in existence immediately, if not sooner. As soon as the government corners the bond market (at effectively zero cost), debt and interest on the debt will truly be owed to itself. Once the bond market is 100% cornered, I propose government debt be declared null and void annually. This would effectively wipe out the entirety of Japan’s debt. Japan’s debt-to-GDP ratio would immediately plunge from 250% to 0%.

National Tax Free Lottery Japan desperately needs to get people to spend, continually. Once again, I have a logical proposal. For every purchase one makes on a credit card, that person gets a free lottery ticket for a weekly drawing worth $10,000,000 tax free. Each week, a random day of the week is selected and separately a random taxpayer ID is selected. If the person drawn made a credit card purchase exceeding $10 on the day of the week drawn, they win $10,000,000 tax free. If there is no winner, the amount rolls over. This beautiful plan will cost no more than $520 million annually, peanuts these days.

Hav-a-Kid Demographics in Japan are a huge problem. Although various incentives have been tried, none of them have gone far enough. I propose a reduction in income taxes for everyone starting a family. The following scale applies. One new child: 50% reduction in income taxes for a period of ten years. Two new children: 100% reduction in income taxes for a period of twenty years. Three new children: Subsidized housing, free healthcare, free schooling, and no income taxes for thirty years. Those with one new child in the last five years get full credit if they add at least one more child in the next five years.

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Well, Mish does have the answer to that above: One Percent Tax Per Month

Japan’s Bond Market Grinds To A Halt (ZH)

The Bank of Japan may or may not be tapering, but that may soon be moot because by the time Kuroda decides whether he will buy less bonds, the bond market may no longer work. As the Nikkei reports, while the Japanese central bank ponders its next step, the Japanese rates market has been getting “Ice-9ed” and increasingly paralyzed, as yields on newly issued 10-year Japanese government bonds remained flat for seven straight sessions through Friday while the BOJ continued its efforts to keep long-term interest rates around zero. The 10-year JGB yield again closed at 0.055%, where it has been stuck since June 15m and according to data from Nikkei affiliate QUICK, this marks the longest period of stagnation since 1994, Because what comes after record low volatility? Simple: market paralysis.

And that’s what Japan appears to be experiencing right now as private bondholders no longer dare to even breathe without instructions from the central bank. Meanwhile, the implied volatility of JGBs tumbled to the lowest level since January 2008 for the same reason we recently speculated may be the primary driver behind the global collapse in volatility: nobody is trading. This means that trading in newly issued 10-year debt has become so infrequent that broker Japan Bond Trading has seen days when no bonds trade hands. It’s not just cash bonds that find themselves in trading limbo: trading in short-term interest rate futures has also thinned and on Tuesday of last week the Nikkei reports that there were no transactions in three-month Tibor futures – the first time that has happened since such trading began in 1989.

As more market participants throw in the towel on a rigged, centrally planned market, the result will – no could – be a further loss of market function, and a guaranteed crash once the BOJ and other central banks pull out (which is why they can’t). As the Nikkei politely concludes, “if the bond and money markets lose their ability to price credit based on future interest rate expectations and supply and demand, the risk of sudden rate volatility from external shocks like a global financial crisis will rise.” Translation: in a world where only central banks trade, everyone else is destined to forget forget what trading, and certainly selling, means.

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“..when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”

“It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day Of The Next Crash (ZH)

While most asset managers have been growing increasingly skeptical and gloomy in recent weeks (despite a few ideological contrarian holdouts), joining the rising chorus of bank analysts including those of Citi, JPM, BofA and Goldman all urging clients to “go to cash”, none have dared to commit the cardinal sin of actually predicting when the next crash will take place. On Sunday a prominent hedge fund manager, One River Asset Management’s CIO Eric Peters broke with that tradition and dared to “pin a tail on the donkey” of when the next market crash – one which he agrees with us will be driven by a collapse in the global credit impulse – will take place. His prediction: Valentine’s Day 2018. Here is what Peters believes will happen over the next 8 months, a period which will begin with an increasingly tighter Fed and conclude with a market avalanche:

“The Fed hikes rates to lean against inflation,” said the CIO. “And they’ll reduce the balance sheet to dampen growing financial instability,” he continued. “They’ll signal less about rates and focus on balance sheet reduction in Sep.” Inflation is softening as the gap between the real economy and financial asset prices is widening. “If they break the economy with rate hikes, everyone will blame the Fed.” They can’t afford that political risk. “But no one understands the balance sheet, so if something breaks because they reduce it, they’ll get a free pass.”

“The Fed has convinced itself that forward guidance was far more powerful than QE,” continued the same CIO. “This allows them to argue that reversing QE without reversing forward guidance should be uneventful.” Like watching paint dry. “Balance sheet reduction will start slowly. And proceed for a few months without a noticeable impact,” he said. “The Fed will feel validated.” Like they’ve been right all along. “But when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”

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One must remember there are no markets left. That makes talking about them dicey.

A Stock Market Crash Scenario (CH Smith)

After 8+ years of phenomenal gains, it’s pretty obvious the global stock market rally is overdue for a credit-cycle downturn, and many research services of Wall Street heavyweights are sounding the alarm about the auto industry’s slump, the slowing of new credit and other fundamental indicators that a recession is becoming more likely. Next February is a good guess, as recessions and market downturns tend to lag the credit market by about 9 months. My own scenario is based not on cycles or technicals or fundamentals, but on the psychology of the topping process, which tends to follow this basic script:

When there are too many bearish reports of gloomy data, and too many calls to go long volatility or go to cash, the market perversely goes up, not down. Why? This negativity creates a classic Wall of Worry that markets can continue climbing. (Central banks buying $300 billion of assets a month helps power this gradual ascent most admirably.) The Bears betting on a decline based on deteriorating fundamentals are crushed by the steady advance. As Bears give up, the window for a Spot of Bother decline creaks open, however grudgingly, as central banks make noises about ending their extraordinary monetary policies by raising interest rates a bit (so they can lower them when the next recession grabs the global economy by the throat). As bearish short interest and bets on higher volatility fade, insiders go short.

A sudden air pocket takes the market down, triggered by some bit of “news.” (Nothing like a well-engineered bout of panic selling to set up a profitable Buy the Dip opportunity.) And since traders have been well-trained to Buy the Dips, the Spot of Bother is quickly retraced. Nonetheless, doubts remain and fundamental data is still weak; this overhang of negativity rebuilds the wall of Worry. Some Bears will reckon the weakened market will double-top, i.e. be unable to break out to new highs given the poor fundamentals, and as a result we can anticipate a nominal new high after the Wall of Worry has been rebuilt, just to destroy all those who reckoned a double-top would mark The Top. Mr. Market (and the central banks) won’t make it that easy to reap a fortune by going short.

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I think the Fed has already done that. By manoeuvering themselves into a position they cannot escape from.

The Fed Is Going to Cause a Recession (James Rickards)

Why did the Federal Reserve (Fed) hike rates last week, and what will its policy look like in the future? They’re trying to prepare for the next recession. They’re not predicting a recession, they never do, but they know a recession will come sooner rather than later. This expansion is 96 months old. It’s one of the longest expansions in U.S. history. It’s also the weakest expansion in U.S. history. A lot of people say, “What expansion? Feels like a depression to me.” I think it is a depression defined as depressed growth, but we’re not in a technical recession and haven’t been since June 2009. So it’s been an eight-year expansion at this point, but it won’t fare well, and the Fed knows that. When the U.S. economy goes into recession, you have to cut interest rates about 3% to get the United States out of that recession. Well, how do you cut interest rates by 3% when you’re only at 1%?

The answer is, you can’t. You’ve got to get them up to 3% to cut them back down, maybe to zero, to get out of the next recession. So that explains why the Fed is raising interest rates. That’s the fourth rate hike getting them up to 1%. They would like to keep going; they would like to get them up to 3, 3.5% by 2019. My estimate is that they’re not going to get there. The recession will come first. In fact, they will probably cause the recession that they’re preparing to cure. So let’s just say we get interest rates to 1% and now you go into recession. We can cut them back down to zero. Well, now what do you do? You do a new round of QE. The problem is that the Fed’s balance sheet is so bloated at $4.5 trillion. How much more can you do—$5 trillion, $5.5 trillion, $6 trillion—before you cause a loss of confidence in the dollar? There are a lot of smart people who think that there’s no limit on how much money you can print. “Just print money. What’s the problem?”

I disagree. I think there’s an invisible boundary. The Fed won’t talk about it. No one knows what it is. But you don’t want to find out the hard way. [..] You probably want to get from $4.5 trillion, down to $2.5 trillion. Well, you can’t sell any treasury bonds. You destroy the market. Rates would go up, putting us in recession, and the housing market would collapse. They’re not going to do that. What they’re going to do is just let them mature. When these securities mature, they won’t buy new ones. They won’t roll it over, and they actually will reduce the balance sheet and make money disappear. They’re going to do it in tiny increments, maybe $10 billion a month or $20 billion a month. They want to run this quantitative tightening in small increments and pretend nothing’s happening. But that’s nonsense. It’s just one more way of tightening money in a weak economy; it will probably cause a recession.

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Views on the dollar are all over the place.

US Dollar Will Strengthen on Fed Hikes – Credit Agricole (CNBC)

While investors seem to have come to a consensus view that the U.S. dollar rally is coming to an end, Credit Agricole has offered a contrarian take: There is room for the greenback to strengthen. David Forrester, the bank’s FX strategist told CNBC Monday that markets have been predominantly focused on U.S. inflation data and pricing in an overly cautious Federal Reserve. But, he thinks the Fed will be more hawkish than what is currently expected, which will support the U.S. dollar. “The Fed seems to have changed its policy response function. Yes it’s going to pay attention to the data, but less so. It now wants to get its rates normalized so that it actually has room to cut rates in the next downturn,” Forrester said.

“Let’s not forget here: The U.S. expansion, while being soft, is actually pretty mature so the Fed is getting lined up here in preparation for the next downturn. That’s why we think they’re going to hike rates and we will see a steepening of the U.S. Treasury curve and that will be supportive of the U.S. going forward.” Credit Agricole expects the Fed to hike rates once more this year, followed by three times in 2018. U.S. inflation — still below its 2% target despite a low unemployment rate — has been a key point in the argument on whether the Fed should continue normalizing rates. Forrester said the divergence between the unemployment rate and inflation is not unique to the U.S. Globally, economies face structural issues such as ageing populations and automation replacing jobs, which could increase the risks of a recession.

But, he said U.S. inflation should pick up on the back of further wage growth and a rebound in oil prices. “We expect the U.S. economy to continue to recover and strengthen, we will believe in the Philips curve in the U.S. We do expect wages growth to accelerate and inflation expectation(s) to pick back up. So all-in-all, we do expect that re-steepening,” he said. The Philips curve relates to a supposed inverse relationship between the level of unemployment and the inflation rate. Forrester’s views are in contrast to that of many analysts, who expect weakness in the U.S. dollar. Ken Peng, Asia investment strategist at Citi Private Bank, told CNBC’s “Squawk Box” that the greenback is headed for a “new cycle” after a six-year rally since 2011. He added that the dollar weakness will be “one of the greatest market trends” for global investors.

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Desperately seeking something.

The $1.5 Trillion US Business Tax Change Flying Under the Radar (WSJ)

Republicans looking to rewrite the U.S. tax code are taking aim at one of the foundations of modern finance—the deduction that companies get for interest they pay on debt. That deduction affects everyone from titans of Wall Street who load up on junk bonds to pay for multibillion-dollar corporate takeovers to wheat farmers in the Midwest looking to make ends meet before harvest. Yet a House Republican proposal to eliminate the deduction has gotten relatively little sustained public attention or lobbying pressure. Thanks in part to the deduction, the U.S. financial system is heavily oriented toward debt, which because of the tax code is often cheaper than equity financing—such as sales of stock. It also is widely accessible. In 2015, U.S. businesses paid in all $1.3 trillion in gross interest, according to Commerce Department data, equal in magnitude to the total economic output of Australia.

Getting rid of the deduction for net interest expense, as House Republicans propose, would alter finance. It also would generate about $1.5 trillion in revenue for the government over a decade, according to the Tax Foundation, a conservative-leaning think thank. The plan would raise money to help offset Republicans’ corporate tax cuts and reduce a “huge bias” toward debt financing, said Robert Pozen, a senior lecturer at MIT’s Sloan School of Management. That bias, he said, hurts companies built around innovation, which tend to not have the physical assets that banks usually require as collateral. [..] Midsize businesses may also get squeezed. “The people that utilize debt, they utilize it because they don’t have the cash and they don’t have the access to equity,” said Robert Moskovitz, CFO of Leaf Commercial Capital, which finances businesses’ purchases of items like copiers and telephone systems.

“A dry cleaner in Des Moines, Iowa? Where is he going to get equity? He can’t do an IPO.” The idea behind the Republican plan is to pair the elimination of this deduction with immediate deductions for investments in equipment and other long-lived assets. Party leaders expect the capital write-offs would encourage more investment and growth and greater worker productivity, but not the debt often associated with it.

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Dijsselbloem et al made a big circus about how taxpayers would never again foot the bill. It was never worth a thing.

“German conservative MEP Markus Ferber (EPP): “With this decision, the European Commission accompanies the Banking Union to its deathbed. The promise that the tax payer will not stand in to rescue failing banks anymore is broken for good. I am very disappointed that the commission has approved this course of action. By doing so the Commission has massively undermined the credibility of the Banking Union. If the common set of rules governing banking resolution is so blatantly ignored, there is no point in negotiating any further on a common deposit insurance scheme. The precondition for a working Banking Union is a common understanding of its rules. If such a basic common understanding is lacking, there is no point in further deepening the Banking Union and mutualising risk.”

Two Failed Italian Banks Split Into Good And Bad Banks, Taxpayers Pay (G.)

The Italian government is stepping in to wind up two failing lenders and prevent a bank run, at a total cost of up to €17bn. After an emergency cabinet meeting on Sunday, ministers agreed to a decree splitting Veneto Banca and Banca Popolare di Vicenza into ‘good’ and ‘bad’ banks, keeping branches open. The ‘good’ assets are being acquired by Italy’s biggest retail bank, Intesa Sanpaolo, with the Italian government handing about €5bn to Intesa as part of the deal. The lenders will then be liquidated, which leaves the state footing the bill for bad loans on both banks’ books, plus restructuring costs.

The Italian government would provide state guarantees worth up to €12bn to cover potential losses at the ‘bad’ bank, Pier Carlo Padoan, the finance minister, told reporters in Rome. That means the total cost could reach €17bn. Padoan added that both banks would operate normally on Monday. The deal is meant to ward off the threat of a bank run, by reassuring nervous savers and deterring them from withdrawing their funds when branches reopen. Paolo Gentiloni, Italy’s prime minister, insisted that the decree fully respected EU rules, even though taxpapers are no longer meant to stump the cost to rescue a failing bank. The funds will come from a €20bn fund created last year to help struggling lenders, so will not affect Italy’s public borrowing, according to the government.

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Lower pensions solve everything.

Investors Call For Greece To Accelerate Reforms (K.)

The return of investor confidence in Greece will require time and the acceleration of the government’s reform program, foreign fund managers told Greek officials during two investment conferences that took place in the last couple of weeks in New York and London with the participation of Greek listed firms. In their meetings with hundreds of funds from the US and Europe, the representatives of Greek companies said that while the recent Eurogroup decision may have banished uncertainty about Greece, the government will need to put in some serious effort and work in addressing the issues of speed and efficiency. This was after Greece had failed to secure any debt-easing measures, while the entry of Greek bonds to the ECB’s QE remains pending.

The main subject at the two investment events was the titanic effort being made by Greek banks to reduce the bad loans in their portfolios. As for the Athens stock market, Alpha Finance noted in its presentation at the 6th Greek Investment Forum in New York on June 21-22 that “there is a light at the end of the tunnel.” The Alpha Bank subsidiary noted that “the Greek market has recorded bigger returns than its European peers and prospects appear very encouraging as Greece has beaten its fiscal targets and restored investor confidence in the timetable of the Greek [bailout] program.”

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“the U.S. will not be indifferent to the mistreatment of the long suffering Greece. That is America’s key strategic base in the Mediterranean, and a location of new military installations on the island of Crete to monitor the Middle East.”

Germans Fearing China’s World Order? Worry About The EU Instead (CNBC)

Criticizing what he saw as Washington’s isolationist bent, German Finance Minister Wolfgang Schäuble voiced a concern in a speech earlier this month that the West could be threatened as China (and Russia) might fill the void. That, he feared, “would be the end of our liberal world order.” He also said that the U.S. was no longer willing to act as a “guardian of global order,” apparently because Washington withdrew from the agreement on climate change, and it allegedly showed no interest for cooperative migration and security policies. The U.S. Department of State has probably something to say about that, but I wish Schäuble were at least partly right. Arguably, the U.S. could cut back on some foreign engagements and pay more attention to pressing domestic problems.

That said, I wonder how the German minister fails to see that the U.S. is all over the map in active, proxy and hybrid warfare — Afghanistan, the Middle East and North Africa, Korean Peninsula, Central and Eastern Europe and the South China Sea. What else would he want? A nuclear war with China and Russia? Germany may wish to think about whether it is in its interest to fuel and broaden the points of friction with the United States. In my view, Berlin should leave the big power dealings alone. Washington and Beijing are engaged on a broad range of issues to build a historically unique relationship between an established superpower and a runner-up that needs space to develop and contribute to the world in peace and harmony. In trying to do that, the two countries are blazing totally new trails of modern statecraft.

Ubiquitous analogies of Sparta (an established power) and Athens (a rapidly developing strategic competitor), and their ensuing Peloponnesian War, are worthless in the case of countries with huge nuclear arsenals and ground, sea, air and airspace delivery vehicles. So, yes, Germany should leave that alone and get over its fury at Washington’s decision to stop the hemorrhage of foreign trade accounts that are killing jobs, incomes and whatever is left of American manufacturing industries. China got that message and is doing something about it. In the first four months of this year, American export sales to China soared 16.1%. By contrast, U.S. exports to the EU, which account for one-fifth of the total, barely eked out a 2.7% increase.

Germany has to make up its mind with regard to the European integration. Bullying the Visegrad Group (and Baltic States) — a task that Germany has subcontracted to France due to dark pages of its history — and pillorying Greece (a task Germany was eager to continue) won’t work. These countries will run to the U.S. for cover, as some of them are doing now by demanding large contingents of U.S. armed forces on their soil. Also, the U.S. will not be indifferent to the mistreatment of the long suffering Greece. That is America’s key strategic base in the Mediterranean, and a location of new military installations on the island of Crete to monitor the Middle East.

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Proud supporters of the Paris Agreement.

China’s Hydropower Frenzy Drowns Sacred Mountains (AFP)

Beijing is building hydropower at a breakneck pace in ethnically Tibetan regions as part of an ambitious undertaking to reduce the country’s dependence on coal and cut emissions that have made it the world’s top polluter. China had just two dams in 1949, but now boasts some 22,000 – nearly half the world total – in all but one of the country’s major waterways. Mountains and rivers are revered as sacred in Tibetan Buddhism, and the extensive construction, which began in 2014, has alarmed locals who believe they can only live peacefully if the nature around them is protected. “Last year, people said that a big forest fire happened because they blasted a road into the holy mountain, and it took revenge,” said villager Tashi Yungdrung, who tends a small herd of yaks in the pastures above her stone, square-windowed home.

Most would not dare remove so much as a single stone from the mountain Palshab Drakar, an important pilgrimage site, she said. Villagers are bracing for mass relocations, an experience that has previously caused havoc elsewhere in China. Beginning in the 1990s, more than a million were moved for the Three Gorges Dam, the world’s largest in terms of capacity, with thousands still mired in poverty. Plans posted at the Lianghekou construction site showed that 22 power plants will be built along the Yalong, a Yangtze tributary, collectively capable of generating 30 gigawatts of electricity – a fifth of China’s current total installed hydropower capacity. Li Zhaolong, a Tibetan from Zhaba village, said he received 300,000 yuan ($44,000) in government compensation to build a new home on higher ground, where he will move next year.

But the 28,000 yuan moving fee his family received per person will not last long once their crops are submerged and they have no other sources of income. “Before we were farmers, and now we have no land,” said Li. [..] Some 80% of China’s hydropower potential lies along the high-flow, glacier-fed rivers of the Tibetan plateau, but dams there bring minimal local benefits because most of the power goes to smog-choked cities in the east, according to the non-governmental organisation International Rivers. Construction worker Zeng Qingtao said the state-owned Power Construction Corporation had brought in some 10,000 employees, but none are locals. “We can’t hire Tibetans. They aren’t reasonable,” he said.

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Nov 302016
 
 November 30, 2016  Posted by at 11:06 am Finance Tagged with: , , , , , , , , , ,  6 Responses »


Wyland Stanley Bulletin press car: Mitchell auto at Yosemite National Park 1920

OK, I get it: Companies Clamor for Cheap Labor, Fed Delivers (WS)
Trump Notches a Win as Carrier Agrees to Keep 1,000 Jobs in U.S.
Asia Is About to Face a Significant Dollar Stress Test (BBG)
Property Bubble ‘Most Important Macro Issue In China’ – Deutsche (BI)
China’s Foreign Investment ‘Shopping Spree’ Over?! (SCMP)
RBS Fails Bank Of England Stress Test (Ind.)
UK Shoppers ‘Resolutely Gloomy’ About The Future Of The Economy (Ind.)
The ‘Washington Post’ ‘Blacklist’ Story Is Shameful and Disgusting (Taibbi)
US Intelligence Experts Urge Obama To End Snowden’s ‘Untenable Exile’ (G.)
The End Of Empires: Rome Vs. America (SHTFP)
The Rediscovery of Men (Jim Kunstler)
Major Global Firms Buy Indonesia Palm Oil Produced By Child Labor (R.)
North Dakota Moves To Block Supplies From Reaching Pipeline Protesters (R.)
The Areas America Could Abandon First (BBG)
Turkey Has Secret Plan To Send 3,000 Refugees To Greece Every Day (Ind.)

 

 

Makes it easier to bring jobs back home, too.

OK, I get it: Companies Clamor for Cheap Labor, Fed Delivers (WS)

Despite all the frothy excitement about the stock market’s new highs, and the drooling today over the new highs reached by Housing Bubble 2, exceeding the prior crazy highs of Housing Bubble 1 even according to the Case-Shiller Index, and despite eight years of super-low interest rates, and a million other things that are hyped constantly, median household incomes, the crux of the real economy, is still a dreary affair. Sentier Research released its median household income measure for October today. Adjusted for inflation, it edged up 0.6% from a year ago to $57,929. But it’s down 1.3% from January 2008, and it’s down 1.5% from its peak in 2002. It has fallen 0.5% since January. That’s not a propitious trend. The report put it this way: “Median annual household income in 2016 has not been able to maintain the momentum that it achieved during 2015.” This chart by Doug Short shows the stagnating inflation-adjusted debacle (blue line) and the nominal income (red line):

[..] Even minuscule but consistent understatement of CPI in relationship to actual price changes as experienced by the median household wreaks havoc on their inflation-adjusted income. Since 2000, official inflation has amounted to 42%. If CPI is understated by just a fraction every year, multiplied by 16 years, it would knock several%age points off real median household income. This translates into reduced purchasing power, which is exactly what many people have been experiencing. This whole affair – the devious impact of inflation on household income – becomes even clearer in this chart by Doug Short at Advisor Perspectives. It shows the% change over time, starting in 2000: The beautifully soaring illusion of nominal income (red line), and the dreary reality of wage stagnation or worse, after inflation (blue line):

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Not even a rounding error, but it gets more headlines than jobs are saved.

Trump Notches a Win as Carrier Agrees to Keep 1,000 Jobs in U.S.

Carrier agreed to keep about 1,000 jobs at an Indiana factory that had been set to move to Mexico, marking a victory for President-elect Donald Trump on an issue that had become a rallying cry during his campaign. “We are pleased to have reached a deal” with Trump and Vice President-elect Mike Pence to keep the work in the U.S., Carrier said Tuesday in a tweet. Trump tweeted that he’ll travel to Indiana on Thursday to make the announcement. Carrier said earlier this year it would move the furnace plant’s operations, eliminating 1,400 U.S. jobs, to keep production costs competitive.

The decision garnered national notice after a worker’s cell-phone video of the announcement to employees took off on social media and generated criticism of Carrier parent United Technologies, which is also a major defense contractor that supplies engines for U.S. fighter jets. Trump, as well as Democratic U.S. Senator Bernie Sanders, seized on the announcement and used the company in their presidential campaigns as an example of how U.S. workers were being hurt by trade deals. In April, Trump said he would impose a hefty tax on Carrier’s Mexican-made products and “within 24 hours, they’re going to call back: ‘Mr. President, we’ve decided to stay. We’re coming back to Indianapolis.’”

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When the reserve currency stops flowing, beware.

Asia Is About to Face a Significant Dollar Stress Test (BBG)

For Asian markets, 2017 could be the year of the dollar crunch. Foreign portfolio flows have taken a sharp downturn since Donald Trump’s election victory, with $15 billion fleeing Asian bonds and stocks this month alone — close to 30% of year-to-date inflows to the region, according to Deutsche Bank — as a strengthening greenback and a bevy of protectionist policies from the president-elect darken the growth prospects for emerging markets. Lending spreads, domestic demand and the resolve of domestic central banks to offset liquidity shortages will be tested next year, analysts warn, as key sources of dollar flows to the region trade and portfolio inflows may unravel if Trump makes good on his key campaign proposals.

A slew of investment banks this week, including Deutsche Bank, Citigroup, Morgan Stanley and Societe Generale, reckon the pain for emerging markets will intensify in 2017, citing, in part, the rising cost of servicing dollar debts amid a strengthening greenback relative to local currencies, and higher Fed policy rates. “The [debt-servicing] challenge looks even fiercer for non-US borrowers who have borrowed in dollars — dollar strength will make it harder to repay the debt,” SocGen analysts, led by Brigitte Richard-Hidden, wrote in a report on Tuesday. “There are plenty of them, as the outstanding dollar-denominated credit to the rest of the world has more than doubled over the past 10 years to nearly $10 trillion,” analysts at the French bank conclude. “EM countries and corporations in particular have been keen on borrowing in dollars ([to the tune of] $3.2 trillion).”

At the heart of the challenge, according to analysts: a tighter U.S. trade position with the region in the coming years, which would shrink the pool of dollars floating overseas and make it harder for emerging markets to settle cross-border trade and service hard-currency debts. “Each of these sources of dollars – whether from trade, portfolio flows or debt issuance – could be at risk in the new post-election regime,” Deutsche Bank strategists, led by Mallika Sachdeva, wrote in a research note on Monday. “This could mean a reduction in trade surpluses in the region: exports could suffer from protectionist efforts.”

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Much of the world is a Chinese property bubble, especially major cities.

Property Bubble ‘Most Important Macro Issue In China’ – Deutsche (BI)

China’s debt-fuelled property boom, and potential bust, will be one of the biggest issues facing the country’s policymakers in 2017, according to Deutsche Bank. Deutsche Bank economists, led by Zhiwei Zhang and Li Zeng, said the real estate bubble is “the most important macro issue in China,” in a note to clients. They point to rapid hikes in land sales and auction prices, as well as mounting debt levels, as needing attention. Land sales accounted for more than a third of local government revenue, Deutsche Bank said, and mortgages made up 43% of all new loans issued in renminbi. The difference between the starting price and final price in land auctions continues to rise rapidly and “this shows some developers continue to expect sharp property price inflation to come,” the analysts said. Here’s the chart:

And here’s the debt chart showing sharp increases for this year:

“Chinese policymakers are aware the market risks overheating and will act accordingly.” “In the next few months we believe the government will put further pressure on developers by tightening broad credit growth,” Zhang and Zeng said. “Property sales and investment growth will likely slow further in 2017Q1. Local government land revenue may weaken by 2017Q2.” On Monday analysts at Morgan Stanley raised the alarm about increased household borrowing, led by mortgages, in a note to clients. China’s debt to GDP rose to 276% in the third quarter this year from 249% in 2015. “This has been mainly driven by a rapid rise in new mortgages from RMB 1.7 trillion in 2014 to RMB 4.6 trillion in the past 12 months,” according to a note circulated to clients. With the debt overhang growing, the economic benefits of borrowing more are shrinking. It took nearly eight units of debt to produce one unit of GDP growth in 2016, compared with around four in 2014.

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Want to bet?

China’s Foreign Investment ‘Shopping Spree’ Over?! (SCMP)

The central government is embarking on a massive policy shift designed stem capital outflow by curbing mainland China’s outbound investment, sources informed of official instructions have told the South China Morning Post. Tighter control of outbound investment is likely to put an end to a trophy asset shopping spree by well-connected companies such as Anbang Insurance and Dalian Wanda, with Beijing is ready to cut the supply of foreign exchange for such deals. Shanghai’s municipal foreign exchange authority had told bank managers in the city that all overseas payments under the capital account bigger than US$5 million would have to be submitted to Beijing for special clearance before proceeding, the sources said. China’s central bank talks up the yuan against US dollar ‘uncertainties’

While the move did not necessarily mean all such deals would be vetoed, the regulatory procedures that would have to be navigated before completing them would take much longer, the sources said. A separate document seen by the Post, said to be the minutes of a central bank meeting on cross-border capital controls, said that from September next year Beijing would ban deals involving investment of more than US$10 billion, mergers and acquisitions valued at more than US$1 billion outside a Chinese investor’s core business, and foreign real estate deals by state-owned enterprises involving more than US$1 billion. [..] Mainland China’s foreign exchange reserves have fallen by US$873 billion since hitting an all-time high of US$3.99 trillion in June 2014. The reserves fell by US$46 billion last month, the largest monthly fall since January, but that understates the size of mainland China’s capital flight because residents are also moving yuan assets abroad.

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It’ll be allowed to blunder on. TBTF.

RBS Fails Bank Of England Stress Test (Ind.)

The Royal Bank of Scotland (RBS) has failed key hurdles in a Bank of England stress test, forcing the lender to draw up new plans in case of a financial crisis. The toughest stress test yet assessed how the UK’s seven biggest lenders would cope with hypothetical scenarios including a recession, a housing crash and a halving of the oil price. RBS, which is still 73% owned by the government after its bailout in 2008, has emerged as the worst hit in the annual health check of the banking system. This means the lender must take action to protect itself against a sharp slump in the economy. RBS has issued a plan intended to bolster its financial strength by an estimated £2bn, which has been accepted by the BoE.

The bank has also reduced its “risky” assets by £10.4bn or 21% to £38.6bn. Ewen Stevenson, RBS chief financial officer, said the bank is committed to creating a “stronger, simpler and safer” bank for their customers and their shareholders. He said: “We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank’s stress resilience including resolving outstanding legacy issues.” Barclays and Standard Chartered also struggled under the test, however neither was required to submit a revised capital plan. The test also covered HSBC, Lloyds Banking Group, Santander and Nationwide.They did not reveal any capital inadequacies in the test, the BoE said.

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“the big theme is the reduced confidence in the UK economy looking back and ahead..”

UK Shoppers ‘Resolutely Gloomy’ About The Future Of The Economy (Ind.)

Shoppers are now “resolutely gloomy” about the country’s economic future and are putting off big purchases as uncertainty mounts, according to a respected survey. The GfK Consumer Confidence Barometer, which surveys 2,000 people, recorded a measure of –22 for confidence in the economy over the next year, down from -17 in October and –9 in September. A negative number means more people think things will get worse than vice versa. Major purchases took the biggest hit according to the report, with the index falling 9 points from 14 in October to 5 in November. People’s view of their personal financial situation over the next twelve months also fell. However, both measures are above their respective post-referendum nadirs.

Spending has so far kept up as buyers stock up on Christmas gifts but the prospect of sharply increasing prices, stagnant wages and further uncertainty over access to the UK’s single market have all weighed heavily on shoppers’ expectations over the past month. Earlier in November, the Bank of England made a dramatic rise to its inflation forecast, predicting it will almost triple from 1% to 2.7% in 2017 as the effects of a weakened pound are felt. National Institute for Economic and Social Research was even more pessimistic, saying it expected inflation to quadruple to about 4% in the second half of next year. Joe Staton, Head of Market Dynamics at GfK, said, “the big theme is the reduced confidence in the UK economy looking back and ahead. We are viewing our economy over the past 12 months with increasing despondency.” Staton said that “despite strong GDP numbers”, shoppers are “resolutely gloomy about the outlook” for the economy.

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Me, I’m wondering where we are when everyone feels compelled to comment on such obvious nonsense. This morning when going through the news I kept on seeing photos of Trump and Romney having dinner. What’s the news? What’s the value? Don’t these people have more important things to do than to report on that?

The ‘Washington Post’ ‘Blacklist’ Story Is Shameful and Disgusting (Taibbi)

Last week, a technology reporter for the Washington Post named Craig Timberg ran an incredible story. It has no analog that I can think of in modern times. Headlined “Russian propaganda effort helped spread ‘fake news’ during election, experts say,” the piece promotes the work of a shadowy group that smears some 200 alternative news outlets as either knowing or unwitting agents of a foreign power, including popular sites like Truthdig and Naked Capitalism. The thrust of Timberg’s astonishingly lazy report is that a Russian intelligence operation of some kind was behind the publication of a “hurricane” of false news reports during the election season, in particular stories harmful to Hillary Clinton. The piece referenced those 200 websites as “routine peddlers of Russian propaganda.”

The piece relied on what it claimed were “two teams of independent researchers,” but the citing of a report by the longtime anticommunist Foreign Policy Research Institute was really window dressing. The meat of the story relied on a report by unnamed analysts from a single mysterious “organization” called PropOrNot – we don’t know if it’s one person or, as it claims, over 30 – a “group” that seems to have been in existence for just a few months. It was PropOrNot’s report that identified what it calls “the list” of 200 offending sites. Outlets as diverse as AntiWar.com, LewRockwell.com and the Ron Paul Institute were described as either knowingly directed by Russian intelligence, or “useful idiots” who unwittingly did the bidding of foreign masters.

Forget that the Post offered no information about the “PropOrNot” group beyond that they were “a collection of researchers with foreign policy, military and technology backgrounds.” Forget also that the group offered zero concrete evidence of coordination with Russian intelligence agencies, even offering this remarkable disclaimer about its analytic methods: “Please note that our criteria are behavioral. … For purposes of this definition it does not matter … whether they even knew they were echoing Russian propaganda at any particular point: If they meet these criteria, they are at the very least acting as bona-fide ‘useful idiots’ of the Russian intelligence services, and are worthy of further scrutiny.”

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How long would he remain alive though?

US Intelligence Experts Urge Obama To End Snowden’s ‘Untenable Exile’ (G.)

The campaign to persuade Barack Obama to allow the NSA whistleblower Edward Snowden to return home to the US without facing prolonged prison time has received powerful new backing from some of the most experienced intelligence experts in the country. Fifteen former staff members of the Church committee, the 1970s congressional investigation into illegal activity by the CIA and other intelligence agencies, have written jointly to Obama calling on him to end Snowden’s “untenable exile in Russia, which benefits nobody”. Over eight pages of tightly worded argument, they remind the president of the positive debate that Snowden’s disclosures sparked – prompting one of the few examples of truly bipartisan legislative change in recent years.

They also remind Obama of the long record of leniency that has been shown by his own and previous administrations towards those who have broken secrecy laws. They even recall how their own Church committee revealed that six US presidents, from Franklin Roosevelt to Richard Nixon, were guilty of abusing secret powers. “There is no question that Snowden broke the law. But previous cases in which others violated the same law suggest leniency. And most importantly, Snowden’s actions were not for personal benefit, but were intended to spur reform. And they did so,” the signatories write. The Church committee, or the US Senate select committee to study government operations with respect to intelligence activities, to give it its full name, sat in 1975-76 at a time of deep public anxiety about the rogue work of federal agencies.

The aftershocks of Watergate were still being felt, and Seymour Hersh had exposed in the New York Times mass illegal activities by the CIA, including routine surveillance of anti-war groups. As the 15 staff members point out, the committee investigation led to the disclosure of jaw-dropping illegal acts including the planting of an FBI informant inside the civil rights group the NAACP, attempts to push Martin Luther King into killing himself, and Cointelpro, the vast program run secretly by the FBI to disrupt progressive organisations in the US.

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Great little history lesson. Whether or not to agree with the assumptions behind it is another matter.

The End Of Empires: Rome Vs. America (SHTFP)

The year was 451, and the battle of Chalons (also known as Catalaunian Fields and Campus Martius) was fought between a coalition of Roman legionnaires, Germanic Visigoths, and Gauls against the Huns. Flavius Aetius was the Roman commanding general, and he led his forces to defeat Attila, king of the Huns and commander of the Hun armies. The loss caused Attila to withdraw and skirmish into Italy, but again (this time through diplomacy and concessions) he withdrew in 452, returning into what is now modern Hungary. Attila died in 453, and the Hun menace to Europe had ended. Aetius had been the declining (and fragmented) Western Roman Empire’s best chance to restructure itself. He had fought in Gaul and throughout Italy and Europe for decades, sometimes even with support from the Huns before Attila began his quest for empire.

A master strategist, tactician, diplomat, and warrior, he effectively stemmed the collapse of the Western Roman Empire for another 25 years. In all probability, he may have been able to turn things around for a longer period of time. This was not to be, as he was assassinated by none other than the Emperor Valentinian III and his henchman Heraclius on 22 September 454. The emperor killed the very man who had protected and assured his throne, and worse: now there was no true strategist to take the reins of military command. The last great Roman general was no more, and the Western Roman Empire continued to decline and fragment. [..] Less than 25 years after the battle of Chalons had given it a fighting chance, the Western Roman Empire was no more. [..]And here we are, as history repeats itself, in the last days of the American Empire.

Now ready to assume the Purple and ascend to the seat of power, Donald Trump is going to command and lead (we hope). The campaigns for the midterm elections will begin in November of 2017, therefore Trump has less than one year to begin to reverse the devastation wrought by two consecutive Obama terms that have, in eight years, placed the country on its deathbed and measured it for burial. In a four-year term of office, Donald Trump has to do the job that Aetius did for Rome in two decades, with the last year of that term being wasted on the primary focus of his reelection. What is the difference between Rome and America? A vast geographical area, influxes of alien migrants, an economy that is faltering, a military less than at its best, immorality, vice, and corruption at every turn, societal degradation and a welfare state, and foreign nations ready to pounce characterize both empires.

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“Hillary Clinton’s campaign was engineered from the get-go to complete the demolition of American manhood..”

The Rediscovery of Men (Jim Kunstler)

Donald Trump was about as far from my sense of the male ideal as anything short of the Golem. His accomplishments in life — developing hotels that look like bowling trophies and producing moronic TV shows — seem as flimsy as the plastic golden heraldry plastered on his casinos. His knowledge of the world appears to be on the level of a fifth grader. He can barely string together two coherent sentences off-teleprompter. I was as astonished as anyone by the disclosure of his “grab them by the pussy” courtship advice to little Billy Bush. In my experience, it seemed a very poor strategy for scoring some action, to say the least. In a better world — perhaps even the America he imagines to have been great once — Donald Trump would be a kind of freak among men, a joke, a parody of masculinity.

But then consider the freak show that American culture has become in our time and it shouldn’t be surprising that a cartoon nation has ended up with a cartoon of a man as head-of-state. In fact, I doubt that there even is any remaining collective idea of what it means to be a man here in terms of the ancient virtues. Honor? Dignity? Patience? Prudence? Fuhgeddabowdit. The cultural memory of all that has been erased. The apotheosis of Trump may remind a few people of all that has been lost, but we’re starting from nearly zero in the recovery of it. Consider also the caliber of the male persons who stepped into the arena last spring when the election spectacle kicked off. Only Bernie Sanders came close to representing honorable manhood — in the form of your irascible old “socialist” uncle from Brooklyn — while the rest of them acted like Elmer Fudd, Mighty Mouse, and Woody Woodpecker. And then when the primary elections ended, Bernie drove a wooden stake into his own heart in a bizarre act of political hara-kiri.

Hillary Clinton’s campaign was engineered from the get-go to complete the demolition of American manhood in what turned out to be a reckless miscalculation. “I’m with her (and against him).” Too much in recent American history has been against “him” and a great many of the hims out there began to notice that they were being squeezed out of the nation’s life like watermelon seeds. Most particularly, men were no longer considered necessary in whatever remained of the family unit. This went against the truth of the matter, of course, because nothing has been more harmful to everyday life than the absence of fathers. And this was connected to the secondary calamity of men losing their roles in the workplace — and the loss of self-respect connected with that. So the election awakened some sleeping notion that life was wildly out of balance in America. And being so out of balance, it swung wildly in the other direction.

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All major food firms are involved. Shun all products that contain palm oil. It’s incredibly damaging in many ways.

Major Global Firms Buy Indonesia Palm Oil Produced By Child Labor (R.)

Global consumer companies, including Unilever, Nestle, Kellogg and Procter & Gamble, have sourced palm oil from Indonesian plantations where labor abuses were uncovered, Amnesty International said on Wednesday. Children as young as eight worked in “hazardous” conditions at palm plantations run by Singapore-based Wilmar International and its suppliers on the Indonesian islands of Kalimantan and Sumatra, Amnesty said in a report. Amnesty, which said it interviewed 120 workers, alleges that many of them worked long hours for low pay and without adequate safety equipment. The palm oil from these plantations could be traced to nine multinational companies, it said.

“Despite promising customers that there will be no exploitation in their palm oil supply chains, big brands continue to profit from appalling abuses,” said Meghna Abraham, senior investigator at Amnesty. The NGO said it chose Wilmar as the focus of its investigation as the company is the world’s largest processor and merchandiser of palm and lauric oils, controlling more than 43% of the global palm oil trade. Other companies operating palm plantations in Indonesia include Golden Agri-Resources, Indofood Agri Resources and Astra Agro Lestari.

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What a blemish on the US this is.

North Dakota Moves To Block Supplies From Reaching Pipeline Protesters (R.)

North Dakota officials on Tuesday moved to block supplies from reaching oil pipeline protesters at a camp near the construction site, threatening to use hefty fines to keep demonstrators from receiving food, building materials and even portable bathrooms. Activists have spent months protesting plans to route the $3.8 billion Dakota Access Pipeline beneath a lake near the Standing Rock Sioux reservation, saying the project poses a threat to water resources and sacred Native American sites. State officials said on Tuesday they would fine anyone bringing prohibited items into the main protest camp following Governor Jack Dalrymple’s “emergency evacuation” order on Monday. Earlier, officials had warned of a physical blockade, but the governor’s office backed away from that.

Law enforcement would take a more “passive role” than enforcing a blockade, said Maxine Herr, a spokeswoman for the Morton County Sheriff’s Department. “The governor is more interested in public safety than setting up a road block and turning people away,” Herr said by telephone. Officers will stop vehicles they believe are headed to the camp and inform drivers they are committing an infraction and could be fined $1,000. These penalties should serve as a hindrance, according to Cecily Fong, a spokeswoman for the North Dakota Department of Emergency Services. “So that effectively is going to block that stuff (supplies), but there is not going to be a hard road block,” Fong said by telephone.

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One can be quite specific here. Insurers so far don’t act because the government doesn’t.

The Areas America Could Abandon First (BBG)

So far this year, the Federal Emergency Management Agency has spent $1.1 billion on what are called Individual Assistance payments, which help households recover from natural disasters. There are no limits on the number of times a household can apply, so the program isn’t just a safety net; for some people, it’s effectively a subsidy to live in areas that are especially vulnerable to hurricanes, floods and storm surges. That hasn’t gone unnoticed in Washington. In 1999, a Nebraska congressman introduced a bill preventing some properties with multiple claims from getting help – not just disaster relief, but also subsidized flood insurance. Two years later, the George W. Bush administration’s first budget proposed denying aid to the “worst offending repetitive loss properties.”

Under President Barack Obama, FEMA proposed reducing disaster aid for public buildings damaged more than once in the previous decade if local governments hadn’t done anything to protect them. None of those proposals took effect. But as extreme weather gets worse, those federal subsidies will only become more expensive – increasing the need to rethink government support for those who choose to live in harm’s way. “Climate change is real and will lead to even more frequent and costly disasters,” Rafael Lemaitre, FEMA’s director of public affairs, told me. “We must continue to work with states to implement longer-term projects and strategies that mitigate against climate change.” That means it’s time to consider an impolitic question: If federal support gets rolled back, which areas will people have the greatest incentive to leave?

To answer that, I asked FEMA which parts of the country have the most households that repeatedly get Individual Assistance payments, which are a useful proxy for exposure to all types of extreme weather. The agency gave me a list of 1,930 counties where at least one address had requested such aid more than once since 1998 – 1.3 million households in total. That data, which the agency said it had never before compiled, is reflected in the graphic below; the shading represents the number of households per capita that have applied for FEMA aid multiple times.

Unsurprisingly, the areas where households are most likely to repeatedly request aid are generally along coasts. The surprise is how they’re distributed: Rather than being spread uniformly along shorelines, a small number of counties account for the most repeat claims – one more reminder that the burden of climate change will not fall evenly. That’s also true within the most affected counties. The charts below show the number of households per capita requesting disaster aid more than once since 1998, by ZIP code, for four areas with especially high concentrations of repetitive claims. These charts don’t just map the losers from any reduction in federal support: At a more basic level, they show some of the places Americans will face the most pressure to abandon because of extreme weather — at least, people who can’t afford the full cost of recovering from natural disasters.

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Unverified, but not at all unlikely.

Turkey Has Secret Plan To Send 3,000 Refugees To Greece Every Day (Ind.)

The Turkish government has a secret plan to allow 3,000 refugees to sail to Greece every day, intelligence officials have claimed. Greek analysts claim thousands of dinghies and motorboats have massed along the Turkish coast as the refugee deal agreed between Ankara and Brussels looks set to unravel. Turkish President Erdogan threatened to open the borders if the EU continued to block talks on the country’s accession to the union. The European Parliament voted to temporarily halt membership talks amid concerns about the brutal crackdown on dissent in the country following an attempted military coup in July. Mr Erdogan warned: “If you go any further, these border gates will be opened.

Neither me nor my people will be affected by these dry threats. It wouldn’t matter if all of you approved the vote”. The deal reached in March meant any refugee who arrived on Italian or Greek shores would be sent back to Turkey in exchange for EU member countries accepting another refugee from a Turkish camp on a “one for one” basis. Ankara will also received aid money to help it care for the refugees within its borders, visa free travel for its citizens and the speeding up of membership talks. But according to Greek newspaper Proto Thema, Ankara has given up on hope of Brussels living up to its side of the deal and could start allowing the refugees to flee “within a matter of weeks”.

Greek intelligence expert Athanassios Drougas told The Times: “No one is underestimating Mr Erdogan and his unpredictability these days. “These plans, along with explicit threats that the Turkish president has made in recent weeks, have Greece’s joint chiefs of staff seriously concerned. “They are fearful and they have told the political leadership here that if Turkey opens the floodgates yet again, Greece, in its current state of financial and social distress, will not be able to withstand the shock. It will spell war or wreak the havoc of one. “With Europe in a mess, Mr Erdogan feels he has a free hand in trying to blackmail the bloc using the refugee crisis as leverage.”

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Aug 162016
 
 August 16, 2016  Posted by at 9:14 am Finance Tagged with: , , , , , , , , ,  1 Response »


Harris&Ewing Army surplus 1919

Mining Giant BHP Slumps To Record Loss (BBC)
Chinese Traders Are Falling Out Of Love With Commodities (BBG)
China’s Fading Animal Spirits (BBG)
Germany Amassing Huge Surpluses – And Huge Risks (MW)
Bundesbank Floats Higher Retirement Age -69- in German Pension Debate (BBG)
Top UK Firms Paid Five Times More In Dividends Than Into Pensions (G.)
Pension Funds Are Driving The Biggest Bond Bubble In History (ZH)
Hedge Funds Bet Dollar Will Lose More Ground Versus Yen (BBG)
Krugman’s Arrow Theory Misses Target by Light Years (Mish)
A Government of Scoundrels, Spies, Thieves, And Killers (JW)
Jimmy Carter: The US Is an ‘Oligarchy With Unlimited Political Bribery’ (IC)
Burning Down the House (Jim Kunstler)
Sleeping Bear Of Debt Set To Wake (Herald Sun)
One-Third Of New Zealand Children Live Below The Poverty Line (G.)

 

 

No matter what anybody does, the overbuilding, overcapacity and overconsumption in China can no longer be extended. Infrastructure investment in other countries won’t be enough to pick up the slack.

Mining Giant BHP Slumps To Record Loss (BBC)

Mining giant BHP Billiton has reported a record loss for the past year following a mining disaster in Brazil and a slump in commodity prices. The Anglo-Australian commodities firm reported an annual net loss of $6.4bn (£5bn) for the year to 30 June. The global mining sector has seen years of weak demand attributed largely to slowing growth in China. BHP results were also hit by costs after the Samarco mining disaster in Brazil, which killed 19 people. The record losses come after the company had reported a $1.9bn net profit. “While commodity prices are expected to remain low and volatile in the short to medium term, we are confident in the long-term outlook for our commodities, particularly oil and copper,” chief executive Andrew Mackenzie said in a statement.

Underlying earnings for the past year, which strip out one-off costs, came in at $1.22bn. The financial fallout from the Samarco mining tragedy is still not clear though warns James Butterfill, head of research & investment strategy at ETF Securities. “There’s a huge uncertainty overhang,” he told the BBC. “The report hasn’t been published with regard to the Samarco dam collapse and there’s currently a $48bn lawsuit. It’s unrealistic to be that amount, but this is really BHP’s Macondo well incident theoretically that BP endured.”

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As consumption and investment falls, so will prices. Commodity producers worldwide are sitting on huge overcapacity. They must shrink their operations, but the first reaction is always to produce more to make up for falling revenue.

Chinese Traders Are Falling Out Of Love With Commodities (BBG)

Chinese traders are falling out of love with commodities. Aggregate volumes across the nation’s three biggest exchanges have shrunk to the lowest level in six months, a shadow of the fevered trading in March and April when retail investors charged into markets for everything from iron ore to cotton, driving up prices and stoking fears of a bubble. Chinese authorities brought an end to the frenzy by introducing curbs on excessive speculation and trading has failed to recover since. Flush with record credit and hunting for returns, investors piled into commodities in the first half of the year, spurred by bets that China’s economic stimulus and industrial reforms would lead to shortages of raw materials. Now, there’s just not much for traders to get excited about, according to Wei Lai, an analyst with Cofco Futures.

Industrial production and fixed-asset investment slowed in July and a measure of new credit expanded the least in two years, spurring concern over growth in the world’s second-largest economy. “Investors are reluctant as there isn’t much information to play around with in the market,”’ Shanghai-based Wei said in an e-mail. High prices for some commodities may also be deterring traders, Wei said. Combined aggregate volume across the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange slid to 23 million contracts as of Aug. 12, the lowest since February and compared with a peak of more than 80 million on April 22 when a total of $261 billion changed hands. Chinese exchanges double count trading volume and turnover.

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China will become known for the biggest misallocation of investment in history.

China’s Fading Animal Spirits (BBG)

The July wobble in China’s economy – like its multi-year slowdown – has much to do with the waning “animal spirits” of Chinese businesses caused by an historic shift in housing. That’s according to Chi Lo, greater China senior economist at BNP Paribas Investment Partners in Hong Kong. A property-led pick up in the first half lost momentum in July, suggesting the market is struggling to digest an overhang in supply of apartments. “In the past, the economic players expanded supply first and created jobs so as to create demand, but that is gone now,” Lo said in a telephone interview after Friday’s disappointing data. “It has to clean out the excess capacity, which means the supply-expansion model has to change.”

Another way of putting it: China’s build-it-and-they-will-come strategy needs to shift to one where demand, not supply, is in the drivers’ seat. It’s a change companies are struggling to come to terms with, leaving private investment in the doldrums. “Little attention has been paid to the underlying structural factor that is hurting private investment incentive,” Lo wrote in a research note ahead of the data last week. “This is the weakening of the final demand for output produced by the investment or capital-intensive sector in China. The key to understand this puzzle is China’s housing market.” That’s because it accounts for about half of all investment in China once spillovers into industries like metals and machinery are thrown in.

With such pervasive impact on everything from cement to cars, China’s property market was dubbed the most important sector in the universe back in 2011 by a UBS economist. BNP’s Lo says it’s unlikely to ever recapture the glory days of old. “China’s housing demand has likely passed its high-growth phase, with housing construction growth expected to go into a secular decline soon,” according to Lo. “This means that the capital-intensive sector, which has focused on producing all this housing units through the decades, is facing a structural decline in demand for its output.”

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One might be forgiven for thinking Berlin is blowing up the eurozone on purpose. What is needed are transfer payments to southern Europe, but there is too much resistance to those.

Germany Amassing Huge Surpluses – And Huge Risks (MW)

As one of the world’s largest exporters, Germany saw an important part of the political and economic rationale of entering European economic and monetary union in 1999 as lowering risks on its international commercial interactions. Nearly two decades later, Germany, more than ever, is an export champion. It is likely to register the world’s largest trade surplus this year, according to the OECD, at $324 billion (against China’s $314 billion), and will amass a record current-account surplus of 9.2% of gross domestic product. Yet, as a result of the large imbalances within EMU that these surpluses symbolize, Germany is a long way from insulating itself against foreign-currency risks.

The Bundesbank provides the strongest indicator of this change. The quintessentially hard-money central bank provided a role model for the ECB at the heart of the euro bloc. Yet the Bundesbank now confronts on its balance sheet a range of potential hazards that the euro’s founding fathers in the 1980s and 1990s would have regarded as inimical to economic stability and, for that reason, impossible to countenance. The Bundesbank’s balance sheet rose to €1.2 trillion in July from €222 billion when monetary union started in January 1999. Underlining the Bundesbank’s pivotal role in eurozone monetary operations, the German central bank’s balance sheet has expanded faster than that of the Eurosystem (the ECB and the constituent national central banks) as a whole.

The Bundesbank’s balance sheet now encompasses around 37% of Eurosystem assets of €3.3 trillion (computed on a net basis that strips out individual central banks’ claims and liabilities against each other under the Target-2 payments system), against 32% at the inception of EMU. The acceleration stands in marked contrast to the central bank’s stated desire, when monetary union started, to slim down its balance sheet and especially to economize on foreign-exchange reserves, held mostly in dollars. These have traditionally (together with gold) made up the lion’s share of the Bundesbank’s foreign assets, but have been cut from €45 billion to €50 billion when the euro was launched to only €30 billion to €35 billion in recent years.

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You’re not going to solve the problems by tweaking the age; that merely shifts the issue into the future. Can, road.

Bundesbank Floats Higher Retirement Age -69- in German Pension Debate (BBG)

Germany’s Bundesbank said raising the legal retirement age to 69 by 2060 could ease some of the pressure on the country’s state pension system as the population ages. Recent reforms won’t protect citizens from a drop in the level of pension payments from 2050, the central bank said in its monthly report published on Monday. Citizens who don’t opt for state-supported private insurance may face shortfalls a lot sooner. Low average interest rates could further reduce available provisions. While higher premiums could theoretically keep payouts stable, they would “raise the strain on those paying the contributions, and an increasing, high burden of payments overall has negative consequences on economic development,” the Bundesbank wrote. To avoid that, “the legal retirement age ultimately needs to be adjusted.”

The Bundesbank said the government’s current plans that include raising the retirement age to 67 by 2030 and increasing contributions don’t account for the fact that the ratio of retirees to contributors is set to widen further. Increasing life expectancy means retirees will draw from pension funds for a longer period of time, and a generation of baby boomers that retires post-2030 means there will be more pensioners to take care of per working adult, while birth rates remain low, according to the report. “Amid demographic change, the parameters of a contribution-based pension system can’t all be kept stable,” the Bundesbank said. “Confidence in pension insurance could be strengthened and uncertainty about financial stability at old age could be decreased if it were made clear how the parameters of retirement age, provision levels, and contribution rates can be adjusted in the long term.”

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Short termism perfected.

Top UK Firms Paid Five Times More In Dividends Than Into Pensions (G.)

Britain’s biggest companies paid five times more in dividends than they did pension contributions last year, according to a new report that highlights the pressure on retirement schemes. FTSE 100 companies paid £13.3bn towards their defined benefit pension schemes, compared with £71.8bn in payments to shareholders, according to the consultancy firm LCP’s annual study of pensions. The report has been published after Sir Philip Green was heavily criticised by a parliamentary investigation into the collapse of BHS for leaving the retailer with a £571m pension deficit, despite his family and other investors banking more than £400m in dividends. BHS’s 164 stores are all scheduled to close by 28 August, a week later than administrators planned last month as the retailer continues to sell its remaining stock.

Green remains locked in talks with the Pensions Regulator about a rescue deal for the BHS pension scheme. He has pledged to sort out the problems facing it, but the regulator has launched an investigation into whether the billionaire tycoon should be forced to make a financial contribution to fill the black hole. Other companies with large pension deficits could face action from the regulator if they are paying dividends, LCP says in its report. The 56 FTSE 100 companies that disclosed a pension deficit at the end of their 2015 financial year had a combined deficit of £42.3bn, but the same companies paid out dividends worth £53bn, 25% more than their pension contributions.

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“..a $1BN pension that is fully funded at prevailing interest rates would be nearly $700mm underfunded if interest rates declined 300bps and all of their assets were invested in 30-year treasury bonds.”

Pension Funds Are Driving The Biggest Bond Bubble In History (ZH)

We’ve frequently discussed the many problems faced by pension funds. Public and private pension funds around the globe are massively underfunded yet they continue to pay out current claims in full despite insufficient funding to cover future liabilities…also referred to as a ponzi scheme. In fact, we recently noted that the Central States Pension Fund pays out $3.46 in pension funds for every $1 it receives from employers. The pension problem is often attributed to low returns on assets. As Bill Gross frequently points out, low interest rates are the enemy of savers and pension funds have some of the biggest savings accounts around. That said, the impact of declining interest rates on the asset side of a pension’s net funded status is dwarfed by the much more devastating impact of declining discount rates used to value future benefit obligations.

The problem is one of duration. By definition, pension liabilities represent the present value of future benefit payments owed to retirees which is a virtually perpetual cash flow stream. Obviously, the longer the duration of a cash flow stream the larger the impact of interest rate swings on the present value of that stream. We created the chart below as a simplistic illustration of the pension “duration dilemma.” The chart graphs how a pension liability grows in a declining interest rate environment versus the value of 5-year and 30-year treasury bonds. As you can see, a $1BN pension that is fully funded at prevailing interest rates would be nearly $700mm underfunded if interest rates declined 300bps and all of their assets were invested in 30-year treasury bonds. The result is obviously even worse if the fund’s assets are invested in shorter duration 5-year treasuries.

Pension Duration

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How Abenomics gets strangled.

Hedge Funds Bet Dollar Will Lose More Ground Versus Yen (BBG)

Hedge funds and other large speculators increased net bets the dollar will weaken against the yen to the highest level in a month, according to Commodity Futures Trading Commission data as of Aug. 9. Traders will focus on the meetings of the Federal Reserve and the Bank of Japan next month for direction, after disappointing stimulus announced last month by the BOJ failed to halt yen strength.

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“Krugman would do himself a favor if he threw away what he thinks he knows about economics and went back for a nice 5th grade education.”

But the saddest part of course is that belugas are kept in an aquarium and learn tricks to amuse Japanese. Who are we?

Krugman’s Arrow Theory Misses Target by Light Years (Mish)

With full employment, roads paved and repaved to nowhere, and bubble blowing beluga whales, just what the hell is Japan supposed to waste money on? Curiously, Krugman says it doesn’t matter. He once proposed a fake aliens from outer space scare as the solution to stimulate the economy. But roads and bridges and bubble blowing blowing beluga whales are surely better than fabricating space aliens or paying people to dig ditches and others to fill them up again. The problem is, it’s hard arguing with economic illiterates like Krugman. He can (and will) say “spending wasn’t enough”.

One can never prove him wrong. The implosion of Japan would not do it. His built-in excuse would be Japan did too little, too late. Just once I would like Krugman to address in his model what happens when the stimulus stops. He cannot and he won’t because he has no answer. The average 5th grader understands it’s absurd to pay money for something guaranteed to be useless, but the average Keynesian economist doesn’t. Krugman would do himself a favor if he threw away what he thinks he knows about economics and went back for a nice 5th grade education.

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John Whitehead does not mince words.

A Government of Scoundrels, Spies, Thieves, And Killers (JW)

“There is nothing more dangerous than a government of the many controlled by the few.”—Lawrence Lessig, Harvard law professor

The U.S. government remains the greatest threat to our freedoms. The systemic violence being perpetrated by agents of the government has done more collective harm to the American people and our liberties than any single act of terror. More than terrorism, more than domestic extremism, more than gun violence and organized crime, the U.S. government has become a greater menace to the life, liberty and property of its citizens than any of the so-called dangers from which the government claims to protect us. This is how tyranny rises and freedom falls.

As I explain in my book Battlefield America: The War on the American People, when the government views itself as superior to the citizenry, when it no longer operates for the benefit of the people, when the people are no longer able to peacefully reform their government, when government officials cease to act like public servants, when elected officials no longer represent the will of the people, when the government routinely violates the rights of the people and perpetrates more violence against the citizenry than the criminal class, when government spending is unaccountable and unaccounted for, when the judiciary act as courts of order rather than justice, and when the government is no longer bound by the laws of the Constitution, then you no longer have a government “of the people, by the people and for the people.”

What we have is a government of wolves. Worse than that, we are now being ruled by a government of scoundrels, spies, thugs, thieves, gangsters, ruffians, rapists, extortionists, bounty hunters, battle-ready warriors and cold-blooded killers who communicate using a language of force and oppression. Does the government pose a danger to you and your loved ones? The facts speak for themselves. We’re being held at gunpoint by a government of soldiers—a standing army. While Americans are being made to jump through an increasing number of hoops in order to exercise their Second Amendment right to own a gun, the government is arming its own civilian employees to the hilt with guns, ammunition and military-style equipment, authorizing them to make arrests, and training them in military tactics.

Among the agencies being supplied with night-vision equipment, body armor, hollow-point bullets, shotguns, drones, assault rifles and LP gas cannons are the Smithsonian, U.S. Mint, Health and Human Services, IRS, FDA, Small Business Administration, Social Security Administration, National Oceanic and Atmospheric Administration, Education Department, Energy Department, Bureau of Engraving and Printing and an assortment of public universities. There are now reportedly more bureaucratic (non-military) government civilians armed with high-tech, deadly weapons than U.S. Marines. That doesn’t even begin to touch on the government’s arsenal, the transformation of local police into extensions of the military, and the speed with which the nation could be locked down under martial law depending on the circumstances. Clearly, the government is preparing for war—and a civil war, at that—but who is the enemy?

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2 weeks old, but highly relevant.

Jimmy Carter: The US Is an ‘Oligarchy With Unlimited Political Bribery’ (IC)

Former president Jimmy Carter said on the nationally syndicated radio show the Thom Hartmann Program that the United States is now an “oligarchy” in which “unlimited political bribery” has created “a complete subversion of our political system as a payoff to major contributors.” Both Democrats and Republicans, Carter said, “look upon this unlimited money as a great benefit to themselves.” Carter was responding to a question from Hartmann about recent Supreme Court decisions on campaign financing like Citizens United. Transcript: HARTMANN: Our Supreme Court has now said, “unlimited money in politics.” It seems like a violation of principles of democracy. … Your thoughts on that?

CARTER: It violates the essence of what made America a great country in its political system. Now it’s just an oligarchy, with unlimited political bribery being the essence of getting the nominations for president or to elect the president. And the same thing applies to governors and U.S. senators and congress members. So now we’ve just seen a complete subversion of our political system as a payoff to major contributors, who want and expect and sometimes get favors for themselves after the election’s over. … The incumbents, Democrats and Republicans, look upon this unlimited money as a great benefit to themselves. Somebody’s who’s already in Congress has a lot more to sell to an avid contributor than somebody who’s just a challenger.

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“..generate Money-Out-Of-Thin-Air (QE) for the purpose of allowing “liquidity” flows to end up in US equity and bond markets in order to paint a false picture of “recovery” so as to insure the election of Hillary Clinton.”

Burning Down the House (Jim Kunstler)

There’s a new feature to the Anything-Goes-and-Nothing-Matters economy: Nothing-Adds-Up. The magicians who pretend to measure the growth of GDP (Gross Domestic Product — the monetary value of all the finished goods and services) came up with a second quarter “adjusted” figure of 1.2 percent. That would have to be construed by anyone acquainted with basic econ stats as perfectly dismal. And yet the Bureau of Labor Statistics put out a sparkly Nonfarm Payroll Report of 255,000 for July, way above the forecast 180,000. There were so many ways to game the jobs number — between people forced to work more than one shit job and the notorious “birth/death model” used to just make up any old number for political purposes — that no one can take this information seriously.

Anyway, the GDP number was instantly forgotten and the jobs number launched the stock markets to previously uncharted record altitude. It’s that time of the year for the hedge fund boys, with their testosterone flowing, to start burning down their house rentals in the Hamptons. And it’s also the time of year for an ever more stressed financial system to go down in flames. And, of course, it’s a presidential election season. Even for one allergic to conspiracy theories, it’s not farfetched to imagine a coordinated effort by central banks — under government direction — to generate Money-Out-Of-Thin-Air (QE) for the purpose of allowing “liquidity” flows to end up in US equity and bond markets in order to paint a false picture of “recovery” so as to insure the election of Hillary Clinton.

I think that is exactly behind the recent money-printing activities by the Japanese and European Central Banks, and the Bank of England. Why would it end up in US markets? For bonds, because the Euro and Japanese bond sovereign yields are in sub-zero territory and the BOE just cut its prime rate lower than the US Federal Reserve’s prime rate; and for stocks, because the value of the other three currencies is sliding down and the dollar has been rising — so, dump your falling currency for the rising dollar and jam it into rising US stocks. It’ll work until it doesn’t.

Why do this for Hillary? Because she represents the continuity of all the current rackets being used to prop up belief in the foundering business model of western civilization. If she doesn’t get into the White House there may be no backstopping of the insolvent banks and bankrupt governments and a TILT message will appear in the sky.

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Australia is a private debt disaster. Public debt is much less important.

Sleeping Bear Of Debt Set To Wake (Herald Sun)

The great sleeping bear of Australia’s economic future – of your economic future – is the current account deficit and our foreign debt. They have completely disappeared from the front page – indeed, even from the business pages. Nobody seems to mention them. But they most certainly haven’t disappeared in reality. And in reality, they’ve never been bigger. The deficit, the CAD, in the latest March quarter was more than $20 billion. It will top $80 billion for the full 2015-16 year. The net foreign debt sits at a tad more than $1 trillion. To give you a sense of the scale, that’s more than half the size of the Australian economy; more than double the total of all federal tax revenues in a year.

The CAD is the difference between what we earn from exports and from our international investments each year and what we pay for imports and to foreign investors in Australia. That last bit includes the interest we pay on our existing foreign debt. And the deficit each year is mostly covered by borrowing more from foreigners. In recent years, the biggest borrowers have been our banks. So we have this merry-go-round. The bigger the foreign debt, the bigger the deficit tends to be because of the interest paid on the debt. Then, the bigger the deficit, the bigger the foreign debt gets. Sound familiar? Because it’s exactly the same as the merry-go-round with the Budget deficit and the national debt. The deficit increases the national debt; and the interest on the debt increases the next year’s deficit; and that deficit further increases the debt.

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“..as a society, are we really prepared to let our children grow up this way?”

One-Third Of New Zealand Children Live Below The Poverty Line (G.)

One-third of New Zealand children, or 300,000, now live below the poverty line – 45,000 more than a year ago. Unicef’s definition of child poverty in New Zealand is children living in households who earn less than 60% of the median national income – NZ$28,000 a year, or NZ$550 a week. The fact that twice as many children now live below the poverty line than did in 1984 has become New Zealand’s most shameful statistic. “We have normalised child poverty as a society – that a certain level of need in a certain part of the population is somehow OK,” said Vivien Maidaborn, executive director of Unicef New Zealand. “The empathy Kiwis are famous for has hardened. Over the last 20 years we have increasingly blamed the people needing help for the problem.

“If you can’t afford your children to have breakfast, you’re a bad budgeter. If you aren’t working you’re lazy. But our subconscious beliefs about some people ‘deserving’ poverty because of poor life choices no longer apply in today’s environment. We have to ask ourselves as a society, are we really prepared to let our children grow up this way?” For a third of New Zealand children the Kiwi dream of home ownership, stable employment and education is just that – a dream. For poor children in the developed South Pacific nation of 4.5 million illnesses associated with chronic poverty are common, including third world rates of rheumatic fever (virtually unknown by doctors in comparable countries like Canada and the UK), and respiratory illnesses.

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May 232016
 


Harris&Ewing Hancock’s, the Old Curiosity Shop, 1234 Pennsylvania Avenue 1914

Japan April Imports Fall 23.3%, Exports Drop 10.1% (BBG)
Japan May Factory Activity Shrinks Most In Over Three Years (R.)
Investors Check Out of Europe (WSJ)
US Dollar Will Be The Winner When The EU Volcano Erupts (CNBC)
Saudi Financial Crisis ‘Could Leave Oil At $25’ As Bills Get Paid In IOUs (AEP)
The IMF And Calling Berlin’s Bluff Over Greece (Münchau)
Athens Agrees Fiscal Measures In Exchange For Debt Relief Talks (FT)
China Steps Up War On Banks’ Bad Debt (FT)
We MUST Quit The EU, Says Cameron’s Guru (DM)
Support For EU Falls Sharply In Britain’s Corporate Boardrooms (G.)
Swiss To Vote On $2,500 a Month Basic Income (BBG)
Snowden Calls For Whistleblower Shield After Claims By New Pentagon Source (G.)
R.I.P., GOP: How Trump Is Killing the Republican Party (Taibbi)
Turks Won’t Get EU Visa Waiver Before 2017: Bild (R.)
Greek Police Poised To Evacuate Idomeni Refugee Camp (Kath.)

In praise of Abenomics…

Japan April Imports Fall 23.3%, Exports Drop 10.1% (BBG)

Japan’s exports fell for a seventh consecutive month in April as the yen strengthened, underscoring the growing challenges to Prime Minister Shinzo Abe’s efforts to revive economic growth. Overseas shipments declined 10.1% in April from a year earlier, the Ministry of Finance said on Monday. The median estimate of economists surveyed by Bloomberg was for a 9.9% drop. Imports fell 23.3%, leaving a trade surplus of 823.5 billion yen ($7.5 billion), the highest since March 2010. Even after coming off an 18-month high earlier this month, the Japanese currency has gained 9% against the dollar this year, eroding the competitiveness of the nation’s products overseas and hurting the earnings of exporters.

Concern about the impact of the yen was on show over the weekend as Finance Minister Taro Aso and his U.S. counterpart disagreed over the seriousness of recent moves in the foreign-exchange market. “Exports are getting a hit from the yen’s gains and weakness in overseas demand, especially in emerging nations,” said Yuichi Kodama at Meiji Yasuda Life Insurance in Tokyo, who added that last month’s earthquakes in Kumamoto also will likely slow exports. “There’s a high chance that Japan’s economy will return to contraction in the April-June period as domestic consumption and exports look weak.”

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Calling Peter Pan!

Japan May Factory Activity Shrinks Most In Over Three Years (R.)

Japanese manufacturing activity contracted at the fastest pace in more than three years in May as new orders slumped, a preliminary survey showed on Monday, putting fresh pressure on the government and central bank to offer additional economic stimulus. The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 47.6 in May on a seasonally adjusted basis, from a final 48.2 in April. The index remained below the 50 threshold that separates contraction from expansion for the third month and showed that activity shrank at the fastest since December 2012. The index for new orders fell to a preliminary 44.1 from 45.0 in the previous month, also suggesting the fastest decline since December 2012.

The aftermath of earthquakes in southern Japan in April may still be weighing heavily on some producers, a statement from Markit said, while foreign demand also contracted sharply. Japan escaped a technical recession in the first quarter, GDP data showed last week, but economists warned the underlying trend for consumer spending remains weak. There are also concerns that companies have already started to delay business investment due to uncertainty about overseas economies. Speculation is growing that Prime Minister Shinzo Abe will delay a nationwide sales tax hike scheduled for next April to focus on measures that will strengthen domestic demand. Economists also expect the Bank of Japan will ease monetary policy even further by July as a strong yen and still-sluggish economy threaten its ability to meet its ambitious inflation target, a Reuters poll showed.

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“Banks are Europe’s worst-performing sector, having fallen nearly 19%.”

Investors Check Out of Europe (WSJ)

Investors are fleeing Europe. Fund managers are pulling cash out of European equity and debt markets in response to concerns about the continent’s fractious politics, ultralow interest rates and weak banks, and relentless economic malaise. Investors have sold exchange-traded funds tracking European shares for nearly 15 weeks—the longest stretch since 2008—according to UBS. Meanwhile, annual net outflows from eurozone bonds were running at over half a trillion euros as of the end of March, according to a Pictet Wealth Management analysis of data from the ECB. That is happening as investors are turning away from Europe’s growing pool of negative-yielding debt. The money is finding a home in places from U.S. Treasurys to emerging economies, helping to push up prices in those markets.

Just last year, Europe was a top pick by global fund managers as it recovered from the sovereign-debt crisis of 2010 to 2012. The current retreat shows that this rehabilitation has faded, and fast. “It’s a one-way flow out of Europe,” said Ankit Gheedia, equity and derivatives strategist at BNP Paribas SA. “You buy something that doesn’t give you a return, you sell.” Last year, ECB monetary stimulus and a fledgling economic recovery brought investors back to Europe after they fled during the eurozone debt crisis. The Stoxx Europe 600 gained 6.8% in 2015, while the S&P 500 lost almost 1%. Now people are leaving again. In recent weeks, investors have been selling equities around the world over concerns about the global economy. But the selling in Europe has been particularly pronounced.

Funds have sold around $22.6 billion worth of ETFs that track European equity since March, which is equivalent to roughly 9.4% of the total held of these investments, according to Mr. Gheedia. Meanwhile, global fund managers’ allocation to eurozone equities dropped to 17-month lows in May, according to a survey by Bank of America Merrill Lynch. When prospects seemed sunnier last year, a net 55% of fund managers favored the region. This is already taking a toll on European markets. The Stoxx Europe 600 is down nearly 8% this year, compared with a roughly flat S&P 500. Banks are Europe’s worst-performing sector, having fallen nearly 19%.

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And when the China Ponzi bursts.

US Dollar Will Be The Winner When The EU Volcano Erupts (CNBC)

Europe’s apparent inability to secure its monetary union leaves the world without any credible dollar alternatives. Those who were expecting that a legal tender of an economic system nearly matching the size of the American economy would offer an effective instrument of portfolio diversification have to accept a simple reality: The dollar remains an irreplaceable global transactions currency and, by far, the world’s most important reserve asset. The pious hopes of the French President François Mitterrand and the German Chancellor Helmut Kohl that a common currency would bond their countries and the rest of Europe into a peaceful and prosperous union could soon be dashed. Their political offspring has become a symbol of European discord and a cause of seemingly irreconcilable French-German economic and political divisions.

These historical divides are now aggravated by violent street demonstrations and frightening civil war rhetoric in France, where the country’s mainstream politicians are trying to fight off extreme right and left parties, commanding nearly half of the popular vote and demanding an immediate exit from the EU and the euro. Investors would be well advised to take this seriously. Even if relatively moderate French center-right forces were able to keep the anti-EU parties at bay, a long-brewing clash with Germany appears inevitable. For many French politicians of all stripes, Germany has gone too far in bossing the rest of Europe around, and in causing a huge economic, social and political damage to France, Italy, Spain, Portugal and Greece with the imposition of its mean-spirited and misguided fiscal austerity.

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It’s a bout the dollar peg, again. Said ages ago it would be untenable.

Saudi Financial Crisis ‘Could Leave Oil At $25’ As Bills Get Paid In IOUs (AEP)

Saudi Arabia faces a vicious liquidity squeeze as capital continues to leak out the country, with a sharp contraction of the money supply and mounting stress in the banking system. Three-month interbank offered rates in Riyadh have suddenly begun to spiral upwards, reaching the highest since the Lehman crisis in 2008. Reports that the Saudi government is to pay contractors with tradable IOUs show how acute the situation is becoming. The debt-crippled bin Laden group is laying off 50,000 construction workers as austerity bites in earnest. Societe Generale’s currency team has advised clients to short the Saudi riyal, betting that the country will be forced to ditch its long-standing dollar peg, a move that could set off a cut-throat battle for global share in the oil markets.

Francisco Blanch, from Bank of America, said a rupture of the peg is this year’s number one “black swan event” and would cause oil prices to collapse to $25 a barrel. Saudi Arabia’s foreign reserves are still falling by $10bn (£6.9bn) a month, despite a switch to bond sales and syndicated loans to help plug the huge budget deficit. The country’s remaining reserves of $582bn are in theory ample – if they are really liquid – but that is not the immediate issue. The problem for the Saudi central bank (SAMA) is that reserve depletion automatically tightens monetary policy. Bank deposits are contracting. So is the M2 money supply. Domestic bond sales do not help because they crowd out Saudi Arabia’s wafer-thin capital markets and squeeze liquidity. Riyadh now plans a global bond issue.

While crude prices have rallied 80pc to almost $50 a barrel since mid-February, this has not yet been enough to ease Saudi Arabia’s financial crunch. The rebound in crude is increasingly fragile in any case as tough talk from the US Federal Reserve sends the dollar soaring, and Canada prepares to restore 1.2m barrels a day (b/d) of lost output. “We feel that markets have moved too high, too far, too soon. We still face a large inventory overhang and supply outages are reversible,” said BNP Paribas. Total chief Patrick Pouyanne told the French senate last week that prices could deflate as fast as they rose. “The market won’t come back into balance until the end of the year,” he said.

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Germany is blowing up the EU, step by step. There is no other way out of this. Berlin has become the schoolyard bully. And not everyone bends over for the bully.

The IMF And Calling Berlin’s Bluff Over Greece (Münchau)

At one level, the recurring Greek crises fit the idea from Karl Marx of history repeating itself, first as tragedy then as farce. Greece came close to a eurozone exit last summer. While it will probably come close this year, it is unlikely to leave. But prepare for some tense moments in the next few weeks and months as Greece and its creditors struggle to agree the first review of last year’s bailout. The IMF has concluded that Greek public debt, at 180% of GDP is unsustainable; as is the agreed annual primary budget surplus, before interest payments, of 3.5% of GDP. The fund insists on debt relief, but Germany resists. A year ago Angela Merkel and Wolfgang Schäuble, her finance minister, sold the Greek bailout to their party and parliament as a loan only. They argued that once you accept a debt writedown, you turn a loan into a transfer.

And once you accept the principle of a one-off transfer to Greece, you are on a slippery road to what the Germans call a transfer union, one where they pay and others receive. In private, senior German government officials agree that Athens needs debt relief. They are not blind. But they are trapped in the lie that Greece is solvent, which is what their own backbenchers were told. Without that lie, Greece would no longer be a eurozone member. But the lie cannot be sustained. IMF insistence on debt relief is what could expose this lie. Christine Lagarde, managing director, last year set debt relief talks as a condition for the fund’s participation in a bailout. Mr Schäuble reluctantly agreed yet managed to insert the words “if needed”, which give him wriggle room. But Berlin imposed another condition: the IMF must participate in the bailout, too. This is what makes the German position vulnerable.

We know IMF staff are steadfast in their opposition to being involved in a bailout without an agreement on debt relief. The trouble is that the policies are not determined by the staff but by the IMF shareholders. The Europeans and the US are the dominant shareholders so the outcome of this battle will depend to a large extent on the view taken by Washington. To get himself out of a hole, Mr Schäuble recently made a counterproposal: Germany accepts debt talks in principle but only from 2018. The date was chosen with care. It is well after the next federal elections. It is not clear whether he will still be finance minister or indeed in government. I suspect the Christian Democratic Union, his party, will lead the next government; the electoral arithmetic makes other constellations improbable. Nevertheless, he is proposing to commit any successor to this course of action. Such a commitment has no credibility.

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Why Tsipras keeps doing these things is hard to fathom.

Athens Agrees Fiscal Measures In Exchange For Debt Relief Talks (FT)

Alexis Tsipras has defended his leftwing government’s adoption of new fiscal measures in return for talks on debt relief, saying Greece was “turning a page” after an unprecedented six-year recession “Spring may be almost over but we are looking forward to an economic spring and a return to growth this year,” the prime minister told parliament, wrapping up a two-day debate on a €1.8bn package of indirect tax increases. As expected, all 153 legislators from the premier’s Syriza party and its coalition partner, the rightwing Independent Greeks, backed the bill, while 145 opposition deputies voted against. There were two abstentions. The latest measures complete a €5.4bn package of fiscal reforms aimed at ensuring a primary budget surplus, before payments of principal and interest on debt, amounting to 3.5% of national output by 2018.

But the legislation also included a provision for “contingency” measures, including wage and pension cuts, that would take effect automatically if budget targets were derailed next year. An upbeat Mr Tsipras insisted that budget projections would be outperformed, saying: “Greece has shown it keeps its promises..I’m certain [contingency] measures will not have to be put into effect.” A senior Greek official said after the vote he was confident that eurozone finance ministers would unlock up to €11bn from Greece’s €86bn third bailout at a meeting scheduled for Tuesday. The funding, to be disbursed in several tranches linked to implementing the reforms, would enable Athens to meet sovereign debt repayments for the remainder of the year and also channel funds to public services such as the healthcare system.

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This is getting weird. It’s like Beijing is reinventing finance. The government is paying off debt to the shadow banks.

China Steps Up War On Banks’ Bad Debt (FT)

Beijing has stepped up its battle against bad debt in China’s banking system, with a state-led debt-for-equity scheme surging in value by about $100bn in the past two months alone. The government-led programme, which forces banks to write off bad debt in exchange for equity in ailing companies, soared in value to hit more than $220bn by the end of April, up from about $120bn at the start of March, according to data from Wind Information. Industry watchers have fiercely debated how far Beijing will go to recapitalise the financial system, with bad loans taking up an ever higher percentage of banks’ balance sheets — as much as 19% by some estimates. The latest figures for the debt-to-equity swap, and a debt-to-bonds swap initiated last year, show a subtle bailout is already under way.

“One can argue the government-led recapitalisation is already happening in an atypical way and thus reducing the need for recapitalisation in its written sense,” said Liao Qiang at S&P Global Ratings in Beijing. Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities. That programme has been hailed a success in that it relieved the pressure on local governments that were forced to take out bank loans to proceed with public works projects in the absence of municipal bond markets.

The debt-to-equity project has received far less enthusiasm from analysts, who say that coercing banks to become stakeholders in companies that could not pay back loans will further weigh down profits this year. Instead of underpinning stability at banks, Mr Liao says the efforts undermine it. The programmes are just two fronts in Beijing’s battle against bad debt. The state-controlled asset management companies that bailed out the country’s four national commercial banks 15 years ago have become increasingly active over the past two years in buying up portfolios of bad debt. Regional asset managers run by provincial governments are doing the same business on a local level. The government is also reopening the market for securitising bad debt with two deals worth Rmb534m due this month.

The efforts have even gone online, with debt managers hawking off bad loans on China’s biggest online retail site. The average rate of non-performing loans at China’s commercial banks hit an official 1.75% at the end of March, according to the banking regulator. That marks the 11th straight quarter that the government-approved figures have risen. But the official data does not include a much larger stockpile of so-called zombie loans that some analysts say could in future require a more formal bailout for the banks. Francis Cheung, analyst at CLSA, estimates that bad debt accounted for 15-19% of banks’ loan books at the end of last year and that the government may have to add Rmb10.6tn of new capital to the banking system, or 15.6% of GDP.

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“As I say to my American friends who don’t really get what the EU is: ‘All you need to know is that it has three presidents, none of whom is elected.’”

We MUST Quit The EU, Says Cameron’s Guru (DM)

David Cameron’s closest friend in politics today breaks ranks to say Britain must leave the ‘arrogant and unaccountable’ EU. In a shattering blow to the Prime Minister, Steve Hilton claims the UK is ‘literally ungovernable’ as a democracy while it remains in a club that has been ‘corruptly captured’ by a self-serving elite. And in an attack on Project Fear, the former No 10 adviser dismisses claims by Mr Cameron, the IMF and the Bank of England that being in the EU makes us more secure. In an exclusive Daily Mail article, Mr Hilton – who persuaded Mr Cameron to stand for Tory leader – also delivers a devastating assessment of the PM’s referendum deal. He says Mr Cameron made only ‘modest’ demands of Brussels – and that even these were swatted contemptuously aside.

He also warns that Brussels will take revenge on Britain for the referendum if it votes to stay, by imposing fresh diktats. Mr Hilton concludes: ‘A decision to leave the EU is not without risk. But I believe it is the ideal and idealistic choice for our times: taking back power from arrogant, unaccountable, hubristic elites and putting it where it belongs – in people’s hands.’ His declaration for Brexit with exactly a month to go until polling day will send tremors through No 10. Along with Michael Gove, he provided the intellectual heft behind Mr Cameron’s rise to power. Both men now argue that the PM is wrong to urge voters to remain in what Mr Hilton condemns as the ‘grotesquely unaccountable’ Brussels club.

[..] Mr Hilton, who remains close to the Prime Minister, had previously declined to be drawn into what is already a bitter ‘blue on blue’ row. But today he claims the key issue for him is that Britain cannot make its own laws and control its own destiny from inside the EU. Mr Hilton says Brussels directives have crept into every corner of Whitehall and that less than a third of the Government’s workload is the result of trying to fulfil its own promises and policies. The rest is generated either by the ‘anti-market, innovation-stifling’ EU or a civil service dancing to the tune of Brussels, he says. Mr Hilton continues: ‘It’s become so complicated, so secretive, so impenetrable that it’s way beyond the ability of any British government to make it work to our advantage.

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The vote is not done yet.

Support For EU Falls Sharply In Britain’s Corporate Boardrooms (G.)

The number of FTSE 350 company boards that believe EU membership is good for their business has dropped significantly over the past six months, with just over a third now saying the EU has a positive impact. The biannual FT-ICSA boardroom bellwether survey, which canvasses the views of the FTSE 350, reported a substantial fall in the number who believe their company benefits from EU membership to 37%, down from 61% in December 2015. It found many were indifferent to a Brexit, with barely half (49%) of boards having considered the implications of the UK leaving the EU. Approximately 43% said they believe a UK exit from Europe would be potentially damaging. Respondents from the FTSE 100 regarded EU membership more favourably than the 250, with more than twice as many (55%) of FTSE 100 companies believing that EU membership has a positive impact.

This compared with 24% of the FTSE 250. John Longworth, chairman of the Vote Leave business council, said the survey findings showed that the remain camp’s economic argument was failing. “The remain camp’s concerted campaign to do down the economy has failed. In fact it has had the opposite effect as the EU supporters have failed to make a positive case for continuing to hand Brussels more control of our economy, our democracy and our borders. He added: “Business recognises it is possible for Britain to continue trading across Europe, part of the free trade zone that exists from Iceland to Turkey, without handing Brussels £350m a week and EU judges ultimate power over our laws. On 23 June the safe option is to take back control.”

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Switzerland is notoriously expensive to live in.

Swiss To Vote On $2,500 a Month Basic Income (BBG)

The Swiss are discussing paying people $2,500 a month for doing nothing. The country will vote June 5 on whether the government should introduce an unconditional basic income to replace various welfare benefits. Although the initiators of the plan haven’t stipulated how large the payout should be, they’ve suggested the sum of 2,500 francs ($2,500) for an adult and a quarter of that for a child. It sounds good, but — two things. It would barely get you over the poverty line, typically defined as 60 percent of the national median disposable income, in what’s one of the world’s most expensive countries. More importantly, it’s probably not going to happen anyway. Plebiscites are a common part of Switzerland’s direct democracy, with multiple votes every year. The basic income initiative is taking place after the proposal gathered the required 100,000 signatures, though current polls suggest it won’t get any further.

The idea of paying everyone a stipend has also piqued interest in other countries, such as Canada, the Netherlands and Finland, where an initial study began last year. The initiators say the sum they’ve mentioned would allow for a “decent existence.” Still, on an annual basis, it would provide only 30,000 francs — just above the 2014 poverty line of 29,501 francs. Nearly one in eight people in Switzerland were below the level in that year, according to the statistics office. That’s more than in France, Denmark and Norway. Among those over 65, one in five were at risk of being poor. “It’s not like you see abject poverty in Switzerland,” said Andreas Ladner, professor of political science at the University of Lausanne. “But there are a few people who don’t have enough money, and there are some people who work and don’t earn enough.”

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But it won’t materialize.

Snowden Calls For Whistleblower Shield After Claims By New Pentagon Source (G.)

Edward Snowden has called for a complete overhaul of US whistleblower protections after a new source from deep inside the Pentagon came forward with a startling account of how the system became a “trap” for those seeking to expose wrongdoing. The account of John Crane, a former senior Pentagon investigator, appears to undermine Barack Obama, Hillary Clinton and other major establishment figures who argue that there were established routes for Snowden other than leaking to the media. Crane, a longtime assistant inspector general at the Pentagon, has accused his old office of retaliating against a major surveillance whistleblower, Thomas Drake, in an episode that helps explain Snowden’s 2013 National Security Agency disclosures. Not only did Pentagon officials provide Drake’s name to criminal investigators, Crane told the Guardian, they destroyed documents relevant to his defence.

Snowden, responding to Crane’s revelations, said he had tried to raise his concerns with colleagues, supervisors and lawyers and been told by all of them: “You’re playing with fire.” He told the Guardian: “We need iron-clad, enforceable protections for whistleblowers, and we need a public record of success stories. Protect the people who go to members of Congress with oversight roles, and if their efforts lead to a positive change in policy – recognize them for their efforts. There are no incentives for people to stand up against an agency on the wrong side of the law today, and that’s got to change.” Snowden continued: “The sad reality of today’s policies is that going to the inspector general with evidence of truly serious wrongdoing is often a mistake. Going to the press involves serious risks, but at least you’ve got a chance.”

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Excellent Taibbi, once again.

R.I.P., GOP: How Trump Is Killing the Republican Party (Taibbi)

If this isn’t the end for the Republican Party, it’ll be a shame. They dominated American political life for 50 years and were never anything but monsters. They bred in their voters the incredible attitude that Republicans were the only people within our borders who raised children, loved their country, died in battle or paid taxes. They even sullied the word “American” by insisting they were the only real ones. They preferred Lubbock to Paris, and their idea of an intellectual was Newt Gingrich. Their leaders, from Ralph Reed to Bill Frist to Tom DeLay to Rick Santorum to Romney and Ryan, were an interminable assembly line of shrieking, witch-hunting celibates, all with the same haircut – the kind of people who thought Iran-Contra was nothing, but would grind the affairs of state to a halt over a blow job or Terri Schiavo’s feeding tube.

A century ago, the small-town American was Gary Cooper: tough, silent, upright and confident. The modern Republican Party changed that person into a haranguing neurotic who couldn’t make it through a dinner without quizzing you about your politics. They destroyed the American character. No hell is hot enough for them. And when Trump came along, they rolled over like the weaklings they’ve always been, bowing more or less instantly to his parodic show of strength. In the weeks surrounding Cruz’s cat-fart of a surrender in Indiana, party luminaries began the predictably Soviet process of coalescing around the once-despised new ruler. Trump endorsements of varying degrees of sincerity spilled in from the likes of Dick Cheney, Bob Dole, Mitch McConnell and even John McCain.

Having not recently suffered a revolution or a foreign-military occupation, Americans haven’t seen this phenomenon much, but the effortless treason of top-tier Republicans once Trump locked up the nomination was the most predictable part of this story. Politicians, particularly this group, are like crackheads: You can get them to debase themselves completely for whatever’s in your pocket, even if it’s just lint.

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Greece should brace itself for a huge new influx of refugees.

Turks Won’t Get EU Visa Waiver Before 2017: Bild (R.)

The German government does not expect Turks to get visa-free entry into the European Union before 2017 because Ankara will not fulfil the conditions for that by the end of this year, newspaper Bild cited sources in Berlin as saying on Monday. Turkey and the EU have been discussing visa liberalisation since 2013 and agreed in March to press ahead with it as part of a deal to stop the flow of illegal migrants from Turkey to the EU. EU officials and diplomats say the EU is set to miss an end-June deadline due to a dispute over Turkish anti-terrorism law. [..] Turkey’s government says it has already met the EU’s criteria for visa-free travel.

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Another thing Tsipras should simply refuse to do.

Greek Police Poised To Evacuate Idomeni Refugee Camp (Kath.)

It appears that Greek authorities are poised to put into action a plan to evacuate the refugee camp in Idomeni, on the border with the Former Yugoslav Republic of Macedonia. According to sources, nine squads of riot police received orders on Monday to travel from Athens to Kilkis so they can take part in the operation if their contribution is needed. Authorities will attempt to move the refugees from the unofficial camp to other sites that have been made ready in various parts of northern Greece. Police sources told Kathimerini that the plan to remove people from Idomeni would be put into action in the coming days, although no decision has been as to exactly when the operation will take place. One source said that it is most likely the orders will be given on Wednesday.

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May 062016
 
 May 6, 2016  Posted by at 9:29 am Finance Tagged with: , , , , , , , , , ,  13 Responses »


NPC Sidney Lust Leader Theater, Washington, DC 1920

Asian Stocks Sink to Four-Week Low as Yen, Dollar Gain (BBG)
Broker CLSA Sees China Bad-Loan Epidemic With $1 Trillion of Losses (BBG)
China Regulator Tries Again To Rein In Banks’ Shadow Assets (WSJ)
China Produces Most Steel Ever After Price Surge (BBG)
Wages’ Share of US GDP Has Fallen for 46 Years (CH Smith)
Deutsche Chief Economist: ECB Should Change Course Before It Is Too Late (FT)
UK Economic Recovery Is ‘On Its Knees’ (Ind.)
The Book That Will Save Banking From Itself (Michael Lewis)
Shift In Saudi Oil Thinking Deepens OPEC Split (R.)
US Crude Stockpiles Seen Rising Further to Record (BBG)
Fort McMurray Fires Knock One Million Barrels Offline (FP)
Canada’s Wildfires Grow Tenfold In Size (G.)
Turkish Power Struggle Threatens EU Migrant Deal (FT)
Merkel Warns Of Return To Nationalism Unless EU Protects Borders (AFP)
Quarter Of Child Refugees Arriving In EU Travelled Without Parents (G.)

The last steps up for the yen?

Asian Stocks Sink to Four-Week Low as Yen, Dollar Gain (BBG)

Global stocks dropped, set for the biggest weekly loss since February, and the yen rose before key American jobs data that will help shape the U.S. interest-rate outlook. Australia’s currency slumped and its bonds surged after the nation’s central bank lowered its inflation forecast. The Stoxx Europe 600 Index and the MSCI Asia Pacific Index both lost ground, as did S&P 500 futures. Shanghai shares tumbled the most since February as raw-materials prices sank in China. The yen rose against all 16 major peers. The Bloomberg Dollar Spot Index gained for a fourth day, buoyed by comments from Federal Reserve officials that a June rate hike is possible. U.S. crude oil sank below $44 a barrel and industrial metals were poised for their biggest weekly loss since 2013. Australia’s three-year bond yield fell to a record.

A retreat in global equities gathered pace in the first week of May as data highlighted the fragile state of the world economy. The Reserve Bank of Australia joined the European Union in trimming inflation projections this week, after the Bank of Japan on April 28 pushed back the target date for meeting its 2% goal for consumer-price gains. Economists predict U.S. non-farm payrolls rose by 200,000 last month, a Bloomberg survey showed before Friday’s report. “With the U.S. jobs report coming up, investors are holding back,” said Masahiro Ichikawa at Sumitomo Mitsui in Tokyo. “They’re watching the yen very closely.” Four regional Fed presidents said Thursday they were open to considering an interest-rate increase in June, something that’s been almost ruled out by derivatives traders. Fed Funds futures put the odds of a hike next month at around 10%, down from 20% a month ago.

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Losses in shadow banks are consistently underestimated.

Broker CLSA Sees China Bad-Loan Epidemic With $1 Trillion of Losses (BBG)

Chinese banks’ bad loans are at least nine times bigger than official numbers indicate, an “epidemic” that points to potential losses of more than $1 trillion, according to an assessment by brokerage CLSA Ltd. Nonperforming loans stood at 15% to 19% of outstanding credit last year, Francis Cheung, the firm’s head of China and Hong Kong strategy, said in Hong Kong on Friday. That compares with the official 1.67%. Potential losses could range from 6.9 trillion yuan ($1.1 trillion) to 9.1 trillion yuan, according to a report by the brokerage. The estimates are based on public data on listed companies’ debt-servicing abilities and make assumptions about potential recovery rates for bad loans. Cheung’s assessment adds to warnings from hedge-fund manager Kyle Bass, Autonomous Research analyst Charlene Chu and the IMF on China’s likely levels of troubled credit.

The IMF said last month that the nation may have $1.3 trillion of risky loans, with potential losses equivalent to 7% of GDP. CLSA estimates bad credit in shadow banking – a category including banks’ off-balance-sheet lending such as entrusted loans and trust loans – could amount to 4.6 trillion yuan and yield a loss of 2.8 trillion yuan. CLSA cites a diminishing economic return on stimulus pumped into the economy as among the reasons for a worsening outlook, with Cheung saying at a briefing that bad loans had the potential to rise to 20% to 25%. “China’s banking system has reached a point where it needs a comprehensive solution for the bad-debt problem, but there is no plan yet,” he said in the report.

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Beijing can’t regulate shadow banking, since it let it grow far too big, but it can try to pick favorites. It’s relevant to ask who has the power in China these days. Local governments are neck deep in shadow loans, and Xi can’t afford, politically, to let them go bust. But can he afford to support them, financially?

China Regulator Tries Again To Rein In Banks’ Shadow Assets (WSJ)

In the pursuit of order in its financial markets, China’s banking regulator has tended to be one step behind in keeping up with a decade-long dalliance between commercial banks and the country’s non-bank lenders, called the shadow banking sector. Its latest directive suggests the government might finally be trying to get ahead. Bankers and analysts say the China Banking Regulatory Commission issued a notice to commercial lenders last week, taking aim at a shadow-banking product that has allowed banks to hide loans, including bad ones, from their books. The watchdog has tried cracking down on similar arrangements in the past. But this time, it appears to have taken a more nuanced approach in order to more effectively get at banks that originate the loans underlying these products.

In its crosshairs is a relatively obscure instrument called credit beneficiary rights, a product that is derived from shadow-banking deals and can then be sold between banks. The CBRC’s new directive in part takes aim at this practice by calling for banks to stop investing in credit beneficiary rights using funds raised from their own wealth management products. In China, shadow banks’ dexterity and relentlessness at product innovation have regularly pushed them right to the edge of what their regulators can tolerate. The CBRC directive, known as Notice No. 82, is the latest in a cat-and-mouse game that banks have played with regulators for years. Beneficiary rights are themselves an innovation to circumvent a CBRC clampdown in 2013 and 2014 on banks directly buying trust products in a similar arrangement to disguise loans, and then developing a lively interbank market for these rights transfers.

There have been regulatory interventions on variations of the practice every year since 2009. The commission hasn’t publicly released the directive. Analysts say the regulator is likely now huddled with banks to gauge how hard they will push back and how thoroughly the regulator can implement the requirements. Beneficiary rights confer on the buyer the right to a stream of income without ceding actual ownership of the underlying asset. That asset is often a corporate loan, which may or may not have already soured, though it could also be anything that generates an income stream, such as a trust, a wealth management product or a margin financing deal.

When one bank sells credit beneficiary rights to another, the transaction allows the first bank to use the accounting change to turn the underlying loan on its books into an “investment receivable.” The rules require banks to set aside about 25% of the receivable’s value in capital provisions, compared with 100% had it been a loan. The deals get more complex as layers are added to further disguise the loan. Banks will have third-party shadow financiers extend the actual loan to the company, in exchange for the bank’s purchase of beneficiary rights to the loan’s income stream.

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And where would you think steel prices are going?

China Produces Most Steel Ever After Price Surge (BBG)

China, maker of half the world’s steel, probably boosted production to a record in April as mills fired up furnaces and domestic prices surged to 19-month highs, according to Sanford C. Bernstein. Average daily output may have eclipsed the previous high of about 2.31 million metric tons in June 2014, said Paul Gait, a senior analyst in London. Producers ramped up supply as demand rebounded and prices jumped as much as 69% from their November low, generating the best margins since 2009.

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1970 is a reasonable guess for peak of prosperity. It’s not the only one, but it’s right up there.

Wages’ Share of US GDP Has Fallen for 46 Years (CH Smith)

The majority of American households feel poorer because they are poorer. Real (i.e. adjusted for inflation) median household income has declined for decades, and income gains are concentrated in the top 5%:

Even more devastating, wages’ share of GDP has been declining (with brief interruptions during asset bubbles) for 46 years. That means that as GDP has expanded, the gains have flowed to corporate and owners’ profits and to the state, which is delighted to collect higher taxes at every level of government, from property taxes to income taxes.

Here’s a look at GDP per capita (per person) and median household income. Typically, if GDP per capita is rising, some of that flows to household incomes. In the 1990s boom, both GDP per capita and household income rose together. Since then, GDP per capita has marched higher while household income has declined. Household income saw a slight rise in the housing bubble, but has since collapsed in the “recovery” since 2009.

These are non-trivial trends. What these charts show is the share of the GDP going to wages/salaries is in a long-term decline: gains in GDP are flowing not to wage-earners but to shareholders and owners, and through their higher taxes, to the government. The top 5% of wage earners has garnered virtually all the gains in income. The sums are non-trivial as well. America’s GDP in 2015 was about $18 trillion. Wages’ share -about 42.5%- is $7.65 trillion. If wage’s share was 50%, as it was in the early 1970s, its share would be $9 trillion. That’s $1.35 trillion more that would be flowing to wage earners. That works out to $13,500 per household for 100 million households.

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When you start with statements like this, what’s left to talk about? “The Bundesbank and Federal Reserve, for example, are respected for achieving monetary stability..”

Deutsche Chief Economist: ECB Should Change Course Before It Is Too Late (FT)

Over the past century central banks have become the guardians of our economic and financial security. The Bundesbank and Federal Reserve, for example, are respected for achieving monetary stability, often in the face of political opposition. But central bankers can also lose the plot, usually by following the economic dogma of the day. When they do, their mistakes can be catastrophic. In the 1920s the German Reichsbank thought it a clever idea to have 2,000 printing presses running day and night to finance government spending. Hyperinflation was the result. Around the same time, the Federal Reserve stood by as more than a third of US bank deposits were destroyed, in the belief that banking crises were self-correcting. The Great Depression followed. Today the behaviour of the ECB suggests that it too has gone awry.

When reducing interest rates to historically low levels did not stimulate growth and inflation, the ECB embarked on a massive programme of purchasing eurozone sovereign debt. But the sellers did not spend or invest the proceeds. Instead, they placed the money on deposit. So the ECB went to the logical extreme: it imposed negative interest rates. Currently almost half of eurozone sovereign debt is trading with a negative yield. If this fails to stimulate growth and inflation, “helicopter money” will be next on the agenda. Future students of monetary policy will shake their heads in disbelief. What is more, as purchaser-of-last-resort of sovereign debt, the ECB is underwriting the solvency of its over-indebted members. Countries no longer fear that failure to reform their economies or reduce debt will raise the cost of borrowing.

Six years after the onset of the European debt crisis, total indebtedness in the eurozone keeps on rising. Badly needed reforms have been abandoned. As a result the eurozone is as fragile as ever. Safe keepers of our wealth, such as insurance companies, pension funds and savings banks barely earn a positive spread. Inflation is just above zero, well below the ECB’s defined target. And with growth anaemic, debt levels in some countries, such as Italy, are not sustainable. Worse still, the ECB is failing in its other mandated duty – to promote stability. Popular opposition to low and negative interest rates, when combined with continuing high unemployment, is fomenting anger with the European project. Even if current policy eventually results in an overdue recovery, political pressure is unlikely to abate.

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It’s like one of those oracle-type questions: ‘how can something be on its knees that doesn’t exist’?

UK Economic Recovery Is ‘On Its Knees’ (Ind.)

The latest survey of the UK’s dominant services sector has today rounded off a dismal hat-trick of disappointment for the British economy. The Markit/CIPs PMI Index for April came in at 52.3. That’s above the 50 point that separates contraction from growth. But it’s also the weakest reading since February 2013, when the economy’s recovery was just starting. And it follows two pretty desperate readings this week from the equivalent PMIs for the manufacturing and construction sectors, which both showed the feeblest levels of activity in around three years. Put all these three readings together and one gets the “composite” PMI which can be used to roughly approximate to GDP growth in the overall economy. And combine these two metrics in the chart below (from Pantheon Macroeconomics) and you get this grim picture:

The blue line (left hand scale) shows the level of the composite PMI. The black line (right hand scale) shows the % quarterly rate of GDP growth. They track reasonably well over time. And the decline in the composite reading suggests GDP growth, which weakened to 0.4% in the first quarter of 2016, could be heading down to zero in the second quarter. What’s going on? Samuel Tombs of Pantheon says business and consumer jitters emanating from uncertainty about the outcome of the Brexit referendum has “brought the recovery to its knees”. More economists are now seriously talking of the possibile need for macroeconomic stimulus to get the recovery back on track. “The deterioration in April pushes the surveys into territory which has in the past seen the Bank of England start to worry about the need to revive growth either by cutting interest rates or through non-standard measures such as QE” said Chris Williamson of Markit.

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Lewis paints King a tad too much like a cross between Einstein and Mother Theresa, if you ask me. He presided over a period when debt was already rising like there’s no tomorrow.

The Book That Will Save Banking From Itself (Michael Lewis)

One of my favorite memories of my brief life on Wall Street in the late 1980s is of Mervyn King’s visit. A year after Professor King – as I still think of him – had been my tutor at the London School of Economics, he was tapped to advise some new British financial regulator. As he had no direct experience of financial markets, either he or they thought he’d benefit from exposure to real, live American financiers. I’d been working at the London office of Salomon Brothers for maybe six months when one of my bosses came to me with a big eye roll and said, “We have this academic who wants to sit in with a salesman for a day: Can we stick him with you?” And in walked Professor King. I should say here that King’s students, including me, often came away from encounters with him feeling humored.

He was gentle with people less clever than himself (basically everyone) and found interest in what others had to say when there was no apparent reason to. He really wanted you to feel as if the two of you were engaged in a genuine exchange of ideas, even though the only ideas with any exchange value were his. Still, he had his limits. The man who a year before had handed me a gentleman’s B and probably assumed I would vanish into the bowels of the American economy never to be heard from again saw me smiling and dialing at my Salomon Brothers desk and did a double take. He took the seat next to me and the spare phone that allowed him to listen in on my sales calls. After an hour or so, he put down the phone. “So, Michael, how much are they paying you to do this?” he asked, or something like it.

When I told him, he said something like, “This really should be against the law.” Roughly 15 years later, King was named governor of the Bank of England. In his decade-long tenure, which ended in 2013, the Bank of England became, and remains, the most trustworthy institutional narrator of events in global finance. It’s the one place on the inside of global finance where employees don’t appear to be spending half their time wondering when Goldman Sachs is going to call with a job offer. For various reasons, they don’t play scared. One of those reasons, I’ll bet, is King.

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They’re all very nervous. What happens when oil prices start falling again?

Shift In Saudi Oil Thinking Deepens OPEC Split (R.)

As OPEC officials gathered this week to formulate a long-term strategy, few in the room expected the discussions would end without a clash. But even the most jaded delegates got more than they had bargained with. “OPEC is dead,” declared one frustrated official, according to two sources who were present or briefed about the Vienna meeting. This was far from the first time that OPEC’s demise has been proclaimed in its 56-year history, and the oil exporters’ group itself may yet enjoy a long life in the era of cheap crude. Saudi Arabia, OPEC’s most powerful member, still maintains that collective action by all producers is the best solution for an oil market that has dived since mid-2014.

But events at Monday’s meeting of OPEC governors suggest that if Saudi Arabia gets its way, then one of the group’s central strategies – of managing global oil prices by regulating supply – will indeed go to the grave. In a major shift in thinking, Riyadh now believes that targeting prices has become pointless as the weak global market reflects structural changes rather than any temporary trend, according to sources familiar with its views. OPEC is already split over how to respond to cheap oil. Last month tensions between Saudi Arabia and its arch-rival Iran ruined the first deal in 15 years to freeze crude output and help to lift global prices. These resurfaced at the long-term strategy meeting of the OPEC governors, officials who report to their countries’ oil ministers.

According to the sources, it was a delegate from a non-Gulf Arab country who pronounced OPEC dead in remarks directed at the Saudi representative as they argued over whether the group should keep targeting prices. Iran, represented by its governor Hossein Kazempour Ardebili, has been arguing that this is precisely what OPEC was created for and hence “effective production management” should be one of its top long-term goals. But Saudi governor Mohammed al-Madi said he believed the world has changed so much in the past few years that it has become a futile exercise to try to do so, sources say. “OPEC should recognize the fact that the market has gone through a structural change, as is evident by the market becoming more competitive rather than monopolistic,” al-Madi told his counterparts inside the meeting, according to sources familiar with the discussions.

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And how could prices rise in the face of record reserves?

US Crude Stockpiles Seen Rising Further to Record (BBG)

U.S. crude inventories will expand to a record 550 million barrels this month before starting their seasonal slide, according to a forecast by Citigroup. Stockpiles rose 2.8 million barrels to 543.4 million last week, the most in more than 86 years, according to data from the Energy Information Administration. Inventories reached the highest ever at 545.2 million barrels in October 1929, according to monthly EIA data.

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Record stockpiles with a million barrels missing. Prices are already dropping again.

Fort McMurray Fires Knock One Million Barrels Offline (FP)

The shut down of energy facilities accelerated Thursday, taking off line about one million barrels – close to 40% – of Alberta’s daily oilsands production, as a wildfire that started near Fort McMurray spread south to new producing areas. Meanwhile, oil companies poured their resources into the firefighting effort — from sheltering evacuees to helping with medical emergencies. Overnight Wednesday, the raging fire forced the evacuation of smaller communities south of Fort McMurray, where many evacuees fleeing the flames this week had taken shelter. They joined residents of Fort McMurray, who were ordered to leave their homes earlier in the week.

“Based on press releases and our discussions with producers, the fires have impacted oilsands production by an estimated 0.9 to 1 million b/d – disproportionately weighted towards synthetic crude oil,” Greg Pardy, co-head of global energy research at RBC Dominion Securities, said in a report. “This would constitute about 35% to 38% of our 2016 oilsands outlook of 2.6 million b/d.” Steve Laut, president of Canadian Natural Resources, said it was difficult to gauge the long-term impacts of the crisis because it was still evolving. “It’s devastating to the city of Fort McMurray,” he said Thursday after addressing the company’s annual meeting. Many production facilities are located away from the fire, but “it’s really the workers at the mines and the plants who live in Fort McMurray who are impacted,” Laut said. Canadian Natural said its operations at the Horizon mining project were stable.

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How is it possible that no-one died yet? They must be doing something very right.

Canada’s Wildfires Grow Tenfold In Size (G.)

A catastrophic wildfire that has forced all 88,000 residents to flee Fort McMurray in western Canada grew tenfold on Thursday, cutting off evacuees in camps north of the city and putting communities to the south in extreme danger. Authorities scrambled to organise an airlift of 8,000 people from the camps on Thursday night and hoped to move thousands more to safer areas as the fast-moving fire threatened to engulf huge areas of the arid western province of Alberta. Officials said 25,000 people had taken shelter in the oilsands work camps when the fires engulfed the city. The remaining 17,000 would have to wait until fuel reserves were refilled and the opening of a main highway to drive themselves south. The out-of-control blaze has burned down whole neighborhoods of Fort McMurray in Canada’s energy heartland and forced a precautionary shutdown of some oil production, driving up global oil prices.

The Alberta government, which declared a state of emergency, said more than 1,100 firefighters, 145 helicopters, 138 pieces of heavy equipment and 22 air tankers were fighting a total of 49 wildfires, with seven considered out of control. Three days after the residents were ordered to leave Fort McMurray, firefighters were still battling to protect homes, businesses and other structures from the flames. More than 1,600 structures, including hundreds of homes, have been destroyed. “The damage to the community of Fort McMurray is extensive and the city is not safe for residents,” said Alberta premier Rachel Notley in a press briefing on Thursday night, as those left stranded to the north of the city clamoured for answers. “It is simply not possible, nor is it responsible to speculate on a time when citizens will be able to return. We do know that it will not be a matter of days,” she added.

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Merkel bet on the wrong horse again. And this one, too, will put people’s well-being in danger. “..It’s time the EU starts to connect the dots and see it for what it is.” Oh, they see it alright.

Turkish Power Struggle Threatens EU Migrant Deal (FT)

A pivotal deal to staunch the flow of migrants from Turkey into the EU, masterminded by Angela Merkel, German chancellor, is in doubt after Turkey’s pro-European prime minister resigned. Ahmet Davutoglu, who personally negotiated the deal with Ms Merkel, quit on Thursday following a power struggle with President Recep Tayyip Erdogan. The premier’s departure imperils an agreement credited with sharply reducing the influx of asylum-seekers into the EU – and rescuing Ms Merkel from a potentially fatal political backlash. The deal enables the EU to send migrants arriving illegally on the Greek islands back to Turkey in exchange for visa requirements on Turkish visitors being eased and financial aid. However, President Erdogan has responded coolly towards the agreement struck by his premier and has shown increasing hostility towards the EU.

Without reforms to Turkey’s antiterrorism and anti-corruption laws, which Mr Erdogan has angrily resisted, Brussels may be unable to grant some of the most important concessions in the deal — a move that Ankara has already warned would cancel its obligation to curtail refugee crossings into Greece. “We’ve made good progress on the agreement with Turkey,” Ms Merkel said in Rome on Thursday. “The European Union, or at least Germany and Italy, are prepared and stand by the commitments that we’ve agreed to. We hope that’s mutual.” To keep the pact on track, Ankara must still meet several benchmarks, including major revisions to its antiterrorism legislation to ensure civil liberties, that Mr Erdogan has been loath to support.

EU officials are now concerned that Ankara will backtrack on reform commitments. “It’s certainly not good news for us,” said the EU official. “Erdogan would be very ill-advised to throw this out of the window and think this is now a matter of horse-trading. He thinks it’s 50% wriggle room, and the rest is all arm-wrestling.” Sinan Ulgen, a former Turkish diplomat at the Carnegie Europe think-tank, said that Mr Erdogan had been “much more categorical” in resisting changes to the antiterrorism law, adding that, with his AK party and parliament in disarray, the chances of reforms being passed in time for a June deadline was becoming increasingly unlikely. When Ms Merkel set out to persuade sceptical EU countries to back the migrant deal, one of her central arguments, according to diplomats, was that it would shore up the pro-European faction in Ankara, led by Mr Davutoglu.

Instead, the deal hastened the demise of her main Turkish ally and left the pro-Europeans seriously weakened. President Erdogan saw Mr Davutoglu’s increasingly close relationship with the EU as a threat. A rift between the two men turned into a power struggle which the prime minister lost. [..] European lawmakers who must now approve the deal say they are becoming increasingly wary. “If this was an isolated incident, you could say it’s just an internal affair,” said Marietje Schaake, a Dutch liberal who has become a leading voice on Turkey in the European parliament. “But we’ve seen a series of incidents that are clearly a pattern towards authoritarianism. It’s time the EU starts to connect the dots and see it for what it is.”

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Merkel has lost it: the EU, in order to survive, needs to start protecting people, especially children, before protecting borders. It’s the only thing that could still save the Union.

Merkel Warns Of Return To Nationalism Unless EU Protects Borders (AFP)

German Chancellor Angela Merkel on Thursday urged European leaders to protect EU borders or risk a “return to nationalism” as the continent battles its worst migration crisis since World War II. As Italian Prime Minister Matteo Renzi kicked off two days of talks in Rome with Merkel and senior EU officials, the German leader said Europe must defend its borders “from the Mediterranean to the North Pole” or suffer the political consequences. Support for far-right and anti-immigrant parties is on the rise in several countries on the continent which saw more than a million people arrive on its shores last year. In Austria, Norbert Hofer of the far-right Freedom Party is expected to win a presidential run-off on May 22 after romping to victory in the first round on an anti-immigration platform.

Merkel told a press conference with Renzi that Europe’s cherished freedom of movement is at threat, with ramped-up border controls in response to the crisis raising questions over whether the passport-free Schengen zone can survive. With over 28,500 migrants arriving since January 1, Italy has once again become the principal entry point for migrants arriving in Europe, following a controversial EU-Turkey deal and the closure of the Balkan route up from Greece. In previous years, many migrants landing in Italy have headed on to other countries – but with Austria planning to reinstate border controls at the Brenner pass in the Alps, a key transport corridor, Rome fears it could be stuck hosting masses of new arrivals. Renzi lashed out at Austria on Thursday, describing Vienna’s position as “anachronistic”.

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Child refugees have to be the no. 1 priority. A Europe with no morals has no future either.

Quarter Of Child Refugees Arriving In EU Travelled Without Parents (G.)

A quarter of all child refugees who arrived in Europe last year – almost 100,000 under-18s – travelled without parents or guardians and are now “geographically orphaned”, presenting a huge challenge to authorities in their adopted countries. A total of 1.2 million people sought asylum in the EU in 2015, 30% of whom – almost 368,000 – were minors. The number of children arriving in Europe last year was two-and-half times that recorded a year earlier, and almost five times as many as in 2012. But the most staggering statistic is that a quarter of the young arrivals were unaccompanied. In all, 88,695 children completed the dangerous journey without their parents – an average of 10 arriving every hour. The highest proportion of child refugees last year were Syrian, followed by Afghans and Iraqis. Together these three nationalities accounted for 60% of all minors seeking asylum in the EU.

In absolute terms, Germany received the highest number of child refugees, taking in more than 137,000 in 2015. However, as a proportion of population Sweden took in the most. Half of the unaccompanied minors came from Afghanistan, and one in seven were Syrian. More unaccompanied minors hailed from Eritrea (5,140) than from Iraq (4,570). Sweden took the highest number of lone children, 35,000 in total, two-thirds of them from Afghanistan. It also recorded the highest number of unaccompanied minors per head of population, followed by Austria and Hungary. It is not possible to get a full picture of how many children have sought asylum in Europe so far in 2016, as several countries have not yet published figures for the first quarter of the year. But the number of child asylum applicants recorded in Europe in January and February already far exceeds that recorded in the same months of 2015.

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