May 042016
 
 May 4, 2016  Posted by at 9:20 am Finance Tagged with: , , , , , , , , , ,  9 Responses »


Jack Delano Myrtle Beach, S.C. Air Service Command Technical Sergeant Choken 1943

US Dollar Plunges As World Plays Dangerous Game Of Pass The Parcel (AEP)
90% of Americans Worse Off Today Than in 1970s (VW)
High Anxiety: Markets Get Roiled (WSJ)
China’s Improbable Commodities Frenzy Leaves Stocks in the Dust (BBG)
Commodities Are China’s Hottest New Casino (FT)
China’s $1 Trillion In Bad Debt Makes A Sharp Slowdown Inevitable (BI)
$571 Billion Debt Wall Points to More Defaults in China (BBG)
The Global Economy is at Stall Speed, Rapidly Losing Lift (Stockman)
Fed Expected To Drag Hedge Funds Into Plan To Halt Next Lehman (BBG)
Barclays Launches First 100% Mortgages Since Crisis (FT)
Whistleblowing Is Not Just Leaking, It’s an Act of Resistance (Snowden)
Whistle-Blower Needed a Smoke Before Giving Up LuxLeaks Data (BBG)
The Kleptocrats’ $36 Trillion Heist Keeps Most of the World Impoverished (DB)
France Threatens To Block TTiP Deal (G.)
TTIP Has Been Kicked Into The Long Grass … For A Very Long Time (G.)
After The Leaks Showing What It Is, This Could Be The End For TTIP (Ind.)
Spain, France, Italy, Portugal To Miss EU Deficit, Debt Reduction Targets (R.)
Theft Of Sausage And Cheese By Hungry Homeless Man ‘Not A Crime’ (G.)

“..the Fed is pursuing a “weak dollar policy” [..] “They are forcing currency appreciation onto weaker economies. It is irrational..” No, it’s not irrational, but it certainly is short term only. “.. the soaring euro is in the end self-correcting since the eurozone cannot withstand the pain for long..”

US Dollar Plunges As World Plays Dangerous Game Of Pass The Parcel (AEP)

The US dollar has plunged to a 16-month low in the latest wild move for the global financial system, tightening the currency noose on the eurozone and Japan as they struggle to break out of a debt-deflation trap. The closely-watched dollar index fell below 92 for the first time since January 2015, catapulting gold through $1300 an ounce in early trading and setting off steep falls on stock markets in Asia and Europe. The latest data from the US Commodity Futures Trading Commission shows that speculative traders have switched to a net “short” position on the dollar. This is a massive shift in sentiment since the end of last year when investors were betting heavily that the US Federal Reserve was on track for a series of rate rises, which would draw a flood of capital into dollar assets.

Markets have now largely discounted a rate rise in June, and are pricing in just a 68pc likelihood of any increases this year. The dollar slide has been a lifeline for foreign borrowers with $11 trillion of debt in US currency, notably companies in China, Brazil, Russia, South Africa, and Turkey that feasted on cheap US liquidity when the Fed spigot was open, and were then caught in a horrible squeeze when the Fed turned to tap off again and the dollar surged in 2014 and 2015. But it increases the pain for the eurozone and Japan as their currencies rocket. The world is in effect playing a high-stakes game of pass the parcel, with over-indebted countries desperately trying to export their deflationary problems to others by nudging down exchange rates. The Japanese yen appreciated to 105.60, the strongest since September 2014 and a shock to exporters planning on an average of this 117.50 this year.

The wild moves over recent weeks have blown apart the Japan’s reflation strategy. Analysts from Nomura said Abenomics is now “dead in the water”. The eurozone is also in jeopardy, despite enjoying a sweet spot of better growth in the first quarter. The euro touched $1.16 to the dollar early in the day. It has risen over 7pc in trade-weighted terms since the Europe Central Bank first launched quantitative easing in a disguised bid to drive down the exchange rate. Prices fell by 0.2pc in April and deflation is becoming more deeply-lodged in the eurozone economy, with no safety buffers left against an external shock. The European Commission this week slashed its inflation forecast to 0.2pc this year from 1.0pc as recently as November.

There is little that the Bank of Japan or the ECB can do to arrest this unwelcome appreciation. The Obama Administration warned them at the G20 summit in February that any further use of negative interest rates would be regarded by Washington as covert devaluation, and would not be tolerated. “These central banks have reached the limits of what they can do with monetary policy to influence their exchange rates, and this is putting their entire models at risk,” said Hans Redeker, currency chief at Morgan Stanley. “Europe and Japan are operating in a Keynesian liquidity trap. We are nearing a danger point like 2012 when it could lead to an asset market sell-off. We’re not there yet,” he said.

Stephen Jen from SLJ Macro Partners said the Fed is pursuing a “weak dollar policy”, reacting to global events in a radical new way. “They are forcing currency appreciation onto weaker economies. It is irrational,” he said. Yet it may not last long if the US economy comes roaring back in the second quarter a after a soft patch. “I doubt this is really the end of multi-year run for the dollar,” he said. Neil Mellor from BNY Mellon says the soaring euro is in the end self-correcting since the eurozone cannot withstand the pain for long, and as this becomes evident the currency will start sliding again.

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“Many believe that globalization is largely to blame.”

90% of Americans Worse Off Today Than in 1970s (VW)

A recent study in March from the Levy Economics Institute found that 90% of Americans were worse off financially in 2015 than at any time since the early 1970s. Furthermore, for the vast majority of Americans, the nation’s economy is in a prolonged stagnation, far worse than that of Japan. Worse than Japan? When we think of the Japanese economy, we think of the “Lost Decades.” Japan’s economy was the envy of the world in the 1980s, but starting in 1991, it fell into a prolonged recession and deflation which lasted from then to 2010. Japan’s GDP fell from $5.33 trillion to $4.36 trillion during that period, which saw wages fall by apprx. 5%. So are we really worse off today than Japan? The Levy Economics Institute at Bard College thinks the answer is YES, when it comes to real income – that is, income adjusted for inflation.

According to their findings, 90% of Americans earn roughly the same real income today as the average American earned back in the early 1970s. As a result of this stagnation in incomes and the plunge in housing values during the Great Recession, 99% of American households have seen their net worth fall since 2007 according to the study. Economic stagnation hasn’t reached the remaining 1% of the US population, which has seen a recovery in their real incomes over the same period to near new highs. The chart below has not been updated to include results for 2015, but the trends are clear. The bottom 99% of US income-earning households have seen their net worth decline since the financial crisis of 2007-2009.

Once upon a time, the American economy worked for nearly everybody, and even the middle class got richer. Things were quite different in the decades preceding the 70s, a period that stretches back to the late 1940s, when real incomes rose for both groups. Simply put, for the vast majority of Americans, the dream of a steady increase in income was lost back in the early 1970s. What can explain this big shift in the income distribution in the last four decades? One clue is in the timeframe of the shift, which coincides with the growing openness of the American economy to international trade and investments. Many believe that globalization is largely to blame.

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The game is getting dangerous. But it’s the only game in town.

High Anxiety: Markets Get Roiled (WSJ)

Stocks and oil futures tumbled and Japan’s yen hit its highest intraday level against the dollar since October 2014, as investors struggled to reconcile recent market gains with unease over the pace of global growth. The latest tumult erupted after the Reserve Bank of Australia on Tuesday cut its benchmark rate by one-quarter of a percentage point to 1.75%. The move reflects soft inflation and economic sluggishness driven in part by weak demand from China, the largest buyer of Australian exports. Adding to concerns were a drop in Chinese manufacturing and signals that eurozone growth is slowing more than previously forecast, traders said.

Tuesday’s developments reflect worries that have shadowed a surprising 2016 recovery in the prices of stocks and many commodities. Global growth has slowed this year, prompting major forecasters to cut their outlooks. Yet in recent months the decline of the U.S. dollar and easier policy from global central banks have helped fuel gains in many riskier assets, allowing the Dow industrials to recover from a decline of as much as 10% earlier this year. The action has vexed many portfolio managers and traders, who came into the year expecting the dollar to gain against the yen and euro as the Fed prepared to further tighten its policy and its peers loosened theirs. Instead, both currencies have surged against the dollar.

The dollar fell as low as ¥105.53 during trading Tuesday before retracing to ¥106 later in the session. The dollar traded at ¥120 at the start of the year, according to CQG. The gains threaten to add to economic turmoil in the world’s third-largest economy while deepening investors’ anxiety. “The financial markets are on edge,’’ said Jack McIntyre at Brandywine Global Investment Management. ”Economic growth is still hard to come by.’’

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Hard to imagine that this still has legs..

China’s Improbable Commodities Frenzy Leaves Stocks in the Dust (BBG)

The wild ride in China’s commodity futures is making the nation’s $5.9 trillion stock market look docile. Compared with the stock market, even eggs have been a better investment in China in 2016, with futures climbing 27%. That’s as the cost of a dozen eggs in the U.S. slumped 24% in the first quarter. The epicenter of the commodities boom, however, has been steel reinforcement bars, which have surged 38%. The dizzying increase in speculative activity prompted the head of the world’s largest metals exchange to say that some traders probably don’t even know what they are buying or selling. The Shanghai Composite Index is down 15% this year.

Fluctuations in steel futures have sent a gauge of price swings to the highest level on record. Rebar surged 29% in Shanghai from the end of March through April 22, before dropping about 11%. Bourses in Dalian, Shanghai and Zhengzhou have announced measures to cool the commodities boom including higher fees and a reduction in night hours. Meanwhile, volatility on the Shanghai Composite, which saw gut-wrenching moves over the summer and the start of 2016, has fallen to the lowest level in more than a year as the market turned flat. The intensity of futures trading on Chinese commodities exchanges is making some of the world’s most liquid markets look leisurely. The average iron ore and steel rebar contracts on the Shanghai Futures Exchange are held for less than four hours, compared with almost 40 hours for WTI crude futures on the New York Mercantile Exchange.

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Time to get out. The House wins.

Commodities Are China’s Hottest New Casino (FT)

China’s market regulator may have succeeded in taking much of the froth off the country’s surging commodities markets last week, but the message is not filtering down to many dedicated retail traders. As Chinese markets reopened on Tuesday after the May Day holiday, a few dozen young traders in Shanghai crowded into a small room provided by a local brokerage. The mostly 20-something male traders, dressed in jeans and T-shirts, were looking forward to another week of fevered risk-taking in China’s hottest new casino. “It’s better for futures traders to be young because they can learn faster,” said Zhang Jun, 26, who has been trading commodities on the Shanghai Futures Exchange for three years but has only recently begun to make any money.

“This is not relevant to anything you study before you get here. I don’t know anyone who studied a relevant major,” said Mr Zhang, a mechanical engineer by training. On April 29, the China Securities Regulatory Commission ordered the country’s three commodities futures exchanges to curb speculation. The exchanges had already taken steps in that direction, by increasing margin requirements and transaction fees while reducing trading hours. The measures appeared to be aimed primarily at large institutional traders who have contributed to price surges for commodities ranging from steel to eggs, which have increased 50% and 10% respectively over recent months. Liu Shiyu, the CSRC’s new boss, wants to avoid the fate of his recently sacked predecessor, who last year presided over a boom and bust on the Shanghai and Shenzhen stock exchanges.

Poor economic data helped Mr Liu’s cause on Tuesday, with the price of the Shanghai exchange’s most popular steel rebar contract falling 4.52% to Rmb2,451 a tonne. Futures for iron ore, the key ingredient in steel production, also took a hit. The most actively traded contract on the Dalian Futures Exchange, which largely trades steel industry inputs, dropped 2.96% to Rmb442.5 per tonne. At the peak of last month’s China commodities fever, the number of steel rebar contracts traded in Shanghai exceeded volumes for the world’s two most important crude oil benchmarks, Brent and West Texas Intermediate.

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More dangerous by the day, but nothing to stop it.

China’s $1 Trillion In Bad Debt Makes A Sharp Slowdown Inevitable (BI)

The amount of debt being carried in the Chinese economy – mostly by state-owned “zombie” companies – is now so high that it could lead to a financial crisis, according to Macquarie analyst Viktor Shvets and his team. “Unless this vicious cycle is broken, financial crisis or at least a sharp slowdown is an inevitable ultimate outcome,” he wrote in a note to investors on April 29. The China debt problem is simple, at least in concept. To grow its economy, the Chinese government and its central bank have extended credit generously to all sorts of Chinese companies. Many of those are “state owned enterprises,” which are often old-fashioned, uncompetitive, or kept alive by political will rather than economic necessity.

These “zombie” companies exist largely to pay back those debts, but as time goes by some of them default, or fail to pay back all if their loans. This was not much of a problem until recently, Shvets argues, because China’s economy was growing so robustly that it eclipsed the rate of non-performing loans (NPLs). But as the economy has grown, so has its debt, to roughly $35 trillion, or nearly 350% of GDP. If too many companies fail to repay their debts, private lenders and banks will become fearful of lending more. And when that happens, it would plunge China into a financial crisis as liquidity dries up. The size of the debt at risk is so large – and the Chinese economy is such a global driving force – that such a crisis would cause a contagion into the markets of the rest of the world.

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It can’t be called an accident, but it sure is waiting to happen.

$571 Billion Debt Wall Points to More Defaults in China (BBG)

Chinese debt investors are turning bearish at just the wrong time for the nation’s corporate borrowers, which face a record 3.7 trillion yuan ($571 billion) of local bond maturities through year-end. With this year’s biggest note payments concentrated in some of the country’s most-cash strapped industries, China needs buoyant markets to help its companies refinance. Instead, yields in April rose at the fastest pace in more than a year and issuance tumbled 43% as borrowers canceled 143 billion yuan of planned debt sales. Deteriorating investor sentiment has heightened the risk of defaults in a market that’s already seen at least seven companies renege on obligations this year, matching the total for all of 2015.

While government-run banks may step in to help weaker borrowers, missed debt payments by three state-owned firms in the past three months suggest policy makers are becoming more tolerant of corporate failures as the economy slows. “The biggest risk to the onshore bond market is refinancing risk,” said Qiu Xinhong at First State Cinda Fund. “With such a big amount of bonds maturing, if Chinese issuers can’t sell new bonds to repay the old, more will default.”Repayment pressures are most extreme in China’s “old economy” industries, the biggest losers from the nation’s slowdown. Listed metals and mining companies, which generated enough operating profit to cover just half of their interest expenses in 2015, face principal payments of 389 billion yuan through year-end.

Power generation firms owe 332 billion yuan, while maturities at coal companies have swelled to 292 billion yuan. SDIC Xinji Energy, a state-owned coal producer that canceled a bond sale on March 11, must repay 1 billion yuan of notes on May 15, according to Bloomberg-compiled data. China International Capital highlighted the company as one of the riskiest onshore issuers in the second quarter. Fei Dai, SDIC’s board secretary, said Tuesday that the firm will arrange bank loans and other measures to avoid a default. The shares fell 5% to the lowest level since December 2014 in Shanghai on Wednesday. [..] “If you have a large number of companies in high-risk sectors that lose access to financing, there will be defaults or restructuring,” said Raja Mukherji, head of Asian credit research at PIMCO.

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“China can’t be growing at 6.7% when its export machine has run out of gas..”

The Global Economy is at Stall Speed, Rapidly Losing Lift (Stockman)

South Korea’s exports tumbled to $41 billion in April, marking the 16th consecutive month of declining foreign sales. Last month’s result represented a 11.2% decline from prior year, and an 18% drop from April 2014. Moreover, within that shrinking total, exports to China were down by 18.4% last month, following a 12.2% drop in March. The Korean export slump is no aberration. The same pattern is evident in the entire East Asia export belt. That’s because the Red Ponzi is in its last innings. Beijing is furiously pumping on the credit accelerator, but to no avail. As can’t be emphasized enough, printing GDP by means of wanton credit expansion does not create wealth or growth; it just results in an eventual day of reckoning when the speculative excesses inherent in central bank money printing collapse in upon themselves.

China is surely close to that kind of implosion. During Q1 total credit, or what Beijing is please to call “social financing”, expanded at a $4 trillion annualized rate. This was up 57% over prior year and represented debt growth at a 38% of GDP annual rate. Stated differently, during the first 90 days of 2016 China piled another $1 trillion of debt on its existing $30 trillion debt mountain, while its nominal GDP expanded by less than $175 billion. That’s right. The Red Ponzi is generating barely $1 of GDP for every $6 of new debt. And much of the “GDP” purportedly generated during Q1 reflected new construction of empty apartments and redundant public infrastructure. By now it ought to be evident that the Chinese economy is a brobdingnagian freak of nature that is destined for a collapse, and that its economic statistics are a tissue of fabrications and delusions.

Even its export figures, which are constrained toward minimum honesty because they can be checked against Chinese imports reported by the rest of the world, are padded to some considerable degree by phony export invoicing designed to hide illegal capital flight. Still, the implication of its export trends are unmistakable. When you put aside the statistical razzmatazz of the Chinese New Year’s timing noise in the data, exports were down by 10% in Q1 as a whole. That is the worst quarterly drop since 2009 amidst the global Great Recession, and was nearly twice the rate of decline during Q4 and Q3 2015. Here’s the thing. China can’t be growing at 6.7% when its export machine has run out of gas, as is so starkly evident in the graph below.

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Still festering in the dark.

Fed Expected To Drag Hedge Funds Into Plan To Halt Next Lehman (BBG)

Hedge funds, insurers and other companies that do business with Wall Street megabanks will pay a price for regulators’ efforts to make sure any future collapse of a giant lender doesn’t tank the entire financial system. The Federal Reserve is set to propose so-called stays on derivatives and other contracts that would prevent counterparties from immediately pulling collateral from a failed bank. The plan released Tuesday is meant to give authorities ample time to unwind a firm, hopefully heading off the frantic contagion that spread through markets when Lehman Brothers toppled in 2008. Though the world’s largest banks have already made strides to include such protections in transactions with each other, the Fed’s proposal insists that the shield be expanded to more contracts – including with non-bank firms.

The curbs would apply to any new contract signed by eight of the biggest and most complex U.S. bank holding companies and the U.S. arms of major foreign banks. So, hedge funds and asset managers that want to keep doing business with such lenders would have to comply. Fed Governor Daniel Tarullo said the proposal is “another step forward in our efforts to make financial firms resolvable without either injecting public capital or endangering the overall stability of the financial system.” Industry groups representing firms such as Citadel, BlackRock and MetLife have resisted efforts to rewrite financial contracts, arguing that it abuses investors’ rights and could make things worse by encouraging trading partners to try to pull away from a bank at the first whiff of trouble, even before a failure. But asset managers and insurers would face a tough task in persuading the Fed to change course.

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Party! It’ll be Britain’s last for a while…

Barclays Launches First 100% Mortgages Since Crisis (FT)

Barclays has become the first high street bank since the financial crisis to launch a 100% mortgage in the latest sign of a return to riskier lending. The bank is allowing some buyers to take out a mortgage to 100% of the value of the property, without needing a deposit. Most banks require at least a 5-10% lump sum. Barclays said the mortgage only needed to be supported by a family member or guardian, who must set aside 10% of the purchase price in cash for three years in return for interest. It said the new mortgage was designed to remove the issue of borrowers drawing from the “bank of Mum and Dad” to stump up a deposit. Ray Boulger, of broker John Charcol, said: “It is the first true 100% mortgage since the financial crisis.” The move marks a shift back to higher loan-to-value lending reminiscent of the boom times before the crisis of 2008, when 100% mortgages were widely available.

The defunct bank Northern Rock became renowned for its aggressive lending, with its “Together” mortgages offering 125% of the property value. Regulators have since clamped down on risky lending through regulation in 2014, called the Mortgage Market Review, designed to ensure borrowers can repay — although it does not prohibit 100% loans. The Bank of England would also be likely to take a dim view of any widespread return to deposit-free mortgage lending. So far, no other bank has offered such loans. “We haven’t seen a resurgence of 100% mortgages; I don’t think regulation would allow that,” said Charlotte Nelson, of consumer site Moneyfacts. “I don’t think it’s something many other banks will take on. If they’re seen to be lending at 100%, even with a guarantee, it doesn’t look great. Seeing 100% deals back on the market can come off as negative.”

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The attitude towards whistleblowers still feels medieval.

Whistleblowing Is Not Just Leaking, It’s an Act of Resistance (Snowden)

“I’ve been waiting 40 years for someone like you.” Those were the first words Daniel Ellsberg spoke to me when we met last year. Dan and I felt an immediate kinship; we both knew what it meant to risk so much — and to be irrevocably changed — by revealing secret truths. One of the challenges of being a whistleblower is living with the knowledge that people continue to sit, just as you did, at those desks, in that unit, throughout the agency, who see what you saw and comply in silence, without resistance or complaint. They learn to live not just with untruths but with unnecessary untruths, dangerous untruths, corrosive untruths. It is a double tragedy: What begins as a survival strategy ends with the compromise of the human being it sought to preserve and the diminishing of the democracy meant to justify the sacrifice.

But unlike Dan Ellsberg, I didn’t have to wait 40 years to witness other citizens breaking that silence with documents. Ellsberg gave the Pentagon Papers to the New York Times and other newspapers in 1971; Chelsea Manning provided the Iraq and Afghan War logs and the Cablegate materials to WikiLeaks in 2010. I came forward in 2013. Now here we are in 2016, and another person of courage and conscience has made available the set of extraordinary documents that are published in The Assassination Complex, the new book out today by Jeremy Scahill and the staff of The Intercept. We are witnessing a compression of the working period in which bad policy shelters in the shadows, the time frame in which unconstitutional activities can continue before they are exposed by acts of conscience.

And this temporal compression has a significance beyond the immediate headlines; it permits the people of this country to learn about critical government actions, not as part of the historical record but in a way that allows direct action through voting — in other words, in a way that empowers an informed citizenry to defend the democracy that “state secrets” are nominally intended to support. When I see individuals who are able to bring information forward, it gives me hope that we won’t always be required to curtail the illegal activities of our government as if it were a constant task, to uproot official lawbreaking as routinely as we mow the grass. (Interestingly enough, that is how some have begun to describe remote killing operations, as “cutting the grass.”)

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Case in point.

Whistle-Blower Needed a Smoke Before Giving Up LuxLeaks Data (BBG)

The man who uncovered secret Luxembourg deals that helped companies slash tax rates was actually looking for training documents when he stumbled upon the files on his computer at PricewaterhouseCoopers. On the eve of his departure from the accounting firm in 2010, Antoine Deltour wasn’t fully aware of what he had discovered. He copied the folder and within half an hour had about 45,000 pages detailing confidential tax agreements that became known as the LuxLeaks. Deltour’s discovery triggered the first in a wave of scandals over how thousands of international companies, including Walt Disney, Microsoft’s Skype and PepsiCo, moved money around the globe to avoid taxes. It also landed him in trouble after PwC sued and prosecutors charged him and two other men with theft and violation of business secrets.

“I had discovered gradually the administrative practice of these deals,” Deltour, 30, told a three-judge panel at his trial in Luxembourg Tuesday. “The opportunity to have stumbled over this folder led me to copy it at that moment without a clear goal in mind,” knowing about the “sensitive and highly confidential nature of these files.” Deltour “felt a bit surprised by the volume of the” files and “didn’t immediately do anything with this mass of information,” he told the court. He felt “isolated” and “alone” and unsure of who to turn to. Months later he was contacted by journalist Edouard Perrin, who was working on a documentary about tax practices. The pair met only once, at Deltour’s home in Nancy, France, where Deltour said he needed a moment before handing over the files. “Of course I hesitated,” Deltour told the judge. “I went to smoke a cigarette on the balcony to think a few moments about this.”

The resulting 2012 documentary by Perrin, who is also a defendant in the case, led to interest from the International Consortium of Investigative Journalists. The group put the documents online in 2014, triggering the LuxLeaks scandal. Perrin, 44, another French citizen, was charged in April 2015 with being the accomplice of Raphael Halet, another ex-PwC staffer who is accused of stealing 16 corporate tax returns from the accounting firm and giving them to the journalist. Perrin is also accused of having urged Halet to search for specific documents, a charge both men rejected.

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Grand Theft Auto. Redux.

The Kleptocrats’ $36 Trillion Heist Keeps Most of the World Impoverished (DB)

For the first time we have a reliable estimate of how much money thieving dictators and others have looted from 150 mostly poor nations and hidden offshore: $12.1 trillion. That huge figure equals a nickel on each dollar of global wealth and yet it excludes the wealthiest regions of the planet: America, Canada, Europe, Japan, Australia, and New Zealand. That so much money is missing from these poorer nations explains why vast numbers of people live in abject poverty even in countries where economic activity per capita is above the world average. In Equatorial Guinea, for example, the national economy’s output per person comes to 60 cents for each dollar Americans enjoy, measured using what economists call purchasing power equivalents, yet living standards remain abysmal.

The $12.1 trillion estimate—which amounts to two-thirds of America’s annual GDP being taken out of the economies of much poorer nations—is for flight wealth built up since 1970. Add to that flight wealth from the world’s rich regions, much of it due to tax evasion and criminal activities like drug dealing, and the global figure for hidden offshore wealth totals as much as $36 trillion. In 2014 the net worth of planet Earth was about $240 trillion, which means about 15% of global wealth is in hiding, significantly reducing the capital available to spur world economic growth. That $12.1 trillion figure for money looted from poorer countries has been hiding in plain sight. It comes from numbers in the global economic data—derived by comparing statistics from the IMF and the World Bank, supplemented by some figures from the United Nations and the CIA—that do not match up, but which until now no one had bothered to analyze.

You might think that with their vast staffs of economists and analysts the IMF, the World Bank, and other institutions would have run the numbers long ago, but no. Instead, one determined person combed 45 years of official statistics from around the world to calculate the flight wealth for nearly 200 countries that publish comparable economic data. That’s Jim Henry, who was a rising corporate star until he gave it all up to document illicit flows of money and the damage they do to billions of people. Henry has been the chief economist at McKinsey, arguably the world’s most influential business consultancy, and worked directly under Jack Welch at General Electric. A Harvard-educated economist and lawyer, Henry calls himself an investigative economist. His approach is simple: “Just look at the effing data and solve the puzzle” of mismatches between the various official sources.

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Seems like a bad time to keep on pushing through ever more deals people obviously don’t want.

France Threatens To Block TTiP Deal (G.)

Doubts about the controversial EU-US trade pact are mounting after the French president threatened to block the deal. François Hollande said on Tuesday he would reject the Transatlantic Trade and Investment Partnership “at this stage” because France was opposed to unregulated free trade. Earlier, France’s lead trade negotiator had warned that a halt in TTIP talks “is the most probable option”. Matthias Fekl, the minister responsible for representing France in TTIP talks, blamed Washington for the impasse. He said Europe had offered a lot but had received little in return. He added: “There cannot be an agreement without France and much less against France.” All 28 EU member states and the European parliament will have to ratify TTIP before it comes into force.

But that day seems further away than ever, with talks bogged down after 13 rounds of negotiations spread over nearly three years. The gulf between the two sides was highlighted by a massive leak of documents on Monday, first reported by the Guardian, which revealed “irreconcilable” differences on consumer protection and animal welfare standards. The publication of 248 pages of negotiating texts and internal positions, obtained by Greenpeace and seen by the Guardian, showed that the two sides remain far apart on how to align regulations on environment and consumer protection. Greenpeace said the leak demonstrated that the EU and the US were in a race to the bottom on health and environmental standards, but negotiators on both sides rejected these claims.

The European commission, which leads negotiations on behalf of the EU, dismissed the “alarmist headlines” as “a storm in a teacup”. But Tuesday’s comments from the heart of the French government reveal how difficult TTIP negotiations have become. France has always had the biggest doubts about TTIP. In 2013 the French government secured an exemption for its film industry from TTIP talks to try to shelter French-language productions from Hollywood dominance. Hollande, who is beset by dire poll ratings, indicated on Tuesday that the government has other concerns about TTIP. Speaking at a conference on the history of the left, Hollande said he would never accept “the undermining of the essential principles of our agriculture, our culture, of mutual access to public markets”. Fekl told French radio that the agreement on the table is “a bad deal”. “Europe is offering a lot and we are getting very little in return. That is unacceptable,” he said.

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With growth gone, so is the desire for deals. Too much domestic backlash.

TTIP Has Been Kicked Into The Long Grass … For A Very Long Time (G.)

As talks to broker a global trade deal entered a second tortuous decade, the US and the European Union came up with an idea. Since it was proving impossible to find agreement among the 150 or so members of the World Trade Organisation about how to tear down barriers to freer commerce, they would strike their own agreement. Talks on the Transatlantic Trade and Investment Partnership (TTIP) began in the summer of 2013 with officials in Washington and Brussels confident they could iron out any difficulties by the time American voters decide on who should succeed Barack Obama as president in November this year. This always looked a ridiculously tight timetable and so it has proved. Cutting trade deals is an agonisingly slow process. The last successful global deal – the Uruguay Round – took seven years before being concluding in 1993.

Talks continued on the Doha Round from 2001 until 2015 before terminal boredom and frustration set in. Was it really feasible that TTIP could be pushed through in little more than three years? Not a chance. There are three reasons for that. First, the main barriers to trade between the US and the EU are not traditional tariff barriers, which have been steadily whittled away in the decades since the second world war, but the differing regulatory regimes that operate on either side of the Atlantic. America and Europe have different views on everything from GM food to safety standards on cars so harmonising standards was always going to take a lot of time. Second, the talks have involved controversial issues and have been taking place when trust in politicians and business has rarely been lower. The main driving forces behind TTIP have been multinational corporations and business lobby groups, who stand to gain from harmonised regulations.

With information about the secret negotiations having to be chiselled out by groups hostile to TTIP, voters have drawn the obvious conclusion: the aim of the talks is to enrich big business even if it means playing fast and loose with environmental and health standards. Which leads to the final and most important factor: there are no votes in trade. It would have been no surprise had Angela Merkel voiced strong opposition to the state of the TTIP negotiations, given the level of public antipathy to the trade deal in Germany and her delicate position in the polls ahead of elections next year. Instead, the German chancellor was beaten to it by François Hollande (also facing a showdown with the voters in 2017) who has made it clear he will not sign TTIP in its current form. Years not months of hard slog lie ahead, by which time the US is likely to have a president much less wedded to the idea of striking trade deals. TTIP has just been kicked into the long grass for a very long time, and perhaps for good.

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Can we have no more of this please?! “The European Commission slapped a 30-year ban on public access to the TTIP negotiating texts at the beginning of the talks in 2013..”

After The Leaks Showing What It Is, This Could Be The End For TTIP (Ind.)

Today’s shock leak of the text of the Transatlantic Trade and Investment Partnership (TTIP) marks the beginning of the end for the hated EU-US trade deal, and a key moment in the Brexit debate. The unelected negotiators have kept the talks going until now by means of a fanatical level of secrecy, with threats of criminal prosecution for anyone divulging the treaty’s contents. Now, for the first time, the people of Europe can see for themselves what the European Commission has been doing under cover of darkness – and it is not pretty. The leaked TTIP documents, published by Greenpeace this morning, run to 248 pages and cover 13 of the 17 chapters where the final agreement has begun to take shape.

The texts include highly controversial subjects such as EU food safety standards, already known to be at risk from TTIP, as well as details of specific threats such as the US plan to end Europe’s ban on genetically modified foods. The documents show that US corporations will be granted unprecedented powers over any new public health or safety regulations to be introduced in future. If any European government does dare to bring in laws to raise social or environmental standards, TTIP will grant US investors the right to sue for loss of profits in their own corporate court system that is unavailable to domestic firms, governments or anyone else. For all those who said that we were scaremongering and that the EU would never allow this to happen, we were right and you were wrong.

The leaked texts also reveal how the European Commission is preparing to open up the European economy to unfair competition from giant US corporations, despite acknowledging the disastrous consequences this will bring to European producers, who have to meet far higher standards than pertain in the USA. According to official statistics, at least one million jobs will be lost as a direct result of TTIP – and twice that many if the full deal is allowed to go through. Yet we can now see that EU negotiators are preparing to trade away whole sectors of our economies in TTIP, with no care for the human consequences.

The European Commission slapped a 30-year ban on public access to the TTIP negotiating texts at the beginning of the talks in 2013, in the full knowledge that they would not be able to survive the outcry if people were given sight of the deal. In response, campaigners called for a ‘Dracula strategy’ against the agreement: expose the vampire to sunlight and it will die. Today the door has been flung open and the first rays of sunlight shone on TTIP. The EU negotiators will never be able to crawl back into the shadows again.

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That must be over half the eurozone right there.

Spain, France, Italy, Portugal To Miss EU Deficit, Debt Reduction Targets (R.)

Three of the euro zone’s four biggest economies look set to break European Union deficit and debt reduction targets this year and next unless they take urgent action, European Commission forecasts showed on Tuesday. The Commission forecast that the three – France, Italy and Spain – were likely to miss goals set for them set by EU finance ministers under a disciplinary procedure for those that run excessive budget deficits and have too high public debt. Portugal would also likely be in breach of EU budget rules. The euro zone’s biggest economy Germany, was in rude fiscal health, the forecasts showed. The Commission’s forecasts, together with medium-term fiscal consolidation plans submitted by governments last month will be the basis for a Commission decision, in the second half of May, on whether to step up the disciplinary procedure against those in breach of the rules.

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“..for supreme court judges, the right to survive still trumped property rights, a fact that would be considered blasphemy in America..”

Theft Of Sausage And Cheese By Hungry Homeless Man ‘Not A Crime’ (G.)

Italy’s highest court has ruled that the theft of a sausage and piece of cheese by a homeless man in 2011 did not constitute a crime because he was in desperate need of nourishment. The high court judges in the court of cassation found that Roman Ostriakov, a young homeless man who had bought a bag of breadsticks from a supermarket but had slipped a wurstel – a small sausage – and cheese into his pocket, had acted out of an immediate need by stealing a minimal amount of food, and therefore had not committed a crime. The case, which drew comparisons to the story of Jean Valjean, the hero of Victor Hugo’s Les Misérables, was hailed in some media reports as an act of humanity at a time when hundreds of Italians are being added to the roster of the country’s “hungry” every day, despite improvements in the economy.

One columnist writing in La Stampa said that, for supreme court judges, the right to survive still trumped property rights, a fact that would be considered “blasphemy in America”. But others commented that the case highlighted Italy’s notoriously inefficient legal system, in which the theft of food valued at about €4.70 (£3.70) was the subject of a three-part trial – the first hearing, the appeal, and the final supreme court ruling – to determine whether the defendant had in fact committed a crime. “Yes, you read that right,” an opinion column in Corriere della Sera said, “in a country with a burden of €60bn in corruption per year, it took three degrees of proceedings to determine ‘this was not a crime’.”

Ostriakov, who was described as a homeless 30-year-old from Ukraine, had been sentenced to six months in jail and a €100 fine by a lower court in Genoa, but that punishment was vacated by the supreme court. “The supreme court has established a sacrosanct principle: a small theft because of hunger is in no way comparable to an act of delinquency, because the need to feed justifies the fact,” said Carlo Rienzi, president of Codacons, an environmental and consumer rights group, told Il Mesaggero. “In recent years the economic crisis has increased dramatically the number of citizens, especially the elderly, forced to steal in supermarkets to be able to make ends meet.”

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May 032016
 
 May 3, 2016  Posted by at 9:14 am Finance Tagged with: , , , , , , , , , , ,  1 Response »


DPC French Market, New Orleans 1910

The EU Exists Only To Become A Superstate (Lawson)
US Dollar Falls To 1-Year Low (BBG)
Yen Under Pressure to Extend World-Beating Rally Against Dollar (BBG)
Kuroda Kollapse Kontinues As USDJPY Nears 105 Handle (ZH)
BOJ Chief Kuroda Warns Current Yen Strength Risks Harming Recovery (BBG)
China Factory Activity Contracts for 14th Straight Month In April (CNBC)
Fed’s Williams Sees Big Drop In Asset Prices As Systemic Risk (R.)
Apple’s Losing Streak Is Nearing Historic Levels (BBG)
No Alternative To Low Rates For Now, Draghi Says (R.)
ECB Report Says Investors May Be Profiting From Leaked US Data (FT)
Six Counterpoints About Australian Public Debt (Stanford)
‘Bank of Mum and Dad’ Behind 25% Of British Mortgages (G.)
Dominoes: Vanishing Arctic Ice Shifts Jet Stream, Which Melts Glaciers (WaPo)
Germany Wants To Extend Border Controls For Another 6 Months (AP)
Denmark Extends Controls On German Border (EN)
EU States Face Charge For Refusing Refugees (FT)
90,000 Unaccompanied Minors Sought Asylum In EU In 2015 (R.)

I don’t think I have much in common with Nigel Lawson -aka Lord Lawson of Blaby-, but it’s important that this ‘little fact’ be known and exposed. Even a superstate needs values if it is to survive. The EU ain’t got any left. Who wants to belong to that?

The EU Exists Only To Become A Superstate (Lawson)

For Britain, the issue in the coming European referendum is not Europe, with its great history, incomparable culture, and diverse peoples, but the European Union. To confuse the two is both geographically and historically obtuse. European civilisation existed long before the coming of the EU, and will continue long after this episode in Europe’s history is, hopefully, over. On the European mainland it has always been well understood that the whole purpose of European integration was political, and that economic integration was simply a means to a political end. In Britain, and perhaps also in the US, that has been much less well understood, particularly within the business community, who sometimes find it hard to grasp that politics can trump economics. The fact that the objective has always been political does not mean that it is in any way disreputable.

Indeed, the most compelling original objective was highly commendable. It was, bluntly, to eliminate the threat to Europe and the wider world from a recrudescence of German militarism, by placing the German tiger in a European cage. Whether or not membership of the EU has had much to do with it, that objective has been achieved: there is no longer a threat from German militarism. But in the background there has always been another political objective behind European economic integration, one which is now firmly in the foreground. That is the creation of a federal European superstate, a United States of Europe. Despite the resonance of the phrase, not one of the conditions that contributed to making a success of the United States of America exists in the case of the EU. But that is what the EU is all about. That is its sole raison d’être. And, unlike the first objective, it is profoundly misguided.

For the United Kingdom to remain in the EU would be particularly perverse, since not even our political elites wish to see this country absorbed into a United States of Europe. To be part of a political project whose objective we emphatically do not share cannot possibly make sense. It is true that our present Prime Minister argues that he has secured a British “opt-out” from the political union, but this is completely meaningless. “But,” comes the inevitable question, “what is your alternative to membership of the EU?” A more absurd question it would be hard to envisage. The alternative to being in the EU is not being in the EU. And it may come as a shock to the little Europeans that most of the world is not in the EU – and that most of these countries are doing better economically than most of the EU.

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Why don’t I see nobody accuse the US of currency manipulation?! That still the Shanghi Accord legacy?

US Dollar Falls To 1-Year Low (BBG)

The dollar fell to an 18-month low against the yen and touched its weakest since August versus the euro amid speculation that the U.S. won’t raise interest rates any time soon. The U.S. currency has lost ground versus most major peers over the past month as traders lowered expectations for a rate increase by the Federal Reserve in June to 12%. The Bloomberg Dollar Spot Index headed for the lowest close in almost a year, after a report showed manufacturing in the U.S. expanded less than forecast. Persistent weakness dragged the dollar down against the euro for a third straight month in April – its longest losing streak since 2013 – amid signs U.S. policy makers aren’t convinced the global and domestic economies can withstand higher borrowing costs.

It fell on Tuesday against Australia’s currency as Chinese equities climbed by the most in nearly three weeks. The U.S. has posted disappointing growth data as nascent signs of recovery emerge in Europe and China’s growth momentum accelerates. “The Fed is completely out of the picture now for the next few weeks – even with the June meeting, there’s got to be a lot of doubt about whether the Fed can raise rates,” said Shaun Osborne at Bank of Nova Scotia in Toronto. “The dollar has just not done particularly well over the past few weeks as the Fed has moved toward delaying rate hikes, and that’s a situation that definitely will continue, certainly for the near term.”

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Abe must be going nuts.

Yen Under Pressure to Extend World-Beating Rally Against Dollar (BBG)

The yen’s world-beating rally against the dollar looks to be gathering momentum, as central bank inaction on both sides of the Pacific Ocean leaves inflation expectations to drive the exchange rate. Japan’s currency extended its climb to an 18-month high Monday after Bank of Japan Governor Haruhiko Kuroda refrained from adding to stimulus on Thursday. That took its gain this year to 13%, the most among developed-market peers. The BOJ’s decision came just hours after Federal Reserve Chair Janet Yellen frustrated dollar bulls by reiterating she’s in no rush to cool the economy by raising interest rates. JPMorgan sees further yen gains after the U.S. put Japan on a new currency watch list.

With consumer price pressures building in the U.S. and dissipating in Japan, that narrows the gap in so-called real yields – the returns an investor can expect after accounting for inflation – supporting yen strength. If both central banks stay on the sidelines, Credit Suisse projects Japan’s currency could rapidly appreciate toward 90 per dollar. “So long as the Fed signals that they are being cautious in raising rates, real yields in the U.S. will decline, leading the dollar weaker,” said Hiromichi Shirakawa, the Swiss lender’s chief Japan economist and a former BOJ official. “The currency market is in a rather dangerous zone.” The BOJ’s benchmark for measuring progress toward its 2% target showed prices retreated at an annual 0.3% pace in March, the biggest decline since April 2013, the month that Kuroda initiated his stimulus program.

It had previously hovered near zero for more than a year. By contrast, the Fed’s preferred measure of inflation, based on the prices of goods and services consumers buy, rose 0.8% in the year through March. The so-called core measure, which strips out food and energy prices, climbed 1.6%. That’s seen a Treasury market gauge of inflation expectations over the coming decade – called the break-even rate – jump to 1.7% from as low as 1.2% in February. The equivalent measure in Japan is languishing at 0.3%. Benchmark 10-year Treasury Inflation Protected Securities yield around 0.1%, compared with about minus 0.5% for equivalent Japanese notes.

Japan met two of three criteria used to judge unfair practices in the U.S. report: a trade surplus with the U.S. above $20 billion, and a current-account surplus amounting to more than 3% of gross-domestic product. The third would be a repeated depreciation of the currency by buying foreign assets equivalent to 2% of gross domestic over a year. Meeting all three would trigger action by the U.S. president to enter discussions with the country and seek potential penalties. China, Germany, South Korea and Taiwan also made the watch list.

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“..Perhaps Jack Lew’s “currency manipulation” report was enough to stall the Japanese currency war for now?..”

Kuroda Kollapse Kontinues As USDJPY Nears 105 Handle (ZH)

Either The BoJ steps in soon and intervenes (even by just “checking levels”) or Kuroda-san is truly terrified of The G-20. USDJPY has now crashed 7 handles since last Thursday’s shock BoJ disappointment crashing to within 5 pips of a 105 handle tonight for the first time in 18 months…

 

 

Erasing the entire devaluation post-Fed, post QQE2…

 

Perhaps Jack Lew’s “currency manipulation” report was enough to stall the Japanese currency war for now? Or is China greatly rotating its Yuan devaluation pressure against another member of its basket…?

 

Charts: Bloomberg

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1) What recovery? 2) Abe and Kuroda are powerless prisoners to America’s dollar manipulation

BOJ Chief Kuroda Warns Current Yen Strength Risks Harming Recovery (BBG)

Bank of Japan Governor Haruhiko Kuroda warned that the yen’s biggest rally since Abenomics began risks harming the nation’s economic recovery. Speaking to reporters in Frankfurt Monday, Kuroda also reiterated that BOJ policy makers won’t hesitate to expand monetary stimulus in order to achieve their 2% inflation target. Japanese Prime Minister Shinzo Abe said the same day in Paris that rapid movements in exchange rates are undesirable, according to national broadcaster NHK. “There is a risk that the yen’s current appreciation brings an unwelcome impact on the economy,” Kuroda said on the sidelines of an annual gathering of finance chiefs from members of the Asian Development Bank, which he used to lead.

“We will be closely monitoring the impact of financial markets on the real economy and prices.” A weaker currency has been a linchpin of Abe’s program to stoke growth and exit deflation. Japan’s economy is at risk of sliding into its second recession in two years after contracting in the final three months of 2015, while inflation remains far from the BOJ’s target. One gauge showed consumer prices retreated at an annual 0.3% pace in March, the biggest decline since April 2013, the month that Kuroda initiated his stimulus program. The yen has climbed 13% against the dollar this year, the best performance among its developed-market peers. That has chipped away at the 36% decline over the previous four years, which was triggered by Abe’s pledge of unlimited monetary easy to correct yen strength.

Kuroda and his board left policy settings unchanged at a meeting Thursday, spurring a nearly 5%, two-day surge in the yen against the dollar. It reached an 18-month high of 106.05 per greenback on Tuesday, before trading at 106.19 as of 9:54 a.m. in Singapore. Japanese markets are closed for holidays Tuesday, Wednesday and Thursday this week.

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Beyond salvation.

China Factory Activity Contracts for 14th Straight Month In April (CNBC)

Activity in China’s manufacturing sector unexpectedly declined further in April, a private survey showed Tuesday, reviving doubts over the health of the world’s second-largest economy. The Caixin Manufacturing Purchasing Managers’ Index (PMI) fell to 49.4 in April from 49.7 in March, according to Markit, which compiles the index. A reading above 50 indicates expansion; one below indicates contraction. The Caixin PMI, which focuses on smaller and medium-sized enterprises, was last in expansionary territory in February 2015. The official PMI, which targets larger companies, printed at 50.2 in April, the second successive month of expansion, figures released over the weekend showed. The survey findings follow recent economic data that appeared to suggest that China’s economy was slowly regaining its poise after a torrid 12 months.

China’s exports rose at their fastest clip in a year in March, while industrial profits also picked up in the first quarter. A flurry of rate cuts and easing of reserve requirement have helped bolster sentiment, while the capital outflows that had unnerved sentiment at the start of the year have slowed. The Caixin survey, however, cast a more somber picture. Respondents reported stagnant new orders, while new export work fell for a fifth month running. Companies shed staff as client demand was muted. “The fluctuations indicate the economy lacks a solid foundation for recovery and is still in the process of bottoming out. The government needs to keep a close watch on the risk of a further economic downturn,” said He Fan at Caixin Insight Group.

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What blows up must blow down.

Fed’s Williams Sees Big Drop In Asset Prices As Systemic Risk (R.)

San Francisco Fed President John Williams reiterated Monday his view that the U.S. economy is ready for higher interest rates, but flagged the risk of broad-based declines in asset prices as a result. “It makes sense for us to be moving interest rates gradually back to more a normal level over the next couple years,” Williams said. “I actually think that’s a sign of strength for the global economy.” Speaking at a panel on systemic risk at the Milken Institute Global Conference, Williams said the biggest systemic financial risk currently is the possibility that “broad sets of assets are going to see big movements downward” as interest rates rise. “That’s an area that I think is a potential risk.” Williams did not suggest he sees another crisis brewing, adding that U.S. regulators have made “amazing” progress in shoring up banks against potential future failure.

“What I worry a lot more about is when people forget about the financial crisis, when they forget about the terrible things that happened,” he said, suggesting that may not happen for another five or ten years. The Fed raised interest rates for the first time in nearly a decade last December, but has held off raising them any further amid global stock volatility and worries over a decline in global growth. Even after the Fed resumes raising rates, Williams said, it will not be able to lift them as high as it has in the past. Most Fed officials currently think that the rate at which the economy can sustain healthy employment and steady prices has probably fallen to about 3.25% in the long run, a full %age point lower than was the case before the crisis. But there are significant downside risks to that estimate, Williams said.

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No. 1 US stock for years.

Apple’s Losing Streak Is Nearing Historic Levels (BBG)

So far in 2016, Apple is the dog of the Dow. After an underwhelming earnings report led to the shares’ worst week since January 2013, Apple stock extended its losses to kick off May, closing down 0.18% on Monday. The benchmark index’s laggard has declined by nearly 11% so far this year heading into today’s session: Bespoke Investment Group notes that Monday’s negative close marks eight straight sessions in the red for Apple—something that last happened in July 1998, and has now happened only four times in the company’s history. More than $79 billion in Apple’s market capitalization has been erased over the past eight sessions.

The company’s heavy weighting in major sector and benchmark indexes, coupled with the stock’s terrible two-week stretch, has made $4 billion in assets of exchange-traded funds evaporate over this stretch. “Smart beta” ETFs are poised to trounce their more popular peers, Bloomberg’s Eric Balchunas observes, in the event that this span of underperformance continues. There’s a possible silver lining for Apple bulls, and investors who own those market-cap-weighted ETFs: The stock tends to bounce back in earnest following these rare stretches of rotten performance. “Two of the three eight-day streaks saw the stock fall on day nine as well, but the stock has never experienced a losing streak longer than nine trading days,” Bespoke writes. “While the next day and next week returns following eight-day losing streaks lean negative, the stock has been higher over the next month all three times for a median gain of 8.01%.”

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Well, there is, but Draghi’s masters don’t want it.

No Alternative To Low Rates For Now, Draghi Says (R.)

Low interest rates are not harmless but they are only the symptom, not the cause of an underlying problem across major economies, ECB President Mario Draghi said on Monday, arguing that there was no alternative for now. “Thus the second part of the answer to raising rates of return is clear: continued expansionary policies until excess slack in the economy has been reduced and inflation dynamics are sustainably consistent again with price stability,” Draghi told a conference. “There is simply no alternative to this today.” “The only potential margin for maneuver is in the composition of the policy mix, that is, the balance of monetary and fiscal policy,” he added.

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Corruption is not a deficiency, it’s the MO.

ECB Report Says Investors May Be Profiting From Leaked US Data (FT)

US investors may be profiting from leaked economic data releases that allow them to front-run market-moving news, according to a research paper published by the ECB. Macroeconomic news announcements can move markets, as traders watch for indications about how the economy is performing. The data are released to everyone at the same time to ensure fairness but ECB researchers said they had found evidence of “informed trading” ahead of US data releases. Of the 21 market-moving announcements analysed, seven “show evidence of substantial informed trading before the official release time”, according to the paper, including two releases from the US government. The pre-release “price drift” accounts for about half of the overall price impact from the announcement.

The researchers looked at the impact on futures tracking the S&P 500 stock index and the 10-year Treasury bond for the 30 minutes preceding the announcement. The researchers also note that the price impact has become worse since 2008, and estimate that since 2008 profits in the S&P “e-mini” futures market alone amount to about $20m per year. “These results imply that some traders have private information about macroeconomic fundamentals,” said the report. “The evidence suggests that the pre-announcement drift likely comes from a combination of information leakage and superior forecasting based on proprietary data collection and reprocessing of public information.”

The paper raises questions about the safeguards used to ensure data are protected up until scheduled release time. Important economic indicators in the US are subject to the “Principle Federal Economic Indicator” guidelines, but the report notes that many distributors of the data are not subject to the same rules. “To ensure fairness, no market participant should have access to this information until the official release time,” the report added. “Yet, in this paper we find strong evidence of informed trading before several key macroeconomic news announcements.”

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Household debt is a much bigger factor is some countries than others. In Australia, it’s far bigger than government debt. But the latter is what all political talk is about. “Pumping up fear of government debt is always an essential step in preparing the public to accept cutbacks in essential public services.”

Six Counterpoints About Australian Public Debt (Stanford)

In the lead-up to today’s pre-election Commonwealth budget, much has been written about the need to quickly eliminate the government’s deficit, and reduce its accumulated debt. The standard shibboleths are invoked liberally: government must face hard truths and learn to live within its means; government must balance its budget (just like households do); debt-raters will punish us for our profligacy; and more. Pumping up fear of government debt is always an essential step in preparing the public to accept cutbacks in essential public services. And with Australians heading to the polls, the tough-love imagery serves another function: instilling fear that a change in government, at such a fragile time, would threaten the “stability” of Australia’s economy.

However, this well-worn line of rhetoric will fit uncomfortably for the Coalition government, given its indecisive and contradictory approach to fiscal policy while in office. The deficit has gotten bigger, not smaller, on their watch, despite the destructive and unnecessary cutbacks in public services imposed in their first budget. Their response to Australia’s fiscal and economic problems has consisted mostly of floating one half-formed trial balloon after another (from raising the GST to transferring income tax powers to the states to cutting corporate taxes), with no systematic analysis or framework. And their ideological desire to invoke a phony debt “crisis” as an excuse for ratcheting down spending will conflict with another, more immediate priority: throwing around new money (or at least announcements of new money), especially in marginal electorates, in hopes of buying their way back into office.

In short, the politics of debt and deficits will be both intense and complicated in the coming weeks. To help innoculate Australians against this hysteria, here are six important facts about public debt, what it is – and what it isn’t.

1. Australia’s public debt is relatively small

3. Other sectors of society borrow much more than government

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Somone should explain to these people what’s going on. Mum and Dad will lose their shirts AND their skirts. Ironically, some insist more homes must be build. Ironoc, because that would mean even steeper losses for those buying into today’s craze.

‘Bank of Mum and Dad’ Behind 25% Of British Mortgages (G.)

The “Bank of Mum and Dad” will help finance 25% of UK mortgage transactions this year, according to research. Parents are set to lend their children £5bn to help them on to the property ladder. If the lending power was of all these parents was combined, it would be a top 10 mortgage provider. Nigel Wilson, chief executive of Legal & General, which carried out the research, said the data showed a number of issues, including house prices being “out of sync with wages”. The research estimated that the Bank of Mum and Dad will provide deposits for more than 300,000 mortgages. The homes purchased will be worth £77bn and the average contribution is £17,500 or 7% of the average purchase price.

But relying on parental support might soon be unsustainable as parents could be giving away more than they can afford. Wilson said that in London the funding method was reaching “tipping point” already as parental contributions made up more than 50% of the wealth (excluding property) of the average household in the capital. He said: “The Bank of Mum and Dad plays a vital role in helping young people to take their early steps on to the housing ladder.” Not all young people have parents who can afford to help them and some who do still do not have enough to buy a place of their own, he said. He added: “We need to fix the housing market by revolutionising the supply side – if we build more houses, demand can be met at a sensible level and prices will stabilise relative to wages.”

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Positive feedback.

Dominoes: Vanishing Arctic Ice Shifts Jet Stream, Which Melts Glaciers (WaPo)

Investigating the factors affecting ice melt in Greenland — one of the most rapidly changing places on Earth — is a major priority for climate scientists. And new research is revealing that there are a more complex set of variables affecting the ice sheet than experts had imagined. A recent set of scientific papers have proposed a critical connection between sharp declines in Arctic sea ice and changes in the atmosphere, which they say are not only affecting ice melt in Greenland, but also weather patterns all over the North Atlantic. The new studies center on an atmospheric phenomenon known as “blocking” — this is when high pressure systems remain stationary in one place for long periods of time (days or even weeks), causing weather conditions to stay relatively stable for as long as the block remains in place.

They can occur when there’s a change or disturbance in the jet stream, causing the flow of air in the atmosphere to form a kind of eddy, said Jennifer Francis, a research professor and climate expert at Rutgers University. Blocking events over Greenland are particularly interesting to climate scientists because of their potential to drive temperatures up and increase melting on the ice sheet. “When they do happen, and they kind of set up in just the right spot, they bring a lot of warm, moist air from the North Atlantic up over Greenland, and that helps contribute to increased cloudiness and warming of the surface,” Francis said. “When that happens, especially in the summer, we tend to see these melt events occur.” Now, two new studies have suggested that there’s been a recent increase in the frequency of melt-triggering blocking events over Greenland — and that it’s likely been fueled by climate change-driven losses of Arctic sea ice.

A paper set to be published Monday in the International Journal of Climatology reveals an uptick in the frequency of these blocking events over Greenland since the 1980s. A team of researchers led by the University of Sheffield’s Edward Hanna used a global meteorological dataset relying on historical records to measure the frequency and strength of high pressure systems over Greenland all the way back to the year 1851. Previous analyses had only extended the record back to 1948, so the new study is able to place recent blocking events in a much larger historical context. When the researchers analyzed the data, they found that the increase in blocking frequency over the past 30 years is particularly pronounced in the summer, the time of year when blocking events are likely to have the biggest impact on ice melt.

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Clueless, rudderless, valueless.

Germany Wants To Extend Border Controls For Another 6 Months (AP)

Germany and some other EU countries are planning to ask the European Commission for an extension of border controls within the Schengen passport-free travel zone for another six months because they fear a new wave of migrants. Interior Minister Thomas de Maizere’s spokesman says a letter is being sent Monday asking for an extension of the controls on the German-Austrian border, which were implemented last year when thousands of migrants crossed into Germany daily. De Maizere has expressed concern before that an increasing number of migrants will try to reach Europe this summer by crossing the Mediterranean Sea from lawless Libya to Italy, then travel north to Austria and Germany. Germany registered nearly 1.1 million new arrivals last year and is keen to bring the numbers down in 2016.

Germany’s defense minister, meanwhile, said it was up to Italy to protect its borders but other European countries must be ready to help if needed. Ursula von der Leyen’s comments Monday touched on the potential problems Italy could have with increased arrival of migrants looking for an alternative route into the EU now that the West Balkans route is closed and Turkey has committed to taking back those arriving illegally to Greece. She said a solution must be found “together with Italy.” Austria plans to impose border controls at its main border crossing with Italy to prevent potential attempts by migrants to enter, and with Austria bordering Germany, von der Leyen’s comments indicate her country’s concern that it also may have to deal with new waves of migrants seeking entry.

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“..We have to protect ourselves against the Islamic State group..”

Denmark Extends Controls On German Border (EN)

Denmark has extended temporary controls on its border with Germany, first imposed in January to help regulate an influx of migrants. The measures have been prolonged by another month until the beginning of June. The European Commission, struggling to prevent the collapse of the Schengen agreement, has confirmed it will soon authorise more such extensions. The Danish government says it has joined several countries in writing to the Commission asking for a two-year extension. “Together with the Germans, the French, the Austrians and the Swedes I have today sent a letter to the EU commission asking for the possibility to extend the border control for the next two years,” said Inger Støjberg, Danish minister of immigration and integration.

“I have done so because we need to look out for Denmark. We have to protect ourselves against the Islamic State group, who are trying to take advantage of the situation where there are holes in borders. But also as protection against the influx of refugees coming through Europe.” The Commission could give the green light as early as Wednesday to countries within the passport-free Schengen zone wishing to extend exceptional border controls. The five countries have taken the measures because of the influx of migrants and refugees heading north via the so-called Balkans route after entering Europe via the Greek shores. Although the crisis has eased, the governments say many migrants are still camped along the route and in Greece.

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The cattle trade continues unabated. Europeans are as immoral as their leadership.

EU States Face Charge For Refusing Refugees (FT)

European countries that refuse to share the burden of high immigration will face a financial charge of about €250,000 per refugee, according to Brussels’ plans to overhaul the bloc’s asylum rules. The punitive financial pay-off clause is one of the most contentious parts of the European Commission’s proposed revision of the so-called Dublin asylum regulation, due to be revealed on Wednesday. It represents the EU’s most concerted attempt to salvage an asylum system that collapsed under the weight of a million-strong migration to Europe last year, endangering the principle of passport-free travel in the Schengen area. In recent weeks migrant flows to Greece have fallen due to tighter controls through the western Balkans and a deal with Turkey to send-back asylum seekers arriving on Greek islands.

However, the EU remains as politically divided as ever over strengthening the bloc’s asylum rules. While acknowledging these political constraints, the commission’s reforms aim to gradually shift more responsibility away from the overwhelmed frontline states, such as Greece, in future crises, primarily through an automatic system to share refugees across Europe if a country faces a sudden influx. Crucially, this is backed by a clause that allows immigration-wary countries to pay a fee — set at a deliberately high level — if they want to avoid taking relocated asylum seekers for a temporary period. According to four people familiar with the proposal, this contribution was set at €250,000 per asylum seeker in Monday’s commission draft. But those involved in the talks say it may well be adjusted in deliberations over coming days.

“The size of the contribution may change but the idea is to make it appear like a sanction,” said one official who has seen the proposal. Another diplomat said in any event the price of refusing to host a refugee would be “hundreds of thousands of euros”. Eastern European states such as Poland and Hungary would welcome alternatives to mandatory asylum quotas but will balk at the high penalties suggested. At the commission’s recommended rate, Poland would need to pay around €1.5bn to avoid its existing 6,200 quota to relocate refugees from Italy and Greece. These financial contributions are in part designed to fix incentives around migrant quotas, which have badly failed and proved almost impossible to implement even once agreed in law. The commission proposal builds on the EU’s flagship emergency scheme to relocate 160,000 refugees, which has barely redistributed 1% of its target since it was agreed last year.

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And how many did you say are unaccounted for, Europe?

90,000 Unaccompanied Minors Sought Asylum In EU In 2015 (R.)

Some 88,300 unaccompanied minors sought asylum in the EU in 2015, 13% of them children younger than 14, crossing continents without their parents to seek a place of safety, EU data showed on Monday. More than a million people fleeing war and poverty in the Middle East and Africa reached Europe last year. While that was roughly double the 2014 figure, the number of unaccompanied minors quadrupled, statistics agency Eurostat said. Minors made up about a third of the 1.26 million first-time asylum applications filed in the EU last year. EU states disagree on how to handle Europe’s worst migration crisis since World War II and anti-immigrant sentiment has grown, even in countries that traditionally have a generous approach to helping people seeking refuge.

Four in 10 unaccompanied minors applied for asylum in Sweden, where some have called for greater checks, suspicious that adults are passing themselves off as children in order to secure protection they might otherwise be denied. Eurostat’s figures refer specifically to asylum applicants “considered to be unaccompanied minors,” meaning EU states accepted the youngsters’ declared age or established it themselves through age assessment procedures. More than 90% of the minors traveling without a parent or guardian were boys and more than half of them were between 16 and 17 years old. Half were Afghans and the second largest group were Syrians, at 16% of the total. After Sweden, Germany, Hungary and Austria followed as the main destinations for unaccompanied underage asylum seekers.

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Apr 292016
 
 April 29, 2016  Posted by at 8:40 am Finance Tagged with: , , , , , , , , , , ,  1 Response »


Harris&Ewing Treasury Building, Fifteenth Street, Washington, DC 1918

Asia’s Two Biggest Stock Markets Have Become An $11 Trillion Headache (BBG)
Japan’s Abenomics ‘Dead In The Water’ After US Currency Warnings (AEP)
Debt Is Growing Faster Than Cash Flow By The Most On Record (ZH)
The Typical American Couple Has Only $5,000 Saved For Retirement (MW)
US Corporate Profits on Pace for Third Straight Decline (WSJ)
Dollar Drops to 11-Month Low as Asian Stocks Fall; Oil Near $46 (BBG)
Sluggish US Growth Part Of A Worrying Global Trend (G.)
Renting In London More Costly Than Living In Most European 4-Star Hotels (Ind.)
China Banks’ Profit Growth Stalls As Bad Debts Rise (R.)
China’s Central Bank Raises Yuan Fixing by Most Since July 2005 (BBG)
Puerto Rico Risks Historic Default as Congress Chooses Inaction (BBG)
El Niño Dries Up Asia As Its Stormy Sister La Niña Looms (AFP)
German Inflation Turns Negative In April (R.)
Greece’s Perfect Debt Trap (Kath.)
German Minister Proposes Law To Limit Social Benefits For EU-Foreigners (DW)
Finland Parliament, Pressured By Weak Economy, Debates Euro Exit (R.)
Italy Says Austria ‘Wasting Money’ In Migrant Border Row (AFP)
One Nation in Europe Wants Refugees But Is Failing to Get Enough (BBG)

$11 trillion is merely the start.

Asia’s Two Biggest Stock Markets Have Become An $11 Trillion Headache (BBG)

Asia’s two biggest stock markets are jostling for an ignominious prize. Japan’s Topix index and China’s Shanghai Composite Index have tumbled more than 13% in 2016 to rank along Nigerian and Mongolian shares as the world’s worst performers. In the two years through the end of December, the Asian gauges outperformed MSCI’s global measure by at least 20 percentage points. The Bank of Japan stood pat on monetary policy Thursday, sending Tokyo stocks tumbling, while the Shanghai measure fell to a one-month low. The benchmark gauges in two of the world’s largest stock markets, which have a combined value of almost $11 trillion, are declining as investors detect a reduced appetite from policy makers to boost monetary stimulus.

Thursday’s BOJ decision was the first under Governor Haruhiko Kuroda where a majority of economists expected easing that didn’t materialize, while strategists now see China’s central bank keeping its main interest rate on hold until the fourth quarter. “Neither China nor Japan have a solid plan on dealing with their slowing economies,” said Tomomi Yamashita at Shinkin Asset Management. “There is still scope for easing, and as for Japan there are fiscal policies they can carry out. There’s still hope. But today there was just too much hope on the BOJ.”

The Topix sank 3.2% on Thursday after the central bank kept bond-buying, interest rates and exchange-traded fund purchases unchanged. The stock gauge has fallen for four straight days, handing losses to foreign investors who piled the equivalent of $4.9 billion into the market last week, the most in a year. Overseas traders were net sellers of Japanese equities for the first 13 weeks of 2016. “I give up,” Ryuta Otsuka at Toyo Securities in Tokyo said. “It’s a really disappointing result and I feel like throwing in the towel. It cuts because we had so much hope.” The Topix posted four straight annual gains through 2015, while even a $5 trillion rout in Chinese shares last summer couldn’t stop the Shanghai Composite from being the world’s top-performing major market over the last two years. The declines for both gauges in 2016 compare with a 2.5% advance by the S&P 500, which is closing in on last year’s record.

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Sometimes I wonder why it takes people so long to figure things out. I’ve been saying ever since Abenomics was launched that it would fail. Because it was always pie in the sky only, not based on any understanding of what caused spending to plummet.

Japan’s Abenomics ‘Dead In The Water’ After US Currency Warnings (AEP)

The Bank of Japan has been forced to retreat from further emergency stimulus after a blizzard of criticism at home and abroad, and warnings that extreme measures may now be doing more harm than good. The climb-down by the world’s most radical central bank is the latest sign that the monetary experiments since Lehman crisis may have run their course. The authorities have not exhausted their ammunition but are hitting political and legal constraints. The yen surged 3pc against the US dollar in the biggest one-day move in eight months and equities skidded across Asia after the BOJ failed to take fresh action to stave off deepening deflation, catching markets badly off guard. Governor Haruhiko Kuroda dashed hopes for ‘helicopter money’, warning that direct monetary financing of spending would be “illegal”.

Mr Kuroda insisted that the BoJ still has plenty of firepower and can at any time push interest rates even deeper into negative territory or boost bond purchases beyond the current $74bn a month. “If additional easing is needed, we will do so promptly,” he said. The reality is that negative rates (NIRP) have backfired badly on every front. They have prompted bitter protests from banks and money market funds caught in a squeeze. The yen has appreciated by 10pc since the BoJ first embarked on the policy in January, the exact opposite of what was intended. The rising yen – ‘endaka’ – is pushing Japan deeper into a deflation trap and undercutting the whole purpose of ‘Abenomics’. Core inflation has fallen to minus 0.3pc. The Nikkei has dropped 13pc this year, with contractionary wealth effects that make the BoJ’s task even harder.

“Negative rates have completely failed,” said David Bloom from HSBC. Washington will not tolerate the use of NIRP in any case, deeming it a disguised attempt to drive down exchange rates and export problems to the rest of the world. Jacob Lew, the US Treasury Secretary, warned Japan and the eurozone at the G20 in Shanghai in February that the Obama administration is losing patience with use of beggar-thy-neighbour tactics by countries already running a current account surplus. They are in effect shifting their excess capacity abroad. Germany in particular is coming into the US cross-hairs. Richard Koo from Nomura said the US is now on the warpath against currency manipulators. Mr Lew’s threat effectively renders Abenomics “dead in the water”. The Japanese economy is contracting again, caught in a debt-deflation vice.

Growth has been negative for four of the last eight quarters. What was once a ‘Lost Decade’ is turning into a “Lost Quarter Century” with no remedy in sight. “Their options are diminishing. I can’t see any way out of the debt-trap, and it is an acid test for the western world,” said Neil Mellor from BNY Mellon. Public debt is rising fast on a shrinking economic base, pushing the public debt ratio to an estimated 250pc of GDP this year. “The debt will never be ‘repaid’ in the normal sense of the word,” said Lord (Adair) Turner from the Institute for New Economic Thinking. Olivier Blanchard, the former chief economist for the International Monetary Fund, warned recently that country is nearing the end-game as the pool of domestic funding for the bond market starts to dry up and the Japanese treasury is forced to rely on much more costly capital from global investors.

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The predictable culmination of decades of a failed system is a hockeystick.

Debt Is Growing Faster Than Cash Flow By The Most On Record (ZH)

By now it is a well-known fact that corporations have no real way of generating organic growth in this economy, so they are relying on two things to boost share prices: multiple expansion (courtesy of central banks) and debt-funded buybacks (courtesy of central banks), the latter of which requires the firm to generate excess incremental cash. Incidentally, as SocGen showed last year, all the newly created debt in the 21st century has gone for just one thing: to fund stock buybacks.

 

The problem with this is that if a firm is going to continue to add debt to its balance sheet in order to fund buybacks (and dividends), then it needs to be able to generate enough operational cash flow in order to service the debt. Even if one makes the argument that debt is cheap right now, which may be true, or that central banks are backstopping it, which is certainly true in Europe as of a month ago, the fact remains that principal balances come due eventually also, and while debt can be rolled over, at some point the inability to generate cash from the operations catches up with them; furthermore even a small increase in rates means the rolling debt strategy is dies a painful death, as early 2016 showed.

In the following chart we can see net debt growth skyrocketing nearly 30% y/y, while EBITDA (cash flow) has been contracting for the past year. In fact, as SocGen shows below, the difference in the growth rate between these two most critical data series is now over 35% – the biggest negative differential in recent history.

 

Of course, every finance 101 student knows that a firm which has to borrow more cash than it is able to produce from its core operations is not a sustainable business model, and yet today’s CFOs, pundits and central bankers do not. And the next question is: what happens if the Fed does raise rates, what happens to the feasibility of these companies servicing the debt while also spending on R&D and CapEx (assuming there is any), and who can only afford the rising interest expense as a result of ever smaller interest rates? The answer is, first, massive cost cutting, i.e. layoffs, which would be a poetic way for the Fed’s disastrous policies to be reintroduced to the real economy… and then, more to the point, mass defaults. 

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Our entire societies will have to change dramatically because of this. Parents will have to move in with their children again. The children who earn much less than the parents did.

The Typical American Couple Has Only $5,000 Saved For Retirement (MW)

When American companies began switching from traditional pensions to self-directed 401(k)-like plans in the 1980s and 1990s, it was supposed to lead to a golden age of retirement security. No longer would workers be at the mercy of the company’s generosity or of Social Security’s solvency; workers themselves would be responsible for saving enough for a comfortable retirement. Some 30 years later, the results are in: The median working-age couple has saved only $5,000 for their retirement, according to an analysis of the Federal Reserve’s 2013 Survey of Consumer Finances by economist Monique Morrissey of the Economic Policy Institute. The do-it-yourself pension system is a disaster.

Even as the traditional company-funded pension has nearly disappeared and even as Social Security benefits are being slowly eroded, most workers haven’t saved enough to offset those losses to their retirement income. 70% of couples have less than $50,000 saved. Even those on the cusp of retirement — the median couple in their late 50s or early 60s — has saved only $17,000 in a retirement savings account, such as a defined-contribution 401(k), individual retirement account, Keogh or similar savings account. How long does $5,000, or even $50,000, last? Until the first big medical bill? Morrissey figures that about 43% of working-age families have no retirement savings at all. Among those who are five to 10 years away from retirement, 39% have no retirement savings of their own.

The sad fact is that most Americans are less prepared for retirement than Americans were 30 years ago. Few have enough pension wealth to make much difference in their lives once they stop working. The lack of savings in 401(k) and individual retirement accounts wouldn’t be a such big deal if retirees could rely on other sources of income, such as a traditional defined-benefit pension or Social Security. But those other income sources are declining. Fewer and fewer newly retired people are covered by a regular pension that provides a guaranteed monthly check based on salary and years of service. In addition, Social Security benefits are already being reduced as the normal retirement age is gradually increased from 65 to 67. Further reductions in Social Security benefits — by limiting the cost-of-living adjustment or by increasing the normal retirement age to 70, for example – would be disastrous for tomorrow’s retirees.


The median working-age couple had $5,000 in a retirement savings account as of the most recent data. The top 10% of savers had accumulated $274,000, according to the Economic Policy Institute analysis of Federal Reserve survey data

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Forget growth. Think survival.

US Corporate Profits on Pace for Third Straight Decline (WSJ)

U.S. corporate profits, weighed down by the energy slump and slowing global growth, are set to decline for the third straight quarter in the longest slide in earnings since the financial crisis. Weakness was felt across the board, with executives from Apple to railroad Norfolk Southern and snack giant Mondelez saying the current quarter remains tough. 3M, which makes tapes, filters and insulation for consumer electronics, forecast continued weak demand for that industry. Procter & Gamble reported sales declines in its five business categories despite price increases. “It’s a difficult environment indeed,” said PepsiCo CEO Indra Nooyi. “Most of the developed world outside the United States is grappling with slow growth. GDP growth in developing and emerging markets is also challenged.”

The concerns from company executives echo weak economic data released Thursday morning, which showed U.S. gross domestic product rose just 0.5% in the first quarter. Business investment and consumer spending on goods slowed, while consumer spending on services climbed. “On the one hand, consumer spending continued to be the primary economic driver in the U.S. On the other hand, industrial production has been disappointing,” United Parcel Service Inc. CEO David Abney said Thursday after the delivery company reported a 3.1% revenue increase. Based on the 55% of companies in the S&P 500 index that had already reported results Thursday morning, Thomson Reuters expects overall earnings to decline by 6.1% in the first quarter compared with a year earlier.

Even excluding energy companies, which are expected to have their worst quarter since oil prices began to plunge in 2014, profits are on pace to fall by 0.5%. Revenues are expected to fall 1.4% overall, or rise 1.7% excluding energy, according to Thomson Reuters. This would mark the S&P 500’s third consecutive quarter of declining earnings—the longest streak since the financial crisis. Revenues will have declined for five quarters in a row, outstripping even the four-quarter slide in 2008 and 2009.

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The US dollar is set to rise like a mushroom cloud and break the global camel’s back.

Dollar Drops to 11-Month Low as Asian Stocks Fall; Oil Near $46 (BBG)

The dollar dropped against all of its G-10 peers after weaker-than-expected U.S. economic growth dimmed prospects for a Federal Reserve interest-rate increase at a time when monetary easing is being put on hold elsewhere. Asian stocks fell and crude oil traded near $46 a barrel. The Bloomberg Dollar Spot Index sank to an 11-month low, while the yen was headed for its biggest weekly jump since 2008 after the Bank of Japan unexpectedly refrained from adding to record stimulus on Thursday. Japanese financial markets are shut for a holiday and an MSCI gauge of shares in the rest of the Asia-Pacific region slid for the third day in a row. The greenback’s decline is proving a plus for commodities, which are poised for their best monthly gain since 2010. Crude has jumped 20% since the end of March, while gold and silver are at 15-month highs.

The BOJ’s surprise decision capped a week of fence-sitting for central banks, with the Fed keeping interest rates steady for a third straight meeting and policy makers from New Zealand to Brazil also holding the line. The slowest pace of American economic expansion in two years reignited some concern over the global outlook, and pushed out bets on the potential timeline for tighter Fed policy. “Central banks look like they have run out of bullets to a degree,” said Mark Lister at Wellington’s Craigs Investment Partners. “We’re getting to that point where there are limits to the results they can get from anything more they do. This points to a fragile outlook with still a lot of risks out there.”

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Worrying only if it surprises you perhaps?!

Sluggish US Growth Part Of A Worrying Global Trend (G.)

It would be easy to dismiss the slowdown in the US economy to near-stall speed as a piece of rogue data resulting from the inability of number crunchers at the Department of Commerce in Washington to take account of the fact that large parts of the country are blanketed by snow during the winter. Easy but wrong. Back in spring 2015, the world’s biggest economy was expanding at an annual rate of 3.9%. In the third quarter the growth rate halved to 2%, before falling again to 1.4% in the final three months of the year. Describing the further easing to 0.5% in the first three months of 2016 as a temporary aberration – which was the knee-jerk response of upbeat analysts on Wall Street – is pushing it a bit.

A better explanation is that the sluggishness of US growth is part of a global trend, in which all the major economies are expanding more weakly than they were in the middle of last year. That’s the story for China, the eurozone, Japan and the UK. Each quarter, the data company Markit compiles a global Purchasing Managers’ Index for JP Morgan, with the intention of providing an up-to-date picture of economic conditions. The result for the first three months of 2016 showed activity at its lowest level in more than three years. Nor is there much hint of an improvement in the near future. In the US, firms are hacking back at investment – normally the sign of a looming recession. Consumer confidence has weakened, in part because real incomes are being squeezed.

As export-driven economies, Japan and the eurozone rely on a thriving US to buy their goods, so it is no surprise to find both struggling. The Bank of Japan will be forced to revisit its decision not to provide additional stimulus, since the upshot of its inaction has been a sharp rise in the yen, which will lead to even slower growth. Mario Draghi may again have to lock horns with the Bundesbank president, Jens Weidmann, in order to force through measures aimed at boosting activity in Europe. But the law of diminishing returns is at work. Each cut in interest rates, each fresh dollop of quantitative easing, has less of an impact than the last. The global economy is running out of steam and the conventional weapons are increasingly ineffective. This is not about blizzards shutting factories in Michigan. It goes much deeper than that.

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Britain is a sad joke.

Renting In London More Costly Than Living In Most European 4-Star Hotels (Ind.)

It is now cheaper to live in a 4-star hotel in two-thirds of European capitals than it is to rent the average London flat. Latest figures show that the average rent for a London flat is now £1,676 per month – or £55 a night – having increased by 30% in the last four years. For the same amount of money you could live year round in a hotel in Dublin, Rome, Paris or Brussels. Among the hotels that are more affordable than the average London rent include the Mercure Warszawa Grand in Warsaw that boasts a fitness centre, business facilities and two restaurants.

The Best Western Plus Hotel in Paris, the Nordic Hotel Domicil in Berlin and the Relais Castrum Boccea in Rome can also all be booked for less than £55 a night on travel websites for the 5th May this year. The figures were highlighted by Labour’s Mayoral candidate Sadiq Khan. He said: “Renting a home shouldn’t be a luxury, but under the Tories Londoners could live in 4-star luxury in most of Europe for what they pay. “Rents have gone up by 30% with a Tory Mayor and it would be exactly the same under Zac Goldsmith – with rents soaring above £2,000 a month. Mr Khan said he would create a London-wide social letting agency as well as naming and shaming bad landlords and setting up a landlord licensing scheme.”

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And that’s before the bad debts are properly accounted for, and while the PBoC still issues record amounts of additional debt.

China Banks’ Profit Growth Stalls As Bad Debts Rise (R.)

Four of China’s five largest state-owned banks barely posted any growth in profit in the first quarter, as widely expected, with rising bad debt and narrower margins hitting their bottom lines. The country’s banks face challenges from both defaulting borrowers, who are struggling amid a slowing economy, and successive cuts in interest rates which have eaten away at margins. Industrial and Commercial Bank of China, China’s biggest lender by assets, announced a 0.6% rise in net profit on Thursday. Bank of Communications posted a 0.5% rise in net profit in the first quarter and Agricultural Bank of China a slightly better 1.1% rise in profit. On Tuesday, Bank of China recorded a 1.7% rise in net profit in the fist quarter.

Non-performing loan (NPL) ratios remained flat -or rose- at all four lenders, while bad loan volumes increased, helping to sink loan-loss allowance ratios. At ICBC, the volume of non-performing loans increased 14% in the three-month period to 204.66 billion yuan ($31.60 billion), from 179.52 billion yuan at the end of 2015, sending the bank’s NPL ratio to 1.66% from 1.5%. ICBC’s loan-loss allowance ratio fell to 141.21%, from 156.34% at the end of December. ICBC also pointed to “the continuing impact of five interest rate cuts by the People’s Bank of China” since 2015 as a source of stress. The bank reported its interest margin (NIM) – the difference between its lending rate and the cost of borrowing – fell to 2.28 at the end of the first quarter, from 2.47 at end-December.

At BoC, NIM fell to 1.97 at end-March from 2.12 at end-December. BoCom did not disclose its NIM, but reported a 2.78% decline in net interest income, even as the bank’s net income rose half a% to 19.07 billion yuan for the first quarter. AgBank also did not disclose its NIM. In a bid to relieve banks of the mounting pile of bad debts, China’s central bank is preparing regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms, sources told Reuters in February.

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Going through the motions.

China’s Central Bank Raises Yuan Fixing by Most Since July 2005 (BBG)

China’s central bank responded to an overnight tumble in the dollar by strengthening its currency fixing the most since a peg was dismantled in July 2005. The reference rate was raised by 0.6% to 6.4589 per dollar. A gauge of the greenback’s strength sank 1% on Thursday after the Bank of Japan’s decision to unexpectedly keep monetary policy unchanged sent the yen surging. The offshore yuan was little changed at 6.4834 after gaining 0.3% in the last session. While the change in the fixing is extreme relative to the small moves of recent years, analysts said it reflects increased volatility in the dollar against other major exchange rates rather than a policy shift by the People’s Bank of China. The yuan weakened against a basket of peers even as it climbed versus the greenback on Friday.

“The offshore yuan’s reaction is muted, so it seems the market was already expecting a much stronger fixing,” said Ken Cheung, a currency strategist at Mizuho Bank in Hong Kong. “This is a reaction to the dollar weakness overnight, and there’s not much in the way of policy intention to read into.” The dollar reached the lowest level since June after the yen jumped the most in almost six years and data showed U.S. gross domestic product expanded in the first quarter at the slowest pace in two years. A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 exchange rates, fell 0.2% to a 17-month low. The onshore yuan climbed less than 0.1%.

“The fixing is no surprise, the expectation for a stronger yuan fix was laid by the gains for the yen after the Bank of Japan announcement yesterday,” said Patrick Bennett at Canadian Imperial Bank of Commerce in Hong Kong. “The trade weighted basket continues to depreciate, albeit at a modest pace. But the key to the lower trade-weighted rate does not really lie with the PBOC, rather it is the dollar weakness against other major currencies which is the main driver.”

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May 1 is big, but still just a transfer station. July 1 is much bigger.

Puerto Rico Risks Historic Default as Congress Chooses Inaction (BBG)

Even if Puerto Rico manages to strike a last-minute deal to defer bond payments due in three days, the commonwealth’s financial collapse is about to enter an unprecedented phase. Anything short of making the $422 million payment that Puerto Rico says it can’t afford would be considered a technical default. More importantly, it opens the door to larger and more consequential defaults on debt protected by the island’s constitution, and raises the risk of putting efforts to resolve the biggest crisis ever in the $3.7 trillion municipal market into turmoil. Nearly 10 months after Governor Alejandro Garcia Padilla said the commonwealth was unable to repay all its obligations, Puerto Rico has failed to reach an accord on a broad restructuring deal presented to bondholders.

During that time the administration has delayed payments to suppliers, postponed tax refunds, grabbed revenue originally used to repay other bonds and missed payments on smaller agency debt. With its options drying up, no bondholder agreement in sight and Congressional action delayed, defaulting may be the next step for Puerto Rico. “It’s a game changer because it starts an actual legal process with teeth on both sides that can finally advance settlement negotiations,” said Matt Fabian at Municipal Market Analytics. “Pre-default negotiations are really not going anywhere. Post default might have a better chance.” Puerto Rico and its agencies racked up $70 billion in debt after years of borrowing to fill budget deficits and pay bills as its economy shrunk and residents left the island for work on the U.S. mainland.

The island’s Government Development Bank, which lent to the commonwealth and its municipalities, is in talks with creditors to avoid defaulting on the $422 million that’s due May 1. The commonwealth may use a new debt moratorium law if it cannot defer that GDB payment, Jesus Manuel Ortiz, a spokesman for Garcia Padilla, said. While a GDB default would be the largest yet by Puerto Rico, a missed payment on its general obligations would signal to investors that the commonwealth is finally executing on its warnings that it cannot pay its debts. Puerto Rico and its agencies owe $2 billion on July 1, including a $805 million payment on its general-obligation bonds, which are guaranteed under the island’s constitution to be paid before anything else.

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“..60 million people worldwide requiring “urgent assistance..”..

El Niño Dries Up Asia As Its Stormy Sister La Niña Looms (AFP)

Withering drought and sizzling temperatures from El Nino have caused food and water shortages and ravaged farming across Asia, and experts warn of a double-whammy of possible flooding from its sibling, La Nina. The current El Nino which began last year has been one of the strongest ever, leaving the Mekong River at its lowest level in decades, causing food-related unrest in the Philippines, and smothering vast regions in a months-long heat wave often topping 40 degrees Celsius (104 Fahrenheit). Economic losses in Southeast Asia could top $10 billion, IHS Global Insight told AFP. The regional fever is expected to break by mid-year but fears are growing that an equally forceful La Nina will follow.

That could bring heavy rain to an already flood-prone region, exacerbating agricultural damage and leaving crops vulnerable to disease and pests. “The situation could become even worse if a La Nina event — which often follows an El Nino — strikes towards the end of this year,” Stephen O’Brien, UN under-secretary-general for humanitarian affairs and relief, said this week. He said El Nino has already left 60 million people worldwide requiring “urgent assistance,” particularly in Africa. Wilhemina Pelegrina, a Greenpeace campaigner on agriculture, said La Nina could be “devastating” for Asia, bringing possible “flooding and landslides which can impact on food production.” El Nino is triggered by periodic oceanic warming in the eastern Pacific Ocean which can trigger drought in some regions, heavy rain in others.

Much of Asia has been punished by a bone-dry heat wave marked by record-high temperatures, threatening the livelihoods of countless millions. Vietnam, one of the world’s top rice exporters, has been particularly hard-hit by its worst drought in a century. In the economically vital Mekong Delta bread basket, the mighty river’s vastly reduced flow has left up to 50% of arable land affected by salt-water intrusion that harms crops and can damage farmland, said Le Anh Tuan, a professor of climate change at Can Tho University. More than 500,000 people are short of drinking water, while hotels, schools and hospitals are struggling to maintain clean-water supplies. Neighbouring Thailand and Cambodia also are suffering, with vast areas short of water and Thai rice output curbed.

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You would think the reason to continue executing a policy lies in its success rate. Not so, you poor innocent you. In reality, the very failure of a policy is reason to continue it: if the strongest eurozone economy with low unemployment does not show any signs of inflationary pressures, the ECB after all might have a point in continuing its ultra-loose monetary policy

German Inflation Turns Negative In April (R.)

German consumer prices unexpectedly fell in April, data showed on Thursday, illustrating the scale of the task the ECB faces in trying to propel inflation back to its target range. The eurozone has struggled with little or no inflation for the past year and the ECB expects the bloc-wide figure to turn negative again before slowly ticking up, undershooting its goal of just under 2% for years to come. The ECB unveiled a surprisingly large stimulus package in March but falling inflation expectations have fueled expectations of even more easing, possibly as early as June, when the bank’s staff present new growth and inflation forecasts. “It might be hard for some German ECB critics to digest, but if the strongest eurozone economy with low unemployment does not show any signs of inflationary pressures, the ECB after all might have a point in continuing its ultra-loose monetary policy,” ING Bank economist Carsten Brzeski said.

Separate data on Thursday showed unemployment unexpectedly fell in April, with the jobless rate remaining at its lowest in more than 25 years. German consumer prices, harmonized to compare with other European countries (HICP), fell by 0.1% on the year after a 0.1% rise in March, the Federal Statistics Office said. The Reuters consensus forecast was for a zero reading. On a non-harmonized basis, consumer prices fell 0.2% on the month and inched up 0.1% on the year. A breakdown showed energy remained the main drag while the food, services and rental costs increased at a slower pace. Analysts said the German data suggested that the April inflation rate for the whole eurozone, due out on Friday, would also turn negative again.

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It’s high time now to see how the Greek debt trap is linked to the article above about German deflation. The link continues with the article below this one: Germany monopolizes the benefits of being in the EU.

Greece’s Perfect Debt Trap (Kath.)

The longer we spend in the hole the harder it is to get out. As long as the negotiations with the troika are not finished and the economy is starved of cash, as long as businesses cannot plan for the next day and citizens remain wary of returning cash to the banks, recovery becomes even more difficult. The government promises that after a positive evaluation by creditors the economy will bounce back like a spring released. Even if we were to accept this theory – which would also demand huge investments – a positive evaluation is still the prerequisite. Despite the progress made in the talks, the economy is deteriorating. Indicative of this is a growing inability to pay taxes. Today outstanding tax debts exceed €87 billion. At the end of 2012 they were at €55.1 billion.

They have grown by 32 billion euros since then, equaling the amount raised by tax rate increases over the same period (as Kathimerini reports on Friday). In the first quarter of 2016, outstanding debts increased by €3.22 billion and, by the end of the year, may exceed last year’s total of €13.48 billion. Nonperforming bank loans, which were at 8.2% of the total at the start of 2010, were at 36.4% at the end of 2015. Unpaid dues to social security funds came to €15.78 billion at the end of the first quarter, from €13.02 billion last September. The swelling of these debts did not begin under this government. Previous governments and opposition parties, as well as creditors, all played a role in this. From the start of the crisis, citizens/taxpayers have been buffeted by uncertainty, despair and anger.

The expectation of debt relief encouraged delays in payments, while excessive taxation meant that outstanding payments multiplied. Also, the state, unable to meet its own obligations, held back on paying what it owed to taxpayers. With the worsening economy and the lack of trust, capital controls were inevitable and, of course, drove us deeper into trouble. This anxiety is set to continue. The government cannot undertake the burden of what creditors demand, and the creditors, in turn, appear disinclined to help out. As the Federation of Greek Industries noted in its weekly bulletin on Thursday: “The government’s insistence on raising taxes instead of cutting expenses, and the recessionary impact that this will have on the economy, leads to the troika’s shortsighted persistence on contingency measures which, unfortunately, increase further the recessionary wave and will be the final blow to the economy.”

We are caught in the perfect trap. As long as the negotiations drag on, the instability and lack of confidence will increase outstanding debt at all levels, prevent growth and, in turn, demand even harsher measures. The only way out is for both the government and creditors to show good will and trust each other. After the past year this seems a most unlikely leap of faith.

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Dividing and demolishing the Union brick by brick. Germany wants to be left with the benefits of that union only, and to shed the drawbacks. Not going to work out well.

German Minister Proposes Law To Limit Social Benefits For EU-Foreigners (DW)

EU foreigners living in Germany may soon have to wait five years before qualifying for social benefits, reported newspapers on Thursday, in reference to a new proposed law from German Labor Minister Andrea Nahles. “We have to stop immigration into the social security system,” Nahles said during an interview in December when she announced plans to restrict social benefits for non-German EU citizens. She added that the restrictions were a matter of “self defense” for Germany. Should the law pass, foreigners from fellow EU member states will be strictly excluded from social assistance if they do not work in Germany or have not acquired social security rights through previous work in Germany. With those same conditions, EU foreigners would also be shut out from Germany’s benefit system for the unemployed, which is known as “Hartz IV.”

EU citizens can eventually gain access to social benefits – but only if they have been living in Germany for five years without state assistance. The draft law, however, provides so-called “transition benefits” for those EU foreigners who no longer qualify for social assistance in Germany. For a maximum of four weeks, those affected will receive assistance to cover the costs of food, housing, and health care. They will also be given a loan to cover costs for a return trip to their home country, where they can then apply for social benefits. The new measures are a direct response to a decision by Germany’s Federal Social Court late last year concerning immigrants from EU countries. In December 2015, the court ruled that EU-foreigners would only acquire entitlement to social benefits after living in the country for at least six months. The decision led to backlash from local authorities, who feared the social system would be overburdened.

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This is something we’ll see a lot of. It’s over. What’s left is pretense.

Finland Parliament, Pressured By Weak Economy, Debates Euro Exit (R.)

Finnish lawmakers on Thursday held a rare debate on whether the Nordic country should quit the euro after 53,000 people signed a petition to force the issue into parliament. The petition, although very unlikely to lead to Finland’s exit of the 19-member currency bloc, highlights the growing level of frustration over the country’s economic performance amid rising unemployment, weak outlook and government austerity. The initiative demands a referendum on euro membership, but this would only go ahead if parliament backed such a vote. Although no political group has proposed a euro exit, some euro-sceptic parliamentarians cited lack of independent monetary policy as a problem and said Finland should have held a referendum before adopting the euro in 1998.

Nordic neighbors Sweden and Denmark voted against adopting the euro a few years later. “The euro is too cheap for Germany and too expensive for the rest of Europe, it does not fulfill requirements of an optimal currency union,” said Simon Elo, an MP from the co-ruling euro-sceptic Finns party. The Finnish economy grew by just 0.5% last year after three years of contraction. The stagnation stemmed from a string of problems, including high labor costs, the decline of Nokia’s former phone business and a recession in neighboring Russia. This year, Finland’s economy is expected to grow slower than in any other EU country, except Greece. Some economists say the country’s prospects would improve if it returned to the markka currency which could then devalue against the euro.

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Union? What union?! Get real.

Italy Says Austria ‘Wasting Money’ In Migrant Border Row (AFP)

Italy told Austria Thursday it would prove Vienna was “wasting money” on anti-migrant measures and closing the border between the two countries would be “an enormous mistake”. Austrian Interior Minister Wolfgang Sobotka, who has vigorously defended the controversial package which was driven by a surge of the far right, met his counterpart Angelino Alfano over the plans, which have infuriated Italians. Alfano said “the numbers do not support” fears of a mass movement of migrants and refugees across the famous Brenner Pass in the Alps. Sobotka said preparations would continue for the construction of a 370-metre (yard) barrier which would be up to four metres (13 foot) high in places, but Alfano said the feared-for crisis would not materialise and “we will show them it is money wasted”.

Italian Premier Matteo Renzi has warned that closing the pass would be a “flagrant breach of European rules” and is pushing the European Commission to force Austria to hold off on a move many fear could symbolise the death of the continent’s Schengen open border system. On Thursday he described the bid to close the border as being “utterly removed from reality”. A European Commission spokesman said the body had “grave concerns about anything that can compromise our ‘back to Schengen’ roadmap”. Its chairman Jean-Claude Juncker is expected to discuss the issue with Renzi at talks in Rome on May 5. The Vienna government is under intense domestic pressure to stem the volume of asylum seekers and other migrants arriving on its soil with the far-right surging in polls.

UN chief Ban Ki-moon hit out Thursday at what he called “increasingly restrictive” refugee policies in Europe, saying he was “alarmed by the growing xenophobia here” and elsewhere in Europe, in a speech to the Austrian parliament. More than 350,000 people, many of them fleeing conflict and poverty in countries like Syria, Iraq and Eritrea, have reached Italy by boat from Libya since the start of 2014, as Europe battles its biggest migration crisis since World War II. Wedged between the Italian and Balkan routes to northern Europe, Austria received 90,000 asylum requests last year, the second highest in per capita terms of any EU country. Legislation approved Wednesday by the Austrian parliament enables the government to respond to spikes in migrant arrivals by declaring a state of emergency which provides for asylum seekers to be turned away at border points.

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Portugal sees what Canada sees too. Question is how deliberate is the EU policy of being so slow in relocating refugees to countries asking for them? Portugal wants 10,000. Canada will take a multiple of that.

One Nation in Europe Wants Refugees But Is Failing to Get Enough (BBG)

Portugal has offered to host 10,000 of the refugees who’ve landed on Europe’s shores from the globe’s war-torn zones. So far, it has taken in 234. Not because it doesn’t want to. Rather, because few have come knocking at its door. “It’s difficult to quickly find refugees that can come to Portugal,” President Marcelo Rebelo de Sousa said on Friday as he met migrants in Evora, southern Portugal. As the refugee crisis stretches the struggling Greek government and rattles politics in Germany and beyond, Portugal’s willingness to share the burden isn’t getting a lot of attention. While the country blames a lack of coordination in Europe and administrative roadblocks, the contrast between its economic performance and that of Germany, which admitted more than 1 million migrants in 2015 alone, may also be playing a role.

Although the Portuguese economy recovered in 2014 and accelerated last year after shrinking for three years through 2013, joblessness remains high. Unemployment, which has eased to 12.3% after peaking at 17.5% in 2013, is still almost triple the German rate of 4.3%, and that may continue to dent Portugal’s allure. “It’s not a very appealing destination given the unemployment rate,” said Rui Serra, chief economist at Caixa Economica Montepio Geral in Lisbon. “It’s easier for an immigrant to go to the center of Europe where there is a more concentrated market than in some countries of the periphery like Portugal. In the center of Europe income per capita is higher.” Prime Minister Antonio Costa says there are structural problems in the euro zone that aggravate the disparities.

“That structural problem has to do with the asymmetry between the different economies,” he said in Athens on April 11. “It’s necessary to give a new impulse to the convergence of our economies with the more developed economies of the euro zone.” With the country’s demographics in mind, the Portuguese government has laid out the welcome mat for refugees. Portugal’s population has declined and aged every year from the end of 2011 to about 10.37 million at the end of 2014 as a weak economy has led many working-age residents to leave. Germany’s population, while also aging, still increased overall every year in the same period.

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Apr 192016
 
 April 19, 2016  Posted by at 9:37 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


G.G. Bain Pelham Park Railroad, City Island monorail, NY 1910

The Hole at the Center of the Rally: S&P Margins in Decline (BBG)
US Nonfinancial Debt Rises 3.5 Times Faster Than GDP (Mauldin)
Asia’s Rich Urged to Buy US Dollars (BBG)
It’s All Suddenly Going Wrong in China’s $3 Trillion Bond Market (BBG)
China Will Bring All The BRICS Tumbling Down (Forbes)
China March Home Prices Rise At Fastest Rate In Two Years (Reuters)
Why Obama Administration Tries to Keep 11,000 Documents Sealed (Matt Taibbi)
Obama Official: Seed Money That Created Al Qaeda Came From Saudi Arabia (P.)
Saudis Are Going For The Kill But The Oil Market Is Turning Anyway (AEP)
A New Map for America (NY Times)
No One Worries Enough About Black Swans (ZH)
Credit Suisse: Germany’s Large Surplus Is The Problem, Not the ECB (BBG)
Talks With Creditors To Resume But Athens Rejects Fresh Austerity (Kath.)
Every Move You Make Is Being Monitored (Whitehead)
The Elephant Cometh (Jim Kunstler)
Over 400 Migrants Drown On Their Way To Italy (Reuters)

“Without the Federal Reserve chipping in with quantitative easing, investors have to go back to valuations and earnings..”

The Hole at the Center of the Rally: S&P Margins in Decline (BBG)

Stocks are rising, the worst start to a year is a memory, and short sellers are getting pummeled. And yet something is going on below the surface of earnings that should give bulls pause. It’s evident in quarterly forecasts for the Standard & Poor’s 500 Index, where profits are declining at the steepest rate since the financial crisis relative to revenue. The divergence reflects a worsening contraction in corporate profitability, with net income falling to 8% of sales from a record 9.7% in 2014. Bears have warned for years that such a deterioration would sound the death knell for a bull market that is about two weeks away from becoming the second-longest on record even as productivity sputters and industrial output weakens.

While none of it has prevented stocks from advancing in seven of the last nine weeks, rallies have seldom weathered a decline in profitability as violent as this one – and the squeeze is often a bad sign for the economy, too. “Analysts have seen the string pull as far as it can go, and there is no way for it to go but to reverse for the moment,” said Barry James at James Investment Research in Xenia, Ohio. “Without the Federal Reserve chipping in with quantitative easing, investors have to go back to valuations and earnings, and both of those – one is high and the other is low – that’s not a very good recipe for stocks.” James said his firm is raising cash amid the recent rally in stocks.

While energy producers are expected to suffer the biggest contraction in margins because of plunging oil prices, with a 28% drop in sales accompanying a first-quarter loss, analyst predicted six of the other 10 S&P 500 industries will also report lower profitability. Financial and raw-materials companies will see income growth trailing sales by at least 12 percentage points.

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It’s just like China.

US Nonfinancial Debt Rises 3.5 Times Faster Than GDP (Mauldin)

In my recent Outside the Box, good friend Dr. Lacy Hunt of Hoisington Investment Management gave us more ammunition to take on those who just don’t seem to get that the endless piling up of debt is not a sustainable way to run an economy. The most striking feature of the US economy’s performance in 2015, according to Lacy, was a massive advance in nonfinancial debt that kept the economy stuck in the doldrums of subpar growth.

US nonfinancial debt rose 3.5 times faster than GDP last year. (Nonfinancial debt is the sum of household debt, business debt, federal debt, and state and local government debt. Lacy also points out unfavorable trends in each component of nonfinancial debt.

Household debt: Delinquencies in household debt moved higher even as financial institutions continued to offer aggressive terms to consumers, implying falling credit standards. Furthermore, the New York Fed said subprime auto loans reached the greatest%age of total auto loans in ten years. Moreover, they indicated that the delinquency rate rose significantly.

Business debt: Last year business debt, excluding off balance sheet liabilities, rose $793 billion, while total gross private domestic investment (which includes fixed and inventory investment) rose only $93 billion. Thus, by inference this debt increase went into share buybacks, dividend increases, and other financial endeavors…. When business debt is allocated to financial operations, it does not generate an income stream to meet interest and repayment requirements. Such a usage of debt does not support economic growth, employment, higher paying jobs, or productivity growth. Thus, the economy is likely to be weakened by the increase of business debt over the past five years.

Federal debt: US government gross debt, excluding off balance sheet items, gained $780.7 billion in 2015 or about $230 billion more than the rise in GDP…. The divergence between the budget deficit and debt in 2015 is a portent of things to come. This subject is directly addressed in the 2012 book The Clash of Generations, published by MIT Press, authored by Laurence Kotlikoff and Scott Burns. They calculate that on a net present value basis the US government faces liabilities for Social Security and other entitlement programs that exceed the funds in the various trust funds by $60 trillion. This sum is more than three times greater than the current level of GDP.

State and local government debt: State and local governments … face adverse demographics that will drain underfunded pension plans…. The state and local governments do not have the borrowing capacity of the federal government. Hence, pension obligations will need to be covered at least partially by increased taxes, cuts in pension benefits or reductions in other expenditures.

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The currency wars simmer on. Time for the vigilantes.

Asia’s Rich Urged to Buy US Dollars (BBG)

Money managers for Asia’s wealthy families are telling clients to buy U.S. dollars as a rally this year in regional currencies begins to sputter. Credit Suisse is advising its private-banking clients to bet the greenback will gain versus a basket of peers that includes the South Korean won, Taiwan dollar, Thai baht and Philippine peso. UBS said investors should buy the currency against the Singapore dollar and yen. Stamford Management, which oversees about $250 million for Asia’s rich, urged clients to buy the U.S. dollar each time it falls below S$1.35. The Monetary Authority of Singapore’s unexpected easing on April 14 has fueled speculation that other policy makers, concerned about a worsening global economic outlook, will follow suit.

A gauge of 10 Asian currencies excluding the yen has fallen 0.1% this month. The Bloomberg-JPMorgan Asia Dollar Index climbed 1.9% in the first three months of the year, the first gain in seven quarters, as traders adjusted bets on the timing of U.S. interest-rate increases. “We see good opportunity now to hedge against U.S. dollar strength after the strong rally in Asian currencies in the first quarter,” said Koon How Heng at Credit Suisse in Singapore. “There are risks that other Asian central banks may follow up with some more easing in the second half if their respective growth outlooks deteriorate further.” The prospect of renewed weakness in the Chinese yuan and two interest rate increases by the Federal Reserve in the second half of the year will boost the greenback, Heng said.

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“China’s aggregate financing – a broad measure of credit that includes corporate bonds – almost doubled from a year earlier to 2.34 trillion yuan [..] Yet even that wasn’t enough to save the seven Chinese companies that reneged on bond obligations this year.”

It’s All Suddenly Going Wrong in China’s $3 Trillion Bond Market (BBG)

The unprecedented boom in China’s $3 trillion corporate bond market is starting to unravel. Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have canceled 60.6 billion yuan ($9.4 billion) of bond sales in April alone, while Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003. While bond yields in China are still well below historical averages, a sustained increase in borrowing costs could threaten an economy that’s more reliant on cheap credit than ever before.

The numbers suggest more pain ahead: Listed firms’ ability to service their debt has dropped to the lowest since at least 1992, while analysts are cutting profit forecasts for Shanghai Composite Index companies by the most since the global financial crisis. “The spreading of credit risks is only at its early stage in China,” said Qiu Xinhong at First State Cinda Fund Management. “Many people have turned bearish.” China’s leaders face a difficult balancing act. On one hand, allowing troubled companies to default forces investors to pay more attention to credit risk and accelerates government efforts to curb overcapacity. The danger, though, is that investor panic leads to tighter credit conditions, dealing a blow to President Xi Jinping’s plan to keep the economy growing by at least 6.5% over the next five years.

Economic figures for March reveal a growing dependence on debt. China’s aggregate financing – a broad measure of credit that includes corporate bonds – almost doubled from a year earlier to 2.34 trillion yuan, exceeding all 24 forecasts in a Bloomberg survey as policy makers turned on the taps to support economic growth. Yet even that wasn’t enough to save the seven Chinese companies that reneged on bond obligations this year. Three of those were part-owned by China’s government, seen not long ago as a provider of implicit guarantees for bondholders. Dongbei Special Steel on April 13 missed a third payment since its chairman was found dead by hanging last month, while Chinacoal Group failed to make a distribution on April 6.

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And not just the BRICS.

China Will Bring All The BRICS Tumbling Down (Forbes)

The concept of the BRICs isn’t heard much these days beyond some cooperative institution building efforts. Originally a Goldman Sachs authored attempt to identify growth opportunities for investors (referring to Brazil, Russia, India and China), it was picked up by those countries to symbolise a hoped-for rotation in the world order: away from the old hierarchy of the West and the Rest, towards a more balanced configuration of global economic progress. For inclusiveness, the ‘s’ was eventually capitalised into ‘South Africa’ so that the African continent was not left out. With hindsight, it remains curious that the idea was ever taken seriously beyond the confines of investor advice. The nominated states have little in common, although the public diplomacy of developing economy cooperation has a lingering appeal.

The Russian economy was always based largely on hydrocarbons, and Brazil’s expansion was a broader commodity play. Each, therefore, nurtured an important relationship with China. Now, though, as commodity prices have sunk, China is the only buyer left and has no qualms about driving a hard bargain. Massive Chinese infrastructure investment created the temporary illusion of wealth while global debt levels grew relentlessly. The commodity curse then undermined real economic progress around the world, as elites chased diminishing surplus for patronage and popularity. This has left producers exposed; one – Venezuela – rapidly becoming a wasteland. In other countries, what limited democracy there was has been hollowed out, leaving Russia in a state of egregious industrial and demographic decline, and Brazil confirming stereotypes about Latin American corruption.

All because the orders are drying up and the money has run out. Both Brazil and Russia are facing the possibility of imminent collapse. India, by contrast, is its own story, a perpetual tale of slow promise that plays tortoise to China’s hare. The only real story behind the BRICs was always just the ‘C,’ as in China, and the huge investment boom that powered commodity prices towards the fantasy of a ‘super-cycle’ – another word we don’t hear much anymore – drove the whole world mad. There was money for social programs in Brazil to lift up the poor, money for Putin’s new model army in Russia to restore imperial prestige, and money for the Olympics and World Cup in both countries. Then there was money for London palaces, money for Panamanian bank accounts, money for small wars and some leftover for the supposed institutions of a ‘new world order,’ since deferred.

Now, China’s policy dilemma belongs to everyone. Having spent 15 years sucking consumption and investment from everywhere, China now has a productive capacity it cannot possibly sustain, and faces a world reluctant any longer to make up for the deficiencies in Chinese demand. It therefore confronts a build up of debts it will struggle to pay and investors who expect a return they may not receive.

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Beijing still can’t seem to see the danger.

China March Home Prices Rise At Fastest Rate In Two Years (Reuters)

China’s home prices in March gained at the fastest pace in almost two years but that growth may slow as local authorities tighten home purchase requirements in the two top performing cities on fears of a bubble forming. The southern city of Shenzhen continued to be the top performer, with home prices surging 61.6% from a year ago, followed by Shanghai with a 25% gain. Prices in the two cities were up 3.7% and 3.6% respectively from a month earlier. Average new home prices in 70 major cities rose 4.9% last month from a year ago, picking up from February’s 3.6% rise, according to Reuters calculations based on data released by the National Statistics Bureau (NBS) on Monday. March prices were up 1.1% compared to a month ago.

China’s housing market bottomed out in the second half of 2015 on a series of government support measures, but a strong rebound in prices in the biggest cities has sparked concerns that some markets may be overheating, driving Shanghai and Shenzhen’s authorities to tighten downpayment requirements for second homes and raising the eligibility bar for non-residents. While home sales in the two cities plunged as much as 52% after the tightening, prices eased only by single digit, according to data from China Real Estate Index System (CREIS). April’s official data, which will reflect the impact of the tightening measures, is due to be released in mid-May. Area of property sold in the first quarter grew 33.1% to a near three-year high, according to data from the National Bureau of Statistics (NBS) on Friday.

While property in China’s top-tier cities is booming, prices in smaller centers, where most of China’s urban population lives, are still sinking and complicating government efforts to spread wealth more evenly and arrest slowing economic growth. “(Monthly) price rises among cities still showed big differences. Cities with big rises were concentrated in the first-tier and, in part, the hot tier-two cities. Their growth is much faster than other cities, with the rest of the second-tier and third-tier cities relatively stable,” Liu Jianwei, a senior statistician at the NBS, said in a statement accompanying the data. The NBS data showed 40 of 70 major cities tracked by the NBS saw year-on-year price gains, up from 32 in February.

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Another A-class piece from Taibbi.

Why Obama Administration Tries to Keep 11,000 Documents Sealed (Matt Taibbi)

[..] Even after the state took over the companies in September of 2008, Fannie and Freddie continued to buy as much as $40 billion in bad assets per month from the private sector. Fannie and Freddie weren’t just bailed out, they were themselves a bailout, used to sponge up the sins of private firms. The original takeover mechanism was a $110 billion bailout, followed by a move to place Fannie and Freddie in conservatorship. In exchange, the state received an 80% stake and the promise of a future dividend. All told, the government ended up pumping about $187 billion into the companies. But now here’s the strange part. Within a few years after the crash, the housing markets improved significantly, to the point where Fannie and Freddie started to make money again. Lots of money. The GSEs became cash cows again, and in 2012 the government unilaterally changed the terms of the bailout.

Now, instead of taking a 10% dividend, the government decided that the new number it preferred was 100%. The GSE regulator, the Federal Housing Finance Agency (FHFA), explained the new arrangement. “The 10% fixed-rate dividend was replaced with a variable structure, essentially directing all net income to the Treasury,” the FHFA wrote. “Replacing the current fixed dividend in the agreements with a variable dividend based on net worth helps ensure stability [and] fully captures financial benefits for taxpayers.” “I’m not worried about Fannie and Freddie’s health,” said former House Financial Services Committee chair Barney Frank. “I’m worried that they won’t do enough to help out the economy.” Translation: We’re taking all your money, not just the money you owe. In court filings later on, the government offered a strange excuse for this sudden and dramatic change in the bailout terms. It explained that at the time, the GSEs “faced enormous credit losses” and “found themselves in a death spiral.”

The government claimed that the poor financial condition of the GSEs would force the Treasury to throw more money at the operations, increasing the total commitment of taxpayers and leading quickly to insolvency. It absolutely denied any foreknowledge that the firms were on the verge of massive profitability. It got weirder. Despite the fact that the GSEs went on to pay the government $228 billion over the next three years, or $40 billion more than they owed, none of that money went to paying off Fannie and Freddie’s debt. When Sen. Chuck Grassley asked aloud how it was that the company and its shareholders were not yet square with the government, the Treasury Department testily answered, in essence, that the bailout had not been a loan, but an investment. This was not a debt that could be paid back. Like a restaurant owner who borrows money from a mobster, the GSEs found themselves in an unseverable relationship.

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Obama visits SA on Wednesday…

Obama Official: Seed Money That Created Al Qaeda Came From Saudi Arabia (P.)

President Barack Obama’s deputy national security adviser said that the government of Saudi Arabia had paid “insufficient attention” to money that was being funneled into terror groups and fueled the rise of Al Qaeda. Ben Rhodes was speaking to David Axelrod in his podcast “The Axe Files” out Monday when he was asked about the validity of the accusation that the Saudi government was complicit in sponsoring terrorism. “I think that it’s complicated in the sense that, it’s not that it was Saudi government policy to support Al Qaeda, but there were a number of very wealthy individuals in Saudi Arabia who would contribute, sometimes directly, to extremist groups. Sometimes to charities that were kind of, ended up being ways to launder money to these groups,” Rhodes said.

“So a lot of the money, the seed money if you will, for what became Al Qaeda, came out of Saudi Arabia,” he added. “Could that happen without the government’s awareness?” Axelrod asked. Rhodes said he doesn’t believe the government was “actively trying to prevent that from happening.” But he said that certain people, within the government or their family members, were able to operate on their own which allowed for the money flows. “So basically there was, at certainly, at least kind of a insufficient attention to where all this money was going over many years from the government apparatus,” Rhodes said. The remarks from Rhodes come as Obama prepares to head to Saudi Arabia on Wednesday and confront the strained relations between the two allies.

The Saudis are still fuming over an Atlantic magazine article that described Obama’s frustrations with Saudi Arabia’s religious ideology, its treatment of women and its rivalry with Iran. Obama also suggested in the piece that Saudi Arabia and other Gulf Arab states are “free riders” who rely too much on the U.S. military. Friction has also been created by a push from relatives of people who died on 9/11 and a bipartisan group of lawmakers to allow U.S. courts to hold the Saudi government responsible if it is found to have played a role in the 2001 attacks.

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Ambrose is always hit and miss. This one is BIG miss: “The scare earlier this year was misguided. It is the next oil supply crunch we should fear most.” No, it’s demand.

Saudis Are Going For The Kill But The Oil Market Is Turning Anyway (AEP)

The collapse of OPEC talks with Russia over the weekend makes absolutely no difference to the balance of supply and demand in the global oil markets. The putative freeze in crude output was political eyewash. Hardly any country in the OPEC cartel is capable is producing more oil. Several are failed states, or sliding into political crises. Russia is milking a final burst of production before the depleting pre-Soviet wells of Western Siberia go into slow run-off. Sanctions have stymied its efforts to develop new fields or kick-start shale fracking in the Bazhenov basin. Saudi Arabia’s hard-nosed decision to break ranks with its Gulf allies at the meeting in Doha – and with every other OPEC country – punctures any remaining illusion that there is still a regulating structure in global oil industry.

It told us that the cartel no longer exists in any meaningful sense. Beyond that it was irrelevant. Hedge funds were clearly caught off guard by the outcome since net ‘long’ positions on the futures markets were trading at a record high going into the meeting. Brent crude plunged 7pc to $41 a barrel in early Asian trading, but what is more revealing is how quickly prices recovered. Market dynamics are changing fast. Output is slipping all over the place: in China, Latin America, Kazakhstan, Algeria, the North Sea. The US shale industry has rolled over, though it has taken far longer than the Saudis expected when they first flooded the market in November 2014. The US Energy Department expects total US output to drop to 8.6m barrels per day (b/d) this year from 9.4m last year.

China is filling up the new sites of its strategic petroleum reserves at a record pace. Its oil imports have jumped to 8m b/d this year from 6.7m in 2015, soaking up a large part of the global glut. Some is rotating back out again as diesel: most is being consumed in China. Goldman Sachs says the twin effect of rising demand and supply disruptions across the world is bringing the market back into balance, leading to a “sustainable deficit” as soon as the third quarter. The inflexion point could come sooner than almost anybody expects if a strike this week in Kuwait drags on as oil workers fight pay cuts. The outage is already costing 1.6m b/d. Kuwait’s woes are the first taste of how difficult it will be for the petro-sheikhdoms to impose austerity measures or threaten the cradle-to-grave social contracts that keep a lid on dissent across the Gulf.

There is little doubt that Mohammad bin Salman, the deputy-crown prince and de facto ruler of Saudi Arabia, wanted an excuse to sabotage the Doha deal. He added a fresh demand that non-OPEC Norway should also limit output – a non-starter – as well as hardening the Saudi objection to Iran’s full return to pre-sanctions output. The calculus is that his country has the deepest pockets and will ultimately stand to gain by shaking out weaker players. This is a gamble. Saudi Arabia is running through $10bn of foreign exchange reserves a month to plug its fiscal deficit. The fixed riyal peg makes it much harder to roll with the budgetary punches as Russia is able to do with the floating rouble. Saudi Arabia is not as rich as often supposed. Per capita income is the same as in Greece. Standard & Poor’s has cut its credit rating twice to A-, and for good reason. The Saudis never built up a proper sovereign wealth fund in good times. Their reserve coverage is two-thirds less than in Kuwait, or Abu Dhabi.

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Decentralization goes global.

A New Map for America (NY Times)

These days, in the thick of the American presidential primaries, it’s easy to see how the 50 states continue to drive the political system. But increasingly, that’s all they drive — socially and economically, America is reorganizing itself around regional infrastructure lines and metropolitan clusters that ignore state and even national borders. The problem is, the political system hasn’t caught up. America faces a two-part problem. It’s no secret that the country has fallen behind on infrastructure spending. But it’s not just a matter of how much is spent on catching up, but how and where it is spent. Advanced economies in Western Europe and Asia are reorienting themselves around robust urban clusters of advanced industry. Unfortunately, American policy making remains wedded to an antiquated political structure of 50 distinct states.

To an extent, America is already headed toward a metropolis-first arrangement. The states aren’t about to go away, but economically and socially, the country is drifting toward looser metropolitan and regional formations, anchored by the great cities and urban archipelagos that already lead global economic circuits. The Northeastern megalopolis, stretching from Boston to Washington, contains more than 50 million people and represents 20% of America’s gross domestic product. Greater Los Angeles accounts for more than 10% of G.D.P. These city-states matter far more than most American states – and connectivity to these urban clusters determines Americans’ long-term economic viability far more than which state they reside in. This reshuffling has profound economic consequences.

America is increasingly divided not between red states and blue states, but between connected hubs and disconnected backwaters. Bruce Katz of the Brookings Institution has pointed out that of America’s 350 major metro areas, the cities with more than three million people have rebounded far better from the financial crisis. Meanwhile, smaller cities like Dayton, Ohio, already floundering, have been falling further behind, as have countless disconnected small towns across the country. The problem is that while the economic reality goes one way, the 50-state model means that federal and state resources are concentrated in a state capital – often a small, isolated city itself – and allocated with little sense of the larger whole. Not only does this keep back our largest cities, but smaller American cities are increasingly cut off from the national agenda, destined to become low-cost immigrant and retirement colonies, or simply to be abandoned.

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Taleb’s take-down of Noah Smith on Twitter has been epic.

No One Worries Enough About Black Swans (ZH)

Over the weekend, Bloomberg View’s quasi-economist wrote his latest laughable article, one which supposedly “explained” how “Everyone Worries Too Much About ‘Black Swans'”, which in addition to being a rambling, meandering stream of consciousness that as is regularly the case with this particular author, made little sense, sparked a Twitter feud with the Nassim Taleb, the person who made the concept of a Black Swan into a household name. We were therefore very amused to note that none other than former FX trader and fund manager, Richard Breslow, who also writes for Bloomberg, seemingly had an epileptic fit upon reading the abovementioned drivel and wrote his own scathing reaction from the perspective of an actual trader, a rection which not only threw up on every argument of the so-called economist’s logic, but on everything else that now is passed off simply as, well, “the new normal.” Here is Richard Breslow:

No One Worries Enough About Black Swans

Trading is a hard business. The world is becoming a more complicated place: a number out of China may do more to the price of your U.S. shares in a retailer than, well, U.S. retail sales. Yet creeping, dangerously, into the investment advice dialog is the argument that buying and holding no matter what the event is the winning strategy. If you ever needed a “past results don’t guarantee…” disclaimer it’s especially true now. It’s not surprising that such shallow reasoning is becoming commonplace. Sure beats staying late at the office doing cash-flow analysis. Bad things happen and the Fed will cut rates. Worked time and again. Presto chango, that financial crisis was a buying event, stupid.

It’s gotten much worse post the latest financial crisis, as it’s assumed asset prices are the main (sole) focus of the all powerful central banks. To buy (pun intended) into this you have to presuppose that Black Swan events are easily controllable episodes that last short amounts of time. That the authorities have unlimited firepower to counteract every natural and man-made disaster. Equally scary, academics as well as analysts have taken to arguing that investors are overestimating the probability of crisis events. You don’t need to be a Taleb or Mandelbrot to calculate that we have been having once in a hundred year events on a regular basis for the last thirty years. Did a crisis happen, if you made money?

This flawed logic argues not only buy every dip, but why waste money on hedges? It assumes unlimited deep pockets and the nerve of a non-sentient computer. Just go “all in.” Looking more like today’s world all the time. Portfolio theory thrown right out the window. Perhaps Harry Markowitz will have his Nobel revoked. A portfolio built to only withstand stress thanks to central bank intervention is one destined to blow-up spectacularly. The embedded flaw in this new logic is that central banks give investors perfect foresight. And nothing can go wrong. Re-read the Investment Process section of those prospectuses.

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“His words sounded like a request of a bailout for his countries’ saving industry and savers, in an ironic twist from previous bailout requests coming from the periphery.”

Credit Suisse: Germany’s Large Surplus Is The Problem, Not the ECB (BBG)

Forget about Greek debt sustainability. Another part of the continent is in need of relief—and this time, it’s a part of the core, not the periphery. That’s how Credit Suisse analysts led by Peter Foley characterized comments from German Finance Minister Wolfgang Schaeuble earlier this month. “The German Finance minister said record low interest rates were causing ‘extraordinary problems’ for German financial institutions and pensioners and risked undermining voters’ support for European integration,” writes Foley. “His words sounded like a request of a bailout for his countries’ saving industry and savers, in an ironic twist from previous bailout requests coming from the periphery.” A common criticism of unconventional central bank policy is that the ultra-low interest rates are too onerous for savers. At present, the average German bund yield is barely above zero:

Some analysts have expressed more than a modicum of sympathy for Schaeuble’s position, indicating that the ECB’s policy represents a form of John Maynard Keynes’ prophesied ‘euthanasia of the rentier’ and is not justified by its positive side effects. But instead of blaming the ECB, Foley suggests that German fiscal policymakers should pull the levers at their disposal to help remedy this situation. “Germany has continued to run a large current account surplus, and has increased it further–from 5.7% of GDP in 2009 to 8.5% in 2015,” wrote the analyst, noting that this surplus constituted the largest imbalance among major economies by this metric. “In an environment short on aggregate demand, Germany’s surplus is a problem, both globally and to the rest of the euro area.”

Foley recommends that the German authorities move to more aggressively reduce financial imbalances by increasing public investment, support private demand in certain soft segments, and implement more structural reforms. This would support Germany’s growth as well as that of its European partners, and as an added bonus, would address Schauble’s concerns about the woes of savers all in one fell swoop, the analyst concludes, by lessening the ECB’s need to support the currency union with unconventional stimulus.

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I see a hot summer.

Talks With Creditors To Resume But Athens Rejects Fresh Austerity (Kath.)

With talks set to resume on Tuesday with Greece’s international creditors, Athens said on Monday it has no intention of implementing austerity measures beyond the commitments it signed on to in the third bailout last July and plans to seek “allies” among European countries that believe now is not the time create political instability in Greece. Government spokeswoman Olga Gerovasili said on Monday that Athens will abide by the commitments it made last July, “nothing more, nothing less.” Her comments came after the IMF and the EU, which overcame their differences at the weekend over Greece’s budgetary outlook, took the wind out of the government’s sails by seeking another package of austerity measures to the tune of more than €3 billion (or 2% of GDP) in case there are target shortfalls over the next three years as a “guarantee” that Greece will achieve a primary budget surplus of 3.5% of GDP in 2018.

The government’s apparent defiance on Monday is a departure from its initial response at the weekend, when it implied that it could be open to discussion over the new measures – which relate to 2018 – as long as it received reassurances that it will get debt relief. Failure to wrap up the review could see negotiations drag on into June, which would put a further strain on the SYRIZA-led coalition’s fragile government, already struggling to stay afloat with a very slim majority of three deputies in Parliament. However, the new turn of events could foil the government’s ambitions, which include reaching a staff level agreement by Friday’s Eurogroup meeting in Amsterdam, to unlock vital tranches of rescue funds and pave the way for debt relief talks – a key demand by Greece.

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“..Simply by liking or sharing this article on Facebook or retweeting it on Twitter, you’re most likely flagging yourself as a potential renegade, revolutionary or anti-government extremist—a.k.a. terrorist.”

Every Move You Make Is Being Monitored (Whitehead)

“The way things are supposed to work is that we’re supposed to know virtually everything about what [government officials] do: that’s why they’re called public servants. They’re supposed to know virtually nothing about what we do: that’s why we’re called private individuals. This dynamic – the hallmark of a healthy and free society – has been radically reversed. Now, they know everything about what we do, and are constantly building systems to know more. Meanwhile, we know less and less about what they do, as they build walls of secrecy behind which they function. That’s the imbalance that needs to come to an end. No democracy can be healthy and functional if the most consequential acts of those who wield political power are completely unknown to those to whom they are supposed to be accountable.” – Glenn Greenwald

 

Government eyes are watching you. They see your every move: what you read, how much you spend, where you go, with whom you interact, when you wake up in the morning, what you’re watching on television and reading on the internet. Every move you make is being monitored, mined for data, crunched, and tabulated in order to form a picture of who you are, what makes you tick, and how best to control you when and if it becomes necessary to bring you in line. Simply by liking or sharing this article on Facebook or retweeting it on Twitter, you’re most likely flagging yourself as a potential renegade, revolutionary or anti-government extremist—a.k.a. terrorist. Yet whether or not you like or share this particular article, simply by reading it or any other articles related to government wrongdoing, surveillance, police misconduct or civil liberties is enough to get you categorized as a particular kind of person with particular kinds of interests that reflect a particular kind of mindset that might just lead you to engage in a particular kinds of activities.

Chances are, as the Washington Post reports, you have already been assigned a color-coded threat score—green, yellow or red—so police are forewarned about your potential inclination to be a troublemaker depending on whether you’ve had a career in the military, posted a comment perceived as threatening on Facebook, suffer from a particular medical condition, or know someone who knows someone who might have committed a crime. In other words, you might already be flagged as potentially anti-government in a government database somewhere—Main Core, for example—that identifies and tracks individuals who aren’t inclined to march in lockstep to the police state’s dictates. The government has the know-how.

As The Intercept recently reported, the FBI, CIA, NSA and other government agencies are increasingly investing in and relying on corporate surveillance technologies that can mine constitutionally protected speech on social media platforms such as Facebook, Twitter and Instagram in order to identify potential extremists and predict who might engage in future acts of anti-government behavior. Now all it needs is the data, which more than 90% of young adults and 65% of American adults are happy to provide.

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“This will go on until it can’t, which is what discontinuity is all about.”

The Elephant Cometh (Jim Kunstler)

The elephant’s not even in the room, which is why the 2016 election campaign is such a soap opera. The elephant outside the room is named Discontinuity. That’s perhaps an intimidating word, but it is exactly what the USA is in for. It means that a lot of familiar things come to an end, stop, don’t work the way they are supposed to — beginning, manifestly, with the election process now underway in all its unprecedented bizarreness. One reason it’s difficult to comprehend discontinuity is because so many operations and institutions of daily life in America have insidiously become rackets, meaning that they are kept going only by dishonest means. If we didn’t lie to ourselves about them, they couldn’t continue.

For instance the automobile racket. Without a solid, solvent middle-class, you can’t sell cars. Americans are used to paying for cars on installment loans. If the middle class is so crippled by prior debt and the disappearance of good-paying jobs that they can’t qualify for car loans, well, the answer is to give them loans anyway, on terms that don’t really pencil out — such as 7-year loans at 0% interest for used cars (that will be worth next to nothing long before the loan expires). This will go on until it can’t, which is what discontinuity is all about. The car companies and the banks (with help from government regulators and political cheerleaders) have created this work-around by treating “sub-prime” car loans the same way they treated sub-prime mortgages: they bundle them into larger packages of bonds called collateralized loan obligations.

These, in turn, are sold mainly to big pension fund and insurance companies desperate for “yield” (higher interest) on “safe” investments that ostensibly preserve their principal. The “collateral” amounts to the revenue streams of payments that are sure to stop because the payers are by definition not credit-worthy, meaning it was baked in the cake that they would quit making payments — especially when they go “under water” owing ever more money for junkers that have lost all value. It’s easy to see how that ends in tears for all concerned parties, but we “buy into it” because there seems to be no other way to a) boost the so-called “consumer” economy and b) keep the matrix of car-dependant suburban sprawl in operation. We took what used to be a fairly sound idea during a now-bygone phase of history, and perverted it to avoid making any difficult but necessary changes in a new phase of history.

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There is a very strange silence in western media about this.

Over 400 Migrants Drown On Their Way To Italy (Reuters)

Somalia’s government said on Monday about 200 or more Somalis may have drowned in the Mediterranean Sea while trying to cross illegally to Europe, many of them teenagers, when the boat they were on capsized after leaving the Egyptian shore. Italian President Sergio Mattarella had said earlier on Monday that several hundred people appeared to have died in a new tragedy in the Mediterranean, after unconfirmed reports spoke of up to 400 victims of capsizing near Egypt’s coast. More than 1.2 million African, Arab and Asian migrants have streamed into the EU since the start of last year, many of them setting off from North Africa in rickety boats that are packed full of people and which struggle in choppy seas.

“We have no fixed number but it is between 200 and 300 Somalis,” Somali Information Minister Mohamed Abdi Hayir told Reuters by telephone when asked about possible Somali deaths in the latest incident. Another Somali government statement, which offered condolences, put the number at “nearly 200”, saying they were mostly teenagers. It said the boat they were on had capsized after leaving Egypt. “There is no clear number since they are not traveling legally,” the minister said, adding that he understood the boat might have been carrying about 500 people, of which 200 to 300 were Somalis “and most of them had died”. He did not give a precise timing for the incident.

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Mar 242016
 
 March 24, 2016  Posted by at 9:28 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »


John M. Fox National Peanut Corp. store on Broadway, NY 1947

Goldman to Fed: Stop Worrying So Much About the Stronger Dollar (BBG)
China Sends Fed A Warning: Devalues Yuan By Most In 2 Months (ZH)
Pimco Sees 7% Drop For Yuan, ‘No. 1 Risk For Global Economy This Year’ (BBG)
Kyle Bass Is Wrong On China: Policy Adviser Li (CNBC)
China’s Debt Bubble Threatens Global Economy (Nikkei)
China Online P2P Financing Firms Face More Regulation (WSJ)
There’s No Sign of a China Rebound (BBG)
China Exports Its Environmental Problems (BBG)
Liquidity Death Spiral Traps Credit Suisse (BBG)
Japan’s Bond Market Is Close to Breaking Point (BBG)
US Oil Falls After Big Jump In Stockpiles (Reuters)
Osborne’s Disability Cuts Are Devastating Families (G.)
Trump Is Right – Dump NATO Now (David Stockman)
Methane and Warming’s Terrifying New Chemistry (McKibben)
EU Border Agency Has Less Than A Third Of Requested Police (AFP)
Key Aid Agencies Refuse Any Role In ‘Mass Expulsion’ Of Refugees (G.)

Everybody knows a stronger dollar is inevitable. Priced in.

Goldman to Fed: Stop Worrying So Much About the Stronger Dollar (BBG)

It’s time for the Federal Reserve to end its dollar fixation. That’s the takeaway from a Goldman Sachs report Wednesday that suggests the U.S. currency poses little threat to the Fed’s inflation goals, challenging policy makers’ comments to the contrary. That’s good news for dollar bulls who are betting on expanded monetary-policy divergence between the U.S., Europe and Japan. Inflation is at the heart of the Fed’s debate about the timing of interest-rate increases as officials look to normalize monetary policy after seven years of near-zero interest rates. With a stronger dollar not translating into significantly cheaper import prices, Goldman Sachs suggests the central bank faces fewer headwinds to hiking rates than markets are currently pricing in.

“The majority of the effects of a stronger dollar on import prices have already been realized,” analysts Zach Pandl and Elad Pashtan wrote in the note. “Inflation data to date appears to be more closely tracking a path with less dollar pass-through to core inflation” than implied by the Fed’s projections for consumer prices. Investors agree. The gap between yields on Treasury Inflation-Protected Securities and nominal 10-year notes, known as the break-even rate, climbed to the highest since August earlier this week. The measure indicates inflation will average about 1.59% over the next decade, compared with 1.2% last month. The Bloomberg Dollar Spot Index, which tracks the currency versus 10 peers, advanced 0.7% on Wednesday, extending its longest streak of gains since the period ending Feb. 16.

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Fed must hike?!

China Sends Fed A Warning: Devalues Yuan By Most In 2 Months (ZH)

With the USD Index stretching to its longest winning streak of the year, jawboned by numerous Fed speakers explaining how April is ‘live’ (and everyone misunderstood the dovishness of Yellen), it appears that The PBOC wanted to send a message to The Fed – Raise rates and we will unleash turmoil on your ‘wealth creation’ plan. Large unexpected Yuan drops have rippled through markets in recent months spoiling the party for many and tonight, by devaluing the Yuan fix by the most since January 7th, China made it clear that it really does not want The Fed to hike rates and cause a liquidity suck-out again. The last 4 days have seen nearly a 1% devaluation in the Yuan fix with today’s drop the biggest in over 2 months…

 

And while everyone is quietly commenting on how “stable” the Yuan has been this year, the truth is that is only the case against the USD, the Yuan basket has been consistently devaluing since PBOC admitted it was more focused on that than the USD only…

The last time they sent a message, The Fed rapidly acquiesced and decided a rate hike was inadvisable due to global market turmoil… we wonder what happens this time.

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Only question is will it be voluntary.

Pimco Sees 7% Drop For Yuan, ‘No. 1 Risk For Global Economy This Year’ (BBG)

The offshore yuan dropped to a one-week low after China’s central bank weakened its daily fixing and Pimco. said it sees further depreciation for the currency. The People’s Bank of China lowered its reference rate by 0.33%, the most since Jan. 7, following an overnight advance in the dollar on comments from Federal Reserve officials on the possibility of an interest-rate increase as soon as April. The yuan, “by far the single biggest risk for the global economy and markets this year,” is expected to depreciate 7% against the dollar over the next year, according to a Pimco report issued Wednesday. “If the Fed raises interest rates in April, the dollar will rebound sharply and pressure the yuan weaker,” said Gao Qi at Scotiabank, who sees a June move as more likely. “We expect the yuan to depreciate modestly to 6.7 against the greenback by the end of this year” as capital leaves, the economy slows and the dollar advances.

The yuan’s share of global payments dropped to the lowest since October 2014, according to the Society for Worldwide Interbank Financial Telecommunications, with data affected by the one-week Lunar New Year holiday. China’s growth will likely decelerate as a trend, with mini-cycles of weak recovery and slowdown led by policy swings, Morgan Stanley economists Chetan Ahya and Elga Bartsch wrote in a note. China won’t devalue the yuan to boost exports, and is confident that the nation’s economy will expand by more than 6.5% annually in the next five years, Premier Li Keqiang said in a speech in Boao, Hainan province, on Thursday. Although pressures for the yuan to depreciate do exist, the nation will be able to keep the exchange rate basically stable as long as the economy stays sound, PBOC adviser Huang Yiping said on Wednesday.

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Saying it does not inspire confidence.

Kyle Bass Is Wrong On China: Policy Adviser Li (CNBC)

Many assumptions about China held by global market players, such as thinking Beijing wants a weaker yuan or that low oil prices are caused by the mainland’s slowing growth, are simply wrong, according to a leading Chinese policy adviser. Li Daokui, director of the Center for China at Tsinghua University and former member of the People’s Bank of China (PBOC) monetary policy committee, said prominent hedge fund managers, including the likes of Kyle Bass, have misunderstood the world’s second-largest economy. For one, focusing on the currency is “the biggest mistake in reading the Chinese economy,” said Li on the sidelines of Thursday’s Boao Forum for Asia conference. “There is no need for the Chinese economy to rely on a big boost of exports….the economy is still facing a big trade surplus.”

Ever since Beijing surprised the world by unexpectedly depreciating the renminbi in August, money managers such as Kyle Bass, David Tepper and Bill Ackman have ramped up bearish bets against the yuan. Goldman Sachs predicts the dollar will be fetching 7 yuan by the end of the year, from 6.5 currently, amid expectations for looser monetary policy and the government’s desire to boost sagging exports. But exports are no longer as important as before the global financial crisis, Li explained, adding that the sector now makes up 20% of GDP, compared with 35% previously. “The renminbi is already an international currency in the region, so when it devalues, everybody devalues. The net impact is almost zero,” he added.

Indeed, fears for an Asian currency war hit fever-pitch after August’s historic devaluation. Export-oriented economies, such as neighboring South Korea, are typically flagged as the most vulnerable to a weaker renminbi as their goods appear more expensive overseas, sparking worries that other central banks would weaken their own currencies to maintain trade competitiveness. “When the Chinese economy does devaluation, the momentum of financial markets will kick in to expect more devaluation. The game has no good ending for anyone,” Li said. Li’s views echo those of Premier Li Keqiang, who said on Thursday that depreciation would not help companies be more competitive, repeating that the government would not devalue the yuan to lift exports.

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Non-financial private debt is over 200% of GDP and counting. $21.5 trillion.

China’s Debt Bubble Threatens Global Economy (Nikkei)

Excessive debt held by Chinese companies and households is highlighting a grave reality behind the country’s economy. In a sign that this debt is being regarded as a risk to the global economy, it became a topic of discussion at a meeting of G-20 finance ministers and central bank governors held in February. China even appears to be taking steps similar to Japan’s moves in its own post-bubble era. Total credit to the Chinese private non-financial sector stood at $21.5 trillion at the end of September 2015, accounting for 205% of the country’s GDP, according to the Bank for International Settlements. In Japan, the figure accounted for more than 200% of the nation’s GDP at the end of September 1989, when the country was in the late stage of its economic bubble.

After that bubble burst, the number shot up to 221% by the end of December 1995. Japan had fallen victim to its own excessive debt, and banks wrestled with bad loans for the next 10 years. In the U.S., the boom in subprime housing loans for low-income borrowers evolved into a global financial crisis in 2008. At the end of September that year, total credit to the U.S. private sector reached its peak, accounting for 169% of the country’s GDP. It took U.S. banks about four years to overcome their bad loan problems. And now in China, the outstanding amount of total credit to the private sector has surged 300% from the end of December 2008. After the crisis triggered by the Lehman bankruptcy in 2008, Chinese companies began borrowing money and increasing investment, thanks to the Chinese government’s introduction of economic measures worth 4 trillion yuan (around $586 billion at the time).

That stimulus has helped the country to account for half of the world’s crude steel production. Now, however, China is facing the difficult task of making production adjustments, which is putting deflationary pressure on overseas economies. At the opening session of the 12th National People’s Congress, which ended on March 16, Chinese Premier Li Keqiang announced that the country will accelerate the development of a new economy. He also stated that China will address overcapacity in steel, coal and other industries. Despite the positive stance, though, total credit to Chinese non-financial companies stood at $17.4 trillion at the end of September 2015, accounting for 80% of the total.

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Beijing has let shadow banking grow so big that regulating it is a risk to the economy.

China Online P2P Financing Firms Face More Regulation (WSJ)

China’s online lending companies are bracing for an industry shake-up this year as competition heats up, the economy slows further and regulatory scrutiny tightens following a bevy of scandals. Operators of online lenders, a hot sector in Chinese finance just two years ago, bemoaned the tougher operating environment and the industry’s battered reputation. Speaking at a forum on Wednesday, executives cited rising credit risks and potential new government restrictions on their ability to accept public deposits. They said those firms that aren’t adaptable and lack proper risk controls will likely fail. “When these guys can’t get access to capital, what will they do?” Simon Loong of online financing platform WeLab said at the Boao Forum for Asia, a gathering of business and government leaders.

“They’ll slowly go bust,” and that in turn could rattle the financial system, Mr. Loong said without elaborating. Having made investing easy, major Chinese Internet companies are now competing to sell financial products. Here’s an introduction to some of the popular online investment platforms. Online lending boomed over the past half-decade. Peer-to-peer, or P2P, financing soared, raising capital from wealthier investors and routing it to smaller businesses and consumers often overlooked by commercial banks. P2P platforms numbered 2,595 at the end of last year, up from 880 at the start of 2014, while outstanding loans rose 14-fold to 440 billion yuan ($66.8 billion), according to data provider Wind Information. After the fast rise, however, business conditions deteriorated and some P2P platforms imploded.

Most spectacular was Ezubo Ltd., which collapsed last year, leaving investors short of $7.6 billion and causing regulators to vow to tighten supervision of the sector. While saying greater oversight is welcome, the online lenders at Wednesday’s panel said defended their business models. “The P2P word now seems to have a negative connotation now,” said Yang Fan, CEO of Iqianjin (Beijing) Information. “But P2P financing supplements the existing financial system. It can more effectively direct resources.” The executives said regulators should distinguish between shady operators and credible firms that are trying to manage the risks of loan default. “Those who were accused of illegal fundraising had just put on the hat of P2P” and weren’t genuine operators, said Zhang Shishi, co-founder of online platform Renrendai.

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But they’ll paint the rosy picture anyway.

There’s No Sign of a China Rebound (BBG)

China’s monetary and fiscal stimulus have yet to spur a rebound in the world’s second-largest economy, according to the earliest private economic indicators for March. A purchasing manager’s index focused on small businesses, a gauge of corporate confidence and a new reading of the economy derived from satellite imagery all remained at levels signaling deterioration, though the pace of declines moderated. Sales manager sentiment was unchanged. The reports follow mixed official data showing investment and property sales recovered in the first two months of the year as trade plummeted and manufacturing remained weak. Meanwhile, the newest data show government reforms to slash industrial capacity and shift to a greater reliance on consumption and services haven’t been able to offset the slump.

“Confidence of companies is still slowly bottoming,” Jia Kang, director of the China Academy of New Supply-side Economics, said in a statement. “As long as the supply-side reforms can push forward, the effects will gradually show up.” That’s more unwelcome news for top officials who are gathered this week at the Boao Forum for Asia on the southern island of Hainan to discuss the challenges facing the economy and goals of the reform. Premier Li Keqiang will deliver a keynote speech Thursday and People’s Bank of China Governor Zhou Xiaochuan is scheduled to participate in a panel discussion with Commerce Minister Gao Hucheng and Foreign Minister Wang Yi.

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Obviously.

China Exports Its Environmental Problems (BBG)

One of the best pieces of news in years is that China’s finally getting serious about cleaning up its environment. Renewable energy use is growing rapidly while coal use is declining. Air pollution targets are being tightened. Contaminated farmland is finally getting high-level attention. Yet all that good could be undermined if China simply exports its environmental problems elsewhere. A case in point is China’s campaign to protect its forests. For years, logging ran rampant as the country transformed itself into the world’s biggest buyer of timber and wood products, including everything from furniture to paper. Denuded hillsides contributed to massive floods in 1998 that forced millions to evacuate their homes. Fortunately, according to a study published last week in Science, stricter enforcement of localized logging bans has reversed the trend: Between 2000 and 2010, tree cover increased over 1.6% of Chinese territory (and declined over .38%).

This year, China plans to cut its commercial logging quota another 6.8% and will expand a ban on logging natural forests nationwide. Here’s the problem, though: As China has quieted its chainsaws, the country has become the world’s largest importer of timber; the government predicts that by 2020 it will rely on imports for 40% of its needs. And as buyers, Chinese companies aren’t terribly discerning. According to the London-based think tank Chatham House, China’s purchases of illegally harvested timber nearly doubled between 2000 and 2013, growing to more than 1.1 billion cubic feet. The damage extends across the developing world. China buys up 90% of Mozambique’s timber exports, around half of which were harvested at rates too fast to sustain the forest over the long-term.

In 2013, the World Wildlife Fund declared that illegal logging in the Russian Far East had reached “crisis proportions” after finding that oak was being logged for export to China at more than twice the authorized volumes. That same year, Myanmar tripled the volume of endangered rosewood exported to China (where it’s particularly valued for its use in furniture). At those rates, some of Myanmar’s rosewood species could be extinct by 2017. Despite a total ban enacted in 2014, rosewood exports to China surged last year to levels reportedly not seen in a decade.

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This does not bode well for TBTF banks.

Liquidity Death Spiral Traps Credit Suisse (BBG)

Credit Suisse just got caught up in the same liquidity death spiral that has claimed a growing number of debt funds.Some of the bank’s traders increased holdings of distressed and other infrequently traded assets in recent months without telling some senior leaders, Credit Suisse CEO Tidjane Thiam said on Wednesday. This is bad on several levels. For one, it highlights some pretty poor risk management on the part of senior officers at the Swiss bank.But perhaps more important from a market standpoint, it exposes a trap in the current credit market: Traders are getting increasingly punished for trying to sell unpopular debt at the wrong time. The result has been a growing number of hedge-fund failures, increasing risk aversion by Wall Street traders and further cutbacks at big banks.

This all simply reinforces the lack of trading in less-common bonds and loans. At best, this spiral is inconvenient, especially for mutual funds and exchange-traded funds that rely on being able to sell assets to meet daily redemptions. At worst, it could set the stage for another credit seizure given the right catalyst – perhaps a sudden, unexpected corporate default or two, or the implosion of a relatively big mutual fund. To give a feeling for just how inactive parts of the market have become, consider this: About 40% of the bonds in the $1.4 trillion U.S. junk-debt market didn’t trade at all in the first two months of this year, according to data compiled from Finra’s Trace and Bloomberg. While corporate-debt trading has generally increased by volume this year, more of the activity is concentrated in a fewer number of bonds.

This has made it even harder for big banks to justify buying riskier bonds to make markets for their clients, the way they used to, because they could get stuck holding the bag. That’s what happened with Credit Suisse, apparently. The bank suffered $258 million of writedowns this year through March 11, and $495 million of losses in the fourth quarter, because of its holdings of distressed debt, leveraged loans and securitized products, including collateralized loan obligations [..] Credit Suisse is in a tough spot because it is trying to get out of its hard-to-trade assets at a bad time. It’s re-evaluating its business model under new leadership, higher capital requirements and the shadow of poor earnings. But it’s certainly not alone in feeling the pain from a brutal and unforgiving period in debt markets. JPMorgan Chase, Bank of America and Goldman Sachs are expected to report disappointing trading revenues in the first three months of the year, and Jefferies already reported its train wreck of a quarter.

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Abe’s run out of wiggle room. He can’t even turn around on a dime anymore.

Japan’s Bond Market Is Close to Breaking Point (BBG)

Signs of stress are multiplying in Japan’s government bond market, which is crumbling under pressure from the central bank’s unprecedented asset-purchase program and negative interest rates. BOJ Governor Haruhiko Kuroda has repeatedly said his policies are having the desired effect on markets, including suppressing JGB yields. His success is driving frenzied demand for longer-dated notes as investors avoid the negative yields offered on maturities up to 10 years. And as buyers hang on to debt offering interest returns, the BOJ is finding it harder to press on with bond purchases of as much as 12 trillion yen ($107 billion) a month, sparking sudden price swings leading to yield curve inversions that have nothing to do with economic fundamentals. “We hold a lot, and we’re not selling,” said Yoshiyuki Suzuki, the head of fixed income at Fukoku Mutual Life Insurance, which has $59 billion in assets. “We can get interest income. If we sell, there are no good alternatives.”

Yields on 40-year JGBs dipped below those on 30-year securities Tuesday, and a BOJ operation to buy long-term notes last week met the lowest investor participation on record. Bond market functionality has deteriorated, with 41% of respondents last month rating it as “low,” the highest proportion since the BOJ began the quarterly survey more than a year ago. “It wouldn’t be surprising to see some BOJ operations fail,” said Yusuke Ikawa at UBS in Tokyo. “The biggest risk of that is in superlong bonds.” A dearth of liquidity has driven a measure of bond-market fluctuations to levels unseen since 1999.

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Back on the way to $30 and beyond.

US Oil Falls After Big Jump In Stockpiles (Reuters)

U.S. oil prices fell in Asian trading on Thursday, adding to a slump in the previous session, after stockpiles rose for the sixth week to another record, sapping the strength of a two-month rally in prices. U.S. crude futures were down 10 cents at $39.69 a barrel at 0302 GMT, trading further below the important $40 level. It closed down $1.66, or 4%, at $39.79 a barrel on Wednesday. That marked the sharpest one-day drop for the front-month contract in U.S. crude since Feb. 11. Brent crude futures were up 7 cents at $40.54 a barrel, after trading lower earlier in the session. They finished the last session down $1.32, or 3.2%, at $40.47 a barrel. Earlier this week, both benchmarks had risen by more than 50% from multi-year lows that hit in January.

The U.S. government’s Energy Information Administration (EIA) said crude stockpiles climbed by 9.4 million barrels last week – three times the 3.1 million barrels build forecast by analysts in a Reuters poll. The continued rise in stockpiles is grinding away at the gains in prices that were largely driven by plans of major producers, including Saudi Arabia and Russia, to freeze production. “OPEC production is still high and Iran is expected to continue to ramp up,” said Tony Nunan at Mitsubishi in Tokyo. “I expect crude to come back down again and test the $35 level again if we continue to get builds,” he said. The market was also supported by a release showing crude stockpiles at the Cushing, Oklahoma, delivery hub – an important data point – fell for the first time in seven weeks.

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People die from austerity.

Osborne’s Disability Cuts Are Devastating Families (G.)

A few stabbings in SW1, a couple of careers seriously injured. Politicians and pundits are frantically trying to shrink the implications of Iain Duncan Smith’s resignation down to Westminster size. So it’s about cabinet feuds and leadership hopes, George Osborne’s snottiness and David Cameron’s way with a swearword. What the welfare secretary’s exit is not about, you understand, is a busted austerity programme that has missed nearly every goal and deadline set forward by its creators. It’s not about a benefits system in chaos – economic chaos being so much uglier a prospect than a flat-pack “Tory civil war”. And it’s certainly not about the people who actually have to use that benefits system.

People like Paul and Lisa Chapman. They won’t pop up in the coverage of the “great social reformer” – yet their story takes you to the heart of what’s wrong with our welfare system. It starts a decade ago when Paul, at only 39, started getting a tremor in his right hand. “Just a small one”, but then his eyes would swell up and his sense of smell disappeared. The doctors guessed what was wrong well before the scans picked it up, but a couple of years ago the diagnosis was confirmed: Parkinson’s disease. Incurable. Evil. Now Paul’s body won’t do what his brain tells it to. Miss any tablets and he shakes “really bad”. Even having taken them cramps still seize his neck, legs and arms. “My speech is going,” Paul begins. “I know what I want to say, but … ” Lisa picks up: “The words come out back to front.”

We were in the Chapmans’ small front room, gazing out on the same Northamptonshire town where Paul had worked for years. “I used to be the quickest postman in Irthlingborough!” He could knock off a round in two hours that would take his colleagues four. Even before taking medical retirement, he was slowing down, sometimes forgetting where he was. Now the same route would take “seven or eight hours”. Anyway, Lisa points out, he no longer has the strength to lift a letterbox. We met two days after Osborne’s announcement of the cuts to the personal independence payment (PIP). Disabilities such as Paul’s cost a lot, – in extra kit, travel and care – and PIP is meant to help. The Chapmans were worried that they’d lose out.

This, famously, was the cut too far for IDS. But the Chapmans told me another story, which underlined how this government’s welfare mess is so much bigger than just one line in a red book. Last summer they were summoned for a medical assessment, to be conducted by Capita for the Department for Work and Pensions. Capita employees apologised for not making a home visit, but said the £4.4bn multinational didn’t have sufficient staff to do one soon (Capita says it initially offered a home visit, which was rescheduled). Lisa asked the assessor if he was a GP. Yes, he said – but on the report he is described as a nurse. [..] The assessor found that Paul wasn’t as disabled as previously thought. He immediately lost £49 a week -a huge blow for the Chapmans.

In front of me, Paul remembered what he told Lisa: “The best thing we can do now is you go round your mum’s. I’ll clear off and I won’t take my tablets or my insulin. And it ll be over then. I won t be here. You go back to work and live your life as normal.” Paul: “I couldn’t face this much aggravation. I felt that bad. I’ve got something which anybody could get and I’m so used to doing 70-80 hours at work.” And now he was reduced to this. [..] A government assessment is made, a brown envelope of bad news is put in the post, and in a terraced house in a small town a sick man is driven to consider suicide.

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NATO does a lot of harm. Which makes a lot of sense given that it’s now 25 years over it’s best-by date.

Trump Is Right – Dump NATO Now (David Stockman)

If you want to know why we have a $19 trillion national debt and a fiscal structure that will take that already staggering figure to $35 trillion and 140% of GDP within a decade, just consider the latest campaign fracas. That is, the shrieks of disbelief in response to Donald Trump’s sensible suggestion that the Europeans pay for their own defense. The fact is, NATO has been an obsolete waste for 25 years. Yet the denizens of the Imperial City cannot even seem to grasp that the 4 million Red Army is no more; and that the Soviet Empire, which enslaved 410 million souls to its economic and military service, vanished from the pages of history in December 1991. What is left is a pitiful remnant -145 million aging, Vodka-besotted Russians who subsist in what is essentially a failing third world economy.

Its larcenous oligarchy of Putin and friends appeared to live high on the hog and to spread a veneer of glitz around Moscow and St. Petersburg. But that was all based on the world’s one-time boom in oil, gas, nickel, aluminum, fertilizer, steel and other commodities and processed industrial materials. Stated differently, the Russian economy is a glorified oil patch and mining town with a GDP the equivalent of the NYC metropolitan area. And that’s its devastating Achilles Heel. The central bank driven global commodity and industrial boom is over and done. As a new cycle of epic deflation engulfs the world and further compresses commodity prices and profits, the Russian economy is going down for the count; it’s already been shrunk by nearly 10% in real terms, and the bottom is a long way down from there.

The plain fact is Russia is an economic and military weakling and is not the slightest threat to the security of the United States. None. Nichts. Nada. Nope. Its entire expenditure for national defense amounts to just $50 billion, but during the current year only $35 billion of that will actually go to the Russian Armed Forces. On an apples-to-apples basis, that’s about 3 weeks of Pentagon spending! Even given its non-existent capacity, however, there remains the matter of purported hostile intention and aggressive action. But as amplified below, there has been none. The whole demonization of Putin is based on a false narrative arising from one single event. To wit, the February 2014 coup in Kiev against Ukraine’s constitutionally elected government was organized, funded and catalyzed by the Washington/NATO apparatus. Putin took defensive action in response because this supremely stupid and illegal provocation threatened vital interests in his own backyard.

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CH4 is some 22 times as powerful as CO2.

Methane and Warming’s Terrifying New Chemistry (McKibben)

Global warming is, in the end, not about the noisy political battles here on the planet’s surface. It actually happens in constant, silent interactions in the atmosphere, where the molecular structure of certain gases traps heat that would otherwise radiate back out to space. If you get the chemistry wrong, it doesn’t matter how many landmark climate agreements you sign or how many speeches you give. And it appears the United States may have gotten the chemistry wrong. Really wrong. There’s one greenhouse gas everyone knows about: carbon dioxide, which is what you get when you burn fossil fuels. We talk about a “price on carbon” or argue about a carbon tax; our leaders boast about modest “carbon reductions.” But in the last few weeks, CO2’s nasty little brother has gotten some serious press. Meet methane, otherwise known as CH4.

In February, Harvard researchers published an explosive paper in Geophysical Research Letters. Using satellite data and ground observations, they concluded that the nation as a whole is leaking methane in massive quantities. Between 2002 and 2014, the data showed that US methane emissions increased by more than 30%, accounting for 30 to 60% of an enormous spike in methane in the entire planet’s atmosphere. To the extent our leaders have cared about climate change, they’ve fixed on CO2. Partly as a result, coal-fired power plants have begun to close across the country. They’ve been replaced mostly with ones that burn natural gas, which is primarily composed of methane. Because burning natural gas releases significantly less carbon dioxide than burning coal, CO2 emissions have begun to trend slowly downward, allowing politicians to take a bow.

But this new Harvard data, which comes on the heels of other aerial surveys showing big methane leakage, suggests that our new natural-gas infrastructure has been bleeding methane into the atmosphere in record quantities. And molecule for molecule, this unburned methane is much, much more efficient at trapping heat than carbon dioxide. The EPA insisted this wasn’t happening, that methane was on the decline just like CO2. But it turns out, as some scientists have been insisting for years, the EPA was wrong. Really wrong. This error is the rough equivalent of the New York Stock Exchange announcing tomorrow that the Dow Jones isn’t really at 17,000: Its computer program has been making a mistake, and your index fund actually stands at 11,000.

These leaks are big enough to wipe out a large share of the gains from the Obama administration’s work on climate change—all those closed coal mines and fuel-efficient cars. In fact, it’s even possible that America’s contribution to global warming increased during the Obama years. The methane story is utterly at odds with what we’ve been telling ourselves, not to mention what we’ve been telling the rest of the planet. It undercuts the promises we made at the climate talks in Paris. It’s a disaster—and one that seems set to spread.

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This is an established pattern.

EU Border Agency Has Less Than A Third Of Requested Police (AFP)

EU border agency Frontex on Wednesday said member states have provided less than a third of the personnel it requested to deal with the record influx of migrants. Frontex, which coordinates border patrols and collects intelligence about the bloc’s frontiers, had called on European countries Friday to provide 1,500 police and 50 readmission experts “to support Greece in returning migrants to Turkey.” Only 396 police officers and 47 re-admission experts have been offered, according to a statement released Wednesday by the Warsaw-based agency. “I am grateful to the countries who have offered (personnel)… but I urge other member states to pledge many more police officers if we want to be ready to support readmission to Turkey as agreed by the EU Council,” Frontex head Fabrice Leggeri said.

Leggeri had earlier said: “It is important to stress that Frontex can only return people once the Greek authorities have thoroughly analyzed each individual case and issued a final return decision.” The European Union struck a landmark deal with Turkey last week to stem the massive influx of migrants. The European Commission has said the implementation of the deal will require the mobilization of some 4,000 personnel, including a thousand security staff and military officers, and some 1,500 Greek and European police. Frontex spokeswoman Ewa Moncure told AFP the officers requested by the agency were part of this figure.

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“Nobody knows. Every five minutes, the orders change. So who knows. Maybe God knows. If you have any communication with God, you can ask him.”

Key Aid Agencies Refuse Any Role In ‘Mass Expulsion’ Of Refugees (G.)

A triple blow has been dealt to the EU-Turkey migration deal after five leading aid groups refused to work with Brussels on its implementation, a Turkish diplomat ruled out changing Turkish legislation to make the deal more palatable to rights campaigners, and a senior Greek official said nobody knew how the agreement was supposed to work. The UN refugee agency said it was suspending most of its activities in refugee centres on the Greek islands because they were now being used as detention facilities for people due to be sent back to Turkey. UNHCR was later joined by Médecins Sans Frontières, the International Rescue Committee, the Norwegian Refugee Council and Save the Children. All five said they did not want to be involved in the blanket expulsion of refugees because it contravened international law.

The UNHCR spokeswoman, Melissa Fleming, said: “UNHCR is not a party to the EU-Turkey deal, nor will we be involved in returns or detention. We will continue to assist the Greek authorities to develop an adequate reception capacity.” In a separate and stronger statement, Marie Elisabeth Ingres, MSF’s head of mission in Greece, said: “We will not allow our assistance to be instrumentalised for a mass expulsion operation and we refuse to be part of a system that has no regard for the humanitarian or protection needs of asylum seekers and migrants.” Over the past year, around 1 million people have crossed the narrow straits between Turkey and Greece to try to claim asylum in Europe. In an attempt to stop this flow, the EU and Turkey reached a deal last week that would see almost all asylum seekers returned to Turkish soil.

To do this, the EU has deemed Turkey a safe country for refugees; a decision strongly contested by rights groups. Turkey is not a full signatory to the UN refugee convention, and while it has accepted more Syrian refugees than any other country, it has sometimes forcibly returned Syrian, Iraqi and Afghan asylum seekers to their countries of origin. Just hours after the EU deal was signed, Amnesty International reported that 30 Afghan refugees were sent back to Afghanistan – in a sign, Amnesty said, of what could be to come. “The ink wasn’t even dry on the EU-Turkey deal when several dozen Afghans were forced back to a country where their lives could be in danger,” said John Dalhuisen, Amnesty’s Europe and Central Asia director.

[..] The deputy mayor of Lesbos, the island where most migrants land, said no Greek official knew exactly how the deportation process would work, nor what to do with the refugees while they waited. When asked by the Guardian if he had received any concrete instructions about how refugees would be processed and returned to Turkey, Giorgos Kazanos said: “No, not yet.” “Nobody knows. Every five minutes, the orders change. So who knows. Maybe God knows. If you have any communication with God, you can ask him.”

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Mar 182016
 
 March 18, 2016  Posted by at 9:20 am Finance Tagged with: , , , , , , , , , ,  7 Responses »


Idomeni: where human rights go to die

Either Something Spooked The Fed Or There Is A “Central Bank Accord” (ZH)
Next Financial Crisis Could Overwhelm World’s Defenses, IMF Says (BBG)
Global Currencies Soar, Defying Central Bankers (WSJ)
Yen Rally Is Piling Pressure On BOJ (CNBC)
China Adjusts Yuan by Biggest Margin Since November (WSJ)
Bank IPOs Expose Dark Arts Of Chinese Finance (Reuters)
China Home Prices Rise Most In 2 Years, Big Cities Bubble Worries (Reuters)
UK Household Debt Binge Has No End In Sight (Telegraph)
800,000 Barrels Of Oil Go Missing Every Day (WSJ)
Brazil Tumbles Like ‘House Of Cards’ In Crisis
Merkel Dodges European Banking Union Push From Draghi (BBG)
Catalonia Said to Court Default in Spanish Game of Chicken (BBG)
Italy Passes Law To Make Supermarkets Give Wasted Food To Charity (Ind.)
EU and Turkey Harden Positions Over Latest Refugee Plan (FT)
Greece Has Much Work To Do If EU Reaches Refugee Deal With Turkey (Kath.)
Idomeni, The Train Stop That Became An ‘Insult To EU Values’ (Guardian)
‘Refugees’ and ‘Migrants’- There Is A Distinction That Matters (UNHCR)

The US beggaring all of its neighbors. Short term only.

Either Something Spooked The Fed Or There Is A “Central Bank Accord” (ZH)

Yesterday’s FOMC meeting and press conference generated widespread unease. My personal uncomfortable feeling was reminiscent of a time many decades ago when a date stood me up and provided an excuse that made little sense. Simply put, the combination of the FOMC’s forecasts, economic assessment, and guidance on the future path of interest rates were incongruous and disconnected to their ‘data dependency’ message. This week was a curious time to recalibrate to a far more dovish stance since it has followed clear improvement in labor markets, inflation indicators, and inflationary expectations. Even with the modest downward adjustments to their economic projects, the Fed’s goals and mandates have not only (basically) been achieved but they seemingly have economic momentum behind them as well.

Core year-over-year inflation measures have been rising. Core CPI rose to 2.3% earlier this week. The PCE deflator has risen to 1.7% which already stands above the Fed’s year-end estimate. The Fed once again lowered the level it believes to be its longer-run estimate of the natural rate to 4.8%. Regardless, with the unemployment rate currently at 4.9%, the Fed is implying by its belief in the Philips Curve that wages will soon accelerate. Despite modest changes in the Fed’s economic projections, the Fed is forecasting growth above its estimate of potential growth. So how is it possible that a ‘data dependent’ Fed turned dovish? Reporters tried to address these questions during the press conference. Yellen was uncharacteristically opaque. She deflected questions.

It had the appearance of a coach who had a specific game plan, but the familiar playbook was replaced on the day of the game. The market place is abuzz with two possibilities for such a shift. The first possibility is that something spooked the board. The market is only learning now from Bernanke’s book that QE2 and QE3 were initiated because of fears of the European crisis, not due to a shortfall in economic targets as claimed. Most people believe that the Fed deferred a hike in September due to “international developments”. The first possibility may have been the catalyst for the second. The second possibility being discussed is that some type of central bank accord was reached at the G20 meeting in Shanghai February 25-26.

Maybe they noticed that diverging central bank policies were leading to extreme market volatility and accusations of currency wars. It is not difficult to envision an agreement where central banks agreed to provide more stimuli, if the Fed agreed to pause in order to not offset the effects of such moves. This would mean that the Fed would have to ignore economic data. Since markets have become more correlated, a pause would allow the dollar to weaken, and in turn, take pressure off of China to devalue the yuan. This would also help commodities to rise and emerging markets to soar. As global financial conditions begin to improve, the Fed would then have better cover under which to hike interest rates.

[..] The time has come to end NIRP and ZIRP, and other forms of aggressive central bank experimentation and the dangerous consequences that come with them. It’s time they take a giant collective BURP, I mean BIRP (Basic Interest Rate Policy).

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No kidding. But what happened to the recovery then?

Next Financial Crisis Could Overwhelm World’s Defenses, IMF Says (BBG)

The global financial safety net has become increasingly fragmented, making it harder to respond to crises in a world roiled by volatile capital flows, International Monetary Fund staffers warned. Defenses haven’t kept up with the growth of external debt in recent years, the Washington-based fund said in a report released Thursday. As a result, a system-wide shock could overwhelm the world’s crisis resources, which include nations’ foreign-exchange reserves, central-bank swap lines, regional funds such as the euro area’s European Stability Mechanism, and the IMF itself, the lender said. Financial cycles have been “growing in amplitude and duration, capital flows have become more volatile, and non-banks have gained importance, altering the nature of systemic risk,” IMF staff said in the report, which was presented to the fund’s executive board on March 7.

In a major event, “the needs could exceed the collective resources available,” the fund said. The paper takes stock of the global monetary system that has prevailed since 1973, the year that marked the collapse of the Bretton Woods system of exchange rates pegged to the dollar. At a meeting in Shanghai last month, Group of 20 finance ministers and central bankers said the IMF’s work would inform the group’s study of the “evolution” of the world’s financial architecture. The current monetary system, with the freedom it offers to countries to choose their exchange-rate strategy, has proven more flexible in responding to shocks, the IMF said. But the 2008 crisis exposed the system’s weaknesses, including a lack of financial oversight. Since then, the global economy has continued to undergo major structural shifts that are having a significant effect on the international monetary landscape, the IMF said.

The growth of emerging-market and developing countries has made the global economy more “multipolar,” fund staff said. Still, financial markets in such nations aren’t as deep as in advanced economies, and the system remains highly dependent on the dollar as a reserve currency. The central role of one or two reserve currencies can have significant spillover effects on other countries, especially those with open economies and less developed financial markets, the IMF said. At the same time, the globalization of finance has led to a dramatic increase in capital flows. “Periodic episodes of high capital flow volatility appear to have become a feature of the new global landscape,” putting pressure on emerging markets in particular, the IMF said.

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No, what happens is the USD weakens. Deliberate ploy.

Global Currencies Soar, Defying Central Bankers (WSJ)

Efforts by many of the world’s central banks to weaken their currencies are failing, raising concerns about whether policy makers are losing the ability to wield control over financial markets. This was the case again in Japan on Thursday, when the dollar fell 1.1% against yen, to ¥111.39. Despite the Bank of Japan’s efforts to push down its currency and jump-start the economy with negative interest rates, the yen is up 8% this year and is at its strongest level against the dollar since October 2014. European central bankers are having similar problems containing the strength of the euro and other currencies. These difficulties are a reminder that the long stretch of exceptionally low rates in response to the 2008 financial crisis has created market distortions that may be difficult for central bankers to contain.

This disconnect could produce more volatility in financial markets. Even if investors can predict what actions central banks are likely to take, they are having a hard time predicting how markets will react, potentially sparking a pullback from riskier assets, such as emerging markets or commodities. It also underscores long-standing concerns about the prospects for global growth. A number of central bankers are reaching for the lever of lower interest rates to weaken their currency and make their exports more competitive. But because policy makers are all following the same approach, they are in effect canceling each other out. “There is a rising concern that central banks are testing the limits of their policies,” said Brian Daingerfield, a currency strategist at RBS Securities. “Each time you take a tool out of the tool kit, it gets closer to being empty.”

The European Central Bank has struggled with its efforts to weaken the euro, which gained 0.8% against the dollar on Thursday. Last week, the ECB cut interest rates further into negative territory, yet the currency is up 4.2% this year. Even some central banks with less actively traded currencies are having a hard time guiding markets. Norway’s central bank on Thursday cut its main interest rate to a record low of 0.5%, and a bank governor said he wouldn’t rule out negative rates, in which central banks charge big lenders to hold deposits. The Norwegian krone gained more than 1% against the dollar and was up against the euro.

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Japan may have to sit this one out.

Yen Rally Is Piling Pressure On BOJ (CNBC)

The strengthening yen could see Japan’s central bank eke out more stimulus as early as next month, confounding expectations for policy inaction following January’s surprise move to negative interest rates. The yen rallied to 110 against the greenback during Thursday’s U.S. session, its strongest level since October 2014, amid relentless dollar selling after the Federal Reserve played down prospects for tighter monetary policy on Wednesday. “At these [yen] levels, it is hard to see the Bank of Japan not extending their stimulus program in some form at their April 28 meeting,” IG market strategist Angus Nicholson said on Friday. A stronger yen hurts Japan’s economy and is especially detrimental to the export sector because it makes local goods more expensive for overseas buyers, providing a fillip to rival Asian manufacturers with weaker currencies, such as South Korea.

The central bank held fire at Monday’s monetary policy review, as anticipated, and economists believed it would continue to take a wait-and-see approach to assess the impact of January’s negative interest rates decision. But that may no longer be the case. “If USD/JPY drifts lower again, we expect more aggressive action from the Bank of Japan,” Kathy Lien at BK Asset Management said on Friday. As an indicator of just how worrying the latest currency strength is to Japan, strategists believe the BOJ intervened in markets on Thursday in attempt to move the yen off its 16-month peak. “In a matter of minutes right around lunchtime in the U.K., USD/JPY jumped nearly 100 pips from its low of 110.67. This is the third time in two months that the BOJ stepped in to buy USD/JPY below 111 as they clearly don’t want to see the currency pair trading on the 110 handle,” observed Lien.

During early Asian trade on Friday, the pair hovered around 111. Japanese finance minister Taro Aso said on Friday that he was closely monitoring the currency’s moves, but minutes released at the market open from the central bank’s January meeting made no mention of the yen. “At 113, the BoJ has leeway to wait but at 110-111 with the risk of further losses, they may not be able to forestall easing for much longer,” said Lien.

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When the USD starts rising again, and it will, China will have to move in the opposite direction.

China Adjusts Yuan by Biggest Margin Since November (WSJ)

China on Friday set its currency 0.52% stronger against the dollar, in the yuan’s steepest one-day fixing increase since November, reflecting the weakness in the dollar after the U.S. Federal Reserve moved to a more dovish tone. The People’s Bank of China set the currency’s daily midpoint at 6.4628 yuan to a dollar, reaching the yuan’s strongest level against the U.S. dollar since Dec. 16. The yuan now trades at 6.4645 to a dollar versus its last official closing of 6.4930. The steep gain in the yuan’s fixing Friday is only surpassed by the 0.54% gain in the daily benchmark on Nov. 2, which remains the biggest daily adjustment since the yuan was de-pegged from the dollar in 2005. In each daily trading session, the central bank allows the dollar/yuan rate to move no more than 2% above or below the benchmark, or the central parity rate, it sets.

Analysts have linked the November appreciation to China’s efforts to have the yuan included in the IMF’s basket of reserve currencies. The IMF announced its decision to include the yuan at the end of November. For Friday’s move, however, traders say the jump in the central parity rate reflects the strength of major currencies in the valuation basket used by the PBOC in determining the daily currency benchmark. The euro, Japanese yen, and Australian dollar have made significant gains against the U.S. dollar after the Fed, at the conclusion of its monetary policy meeting on Wednesday, toned down its expectations of the pace of interest rate increases. The euro and the Japanese yen have both risen by nearly 2% against the dollar since the Fed suggested it would likely only raise the benchmark rate just twice this year, down from earlier projections of four increases.

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Wall Street 10 years ago, all over again.

Bank IPOs Expose Dark Arts Of Chinese Finance (Reuters)

Hong Kong’s stock market is shining a new light on the dark arts of Chinese finance. The country’s mid-sized lenders have become skilled at repackaging loans to look like lower-risk investments. Two impending share offerings from state-backed banks underscore how such wizardry has fueled growth. In recent years mid-sized Chinese banks have devoted an increasing proportion of their balance sheets to various investment products, often issued by other financial institutions. These vehicles, known as trust plans, asset management plans or wealth management products, tend to be backed by loans or bonds, though it’s often hard to tell exactly where the money has ended up. What’s clear, however, is that Chinese banks find this business more attractive than regular lending.

This may be because it requires them to hold less capital than for corporate loans, and also carry fewer provisions for possible bad debts. To see how important this business has become, just look at China Zheshang Bank, which is based in Hangzhou, the home town of e-commerce giant Alibaba. It is currently completing a $1.75 billion initial public offering in Hong Kong. At the end of 2013, Zheshang had less than $3 billion of debt instruments, such as wealth management products, on its balance sheet. By the end of last year this had exploded to $66 billion – 42% of its total assets. Income and fees from these activities – which the bank calls “Treasury Business” – brought in a staggering 80% of pre-tax profit last year.

It isn’t alone. Bank of Tianjin, which is seeking to raise $1.23 billion from Hong Kong investors, has also embraced what it calls “non-standard credit”. The group, whose shareholders include Australia’s ANZ, had $19 billion of such loans outstanding in September last year – three times as much as at the end of 2012. Chinese banks’ increasing dependence on these financial instruments raises several risks. For one, it means that long-term and illiquid loans are increasingly funded with short-term investments which are susceptible to a sudden loss of confidence. Second, it increases the web of links between banks and other financial institutions, increasing the vulnerability of the overall system. Rapid growth also raises the risks of loose lending. Financial sorcery rarely ends well.

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Government credibility erodes further.

China Home Prices Rise Most In 2 Years, Big Cities Bubble Worries (Reuters)

China’s home prices rose at their fastest clip in almost two years in February thanks to red-hot demand in big cities, but risks of overheating in some places combined with weak growth in smaller cities threaten to put more stress on an already slowing economy. Average new home prices in 70 major cities climbed 3.6% in February from a year ago, quickening from January’s 2.5% rise, according to Reuters calculations on Friday. That was the quickest year-on-year increase since June 2014, and encouragingly, 32 of 70 major cities tracked by the NBS saw annual price gains, up from 25 in January. Ordinarily, that should be welcome news for policymakers who have rolled out a raft of stimulus measures to support an economy growing at its slowest pace in a quarter of a century.

But the divergence in home prices – surging values in bigger cities and depressed markets in smaller cities plagued by a supply glut – makes Beijing’s job harder as it looks to reanimate growth without inflating asset bubbles. “The government’s all-out encouragement of housing sales seems to be working, but at the cost of surging prices in big cities,” said Rosealea Yao at Gavekal Dragonomics in Beijing. “These surges in big cities are not sustainable and would increase uncertainties and instability in the overall housing market.” The data showed tier 1 cities, including Shenzhen, Shanghai and Beijing, remained the top performers, with prices surging 56.9%, 20.6% and 12.9% respectively. “Prices in first-tier cities are very expensive now, it’s hard for new families to afford a home,” said Tan Huajie, vice president China’s biggest property firm Vanke.

The trouble is that speculators and ordinary investors, who have been shaken by the summer crash in mainland stock markets, are increasingly ploughing their money into the housing market – most of it going to the frothy sector in big centers. A slowing economy has also meant most jobs are in the biggest cities, drawing more people into these places and feeding the insatiable demand for homes. A breakdown of NBS data showed that a slew of government measures and increased lending has failed to arrest persistent softness in property markets in smaller cities where a glut of unsold houses have weighed on prices. Most third-tier cities still saw on-year prices drops in February, though the declines eased from the previous month.

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How Britain keeps the illusion going.

UK Household Debt Binge Has No End In Sight (Telegraph)

Britain’s credit binge has no end in sight as weak pay growth and low interest rates encourage households to load up on debt, official forecasts show. The Office for Budget Responsibility (OBR) said UK households were on course to spend more than they earned for the rest of the decade. Such a long period of households living so far beyond their means would be “unprecedented”, the fiscal watchdog said. Households are expected to spend £58bn more than they earn this year, rising to £68bn by the end of the decade. This is up from respective deficit forecasts of £41bn and £49.2bn in November. The OBR said data suggested spending had “significantly outpaced the growth of labour income” at the end of last year.

Consumers are expected to raid their savings to fuel consumption growth. Borrowing over the next five years would also be supported by the Bank of England’s “extremely accommodative monetary policy”. “The persistence of a household deficit of this size would be unprecedented in the latest available historical data, which extend back to 1987,” the OBR said in its latest UK healthcheck. It said comparable data stretching back to the early 1960s also “showed the household surplus moving into negative territory in only one year between 1963 and 1987”. The eight years of deficits forecast by the OBR contrast with a household surplus of £37.7bn in 2012 as Britons tightened their belts in the wake of the financial crisis and saved more.

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“..The agency found that “[statistical] limitations can introduce errors into the data, although the magnitude and direction of these errors are not clear.”

800,000 Barrels Of Oil Go Missing Every Day (WSJ)

There is mystery at the heart of the oversupplied global oil market: missing barrels of crude. Last year, there were 800,000 barrels of oil a day unaccounted for by the International Energy Agency, the energy monitor that puts together data on crude supply and demand. Where these barrels ended up, or if they even existed, is key to an oil market that remains under pressure from the glut in crude. Some analysts say the barrels may be in China. Others believe the barrels were created by flawed accounting and they don’t actually exist. If they don’t exist, then the oversupply that has driven crude prices to decade lows could be much smaller than estimated and prices could rebound faster. Whatever the answer, the discrepancy underscores how oil prices flip around based on data that investors are often unsure of.

Barrels have gone missing before, but last year the tally of unaccounted-for oil grew to its highest level in 17 years. At a time when the issue of oversupply dominates the oil industry, this matters. “If the market is tighter than assumed due to the missing barrels, prices could spike quicker,” said David Pursell at energy-focused investment bank Tudor, Pickering, Holt. Here’s how a barrel of crude goes “missing” in the data. Last year, the IEA estimated that on average the world produced around 1.9 million barrels a day more crude than there was demand for. Of that crude, 770,000 barrels went into onshore storage while roughly 300,000 barrels were in transit on the seas or through pipelines. That left roughly 800,000 barrels a day unaccounted for in the data. Global oil supply is about 96 million barrels a day.

In the fourth quarter, the number of missing barrels reached as high as 1.1 million barrels a day, or 43% of the estimated oversupply during that period. The IEA collates production and demand data from around the world, and its monthly reports often move prices. Other major market monitors, like the U.S. EIA and the OPEC, don’t break down their data to show the number of missing barrels. In 1998, the last time the number of missing barrels was so high, concern over the discrepancy reached the US Congress. A U.S. senator asked the Government Accountability Office, a nonpartisan agency working for Congress, to examine the IEA data. The agency found that “[statistical] limitations can introduce errors into the data, although the magnitude and direction of these errors are not clear.”

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Fascinating drama, but, really guys? Olympics? There? In a few months?

Brazil Tumbles Like ‘House Of Cards’ In Crisis

The plot to Brazil’s political crisis has become so complicated that even makers of political drama ‘House of Cards’ joke they are now following events. There is even an online quiz where one has to guess: did it happen in Brazil or in House of Cards, or both? But this is no laughing matter in Brazil. This is the country’s toughest political crisis since the early 1990s, when its first democratically-elected President in the modern era, Fernando Collor, was removed from power. On Wednesday night the crisis took a bizarre turn, as a judge revealed phone conversations between President Dilma Rousseff and her predecessor Luiz Inacio Lula da Silva and suggested they are trying to obstruct the course of an investigation into corruption. Spontaneous protests erupted in more than 15 cities across the country and riot police acted against demonstrators in Brasilia.

Both Rousseff and Lula – as he is known – are fighting for their political survival. Their political project has been shaping Brazil since 2003, when Lula defeated the opposition and established the Workers’ Party at the top of Brazilian politics. Rousseff is under fire for allegedly doctoring government accounts last year and could be suspended from her job as early as May if she loses a key vote in Congress. Lula is investigated for allegedly having received gifts from construction firms that were benefitted with inflated contracts from state oil giant Petrobras. Two weeks ago it looked like investigators were close to charging Lula for corruption, after he was detained and questioned for three hours. On Sunday, opponents of Rousseff and Lula staged one of the country’s largest demonstrations in history asking for her removal and his imprisonment.

Usually when politicians are involved in corruption allegations, they are either fired or suspended from their jobs – not invited into the government. But these are strange times in Brazilian politics. Rousseff’s reaction this week took everyone by surprise. She invited Lula to become her Chief of Staff and help lead her efforts out of the impeachment mess. On Wednesday, she justified her decision by saying he is “important and relevant for his unequivocal political experience”. She dismissed criticism that Lula was only being offered a job to escape criminal charges. As a minister, he will have prosecution privileges and only Brazil’s Supreme Court will be able to try him. She also denied that Lula would become a “de-facto” President – a “super minister” more powerful than the President herself.

“I have to laugh when you ask that,” she told journalists on Wednesday. But hours after Rousseff’s announcement to the press, a “bomb” was dropped in Brazil’s political scene. A phone conversation between Rousseff and Lula – taken earlier that day – was released to the public. Rousseff tells Lula that she is sending him a document which he can use “if necessary”. That document confirmed Lula’s nomination as a minister. One reading of that conversation suggests that Lula should use it in case prosecutors want to charge him before he is sworn in. That would corroborate the idea that Lula’s nomination is nothing but a plan to save him from prison. The phone conversation was revealed by federal judge Sergio Moro who has become a central person in the Petrobras probe and a hero to many people who are anti the Workers’ Party.. In Sunday’s mass protests, demonstrators showed hostility towards opposition politicians. The only unanimous figure amongst them was Moro.

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Not going to happen.

Merkel Dodges European Banking Union Push From Draghi (BBG)

ECB President Mario Draghi pushed European Union leaders for clarity on the future of the euro on Thursday. But Germany still chose to skirt a critical area of disagreement with its partners. During a closed-door session in Brussels, Draghi told EU leaders that the most important thing they could do would be to set out a clear path forward for the monetary union, according to two officials familiar with deliberations. When Portugal later called for a specific commitment to discuss banking union at an upcoming summit in June, German Chancellor Angela Merkel said such language wasn’t warranted, the officials said, asking not to be named because the talks were private.

Merkel, struggling to reassure her voters that she can get a grip on immigration flows, is sensitive to the risk of a domestic backlash against underwriting bank deposits in the rest of the bloc; Draghi has already faced German dissent in his battle to fan inflation across the currency union. At Thursday’s summit, Draghi said the ECB has “no alternative” to its recent rate cuts and monetary policy actions, and he encouraged them to support the central bank by reassuring savers, insurers and bankers about potential market distortions or risks to financial stability from the latest stimulus efforts. Draghi also spoke to reporters after leaders wrapped up the economic part of their deliberations and he left the meeting.

“I made clear that even though monetary policy has been really the only policy driving the recovery in the last few years, it cannot address some basic structural weaknesses of the euro-zone economy,” Draghi said. He also pledged that rates would stay low and that the ECB would use “all the appropriate instruments” as the outlook requires. [..] One particular area of German opposition has been further moves on banking union. The euro area has already adopted common banking supervision and resolution frameworks, while stopping short of creating a common deposit insurance framework. Germany has said it can’t proceed with pooling guarantees until the euro area has addressed broader questions about sovereign debt risk and financial stability. Draghi identified the euro area’s lack of joint deposit insurance as one of the main policy changes facing the EU..

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High stakes games.

Catalonia Said to Court Default in Spanish Game of Chicken (BBG)

Catalonia is deliberately flirting with default on its bank loans as the region’s separatist government tries to force the Spanish state to deliver aid payments, according to two people familiar with the situation. Officials in the regional capital Barcelona are counting on Spain to step in and supply the funds they need to meet loan repayments coming due this year, betting the central government will be forced to back down because the costs of a default would be greater for the Spanish sovereign, the people said, asking not to be identified discussing confidential matters. The region already missed payments on at least two bank loans, Regional President Carles Puigdemont said earlier this month according to El Mundo newspaper. Albert Puig, a spokesman for the Catalan government, said the region is trying to persuade Spain to release aid money due from 2014.

He said Wednesday there’s “no scenario” in which Catalonia would default. Catalan bonds maturing in February 2020 plunged the most since June 2013 on Wednesday after El Mundo reported that the region could be placed on selective default by credit rating company Standard & Poor’s. The yield on the debt rose by 21 basis points to 4.18% on Thursday after jumping by 84 basis points during the previous session. Similarly dated Spanish debt yields 0.36%. The separatist government in Catalonia, Spain’s biggest regional economy, is locked in a battle with the authorities in Madrid as it fights for independence. Puigdemont has pledged to prepare for secession by the middle of next year, though caretaker Prime Minister Mariano Rajoy says his plans are illegal.

The latest skirmish between the two administrations is over Catalonia’s plan to extend the maturity of approximately €1.6 billion of bank loans coming due this year. Such modifications require approval from the central government under the terms of the region’s 2012 bailout deal and Spain has been dragging its feet. Those loans are from Banco Santander, Banco Bilbao Vizcaya Argentaria, CaixaBank and Banco Sabadell, the two people said.

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Must be EU law ASAP. Make that global.

Italy Passes Law To Make Supermarkets Give Wasted Food To Charity (Ind.)

Italy has passed a law which will make supermarkets donate more of their waste food to charities. The country is now the second in Europe to pass such a law, after a bill was introduced in France in February which fines retailers who throw away unsold food. The bill received strong support from all parties, and was passed by the Italian parliament’s lower house on Thursday. It is expected to get approval from the Senate this week. Rather than penalising retailers who throw away food, the new law makes it easier for them to give it away, through the reform of certain tax laws which previously made it difficult to donate unsold produce. The law also allows businesses to give away food which is past its ‘sell by’ date, if it is not spoiled.

Italian agriculture minister Maruizio Martina told La Repubblica: “We are making it more convenient for companies to donate than to waste.” “We currently recover 550 million tonnes of excess food each year, but we want to arrive at one billion in 2016.” According to food producers’ organisation Coldiretti, the equivalent of 76kg of food for each person in the country is thrown away every year. With the passing of the new bill, it is hoped that some of this food will be passed on to the six million Italians who rely on donations from charities to eat. The anti-waste movement has been gathering momentum across Europe recently – French politician Arash Derambarsh, who is trying to pass EU-wide food donation legislation, has previously told The Independent: “The problem is simple – we have food going to waste and poor people who are going hungry.”

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The deal can’t be done without the EU playing fast and loose with a whole slew of international laws.

EU and Turkey Harden Positions Over Latest Refugee Plan (FT)

The EU and Turkey on Thursday night hardened their positions over the EU’s latest migration plan, leaving many disputes still to be resolved on a big-bang proposal to systematically turn back migrants reaching Greek islands. After five-hours of summit talks in Brussels, EU leaders agreed a negotiating position that further diverged from Ankara’s demands, setting the stage for a clash on Friday over key legal, practical and political elements of the package. These include Turkey’s refusal to apply full international standards on refugees, a Cypriot veto on opening parts of Ankara’s EU-membership talks, and Greece’s demands for thousands more staff to implement the plan. Differences also remain on the EU side over promises to accept Syrian migrants directly from Turkey to compensate for those turned back from Greek islands.

Angela Merkel, the German chancellor, said the final round of negotiations “will be anything but easy”. François Hollande, the French president, added: “I can’t guarantee you a happy conclusion.” Talks with Turkey on the offer will begin on Friday morning, when Ahmet Davutoglu, Turkish prime minister, will meet with Donald Tusk, the European Council president, Mark Rutte, the Dutch premier, and Jean-Claude Juncker, the European Commission president. Diplomats said one of the biggest stumbling blocks was the legal status of the plan, with Spain, Portugal and France pressing for Turkey to revamp its asylum system so migrants from all countries are able to seek international protection there. According to a draft of the EU’s position seen by the FTs, the bloc calls on Turkey to offer a “commitment that migrants returned to Turkey will be protected in accordance with the relevant international standards”.

Ankara is resisting any such formal legal changes, which EU officials fear would blow a hole in the legal basis for the deal. Ms Merkel said there were “certain legal prerequisites” needed to ensure migrants would be treated humanely in Turkey. Mariano Rajoy, Spain’s premier, said: “I defended the principle that whatever decision that is adopted must be in conformity with international law, and I made clear that without that we couldn’t support the conclusions.” Also sensitive are Ankara’s demands that Cyprus lifts a freeze on several “chapters” in its EU membership talks, a concession Nicosia is unwilling to make without Turkey recognising its government. While the issue touches on 40 years of enmity and has the potential to flare up, diplomats are discussing various compromises to work around the Cypriot block. Mr Hollande said leaders were “careful not to name the [specific] chapters”.

On the practical front, Greece also requested 4,000 extra staff — including 2,500 from other EU countries — to help it man borders and detain and handle an estimated 10,000 arrivals per week, who must be processed individually according to the terms of the deal. Ms Merkel said Germany was willing to contribute personnel to the Greek effort, saying EU member states could be able to commit specific numbers in a matter of days. “Each and every refugee has to be evaluated, each and every individual case has to be analysed,” Ms Merkel said. “From a logistical point of view, it’s going to be very important to have the necessary personnel on the islands to make this procedure possible.”

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Imagine the mess this will cause: “Each person applying for asylum will have to be interviewed as part of the process and each application examined separately. The arrivals will have the right to appeal if their asylum claim is rejected.”

Greece Has Much Work To Do If EU Reaches Refugee Deal With Turkey (Kath.)

Late last night European Union leaders were discussing the plan for Greece to return refugees to Turkey, which will require the government in Athens to conduct a huge amount of work in the coming days if the scheme is approved. European Council President Donald Tusk said he was “more cautious than optimistic” that an agreement could be reached on the plan, which is based around the EU resettling one refugee directly from Turkey for every refugee that crosses the Aegean and arrives in Greece. If approved, the deal will entail a huge amount of legal and technical work for Greek authorities in the next few days.

Firstly, the country’s asylum service will have to be overhauled immediately, starting with the recognition of Turkey as a “safe third country,” which would allow asylum seekers to be returned there from Greece. Legislation would also have to change so that asylum applications are processed within days rather than months, as is the case now. At the same time, Greece will have to remove all the refugees and migrants currently on its islands and take them to camps on the mainland. This has to happen before the agreement with Turkey for the return of anyone arriving on the islands can begin. This means some 8,000 people will have to be transferred.

Having done this, the Greek government will have to set up a system to register and process any new arrivals on the islands and examine their asylum applications. Each person applying for asylum will have to be interviewed as part of the process and each application examined separately. The arrivals will have the right to appeal if their asylum claim is rejected. This would require hundreds of public servants and other personnel to be stationed on the islands. This includes judges, employees of Greece’s asylum service, translators, security staff and officials from the EU’s border agency, Frontex. Also, there will be Turkish observers on the islands to ensure the refugees sent back have traveled from Turkey in the first place.

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“All they want is a better life, to escape war, to escape poverty. And what do they get? Greece of [Nazi] occupation. These are scenes from another century, another time.”

Idomeni, The Train Stop That Became An ‘Insult To EU Values’ (Guardian)

Not long ago few had heard of Idomeni, a train stop on the Greek-Macedonian border. Now it has become Europe’s biggest favela: an embarrassment to the values the continent holds so dear. Its tents, clinics and cabins lie on mud-soaked land. Its fields, once fertile, are toxic dumps. Its air is acrid and damp. Children dart this way and that, exhausted, hungry, unwashed. Waterlogged tents surround them – women sitting inside, men sitting in front, attempting vainly to stoke fires on rain-sodden wood. Everywhere there are lines: of bedraggled refugees queuing for food, of scowling teenage boys waiting for medics, of teenage girls holding babies, of older men and women staring into the distance in disbelief. And everywhere there are piles: of sodden clothes, soaked blankets, muddy shoes, tents, wood, rubbish – the detritus of despair but also desperation of people who never thought that this was where they would end up.

Taking in the camp’s chaotic scenes on Tuesday, the EU’s top immigration official Dimitris Avramopoulos, momentarily struggled to find the words. “These are images that offend us all,” he said, young boys breaking into a fight as they scavenged for wood behind him. “The situation is tragic, an insult to our values and civilisation.” Idomeni was never meant to happen. It is a bottleneck that abruptly occurred when Macedonia – following other eastern European and Balkan states – arbitrarily decided to seal its frontier. At its most intense, 14,000 people – mainly Syrians and Iraqis but also Afghans, Iranians, Moroccans, Algerians and Tunisians – have converged on this boggy plain, all bound by a common dream to continue their journey into central Europe.

For many the sight of Avramopoulos, wading through the slush in pristine wellies, was the first sign that hope was in the offing. Few politicians have ventured this far north. With almost every refugee in close contact with relatives abroad, hopes abound that the visit will augur well when EU leaders meet to decide their fate in Brussels on Thursday. More than 45,000 migrants and refugees are now stranded in Greece. Urging “pan-European” solutions to Europe’s biggest crisis yet, the German chancellor, Angela Merkel, declared on Wednesday that time was of the essence. “The situation in Greece should very much worry us all,” she told Berlin’s federal parliament ahead of the summit. “Because it won’t be without consequences for any of us in Europe.”

No one knows this better than those in Idomeni. Doctors are quick to say that until they got to the camp they had no idea what a public health emergency meant. Exposed to the elements, the place is being described as a timebomb. The vast majority of refugees have been here for weeks with some close to completing a month. Cases of fever, pneumonia, septicaemia, hysteria and psychotic breaks are all on the rise, according to health workers. “We have found women in tents writhing in pain as a result of [intrauterine] foetal deaths,” says Despoina Fillipidaki, who is coordinating volunteers, clinics, drug supplies and medics for the Red Cross in the tent city. “My biggest fear is that soon people will start to die. And what was their crime? All they want is a better life, to escape war, to escape poverty. And what do they get? Greece of [Nazi] occupation. These are scenes from another century, another time.”

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UNHCR confirms what I’ve written repeatedly. Compare this for instance to the standard BBC ‘disclaimer’, which is clearly disingenuous and doesn’t comply with international legal definitions:

The BBC uses the term migrant to refer to all people on the move who have yet to complete the legal process of claiming asylum. This group includes people fleeing war-torn countries such as Syria, who are likely to be granted refugee status, as well as people who are seeking jobs and better lives, who governments are likely to rule are economic migrants.

‘Refugees’ and ‘Migrants’- There Is A Distinction That Matters (UNHCR)

1. Are the terms ‘refugee’ and ‘migrant’ interchangeable? No. Although it is becoming increasingly common to see the terms ‘refugee’ and ‘migrant’ used interchangeably in media and public discussions, there is a crucial legal difference between the two. Confusing them can lead to problems for refugees and asylum-seekers, as well as misunderstandings in discussions of asylum and migration.

2. What is unique about refugees? Refugees are specifically defined and protected in international law. Refugees are people outside their country of origin because of feared persecution, conflict, violence, or other circumstances that have seriously disturbed public order, and who, as a result, require ‘international protection’. Their situation is often so perilous and intolerable, that they cross national borders to seek safety in nearby countries, and thus become internationally recognized as ‘refugees’ with access to assistance from states, UNHCR, and relevant organizations. They are so recognized precisely because it is too dangerous for them to return home, and they therefore need sanctuary elsewhere. These are people for whom denial of asylum has potentially deadly consequences.

5. Can ‘migrant’ be used as a generic term to also cover refugees? A uniform legal definition of the term ‘migrant’ does not exist at the international level. Some policymakers, international organizations, and media outlets understand and use the word ‘migrant’ as an umbrella term to cover both migrants and refugees. For instance, global statistics on international migration typically use a definition of ‘international migration’ that would include many asylum-seeker and refugee movements. In public discussion, however, this practice can easily lead to confusion and can also have serious consequences for the lives and safety of refugees. ‘Migration’ is often understood to imply a voluntary process, for example, someone who crosses a border in search of better economic opportunities.

This is not the case for refugees who cannot return home safely, and accordingly are owed specific protections under international law. Blurring the terms ‘refugees’ and ‘migrants’ takes attention away from the specific legal protections refugees require, such as protection from refoulement and from being penalized for crossing borders without authorization in order to seek safety. There is nothing illegal about seeking asylum – on the contrary, it is a universal human right. Conflating ‘refugees’ and ‘migrants’ can undermine public support for refugees and the institution of asylum at a time when more refugees need such protection than ever before.

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