Jan 042017
 
 January 4, 2017  Posted by at 10:29 am Finance Tagged with: , , , , , , , , ,  3 Responses »
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Readers browse bomb-damaged library of Holland House, London 1940


The Wrong Things Are Being Forecast (Morgan)
China Calls US ‘A Shooting Star In The Ample Sky Of History’ (G.)
China’s New Year Currency Moves Won’t Make Donald Trump Happy (CNBC)
Banks Create Money From Nothing. And It Gets Worse (ND)
India Government Set To Endorse Universal Basic Income (BI)
US Banks Gear Up To Fight Dodd-Frank Act’s Volcker Rule (R.)
Wall Street Banks Have $2 Trillion European Exposure (Martens)
How to Make America Great Again with Other People’s Money (Orlov)
The Trump Effect Will Accentuate Unrest (Nomi Prins)
Anti-Surveillance Clothing Aims To Hide Wearers From Facial Recognition (G.)
Guardian Report On Ailing Greek Health System Sparks Ugly Row (Kath.)
The Necessity of Maintaining Borders (Kath.)

 

 

If all ‘growth’ is borrowed anyway, and then some, as in every dollar of ‘growth’ takes $10 of debt, maybe you should stop calling it growth?!

The Wrong Things Are Being Forecast (Morgan)

It is customary to use the start of the year to set out some forecasts. Though I’ve not previously done this, I’ve decided to make an exception this time – mainly because I’m convinced that the wrong things are being forecast. Central forecasts tend to focus on real GDP, but in so doing they miss at least three critical parameters. The first is the relationship between growth and borrowing. The second is the absolute scale of debt, and our ability to manage it. The third is the impact of a tightening resource set on the real value of global economic output. Most commentators produce projections for growth in GDP, and mine are for global real growth of around 2.3% between 2017 and 2020. I expect growth to slow, but to remain positive, in countries such as the United States, Britain and China.

It’s worth noting, in passing, that these growth numbers do not do much to boost the prosperity of the individual, since they correspond to very modest per capita improvements once population growth is taken into account. Moreover, the cost of household essentials is likely to grow more rapidly than general inflation through the forecast period. What is more intriguing than straightforward growth projections, and surely more important too, is the trajectory of indebtedness accompanying these growth estimates. Between 2000 and 2015, and expressed at constant 2015 dollar values, global real GDP expanded by $27 trillion – but this came at the expense of $87 trillion in additional indebtedness (a number which excludes the inter-bank or “financial” sector). This meant that, in inflation-adjusted terms, each growth dollar cost $3.25 in net new debt.

If anything, this borrowing-to-growth number may worsen as we look forward, my projection being that the world will add almost $3.60 of new debt for each $1 of reported real growth between now and 2020. On this basis, the world should be taking on about $5.8 trillion of net new debt annually, but preliminary indications are that net borrowing substantially exceeded this number in 2016. China has clearly caught the borrowing bug, whilst big business continues to take on cheap debt and use it to buy back stock. Incredible though it may seem, the shock of 2008-09 appears already to be receding from the collective memory, rebuilding pre-2008 attitudes to debt. On my forecast basis, global real “growth” of $8.2 trillion between now and 2020 is likely to come at a cost of $29 trillion in new debt. If correct, this would lift the global debt-to-GDP ratio to 235% in 2020, compared with 221% in 2015 and 155% in 2000.

Adding everything together, the world would be $116 trillion more indebted in 2020 than in 2000, whilst real GDP would have increased by $35 trillion. Altogether, what we are witnessing is a Ponzi-style financial economy heading for end-game, for four main reasons. First, we have made growth dependent on borrowing, which was never a sustainable model. Second, the ratio of efficiency with which we turn borrowing into growth is getting steadily worse. Third, the demands being made on us by the deterioration of the resource scarcity equation are worsening. Fourth, the ageing of the population is adding further strains to a system that is already nearing over-stretch. One thing seems certain – we cannot, for much longer, carry on as we are. y

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This calls for the poet in Trump to respond.

China Calls US ‘A Shooting Star In The Ample Sky Of History’ (G.)

Donald Trump has doubled down on his plans to transform US trade policy, picking a longtime China critic and protectionist to be America’s next chief trade negotiator. Robert Lighthizer, 69, has advocated for increasing tariffs and repeatedly criticised China for failing to adhere to international trade practices, saying tougher methods were needed to change the system. The move is likely to further alarm Beijing, where state-controlled media said on Wednesday “Trump is just fixated on trade” and warned the president elect “not try to boss China around” on economic and security issues. “May the arrogant Americans realise that the United States of America is perhaps just a shooting star in the ample sky of history,” said an editorial in the Communist party-affiliated Global Times newspaper.

It follows the selection by Trump last month of Peter Navarro to lead a new presidential office for US trade and industrial policy. Navarro has previously described China’s government as a “despicable, parasitic, brutal, brass-knuckled, crass, callous, amoral, ruthless and totally totalitarian imperialist power”. Trump has packed his cabinet with tycoons, vowed to renegotiate trade deals and crack down on what he says are China’s unfair policies. Lighthizer is a former Reagan-era trade official and had a previous stint in the Office of the US Trade Representative, where he travelled the world negotiating deals to curb steel imports. He then went on to a career as a trade lawyer, representing giants such as US Steel Corp working to fend off foreign imports.

In 2011, he wrote in an opinion piece for the Washington Times: “How does allowing China to constantly rig trade in its favour advance the core conservative goal of making markets more efficient? Markets do not run better when manufacturing shifts to China largely because of the actions of its government.” While less prone to bombast than Navarro, he and Lighthizer share the view that China’s economic policies are fundamentally flawed. Years of passivity and drift among US policymakers have allowed the US-China trade deficit to grow to the point where it is widely recognised as a major threat to our economy, Lighthizer wrote. Going forward, US policymakers should take these problems more seriously, and should take a much more aggressive approach in dealing with China.

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Excuse me? “China has put a new chip on the table to counter trade adventurism by the Trump administration.” Other than that, the new capital controls seem to work so far, to an extent.

China’s New Year Currency Moves Won’t Make Donald Trump Happy (CNBC)

Call it a New Year’s greeting from the Chinese government to the incoming administration of Donald Trump. As the president-elect rang in 2017 entertaining guests at his opulent Mar-a-Lago estate, China quietly ushered in a series of measures aimed at better controlling the value of its local currency, the yuan. Throughout his campaign, Trump accused China of “manipulating” the yuan to make Chinese exports more competitive in global markets. China’s latest announcement will likely add fuel to that debate. Unlike countries that mostly let markets determine the value of their currencies, Beijing tries to peg the yuan to a basket of other currencies. Starting Jan. 1, the Chinese State Administration of Foreign Exchange will use a new, broader basket of global currencies to benchmark the yuan’s value.

The change will have the effect of reducing the impact of the U.S. dollar on the official valuation. “This is unambiguously bad news for the United States,” High Frequency Economics Chief Economist Carl Weinberg said in a note to clients Tuesday. “China has put a new chip on the table to counter trade adventurism by the Trump administration.” While China has sought to dampen the value of its currency in the past, the People’s Bank of China has more recently been scrambling to support the yuan. Beijing is deeply concerned that the weakening yuan is encouraging Chinese to shift their wealth out of the country into stronger currencies or other, more stable holdings. China needs a lot of capital in the country in order to continue to fund its growth, which is very heavily reliant on borrowing.

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I was thinking about exactly this, the other day. That a basic income scheme may be a Trojan horse AND a wolf in sheep’s clothing if it comes entirely digitized.

Banks Create Money From Nothing. And It Gets Worse (ND)

Richard Werner, the German professor famous for inventing the term ‘quantitative easing’, says the world is finally waking up to the fact that “banks create money out of nothing” – but warns this realisation has given rise to a new “Orwellian” threat. In an exclusive interview with The New Daily, Professor Werner says the recent campaigns around the world, including in India and Australia, to get rid of cash are coordinated attempts by central bankers to monopolise money creation. “This sudden global talk by the usual suspects about the ‘need to get rid of cash’, ostensibly to fight tax evasion etc, has been so coordinated that it cannot but be part of another plan by central bankers, this time to stay in charge of any emerging reform agenda, by trying to control, and themselves run, the ‘opposition’,” he says.

“Essentially, the Bank of England and others are saying: okay, we admit it, you guys were right, banks create money out of nothing. So now we need to make sure that you guys will not be able to set the agenda of what happens in terms of reforms.” [..] The main point is that the banks do not lend existing money, but add to deposits and the money supply when they ‘lend’. And when those loans are repaid, money is removed from circulation. Thus, the supply of money is constantly being expanded and contracted by banks – which may explain why the ‘credit crunch’ of the global financial crisis was so devastating. Banks weren’t lending, so there was a shortage of money. By some estimates, the banks create upwards of 97% of money, in the form of electronic funds stored in online accounts. Banknotes and coins? They are just tokens of value, printed to represent the money already created by banks.

Professor Werner is pleased the world is waking up to the truth of how money is created, but is very displeased with what he sees as the central bankers’ reaction: the death of cash and the rise of central bank-controlled digital currency. This will further centralise what he describes as the “already excessive and unaccountable powers” of centrals banks, which he argues has been responsible for the bulk of the more than 100 banking crises and boom-bust cycles in the past half-century. “To appear active reformers, they will push the agenda to get rid of bank credit creation. This suits them anyway, as long as they can fix the policy recommendation of any such reform, to be … that the central banks should be the sole issuers of money.”

The professor also fears the global push for ‘basic income’, which is being trialled in parts of Europe and widely discussed in the media, will form part of the central bankers’ attempt to kill off cash. ‘Basic income’ is a popular idea that can be traced back to Sydney and Beatrice Webb, founders of the London School of Economics. It proposes we abolish all welfare payments and replace them with a single ‘basic income’ that everyone, from billionaires to unemployed single mothers, receives. Either we accept the digital currency issued by central banks, or we miss out on basic income payments. That is Professor Werner’s theory of what might happen. His solution to this “Orwellian” future is decentralisation, in the form of lots of non-profit community banks, as exist in his native Germany.

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That same basc income danger of course looms large in India.

India Government Set To Endorse Universal Basic Income (BI)

The Indian government is set to endorse Universal Basic Income, according to one of the leading advocates of the scheme. Professor Guy Standing, an economist who co-founded advocate group Basic Income Earth Network (BIEN) in 1986, told Business Insider that the Indian government will release a report in January which says the idea is “feasible” and “basically the way forward.” The idea behind universal basic income is simple: a regular state payment made to all citizens (one variation specifies adults), regardless of working status. Advocates say it would provide a vital safety net for all citizens and remove inefficient benefit systems currently in place; critics say it would remove the incentive for citizens to work and prove to be wildly expensive.

It has, however, attracted a growing amount of attention across the world, in both rich and developing countries. Standing, professor of development at the School for African and Oriental Studies, is considered one of the leading proponents of UBI. He has advised on numerous UBI pilot schemes, and recently returned from California, where he consulted on a $20 million trial set to launch in California this year. He was closely involved with three major pilot schemes in India — two in Madhya Pradesh, and a smaller one in West Delhi. The pilots in Madhya Pradesh launched in 2010, and provided every man, woman, and child across eight villages with a modest basic income for 18 months. Standing reports that welfare improved dramatically in the villages, “particularly in nutrition among the children, healthcare, sanitation, and school attendance and performance.”

He also says the scheme also turned out some unexpected results. “The most striking thing which we hadn’t actually anticipated is that the emancipatory effect was greater than the monetary effect. It enabled people to have a sense of control. They pooled some of the money to pay down their debts, they increased decisions on escaping from debt bondage. The women developed their own capacity to make their own decision about their own lives. The general tenor of all those communities has been remarkably positive,” he said. “As a consequence of this, the Indian government is coming out with a big report in January. As you can imagine that makes me very excited. It will basically say this is the way forward.”

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No, someone at Reuters really wrote this: “The Obama administration’s regulators and enforcement agencies have been tough on banks..” And then they printed it.

US Banks Gear Up To Fight Dodd-Frank Act’s Volcker Rule (R.)

Big U.S. banks are set on getting Congress this year to loosen or eliminate the Volcker rule against using depositors’ funds for speculative bets on the bank’s own account, a test case of whether Wall Street can flex its muscle in Washington again. In interviews over the past several weeks, half a dozen industry lobbyists said they began meeting with legislative staff after the U.S. election in November to discuss matters including a rollback of Volcker, part of the Dodd-Frank financial reform that Congress enacted after the financial crisis and bank bailouts. Lobbyists said they plan to present evidence to congressional leaders that the Volcker rule is actually bad for companies, investors and the U.S. economy. Big banks have been making such arguments for years, but the industry’s influence waned significantly in Washington after the financial crisis.

The Obama administration’s regulators and enforcement agencies have been tough on banks, while lawmakers from both parties have seized opportunities to slam Wall Street to score political points. Banks now see opportunities to unravel reforms under President-Elect Donald Trump’s administration and the incoming Republican-led Congress, which appear more business-friendly, lobbyists said. While an outright repeal of the Volcker rule may not be possible, small but meaningful changes tucked into other legislation would still be a big win, they said. “I don’t think there will be a big, ambitious rollback,” said one big-bank lobbyist who was not authorized to discuss strategy publicly. “There will be four years of regulatory evolution.” Proponents of the Volcker rule say lenders that benefit from government support like deposit insurance should not be gambling with their balance sheets. They also argue such proprietary bets worsened the crisis and drove greedy, unethical behavior across Wall Street.

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Darn Europeans. The US would be fine without them.

Wall Street Banks Have $2 Trillion European Exposure (Martens)

Just 17 days from today, Donald Trump will be sworn in as the nation’s 45th President and deliver his inaugural address. Trump is expected to announce priorities in the areas of education, infrastructure, border security, the economy and curtailing the outsourcing of jobs. But Trump’s agenda will be derailed on all fronts if the big Wall Street banks blow up again as they did in 2008, dragging the U.S. economy into the ditch and requiring another massive taxpayer bailout from a nation already deeply in debt from the last banking crisis. According to a report quietly released by the U.S. Treasury’s Office of Financial Research less than two weeks before Christmas, another financial implosion on Wall Street can’t be ruled out.The Office of Financial Research (OFR), a unit of the U.S. Treasury, was created under the Dodd-Frank financial reform legislation of 2010.

It says its role is to: “shine a light in the dark corners of the financial system to see where risks are going, assess how much of a threat they might pose, and provide policymakers with financial analysis, information, and evaluation of policy tools to mitigate them.” Its 2016 Financial Stability Report, released on December 13, indicates that Wall Street banks have been allowed by their “regulators” to take on unfathomable risks and that dark corners remain in the U.S. financial system that are impenetrable to even this Federal agency that has been tasked with peering into them. At a time when international business headlines are filled with reports of a massive banking bailout in Italy and the potential for systemic risks from Germany’s struggling giant, Deutsche Bank, the OFR report delivers this chilling statement:

“U.S. global systemically important banks (G-SIBs) have more than $2 trillion in total exposures to Europe. Roughly half of those exposures are off-balance-sheet…U.S. G-SIBs have sold more than $800 billion notional in credit derivatives referencing entities domiciled in the EU.”

When a Wall Street bank buys a credit derivative, it is buying protection against a default on its debts by the referenced entity like a European bank or European corporation. But when a Wall Street bank sells credit derivative protection, it is on the hook for the losses if the referenced entity defaults. Regulators will not release to the public the specifics on which Wall Street banks are selling protection on which European banks but just the idea that regulators would allow this buildup of systemic risk in banks holding trillions of dollars in insured deposits after the cataclysmic results of similar hubris in 2008 shows just how little has been accomplished in terms of meaningful U.S. financial reform.

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“What’s a poor bankrupt former superpower to do?” Lovely from Dmitry. Go after Saudi Arabia.

How to Make America Great Again with Other People’s Money (Orlov)

1. It all started when the US decided to leave the British Empire. This event is often portrayed as a tax revolt by rich landholders, but there is more to it than that: it allowed the former colonies to loot and plunder British holdings by funding and outfitting “privateers”—pirates, that is. This went on for quite some time.

2. Another major boost resulted from the Civil War, which destroyed the agrarian economy of the south and by so doing provided cheap labor and feedstocks to industries in the north. Plenty of people in the south are still in psychological recovery from this event, some 15 decades later. It was the first war to be fought on an industrial scale, and a fratricidal war at that. Clearly, Americans are not above turning on their own if there’s a buck or two to be made.

3. Early in the 20th century, World War I provided the US with a rich source of plunder in the form of German reparations. Not only did this fuel the so-called “roaring twenties,” but it also pushed Germany toward embracing fascism in furtherance of the long-term goal of creating a proxy to use against the USSR.

4. When in 1941 this plan came to fruition and Hitler invaded the USSR, the US hoped for a quick Soviet surrender, only joining the fray once it became clear that the Germans would be defeated. In the aftermath of that conflict, the US reaped a gigantic windfall in the form of Jewish money and gold, which fled Europe for the US. It was able to repurpose its wartime industrial production to make civilian products, which had little competition because many industrial centers of production outside of the US had been destroyed during the war.

5. After the USSR collapsed in late 1991, the US sent in consultants who organized a campaign of wholesale looting, with much of the wealth expropriated from the public and shipped overseas. This was the last time the Americans were able to run off with a fantastic amount of other people’s money, giving the US yet another temporary lease on life.

But after that the takings have thinned out. Still, the Americans have kept working at it. They destroyed Iraq, killed Saddam Hussein and ran off with quite a bit of Iraqi gold and treasure. They destroyed Libya, killed Muammar Qaddafy and ran off with Libya’s gold. After organizing the putsch in the Ukraine in 2014, shooting up a crowd using foreign snipers and forcing Viktor Yanukovich into exile, they loaded Ukrainian gold onto a plane under the cover of darkness and took that too. They hoped to do the same in Syria by training and equipping a plucky band of terrorists, but we all know how badly that has turned out for them. But these are all small fry, and the loot from them is too meager to fuel even a temporary, purely notional rekindling of erstwhile American greatness. What’s a poor bankrupt former superpower to do?

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Only point 10 of 10 in Nomi’s “My Political-Financial Road Map for 2017”. But it fits my format quite well. DO read the whole thing.

The Trump Effect Will Accentuate Unrest (Nomi Prins)

Trump is assembling the richest cabinet in the world to conduct the business of the United States, from a political position. The problem with that is several fold. First, there is a woeful lack of public office experience amongst his administration. His supporters may think that means the Washington swamp has been drained to make room for less bureaucratic decisions. But, the swamp has only been clogged. Instead of political elite, it continues business elite, equally ill-suited to put the needs of the everyday American before the needs of their private colleagues and portfolios.

Second, running the US is not like running a business. Other countries are free to do their business apart from the US. If Trump’s doctrine slaps tariffs on imports for instance, it burdens US companies that would need to pay more for required products or materials, putting a strain on the US economy. Playing hard ball with other nations spurs them to engage more closely with each other.That would make the dollar less attractive. This will likely happen during the second half of the year, once it becomes clear the Fed isn’t on a rate hike rampage and Trump isn’t as adept at the economy as he is prevalent on Twitter. Third, an overly aggressive Trump administration, combined with its ample conflicts of interest could render Trump’s and his cohorts’ businesses the target of more terrorism, and could unleash more violence and chaos globally.

Fourth, his doctrine is deregulatory, particularly for the banking sector. Consider that the biggest US banks remain bigger than before the financial crisis. Deregulating them by striking elements of the already tepid Dodd-Frank Act could fall hard on everyone. When the system crashes, it doesn’t care about Republican or Democrat politics. The last time a deregulation and protectionist businessmen filled the US presidential cabinet was in the 1920s. That led to the Crash of 1929 and Great Depression. Today, the only thing keeping a lid on financial calamity is epic amounts of artisanal money. Deregulating an inherently corrupt and coddled banking industry, already floating on said capital assistance, would inevitably cause another crisis during Trump’s first term.

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Nice.

Anti-Surveillance Clothing Aims To Hide Wearers From Facial Recognition (G.)

The use of facial recognition software for commercial purposes is becoming more common, but, as Amazon scans faces in its physical shop and Facebook searches photos of users to add tags to, those concerned about their privacy are fighting back. Berlin-based artist and technologist Adam Harvey aims to overwhelm and confuse these systems by presenting them with thousands of false hits so they can’t tell which faces are real. The Hyperface project involves printing patterns on to clothing or textiles, which then appear to have eyes, mouths and other features that a computer can interpret as a face. This is not the first time Harvey has tried to confuse facial recognition software. During a previous project, CV Dazzle, he attempted to create an aesthetic of makeup and hairstyling that would cause machines to be unable to detect a face.

Speaking at the Chaos Communications Congress hacking conference in Hamburg, Harvey said: “As I’ve looked at in an earlier project, you can change the way you appear, but, in camouflage you can think of the figure and the ground relationship. There’s also an opportunity to modify the ‘ground’, the things that appear next to you, around you, and that can also modify the computer vision confidence score.” Harvey’s Hyperface project aims to do just that, he says, “overloading an algorithm with what it wants, oversaturating an area with faces to divert the gaze of the computer vision algorithm.” The resultant patterns, which Harvey created in conjunction with international interaction studio Hyphen-Labs, can be worn or used to blanket an area. “It can be used to modify the environment around you, whether it’s someone next to you, whether you’re wearing it, maybe around your head or in a new way.”

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“The lives of patients that are lost are considered collateral damage in the conservation of power.”

Guardian Report On Ailing Greek Health System Sparks Ugly Row (Kath.)

A report by The Guardian on Sunday on the problems faced by Greece’s ailing public healthcare system has sparked an ugly war of words between Alternate Health Minister Pavlos Polakis and unionists. The row started with a social media post made by Polakis on Tuesday, in which he accuses the head of the Panhellenic Federation of Public Hospital Employees (POEDIN), Michalis Giannakos, who is extensively quoted in the report, of “despicable lies.” Polakis went on to say that Giannakos’s comments to Guardian reporter Helena Smith were “slandering to the country and the SYRIZA government, which cut off access to the chow trough and special favors,” and called the unionist a “louse.” In the same post, Polakis also suggested that local media quoting Giannakos’s “vomit-inspiring interview” were lashing out at the leftist-government for cutting advertising revenues from the Center of Disease Prevention and Control (KEELPNO).

“No one who works in a public hospital believes you anymore, just your posse of friends,” Polakis said in his comments, which were directed at Giannakos, adding that the data the unionist cited was from 2012 and no longer valid. “Your time has finished, your place is on history’s trash heap,” Polakis said. His comments prompted an equally vehement response from POEDIN on Tuesday, calling Polakis a “political miasma” and accusing Prime Minister Alexis Tsipras of appointing him “to do the dirty work.” “With his latest misspelt, badly written and delusional post on Facebook against the president of POEDIN, Mr. Polakis has once more confirmed that he is the political miasma of the country’s civil and social life,” the union said in its statement.

In the interview, Giannakos suggested that cutbacks are putting patients’ lives at risk by over-taxing dwindling staff and curbing hospitals’ access to basic necessities and equipment. “The interview in The Guardian underscores the collapse of the public health system and public hospitals. Why doesn’t the government use the publication as an opportunity in its negotiations with the lenders to exempt healthcare from the memorandums? It is clear from its reaction that the government intends to achieve high primary surpluses by the continued reduction of public healthcare spending,” POEDIN said. “The lives of patients that are lost are considered collateral damage in the conservation of power.” The union also said that it is planning to take legal action against Polakis, accusing the health official of using “degrading, insulting and wholly inappropriate” language in his post.

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Erdogan makes Greeks nervous. And mainatining your borders, like maintaining your culture, is not a bad thing. Nor will it lead to war. Quite the opposite.

The Necessity of Maintaining Borders (Kath.)

Since the failed coup in Turkey on July 15, I have been rather surprised by the silence of the country’s intellectuals, who up until recently had been very talkative. Whether they kept silent out of fear or discomfort, we should respect it. Nevertheless, Orhan Pamuk’s silence, for instance, cannot go unnoticed. The point is not to carry out direct political interventions, but to bare the essential transformations that Turkish society has gone through in the nearly 15 years that Recep Tayyip Erdogan’s Justice and Development Party (AKP) has been in power – changes that are obvious even to non-Turkish experts like myself. The mere presence (2002-17) of the same party in government for so long makes you wonder about the nature of our neighboring democracy.

I read in Monday’s Corriere della Sera that prior to the attack on Istanbul’s Reina nightclub, Turkey’s director for religious affairs, who represents the state, had accused those preparing to celebrate New Year’s Eve of being “infidels.” Meanwhile, author Burhan Sonmez told the same paper that similar complaints, regarding both Christmas and New Year’s Eve, were made by several leading AKP officials. While Turkey officially condemned the attack, on social media and elsewhere online, many defended the assassin in the name of religion. In a statement claiming responsibility for yet another mass murder, the slaughterers’ group referred to the “apostate Turkish government.” These are the same people Erdogan helped in the past but was forced to drop when he started reaching an understanding with Russia’s Vladimir Putin, abandoning the US, which is helping the Kurds and which forced him to move away from his friend Bashar al-Assad.

There is something wrong with the sultan of democracy. He now claims that Kurdish terrorism is equal to Islamic terrorism. The result of the equation is weekly massacres. How can social cohesion be maintained faced with weekly attacks on civilians from Diyarbakir to Istanbul? How much can you trust a leader who does not hide his autocratic tendencies, who has changed his country’s allies on numerous occasions in the last decade and who undermines his own military and secret service forces? Given that Greece and Europe have based their entire management of the refugee-migrant crisis on Erdogan’s word, should we start worrying? Instead of looking for frigates invading our islets, should we be looking out for dinghies flooding our cities with human despair? Until the world becomes paradise, you need borders, even those at sea.

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Sep 162015
 
 September 16, 2015  Posted by at 10:13 am Finance Tagged with: , , , , , ,  6 Responses »
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NPC Fire at S. Kanns warehouse, Washington, DC 1908

It’s highly amusing to read all the ‘expert’ theories on a Federal Reserve hike or no hike tomorrow, but it’s also obvious that nobody really has a clue, and still feel they should be heard. Don’t know if that’s so smart, but I guess in that world being consistently wrong is not that big a deal.

Thing is, US economic numbers are so ‘massaged’ and unreliable, the Fed can pick whichever way the wind blows to argue whatever decision it makes. As long as jobs numbers get presented for instance without counting the 90-odd million Americans who are not in the labor force, and a majority of new jobs are waiters, just about anything goes in that area. Numbers on wages are just as silly.

And people can make inflation a big issue, but hardly anyone even knows what inflation is. Wonder if the Fed does. It had better, because if you don’t look at spending, prices don’t tell you a thing. They surely must look at velocity of money charts from time to time?!

The biggest thing for the Fed might, and perhaps must, be the confidence factor. It’s been talking about rate hikes for so long now that if it decides to leave rates alone, it will only create more uncertainty down the road. Uncertainty about the economy (no hike would suggest a weak economy), and also about its own capabilities.

If all you have is talk, people tend to take you a lot less serious. Moreover, the abject -and grossly expensive- failure of the Chinese central bank to quiet down its domestic stock markets has raised questions about the omnipotence of all central banks.

This morning’s spectacle of a 5% rise in Shanghai in under an hour near the close no longer serves to restore confidence, it further undermines it. Beijing doesn’t seem to get that yet. But the Fed might.

No rate hike is therefore an enormous potential threat to Fed credibility. And that’s a factor it may well find much more important than a bunch of numbers it knows are mostly fake anyway. It has for years been able to fake credibility, but that is no longer all that obvious. And delaying a hike will certainly not boost that credibility.

Sure, volatility is an issue too, but volatility won’t go down on a hike delay. It’ll simply continue – and perhaps rise- until the next meeting. There’s nothing to gain there.

Besides, don’t let’s forget how crazy it is that the entire financial world is dead nervous ahead of a central bank meeting, even as everyone knows it’s all just about a decision on a very small tweak in rates.

Yellen et al are very aware of the risks of that, even if they love the limelight it brings. All that attention tells people, meeting after meeting, that the US economy is not functioning properly, no matter what the official statements say.

There are ‘experts’ talking about the dangers of emerging markets if the Fed votes Yes on a hike, but those markets are not even part of its mandate. if Yellen thinks something can be gained from pushing emerging markets and currencies down further, she’ll do just that.

Still, all this is just pussyfooting around the bush. The Fed may have noble mandates to help the real economy, but it will in the end always decide to do what’s best for Wall Street banks. And these banks could well make a huge killing off a rate hike.

They can profit from trouble and volatility in emerging markets as well as domestic markets, provided they’re well-positioned. Given that they’ve had ample time, and it’s hard to answer the question who else is in a good position, we may have an idea which wind the wind will blow.

Increasing credibility for the Fed and increasing profits for Wall Street banks. Might be a winning combination. And if Yellen is realistic about the potential for a recovery in the American economy, why would she not pick it?

Feb 232015
 
 February 23, 2015  Posted by at 7:22 am Finance Tagged with: , , , , , ,  7 Responses »
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Dorothea Lange “Men on ‘Skid Row’, Modesto, California” 1937

Before we get news in a few hours on the new proposals Greece is required to hand to its slavemasters today, Monday Feb 23, it seems relevant to point out one more time that what is happening to Greece is the result of political, not economic, decisions and points of view. One could argue that Greece is being thrown under the bus because it’s not – yet – deeply enough entangled and enmeshed in the global financial matrix. Just think back to a point Gordon Kerr of Cobden Partners made a few days ago on Bloomberg:

They [Greece] don’t have systemically important financial institutions dragging down their economy ..

In other words, Greek banks are not too big to fail. They could therefore be restructured – by the Greek government itself – without global contagion, certainly theoretically (it’s hard to pinpoint how this would turn out in practice, there are too many variables involved). And that is a major potential threat to other – European -banks, who A) could then also face calls for restructuring, and B) still have money invested in Greece. Just not that much anymore…

Bloomberg’s Mark Whitehouse showed in a piece over the weekend to what extent Germany’s banks pulled out of Greece since 2010. Thanks to the same bailouts that are now being used to try and force Greece into ever more austerity, budget cuts, depleted services and shy high unemployment.

I said it before: the decision to not restructure banks is purely political. It’s not an economic decision, though you will see everyone pretend it is, and claim the banking system(s) would collapse in case of debt restructuring and defaults on wagers. It was decided early on, 2007, that bank debts would, instead of being restructured, be transferred to public coffers. But that’s just a choice, not a necessity.

Moreover, it’s the by far worst choice, if only because it rewards gambling addicts for their behavior, at the cost of everyday people simply trying to make ends meet – and failing -. And this is self-reinforcing: the world today is firmly ruled by gambling addicts and their enablers, because they have managed to get their hands in the till. And they’re not just not planning to let go, they want more.

Here’s what happened to German bank debt in Greece:

Why Germany Might Not Be Bluffing in Greece

As Europe’s high-stakes debt negotiations with Greece reach an impasse, Germany has appeared surprisingly willing to drive the country out of the euro, regardless of the potentially dire repercussions for Italy, Portugal, Spain and the entire currency union. One possible explanation for Germany’s brinkmanship: Its banks have a lot less to lose than they once did. When the European debt crisis first flared up in 2010, Germany’s finances were closely linked to those of the euro area’s more economically fragile members. Its banks’ claims on Greece, Italy, Portugal and Spain – including money lent to governments and companies – amounted to more than €350 billion, about equal to all the capital in the German banking system.

If the periphery countries had forced losses on private creditors, which they arguably should have done, Germany would have had to recapitalize its banks or face an immediate meltdown.

The picture is very different now. The ECB, the IMF and other taxpayer-backed creditors have pumped hundreds of billions of euros of loans into the periphery countries, making it possible for German banks to extract themselves with minimal damage.

Thanks in part to this back-door rescue, the banks have also been able to raise some capital. As a result, they are in much better shape to withstand a Greek disaster. As of September 2014, their claims on Greece, Italy, Portugal and Spain had declined to about €216 billion, or 46% of capital. The upshot: Greece is left with more debt than it can pay, and Germany – with its banks effectively bailed out – has one less pressing reason to give Greece a break. Hardly the right incentives for a happy ending.

Merkel and Schäuble decided to save Wall Street mogul and derivatives behemoth Deutsche Bank at the cost of the Greek people. Not for economic reasons, but because Deutsche has much more political power inside the European Union than the entire Greek nation. Now you know what’s so inherently wrong in that union. Same story for France, where BNP, SocGen and Crédit Agricole had humongous amounts of debt outstanding in Athens. Where’s all that debt now, where’s it gone? Well, check your wallet.

When the decision came to throw either their own biggest banks, or the grandmas of a co-member nation of the currency union under the bus, I don’t think they even hesitated; they probably only went looking for the most efficient way to do it. And they have control over the perfect vehicle for such tasks: the ECB. A allegedly neutral institution that in reality peddles political influence in a way that guarantees the poorer countries will always wind up footing the bill.

And now that the systemic risk that Greece still might have been is effectively gone, and the debt has been transferred to the union’s bottom dwellers, Merkel and Schäuble can talk tough to Greece. Even if it wasn’t the Greeks that created this mess, it was Merkel and the Frankfurt bank CEO’s she confers with on a daily basis.

Banks are more important than people, certainly grandmas. That’s true on Wall Street, and it‘s true all over Europe. But it’s still just a political decision. And one that could be reversed as easily as it was taken. Which it what the paymasters find so scary about Syriza.

For those of you who don’t want to wake up one day to find their own grandmas crushed under the same bus the Greek yiayia’s are under as we speak, it would be beneficial to ponder how perverse this all is, not just the isolated events but the entire underlying system that produces them. And you support this perversity. And don’t fool yourself into thinking that the system won’t come for your grandma too. If you think that, you simply don’t understand how it works.

Feb 052015
 
 February 5, 2015  Posted by at 11:40 pm Finance Tagged with: , , , , , , , ,  13 Responses »
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Harris&Ewing Washington snow scenes April 1924

With all the media focus aimed at Greece, we might be inclined to overlook – deliberately or not – that it is merely one case study, and a very small one at that, of what ails the entire world. The whole globe, and just about all of its 200+ nations, is drowning in debt, and more so every as single day passes. Not only is this process not being halted, it gets progressively, if not exponentially, worse. There are differences between countries in depth, in percentages and other details, but at this point these seem to serve mostly to draw attention away from the ghastly reality. ‘Look at so and so, he’s doing even worse than we are!’

Still, though there are plenty accounting tricks available, you’d be hard put to find even one single nation of any importance that could conceivably ever pay back the debt it’s drowning in. That’s why we’re seeing the global currency war slash race to the bottom of interest rates.

Greece is a prominent example, though, simply because it’s been set up as a test case for how far the world’s leading politicians, central bankers, bankers as well as the wizards behind the various curtains are prepared to go. And that does not bode well for you either, wherever you live. Greece is a test case: how far can we go?

And I’ve made the comparison before, this is what Naomi Klein describes happened in South America, as perpetrated by the Chicago School and the CIA, in her bestseller Shock Doctrine. We’re watching the experiment, we know the history, and we still sit our asses down on our couches? Doesn’t that simply mean that we get what we deserve?

Here’s McKinsey’s debt report today via Simon Kennedy at Bloomberg:

A World Overflowing With Debt

The world economy is still built on debt. That’s the warning today from McKinsey’s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product.

While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. Government debt alone has swelled by $25 trillion over the past seven years and developing economies are responsible for almost half of the overall gain. McKinsey sees little reason to think the trajectory of rising leverage will change any time soon. Here are three areas of particular concern:

1. Debt is too high for either austerity or growth to cure. Politicians will instead need to consider more unorthodox measures such as asset sales, one-off tax hikes and perhaps debt restructuring programs.

2. Households in some nations are still boosting debts. 80% of households have a higher debt than in 2007 including some in northern Europe as well as Canada and Australia.

3. China’s debt is rising rapidly. Thanks to real estate and shadow banking, debt in the world’s second-largest economy has quadrupled from $7 trillion in 2007 to $28 trillion in the middle of last year. At 282% of GDP, the debt burden is now larger than that of the U.S. or Germany. Especially worrisome to McKinsey is that half the loans are linked to the cooling property sector.

Note: Chinese total debt rose $20.8 trillion in 7 years, or 281%. And we’re talking about Greece as a problem?! You’d think – make that swear – that perhaps Merkel and her ilk have bigger fish to fry. But maybe they just don’t get it?!

Ambrose has this earlier today, just let the numbers sink in:

Devaluation By China Is The Next Great Risk For A Deflationary World

China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years, that they cannot deflate a credit bubble safely. A year of tight money from the People’s Bank and a $250bn crackdown on shadow banking have pushed the Chinese economy close to a debt-deflation crisis. Wednesday’s surprise cut in the Reserve Requirement Ratio (RRR) – the main policy tool – comes in the nick of time. Factory gate deflation has reached -3.3%.

The official gauge of manufacturing fell below the “boom-bust” line to 49.8 in January. Haibin Zhu, from JP Morgan, says the 50-point cut in the RRR from 20% to 19.5% injects roughly $100bn into the system. This will not, in itself, change anything. The average one-year borrowing cost for Chinese companies has risen from zero to 5% in real terms over the past three years as a result of falling inflation.

UBS said the debt-servicing burden for these firms has doubled from 7.5% to 15% of GDP. Yet the cut marks an inflection point. There will undoubtedly be a long series of cuts before China sweats out its hangover from a $26 trillion credit boom. Debt has risen from 100% to 250% of GDP in eight years. By comparison, Japan’s credit growth in the cycle preceding its Lost Decade was 50% of GDP.

Wednesday’s trigger was an amber warning sign in the jobs market. The employment component of the manufacturing survey contracted for the 15th month. Premier Li Keqiang targets jobs – not growth – and the labour market is looking faintly ominous for the first time. Unemployment is supposed to be 4.1%, a make-believe figure. A joint study by the IMF and the International Labour Federation said it is really 6.3% [..]

Whether or not you call it a hard-landing, China is struggling. Home prices fell 4.3% in December. New floor space started has slumped 30% on a three-month basis. This packs a macro-economic punch. A study by Jun Nie and Guangye Cao for the US Federal Reserve said that since 1998 property investment in China has risen from 4% to 15% of GDP, the same level as in Spain at the peak of the “burbuja”. The inventory overhang has risen to 18 months compared with 5.8 in the US.

The property slump is turning into a fiscal squeeze since land sales make up 25% of local government money. Zhiwei Zhang, from Deutsche Bank, says land revenues crashed 21% in the fourth quarter of last year. “The decline of fiscal revenue is the top risk in China and will lead to a sharp slowdown,” he said.

Asia is already in a currency cauldron, eerily like the onset of the 1998 crisis. The Japanese yen has fallen by half against the Chinese yuan since Abenomics burst upon the Pacific Rim. Japanese exporters pocketed the windfall gains of devaluation at first to boost margins. Now they are cutting prices to gain export share, exporting deflation.

This is eroding the wafer-thin profit margins of Chinese companies and tightening monetary conditions into the downturn. David Woo, from Bank of America, says Beijing may be forced to join the currency wars to defend itself, even though this variant of the “Prisoner’s Dilemma” leaves everybody worse off. “We view a meaningful yuan devaluation as a major tail-risk for the global economy,” he said.

If this were to happen, it would send a deflationary impulse worldwide. China spent $5 trillion on fixed investment last year, more than Europe and America combined, increasing its overcapacity in everything from shipping to steels, chemicals and solar panels , to even more unmanageable levels. A yuan devaluation would dump this on everybody else. Such a shock would be extremely hard to combat. Interest rates are already zero across the developed world. Five-year bond yields are negative in six European countries. The 10-year Bund has dropped to 0.31. These are no longer just 14th century lows. They are unprecedented.

[..] .. helicopter money, or “fiscal dominance”, may be dangerous, but not nearly as dangerous as the alternative. China faces a Morton’s Fork. Li Keqiang has been trying for two years to tame the state’s industrial behemoths, and trying to wean the economy off credit. Yet virtuous intent has run into cold reality. It cannot be done. China passed the point of no return five years ago.

That ain’t nothing to laugh at. But still, Malcolm Scott has more for Bloomberg:

Pushing on a String? Two Charts Showing China’s Dilemma

Is China’s latest monetary easing really going to help? While economists see it freeing up about 600 billion yuan ($96 billion), that assumes businesses and consumers want to borrow. This chart may put some champagne corks back in. It shows demand for credit is waning even as money supply continues its steady climb.

The reserve ratio requirement cut “helps to raise loan supply, but loan demand may remain weak,” said Zhang Zhiwei, chief China economist at Deutsche Bank. “We think the impact on the real economy is positive, but it is not enough to stabilize the economy.” This chart may also give pause. It shows the surge in debt since 2008, which has corresponded with a slowdown in economic growth.

Note: Social finance is, to an extent, just another word for shadow banking.

“Monetary stimulus of the real economy has not worked for several years,” said Derek Scissors, a scholar at the American Enterprises Institute in Washington who focuses on Asia economics. “The obsession with monetary policy is a problem around the world, but only China has a money supply of $20 trillion.”

China now carries $28 trillion in debt, or 282% of its GDP, $20 trillion of which was added in just the past 7 years. It’s also useful to note that it boosted its money supply to $20 trillion. What part of these numbers includes shadow banking, we don’t know – even if social finance can be assumed to include an X amount of shadow funding-. However, there can be no doubt that China’s real debt burden would be significantly higher if and when ‘shadow debt’ would be added.

Ergo: whether it’s tiny Greece, or behemoth China, or any given nation in between, they’re all in debt way over their heads. One might be tempted to ponder that debt restructuring would be worth considering. A first step towards that would be to look at who owes what to whom. And, of course, who profits. When it comes to Greece, that’s awfully clear, something you may want to consider next time you think about who’s squeezing who. From the Jubilee Debt Campaign through Telesur:

That doesn’t leave too many questions, does it? As in, who rules this blue planet?! That also tells you why there won’t be any debt restructuring, even though that is exactly what this conundrum calls for. Debt is a power tool. Debt is how the Roman Empire managed to stretch its existence for many years, as it increasingly squeezed the periphery. And then it died anyway. Joe Stiglitz gives it another try, and in the process takes us back to Greece:

A Greek Morality Tale: We Need A Global Debt Restructuring Framework

At the international level, we have not yet created an orderly process for giving countries a fresh start. Since even before the 2008 crisis, the UN, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework. But the US is adamantly opposed; perhaps it wants to reinstitute debtor prisons for over indebted countries’ officials (if so, space may be opening up at Guantánamo Bay).

The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability. There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others. This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors?

If there is a moral hazard, it is on the part of the lenders – especially in the private sector – who have been bailed out repeatedly. If Europe has allowed these debts to move from the private sector to the public sector – a well-established pattern over the past half-century – it is Europe, not Greece, that should bear the consequences. Indeed, Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it. So it is not debt restructuring, but its absence, that is “immoral”.

There is nothing particularly special about the dilemmas that Greece faces today; many countries have been in the same position. What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.

You can put it down to technical or structural issues, but down the line none of that will convince me. Who cares about talking about technical shit when people are suffering, without access to doctors, and/or dying, in a first world nation like Greece, just so Angela Merkel and Mario Draghi and Jeroen Dijsselbloem can get their way?

Oh, no, wait, that graph there says it’s not them, it’s Wall Street that gets their way. It’s the world’s TBTF banks (they gave themselves that label) that get to call the shots on who lives in Greece and who does not. And they will never ever allow for any meaningful debt restructuring to take place. Which means they also call the shots on who lives in Berlin and New York and Tokyo and who does not. Did I mention Beijing, Shanghai, LA, Paris and your town?

Greece’s problem can only be truly solved if large scale debt restructuring is accepted and executed. But that would initiate a chain of events that would bring down the bloated zombie that is Wall Street. And it just so happens that this zombie rules the planet.

We are all addicted to the zombie. It allows us to fool ourselves into thinking we are doing well – well, sort of -, but the longer term implications of that behavior will be devastating. We’re all going to be Greece, that’s inevitable. It’s not some maybe thing. The only thing that keeps us from realizing that is that the big media outlets have become part of the same industry that Wall Street, and the governments it controls, have full control over.

And that in turn says something about the importance of what Yanis Varoufakis and Syriza are trying to accomplish. They’re taking the battle to the finance empire. And it should not be a lonely fight. Because if the international Wall Street banks succeed in Greece, some theater eerily uncomfortably near you will be next. That is cast in stone.

As for the title, it’s obviously Marquez, and what better link is there than Wall Street and cholera?

Jan 312015
 
 January 31, 2015  Posted by at 11:47 pm Finance Tagged with: , , , ,  13 Responses »
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DPC Grand Central Station and Hotel Manhattan, NY 1903

On the one hand, I’ve written so much about Greece lately I fear I’m reaching overkill. On the other hand, there’s so much going on with Greece, and so fast, that I wouldn’t know here to begin. Moreover, I’m thinking and trying to figure what is what and what is actually happening so much it’s hard to stay focused for more than a short while before something else happens again and it all starts all over. And I’m thinking it must feel that way for the Syriza guys as well.

One thing I do increasingly ponder is that it gets ever harder to see the eurozone survive. In its present shape and form, that is. Damned if you do, doomed if you don’t, is an expression I’ve used before. It’s like this big experiment that a bunch of power hungry Europeans really get off on, that now all of a sudden is confronted with the democracy they all only thought existed in books of history anymore.

But if you take your blind hunger far enough to kill people, or ‘only’ condemn them to lives of misery, they will eventually try to speak up, even if not nearly soon enough. It’s like a law of physics, or like Icarus in, yes, Greek mythology: try to reach too high, and you’ll find you can’t.

What is Brussels supposed to do now? Throw Athens off a cliff? Not respect the voice of the Greek people? That doesn’t really rhyme with the ideals of the union, does it? If they want to keep the euro going, they’re going to have to give in to a probably substantial part of what Syriza is looking for. Or Greece will leave the eurozone, and bust it wide open, exposing its failures, its lack of coherence, and especially its lack of democratic and moral values.

The problem with giving in, though, is that there are large protest demonstrations in Spain and Italy too. Give anything at all to Greece, and the EU won’t be able to avoid giving it to others as well. And by then you’re talking real money.

They called it upon themselves. They got too greedy. They thought those starving Greek grannies would not be noticed enough to derail their big schemes. That claiming “much progress has been made”, as Eurogroup head Dijsselbloem did again this week, would be considered more important than the fact that an entire eurozone member nation has been thrown into despair.

That’s a big oversight no matter how you put it. The leadership can be plush and comfy in Berlin, Paris, Helsinki, but that doesn’t excuse them sporting blinders. And now they know. Or, let’s say, are beginning to know, because they still think they can ‘win this battle’, ostensibly with the aim of deepening the Greek misery even further, while continuing to proclaim that “much progress has been made”.

Not very smart. At least that much is obvious. But what else is? Greek Finance Minister Varoufakis declares in front of a camera that Greece ever paying back its full debt is akin to the Santa Claus story. Less than 24 hours later, PM Tsipras says of course Greece will pay back its debt. Varoufakis lashed out about Syriza not being consulted on EU sanctions against Russia, but shortly after their own Foreign Minister was reported to have said he reached a satisfactory compromise on the sanctions with his EU peers.

Discontent, confusion, or something worse, in the ranks? Hard to tell. What we can tell, however, is that the obvious discomfort with Dijsselbloem, Draghi, and the entire apparatus in Brussels – and Frankfurt – is a fake move. Either that or it’s only foreplay. If Yanis and Alexis want to get anywhere, they’ll need to take on Wall Street and its international, American, French, German, TBTF banks, primary dealers. And if there’s one thing those guys don’t like, it’s democracy.

Syriza is not really up against the EU or ECB, or the Troika, that’s a sideshow. They’re taking the battle to the IMF, a sort of silent partner in the Troika, and the organization that rules the world for the rich and the banks they own. And that, if they had paid a bit more attention and a bit less hubris, could have gone on the way they have, small squeeze after small squeeze, without hardly anyone noticing, until the end of – this – civilization. But no. It had to be more.

It’s going to be a bloody battle. And it hasn’t even started yet. But kudos to all Greeks for starting it. It has to be done. And I don’t see how the euro could possibly survive it.

Jan 292015
 
 January 29, 2015  Posted by at 6:49 pm Finance Tagged with: , , , , , , ,  8 Responses »
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Edwin Rosskam Shoeshine, 47th Street, Chicago’s main Negro business street 1941

First off, no, I don’t think Syriza is a problem, I just couldn’t resist the Sound of Music link once it popped into my head, as in ‘headlines you can sing’. I think Syriza may well be a solution, if it plays its cards right. But that still leaves politicians and investors denominating Tsipras et al as a problem, if not a menace. Now, investors may not need to possess any moral values – though things would probably have been much better if that were a requirement -, but you can’t say the same for politicians. Politics is supposed to BE about moral values.

And supporting Samaras and his technocrat oligarchy, as has been the EU/Troika policy, doesn’t exactly show a high moral standard. Not just because trying to influence an election is an no-go aberration (though it’s so common in the EU you’d almost forget that), but certainly also because of what Samaras and the EU have done to the Greek people over the past few years. And neither does it show in what happens now, where the Greeks, steeped in Troika-induced misery as they are, are labeled greedy bastard cheats.

Since the EU lies as much about Greece as it does about Russia, it’s only fitting that the former should speak out for the latter. And it’s deliciously easy: the EU wants to step up sanctions against Russia (because the Ukraine shelled Mariupol?!), but EU sanctions decisions require unanimity. Since Greek-Russian relations have historically been close, Syriza resisting ever tighter sanctions should be no surprise.

At the end of the day, European taxpayers shouldn’t be angry at Greece, no matter how much their media try to stoke that anger, but at their own banks, governments and central banks. Things pertaining to Greece and its debt are not at all what they seem. Most of it is just another narrative originating in Brussels, Frankfurt and the financial media cabal. Not much is left of this narrative if we dig a little deeper. This from Mehreen Khan for the Telegraph today may be a little ambivalent in what it points to, but it certainly puts the Greek debt in a different light from the ‘official’ one:

Three Myths About Greece’s Enormous Debt Mountain

€317bn. Over 175% of national output. That’s the enormous debt mountain that faces the new Greek government. It is the issue over which the country is set to clash with other countries in the eurozone. As it stands, Greece’s debt-to-GDP ratio is the highest in the currency bloc. It has been steadily rising as the country has undergone painful austerity and experienced a severe contraction in economic output. The new far-left/right-wing coalition is now demanding a write-off of up to 50% of its liabilities. The government argues that this is the only way Greece can remain in the single currency and prosper.

According to the newly appointed finance minister, who first coined the term “fiscal waterboarding” to describe Greece’s plight, the EU has loaded “the largest loan in human history on the weakest of shoulders – the Greek taxpayer”. So far, the rest of the eurozone is adamant that it will not meet demands for debt forgiveness. And yet, the value of Greece’s debt mountain has been called a meaningless “accounting fiction” by Nobel laureate Paul Krugman. So what does Greece’s €317bn debt really mean for the country and its creditors? And can it ever be paid back?

Myth 1: They can never pay it back. Ever. Never say never. On the issue of repaying back its liabilities, it’s more a question of time, rather than money. Greece has already been the beneficiary of a number of debt extensions, and in 2012, underwent the biggest private sector debt restructuring in history. The average maturity on Greek government debt currently stands at 16.5 years. The sustainability, or otherwise, of the country’s burden relies more on the timetable for repayment rather than the overall stock of the debt, argue many economists. The chart below shows the repayment schedule on the country’s €245bn rescue package and extends all the way out to 2054.


Source: Hellenic Republic Public Debt Bulletin

Although the question of cancelling any portion of the principal owed to Greece’s creditors seems to be a firm no-go area, the idea of further debt extensions could be an option. But as noted by Ben Wright, allowing Greece more time to payback its loans is still a fiscal transfer in all but name.

Myth 2: Greece is paying punitive interest rates. Not really. Greece has managed to negotiate favourable terms on which it can service the cost of its loans and the interest paid by the country is far below that of Spain, Ireland, and Portugal (see chart below). Think-tank Bruegel calculates that Greece paid a sum equal to around 2.6% of its GDP (rather than the widely quoted figure of around 4%) to service its loans last year. This is because Greece will actually receive back the interest it pays to the ECB should it continue to meet its bail-out conditions.

Even without a further renegotiation on interest payments, the costs could be even lower this year. In the words of economist Zolst Darvas from Bruegel:

Given that interest rates have fallen significantly from 2014, actual interest expenditures of Greece will be likely below 2% of GDP in 2015, if Greece will meet the conditions of the bail-out programme.

It is this combination of such long maturities and rock-bottom interest rates, that has led at least one former ECB governing board member to argue that Greece’s debt burden is far more sustainable than many of its southern neighbours.


Who owns Greek debt? (Source: Open Europe)

Myth 3: Greece won’t recover without debt forgiveness. Wrong again. For all the fixation on the outstanding stock of Greek debt, kickstarting growth in the country is more likely to happen through a relaxation of budget rules rather than a debt cancellation. With the coffers looking sparse, the Syriza-led government is also asking for a renegotiation of the surplus rules imposed on the country. Greece is currently required to run a primary surplus of 4.5% of its GDP. Before taking account of its debt interest payments, it is likely to achieve a primary budget surplus of around 3% of its national output this year. This severely limits the new government’s room for fiscal manoeuvre. It also makes it almost impossible for Syriza to fulfil its pre-election promises to raise the minimum wage and create public sector jobs.

According to calculations from Paul Krugman:

Dropping the requirement that Greece run a primary surplus of 4.5% of GDP would allow spending to rise by 9% of GDP, and that this would raise GDP by 12% relative to what it would have been otherwise. Unemployment would fall by around 10% relative to no relief.

None of this is to deny that Greece would hugely benefit from a significant debt cancellation. But the politics of the eurozone means that this is virtually impossible. However, there do seem to be other ways that Greece could start tackling its enormous debt mountain.

And if that is not enough to change your mind about what the reality is in the Greek debt situation, David Weidner at MarketWatch has more, from an entirely different angle, that nevertheless hammers the official narrative just as much, if not more. Weidner refers to work by French economist Eric Dor, as cited by Mish Shedlock last week. What Dor contends is that a very substantial part of Greece’s debt to EU taxpayers was nothing but Wall Street wagers gone awry.

Not exactly something one can blame the Greeks in the street for, just perhaps the elite and oligarchy. Instead of restructuring their banks, the richer nations of Europe, like the US, decided to transfer their gambling losses to the people’s coffers. And though there are all kinds of reasons provided, which even Weidner suggests may be ‘genuine’, not to restructure a banking system, in the end it is a political choice made by those who owe their power to those same banks.

The result has been that Greece was saddled with so much debt, they had to borrow even more, and the Troika could come in and unleash a modern day chapter of the Shock Doctrine. How convenient.

How Wall Street Squeezed Greece – And Germany

Europe’s political leaders and bankers would have you believe that the conflict between Greece and the European Union is a tug of war between a deadbeat nation and its richer ones who have come to the debtor’s aid time and time again. Instead, what most of these leaders miss is that it’s a bank bailout in plain view.

What’s really happened is that since Greece ran into serious trouble repaying its debts four years ago, Germany, France and the EU have instituted what can only be described as a massive bailout of its own financial system – shifting the burden from banks to taxpayers. Last week, Mike Shedlock republished research by Eric Dor, a French business school director, and it shows the magnitude of the shift. To put it simply, German taxpayers are on the hook for roughly $40 billion in Greek debt. German banks? Just $181 million, though they do hold $5.9 billion in exposure to Greek banks. Those numbers are a flip-flop from where things stood less than five years ago.

German banks were heavily exposed to Greek debt when the crisis began, but they’ve been bailed out and now German taxpayers are on the hook. French banks were similarly bailed out by the European Union.

This massive shift from private gains to public losses was done through the European Financial Stability Facility. Created in 2010, this was the European Union’s answer to the U.S. Troubled Asset Relief Program, the Treasury Department’s 2008 bailout program. There are some differences. The EFSF issues bonds, for instance, but the principle is the same. Governments buy bad bank debt and hold it on the public’s books.

The terms set by the EFSF are basically what’s at issue when we hear about Greece’s new government being opposed to austerity in their nation. The Syriza victory, which was a sharp rebuke to the massive cost-cutting in government spending, including pensions and social welfare costs, drew warnings from leaders across Europe. “Mr. Tsipras must pay, those are the rules of the game, there is no room for unilateral behavior in Europe, that doesn’t rule out a rescheduling of the debt,” ECB’s Benoît Coeuré said.

“If he doesn’t pay, it’s a default and it’s a violation of the European rules.” British Prime Minister David Cameron’s Twitter account said, the Greek election results “will increase economic uncertainty across Europe.” And Jens Weidmann, president of the German central bank, warned the new ruling party that it “should not make promises that the country cannot afford.” Those sound like very threatening words. And one wonders if these same officials made the same tough statements to Deutsche Bank, Commerzbank, Credit Agricole or SocGen when they were faced with potentially billions in losses when the banks were holding Greek debt.

European leaders such as Angela Merkel in Germany, Francois Hollande in France and Finnish Prime Minister Alexander Stubb have been eager to beat down Greece and stir broader support at home by making it an us-against-them game. Not to deny that Greece’s financial troubles do threaten the European Union, but today’s crisis pitting nation against nation was created by these leaders in an effort to minimize losses at their biggest lending institutions. Perhaps the move to shift Greek liabilities to state-owned banks (Germany’s export/import bank holds $17 billion in Greek debt) was necessary, but that doesn’t make it fair, or the right thing to do. Europe, like the United States, seems to be at the beck and call of its financial industry.

Michael Hudson recognized this early on. In 2011 he wrote that in Europe there is a belief “governments should run their economies on behalf of banks and bondholders. “They should bail out at least the senior creditors of banks that fail (that is, the big institutional investors and gamblers) and pay these debts and public debts by selling off enterprises, shifting the tax burden onto labor. To balance their budgets they are to cut back spending programs, lower public employment and wages, and charge more for public services, from medical care to education.”

Yes, Greece overspent. But to do so, someone had to overlend. German and French banks did so because of an implicit guarantee by the EU that all nations would stick together. Well, the bankers and politicians have stuck together. Everyone else seems to be on their own. Merkel and the austerity hawks of Europe who won’t share the responsibility for a system’s failure are doing the bidding of banks. At least in Greece, the lawmakers are put into power by the people.

And that still leaves unaddressed that Greece as a whole may have overspent and -borrowed, but it was the elite that was responsible for this, egged on by the likes of Goldman Sachs, whose involvement in the creative accounting that got Greece accepted into the EU, as well as the derivatives that are weighing down the nation as we speak, is notorious.

The world’s major banks got rich off the back of the Greek population at large, and when their wagers got so absurd they collapsed, the banks saw to it that their losses were transferred to European -and American – taxpayers. And those taxpayers are now told to vent their anger at those cheating, lazy Greeks, who are actually notoriously hard workers, who have doctors prostituting themselves, and many of whom have no access to the health care those same doctors should be providing, and whose young people have no future to speak of in their own magnificently beautiful nation.

The Troika, the EU, the IMF, and the banks whose sock puppets they have chosen to be, are a predatory force that has come a long way towards wiping Greece off the map. And we, whether we’re European or American, are complicit in that. It’s Merkel and Cameron etc., who have allowed for their banks to transfer their casino losses to the – empty – pockets of the Greeks, and of all of us. That is the problem here.

And that’s what Syriza has set out to remediate. And for that, they deserve, and probably will need, our unmitigated support. It’s not the Greek grandmas (they’re dying because they have no access to a doctor) who made out like bandits here. It’s the usual suspects, bankers and politicians. And you and I, too, are eerily close to being the usual suspects. We should do better. Or else we are dead certain of being next in line.

Jan 282015
 
 January 28, 2015  Posted by at 11:24 am Finance Tagged with: , , , , , , , , ,  5 Responses »
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Harris&Ewing “Street scene with snow, F STreet Washington, DC” 1918


Why Europe Will Cave to Greece (Bloomberg)
Can Europe Resist Greek Demands For A Debt Haircut? (CNBC)
How Wall Street Squeezed Greece – And Germany (MarketWatch)
Five Things Syriza Wants To Change (BBC)
Greece’s Coming Clash in Europe Starts With Russia Sanctions (Bloomberg)
Greek Finance Minister Varoufakis: ‘End The Vicious Cycle’ (CNBC)
Greek PM Alexis Tsipras Unveils Cabinet Of Mavericks And Visionaries (Guardian)
Stiglitz: Germany’s The Problem, Not Greece (CNBC)
Germany’s Top Institutes Push ‘Grexit’ Plans As Showdown Escalates (AEP)
Why Aren’t Markets Panicking About Greece? (BBC)
New Greek PM Finds Official Residence Strippped Bare By Predecessor (Guardian)
Orders for US Durable Goods Fell in December for Fourth Month (Bloomberg)
ECB Bond Buying Makes Fed Rate Increase More Likely (Bloomberg)
Obama Proposes Offshore Oil Drilling From Virginia to Georgia (Bloomberg)
Crude at $49: The New Reality for Big Oil Companies (Bloomberg)
He Called $50 Oil, Now He Says It’s Going Lower (MarketWatch)
France ‘Proves’ Q€ Is Entirely Useless (Zero Hedge)
Syriza’s ‘Bella Ciao’ Casts Shadow Over Italy President Vote (Bloomberg)
Portugal Repays IMF Early; Greece Prepares Fight (Bloomberg)
Singapore Surprises With Easing, Clubbing Currency (CNBC)
Subprime Bonds Are Back With Different Name 7 Years After US Crisis (Bloomberg)
Looming Recession Will Be “Remembered For 100 Years”: Crispin Odey (Zero Hedge)

“What surprises me is that this all-or-nothing positioning takes anybody in. Debts are debts? Please.”

Why Europe Will Cave to Greece (Bloomberg)

A prediction for you: Greece and the European Union will split the difference in their quarrel over debt relief. What’s uncertain is how their respective governments will justify the new deal, and how much damage they’ll inflict on each other before accepting the inevitable. EU governments, with Germany in the lead, are saying that debt writedowns are out of the question. Debts are debts. Greece’s newly elected leader, Alexis Tsipras, calls the current settlement “fiscal waterboarding” and says his country faces a humanitarian crisis. His government won’t pay and wants much of the debt written off. Neither side is willing to give way. What surprises me is that this all-or-nothing positioning takes anybody in. Debts are debts? Please. Europe’s governments have already provided debt relief to Greece. (In that process, private creditors saw their loans written down; most of what remains is owed to governments.)

However, the plan hasn’t worked. Greece’s fiscal position was so bad that the haircuts, reschedulings and interest-rate concessions weren’t sufficient to restore its creditworthiness. At the same time, thanks to slower-than-expected growth, the fiscal conditions tied to the settlement proved harsher than intended. Greek voters have just repudiated those terms. In other words, the existing settlement has failed. It therefore needs to be revised. No conceptual revolution is required. This conclusion follows from the same kind of analysis that EU governments have already relied on. For sure, granting additional debt relief has drawbacks – just as there were drawbacks to granting debt relief in the first place. It sends a bad message; it encourages bad behavior in future; it will inflame resentment among voters in other EU countries.

That’s why it’s a good idea, so far as possible, to make relief conditional on efforts to behave responsibly. But the likely consequences of any EU refusal to budge are much worse. There’s a serious risk that Greece will default unilaterally. This would not be in Greece’s interests, but it’s too close a call for comfort. The existing settlement will require the government to run primary budget surpluses (that is, excluding interest payments) in the neighborhood of 4% of GDP That means that if Greece defaulted, it could cut taxes or raise public spending substantially without needing to borrow. The downside of default would be huge – possible ejection from the euro system. That would be a calamity for Greece and, because of the risk of contagion, for the rest of the euro area as well. Nonetheless, if the EU offers Tsipras nothing, that’s how things could turn out.

Read more …

“.. to bring its debts down to 60% of GDP – in order to meet the terms of the fiscal compact – Greece would require a primary surplus (where government income exceeds spending) of 9% (of GDP).”

Can Europe Resist Greek Demands For A Debt Haircut? (CNBC)

As Greece’s new Prime Minister Alexis Tsipras settles into running government, euro zone leaders have rushed to dismiss talk of any haircut or forgiveness of Greek debt, but economists are already wondering how long Europe’s resistance can last. Tsipras became prime minister after his party won a snap general election on Sunday, dramatically ousting the New Democracy party and its leader Antonis Samaras from power. Samaras oversaw tough austerity measures that were imposed as part of a 240 billion euro ($271 billion) bailout terms agreed with the so-called troika, comprising the European Commission, International Monetary Fund and European Central Bank.

The left-wing party Syriza – which is joined in a coalition government by the right-wing Independent Greeks party – has said it will repeal unpopular austerity measures, rehire fired public sector workers and aim to get lenders to write off a third of Greece’s debt. Despite euro zone resistance to such a demand, the region’s leaders might not have much of a choice, according to economist Philippe Legrain. “Really, Greece needs a haircut,” Legrain, a former economic advisor to the President of the European Commission, told CNBC Tuesday. “Greece’s debts are unsustainably large.” On Monday, euro zone leaders did not delay in making their feelings on any possible debt haircut known to Syriza.

The head of the European Commission, Jean-Claude Juncker, reminded Tsipras of the need to “ensure fiscal responsibility” while German Finance Minister Wolfgang Schaeuble ruled out a debt haircut for Greece on Monday, telling ARD Television that Greece was not “overburdened by its debt servicing,” as Syriza argue. However, Legrain dismissed Scheuble’s comments as “propaganda” and criticized the Berlin government for “saying that this is somehow a bearable burden and that the interest costs are low. But to bring its debts down to 60% of GDP – in order to meet the terms of the fiscal compact – Greece would require a primary surplus (where government income exceeds spending) of 9% (of GDP).”

Read more …

“Europe, like the United States, seems to be at the beck and call of its financial industry.”

How Wall Street Squeezed Greece – And Germany (MarketWatch)

Europe’s political leaders and bankers would have you believe that the conflict between Greece and the European Union is a tug of war between a deadbeat nation and its richer ones who have come to the debtor’s aid time and time again. Instead, what most of these leaders miss is that it’s a bank bailout in plain view. What’s really happened is that since Greece ran into serious trouble repaying its debts four years ago, Germany, France and the EU have instituted what can only be described as a massive bailout of its own financial system — shifting the burden from its banks to taxpayers. Last week, asset manager Mike Shedlock republished research by Eric Dor, a French business school director, and it shows the magnitude of the shift. To put it simply, German taxpayers are on the hook for roughly $40 billion in Greek debt. German banks? Just $181 million, though they do hold $5.9 billion in exposure to Greek banks. Those numbers are a flip-flop from where things stood less than five years ago.

This massive shift from private gains to public losses was done through the European Financial Stability Facility. Created in 2010, this was the European Union’s answer to the U.S. Troubled Asset Relief Program, the Treasury Department’s 2008 bailout program. There are some differences. The EFSF issues bonds, for instance, but the principle is the same. Governments buy bad bank debt and hold it on the public’s books. The terms set by the EFSF are basically what’s at issue when we hear about Greece’s new government being opposed to austerity in their nation. The Syriza victory, which was a sharp rebuke to the massive cost-cutting in government spending, including pensions and social welfare costs, drew warnings from leaders across Europe. “Mr. Tsipras must pay, those are the rules of the game, there is no room for unilateral behavior in Europe, that doesn’t rule out a rescheduling of the debt,” ECB’s Benoît Coeuré said.

“If he doesn’t pay, it’s a default and it’s a violation of the European rules.” British Prime Minister David Cameron’s Twitter account said, the Greek election results “will increase economic uncertainty across Europe.” And Jens Weidmann, president of the German central bank, warned the new ruling party that it “should not make promises that the country cannot afford.” Those sound like very threatening words. And one wonders if these same officials made the same tough statements to Deutsche Bank, Commerzbank, Credit Agricole or SocGen when they were faced with potentially billions in losses when the banks were holding Greek debt. [..] Perhaps the move to shift Greek liabilities to state-owned banks (Germany’s export/import bank holds $17 billion in Greek debt) was necessary, but that doesn’t make it fair, or the right thing to do. Europe, like the United States, seems to be at the beck and call of its financial industry.

Read more …

“Syriza wants Germany to repay a loan that the Nazis forced the Bank of Greece to pay during the occupation. That would work out at an estimated €11bn today.”

Five Things Syriza Wants To Change (BBC)

Syriza, the left-wing party that stormed to power in Greece with 36% of the vote, has promised to ditch austerity and renegotiate the country’s €240bn bailout with the EU and IMF. But what exactly have Greeks signed up to, backing a party that was once a wide-ranging far-left coalition that included Maoists? Here are five of Syriza’s key aims.

Actions on jobs and wages Most eye-catching for Greeks is the promise of 300,000 new jobs in the private, public and social sectors, and a hefty increase in the minimum monthly wage – from €580 to €751. The new jobs would focus on the young unemployed – almost 50% of under-25s are out of work – and the long-term unemployed, especially those over 55. Salaries and pensions plummeted in 2012 as Greek ministers tried to curb spending. Now Syriza aims to reverse many of those “injustices”, bringing back the Christmas bonus pension, known as the 13th month, for pensioners receiving less than €700 a month. Syriza says it will rebuild Greece with what it describes as four pillars: • Confronting the humanitarian crisis • Restarting the economy and promoting tax justice • Regaining employment • Transforming the political system to deepen democracy

Power to the people For Syriza, 300,000 appears to be a magic number. They are promising 300,000 households under the poverty line up to 300 kWh of free electricity per month and food subsidies for the same number of families who have no income. Tax on heating fuel will be scrapped. Then there are plans for free medical care for those without jobs and medical insurance.

Debt write-off The headline-grabbing Syriza policy that has shaken the eurozone is a promise to write off most of Greece’s €319bn debt, which is a colossal 175% of its GDP. But the write-off is only part of it. Syriza also wants: • Repayment of the remaining debt tied to economic growth, not the Greek budget • A “significant moratorium” on debt payments • The purchase of Greek sovereign bonds under the European Central Bank’s €60bn monthly programme of quantitative easing.

Syriza wants a European Debt Conference modelled on the London Debt Conference of 1953, when half of Germany’s post-World War Two debt was written off, leading to a sharp increase in economic growth. If it happened for Germany, it can happen for Greece, the party argues. Syriza wants Germany to repay a loan that the Nazis forced the Bank of Greece to pay during the occupation. That would work out at an estimated €11bn today. The Independent Greeks also want Germany to pay war reparations.

Scrapping of property tax It is not just the poor who voted for Syriza but the middle classes as well. Property owners in Athens’s leafy, northern suburbs were enticed with the promised abolition of a hated annual levy on private property. Known as “Enfia”, the tax was introduced in 2011 as an emergency measure but made permanent under the previous government. Instead, there will be a tax on luxury homes and large second properties.

Closer relations with Russia It did not go unnoticed that the first foreign ambassador whom Syriza leader Alexis Tsipras met as prime minister was Russia’s envoy. Not a great surprise, perhaps, as he was once considered a pro-Moscow communist and visited Russia last May. Mr Tsipras has strongly criticised EU sanctions imposed on Russia for its annexation of Crimea and its involvement in eastern Ukraine, and there are signs that the election of a pro-Russian government in Athens could affect policy in Brussels.

Read more …

“Sanctions require unanimity among the 28 governments.”

Greece’s Coming Clash in Europe Starts With Russia Sanctions (Bloomberg)

Greece’s new government questioned moves to impose more sanctions on Russia, adding a foreign-policy angle to its challenge to the status quo in Europe. Prime Minister Alexis Tsipras’s Syriza-led coalition said it opposed a European Union statement issued in Brussels Tuesday paving the way to additional curbs on the Kremlin over the conflict in Ukraine, and complained it hadn’t been consulted. “Greece doesn’t consent,” the government said in a statement. It added that the announcement violated “proper procedure” by not first securing Greece’s agreement. Whether the government in Athens turns that rhetoric into reality will be tested when Greece’s new foreign minister, Nikos Kotzias, has the opportunity to block further sanctions at an EU meeting in Brussels on Thursday.

Sanctions require unanimity among the 28 governments. A Greek veto would shatter the fragile European consensus over dealing with Russia, potentially robbing Syriza of early goodwill as it lobbies for easier terms for Greece’s bailout. It would also deepen a looming stand-off with German Chancellor Angela Merkel, who has signaled her support to keep up the pressure on Russia amid an escalation in violence in eastern Ukraine. Kotzias, a politics professor and former communist, has advocated closer ties with Russia, spoken out against a German-dominated Europe and, in the 1980s, praised the Polish government’s crackdown on the Solidarity movement.

He said the new government objected to the “rules of operation” within the EU regarding the Russia statement. “Anyone who thinks that in the name of the debt, Greece will resign its sovereignty and its active counsel in European politics is mistaken,” Kotzias said at the ceremony to take over the Foreign Ministry. “We want to be Greeks, patriots, Europeanists, internationalists.” He’s part of a cabinet in Greece named on Tuesday by Tsipras after he formed a coalition with Independent Greeks, a more socially conservative party that also opposes austerity. After winning the election two seats short of a majority, Syriza decided against seeking a deal with To Potami, a new party whose leader has pledged to steer a “European course.”

Read more …

“You know that I can’t really repay you the money I already borrowed and now you’re asking me to borrow more..”

Greek Finance Minister Varoufakis: ‘End The Vicious Cycle’ (CNBC)

Greece’s newly elected government will look to “end the vicious cycle” of bailout and borrowing that has persisted through years of financial crisis, Finance Minister Yanis Varoufakis told CNBC on Tuesday. Varoufakis is a member of the Cabinet of Alexis Tsipras, who was elected prime minister on Sunday. Tsipras leads the leftist Syriza party, which has formed a coalition with the right-wing Independent Greeks party. The new government has made renegotiating Greek debt to the European Central Bank a priority. It wants European leaders, the European Central Bank and the International Monetary Fund to “table [its] comprehensive proposal for ending this never-ending Greek crisis,” Varoufakis said in an interview on CNBC.

Tsipras’ party has promised to repeal austerity policy and seek to shave off some of Greece’s debt. The country has imposed stiff austerity measures in the years following a €240 billion euro bailout package from the “troika” of the European Commission, ECB and IMF. Varoufakis stressed “finding common ground for Europeans.” He argued that Greece has been put in a tough situation where it is being asked to borrow money to pay back debts for which it already borrowed. “You know that I can’t really repay you the money I already borrowed and now you’re asking me to borrow more,” Varoufakis said.

Read more …

“Panos Kammenos, who has declared that Europe is governed by “German neo-Nazis”, assumes the helm of the defence ministry.”

Greek PM Alexis Tsipras Unveils Cabinet Of Mavericks And Visionaries (Guardian)

Greece’s prime minister, Alexis Tsipras, has lined up a formidable coterie of academics, human rights advocates, mavericks and visionaries to participate in Europe’s first anti-austerity government. Displaying few signs of backing down from pledges to dismantle punitive belt-tightening measures at the heart of the debt-choked country’s international rescue programme, the leftwing radical put together a 40-strong cabinet clearly aimed at challenging Athens’s creditors. In a taste of what lies ahead, Yanis Varoufakis, the flamboyant new finance minister, said on his way to the government’s swearing-in ceremony that negotiations would not continue with the hated troika of officials representing foreign lenders. “They have already begun but not with the troika,” said Varoufakis, an economist who has disseminated his anti-orthodox views through blogs and tweets almost daily since the debt crisis exploded in Athens in late 2009 – something he promised on Tuesday to continue to do.

“The time to put up or shut up has, I have been told, arrived,” he wrote on his blog. “My plan is to defy such advice.” Tsipras’s Syriza party, which emerged as the winner of snap polls on Sunday, has been adamant that it will deal only with governments, and not the technocrats that represent the EU, ECB and IMF. Varoufakis is to represent Greece at eurozone meetings. Setting its stamp on the new era, the cabinet took the oath of office in two separate ceremonies, with some sworn in during a religious service but most breaking with tradition to conduct their investiture before the president, Karolos Papoulias. Tsipras, an avowed atheist, was sworn in by Papoulias on Monday. At 40 he is Athens’s youngest postwar prime minister. After falling two seats short of attaining a 151-seat majority in Greece’s 300-seat parliament, Syriza was forced into a coalition with the populist rightwing Independent Greeks party.

The junior partner is openly Eurosceptic and withering of the way international creditors have turned Greece into an “occupied zone, a debt colony”. Its leader, Panos Kammenos, who has declared that Europe is governed by “German neo-Nazis”, assumes the helm of the defence ministry. Tsipras acted on pledges to pare back government with the establishment of 10 ministries and four super-ministries amalgamating different portfolios, starkly illuminating the failure of previous Greek governments to act on promises to reform ministry structures. Giorgos Stathakis, a political economics professor, took over the development portfolio, a super-ministry that includes oversight of tourism, transport and shipping, the country’s biggest industries. Panaghiotis Kouroublis, who is blind, was made health minister, becoming the first Greek politician with a disability to hold public office. Euclid Tsakalotos, a British-trained economist who rose out of the anti-globalisation movement, became deputy minister in charge of international economic relations.

Read more …

“Greece made a few mistakes … but Europe made even bigger mistakes..”

Stiglitz: Germany’s The Problem, Not Greece (CNBC)

Nobel Prize-winning economist Joseph Stiglitz told CNBC on Monday that the euro zone should stay together but if it breaks apart, it would be better for Germany to leave than for Greece. “While it was an experiment to bring them together, nothing has divided Europe as much as the euro,” Stiglitz said in a “Squawk Box” interview. The risk of a sovereign default in Greece has increased after the anti-austerity party Syriza won Sunday’s snap elections, raising concerns over the possibility of a Greek exit from the euro zone. Greece is not the only economy struggling under the euro, and that’s why a new approach is needed, Stiglitz said. “The policies that Europe has foisted on Greece just have not worked and that’s true of Spain and other countries.”

The Columbia University professor is one of 18 prominent economists who co-authored a letter saying that Europe would benefit from giving Greece a fresh start through debt reduction and a further conditional extension in the grace period. But in the letter in the Financial Times last week, they stressed that Greece would also have to carry out reforms. “Greece made a few mistakes … but Europe made even bigger mistakes,” Stiglitz told CNBC. “The medicine they gave was poisonous. It led the debt to grow up and the economy to go down.” “If Greece leaves, I think Greece will actually do better. … There will be a period of adjustment. But Greece will start to grow,” he said. “If that happens, you going to see Spain and Portugal, they’ve been giving us this toxic medicine and there’s an alternative course.”

Insisting that it’s best for Europe and the world to keep the euro intact, he argued that keeping the single currency together requires more integration. “There’s a whole set of an unfinished economic agenda which most economists agree on, except Germany doesn’t.” He said the real problem is Germany, which has benefited greatly under the euro. “Most economists are saying the best solution for Europe, if it’s going to break up, is for Germany to leave. The mark would rise, the German economy would be dampened.” Under that scenario, Germany would find out just how much it needs the euro to stay together, he added, and possibly be more willing to help out the countries that are struggling. “The hope was, by having a shared currency, they would grow together.” But he said that should work both ways.

Read more …

Ambrose has a more aggressive take.

Germany’s Top Institutes Push ‘Grexit’ Plans As Showdown Escalates (AEP)

A top German body has called for a clear mechanism to force Greece out of the euro if the left-wing Syriza government repudiates the terms of the country’s €245bn rescue. “Financial support must be cut off if Greece does not comply with its reform commitments,” said the Institute of German Economic Research (IW). “If Greece is going to take a tough line, then Europe will take a tough line as well.” IW is the second German institute in two days to issue a blunt warning to the new Greek premier, Alexis Tsipras, who has vowed to halt debt payments and reverse austerity measures imposed by the EU-IMF Troika. The ZEW research group said on Tuesday that the EU authorities should order an immediate stress test of banks linked to Greece, and drive home the threat that they are willing to let a Greek default run its course rather than cave to pressure.

“Europe should clearly signal that it is not susceptible to blackmail,” it said. Germany’s finance minister, Wolfgang Schäuble, said in Brussels that debt forgiveness for Greece is out of the question. “Anybody discussing a haircut just shows they don’t know what they are talking about.” Mr Schäuble said he was sick of having to justify his rescue strategy. “We have given exceptional help to Greece. I must say emphatically that German taxpayers have handed over a great deal,” he said. In a clear warning, he said the eurozone is now strong enough to withstand a major shock. “In contrast to 2010, the financial markets have faith in the eurozone. We face no risk of contagion, so nobody should think we can be put under pressure easily. We are relaxed,” he said. Officials in Berlin are irritated that Mr Tsipras has gone into coalition with the Independent Greeks, a viscerally anti-German party that seems to be spoiling for a cathartic showdown over Greece’s debt.

“This increases the risk of a head-on collision with the international creditors,” said Holger Schmieding, from Berenberg Bank. Mr Schmieding said the likelihood of “Grexit” has risen to 35pc. He warned that Mr Tsipras could be in for a reality shock after making “three impossible promises to his country in one campaign”. The risk is that he will end up “ruining his country” like Argentina’s Peronist leader Cristina Kirchner. “Vicious circles can start fast,” he said. Sources close to Mr Tsipras say he is convinced that German leaders are bluffing and will ultimately yield rather than admit to their own people that the whole EMU crisis strategy has been a failure. Markets do not agree. Credit default swaps measuring bankruptcy risk in Greece rocketed on Tuesday by 248 points to 1,654, but those for Portugal, Italy and Spain barely moved.

Read more …

“Greece’s debt problem is worse today than it was when it was rescued.”

Why Aren’t Markets Panicking About Greece? (BBC)

The Greek people don’t seem desperately grateful for the 240bn euros in bailouts they’ve had from the eurozone and IMF – and here is one way of seeing why. The country’s economic crisis was caused in large part because its government had taken on excessive debts. So at the time the crisis began in earnest, at the end of 2009, its debts as a share of GDP were 127% of GDP or national income – and rose the following year to 146% of GDP. As a condition of the official rescues, significant public spending cuts and austerity were imposed on Greece. And that had quite an impact on economic activity. The country was already in recession following the 2008 financial crisis. But since 2010, and thanks in large part to austerity imposed by Brussels, GDP has shrunk a further 19%.

GDP per head, perhaps a better measure of the hardship imposed on Greeks, has fallen 22% since the onset of the 2008 debacle. So austerity has certainly hurt. But has it worked to get Greece’s debts down? To the contrary, Greek debt as a share of GDP has soared to 176% of GDP, as of the end of September 2014. Now it has fallen a bit in absolute terms. Greek public sector debt was €265bn in 2008, €330bn in 2010 and was €316bn in September of last year. But it is debt as a share of GDP or national income which determines affordability. And on that important measure, Greece’s debt problem is worse today than it was when it was rescued. To state the obvious, it is the collapse in the economy which has done the damage.

And although Greece started to grow again last year, at the current annual growth rate of 1.6% (which may not be sustained) it would take longer than a generation to reduce national debt to a manageable level. Little wonder therefore that a party – Syriza – campaigning to end austerity and write off debts, has enjoyed an overwhelming victory in the general election. That it appears to be two seats short of a clear majority in the Athens parliament should not disguise the clear message sent by Greek people to Brussels. Or perhaps it would be more apt to talk of the message being sent to Berlin – since it is Germany which has been the big eurozone country most wedded to the economic orthodoxy that there’s no gain without austerity pain.

Read more …

Samaras is one sore loser.

New Greek PM Finds Official Residence Strippped Bare By Predecessor (Guardian)

To the victor the spoils? Not in Athens, where the new prime minister arrived at his official residence on Monday night to discover that computers, paperwork and even the toiletries had been removed by the outgoing administration. Shortly after he was sworn in, Syriza leader Alexis Tsipras found himself inside the Maximos Mansion without some basic necessities. “They took everything,” he said. “I was looking for an hour to find soap.” Traditionally, a defeated Greek prime minister will wait until their successor has been anointed to wish them well. But Antonis Samaras was in such a rush to go that he even failed to leave the Wi-Fi password.

“We sit in the dark. We have no internet, no email, no way to communicate with each other,” one staffer told Germany’s Der Spiegel. It took until Tuesday evening for Tsipras to get his hands on the official prime ministerial Twitter account. In his first tweet, he repeated the oath he took 24 hours earlier, pledging to uphold the constitution and always serve the interests of the Greek people. But on Tuesday night, the new administration was struggling to put its mark on the system; 48 hours after the polls closed, an official Greek government website still showed Samaras as prime minister.

Read more …

3.4% is no pittance.

Orders for US Durable Goods Fell in December for Fourth Month (Bloomberg)

Orders for business equipment unexpectedly fell in December for a fourth month, signaling a global growth slowdown is weighing on American companies. Bookings for non-military capital goods excluding aircraft dropped 0.6% for a second month, data from the Commerce Department showed today in Washington. Demand for all durable goods – items meant to last at least three years – declined 3.4%, the worst performance since August. Slackening demand from Europe and some emerging markets is probably weighing on orders, making companies less willing to invest in new equipment. At the same time, brightening American consumer attitudes are leading to gains in purchases of big-ticket items such as automobiles and appliances that can ripple through the economy and underpin manufacturing.

Read more …

No need for any Yellen announcements this week.

ECB Bond Buying Makes Fed Rate Increase More Likely (Bloomberg)

Dollar bulls say Europe’s €1.1 trillion euro bond-buying plan will bring the Federal Reserve a step closer to raising interest rates before the year’s out. By pumping cash into global markets, the European Central Bank may clear the way for the U.S. to tighten its own money supply without stoking volatility, according to Citigroup and Bank of America. As Fed officials start a two-day policy meeting, the greenback is extending a rally that’s taken it to a more than decade-high versus a basket of its peers even as bond investors express less conviction about the timing of an U.S. central bank’s first rate increase since 2006. “We’ve been expecting dollar strength, and it’s coming quicker than we thought,” Steven Englander at Citigroup said.

Fed officials “may feel they actually have to advance the first tightening rather than put it off.” Money has flooded into dollar assets in recent months as the world’s largest economy outperforms its developed peers and the Fed prepares to raise its main interest rate from the zero-to-0.25% range it’s been in since 2008. That makes the dollar more valuable to investors, particularly as central banks from Japan and Canada to Europe debase their currencies by easing their monetary policies. The anticipated timing of that first Fed increase inched forward as the ECB unveiled its government-bond purchase program. Investors now expect the U.S. central bank to boost borrowing costs from near zero in October, after betting on a December increase just a month ago, according to futures prices compiled by Bloomberg.

Read more …

Sure, we don’t have enough of the stuff yet.

Obama Proposes Offshore Oil Drilling From Virginia to Georgia (Bloomberg)

The Obama administration proposed opening to offshore drilling an area from Virginia to Georgia in a policy shift long sought by energy companies but opposed by environmentalists concerned about popular resorts such as the Outer Banks and Myrtle Beach. The proposed offshore plan for 2017 to 2022, marks the second time President Barack Obama has recommended unlocking areas in the U.S. Atlantic for oil drilling, and faced criticism from allies who say the risks of a spill along the populated coast don’t justify the payoff. “At this early stage in considering a lease sale in the Atlantic, we are looking to build up our understanding of resource potential, as well as risks to the environment and other uses,” Interior Secretary Sally Jewell said in a statement.

The agency said it would do one auction in the Atlantic and keep a 50-mile buffer from the shore. Managing the U.S. oil and gas boom has become a fraught issue for Obama, who has continued to trumpet the benefits of the jump in production and falling prices, while also seeking to balance it with a desire to combat climate change. Environmentalists say the administration hasn’t done enough to counter the risks of pollution, spills and greenhouse-gas emissions from the domestic production. “The world is in a very big hole with climate change and when you’re in a hole the first order of business should be to stop digging,” Steve Kretzmann, executive director of Oil Change International, said in an e-mail. “Unfortunately, the administration’s five-year plan amounts to climate denial.”

Read more …

“Our research suggests that the consensus view that oil markets will recover by the second half of 2015 may well be optimistic.”

Crude at $49: The New Reality for Big Oil Companies (Bloomberg)

Financial results from a fourth quarter that saw the collapse of the crude market will provide a window into how the world’s biggest oil companies are adjusting to a new reality of slowing growth and low prices. Oil that topped $115 a barrel as recently as June has been trading below $50 a barrel since the first week of the year, portending a bleak 2015 for the world’s five so-called supermajors – Exxon Mobil, Shell, Chevron, Total and BP. The companies, whose businesses combine oil and natural gas exploration with refining and chemical manufacturing, have historically been among the most resilient players during down cycles. This could be the oil bust that breaks that pattern. “The issue for this group of companies is they don’t have bulletproof business models,” said Brian Hennessey at Alpine Woods. A 57% plunge in the price of oil since June “really tests your convictions.”

The industry’s stark change in fortune set off panic from corporate board rooms to drill-rig floors as companies that pump almost one-tenth of the world’s crude scramble to tighten budgets and preserve cash for dividends, buybacks and capital projects too far along to abandon. BP froze wages, Chevron delayed its 2015 drilling budget and Shell canceled a $6.5 billion Persian Gulf investment; layoffs industrywide have topped 30,000, enough to fill almost every seat in Madison Square Garden twice. Investors will be sifting the data from the fourth quarter for clues to how long the current slump will last. Momentum from $109 a barrel oil during the first half of the year helped carry producers through the last three months, when the price of Brent, the benchmark used by most of the world, averaged $77.07 — well above the current price of $49.

The effects of lower prices will still take their toll as all except Shell are forecast to report earnings declines compared with the fourth quarter of 2013. Shell profits are expected to rise compared with unusually ugly results the year before. Worldwide crude supplies appear likely to exceed demand for the rest of the year and beyond, even as the lowest oil prices since 2009 discourage new developments in high-cost regions such as Canada’s oil sands, said Paul Sankey at Wolfe Research. That would postpone any rebound in share prices of the five biggest oil majors, which have tumbled by an average of 8.1% since crude prices began to slide in June. That compares with a 28% decline in a Standard & Poors index of 18 smaller U.S. oil and gas producers. “Buying oil equities here would be dangerous,” Sankey said. “Our research suggests that the consensus view that oil markets will recover by the second half of 2015 may well be optimistic.”

Read more …

“’Never’ is a long time.” Then he paused. “It’s going to be a long time.”

He Called $50 Oil, Now He Says It’s Going Lower (MarketWatch)

Last November, when I was trying to figure out where oil prices were going, I spoke with Shawn Driscoll, manager of the T. Rowe Price New Era Fund, a mutual fund that focuses on natural resource stocks. Brent crude was trading at $80 a barrel, and there was speculation that OPEC would halt its slide by cutting production at its upcoming meeting, scheduled for Thanksgiving Day. Driscoll was having none of it. Oil, gold, and other commodities, he told me, were in a secular bear market that could last another decade. He said oil would bottom out around $50 over the next 10 years. Actually it took less than 10 weeks, as Brent traded under $48 a barrel on Monday. I usually don’t revisit columns or sources that quickly, but events have moved so fast I decided to catch up with Driscoll again. Right off the bat, he acknowledged being surprised by the suddenness of oil’s price drop.

“We expected Saudi Arabia to cut, frankly,” he told me in a phone interview. “Once Saudi Arabia didn’t cut production, it became clear to us there was a problem.” Both supply and demand were heading in opposite directions more drastically than he expected. “Underlying demand got a lot weaker, Libya came back, Iraqi volumes have been pretty good,” he explained. We spoke last Friday, the day after the pro-U.S. Yemeni government had fallen and King Abdullah of Saudi Arabia died and was succeeded by his 79-year-old half-brother Salman. Yet despite these new uncertainties in the world’s most volatile, energy-rich region, Driscoll’s view remains unchanged: look out below. He explained that $40 a barrel is the top of the industry’s operating cost curve – the price at which individual wells break even after they’ve been drilled and are producing and below which operators shut in existing wells.

So, does he think Brent will fall below that $40 magic number? “I do,” he told me. Why? Whatever political or competitive motives may be behind Saudi Arabia’s refusal to cut production, the world is awash in oil. “There’s still an overwhelming glut of supply in global markets,” Stephen Schork, president of Schork Group, said. No wonder Wall Street firms have been falling all over each other to predict ever-lower crude prices: Goldman Sachs is looking for $40 Brent and Bank of America Merrill Lynch says crude futures could fall to $31 a barrel in the first quarter, lower than they were during the financial crisis. “The job of correcting markets when they’re oversupplied is to find a price that destroys the oversupply,” Driscoll told me. That destruction is just getting started. Asked about billionaire Saudi investor Prince Alwaleed bin Talal’s comments that “I’m sure we’re never going to see $100 anymore,” Driscoll replied: “’Never’ is a long time.” Then he paused. “It’s going to be a long time.”

Read more …

Not for the banks.

France ‘Proves’ Q€ Is Entirely Useless (Zero Hedge)

According to the doctrine of central planners, the idea of Q€ is to lower rates to encourage borrowing (and credit creation) to spark growth and kickstart a virtuous recovery. As the following chart shows, that is total and utter crap… French jobseekers just hit a fresh record high and French rates just hit a record low – and that has been the story for 6 years. So – just as The Fed was finally forced to admit, Q€ is nothing more than wealth redistribution from all taxpayers to the ultra-rich asset owners who – it is hoped- will bless the plebeians with some trickle-down-ness… with every asset under the moon already at record highs, once again we ask – just what do you think this will achieve Draghi.

And finally, we have no words for this idiot…: “Bank Of Italy’s PANETTA: ECB QE TO BOOST GROWTH ‘SIGNIFICANTLY’ OVER NEXT 2 YEARS”. Yep – they really believe that.

Read more …

Syriza is sure to wake up sentiments across Europe.

Syriza’s ‘Bella Ciao’ Casts Shadow Over Italy President Vote (Bloomberg)

As Greeks welcome Syriza’s historical victory with the Italian partisan anthem “Bella Ciao,” Italian Premier Matteo Renzi is nervously eyeing resistance within his own party before a key presidential vote this week. “By gaining a clear lead and moving to form a new government in a short time, Syriza leader Alexis Tsipras is also galvanizing his Italian supporters, including a significant number of Renzi’s opponents within his party,” Francesco Galietti, founder of research firm Policy Sonar in Rome, said in a phone interview. Renzi’s grip on the Democratic Party, or PD, will be closely-watched Jan. 29, when 1,009 national lawmakers and regional delegates meet in Rome to start voting for the new head of state, a post left vacant by 89-year-old Giorgio Napolitano earlier this month.

Some lawmakers within the left-wing PD minority, including Giuseppe Civati and Stefano Fassina, were part of a pro-Syriza delegation who visited Athens before the vote. Supporters of Nichi Vendola, leader of the Left, Ecology and Freedom party, one of the strongest supporters of Syriza in Italy, sang the World War II “Bella Ciao” anthem at a three-day event in Milan last week. Now, Vendola is trying to open a dialogue with the anti-Renzi line of the PD to see if they can join forces. “Numerous defections in the first three rounds of voting and an election that drags on past the fifth round will spell trouble” for the premier, Wolfango Piccoli, managing director at Teneo Intelligence in London, wrote in a Jan. 13 note to clients. Such an outcome would probably mark the beginning of the end for “his flagship reforms and the current legislature.”

Read more …

Paying off the IMF through record low borrowing. Sounds nice, but what justifies the low rates for places like Portugal?

Portugal Repays IMF Early; Greece Prepares Fight (Bloomberg)

As Greece gets ready to fight the IMF, Portugal wants to pay it off early. While Greece catapulted Alexis Tsipras into power and set up a confrontation with its creditors, Portugal has raised almost half of its planned gross bond issuance for this year. With falling borrowing costs, Portugal now plans to make an early repayment of its IMF bailout loans. “Portugal has already covered about 40% of the maximum size of its own target, and it extended its curve by eight years,” said David Schnautz at Commerzbank. “After this start, Portugal should be able to wrap up its ‘must do’ bond supply activities soon, maybe before the slow supply summer season.” Portugal’s message to investors is this: the country is more like Ireland than Greece. The Irish government has already taken advantage of record low borrowing costs and relative political stability to refinance about €9 billion of its IMF loans.

While anti-austerity parties Podemos in Spain and Tsipras’s Syriza in Greece tap into voter discontent, in Portugal the ruling Social Democrats and the Socialists, the main opposition party, still dominate opinion polls ahead of elections scheduled for September or October. “The political system has proven its maturity,” Economy Minister Antonio Pires de Lima said. “The radical parties exist, but you cannot imagine in Portugal that those parties get more than 10% or 15%, never more than 20% in polls.” Portugal this month sold 5.5 billion euros of 10- and 30-year government securities via banks. Debt agency IGCP plans gross issuance of €12 billion to €14 billion in 2015. The government is paying an estimated 3.7% on 26.5 billion euros of IMF loans. They formed part of the country’s 2011 bailout program, which Portugal exited in May last year after Ireland wrapped up its rescue package in December 2013.

Read more …

One more down in the currency race to the bottom.

Singapore Surprises With Easing, Clubbing Currency (CNBC)

Singapore’s central bank surprised markets with a between-meeting easing amid nearly non-existent inflation, sending the city-state’s currency sharply lower. “With material downward revision to the inflation outlook, MAS (Monetary Authority of Singapore) saw cause for preemptive action,” Mizuho Bank said in a note Wednesday. “On the growth front, MAS also sounded more cautious, pointing to a mixed outlook for the global economy, which is likely to weigh on the export-oriented sectors.” Without waiting for its scheduled April review – or today’s U.S. Federal Reserve’s meeting – the MAS Wednesday announced that it was reducing the slope of the Singapore dollar’s appreciation against an undisclosed, trade-weighted basket of currencies.

Rather than using interest rates, Singapore sets its monetary policy by adjusting the currency’s trading range. The slope was last flattened in 2011 and this was the MAS’ first unscheduled policy statement since 2001. Inflation in the trade-dependent city-state has been on the wane despite rising labor shortages as the government limited the number of foreign workers. In December, the consumer price index fell 0.2% on-year after declining 0.3% in November as declining oil prices globally eased fuel costs and as housing costs were lower. The MAS cut its headline inflation forecast for 2015 to a band of negative 0.5% to 0.5% from 0.5-1.5% previously.

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Just great.

Subprime Bonds Are Back With Different Name 7 Years After US Crisis (Bloomberg)

The business of bundling riskier U.S. mortgages into bonds without government backing is gearing up for a comeback. Just don’t call it subprime. Hedge fund Seer Capital Management, money manager Angel Oak Capital and Sydney-based bank Macquarie are among firms buying up loans to borrowers who can’t qualify for conventional mortgages because of issues such as low credit scores, foreclosures or hard-to-document income. They each plan to pool the mortgages into securities of varying risk and sell some to investors this year. JPMorgan analysts predict as much as $5 billion of deals could get done, while Nomura Holdings Inc. forecasts $1 billion to $2 billion. Investment firms are looking to revive the market without repeating the mistakes that fueled the U.S. housing crisis last decade, which blew up the global economy.

This time, they will retain the riskiest stakes in the deals, unlike how Wall Street banks and other issuers shifted most of the dangers before the crisis. Seer Capital and Angel Oak prefer the term “nonprime” for lending that flirts with practices that used to be employed for debt known as subprime or Alt-A. While “subprime is a dirty word” these days, “what everyone is seeing is the credit box has shrunk so much that there’s a lot of good potential borrowers out there not being served,” said John Hsu, the head of capital markets at Angel Oak. The Atlanta-based firm expects to have enough loans for a deal next quarter in which it retains about 20% to 33%, he said. Reopening this corner of the bond market may lower consumer costs and expand riskier lending, aiding the housing recovery.

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“..the slowdown/recession finds a secondary downturn thanks to the immediate closing down of any discretionary capital expenditure..”

Looming Recession Will Be “Remembered For 100 Years”: Crispin Odey (Zero Hedge)

“I think equity markets will get devastated,” warns famed $12bn AUM hedge fund manager Crispin Odey in his latest letter to investors. Having been one of the biggest bulls of this particular central bank artificial-bull cycle, his dramatic bearish tilt (as we discussed what he thinks are the biggest risks underpriced by the market previously), is notable. Finally, Odey fears major economies are entering a recession that will be “remembered in a hundred years,” adding that the “bearish opportunity” to short stocks looks as great as it was in 2007-2009.

Odey Asset Management (report for Dec 2014)
• The themes I have been outlining since the second quarter of 2014 are now establishing themselves:
• A faltering Chinese economy with growth ultimately slowing down to 3%.
• A hard landing for those countries plugged into China’s growth – especially Australia, South Africa and Brazil.

A fall in commodity prices bringing with it pain to those heavily exposed. For oil this is the Middle East, Venezuela, Argentina, mid-west USA, Canada, Norway and Scotland. No one forecast how fast and how far those commodity markets would fall. However, the same people who singly failed to see this coming are the first to say that the benefits of falling prices will outweigh the costs. My problem with such a hopeful outcome is that, in my experience, those that lose out from a fall in their income are quicker to adjust than those that benefit. In that intertemporal space lurks a recession. For me, the slowdown/recession finds a secondary downturn thanks to the immediate closing down of any discretionary capital expenditure in the affected industries and countries, something we are only just seeing.

This obviously has knockon effects for incomes and employment. At that time the exchange rate is likely to be falling to give some support. In my world this slowdown in the commodity producer’s economy is felt via falling exports back in the beneficiary’s economy, which finds external markets weaken. Again, if I am right on timing, the effect can be great because it is not yet affected by a pickup in spending in the beneficiary’s economy. As always, that is the theory and markets will show whether it works in practice. In my world, this hit to the world economy is the first experience of a business cycle since 2008. Most investors do not believe we can experi-ence such a downturn. They rely upon Central bankers who they think have solved the problem.

Read more …

Oct 142014
 
 October 14, 2014  Posted by at 8:39 pm Finance Tagged with: , , , ,  6 Responses »
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Dorothea Lange Drought-stricken farmer and family near Muskogee, OK Aug 1939

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

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

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

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

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

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

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

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

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

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

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

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

No Stock Salvation Seen in Bank Results as VIX Surges

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sep 302014
 
 September 30, 2014  Posted by at 9:49 pm Finance Tagged with: , , , ,  17 Responses »
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Herbert Mayer Honi soit qui mal y pense: Aug 1939

This is not the first time I’ve written on this topic, but I want to do it again, because rate hikes, when they come, will have a tremendous effect on everybody’s loves and economies, wherever you live. And because I think there’s still far too much complacency out there, far too much ‘conviction’ that higher rates will come only after a comfortable period of time, and even then only gradually.

There are three steps in the Fed’s ‘policies’. There’s QE, which will end in October. There’s ultra low interest rates, which have so far been maintained. And then there’s the dollar, whose rate many people still think is determined by the ‘markets’, even if the Fed is in effect the ‘markets’. When the Fed buys, or makes third parties buy, bonds and stocks (and we know it has), it’s not going to let the dollar roam free. That makes no sense.

Which means the rising dollar (about 10% vs the euro in mere weeks) is due to Fed actions. The Fed manipulates what it can. It’s the motivation behind its actions that catches people on the wrong foot. Most continue to have this idea that Janet Yellen, and Ben Bernanke before her, seek and sought their alleged dual mandate of full employment and price stability. Ironically, those are two things they have zero control over.

What they do instead, what motivates their actions, is seek to maximize Wall Street bank profits, and, in the same vein and same breath, hide these banks’ losses. Once you realize and acknowledge that, policies over the past 8 years – and before, cue Greenspan – make a lot more sense then when you try to see them through that alleged dual mandate view.

QE is all but done. This alone already has started a capital flight move away from emerging markets. Many of whom will soon look a whole lot less emerging because of it. The capital will continue to flow back to the global financial center from the periphery, leaving dozens of countries and companies scrambling to find dollars to pay off the loans that looked so cheap.

The rising dollar will only make that worse. And moreover, it will catch many other countries, for instance southern European ones, in the same dragnet the emerging economies were already in. If and when your currency loses 10%+ against the currency more commodities and debts are denominated in, and you have such debts and need such commodities, you stand to lose, in all likelihood, a lot.

That leaves interest rates. Given the recent Fed actions on QE and the dollar, why would it NOT raise rates? The dual mandate? To affect price stability in the US? With the dollar moving the way it has, that’s gone anyway. To help Americans get jobs? The only reason US jobless numbers are not much higher is A) millions left the job market altogether and B) millions who were once account managers are now burger flippers, WalMart greeters and self-employed.

The definitions were changed as we went along, that’s why, at least officially, unemployment is not at 15% or 20%. And that is al part of the same opaque truth, that nothing the Fed did since 2008 has mattered one bit when it comes to jobs for Americans. All it has effectively achieved is that trillions of dollars in Main Street money and future obligations were shifted to Wall Street.

The objectives of the Fed’s dual mandate have turned out to be a total joke when the chips came down. Not surprising, because they were always a joke to begin with. A central bank should not be involved in job creation, and it should not hand trillions of dollars to the banks that are its owners, to ostensibly keep prices stable in the real economy, where none of those trillions end up. It’s all just a joke, albeit a very costly one.

QE was never meant to benefit Main Street. Neither was the suppression of the dollar. Why then would the Federal Reserve NOT hike rates only to protect the real American economy? Nothing it has done so far has been aimed at that goal, so why start now? There’s no logic there.

The Fed will continue to do what it’s done all these years: enact those policies that promise to bring the greatest profits to the banks that own it. And right now, those profits are not in more bond buying, and not in artificially low rates, and not in an artificially low dollar. Simply because that’s what everybody else is betting on, and the money when that happens is on the opposite side of the bet.

I cited this piece by Philip Van Doorn at MarketWatch 5 weeks ago, and it’s as relevant now as it was then:

Big US Banks Prepare To Make Even More Money

[..] … the debate at the Federal Reserve has now shifted to the timing of interest rate increases. Most economists expect the federal funds rate to begin climbing in the second half of 2015, but it could well happen sooner than that. For most banks, the extended period of low interest rates has become quite a drag on earnings. Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago

Once you you’ve metastasized that, and the truth about the dual mandate thing, and you’ve read the ‘Secret Goldman Tapes’ stories earlier this week, which showed in a blinding fashion how Goldman Sachs controls the Fed, not the other way around, then maybe your idea about those ‘soft slow’ rate hikes are due for a review as well.

Just look at what Dallas Fed head Richard Fisher had to say over the weekend:

Fisher Says Fed Must Weigh Wage Pressures in Setting Rate Policy

“I don’t want to fall behind the curve here,” Fisher said in a Fox News interview. “I think we could suddenly get a patch of high growth, see some wage-price inflation, and that is when you start to worry.” Fisher dissented on Sept. 17 at the last meeting of the Federal Open Market Committee, when the Fed retained a pledge to keep rates near zero for a “considerable time” after its asset purchases halt at the end of next month.

He called U.S. second-quarter growth “uber strong,” referring to the upward revision last week to an annualized rate of 4.6% from 4.2% previously estimated, and said history had shown that wage pressures could accelerate when unemployment got below current levels of 6.1%. In addition, Fisher said surveys of wage-price pressures in the Dallas Fed’s district, which includes Texas, northern Louisiana and southern New Mexico, were the highest since before the recession, and other indictors were also buoyant. “We’re going to be releasing some data on Monday and Tuesday, our new surveys, that I think will just knock your socks off,” he said.

I’d say Fisher is uber happy, and those data did come in as he predicted – though I think everyone wearing socks still has them on. Fisher wants that rate hike now, not next summer or fall. And he has a voice, even if he himself and fellow hawk Philly Fed head Charles Plosser are poised to step down some 6 months from now. I’m reading ‘experts’ who claim that will relieve the pressure on Yellen and her doves, but it’s the other way around: they’re going to make sure their – departing – voices will be heard one last time.

But of course down the line that’s all theater. The rate hike is a foregone conclusion. As is the mayhem it will give birth to. Prepare yourselves accordingly. And from now on always keep in the back of your mind what the Fed really is. It is not your friend. Unless you too own a piece.

Why A Strong Dollar Is Scarier Than Taper Tantrum (CNBC)

Expectations that the Federal Reserve is on course to start tightening policy has spurred fears of a return of last year’s emerging market turmoil, but Societe Generale tips a strong dollar as a bigger risk. “A strong dollar tantrum could be a more worrying scenario than a Fed tightening tantrum,” Michala Marcussen, global head of economics at Societe Generale, said in a note dated Sunday. The U.S. dollar index has climbed around 7% this year, with the Fed now nearly completing the tapering of its asset purchases, with markets widely expecting interest rate increases to begin sometime next year. Some analysts are concerned this will spur a repeat of the “taper tantrum,” when concerns about the Fed’s move to begin tapering caused a brutal selloff in emerging market assets earlier this year and last year.

“Hope today is that a strong dollar will cap U.S. inflation, delay Fed tightening and boost exports to the U.S.,” Marcussen noted, but she believes for that to happen, the U.S. dollar would need to strengthen so much that it would signal much weaker growth in the rest of the world. To delay Fed rate hikes, the euro would need to fall to $1.10, while the U.S. dollar would need to fetch around 120 yen and 6.50 yuan, she said. Early Tuesday, the euro was around $1.2690 and the dollar was fetching 109.40 yen and 6.1495 yuan. “In such a scenario, [a strong] dollar would equate to further capital outflows, placing further pressure on already vulnerable economies,” she said. “A ‘dollar tantrum’ scenario could well prove more painful than a ‘Fed tightening tantrum,’ assuming the latter comes with better growth in the rest of the world.” To be sure, she doesn’t believe the dollar’s move yet qualifies the currency as “strong,” with it still trading just below its long term average, although Societe Generale expects the trade-weighted dollar will rise further into 2015.

Others expect some emerging market assets will react negatively to the dollar’s recent advance. “The upcoming Fed exit will continue to lead front-end rates higher in the quarters ahead,” Goldman Sachs said in a note last week. “In a market environment where China growth expectations decline, front-end U.S. rates gradually push higher and emerging market front-end yields remain anchored around current levels, there is room for emerging market currencies (particularly high-yielding ones) to weaken further.” But Goldman is looking to Europe for cues on whether any emerging market selloff will be confined to the currencies or if it will spill over to other assets. “Heightened Euro area growth concerns can weigh on risky assets, including parts of emerging market credit and equities,” it said.

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Nah.

Strong Dollar Bolsters Fed Patience on Rates Amid Growth Impact (Bloomberg)

The dollar’s strongest year since 2008 is a source of growing concern among some Federal Reserve policy makers, who say further gains have the potential to curb economic growth and keep inflation too low. Atlanta Fed President Dennis Lockhart, New York’s William C. Dudley and Chicago’s Charles Evans have all said in the past week they are watching the dollar as officials debate the timing of the first interest-rate increase since 2006. A strong dollar tends to restrain exports by making them more expensive, holding back growth, while reducing the cost of imported goods. “We’re going to take that into account, the way it’s affecting the economy in terms of net exports and GDP growth and what it means for our inflationary developments,” Evans told reporters yesterday after a speech in Chicago. Evans and Dudley are among policy makers who argue that the Fed can afford to be patient on raising interest rates, and that tightening prematurely poses a greater risk to the world’s largest economy than waiting too long.

“They are worried about the durability of the labor-market recovery and inflation still running below their target, and the dollar feeds into that,” said Guy Berger, U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “If you have a stronger dollar you’re going to have less inflation, and that’s the reason they’re focusing on it,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York and a former New York Fed economist, who said the dollar’s gains so far are unlikely to affect monetary policy. “If the dollar keeps going up obviously it may have implications for the timing of tightening,” he said. On the other side of the debate are officials such as Dallas Fed President Richard Fisher, who favors an interest-rate increase at the end of the first quarter of next year. In a Bloomberg Radio interview yesterday, Fisher called the strength of the dollar “a vote of confidence” in the U.S. economy. “Everybody is finding the things that are favorable to their side of the argument,” Berger said. “In the case of the doves, the dollar is one of them.”

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Could=Will.

Record World Debt Could Trigger New Financial Crisis (Guardian)

Global debts have reached a record high despite efforts by governments to reduce public and private borrowing, according to a report that warns the “poisonous combination” of spiralling debts and low growth could trigger another crisis. Modest falls in household debt in the UK and the rest of Europe have been offset by a credit binge in Asia that has pushed global private and public debt to a new high in the past year, according to the 16th annual Geneva report. The total burden of world debt, excluding the financial sector, has risen from 180% of global output in 2008 to 212% last year, according to the report. The study by a panel of senior academic and finance industry economists accuses policymakers in many countries of failing to spur sustainable growth by capitalising on historically low interest rates while deterring exuberant lending.

It called for Brussels to write off the debts of the eurozone’s worst-hit countries and urgently embark on a “sizeable” programme of electronic money creation or quantitative easing to push down long-term interest rates. It said unless policymakers kept a lid on risks in the financial system, especially overvalued property and stock markets, a trend for investing in assets with borrowed money could run out of control. The Geneva report, which is commissioned by the International Centre for Monetary and Banking Studies, follows a study earlier this year by the Bank of International Settlements (BIS), which diagnosed the same problem, but said risky borrowing could only be discouraged by higher interest rates. The Geneva report instead argued a concerted effort to tackle the after-effects of the crisis was needed to mitigate a “poisonous combination of high and rising global debt and slowing nominal GDP [gross domestic product], driven by both slowing real growth and falling inflation”.

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Deflation is all that’s left. Until debts are restructured.

Japan’s Industrial Production, Household Spending and Real Wages Fall (WSJ)

A raft of economic data released Tuesday continues to paint a picture of sluggish growth for the third quarter in Japan, despite a tight labor market and rising wages. Industrial production fell a surprising 1.5% on month in August. Retail sales grew 1.9% on month, but separate data adjusted for inflation and expenditure on services showed household spending fell 4.7% on year. At the same time, the unemployment rate fell to 3.5%, a 17-year low. The tightening labor market has contributed to a run of year-on-year wage increases not seen in six years. But those wage gains are outpaced by inflation, meaning real wages are still down 2.6% on year. The government and the Bank of Japan believe wage growth will eventually filter through the economy and start a virtuous cycle of higher private spending and increased production and investment. But some private economists are skeptical about this rosy scenario. Others say that even if such a virtual cycle eventually materializes, the economy will likely lack a robust growth engine for some time.

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Repeat: Deflation is all that’s left. Until debts are restructured.

Eurozone Inflation Drops To Fresh 5 Year Low, Euro Tumbles (Zero Hedge)

Anyone confused why futures are doing their best to surge in the overnight session, the answer is simple: first it was Japan reporting the latest batch of atrocious economic data, which an hour ago was followed by Europe own abysmal econofreakshow, where Eurostat just reported that in September Eurozone inflation rose a meager 0.3% from a year ago, the lowest annual increase since October 2009.This marks the 12th straight month that Euro inflation has been below 1%, and far below the ECB’s goal of 2% inflation.

More importantly, it also shows that some 3 months of a sliding Euro have not only had zero impact on European export competitiveness, as the entire continent is careening into a triple dip recession, but that the ECB is completely powerless to create an inflationary spark, as not only is the bulk of the Eurozone flirting with disinflation but more and more European countries are in outright deflation. Also of note, while headline inflation was in line with expectations, it was core CPI that missed expectations of a 0.9% increase, and rose by only 0.7%, confirming that the most recent bout of deflation in Europe is about far more than just sliding energy prices. In fact for the culprit, perhaps look at Japan which is now exporting deflation hand over fist.

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Tick tick tick.

Europe Ticking All the Wrong Boxes Starts Mirroring Japan (Bloomberg)

Similarities between the euro region and Japan are intensifying, heaping pressure on Mario Draghi while offering good news for bond holders. Sluggish credit growth? Check. Slowing economy? Check. Falling market expectations for inflation? Check. Aging population? Yes, it has that too, placing Europe in a similar situation to what was encountered by the world’s third-largest economy after the bubble burst on its postwar Economic Miracle. That’s a concern for DZ Bank AG, the most bullish forecaster of German bunds in data compiled by Bloomberg. It estimates the 10-year yields will fall to a euro-era record of 0.5% by the first quarter, leaving them below the 0.65% percent median estimate for their Japanese peers.

With the official interest rate near zero, European Central Bank President Draghi may need to do more to steer the region away from the deflation and debt traps that condemned Japan to two decades of stagnation. “Renewed ECB activism offers hope that the euro area will not follow the path Japan embarked on in the 1990s,” said Nikolaos Panigirtzoglou, London-based global market strategist at JPMorgan Chase. “Low growth leads to low income growth. Combine that with persistently high unemployment and you’ve got a lack of confidence.” Europe should be on a roll. It’s never been cheaper for euro-area governments or individuals to borrow money and the ECB is seeking to put cash into the economy through cheap loans to banks and a pledge to buy asset-backed securities.

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A lot.

A Look At Just How Much China’s Housing Downturn Could Hurt GDP (WSJ)

Just how much will a downturn in China’s property market hurt the economy? A new analysis by analysts at Japanese bank Nomura sheds some light. China’s property market won’t recover any time soon, say the analysts, who figure the downturn will shave the country’s GDP growth by 1.4 percentage points in 2014 and 0.6 percentage points in 2015 if there are no drastic changes to policy. In the worst-case scenario , GDP growth could plunge by 4 percentage points. There is no easy way out: the property market correction will be long-lasting if orderly, or very painful if sudden, Nomura analysts Changchun Hua, Wendy Chen and Rob Subbaraman say in a report. The analysts came up with three scenarios. If government policy continues at its current pace—piecemeal targeted easing—GDP growth will drop by 1.4 percentage points this year because property takes a big bite out of industries like steel, construction, chemicals and transport.

If the government eases monetary policy by lifting credit curbs, cutting banks’ reserve requirement ratios and interest rates, and rolling out large stimulus packages, the impact on GDP would be smaller this year and next, shaving growth by 1.1 percentage points in 2014 and 0.3 percentage points in 2015. But in the longer term, it could be worse than continuing current policy because debt levels would be pushed higher and the oversupply situation would worsen, the analysts say. “This is a risky strategy as it could eventually lead to an even sharper correction in the sector, and indeed in the wider economy, ahead.” The third scenario is if the government does nothing and a housing crash ensues. In that case, GDP growth could fall 4 percentage points, the investment firm said. In any case, the downturn could last between two to four years.

“This is not a minor correction,” they said. “This property market downturn is different to those China has experienced in the past. Previous downturns were largely driven by tighter policies while this one appears more naturally driven by market forces.” The last two property market corrections in China occurred in 2007-08 and in 2011-12. (China, where the private housing market only started in 1998, has a shorter property cycle than more mature markets such as the U.S. and Japan.) Those downturns were triggered by policy tightening aimed at reining in property investment, but the market turned around quickly because policymakers changed their minds and loosened the curbs to counter effects of the global financial crisis in 2009 and slowing domestic growth in 2012. This time, the market isn’t likely to behave like a yo-yo. The country is currently plagued by an oversupply problem, especially in so-called third- and fourth-tier cities, and barring a significant crash, the correction will likely be long-lasting, the Nomura analysts said.

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Pimco May Suffer Over $250 Billion In Outflows: Deutsche (CNBC)

Estimates of how much investors are likely to pull from Pimco following the departure of star manager Bill Gross are swirling, with Deutsche Bank now expecting around $266 billion in outflows or a fall in assets equivalent to 20% over the next two years.
The firm has named Daniel Ivascyn as chief investment officer and Gross’s successor while Scott Mather, Mark Kiesel and Mihir Worah will take on Gross’s flagship $221 billion Total Return fund after his shock exit on Friday. Chief executive of Pimco Doug Hodge has said Gross’s former fund “does not define Pimco,” but analyst estimates of outflows are racking up. Deutsche Bank research argued that each €100 billion in outflows is equivalent to around 9% of third party assets under management (AUM), which reduces Pimco’s parent company Allianz’s earnings by around 2%.

The bank also cut its price target on the insurer to €135 from €140, but maintained a hold position on the stock. Bernstein Research expects asset outflows between 10 and 30% and sees a “good deal” of Pimco clients switching to Janus Capital Group – where Gross has taken up a post managing a recently launched unconstrained bond fund and similar strategies. “We estimate that a drop in AUM of 10% would have a minor impact on Allianz fair value of 2%, while a 30% drop in AUM would hit the stock by around 13% according to our fundamental valuation mode,” analysts led by Thomas Seidl said.

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Hong Kong Protesters Stockpile Supplies, Prepare For Long Haul (Reuters)

Tens of thousands of pro-democracy protesters extended a blockade of Hong Kong streets on Tuesday, stockpiling supplies and erecting makeshift barricades ahead of what some fear may be a push by police to clear the roads before Chinese National Day. Riot police shot pepper spray and tear gas at protesters at the weekend but withdrew on Monday to ease tension as the ranks of demonstrators swelled. Protesters spent the night sleeping or holding vigil unharassed on normally busy roads in the global financial hub. Rumors have rippled through crowds of protesters that police could be preparing to move in again on the eve of Wednesday’s anniversary of the Communist Party’s foundation of the People’s Republic of China in 1949. “Many powerful people from the mainland will come to Hong Kong. The Hong Kong government won’t want them to see this, so the police must do something,” Sui-ying Cheng, 18, a freshman at Hong Kong University’s School of Professional and Continuing Education, said of the National Day holiday.

“We are not scared. We will stay here tonight. Tonight is the most important,” she said. The protesters, mostly students, are demanding full democracy and have called on the city’s leader, Leung Chun-ying, to step down after Beijing ruled a month ago it would vet candidates wishing to run for Hong Kong’s leadership in 2017. While Leung has said Beijing would not back down in the face of protests it has branded illegal, he also said Hong Kong police would be able to maintain security without help from People’s Liberation Army (PLA) troops from the mainland. “When a problem arises in Hong Kong, our police force should be able to solve it. We don’t need to ask to deploy the PLA,” Leung told reporters at a briefing on Tuesday. There was a growing sense that the protests could come to a head later on Tuesday before the National Day celebrations.

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No.

Will Hong Kong Spark An Asian Spring? (CNBC)

Thousands of protesters campaigned for full democracy in Hong Kong over the weekend, raising the question: Could unrest spread to mainland China. “Today is a very important moment for Beijing and for the Hong Kong government because if they don’t control the streets of Hong Kong today they could see this thing start to mushroom,” Gordon Chang, author of ‘The Coming Collapse of China’ told CNBC on Monday. “Beijing has a lot at stake here as this is something that could spread…political scientists call it the ‘demonstration effect,'” he said. “We’re starting to see that now in China.” Netizens across China shared images from the protests and expressed their views via social media, but authorities quickly deleted posts and shut down websites, in line with China’s history of censorship.

Popular photo sharing website Instagram was blocked after photos and videos from the Hong Kong protests were posted, according to numerous reports. Meanwhile, the phrase “Occupy Central” was blocked on Weibo – the hugely popular micro-blogging site in China – on Sunday. Ripples of discontent have begun to show in Taiwan and Macau. In Taiwan, a state that is essentially autonomous, student leaders occupied the lobby of Hong Kong’s representative office on Monday in a show of support for democracy protesters, according to local media. Meanwhile, in Macau – another “special administrative region” like Hong Kong, a referendum conducted last month during the official election of its chief executive, showed a striking disparity between the election result and public opinion.

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Obama step in?!

US Judge Holds Argentina in Contempt of Court in Bond Payment Case (NY Times)


For more than a year, Judge Thomas P. Griesa of Federal District Court in Manhattan has warned that Argentina would suffer repercussions if it defied his orders regarding payments to bondholders. On Monday, the judge put some teeth behind those warnings, ruling the nation in contempt of court. He stopped short of issuing sanctions, however, saying he would make a decision on them in the future. Speaking firmly, Judge Griesa indicated that the Republic of Argentina had gone a step too far in seeking to sidestep his injunction that forbids the government from paying only the bondholders it chooses. “What has happened is the Republic, in various ways, has sought to avoid, to not attend to, almost to ignore this basic part of its financial obligations,” Judge Griesa said on Monday. The ruling was another dramatic turn in a legal battle that has pitted President Cristina Fernández de Kirchner of Argentina against a group of hedge funds that are seeking more than $1.5 billion in payments on bonds that defaulted in 2001.

In a separate move that could increase the tension, the Argentine government sent a letter to Secretary of State John F. Kerry on Monday morning before the hearing, seeking to enlist his support and calling the actions by Judge Griesa “excessive judicial harassment,” according to the embassy in Washington. “A declaration of contempt would result in an unprecedented escalation in the conflict,” the letter, signed by the Argentine ambassador to the United States, said. “We are in uncharted waters,” said Arturo C. Porzecanski, economist in residence at American University’s School of International Service. “This makes official the fact that Argentina has been a rogue debtor for many many years and has been in contempt of many many judgments.”

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And they’re right.

Argentina Says US Judge Contempt Order ‘Violates International Law’ (BAH)

The Foreign Ministry has asserted that New York district judge Thomas Griesa’s contempt ruling against Argentina is in clear breach of international law, adding that the decision had no practical ramifications against the nation and only served to aid the vulture fund campaign. The government department, headed by Foreign minister Héctor Timerman, stated this evening that Griesa’s ruling “is in violation of international law, the United Nations Charter and the Organisation of American States charter,” in a press statement.
“All of these instruments establish that the United States of America as a state is the only entity responsible for the actions of any of its organisms, such as the recent decision from its judicial branch,” the missive fired, hours after the judge’s ruling was made public.

“Judge Griesa’s decision has no practical effect, expect for providing new elements for the vulture funds to use in their slanderous political and media campaign against Argentina.” The Ministry strongly criticised the magistrate, who despite finding Argentina in contempt declined to immediately impose financial penalties of up to 50,000 dollars a day, as requested by plaintiffs NML Capital in the ongoing sovereign debt conflict in New York. “Griesa boasts the sad record of being the first judge to hold a sovereign state in contempt for paying a debt, after failing in his efforts to obstruct Argentina’s foreign debt restructuring,” the statement said. “The Argentina government reaffirms its decision to keep exercising its defence of national sovereignty, and requesting that the United States accepts the International Court of Justice’s juridisction in order to solve this controversy between the two countries.”

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Word.

Europe’s Real Crisis Will Be Political With Spain as Ground Zero (Phoenix)

Spain’s Mariano Rajoy is back with yet another display of why he should never have been allowed to take office in the first place. For those who need a quick primer, here’s a quick highlight reel of Rajoy’s more notable accomplishments:

1) Helped facilitate biggest housing bubble in Spanish history, a bubble so large that the US’s looks like a molehill in comparison

2) Took bribes and kickbacks from developers in helping to create said bubble (more on this later).

3) Claimed Spain would never need a bailout, then demanded a €100 billion bailout one weekend before flying off to watch a soccer match.

4) Raided Spain’s social security fund, investing 90% of its assets in Spanish bonds… which were on the verge of default a mere six months before.

5) Got caught with dirty money he received from property developers and stated the following, “…everything that has been said about me and my colleagues in the party is untrue, except for some things that have been published by some media outlets,”

Now Rajoy is dealing with the problem of Catalonia (a region in Spain) wanting independence. Catalonians are proposing putting the matter to a vote, much as Scotland recently did regarding its own move to potentially break away from the UK. Rajoy, never one to miss the opportunity to embarrass himself, has called the decision to vote for independence “profoundly anti-democratic.” Bear in mind, this is the same “leader” who likes to proclaim that Spain is in a recovery… while Spain’s unemployment is roughly 24% and youth unemployment is above 50%. At some point, the markets will call BS on Spain’s dreams of recovery and the bond markets will rebel. When this happens the whole fraud will come unraveled. However it might take a full-scale political crisis before this happens. And by the look of things we’re not far from one. We’re back in trouble whenever Spain takes out the long-term trendline for its 10-year bond yields.

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Democracy?

Spain Court Blocks Catalonia Vote as Standoff Escalates (Bloomberg)

Spain’s Constitutional Court temporarily blocked Catalan government plans to hold a vote on independence, raising the stakes in the central government’s standoff with the regional administration in Barcelona. Catalan president Artur Mas signed a decree on Sept. 27 calling for a Nov. 9 ballot as a non-binding consultation on independence for the region of about 7.5 million people in northeastern Spain. Spanish Prime Minister Mariano Rajoy denounced the vote as unconstitutional and said yesterday that his government had filed a lawsuit to block it. The suit was admitted for consideration, effectively blocking the Catalan decree and vote until the court makes a further ruling on the government’s legal action, a Madrid-based official at the court said last night by phone.

“It’s false that the right to vote can be assigned unilaterally to one region about a matter that affects all Spaniards,” Rajoy told reporters at the government palace in Madrid. “It’s profoundly anti-democratic.” Less than two weeks after Scotland voted against independence from the U.K. after 307 years of union, Mas and Rajoy are at loggerheads over whether the Spanish region can stick with its plan to vote on independence following the court’s blocking of the vote. Unlike in Scotland, polls suggest a majority of Catalans would support independence. “The Constitutional Court met at supersonic speed,” Mas said yesterday during a televised presentation of the steps to be taken on the proposed transition of Catalonia. “We hope the members of the Constitutional Court keep in mind that they should be a referee for everyone, not for one side only.”

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Mass graves uncovered. No mention in the west.

Russia Investigates ‘Kiev Sponsored Genocide’ In East Ukraine (Reuters)

Russia opened a criminal case Monday into what it called Kiev’s genocide of Russian-speaking residents in eastern Ukraine in a move that could increase tensions during a strained ceasefire in the region. An official statement said Russian-speaking citizens were targeted by Kiev forces using heavy weapons to kill over 2,500 people in the “Luhansk and Donetsk people’s republics,” the breakaway regions in the east. The investigation could ratchet up tensions between the post-Soviet neighbors weeks after Kiev and pro-Russian rebels agreed on a ceasefire earlier this month that has been marred by daily skirmishes and artillery shelling. “The Investigative Committee opened has opened a criminal case into the genocide of the Russian-speaking population of Ukraine’s southeast,” said the statement by the Investigative Committee of the Russian Federation, a law enforcement body that answers only to President Vladimir Putin.

“Unidentified representatives of Ukraine’s senior political and military leadership, National Guard and the Right Sector [nationalist organization] gave orders aimed at the intentional annihilation of the Russian-speaking citizens,” the statement said. The statement cited violations of the 1948 U.N. convention on genocide and other “international legal acts” to describe the reported violence, including the destruction of 500 houses and public infrastructure buildings since fighting erupted in April. Russia has long blamed Kiev for violence against civilians in the east, as the West has accused Moscow of sending weapons and troops to help pro-Russian rebels fighting Kiev’s forces. A recent U.N. report put the death toll at 2,593 people on both sides and accused pro-Russian separatists of a wide array of human rights abuses, including murder, abductions and torture.

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“Carter said 200-300 girls are sold into sexual slavery every month in his home state Georgia.”

Happy birthday, Mr. President.

Jimmy Carter, Turning 90, Says Slavery Is Worse Now Than In 1700s (CNBC)

Human slavery is not just a major issue in developing countries, but is a serious problem in the U.S. and is more prolific now than during the 18th and 19th century, former President Jimmy Carter has told Tania Bryer, host of “CNBC Meets.” Carter said 200-300 girls are sold into sexual slavery every month in his home state Georgia, and many living in advanced economies are completely unaware of the abuse happening to young women close to home. Referring to facts in his most recent book, “A Call to Action, Women, Religion, Violence and Power,” Carter describes the abuse of women around the world as “the worst, unaddressed issue that the world faces today.” “And those of us in the more advanced countries don’t know much about horrible abuse of girls whose genitals are mutilated when they’re very young, children who are killed because a girl is raped by strangers and her family kills her to protect their own nation’s honor.

These kinds of things go on in the more remote parts of the world as far as we’re concerned,” the Democratic former president said. “But even in the United States, human slavery now is greater than it ever was during the 18th or 19th century. In Atlanta, Georgia, we have between 200-300 girls sold into sexual slavery every month,” he added. Before moving into politics, Carter was in the Navy and worked on the family’s farm. He served as the 39th president from 1977 to 1981 and was awarded the Nobel Peace Prize in 2002 for his efforts in finding peaceful solutions to international conflicts and his work in human rights. Carter, who is turning 90 on Wednesday, and wife Rosalynn still travel the world doing work for The Carter Center, his human rights and health care charity, which he set up after leaving the White House.

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Export land model.

Saudi Arabia Poised To Tip Into Deficit (CNBC)

Saudi Arabia risks falling into a budget deficit next year and may have to tap its reserves, the International Monetary Fund (IMF) has warned. One sign that Saudi Arabia is in danger of dipping into deficit is its “break-even oil price” – the price oil would need to be for the country to balance its budget. The IMF, in its annual consultation paper released Wednesday, notes that Saudi Arabia’s break-even price has risen to $89 a barrel in 2013 from $78 a barrel in 2012. It would be the first time since 2010 that the Middle East’s largest economy records a deficit for its government finances. Apart from domestic expenditures such as ambitious infrastructure outlays, pressure on government finances is also coming from substantial aid pledges to countries across the Arab World.

“This expenditure path and lower oil revenues lead to an overall fiscal deficit in 2015, which is expected to deteriorate further to almost 7.5% of (gross domestic product) GDP by 2019,” the fund said in the 54-page dossier. But while Saudi officials have shrugged off suggestions spending needed to be reined in, experts diverge on projections. “According to our model, we will see a fiscal deficit in 2016 as government maintains high spending while a gradual decline in oil prices will push revenues downward,” Fahad Alturki, Head of Research at Riyadh-based Jadwa Investment, told CNBC. “We also factor in lower oil production as many of the oil outages that we see today are expected to resume production”.

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Something tells me taxpayers will chip in.

North Sea Oil Costs Threaten $1.6 Trillion Investment Needed (Bloomberg)

North Sea oil operators’ surging costs risk scaring away the more than 1 trillion pounds ($1.6 trillion) of investment needed to meet their production goals, according to industry lobby Oil & Gas U.K. The country needs that investment if it hopes to recover the equivalent of more than 20 billion barrels of oil, the group said today in a statement. Unit operating costs are about 60% higher than as recently as 2011, it said. “The U.K. has to compete for each and every pound of that investment,” Malcolm Webb, chief executive officer of the industry group, said today in the statement. “If the current trend of rising cost continues, the U.K. Continental Shelf will cease to provide a healthy return on investment.”

Energy resources were central to the debate over Scottish independence, with those supporting a split claiming almost all the oil as the nation’s own. Oil companies were among those who said before the Sept. 18 referendum that keeping Britain’s 307-year-old union was good for the industry because of the stability and certainty it provided. A review by Ian Wood, former head of engineering company John Wood Group Plc (WG/), this year estimated there were 12 billion to 24 billion barrels yet to be extracted from the North Sea. Production has dropped 40% in the past three years as fields mature, according to the February report. “We need a lighter tax burden, a simpler and more predictable system of field allowances and fiscal support for exploration,” said Michael Tholen, director of economics at Oil and Gas U.K. The government is expected to announce the results of its fiscal review in December.

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How low are we going to take this?

Earth Lost 50% Of Its Wildlife In The Past 40 Years (Guardian)

The number of wild animals on Earth has halved in the past 40 years, according to a new analysis. Creatures across land, rivers and the seas are being decimated as humans kill them for food in unsustainable numbers, while polluting or destroying their habitats, the research by scientists at WWF and the Zoological Society of London found. “If half the animals died in London zoo next week it would be front page news,” said Professor Ken Norris, ZSL’s director of science. “But that is happening in the great outdoors. This damage is not inevitable but a consequence of the way we choose to live.” He said nature, which provides food and clean water and air, was essential for human wellbeing. “We have lost one half of the animal population and knowing this is driven by human consumption, this is clearly a call to arms and we must act now,” said Mike Barratt, director of science and policy at WWF. He said more of the Earth must be protected from development and deforestation, while food and energy had to be produced sustainably.

The steep decline of animal, fish and bird numbers was calculated by analysing 10,000 different populations, covering 3,000 species in total. This data was then, for the first time, used to create a representative “Living Planet Index” (LPI), reflecting the state of all 45,000 known vertebrates. “We have all heard of the FTSE 100 index, but we have missed the ultimate indicator, the falling trend of species and ecosystems in the world,” said Professor Jonathan Baillie, ZSL’s director of conservation. “If we get [our response] right, we will have a safe and sustainable way of life for the future,” he said. If not, he added, the overuse of resources would ultimately lead to conflicts. He said the LPI was an extremely robust indicator and had been adopted by UN’s internationally-agreed Convention on Biological Diversity as key insight into biodiversity.

A second index in the new Living Planet report calculates humanity’s “ecological footprint”, ie the scale at which it is using up natural resources. Currently, the global population is cutting down trees faster than they regrow, catching fish faster than the oceans can restock, pumping water from rivers and aquifers faster than rainfall can replenish them and emitting more climate-warming carbon dioxide than oceans and forests can absorb. The report concludes that today’s average global rate of consumption would need 1.5 planet Earths to sustain it. But four planets would be required to sustain US levels of consumption, or 2.5 Earths to match UK consumption levels.

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Useless stats.

Affordable Global Housing Will Cost $11 Trillion (Bloomberg)

Replacing the world’s substandard housing and building affordable alternatives to meet future global demand would cost as much as $11 trillion, according to initial findings in a McKinsey & Co. report. The shortage of decent accommodation means as many as 1.6 billion people from London to Shanghai may be forced to choose between shelter or necessities such as health care, food and education, data disclosed at the 2014 CityLab Conference in Los Angeles show. McKinsey will release the full report in October. The global consulting company says governments should release parcels of land at below-market prices, put housing developments near transportation and unlock idle property hoarded by speculators and investors. The report noted that China fines owners 20% of the land price if property is undeveloped after a year and has the right to subsequently confiscate it.

“Cities struggle with the dual challenges of housing their poorest citizens and providing housing at a reasonable cost,” said the paper, whose lead author, Jonathan Woetzel, is a Shanghai-based director of McKinsey Global Institute, the company’s research unit. About 330 million households — about 1.2 billion people — now struggle with substandard housing, a number that may increase to 440 million in 11 years, McKinsey forecasts. Acceptable housing is within an hour’s commute of work and has basic services including flush toilets and running water, the report says. What the authors call the affordable-housing gap now stands at about $650 billion a year, or 1% of global gross domestic product. The baseline for their calculation is housing payments that exceed 30% of household income in 2,400 cities around the globe.

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Sep 282014
 
 September 28, 2014  Posted by at 7:55 pm Finance Tagged with: , , , , ,  16 Responses »
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Marjory Collins Traffic jam on road from the Bethlehem Fairfield shipyard to Baltimore April 1943

It is, let’s say, exceedingly peculiar to begin with that a government – in this case the American one, but that’s just one example -, in name of its people tasks a private institution with regulating not just any sector of its economy, but the richest and most politically powerful sector in the nation. Which also happens to be at least one of the major forces behind its latest, and ongoing, economical crisis.

That there is a very transparent, plain for everyone to see, over-sized revolving door between the regulator and the corporations in the sector only makes the government’s choice for the Fed as regulator even more peculiar. Or, as it turns out, more logical. But it is still preposterous: regulating the financial sector is a mere illusion kept alive through lip service. Put differently: the American government doesn’t regulate the banks. They effectively regulate themselves. Which inevitably means there is no regulation.

The newly found attention for ProPublica writer Jake Bernstein’s series of articles, which date back almost one whole year, about the experiences of former Fed regulator Carmen Segarra, and the audio files she collected while trying to do her job, leaves no question about this.

What’s going on is abundantly clear, because it is so simple. The intention of the New York Fed as an organization is not to properly regulate, but only to generate an appearance – or illusion – of proper regulation. That is to say, Goldman will accept regulation only up to the point where it would cut into either the company’s profits or its political wherewithal.

What the ‘Segarra Files’ point out is that the New York Fed plays the game exactly the way Goldman wants it played. Ergo: there is no actual regulation taking place, and Goldman will comply only with those requests from the New York Fed that it feels like complying with.

In the articles, the term ‘regulatory capture’ pops up, which means – individual – regulators are ‘co-opted’ by the banks they – are supposed to – regulate. But the capture runs much larger and wider. It’s not about individuals, it’s a watertight and foolproof system wide capture.

The government picks a – private – regulator which has close ties to the banks. The government knows this. It also knows this means that its chosen regulator will always defer to the banks. And when individual regulators refuse to comply with the system, they are thrown out.

In one of the cases Segarra was involved in during her stint at the Fed, the Kinder Morgan-El Paso takeover deal, Goldman advises one party, has substantial stock holdings in the other, and appoints a lead counsel who personally has $340,000 in stock involved. Conflict of interest? Goldman says no, and the Fed complies (defers).

The lawsuit Segarra filed against the NY Fed and three of its executives was thrown out on technicalities by a judge whose husband was legal counsel for Goldman in the exact same case. No conflict of interest, the judge herself decides.

This is not regulation, it’s a sick and perverted joke played on the American people, which it has been paying for it through the nose for years, and will for many years to come. Sure, Elizabeth Warren picks it up now and wants hearings on the topic in Congress, but she’s a year late (it’s been known since at least December 2013 that Segarra has audio recordings) and moreover, it was Congress itself that made the NY Fed the regulator of Wall Street. Warren has as much chance of getting anywhere as Segarra did (or does, she’s appealing the case).

The story: In October 2011, Carmen Segarra was hired by New York Fed to be embedded at Goldman as a risk specialist, and in particular to investigate to what degree the company complied with a 2008 Fed Supervision and Regulation Letter, known as SR 08-08, which focuses on the requirement for firms like Goldman, engaged in many different activities, to have company-wide programs to manage business risks, in particular conflict-of-interest. Some people at Goldman admitted it did not have such a company-wide policy as of November 2011. Others, though, said it did.

Let’s take it from there with quotes from the 5 articles Bernstein wrote on the topic over the past year. To listen to the Segarra files, please go to The Secret Recordings of Carmen Segarra at This American Life.

One last thing: Jake Bernstein’s work is of high quality, but I can’t really figure why he syas things such as teh audio files show: “a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority”. Through his work, and the files, it should be clear that just ain’t so. Both the Fed’s policy and authority are crystal clear and ironclad.

October 10 2013:

NY Fed Fired Examiner Who Took on Goldman

In the spring of 2012, a senior examiner with the Federal Reserve Bank of New York determined that Goldman Sachs had a problem. Under a Fed mandate, the investment banking behemoth was expected to have a company-wide policy to address conflicts of interest in how its phalanxes of dealmakers handled clients. Although Goldman had a patchwork of policies, the examiner concluded that they fell short of the Fed’s requirements. That finding by the examiner, Carmen Segarra, potentially had serious implications for Goldman, which was already under fire for advising clients on both sides of several multibillion-dollar deals and allegedly putting the bank’s own interests above those of its customers. It could have led to closer scrutiny of Goldman by regulators or changes to its business practices.

Before she could formalize her findings, Segarra said, the senior New York Fed official who oversees Goldman pressured her to change them. When she refused, Segarra said she was called to a meeting where her bosses told her they no longer trusted her judgment. Her phone was confiscated, and security officers marched her out of the Fed’s fortress-like building in lower Manhattan, just 7 months after being hired. “They wanted me to falsify my findings,” Segarra said in a recent interview, “and when I wouldn’t, they fired me.” Today, Segarra filed a wrongful termination lawsuit against the New York Fed in federal court in Manhattan seeking reinstatement and damages.

[..] Goldman is known for having close ties with the New York Fed, its primary regulator. The current president of the New York Fed, William Dudley, is a former Goldman partner. One of his New York Fed predecessors, E. Gerald Corrigan, is currently a top executive at Goldman. At the time of Segarra’s firing, Stephen Friedman, a former chairman of the New York Fed, was head of the risk committee for Goldman’s board of directors.

[..] Segarra’s termination has not been made public before now. She was specifically assigned to assess Goldman’s conflict-of-interest policies and took a close look at several deals, including a 2012 merger between two energy companies: El Paso Corp. and Kinder Morgan. Goldman had a $4 billion stake in Kinder Morgan while also advising El Paso on the $23 billion deal. Segarra said she discovered previously unreported deficiencies in Goldman’s efforts to deal with its conflicts, which were also criticized by the judge presiding over a shareholder lawsuit concerning the merger. Her lawsuit also alleges that she uncovered evidence that Goldman falsely claimed that the New York Fed had signed off on a transaction with Santander, the Spanish bank, when it had not. A supervisor ordered her not to discuss the Santander matter, the lawsuit says, allegedly telling Segarra it was “for your protection.”

[..] As part of her examination, Segarra began making document requests. The goal was to determine what policies Goldman had in place and to see how they functioned in Kinder Morgan’s acquisition of El Paso. The merger was in the news after some El Paso shareholders filed a lawsuit claiming they weren’t getting a fair deal.

[..] By mid-March 2012, Goldman had given Segarra and a fellow examiner from the New York State Banking Department documents and written answers to their detailed questions. Some of the material concerned the El Paso-Kinder Morgan deal. Segarra and other examiners had been pressing Goldman for details about the merger for months. But it was from news reports about the shareholder lawsuit that they learned the lead Goldman banker representing El Paso, Steve Daniel, also had a $340,000 personal investment in Kinder Morgan, Segarra said.

[..] At the New York Fed, Goldman told the regulators that its conflict-of-interest procedures had worked well on the deal. Executives said they had “exhaustively” briefed the El Paso board of directors about Goldman’s conflicts, according to Segarra’s meeting minutes. Yet when Segarra asked to see all board presentations involving conflicts of interest and the merger, Goldman responded that its Business Selection and Conflict Resolution Group “as a general matter” did not confer with Goldman’s board. The bank’s responses to her document requests offered no information from presentations to the El Paso board discussing conflicts, even though lawsuit filings indicate such discussions occurred.

Goldman did provide documents detailing how it had divided its El Paso and Kinder Morgan bankers into “red and blue teams.” These teams were told they could not communicate with each other — what the industry calls a “Chinese Wall” — to prevent sharing information that could unduly benefit one party. Segarra said Goldman seating charts showed that that in one case, opposing team members had adjacent offices. She also determined that three of the El Paso team members had previously worked for Kinder Morgan in key areas. “They would have needed a Chinese Wall in their head,” Segarra said.

[..] In April, Goldman assembled some of its senior executives for a meeting with regulators to discuss issues raised by documents it had provided. Segarra said she asked [Michael] Silva [senior supervising officer for the Fed at Goldman] to invite officials from the SEC, because of what she had learned about the El Paso-Kinder Morgan merger, which was awaiting approval by other government agencies. Segarra said she and a fellow examiner from New York state’s banking department had prepared 65 questions. But before the meeting, Silva told her she could only ask questions that did not concern the El Paso-Kinder Morgan merger, she said.

[..] As the Goldman examination moved up the Fed’s supervisory chain, Segarra said she began to get pushback. According to her lawsuit, a colleague told Segarra in May that Silva was considering taking the position that Goldman had an acceptable firm-wide conflict-of-interest policy. Segarra quickly sent an email to her bosses reminding them that wasn’t the case and that her team of risk specialists was preparing enforcement recommendations. In response, Kim [her supervisor] sent an email saying Segarra was trying to “front-run the supervisory process.”

October 28 2013:

So Who is Carmen Segarra? A Fed Whistleblower Q&A

After getting a master’s degree in French cultural studies at Columbia’s campus in Paris, she went on to law school at Cornell. She then spent 13 years working at different financial firms, including Citigroup and Société Générale. Outside of the office, she held leadership positions in the Hispanic National Bar Association. Hired by the Fed as a legal and compliance specialist, she was told to pay particular attention to how Goldman was complying with the Fed’s requirements on conflicts of interest. Segarra says she was fired after she found that Goldman lacked an adequate company-wide policy to manage conflicts of interest — and after her superiors urged her to change this finding and she refused.

Dec 6 2013:

New Allegations from Fired Examiner Describe Chaotic Workplace at New York Fed

Segarra claims she was terminated for refusing to change her finding that Goldman Sachs did not have appropriate policies for handling conflicts of interest in its business dealings. Her complaint alleges that the senior supervising officer for the Fed at Goldman, Michael Silva, and his deputy, Michael Koh, obstructed her examination of Goldman on several occasions. Silva, who had worked at the New York Fed since 1992, left last month to take a job as the chief regulatory officer and compliance leader of GE Capital. That firm is one of the Too-Big-to-Fail financial institutions regulated by the New York Fed.

[..]While at the New York Fed, Segarra had a direct supervisor, Jonathon Kim, who oversaw legal and compliance specialist examiners stationed at several banks. According to the amended complaint, Kim, also a defendant, told Segarra that the Fed “had failed to clearly articulate the different roles of [the relationship managers] and bank examiners.” When Segarra complained about the obstruction, the complaint says, Kim told her she needed to learn “the critical skills of ‘absorbing and diffusing.’” “They allowed this lack of clarity to interfere with Carmen’s bank examining activity,” said Segarra’s attorney, Linda Steagle. “In fact we are saying that this amorphous structure exists, in large part, so they can do exactly that.”

[..] In an addition to the amended complaint, the parties this week filed a joint letter detailing a trial schedule that is expected to stretch into next year. The letter discloses that Segarra possesses “audio recordings of several meeting with defendants” and suggests that they might assist the Court if there are disputes over facts in the case. The New York Fed is one of 12 regional reserve banks that form the Federal Reserve System. It is the largest such bank in terms of assets and volume of activity, according to its website. While the New York Fed is a private bank, the Federal Reserve’s Board of Governors in Washington, DC, delegates a public regulatory function to it.

April 24 2014:

Judge Tosses Retaliation Lawsuit by Fired N.Y. Fed Examiner

U.S. District Judge Ronnie Abrams in New York ruled late Wednesday that the assertion by Carmen Segarra that supervisors retaliated against her failed to fall within the whistleblower statute under which she filed her case. The law, enacted in 1989 after the savings and loan crisis to protect bank examiners from outside interference, covers an individual who “discloses protected information to a third party, not when she is asked to alter that information,” the judge ruled. In October, [Segarra] filed a wrongful termination complaint naming the New York Fed and three of its officials.

The judge dismissed the claims against the three officials, saying the law could only be used to file lawsuits against institutions and not individuals. Known as the “depository institution employee protection remedy,” it safeguards examiners who “provide information” about “any possible violation of any law or regulation.” In her ruling, Abrams also concluded that the Fed guidance Segarra cited — that Goldman Sachs have a firm-wide conflicts-of-interest policy — was only advisory and not a law or regulation. As such, it was not covered under the statute, the judge decided.

[..] Abrams’ ruling also recounts how, earlier this month, the judge disclosed to the parties in the case that her husband, Greg Andres, a partner at the law firm Davis Polk & Wardwell in New York, was representing Goldman Sachs in an advisory capacity. During a telephone conference, Abrams asked lawyers for the Fed and Segarra if they wanted to her to recuse herself or consult with their clients. The revelation came the day before oral arguments on a motion by the New York Fed to dismiss the case. During the call, both sides declined to request a recusal.

After the arguments, however, Segarra’s lawyer sent out a list of questions asking about the relationship of Andres with Goldman Sachs. In her ruling, Abrams said the questions came too late and gave the appearance that Segarra was shopping for another judge. “Such an attempt to engage in judicial game-playing strikes at the core of our legal system,” the judge wrote. Abrams had also previously worked at a law firm with the Fed’s lead counsel in the case, but the judge said that the two “didn’t work together closely.”

September 26 2014:

Inside the New York Fed: Secret Recordings and a Culture Clash

Barely a year removed from the devastation of the 2008 financial crisis, the president of the Federal Reserve Bank of New York faced a crossroads. Congress had set its sights on reform. The biggest banks in the nation had shown that their failure could threaten the entire financial system. Lawmakers wanted new safeguards. The Federal Reserve, and, by dint of its location off Wall Street, the New York Fed, was the logical choice to head the effort. Except it had failed miserably in catching the meltdown. New York Fed President William Dudley had to answer two questions quickly: Why had his institution blown it, and how could it do better?

So he called in an outsider, a Columbia University finance professor named David Beim, and granted him unlimited access to investigate. In exchange, the results would remain secret. After interviews with dozens of New York Fed employees, Beim learned something that surprised even him. The most daunting obstacle the New York Fed faced in overseeing the nation’s biggest financial institutions was its own culture. The New York Fed had become too risk-averse and deferential to the banks it supervised. Its examiners feared contradicting bosses, who too often forced their findings into an institutional consensus that watered down much of what they did.

Beim provided a path forward. He urged the New York Fed to hire expert examiners who were unafraid to speak up and then encourage them to do so. It was essential, he said, to preventing the next crisis. A year later, Congress gave the Federal Reserve even more oversight authority. And the New York Fed started hiring specialized examiners to station inside the too-big-to fail institutions, those that posed the most risk to the financial system. One of the expert examiners it chose was Carmen Segarra. Segarra appeared to be exactly what Beim ordered.

Passionate and direct, schooled in the Ivy League and at the Sorbonne, she was a lawyer with more than 13 years of experience in compliance – the specialty of helping banks satisfy rules and regulations. The New York Fed placed her inside one of the biggest and, at the time, most controversial banks in the country, Goldman Sachs. It did not go well. She was fired after only seven months. Segarra sued the New York Fed and her bosses, claiming she was retaliated against for refusing to back down from a negative finding about Goldman Sachs. A judge threw out the case this year without ruling on the merits, saying the facts didn’t fit the statute under which she sued.

At the bottom of a document filed in the case, however, her lawyer disclosed a stunning fact: Segarra had made a series of audio recordings while at the New York Fed. Worried about what she was witnessing, Segarra wanted a record in case events were disputed. So she had purchased a tiny recorder at the Spy Store and began capturing what took place at Goldman and with her bosses. Segarra ultimately recorded about 46 hours of meetings and conversations with her colleagues. Many of these events document key moments leading to her firing. But against the backdrop of the Beim report, they also offer an intimate study of the New York Fed’s culture at a pivotal moment in its effort to become a more forceful financial supervisor.

The recordings make clear that some of the cultural obstacles Beim outlined in his report persisted almost three years after he handed his report to Dudley. They portray a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority while integrating Segarra and a new corps of expert examiners into a reorganized supervisory scheme.

Segarra became a polarizing personality inside the New York Fed — and a problem for her bosses — in part because she was too outspoken and direct about the issues she saw at both Goldman and the Fed. Some colleagues found her abrasive and complained. Her unwillingness to conform set her on a collision course with higher-ups at the New York Fed and, ultimately, led to her undoing.

In a tense, 40-minute meeting recorded the week before she was fired, Segarra’s boss repeatedly tries to persuade her to change her conclusion that Goldman was missing a policy to handle conflicts of interest. Segarra offered to review her evidence with higher-ups and told her boss she would accept being overruled once her findings were submitted. It wasn’t enough.