Aug 052018
 August 5, 2018  Posted by at 8:57 am Finance Tagged with: , , , , , , , , , , ,  

Claude Monet Hollowed Cliff near Étretat 1883


The Real Threat To The Fed’s Independence Is Wall Street, Not Trump (WM)
The Trillion-Dollar Question: Can The Tech Giants Keep Growing? (G.)
Light It Up (Kunstler)
IMF Option Looms Larger For Turkey Amid Row With US (AL M.)
Beware the Slippery Slope of Facebook Censorship (Matt Taibbi)
Why Theresa May Must Stop The Brexit Clock (O.)
UK Trade Minister Fox Says EU Is Pushing Britain To No-Deal Brexit (R.)
Separating Children From Their Parents Puts UK Government To Shame, Too (O.)
Britain’s Economics Students Are Dangerously Poorly Educated (G.)
How Reality Is Being Redefined (Slog)
Greece’s Unemployment Highest in Developed World (GR)
Greece: An Economy That Has Shrunk So Much It Looks War-Torn (WaPo)



But we’ve given them all the power…

The Real Threat To The Fed’s Independence Is Wall Street, Not Trump (WM)

[..] the real threat to the Fed’s independence isn’t coming from Trump—it’s coming from Wall Street. The Fed’s structural flaws have led to regulatory capture, which compromises its ability to set monetary and regulatory policy in a manner that isn’t tilted to favor those at the very top of the economic ladder. Trump may have broken a norm by commenting on monetary policy, but the Fed’s status quo is unaccountable, opaque decision-making shaped by deep conflicts of interest with the very financial institutions the Fed is ostensibly supposed to supervise. Consider, for instance, the abrupt resignation in March of David Cote from the New York Fed’s board of directors—a move that came as a shock to many Fed watchers.

Cote was one of just a couple people responsible for choosing the next president of the New York Fed, the most powerful economic policymaking position in the country that Trump doesn’t control. Yet before the search for New York Fed President Bill Dudley’s successor had formally concluded, Cote left the board to pursue “new business opportunities that could affect his eligibility to serve”—later revealed to be helping Goldman Sachs undertake an ambitious corporate acquisition strategy. The New York Fed claims that Cote and his fellow board members had already decided on former San Francisco Fed President John Williams to succeed Dudley by the time that Cote announced his resignation, but that means that Cote was simultaneously negotiating a new gig at Goldman Sachs while selecting one of Goldman’s top regulators.

The entire ordeal served as an unsettling reminder of the cozy relationship between the Federal Reserve and the biggest behemoth on Wall Street. Prior to being selected as New York Fed president in 2009, Dudley was Goldman Sachs’s chief economist. In 2008, Goldman Sachs Director Stephen Friedman chaired the New York Fed’s board of the directors at the same moment that it was reviewing Goldman’s application to become a bank holding company. In 2014, leaked tapes exposed New York Fed regulators pressuring one of their examiners to back off of a finding that would have imperiled Goldman Sachs’s ability to engage in a deal with Banco Santander. And in 2015, the Fed chose three consecutive men with strong ties to Goldman Sachs to be new Federal Reserve Bank presidents.

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Only if we let them.

The Trillion-Dollar Question: Can The Tech Giants Keep Growing? (G.)

It has been a tumultuous couple of weeks for America’s high-flying technology stocks, even by their own unique standards. Their shares have been soaring since the start of the year, despite being buffeted by trade war fears as President Trump talked of limiting Chinese investments in the US and restricting American technology imports to China. But now there are signs that cracks may be starting to appear in some of the biggest firms in the sector. Facebook suffered the biggest ever one-day drop in a company’s market value – losing more than £90bn – after its growth slowed in the wake of the Cambridge Analytica scandal. Twitter lost 20%, or $5bn, as it reported a surprise fall in active monthly users, while streaming service Netflix missed its targets for subscriber numbers.

On the other hand, electric car specialist Tesla managed to head in the right direction despite making a $717m second-quarter loss, as its controversial chief executive, Elon Musk, regained investor confidence after apologising for previous outbursts. That was in marked contrast to a conference call for the company’s previous set of figures, when he accused a Wall Street analyst of “boring bonehead questions” and ignored queries from investors. But the pick of the bunch remains Apple, which beat Amazon and Google to reach the landmark $1 trillion valuation on Thursday.

Despite the recent rollercoaster ride, the five key tech stocks, known as the “Faangs” – Facebook, Amazon, Apple, Netflix, and Alphabet-owned Google – have reached breathtaking heights. The total value of the five companies amounts to a staggering 19% of total US GDP. But their surge in value has prompted fears of a re-run of the dotcom boom of the late 1990s, when technology businesses dominated the stock market before coming crashing to earth. Russ Mould at investment group AJ Bell says: “That [19%] compares to the 15.5% of US GDP reached by the five biggest companies by value at the US stock market’s peak in the fourth quarter of 1999, just before the technology, media and telecoms bubble burst and that particular mania came to grief.”

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“That’s my theory about what Russia is up to. If you have a better one, let’s hear it?”

Light It Up (Kunstler)

The Guardians of the Galaxy at National Public Radio were beside themselves Wednesday night reporting that “the lights are blinking red for a 2018 election attack by Russia.” Well, isn’t that an interesting set-up? In effect, NPR is preparing its listeners in advance to reject and dispute the coming midterm election if they’re not happy with the results. Thus continues America’s institutional self-sabotage, with the help of a news media that’s become the errand boy of the Deep State.

What do I mean by the Deep State? The vested permanent bureaucracy of Washington DC, and especially its vastly overgrown and redundant “Intel Community,” which has achieved critical mass to take on a life of its own within the larger government, makes up its own rules of conduct, not necessarily within the rule of law, and devotes too much of its budget and influence defending its own prerogatives rather than the interests of the nation.

Personally, I doubt that President Putin of Russia is dumb enough to allow, let alone direct, his intel services to lift a finger “meddling” in the coming US midterm election, with this American intel behemoth vacuuming every digital electron on earth into the NSA’s bottomless maw of intercepted secrets. Mr. Putin must have also observed by now that the US Intel Community is capable of generating mass public hallucinations, to the beat of war-drums, and determined not to give it anything to work with. That’s my theory about what Russia is up to. If you have a better one, let’s hear it?

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Turkey double-crossed the US in a prisoner swap deal. Bad idea of course. Erdogan wants Gulen, but this is not the way.

IMF Option Looms Larger For Turkey Amid Row With US (AL M.)

While the climate of uncertainty is discouraging investments, inflation is eroding real incomes and curbing domestic consumption. As a result, the shrinking demand is bearing on economic growth, which has relied largely on the domestic market. The Turkish economy, which grew 7.4% in 2017, is expected to slow in the third quarter before beginning to contract.

The growing uncertainties are discouraging also the inflow of hot money from abroad, which Turkey desperately needs. Moreover, existing foreign investors have been fleeing the Turkish stock market, albeit slowly — a trend that contributes to sustaining the high prices of foreign exchange, especially the dollar. Accordingly, Turkey’s risk premium — reflected in credit default swaps (CDS) — is on the rise. Turkey’s CDS, which had stood at 166 basis points Feb. 1 and 199 basis points May 1, hit a record high of 334 basis points on the evening of Aug. 1 — up from 321 points in the morning. The increasing risk premium means that Turkey will now face higher interest rates when it tries to borrow from foreign creditors.

The country’s external financing needs for the next 12 months amount to $230 billion, including $180 billion to roll over external debts and $50 billion to cover its gaping current account deficit. Hence, the question of how the required funds will be secured and at what cost is crucial. The tensions with Washington came amid this already serious crunch, exacerbating the woes of Erdogan’s regime. The row over Brunson had flared last week, as both President Donald Trump and Vice President Mike Pence threatened sanctions unless Ankara took “immediate action” to release the pastor, who is being held on what Washington sees as bogus charges of espionage and collaboration with terrorist groups.

The warnings had an immediate economic effect, pushing up Turkey’s risk premium, as pundits sought to predict the scope of the upcoming sanctions. Some suggested that Washington’s hardening stance would bear on the flow of foreign capital to Turkey and the support it might seek from the IMF, while others saw trouble looming over Halkbank, the Turkish public lender embroiled in a scheme to evade US sanctions against Iran. Ultimately, Washington announced sanctions on Interior Minister Suleyman Soylu and Justice Minister Abdulhamit Gul under the 2016 Magnitsky Act, which targets individuals and entities involved in human rights abuses. According to Bloomberg, this “could be just the start of what would look like a US assault on Turkey’s vulnerable economy,” including a potentially hefty fine on Halkbank.

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There’s Mark Warner again, the guy who with Comey screwed up the Assange deal with the DOJ.

Beware the Slippery Slope of Facebook Censorship (Matt Taibbi)

You may have seen a story this week detailing how Facebook shut down a series of accounts. As noted by Politico, Facebook claimed these accounts “sought to inflame social and political tensions in the United States, and said their activity was similar — and in some cases connected — to that of Russian accounts during the 2016 election.” Similar? What does “similar” mean? The death-pit for civil liberties is usually found in a combination of fringe/unpopular people or ideas and a national security emergency. This is where we are with this unsettling new confab of Facebook, Congress and the Trump administration.

Read this jarring quote from Sen. Mark Warner (D-VA) about the shutting down of the “inauthentic” accounts: “Today’s disclosure is further evidence that the Kremlin continues to exploit platforms like Facebook to sow division and spread disinformation… I also expect Facebook, along with other platform companies, will continue to identify Russian troll activity and to work with Congress…” This was in a story in which Facebook stated that it did not know the source of all the pages. They might be Russian, or they might just be Warner’s idea of “sowing division.” Are we comfortable with that range of possibilities?

[..] Facebook was “helped” in its efforts to wipe out these dangerous memes by the Atlantic Council, on whose board you’ll find confidence-inspiring names like Henry Kissinger, former CIA chief Michael Hayden, former acting CIA head Michael Morell and former Bush-era Homeland Security chief Michael Chertoff. (The latter is the guy who used to bring you the insane color-coded terror threat level system.) These people now have their hands on what is essentially a direct lever over nationwide news distribution. It’s hard to understate the potential mischief that lurks behind this union of Internet platforms and would-be government censors. As noted in Rolling Stone earlier this year, 70 percent of Americans get their news from just two sources, Facebook and Google. As that number rises, the power of just a few people to decide what information does and does not reach the public will amplify significantly.

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Makes sense. But too much of the whole thing doesn’t.

Why Theresa May Must Stop The Brexit Clock (O.)

May’s cabinet colleagues, fanning out across the continent like Patton’s Third Army to advance her Chequers compromise, do not appear to have fared any better. Especially embarrassing are the efforts of Jeremy Hunt, the new foreign secretary. He gravely warned puzzled Europeans last week that Britain was heading for “no-deal by accident” by pushing itself off a cliff. The UK would not “blink first”, he added. Perhaps Hunt thinks he is Clint Eastwood. It matters not. On Brexit, this government has its eyes tight shut. It is blind to the consequences – and the waiting chasm. Blinking does not come into it. What part of the EU’s unchanging position on the principles governing Britain’s future relationship with Europe does May’s government not understand?

For two years or more, Barnier, the chief negotiator, firmly backed by 27 governments, has been telling London there can be no compromise and no fudge that weakens the integrity of the single market, pan-European customs and legal regulations and Europe’s borders. Yet May’s Chequers plan, seeking exceptional (and unworkable) arrangements, blithely ignores all that. In case the European public did not appreciate what was at stake, or was taken in by chauvinistic Tory claims of EU vindictiveness and dogmatism, Barnier published an op-ed in 20 European newspapers last week. Amid Brexit’s baffling complexities, his concision and clarity were refreshing. He explained the EU’s justified fears about the impact of Brexit on Europe and why it cannot reasonably be expected to bow to May’s demands for special treatment:

“The UK knows well the benefits of the single market. It has contributed to shaping our rules over the last 45 years. And yet some UK proposals would undermine our single market, which is one of the EU’s biggest achievements. The UK wants to keep free movement of goods between us, but not of people and services. And it proposes to apply EU customs rules without being part of the EU’s legal order. The UK wants to take back sovereignty and control of its own laws, which we respect, but it cannot ask the EU to lose control of its borders and laws,” Barnier wrote.

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Oh, yeah, they’re going to blame it on the EU.

UK Trade Minister Fox Says EU Is Pushing Britain To No-Deal Brexit (R.)

British trade minister Liam Fox said “intransigence” from the European Union was pushing Britain toward a no-deal Brexit, in an interview published on Saturday by the Sunday Times. With less than eight months until Britain quits the EU, the government has yet to agree a divorce deal with Brussels and has stepped up planning for the possibility of leaving the bloc without any formal agreement. Fox, a prominent Brexit supporter in Prime Minister Theresa May’s cabinet, put the odds of Britain leaving the European Union without agreeing a deal over their future relationship at 60-40. “I think the intransigence of the commission is pushing us toward no deal,” Fox told the Sunday Times after a trade mission in Japan.

“We have set out the basis in which a deal can happen but if the EU decides that the theological obsession of the unelected is to take priority over the economic wellbeing of the people of Europe then it’s a bureaucrats’ Brexit — not a people’s Brexit — (and) then there is only going to be one outcome.” It was up to the EU whether it wanted to put “ideological purity” ahead of the real economy, Fox said. If Britain fails to agree the terms of its divorce with the EU and leaves without even a transition agreement to smooth its exit, it would revert to trading under World Trade Organization rules in March 2019.

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All sociopaths do it. They are defined by their lack of empathy.

Separating Children From Their Parents Puts UK Government To Shame, Too (O.)

Donald Trump’s policy of forcibly separating immigrant parents and children at the US border has been greeted with shock and abhorrence. Around the world, people have listened to audio of young children sobbing for their parents while federal agents crack jokes and heard the stories of children locked up in cages in the richest country in the world. Even the prime minister broke with her usual timidity about Trump’s transgressions to call his family separation policy “deeply disturbing”. What hypocrisy. Less noticed – although no less inhumane – is the British government’s policy of separating parents from their young children as part of immigration detention, all conducted on Theresa May’s watch, first as home secretary, then as prime minister.

Charities such as Bail for Immigration Detainees (BID) have for years been raising the cases of children, many of whom are British citizens, taken into care because their parents have been detained, or even deported, without them. In recent months, a long list of cruelties meted out in the name of the government’s “hostile environment” policy has come to the public’s attention: people who’ve lived in Britain legally for decades, paying their taxes, suddenly denied life-saving NHS care; young people who’ve grown up in Britain facing many thousands of pounds in fees and a multi-year slog to get permanent residency; children raised in care facing the risk of deportation as an adult to a country they don’t know. Any sense of basic justice or human compassion seems to have eluded the Home Office.

But separating tiny children from their parents is cruelty of a whole different order. Today, we report on the case of Kishi, a young mother who dropped her two-year-old off at nursery in order to attend an appointment at an immigration reporting centre. There, she was restrained by immigration security officials and taken to an immigration removals centre. No arrangements were made for her toddler, who was put into emergency foster care when no one came to pick her up, and Kishi was not told where her daughter was for two days. It was another month before she saw her. Kishi and her child are not alone. BID says more than 300 children were removed from their parents in the last 12 months, an increase of 16% on the previous year. Many of those will have been taken into care as a result. The Home Office does not keep records on this; perhaps because it contravenes its own guidance, which says children must not be separated from their parents for immigration purposes if it means they will be taken into care.

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Sometimes I think in Britain it’s not only the economists.

Britain’s Economics Students Are Dangerously Poorly Educated (G.)

This month, the pressure group Rethinking Economics said Britain’s universities were failing to equip economics students with the skills that businesses and the government say they need. Following extensive interviews with employers, including organisations such as the Bank of England, it found that universities were producing “a cohort of economic practitioners who struggle to provide innovative ideas to overcome economic challenges or use economic tools on real-world problems”. Moreover, the group said, “when political decisions are backed by economics reasoning, as they so often are, economists are unable to communicate ideas to the public, resulting in a large democratic deficit.”

You could easily level that criticism at the economists forecasting the impact of AI. What are people supposed to think when those who study the field come up with such wildly varying predictions? More importantly, what will politicians think they should do? Nothing, probably, given the confusion. The Rethinking group is concerned that university departments only train, rather than educate, huge numbers of graduates for econometrics jobs across the banking, insurance and consulting sectors. In our increasingly student-led system, these young people don’t want to mess around with history or modules on inequality. They are on a mission to make money for themselves in the private sector.

If they were diverted into discussions of economic history, they might find out we are about to repeat the mistakes of the past and trigger another financial crisis. Even more inhibiting, their course might show that higher inequality dampens workers’ incentives to increase productivity, and might prompt them to ask why young economists in the City are paid colossal amounts of money to analyse bond yields or forecast oil prices. Pay them less, share the money around, and productivity might improve. Failing that, let a robot do their job.

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John put something like dictatorship in the title. Bit much.

How Reality Is Being Redefined (Slog)

The last burgeoning growth sector on the Planet is the pursuit of redefinition. The idea is first to confuse, then create a climate of acceptance, and finally do away with every form of liberty that stands in the way of power. Both Capital and Labour are actively following the same road. It will be the end of the road for citizen freedom unless they’re both stopped. John Williams at reckons that the real unemployment rate in the US is 21.4%. Unimpressed by the US State’s insane assumption that all those no longer able to claim unemployment welfare “have found a job”, Mr Williams provides further fuel for my longstanding thesis that no real recovery can occur – if more and more mass-market consumers work fewer and fewer hours for less and less money or have no job at all – because their personal disposable income is disappearing out of sight. The term ‘in employment’ has been redefined.

When he arrived at the UK Treasury as Chancellor, George Osborne immediately gave notice that he’d be switching from the higher RPI measure of inflation (then at 5.2%) to the lower CPI at 4.5%. That doesn’t sound like much, but one has to remember two things: first, that is a 14% difference in levels that makes inflation look much lower; and second, over time the different impression given is huge: from 1996 to 2011, under the RPI system prices rose 53.6%….but using the CPI method, it only came to 35.6%. Significantly, the CPI system excludes financial services costs and government charges to the consumer. Just fancy that. So the term ‘inflation’ has been redefined.

Within two years of taking office, the Conservative-led coalition’s leader David Cameron started claiming that “the Government’s long-term economic plan is working to create more jobs”. Government Party Political Broadcasts showed the statistics, and yes, it certainly looked that way. But “a job” to most people over the last half century meant 38-40 hours a week with a month’s notice. When analysed, these new jobs were averaging 20 hours a week, often at unsocial hours and frequently on no contracts at all. They typically demand, for example, that the “employee” be ready to come into the workplace without notice. When using the weasel term ‘job’, Cameron was comparing meat and two veg with bread and dripping. So the term ‘job’ has been redefined.

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One thing: people earning a low income ‘rate’ is much higher than 10.6%, and up by much more than 2% in 10 years. Lost in translation?

Greece’s Unemployment Highest in Developed World (GR)

Greece tops all countries in the developed world in unemployment according to the Organization for Economic Cooperation and Development’s (OECD) Employment Outlook 2018. Greece has suffered a dramatic spike in unemployment, with the 2017 total climbing to 21.7% of the working population, more than double the 2006 figure.

Large increases in unemployment and an underutilized workforce were accompanied by falling output, very high debt, a serious GDP deficit and deflation, the report says. Along with its impact on employment levels, the financial crisis caused a reduction in wage growth in a lot of countries, leading to a drop in living standards for many.

The proportion of working-age people earning the “low-income” rate jumped to 10.6%, up from 9.56% a decade earlier. Although Korea, Mexico, and Chile have seen a decrease in the number of low-income households, most of the countries hit hardest by the euro crisis, such as Greece, Italy, Spain and Slovenia, have suffered a 2% rise.

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Thank you Brussels and Berlin.

Greece: An Economy That Has Shrunk So Much It Looks War-Torn (WaPo)

The point is that this kind of economic collapse is usually the symptom of a broader state collapse. Which is why it almost never happens in rich countries. That’s clear enough if you look at the late Angus Maddison’s historical GDP per capita numbers. Going back to 1900, there have been only three general times when European economies have shrunk over a 10-year period as much as Greece’s has since 2008: after World War I, after World War II and after the fall of communism. Most of the exceptions to this involve other wars – in particular, the Balkan wars of the 1910s, the Spanish Civil War, the Greek Civil War and the Yugoslav wars of the 1990s — but there is one that largely took place during peacetime. That was Weimar Germany’s hyperinflation.

It’s worth pointing out what isn’t here: the Great Depression. That wasn’t quite as bad in Europe as it was in the United States — at its nadir in 1933, the U.S. 10-year decline was actually comparable to Greece’s today — partly due to the fact that most European countries were quicker to leave the gold standard when things did start to get more dire. That allowed them to inject enough monetary stimulus into their economies to jump-start almost immediate recoveries. The problem, of course, is that it’s a lot harder for Greece to do the equivalent of that right now. The gold standard and the euro are similar in that they are both fixed-exchange rate systems that can get countries into trouble if they are hit by a big enough shock that their economy “needs” a cheaper currency than it has under the system.

But they’re different in that it’s a lot simpler to say your currency won’t be worth as much gold as it used to than to replace all of your currency with a new one. So instead of stimulus, Greece has gotten austerity — and a lot of it. Under the terms of its just-about-to-be-completed bailout agreement, Greece is actually supposed to keep running primary budget surpluses of at least 2.2 percent of GDP until 2060. That’s right: four more decades of austerity. It’s no wonder, then, that Greece’s economy might not get back to where it was in 2008 until 2030. This is what Europe calls a success: an economy that has shrunk so much it looks war-torn.

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Aug 242017
 August 24, 2017  Posted by at 9:11 am Finance Tagged with: , , , , , , , , , ,  

Egon Schiele Meadow, Church and Houses 1912


Wall Street Banks Warn Downturn Is Coming (BBG)
Big US Banks Could See Profit Jump 20% With Deregulation (BBG)
ECB Chief Draghi: QE Has Made Economies More Resilient (BBC)
Yellen’s Coming Speech Could Mark The ‘End Of An Era’ (BI)
Here’s Why New Home Sales Tanked (CNBC)
Autos Put Economic Downside Risks on Full Display (DDMB)
Merkel Aide Says Germany Has ‘Vital Interest’ in Diesel Survival (BBG)
China’s ‘Belt And Road’ Could Be Next Risk To Global Financial System (CNBC)
Being Here (Brodsky)
All The Countries The USA Has Invaded, In One Map (Indy)
America, Home of the Transactional Marriage (Atlantic)



More cycles.

Wall Street Banks Warn Downturn Is Coming (BBG)

HSBC, Citigroup and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle. Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop. “Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published Tuesday. His bank’s model shows assets across the world are the least correlated in almost a decade, even after U.S. stocks joined high-yield credit in a selloff triggered this month by President Donald Trump’s political standoff with North Korea and racial violence in Virginia.

Just like they did in the run-up to the 2007 crisis, investors are pricing assets based on the risks specific to an individual security and industry, and shrugging off broader drivers, such as the latest release of manufacturing data, the model shows. As traders look for excuses to stay bullish, traditional relationships within and between asset classes tend to break down. “These low macro and micro correlations confirm the idea that we’re in a late-cycle environment, and it’s no accident that the last time we saw readings this low was 2005-07,” Sheets wrote. He recommends boosting allocations to U.S. stocks while reducing holdings of corporate debt, where consumer consumption and energy is more heavily represented. That dynamic is also helping to keep volatility in stocks, bonds and currencies at bay, feeding risk appetite globally, according to Morgan Stanley. Despite the turbulent past two weeks, the CBOE Volatility Index remains on track to post a third year of declines.

Oxford Economics macro strategist Gaurav Saroliya points to another red flag for U.S. equity bulls. The gross value-added of non-financial companies after inflation – a measure of the value of goods after adjusting for the costs of production – is now negative on a year-on-year basis. “The cycle of real corporate profits has turned enough to be a potential source of concern in the next four quarters,” he said in an interview. “That, along with the most expensive equity valuations among major markets, should worry investors in U.S. stocks.” The thinking goes that a classic late-cycle expansion – an economy with full employment and slowing momentum – tends to see a decline in corporate profit margins. The U.S. is in the mature stage of the cycle – 80% of completion since the last trough – based on margin patterns going back to the 1950s, according to Societe Generale.

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They warn about a downturn, but not for themselves. Their asses are covered.

Big US Banks Could See Profit Jump 20% With Deregulation (BBG)

The deregulation winds blowing through Washington could add $27 billion of gross profit at the six largest U.S. banks, lifting their annual pretax income by about 20%. JPMorgan Chase and Morgan Stanley would benefit most from changes to post-crisis banking rules proposed by Donald Trump’s administration, with pretax profit jumping 22%, according to estimates by Bloomberg based on discussions with analysts and the banks’ own disclosures. Goldman Sachs would have the smallest percentage increase, about 16%. Bloomberg’s calculations are based largely on adjustments banks could make to the mix of securities they hold and the interest they earn from such assets. The proposed changes would allow the largest lenders to take on more deposits, move a greater portion of their excess cash into higher-yielding Treasuries and municipal bonds, and issue a lower amount of debt that costs more than customer deposits.

Of the changes proposed in June by Treasury Secretary Steven Mnuchin, the one that would probably have biggest impact on profit is allowing banks to buy U.S. government bonds entirely with borrowed money. Three others could also boost income: counting municipal bonds as liquid, or easy-to-sell, assets; requiring less debt that won’t have to be paid back if a bank fails; and making it easier to comply with post-crisis rules. Regulators appointed by Trump could make these changes without congressional approval. Doing so would reverse their agencies’ efforts since 2008 to strengthen capital and liquidity requirements for U.S. banks beyond international standards. While bringing U.S. rules in line with global ones probably wouldn’t threaten bank safety, some analysts and investors worry the pendulum could swing even further.

“Since the crisis, we’ve had the luxury of excess capital buildup in the banking system and regulators reining in risky activities,” said William Hines at Standard Life Aberdeen. “If there’s too much pullback on minimum capital requirements, too much relaxation of restraints, we’re concerned there’ll be more risk-taking by banks, and the system will become vulnerable.”

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Blowing bubbles everywhere and claiming they bring strength. It’s Orwell.

ECB Chief Draghi: QE Has Made Economies More Resilient (BBC)

European Central Bank President Mario Draghi has said unconventional policies like quantitative easing (QE) have been a success both sides of the Atlantic. QE was introduced as an emergency measure during the financial crisis to pump money directly into the financial system and keep banks lending. A decade later, the stimulus policies are still in place, but he said they have “made the world more resilient”. But he also said gaps in understanding these relatively new tools remain. As the economic recovery in the eurozone gathers pace, investors are watching closely for when the ECB will ease back further on its €60bn a month bond-buying programme. Central bankers, including Mr Draghi, are meeting in Jackson Hole, Wyoming, later this week, where they are expected to discuss how to wind back QE without hurting the economy.

On Monday, a former UK Treasury official likened the stimulus to “heroin” because it has been so difficult to wean the UK, US and eurozone economies off it. In a speech in Lindau, Germany on Wednesday, Mr Draghi defended QE and the ECB’s policy of forward guidance on interest rates. “A large body of empirical research has substantiated the success of these policies in supporting the economy and inflation, both in the euro area and in the United States,” he said. The ECB buying relatively safe assets such as government bonds means that banks can lend more and improve access to credit for riskier borrowers, Mr Draghi said. He added: “Policy actions undertaken in the last 10 years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges.”

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End the Fed.

Yellen’s Coming Speech Could Mark The ‘End Of An Era’ (BI)

Janet Yellen could be on her way out as chair of the Federal Reserve. On Friday, she’s set to deliver a speech on financial stability at the Fed’s annual economic symposium in Jackson Hole, Wyoming. It could be her last, following months of speculation that President Donald Trump plans to nominate a different candidate when her four-year term ends in February. And Yellen’s successor could have a very different approach to the job. Yellen’s Jackson Hole showing could be the last one, for now, under a Fed chair who takes a technocratic approach to monetary policy, according to Luke Bartholomew, an investment strategist at Aberdeen Standard Investments. “There could be an end-of-an-era feel to Jackson Hole this year,” Bartholomew told Business Insider.

The Fed chair could be replaced by someone who’s “probably not the sort of academic economist that’s been leading it through the Bernanke/Yellen period,” he said, adding that there’s “a broader feeling that under the Trump administration, the technocratic approach of the Fed is increasingly out of favor.” Yellen, 71, was a career economist and academic before President Barack Obama nominated her to replace Ben Bernanke in 2014. Trump told The Wall Street Journal last month that Gary Cohn, Yellen, and “two or three” other candidates were in the running for the job. One of those other people could be Kevin Warsh, a former Fed governor who is now a fellow at the Hoover Institution. But Cohn, the National Economic Council director and Trump’s top economic adviser, is reportedly the top contender. He’s the “archetype of Wall Street, given his job at Goldman in the past,” Bartholomew said. “He certainly brings financial acumen to the job. I’m not sure that’s what the job of Fed chairman is, but he’s a fine candidate.”

Walsh brings some years of Fed experience to the table. But he has worked for seven years in investment banking, at Morgan Stanley, and isn’t an academic policymaker like Yellen or Bernanke. That’s not the only red flag Yellen’s exit would raise. On one extreme, Yale School of Management’s Jeffrey Sonnenfeld thinks markets would crash if Cohn were to leave the White House for the Fed. Stocks dipped last week as rumors spread that he was leaving the administration following Trump’s response to the white-nationalist rally in Charlottesville, Virginia. “I don’t want to be an alarmist, but there is a lot of faith that he is going to help carry through the tax reform that people are looking for,” Sonnenfeld told CNBC last week.

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“Long term, the new home median price has been mostly 10% to 20% above the existing home median since 1990. Since 2011, however, new home prices have been at a 35% to 40% premium over resale prices..”

Here’s Why New Home Sales Tanked (CNBC)

Newly built homes are more expensive than they’ve ever been before. They are also more expensive when compared to similar existing homes than they’ve ever been before. And that is why sales are suffering, dropping an unexpected 9.4% in July compared to June, according to the U.S. Census. They are simply out of reach for too many potential buyers. You don’t have to do a lot of math to see it. The median sale price of a newly built home in July jumped more than 6% compared to July 2016, to $313,700. That marks the highest July price ever. Last December, the median price hit the highest of any month on record. In addition, the price premium for newly built homes compared to comparable existing homes has more than doubled since 2011, according to John Burns Real Estate Consulting.

“Long term, the new home median price has been mostly 10% to 20% above the existing home median since 1990. Since 2011, however, new home prices have been at a 35% to 40% premium over resale prices,” John Burns wrote in a recent note to clients. “While the exact percentages aren’t perfect due to ‘apples and oranges’ comparisons, our consultants have been confirming for years that new home sales have been slowed by larger than usual new home premiums.” The supply of existing homes for sale is still extremely low, but the supply of newly built homes moved higher in July to 5.8 months of inventory. “The scars of the housing bust are still fresh in the minds of many homebuilders, so it is not surprising that many are taking a cautious approach to ramping up production,” noted Aaron Terrazas, a senior economist at Zillow, in reaction to the July report.

Homebuilders are feeling slightly better about their business lately, but they continue to complain about the costs of land, labor, materials and regulation. They claim that is why they cannot build cheaper homes. Unfortunately, the lower end of the market is where most of the demand is and where supply is weakest. “There is still no pickup in sales for homes priced below $300,000, and this is where most of the first time households would be shopping in,” wrote Peter Boockvar, chief market analyst at The Lindsey Group in a note following the Census release on new home sales. “I repeat that the housing industry needs a moderation in home price gains in order to better compete with renting where rents increases are now moderating.”

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Auto loans are a huge part of money creation.

Autos Put Economic Downside Risks on Full Display (DDMB)

Federal Reserve data released last week on July industrial production offered little more than more of the same. Despite post-election optimism for a rebound in activity on the nation’s factory floors, the data reveal a continued throttling down in the growth rate to just over 2% compared with this time last year. The main drag on activity – the auto sector – should come as no surprise to investors. Rather than rising by 0.2% over June as projected, manufacturing production contracted by 0.1%, marking the third decline in five months. Motor vehicles and parts production fell by 3.6% on the month, taking the year-over-year slide to 5%. Evidence continues to build that a sampling error may be to blame for the surprising strength in June and July car sales.

Inventory continues to pile up, suggesting more production cuts are in the offing: As of June, the latest data on hand, auto inventories were up 7.4% over last year, leaving manufacturers choking for air. In July, General Motors alone was sitting on 104 days of supply, well above its target of 70 days. Industry-wide, the July/August average of 69 days ties the August 2008 record and sits above the historic average of 56 days of supply. In all, automakers have 3.9 million units of unsold light vehicles, up 324,600 from last August and the highest on record for the month. For context, July and August tie for the leanest stock levels of the year. The decline in July sales was already the steepest this year. Fresh loan delinquency data suggest more pain ahead.

“Deep subprime” borrowers have been a big boost at the margin, propelling back-to-back record years of sales in 2015 and 2016 as lending standards loosened sufficiently to allow millions with credit scores below 530 to access financing. Equifax, the consumer credit reporting firm, didn’t hold back in its second-quarter update, saying the performance of recent vintages of deep subprime loans was “awful.” While industry insiders are quick to point out that the overall pace of defaults across all borrowers remains in check, up just marginally over last year, there is growing concern that deep subprime delinquencies are back at 2007 levels. “The bottom line is excess auto inventories are clearly evident and the auto sector is now in recession,” said The Lindsey Group’s Peter Boockvar.

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We’re about to winess the political power of German carmakers. How many execs are being prosecuted? Right.

Merkel Aide Says Germany Has ‘Vital Interest’ in Diesel Survival (BBG)

Chancellor Angela Merkel’s chief of staff said Germany has a “vital interest” in ensuring diesel engines survive, defending the embattled technology as the industry comes under fire for cheating on emissions tests. Excessive pollution from diesel, as well as traditionally close ties between the government and auto industry, have emerged as a campaign issue in the run up to the country’s federal election in September. Merkel has been confronted by voters on the campaign trail, who accused the government of being too lenient on automakers, prompting the chancellor to question high bonuses for auto executives embroiled in Volkswagen’s cheating scandal. “We have a vital interest in preserving diesel as a technology because it emits far less CO2 than other technologies,” Peter Altmaier, Merkel’s chief of staff, said in a Bloomberg TV interview in Berlin.

“At the same time we have to make sure that all the rules are respected and all the regulations are fully implemented.” Car bosses and government officials reached a compromise deal earlier this month to lower pollution that calls for software updates on million of vehicles instead of more costly hardware fixes. Volkswagen, Daimler and BMW also agreed to a trade-in bonus for cars with outdated emissions controls. The measures have been criticized as a slap on the wrist for Germany’s biggest industry. “We have the responsibility to fight for a good deal but also to preserve the strength and the performance of the automobile industry,” Altmaier said in the interview late on Tuesday. “I’m very optimistic that we will overcome this.”Diesel software updates alone are “insufficient” for many cities to meet the legal limit for nitrogen oxides in the air, Environment Minister Barbara Hendricks told reporters on Wednesday, citing ministry tests conducted this month.

Excessive pollution impacts 70 German towns and cities, and the fixes agreed earlier this month would cut car emissions by a maximum of 6%, she said. Hendricks – a member of Merkel’s junior coalition partner, the Social Democrats – said her ministry and others will ascertain in the coming weeks whether hardware changes in diesels currently on the road are necessary to further lower emissions and will present their findings after the election. “Nobody wants to ban diesels from our cities,” she said. Merkel, who has so far largely steered clear of the debate, is hosting a meeting on Sept. 4 with representatives of the major cities, including the hometowns of BMW, Mercedes-Benz and Porsche, struggling to lower their pollution levels. A number of cities and courts continue to evaluate potential diesel driving bans as the most effective means to meet regulation quickly.

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China exports its Ponzi.

China’s ‘Belt And Road’ Could Be Next Risk To Global Financial System (CNBC)

China has pitched its mammoth, pan-Eurasian “Belt and Road” infrastructure initiative as a means of promoting economic prosperity and fostering diplomatic ties on a global scale. That rhetoric may win plaudits at a time when other global powers are voicing increasingly protectionist agendas, but it also comes with risks, and increasing levels of state-backed funding have raised concerns about just how safe of a gamble it is. Reports on Tuesday claimed that some of China’s biggest state-owned commercial banks will begin raising capital to fund investments into the initiative, also known as “One Belt, One Road,” which aims to connect more than 60 countries across Asia, Europe and Africa with physical and digital infrastructure. China Construction Bank, the country’s second-largest bank by assets, has been conducting roadshows to raise at least 100 billion yuan ($15 billion) from on- and offshore investors.

Bank of China, Industrial and Commercial Bank of China, and Agricultural Bank of China are also said to be raising tens of billions of dollars. The news highlights the risk that the state could amass hundreds of billions of dollars in nonperforming loans if the projects fail. For Xu Chenggang, professor of economics at Cheung Kong Graduate School of Business in Beijing, it was not a surprise. “It supports my concerns,” Xu told CNBC over the phone. “The impact could be damaging not just for China, but for the global financial system.” “These loans are being extended to governments in risky countries to fund risky infrastructure projects. If the projects were launched by private firms we wouldn’t have to worry because they would know they had to bear the consequences. But here we are talking about government-to-government lending and, ultimately, intergovernmental relations.”

[..] It took decades of economic reforms and loss-making firms before it succeeded in what Xu termed a process of “quiet privatization” at the turn of the 21st century. However, the process has lost momentum over the past 10 years, and the state remains burdened with issues of overcapacity and myriad “zombie firms,” especially within the metals and construction and materials sectors. Xu said that has partially been the motivation for the “Belt and Road” initiative: “Instead of solving the overcapacity problems, they are expanding the problem to projects overseas.” “They (China) are proposing lending money to foreign governments, who will then use the Chinese funds to pay the Chinese companies,” he explained.

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“.. one might say Mr. Trump represents a triumph of democracy..”

Being Here (Brodsky)

It should not surprise anyone that Western societies are becoming restless. Trump, Brexit, Charlottesville and, arguably, even radical Islamic terrorism are bi-products of global economic distortions largely created by the unwillingness of the Western political dimension to let the global factors of production naturally settle global prices and wages. (Sorry, it had to be said.) Donald Trump is a sideshow. His ascension, or someone like him, was inevitable. He may have official authority to behave like the leader of the free world (even if he is unable to do so), but so far he has only shown that virtually anyone can become president. Indeed, one might say Mr. Trump represents a triumph of democracy. Behold the robustness of America: the most powerful nation on Earth is unafraid to elect a cross between P.T. Barnum and Chauncey Gardner!

This is not to say a US president cannot raise and emphasize truly meaningful economic goals and mobilize countries around the world to help achieve them; but it is to say that this President seems to not know or be interested in what those goals might be. As discussed, the biggest challenges facing the US economy and US labor stem from a distorted global price and wage scale. Mr. Trump’s domestic fiscal, regulatory, tax and immigration goals seek only to raise US output and wages. This cannot be achieved without the participation of global commerce. There is no such thing anymore as a US business that makes US products sold only in the US without being influenced by global prices, wages and exchange rates. The romantic, patriotic “made in the USA” theme does not comport with the reality that the US also seeks to keep the dollar the world’s reserve currency and that maintaining America’s power requires the US to control the world’s shipping lanes.

Mr. Trump and his base cannot have one without the other. (Do we really have to articulate this?) Mr. Trump’s “Being There” presidency is reflecting an inconvenient truth back on a society that has, until maybe now, successfully deluded itself into believing government is functionally the glue holding society together. Though he does not mean to, Mr. Trump is single-handedly demonstrating to groups ranging from idealistic Washington elites to social media zombies to southern white supremacists that Madisonian government has become a dignified cover for the financial, commercial and national security interests that control it. We suspect those interests would rather the reach of their power be less visible.

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Two maps, actually. Click the link for fully interactive versions.

All The Countries The USA Has Invaded, In One Map (Indy)

From Montezuma to the shores of Tripoli, the US has had a military presence across the world, from almost day one of her independence. What constitutes invasion? As one map below shows, the US has a military presence in much of the world without being an occupying force (though some would dispute that definition). For instance, although the Confederacy considered the US to be a hostile invading power, indy100 are not counting the Civil War or any annexation within the continental United States as an ‘invasion’. Using data on US military interventions published by the Evergreen State College, in Olympia Washington, indy100 has created this map (below). The data was compiled by Dr Zoltan Grossman, a professor of Geography and Native Studies. The map documents a partial list of occasions, since 1890, that US forces were used in a territory outside the US.

Caveats: This includes: Deployment of the military to evacuate American citizens, Covert military actions by US intelligence, Providing military support to an internal opposition group, Providing military support in one side of a conflict (e.g. aiding Iraq during the Iran-Iraq War 1988-89), Use of the army in drug enforcement actions (e.g. Raids on the cocaine region in Bolvia in 1986 It does not include threats of nuclear weapons against a territory, such as during the Berlin Air Lift (1948-49). It also excludes any time US military personnel were deployed to a foreign country for an exclusively humanitarian purpose – e.g. sending troops to the Democratic Republic of the Congo to provide assistance to refugees fleeing the Rwandan genocide (1996-97).

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The demise of a society. Not because of marriages declining, but because of why they are.

America, Home of the Transactional Marriage (Atlantic)

Over the last several decades, the proportion of Americans who get married has greatly diminished—a development known as well to those who lament marriage’s decline as those who take issue with it as an institution. But a development that’s much newer is that the demographic now leading the shift away from tradition is Americans without college degrees—who just a few decades ago were much more likely to be married by the age of 30 than college graduates were. Today, though, just over half of women in their early 40s with a high-school degree or less education are married, compared to three-quarters of women with a bachelor’s degree; in the 1970s, there was barely a difference. The marriage gap for men has changed less over the years, but there the trend lines have flipped too: 25% of men with high-school degrees or less education have never married, compared to 23% of men with bachelor’s degrees and 14% of those with advanced degrees.

Meanwhile, divorce rates have continued to rise among the less educated, while staying more or less steady for college graduates in recent decades. The divide in the timing of childbirth is even starker. Fewer than one in 10 mothers with a bachelor’s degree are unmarried at the time of their child’s birth, compared to six out of 10 mothers with a high-school degree. The share of such births has risen dramatically in recent decades among less educated mothers, even as it has barely budged for those who finished college. (There are noticeable differences between races, but among those with less education, out-of-wedlock births have become much more common among white and nonwhite people alike.)

[..] Autor, Dorn, and Hanson found that in places where the number of factory jobs shrank, women were less likely to get married. They also tended to have fewer children, though the share of children born to unmarried parents, and living in poverty, grew. What was producing these trends, the researchers argue, was the rising number of men who could no longer provide in the ways they once did, making them less attractive as partners. Furthermore, many men in these communities became no longer available, sometimes winding up in the military or dying from alcohol or drug abuse. (It’s important to point out that this study and similar research on employment and marriage focus on opposite-sex marriages, and a different dynamic may be at work among same-sex couples, who tend to be more educated.)

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Jan 042017
 January 4, 2017  Posted by at 10:29 am Finance Tagged with: , , , , , , , , ,  

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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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: , , , , , ,  

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: , , , , , ,  

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: , , , , , , , ,  

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: , , , ,  

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: , , , , , , ,  

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: , , , , , , , , ,  

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.

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“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.”

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“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.

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“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.

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“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.

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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.

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“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.

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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.

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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.

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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.

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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.”

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“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.”

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“’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.”

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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.

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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.”

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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.

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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.

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Oct 142014
 October 14, 2014  Posted by at 8:39 pm Finance Tagged with: , , , ,  

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.