Sep 282016
 
 September 28, 2016  Posted by at 9:20 am Finance Tagged with: , , , , , , , , ,  7 Responses »
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DPC Heart of Chinatown, San Francisco, after earthquake and fire 1906


Small Army Of Fed Speakers, OPEC On Tap For Wednesday (CNBC)
“Negative Growth” of Real Wages is Normal for Much of the Workforce (WS)
Grocery Prices Are Plunging (BBG)
EU Banking Mayhem, One Bank at a Time, then All at Once (WS)
Deutsche Bank Troubles Cast Long Shadow Over European Banking (BBG)
IMF Warns Central Banks Could Lose Deflation Fight (AFP)
A Legal Barrier to Higher US Interest Rates (WSJ)
Global Container Volume on Track for Worst Year Since 2009 (WSJ)
Wells Fargo Executives Forfeit Millions, CEO To Forgo Salary (G.)
Worries Grow Over Greek Economic Forecast (WSJ)
Germany’s Hypocrisy Over Greece Water Privatisation (G.)
China Wants GMOs. The Chinese People Don’t. (BBG)
Single Clothes Wash May Release 700,000 Microplastic Fibres (G.)

 

 

And the MH17 report that lost all credibility long ago. Got to keep the customer entertained.

Small Army Of Fed Speakers, OPEC On Tap For Wednesday (CNBC)

A flurry of Fed speakers, including the Fed chair, will keep markets busy Wednesday. There are also mortgage applications at 7 a.m. EDT, durable goods data at 8:30 a.m. EDT and oil inventory data at 10:30 a.m. EDT. OPEC, meanwhile, is meeting in Algeria and could continue to create volatility in oil prices after headlines from there triggered a near 3% plunge Tuesday. Fed Chair Janet Yellen appears before the House Financial Services Committee at 10 a.m. on supervision and regulation. The Fed chair was personally criticized in the presidential debate Monday night by GOP candidate Donald Trump, who said the Fed’s decision to keep rates low was political and that it’s creating a bubble in the stock market.

“It has to worry the markets that potentially you could have a president getting into a nasty dispute with the chairman of the Fed in early 2017. That’s something the market would not like to see. I think the Fed has not done a very good job communicating. It’s a cacophony of confusing comments. There’s reason to criticize the Fed, but the personal attack on Yellen is unprecedented,” said Greg Valliere, chief global strategist at Horizon Investments. Traders are watching to see if Yellen is in the political hot seat on banking regulation and supervision when she appears before the committee.

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One side of US deflation is falling wages…

“Negative Growth” of Real Wages is Normal for Much of the Workforce (WS)

The chart below shows the%age change of real wages (left, y-axis) as these men aged (horizontal, x-axis). As young adults, their wages soared by up to 10% a year. Then the rate of growth fell off sharply. When the men in this cohort turned 40 in the 1990s, wage growth disappeared. By around the year 2000, the real wage peak in the US, when the oldest men in this cohort turned 50, wages had begun to decline for most of them. By the time these men were in the mid-50s, their wages across the board were heading south – and for many of them, rapidly. Hence this colorful, drooping spaghetti:

This “negative real wage growth” – devastating as it may be for those experiencing it – is nothing special, according to the New York Fed. And it crushes not just white men, but everyone: “Real wages tend to rise early in a worker’s career, flatten out mid-career, and then decline as the worker approaches retirement. This inverted U-shape pattern is a well-established feature in the labor economics literature.” The report explained it further: “Labor economists explain the rapid real wage growth early in a worker’s career as a combination of on-the-job learning and better matching of workers to jobs. A large portion is due to job matching as workers change jobs in search of a position that better utilizes their skills. As workers age, the decline in the pace of their real wage growth reflects a diminished incentive to invest in new skills (because their remaining work life is shorter) and fewer job changes (because they have found a good job match).”

The report divides life for its purposes into three phases, terms of wage growth: • Fast growth, up to age 40, • Flat growth, ages 41-54, • “Negative growth,” age 55 and older. Now there’s another problem mucking up the overall and ever-elusive real-wage growth miracle everyone has been counting on: demographics. The US population is aging. There are more people aged 40 and over in the workforce, and their incomes are now flat or declining. The portion of the population in the first phase when wages are growing fast has plunged from close to 60% in the 1980s to the mid-40% range currently. And the portion of workers with wages in the “negative growth” phase has ballooned. Given the demographics, real wage declines among workers over 50 will continue to hammer the national averages.

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…and when wages are falling, so must prices.

Grocery Prices Are Plunging (BBG)

Call it the Great Grocery-Store Giveaway of 2016. In Austin, Texas, Randalls slashed prices for boneless beef ribs by 40%, to $3.99 a pound. Not to be outdone, the H-E-B grocer down the street charged $1 a pound less. Not long ago, Albertsons advertised a deal you don’t normally see on your finer cuts of meat: “buy 1 get 1 free” specials on “USDA Choice Petite Sirloin Steak.” And what does $1 buy these days? In North Bergen, New Jersey, you could pick up a dozen eggs at Wal-Mart. OK, the price was actually $1.14. A mile away, check out Aldi, the German supermarket discounter, which can actually break the buck – 12 eggs for 99 cents. A year ago, you would have paid, on average, three times that price.

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 – with the exception of 2009, when the financial crisis was winding down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters. Consumers are winning out; grocery chains, not so much. Their margins and, in some cases, their stock prices, are taking a hit. Eggs and beef have have grown especially inexpensive, and it isn’t only an American phenomenon: In England, Aldi recently offered its prized 8-ounce wagyu steaks from New Zealand for about $6.50 – a little more than the price of a pint of beer. “The severity of what we’re seeing is completely unprecedented,” said Scott Mushkin at Wolfe Research, who has studied grocery prices around the country for more than ten years. “We’ve never seen deflation this sharp.”

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“The can has been kicked down the road for years. Now negative interest rates appear to have inadvertently crushed the can.”

EU Banking Mayhem, One Bank at a Time, then All at Once (WS)

Here are the 29 banks in the ESTX Banks Index of Eurozone banks (so Swiss and UK banks, for example are not included). It shows the percentage drop from their 52-week high. But for some of these banks, particularly for Italian and Portuguese banks, that 52-week high was just about last year’s 52-week low, so relentless has their decline been over the years. Some of them had already been reduced to penny stocks years ago, and for them, in euro terms, the biggest losses occurred back then. So these mayhem banks, color coded by country:

If a bank stock plunges from €0.04 to €0.01 over the 52-week period, such as Banco Comercial Português in Portugal, it has been toast for longer than 52 weeks, and the percentage plunge is essentially meaningless because shares were worthless to begin with. The shares of five of these banks trade under €1. Another 8 banks trade under €3. These 29 banks form a big part of the European financial system. It includes some of the world’s largest banks, such as Deutsche Bank, Societe Generale, and BNP Paribas. It includes a slew of other “systemically important financial institutions,” such as Unicredit, ING, and Santander. They’re troubled at the same time. The can has been kicked down the road for years. Now negative interest rates appear to have inadvertently crushed the can.

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Deutsche won’t go alone. Just like saving only Deutsche is far from enough. The dominoes suppart each other.

Deutsche Bank Troubles Cast Long Shadow Over European Banking (BBG)

The turmoil swirling around Deutsche Bank has brought simmering concerns about the health of Europe’s banks back to a boil. Germany’s largest lender extended losses to a record low this week, dragging down European financial stocks, after the U.S. Department of Justice requested $14 billion to settle claims tied to fraudulent mortgage-backed securities. While the bank said it won’t pay anywhere close to that amount, the dust-up fueled doubts over its capital levels and refocused investors on the industry’s faults. “One word – Deutsche,” David Moss at BMO Global Asset Management in London, said when asked to sum up the recent slump in European banks. “That’s the biggest thing – it’s reignited the risk around regulation, fines and litigation.”

Dismissing concern about the bank’s finances, Chief Executive Officer John Cryan told Bild in an interview published late Tuesday that capital “is currently not an issue,” and accepting government support is “out of the question for us.” Deutsche Bank has tumbled almost 20% this month, while Royal Bank of Scotland – which also faces a looming Justice Department fine – fell 13%, and Italy’s UniCredit slumped 12%. The Bloomberg Europe 500 Banks and Financial Services Index has declined 4.2% in September, making it the worst month since June, when Britain’s vote to exit the European Union roiled markets and sent bank shares plunging.

[..] European banks are grappling with tougher regulatory requirements, sputtering economic growth and negative interest rates, which squeeze lending margins and crimp investment returns. In Italy, where banks are burdened with some €360 billion of soured loans, UniCredit is working on a plan to boost capital that may include asset sales and a stock offering, according to people familiar with the matter. In Germany, Commerzbank scaled back its full-year profit goals and may announce thousands of job cuts this week,

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They already have.

IMF Warns Central Banks Could Lose Deflation Fight (AFP)

The IMF warned Tuesday that central banks are struggling to beat back deflationary forces and that governments need to spend to help them succeed. In a new assessment of global economic conditions, the IMF said many countries worldwide are battling disinflation – low and slowing inflation – due to weak global economic growth.If central banks around the world cannot halt this stall, and if companies and people increasingly believe they can’t halt it, their economies risk sinking into a deflationary spiral – where prices generally start to fall and companies and consumers hold back spending and investment, stalling the economy. In this case, “countries can’t afford to be complacent,” the Fund warned. The report said deflationary pressures in many countries are coming from abroad, in the form of sinking prices of both commodities and manufactured goods.

“The breadth of the decline in inflation across countries and the fact that it is stronger in the tradable goods sectors underscore the global nature of disinflationary forces,” the IMF said. Weak inflation challenges central banks’ ability to use monetary policy to stimulate demand, the IMF notes, because interest rates are likely to already be very low, giving them little room to cut further. That has been the case with top central banks including the Fed, the ECB and the BOJ, with the latter two already having taken some interest rates negative. “Eventually, ‘persistent’ disinflation can lead to costly deflationary cycles – as we have seen in Japan – where weak demand and deflation reinforce each other, and end up increasing debt burdens and hindering economic activity and job creation.”

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How to politicize the Fed?!

A Legal Barrier to Higher US Interest Rates (WSJ)

Defending the Fed’s recent decision to put off raising interest rates again, Fed Chair Janet Yellen told reporters last week that she and other Fed governors wanted “to see some continued progress” before taking that step. Politics, she insisted, had nothing to do with it. What Ms. Yellen didn’t say is that the Fed couldn’t raise its rates without breaking the law. Since when are Fed rate increases illegal? Since the 2007-08 subprime meltdown and financial disaster, actually. Until then the Fed could set any target it liked for the federal-funds rate—the interest rate banks pay for overnight loans of cash reserves. To keep the fed-funds rate from rising above target, the Fed pumped more reserves into the banking system. To keep it from dropping below, it took reserves away.

But after Lehman Brothers failed in 2008, the Fed’s efforts to keep the fed-funds rate from dropping below its target proved futile. To set a floor on how far the rate could go, the Fed started paying interest on banks’ reserve balances with the Fed, taking advantage of the 2006 Financial Services Regulatory Relief Act giving it permission to do so. Alas, it didn’t work. Government-sponsored enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which also kept deposit balances at the Fed but weren’t eligible for interest on reserves (IOR), started making overnight loans to banks at rates below the IOR rate. In effect, this turned what the Fed hoped would be a floor on the fed-funds rate into a ceiling. To raise rates now, the Fed increases the rate on reserves.

So what’s to keep the Fed from raising rates this way again? The 2006 Financial Services Regulatory Relief Act is what. For that law only allows the central bank to pay interest on reserves “at a rate or rates not to exceed the general level of short-term interest rates.” The rub is that the Fed’s IOR rate of 50 basis points (0.5%) already exceeds the closest comparable market rates: those on shorter-term Treasury bills. At the start of this month, the four-week T-bill rate was just 26 basis points; since then it has slid even lower, all the way down to 10 basis points. Judging by these numbers, the Fed is already flouting the law. Another hike would mean flouting it all the more flagrantly. Lawmakers will be duty-bound to object. The law can only be stretched so far. Unless “general short-term rates” rise markedly, Congress can be expected to question the legality of any Fed rate increase. If it comes to that, Ms. Yellen will find it very hard to dissemble her way out of it.

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2016 will be known as the good old days.

Global Container Volume on Track for Worst Year Since 2009 (WSJ)

Global container volumes are on track for zero growth this year, which would mark the sector’s worst performance since the 2009 economic crisis and a sure catalyst for further bankruptcies and possible acquisitions in the beleaguered shipping industry, shipping executives said. Freight rates, the predominant source of income for shipping companies, fell 20% in the benchmark Asia to Europe trade route this week compared with last week to $767 per container. Rates have mostly stayed well below $1,000 since the start of the year and operators say anything below $1,400 is unsustainable. They aren’t expected to turn around soon.

China’s Golden Week holiday starts at the beginning of October, marking the slow season for operators as many Chinese factories cut production levels after an output frenzy in the summer months when western importers stack up products for the year-end holidays. “The industry faces its worst year since the Lehman Brothers collapse,” said Jonathan Roach, an analyst at London based Braemar ACM. “Demand is around zero and any moves to increase freight rates will likely fail.” Hanjin, South Korea’s biggest operator and the world’s seventh largest in terms of capacity, filed for bankruptcy protection last month and is under court order to sell its own ships and returning chartered ships to their owners. Container operators, which move everything from clothes and shoes to electronics and furniture, are burdened by 30% more capacity in the water than demand.

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And they’ll keep their jobs?

Wells Fargo Executives Forfeit Millions, CEO To Forgo Salary (G.)

Wells Fargo executives will forfeit millions of dollars in the wake of revelations that the bank’s sales quotas led to the creation of more than 2m unauthorized accounts. The bank’s chief executive John Stumpf will forgo his salary for the coming months as independent directors launch a new investigation into Wells Fargo’s retail banking and sales practices. Last year, Stumpf made about $19.3m. Stumpf will also forfeit unvested equity awards worth about $41m. Carrie Tolstedt, who oversaw the retail banking at Wells Fargo while the unauthorized accounts were opened, was slated to receive as much as $124.6m after retiring this summer, according to Fortune. The bank said on Tuesday that she would not receive an undisclosed severance and would forfeit about $19m in unvested awards.

Less than three weeks ago, Wells Fargo announced that it had agreed to pay $185m in penalties after an audit found that its employees opened as many as 1.5m deposit accounts and 565,000 credit card accounts without customers’ consent. The accounts were opened by the bank’s staff in hopes of meeting their monthly sales quota and earning their incentive bonuses. Wells Fargo workers have tried to draw attention to the “unreasonable” quotas before – some even staged a protest in front of the bank’s headquarters last year. When Stumpf testified in front of the US Senate last week, he drew ire from US lawmakers. Many of them called for the bank to recoup pay from Stumpf and Tolstedt and hold them accountable.

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The EU has made Greek recovery impossible. Spending power has been murdered, and a whole generation of younger people is 50-60% long-term unemployed. It makes no difference what anyone forecasts.

Worries Grow Over Greek Economic Forecast (WSJ)

Greece’s economic recovery is proving elusive, challenging the forecasts of the country’s government and foreign creditors still counting on growth reviving this year. The IMF said last week that the economy is stagnating, in the first admission from creditors that Greece’s recovery is off track again. Growth will only restart next year, the head of the IMF’s team in Greece said on a conference call with reporters, without offering details. Of particular concern is that exports, which are supposed to lead Greece out of trouble, are on a slow downward trajectory, hampered by capital controls, taxes and a lack of credit. “There is no chance we will see a rebound unless we see some bold political decisions that would introduce a more stable business environment,” said Dimitris Tsakonitis, general manager at mining company Grecian Magnesite.

The bailout agreement between Greece and its German-led creditors assumes rapid growth from late 2016 onward, including an official forecast of 2.7% growth in 2017. Private-sector economists believe next year’s growth could be closer to 0.6%. Weaker growth would undermine the budget, likely leading to fresh arguments with lenders about extra austerity measures. Greece is still grappling with the measures it has already agreed to. Late on Tuesday the country’s parliament approved pension overhauls and other policy changes that have been delayed for months, holding up bailout funding.

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Good to note. Berlin buys back its water, and forces Athens to sell it. “It’s not any more a democracy or equality in the EU. It’s a kind of business..”

No society should ever agree to sell its basic needs to foreigners. Leaders who do that anyway should be fired.

Germany’s Hypocrisy Over Greece Water Privatisation (G.)

Greek activists are warning that the privatisation of state water companies would be a backward step for the country. Under the terms of the bailout agreement approved by the Greek parliament today, Greece has pledged to support an existing programme of privatisation, which includes large chunks of the water utilities of Greece’s two largest cities – Athens and Thessaloniki. There is ongoing debate about water privatisation and the role of business. Across Europe a wave of austerity-driven privatisation proposals has led to protests in Ireland, Italy, Greece and Spain. At the same time, some of northern Europe’s largest cities, including Paris and Berlin, are buying back utilities they sold just last decade.

President of the Thessaloniki water company trade union George Argovtopoulos said a move to a for-profit model would raise prices for consumers and degrade services. “It’s not any more a democracy or equality in the EU. It’s a kind of business,” he said, adding that austerity measures that require water privatisation smacked of a “do as I say, but not as I do” approach from Germany. “We know that in Berlin, just two years ago they remunicipalised the water there, although they paid just under €600m to Veolia [to buy back its stake]. It’s clear that the model of privatisation of water has failed all around the world,” he said. The German finance ministry refused to comment ahead of a Eurogroup meeting in Brussels on Friday where the third bailout deal looked set to be signed.

[..] Austerity-led changes to water supply have been fiercely resisted across Europe’s most indebted countries. In Dublin this year, huge protests erupted over plans to directly charge water users who previously paid for water through their taxes. This was seen as a first step towards selling off Ireland’s water supply. A water privatisation push by former Italian prime minister Silvio Berlusconi was crushed by a 95% referendum vote in 2011. A similar referendum in Thessaloniki last year delivered a 98% vote against. A 2014 report by the Transnational Institute’s Satoko Kishimoto found that across the world 180 cities had bought back (or remunicipalised) their water supply. She said this was a response to almost universally higher water prices and the loss of control over a fundamental resource.

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Another author claiming that “..the scientific consensus within and outside of China is that GMOs are safe..”

China Wants GMOs. The Chinese People Don’t. (BBG)

The latest food safety scandal in China might be its most damaging. Earlier this week, a former doctoral student at one of the country’s national testing centers for genetically modified organisms went public with allegations of scientific fraud, including claims that records were doctored extensively, that unqualified personnel were employed under illegal contracts and – most seriously – that authorities refused to take action when his concerns were aired privately. On Wednesday, China’s Ministry of Agriculture responded to a social media storm by suspending operations at the center. That might take care of the current scandal, but the Chinese public’s hostility toward GMOs won’t go away so easily.

Those concerns have only grown over the past decade as the government has increased its support of GMOs, including approval of the state-owned ChinaChem Group’s $43 billion takeover offer for the Swiss seed giant Syngenta. These efforts have galvanized a very public opposition that transcends China’s typical political fault lines, and created one of the government’s most intractable headaches. Feeding China’s huge population has never been easy. But over the last three decades, the challenges have become considerably greater as urbanization devoured farmland, and pollution made even more of it unusable. Today, the government is faced with the task of feeding 21% of the world’s population with 9% of its arable land. Its reliance on foreign goods has made China the world leader in imports since 2011.

Officials now fear the country could become dependent on foreigners for its food supply and the government remains committed to maintaining self-sufficiency in rice, wheat, and other key grains. As a result, the political pressure to increase yields is considerable. In fact, this pressure is centuries-old. Domesticated rice first appeared in the Yangtze River Valley at least 8,000 years ago, and Chinese farmers and scientists have been innovating ever since. In 1992, China became the first country to introduce a GMO crop into commercial production, when it sowed a virus-resistant tobacco plant on 100 acres. Since then, the government has issued safety certificates for a wide range of GMO crops, ranging from chili peppers to petunias. Yet, so far at least, only cotton has gone into wide cultivation. Other GMOs – especially rice, a staple of the Chinese diet – are still awaiting approval to be domestically cultivated.

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The blessings of plastic.

Single Clothes Wash May Release 700,000 Microplastic Fibres (G.)

Each cycle of a washing machine could release more than 700,000 microscopic plastic fibres into the environment, according to a study. A team at Plymouth University in the UK spent 12 months analysing what happened when a number of synthetic materials were washed at different temperatures in domestic washing machines, using different combinations of detergents, to quantify the microfibres shed. They found that acrylic was the worst offender, releasing nearly 730,000 tiny synthetic particles per wash, five times more than polyester-cotton blend fabric, and nearly 1.5 times as many as polyester. “Different types of fabrics can have very different levels of emissions,” said Richard Thompson, professor of marine biology at Plymouth University, who conducted the investigation with a PhD student, Imogen Napper.

“We need to understand why is it that some types of [fabric] are releasing substantially more fibres [ than others].” These microfibres track through domestic wastewater into sewage treatment plants where some of the tiny plastic fragments are captured as part of sewage sludge. The rest pass through into rivers and eventually, oceans. A paper published in 2011 found that microfibres made up 85% of human-made debris on shorelines around the world. The impact of microplastic pollution is not fully understood but studies have suggested that it has the potential to poison the food chain, build up in animals’ digestive tracts, reduce the ability of some organisms to absorb energy from foods in the normal way and even to change the behaviour of crabs.

Read more …

Sep 252016
 
 September 25, 2016  Posted by at 8:50 am Finance Tagged with: , , , , , , ,  Comments Off on Debt Rattle September 25 2016
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Harris&Ewing Boy Scout farm 1917


The Market Is In Line With History. The History Of Crashes (Stockman)
How to Suffocate Your Economy: Drown it in Massive Private Debt (Vague)
Vancouver Property Sales To Foreigners Crash 96% (ZH)
Merkel Rules out State Assistance for Deutsche Bank (BBG)
EU Must Turn Off the Dividend Spigot at Under-Capitalized Banks (PS)
China Continues to Battle Massive Capital Flight Problem (Brink)
Naked Shorts Can’t Stay Naked Forever (Dayen)
Whistleblower Describes Years Of Fraudulent, Criminal Culture At Wells Fargo (BB)
Former Employees File Class Action Against Wells Fargo (R.)
Clinton Server Tech Told FBI Of Colleagues’ Worries About System (R.)
America’s War On Its Own Children (G.)
Death Toll In Migrant Shipwreck Off Egypt Rises To 300 (G.)

 

 

The level of high grade corporate debt is more than 2X its pre-crisis peak. As Capex is down 10%, and net fixed business investment is 20% below 2000 levels. Corporations are burning and bleeding cash left right and center. Question: what has the debt been used for?

The Market Is In Line With History. The History Of Crashes (Stockman)

By punting again [this week], our dithering money printers at the Fed are continuing to fuel a monumental orgy of corporate bond issuance. It only enables companies to speculate in their own stocks with borrowed money, while heaping windfall gains on the fast money traders who hound corporate boards into strip-mining their own balance sheets. The level of high grade corporate debt outstanding has gone nearly parabolic in the last few years and now stands at more than 2X its pre-crisis peak. Yet even Yellen admitted during yesterday’s mindlessly meandering presser that business capital expenditure (CapEx) has been extraordinarily weak. In fact, non-defense CapEx orders excluding aircraft peaked in mid-2104 and are now down by 10%.

Even more to the point, real net fixed business investment after depreciation is still 20% below the level it reached way back in early 2000. That is, two bubbles ago. Perhaps the question about where all this hand-over-fist corporate borrowing is going might have occurred to at least one of the geniuses who voted to stand pat. But apparently it didn’t because once again Yellen insisted that “valuations are largely in line with their historical trends.” What in the world is our clueless school marm talking about? At the closing price yesterday, the S&P 500 traded at 25X the $87 per share reported for the last twelve month (LTM) period ending in June. And that was in the face of earnings that have plunged 19% since peaking in the September 2014 LTM period.

Yellen is right about the historical trends, of course. But not at all in a good way. In fact, on the eve of the last crash when the market peaked in October 2007 at about 1550, S&P 500 earnings during the most recent LTM period had posted at $79 per share. That means the peak pre-crash multiple was substantially lower than today at 19.7X. Even when S&P earnings peaked at $54 per share in September 2000, the multiple was only a tad higher than today at 26.5X. So, yes, the market is in line with history. That is, the history of crashes! The truth is, the Fed is inherently, relentlessly and radically in the financial bubble business. But the Keynesian school marm who runs it wouldn’t know a bubble if one transported her to the moon and back.

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The role of debt has been growing for a long time.

How to Suffocate Your Economy: Drown it in Massive Private Debt (Vague)

[..] if a country’s private debt to GDP ratio is low, let’s say 50%, then the households and businesses in that country generally have low loan-to-income ratios and are well positioned to power growth through increased leverage. And if a country’s private debt to GDP ratio is high, let’s say 200%, then the households and businesses in that country are generally overleveraged, with, on average, very high debt ratios. They are much less likely to be able to boost growth through more borrowing.

Chart 2 showed that private debt to GDP in major economies has been growing rapidly since World War II. However, it has been growing in size relative to GDP for a lot longer than that. It’s part of a process often described by economists as “financialization” or “financial deepening,” an increase in the size of a country’s debt and equity markets usually explained as simply the maturation of a market. But as we have seen, when it comes to debt, it is much more than that—it is the path from low leverage to overleverage for the participants in that economy. The benefit of increasing leverage from low levels has played a central role in the miraculous gains in incomes over the 200-plus years since the Industrial Revolution.

You can see this clearly in Chart 3. I have made a concerted effort to reconstruct more than 200 years of private debt history for the six countries in this chart—China, Japan, Germany, Britain, France, and the United States—because collectively, they have accounted for roughly 50% or more of global GDP since the Industrial Revolution. So studying the data of these six countries during this period gives us a fairly solid proxy for the world during the most important era of economic history. (This chart is a work-in-progress which will be augmented and refined in preparation for an upcoming book on this same subject.)

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Auckland, Sydney, London etc. should do the same.

Vancouver Property Sales To Foreigners Crash 96% (ZH)

China’s favorite offshore money laundering hub is officially no longer accepting its money. According to data released by British Columbia’s Ministry of Finance on Thursday, foreign investors officially disappeared from Vancouver’s property market last month after the local government imposed a 15% surcharge to curb a record-shattering surge in home prices. Overseas buyers accounted for a paltry 0.7% of the C$6.5 billion of residential real estate purchases in August in Metro Vancouver; this represents a 96% plunge from the seven weeks prior, when foreigners were responsible for 16.5% of transactions by value. According to the latest data overseas buyers snapped up C$2.3 billion of homes in the seven weeks before the tax was imposed, and less than C$50 million in the next four weeks.

[..] As Bloomberg notes, the plunge in foreign participation joins other signs of a slowdown in Canada’s most expensive property market. The silver lining is that while transactions may have ground to a halt, the government did pick up some extra tax revenues: British Columbia has raised C$2.5 million in revenue from the new levy since it took effect. Budget forecasts released last week indicated that the Pacific coast province expects foreign investors to scoop up about C$4.5 billion of real estate through March 2019. That may prove optimistic, because as reported two weeks ago as Chinese buyers wave goodbye to Vancouver, they have set their sights on another Canadian city: Toronto. According to the Star, sales of $1-million-plus Toronto-area single-family homes rose 83% year over year in July and August. That’s 3,026 homes, with 55% of them inside Toronto’s borders.

[..] if they are looking in Canada, we believe Toronto will be the most logical place for people to consider. Montreal and Calgary will probably also get a look-see,” Henderson said. Or maybe not. As CBC reported earlier this week, economist Benjamin Tal of CIBC said that Ontario will have little choice but to copy Vancouver and implement a tax on foreign house buyers. In a recent note to clients, the economist said the biggest problem facing policymakers with regard to hot housing markets in Toronto and Vancouver is a limit on the supply of new homes. “The main reason behind higher prices in the [Greater Toronto Area] is a policy-driven lack of land supply,” Tal said. “And with no change on that front, policymakers have to use demand tools to deal with what is essentially a supply problem.”

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I’m going to have my doubts here.

Merkel Rules out State Assistance for Deutsche Bank (BBG)

Chancellor Angela Merkel has ruled out any state assistance for Deutsche Bank in the year heading into the national election in September 2017, Focus magazine reported, citing unidentified government officials. The German leader also declined to step into the bank’s legal imbroglio with the U.S. Justice Department, which may seek as much as $14 billion in sanctions against Deutsche Bank’s mortgage-backed securities business, the magazine said. The finances of Germany’s biggest lender, which has lost almost half of its market value this year, are raising concern among German politicians.

At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Germany’s government expects a “fair outcome” in the U.S. probe, the Finance Ministry said on Sept. 16. Deutsche Bank has said it’s unwilling to pay the maximum amount sought by U.S. authorities as investors fret about the bank’s capital. Chief Executive Officer John Cryan, 55, has struggled to boost profitability by selling riskier assets and eliminating jobs as unresolved legal probes and claims add to concerns that the lender will be forced to raise capital.

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Cut off dividends and share prices will fall through the floor.

EU Must Turn Off the Dividend Spigot at Under-Capitalized Banks (PS)

Dividend payments made by under-capitalized banks amount to a substantial wealth transfer from subordinated bondholders to shareholders, because it is bondholders who will suffer the losses in a crisis. Moreover, it is potentially a wealth transfer from taxpayers to private shareholders, because under new banking rules government bailouts are possible after bondholders have covered (bailed in) 8% of a bank’s equity and liabilities. By contrast, undercapitalized banks in the US are forced to halt all forms of capital distribution if they fail a stress test. Fortunately, following the 2016 round of stress tests, the EBA is now also considering this type of regulatory sanction. Thus, “competent authorities may also consider requesting changes to the institutions’ capital plan,” which “may take a number of forms such as potential restrictions on dividends required for a bank to maintain the agreed trajectory of its capital planning in the adverse scenario.”

We estimate that if European regulators had adopted this approach and forced banks to stop paying dividends in 2010 – the start of the sovereign debt crisis in Europe – the retained equity could have paid for more than 50% of the 2016 capital shortfalls. The figure above shows our calculated capital shortfalls, using the EBA stress test’s “adverse scenario” losses and the cumulative dividends these banks have distributed since 2010. Dividends paid out by some banks, such as BNP Paribas and Barclays, actually exceed the current capital shortfalls, while at others – such as Deutsche Bank, Commerzbank, and Société Générale – capital shortfalls far exceed dividends that would have been retained. The latter banks would still require substantial capital issuances on top of dividend restrictions to make up the difference. Nonetheless, our findings suggest a simple first step toward preventing bank capital erosion: stop banks with capital shortfalls from paying dividends (including internal dividends such as employee bonuses).

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Not everyone believes the omnipotency tale Beijing likes to spread.

China Continues to Battle Massive Capital Flight Problem (Brink)

Last summer, China’s stock market collapse and unexpected devaluation deepened its capital outflow problem and accelerated the fall of reserves, which had started in mid-2014. Since February, reserves have started to stabilize. While the situation is clearly better, China continues to struggle in terms of stabilizing its massive capital outflows. Within that context, foreign reserves seem to have become a policy target. Although capital outflows are still large, it’s not enough for reserves to start falling again. In 2015, the largest net outflows stemmed from the repayment of bank loans (close to $500 billion in “other investment” outflows), followed by unrecorded outflows of residents amounting to nearly $200 billion.

Portfolio flows (equity and bond) were also negative, but smaller. The situation has hardly improved in 2016, based on first quarter data. In fact, all types of capital recorded outflows, even net foreign direct investment (FDI), which was not the case in 2015. It’s important to note that Chinese residents have been driving capital outflows for years. The difference in 2015 is that non-residents stopped investing in China and started to move their capital out. Still, the bulk of the outflow was made by residents. These are unrecorded outflows and also include the investment of Chinese companies, as well as the loans of Chinese banks abroad (increasingly in the emerging world).

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SEC? FBI? Who can be trusted to investigate?

Naked Shorts Can’t Stay Naked Forever (Dayen)

A few years into his personal quest to understand how he had lost a million dollars on a penny stock, Chris DiIorio developed a sweeping hypothesis involving Knight Capital, the mammoth brokerage company that frequently traded in them. Knight earned $333 million in pre-tax profits in 2008, and another $232 million in 2009. But DiIorio didn’t think Knight was making that kind of money simply from executing transactions for clients. As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting. It’s illegal when regular people do it. DiIorio suspected that Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.

His suspicion grew when he noticed that Knight often traded in securities that were red-flagged on the Depository Trust Company’s “chill list.” The DTC is an obscure financial industry-owned company that manages the custody of more than $1 quadrillion in securities annually, recording the transfers with journal entries and guaranteeing the trade. The company makes it easy for people to buy and sell securities without needing to exchange paper stock But when the DTC senses trouble, it will stop clearing trades on a stock temporarily. A chilled stock can still trade — as long as the market participants handle the physical certificates themselves. But it can be a sign that something is gravely wrong. The DTC states on its website that it chills stocks “when there are questions about an issuer’s compliance with applicable law.” That doesn’t stop Knight from buying and selling them, though.

Its chief legal officer, Thomas Merritt, acknowledged at a 2011 Securities and Exchange Commission roundtable that the company actively traded chilled stocks, saying that as long as the security still trades, “we are going to be involved in that business.” And DiIorio found numerous examples of Knight trading chilled penny stocks. “I didn’t know they did that,” said Jim Angel, a Georgetown University business school professor. “I’m kind of shocked to think that Knight would be working with paper stock certificates.” He suggested that Knight might simply want to accommodate customers trying to get out of chilled stocks. “Or maybe they feel there’s enough interest in a security that they can trade profitably, even if they have to shuffle the certificates.” Because most other market makers flee chilled stocks, however, this means Knight can assume even more control over the stock price.

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Upper management should be dragged before a public committe.

Whistleblower Describes Years Of Fraudulent, Criminal Culture At Wells Fargo (BB)

Beth Jacobson was a Wells Fargo loan officer who blew the whistle on the bank’s predatory, racist loan-fraud in the runup to the 2008 financial crisis, which tanked the world’s economy and nearly wiped out Wells Fargo (they were rescued with a $36B taxpayer-funded bailout). Eight years later, Wells Fargo has fired 5,300 employees for participating in a scam that involved opening 2,000,000 fake accounts in its customers’ names, stealing their money and crashing their credit-ratings – the exec who oversaw this a $125M taxpayer-subsidized bonus, and CEO John Stumpf, who took home $200M in bonuses based on profits from the fraud, will keep the money and his job, but the whistleblowers who reported the fraud starting in 2011 were all illegally fired.

Jacobson describes how Stumpf – now CEO, then a top exec – was complicit in the fraud that helped precipitate the crash and the worst recession since the Great Depression. She pins blame for the loan-fraud on the bank’s aggressive sales targets – the same thing that caused the current fraud, suggesting that the bank hasn’t learned a fucking thing since 2008, except that it can get away with crime, every time. “One means of falsifying loan applications that I learned of involved cutting and pasting credit reports from one applicant to another. I was aware of A reps who would ‘cut and paste’ the credit report of a borrower who had already qualified for a loan into the file of an applicant who would not have qualified for a Wells Fargo subprime loan because of his or her credit history.

I was also aware of subprime loan officers who would cut and paste W-2 forms. IDs deception by the subprime loan officer would artificially increase the creditworthiness of the applicant so that Wells Fargo’s underwriters would approve the loan. I reported this conduct to management and was not aware of any action that was taken to correct the problem. “High-ranking Wells Fargo managers knew that this practice was going on, because after about a year of these standby explanations being given, underwriters in the underwriting department were told to call the customers directly rather than contact the loan officer who was working with the customer. The loan officers quickly figured out how to work around this by warning customers that underwriters might call them and then coaching the customers about what to say.

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CEO gone.

Former Employees File Class Action Against Wells Fargo (R.)

Two former Wells Fargo employees have filed a class action in California seeking $2.6 billion or more for workers who tried to meet aggressive sales quotas without engaging in fraud and were later demoted, forced to resign or fired. The lawsuit on behalf of people who worked for Wells Fargo in California over the past 10 years, including current employees, focuses on those who followed the rules and were penalized for not meeting sales quotas. “Wells Fargo fired or demoted employees who failed to meet unrealistic quotas while at the same time providing promotions to employees who met these quotas by opening fraudulent accounts,” the lawsuit filed on Thursday in California Superior Court in Los Angeles County said.

Wells Fargo has fired some 5,300 employees for opening as many as 2 million accounts in customers’ names without their authorization. On Sept. 8, a federal regulator and Los Angeles prosecutor announced a $190 million settlement with Wells. The revelations are a severe hit to Wells Fargo’s reputation. During the financial crisis, the bank trumpeted being a conservative bank in contrast with its rivals. The lawsuit accuses Wells Fargo of wrongful termination, unlawful business practices and failure to pay wages, overtime, and penalties under California law. Former employees Alexander Polonsky and Brian Zaghi allege Wells Fargo managers pressed workers to meet quotas of 10 accounts per day, required progress reports several times daily and reprimanded workers who fell short.

Polonsky and Zaghi filed applications matching customer requests and were counseled, demoted and later terminated, the lawsuit said. While executives at the top benefited from the activity, the blame landed on thousands of $12-per-hour employees who tried to meet the quotas and were often required to work off the clock to do so, the lawsuit said.

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It’s time to scrutinize the FBI’s role in the whole ‘affair’. That the Hillary people have not been fully honest is now so obvious one wonders why Comey et al have granted many immunity and let them off the hook in general.

Clinton Server Tech Told FBI Of Colleagues’ Worries About System (R.)

A technician hired by Hillary Clinton to run the private email system she used while U.S. secretary of state told investigators he tried to pass on colleagues’ concerns that the system might not comply with records laws, FBI interview summaries show. Bryan Pagliano, the technician Clinton hired when she joined the State Department in 2009, told federal investigators he relayed the concerns to Cheryl Mills, then Clinton’s chief of staff. Mills has previously testified under oath she could not recall anyone alerting her to potential problems with Clinton’s email arrangement.

The episode had not been disclosed until the Federal Bureau of Investigation released on Friday night nearly 200 pages of additional records from its year-long investigation into the handling of classified government documents by Clinton and her staff via an unauthorized email server in the basement of her New York home. Clinton has said the decision to use a private email system was a mistake, but the controversy has dogged her campaign as the Democratic candidate for the presidency and raised public doubts about her trustworthiness, public opinion polls show. Republicans have criticized her for putting national security at risk. The FBI closed the year-long investigation in July, recommending no charges, although FBI Director James Comey said Clinton and her staff had been “extremely careless” in handling classified government secrets.

Pagliano has declined to answer questions by Republican lawmakers about his work on Clinton’s server, but spoke to federal investigators after securing a form of immunity from prosecution. He told investigators two colleagues from the technology office approached him with concerns during Clinton’s first year after learning about the email system. One said it could lead to a “federal records retention issue,” Pagliano told investigators, and urged him to raise the concern with Clinton’s “inner circle.” A colleague also warned Pagliano “he wouldn’t be surprised” if classified information was being sent through Clinton’s unsecure system, Pagliano told the FBI.

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“Every day, on average, seven children and teens are killed by guns in America.”

America’s War On Its Own Children (G.)

It was just another day in America. And as befits an unremarkable Saturday, 10 children and teens were killed by gunfire. They died in altercations at gas stations, accidents in bedrooms, standing on stairwells and walking down the street, in gangland hits and by mistaken identity. Like the weather, none of them would make the national news because, like the weather, their deaths did not disturb the accepted order of things. Every day, on average, seven children and teens are killed by guns in America. Firearms are the leading cause of death among black children under 19, and the second greatest cause of death for all children of the same age, after car accidents. I picked this day at random, and spent two years trying to find out who these children were.

I searched for their parents, pastors, baseball coaches, and scoured their Facebook and Twitter feeds. The youngest child was nine, the oldest 19. Four years ago, for a moment, there was considerable interest in the fact that large numbers of Americans were being fatally shot. On 14 December 2012, 20-year-old Adam Lanza shot his mother, then drove to Sandy Hook Elementary School and shot 20 small children and six staff dead. Mass shootings comprise a small proportion of gun violence, but they disturb America’s self-image in a way that the daily torrent of gun deaths does not. “Seeing the massacre of so many innocent children … it’s changed America,” said the Democrat senator Joe Manchin, who championed a tepid gun-control bill. “We’ve never seen this happen.”

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“At the current rate, the death toll for 2016 is expected to easily surpass the figure for 2015 of 3,771..”

Death Toll In Migrant Shipwreck Off Egypt Rises To 300 (G.)

A record number of migrants is expected to drown in the Mediterranean in 2016, after the estimated death toll in this week’s latest shipwreck rose to about 300 on Friday. Egyptian officials have rescued about 160 survivors from Wednesday’s shipwreck off the country’s north coast, leaving about 150 people still unaccounted for, according to the International Organisation for Migration (IOM). Those confirmed dead include 10 women and a baby, taking the estimated number of migrants to die in the Mediterranean so far this year to more than 3,500. At the current rate, the death toll for 2016 is expected to easily surpass the figure for 2015 of 3,771, which was the highest ever recorded. By this stage in 2015, 2,887 people had drowned.

The number of people trying to reach Europe has fallen significantly since last year’s record levels, as a result of the deal struck between the EU and Turkey and the closure of a humanitarian corridor between Greece and Germany. The flow of migrants from the three main departure points – Libya, Turkey and Egypt – stands at roughly the same level as 2014.

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Sep 222016
 
 September 22, 2016  Posted by at 8:24 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle September 22 2016
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Harris&Ewing Harding inauguration 1921


The Global Economic Outlook: Dark Clouds Ahead (Guardian Ed.)
UN Fears Third Leg Of Global Financial Crisis – With Epic Debt Defaults (AEP)
Major Trend Forecast For The Rest Of 2016 (Celente)
Report Highlights Rising US Poverty (D&C)
In Places With Fraying Social Fabric, a Political Backlash Rises (WSJ)
Greek Bakers Unite To Give Away Bread To Those Too Poor To Afford It (KTG)
Young Britons Live In ‘Suspended Adulthood’ (G.)
It’s Not Just Consumers That Are Living Paycheck To Paycheck (BBG)
Divided Fed Holds Fire, Signals 2016 Rate Increase Still Likely (BBG)
Bank of Japan’s Inflation Overshoot Deepens Policy Innovation (BBG)
Real Estate Gets Its Seat At The S&P 500 Table (Forbes)
With Mortgage Rates So Low, Why Are So Many People Still Renting? (Time)
House-Flippers Are Back, With Anonymous Funding (BBG)
China Chalks Up $667-Billion Debt Pile Over Toll Roads (R.)
Wells Fargo Too Arrogant To Own Up To Its Fraudulent Ways (WaPo)
27 US Senators Rebel Against Arming Saudi Arabia (I’Cept)
A First Step for Syria? Stop the Killing (Jimmy Carter)
Apologizing to My Daughter for the Last 15 Years of War (Van Buren)

 

 

Actually not all that bad from the Guardian Ed. staff. Though they predictably conclude with plain silliness: In the long run, this failed globalisation needs to be turned into something more sustainable and more inclusive, built on higher wages, robust tax systems and strong public safety nets.

The Global Economic Outlook: Dark Clouds Ahead (Guardian Ed.)

Eight years ago this month, a bank collapsed, Wall Street went into meltdown and the world economy plunged into crisis. Trillions were lost in output ($22tn in the US, within just five years), millions of workers were made redundant (8.8 million in America’s great recession, 1.2 million in the UK) and thousands of promises were made by politicians and policymakers – everyone from Barack Obama and Gordon Brown to David Cameron and Christine Lagarde – that things would change. Yet, nearly a decade later, what is most striking is how little has changed. In the US, the UK and the rest of the developed world, policymakers talk of the “new mediocre”, so tepid is economic performance. And in the developing world things look even worse.

Such is the message from two of the world’s leading economic thinktanks, the OECD and the UN Conference on Trade and Development (Unctad). Both their reports on Wednesday were thick with cloud and short on silver lining. Yes, the OECD believes that Brexit Britain will have a slightly easier time this year – but that will be followed by a far choppier 2017. And the Unctad report is even more troubling. The biggest single warning it makes is that the world is on the verge of “entering a third phase of the financial crisis”. What began in the US subprime housing market before roiling Europe’s governments is likely to rear its head again – this time in Latin America, Africa and other poor countries. What will do for them, believe the Unctad researchers, is what also did for America and Europe: debt.

Much of the cheap money created by the Fed, the BOE and the ECB has been pushed by financial speculators into the higher-yielding markets of South Africa, Brazil and India, among others. Economists at the Bank for International Settlements, the central banks’ central bank, reckon that $9.8tn was pumped out in foreign bank loans and bonds in the first half-decade after the Lehman Brothers collapse. Unctad calculates that around $7tn of that was pushed through to emerging markets. By any standards, that is a flood of credit – one that was encouraged by panicky policymakers.

Wasn’t it the turn of China and the rest to pick up the slack in the global economy? Except now developing countries are lumbered with a gigantic private debt mountain to pay down. The private, non-financial sector across the developing world has debt service obligations worth nearly 150% of its income. The comparable figure for the developed world, by contrast, is just above 80%. And now developing countries are hobbling along rather than sprinting ahead, while commodity prices have tanked. To make matters worse, companies will typically have borrowed in US dollars and invested in their local currencies – but the strength of the dollar will make those loans all the harder to repay.

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“What is clear is that world will soon need a massive and coordinated spending push by governments to create demand and bring the broken global system back into equilibrium. UNCTAD is entirely right about that. If this does not happen, it is sauve qui peut.”

UN Fears Third Leg Of Global Financial Crisis – With Epic Debt Defaults (AEP)

The third leg of the world’s intractable depression is yet to come. If trade economists at the United Nations are right, the next traumatic episode may entail the greatest debt jubilee in history. It may also prove to be the definitive crisis of globalized capitalism, the demise of the liberal free-market orthodoxies promoted for almost forty years by the Bretton Woods institutions, the OECD, and the Davos fraternity. “Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,” said the annual report of the UN Conference on Trade and Development (UNCTAD). We know already that the poisonous side-effect of zero rates and quantitative easing in the US, Europe, and Japan was to flood developing nations with cheap credit, upsetting their internal chemistry and drawing them into a snare.

What is less understood is just how destructive this has been. Much of the money was wasted, skewed towards “highly cyclical and rent-based sectors of limited strategic importance for catching up,” it said. Worse yet, these countries have imported the deformities of western finance before they are ready to cope with the consequences. This has undermined what UNCTAD calls the “profit-investment nexus” that ultimately drives growth and prosperity. The extraordinary result is that some countries are slipping backwards, victims of “premature deindustrialisation”. Many of them have fallen further behind the rich world than they were in 1980 despite opening up their economies and following the global policy script diligently.

The middle income trap closed in on Latin America and the non-oil states of the Middle East a long time ago, but now it is beginning to close in such countries as Malaysia and Thailand, and in some respects China. “The benefits of a rushed integration into international financial markets post-2008 are fast evaporating,” it said. Yet the suffocating liabilities built up over the QE years remain. UNCTAD says corporate debt in emerging markets has risen from 57pc to 104pc of GDP since the end of 2008, and much of this may have to written off unless there is a world policy revolution. “If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system,” it said.

“There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market,” it said. These are deeply-disturbing assertions. The combined US subprime and ‘Alt-A’ property exposure before the Lehman crisis was just $2 trillion, and Greece’s debts were trivial. What UNCTAD is talking about is an order of magnitude larger.

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Haven’t featured Celente in ages…

Major Trend Forecast For The Rest Of 2016 (Celente)

Central bank policies rule the financial world. Their never-in-the-history-of-the-world negative and historically low interest rate policies, plus massive government and corporate bond buying schemes have enriched equity markets but not the general economy… “In fact, what we have been forecasting and reporting since 2010, the Bank for International Settlements confirmed this week with its warning that central bank behavior, not economic fundamentals, hold sway over markets. Claudio Borio, head of the monetary and economic department of the BIS questioned whether “market prices fully reflect the risk ahead,” and “doubts about valuations seem to have taken hold in recent days.” Indeed true price discovery is dead.

Despite massive Federal Reserve intervention in the US that has driven the Dow and NASDAQ to new highs, S&P 500 companies reported five straight quarters of year-over-year declines. Also on the market fundamental front, with retail sales down 0.3% in August, there was no back-to-school-splurge. The service sector, the main economic driver of the United States economy, fell to its lowest level since 2010. Despite “experts” forecasting US GDP to rise 3% in 2016, it’s slogged along at an annualized 1% for the first two quarters. Just yesterday it was reported that housing starts in the US came in at an annualized rate of 1.14 million in August, well below the expected 1.19 million while construction permits fell 0.4% to a 1.14 million-unit rate last month.

And while President Obama chastised “Anyone claiming that America’s economy is in decline is peddling fiction,” US economic growth since the recession ended is tracking at its weakest pace of any expansion since 1949. As the BIS report concludes, “A more balanced policy mix is essential to bring the global economy into a more robust, balanced and sustainable expansion.” Yet, today, all equity eyes are concentrated more on central bank maneuvers than market fundamentals. In Japan, with new data showing exports falling 9.6% and imports down 17.3% in August, the focus is on what new schemes the Bank of Japan will invent to boost the economy despite its long proven track record of failure.

Similarly, later today in the US, the markets await news of if, and when, the Fed will raise interest rates. Yet, as the data proves since the Panic of ’08, central banks’ “policy mix” has failed …and we forecast despite pending measures, they will continue to fail to generate true economic growth. Thus we forecast continued equity market volatility with increasing prospects for a market meltdown.

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There should have been much more of this. People would have understood the world they live in so much better. The lack of this sort of analysis gives birth to Brexit and the Donald.

Report Highlights Rising US Poverty (D&C)

Among the troubling statistics in a new report released Tuesday was the rising concentration of poverty in city neighborhoods, and expanding number of census tracts where the poverty rate stood at 40% or higher. The count of high-poverty census tracts has nearly doubled in the city, from 19 to 37 since 2000. Fully one-third of Rochester residents live in poverty, and nearly another third require some outside assistance to get by, according to estimates in the ACT Rochester and Rochester Area Community Foundation update to its 2013 report on the state of poverty and self-sufficiency across the Greater Rochester region. The numbers are a near mirror-image of the suburbs, where more than two-thirds of residents are self-sufficient. And while the poverty rate in the nine-county Greater Rochester region continues to creep upward, it remains below state and national averages, the report shows.

“We don’t really have a poverty problem,” said Edward Doherty, a Strategic Community Intervention associate who served as project manager and editor of the report, and is active in local efforts to combat poverty. “We have a concentration of poverty problem.” Rochester has the third-highest concentration of poverty in the nation. And a significant segment of that population is female-headed families with children younger than 18. Though accounting for 17% of the population, the report found, the city has 36% of such households, and that population has a staggering poverty rate of 59.9%. Doing the math, the report estimates these families account for nearly half of all people living in poverty in the city, and these children account for more than 80% of all poor children in the city.

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This is changing the world, all over the world. Poverty and loss hidden from us by media and political propaganda.

In Places With Fraying Social Fabric, a Political Backlash Rises (WSJ)

Reading, Pa.— The buckling of social institutions fundamental to American civic life is deepening a sense of pessimism and disorientation, while adding fuel to this year’s rise of political populists like Donald Trump and Bernie Sanders. Here and across the U.S., key measures of civic engagement ranging from church attendance to civic-group membership to bowling-league participation to union activity are slipping. Unlocked doors have given way to anxiety about strangers. In Reading, tension between longtime white residents and Hispanic newcomers has added to the unease. For Mr. Martin, social and economic setbacks led him to support Mr. Sanders, who he figured would stick it to the big businesses Mr. Martin feels have sold out working people.

Other people here find resonance in Mr. Trump’s message that the U.S. has skidded so far off course that it needs to lock out immigrants and block imports to recover an era of greatness. “When you lose the family unit and you lose the church community, you are losing a whole lot,” says Bonnie Stock, a retired teacher in Reading and Trump supporter, who says the church where she was baptized is dying from lack of young members. “People are looking at Trump because most of us see this [country] isn’t working,” she says. Ms. Stock figures Mr. Trump’s business experience would help him better attack societal problems like drug addiction.

Across the U.S., the Republican presidential nominee has his firmest support among the white working class. In the Republican primaries, he carried all but nine of the country’s 156 counties where at least 85% of the adult population was whites without four-year college degrees. Mr. Trump won 64% of the vote in Berks and Schuylkill counties, where noncollege whites were 66% of the adult population as of 2014. In Berks County, once famous for the Reading Railroad stop on the Monopoly board game, social ills have been exacerbated by a 30% decline in manufacturing jobs and 6% fall in inflation-adjusted median income since 1995.

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In case you’re wondering why the Automatic Earth tries so hard to help the poorest Greeks. These are the very people your generous donations assist. The problem is their numbers are rising fast.

But we’re not going to give up. I’m breaking my head over the next steps in the process. We need to do something big for Christmas. Meanwhile, please keep donating through our Paypal widget, top left corner of the site, in amounts that end in $0.99 or $0.37.

Greek Bakers Unite To Give Away Bread To Those Too Poor To Afford It (KTG)

Did you know that there are people in Greece who cannot afford to buy even a loaf of bread at a cost of €0.60 – €0.70? Almost a year after Greece surrendered into the arms of the international lenders and the IMF and the austerity cuts started to affect people’s lives, a bakery in our neighborhood was offering a bread at a special price for pensioners and unemployed. The special price was just half a euro. At one point, I remember that more and more people were going to this bakery and asking for bread from the previous day for a couple of cents or even free of charge. Two days ago, the grim Greek reality hit me again. I was at the bakery sometime at noon. All different kinds of bread loafs were waiting for customers, nicely set in order, one by one, next to each other.

Yet, somewhere, in a corner at one of the lower shelves there was a group of breads: several loaves, long and round, white and wholewheat, a couple of baguettes. “What are these?” I asked the baker and he answered “This is bread from yesterday, for the poor. We give it free of charge.” He told me further, that he had 6-7 returning customers who come every second day for the bread from yesterday. Mostly elderly, pensioners. And “maybe 2-3 people per day,” people he does not know who just step in and ask for “old bread for free.” The problem of poverty is not widespread only in Athens, where the cost of living is much higher than in the countryside. Today, I read about the action of the Bakers’ Association in Kozani, in Northern Greece. Customers can buy extra bread for those in need, while the bakers will keep records of the “Bread on the waiting” – as they call their action – and give it to those who cannot afford it.

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As I’ve written before: and still everyone says they love their kids.

Young Britons Live In ‘Suspended Adulthood’ (G.)

Despair, worries about the future and financial pressures are taking a toll on millions of young Britons, according to a poll which found young women in particular were suffering. Low pay and lack of work in today’s Britain are resulting in “suspended adulthood”, with many living or moving back in with their parents and putting off having children, according to the poll of thousands of 18 to 30-year-olds. Large numbers describe themselves as worn down (42%), lacking self-confidence (47%) and feeling worried about the future (51%).

The Young Women’s Trust, the charity that commissioned the polling by Populus Data Solutions, warned that Britain was facing a “generation of young people in crisis” as it called on the government to take steps including creating a minister with responsibility for overall youth policy. Young women are being particularly affected. The percentage of women reporting that they lacked self-confidence was 54%, compared with 39% of young men. While four in 10 young people said they felt worn down, the percentage for young women was 46% compared with 38% of men. One in three said they were worried about their mental health, including 38% of young women and 29% of young men.

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US small business dances on the edge. They account for 50% of GDP and more than 50% of new job creation.

It’s Not Just Consumers That Are Living Paycheck To Paycheck (BBG)

As Federal Reserve officials gather to issue their monthly assessment of the world’s largest economy, a new study lays bare the extent to which many small firms are pressed for cash. “Most small businesses are operating on very small margins,” Diana Farrell, CEO of the JPMorgan Chase Institute, an in-house think tank that uses data from the bank to analyze the economy. “The small business sector is less full of future Googles and Ubers and tons and tons of very small operators living month to month,” she said in a phone interview. The companies in question may be small, but they represent an outsized share of the U.S. economy.

According to the Small Business and Entrepreneurship Council, they account for roughly 50% of GDP and more than 50% of new job creation — a metric that’s closely watched by the Fed in determining whether the economy can withstand a constriction in financing conditions. Yet even though they’re contributing a great deal to the economy there remains ignorance about their financial health, Farrell added. On average, the companies surveyed have just 27 days worth of cash reserves — or money to cover expenses if inflows suddenly stopped — according to the JPMorgan study, which analyzed 470 million transactions by 570,000 small business last year. Restaurants typically hold the smallest cash buffers, with just 16 days of reserves, while the real-estate sector boasts the biggest, at 47 days.

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These people get far too much attention. That makes them feel much too important. We should ignore them. After taking their undemocratic powers away.

Divided Fed Holds Fire, Signals 2016 Rate Increase Still Likely (BBG)

A divided Federal Reserve left its policy interest rate unchanged to await more evidence of progress toward its goals, while projecting that an increase is still likely by year-end. “Near-term risks to the economic outlook appear roughly balanced,” the Federal Open Market Committee said in its statement Wednesday after a two-day meeting in Washington. “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” The sixth straight hold extends U.S. central bankers’ run of getting cold feet amid risks from abroad and inconsistent signs of economic strength.

Now the focus will shift to December as the Fed’s likely last chance to raise interest rates in 2016 – a move that depends on how the economy, inflation and markets fare in the months surrounding a contentious presidential election. “The statement is much more hawkish than I thought it would be,” said Stephen Stanley at Amherst Pierpont Securities in New York, who said he expects a rate increase in December. “That just tells you they are revving up the engines.” Three officials, the most since December 2014, dissented in favor of a quarter-point hike. Esther George, president of the Kansas City Fed, voted against the decision for a second straight meeting. She was joined by Cleveland Fed President Loretta Mester – in her first dissent – and Eric Rosengren, head of the Boston Fed, whose previous dissents called for easier policy.

Read more …

Uh, no: The need for yet another overhaul of the BOJ’s policy framework [..] speaks to the deep-seated challenges facing policy makers. Actually, it speaks to the utter failure of all ‘policies’ up till now.

Bank of Japan’s Inflation Overshoot Deepens Policy Innovation (BBG)

The first major central bank to adopt quantitative easing in the modern era has innovated again. BOJ Governor Haruhiko Kuroda and his colleagues adopted a pledge of “overshooting” their 2% inflation target, an idea floated by central bankers including Federal Reserve Bank of Chicago President Charles Evans, but not formally adopted up to now. They also unveiled a strategy of targeting short- and longer-term rates to provide the economy with cheap borrowing costs. Since taking the helm in 2013, Kuroda had previously pursued a QE-on-steroids policy to shock Japan out of deflation. Yet after three and a half years, he was running into increasing concerns about the sustainability of the purchases of government bonds, which have run at about 15% of gross domestic product annually.

The adoption of a negative interest rate on some bank reserves resulted in an outcry from banks, and – for a time – an alarming plunge in yields even on longer-dated securities. The Federal Reserve had a cap on long-term yields back in the 1940s, as part of the U.S. government’s efforts to keep down wartime and postwar debt financing. But a strategy of targeting the yield curve as a reflation initiative is new to the major central banks of today. “The BOJ had to do something revolutionary out of necessity – they are concerned about sustainability,” said Yuji Shimanaka at Mitsubishi UFJ Morgan Stanley Securities. The need for yet another overhaul of the BOJ’s policy framework – this is the third iteration under Kuroda alone – speaks to the deep-seated challenges facing policy makers. Japan’s consumer prices slumped 0.5% in July from a year before, far from the 2% gains targeted “at the earliest possible time.”

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There are still scores of greater fools out there… This time lured by low rates.

Real Estate Gets Its Seat At The S&P 500 Table (Forbes)

In case you haven’t noticed, the S&P 500 Index is looking a little different these days. Once a sub-industry of the financial sector, real estate now has its own zip code in the universe of blue chip stocks. It’s the first time since 1999 that such a change has been made to the S&P’s composition. The new sector has a weighting of nearly 3%, all of it taken out of financials. Real estate’s promotion should attract more institutional and individual investors to the space. It tells them this is no longer a niche market but one with a distinct and significant presence, with its own unique business drivers.

This has been a long time coming, to be perfectly honest. Ever since the housing and financial crisis, real estate investment trusts (REITs) have been pulling in some serious cash as more become available for trading on the New York Stock Exchange and elsewhere. Altogether, REITs currently have a market cap of over $1 trillion, according to REIT.com. With investors on the hunt for yield, it’s not hard to see why. As of August 31, the FTSE NAREIT All Equity REITs Index yielded an average of 3.61%, compared to the S&P 500’s 2.11%. During 2015, stock exchange-listed REITs paid out a whopping $46.5 billion in dividends.

Looking just at the residential housing market, business is definitely booming. With 30-year mortgage rates at below 3.5%, the market is scorching hot in many parts of the U.S.—so much so, some builders are reporting a shortage in construction workers to meet demand. New construction starts rose to 1.2 million in July, beating analysts’ forecasts and suggesting the U.S. housing market appears to have finally made a full recovery eight years following the recession, with Bloomberg calling this the “strongest home sales since the start of the economic expansion.”

Trouble could be brewing, however. As I shared with you last month, millennials just aren’t buying homes at the same rate we’ve historically seen from 18- to 34-year-olds. There are many theories as to why this is, from millennials delaying starting families to focus on careers, to a loss of trust in homeownership as a reliable investment or even as an institution, to a preference to rent. This trend has contributed to the lowest U.S. homeownership rate in five decades. How can this be? How could there be both massive housing demand and yet declining home ownership?

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“On average, homeowners paid 28% more in mortgage payments than renters did in monthly rent.”

With Mortgage Rates So Low, Why Are So Many People Still Renting? (Time)

With interest rates lower than they have been for years, many people still find that renting is more budget-friendly than a monthly mortgage payment. This is not true in all parts of the U.S., but a study by Robert W. Baird & Co. shows that living in one of the biggest housing markets in the country is often more expensive. The study looked at 28 different cities, and found that U.S. homeowners in 24 of the cities paid more than those who rent. On average, homeowners paid 28% more in mortgage payments than renters did in monthly rent. The study looked at properties with ratings of four or five stars to keep variables to a minimum.

The study also made some assumptions, such as that all mortgages were 30-year fixed loans, that all homeowners made a down payment of 15%, and that all mortgages included private mortgage insurance, homeowners’ insurance, and taxes. Of the 28 different markets examined, it was more affordable to own than to rent in Baltimore, Maryland, Tampa, Florida, Jacksonville, Florida, and Norfolk/Richmond, Virginia. Of the remaining 24 cities, 15 showed a 20% or higher difference in the cost of renting versus the cost of owning. These differences were due to factors such as the increase in housing prices and the fact that there are few houses on the market in many of these areas.

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More fallout from the war on interest rates.

House-Flippers Are Back, With Anonymous Funding (BBG)

Alex Sifakis never raised this much money this fast. The house flipper from Jacksonville, Florida, crowdfunded nine deals totaling more than $9 million through RealtyShares over the last two and a half years. A July deal for $1 million took him just 12 hours. “Generally, raising money takes so much time,’’ said Sifakis, 33. “This offers so much flexibility and time savings. It’s so much better than going to family offices, banks or Wall Street firms.’’ House flippers and property developers are increasingly crowdfunding — tapping the virtual wallets of anonymous internet backers on platforms such as RealtyShares, LendingHome, PeerStreet and Patch of Land. For riskier ventures, such as building new homes and buying, renovating and selling existing ones, they’re finding quick financing can be easier to get online than from banks.

That’s contributed to an increase in home flipping. In the second quarter, 39,775 investors bought and sold at least one house, the most since 2007, according to ATTOM Data Solutions. The crowdfunding sites are part of the multibillion-dollar ecosystem of marketplace lenders, like LendingClub Corp. and Prosper Marketplace Inc., that match users who need money with people who want to provide it for anything from debt consolidation to elective medical procedures. That business hasn’t always run smoothly. LendingClub is going through a rough stretch after years of rapid growth. In May, its founder and chief executive officer resigned amid an internal probe into a botched loan sale, sending LendingClub’s shares tumbling. So far, there have been few defaults in real estate crowdfunding deals. When they happen, the platforms say they’ll pay investors the proceeds from property sales.

The business has other potential pitfalls. When it comes to real estate, faster isn’t always better. Wall Street’s home-mortgage machine of the mid-2000s valued speed over accuracy, with disastrous results, though most crowdfunding sites cater to investors and not homebuyers. Also, clicking for capital can be exploited by fraudsters who may not be who they say they are, according to Sara Hanks, co-founder and CEO of CrowdCheck, which provides due-diligence services for online investors. “We’ve seen some things where the entity that’s supposed to own the property doesn’t actually own it,’’ she said.

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“..40% of China’s expressways were built between 2010 and 2015..”

China Chalks Up $667-Billion Debt Pile Over Toll Roads (R.)

China’s toll roads have stacked up a debt pile of 4.45 trillion yuan ($666.96 billion), with almost 80% of their annual income last year going to repay loans, the transport ministry said, as the country accelerates road building. Beijing has cranked up state spending on infrastructure to support economic growth as private sector investment falters, and efforts to lure investors into private-public partnerships to build projects such as toll roads have had few successes. The ministry published the 2015 figures late on Tuesday in a report that comes as global investors express growing concern over China’s overall credit, much of which has gone to build infrastructure. The toll road network’s debt grew an annual 15.7% last year, far outpacing income growth of 4.6%, the ministry said in the report.

“Although China’s toll road debt is relatively large, this is just a phase,” state newspaper the People’s Daily quoted Sun Yonghong, an official of the ministry’s highway division, as saying. “In the long run, the risks are controllable.” About three-quarters of 2015 revenue of 409.78 billion yuan went to paying down debt and interest, as banks sought payment of the principal one year after project completions, Sun said. Toll roads make up less than 4% of China’s road network, which stretches 4.5 million km (2.8 million miles). Sun said much of the debt was incurred to build expressways, and accumulation would slow as the road network matured. Almost 40% of China’s expressways were built between 2010 and 2015, at a cost of 3.32 trillion yuan, about 2.23 trillion yuan of which was paid through loans, he said.

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Sickening.

Wells Fargo Too Arrogant To Own Up To Its Fraudulent Ways (WaPo)

The 2008 financial collapse was eight years ago this month — and the big banks are back to their old shenanigans. Venerable Wells Fargo has engaged in behavior that would have made a robber baron blush: It pressured low-wage workers with unrealistic sales targets, so these workers created 2 million bogus accounts over five years, causing customers to be hit with fees and damage to their credit ratings. About 5,300 workers have been fired and $185 million in penalties assessed to the bank, but not a single high-level executive has been sacked or even forced to give back the tens of millions of dollars in pay earned based on the fraud. When Wells Fargo chairman and CEO John Stumpf sat before the Senate Banking Committee this week, he represented a bank too big to fail, too sprawling to manage and too arrogant to own up to its failures.

Can’t Wells Fargo take back some of the executive payouts? “I’m not an expert in compensation,” Stumpf said. Would he commit to investigate whether the fraud began in earlier years? “I can’t tell you that today.” Did he learn about the fraud before reading about it in the Los Angeles Times? “I don’t remember the exact time frame.” Stumpf informed the senators that what Wells Fargo did “was not a scam,” disputed that “this is a massive fraud” and said he had no idea “why people did this.” Sen. Jerry Moran, R-Kan., encouraged Stumpf to “make certain that the employees are not the scapegoat for behavior at higher levels.” Stumpf repeated that “the 5,300, for whatever reason, they were dishonest, and I’m not scapegoating.” If high-level bankers didn’t go to prison for the subprime high jinks that caused the 2008 crash, it’s a safe bet that none will in the Wells Fargo scandal either.

But if arrogance were a criminal offense, Stumpf would be looking at a life sentence. The bank’s fraud, and the executive’s insolence, may have one salutary result: It takes off the agenda any plan to dismantle the Consumer Financial Protection Bureau, one of the post-2008 regulatory creations and a top target of Donald Trump and congressional Republicans. The Los Angeles city attorney and the Los Angeles Times may deserve more credit for exposing the wrongdoing, but the audacity at Wells Fargo shows that the industry isn’t about to police itself. Stumpf also managed to create rare bipartisan unity on the Banking Committee – in condemnation of his actions. Sherrod Brown, D-Ohio, was “stunned.” Dean Heller, R-Nev., compared him to Sgt. Schultz of “Hogan’s Heroes.” Robert Menendez, D-N.J., called the actions “despicable.” Patrick J. Toomey, R-Pa., told Stumpf: “This isn’t cross-selling, this is fraud.”

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“Let’s ask ourselves whether we are comfortable with the United States getting slowly, predictably, and all too quietly dragged into yet another war in the Middle East.”

27 US Senators Rebel Against Arming Saudi Arabia (I’Cept)

A Senate resolution opposing a $1.15 billion arms transfer to Saudi Arabia garnered support from 27 senators on Wednesday, a sign of growing unease about the increasing number of civilians being killed with U.S. weapons in Yemen. A procedural vote to table the resolution passed 71-27. The Obama administration announced the transfer last month, the same day the Saudi Arabian coalition bombed a potato chip factory in the besieged Yemeni capital. In the following week, the Saudi-led forces would go on to bomb a children’s school, the home of the school’s principal, a Doctors Without Borders hospital, and the bridge used to carry humanitarian aid into the capital. Saudi Arabia began bombing Yemen in March 2015, four months after Houthi rebels from Northern Yemen overran the capitol, Sanaa, and deposed the Saudi-backed ruler, Abdu Rabbu Mansour Hadi.

In addition to providing Saudi Arabia with intelligence and flying refueling missions for its air force, the United States has enabled the bombing campaign by supplying $20 billion in weapons over the past 18 months. In total, President Obama has sold more than $115 billion in weapons to the Saudi kingdom – more than any other president. After the White House failed to respond to a letter from 60 members of Congress requesting that the transfer be delayed, Sens. Chris Murphy, D-Conn., and Rand Paul, R-Ky., introduced a resolution condemning the arms sale. Paul and Murphy said they had planned to pursue binding legislation if their resolution was successful. “It’s time for the United States to press ‘pause’ on our arms sales to Saudi Arabia,” Murphy said. “Let’s ask ourselves whether we are comfortable with the United States getting slowly, predictably, and all too quietly dragged into yet another war in the Middle East.”

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Carter’s a real man. No Clinton, Bush or Obama is fit to shine his shoes.

A First Step for Syria? Stop the Killing (Jimmy Carter)

The announcement this month of a new cease-fire agreement in Syria is good news. But a lack of trust among the Syrian belligerents and their foreign supporters means this agreement, like the one that came before it, is vulnerable to collapse. It is already showing severe signs of strain. Over the weekend, the United States accidentally bombed Syrian government troops. On Monday, the Syrian military declared it would no longer respect the deal, resumed airstrikes on Aleppo, and even a humanitarian aid convoy was bombed. Still, there is reason for hope. If Russia and the United States were willing to come far enough in their negotiations to reach this deal, these setbacks can be overcome. The targeting of the humanitarian convoy, a war crime, should serve as an added impetus for the United States and Russia to recommit to the cease-fire.

The two parties were well aware of the difficulties as they spent a month negotiating the cease-fire’s terms. The agreement can be salvaged if all sides unite, for now, around a simple and undeniably important goal: Stop the killing. It may be more likely than it sounds. Reliable sources estimate the number of Syrians killed to date at almost half a million, with some two million more people wounded. Well over half of the country’s 22 million prewar population has been displaced. These shocking numbers alone should convince all concerned that war itself is the greatest violation of human rights and the ultimate enemy of Syria. If this cease-fire is to last, the United States and Russia must find ways to work beyond the lack of trust that undermined the previous cease-fire, in February.

The countrywide cessation of hostilities that began then started to crumble within two months, with battles in much of the countryside around Damascus, central and northern Syria, and Aleppo. The resumption of the conflict led in April to the suspension of UN-sponsored peace talks in Geneva. However, a strong effort was made earlier in the year when the United States and Russia pressed their respective allies to pause the fighting and give the negotiations a chance. But the American and Russian expectation that they reach an agreement on issues of transitional governance by Aug. 1 was unrealistic. After five years of killing, and before any semblance of trust could be established, pushing the Syrian parties and their supporters to agree on power-sharing was seen as too threatening by some and too inadequate by others. Unsurprisingly, they reverted to violence.

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A lovely letter.

Apologizing to My Daughter for the Last 15 Years of War (Van Buren)

I recently sent my last kid off for her senior year of college. There are rituals to such moments, and because dad-confessions are not among them, I just carried boxes and kept quiet. But what I really wanted to say to her — rather than see you later, call this weekend, do you need money? – was: I’m sorry. Like all parents in these situations, I was thinking about her future. And like all of America, in that future she won’t be able to escape what is now encompassed by the word “terrorism.” Terrorism is a nearly nonexistent danger for Americans. You have a greater chance of being hit by lightning, but fear doesn’t work that way. There’s no 24/7 coverage of global lightning strikes or “if you see something, say something” signs that encourage you to report thunderstorms.

So I felt no need to apologize for lightning. But terrorism? I really wanted to tell my daughter just how sorry I was that she would have to live in what 9/11 transformed into the most frightened country on Earth. Want the numbers? Some 40% of Americans believe the country is more vulnerable to terrorism than it was just after September 11, 2001 – the highest%age ever. Want the apocalyptic jab in the gut? Army Chief of Staff General Mark Milley said earlier this month that the threat remains just as grave: “Those people, those enemies, those members of that terrorist group, still intend – as they did on 9/11 – to destroy your freedoms, to kill you, kill your families, they still intend to destroy the United States of America.” All that fear turned us into an engine of chaos abroad, while consuming our freedoms at home.

And it saddens me that there was a different world, pre-9/11, which my daughter’s generation and all those who follow her will never know. [..] After the last cardboard boxes had been lugged up the stairs, I held back my tears until the very end. Hugging my daughter at that moment, I felt as if I wasn’t where I was standing but in a hundred other places. I wasn’t consoling a smart, proud, twenty-something woman, apprehensive about senior year, but an elementary school student going to bed on the night that would forever be known only as 9/11. Back home, the house is empty and quiet. Outside, the leaves have just a hint of yellow. At lunch, I had some late-season strawberries nearly sweet enough to confirm the existence of a higher power. I’m gonna really miss this summer.

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Sep 212016
 
 September 21, 2016  Posted by at 9:16 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle September 21 2016
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Harris&Ewing Preparations for the inauguration of Woodrow Wilson, Court of Honor before White House 1913


Unlike in 1986, This Time US Might Not Dodge a Recession: Deutsche Bank (BBG)
Get Ready For The Mother Of All Stock Market Corrections (Tel.)
Japan Exports Fall 11th Straight Month, 9.6% YoY, Imports Plunge 17.3% (R.)
Bank of Japan Overhauls Policy Framework, Sets Yield Curve Target (R.)
Bank of Japan Introduces Rate Target for 10-Year Government Bonds (WSJ)
Could Germany Allow Deutsche Bank To Go Under? (Golem XIV)
Keynesian Deflation Humbug (Mish)
Nobody Has Ever Shut Down The World’s Best Drilling Rigs – Until Now (BBG)
Crude Slips As Venezuela Says Market Is 10% Oversupplied (Dow Jones)
SEC Probes Exxon Over Asset Valuation, Climate Change Accounting (WSJ)
Court Says Hanjin Shipping Rehab Plan ‘Realistically Impossible’ (R.)
Elizabeth Warren to Wells Fargo CEO: Resign, Return Earnings, Face Inquiry (G.)
Mexico Police Raid Sawmills To Rescue Monarch Butterfly Refuge (AFP)
Italy PM Renzi: Merkel Is ‘Lying To The Public’, Europe Is a ‘GHOST’ (Exp.)
EU: Refugees Must Stay On Greek Islands Despite Lesbos Fire (AP)

 

 

There are few things more nonsensical than ‘experts’ saying things like “..there’s a 30% probability that the U.S. will succumb to a recession over the next 12 months..” Yet, people keep listening.

Unlike in 1986, This Time US Might Not Dodge a Recession: Deutsche Bank (BBG)

Falling corporate margins, weakness in the U.S. labor market and rising corporate default rates — all features of the U.S. economy in 1986, a year it avoided a recession. Even if this year markets are largely shrugging off the deterioration in those key indicators and betting grim readings are down to temporary forces, Deutsche Bank strategists say to take little hope from a 30-year old precedent. Investors jittery over bleak readings on a slew of macro and corporate data have seized on 1986, when the same signals for a U.S recession were in place but the economy ended up growing 3.5% after inflation.

But bets on the continued expansion in U.S. output over the next year might be misplaced, according to European equity strategists at Deutsche Bank, since the economy is on a significantly weaker footing compared to the year that saw the release of Ferris Bueller’s Day Off. They restate the bank’s call that there’s a 30% probability that the U.S. will succumb to a recession over the next 12 months. That compares pessimistically with the 20% that is the average expectations of analysts surveyed by Bloomberg — and even with other analysts at the bank.

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…when central banks stop printing…

Get Ready For The Mother Of All Stock Market Corrections (Tel.)

[..] According to Chris Watling at Longview Economics, a wide range of indicators confirm the message: recession risks are rising. And if a recession is indeed looming, it almost certainly means a bear market in equities. Looking at all the US recessions of the last 77 years, Mr Watling finds that there is only one (1945) which has not been accompanied by a stock market correction. Complicating matters further is an ever more worrisome phenomenon – that both bond and equity markets are being artificially propped up by central bank money printing. Further easing this week from the Bank of Japan would only deepen the problem. Yet eventually it must end, and when it does, share prices globally will return to earth with a bump. Only lack of alternatives for today’s ever rising wall of money seems to hold them aloft.

Over the last year, central bank manipulation of markets has reached ludicrous levels, far beyond the “quantitative easing” used to mitigate the early stages of the crisis. Through long use, “unconventional monetary policy” of the original sort has become ineffective, and, well, simply conventional in nature. To get pushback, central banks have been straying ever further onto the wild-west frontiers of monetary policy. Today it’s not just government bonds which are being bought up by the lorry load, but corporate debt, and in the case of the Bank of Japan and the Swiss National Bank (SNB), even high risk equities. [..] For global corporations at least, credit has never been so free and easy, encouraging aggressive share buy-back programmes.

This in turn further inflates valuations already in danger of losing all touch with underlying fundamentals. By the by, it also helps trigger lucrative executive bonus awards. Where’s the real earnings and productivity growth to justify the present state of stock markets? As long as the central bank is there to do the dirty work, it scarcely seems to matter. In any case, the situation seems ever more precarious and unsustainable. Conventional pricing signals have all but disappeared, swept away by a tsunami of newly created money. Globally, the misallocation of capital must already be on a par with what happened in the run-up to the financial crisis, and possibly worse given the continued build-up of debt since then.

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World trade summed up.

Japan Exports Fall 11th Straight Month, 9.6% YoY, Imports Plunge 17.3% (R.)

Japan’s exports fell 9.6% in August from a year earlier, posting an 11th straight month of decline, Ministry of Finance data showed on Wednesday, underscoring sluggish external demand. The fall compares with a 4.8% decrease expected by economists in a Reuters poll. It followed a 14.0% drop in July, the data showed. Imports fell 17.3% in August, versus the median estimate for a 17.8% decline. The trade balance swung to a deficit of 18.7 billion yen ($184 million), versus the median estimate for a 202.3 billion yen surplus. It was a first trade deficit in three months.

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Who says Kuroda has no sense of humor? After failing to lift inflation for years, he now says he will “..allow inflation to overshoot its target..

Bank of Japan Overhauls Policy Framework, Sets Yield Curve Target (R.)

The Bank of Japan added a long-term interest rate target to its massive asset-buying program on Wednesday, overhauling its policy framework and recommitting to reaching its 2% inflation target as quickly as possible. The central bank also said it will allow inflation to overshoot its target by maintaining an ultra-loose policy – beefing up its previous commitment to keep policy easy until the target was reached and kept in a stable manner. At the two-day rate review that ended on Wednesday, the BOJ maintained the 0.1% negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.

But it abandoned its base money target and instead adopted “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero %. The BOJ said it would continue to buy long-term government bonds at a pace that ensures its holdings increase by 80 trillion yen ($781 billion) per year. Under the new framework that adds yield curve control to its current quantitative and qualitative easing (QQE), the BOJ will deepen negative rates, lower the long-term rate target, or expand base money if it were to ease again, the central bank said in a statement announcing the policy decision. “The BOJ will seek to lower real interest rates by controlling short-term and long-term interest rates, which would be placed as the core of the new policy framework,” it said.

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But seriously, historians will look back on today wondering how on earth we could have all swallowed this continuing gibberish.

Bank of Japan Introduces Rate Target for 10-Year Government Bonds (WSJ)

Japan’s central bank took an unexpected step Wednesday, introducing a zero interest-rate target for 10-year government bonds to step up its fight against deflation, after an internal review of previous measures that fell short of expectations. he adoption of a long-term target, the first such attempt in the BOJ’s history, came as global central banks struggle to find ways to get prices rising. Financial markets gyrated following the Bank of Japan’s announcement of what it called a “new framework” to overcome deflation. Some thought it illustrated the limits of the BOJ’s powers, since the decision didn’t include any direct new stimulus measures, while others were encouraged by the BOJ’s tone.

“Investors are showing a positive response as they got the feeling that the BOJ will do whatever it can do to tackle deflation,” said Kengo Suzuki at Mizuho Securities in reference to the yen’s fall following the BOJ action. The dollar was around 102.60 yen in afternoon Tokyo trading, compared with around 101.90 yen before the decision. The 10-year Japanese government bond yield had already been near zero in recent weeks. It was minus 0.06% just before the decision and was minus 0.03% in Tokyo afternoon trading hours after the decision. The new framework puts 10-year interest rates at the center of policy, a contrast to the BOJ’s approach for the last 3 1/2 years under Gov. Haruhiko Kuroda, when asset purchases and expanding the monetary base were the key policy tool.

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Smart from Golem.

Could Germany Allow Deutsche Bank To Go Under? (Golem XIV)

[..] public bail outs are supposed to be strictly temporary. No holding 80% of RBS for most of a decade. Really? But that’s not the point which is important for Deutsche Bank. The important point is that in any sale of the viable parts of Germany’s only G-SIB, the brutal fact of the matter is that there is no other German financial institution that could afford to buy any of it. Commerzbank? Allianz? Letting an insurer buy a bank? So imagine the situation for Germany. They lose their seat at the top table and then they watch as France, England, American or perhaps China buy the crown of German financial might. So I don’t think it will ever happen. Or at least it will only happen when Germany is truly out of any other options. So if Deutsche is not going to be declared “no longer viable” what are the alternatives?

One option is the UniCredit route. UniCredit was a trillion euro bank. It was Italy’s flag carrier. It had bought Bavaria’s banks and some of Austria’s as well. And yet it’s share price was always paltry. Just 7.6 Euros at the market top in May ’07. And since then it has been a hollow and enfeebled giant. Lumbering and ineffectual. It has been the laughing stock of European banks. But Italy doesn’t seem to mind. They seem content to let UniCredit be the quintessential Zombie bank. Would Germany be as sanguine to leave Deutsche to go the same way? This would, I suggest, be almost as injurious to German pride and industrial policy as letting Deutsche go down completely.

But if Germany decided it could not face the financial consequences of obeying the letter of the resolution law nor leave the bank to be a bloated and useless zombie then the alternatives bring in their train even greater political upheavals. Imagine the German government decides that not bailing out Deutsche just inflicts too much damage on Germany – potentially reducing Germany from the front rank of globally significant nations to something lesser. It becomes a matter of national pride if not of survival. So Germany ignores all the FSB rules and regulations and bails Deutsche bringing it into government ownership/protection – call it what you like. In so doing it demolishes the entirety of European policy regarding bail outs, government debts and austerity.

Where then all the German insistence on fiscal discipline it has forced upon Greece, Ireland, Portugal, Spain and Italy? The Bundesbank, Berlin and the ECB would have no authority at all. Every country would have a green light to do the same for their flag carriers. It would be the end the European experiment. Or the European system would have to try to continue without Germany. And that could only happen if all debts to Germany were repudiated. I realise all this is speculation. But Deutsche has lost 90% of its value. Only RBS has lost more. Deutsche has 7000 legal cases against it. Frau Merkel is losing her grip, Brexit rocked the complacent rulers of Euroland and Madame Marine Le Pen would like to push France to do the same.

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Mish restates the obvious: “Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it’s precisely the opposite.”

Keynesian Deflation Humbug (Mish)

Hip, hip, hooray! The CPI is up more than expected, led by a huge 1.1% month-over-month surge in medical care supplies. Medical care services jumped 0.9%, and shelter jumped 0.3%. This will not help the economy. And it will subtract from consumer spending other than Obamacare and rent, but economists are cheering.

Real World Happiness

  • Food at home -1.9%
  • Energy -9.2%
  • Gasoline -17.3%
  • Fuel Oil -12.8%
  • Electricity -.07%
  • Used cars -4.0%

Unreal World Happiness

  • Food Away From Home +2.8%
  • Medical Care Commodities +4.5%
  • Shelter +3.4%
  • Transportation Services +3.1%
  • Medical Care Services +5.1%

Keynesian Theory vs. Practice Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it’s precisely the opposite. If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.

Reality Check Questions

  • If price of food drops will people stop eating?
  • If the price of gasoline drops will people stop driving?
  • If price of airline tickets drop will people stop flying?
  • If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
  • If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
  • If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
  • Will people delay medical procedures in expectation of falling prices?
  • If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

Bonus Question

If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?

Anyone who thinks soaring Obamacare and rent is a good thing and will help the economy is crazy.

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Forget the OPEC output cut talks, here’s what’s really happening in oil.

Nobody Has Ever Shut Down The World’s Best Drilling Rigs – Until Now (BBG)

In a far corner of the Caribbean Sea, one of those idyllic spots touched most days by little more than a fisherman chasing blue marlin, billions of dollars worth of the world’s finest oil equipment bobs quietly in the water. They are high-tech, deepwater drillships – big, hulking things with giant rigs that tower high above the deck. They’re packed tight in a cluster, nine of them in all. The engines are off. The 20-ton anchors are down. The crews are gone. For months now, they’ve been parked here, 12 miles off the coast of Trinidad & Tobago, waiting for the global oil market to recover. The ships are owned by a company called Transocean Ltd., the biggest offshore-rig operator in the world. And while the decision to idle a chunk of its fleet would seem logical enough given the collapse in oil drilling activity, Transocean is in truth taking an enormous, and unprecedented, risk.

No one, it turns out, had ever shut off these ships before. In the two decades since the newest models hit the market, there never had really been a need to. And no one can tell you, with any certainty or precision, what will happen when they flip the switch back on. It’s a gamble that Transocean, and a couple smaller rig operators, felt compelled to take after having shelled out millions of dollars to keep the motors running on ships not in use. That technique is called warm-stacking. Parked in a safe harbor and manned by a skeleton crew, it typically costs about $40,000 a day. Cold-stacking – when the engines are cut – costs as little as $15,000 a day. Huge savings, yes, but the angst runs high.

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OPES helps the US bring Maduro to his knees.

Crude Slips As Venezuela Says Market Is 10% Oversupplied (Dow Jones)

Oil prices dipped to a new one-month low Tuesday as hopes for any deal between OPEC countries and Russia to freeze production continued to fade. U.S. crude for October delivery recently fell 14 cents, or 0.3%, to $43.18 a barrel on the New York Mercantile Exchange. The October contract expires at settlement, and the more actively traded November contract recently fell 27 cents, or 0.6%, to $43.59 a barrel. Brent, the global benchmark, fell 42 cents, or 0.9%, to $45.53 a barrel on ICE Futures Europe. Recent trade has been marked by fears that more OPEC members are intent on increasing production, even as leaders discuss the possibility of an output cap. Libya, Iran and Nigeria combined want to increase their output by about 1.5 million barrels a day this year.

Even Venezuela is raising exports, despite financial and production troubles, and the moves from all these countries are a clear message that none would be interested in agreeing to a cap, said Bjarne Schieldrop from Sweden’s SEB bank. He added that any deal would probably allow exceptions for Nigeria, Libya, Venezuela and Iran to lift production, possibly nullifying any agreement. “It doesn’t seem like any oil producers outside of North America are doing anything to control their production levels,” said Gene McGillian, research manager at Tradition Energy. Oil has been in a steady downtrend for the better part of two weeks with concerns over lingering oversupply. Prices are down 9.4% since they hit a high point for nearly the past month on Sept. 8.

The biggest drop came in two days last week after the International Energy Agency said a slowdown in global oil demand growth accelerated this quarter, sinking to 800,000 barrels a day – 1.5 million barrels a day lower than the third quarter of 2015. Despite that and talks of an output cap, data show OPEC members broadly producing near-record amounts of crude. “Fundamentals suggest the oil market is likely to remain in surplus for longer than many expected,” strategists at ING Bank said in a note.

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Exxon has not: 1) written down valuations of reserves as prices plunged, and 2) accounted for the financial consequences of climate change regulations.

SEC Probes Exxon Over Asset Valuation, Climate Change Accounting (WSJ)

The U.S. Securities and Exchange Commission is investigating how Exxon Mobil values its assets in a world of increasing climate-change regulations, a probe that could have far-reaching consequences for the oil and gas industry. The SEC sought information and documents in August from Exxon and the company’s auditor, PricewaterhouseCoopers, according to people familiar with the matter. The federal agency has been receiving documents the company submitted as part of a continuing probe into similar issues begun last year by New York Attorney General Eric Schneiderman, the people said.

The SEC’s probe is homing in on how Exxon calculates the impact to its business from the world’s mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects. The decision to step into an Exxon investigation and seek climate-related information represents a moment in the effort to take climate change more seriously in the financial community, said Andrew Logan, director of the oil and gas program at Ceres, a Boston-based advocacy organization that has pushed for more carbon-related disclosure from companies.

“It’s a potential tipping point not just for Exxon, but for the industry as a whole,” he said. As part of its probe, the SEC is also examining Exxon’s longstanding practice of not writing down the value of its oil and gas reserves when prices fall, people familiar with the matter said. Exxon is the only major U.S. producer that hasn’t taken a write down or impairment since oil prices plunged two years ago. Peers including Chevron have lowered valuations by a collective $50 billion.

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Shipping prices will plummet.

Court Says Hanjin Shipping Rehab Plan ‘Realistically Impossible’ (R.)

The South Korean court overseeing Hanjin Shipping’s receivership said a rehabilitation plan is “realistically impossible” if top priority debt such as backlogged charter fees exceed 1 trillion won ($896 million), South Korea’s Yonhap newswire reported on Wednesday. Hanjin Shipping, the world’s seventh-largest container carrier, filed for receivership late last month in a South Korean court and must submit a rehabilitation plan in December. With debt of about 6 trillion won ($5.4 billion) at the end of June and the South Korean government’s unwillingness to mount a rescue, expectations are low that Hanjin Shipping will be able to survive. Top priority debt means claims for public interests, which are paid first to creditors and include cargo owners’ damages and unpaid charter fees, Yonhap reported citing the Seoul Central District Court.

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Shouldn’t such an inquiry be as obvious as common sense??

Elizabeth Warren to Wells Fargo CEO: Resign, Return Earnings, Face Inquiry (G.)

Wells Fargo chief executive John Stumpf should resign, return his pay and be criminally investigated over the bank’s illegal sales practices, Senator Elizabeth Warren said on Tuesday. The Massachusetts senator’s comments came moments after Stumpf said he was “deeply sorry” for the more than 2m unauthorized accounts his staff opened for the bank’s customers. The accounts, ranging from credit cards to checking accounts, were opened by thousands of the bank’s employees in an effort to meet Wells Fargo’s sales quotas and have already led to a record $185m fine. While testifying in front of the Senate banking committee, Stumpf said he was “deeply sorry” that the bank let down its customers and apologized for violating their trust.

“I accept full responsibility for all unethical sales practices in our retail banking business, and I am fully committed to doing everything possible to fix this issue, strengthen our culture, and take the necessary actions to restore our customers’ trust,” Stumpf said in his prepared remarks. Warren accused Stumpf of “gutless leadership”, telling him that his definition of being accountable is to push the blame on lower-level employees who do not have a PR firm to defend them. Warren questioned Stumpf’s compensation, asking him: “Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?” “The board will take care of that,” Stumpf said after attempting to duck the question. He also told Warren that this “was not a scam”.

Warren pointed out that during the time that the unauthorized accounts were being opened, the share price of Wells Fargo went up by about $30. Stumpf personally owns about 6.75m shares of Wells Fargo stock and made more than $200m just off his stock during that time, Warren said. [..] At the hearing Stumpf pointed out that the lowest paid employees at Wells Fargo earn $12 an hour and that the employees let go for opening unauthorized accounts were making “good money”, earning $30,000 to $60,000 a year. “How much money did you make last year?” New Jersey senator Robert Menendez asked Stumpf. “$19.3m,” said Stumpf. “Now that’s good money,” said Menendez.

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Kudo’s.

Mexico Police Raid Sawmills To Rescue Monarch Butterfly Refuge (AFP)

A special Mexican police unit has raided seven sawmills near the monarch butterfly’s mountain sanctuary in a bid to prevent illegal logging threatening the insect’s winter migration, officials said Tuesday. Backed up by a helicopter, some 220 members of the country’s police force and 40 forestry inspectors participated in the September 12 operation in the western state of Michoacan. North American governments have taken steps since last year to protect the monarch butterfly, which crosses Canada and the United States each year to hibernate on the fir and pine trees of Mexico’s western mountains. Last week’s raid was the first since the government decided in April to add the police to protection efforts for the brilliant orange and black monarchs.

The force has been conducting foot patrols day and night, using drones and helicopters for surveillance when weather permits, Abel Corona, director of the special units, said at a news conference. [..] Illegal logging dropped by 40% between the 2014-2015 and 2015-2016 butterfly season, environmental protection authorities said last month. But March storms killed seven% of the monarchs. The cold spell came after authorities had reported a rebound in the 2015-2016 season, with the butterfly covering 4.01 hectares (9.9 acres) of forest, more than tripling the previous year’s figure.

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Renzi in his referendum desperation finally tells the truth, somewhat.

Italy PM Renzi: Merkel Is ‘Lying To The Public’, Europe Is a ‘GHOST’ (Exp.)

Angela Merkel has been lying to the public about European unity, Italian Prime Minister Matteo Renzi has said. In a brutal attack on his fellow EU members, he said the first EU summit without the UK amounted to no more than “a nice cruise on the Danube”. Having been excluded from a joint news conference by the German Chancellor, Mrs Merkel and French President Francois Hollande, he said he was dissatisfied with the Bratislava summit’s closing statement. The outspoken Italian premier hit out at the lack of commitments on the economy and immigration in the summit’s conclusions, despite signing it himself. In a fiery interview in Italian daily Corriere della Sera, Mr Renzi intensified his criticisms, although he remained vague on what commitments he would have liked the summit to produce.

The Prime Minister has staked his career on a referendum this autumn over plans for constitutional reform, promising to resign if he loses. Talking about his fellow leaders, he said: “If we want to pass the afternoon writing documents without any soul or any horizon they can do it on their own. “I don’t know what Merkel is referring to when she talks about the ‘spirit of Bratislava’. “If things go on like this, instead of the spirit of Bratislava we’ll be talking about the ghost of Europe.” Mr Renzi said he is preparing a 2017 budget which he claims will cut taxes despite a slowing economy and record high public debt. He added: “At Bratislava we had a nice cruise on the Danube, but I hoped for answers to the crisis caused by Brexit, not just to go on a boat trip.”

He was similarly belligerent about the Italian budget to be presented next month, saying there would be “no negotiation” with Brussels, and money he planned to spend on tackling immigration and making Italy safer from earthquakes would be excluded from EU rules on deficit limits. Other countries were more guilty than Italy of breaking budget rules and Italy had met its commitments on tackling the inflows of migrants crossing the Mediterranean, Renzi said. He said: “I’m not going to stay silent for the sake of a quiet life. “If someone wants to keep Italy quiet they have picked the wrong place, the wrong method and the wrong subject.”

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In case anyone still had any doubts about this, here’s more proof that it’s the EU, not Greece, that is responsible for the expanding misery. Europe wants the islands to serve as holding pens, so richer Europe doesn’t have to face the consequences of the policies it itself dictates.

“To avoid secondary movement to the rest of Europe, that means keeping asylum seekers on the islands..”

EU: Refugees Must Stay On Greek Islands Despite Lesbos Fire (AP)

Authorities on the island of Lesvos called for the immediate evacuation Tuesday of thousands of refugees to the Greek mainland after a fire gutted a detention camp following protests. But EU officials appeared cool to the idea. More than 4,000 people were housed at the camp in Moria on Lesvos where the fire broke out late Monday, destroying or damaging tents and trailers. No injuries were reported at the camp, about 8 kilometers north of the island’s main town. Nine migrants were arrested on public disturbance charges after the chaotic scenes. Families with young children hastily packed up their belongings and fled into the nearby fields as the fire raged after nightfall. Many were later given shelter at volunteer-run camps. “We have been saying for a very long time that overcrowding on the islands must be eased,” regional governor Christiana Kalogirou said.

“On the islands of the northeast Aegean, official facilities have a capacity of 5,450 places, but more than 10,500 people are there. There is an immediate need to take people off the islands because things will get even more difficult,” she said. More than 60,000 migrants and refugees are stranded in transit in Greece, and those who arrived after March 20 have been restricted to five Aegean islands under an EU-brokered deal to deport them back to Turkey. But the agreement has been fraught with delays. In Brussels, a spokeswoman for the European Commission, Natasha Bertaud, said the Greek government had described the situation as being under control. Transfers to the mainland, she said, would remain limited. “To avoid secondary movement to the rest of Europe, that means keeping asylum seekers on the islands for the most part,” Bertaud said.

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 September 11, 2016  Posted by at 9:28 am Finance Tagged with: , , , , , , , ,  6 Responses »
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Harris&Ewing No caption, Washington DC 1915


Fed Dove Frets About Asset Bubbles, Wall Street Freaks Out (WS)
Hostage to a Bull Market (Jim Grant)
Leverage Soars to New Heights as Corporate Bond Deluge Rolls On (BBG)
On Nov. 8 Americans Decide To Either Rescue The Banks Or The Consumer (RI)
Wells Fargo Opened a Couple Million Fake Accounts (BBG)
It’s Business As Usual At Wells Fargo After Record Fine (MW)
New Zealand Prepares for the Party to End (Hickey)
Italy’s Renzi: At Last Hollande Is With Us, We Can Cause A Stir (Kath.)
Yanis Varoufakis’s Fantasy Politics (Jacobin)
Greek PM Tsipras Pledges Growth Amid Protests, Austerity Plans (AP)
EU Adds €115 Million In Aid For Migrants In Greece (DW)
Rescuers Bring 2,300 Migrants To Safety From Mediterranean on Saturday (R.)

 

 

There’s only one solution: take away from central banks their current powers to manipulate markets and economies.

Fed Dove Frets About Asset Bubbles, Wall Street Freaks Out (WS)

When Boston Fed governor Eric Rosengren, a voting member of the Federal Open Markets Committee, where monetary policy is decided, shared some aspects of his worries on Friday morning, markets tanked instantly. This came just after the ECB’s refusal to please the markets with promises of additional bond purchases. Instead, it stuck to the promises it had made previously. What a disappointment for markets running on nothing but central-bank mouth-wagging and money-printing! [..] In his speech, Rosengren discussed how the US economy has been “fairly resilient” and is near “reaching the Federal Reserve’s dual mandate from Congress (stable prices and maximum sustainable employment),” despite all the global headwinds, some of which he enumerated.

And so, he said, “a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.” Hence, rate increases, even though there were some “conflicting signals” in the economic data – “Clearly, the first two quarters did not live up to the forecasts,” he said. But “waiting too long to tighten” would expose the economy to two risks: First, the economy overheats – the belated tightening might “require more rapid increases in interest rates later in the cycle,” which will likely “result” in a recession, as it did “frequently” in the past. And second, asset bubbles – “that some asset markets become too ebullient.” He pointed at commercial real estate prices that “have risen quite rapidly over the past five years, particularly for multifamily properties.”

He added: Because commercial real estate is widely held in the portfolios of leveraged institutions, commercial real estate cycles can amplify the impact of economic downturns as financial institutions need to write down the value of loans and cut back on lending to maintain their capital ratios. And what a bubble it is. Over the past 12 months, prices have jumped only 6%, according to the Green Street Commercial Property Price Index, compared to the double-digit gains in prior years. “Equilibrium,” the report called it. The index has soared 107% from May 2009, and 26.5% from the peak of the totally crazy prior bubble that ended with such spectacular fireworks:

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Excellent from Grant, fully in line with Nicole’s series the past week.

Hostage to a Bull Market (Jim Grant)

If there is a curse between the covers of this thin, self-satisfied volume, it doesn’t have to do with cash, the title to the contrary notwithstanding. Freedom is rather the subject of the author’s malediction. He’s not against it in principle, only in practice. Ken Rogoff is a chaired Harvard economics professor, a one-time chief economist at the International Monetary Fund and (to boot) a chess grandmaster. He laid out his case against cash in a Saturday essay in this newspaper two weeks ago. By abolishing large-denomination bills, he said there, the government could strike a blow against sin and perfect the Federal Reserve’s control of interest rates. “The Curse of Cash,” the Rogoffian case in full, comes in two parts.

The first is a helping of monetary small bites: a little history (in which the gold standard gets the back of the author’s hand), a little central-banking practice, a little underground economy. It’s all in the service of showing where money came from and where it should be going. Terrorists traffic in cash, Mr. Rogoff observes. So do drug dealers and tax cheats. Good, compliant citizens rarely touch the $100 bills that constitute a sizable portion of the suspiciously immense volume of greenbacks outstanding—$4,200 per capita. Get rid of them is the author’s message. Then, again, one could legalize certain narcotics to discommode the drug dealers and adopt Steve Forbes’s flat tax to fill up the Treasury. Mr. Rogoff considers neither policy option. Government control is not only his preferred position.

It is the only position that seems to cross his mind. Which brings us to the business end of this production. Come the next recession, the book’s second part contends, the Fed should have the latitude to drive interest rates below zero. Mr. Rogoff lays the blame for America’s lamentable post-financial-crisis economic record not on the Obama administration’s suffocating tax and regulatory policies. The problem is rather the Fed’s inability to put its main interest rate, the federal funds rate, where it has never been before. In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth.

At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. According to the worldview of the people who constitute what Mr. Rogoff fraternally calls the “policy community” (who elected them?), the spending will buttress “aggregate demand,” thus restore prosperity. You may doubt this. Mr. Rogoff himself sees difficulties. For him, the problem is cash. The ungrateful objects of the policy community’s statecraft will stockpile it. What would you do if your bank docked you, say, 3% a year for the privilege of holding your money? Why, you might convert your deposit into $100 bills, rent a safe deposit box and count yourself a shrewd investor. Hence the shooting war against currency.

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Historians will see us as too deluded to be true.

Leverage Soars to New Heights as Corporate Bond Deluge Rolls On (BBG)

Here’s a gut check for bond investors: corporate America is now more leveraged than ever. As this year’s corporate bond sales raced past $1 trillion on Wednesday – marking the fifth consecutive year of trillion-plus issuance – Morgan Stanley published a report Friday highlighting the growing strains on company balance sheets. The report, which estimated US companies’ collective debt at a record 2.4 times their collective earnings as of June, comes at a time of growing angst in global bond markets “The investment-grade ‘safe’ part of the market is becoming the most dangerous,” said Ashish Shah, CIO at AllianceBernstein. “There are so little returns out there. People are crowding into whatever they can.”

The debt metric, which doesn’t include banks and other financial companies, has climbed for five straight quarters as corporate profits decline at the same time companies load up on the increasingly cheap borrowings, Morgan Stanley analysts led by Adam Richmond wrote in a note to clients. In 2010, when the U.S. economy started recovering from the longest recession since the Great Depression, the ratio fell to 1.7 times. But what has the analysts uneasy isn’t just the speed at which leverage is climbing, but that it’s happening while the economy continues to grow. “Leverage tends to rise most in a recession – so the fact that it is this high in a ‘healthy economy’ is even more concerning,” the analysts wrote. In other words, they said, “mistakes are both more likely and more costly.”

The analysts’ assessment wasn’t totally worrisome. Years of near-zero interest rates have made it a lot easier to service those debt loads. The typical company’s annual earnings before interest, taxes, depreciation and amortization, known as Ebitda, is still almost 10 times its interest payments, Morgan Stanley’s data shows. Even that number has been declining, though, as earnings slump.

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“Today, consumption can only increase if someone hands out money. This money cannot be earned by companies, because consumers are unable to buy additional products.”

On Nov. 8 Americans Decide To Either Rescue The Banks Or The Consumer (RI)

Recently, the Fed decided not to change interest rates. Various reasons were given, but as we know, there are two “parties” in the US, one which favors monetary easing, and the other, tightening, and each has arguments for their case. Economists are divided on how to proceed. They disagree on precisely this: which economic policies can facilitate growth in our times? A brief look at the last 50 years provides some context. In the 70s, household incomes fell, most of all from 1972-73, and with them, spending. Starting in 1981, (Reaganomics!), spending began to rise, but income, hardly at all. Economic growth was due to increased consumption driven by a rise in household debt, and from 2008 on, in government debt. If we look at real disposable household income, it is the same today as it was in the early 60s.

Today, average household debt is 120% of annual income, whereas up until 1981 it never exceeded 65%. Note too, that in 1981, the discount rate was 19%, whereas today it is practically zero. Today, consumption can only increase if someone hands out money. This money cannot be earned by companies, because consumers are unable to buy additional products. So the only way is to increase debt. But lowering interest rates is impossible because they are already at zero. So there are two options: 1) print money and hand it out to people through the banks, with the understanding that this money will not be returned, or 2) restructure the existing debt, both personal and corporate, in the hopes that then people will start to consume.

In order to do this, interest rates would have to be raised to at least 3-4%, with the banks taking a major hit, because their customers cannot service their loans at those rates… Voila the collision of interests between the people and the banks. Unsurprisingly, the two US candidates disagree on this issue. Clinton is for option 1, i.e. more monetary easing (helping the banks), and Trump is for tightening (helping the people). The choice, of course, lies with the American voter.

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And nobody in management noticed a thing?

Wells Fargo Opened a Couple Million Fake Accounts (BBG)

[..] Wells Fargo was fined $185 million by various regulators for opening customer accounts without the customers’ permission, and that is bad, but there is also something almost heroic about it. There’s a standard story in most bank scandals, in which small groups of highly paid traders gleefully and ungrammatically conspire to rip-off customers and make a lot of money for themselves and their bank. This isn’t that. This looks more like a vast uprising of low-paid and ill-treated Wells Fargo employees against their bosses. The Consumer Financial Protection Bureau, which fined Wells Fargo $100 million, reports that about 5,300 employees have been fired for signing customers up for fake accounts since 2011. You’d have a tough time organizing 5,300 people into a conspiracy, which makes me think that this was less a conspiracy and more a spontaneous revolt.

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“Wells Fargo’s punishment comes to only 0.9% of the $22.9 billion that the bank earned last year..”

It’s Business As Usual At Wells Fargo After Record Fine (MW)

“The fine is a rounding error, and I don’t see any unintended consequences.” So said FBR analyst Paul Miller, describing the $185 million in fines and penalties, plus another $5 million for “customer remediation,” that Wells Fargo agreed to pay. Wells Fargo’s punishment comes to only 0.9% of the $22.9 billion that the bank earned last year. The Consumer Financial Protection Bureau (CFPB) found “widespread unlawful practices” at the third-largest U.S. bank by assets, including the opening of “hundreds of thousands” of accounts by employees without customers’ knowledge so employees could hit lofty sales targets. The fine was the largest levied since the CFPB’s founding in 2011.

Shares of San Francisco-based Wells Fargo fell 2.4% at the close of regular trading Friday, in line with the benchmark S&P 500 suggesting a low level of worry among investors. But there could be longer-term consequences for the bank’s reputation, as Federal Reserve Gov. Daniel Tarullo said during a CNBC interview that criminal charges against bank officers should be pursued. In Wells Fargo’s more than 6,000 retail branches, there has long been a culture of cross-selling as many products to customers as possible, which has been a big part of the bank’s success for decades, according to Marty Mosby, director of bank and equity strategies at Memphis, Tenn.-based broker-dealer Vining Sparks.

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I’m afraid the walls will have to come crumbling down before Kiwis accept their reality.

New Zealand Prepares for the Party to End (Hickey)

Should we all celebrate? Or sink into a great depression, or run for the nearest bunker? It’s hard to know how to react to the news Auckland’s average house value rose over $1 million in August. Auckland’s homeowners should in theory be celebrating their good fortune and voting for more of the same. Anyone who invested just over $53,000 of their money in 2011 to buy an average Auckland house with a 90% mortgage would now be sitting on tax-free capital gains of $486,000. Indeed, some are celebrating. New car sales are at record highs and spending in Auckland’s cafes, bars and restaurants is growing at double-digit rates. But it’s not the sort of go-for-broke debt-fuelled spending binge like the one we saw from 2002-07 when mortgage lending grew at an annual rate of 15%.

Mortgage debt grew 9% in the last year and most people think it has peaked, given the Reserve Bank’s latest restrictions on low deposit lending and a limit on debt to income multiples expected next year. Most Aucklanders don’t believe the manna from the great housing gods in the heavens is real enough to go withdrawing from their household ATMs, which is why the lending growth is relatively subdued. They can also feel in their bones that house prices at 10 times incomes are hyper≠ventilated, if not downright over-valued. New Zealand’s house-price-to-income multiple is the second-most-expensive relative to long run averages in the OECD (behind Belgium), and is the most expensive relative to rents in the OECD. That overvaluation has grown more than any other country in the OECD over the past six years.

This is not the sort of world champion tag we want. The $1m milestone is clearly a moment of despair for those young Aucklanders aspiring to own a home and start a family, particularly those whose parents were also renters. The combination of the price rises and the new LVR rules mean they face decades of saving for a deposit, let along being able to borrow the hundreds and hundreds of thousands to buy a home. All they can hope for is to win Lotto or to marry into a rich family. Another response is to hunker down and prepare for an implosion, which means saving madly to repay debt ahead of the housing market end-times and to diversify into other types of assets. This isn’t so much a celebration as a preparing for the party to be shut down.

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Really?

Italy’s Renzi: At Last Hollande Is With Us, We Can Cause A Stir (Kath.)

After the EU-Mediterranean summit in Athens on Friday, Italian Prime Minister Matteo Renzi expressed his satisfaction that French President Francois Hollande joined Alexis Tsipras’s initiative to form a front against austerity, Italy’s Corriere della Sera newspaper reported on Saturday. “At last, Hollande is with us, he got over his indecisiveness,” the paper quoted Renzi as saying. “Now we can take action.” On the flight back to Rome from Athens, Renzi appeared more than satisfied with the outcome of the summit, the paper reported. Renzi is said to have expressed relief, in comments to journalists, that Hollande signed a declaration embracing the policies that Italy and other southern European countries are promoting. “Now we are many, we can cause a stir,” Renzi is reported to have said, adding that he expected that “in the future the balance of power will change.”

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Much as I appreciate Yanis, I’m afraid I have to agree with much of this article. Reforming the EU is akin to reforming the mob. Why not put your energy into an organization that exists ‘parallel’ to the EU?

Yanis Varoufakis’s Fantasy Politics (Jacobin)

To his credit, Varoufakis at least recognizes that progressives “have no alternative” but a “head-on clash with the EU establishment,” since the European Union simply cannot be reformed to make it more democratic. But, he nonetheless insists, leftists must not support referenda to leave the EU. He offers two confused reasons for this. First, since exit referenda are “movements that have been devised and led primarily by the Right,” it is “unlikely” that joining them “will help the Left block their opponents’ political ascendancy.” This left defeatism is simply a self-fulfilling prophecy. If the Left refuses to lead exit referenda campaigns, of course the running will be left to the Right. And since the Left cannot convincingly defend the European Union, that leaves the Right to benefit.

Secondly, Varoufakis suggests that restoring national democracy will mean the end of the free movement of “workers.” “Given that the EU has established free movement, Lexit involves acquiescence to – if not actual support for – the reestablishment of national border controls, complete with barbed wire and armed guards.” Leaving aside the fact that left-wing leadership could theoretically persuade an electorate to accept open borders, this defence of the EU is simply bizarre. The European Union is very far from “borderless” (his word). It has created free movement not for “workers,” but for EU citizens, albeit limited for the citizens from accession countries.

But for non-EU workers, the European Union has established Fortress Europe: “barbed wire and armed guards” surround the continent, resulting in thousands of dead Africans and Asians in the Mediterranean Sea, and hundreds of thousands more languishing in squalid conditions in southeast Europe (including Varoufakis’s own home country, Greece) and Turkey. Moreover, the migration crisis has led to the restoration of “barbed wire and armed guards” across the continent. The idea that the European Union safeguards some sort of workers’ paradise of open borders against right-wing revanchism is ludicrous.

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Growth is a pipedream wih half your young people long term unemployed (which kills economic activity), wages as low as €100 a week, and pensions at €380 a month (both of which kill consumption).

Greek PM Tsipras Pledges Growth Amid Protests, Austerity Plans (AP)

Greece’s prime minister promised Saturday to deliver economic growth to a country hammered by years of economic hardship, as thousands gathered in protest at more planned austerity measures. About 15,000 protesters – beating drums, waving black flags and holding helium balloons bearing anti-government slogans – took part in demonstrations, marching through the center of Greece’s second-largest city, Thessaloniki, where Prime Minister Alexis Tsipras spoke on the state of the nation’s economy. “In five disastrous years … a quarter of our national wealth was destroyed, disposable income fell by 40%, unemployment soared to 28% and the level of poverty rose to 38%,” Tsipras told an audience of politicians and business leaders, referring to governments before he took office in early 2015.

“Now, all the indications are that this chapter is closing…Finally, we are going from a negative direction to a positive one.” As expected Tsipras said that €246 million, the proceeds of a recent auction of TV licenses, would go toward the “needs of the welfare state.” He promised 10,000 new jobs at state hospitals, thousands more free meals at schools, more kindergarten places and a program aimed at bringing back young Greeks who left the country due to the crisis. “Every last euro of the €246 million will go the people,” he said. He also heralded a 5-year action plan – “a realistic road map for the recovery of the economy and reduction of burdens” – that would bring about a “new Greece” by 2021 and promised to freeze the social security contributions of self-employed Greeks as well as reducing taxes in two years time.

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I had to read 5-6 versions of this, in order to find where the money would be going. Turns out, as I feared, that it goes not to the Greeks but to -mostly- international NGOs, who’ve done a far from stellar job. Give a fraction of the €115 million to Konstantinos and his O Allos Anthropos ‘movement’ that we support, and many more people get help. That this is still needed despite the 100s of millions of euros doled out to those NGOs says more than enough. International NGOs are way too expensive and inefficient. So please click that link and help The Automatic Earth help where it counts.

EU Adds €115 Million In Aid For Migrants In Greece (DW)

The European Union will provide humanitarian organizations in Greece an additional €115 million on top of €83 million from earlier this year, the European Commission said on Saturday. “The European Commission continues to put solidarity into action to better manage the refugee crisis, in close cooperation with the Greek Government,” Humanitarian Aid Commissioner Christos Stylianides said. “The new funding has the key aim to improve conditions for refugees in Greece, and make a difference ahead of the upcoming winter.”

About 60,000 refugees and migrants are stranded in Greece due to border closures implemented earlier this year in the Balkans. Rights organizations have documented poor conditions in overcrowded camps. The new funding will help improve existing shelters and build new ones, pay for a voucher system for migrants, and provide education and other support to unaccompanied minors. It will be channelled via humanitarian organizations. The EU’s emergency support aid is in addition to financial assistance given under other funding programmes.

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A routine day.

Rescuers Bring 2,300 Migrants To Safety From Mediterranean on Saturday (R.)

Rescuers pulled 2,300 migrants to safety on Saturday in 18 separate rescue operations in the Mediterranean coordinated by the Italian coast guard. A Spanish boat belonging to an EU naval force, an Irish navy vessel and boats of four non-governmental organizations were involved in the rescue operations, the coast guard said in a statement. It did not say where the migrants, who were traveling in 17 rubber vessel and one small boat, originally came from. Since moves to stop people crossing from Turkey to Greece, Europe’s worst migrant crisis since World War Two is now focused on Italy, where some 115,000 people had arrived by the end of August, according to the United Nations refugee agency UNHCR.

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