yen Archives - Page 3 of 3 - The Automatic Earth

U.S. businesses, feeling heat from activist investors, are slashing long-term spending and returning billions of dollars to shareholders, a fundamental shift in the way they are deploying capital. Data show a broad array of companies have been plowing more cash into dividends and stock buybacks, while spending less on investments such as new factories and research and development. Activist investors have been pushing for such changes, but it isn’t just their target companies that are shifting gears. More businesses sitting on large piles of extra cash are deciding to satisfy investors by giving some of it back. Rock-bottom interest rates have made it cheap to borrow to buy back shares, which can boost a company’s stock price. And technology-driven productivity gains are enabling some businesses to do more with less.

As the trend picks up steam, so too has debate about whether activist investors—who take sizable stakes in companies, then agitate for changes they think will boost share prices—have caused companies to tilt too far toward short-term rewards. Laurence Fink, chief executive of BlackRock, the world’s largest money manager, argued as much in a March 31 letter to S&P 500 CEOs. “More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”

An analysis conducted for The Wall Street Journal by S&P Capital IQ shows that companies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003. At S&P 500 companies targeted by activists, the spending cuts were more dramatic. Targeted companies reduced capital expenditures in the five years after activists bought their shares to 29% of operating cash flow, from 42% the year before, the Capital IQ analysis shows. Those companies boosted spending on dividends and buybacks to 37% of operating cash flow in the first year after being approached, from 22% in the year before.

Rent seeking.

• You’ve Met Hillarynomics. Now Meet Left-of-Hillarynomics. (Vox)

Conventional thinking holds that wealth should be invested and, through investment, put to productive use, with those investments creating job opportunities and higher wages. Alternatively, if few productive investment opportunities are available, the return on invested wealth should start falling. It ought to be a self-correcting cycle in which wealth cannot outpace incomes for long. But the return from capital remains high, and wages are stagnating. Something’s gone wrong. The problem, Stiglitz and his co-authors write, is that the rise in wealth isn’t coming from productive investments. It’s coming from what economists call rents — a metaphorical extension of the 18th-century practice of small farmers paying rent to landlords for the right to use the total inert asset of land.

Stiglitz and his co-authors extend the idea to include a wider and more modern array of rents. A patent or a copyright, for example, can be a valuable financial commodity to own, even without being productive in the way a factory or tractor is. To see the distinction, imagine you have $300 million and can either invest it in a startup or use it to buy the rights to the Beatles’ songs. In the former case, you’re providing money that a company can then use to hire people, produce goods, and generally create wealth in the world. In the latter, you’re producing nothing; you’re just grabbing something that someone else produced and claiming the proceeds from it. “Rent-seeking,” as economists call it, is generally viewed as economically counterproductive. It’s especially counterproductive when it becomes so lucrative as to provide a more attractive outlet for people’s money than real investments.

The report’s authors argue that’s exactly what’s happening with Wall Street. Its growth has fueled a big rise in credit — credit that tends to go to those who already have wealth, often in the form of rents, exacerbating existing rent-based problems. Financiers have also identified novel ways to rent-seek. “Too big to fail” status, for example, can count as a rent. It increases the value of firms like Goldman Sachs or JPMorgan Chase not by making them more productive, but by providing an implicit government subsidy. Trading mortgage-backed securities for profit, similarly, does little to actually increase wealth but a lot to redirect it. That makes it attractive as a business activity for banks and hedge funds, redirecting their energies from profitable activities that create wealth.

Many of these rents are explicitly created by government policies. “Too big to fail” is an obvious example, but financial deregulation more broadly has made speculation vastly more profitable in recent decades, encouraging rent-seeking on the part of financial firms. Stiglitz and his co-authors also finger tax cuts for the wealthy as a culprit. [..] countries that slashed their top marginal tax rates the most in recent decades also saw the biggest increases in inequality before taxes. That might make sense if the tax cuts boosted growth, but that wasn’t really what happened. [..] the tax cuts gave top earners bigger incentive to extract rents for themselves, to bargain hard to increase their share of the company’s wages. In the 1950s, when the top marginal tax rate in the US was 91%, getting an extra $1 in income through rents only yielded $0.09 after taxes. Today, it means getting $0.60. That’s a sixfold increase — a huge increase in the incentive to find rents for oneself.

All the job protection our (grand-)parents fought for are gone.

• 40% of American Workers Now Have ‘Contingent’ Jobs (Forbes)

Tucked away in the pages of a new report by the U.S. General Accounting Office is a startling statistic: 40.4% of the U.S. workforce is now made up of contingent workers—that is, people who don’t have what we traditionally consider secure jobs. There is currently a lot of debate about how contingent workers should be defined. To arrive at the 40.4 %, which the workforce reached in 2010, the report counts the following types of workers as having the alternative work arrangements considered contingent. (The government did some rounding to arrive at its final number, so the numbers below add up to 40.2%).

Agency temps: (1.3%); On-call workers (people called to work when needed): (3.5%); Contract company workers (3.0%); Independent contractors who provide a product or service and find their own customers (12.9%); Self-employed workers such as shop and restaurant owners, etc. (3.3%); Standard part-time workers (16.2%). In contrast, in 2005, 30.6% of workers were contingent. The biggest growth has been among people with part time jobs. They made up just 11.9% of the labor force in 2005. That means there was a 36% increase in just five years. The report uses data from the Bureau of Labor Statistics. It begs an important question: Are traditional jobs—the foundation of our consumer economy–running their course and going the way of the typewriter and eight-track tape? And if so, what do we do about it?

This report is important because it’s the first time since the Great Recession that the U.S. government has taken stock of how many people are working without the protections that come with traditional, full-time W-2 jobs. It reinforces estimates of the independent workforce that have come from observers ranging from the Freelancers Union to Faith Popcorn and are in a similar ballpark. Many people in this workforce are struggling economically. In a note issued with the report, Senators Patty Murray (D-WA) and Kirsten Gillibrand (D-NY) write, “Because contingent work can be unstable, or may afford fewer protections depending on a worker’s particular employment arrangement, it tends to lead to lower earnings, fewer benefits, and a greater reliance on public assistance than standard work.”

Sorry, technodreamers, but we will never power anything like our present economy on renewables. Ambrose has no clue.

• Fossil Industry Faces A Perfect Political And Technological Storm (AEP)

The political noose is tightening on the global fossil fuel industry. It is a fair bet that world leaders will agree this year to impose a draconian “tax” on carbon emissions that entirely changes the financial calculus for coal, oil, and gas, and may ultimately devalue much of their asset base to zero. The IMF has let off the first thunder-clap. An astonishing report – blandly titled “How Large Are Global Energy Subsidies” – alleges that the fossil nexus enjoys hidden support worth 6.5pc of world GDP. This will amount to $5.7 trillion in 2015, mostly due to environmental costs and damage to health, and mostly stemming from coal. The World Health Organisation – also on cue – has sharply revised up its estimates of early deaths from fine particulates and sulphur dioxide from coal plants.

The killer point is that this architecture of subsidy is a “drag on economic growth” as well as being a transfer from poor to rich. It pushes up tax rates and crowds out more productive investment. The world would be richer – and more dynamic – if the burning of fossils was priced properly. This is a deeply-threatening line of attack for those accustomed to arguing that solar or wind are a prohibitive luxury, while coal, oil, and gas remain the only realistic way to power the world economy. The annual subsidy bill for renewables is just $77bn, trivial by comparison. The British electricity group SSE is already adapting to the new mood. It will close its Ferrybridge coal-powered plant next year, citing the emerging political consensus that coal “has a limited role in the future”.

The IMF bases its analysis on the work Arthur Pigou, the early 20th Century economist who advocated taxes to ensure to stop investors keeping all the profit while dumping bad side-effects on the rest of society. The Fund has set off a storm of protest. Subsidies are not quite the same as costs. Oil veterans retort that they have been paying punitive taxes into the common welfare pool for a long time. But whether or not you agree with the IMF’s forensic accounting the publication of such claims by the world’s premier financial body is itself a striking fact. The IMF is political to its fingertips. It rarely deviates far from the thinking of the US Treasury.

It is becoming clearer last year’s sweeping deal on climate change between the US and China was an historical inflexion point, the beginning of the end for a century of fossil dominance. At a single stroke it defused the ‘North-South’ conflict that has bedevilled climate policy and that caused the collapse of the Copenhagen talks in 2009. Todd Stern, the chief US climate negotiator, said the chemistry is radically different today as sherpas prepare for the COPS 21 summit in Paris this December. “The two 800-pound gorillas are working together,” he said.

Glut.

• The Tanker Market Is Sending a Big Warning to Oil Bulls (Bloomberg)

Four months into oil’s rebound from a six-year low, the tanker market is sending a clear signal that the rally is under threat. A sudden surge in demand for supertankers drove benchmark charter rates 57% higher in the two weeks through May 20. OPEC will have almost half a billion barrels of oil in transit to buyers at the start of June, the most this year, while analysts say about 20 million barrels is being stored on ships in another indication the glut has yet to dissipate. OPEC is pumping the most oil in more than two years, determined to defend market share rather than prices. A record cut to the number of active U.S. drilling rigs and billions of dollars of spending reductions by companies since last year’s price plunge has yet to translate into a slump in barrels produced.

The world is producing about 1.9 million barrels a day more crude than it needs, according to Goldman Sachs “Supply of oil continues to build,” said Paddy Rodgers of Euronav, whose supertanker fleet can haul 56 million barrels of crude. “All of this oil needs to go somewhere,” he wrote in an e-mail May 19. Daily rates for supertankers on the industry’s benchmark route reached $83,412 on May 20, from $52,987 on May 6, according to the Baltic Exchange in London. While rates since retreated to $69,594, they’re still the highest for this time of year since at least 2008.

OPEC’s 12 members have will have 485 million barrels of oil in transit to buyers in the four weeks to June 6, the most since November, Roy Mason, founder of Oil Movements, monitoring the flows, said by e-mail Wednesday. Iraq, the group’s second-largest producer, plans to boost exports to a record 3.75 million barrels a day next month, according to shipping programs. Spare tanker capacity in the Middle East has seldom been tighter. The combined excess of ships competing for the region’s exports stood at 6% last week, the lowest for the time of year in Bloomberg surveys of shipbrokers that started in 2009. While that expanded to 12% this week, the monthly average was still the lowest on record for May.

Expect many, and bigger, swings.

• China Stocks Plunge 6.5%, Worst Selloff In 4 Months (CNBC)

It was a sea of red in China, with the key Shanghai Composite ending down 6.5% at a near one-week low, marking its biggest one-day loss since January 19 and breaking an eight-session winning streak. The CSI 300 index of the largest listed companies in Shanghai and Shenzhen tumbled 6.7%, while the start-up board ChiNext sank 5.4%. News that more Chinese brokerages are tightening margin lending rules seem to be the main cause of concern among retail investors, experts say. According to IG market strategist Bernard Aw, Guosen Securities increased the margin requirement for 908 counters while Southwest Securities reduced the amount of margin financing that traders can receive using collateral.

Separately, the Shanghai Securities News also reported that regulators have recently urged banks to submit data regarding money flows into the stock market, according to Reuters. Meanwhile, Hong Kong shares tracked their mainland peers to recede more than 2%, hitting a two-week low. Shares of Hong Kong-listed Evergrande Real Estate Group inched up 0.1% after announcing plans to raise around $600 million in a Hong Kong share offering. Sunac China Holdings plunged nearly 6% following news that it is terminating a takeover deal for troubled Chinese developer Kaisa.

“Once it’s government policy, you better pay attention.”

• Yen Drops to 12-Year Low as Yellen Builds Case for Fed Rate Rise (Bloomberg)

The yen fell to a 12-year low versus the dollar as the Federal Reserve prepares to raise interest rates, sharpening the contrast with the Bank of Japan’s unprecedented monetary stimulus. Japan’s currency led declines among 16 major peers this week as signs of U.S. economy strengthening revived the greenback’s rally. The yen’s 30% drop since 2012 is driving record profits at Japan’s biggest companies, helping the nation’s stocks toward their longest rally since 1988. BOJ Governor Haruhiko Kuroda repeated this week that he’ll adjust monetary policy if needed to meet his inflation target.

“The dollar will appreciate relative to the yen because Japanese government policy is to depreciate the yen,” Daniel Fuss at Loomis Sayles said in an interview in Tokyo Wednesday. “Once it’s government policy, you better pay attention.” The Japanese currency has depreciated by 2.1% versus the greenback since May 21, the day before Fed Chair Janet Yellen said she expects to raise interest rates this year for the first time since 2006. Until last week, the yen had been trading in a range of just two yen around 120 per dollar this quarter. The yen’s weakness came as the BOJ pursued policies including unprecedented debt purchases, seeking to revive an economy that spent more than a decade battling deflation.

The fine print: the original Guardian headline is: “US to urge Greece to end brinkmanship with creditors at G7 meeting”, accusing Greece of brinkmanship. But that’s not what Lew said, even in the article.

• US To Urge Greece, Creditors To End Brinkmanship At G7 Meeting (Guardian)

The US Treasury secretary has said he will use the G7 finance ministers’ meeting to press Greece and its European creditors to end their brinkmanship and forge a rescue deal. With the Syriza-led coalition scrambling to secure an agreement, which will release the final €7.2bn (£5.1bn) tranche of bailout cash and prevent it defaulting on a looming payment to the International Monetary Fund (IMF), Jack Lew urged both sides in the ongoing Greek debt crisis to “treat every deadline as the last”. Washington has looked on with varying degrees of frustration and alarm throughout the long-running saga, which has seen Greece bailed out twice by a total of €240bn.

On a day when share prices soared on rumours of a breakthrough in the debt talks, before German officials scotched talk of “progress”, Lew warned both sides against complacency. Speaking to students at the London School of Economics before flying to Dresden for the G7 summit, which will take place on Thursday and Friday, he said: “No one should have a false sense of confidence that they know what the result of a crisis in Greece would be.” He stressed that he believed all parties were negotiating in good faith, with neither deliberately aiming at a Greek default. However, Lew said he feared an “accident”, with the high-stakes negotiations ending in crisis. “It is profoundly in the interests of the US and European economies for the accident to be avoided,” Lew said, speaking to students at the London School of Economics. “Brinksmanship is a dangerous thing”.

Dangerous. The troika could stop this, but won’t.

• Greek Bank Losses Show Predicament Amid Record Deposit Outflows (Bloomberg)

Greek banks, forced into a central bank liquidity lifeline, are poised to report sustained losses as they grapple with record deposit outflows and an economy that plunged into double-dip recession. National Bank of Greece, the country’s biggest lender by assets, and Alpha Bank report first-quarter earnings Thursday. Piraeus Bank on Wednesday said its first-quarter loss was €69 million, as deposits shrank by 15% to €46.5 billion, with a further €1.9 billion of private deposit outflows through mid-May. “We expect the Greek banks to remain loss-making this quarter” on more expensive funding from the ECB and higher provisions for souring loans, Euroxx Securities analyst Maria Kanellopoulou said.

The prolonged uncertainty on Greece’s support program “will inevitably weigh on banks’ asset quality, with a fresh rise in new non-performing loans.” Greek lenders have lost access to capital markets and the ECB’s normal financing operations amid a standoff between the country’s anti-austerity coalition and its creditors over the terms of the current bailout. Lenders rely on more than €80 billion of Emergency Liquidity Assistance extended by the Bank of Greece to stay afloat, a more expensive source of funding, while they are forced to participate in liquidity-draining auctions of government treasury bills rather than let the country default.

“Tsipras added that there is “absolutely no risk to salaries and pensions, nor to bank deposits.”

• Athens, Creditors Offer Conflicting Views On Negotiations (Kathimerini)

Prime Minister Alexis Tsipras said Wednesday that a deal with creditors was “close” and government officials said an agreement was being drafted but representatives of the country’s creditors made it quite clear that they do not share such optimism. In comments after a meeting at the Finance Ministry, Tsipras said a deal with creditors was “close” and that “very soon we will be able to present more details.” He stressed the need for “calm and determination,” noting that Greece would come under additional pressure in the final stretch of negotiations. He also referred to “conflicting views between institutions” and to “countries with different approaches.” Tsipras added that there is “absolutely no risk to salaries and pensions, nor to bank deposits.”

According to sources, Tsipras was advised to make the statement by aides fearing that jitters were creeping back into the markets and could prompt a new wave of deposit outflows. Tsipras chose to make the statement flanked by Finance Minister Yanis Varoufakis to underline the government’s backing for the latter, who has come under fire over his confusing statements about the content of a potential deal. Earlier in the day, the ECB decided not to raise the ceiling on emergency liquidity to Greece. A Greek government official commented that the Bank of Greece had not requested an increase to emergency liquidity as the current ceiling of €80.2 billion is regarded as adequate “following a stabilization of deposit outflows.”

In an interview with Die Zeit on Wednesday, German Finance Minister Wolfgang Schaeuble said it was down to Greece to decide on whether to introduce capital controls. He defended the decision by Greece’s creditors to link loans to further reforms, despite the country’s tightening liquidity problems. “That is the philosophy of the rescue program. The new government is saying: we want to keep the euro but we don’t want the program any more. That doesn’t fit together,” he said. Earlier, on a stopover in London on his way to a meeting of Group of Seven finance ministers in Dresden, US Treasury Secretary Jack Lew called on Greece’s creditors “show enough flexibility so if the Greeks are prepared to take the kind of steps they need to take, they find a pathway to resolving this without there being an unnecessary crisis.”

It’s easy to forget that all Syriza has been able and allowed to do so far is to negotiate with creditors, and that everything else has been forced onto the backburner.

• Romantic Notions Meet Reality (Alexis Papachelas)

Before the elections, there was a considerable number of people who totally disagreed with the ideas and program put forward by SYRIZA, but they expected that the leftist party would, at least, provide a breath of fresh air as it climbed to power. They believed that SYRIZA would do away with the highly partisan tactics of its socialist and conservative predecessors and move on to adopt more meritocratic practices. They expected that SYRIZA would install young, independent people in key government posts, making use of the best talents that the country has to offer. They hoped that SYRIZA officials would man the state apparatus after poring over the CVs of thousands of job-seekers in the private sector. And they anticipated a growth-oriented strategy that would enable people to try their luck without running into unnecessary or artificial obstacles, and without having to pay bribes here and there.

It was only natural that a large section of voters would expect all that. Because, regretably, and despite the crisis, the old political system failed to change the way things work in this country. Unfortunately, the expectations of all those voters with romantic notions of what to expect have not been fulfilled. The state mechanism has mostly been manned by friends and political cronies of the ruling party. Key posts have been entrusted to well-connected representatives of the good old system. The way SYRIZA has dealt with the so-called oligarchs seems very selective. It does not seem to have allowed the domestic institutions to carry out their work in a fair and transparent manner. In fact, it smacks of an attempt to install a new oligarchy – only, this time, one that is pro-SYRIZA.

So, no breath of fresh air. The question, of course, is why? The answer is that SYRIZA has strong ties with groups that depend exclusively on the state for their survival. The healthy private sector which does not rely on the generosity of the state for its well-being has no political representation in Alexis Tsipras’s party. The truth is, even the country’s conservative parties have failed in that respect. It’s hard to say how long SYRIZA will manage to stay in power. Any prediction would be risky these days. That said, those who looked forward to some creative big bang, as it were, spawned by SYRIZA’s victory are beginning to feel disappointed. That does not mean to say that the party will not be able to consolidate itself as the dominant political player. It does mean, however, that the dreamers will have to wait. Or move to a more cynical, same-old view of things.

A moment of clarity from Ye Olde Paul.

• Grexit and the Morning After (Krugman)

We just had another electoral earthquake in the euro area: Podemos-backed candidates have won local elections in Madrid and Barcelona. And I hope that the IFKAT — the institutions formerly known as the troika — are paying attention. The essence of the Greek situation is that the actual parameters of a short-run deal are clear and unavoidable: Greece can’t run a primary budget deficit, because nobody will lend it new money, and it won’t (and basically can’t) run a large primary surplus, because you can’t squeeze even more blood from that stone. So you would think that an agreement for Greece to run a modest primary surplus over the next few years would be easy to reach — that is what will happen, so why not make it official?

But now the IMF is playing bad cop, declaring that it cannot release funds until Syriza toes the line on pensions and labor market reform. The latter is dubious economics — the IMF’s own research doesn’t support enthusiasm about structural reforms, especially in the labor market. The former probably recognizes a real problem — Greece probably can’t deliver what it has promised pensioners — but why should this be an issue over and above the general question of the primary surplus. What I would urge everyone to do is ask what happens if Greece is in fact pushed out of the euro. (Yes, Grexit — ugly word, but we’re stuck with it.) It would surely be ugly in Greece, at least at first.

Right now the core euro countries believe that the rest of the euro area can handle it, which might be true. Bear in mind, however, that the supposed firewall of ECB support has never actually been tested. If markets lose faith and the time for ECB purchases of Spanish or Italian bonds arises, will it really happen? But the bigger question is what happens a year or two after Grexit, where the real risk to the euro is not that Greece will fail but that it will succeed. Suppose that a greatly devalued new drachma brings a flood of British beer-drinkers to the Ionian Sea, and Greece starts to recover. This would greatly encourage challengers to austerity and internal devaluation elsewhere.

Think about it. Just the other day the Very Serious Europeans were hailing Spain as a great success story, a vindication of the whole program. Evidently the Spanish people don’t agree. And if the anti-establishment forces have a recovering Greece to point to, the discrediting of the establishment will accelerate. One conclusion, I guess, is that Germany should try to sabotage Greece post-exit. But I hope that will be considered unacceptable. So think about it, IFKATs: are you really sure you want to start going down this road?

Has been for years. The plunge will be historic.

• Australia Property Boom Is On Borrowed Time (Business Spectator)

The stage is set for Australian property to finally feel the pain so evident across other sectors of the economy. A series of headwinds – combined with tighter lending standards – ensures that the investor property boom is now on borrowed time. Yesterday, Westpac decided to cut the lucrative interest rate discounts offered to new housing investors – following similar action from its major rivals last week – as regulatory pressure from the Australian Prudential Regulation Authority begins to take effect. The implication of this shift in regulatory policy will be modest at first but could soon snowball into a much weaker period for Australian property. Rarely can a housing downturn be so easily identified.

Nevertheless, right now, prices continue to rise at a rapid pace in Sydney and to a lesser extent Melbourne. By comparison, conditions in the other capitals remain more modest. Real dwelling prices – that is prices adjusted for inflation – have increased by 30% since the beginning of 2013 in Sydney and by 15% in Melbourne. In the other capitals, price growth has better reflected income growth. But the tide is clearly turning and the outlook for the property sector needs to be viewed against the broader economic backdrop. The Reserve Bank, for example, was recently forced to cut their economic outlook for the fourth time in the past five quarters. We are currently stuck in the middle of an ‘income recession’ due to the sharp fall in commodity prices.

In the next few years, higher taxes will hit the market at the very top – since high income earners obviously purchase expensive housing – but also towards the bottom – since investors often favour cheap rental properties. Alternatively, higher taxes could make negative gearing more attractive. Meanwhile, the Federal Government has taken clear and decisive steps to reign in foreign investment in established property, while maintaining the existing arrangements for new construction. We also cannot ignore the possibility that the Western Australia economic bust has significant spill over effects for the broader economy and financial system.

But will it stick? Does RICO apply to FIFA?

• US Treats FIFA Like the Mafia (Bloomberg)

It wasn’t exactly extraordinary rendition. But when Swiss police arrested seven officials of FIFA, the international football federation, for extradition to the U.S., there were some echoes of the secret terrorism arrests. Soccer is a global game, and it matters more to almost everyone than to Americans. So why is the U.S. acting as the international sheriff and grabbing up non-U.S. citizens to try them domestically for corrupting the sport worldwide? And more to the point, why is this legal? It turns out the legal basis for the FIFA prosecutions isn’t all that simple or straightforward – and therein lies a tale of politics and sports. The prosecutions are being brought under RICO, the Racketeer Influenced and Corrupt Organizations Act of 1970, which was designed to prosecute crime syndicates that had taken over otherwise lawful organizations.

Roughly speaking, the law works by allowing the government to prove that a defendant participated in a criminal organization and also committed at least two criminal acts under other specified laws, including bribery and wire fraud. If the government can prove that, the defendant is guilty of racketeering, and qualifies for stiff sentences, the seizure of assets and potential civil-liability lawsuits. The first and most obvious problem raised by the FIFA arrests is whether the RICO law applies outside the U.S., or “extraterritorially” as lawyers like to say. Generally, as the Supreme Court has recently emphasized, laws passed by Congress don’t apply outside the U.S. unless Congress affirmatively says so. RICO on its face says nothing about applying beyond U.S. borders. So you’d think that RICO can’t reach conduct that occurred abroad, and much of the alleged FIFA criminal conduct appears to have done so.

But in 2014, the U.S. Court of Appeals for the Second Circuit held that RICO could apply extraterritorially – if and only if the separate criminal acts required by the law, known as “predicate acts,” violated statutes that themselves apply outside U.S. borders. The court gave as an example the law that criminalizes killing an American national outside the U.S. That law clearly applies abroad, the court pointed out. And it may function to define one of the predicate offenses under RICO. Thus, RICO can apply abroad. To convict the FIFA defendants, therefore, the Department of Justice will have to prove either that they committed crimes within the U.S. or that they committed predicate crimes covered by RICO that reach beyond U.S. borders.

Bet you didn’t know.

• You’ll Be Sorry When The Robot McJournalists Take Over (Irish Times)

If you consume much of your daily news diet online, you’re probably already acquainted with the work of “robot journalists”, you just don’t know it yet. We’re not talking here about Wall-E running around with a reporter’s notebook chasing stories on Amal Clooney (well, not yet), but about the algorithms used by organisations such as Forbes, AP and Fortune to produce millions of stories AP relies on a content generation package called Wordsmith to produce some of its quarterly-earnings business stories and will soon be using it for sports coverage too. You’ve never heard of Wordsmith but you’re probably familiar with its work: it produced 300 million stories last year and is aiming for one billion this year. A rival company, Narrative Science, provides content to Forbes, Fortune and others.

“We sort of flip the traditional content creation model on its head,” Robbie Allen, creator of Wordsmith told the New York Times. “Instead of one story with a million page views, we’ll have a million stories with one page view each.” The cheerleaders for this new technology – who includes some journalists (New York magazine declared that “the stories that today’s robots can write are, frankly, the kinds of stories that humans hate writing anyway”) – claim that it will free journalists up to do more meaningful pieces, while algorithms churn out rewrites of press releases, mine longer texts for insights, or produce entirely personalised packages of content tailored for individuals. That’s nonsense. As always, “freeing people up” invariably means “liberating them of their jobs”.

But leaving aside the prospect of fewer people in employment, the notion that algorithms may end up taking over even the quotidian aspects of content production is depressing, and not just for journalists. [..] it’s you, the reader, who will suffer. Algorithms may be good at crunching numbers and putting them in some kind of context, but journalists are good at noticing things no one else has. They’re good at asking annoying questions. They’re nosy and persistent and willing to challenge authority to dig out a story. They’re good at provoking irritation, devastation, laughter or controversy. Wildly efficient robot journalists may offer hope to an industry beset by falling advertising rates and disappearing readers. The world will have fewer human journalists as a result, which may not be altogether a bad thing. But the question is: does it really need a billion more pieces of McJournalism?

Go to site to watch video.

• Julian Assange: TPP Isn’t About Trade, But Corporate Control (Democracy Now)

As negotiations continue, WikiLeaks has published leaked chapters of the secret Trans-Pacific Partnership — a global trade deal between the United States and 11 other countries. The TPP would cover 40% of the global economy, but details have been concealed from the public. A recently disclosed “Investment Chapter” highlights the intent of U.S.-led negotiators to create a tribunal where corporations can sue governments if their laws interfere with a company’s claimed future profits. WikiLeaks founder Julian Assange warns the plan could chill the adoption of health and environmental regulations.

Julian Assange: ..it’s the largest-ever international economic treaty that has ever been negotiated, very considerably larger than NAFTA. It is mostly not about trade. Only five of the 29 chapters are about traditional trade. The others are about regulating the Internet and what Internet—Internet service providers have to collect information. They have to hand it over to companies under certain circumstances. It’s about regulating labor, what labor conditions can be applied, regulating, whether you can favor local industry, regulating the hospital healthcare system, privatization of hospitals. So, essentially, every aspect of the modern economy, even banking services, are in the TPP.

And so, that is erecting and embedding new, ultramodern neoliberal structure in U.S. law and in the laws of the other countries that are participating, and is putting it in a treaty form. And by putting it in a treaty form, that means—with 14 countries involved, means it’s very, very hard to overturn. So if there’s a desire, democratic desire, in the United States to go down a different path—for example, to introduce more public transport—then you can’t easily change the TPP treaty, because you have to go back and get agreement of the other nations involved. Now, looking at that example, what if the government or a state government decides it wants to build a hospital somewhere, and there’s a private hospital, has been erected nearby?

Well, the TPP gives the constructor of the private hospital the right to sue the government over the expected—the loss in expected future profits. This is expected future profits. This is not an actual loss that has been sustained, where there’s desire to be compensated; this is a claim about the future. And we know from similar instruments where governments can be sued over free trade treaties that that is used to construct a chilling effect on environmental and health regulation law. For example, Togo, Australia, Uruguay are all being sued by tobacco companies, Philip Morris the leading one, to prevent them from introducing health warnings on the cigarette packets.

But that’s against our life philosophy?!

• The Cheapest Way To Help the Homeless: Give Them Homes (Mother Jones)

Santa Clara County is perhaps best known as the home of Silicon Valley. It also has one of the country’s highest rates of homelessness and its third largest chronically homeless population. An extensive new study of the county’s homelessness crisis, published yesterday, finds that the most cost-effective way to address the problem is to provide people with homes. Those findings echo a similar approach that’s been successfully adopted in Utah, the subject of Mother Jones’ April/May cover story. The study was conducted by county officials who teamed up with Economic Roundtable, a nonprofit public policy research organization, and Destination: Home, an agency that works to house the homeless.

Researchers dug into 25 million records to create a detailed picture of the demographics and needs of the more than 104,000 people who were homeless in the county between 2007 and 2012. They found that much of the public costs of homelessness stemmed from a small segment of this population who were persistently homeless, around 2,800 people. Close to half of all county expenditures were spent on just five% of the homeless population, who came into frequent contact with police, hospitals, and other service agencies, racking up an average of $100,000 in costs per person annually. Those costs quickly add up—overall, Santa Clara communities spend $520 million in homeless services every year.

The study also highlights solutions. The researchers examined Destination: Home’s program, which has housed more than 800 people in the past five years. The study looked at more than 400 of these housing recipients, a fifth of whom were part of the most expensive cohort. Before receiving housing, they each averaged nearly $62,500 in public costs annually. Housing them cost less than $20,000 per person—an annual savings of more than $42,000.

Fifty shades of dry.

• US Droughts Set To Be Worst In 1000 Years (OnEarth)

The National Oceanic and Atmospheric Administration’s seasonal outlook is out, and this summer is going to be a dry one. The massive drought consuming the West will likely continue and even intensify in most places (sorry Nevada, that forecast covers the entire Silver State.) But it won’t be alone: The upper Midwest and Northeast will be parched, too. As for the lower Midwest, a few states could get some relief, but…I wouldn’t let those green lawns go to your head. Scientific models predict that as the climate warms, we’ll see more droughts, and according to the video below, they’ll also last longer than in the past. So Americans, start swinging your partner round and round, shaking your moneymaker, or electric-sliding (if you must)—because we may need to come up with a national rain dance.

History revised: no asteroid.

• Fossil Fuel Burning Nearly Wiped Out Life On Earth 250m Years Ago (Monbiot)

In the media, if not scientific literature, global catastrophes have long been associated with asteroid strikes. But as the dating of rocks has improved, the links have vanished. Even the famous meteorite impact at Chicxulub in Mexico, widely blamed for the destruction of the dinosaurs, was out of sync by more than 100,000 years. The story that emerges repeatedly from the fossil record is mass extinction caused by three deadly impacts, occurring simultaneously: global warming, the acidification of the oceans and the loss of oxygen from seawater. All these effects are caused by large amounts of carbon dioxide entering the atmosphere. When seawater absorbs CO2, its acidity increases. As temperatures rise, circulation in the oceans stalls, preventing oxygen from reaching the depths.

The great outgassings of the past were caused by volcanic activity that were orders of magnitude greater than the eruptions we sometimes witness today. The dinosaurs appear to have been wiped out by the formation of the Deccan Traps in India: an outpouring on such a scale that one river of lava flowed for 1,500km. But that event was dwarfed by a far greater one, 190m years earlier, that wiped out 96% of marine life as well as most of the species on land. What was the cause? It now appears that it might have been the burning of fossil fuel. Before I explainthis extraordinary contention, it’s worth taking a moment to consider what mass extinction means.

This catastrophe, at the end of the Permian period about 252m years ago, wiped out not just species within the world’s ecosystems but the ecosystems themselves. Forests and coral reefs vanished from the fossil record for some 10 million years. When, eventually, they were reconstituted, it was with a different collection of species which evolved to fill the ecological vacuum. Much of the world’s surface was reduced to bare rubble. Were such an extinction to take place today, it would be likely to eliminate almost all the living systems that sustain us. When plants are stripped from the land, the soil soon follows.

Blackberry founder decides Artic ownership?

• A 19th Century Shipwreck Could Give Canada Control of the Arctic (Bloomberg)

Jim Balsillie, the former co-CEO of Research In Motion, the company behind the BlackBerry, believes rituals are scenes we perform so our lives might take the shape we need them to take. It’s a symbolic act, and symbols matter to him. Directly beneath the hole in the ice, visible on the seafloor, is the biggest symbol of all: the HMS Erebus, one of two British navy ships lost during Sir John Franklin’s doomed 1845 quest to find the Northwest Passage through the Arctic. The whereabouts of the Erebus frustrated hundreds of searchers for more than 150 years, costing several their lives. Balsillie helped finance and coordinate the successful hunt for the ship, rediscovered in September 2014.

On a personal level, the search for the Erebus was a way for him to take more control over his life after his unceremonious exit from RIM, which left him angry, drained, and disoriented. But it’s much more than an archeological artifact. It represents an opportunity for Canada to take more control of the Arctic. Exploring the Erebus, Balsillie hopes, will draw the collective attention of Canadians northward to a neglected region with billions in potential resources. And by conducting a complex operation in the waters, Canadian military and civilian officials say they are demonstrating their sovereignty over the Northwest Passage. The Queen Maud Gulf, where the Erebus sits, is part of the southern branch of the Northwest Passage.

The route is a fabled link between the Atlantic and Pacific that for centuries proved a dangerous magnet for seekers of knowledge, fortune, and glory. Since 2007, as a result of climate change, the passage has become navigable by smaller ships for a couple of months during most summers. An open route can cut thousands of miles off of trips between the west coast of the Americas and Europe. The two alternative routes are the Panama Canal and the Northern Sea Route, which runs from the Bering Strait and over the Russian Arctic. In 2013 the MS Nordic Orion, a Norwegian freighter, made the first cargo transit of the Northwest Passage. That trip, which carried coal from Vancouver to Norway, hasn’t been repeated. But it raised an unanswered question in maritime law: Who really controls the waters of the route and the rest of Canada’s Arctic archipelago, which consists of more than 30,000 islands?

She’s a beauty.

• The Tiny House Powered Only by Wind and Sun (Atlantic)

In theory, I support the tiny-house lifestyle. I would enjoy the opportunity to live on a lonesome plain somewhere, with only the stars and many insects for company. I’m sure I could find a way to de-clutter my life such that the floor of my room/house was not always covered by 100 pairs of yoga pants. I would emerge from the experience a stronger, more reflective person who, if tiny house documentaries are to be believed, is also an expert in knitting and roof repair. The problem would lie in the construction of said house. If I were in charge of hooking up my own water lines, for example, I would be dead of dysentery by now.

Enter the Ecocapsule, a new kind of micro-house powered entirely by solar and wind energy. The capsule, made by a Slovakian company called Nice Architects, comes pre-made and ready to house two adults. Its kitchenette spouts running water, the toilet flushes, and the shower flows hot. It is 14.6 feet long and 7.4 feet wide. Nice Architects will start taking pre-orders in the fall of this year, and it expects to start delivering the first units in the beginning of 2016. They’re unveiling the Ecocapsule publicly for the first time this week at the Pioneers festival in Vienna. The company suggest the Ecocapsule can be used as a portable hotel, a research station, or even a charging hub for electric vehicles.

The designers, for whom English is not a first language, also write in the release that the “capsule can be used as a urban dwelling for singles in the high-rent, high-income areas like NY or Silicone valley. It can be placed on the rooftop or vacant parking lot.” (Hear that, Google employees? Enjoy dealing with your new, pod-dwelling roof squatters!) Okay, so maybe that last one is wishful thinking. But if it works as described, the capsule might just be the perfect tiny house for those who yearn to live on the edge of an ethereal cliff but don’t want to learn how to build a composting toilet.

Debt Rattle January 11 2015

Jan 112015

January 11, 2015 Posted by Raúl Ilargi Meijer at 11:58 am Finance Tagged with: Charlie Hebdo, default, deflation, legal challenges, subprime, Ukraine, US equities, yen 4 Responses »

DPC Sloss City furnaces, Birmingham, Alabama 1906

• Foreign Ownership Of US Equities Hits 69-Year High (MarketWatch)

• US Retakes the Helm of the Global Economy (Bloomberg)

• Fed’s Lockhart Says Jobs Report No Reason to Raise Rates Sooner (Bloomberg)

• Legal Challenge Shows Rocky Path To ECB Money-Printing (Reuters)

• Voices Join Greek Left’s Call for a New Deal on Debt (NY Times)

• Anxiety Rises Over Eurozone’s Falling Prices (Observer)

• Spectre Of Deflation Horrifies Bankers, But Japan Has A Taste For It (Observer)

• Princes of the Yen: Central Banks and the Transformation of the Economy (YouTube)

• Here They Go Again: Subprime Delinquencies Rising In Autoland (David Stockman)

• Investors Put Their Hopes, and Money, in Modi (Reuters)

• Russia, Ukraine and Greece – Default Probabilities (Acting Man)

• Russia May Demand Early Repayment Of $3 Billion Loan To Ukraine (RT)

• Creationism Vs. Evolution: Whose God Is Making America Richer? (Paul B. Farrell)

• Paris Attacks: Don’t Blame These Atrocities On Security Failures (Cockburn)

• Curious Charlie Carnage (StealthFlation)

• German Paper Target Of Arson Attack After Printing Charlie Hebdo Cartoons (DW)

• French Unity Against Terrorism May Not Last Far Beyond Paris March (Observer)

• Charlie Hebdo Cartoonist Slams Hypocritical ‘New Friends’ Of Magazine (AFP)

Bringing the dollar home!

• Foreign Ownership Of US Equities Hits 69-Year High

The U.S. stock markets are globalizing, and the British and Canadians are leading the charge. Foreign ownership of U.S. stocks totaled 16% in 2014, the highest in 69 years since such records have been kept, according to a Goldman Sachs report. The equity markets’ global diversification trend is expected remain intact in 2015, said Goldman’s Amanda Sneider. She didn’t elaborate on specific numbers. Britons and Canadians were the biggest foreign investors in U.S. stocks, each accounting for 12%, while Japanese investors checked in at 6%. Another one-third were from tax havens such as Luxembourg, Switzerland, and the Cayman Islands.

In 2015, net foreign inflow of funds into U.S. equity is expected to hit $125 billion, up from net $103 billion in 2014. That compares to total net equity inflow of $220 billion projected for 2015 versus $178 billion last year. U.S. investors are also likely to step up investment in foreign stocks to the tune of $250 billion this year versus $231 billion in 2014. Americans favored European (excluding the U.K.) and Caribbean securities. Among domestic players, corporations will continue to dominate the market with net purchases of $450 billion, equivalent to 2% of market capitalization. Inflow from equity-linked exchange-traded fund will total $170 billion and mutual funds will account for $125 billion.

““The economy is looking stellar ..”

• US Retakes the Helm of the Global Economy (Bloomberg)

The U.S. is back in the driver’s seat of the global economy after 15 years of watching China and emerging markets take the lead. The world’s biggest economy will expand by 3.2% or more this year, its best performance since at least 2005, as an improving job market leads to stepped-up consumer spending, according to economists at JPMorgan, Deutsche Bank and BNP Paribas. That outcome would be about what each foresees for the world economy as a whole and would be the first time since 1999 that America hasn’t lagged behind global growth, based on data from the International Monetary Fund. “The U.S. is again the engine of global growth,” said Allen Sinai, chief executive officer of Decision Economics in New York. “The economy is looking stellar and is in its best shape since the 1990s.”

In the latest sign of America’s resurgence, the Labor Department reported on Jan. 9 that payrolls rose 252,000 in December as the unemployment rate dropped to 5.6%, its lowest level since June 2008. Job growth last month was highlighted by the biggest gain in construction employment in almost a year. Factories, health-care providers and business services also kept adding to their payrolls. About 3 million more Americans found work in 2014, the most in 15 years and a sign companies are optimistic U.S. demand will persist even as overseas markets struggle. U.S. government securities rose after the report as investors focused on a surprise drop in hourly wages last month. “We are still waiting to see the kind of strengthening of wage numbers we would expect to be consistent with what we are seeing elsewhere in terms of growth and the absolute jobs numbers,” Federal Reserve Bank of Atlanta President Dennis Lockhart said in a Jan. 9 interview.

The Fed continues to reinforce the narrative of dissent.

• Fed’s Lockhart Says Jobs Report No Reason to Raise Rates Sooner (Bloomberg)

Federal Reserve Bank of Atlanta President Dennis Lockhart said today’s strong jobs report is no reason to speed up the timing of an interest-rate increase that he sees occurring in the middle of the year or later. “I don’t see a reason yet to accelerate my assumption of when a policy move might be appropriate,” Lockhart, who votes on monetary policy this year, said in a telephone interview from Atlanta. At the same time, “clearly this added to accumulated progress with very healthy numbers.” Employment rose more than forecast in December, and the jobless rate declined to 5.6%, capping the best year for the labor market since 1999, a Labor Department report showed today.

The Fed last month said it would be “patient” in raising rates from close to zero, with Chair Janet Yellen saying an increase was unlikely before late April. “The report confirms my sense of how the economy is progressing,” said Lockhart, 67, who has been a consistent supporter of record stimulus. “If the committee is to err on the side of being a little late as viewed by history writers or maybe a little early, I prefer to take the risk of being a little bit late.” A lack of wage growth suggests slack remains in the labor market, Lockhart said. “All the wage measures remain well below historical norms, and I think I would have to say they are not consistent yet with particularly tight labor markets,” he said.

He called a monthly decline in average hourly earnings in December “potentially noise” and inconsistent with other data on compensation. Average hourly earnings for all employees dropped by 0.2% in December from the prior month, the biggest decline since comparable records began in 2006, today’s Labor Department report showed. Earnings increased 1.7% over the 12 months ended in December, the smallest gain since October 2012. “We are still waiting to see the kind of strengthening of wage numbers we would expect to be consistent with what we are seeing elsewhere in terms of growth and the absolute jobs numbers,” Lockhart said.

Will the ECB dare pre-empt court decisions?

• Legal Challenge Shows Rocky Path To ECB Money-Printing (Reuters)

A landmark legal opinion this week will remind the European Central Bank of the limits it faces as it advances towards money printing, while a tumbling oil price saps inflation in debt-strained Europe. With expectations high that the ECB is on the verge of buying government bonds with new money to shore up the economy, an influential adviser to Europe’s top court will give his view on Jan. 14 about an earlier unused bond-buying scheme. It is the latest chapter in a long-running and increasingly bitter dispute about QE between the ECB and Germany, the largest member of the 19-country bloc, that is likely to limit the size or scope of such a program. As the debate continues, the euro zone economy is all but grinding to a halt. Germany is expected to announce modest growth on Jan. 15 for last year.

In the United States, fresh data on rising employment as well as retail sales is set to show just how much its recovery has overtaken Europe. “The global economy is at a precarious point,” said Jacob Kirkegaard of Washington think tank, the Peterson Institute. “The falling oil price is a huge shot in the arm. Nonetheless, it is clear that the ECB will have to do something. There is no growth and the debt burden is too high. The world will be flying on one engine, the U.S., for quite some time.” [..] Low price inflation, a symptom of the global slowdown, has led some to question the rule of thumb for measuring economic health, namely that there should be a steady up-tick in prices.

British inflation will be watched on Tuesday, with analysts betting it will hit a fresh 12-year low below 1%. Those looking for respite elsewhere may be disappointed. The People’s Bank of China cut the cost of borrowing in November and loosened loan restrictions to encourage lending. It is expected to take further such steps, as the country’s property market downturn continues and local governments and companies grapple with heavy debts. Bank lending data and a readout on economic output in the final three months of last year are likely to paint a glum picture. Hopeful eyes are turning to the ECB. But German opposition to money printing could put a fly in the ointment. Its Bundesbank has warned that buying bonds issued by euro zone governments – including politically brittle Greece – could leave it on the hook for losses.

Next week, an adviser to Europe’s top court will give his opinion on a challenge by a group of Germans to an earlier ECB bond-buying program. If he shares any of the concerns of Germany’s constitutional court, which referred the case to European judges, it would be significant. Alain Durre, an economist with Goldman Sachs, said this could lead to the ECB setting a fixed limit on its bond-buying plans or to take priority over other investors when it buys state bonds. Whatever the outcome, the German protest is likely to get louder. “The ECB has stepped beyond its remit. The European court should forbid the ECB from doing this,” said Dietrich Murswiek, a lawyer representing one of the plaintiffs. “You can draw parallels with quantitative easing. From my point of view, QE is also beyond its remit. This can also lead to legal action.”

If only the PIIGS would unite.

• Voices Join Greek Left’s Call for a New Deal on Debt (NY Times)

The concern now is that Mr. Tsipras, in challenging Europe on these thorny issues, will force Greece into default and perhaps a messy exit from the euro — an event that could unleash a new wave of investor contagion. Some analysts, however, are advancing an alternate view: that a radical new Greek government would not be that radical after all. Jens Bastian, a financial analyst based in Athens, notes that Mr. Tsipras’s core argument — that Greece’s onerous debt is not sustainable and should be reduced — has also been put forward by one of Greece’s larger creditors: the IMF. “It was the I.M.F. that kick-started the idea of restructuring Greece’s debt with Europe,” Mr. Bastian said.

“Mr. Tsipras can say we are in line with the IMF — we just want to talk to our European partners about the debt.” This is hardly a radical notion, Mr. Bastian argues. Perhaps. But that also means that European taxpayers — particularly those in Germany — will have to absorb the full brunt of the haircut as the IMF, by tradition, does not allow its debts to be restructured. Greece’s official creditors in the eurozone hold 65% of the country’s debt load of €317 billion. Private sector investors, whose bonds were restructured in 2012, hold just 15%. These investors range from mutual funds like Putnam Investments and Capital Group, which own the restructured bonds, to vulture funds that did not participate in the bond swap. The I.M.F. and the European Central Bank make up the rest.

Yanis Varoufakis, an economist and adviser to Mr. Tsipras, says that a Tsipras-led government would not make a private sector haircut a priority — an outcome that many foreign investors now fear. Instead, Mr. Varoufakis proposes a grand bargain of sorts by which Europe agrees to exchange its current obligations for new Greek bonds that are linked directly to Greece’s economy. If the economy grows, as it is expected to this year, bondholders receive a nice return; if it does not, the bonds pay nothing. “We are turning Europe into a partner for growth as opposed to a partner for austerity,” Mr. Varoufakis said in a recent interview. “This fiscal waterboarding has to end.”

“Before the crisis we probably had excessively high growth expectations. Now it is the opposite.”

• Anxiety Rises Over Eurozone’s Falling Prices (Observer)

Consumers who believe that prices are going to continue falling tend to sit on their hands, postponing spending in the belief that their money will go further in the future. This weak demand can cause businesses to cut back on investment and stint on wages and a vicious spiral sets in. This is particularly dangerous for heavily indebted countries, as deflation increases the real value of their debts. In Japan, policymakers have spent more than two decades trying to jolt the economy out of just this kind of deflationary trap: the country’s debt-to-GDP ratio has rocketed to well over 200%. HSBC’s Henry warns that some in the eurozone are already responding to the uncertain climate and the prospect of declining prices. “For companies in particular, there’s already evidence of deflationary behaviour. Why are they going to invest if they think things are going to be even cheaper tomorrow?”

Peter Praet, the ECB’s chief economist, said in an interview last month: “What we are increasingly worried about … is the high risk that after seven years of crisis and poor economic performance in the euro area, businesses and households are reducing their long-term growth expectations and adapting to weak growth and low inflation. To some extent this risk is already materialising: companies are starting to adjust to a 1% growth/1% inflation economy.” Behavioural changes like these are notoriously hard to forecast: the impact on workers’ pay of their employers’ chastened mood will depend partly on the specifics of wage-bargaining, for example.

But if the onset of deflation adds to the downbeat mood, it may take a long time to shift. As Praet put it: “Before the crisis we probably had excessively high growth expectations. Now it is the opposite. The big risk is that this growth pessimism perpetuates the current situation.” Danny Gabay of Fathom Consulting, warns that in some ways, the situation in the eurozone is worse than Japan’s at the start of what used to be known as its “lost decade” – before the 10-year stretch became 20 years and more. “Japan didn’t fall into deflation with debts of 100% of GDP, unemployment in double digits and recession,” he said. “It started from a pretty good point compared with Europe.” Average unemployment across the eurozone is 11.5%, more than twice Japan’s historical maximum.

“Visitors from London and Sydney can barely believe how little they pay, comparatively, for a decent meal and a few drinks in Tokyo.”

• Spectre Of Deflation Horrifies Bankers, But Japan Has A Taste For It (Observer)

Europeans wondering what life might be like under sustained deflation need look no further than a bowl of gyudon – the Japanese comfort food of rice topped with beef and onions. The price of gyudon has become an unofficial bellwether for the health of the world’s third biggest economy, which has been beleaguered by more than two “lost decades” of stagnation as consumers have resolutely refused to start spending and lift their economy out of trouble. Which is why last month’s decision by Yoshinoya, Japan’s largest chain of gyudon restaurants, to raise the price of a standard-size dish by a whopping 27% is not all it seems. Far from heralding a new era of inflation, the price rise, to a still very affordable ¥380 (about £2.11), simply highlights the deflationary depths into which Japan has sunk: this, after all, was the first gyudon price hike for almost a quarter of a century. If Japan’s experience is any indication, living in a deflationary spiral can be complicated.

Conventional wisdom tells us deflation is bad for jobs and growth, and that it causes the debt burden to weigh more heavily on households, companies and governments. But for the average Japanese person, life under two decades of falling prices has had its compensations. Having seen so many false dawns, consumers have reached their own accommodation, of sorts, with the scourge that is now threatening the eurozone. First, it has shattered Tokyo’s undeserved reputation as a prohibitively expensive city. It wasn’t so long ago that McDonald’s there was selling a ¥100 hamburger (that’s about 56p), and clothing retailer Uniqlo has built a global empire on selling cheap, no-fuss garments. Expensive hostess clubs, harking back to Japan’s 1980s bubble era, still exist, but they share premises with izakayas (pubs) where a glass of beer costs a paltry ¥180 (£1). Visitors from London and Sydney can barely believe how little they pay, comparatively, for a decent meal and a few drinks in Tokyo.

Great video.

• Princes of the Yen: Central Banks and the Transformation of the Economy

“Princes of the Yen” reveals how Japanese society was transformed to suit the agenda and desire of powerful interest groups, and how citizens were kept entirely in the dark about this. Based on a book by Professor Richard Werner, a visiting researcher at the Bank of Japan during the 90s crash, during which the stock market dropped by 80% and house prices by up to 84%. The film uncovers the real cause of this extraordinary period in recent Japanese history.

Making extensive use of archival footage and TV appearances of Richard Werner from the time, the viewer is guided to a new understanding of what makes the world tick. And discovers that what happened in Japan almost 25 years ago is again repeating itself in Europe. To understand how, why and by whom, watch this film. “Princes of the Yen” is an unprecedented challenge to today’s dominant ideological belief system, and the control levers that underpin it. Piece by piece, reality is deconstructed to reveal the world as it is, not as those in power would like us to believe that it is. “Because only power that is hidden is power that endures.”

“Central bank interest rate repression either encourages households to supplement income based spending with incremental borrowings— or it has no direct impact on measured GDP.”

• Here They Go Again: Subprime Delinquencies Rising In Autoland (David Stockman)

Yesterday’s WSJ article on rising auto loan delinquencies had a familiar ring. It focused on sub-prime borrowers who were missing payments within a few months of the vehicle purchase. Needless to say, that’s exactly the manner in which early signs of the subprime mortgage crisis appeared in late 2006 and early 2007.

More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November, according to the Moody’s analysis of Equifax credit-reporting data. That was the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%.

To be sure, subprime auto will never have the sweeping impact that came from the mortgage crisis. The entire auto loan market is less than $1 trillion compared to a mortgage market of more than $10 trillion at the time of the crisis. Yet the salient point is the same.The apparent macro-economic recovery and prosperity of 2004-2008 rested on the illusion of an unsustainable debt fueled housing boom; this time its the auto sector. Indeed, delete the auto sector from the phony 5% GDP SAAR of Q3 2014 and you get an economy inching forward on its own capitalist hind legs. Q3 real GDP less motor vehicles was up just 2.3% from the prior year (LTM); and that’s the same LTM rate as recorded in Q3 2013, and slightly lower than the 2.4% growth rate posted in Q3 2012. Aside from autos, there has been no acceleration, no escape velocity.

Furthermore, the 2%+/- growth in the 94% balance of the economy after the 2008-09 plunge has nothing to do with the Fed’s maniacal money printing stimulus and the booster shot from cheap credit that is supposed to provide. The reason is straight forward. There is no such thing as Keynesian monetary magic. Central bank interest rate repression either encourages households to supplement income based spending with incremental borrowings— or it has no direct impact on measured GDP. The fact is, outside of autos and student loans, households have reached peak debt. That is after a 30-year spree of getting deeper and deeper into hock, middle class households stopped adding to leverage on their wage and salary incomes at the time of the financial crisis; and since then they have actually deleveraged slightly—albeit at levels that are still way off the historical charts.

Overblown expectations.

• Investors Put Their Hopes, and Money, in Modi (Reuters)

Global statesmen and business titans descended on the home state of Prime Minister Narendra Modi of India on Sunday to pay homage to the man they count on to unleash big-bang economic changes. Big business cheered Mr. Modi when he won India’s strongest election mandate in 30 years in May, and he has caught its attention with eye-catching initiatives like his Make in India campaign. Now, in his home state of Gujarat, he has turned the assembly he founded as the state’s chief minister in 2003, called Vibrant Gujarat, into a pitch to put his nation firmly on the investment map. “India is marching forward with a clear vision to become a global power, even as most of the world is struggling with low growth,” the country’s richest man, Mukesh Ambani, told an audience of hundreds of chief executives and politicians.

A roll call of world leaders – including the United Nations secretary general, Ban Ki-moon; the World Bank head Jim Yong Kim; and Secretary of State John Kerry – converged on Mr. Modi’s hometown, Gandhinagar, for Vibrant Gujarat, a three-day Davos-style meeting. President Obama will also visit India this month. Eight months into Mr. Modi’s rule, the failure of India to emerge from its longest growth slowdown in a generation is raising questions about how much substance there is behind the premier’s promise of “red carpet, not red tape.” The Make in India campaign has drawn comparisons to the manufacturing miracle that turned China into the world’s second-largest economy. But skeptics argue that India’s competitive strengths are not in making things, but in areas like information technology and business process outsourcing, in which it is a world leader.

Vibrant Gujarat, held every two years, has yielded billions of dollars in investment promises, but only a fraction of the deals announced have come to fruition. In keeping with tradition, Mr. Ambani said his conglomerate, Reliance Industries, would invest 1 trillion rupees, or $16 billion, in its home state of Gujarat over the next year to 18 months. “There is an air of optimism in the air of India,” said Sam Walsh, the chief executive of the global mining giant Rio Tinto, who flagged two potential projects: a $2 billion iron ore project in Odisha State and an investment in Madhya Pradesh that could employ 30,000 diamond cutters. Mr. Modi needs investors to fulfill their monetary commitments to end the stagnation in capital investment that has held India’s growth to 5.3%.

“Ukraine’s government will need an additional 15 billion dollars to remain afloat, but there is currently no-one who wants to provide the money.”

• Russia, Ukraine and Greece – Default Probabilities (Acting Man)

Currently there are a number of weak spots in the global financial edifice, in addition to the perennial problem children Argentina and Venezuela (we will take a closer look at these two next week in a separate post). There is on the one hand Greece, where an election victory of Syriza seems highly likely. We recentlyreported on the “Mexican standoff” between the EU and Alexis Tsipras. We want to point readers to some additional background information presented in an article assessing the political risk posed by Syriza that has recently appeared at the Brookings Institute. The article was written by Theodore Pelagidis, an observer who is close to the action in Greece. As Mr. Pelagidis notes, one should not make the mistake of underestimating the probability that Syriza will end up opting for default and a unilateral exit from the euro zone – since Mr. Tsipras may well prefer that option over political suicide.

Note by the way that the ECB has just begun to put pressure on Greek politicians by warning it will cut off funding to Greek banks unless the final bailout review in February is successfully concluded (i.e., to the troika’s satisfaction). The stakes for Greece are obviously quite high. There are two ways of looking at this: either the ECB provides an excuse for Syriza, which can now claim that it is essentially blackmailed into agreeing to the bailout conditions “for the time being”, or Mr. Tsipras and his colleagues may be enraged by what they will likely see as a blatant attempt at usurping what is left of Greek sovereignty, and by implication, their power.

We have already discussed Russia’s situation in some detail in recent weeks. As regards Ukraine, its economy is already doing what observers are merelyexpecting to happen with Russia’s economy in light of the recent decline in crude oil prices. In other words, It is no exaggeration to state that Ukraine’s economy is in total free-fall. The country’s foreign exchange reserves have declined precipitously, most of the central bank’s gold has been mysteriously “vaporized”, and what is left of it has turned out to be painted lead (no kidding, the central bank’s vault in Odessa was found to contain painted lead bars instead of gold bars – the thieves didn’t even bother with using tungsten).

Last year Ukraine’s GDP contracted by an official 7% and this year another contraction of 6% is expected. Ukraine’s government will need an additional 15 billion dollars to remain afloat, but there is currently no-one who wants to provide the money. The EU is itself short on funds, and JC Juncker let it be known that: “There is only a small margin of flexibility for additional financing next year. And if we fully use our margin for Ukraine, we will have nothing to address other needs that may arise over the next two years.” Somewhat earlier, the authorities in Kiev asked Brussels for a third program of macro-financial aid in the amount of €2 billion. European commissioner for neighborhood and enlargement policies, Johannes Hahn, said the EU was prepared to continue aid to Kiev but only in exchange for concrete results of reforms. Finland’s Prime Minister Alexander Stubb said the EU would not take any decisions on extra financial aid to Ukraine right now because the country had not implemented the essential structural reforms yet.”

“Ukraine, indeed, has violated the terms of the loan, namely because its national debt exceeds 60% of its GDP ..”

• Russia May Demand Early Repayment Of $3 Billion Loan To Ukraine (RT)

Ukraine has violated the terms of the $3 billion Russian loan by allowing its national debt to exceed 60% of its GDP. This makes Moscow eligible to demand an early repayment of the debt, Anton Siluanov, Russia’s finance minister, said. “Ukraine, indeed, has violated the terms of the loan, namely because its national debt exceeds 60% of its GDP,” Siluanov said, commenting on earlier media reports of Kiev’s loan violation. The minister stressed that now Russia has “every reason” to demand an early repayment of the debt, but added, “at the moment, a decision to do so hasn’t been made.” “It’s also surprising that the federal budget of Ukraine doesn’t foresee the settlement of the $3 billion obligations [to Russia]. But Ukraine is fulfilling and will keep fulfilling its obligations to other borrowers, including the IMF,” Siluanov is cited as saying by TASS.

Viktor Suslov, who was Ukraine’s finance minister from 1997 to 1998, confirmed to RIA Novosti that Moscow is, in fact, eligible to demand repayment from Kiev. “Yes, in accordance with the terms of the loan, they may demand it or they may not demand it. However, in late 2014 the Russian authorities said that they won’t be pushing for an early repayment,” Suslov said. In December 2013, Vladimir Putin and then president of Ukraine, Viktor Yanukovich, agreed that Moscow would provide Kiev financial assistance of $15 billion. However, only the first tranche of $3 billion was forwarded, with Russia buying out Ukrainian Eurobonds, which had a maturing date in 2015 and a coupon rate of 5% per annum.

“Today every member of the GOP controlling the Senate, House and their state governors are all de facto mutant capitalists ..”

• Creationism Vs. Evolution: Whose God Is Making America Richer? Paul B. Farrell

The defining war of this century is being waged by “mutant capitalists, whose obsession with perpetual growth and material wealth, is destroying the planet’s ecosystem, will end our civilization.” Jack Bogle warned us of this virus in his classic, “The Battle for the Soul of Capitalism.” Now, a decade later, mutant capitalism is mutating further, becoming a pandemic among conservative politicians. Today every member of the GOP controlling the Senate, House and their state governors are all de facto mutant capitalists, thanks to big money donations, and like robots all linked to one master machine that renders them incapable of independent thinking when it comes to their lockstep march as climate-science deniers.

Yes, they’re mindless robots at odds with over 2,500 scientists who now warn, after more than two decades of research, that they are 97% “certain humans are causing climate change, that the damage is accelerating 10 times faster than the past 65 million years and soon we will self-destruct our civilization and disappear like dinosaurs, forever.” Bill Nye “the science guy” is the new warrior challenging antiscience robotic senators like the GOP’s James Inhofe, who’ll soon be chairman of the Senate Environment and Public Works Committee. Nye says America needs a new generation of leaders savvy in science and technology. Inhofe and fellow Republicans are Luddites trapped in a 19th century Wild West time warp. Fortunately Bill Nye, “the science guy” believes that while deniers are a lost cause, too incapable of rational thinking, their kids are not.

Nye’s “biggest concern is about creationist kids” whose parents are science deniers. “They’re compelled to suppress their common sense, to suppress their critical-thinking skills at a time in human history,” Nye recently told New York Times reviewer Jeffery DelViscio about his new book, “Undeniable: Evolution and the Science of Creation.” So Nye’s just stepped into the science denialism war zone, and on a rigid ideological land mine. Maybe Nye and his 2,500 “science guy” friends on the UN Intergovernmental Panel on Climate Change are worried about the education of the next generation of creation kids. But unfortunately, the fact is that 42% of all Americans don’t agree with Bill Nye when it comes to science. So Nye, Pope Francis and all climate-science believers have an enormous fight on their hands with the parents, teachers and their state education officials of these creation kids.

Here’s a profile of the everyday world their creation kids live and learn in:
• Gallup says 42% of Americans believe in creationism
• And 76% believe climate is not a major national priority
• Half of Americans say climate change is a “sign of the Apocalypse”
• Those who do believe will pay only about $5 to stop global warming

Check the facts: According to Gallup polling, “more than four in 10 Americans continue to believe that God created humans in their present form 10,000 years ago, a view that has changed little over the past three decades. Half of Americans believe humans evolved, with the majority of these saying God guided the evolutionary process.” Moreover, another Gallup poll says only 24% of Americans think “climate change” is a problem, put it near the bottom of 15 national problems polled. So today, 76% of Americans (that’s about 235 million!), say climate change, global warming and the environment are not the nation’s top priority. What is? Social Security, jobs, immigration, crime, big government, etc. But not overheating the planet.

“.. there are six major conflicts in Muslim countries between India and the Tunisian border that provide fertile ground for fanatical Sunni al-Qaeda type groups to take root and flourish.”

• Paris Attacks: Don’t Blame These Atrocities On Security Failures (Cockburn)

Will France make the same mistake the US did, when the Bush administration, the neo-conservatives and state security agencies exploited 9/11 to increase their power and implement their agendas? It could easily happen. Former President Nicolas Sarkozy has already spoken twice about the “war of civilisations” that sounds suspiciously like a French version of Bush’s “war on terror”, which in present circumstances is the sort of demagoguery that will be music to the ears of jihadis. There is already a potential constituency for jihadism among France’s 6 million Muslims, who have been pushed to the margins and see themselves as the victims of old-fashioned racism disguised as a confrontation between progressive secularism and medieval Islamic practices. War exposes and exacerbates such divisions in any country but France is especially vulnerable, because of the legacy of hatred stemming from the Algerian war of independence.

Some of the rhetoric immediately after the Paris massacre included melodramatic slogans such as “France is at war”. Again this echoes President Bush over a decade ago. And, of course, France is not at war, but, while the slogan is untrue as it stands, it does lead the way to an important but little appreciated truth about French security that applies equally to the rest of Europe. France may not be at war but it is suffering from the effects at a distance of the four wars now raging in the wider Middle East. Three of these – Syria, Libya and Yemen – have started since 2011, and a fourth in Iraq has massively escalated since that time. In addition, there are continuing wars in Afghanistan and Somalia, which means that there are six major conflicts in Muslim countries between India and the Tunisian border that provide fertile ground for fanatical Sunni al-Qaeda type groups to take root and flourish.

In the wake of the Paris killings there is much speculation about what links there may have been with foreign jihadis in the shape of Isis or al-Qaeda in Yemen. But this rather misses the point. Attacks on civilians require weapons, ammunition and the ability to use them, but no great level of combat training. What is really driving these attacks in Europe, and will go on doing so, is the collapse of so many Muslim states into violence and anarchy providing an ideal environment for Sunni jihadism to grow. Unsurprisingly, extreme fanatical Sunni jihadis, whom sympathisers might see as “holy warriors” and one Afghan journalist described as “holy fascists”, do well in wartime conditions. The Isis, in particular, relates to the world around it almost solely through acts of violence.

How much choice did they have, though?

• Curious Charlie Carnage (StealthFlation)

Just a few random thoughts on Charlie. I never can quite understand why these crack S.W.A.T teams don’t strategically hold off for 24-48 hours so as to exhaust the terrorists and attempt to gas them out, or at the very least, equipped with the latest military grade night vision, aim to catch them off guard overnight. Instead, they choose to impetuously storm the building by barging and charging, which virtually assures that hostages are also killed during the ensuing mayhem. One would assume the pros know what they’re doing, but it sure as hell seems questionable. C’mon now, slowly mechanically raising a shop’s street level security gate, are you kidding me??? You can’t be serious! Whatever happened to the element of surprise, isn’t that like terrorist manhunt school 101?

Don’t get me wrong, it’s just that I would much rather see these crazed craven characters professionally tortured, effectively interrogated and only then summarily executed, so that at least we stand a fighting chance to find out who and what was really behind them………and certainly the hostages spared at all costs. I mean once they have them completely cornered with thousands of expert anti terrorist police surrounding the perimeter, what’s the big rush to go in there guns a blazing…… Seriously, these crazed undisciplined young terrorist couldn’t stay awake for days on end, yet the expert S.W.A.T teams can, as they would rotate shifts. Just seems so ill-considered and outright reckless when hostages are involved.

It would be surprising not to see more of this.

• German Paper Target Of Arson Attack After Printing Charlie Hebdo Cartoons (DW)

A German newspaper in the northern city of Hamburg that reprinted Prophet Muhammad cartoons from French paper Charlie Hebdo has been the target of an apparent arson attack. Authorities said no one was injured. Police said “rocks and then a burning object” were thrown through rear court-yard windows into archive rooms of Hamburg’s daily newspaper, the Hamburger Morgenpost around 0200 a.m. local time (0100 UTC). Two people seen acting suspiciously in the area had been taken into custody, as authorities investigated further, police added, refusing to give more information about those detained. The investigation had been handed to Hamburg city state’s protection service.

The Hamburger Morgenpost had printed three Charlie Hebdo cartoons following last Wednesday’s massacre in Paris. The Morgenpost headline on Thursday had read, “this much freedom must be possible.” The “key question” authorities said early on Sunday was whether there was a connection between with the reprinting of the caricatures, adding that it is “too soon” to confirm such speculation. “Thick smoke is still hanging in the air, the police are looking for clues,” the Hamburger Morgenpost wrote briefly in its online edition early on Sunday. The German news agency DPA reported that contents in the newspaper’s archive rooms were destroyed in the apparent attack. No one had been injured in the incident. Two rooms on the lower floors were damaged but the fire was put out quickly,” police said.

“While almost everyone is Charlie when it comes to defending the fundamental values of the French republic, there is less unity when it comes to dealing with threats to those values.”

• French Unity Against Terrorism May Not Last Far Beyond Paris March (Observer)

Je suis Charlie. Nous sommes Charlie. La France est Charlie. Under the banner Tous Unis! (All United), France’s Socialist government has called for a show of national unity after three days of bloodshed that were seen as a direct blow to the republican values of liberté, égalité and fraternité. On Sunday, David Cameron and Angela Merkel, as well as the Ukrainian president Petro Poroshenko, Matteo Renzi, prime minister of Italy, and the Spanish premier, Mariano Rajoy – among 30 world leaders in all – will take part in one of the most significant public occasions in the history of postwar France. Behind what is sure to be an impressive, emotional show of solidarity, however, cracks have already appeared, suggesting political unity in France is unlikely to hold out much beyond the three-kilometre march from Place de la République to Place de la Nation. While almost everyone is Charlie when it comes to defending the fundamental values of the French republic, there is less unity when it comes to dealing with threats to those values.

It was almost inevitable that the far-right Front National – which has linked immigration from France’s former north African colonies to Islamist terrorism – was the first to break ranks. The party’s leader, Marine Le Pen, complained of being banned, or at least not formally invited to Sunday’s march. And her father, Jean-Marie, the provocative former paratrooper and the FN’s honorary president, showed that, at 86, he is still spoiling for a scrap. “Keep Calm and Vote Le Pen,” he tweeted. Later he told journalists: “National unity my arse, we [FN] have been sidelined. I deplore the deaths of 12 French people, but I’m not Charlie at all. I’m Charlie Martel, if you know what I mean.” The reference to the first-century Frankish leader Charles Martel, who is credited with halting the Islamic advance into Christian western Europe at the Battle of Tours in 732, was picked up by other far-right supporters.

“We vomit on all these people who suddenly say they are our friends.” Holtrop refused extra protection.

• Charlie Hebdo Cartoonist Slams Hypocritical ‘New Friends’ Of Magazine (AFP)

A prominent Dutch cartoonist at Charlie Hebdo heaped scorn on the French satirical weekly’s “new friends” since the massacre at its Paris offices, in particular far-right National Front leader Marine Le Pen. “We have a lot of new friends, like the pope, Queen Elizabeth and (Russian President Vladimir) Putin. It really makes me laugh,” Bernard Holtrop, whose pen name is Willem, told the Dutch center-left daily Volkskrant. “Marine Le Pen is delighted when the Islamists start shooting all over the place,” said Willem, 73, a longtime Paris resident who also draws for the French leftist daily Liberation. He added: “We vomit on all these people who suddenly say they are our friends.”

Commenting on the global outpouring of support for the weekly, Willem scoffed: “They’ve never seen Charlie Hebdo.” “A few years ago, thousands of people took to the streets in Pakistan to demonstrate against Charlie Hebdo. They didn’t know what it was. Now it’s the opposite, but if people are protesting to defend freedom of speech, naturally that’s a good thing.” Willem was on a train between northwestern Lorient and Paris when he learned of Wednesday’s attack by two Islamist gunmen as the paper was holding its weekly editorial meeting. He told Liberation: “I never come to the editorial meetings because I don’t like them. I guess that saved my life.” Willem stressed that Charlie Hebdo must continue to publish. “Otherwise, (the Islamists) have won.”

Debt Rattle December 5 2014

Dec 052014

December 5, 2014 Posted by Raúl Ilargi Meijer at 12:20 pm Finance Tagged with: deflation, drillers, ECB, export ban, Minsky Moment, oil, Putin, QE, Saudi, wages, yen 1 Response »

William Henry Jackson Hand cart carry, Adirondacks, New York 1902

• This Is Oil’s ‘Minsky Moment’: Marc Chandler (CNBC)

• Cheap Oil’s Economic Benefits May Be A Big Myth (MarketWatch)

• Brent Drops From 4-Year Low as Saudi Discounts Deepen Price War (Bloomberg)

• Oil Drop Gives U.S. Drillers Argument to End Export Ban (Bloomberg)

• Canada-U.S. LNG Rivalry Draws Focus After Petronas Delay (Bloomberg)

• ECB Paralyzed By Split As Irreversible Deflation Trap Draws Closer (AEP)

• Greenspan Says He Would Pre-Empt Asset Bubbles Financed by Debt (Bloomberg)

• US Economy Still Bigger, But China’s More Crucial (MarketWatch)

• Wage Growth Stuck Below Pre-Crisis Levels (CNBC)

• British Workers Suffer Biggest Real-Wage Fall Of Major G20 Countries (Guardian)

• ‘Colossal’ Cuts To Come, Warns UK Institute For Fiscal Studies (BBC)

• North Sea Oil Exploration To Be Allocated UK Taxpayers’ Money (Guardian)

• Poland More Worried About Europe Than Russia (CNBC)

• Eurozone Mulls Longer Greek Bailout, But Athens Refuses (Reuters)

• Japan Pension Fund Head Calls for $389 Billion Stock Revamp (Bloomberg)

• The Japanese Government Bond Market Is Dead. And the Yen? (Wolfstreet)

• Companies Don’t Need Banks for Bank Loans (Bloomberg)

• Putin Warns Russians Of Hard Times Ahead (BBC)

• Finns Who Can’t Be Fired Show Debt Trap at Work (Bloomberg)

• Vatican Finds Hundreds Of Millions Of Euros ‘Tucked Away’ (Reuters)

Marc Chandler says what I have said: it’s not about the energy, it’s about the financing. Which is vanishing from the shale patch. “The big risk now to our shale is not going to be that the price of oil drops so far that it’s not going to be profitable,” he said. “The weakness, the Achilles’ heel, is that they don’t get the cheap funding anymore.”

• This Is Oil’s ‘Minsky Moment’: Marc Chandler (CNBC)

Six years ago, the theories of economist Hyman Minsky were used to make sense of the collapse in housing prices, and its attendant effects on the economy. Today, Marc Chandler says the energy sector has just suffered its own Minsky moment. And while he doesn’t expect it to take down the stock market, the slide in oil could have a serious impact on the high-yield bond market. Minsky moment is a term coined by Pimco economist Paul McCulley in 1998, and it refers to a point when a period of rapid growth and risk-taking leads to a sudden turn lower and a crisis. Chandler, global head of markets strategy at Brown Brothers Harriman, says that is precisely what is happening in crude oil. “Many people a couple years ago, a year ago, were saying that oil prices could only go up—’we’re in peak oil’—meaning that we’re running out of the stuff. So a lot of things were leveraged based on oil prices that can only go up. Sort of like house prices—’they can only go up.’ So what happened is, because people held this as a deep conviction, they leveraged up,” Chandler said.”

In fact, the energy sector has borrowed $90 billion in the high-yield market since 2008, Chandler said, making energy producers “a large component of the high-yield market itself.” The problem is that “a lot of the loans, like loans on houses, were made not so much on a person’s ability to repay the loan as on the value of the house. Similarly, the banks and investors bought high-yield bonds or leveraged loans on the energy sector not on the basis of their ability to repay it, but on the value of the oil in the ground.” And so what happens now that crude oil has fallen nearly 40% from its June highs? Chandler foresees both further consolidation (along the lines of Halliburton’s acquisition of Baker Hughes) and failures ahead as the cheap financing dries up. “The big risk now to our shale is not going to be that the price of oil drops so far that it’s not going to be profitable,” he said. “The weakness, the Achilles’ heel, is that they don’t get the cheap funding anymore.” Or, to use a more modern metaphor: “This is sort of when Wile E. Coyote runs off the cliff.”

“[When] an individual fills up their automobile, there is not an extra $10 bill that shows up in their wallet, therefore, the incentive to spend really is not recognized and the ‘savings’ get washed within already tight consumer budgets ..”

• Cheap Oil’s Economic Benefits May Be A Big Myth (MarketWatch)

Cheap oil is awesome, right? Most economists describe it as a sort of tax cut for Americans at the gas pump. Even Larry Fink, a hot-shot Wall Street money manager, declared oil’s decline “spectacular.” “This is an incredible tax cut for Americans and everywhere else around the world,” Fink told CNBC Wednesday, referring to the startling plunge oil has seen in recent weeks. The cheap oil argument goes like this: consumers and businesses save in heating costs and in fueling their cars and those savings will be spent on discretionary items, fueling consumption. A recent article in the Washington Post indicated that Americans would pocket a $230 billion windfall, if prices stay at their current levels, compared to where they were in June.

However, some financial experts argue that a decline in oil isn’t all that it’s cracked up to be. In fact, it could be a bad omen for the U.S. economy. Lance Roberts, Strategist for STA Wealth Management, said the idea that declining energy prices are good for the economy is wrong. “[When] an individual fills up their automobile, there is not an extra $10 bill that shows up in their wallet, therefore, the incentive to spend really is not recognized and the ‘savings’ get washed within already tight consumer budgets,” Roberts argued. It’s often noted that consumer spending accounts for about two-thirds of gross domestic product. But Roberts pointed out that history does not seem to support the idea that lower gasoline prices, and other cheaper energy costs, lead to higher consumer spending, as the following chart shows:

In fact, as Roberts attempted to illustrate in the chart below, sharp declines in energy prices have actually “been coincident with lower economic growth rates,” as he termed it. In other words, falling oil prices have typically been a harbinger of difficult economic times to come. Think of oil prices as a measure of the global economy’s blood pressure. While there has been a production glut, the strengthening dollar has also contributed to the dramatic drop in oil prices — and that rapidly rising dollar is a function of weakness elsewhere, particularly in Europe and Asia.

Everything’s on hold for US job numbers later today, but oil is at multi-year lows and slowly falling further this morning.

• Brent Drops From 4-Year Low as Saudi Discounts Deepen Price War (Bloomberg)

Brent extended losses from a four-year low as Saudi Arabia offered customers in Asia record discounts on its crude, bolstering speculation it’s defending market share. West Texas Intermediate dropped in New York. Futures fell as much as 0.8% in London and are headed for a second weekly decline. State-run Saudi Arabian Oil Co. cut its differential for Arab Light sales to Asia next month to $2 a barrel below a regional benchmark, according to a company statement. That’s the lowest in at least 14 years. The kingdom doesn’t want to subsidize Iran, Iraq and Venezuela and is willing to let the market decide prices, said Daniel Yergin, an energy analyst and Pulitzer Prize-winning author.

Crude slumped 18% last month as the Organization of Petroleum Exporting Countries maintained its output quota, letting prices decrease to a level that may slow U.S. production. Saudi Arabia has no price target and will let the market decide at what level oil should trade for now, said a person familiar with its policy. “It seems what the Saudis want, the Saudis are going to get,” Phil Flynn, a senior market analyst at Price Futures Group in Chicago, said by e-mail today. “We’re going to see prices continue to be under pressure. It is still game on.”

Great idea to add US oil to an already overloaded global market.

• Oil Drop Gives U.S. Drillers Argument to End Export Ban (Bloomberg)

Collapsing crude prices have given oil producers a new argument for ending a 39-year-old U.S. ban on exports. With U.S. output at a 31-year high and imports at the lowest level since 1995, producers seeking the best possible price for crude are straining at having to keep sales at home. Removing the ban could erase an imbalance between U.S. and foreign crude prices by expanding the market for shale oil. A 38% decline in crude prices since June, “will weigh into the debate” and help make the case to lift the export ban, said Senator Lisa Murkowski, the Alaska Republican poised to take over as head of the Energy and Natural Resources Committee next year. Lawmakers in Washington are set to hold a hearing next week on dropping the ban. Murkowski hasn’t decided yet whether she’ll introduce a bill to allow exports.

Republicans, who are slated to take control of both houses of Congress next year, have yet to reach consensus on what to do. The top House and Senate Republicans haven’t yet taken a position on the matter and some rank-and-file members, including Senator Susan Collins of Maine, say they are wary of action because of fears it may lead to higher gasoline and heating-oil prices. President Barack Obama’s former top economic adviser Lawrence Summers called for ending the ban in September after the Brookings Institution, a Washington policy group, released an analysis showing that exports would lower gasoline prices. White House Press Secretary Josh Earnest declined to say yesterday whether lifting the ban was being discussed or considered by the administration.

With falling oil prices, these projects loook ever more megalomaniacal. “Backers of LNG projects in British Columbia face higher costs than Gulf Coast proponents such as Sempra Energy because of the pipelines required across two Canadian mountain ranges, the lack of existing infrastructure on the Pacific Coast and negotiations with aboriginals.”

• Canada-U.S. LNG Rivalry Draws Focus After Petronas Delay (Bloomberg)

Petroliam Nasional’s deferred decision on a C$36 billion ($32 billion) liquefied natural gas project in British Columbia is bringing to the fore Canada’s struggle to compete with the U.S. on costs. Petronas, as the Malaysian state-owned producer is known, is pushing contractors to bring costs closer in line with U.S. rivals as it tries to keep the first exports to Asia on track to start by 2019, Michael Culbert, chief executive officer of the Pacific NorthWest LNG project, said. “We’ve got real competition that is coming out of the Gulf Coast projects,” Culbert said by phone yesterday, estimating U.S. suppliers can deliver LNG to Asia for $1 to $2 less per million British thermal units than Canadian projects. “With the changing oil prices, contractors may not be as busy as they thought they would be.” While U.S. terminals are already being built, none of the proponents in Canada have decided to proceed. Pacific NorthWest LNG would be the country’s first large project to come online among a handful put forward by Shell to Chevron.

Petronas joined BG Group in pushing back a decision on its plans in Canada as oil trades close to five-year lows. BG cited competition from U.S. supplies when it deferred its decision in October. Backers of LNG projects in British Columbia face higher costs than Gulf Coast proponents such as Sempra Energy because of the pipelines required across two Canadian mountain ranges, the lack of existing infrastructure on the Pacific Coast and negotiations with aboriginals. U.S. projects have caught up to Canadian rivals that received export approvals to start lining up buyers earlier and are now passing them by. Gulf Coast proponents adding export capabilities to existing LNG import terminals need less new equipment and have access to a network of pipelines already linked to vast supplies of gas in shale formations, as well as a larger labor pool.

Ambrose is right. All the speculation on ECB QE is more or less pointless, because Germany (re: the Bundesbank) is not likely to change its mind.

• ECB Paralyzed By Split As Irreversible Deflation Trap Draws Closer (AEP)

The European Central Bank has dashed hopes for quantitative easing this year and acknowledged for the first time that the institution’s elite board is split on plans for a €1 trillion liquidity blitz. Equity markets fell across southern Europe,with Italy’s MIB off 2.77pc, led by sharp falls in bank stocks. Spain’s IBEX dropped 2.35pc. The euro surged by more than 1pc to $1.2455 against the dollar in early trading as speculators rushed to cover short positions. Expectations for immediate stimulus had been riding high after the ECB’s president, Mario Draghi, pledged action “as fast as possible” last month. The bank slashed its forecasts for economic growth to 1pc next year, and admitted that inflation will remain stuck at just 0.7pc, a combination that traps large parts of southern Europe in deflationary slump and corrodes debt dynamics. BNP Paribas said eurozone inflation is likely to average 0pc in 2015, after turning negative this month.

“The ECB’s measures are woefully behind the curve,” said Ashoka Mody, a former EU-IMF bailout chief now at the Bruegel think-tank in Brussels. “For anyone who wants to see it, a debt-deflation cycle is ongoing in the distressed economies. The authorities have very nearly lost control of a process that will become ever harder to manage as it becomes more entrenched,” he said. Mr Mody said the ECB repeatedly asserts that it will act “if needed” but declines to spell out what that means and why it continues to delay when the inflation level – now 0.3pc – is already so far below target. “Cheap talk is a legitimate policy tool. But talk can also create a cognitive bubble,” he said. Mr Draghi denied that the ECB is complacent about the deflation risk or that is succumbing to paralysis. “Let me be absolutely clear. We won’t tolerate prolonged deviation from price stability,” he said.

Yet he pleaded for more time to study the effects of the oil price crash and gave a strong hint that there would be no further decisions on monetary stimulus until after the next meeting in January. The governing council discussed possible purchases of every major asset “other than gold” but has not yet agreed to go beyond the current mix of covered bonds and asset-backed securities. “The credibility of the ECB lies in tatters. It’s now patently clear that Draghi lacks the crucial German support for launching full-blown QE,” said sovereign bond strategist Nicolas Spiro. Mr Draghi insisted that the bank could in principle ram through the QE decision by majority vote but said he was “still confident” that a package of measures could be designed to keep everybody on board.

The oracle leaks lubricant.

• Greenspan Says He Would Pre-Empt Asset Bubbles Financed by Debt (Bloomberg)

Former Federal Reserve Chairman Alan Greenspan, who was blamed by some economists for overheating equity and housing prices in the 1990s and 2000s, said that were he in the job today, he would take pre-emptive action to tackle asset bubbles if they were financed by leverage. Greenspan, who argued in office that it was better to clean up after an asset bubble had burst rather than artificially prick it, told delegates at a conference hosted by Citigroup Inc. in London today that he believed that argument is correct when a speculative boom isn’t financed by debt, mentioning the 1987 stock market crash as an example. If the overheating was caused by leverage, however, “then you’re going to have problems,” he said. “Bubbles are aspects of human nature and you can try as hard as you like, you will not alter the path,” Greenspan told the audience at Citigroup’s European Credit Conference via a video link from Washington.

“I still hold to the general view that unless you have debts supporting the bubble, I would just let it alone because certain things about human nature cannot be changed and I’ve come to the conclusion this is one of them.” The former Fed chairman, who warned against “irrational exuberance” in stock markets as early as 1996, was faulted by some economists for not using higher borrowing costs to prevent equity prices from rising before the bursting of the so-called tech bubble in 2000. He cut interest rates afterwards to “mop up” the damage, which some analysts said led to an overheating in the housing market that partly caused the financial crisis. Greenspan remained unapologetic about the tech bubble, saying in a December 2002 speech that central banks had “little experience” in dealing with market bubbles and that “dealing aggressively with the aftermath of a bubble” was “likely to avert long-term damage.”

Yeah, that’s a really important topic. Bragging rights in the glue factory.

• US Economy Still Bigger, But China’s More Crucial (MarketWatch)

Commentary was ablaze Thursday over new data suggesting China now makes up a larger portion of the world economy than the U.S., or at least when adjusted to reflect purchasing power. The numbers — published by the International Monetary Fund — had folks from Nobel laureate economist Joseph Stiglitz to MarketWatch columnist Brett Arends declaring the end of the U.S. as the top economic power, while others such as Harvard professor and former Clinton Administration advisor Jeffrey Frankel, argued that America was still on top. But while most economic analysis would still put the U.S. comfortably atop the world rankings, HSBC economist Frederic Neumann said that the real lesson of the IMF data was that China, and emerging Asia as a whole, has become more crucial to the global economy.

In a report Friday, Neumann noted that if you adjust this year’s gross domestic product data for purchasing parity (smoothing out foreign-exchange differences by making the price of products the same in each country), not only is China bigger than the U.S., but the emerging economies of Asia would be bigger than those of the U.S. and euro zone combined. “But that’s not necessarily the right measure to look at to gauge a market’s importance to the world,” Neumann wrote. “Here, international purchasing power matters, and that is best captured by looking at GDP in U.S. dollars.” In other words, an economy’s influence must be measured by what it’s worth globally, not just in its own currency. So if you look at nominal dollar-denominated GDP, the U.S. makes up 22% of the world’s total, while the euro zone is 17%, and China is 11%. “But that’s not to dismiss the growing importance of Asia,” the HSBC economist wrote. “For one, emerging Asia’s combined U.S.-dollar GDP will pull equal to that of the U.S. for the first time this year.”

We know. That’s why we call BS on ‘growth’.

• Wage Growth Stuck Below Pre-Crisis Levels (CNBC)

Stagnant wage growth in developed countries has pulled average global earnings lower and is in danger of dragging economic performance down, according to the International Labour Organization (ILO). In its latest report published Friday, the ILO said that global wage growth in 2013 slowed to 2%, from 2.2% the year before. As such, pay growth has a significant way to go before it reaches its pre-crisis level of around 3%. The average rate was pulled down by stagnant pay in developed countries, the organization said. Annual wage growth in these economies had been around 1% since 2006, but fell to just 0.1% in 2012, and 0.2% in 2013. Wage growth in developed countries was hit hard by the recent economic crisis, which saw employers become reluctant to increase workers’ pay. Over the past few years, as nascent recoveries took hold in major economies including the U.S. and U.K., pay increases have lagged broader economic growth.

It’s an issue that will be in focus on Friday, when the U.S.’s non-farm payrolls numbers are released. The unemployment rate is expected to be unchanged at 5.8%, according to Reuters, but analysts are hoping for a slight increase in wages – a key measure for the Federal Reserve in considering when to raise interest rates. “Wage growth has slowed to almost zero for the developed economies as a group in the last two years, with actual declines in wages in some,” Sandra Polaski, the ILO’s deputy director-genera for policy, said in a release. “This has weighed on overall economic performance, leading to sluggish household demand in most of these economies and the increasing risk of deflation in the euro zone.” By contrast, pay growth in emerging countries has stormed ahead over the last two years, according to the ILO, coming in at 6.7% and 5.9% in 2012 and 2013 respectively.

That’s how they get their ‘recovery’.

• British Workers Suffer Biggest Real-Wage Fall Of Major G20 Countries (Guardian)

British workers suffered the biggest fall in real wages of all major G20 countries in the three years to 2013, according to the International Labour Organisation (ILO). They fared worse in terms of falling real pay than all of the bailed-out eurozone economies – Portugal, Spain and Ireland – apart from Greece. Wages in Japan and Italy also fell over the period but at a slower rate than in the UK, while real terms pay increased in the US, France, Germany, Canada and Australia. Patrick Belser, senior economist at ILO and author of the report, said: “In the UK in 2008 there was some positive growth of real wages whereas some other countries had stagnant or declining wages – such as Japan. Then what you see subsequently is a continuous fall in wages to 2013. We expect wages to be at best flat this year, and they will most likely decline.”

The biggest fall in UK wages adjusted for inflation came in 2011, when they fell by 3.5%. In Italy, which was one of the countries hit hardest by the eurozone crisis, real pay fell by only 1.9%. Last year real UK pay fell by 0.3% according to the ILO, compared with a 2% increase globally. Real wages in the UK have fallen consistently since 2008, with inflation outpacing pay rises an economic recovery and recent rapid falls in unemployment. In the UK, but also in Greece, Ireland, Italy, Japan and Spain, average real wages in 2013 remained below their 2007 level. Belser said weak productivity was part of the story in the UK. The Bank of England said in its latest quarterly inflation report last month that recent employment growth had been concentrated among young, lower-skilled and lower-paid workers, which was probably dragging down average wage growth. Weaker-than-expected pay growth in Britain has also generated lower than expected tax revenues for the government, which in turn has slowed deficit reduction.

“One thing is for sure – if we move in anything like this direction, whilst continuing to protect health and pensions, the role and shape of the state will have changed beyond recognition.”

• ‘Colossal’ Cuts To Come, Warns UK Institute For Fiscal Studies (BBC)

The plans set out by George Osborne in the Autumn Statement on Wednesday will require government spending cuts “on a colossal scale” after the election, an independent forecaster has warned. The Institute for Fiscal Studies (IFS) said just £35bn of cuts had already happened, with £55bn yet to come. The detail of reductions had not yet been spelled out, IFS director Paul Johnson said. As a result, he said it would be wrong to describe them as “unachievable”. However, voters would be justified in asking whether the chancellor was planning “a fundamental reimagining of the role of the state”, Mr Johnson told a briefing in central London on Thursday.

If reductions in departmental spending were to continue at the same pace after the May 2015 election as they had over the past four years, welfare cuts or tax rises worth about £21bn a year would be needed by 2019-20, at a time when the Conservatives were committed to income tax cuts worth £7bn, according to the IFS. Mr Johnson added: “One thing is for sure – if we move in anything like this direction, whilst continuing to protect health and pensions, the role and shape of the state will have changed beyond recognition.”

What a great idea with oil moving towards $50. Does that mean they’ll get more of our money?

• North Sea Oil Exploration To Be Allocated UK Taxpayers’ Money (Guardian)

Taxpayers’ money could be channelled directly into North Sea oil exploration under a scheme announced to the industry in Aberdeen on Thursday by Danny Alexander, chief secretary to the Treasury. The promise to give financial support for seismic surveys was one of a number of tax and other benefits proposed by the government in an attempt to halt a collapse in exploration and remedy a fall in production. The moves were welcomed by the offshore industry but criticised by environmentalists as “environmental and economic illiteracy of the highest order”. Alexander said it was right to give targeted support to Scotland’s oil and gas industry building on tax reductions and other moves made in the autumn statement on Wednesday.

“We’re incentivising and working with the industry to develop new investment opportunities and support new areas of exploration. This will help ensure that the industry continues to thrive and contribute to the economy,” he explained. Other North Sea countries including Norway and Holland provide seismic incentives but they are new in the UK. Mike Tholen, economics and commercial director at lobby group Oil & Gas UK, said the allocation was expected to be a few millions of pounds rather than billions and to be matched by companies. It would be targeted at areas that would otherwise not be explored. “It is small beer financially but it is important because it is government putting its money where its mouth is,” he said.

Friends of the Earth said it was extraordinary that the government was trying to squeeze as much oil out of the North Sea as it could while the international community was trying to agree a plan during world climate talks in Lima, Peru to head off the threat of catastrophic climate change. Craig Bennett, the organisation’s policy and campaigns director, said: “This is environmental and economic illiteracy of the highest order. Ministers must end their obsession with dirty fossil fuels and build a clean economy for the future based on energy efficiency and the nation’s huge renewable power resources.”

As the western press tries to make the most out of Poland’s fear of Putin, they have other things on their mind.

• Poland More Worried About Europe Than Russia (CNBC)

With Russia and Ukraine for neighbors, Poland’s economy is feeling the heat from the geopolitical crisis but government officials said insist the country was a bright spot in a bad neighborhood and that the euro zone was more of a concern than Russia. “Sanctions are felt across the board, exports to Ukraine are down 25% and to Russia they’re down 10%,” Krzysztof Rybinski, the former deputy governor of the Polish Central Bank, told CNBC Friday. “But I don’t think investors will pull the plug on Poland unless Russia does something really unpredictable.” For Poland the euro zone slowdown was more of a worry. “For the Polish economy it’s much more important what happens in the west, if there is no growth, stagnation and recession in the west it will take us down with the situation.

Russia and Ukraine together are only about 7.5% of Polish exports – that’s significant but not as much as (our exports to) Germany.” Sanctions in Russia and the conflict in Ukraine, coupled with sluggish growth in the euro zone have had a “chilling” effect on Central Eastern Europe, with Poland no exception. Despite credit rating agency Moody’s saying that Poland’s economy had shown “resilience in times of stress” the country’s gross domestic product has declined. The economy grew by 2.0% in 2012, but grew 1.6% last year, according to EU statistics service Eurostat. Rybinski said there had been some positive effects of the sanctions on Russia, however. “We have many Ukrainian young people flowing through the border to Polish universities, this is a positive effect of sanctions. Other positive effects are that the zloty (the Polish currency) is not very strong which is helping Polish exporters,” he said.

Without that bailout, the markets will attack Greece once again.

• Eurozone Mulls Longer Greek Bailout, But Athens Refuses (Reuters)

Euro zone ministers are considering extending Greece’s bailout by six months to mid-2015, according to a document obtained by Reuters, but Athens said it was only willing to consider an extension of a few weeks to the unpopular program. Extending the program beyond a few weeks into the new year would complicate Prime Minister Antonis Samaras’ efforts to secure victory for his preferred candidate in a presidential vote in February. He had depended on exiting the EU/IMF bailout by the end of the year, when funding from the EU is due to end. “Greece has not received any written proposal on an extension,” a government official told Reuters. “In any case, everything that the prime minister and Finance Minister (Gikas) Hardouvelis has said stands – that Greece can discuss only a technical extension, which cannot be longer than a few weeks.”

An extension of the bailout, under which Athens will have received a total of €240 billion ($300 billion) since 2010, is necessary because international lenders and the Greek government are still negotiating what Athens must do to get the remaining €1.8 billion and secure a back-up credit line for after the bailout ends and Greece returns to market financing. Athens needed to wrap up its bailout review by a meeting on Dec. 8 of euro zone ministers to meet the timeline for exiting by the end of the year. But the talks have been held up by a row over a budget shortfall next year, and a senior euro zone official on Wednesday said Greece would have to ask for an extension on its bailout because a credit line to replace the program will not be ready in time. Euro zone officials are now urging the country to reach a deal by Dec. 14, a Greek finance ministry official said.

Stop pretending already. There is no cure for Japan.

• Japan Pension Fund Head Calls for $389 Billion Stock Revamp (Bloomberg)

Japan’s Government Pension Investment Fund is considering whether to overhaul its $389 billion of stock investments by loosening rules that restrict managers to domestic or international equities. A month after the $1.1 trillion pool unveiled plans to more than double local and foreign share targets so that each makes up 25% of assets, Takahiro Mitani, its president, said separating the world into Japan and everywhere else may not be the best approach. GPIF should consider letting some of its managers invest both at home and abroad, he said. “More funds are investing without discriminating between domestic and foreign, and I think that’s worth considering,” Mitani, 65, said in an interview in Tokyo on Dec. 3. “If choosing between Toyota and Volkswagen, instead of being limited to just Toyota and Nissan, raises investment performance and efficiency, it’s an option we mustn’t rule out.”

The California Public Employees’ Retirement System, the biggest U.S. public pension, makes no distinction between local and foreign holdings. Calpers, which oversees about $295 billion, has a 51% target for public equities, according to its website. GPIF’s stock investments were parceled out to managers in 45 different pieces as of March 31, according to the fund’s annual report. The Topix index rallied 8.4% since GPIF announced the investment strategy changes on Oct. 31. The Bank of Japan unexpectedly expanded its bond buying to 80 trillion yen ($666 billion) a year on the same day, as it targets annual inflation of 2%. The extra purchases helped drive yields on benchmark 10-year notes down by 3.5 basis points to 0.435% yesterday, after touching a more than 1 1/2-year low at the end of November. The Topix rose 0.4% at today’s close to extend a seven-year high. The yen fell 0.3% to 120.01 per dollar.

GPIF would have to revise its systems to allow one manager to invest across Japanese and non-domestic shares, Mitani said. Alternatively, it could create a new global stock class on top of the existing ones, he said. The fund is due to review foreign equity managers in about 18 months, according to Mitani, who said he plans to retire when his five-year term finishes at the end of March.

And this is what you get, Mr. Pension fund head: ” .. 37% of Japan’s yen-denominated wealth has gone up in smoke ..” Abenomics equals desperation.

• The Japanese Government Bond Market Is Dead. And the Yen? (Wolfstreet)

[The BOJ’s] relentless bid has driven yields to near zero, now increasingly for longer-dated maturities as well. In this process, the Bank of Japandemonium, as I’ve come to call it, has tightened its iron grip on the government bond market to where the market ran out of air and died. Takeshi Fujimaki, an opposition lawmaker, explained the phenomenon this way:

The BOJ used consumer prices as an excuse to add stimulus and continues to hide that it’s monetizing government debt. But the truth is that Japan will default unless the BOJ continues to buy JGBs even after inflation accelerates beyond its intended target.

Alas, to monetize ever larger portions of government debt, the BOJ is selling freshly printed yen into a market it can manipulate but not control: the global currency market. Once big players around the world start dumping the yen, and once scared Japanese folks start dumping their yen too, the yen might do what the ruble is doing now: spiraling down uncontrollably. When Abenomics became a noun in late 2012, it took ¥75 to buy $1. Today it takes ¥120. With the effect that 37% of Japan’s yen-denominated wealth has gone up in smoke. But once the BOJ decides that the yen has fallen enough, it might not be able to stop its fall. It would have to sell its international reserves and buy yen – the opposite of QE.

If it decided to buy yen, instead of printing yen, to prop up the currency, it would thereby surrender control over the government bond market. The relentless bid would disappear even as the flood of new JGBs would continue. There would be no other buyers, not with yields at near zero. Chaos would break out instantly. The BOJ might try for a minute or two, and it might try to talk up the yen, but it can’t actually prop up the yen with yen purchases without causing JGBs to spiral out of control, which it would never allow to happen. It would never allow a debt crisis to throw Japan into chaos. Instead, it will continue to guarantee the nominal value of the debt by buying up every JGB that comes on the market, while keeping yields at near zero. And to heck with the yen. Fujimaki sees ¥200 to the dollar.

Good point.

• Companies Don’t Need Banks for Bank Loans (Bloomberg)

A while ago U.S. banking regulators announced guidelines to prevent banks from making loans to companies at more than six times Ebitda, because the regulators thought those loans were too risky. More recently those regulators have announced, roughly once a week, that they intend to enforce those rules, but for real this time. Here is a Wall Street Journal story about how private-equity firms – whose buyouts tend to be funded by leveraged loans – are adapting to those rules. Here is one funny way to adapt:

Private-equity firms have used adjustments in their models that contribute to a company’s earnings, thereby decreasing the leverage ratio and lifting a company’s future cash flow, a measure regulators use to calculate a company’s ability to repay debt. Vista Equity Partners adjusted Tibco Software’s Ebitda for the 12 months to Aug. 31 by 58%, to $378 million, from Tibco’s own calculation of $239 million.

This is an admirable strategy: If you want to borrow 8.5 times as much money as you make in a year, then that’s bad. One way to fix that is to borrow less money, but that is no fun. Another way to fix it is to make more money, but that is hard. A third way to fix it is to cross out the number of dollars that you make in a year and write a different number, and, boom, now you are borrowing 5.3 times Ebita. (Yes yes yes Vista “factored in cost savings” that the buyout would generate.) I don’t know how popular that strategy is.

The more interesting adaptation strategy is direct syndication. The thing is, most leveraged loans don’t come from banks. When a company does a leveraged loan, a bank will normally arrange the loan, and lend some of the money, but typically most of the money will come from other investors: hedge funds, mutual funds, collateralized loan obligations, etc.3 In the modern leveraged-loan market — much like in the stock and bond markets — banks are mostly intermediaries, matching companies that want to borrow with investors who want to lend. Those investors can still lend. The banks can’t. (I mean, they can, but the regulators will make sad faces at them.) But statistically the banks weren’t lending that much anyway. They were calling up the investors who were actually lending, but banks don’t have a monopoly on telephones.

Everyone seems to be gambling on Russians dumping Putin in hard times, but why should they?

• Putin Warns Russians Of Hard Times Ahead (BBC)

President Vladimir Putin has warned Russians of hard times ahead and urged self-reliance, in his annual state-of-the nation address to parliament. Russia has been hit hard by falling oil prices and by Western sanctions imposed in response to its interventions in the crisis in neighbouring Ukraine. The rouble, once a symbol of stability under Mr Putin, suffered its biggest one-day decline since 1998 on Monday. The government has warned that Russia will fall into recession next year. Speaking to both chambers in the Kremlin, Mr Putin also accused Western governments of seeking to raise a new “iron curtain” around Russia. He expressed no regrets for annexing Ukraine’s Crimea peninsula, saying the territory had a “sacred meaning” for Russia.

He insisted the “tragedy” in Ukraine’s south-east had proved that Russian policy had been right but said Russia would respect its neighbour as a brotherly country. Speaking in Basel in Switzerland later, US Secretary of State John Kerry said the West did not seek confrontation with Russia. “No-one gains from this confrontation… It is not our design or desire that we see a Russia isolated through its own actions,” Mr Kerry said. Russia could rebuild trust, he said, by withdrawing support for separatists in eastern Ukraine.

This has many European countries worried.

• Finns Who Can’t Be Fired Show Debt Trap at Work (Bloomberg)

Finland is a nice place to be if you work in the public sector. But laws that protect municipal workers from the hard reality of a faltering economy are adding to the debt burden in a country that had its credit rating cut just two months ago. In some towns, no public-sector staff can be fired until as late as 2022. Meanwhile, Finnish local government debt has tripled to €16.3 billion ($20 billion) since 2000. It will grow by another €10 billion by 2018, the Finance Ministry estimates. “The government and municipalities have the same problem: the income base has collapsed while expenses have continued to grow,” Anssi Rantala, chief economist at Aktia Bank Oyj, said by phone. As more people retire than join the workforce, Finland’s recession shows no sign of easing.

Prime Minister Alexander Stubb has described the country’s plight as a “lost decade” as manufacturing fails to spur growth for a third consecutive year. Adding to the country’s woes is the economic pain spreading through its eastern neighbor as exports to Russia collapse. In October, Standard & Poor’s cut Finland to AA+ from AAA as the state’s debt exceeds the 60% limit to gross domestic product permitted inside the European Union. As the government struggles to squeeze more competitiveness out of its labor force, existing laws are hampering its efforts. Many municipal employees enjoy a five-year immunity in case their town is merged with another. Among Finland’s 320 towns, the smallest ones may merge several times – giving those workers another five years of job protection each time.

Francis has guts. He fired the head of the Swiss guard as well yesterday. But money is a topic that can draw especially harsh responses, certainly when it’s a lot. And the Vatican has an awful lot.

• Vatican Finds Hundreds Of Millions Of Euros ‘Tucked Away’ (Reuters)

The Vatican’s economy minister has said hundreds of millions of euros were found “tucked away” in accounts of various Holy See departments without having appeared in the city-state’s balance sheets. In an article for Britain’s Catholic Herald Magazine to be published on Friday, Australian Cardinal George Pell wrote that the discovery meant overall Vatican finances were in better shape than previously believed. “In fact, we have discovered that the situation is much healthier than it seemed, because some hundreds of millions of euros were tucked away in particular sectional accounts and did not appear on the balance sheet,” he wrote. “It is important to point out that the Vatican is not broke … the Holy See is paying its way, while possessing substantial assets and investments,” Pell said, according to an advance text made available on Thursday.

Pell did not suggest any wrongdoing but said Vatican departments had long had “an almost free hand” with their finances and followed “long-established patterns” in managing their affairs. “Very few were tempted to tell the outside world what was happening, except when they needed extra help,” he said, singling out the once-powerful Secretariat of State as one department that had especially jealously guarded its independence. “It was impossible for anyone to know accurately what was going on overall,” said Pell, head of the new Secretariat for the Economy that is independent of the now downgraded Secretariat of State. Pell is an outsider from the English-speaking world transferred by Pope Francis from Sydney to Rome to oversee the Vatican’s often muddled finances after decades of control by Italians.

Pell’s office sent a letter to all Vatican departments last month about changes in economic ethics and accountability. As of Jan. 1, each department will have to enact “sound and efficient financial management policies” and prepare financial information and reports that meet international accounting standards. Each department’s financial statements will be reviewed by a major international auditing firm, the letter said. Since the pope’s election in March, 2013, the Vatican has enacted major reforms to adhere to international financial standards and prevent money laundering. It has closed many suspicious accounts at its scandal-rocked bank. In his article, Pell said the reforms were “well under way and already past the point where the Vatican could return to the ‘bad old days’.”

Debt Rattle November 22 2014

Nov 222014

November 22, 2014 Posted by Raúl Ilargi Meijer at 12:58 pm Finance Tagged with: BoE, buybacks, China, Fed, madmen, oil, pensions, Russia, Saudi, Segarra, yen 1 Response »

NPC Newsstand with Out-of-Town Papers, Washington DC 1925

• Cheap Oil May Be A Sign Of Bigger Problems (MarketWatch)

• Drilling Slowdown on Sub-$80 Oil Creeps Into Biggest US Fields (Bloomberg)

• Russia to Cooperate With Saudis on Oil, Avoiding Output Cuts (Bloomberg)

• Sell, Sell, Sell .. The Central Bank Madmen Are Raging (David Stockman)

• What Record Stock Buybacks Say About Economic Growth (Zero Hedge)

• Is China Building a Mortgage Bomb? (Bloomberg)

• ‘China’s Economy Is Slowing Faster Than You Think’ (CNBC)

• China Cut Pegs Growth Floor At 7%, Says Stephen Roach (CNBC)

• Yen Weakens to Seven-Year Low as Japan Will Vote on Abenomics (Bloomberg)

• ‘We Are Living in an Aberrational World’ (Finanz und Wirtschaft)

• European Central Bank Has Begun Buying Asset-Backed Securities (Reuters)

• RBS Admits Overstating Financial Strength In Stress Test (Guardian)

• Bank Of England Investigates Staff Over Possible Auction Rigging (Reuters)

• The Impossible American Mall Business. ‘We Surrender’ (Bloomberg)

• Dudley Defends New York Fed Supervision In Heated Senate Hearing (Bloomberg)

• Illinois $111 Billion Pension Deficit Fix Struck Down (Bloomberg)

• Click Here to See If You’re Under Surveillance (BW)

“If China does decelerate well below 7% in 2015, an oil price target in the $30 to $40 range is completely realistic.”

• Cheap Oil May Be A Sign Of Bigger Problems (MarketWatch)

While there is no instant replay in the markets, if commodities raised more red flags over the summer, at this point they are doing the equivalent of the football coach screaming in the referee’s face as he has been completely ignoring the flags being thrown on the field. Looking at oil dispassionately, one has to admit that for all intents and purposes, WTI crude oil has been down for seven straight weeks. The glass-half-full crowd will note that consumers get more money to spend for the holidays, and this is true. The glass-half-empty crowd will say that oil price weakness indicates weak global demand and consumers cannot possibly make up for that. This does not necessarily have to be the case, although it is certainly a possibility with rising probabilities at the moment. Brent crude oil futures (the European benchmark) are much weaker from a trading perspective as they have taken out key support levels with rather persistent selling that indicates weak demand at a time when oil markets have ample supply.

European economic data signifies what is in effect an economic rarity — a triple-dip recession — as the eurozone never really recovered from its sovereign-debt crisis. Shrinking eurozone bank lending over the past two years already told us with a high degree of certainty that this was coming, but now that it is here, we are starting to see repercussions in key commodities. One thing that strikes me about this oil-price decline is how persistent and methodical it has been. Commodities trend much differently than stocks as strong trends sometimes seem almost linear in nature with very shallow countertrend moves. I have used the analogy that the zigs and zags of stocks are typically much better defined than those for key commodities in strong trends. The other asset class that tends to show such “zagless” strong trends at times is currencies. This can easily be seen in the yen’s USD/JPY cross rate upward move. The euro is also showing a weakening trend, where the EUR/USD downward move has been accelerating as deposit rates at the ECB have sunk further into negative territory.

Strong declines in commodity prices signify a supply-demand imbalance. You can’t quickly shut off supply, as there are many already-spent budgets and projects that need to be completed, so weakening demand can carry the oil price much further. I think this oil situation has little to do with the U.S. and much more to do with Europe and China, much the same way in which commodity-price weakness in 1997-1998 was due to the Asian Crisis and not U.S. demand. How low can the oil price go? [..] we know that the cash cost of shale oil is about $60 per barrel, varying among different producers, and that historically, commodity producers have been known to produce their respective commodities at a loss to keep personnel and equipment going, as well a service debts that have financed their recent expansion. In that regard, it would be interesting to note that energy junk bonds comprise 16% of the junk-bond market, and their issuance is up 148% to $211 billion according to Fitch. So, yes, I think the oil price can decline below $60.

2015 will be a bloody year for the shale industry. Money looks certain to stop flowing in, and then reality fills the freed up space.

• Drilling Slowdown on Sub-$80 Oil Creeps Into Biggest US Fields (Bloomberg)

The slowdown in the U.S. oil-drilling boom spread to two of the nation’s largest fields this week. The Permian Basin of Texas and New Mexico, the country’s biggest oil play, lost four rigs targeting crude, dropping to 558, Baker Hughes aid on its website today. Those in North Dakota’s Williston Basin, the third-largest and home to the Bakken shale formation, slid to the lowest level since August, according to the Houston-based field services company’s website. It was the first time in four weeks that oil rigs dropped in the Williston. Oil prices have tumbled 29% from this year’s peak, pausing a surge in drilling in U.S. shale plays that has propelled domestic crude production to the most in three decades and brought retail gasoline prices below $3 a gallon for the first time since 2010. Drillers from Apache to Hess have announced plans to cut their rig counts in some North American oil fields as crude futures trade under $80 a barrel.

U.S. benchmark West Texas Intermediate crude for January delivery gained 66 cents to settle at $76.51 a barrel on the New York Mercantile Exchange. “We’ll start to see really big drops early next year if oil prices stay the same,” James Williams, president of WTRG Economics in London, Arkansas, said by telephone. Nineteen shale regions in the U.S. are no longer profitable with oil at $75 a barrel, data compiled by Bloomberg New Energy Finance show. Those areas, including parts of the Eaglebine and Eagle Ford in Texas, pumped about 413,000 barrels a day, according to the latest data available from Drillinginfo and company presentations.

“If OPEC wants to reduce output, it only makes sense if other oil producers outside of OPEC do the same .. ”

• Russia to Cooperate With Saudis on Oil, Avoiding Output Cuts (Bloomberg)

Russia said it’s willing to cooperate with Saudi Arabia on the oil market, while avoiding a commitment to limit output to reverse plunging prices. The two countries also sought to overcome differences on Syria during the first ever talks in Moscow between their foreign ministers, marking a thawing of ties between the world’s two biggest oil exporters. Oil has collapsed into a bear market this year as the U.S. pumps crude at the fastest rate in more than three decades and demand shows signs of weakening. Russia, which depends on oil and gas for about half its revenue, is on the brink of recession amid U.S. and European sanctions targeting its energy and financial industries.

Saudi Arabia and Russia, which together produce 25% of global oil, agreed the market “must be free of attempts to influence it for political and geopolitical reasons,” Russian Foreign Minister Sergei Lavrov said after the talks today. Where supply and demand are “artificially distorted,” oil exporters “have a right to take measures to correct these non-objective factors.” Lavrov and Saudi Arabian Foreign Minister Prince Saud Al-Faisal said in a joint statement that they’ll coordinate on “issues” affecting the energy and oil markets, without giving more detail. [..] “If OPEC wants to reduce output, it only makes sense if other oil producers outside of OPEC do the same,” said Elena Suponina, a Middle East expert and adviser to the director of Moscow’s Institute for Strategic Studies. “Otherwise you just lose market share.”

“Japan is going down for the count, China’s house of cards is truly collapsing, Europe is plunging into a triple dip and Wall Street’s spurious claim that 3% “escape velocity” has finally arrived in the US is soon to be discredited for the 5th year running.”

• Sell, Sell, Sell .. The Central Bank Madmen Are Raging (David Stockman)

The global financial system has come unglued. Everywhere the real world evidence points to cooling growth, faltering investment, slowing trade, vast excess industrial capacity, peak private debt, public fiscal exhaustion, currency wars, intensified politico-military conflict and an unprecedented disconnect between debt-saturated real economies and irrationally exuberant financial markets. Yet overnight two central banks promised what amounts to more monetary heroin and, presto, the S&P 500 index jerked up to 2070. That is, the robo-traders inflated the PE multiple for S&P’s basket of US-based global companies to a nose bleed 20X their reported LTM earnings. And those earnings surely embody a high water mark in a world where Japan is going down for the count, China’s house of cards is truly collapsing, Europe is plunging into a triple dip and Wall Street’s spurious claim that 3% “escape velocity” has finally arrived in the US is soon to be discredited for the 5th year running.

So it goes without saying that if “price discovery” actually existed in the Wall Street casino, the capitalization rate on these blatantly engineered earnings (i.e. inflated EPS owing to massive buybacks) would be decidedly less exuberant. In truth, nothing has changed about the precarious state of the world since yesterday. Except .. except the Great Bloviator at the ECB made another fatuous and undeliverable promise – this time that he would do whatever he “must to raise inflation and inflation expectations as fast as possible”; and, at nearly the same hour, the desperate comrades in Beijing administered another sharp poke in the eye to China’s savers by lowering the deposit rate to by 25 bps to 2.75%.

Let’s see. Can it possibly be true that European growth is faltering because it does not have enough inflation? Or that China’s fantastic borrowing and building boom is cooling rapidly because the People Bank of China (PBOC) has been too stingy? The answer is not on your life, of course. So why would stocks soar based on two overnight announcements that can not possibly alleviate Europe’s slide into recession or the collapse of China’s out-of-control investment and construction bubble?

There is no growth.

• What Record Stock Buybacks Say About Economic Growth (Zero Hedge)

For all the obfuscation surrounding the topic of stock buybacks and corporations returning record amounts of cash to their shareholders, the bottom line is as simple as it gets. This is what you are taught in CFO 101 class:

if you see organic growth opportunities for your business, or if you want to maintain the asset quality generating your cash flows, you invest in (either maintenance or growth) capex.
if there are no such opportunities, you return cash to investors (or, maybe spend a little on M&A unless you are Valeant in which case you spend everything and then much more).

That’s it. Well, based on this shocking chart from the FT’s John Authers, does it seem that America’s corporations – who are returning over a record 90% of Net Income to shareholders – are seeing (m)any growth opportunities?

The Chinese housing sector is in deep doodoo.

• Is China Building a Mortgage Bomb? (Bloomberg)

The first Chinese interest-rate cut in more than two years is a stark recognition that the world’s second-biggest economy is in trouble. After years of piling ever more public debt onto the national balance sheet, it makes sense to have the People’s Bank of China take the lead in propping up gross domestic product. Yet while today’s benchmark rate cut should help stabilize growth, the move also adds to worries about looser credit that could pose risks to the global economy. Case in point: mortgages. Earlier this year, Chinese officials took several stealthy steps aimed at stabilizing the property sector and bolstering GDP growth. The China Banking Regulatory Commission loosened lending policies. Even before cutting the one-year lending rate to 5.6% and the one-year deposit rate to 2.75% today, the central bank had cut payment ratios and mortgage rates, while prodding loan officers to ease up on their reluctance to approve borrowers without local household registrations.

Pilot programs for mortgage-backed securities and real-estate investment trusts got more support. Incentives were rolled out to encourage high-end buyers to upgrade properties. There’s good news and bad in all this. The good: It marks progress for President Xi Jinping’s efforts to recalibrate China’s growth engines. In highly developed economies like the U.S., the quest for homeownership feeds myriad growth ecosystems and offers the masses ways to leverage their equity for other financial pursuits. And China’s debt problems are in the public sphere, not among consumers. The bad: If ramped-up mortgage borrowing isn’t accompanied by bold and steady progress in modernizing the economy, China will merely be creating another giant asset bubble. “Expanding the underdeveloped mortgage market is not bad news,” says Diana Choyleva of Lombard Street Research. “But if China relies on household credit to power the economy and pulls back from much-needed financial reforms, the omens are not good.”

As I’ve said a hundred times.

• ‘China’s Economy Is Slowing Faster Than You Think’ (CNBC)

The Chinese economy is slowing even faster than indicated by the People’s Bank of China’s surprise interest rate cut on Friday, said Peter Baum, a former Asian sourcing executive. China has too much manufacturing capacity for current levels of global demand, which has not adequately recovered from the financial crisis, the COO and CFO of Essex Manufacturing told CNBC’s “Power Lunch” on Friday. “As an example, I was just back. We have plants that we run where they used to have 500, 1,000 workers. They’re down to 200,” Baum said.

Labor costs for factories are rising because working age Chinese have been educated and don’t want to toil in such positions, he said. At the same time, the managers must amortize the fixed costs of the facilities over lower productivity. On top of that, the Chinese renminbi has appreciated 25% since 2004, putting pressure on producers to raise prices, Baum said. Debt levels could be problematic because many Chinese factory owners plan to sell their property to developers if the business fails, but the real estate market is on the rocks, he said. “If real estate is tanking, if there’s no demand for manufacturing, somebody is carrying all the debt, whether it’s banks, whether it’s their shadow banking system,” Baum said.

Roach is more of a religious man, or I can’t explain the 7% limit. It’s as if he’s saying China can set its own growth level.

• China Cut Pegs Growth Floor At 7%, Says Stephen Roach (CNBC)

After unexpectedly cutting interest rates for the first time in two years, Chinese leaders have revealed their floor for economic growth is around 7%, said Stephen Roach, senior fellow at Yale’s Global Affairs Institute. The move also signals investors can expect further moves if China fears the growth rate will go appreciably below 7%, the former chairman of Morgan Stanley Asia said Friday on CNBC’s “Squawk Box.” In a surprise announcement Friday, the People’s Bank of China said it was cutting one-year benchmark lending rates by 40 basis points to 5.6%. It also lowered one-year benchmark deposit rates by 25 basis points. The changes take effect Saturday. The rate cut is seen as addressing slowing factory growth and a stalled property market, which have dragged down the broader economy.

China is addressing cyclical changes while also fixing big structural issues in its economy, something that no other economy is doing right now, Roach said. “There are headwinds associated with that when you try to shift the mix of economic growth from your hyper-growth sectors of investment—debt-intensive investments and exports—to services and internal private consumption,” he said. “There’s some slowing associated with that, and when that occurs in the context of much weaker external environment, which is obviously the case given what’s going on in the world, China’s got downside pressures to contend with,” Roach added. The hyperbole about China being an ever-ticking debt bomb stacked with excesses and nonperforming loans is based on emotion rather than empirical data, he said.

And China needs to keep up with the yen devaluation too.

• Yen Weakens to Seven-Year Low as Japan Will Vote on Abenomics (Bloomberg)

The yen slid to its lowest level in seven years versus the dollar after Japan’s Prime Minister Shinzo Abe called early elections seeking to renew his mandate for economic stimulus as the nation entered a recession. The 18-nation euro declined versus most of its 31 major peers as European Central Bank President Mario Draghi said officials “will do what we must” to raise inflation. The Swiss franc tested its cap versus the weakening shared currency as a central bank official vowed to defend it. The yen fell for a sixth week against the euro, the longest streak since December 2013, as the Bank of Japan warned inflation may slip below 1% before a consumer prices report Nov. 27.

“We have uncertainty on the political front and we have weaker domestic data combined with very aggressive policy coming from the central bank, all of which should be driving a weaker yen,” said Camilla Sutton, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. The yen tumbled 1.3% against the dollar this week in New York, touching 118.98 on Nov. 20, the weakest level since August 2007. The currency lost 0.2% versus the euro, which fell 1.2% to $1.2391 per dollar. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose a fifth week, adding 0.2% to close at the highest level since March 2009.

“By the end of this year or by the start of next year, without QE, the market is going down”.

• ‘We Are Living in an Aberrational World’ (Finanz und Wirtschaft)

The editor of the influential investment newsletter ‘The High-Tech Strategist’ warns of trouble in semiconductor stocks and spots bright investment opportunities in gold miners. It’s unchartered territory: For the first time since more than half a decade the global financial markets are supposed to live without the constant liquidity infusions of the Federal Reserve. Fred Hickey, the outspoken editor of the widely-read investing newsletter ‘The High-Tech Strategist’, says this won’t work well for long. “By the end of this year or by the start of next year, without QE, the market is going down”, says the sharply thinking contrarian. In his view, especially the outlook for semiconductor makers like Intel is gloomy. As protection against the upcoming crash he recommends investments in gold and in gold mining stocks.

Mr. Hickey, after the short setback in October the hunt for new records at the stock market is on once again. What’s your take on the current situation?
We are living in an aberrational world. It’s all driven by an orgy of money printing. All the major central banks are engaged in this. From the Federal Reserve in the United States to the ECB, to the Bank of England and the National Bank of Switzerland to the Bank of Japan and the People’s Bank of China. It’s been tried ever since there was money, but in thousands of years of history it has never worked. When the Roman empire was unraveling the Caesars would shave the silver from the coins in order to be able to make a lot more of them. And in Weimar Germany, Reichsbank president Rudolf Havenstein ran the printing presses day and night, seven days a week. And here we are now, repeating the same mistake.

Yet, the markets love cheap money. The S&P 500 just climbed to another record high this Monday.
I lean towards the school of Austrian economists and they tell you that you can’t get out of those things. As a reminder, I keep the following quote from the great Austrian economist Ludwig von Mises pinned to the bulletin board in my office: “The final outcome of credit expansion is general impoverishment”. Von Mises also warned that the boom can only last as long as the credit expansion progresses at an ever-accelerating pace. That’s why the Federal Reserve is unable to get out of this. Shortly after QE1 the stock market sold off 13% and the economy tanked. Then they did QE2 and when that ended the market sunk 16% in just a few weeks. That led to Operation Twist and that led to QE3, the biggest money printing operation of them all. Even before QE3 ended the markets started to take a dive and the Fed had to come to the rescue again. James Bullard of the St. Louis Fed came out and said that maybe they shouldn’t stop QE. That led to what they call the «Bullard Bounce» or «Bullard’s Charge». So they gave the green light to speculate once again. But fact of the matter is that money printing does not work.

Nevertheless, Fed chief Janet Yellen stopped QE3 at the end of October.
That’s why I expect things to fall apart in the market. I don’t know what’s going to happen between now and the year end because this is a seasonally strong period for stocks. Money managers who have been underperforming all year are under pressure to get into the stock market. And we might see what I call a «Run for the Roses» and the market gets to even more extreme levels. I don’t know how much longer this global money printing experiment can continue. But it sure feels to me that we’re nearing the day that it spins out of control. By the end of this year or by the start of next year without QE the market is going down and we will end up in chaos.

Another stillborn plan. In his latest speech, Draghi was poiting to the emphasis on confidence. His actions must make people feel confident. I guess that shows he doesn’t believe it himself.

• European Central Bank Has Begun Buying Asset-Backed Securities (Reuters)

The European Central Bank has started buying asset-backed securities, it said on Friday, in a move to encourage banks to lend and revive the economy. “Following publication of legal act on the implementation of the ABS purchase programme, the Eurosystem has started the purchases on 21/11/2014,” the ECB said on its Twitter feed. The program is one plank in a strategy which ECB chief Mario Draghi hopes will increase its balance sheet by up to €1 trillion. It already buys covered bonds, a secure form of debt often backed by property.

The ABS and covered bond programs will last for at least two years. The ECB will give a weekly updated on its purchases on its website around 1430 GMT on Mondays, as it is already doing with the covered bond purchases. If it falls short of this overall €1 trillion mark and fails to boost the economy significantly, pressure to print money to buy government bonds, also known as quantitative easing, will reach fever pitch. However, expectations among market experts for the program are muted. To limit its risk, the ECB will buy only the most secure part of such loans in the hope that others pile in behind it to buy riskier credit.

Excuse me, but what use is a stress test if banks can throw out false numbers and the test doesn’t detect them?

• RBS Admits Overstating Financial Strength In Stress Test (Guardian)

Royal Bank of Scotland has admitted it made a mistake that led to it overstating its financial strength to banking regulators. Shares in RBS tumbled by almost 3% at one point on Friday as investors digested the bank’s announcement that it is less able to withstand an economic crisis than previously thought. The bank, which is 80% owned by the British taxpayer, has still passed the stress test exercise designed by European banking regulators, but among UK banks it has the least margin for error. An RBS spokesperson said the stress tests were a “theoretical” exercise that had no impact on its most recent capital position. One in five European banks failed the stress tests that were published last month by the European Banking Authority. The tests were intended to prevent a rerun of the economic crisis, with banks required to show they had enough capital to withstand a series of economic shocks such as a sudden rise in unemployment, a sharp fall in house prices and decline in economic growth.

The banks were asked to model how a slide into recession imposing £20bn of losses would affect their common equity tier 1 ratio – a key measure of financial strength based on its earnings. Under Friday’s revised results, RBS has found that its capital position in a crisis would be weaker than it previously thought: it would have a common equity tier 1 ratio of 5.7%, scraping above the EBA pass rate of 5.5%, but significantly less comfortable than the 6.7% it reported last month. The revised results mean that RBS beat the threshold by the narrowest margin among UK banks: Lloyds came in at 6.2%, followed by Barclays at 7.1% and HSBC at 9.3%. RBS said that if it was repeating the stress-test exercise based on its latest earnings figures, it would have a stronger financial cushion. The bank said it had improved its CET 1 ratio by 220 basis points to 10.8% by 30 September, compared to 8.6% at the end of last year.

The mistake was discovered by officials at the Bank of England, who spotted an anomaly in RBS’s figures after the pan-European results were published in late October. Officials at Threadneedle Street contacted RBS, which amended the figures and filed the results to the EBA on Friday. No errors were uncovered at any other UK bank, although Deutsche Bank amended one of its figures shortly after the stress test results were published.

Investigating yourself. That always works fine.

• Bank Of England Investigates Staff Over Possible Auction Rigging (Reuters)

The Bank of England is investigating whether staff knew or even aided possible manipulation of auctions it held at the onset of the financial crisis to pump liquidity into the banking system, the Financial Times has reported. The newspaper said the formal inquiry began during the summer and the central bank asked the British lawyer who looked into the Bank’s role in a foreign exchange scandal to head the new investigation. “If the bank were conducting an investigation or review of any of its activities, as it does from time to time, it would be wholly inappropriate to provide a running commentary via the press,” a spokesman said. “I can tell you that no actions have been taken or are currently being contemplated against any employee of the bank.“ The FT, quoting people familiar with the situation, said the investigation would look into whether Bank of England money market auctions in late 2007 and early 2008 were rigged, and whether officials were party to any manipulation.

About 10 Bank staff have been interviewed as part of the inquiry and have been provided with defence lawyers at the expense of the Bank, the FT said. The report comes little more than a week after an investigation, headed by lawyer Anthony Grabiner and commissioned by the Bank’s oversight committee, found no evidence that any of its official had been involved in improper behaviour in relation to a foreign exchange trading scandal. The FT said Grabiner had been asked to conduct the new investigation. The Bank dismissed its chief foreign exchange dealer last week, saying it found information about serious misconduct but it stressed the case was unrelated to the foreign exchange scandal.

A dead model. Good riddance.

• The Impossible American Mall Business. ‘We Surrender’ (Bloomberg)

On a crisp Friday evening in late October, Shannon Rich, 33, is standing in a dying American mall. Three customers wander the aisles in a Sears the size of two football fields. The RadioShack is empty. A woman selling smartphone cases watches “Homeland” on a laptop. “It’s the quietest mall I’ve ever been to,” says Rich, who works for an education consulting firm and has been coming to the Steeplegate Mall in Concord, New Hampshire, since she was a kid. “It bums me out.” Built 24 years ago by a former subsidiary of Sears Holdings Corp., Steeplegate is one of about 300 U.S. malls facing a choice between re-invention and oblivion. Most are middle-market shopping centers being squeezed between big-box chains catering to low-income Americans and luxury malls lavishing white-glove service on One%ers.

It’s a time of reckoning for an industry that once expanded pell-mell across the landscape armed with the certainty that if you build it, they will come. Those days are over. Malls like Steeplegate either rethink themselves or disappear. This summer Rouse Properties a real estate investment trust with a long track record of turning around troubled properties, decided Steeplegate wasn’t salvageable and walked away. The mall is now in receivership. As management buys time by renting space to temporary shops selling Christmas stuff, employees fret that if the holiday shopping season goes badly, more stores will close. Should the mall lose one of its anchors – Sears, J.C. Penney and Bon-Ton Stores – the odds of survival lengthen. “Rouse is basically saying ‘We surrender,’” said Rich Moore, an analyst at RBC Capital Markets who has covered mall operators for more than 15 years. “If Rouse couldn’t make it work and that’s their specialty, then that’s a pretty tough sale to keep it as is.”

“Either you need to fix it, Mr. Dudley, or we need to get someone who will.”

• Dudley Defends New York Fed Supervision In Heated Senate Hearing (Bloomberg)

William C. Dudley came under attack today by U.S. senators, who accused the Federal Reserve Bank of New York president of being too cozy with big Wall Street banks. “I wouldn’t accept the premise that there’s been a long list of failures by the New York Fed since my tenure,” Dudley said in response to an assertion by Elizabeth Warren, a Massachusetts Democrat. “Is there a cultural problem at the New York Fed? I think the evidence suggests that there is,” Warren said. “Either you need to fix it, Mr. Dudley, or we need to get someone who will.” The hearing was prompted by allegations by a former New York Fed bank examiner, Carmen Segarra, who said her colleagues were too deferential to Goldman Sachs Group Inc., the Wall Street bank where Dudley was chief economist for a decade.

Segarra attended today’s hearing and later released a statement via a spokesman expressing disappointment that she was not given a chance to address the panel. “She looks forward to publicly testifying if and when the Senate moves forward with additional hearings,” said her spokesman, Jamie Diaferia, in an e-mail. Senators questioned Dudley, 61, on issues ranging from whether some banks are too big to regulate to the Fed’s role in overseeing their commodities businesses. Some of the criticism was pointed. Warren, a frequent critic of financial regulators, asked Dudley if he was “holding a mirror to your own behavior.”

Can this be solved without a default? Hard to see.

• Illinois $111 Billion Pension Deficit Fix Struck Down (Bloomberg)

Illinois will have to find a new way to fix the worst pension shortfall in the U.S. after a judge struck down a 2013 law that included raising the retirement age. Yesterday’s ruling that the pension changes would have violated the state’s constitution undoes a signature achievement of outgoing Democratic Governor Pat Quinn and hands responsibility for tackling the state’s $111 billion pension deficit to Republican businessman Bruce Rauner, who defeated him in the Nov. 4 election. State constitutions have been invoked elsewhere to try to prevent cuts to public pensions. In Rhode Island, unions settled with the state over pension cuts before their constitutional challenge could be put to the test. In municipal bankruptcy cases in Detroit and California, judges ruled that federal law overrode state bans on cutting pensions.

Illinois Attorney General Lisa Madigan, a Democrat, said she’ll appeal the ruling by Judge John Belz in Springfield and ask the state Supreme Court to fast-track the review. “Today’s ruling is the first step in a process that should ultimately be decided by the Illinois Supreme Court,” Rauner said yesterday. “It is my hope that the court will take up the case and rule as soon as possible. I look forward to working with the legislature to craft and implement effective, bipartisan pension reform.” Belz concluded that a 1970 constitutional provision barring cuts to public employee retirement benefits trumps the state’s claim that it has the power to trim future cost-of-living adjustments and delay retirement eligibility for some workers. “The court finds there is no police power or reserved sovereign power to diminish pension benefits,” he said, voiding the legislation in its entirety and permanently barring the state from enforcing any part of it.

Unfortunately, only for Windows computers.

• Click Here to See If You’re Under Surveillance (BW)

For more than two years, researchers and rights activists have tracked the proliferation and abuse of computer spyware that can watch people in their homes and intercept their e-mails. Now they’ve built a tool that can help the targets protect themselves. The free, downloadable software, called Detekt, searches computers for the presence of malicious programs that have been built to evade detection. The spyware ranges from government-grade products used by intelligence and police agencies to hacker staples known as RATs—remote administration tools. Detekt, which was developed by security researcher Claudio Guarnieri, is being released in a partnership with advocacy groups Amnesty International, Digitale Gesellschaft, the Electronic Frontier Foundation, and Privacy International.

Guarnieri says his tool finds hidden spy programs by seeking unique patterns on computers that indicate a specific malware is running. He warns users not to expect his program (which is available only for Windows machines) to find all spyware, and notes that the release of Detekt could spur malware developers to further cloak their code. The use of the programs—which can remotely turn on webcams and track keystrokes—gained attention as researchers increasingly found the spyware being used to target political activists and journalists. In Syria, dissidents have been attacked by malware delivered through fake documents sent via Skype. In Washington and London, Bahraini democracy activists received e-mails laced with what was identified as the German-made FinSpy Trojan.

In Ethiopia, another hacking tool made multiple attempts against employees of an independent media company, according to a probe by Guarnieri and security researchers Morgan Marquis-Boire, Bill Marczak, and John Scott-Railton. The new safeguard comes amid fresh reminders of pervasive electronic snooping around the globe. Just this week, London-based Privacy International published a 96-page report detailing surveillance capabilities of Central Asian republics and the companies that supply them.

Debt Rattle November 20 2014

Nov 202014

November 20, 2014 Posted by Raúl Ilargi Meijer at 12:26 pm Finance Tagged with: bad debt, climate, deflation, dishonesty, Fed, god, Growth, iron ore, oil, PMI, rates, yen 13 Responses »

Jack Delano Truck service station on US 1, NY Avenue, Washington DC Jun 1940

• Growth Isn’t God in Indonesia (Bloomberg)

• Federal Reserve In Easy Decision To End Stimulus (BBC)

• Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)

• The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)

• Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)

• Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)

• Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)

• China’s Factory Activity Stalls In November (CNBC)

• Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)

• The Yen Looks Like It’s Ready To Get Crushed (CNBC)

• BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)

• Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)

• Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)

• Eurozone PMI Falls To 16-Month Low In November (MarketWatch)

• French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)

• Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)

• Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)

• Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)

• Goldman Fires Staff For Alleged NY Fed Breach (FT)

• Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)

• New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

Is there still hope and sanity in the world?

• Growth Isn’t God in Indonesia (Bloomberg)

Joko Widodo’s rise from nowhere to Jakarta governor and then the presidential palace showed the wonders of Indonesia’s democracy. Now, he wants to democratize the economy as well, focusing as much on the quality of growth as the quantity. Sixteen years ago, Indonesia was cascading toward failed statehood. In 1998, as riots forced dictator Suharto from office, many wrote off the world’s fourth-most populous nation. Today, Indonesia is a stable economy growing modestly at 5%, with quite realistic hopes of more. There’s plenty for Widodo, known by his nickname “Jokowi,” to worry about, of course. Indonesia still ranks behind Egypt in corruption and near Ethiopia in ease-of-doing-business surveys. More than 40% of the nation’s 250 million people lives on less than $2 a day.

A dearth of decent roads makes it more cost-effective to ship goods to China than across the archipelago. Retrograde attitudes abound: to this day, female police recruits are subjected to humiliating virginity tests. But this week, Jokowi reminded us why Indonesia is a good-news story — one from which Asian peers could learn. His move to cut fuel subsidies, saving a cash-strapped nation more than $11 billion in its 2015 budget, showed gumption and cheered investors. Even more encouraging is a bold agenda focusing not just on faster growth, but better growth that’s felt among more than Jakarta elites. This might seem like an obvious focus in a region that’s home to a critical mass of the world’s extreme poor (those living on $1 or $2 a day).

But grand rhetoric about “inclusive growth” hasn’t even come close to meeting the reality on the ground. In India, for example, newish Prime Minister Narendra Modi boasts that he will return gross domestic product to the glory days of double-digit growth rates, as if the metric mattered more than what his government plans to do with the windfall. The “Cult of GDP,” the dated idea that booming growth lifts all boats, has long been decried by development economists like William Easterly. The closer growth gets to 10%, the more likely governments are to declare victory and grow complacent. In many cases rapid GDP growth masks serious economic cracks. In her recent book, “GDP: A Brief but Affectionate History,” Diane Coyle called the figure a “familiar piece of jargon that doesn’t actually mean much to most people.”

Janet Yellen lives in virtual reality.

• Federal Reserve In Easy Decision To End Stimulus (BBC)

Although the US Federal Reserve was worried about turmoil in emerging markets, the central bank reached an easy consensus to end its stimulus programme, its latest minutes reveal. Minutes from the central bank’s October meeting show officials were concerned about stock market fluctuations and weakness abroad. However, they worried that saying so could send the wrong message. Overall, officials were confident the US economy was on a strong footing. That is why they decided to end their stimulus programme – known as quantitative easing (QE) – in which the Fed bought bonds in order to keep long-term interest rates low and thus boost spending. “In their discussion of the asset purchase programme, members generally agreed … there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment,” read the minutes, referring to the decision to end QE. US markets reacted in a muted way to the news, with the Dow Jones briefly rising before falling once more into the red for the day.

However, to reassure markets that the Fed would not deviate from its set course, the central bank decided to keep its “considerable time” language in reference to when the Fed would raise its short term interest rate. That interest rate – known as the federal funds rate – has been at 0% since late 2008, when the Fed slashed rates in the wake of the financial crisis. Most observers expect that the bank will begin raising that rate in the middle of 2015, mostly in an effort to keep inflation in check as the US recovery gathers steam. However, US Fed chair Janet Yellen has sought to reassure market participants that the bank will not act in haste and remains willing to change its timeline should economic conditions deteriorate in the US. The minutes also show that the Fed is still concerned about possibly lower-than-expected inflation, particularly as oil prices continue to decline and wage growth remains sluggish.

They’re going to do it. Screw the real economy, it’s dead anyway.

• Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)

U.S. central bankers are weighing whether they should communicate more of their views about the probable pace of interest-rate increases after they lift off zero next year. “A number of participants thought that it could soon be helpful to clarify the committee’s likely approach” to the pace of increases, according to minutes of the Oct. 28-29 Federal Open Market Committee meeting released today in Washington. The discussion last month underscored how much officials will rely on forward guidance on the pace of tightening in the future. After bond purchases ended last month, guidance may be the most practical option left to assure investors that policy won’t become overly restrictive if officials decide to take a stand against inflation seen as too low. The pace of rate increases is “going to be slow until they are really convinced that inflation’s sustainably at target and the labor market’s in really, really good shape,” said Guy Berger, a U.S. economist at RBS Securities. “They are going to take their sweet time.”

The minutes showed that many FOMC participants last month felt the committee should stay on the lookout for signs that inflation expectations were declining. Declining expectations could herald an actual fall in prices. Such deflation does economic damage by encouraging consumers to delay spending in anticipation of lower prices in the future. The potency of the first rate increase could be diminished or increased, depending on what the FOMC says about how it views its subsequent moves, said Laura Rosner, U.S. economist at BNP Paribas SA in New York. “It isn’t just the timing of liftoff the Fed cares about, but the whole path of federal funds rate,” said Rosner, a former New York Fed staff member. “I think they do probably want to limit the extent of tightening that people expect, at least at the beginning.” While telegraphing the future rate path may be attractive to some officials, it may also be unpopular with those, such as Chair Janet Yellen, who recall the Fed’s experience in 2004 with language saying the pace of increases would be “measured.”

“Positioning for a deflationary boom is a binary event.”

• The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)

Deflation. And not just deflation, but a deflationary bust! At least, such is the goalseeked logic of Cornerstone Marco, which has released a bullish (no really) note titled the Coming Deflationary Boom in the U.S. In it the authors throw in the towel on the most conventional concept in modern economics, namely that for growth one needs stable inflation which in turn causes earnings growth and is low enough not to pressure multiples too high. Well, according to the BLS’ hedonic adjustments and courtesy of Japan’s epic exporting of deflation, inflation is nowhere to be seen (except if one eats pork or beef, or drinks milks), so it is time to give ye olde paragidm shift a try. The paradigm that the only thing more bullish for stocks than inflation, is deflation. To wit:

The concept of a deflationary boom is a controversial one in economics. Truth be told it will not work in every economy. Indeed, a prerequisite for this to unfold is an economy driven by consumers. In that sense, it does not get more consumer-centric than the US. The second, and necessary, condition calls for a major decline in commodity prices ideally compounded by a strong currency to provide the fuel for growth. In essence, a decline in commodity and import prices creates disposable income the same way the Fed Funds rate cuts used to a decade ago.

Positioning for a deflationary boom is a binary event. After all, “deflationary” implies that stocks levered to lower inflation will have a powerful tailwind, these are what we like to call early cyclicals such as consumer, transports and other similar segments. Meanwhile, the “boom” part of the story implies that segments levered to growth, US growth in this case, also find a tailwinds. This should help the beleaguered financials to a better year in 2015 and also provides support for sectors like technology and some of the industrials. As we see it, “deflation” is going to become the operative word on the street … that and PE expansion since they typically go hand in hand. As always, we shall see.

Indeed we shall. Then again the only thing we will see is how every time there is deflation somewhere in the world, one after another central bank somewhere will admit its only mandate is to keep stocks at record highs and inject a few trillion in risk-purchasing power into what was once called a market.

Wait till shale implodes, then we can talk again.

• Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine. “A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup, said in an e-mail.

“Undoubtedly some of the geopolitical changes will be momentous.” They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead. Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor.

“It drives economies around the world” and is located in some “usually very volatile places.” Benchmark oil prices in New York have dropped more than 30% during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.

Petrobras was aiming to be the world’s first trillion-dollar company. Now it’s the most indebted company in the world.

• Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)

Brazil’s Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once. PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a “comfort letter”. The stock price has dropped 87pc from the peak. Hopes of becoming the world’s first trillion dollar company have deflated brutally. What it still has is the debt. Moody’s has cut its credit rating to Baa1. This is still above junk but not by much. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA). Roughly $52bn of this has been raised on the global bond markets over the last five years from the likes of Fidelity, Pimco, and BlackRock.

Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging. The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story – for different reasons – in the Arctic ‘High North’, off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit. The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel.

“The oil majors could not even generate free cash flow when oil prices were averaging $100 ,” said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000. “They have been able to disguise this by drawing down legacy barrels, but they won’t be able to get away with this over the next five years. We think the break-even price for the whole industry is now over $100,” he said. A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March – and sold off a net $73bn of assets – to cover surging production costs. The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.

They’ve all invested for continuing huge growth numbers. And now growth is gone.

• Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)

Iron ore’s golden spending era is history. That’s the verdict of BHP Billiton, the world’s biggest mining company. BHP and rivals Rio Tinto and Vale are flooding the global iron ore market after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil. Now prices have slumped to the lowest in more than five years as surging supply coincides with a slowdown in China, the world’s biggest consumer. “Our company has been very clear that the time for massive expansions of iron ore are over,” BHP CEO Andrew Mackenzie told reporters today after a shareholder meeting in Adelaide, South Australia. While BHP is still increasing production, the company last approved spending on an iron ore expansion in 2011.

It’s shifting investment into copper and petroleum, he said Global seaborne output will exceed demand by 100 million metric tons this year from 16 million tons in 2013, HSBC said last month. Prices, which are trading around $70 a ton in China, may drop to below $60 a ton next year, according to Citigroup forecasts. “At these prices, we still have a very decent business,” Mackenzie said. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.” Investments in copper may help BHP seize on rising demand for energy in emerging economies. Demand from China, the biggest metals consumer, will be supported by electricity grid expansion and greater adoption of renewable energy sources, all of which require more copper wiring, according to Citigroup.

The prospects for an expansion of BHP’s Olympic Dam copper, gold and uranium mine in Australia are looking more promising after testing of new processing technology shows early signs of success, Mackenzie said. Olympic Dam in South Australia is the world’s largest uranium deposit and fourth-biggest copper deposit. BHP is pilot testing a heap leaching extraction process used in its copper mines in Chile. If the tests “are successful, and they are showing considerable promise, we will use this technology and phased expansions of the underground mine to further increase Olympic Dam’s output,” Mackeznie told the meeting. In 2012, BHP halted a proposed expansion of Olympic Dam, estimated by Deutsche Bank AG to cost $33 billion. Mackenzie was addressing the first annual meeting held in the state since the decision.

Flash PMI at zero growth.

• China’s Factory Activity Stalls In November (CNBC)

China’s factory activity stalled in November as output shrank for the first time in six months, a private survey showed on Thursday. The HSBC flash Purchasing Managers’ Index (PMI) for November clocked in at the breakeven level of 50.0 that separates expansion from contraction, compared with a Reuters estimate for 50.3 and following the 50.4 final reading in October. Overall, new orders picked up slightly but new export orders slowed markedly, dragging on activity. The factory output sub-index fell to 49.5, the first contraction since May.

The Australian dollar eased against the greenback on the news, trading at $0.8607. But shares in China and Hong Kong appear unaffected by the data. The reading is the latest evidence that the world’s second biggest economy continues to lose traction. Recent data on housing prices and foreign direct investments also missed forecasts. “China is slowing and we think it will continue to slow. A lot of it is structural, and in our view, growth will slow to about 4.5% over the next 10 years. We see some sectors that are very challenged; clearly real estate is one,” Robin Bew, MD of Economist Intelligence Unit, told CNBC.

“They keep reporting such a low number for so many years, there’s only one way it can go – up …”

• Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)

Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management. The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders. Nonperforming loans at Chinese banks jumped by the most since 2005 in the third quarter to 766.9 billion yuan ($125.3 billion), official statistics released earlier this month showed. The People’s Bank of China has injected 769.5 billion yuan into its banking system over the past two months to support an economy growing at the slowest pace in more than a decade.

“They keep reporting such a low number for so many years, there’s only one way it can go – up,” DAC co-founder Philip Groves said in an interview. “We’ve yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.” DAC manages about $400 million of its own and clients’ money onshore in China. It first bought Chinese bad loans in December 2001 from China Orient Asset Management, one of four asset management companies created by the government to buy, repackage and onsell soured debt, Groves said.

While China’s bad loan ratio is relatively small versus other countries in Asia – soured loans are equivalent to 1.16% of total advances compared with 3.88% in Vietnam and 0.86% in South Korea – their total is still in an order of magnitude greater than the funds raised by distressed investors, Groves said. There hasn’t been enough capital to soak up the nonperforming debt and much ends up being reabsorbed by the government, he said. That’s why distressed activity in China has been “sporadic” over the past 10 years and why some large investors aren’t participating. “It never became a market where you could put a billion dollars to work in a year,” Groves said. “But if the wave of bad debt comes, and there are things to buy, the money will follow.”

I’ve said it before, Japan is not going to be a nice place to be.

• The Yen Looks Like It’s Ready To Get Crushed (CNBC)

Japan has slipped back into recession, with the economy shrinking 1.6% in the third quarter, surprising economists who forecast it would grow 2%. The takeaway? Double down on the dollar versus the yen. How weak can the yen get? Forecasters are lowering their already bearish targets after the new disappointing economic data. “I’d expect another 20% drop next year, which would take us north of 140,” said Peter Boockvar of the Lindsey Group about the dollar-yen rate. The team at Capital Economics raised their forecast for dollar-yen to finish next year at 140 as well, up from 120 previously.

Those are bold calls, because it’s unusual for any currency to move more than 5% to 10% per year. Also, the yen has already tumbled 14% in the past 12 months and 19% the previous year, making it the worst-performing major currency against the dollar both years. But when it comes to the yen right now, it seems, no forecast is too bearish. “When I started in the business, dollar-yen was 230,” recalled David Rosenberg, chief economist and strategist at Gluskin Sheff. “For those that think this move is over, this is probably going to be a round trip, meaning that the dollar’s run-up against the yen has a lot further to go.”

Japan is a state of panic.

• BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)

If one were to look up the definition of hypocrisy, the image of BoJ head Kuroda should be front-and-center. Having tripled-down on his money-printing and ETF-buying largesse just last week, he came out swinging last night at the government’s fiscal irresponsibility blasting Abe’s policies by saying Japan’s fiscal health “is the responsibility of parliament and the government, not an issue for the central bank to be held responsible for.” Aside from the fact that he is directly monetizing all JGB issuance – thus enabling Abe’s arrogant fiscal stimulus plan (by issuing 30Y and 40Y debt), Bloomberg notes that “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ.” The world has truly gone mad. Seemingly paying the same lip-service as Bernanke and Yellen in the US and Draghi in Europe, BoJ’s Haruhiko Kuroda is carefully positioning the blame for lack of growth and economic chaos on the government’s lack of growth-oriented policies… and not the central bank’s enabling experiments… (via Bloomberg):

Bank of Japan chief Haruhiko Kuroda emphasized the onus is on the government to strengthen its finances after PM Shinzo Abe postponed a sales-tax hike and outlined plans to boost fiscal stimulus. “It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said when asked about risks to Japan’s fiscal health. The BOJ’s job is to achieve its inflation target, he said at a press conference in Tokyo. Kuroda’s repeated comments at a press conference today on the importance of fiscal discipline indicate the governor is unhappy and may signal a change in strategy, said Credit Suisse economist Hiromichi Shirakawa. “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ,” said Shirakawa, a former BOJ official. “This is true, but he used to highlight that the BOJ and the government were working together. Abe might have created an enemy by postponing the sales-tax hike.”

This is how you expose the madness in all those nonsensical plans and targets.

• Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)

The U.K. government needs to make radical changes to halt the slide in export growth, the head of British Chambers of Commerce told CNBC. “Exports are tailing off, the rate of growth is tailing off — it’s the one part of the economy we are failing on,” BCC’s Director- General John Longworth told CNBC Europe’s “Squawk Box” on Thursday. “They always say that the definition of madness is carrying on doing the same thing as before and expecting a different result. We need to do something radically different as a country.” His comments come as the BCC published its third-quarter Trade Confidence Index on Thursday. The survey, carried out with delivery company DHL Express, measures U.K. exporting activity and business confidence of more than 2,300 exporting firms.

It found that in the latest quarter, fewer exporters reported increased sales: 29% of exporters stated that sales had increased in the third quarter of 2014, a sharp drop from 47% in the second quarter. Of those exporters no longer seeing an increase in export sales, most said that sales have remained consistent. “There has a slowdown in the U.K.’s export potential because of the slowdown global economic circumstances,” Longworth said, or government export targets would be missed. The U.K. Prime Minister David Cameron said in his 2012 budget that he wanted the U.K. to double exports to £1 trillion ($1.5 trillion) by 2020. In order to achieve that, however, Longworth said the U.K. would have to see export growth of nearly 11% year-on-year growth every year. “So far since the beginning of the recovery in 2010, the total growth in those years has been 14%. So we’ve got a real issue and unless we do something different we’re not going to hit those targets.”

And so must Italy, Greece, and many others. Let the people debate it, and give them alll the information, not just choice bits.

• Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)

Michael Pettis has a very interesting article on the Spanish news site ABC regarding a possible default of Spain and the eventual breakup of the eurozone. [..] What follows is my heavily modified translation of key portions of Pettis’ article after reading both of the above translations.

In the Panic of 1837, two-thirds of the US, including several of the richest states, suspended payment of external debt. The United States survived. If the European Union is to survive, it will have to find a solution to the European debt. The more hope instead of action, the more likely there’s a permanent breakdown of the euro and the European Union. In a gesture more of faith than economic or historical data, Madrid assures us that with the right reforms, it will eventually be able to get out of debt. Other countries in debt crises have made the same promise, but the promise is rarely fulfilled. Excessive debt itself impedes growth. Even without the straitjacket of the euro, Spain probably cannot afford its debt. Even those who are against debt cancellation recognize that the only thing that shielded Germany from a Spanish default was the European Central Bank.

Despite their obnoxious policies, far-right parties across Europe flourish more than ever because the ECB protects the euro and European banks at enormous costs for the working and middle classes. These extremists exploit the refusal of European leaders to acknowledge their errors. The longer the economic crisis, greater their chances of winning, and then comes an end to Europe. The only thing that prevented a suspension of payments by Spain and other countries was the promise of the European Central Bank in 2012 to do “whatever it takes” to protect the euro. But debt continues to grow faster than GDP in Europe, and the ECB load increases inexorably month after month. There will come a time when rising debt and a weakening of the German economy will jeopardize the credibility of the guarantee of the ECB (which will be useless), little by little at first, and then suddenly later. In a matter of months Spain will suspend payments.

For now, with debt settlement postponed, German banks strengthen capital to protect themselves from bankruptcy that many predict. Berlin is playing the same game as Washington during the crisis in Latin America in the 1980s. Then US banks actively strengthened their capital, mainly at the covert expense of ordinary Americans, while insisting that Latin American countries needed further reforms and no debt forgiveness. However, multiple reforms led to extremely high rates of unemployment and enormous social upheaval throughout Latin America. From 1987 to 1988, when US banks finally had enough capital, Washington officially recognized that full payment of the debt in 1990 was impossible and forgave the debt of Mexico. In the years following, US banks forgave almost the entire debt of other Latin American countries.

It’s getting painful. Stop the experiment, it’s failed beyond repair.

• Eurozone PMI Falls To 16-Month Low In November (MarketWatch)

Activity in the eurozone’s private sector slowed in November, according to surveys of purchasing managers, an indication the currency area’s economy will continue to grow weakly, if at all, in the final quarter of the year. The surveys also found that businesses again cut their prices in the face of weak demand, a development that will concern the European Central Bank, which is struggling to raise the currency area’s inflation rate from the very low level it has settled at for more than a year. Data firm Markit on Thursday said its composite purchasing managers index – a measure of activity in the manufacturing and services sectors in the currency bloc – fell to 51.4 from 52.1 in October, reaching a 16-month low. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.

Preliminary results from Markit’s survey of 5,000 manufacturers and service providers also showed that a significant pickup in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged. The surveys also found that businesses continued to cut their prices, although at a slightly less aggressive pace. “The deteriorating trend in the surveys will add to pressure for the ECB to do more to boost the economy without waiting to gauge the effectiveness of previously announced initiatives,” said Chris Williamson, chief economist at Markit.

France toast.

• French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)

French manufacturing shrank more than analysts forecast in November and demand fell, signaling that an economic rebound seen in the third quarter might be short lived. A Purchasing Managers Index fell to 47.6, the lowest in three months, from 48.5 in October, London-based Markit Economics said today. That’s below the 50-point mark that divides expansion from contraction and compares with the median forecast of 48.8 in a Bloomberg News survey. A separate index showed services also contracted, while new business across both industries fell the most in 17 months. The euro area’s second-largest economy has barely grown in three years and recent data suggests that 2014 will be little different. With unemployment near a record and the budget deficit widening, President Francois Hollande is under pressure to deliver on his promises of business-friendly reforms.

“The continued softness in private-sector activity signaled by the PMIs suggests an ongoing drag on growth during the fourth quarter,” said Jack Kennedy, senior economist at Markit. “Another round of job shedding by companies during November meanwhile provides little hope of bringing down the high unemployment rate.” An index of services activity rose to 48.8 this month from 48.3 in October, while a composite gauge for the whole economy increased to 48.4 from 48.2, according to today’s report. Employment across both manufacturing and services fell for 13th month, though the rate of decline slowed compared with the previous month. The French economy grew 0.3% in the three months through September as a jump in public spending offset a fourth quarterly decline in investment. The unemployment rate stood at 10.5% in September, more than double than Germany’s 5%, according to Eurostat. Hollande, whose popularity is among the lowest ever registered for a French president, has said he won’t run for a second term if he is unable to bring down joblessness.

Please, let’s have some violent infighting in Brussels.

• Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)

In Luxembourg, corporate income taxes are as low as 1% for some companies. An average worker in Germany with a salary of €40,000 ($50,000) who doesn’t joint file with a spouse has to pay about €8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay €400. But some companies have even managed to finagle a tax rate of 0.1%, which would amount to a paltry €40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts. That’s why it came across as obscene to many when Juncker defended Luxembourg’s tax arrangements on Wednesday as “legal”. They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis – that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes.

But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries’ national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU’s interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg’s neighbors of tax money, is supposed to be the main face representing the EU. It’s also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future.

Kudos Crapo. Let’s cut the crap, not reintroduce it.

• Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)

A controversial housing-finance proposal quickly came under fire during a Wednesday Capitol Hill hearing, with a top committee Republican questioning whether it’s a good idea to allow federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to back mortgages with very low down payments. “I’m troubled,” said Idaho Sen. Mike Crapo, the leading Republican member of the Senate Banking, Housing and Urban Affairs Committee, by a plan from the Federal Housing Finance Agency to enable Fannie and Freddie to buy mortgages with down payments as low as 3%. “After the problems we’ve seen” it could be risky for Fannie and Freddie to buy loans when borrowers have little equity, Crapo said.

In response, Mel Watt, who became FHFA’s director in January and was the sole witness at the agency-oversight hearing, told senators that mortgages with low down payments will require insurance, and that borrowers will be required to have relatively strong credit profiles otherwise. He added that FHFA will provide more details in December about the types of borrowers who would be eligible for such mortgages. “We are not making credit available to people that we cannot reasonably predict, with a high degree of certainty,” will make their mortgage payments, Watt said. Decisions over who can qualify for loans bought by Fannie and Freddie can have a large impact on the housing market. Together Fannie and Freddie back about half of new U.S. mortgages. The FHFA must carefully craft rules that support the housing market’s somewhat erratic recovery without creating too much risk.

This could make plenty waves, it’s a high stakes game.

• Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)

The explosion of brokers plowing into the lucrative junk-bond underwriting business may be fading. The number of firms managing U.S. high-yield bond sales isn’t growing for the first year since 2008, according to data compiled by Bloomberg. The ranks will likely thin in upcoming years as yields rise, making it more expensive for speculative-grade companies to borrow, according to Charles Peabody, a banking analyst at research firm Portales Partnersin New York. “You’re going to see fewer and fewer deals,” he said in a telephone interview. “Underwriting volumes are probably going to decline from here and you’re going to see more of a consolidation or exodus.” So far, the decline has been small, with 87 firms managing high-yield bond sales this year, down from the record 92 in the same period in 2013, Bloomberg data show.

The number of underwriters is still about twice as many as in 2009, when a slew of bankers founded their own firms to grab business from Wall Street firms that were shrinking as the credit crisis caused trillions of dollars of losses and writedowns. The new firms sought to win assignments managing smaller deals that bigger banks didn’t have the appetite for anymore. Five years later, the scene is changing. The least-creditworthy companies have borrowed record amounts of debt, spurred by central-bank stimulus that pushed borrowing costs to all-time lows. Now, the Federal Reserve is preparing to raise rates and junk-bond buyers are getting jittery.

The notes have declined 1.7% since the end of August as oil prices plunged, eroding the value of debt sold by speculative-grade energy companies, Bank of America Merrill Lynch index data show. While junk-bond sales are still on track for a new record this year, issuance has been choppy, with deals being canceled one week and then a flood of sales going through the next. For the past few years, high-yield underwriting has been a bright spot for banks, especially compared with flagging trading revenues. Speculative-grade companies have sold $1.2 trillion of dollar-denominated debt since the end of 2010 to lock in historically low borrowing costs. That’s also meant there have been a swelling number of firms elbowing each other out of the way for a chance to manage those deals, vying for fees that have been almost three times as much as those on higher-rated deals.

Pot and kettle.

• Goldman Fires Staff For Alleged NY Fed Breach (FT)

Goldman Sachs has fired an investment banker who allegedly accessed confidential information from the Federal Reserve Bank of New York, his former employer. Goldman said it had fired Rohit Bansal, a junior employee, in September and then fired his supervisor Joe Jiampietro, a better-known senior banker in the financial institutions group, which advises other banks. Mr Jiampietro was himself a former government official – a top adviser to Sheila Bair when she was chairman of the Federal Deposit Insurance Corporation. The New York Fed said: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”

The news, first reported by the New York Times, comes ahead of a congressional hearing on Friday that is examining whether there is too “cosy” a relationship between regulators and banks. Goldman has been nicknamed “Government Sachs” as the epitome of the “revolving door” between government and banking. Several of its employees formerly worked at government agencies, including the Fed and US Treasury. Hank Paulson, Goldman’s former chief executive, left the bank to become US Treasury secretary under President George W. Bush. On Friday, the Senate banking committee is due to examine allegations from a former New York Fed examiner, who says that she was fired because her bosses wanted her to water down criticism of Goldman. Bill Dudley, president of the New York Fed and himself a former Goldman employee, is due to testify.

A little skimpy perhaps, but who would doubt the premise?

• Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)

How do you tell if a group of bankers is dishonest? Simply by getting them all to toss a coin. That may not seem like in-depth research, but it is the basis of an academic paper published in Nature magazine this week, which investigates whether the financial sector’s culture encourages dishonesty – and concludes that it does. The academics from the University of Zurich used a sample of 128 employees of a large bank, and split them into two groups. The first set of bankers were primed to start thinking about their job, with questions such as “what is your function at this bank?”. They were then asked to toss a coin 10 times, in private, knowing which outcome would earn them $20 a flip. They then had to report their results online to claim any winnings. Unsurprisingly perhaps, there was cheating – with the percentage of winning tosses coming in at an incredibly fortunate 58.2% (although the research omitted to say how many bankers also trousered the coin).

Meanwhile, the second group completed a survey about their wellbeing and everyday life, that did not include questions relating to their professional life. They then performed the coin-flipping task, which threw up a quite astonishing finding: these bankers proved honest. Identical exercises in other industries did not produce the same skewing in results when participants were primed to start thinking about their work. The research does not reveal which institution took part in the survey, presumably to avoid it suing the authors for unearthing some decent behaviour among the cheating. “The effect induced by the treatment could be attributable to several causes,” the authors muse, “including the competitiveness expected from bank employees, the exposure to competitive bonus schemes, the beliefs about what other employees would do in the same situation or the salience of money in the questionnaire.”

Anti-tax rant. Simon Black knows quite a bit about moving abroad.

• New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

This past month, a real-life guild of thieves was formed. With 51 governments pledging their support to each other for the protection of their ignoble craft of theft. And another 30 pledging to join by 2018. From day one, governments have been pilfering their citizens’ assets through taxation, claiming a monopoly on thievery. From the largest institution to the pettiest pickpocket, anyone else who tries to engage in theft is severely punished, as governments work to protect their exclusive right to steal. Frighteningly, they do this all out in the open, believing that they actually have a moral right to commit theft. You can see this delusion in the US government’s claims that last year they “lost out” on $337 billion from people avoiding taxes. As if they have some moral claim to the money they’d failed to pilfer. Nonetheless, they use this claim to justify actively hunting down and penalizing anyone who takes action to avoid being stolen from.

The ones that are doing this are the bankrupt countries, and the deeper they slide into debt, the more desperate they become. Which is why these broke governments are now joining forces, pledging to to collect and share information amongst themselves about citizens’ bank accounts, taxes, assets and income outside local tax jurisdictions. Basically – I’ll help you steal from your citizens if you help me steal from mine. Both the punishment and the likelihood of getting caught for tax evasion are growing. Don’t even bother trying. However that doesn’t mean that you have no choice but to sit there and let your self be stolen from. While there are still ways of legally reducing your tax burden from within a country, your best option is to move and diversify. Diversification is key, because if you have all your eggs in one bankrupt basket, you are really taking on extraordinary risk. Moving some assets abroad can legitimately reduce some of this risk. And an even greater strategy is considering moving yourself.

Debt Rattle October 3 2014

Oct 032014

October 3, 2014 Posted by Raúl Ilargi Meijer at 1:44 pm Finance Tagged with: Draghi, ebola, ECB, Fed, JPMorgan, Noyer, yen 6 Responses »

Dorothea Lange Negro women near Earle, Arkansas July 1936

Hi, Ilargi here. As per today, October 3, I’m going to make some changes I’ve been thinking about for a while, for a number of reasons. That is, the Daily Links that used to be in this space will now become part of a daily separate post, entitled Debt Rattle +date (to be found below where all posts are, at about 8am ET every day), which will also include the quotes from these same links, which used to be below our own daily essays. The latter will now stand on themselves, and also be separate posts. So the only change for you is that to get to the links, you will need to execute one extra click, but then you get everything I read everyday presented in one go.

If you think this is the worst idea ever, or if you think it’s great, please do let me know at ilargi •AT• theautomaticearth •DOT• com. And thanks for your support. Talking of which: please check our donate box, top of the left hand column, below the ad, and donate what you can. This site runs well below the poverty line these days, and it shouldn’t. I want to bring back a lot more Nicole Foss here, but she does have to make a living.

Yours, Raúl Ilargi Meijer

• Albert Edwards Says Watch Japanese Yen and Be Very Afraid (Bloomberg)	• “When Bad News Becomes Bad News Again”: Albert Edwards (Zero Hedge)
• Japanese Stocks Have Crashed Over 1000 Points Since Friday (Zero Hedge)	• Yen’s Steepest Decline in 20 Months Spreads Unease in Japan (Bloomberg)
• Emerging Stocks Pummeled as Weak Yen Boosts Japan (Bloomberg)	• Japan Inc. Begins To Turn Against The Weak Yen (MarketWatch)
• European Stocks Plunge Most In 16 Months As Draghi Disappoints (Zero Hedge)	• Eurozone Private-Sector Growth Slows More Sharply (MarketWatch)
• Draghi Keeps QE Herd Waiting With Stimulus Goal Shrouded (Bloomberg)	• Mario Draghi Stung By Austerity Critics As Naples Hit By Protests (Guardian)
• Mario Draghi’s QE: Too Little For Markets, Too Much For Germany (AEP)	• France’s Noyer Is Third ECB Dissenter Against ABS Buying Plan (Bloomberg)
• Bank of England To Hike Rates Before Fed But At Slower Pace: Goldman (CNBC)	• China Debt Fix Is ‘Short-Term Pain, Long-Term Gain’ (CNBC)
• Oil Heads To Bear Market As Saudis Signal Price War (CNBC)	• JP Morgan: 76 Million Households Hit In Largest Ever Data Breach (Guardian)
• Is the New York Fed a Pushover for Big Banks? Dudley Fires Back (Bloomberg)	• How to Collect Argentina Bond Payment Is An Unsolved Riddle (Bloomberg)
• Humans Lose to Machines in $500 Billion-a-Day Bond Market (Bloomberg)	• Four People Close To US Ebola Patient Quarantined In Dallas (Reuters)
• NBC Cameraman Becomes 4th American To Test Positive For Ebola (Telegraph)	• Ebola ‘Could Become Airborne’: UN Warns Of ‘Nightmare Scenario’ (Telegraph)

“What happened in March 2009, when the S&P 500 touched 666, that was just a brief stop,” he said. “We will go lower than that.”

• Albert Edwards Says Watch Japanese Yen and Be Very Afraid (Bloomberg)

The Japanese yen goes into freefall. China’s fragile economy tips over the edge. A wave of profit-crushing deflation comes washing over the U.S. and Europe. Investors panic. That’s the view of perennial pessimist Albert Edwards. The London-based analyst and his team at investment bank Societe Generale SA have been ranked No. 1 for global strategy in surveys by Thomson Reuters Extel every year since 2007, even with a history of saying unpleasant things that few want to hear. “My role is to step back from the excessive enthusiasm that builds up in the market, and to just say, ‘This is wrong. This is going to go horribly wrong,’” the 53-year-old said by phone last week. The cliche is that when the U.S. sneezes, Japan catches a cold. Edwards says Japan is just as apt to lead the way.

When the Internet bubble burst in 2000, Japan’s tech-heavy Jasdaq index started to slide weeks before the Nasdaq. Japan also pioneered the deflation that now threatens the West. In 1997, it was a plunging yen that helped trigger Asia’s currency crisis. With the yen’s drop this week to a six-year low of 110 versus the dollar, Japan’s currency may once again be the first domino to fall in a chain of events that could be bad for everyone, according to Edwards. The U.S. stock market rally has been going for 66 months since the financial crisis bottomed in March 2009, a streak that’s already a year longer than average. A disconnect between buoyant equity prices and corporate profit growth in the low single-digits makes the situation especially precarious. “Almost 100% of investors think we’re at the start of a long recovery,” Edwards said.

“It’s already a long recovery. Forget about starting from here.” In an hour-long interview, during which he made the global economy sound like a game of Mousetrap, Edwards explained why investors should be watching Japan for clues about what may happen in the next big trouble-spot: China, whose economy is already headed for its slowest full-year growth since 1990. The argument was this: if the yen falls, it will take other Asian currencies down with it. Eventually China will be forced to weaken the yuan, by adjusting its trading range and expanding its money supply, to keep its exports competitive. That will squeeze developed economies that have yet to fully recover from the financial crisis.

[..] In 2006, when the S&P 500 was rising ever higher and then-Fed Chairman Alan Greenspan was being feted as “the Maestro,” Edwards called him “an economic war criminal.” Two years later financial markets were in crisis. Edwards’ aversion to equities stems from watching the experience of Japan, where the market took more than two decades to find a bottom after the 1989 bust. According to Edwards’ view, it’s a template for the extended bear market that will unfold in the U.S. and Europe, as stocks recover only to crash again and plumb ever-new lows. “What happened in March 2009, when the S&P 500 touched 666, that was just a brief stop,” he said. “We will go lower than that.” The structural bear market ends when equities are dirt cheap.”

“Investors are beginning to see how impotent the Fed and ECB’s efforts are to prevent deflation”.

But:

” … investors once again chose to tilt their ears towards the reassuring siren songs of the Central Bankers and away from the increasingly hysterical ramblings of the perma-bears and doomsayers.”

• “When Bad News Becomes Bad News Again”: Albert Edwards (Zero Hedge)

One of Albert Edwards’ trademark terms to define the New (and not so New) Normal, is the so-called Ice Age: a period of prolonged stagnation marked by pervasive deflation, deteriorating living conditions and a sliding stock market. It was to defeat the oncoming “Ice Age” that the global central banks embarked on a massive, coordinated (and largely failed) money printing monetary experiment some 6 years ago. Now, in what Albert Edwards dubs his “second most important chart for investors”, (as a reminder his “most important chart” is here), he warns that as a result of the central banks to offset broad deflationary headwinds, the Ice Age is once again just around the corner. From his most recent note, here is what Albert Edwards believes is the chilly chart that is the “second most important for investors.”

Inflation expectations in the US have just followed the eurozone by plunging lower. Until very recently, the Fed and the ECB had been quite successful at keeping inflation expectations in their normal range – this despite their clear failure to control actual inflation itself, which has consistently undershot expectations. Investors are beginning to realise that contrary to their confident actions and assurances, the Fed and the ECB have failed to prevent a dreaded replay of Japan’s deflationary template a decade earlier in the West. The Ice Age is once again about to exert its frosty embrace on markets as investors wake up to a new and colder reality. There were two key parts to our Ice Age thesis. First, that the West would drift ever closer to outright deflation, following Japan’s template a decade earlier. And second, financial markets would adjust in the same way as in Japan. Government bonds would re-rate in absolute and relative terms compared to equities, which would also de-rate in absolute terms.

This would take many economic cycles to play out. Previous US equity valuation bear markets have taken 4-6 recessions to complete; we’ve only had two thus far. Another associated element of the Ice Age we also saw in Japan is that with each cyclical upturn, equity investors have assumed with child-like innocence, that central banks have somehow ‘fixed’ the problem and we were back in a self-sustaining recovery. Those hopes would only be crushed as the next cyclical downturn took inflation, bond yields and equity valuations to new destructive lows. In the Ice Age, hope is the biggest enemy. Investors must pay close attention to the (second most important) chart below. Investors are beginning to see how impotent the Fed and ECB’s efforts are to prevent deflation. And as the scales lift from their eyes, equity, credit and other risk assets trading at extraordinary high valuations will take their next giant Ice Age stride towards the final denouement.

They may be impotent to prevent deflation, but they are quite omnipotent at printing money, either electronically or in paper format, and while so far they have focused on outside money, soon they will shift to “inside” money creation, also known as Bernanke’s helicopter paradrop. That will be the moment when the status quo finally uses the nuclear option at pervasive global deflation, leading to a collapse in sequential, or parallel, collapse in fiat. But even before that, there is something, that to the current generation of traders may be even scarier: a return to normalcy, or as Edwards calls it: bad news being bad news again, something which traders haven’t experienced in nearly 6 years.

… “amid the inevitable impending global economic and financial carnage, when people, like Queen Elizabeth ask, as she did in November 2008, why no-one saw this coming, tell them that many did. But just like in 2006, before the Great Recession, investors once again chose to tilt their ears towards the reassuring siren songs of the Central Bankers and away from the increasingly hysterical ramblings of the perma-bears and doomsayers.”

Let’s talk Japan, shall we? This is what you call deep trouble.

• Japanese Stocks Have Crashed Over 1000 Points Since Friday (Zero Hedge)

After ticking just above 110.00, USDJPY has been a one-way street lower and that means only one thing… Japanese stocks are cratering. From Friday’s highs, The Nikkei 225 has crashed over 1000 points (despite Abe’s promises yet again of more pension reform buying of stocks). Of note, perhaps, is that, Japanese investors bought a net $3.6 billion of foreign stocks last week – the most since January 2009 – perfectly top-ticking global equities… Well played Mrs. Watanabe.

What seemed so nice and benign, the weaker yen, threatens to turn into a nightmare.

• Yen’s Steepest Decline in 20 Months Spreads Unease in Japan (Bloomberg)

The yen’s steepest decline in 20 months is prompting concern in Japan that the central bank’s support for a weaker currency may hurt consumers and companies. Monetary authorities intervention to curb the slump is “possible,” according to Hirohisa Fujii, a former finance minister and member of the opposition party, after the currency’s steepest drop last month since January 2013. Some companies are suffering from the weaker yen, Nobuhide Minorikawa, Japan’s vice finance minister said this week, following comments from the nation’s economy minister on the risk of excessive gains or declines in the yen. The chorus of dissent against the Bank of Japan’s accommodative monetary policy, which has seen 60 trillion yen ($553 billion) to 70 trillion yen committed to annual asset purchases, is growing louder, as consumer prices remain depressed and growth is anemic. The weaker yen puts Japan at risk of recession, Kazumasa Iwata, deputy governor of the central bank until 2008, warned last month.

“The whole notion of devaluing the currency has been a bad policy,” Robert Sinche, a global strategist at Pierpont Securities, said by phone. “They think the yen is overvalued, but we’ve just had a very extreme move and I think their concern was that it could destabilize markets and destablize the economy.” Sinche forecasts the currency will slump to 120 yen per dollar by the end of 2015. The currency slumped 5.3% last month and is down 2.8% this year. The weaker yen is driving up the price of imported energy and hurting small companies, consumers, and Japan’s regional economies, Vice Finance Minister Minorikawa said in Tokyo yesterday. A weaker currency is positive for companies that have overseas business or rely on exports, he said. BOJ Governor Haruhiko Kuroda said last month, after the dollar rose above 109 yen, that he didn’t see any big problems with current movements in exchange rates.

Everybody will get hit by the higher dollar. Everybosy except Wall Street banks, that is.

• Emerging Stocks Pummeled as Weak Yen Boosts Japan (Bloomberg)

The yen’s slide to a six-year low is amplifying a rout in emerging-market stocks as investors shift their focus to Japanese companies with earnings in dollars, according to Morgan Stanley. The CHART OF THE DAY shows the MSCI Emerging Market Index tumbled 7.6% in September, the most since May 2012, led by China and Hong Kong. That compares with a 3.8% drop for the Topix Index in the period. The yen depreciated 5.1% versus the dollar to the weakest level since August 2008 last month, while a gauge tracking developing-nation currencies retreated 3.8%. “Asset allocation away from emerging markets was in part because Japan was back and that yen weakness is a positive catalyst,” Jonathan Garner, Hong Kong-based head of Asia and emerging-market strategy at Morgan Stanley, said by phone on Sept. 25.

“We don’t have a large export-industrial dollar earnings sector for EM, while Japan’s corporate-sector earnings responded positively to yen weakness.” Japan’s exporters are benefiting from a weaker currency, which boosts overseas income when repatriated, while developing-nation assets have come under pressure as the prospect for higher Federal Reserve interest rates dents demand for riskier assets. Toyota, the world’s biggest carmaker by market value which derives most of its revenue from the U.S., rallied 9% last month. Net inflows to U.S. exchange-traded funds that invest in emerging-markets tumbled 82% to $977.9 million in September, led by a 90% decline to China and Hong Kong, data compiled by Bloomberg show.

All the promised exports ain’t going anywhere either. As we predicted.

• Japan Inc. Begins To Turn Against The Weak Yen (MarketWatch)

When the Japanese yen began its long descent in late 2012 — around the time it became clear Shinzo Abe would be elected to another prime-ministership — the executives running Japan’s top corporations seemed to believe that the lower the currency, the better, regardless of all else. But since then, the yen has trekked steadily, inexorably downward against the dollar, with the greenback rising from around ¥78 two years ago to ¥110 earlier this week. And, at least according to a Nikkei news survey out Friday, some senior corporate officers are having second thoughts about the race to the bottom for forex. The survey covered responses from 65 chief financial officers at the largest Japanese corporations, an admittedly small sample. But it’s notable that more than half said they’d prefer the dollar to range between ¥100 and ¥104, a level last seen in early September.

The next most popular forex range was for a dollar just above ¥108 — but only just: A mere 3% called for a rate between ¥110 and ¥114 rate. And not a single CFO said they wanted to see the dollar breach above ¥115. Of course not all companies see the yen in the same way. While some follow the classic exporter model of making stuff at home to sell abroad, many corporations do not. Consider Honda: The cars it sells in North America, for instance, are generally made in North America, with the costs incurred in foreign currencies. Of course, it does eventually repatriate the profit, but its geographic diversity means there’s no special rush to do so. And of course, for companies that need to import materials — especially fuel — the falling yen is no good at all. Meanwhile, the Nikkei survey said roughly 20% of CFOs surveyed are looking at further forex hedging on the futures market to guard against any further dramatic currency moves.

The ECB spells infighting these days.

• European Stocks Plunge Most In 16 Months As Draghi Disappoints (Zero Hedge)

Broad European stocks plunged into the red for 2014 today as a rattled Mario Draghi disappointed a hungry-for-more risk market. Bloomberg’s BE500 index dropped its most since June 2013 to 2-month lows led by weakness in Italian banks. UK stocks underperformed (-3.6%) but Spain, Italy, and Portugal all tumbled 2-3%. The selling pressure interestingly stayed in stocks as bond spreads rose only modestly and EURUSD roundtripped to only a small rise from pre-ECB. Notably, US equities are cratering as they are so used to the pre-EU-close pump that did not happen.

And the eurozone is sick.

• Eurozone Private-Sector Growth Slows More Sharply (MarketWatch)

Activity in the eurozone’s private sector slowed more sharply in September than initially estimated, an indication that the currency area’s economy remains trapped in a period of low or no growth. Data firm Markit’s monthly composite purchasing managers index–a measure of activity in the currency bloc’s manufacturing and services sectors–fell to 52.0 from 52.5 in August, and was lowered from an initial estimate of 52.3. The average PMI for the third quarter was lower than in either of the two previous periods. But there are some parts of the economy that may be benefiting from low inflation for now. Figures released by the European Union’s statistics agency on Friday showed the volume of retail sales rose by 1.2% in August from July, the largest increase since Dec. 2009 and likely reflecting a pickup in real wages.

European Central Bank President Mario Draghi Thursday acknowledged that recent surveys have pointed to a “weakening in the euro area’s growth momentum,” but said the ECB governing council continues to expect a recovery in 2015. However, he warned those expectations could be disappointed, noting in particular that the economy’s second-quarter stagnation, and signs the third quarter wasn’t much better, “could dampen confidence and, in particular, private investment.” The governing council took no new action at its meeting Thursday, despite inflation weakening to a five-year low, signaling that it will wait to see if stimulus measures undertaken in recent months lift the eurozone’s weak economy. The surveys of 5,000 businesses across the currency area indicated that the annual rate of inflation is unlikely to quickly move back toward the central bank’s target of just below 2%, and may fall further below it. Manufacturers and service providers said they cut their prices again in September, and more steeply than in any month since July 2013.

Too much dissent. Draghi is stuck.

• Draghi Keeps QE Herd Waiting With Stimulus Goal Shrouded (Bloomberg)

Mario Draghi hasn’t moved any closer to full-blown quantitative easing. Focusing on plans to buy private debt as soon as this month to buoy the weakest euro-area inflation in five years, the European Central Bank president yesterday left the option of purchasing government bonds in his toolbox. He also backpedaled on indications that he could boost the central bank’s balance sheet by as much as €1 trillion ($1.3 trillion). Draghi’s reluctance to spell out how many assets officials might buy disappointed investors pushing him to go all-in. With the outlook for consumer prices worsening and the 18-nation economy closer to renewed recession, they’re pressuring him to honor his pledge to take further action if needed. “For a dove, that was hawkish,” said Lars Peter Lilleore, chief analyst at Nordea Markets in Copenhagen. “The herd of market participants pining for QE will have to wait a bit longer.”

The ECB will start buying covered bonds this month and asset-based securities this quarter and continue for at least two years, Draghi said yesterday after the 24-member Governing Council met in Naples, Italy. He also reiterated that he wants to “steer” the ECB’s assets toward early-2012 levels, when they were at more than €3 trillion, compared with €2 trillion currently. Yet he also said investors shouldn’t place too much emphasis on the precise size of the balance sheet. “Draghi seemed to back away from his previous commitment to expand the ECB’s balance sheet back to 2012 levels,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “What the markets were hoping for were some ballpark figures for what the ECB was likely to achieve.”

Spanish and Italian bonds dropped and the euro rose as the lack of a target conflicted with Draghi’s claim that policy makers are taking greater control over the level of stimulus they inject. “The door to quantitative easing didn’t widen or narrow,” said Hetal Mehta, a London-based economist at Legal & General Investment Management, which oversees 450 billion pounds ($726 billion). “The ECB is very much in a wait-and-see mode.” The refusal to lock in a number may reflect division among policy makers or a suspicion that a lack of available assets limits any swelling of stimulus, said Azad Zangana, European economist at Schroder Investment Management Ltd. in London.

Stuck on both sides, that is.

• Mario Draghi Stung By Austerity Critics As Naples Hit By Protests (Guardian)

Mario Draghi gave an impassioned defence of the European Central Bank’s role in the eurozone crisis as anti-austerity protestors took to the streets of Naples blaming the central bank for economic misery. The ECB’s president rejected the suggestion that the bank had been an agent of doom for the people of Italy and the wider economic bloc because of its role in pushing spending cuts and tax rises in some of the worst hit countries in the region. Speaking after the October meeting of the ECB’s governing council in Naples, he insisted the it had instead taken radical steps in recent months to breathe some life into the eurozone’s flagging economy. “I think the description of the ECB here as the guilty actor needs to be corrected. Go back and ask yourself how you were two and a half, three years ago. The financial system seemed on the verge of collapsing.” Draghi appeared to be stung as the bank became the subject of protests in his home country. Protestors held banners declaring “block the ECB” and “job insecurity, poverty, unemployment, speculation. Free us from the ECB.”

Reeling out a list of measures introduced by the ECB over recent months to combat weak growth and low inflation, Draghi said they were expected to have a “sizeable impact” on the eurozone economy. He added: “We have done a lot since June, quite unprecedented. We have decided a massive amount of measures now and we haven’t yet seen the impact on the economy.” Last month the ECB took markets by surprise, further cutting the main interest rate from 0.15% to 0.05%. Policymakers also made it more expensive for banks to park money with the ECB – cutting the deposit rate, which was already negative, from -0.1% to -0.2% in the hope of persuading banks to lend more to businesses and consumers. The ECB announced no new measures on Thursday, and failed to reveal the scale of an asset purchasing scheme announced last month. Investors were left disappointed, contributing to a large scale selloff of equities across Europe.

“Mr Draghi is facing a severe credibility problem” alright, but that’s not the whole story. He has a rock and a hard place problem.

• Mario Draghi’s QE: Too Little For Markets, Too Much For Germany (AEP)

European stocks have suffered the steepest one-day fall in 15 months after the European Central Bank retreated from pledges for a €1 trillion blitz of stimulus and failed to clarify the scale of quantitative easing. The sell-off came amid a mounting political storm in Europe as leading German economists and jurists reacted with fury to the ECB’s first asset purchases, denouncing the move as monetary debauchery, and threatening a blizzard of lawsuits in the German courts. “Our worst fears are being fulfilled,” said Hans Werner Sinn, head of Germany’s IFO Institute. The Milan bourse tumbled almost 4pc, led by sharp falls in Italian banks counting on fresh ECB liquidity. The Eurostoxx 600 index was off 2.4pc and the FTSE 100 fell 1.7pc to its lowest level this year, with effects spreading through global markets. The CRB index of commodities slumped to 2004 levels, before the onset of the resource boom, and Brent crude fell to a two-year low of $92.83 on rising Libyan supply and fears of a deepening industrial slowdown in China.

Mario Draghi, the ECB’s president, seemed unable to secure backing for far-reaching measures from Germany’s two ECB members or from the German finance ministry, forcing him to play down earlier hints for a €1 trillion boost to the ECB’s balance sheet. As he spoke inside a renaissance palace in Naples, riot police doused crowds of protesters on the street outside with water cannon. The city has become a political cauldron, with the highest “misery index” Europe. Youth unemployment in Italy’s Mezzogiorno is still rising, topping 56pc in the second quarter. Mr Draghi said the ECB would start to buy covered bonds and asset-backed securities (ABS) as soon as this month, but gave no concrete figure and deflected all questions on the scope of stimulus. “I wouldn’t want to emphasise the balance sheet size per se,” he said. Sovereign bond strategist Nicholas Spiro said the ECB was “backtracking” on earlier pledges and seemed to be losing confidence in its ability to halt deflation at all. “Mr Draghi is facing a severe credibility problem,” he said.

The central bankers of Germany, France and Austria are all against the ABS plan. That’s what you get when you want to buy junk loans.

• France’s Noyer Is Third ECB Dissenter Against ABS Buying Plan (Bloomberg)

France’s Christian Noyer joined European Central Bank policy makers from Germany and Austria in opposing a program to buy asset-backed securities, according to two euro-area officials. His dissent leaves President Mario Draghi facing a clash with policy makers from the region’s two largest economies, albeit for different reasons. While Noyer disapproved of the way the purchases will be conducted, Austrian central bank Governor Ewald Nowotny shared Bundesbank President Jens Weidmann’s view that the measure involves too much balance-sheet risk, said the people, who asked not to be identified because the talks are private.

Draghi unveiled details of the program yesterday, pledging to buy both covered bonds and ABS before the end of the year. He shied away from a definitive goal for the plan, saying total stimulus may fall short of the 1 trillion euros ($1.3 trillion) he had signaled in September. Noyer opposed the design of the program because it will exclude national central banks from its implementation, said the people. ECB policy is generally conducted in a decentralized way, with national institutions responsible for refinancing their banks and purchasing securities. In this case, the ECB has opted to involve outside brokers to buy ABS, the people said, even though the French central bank has a long-standing expertise in assessing the quality of ABS. It was the euro-area hub for valuing the assets until 2012, when it was replaced by a regional initiative.

How smart is this when the dollar is rising?

• Bank of England To Hike Rates Before Fed But At Slower Pace: Goldman (CNBC)

The Bank of England (BoE) will start to tighten the screws of monetary policy earlier than the Federal Reserve but will raise rates at a slower pace than its U.S. counterpart, according to Goldman Sachs. The BoE will begin raising interest rates in the first quarter of 2015, while the Fed will wait until the third quarter, Goldman Sachs economists led by Huw Pill wrote in a note on Friday. The U.K. central bank appears more hawkish than its U.S. counterpart, they said. “We expect U.K. rates to rise by around 75 basis points per year vs. 100-125 basis points per year in the U.S. [between 2015-2018],” Pill said. The difference in the speed of interest rate hikes comes down to the different cyclical positions of each economy. “Looking forward, we expect U.K. GDP (gross domestic product) growth and the pace of the decline in U.K. unemployment to moderate in the quarters ahead, both in absolute terms and relative to the U.S. All else equal, this would imply the need for a slower pace of tightening in the U.K.,” Pill said.

Britain’s economy grew 0.9% in the three months from April to June this year, the quickest increase since the third quarter of 2013. The U.S. economy, meanwhile, expanded at a 4.6% annual rate over the same period, its fastest pace in 2-1/2 years. Looking back over the past quarter-century, the BoE has typically tightened more slowly than the Fed, according to Goldman. On the basis of five tightening cycles for the U.K. and three for the U.S. over this period, the Fed has raised rates on average by 2.1 percentage points in the first year, while the BoE has raised rates by just 1.3 percentage points. One reason they have risen more gradually is that the U.K.’s private sector has been more highly leveraged compared with the U.S. In addition, the average duration of debt held by British households is shorter than their American counterparts.

China debt fix is desperate.

• China Debt Fix Is ‘Short-Term Pain, Long-Term Gain’ (CNBC)

China’s debt loads have long loomed as a serious economic risk, and while analysts say new plans to clean up local government borrowing will bring near-term pain, a longer-term fix may be in sight. “[The new plan] represents the first concrete step by the central government to clean up the debt problems at the local governments,” analysts at Bernstein Research said in a note Friday. Provincial governments’ debt, often issued via local government financing vehicles, or LGFVs, has worried economists for years. Outstanding debt climbed to around 17.9 trillion yuan ($2.92 trillion) by the end of the first half of 2013, according to the most recent national audit, from around 10.7 trillion in 2010. On Thursday, China’s State Council, its highest authority, set quotas on the amount of debt that local governments can issue, required it to be used for public projects rather than operational spending and tied debt levels to local officials’ performance reviews.

It also barred local governments from using LGFVs and state-owned enterprises (SOEs) to raise debt and from guaranteeing or covering the liabilities of financial institutions or local corporates. “It’s a tick in the right box,” said Freya Beamish, an economist at Lombard Street Research, noting it indicates Beijing is willing to accept slower growth as a step toward avoiding an “Armageddon” scenario over its debt. “While this may bring short-term pain in terms of slowing economic growth and accelerating credit losses at LGFVs, we think the reform will benefit the economy and the Chinese banking sector in the long term,” Bernstein said. It expects the reforms will weaken economic growth in debt-laden provinces as they incorporate existing and new debt into their budgets, as well as spurring an increase in the number of defaults among existing LGFV and local SOE debts.

Saudis are dumping. Couldn’t have anything to do with putting the squeeze on Putin?!

• Oil Heads To Bear Market As Saudis Signal Price War (CNBC)

Oil could continue its deep slide, possibly dipping into bear market territory, under new pressure from Saudi Arabia’s decision to defend market share, as opposed to cutting production to battle falling prices. A well-supplied oil market, helped by increased North American production and softer global demand as Europe’s economy falters and Chinese demand growth slows, has created a supply imbalance that has driven prices sharply lower. The Saudi move is counter to expectations that it would further cut its 9.6 million barrel-a-day production to bring back oil prices. West Texas Intermediate oil futures for November hit a 17-month low early Thursday, falling below the $90 mark for the first time since April 2013. That was a 16% decline from its June high. Brent, the international benchmark, fell to a 27-month low of $91.55 per barrel, before recovering at about $93 per barrel for November futures. Brent, at the low, was about 19% off its high. A weaker dollar helped lift oil off its lows.

Oil analysts expect oil to fall another couple%, which could take both WTI and Brent into bear market territory—a 20% decline from recent highs. “It’s both supply and demand. it’s basically the perfect storm that brought oil prices down,” said Fadel Gheit, Oppenheimer senior energy analyst. “You have plenty of supply which you never thought possible, and all of a sudden, demand is shrinking, China’s slowing down, Europe never recovered.” He said the fact that the Saudis are willing to play hardball with prices makes it difficult for other oil-based economies like Russia. Saudi Aramco, the state-run oil company, surprised markets Wednesday when it announced it would cut official prices for Asian customers in November. The cuts come as the Organization of Petroleum Exporting Countries was expected to be on course to cut back on production instead, to protect prices.

That’s a lot of people.

• JP Morgan: 76 Million Households Hit In Largest Ever Data Breach (Guardian)

JP Morgan Chase, one of the largest banks in the US, said on Thursday that a massive computer hack affected the accounts of 76 million households and about seven million small businesses, making it one of the largest of its kind ever discovered. The attack was under way for a month before it was discovered in July, and when it was disclosed in August, the bank estimated that about one million accounts had been compromised. But the latest information revealed on Thursday showed the attack was vastly more serious than earlier thought. The bank said financial information was not compromised and that there had been no breach of login information such as account or social security numbers, passwords or dates of birth. However names, email addresses, phone numbers and addresses of account holders were captured by hackers. “As of such date, the firm continues not to have seen any unusual customer fraud related to this incident,” the bank said in a regulatory filing. It said customers would not be liable for unauthorized transactions on their account.

JP Morgan, the largest bank in the country by assets, is working with the Federal Bureau of Investigation and the US secret service to determine the roots of the attack. The scale of the hack, one of the largest ever, comes after a series of massive data breaches at US institutions and follows in the wake of attacks on Target and Home Depot. In September, Home Depot confirmed its payment systems were breached in an attack that some estimated impacted 56 million payment cards. Last year’s attack on Target impacted 40 million payment cards and compromised the personal details of some 70 million people. But the JP Morgan hack is considerably more serious, as banks holds far more sensitive information than retailers. In August, Bloomberg reported that the attack on JP Morgan had been linked to Russian hackers who FBI sources said had been able to extract “gigabytes of sensitive data”.

Integrity!

• Is the New York Fed a Pushover for Big Banks? Dudley Fires Back (Bloomberg)

William C. Dudley, president of the Federal Reserve Bank of New York, defended his bank-supervision staff following allegations that they had been too deferential to large financial firms. “I completely stand behind the integrity and work of our supervision staff,” he said after a speech today in New York. “They are operating completely in the public interest.” Dudley’s remarks, his first addressing allegations of lax supervision aired last week by former employee Carmen Segarra, highlight the New York Fed’s difficulties in overcoming perceptions that it’s too close to Wall Street. “This is a zero-credibility era for big banks and their regulators,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington. As a result, stories like Segarra’s “have a lot of resonance regardless of their truth,” she added. Dudley turned voluntarily to the topic after getting no questions about it from the audience at New York University’s Stern School of Business.

He said there had been a “significant reorganization” following a report commissioned by the regional Fed bank, and that “improving supervision has been and remains an ongoing priority for me.” The 2009 report, by Columbia University Professor David Beim, made recommendations to improve bank supervision, including that Fed officials should seek to keep their distance and be more skeptical of the banks they oversee. Dudley’s comments follow reports last week on the radio program “This American Life” and ProPublica, a nonprofit news organization. The radio program broadcast excerpts of conversations it said were secretly recorded by Segarra, a former New York Fed bank examiner fired in 2012, with some of her colleagues and her supervisor. In a transcript of the broadcast, Segarra described how she felt that her Fed colleagues were afraid of Goldman Sachs and handled it with kid gloves.

Disgraceful.

• How to Collect Argentina Bond Payment Is An Unsolved Riddle (Bloomberg)

After announcing a plan to sidestep a U.S. court order that prevented Argentina from paying its bondholders, Economy Minister Axel Kicillof scoffed at the idea that it would be hard to pull off. “No one’s going to have to take a plane,” he told reporters Aug. 20. “These days even your gas and electricity bills can be paid by the Internet. We’re not going to have an influx of bond tourists coming to get paid.” Six weeks later, holders of the nation’s foreign-currency bonds still have no idea how the plan will actually enable them to get paid. While Argentina has deposited $161 million with a local bank in downtown Buenos Aires to make good on an interest payment due Sept. 30, the government hasn’t given bondholders any instructions on how they can go about collecting their cash, said Emso Partners, which owns Argentine notes.

“It’s a completely symbolic gesture designed to allow Argentina to continue to claim that it’s fulfilling its obligations to bondholders,” Patrick Esteruelas, an analyst at Emso, a New York-based hedge fund, said by telephone. “Without being able to secure the information and effectively confirm who it is that is the holder of the bond, you don’t have a verifiable mechanism to impart payment or collect payment.” Argentina’s attempt to honor its debt underscores how bondholders remain in limbo two months after the court order blocked a debt payment and caused the nation to default on July 30, its second in 13 years. The government, which has been entangled in a legal dispute with unpaid creditors from its $95 billion default in 2001, was barred from paying other bondholders until it settled with the so-called holdouts.

And everywhere else too.

• Humans Lose to Machines in $500 Billion-a-Day Bond Market (Bloomberg)

While investors traditionally negotiated prices for U.S. Treasuries by telephone, they’re increasingly turning to computer-based marketplaces for a range of price quotes from different dealers. Human traders are increasingly losing out to machines in the world’s biggest bond market. While investors traditionally negotiated prices for U.S. Treasuries by telephone, they’re increasingly turning to computer-based marketplaces for a range of price quotes from different dealers. A record 48% of trades in U.S. government debt have occurred on electronic platforms this year, up from 31% in 2012, according to a Greenwich Associates study released yesterday. Bond managers are looking for more efficient ways to determine values in a $12 trillion market as banks use less of their own money to opportunistically buy and sell, giving them less of an edge when they pitch their brokerage services. “Investment firms are much more focused on being able to prove they’re getting good execution than ever before,” said Kevin McPartland, head of research at Greenwich Associates.

“In Treasuries, the market seems ripe for electronic trading.” The trend is squeezing profits on Wall Street, where firms are already facing lower trading revenues in a sixth year of record Federal Reserve stimulus that’s suppressing yields and volatility. (Bloomberg LP, the parent company of Bloomberg News, and Tradeweb Markets LLC are the dominant providers of electronic systems for Treasuries trading, according to the Greenwich Associates study.) The biggest banks reduced their rates-trading balance sheets by almost one-third, or about $200 billion, since the 2010 peak, Credit Suisse Group AG analysts Ira Jersey and William Marshall wrote in a May report. While electronic trading systems may allow for faster price discovery, the trend may also discourage some investors from selling bigger chunks of less-traded securities out of concern they may move prices against themselves.

Too many hiccups in this case.

• Four People Close To US Ebola Patient Quarantined In Dallas (Reuters)

Four people close to the first person diagnosed with Ebola in the United States were quarantined in a Dallas apartment, where sheets and other items used by the man were sealed in plastic bags, as health officials widened their search for others who had direct or indirect contact with him. In Liberia, an American freelance television cameraman working for NBC News in Liberia has contracted Ebola, the fifth U.S. citizen known to be infected with the deadly virus that has killed at least 3,300 people in the current outbreak in West Africa. The 33-year-old man, whose name was not released, will be flown back to the United States for treatment, the network said on Thursday. Immediately after beginning to feel ill and discovering he was running a slight fever, the cameraman quarantined himself. He then went to a Doctors Without Borders treatment center and 12 hours later learned he tested positive for Ebola.

The entire NBC crew will fly back to the United States on a private charter plane and will place themselves under quarantine for 21 days, the maximum incubation period for Ebola. U.S. health officials said they were confident they could prevent the spread of Ebola in the United States after the first case was diagnosed this week on U.S. soil. Up to 100 people had direct or indirect contact with Thomas Eric Duncan, a Liberian citizen, and a handful were being monitored, said Dr. Thomas Frieden, director of the U.S. Centers for Disease Control and Prevention (CDC). None of those thought to have had contact with Duncan were showing symptoms of Ebola, Dallas County officials said at a news conference.

And counting.

• NBC Cameraman Becomes 4th American To Test Positive For Ebola (Telegraph)

An American freelance television cameraman has contracted Ebola in Liberia, becoming the fourth US national to be diagnosed with the deadly disease. He had been hired on Tuesday to work with NBC News chief medical editor Dr Nancy Snyderman covering the outbreak which has so far killed more than 3,000 people in West Africa. A statement on the news network’s website said; “The freelancer came down with symptoms on Wednesday, feeling tired and achy. As part of a routine temperature check he discovered he was running a slight fever. He immediately quarantined himself and sought medical advice.” He went to a Medecins Sans Frontieres treatment centre on Thursday and a positive result for Ebola came back 12 hours later. Mr Mukpo, who has been working in Liberia for three years, is the fourth American to contract Ebola in Liberia during the current outbreak. The others were Christian missionaries.

A slim chance for now, but …

• Ebola ‘Could Become Airborne’: UN Warns Of ‘Nightmare Scenario’ (Telegraph)

There is a ‘nightmare’ chance that the Ebola virus could become airborne if the epidemic is not brought under control fast enough, the chief of the UN’s Ebola mission has warned. Anthony Banbury, the Secretary General’s Special Representative, said that aid workers are racing against time to bring the epidemic under control, in case the Ebola virus mutates and becomes even harder to deal with. “The longer it moves around in human hosts in the virulent melting pot that is West Africa, the more chances increase that it could mutate,” he told the Telegraph. “It is a nightmare scenario [that it could become airborne], and unlikely, but it can’t be ruled out.” He admitted that the international community had been “a bit late” to respond to the epidemic, but that it was “not too late” and that aid workers needed to “hit [Ebola] hard” to rein in the deadly disease.

Mr Banbury was speaking shortly before the first Ebola diagnosis was made in the US on Tuesday evening. The man, who contracted Ebola in Liberia before flying to Dallas, Texas, is the first case to be diagnosed outside Africa, where the disease has already killed more than 3,000 people. The number of people infected with Ebola is doubling every 20 to 30 days, and the US Center for Disease Control and Prevention has forecast that there could be as many as 1.4m cases of Ebola by January, in the worst case scenario. More than 3,300 people have been killed by the disease this year. Mr Banbury, who has served in the UN since 1988, said that the epidemic was the worst disaster he had ever witnessed.

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