Jun 152016
 
 June 15, 2016  Posted by at 7:48 am Finance Tagged with: , , , , , , , ,  3 Responses »


Lewis Wickes Hine Workers stringing beans in J.S. Farrand Packing Co, Baltimore 1920

A Lost Decade? We Should Be So Lucky (Das)
NY Pension Fund Posts 0.19% Return In Fiscal Year (WGRZ)
The Typical American Couple Has Only $5,000 Saved For Retirement (MW)
Borrowing From ECB Shows Where Banks Are Most Vulnerable (BBG)
How Low Can Bond Yields Go? Lower (ZH)
China Devalues Yuan To Weakest Since Jan 2011 (ZH)
China Stocks Denied MSCI Entry In Blow To Xi’s Ambitions (BBG)
Fed Faces Battle To Escape World’s Low Interest Rate Grip (R.)
Jeff Gundlach Says ‘Central Banks Are Losing Control’ (R.)
London House Prices Up 14% In A Year (Ind.)
Let’s Not Sleepwalk Into Economic And Geopolitical Catastrophe (T.)
George Osborne: Vote For Brexit And Face £30 Billion Of Taxes And Cuts (G.)
Bookies Are Still Pretty Sure Brexit Isn’t Going to Happen (BBG)
The Law of Attraction (Dmitry Orlov)
Putting A Price On Nature Is Wrong (G.)
Avocado Shortage Fuels Crime Wave In New Zealand (G.)

“..Unfortunately, as Brazilian writer Paulo Coelho once observed, “Every time we repeat the same mistake, the price goes up.”

A Lost Decade? We Should Be So Lucky (Das)

A growing number of economists seem convinced that the U.S., European Union and China are all headed for a prolonged period of sluggish growth — secular stagnation, in the words of former Treasury Secretary Larry Summers. A close parallel would seem to be 1990s Japan. There, too, the bursting of debt-funded asset price bubbles gave way to multiple rounds of fiscal stimulus, massive monetary easing and rock-bottom interest rates. Rescue efforts stabilized conditions but couldn’t spark a sustainable recovery, leaving the economy mired in low growth, low inflation and high debt. In some ways, this outcome might not seem so terrible. (One visiting English politician dazzled by Tokyo’s Ginza noted that if this was a recession, he wanted one too.)

When Japan entered its downturn, however, the country had several advantages both internally and externally that nations today don’t. For many, a Japan-style slump may be the best-case scenario. First and foremost, at the onset of its crisis, Japan enjoyed modest levels of government debt – around 20% of GDP – as well as strong domestic savings and an abnormally high home bias in investment. Even now, around 90% of government bonds are held by Japanese buyers. This has allowed successive Japanese governments to run large budget deficits and finance their spending domestically, assisted by an accommodative central bank that’s kept the cost of servicing debt low. By contrast, many problem economies today suffer from high levels of government debt – around 80% to 100% of GDP – as well as total debt. China’s official government debt is lower, around 55% of GDP.

But that number doesn’t take into account borrowing by large banks and other state-owned enterprises, which is backed up to varying degrees by the government. Some countries also have low domestic savings and are reliant on foreign capital, limiting their ability to finance budget deficits.

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The gall: “Despite weak equity markets, the fund’s diversified portfolio and our investment team delivered a positive return..”

NY Pension Fund Posts 0.19% Return In Fiscal Year (WGRZ)

New York’s $178 billion pension fund posted a mere 0.19% return on investments for the fiscal year that ended March 31, the lowest return since 2009, Comptroller Thomas DiNapoli announced Monday. New York’s Common Retirement Fund includes 1 million active members and retirees, and the performance of the fund impacts how much local governments have to pay into the system each year – which influences property taxes. Pension costs soared after the recession in 2009 when the fund plummeted nearly 25%. But the fund has improved in recent years, leading to back-to-back years of a decline in contribution rates for municipalities. DiNapoli said the fund’s performance was the result of a weak year on Wall Street.

“Despite weak equity markets, the fund’s diversified portfolio and our investment team delivered a positive return,” DiNapoli said in a statement. “We continue to have confidence in our asset allocation for the long term. Our investment team is focused on ensuring we remain one of the best funded and top performing plans in the country.” The fund is the third-largest public pension fund in the nation, giving it pull with investors and companies. The pension plan has often been cited as one of the best-funded plans in the nation, avoiding pension shortfalls found in other states. But DiNapoli has repeatedly lowered the fund’s expected rate of return – from 8% to 7.5% in 2010 and then again last year to 7% to limit the fund’s volatility.

In August or September, DiNapoli will announce the contribution rates for local governments for the coming year. Currently, the average contribution rate for state and local governments to fund the pension fund is 18% of payroll. For police and fire officers, the governments contribute about 25%. In the early 2000s, local governments contributed nearly zero to the fund.

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Just wait till the recovery sets in. Everything will be just peachy.

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

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

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

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Not exactly news, is it?

Borrowing From ECB Shows Where Banks Are Most Vulnerable (BBG)

Spanish and Italian banks scoop up more than half of the money the European Central Bank provides in its regular refinancing operations, signaling that borrowing in financial markets remains difficult or unattractive for them eight years after the collapse of Lehman Brothers Holdings Inc. Banks’ balance sheets remain cluttered with non-performing loans and foreclosed assets just as revenue generation is damped by sluggish credit demand and low interest rates depressing margins. In addition to the weekly and three-months operations, the ECB will offer targeted longer-term loans next week that’ll mature in 2020.

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To phrase it differently: how crazy are central bankers?

How Low Can Bond Yields Go? Lower (ZH)

How low can bond yields go? Every day seems to provide fresh evidence that we really don’t know. But whatever your answer, between the gravitational pull of central bank debt purchases and a slowing global economy, the reality is: probably lower. Milestones include unprecedented 10-year yields in Germany, Japan and the U.K. British government debt has returned 8.1% this year and the spread between 10-year gilts and comparable Treasuries is at the widest since 2006 on concern the U.K. may vote to leave the EU. It may seem crazy that 11 sovereigns have negative-yielding five-year debt. Hard though it is to accept, bondholders aren’t playing the greater fool. Central banks are primed to push yields lower until they get results. “It’s a mad scramble for defensive positions,” said Jack McIntyre, a bond manager with Brandywine Global Investment Management. “We’re competing against the world’s central banks” for bonds”.

Trends in consumer prices haven’t acted as a brake. Inflation in advanced economies fell to 0.3% last year, the least since 2009 and down from 1.4% in 2014, according to IMF data. The U.K. vote has broader consequences. Recent polls have favored the Brexit camp, and should voters seek separation, others in the EU may try to follow. Should that happen, German 10-year yields could go more negative than -0.03%. Gilts have rallied without BOE purchases. A decision to depart may force its hand in lowering rates or resuming bond acquisitions, boosting gains in the process. McIntyre prefers Treasuries to gilts in either voting outcome. They’ll hold their value better should the U.K. remain, while Brexit may tarnish its standing as a top-tier issuer by introducing credit risk.

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Bunch of manipulators.

China Devalues Yuan To Weakest Since Jan 2011 (ZH)

Just in case The Fed had any ideas of surprising markets with a “confidence-inspiring” rate-hike tomorrow, The PBOC just sent a message loud and clear to Janet as they devalued the Yuan fix by over 2 handles, above 6.60 for the first time since January 2011. This is the 3rd major devaluation step in the last 10 months (remember when China said August was a “one off”?)

 

Bear in mind this kind of currency turmoil has not ended well for US equities in the past…

 

 

Which may help explain why funding market stress is starting to appear in Libor/OIS and basis-swaps (demand for USDollars), and why US and European banks are tumbling…

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“..investors clearly indicated that they would like to see further improvements in the accessibility..”

China Stocks Denied MSCI Entry In Blow To Xi’s Ambitions (BBG)

China’s domestic equities were denied entry into MSCI Inc.’s benchmark indexes for a third time, a setback for President Xi Jinping’s efforts to raise the profile of mainland markets and turn the yuan into an international currency. Policy makers need to make additional improvements to the accessibility of the A share market, according to a statement from the index compiler on Tuesday. MSCI, whose emerging-market index is tracked by investors with $1.5 trillion in assets, said it will reconsider inclusion in its 2017 review, while not ruling out an earlier announcement.

China was rejected despite a flurry of measures this year to address MSCI’s concerns, including curbs on arbitrary trading halts and looser restrictions on cross-border capital flows. The decision suggests international investors are still uncomfortable putting their money in the $6 trillion market after a botched government campaign to prop up share prices roiled global equities last year. While Chinese authorities have demonstrated a commitment to opening the market, “investors clearly indicated that they would like to see further improvements in the accessibility,” Remy Briand, MSCI’s global head of research, said in the statement.

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“..it could also force discussion of whether to raise the inflation target in order to try to push the entire rate structure higher.”

Fed Faces Battle To Escape World’s Low Interest Rate Grip (R.)

Evidence that the U.S. neutral rate of interest remains stalled near zero may slow Federal Reserve rate hikes even more than expected, tying the hands of policymakers until a rebound in global demand or other forces raise that key measure of the economy’s underlying strength. Though difficult to estimate precisely, the neutral rate is the point at which monetary policy neither encourages nor discourages spending and investment, and is thus a key measure of whether a given federal funds rate is stimulating or restricting the economy. With the Fed still trying to encourage spending, investment and hiring, a low neutral rate means the Fed has less room to move before that stimulus is gone.

Fed estimates published online show little consistent movement in the neutral rate in recent years even as the labor market tightened and growth continued above trend, confounding expectations that it would move higher in an economy expanding beyond potential. Officials cite a variety of possible explanations, but the result is the same: until policymakers are satisfied that the neutral rate is moving higher, they face an effective cap of 2% or even less on the federal funds rate. Coupled with a 2% inflation rate, the Fed’s target, that would put the “real” federal funds rate at zero. If inflation remains below target, the ceiling on the Fed would be that much lower as well.

That is a far cry from the 3.5 to 4% that the Fed’s policy rate has averaged since the 1990s, and means the central bank will treat each move with particular caution, current and former Fed officials say. It also means the central bank would be stuck near zero, and more likely to have to return to unconventional policy in a downturn; it could also force discussion of whether to raise the inflation target in order to try to push the entire rate structure higher.

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“They’ve turned into the ‘Zombie Fed.'”

Jeff Gundlach Says ‘Central Banks Are Losing Control’ (R.)

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Tuesday investors are dropping risky assets and turning to safer securities including Treasuries and gold because they are losing faith in central banks. The man known on Wall Street as the ‘Bond King’ is one of the first heavyweight investors to publicly raise red flags about the credibility of major central banks, including the U.S. Federal Reserve, as countries struggle to manage economic growth. Last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China’s slowing economy would pressure emerging markets. In 2014, he forecast U.S. Treasury yields would fall, not rise as many others had expected.

“Central banks are losing control and they don’t know what to do … just like the Republican establishment and Donald Trump,” Gundlach told Reuters in a telephone interview, referring to the Republic Party’s unpredictable presumptive nominee for U.S. President. Safe-haven German Bund yields fell below zero on Tuesday for the first time and global equity markets slid for a fourth day in a row on intensifying worries about a potential British exit from the EU next week. [..] “The Fed is confused and their confusion spills into investor psychology,” said Gundlach. [..] “The Fed changes its tone so frequently, it seems every other week the message is different. They’ve turned into the ‘Zombie Fed.’ They say the meeting this week is ‘live,’ but investors all know it isn’t at all.”

[..] Gundlach also noted the dramatic “drawdowns” from the highs in several stock markets. Germany is down 22%, Japan is down 23%, China is down 45%, the United Kingdom market is down 15% and France is down 20%. “Negative rates do not prop up stock markets,” Gundlach said on the webcast.

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How to kill a city.

London House Prices Up 14% In A Year (Ind.)

House prices across the UK continued to grow in April, with London prices leaping by more than 14% over the past year, according to official figures published on Tuesday. The average house price in the UK increased 8.2% year on year to £209,054, up 16,000 from the same time in 2015. In London, which continued to be far more expensive than anywhere else in the country, the average house price is now more than £470,000, up by nearly £60,000 on April last year. [..]

The average house price for England was £225,000, an increase of 9.1% on last year compared, with £139,000 in Wales, £138,000 in Scotland and £118,000 in Northern Ireland. The increase came despite clear evidence that housing market activity has slowed markedly following April’s Stamp Duty increase for buy-to-let investors and second home buyers. The possibility of the UK leaving the European Union following the referendum on 23 June has not dampened demand, the ONS said. “Despite the short term uncertainty of next week’s EU referendum, regional property markets are receiving a pre-summer swell, giving homebuyers more choices.

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You guys should have thought of that before creating your biggest ever housing bubble.

Let’s Not Sleepwalk Into Economic And Geopolitical Catastrophe (T.)

If Europe’s political leaders awake on Friday June 24 to find that Britain has voted to leave the EU – which judging by the polls is looking ever more likely – they will know who to blame most: themselves. For many citizens, there are much greater issues of principle and interest at stake in this referendum than the economy. But for me, economic and political stability are the prime consideration, which is why, as regular readers of my columns will already have guessed, I will be voting to remain. Yet I do so with a deep sense of foreboding, for despite the benefits Britain has enjoyed in its 43 years of membership, the EU has become a dysfunctional Byzantium of paralysing political and economic complexity. It has not been possible for a long time now to be an enthusiastic European.

Much of what was good about the EU as a force for peace through trade and economic advancement has long since ceased to be true. Over the last eight years, the EU has faced two distinct but related, existential crises – the eurozone debt meltdown and the challenge of mass, cross border migration. On both counts it has failed miserably. Though very different in their characteristics, these crises essentially have the same genesis. Both result from the attempt to crunch together economies of widely different income, wealth and welfare support. Give Greece, Spain, Portugal and Italy the ability to borrow at a German interest rate, and they were always bound to be enveloped by an unsustainable credit boom.

Denied both the natural market adjustment mechanism of free floating exchange rates, and the policy flexibility to mount a nationally-determined response, these debt crises have been left festering and unresolved, with devastating consequences for growth and jobs. Similarly, if the inhabitants of a low income, developing country are given the right to live and work in a much richer one with far superior public services and social welfare, then nobody should be surprised by both the reality of mass migration and the now all too evident backlash against it. In this regard too, the single European market, with its founding “four freedoms”, has proved incapable of responding.

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Tune in next week and/or tomorrow for Hell Freezes Over.

George Osborne: Vote For Brexit And Face £30 Billion Of Taxes And Cuts (G.)

George Osborne will warn that he would have to fill the £30bn blackhole in public finances triggered by a vote to leave the European Union by hiking income tax, alcohol and petrol duties and making massive cuts to the NHS, schools and defence. In a sign of the panic gripping the remain campaign, the chancellor plans to say that the hit to the economy will be so large that he will have little choice but to tear apart Conservative manifesto promises in an emergency budget delivered within weeks of an out vote. “Far from freeing up money to spend on public services as the leave campaign would like you to believe, quitting the EU would mean less money,” Osborne will say. “Billions less. It’s a lose-lose situation for British families and we shouldn’t risk it.”

The chancellor will spell out his concerns at an event where he will be joined by his predecessor, Alistair Darling. The Labour politician will say he is more worried now than he was during the 2008 financial crisis, arguing that a Brexit vote will result in not just one emergency budget but “one after another”. The pair will publish an “illustrative budget scorecard” comprising a long list of the sort of measures they say may have to be implemented.

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Or so they say.

Bookies Are Still Pretty Sure Brexit Isn’t Going to Happen (BBG)

While polls show the U.K.’s Brexit vote poised on a knife’s edge, bookies remain fairly confident the nation will stay in the European Union. Most of the biggest betting firms and exchanges in the U.K., Ireland and beyond place a 60% or better chance on David Cameron averting a so-called Brexit. That’s even after five polls published this week showed the “Leave” side ahead, with the latest survey giving it as much as a 7 percentage-point lead over “Remain.” “Pollsters ask people what they feel on a particular day; we are predicting what they will actually do on June 23,” said Jamie McKittrick, head of sports trading at Ladbrokes Plc. “Historically, we have seen a late swing to the status quo, especially among the undecideds.”

Analysts at firms like Danske Bank A/S and Investec Plc now routinely include gambling odds in client notes, with betting markets viewed as offering clues to the direction of political events. In March, for example, Paddy Power Betfair Plc, Ireland’s largest bookmaker, paid out 120,000 euros ($135,000) on Donald Trump winning the U.S. Republican presidential nomination, months before he won enough delegates to become the presumptive nominee. [..] As recently as last month, oddsmakers were placing a 20% chance on the possibility of the U.K. leaving the EU. While bookmakers like Ladbrokes this week slashed the odds on a Brexit, for now, they still make the U.K. staying in the EU the most likely outcome. That’s a pattern apparent across most betting firms and exchanges.

“The EU referendum market has exploded into life in the past week with an average of 1 million pounds traded every day, ” said Naomi Totten of Betfair, which also places a 60% probability on the U.K. opting to stay inside the EU. “Brexit has been backed heavily in the past 24 hours, although Remain is still clinging to favoritism.”

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Excellent Dmitry on Dunbar’s rule of 150.

The Law of Attraction (Dmitry Orlov)

One unintended consequence of our current mode of living is that it has warped and perverted our interpersonal interactions. In order to be able to afford to simply inhabit the planet and satisfy our basic needs, we are required to play all sorts of contrived roles. Specifically, we are forced deal with each other according to arbitrary rules that are forced upon us. As employees we are expected to readily lie to customers to protect our employers’ profits. As salespeople we are expected to sell things we know better than to ever want to buy. Then there is a whole category of people who work as enforcers, and are specifically paid to disregard all humane considerations and to dole out punishments without any allowance for dire personal circumstances.

Vast social and financial hierarchies reward psychopathic behavior (which is regarded as professionalism) while punishing altruism and compassion (which is regarded as weakness or corruption). Co-workers arbitrarily thrown together by managerial whim often spend more time with each other than with their own families, trapped in a world of stunted, superficial relationships that gradually erode their humanity. Parents often have no choice but to pay strangers to raise their children for them. These strangers work for a wage rather than out of love for the children, and when their contract ends, so does the bond between the child and caregiver, undermining the child’s faith in humanity. When parents do get to see their children, they are often tired and distracted, conditioning the children to treat them no better than they treat the strangers who take care of them the rest of the time.

Growing up with a constant deficit of sensitivity, sincerity, security and warmth, once they reach adulthood these children expect their relationships to be either manipulative and abusive, or regulated by contract. Their humanity becomes reduced to a set of selfish and materialistic drives. Their misshapen psyches are balanced on a knife’s edge between a morbid fear of exclusion, which drives them toward mimicry and conformism, and an unnatural, hypertrophied competitive drive that destroys their instinct for spontaneous cooperation. When you take a step back from it all and look at it, the impression is one of a society-wide mental disorder.

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Good starting point, not great execution.

Putting A Price On Nature Is Wrong (G.)

The paradox of environmental economics is that we feel compelled to price nature to make its loss visible on the balance sheet, but in doing so we legitimise its commodification and validate its critical overconsumption in an unbounded market system. No carbon market is yet designed to work within a precautionary limit on global emissions. That means that currently it would be possible to pay to emit the notional extra tonne of carbon that might push us over the edge into irreversible climatic upheaval. What price should that tonne of carbon carry? The more goods you pile onto a ship, the more likely it is to sink. You can price the relative risk of different levels of load, and insure it accordingly, and you can put a price on the economic cost of lost goods should the ship turn turtle.

But if your life depends on keeping the boat afloat, pricing ultimately becomes irrelevant. The point is to stay on the surface. That is why the Plimsoll safety line on the side of ships was introduced to prevent overloading (easy to spot, it looks exactly like the London Underground symbol). There are many economic and scientific problems in pricing nature and the environment, such as around offsetting, and there are philosophical ones too. In deciding whether or not to build a new road through a community woodland, how is the value of the woodland arrived at in any cost benefit analysis done by planners? Asking how much the community is prepared to pay to keep it would be constrained by ability to pay, but ask what amount would be needed to compensate for its intrinsic worth might, in theory, yield an infinite price.

Fiona Reynolds, former chief of the National Trust, is the latest to argue that we need whole other ways to assess the value of the natural world. When the economist Dieter Helm, chair of the Natural Capital Committee, wrote that: “the environment is part of the economy and needs to be properly integrated into it so that growth opportunities will not be missed,” he both gave the game away about pricing as a hostage to fortune, and made a category error. It is the economy that needs to be properly integrated into the environment so that its limits to growth can be understood.

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“These stolen avocados can carry risks,” he said.

Avocado Shortage Fuels Crime Wave In New Zealand (G.)

Surging local and international demand for avocados is fuelling a crime wave in New Zealand. Since January there have been close to 40 large-scale thefts from avocado orchards in the north island of New Zealand, with as many as 350 fruit stolen at a time. Avocados are selling for between NZ$4-6 each (£2-3) across the country, after a poor season last year and increasing local demand. According to New Zealand Avocado in 2015 an additional 96,000 New Zealand households began purchasing avocados, and local growers – largely geared towards the lucrative export market – have been unable to keep up with the surge in demand.

The recent thefts have taken place in the middle of the night, with the crop either “raked” from the tree and collected in blankets or sheets on the ground, or hand-picked and driven away to pop-up road-side stallsgrocery stores or small-scale sushi, fruit and sandwich shops in Auckland. Sergeant Aaron Fraser of Waihi said there had been “spates” of avocado thefts during his time in the police but nothing as sustained as the current activity. “These stolen avocados can carry risks,” he said. “They are unripe, some have been sprayed recently and they may still carry toxins on the skin. But with the prices so high at the moment, the potential for profit is a strong inducement for certain individuals.”

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Jan 022016
 
 January 2, 2016  Posted by at 10:09 am Finance Tagged with: , , , , , , , , ,  6 Responses »


Earl Theisen Walt Disney oiling scale model locomotive at home in LA 1951

After a Tumultuous 2015, Investors Have Low Expectations for Markets (WSJ)
Will Corporate Investment and Profits Rebound This Year? (WSJ)
A Year of Sovereign Defaults? (Carmen Reinhart)
The Next Big Short: Amazon (Stockman)
The Real Financial Risks of 2016 (Taleb)
High-Yield Bonds: Worthy of the Name Again (WSJ)
Slowdown In Chinese Manufacturing Deepens Fears For Economy (Guardian)
Opinion Divided On State Of Chinese Economy, But Not Its Importance (Guardian)
‘Indigestion’ Hits Diamond Companies: Too Much Supply, Too Little Demand (FT)
Iraq Says It Exported More Than 1 Billion Barrels of Oil in 2015 (BBG)
The Federal Reserve’s Brave New Interest Rate World (Coppola)
Economic Sweet Spot Of 2016 Before The Reflation Storm (AEP)
New Year Brings Minimum Wage Hikes For Americans In 14 States (Reuters)
Swiss Bank Admits Cash and Gold Withdrawals Cheated IRS (BBG)
Edward Hugh, Economist Who Foresaw Eurozone’s Struggles, Dies At 67 (NY Times)
As 2016 Dawns, Europe Braces For More Waves Of Refugees (AP)

Watch out below.

After a Tumultuous 2015, Investors Have Low Expectations for Markets (WSJ)

After a year of disappointment in everything from U.S. stocks to emerging markets and junk bonds, investors are approaching 2016 with low expectations. Some see the past year as a bad omen. Two major stock indexes posted their first annual decline since the financial crisis, while energy prices fell even further. Emerging markets and junk bonds also struggled. Others view the pullback as a sensible breather for some markets after years of strong gains. While large gains were common as markets recovered in the years after the 2008 financial crisis, many investors say such returns are growing harder to come by, and expect slim gains at best this year.

“You have to be very muted in your expectations,” said Margie Patel, senior portfolio manager at Wells Fargo Funds who said she expects mid-single percentage-point gains in major U.S. stock indexes this year. “It’s pretty hard to point to a sector or an industry where you could say, well, that’s going to grow very, very rapidly,” she said, adding that there are “not a lot of things to get enthusiastic about, and a long list of things to be worried about.” As the year neared an end, a fierce selloff hit junk bonds in December, while U.S. government bond yields rose only modestly despite the Federal Reserve’s decision to raise its benchmark interest rate in December, showing investors weren’t ready to retreat from relatively safe government bonds.

For the U.S., 2015’s rough results stood in contrast to three stellar years. After rising 46% from 2012 through 2014, the Dow Jones Industrial Average fell 2.2% last year. The S&P 500 fell 0.7%. While most Wall Street equity strategists still expect gains for U.S. stocks this year, they also once again expect higher levels of volatility than in years past. Of 16 investment banks that issued forecasts for this year, two-thirds expect the S&P 500 to finish 2016 at a level less than 10% above last year’s close, according to stock-market research firm Birinyi Associates. Some investors say a pause for stocks is normal for a bull market of this length, which has been the longest since the 1990s. Including dividends, the S&P 500 has returned 249% since its crisis-era low of 2009.

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How could they? On what? “This recovery still stinks.”

Will Corporate Investment and Profits Rebound This Year? (WSJ)

In 2015, the American corporate landscape was dominated by activist investors, buybacks, currencies and deals. This year, the question is whether U.S. businesses will shake off the weight of a strong dollar and lower commodity prices to expand profit growth, end their dependence on boosting returns with buybacks, and turn to investing in their operations. The Federal Reserve had enough confidence in the economic recovery to raise interest rates in December, but it remains unclear whether global growth will be buoyant enough reverse weak business investment. Many big companies are reining in spending. 3M, with thousands of products from Scotch tape to smartphone materials, forecasts capital spending roughly unchanged from 2015.

Telecom companies AT&T and Verizon both plan to hold capital spending generally level in the coming year. Meanwhile, industrial giants like General Electric and United Technologies are aggressively cutting costs and seeking to squeeze more savings from suppliers. Capital expenditures by members of the S&P 500 index fell in the second and third quarters of 2015 from a year earlier, the first time since 2010 that the measure has fallen for two consecutive quarters, according to data from S&P Dow Jones Indices. Another measure of business spending on new equipment—orders for nondefense capital goods, excluding aircraft—was down 3.6% from a year earlier in the first 11 months of 2015, according to data from the U.S. Department of Commerce.

More broadly, only 25% of small companies plan capital outlays in the next three to six months, according to a November survey of about 600 firms by the National Federation of Independent Business. That compares with an average of 29% and a high of 41% since the surveys began in 1974. “Our guys are in maintenance mode,” said William Dunkelberg, chief economist for the trade group. “This recovery still stinks.” Profit growth for the constituents of the S&P 500 index stalled in 2015 thanks to a combination of a strong dollar and falling prices for steel, crude oil and other commodities. Deutsche Bank estimates total net income for companies in the index fell 3% in 2015, while sales declined 4%. For 2016, Deutsche Bank forecasts net income growth of 4.3% and a 4% increase in revenue.

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Given the reliance on dollar-denominated low interest loans, it seems all but certain.

A Year of Sovereign Defaults? (Carmen Reinhart)

When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”). If history is a guide, such conversations may be happening a lot in 2016. Like so many other features of the global economy, debt accumulation and default tends to occur in cycles.

Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults. The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors. Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts.

But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions. And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. As my recent work with Vincent Reinhart and Christoph Trebesch reveals, peaks and troughs in the international capital-flow cycle are especially dangerous, with defaults proliferating at the end of a capital-inflow bonanza.

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Big call from Dave.

The Next Big Short: Amazon (Stockman)

If you have forgotten your Gulliver’s Travels, recall that Jonathan Swift described the people of Brobdingnag as being as tall as church steeples and having a ten foot stride. Everything else was in proportion – with rats the size of mastiffs and the latter the size of four elephants, while flies were “as big as a Dunstable lark” and wasps were the size of partridges. Hence the word for this fictional land has come to mean colossal, enormous, gigantic, huge, immense or, as the urban dictionary puts it, “really f*cking big”. That would also describe the $325 billion bubble which comprises Amazon’s market cap. It is at once brobdangnagian and preposterous – a trick on the casino signifying that the crowd has once again gone stark raving mad.

When you have arrived at a condition of extreme “irrational exuberance” there is probably no insult to ordinary valuation metrics that can shock. But for want of doubt consider that AMZN earned the grand sum of $79 million last quarter and $328 million for the LTM period ending in September. That’s right. Its conventional PE multiple is 985X! And, no, its not a biotech start-up in phase 3 FDA trials with a sure fire cancer cure set to be approved any day; its actually been around more than a quarter century, putting it in the oldest quartile of businesses in the US. But according to the loony posse of sell-side apologists who cover the company – there are 15 buy recommendations – Amazon is still furiously investing in “growth” after all of these years.

So never mind the PE multiple; earnings are being temporarily sacrificed for growth. Well, yes. On its approximate $100 billion in LTM sales Amazon did generate $32.6 billion of gross profit. But the great builder behind the curtain in Seattle choose to “reinvest” $5 billion in sales and marketing, $14 billion in general and administrative expense and $11.6 billion in R&D. So there wasn’t much left for the bottom line, and not surprisingly. Amazon’s huge R&D expense alone was actually nearly three times higher than that of pharmaceutical giant Bristol-Myers Squibb. But apparently that’s why Bezos boldly bags the big valuation multiples.

Not so fast, we think. Is there any evidence that all this madcap “investment” in the upper lines of the P&L for all these years is showing signs of momentum in cash generation? After all, sooner or later valuation has to be about free cash flow, even if you set aside GAAP accounting income. In fact, AMZN generated $9.8 billion in operating cash flow during its most recent LTM period and spent $7.0 billion on CapEx and other investments. So its modest $2.8 billion of free cash flow implies a multiple of 117X.

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“Zero interest rates turn monetary policy into a massive weapon that has no ammunition.”

The Real Financial Risks of 2016 (Taleb)

How should we think about financial risks in 2016? First, worry less about the banking system. Financial institutions today are less fragile than they were a few years ago. This isn’t because they got better at understanding risk (they didn’t) but because, since 2009, banks have been shedding their exposures to extreme events. Hedge funds, which are much more adept at risk-taking, now function as reinsurers of sorts. Because hedge-fund owners have skin in the game, they are less prone to hiding risks than are bankers. This isn’t to say that the financial system has healed: Monetary policy made itself ineffective with low interest rates, which were seen as a cure rather than a transitory painkiller. Zero interest rates turn monetary policy into a massive weapon that has no ammunition.

There’s no evidence that “zero” interest rates are better than, say, 2% or 3%, as the Federal Reserve may be realizing. I worry about asset values that have swelled in response to easy money. Low interest rates invite speculation in assets such as junk bonds, real estate and emerging market securities. The effect of tightening in 1994 was disproportionately felt with Italian, Mexican and Thai securities. The rule is: Investments with micro-Ponzi attributes (i.e., a need to borrow to repay) will be hit. Though “another Lehman Brothers” isn’t likely to happen with banks, it is very likely to happen with commodity firms and countries that depend directly or indirectly on commodity prices.

Dubai is more threatened by oil prices than Islamic State. Commodity people have been shouting, “We’ve hit bottom,” which leads me to believe that they still have inventory to liquidate. Long-term agricultural commodity prices might be threatened by improvement in the storage of solar energy, which could prompt some governments to cancel ethanol programs as a mandatory use of land for “clean” energy.

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Yield rises with risk. Risk leads to losses.

High-Yield Bonds: Worthy of the Name Again (WSJ)

By mid-2014, some were starting to wonder whether the high-yield bond market needed to find a new name for itself. U.S. yields fell below 5%, while European yields dipped beneath 4%, according to Barclays indexes. But at the end of 2015, the market once again has an appropriate moniker. U.S. yields are ending the year at 8.8%, the Barclays index shows, returning to levels last seen in 2011. They have risen by about 2.3 percentage points this year. European yields stand at 5% — not huge in absolute terms, but high relative to ultralow European government bond yields. Of course, for existing investors that has been bad news. The ride—including the high-profile meltdown of Third Avenue Management’s Focused Credit Fund, which shook the market in December—has been rough.

It has taken its toll on borrowers too. The U.S. high-yield bond market has recorded the slowest pace of fourth-quarter issuance since 2008, when the collapse of Lehman Brothers essentially shut the market down, according to data firm Dealogic. Global issuance has fallen 23% this year to $366.5 billion, the lowest level since 2011. The market is likely to face further tests in 2016. Defaults are set to rise, and companies may find it tougher to get financing. But at least investors will now get chunkier rewards for taking risk. Arguably, high-yield investors should always be focused on absolute rather than relative yields, given the need to compensate for defaults. From that point of view, 2015 was the year high-yield bonds got their mojo back.

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China will find it much harder to keep up appearances in 2016.

Slowdown In Chinese Manufacturing Deepens Fears For Economy (Guardian)

A further slowdown in China’s vast manufacturing sector has intensified worries about the year ahead for the world’s second largest economy. The latest in a string of downbeat reports from showed that activity at China’s factories cooled in December for the fifth month running, as overseas demand for Chinese goods continued to fall. Against the backdrop of a faltering global economy, turmoil in the country’s stock markets and overcapacity in factories, Chinese economic growth has slowed markedly. The country’s central bank expects growth in 2015 to be the slowest for a quarter of a century. After growing 7.3% in 2014, the economy is thought to have expanded by 6.9% in 2015 and the central bank has forecast that it may slow further in 2016 to 6.8%.

A series of interventions by policymakers, including interest rate cuts, have done little to revive growth and in some cases served only to heighten concern about China’s challenges. Friday’s figures showed that the manufacturing sector limped to the end of 2015. The official purchasing managers’ index (PMI) of manufacturing activity edged up to 49.7 in December from 49.6 in November. The December reading matched the forecast in a Reuters poll of economists and marked the fifth consecutive month that the index was below 50, the point that separates expansion from contraction. “Although the PMI slightly rebounded this month, it still lies below the critical point and is lower than historic levels over the same period,” Zhao Qinghe, a senior statistician at the national bureau of statistics, said.

Analysts said the latest manufacturing PMI pointed to falling activity, but that some hope could be taken from the improvement on November’s three-year low. The small rise “suggests that growth momentum is stabilising somewhat … however, the sector is still facing strong headwinds,” said Zhou Hao at Commerzbank. “In order to facilitate the destocking and deleveraging process, monetary policy will remain accommodative and the fiscal policy will be more proactive.”

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Can China let go of the peg and let the yaun plunge, while it’s in the IMF basket?

Opinion Divided On State Of Chinese Economy, But Not Its Importance (Guardian)

It was perhaps fitting that China’s latest lacklustre industrial survey was the first fragment of financial data to greet the new year. Economists are divided about the risks facing the vast Chinese economy, but agree that how they play out will have profound consequences for the rest of the world in 2016. The optimists point to China’s large and growing middle class, the vast foreign currency reserves that give Beijing ample ammunition to respond to any crisis that emerges, and the authoritarian regime that allows its policymakers to force through economic change. And official figures do suggest that economic growth may have stabilised at about 6.5% – considerably weaker than the double-digit pace that was the norm before the financial crisis, but not the feared “hard landing”.

Yet pessimists argue that the official figures radically overestimate the true pace of growth: using alternative indicators such as freight volumes and electricity usage, City analysts Fathom calculate that growth could be below 3%. And last summer’s share price crash, and the chaos that surrounded Beijing’s decision to devalue the yuan, suggested there is no reason to think Chinese policymakers are any more in control of the forces of capitalism than their western counterparts were in the run-up to the financial crisis. China’s latest five-year plan involves a conscious attempt to switch growth away from the export-led model that has driven its rise to the economic premier league, and towards more sustainable, domestic consumption-led growth.

But with many of the country’s powerful state-owned enterprises loaded up with debt, property bubbles deflating and the knock-on effects of the share price crash still being felt, domestic demand has so far failed to pick up the slack. The challenge of maintaining politically acceptable rates of economic growth may become tougher in 2016, particularly if the US Federal Reserve presses ahead with its bid to return interest rates to somewhere near normal. The value of the Chinese yuan is not allowed to move too far out of line with the dollar, under a “crawling peg” – effectively a semi-fixed exchange rate.

But as the greenback moves upwards to reflect the strengthening US economy and rising rates, it is taking the yuan with it, and making it harder for Chinese exporters to compete. As the dollar continues to appreciate, it may become increasingly tempting for policymakers to abandon the peg and let the currency plunge, returning to the familiar export-led pattern of growth. And if Beijing does devalue sharply, it would damage China’s exporting rivals, and send deflation rippling out through the global economy, increasing the risk of a lengthy period of economic weakness. China’s true fragility is impossible to gauge; but it matters.

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Not a good sign for gold.

‘Indigestion’ Hits Diamond Companies: Too Much Supply, Too Little Demand (FT)

De Beers was hoping its “Live your love today” campaign would entice Chinese consumers to buy diamond jewellery this holiday season. It is unlikely to be enough to turn round the miner’s fortunes. While auction prices set records for some big gems in 2015 — Lucara Diamond found one of the largest stones to date — the sector has had its toughest year since the global financial crisis as it struggles with too much supply and too little demand. Miners including De Beers, which is owned by Anglo American, and Canada’s Dominion Diamond have acknowledged falling revenues and lower prices for rough diamonds. In China, the big jewellers are suffering. Chow Tai Fook, the largest by market value, reported a 42% fall in net profits in interim results.

But the pain has been most acute for the trade’s “midstream”, the hundreds of cutters and polishers, mostly in India, which buy rough stones from miners and supply retailers. “The raw [rough] diamond price is still high but the polishers [like us] have to sell cheaper because of the drop in demand,” said Chirag Kakadia of Sheetal, an Indian diamond polisher, speaking at a Hong Kong trade show. “We are forced to purchase higher but sell lower. Our production has dropped 40% from 2014 but our sales are 50% less.” Companies such as Sheetal have been hit by a bout of what Johan Dippenaar, chief executive of Petra Diamonds, has described as industry “indigestion”, stemming from an over-optimistic assessment of demand from China.

Retailers that had geared up for years of growth were caught out by a slowing economy and an anti-corruption drive, with officials banned from receiving gifts. A person in the industry who asked not to be named said demand in Hong Kong and Macau had been “absolutely mullered” by the corruption crackdown. The lack of interest from consumers has left cutters and polishers holding too much stock. In turn, their need to buy from miners has declined, forcing down rough prices. Analysts said that, even if midstream groups wanted to restock, many would find it hard to do so. Much of the credit in the sector has been withdrawn as banks have grown wary of lending to businesses that are family-owned and tend to be opaque. The question is whether the market will bounce back or be altered for good.

De Beers, which has lost much of its power as a supplier but remains a dominant participant, says the industry does not face a long-term bust and once the temporary oversupply is dealt with equilibrium will be restored. Philippe Mellier, chief executive, told industry analysts in December: “This is a stock crisis, not a demand crisis.” De Beers has allowed midstream companies to put regular purchases on hold. “We just want our customers to buy what they need and not increase the stock problem,” said Mr Mellier. The miner has also cut production and closed two diamond mines. Consultants at Bain say the diamond pipeline should return to normal functioning once midmarket businesses and retailers clear excess inventories, provided that miners and polishers manage supplies adroitly.

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And now Iran will follow.

Iraq Says It Exported More Than 1 Billion Barrels of Oil in 2015 (BBG)

Iraq said it exported 1.097 billion barrels of oil in 2015, generating $49.079 billion from sales, according to the oil ministry. It sold 99.7 million barrels of oil in December, generating $2.973 billion, after selling a record 100.9 million barrels in November, said oil ministry spokesman Asim Jihad. The country sold at an average price of $44.74 a barrel in 2015, Jihad said. Iraq, with the world’s fifth-biggest oil reserves, needs to keep increasing crude output because lower oil prices have curbed government revenue. Oil prices have slumped in the past year as OPEC defended market share against production in the U.S. OPEC’s second-largest crude producer is facing a slowdown in investment due to lower oil prices while fighting a costly war on Islamist militants who seized a swath of the country’s northwest. The nation’s output will start to decline in 2018, Morgan Stanley said in a Sept. 2 report, reversing its forecast for higher production every year to 2020.

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The real rate rise is still substantially lower than 0.25%, though.

The Federal Reserve’s Brave New Interest Rate World (Coppola)

On December 17th, 2015, the FOMC raised interest rates for the first time since the 2008 financial crisis. To be sure, it had little choice. The Fed had been signalling an interest rate rise persistently for months, and had already disappointed markets twice by delaying rate rises in September and October. It had painted itself into the same corner as the ECB did over QE earlier in the year. The ECB signalled for months that it was going to start QE, and backed off several times, to the disappointment of market participants. Eventually, ECB was forced to start QE for the simple reason that NOT doing so threatened financial stability, because markets had already priced it in. So with the FOMC. Encouraged by broadly good economic data, and by the Fed’s approving noises, markets priced in a 25bps interest rate rise.

The FOMC was all but obliged to act, simply to avoid sparking a market rout. It was yet another fine example of markets being willing to let the Fed guide them along the road that they were already travelling. Since that small but oh-so-significant rate rise, the Fed Funds rate has obediently remained firmly within its new 25 to 50 bps corridor. Indeed, it has hovered persistently around the midpoint of the range. Given that the system is still awash with excess reserves and the Fed Funds rate therefore has little effect on bank lending, it is remarkable that the rate has stayed both elevated and stable. How has this been achieved? Yesterday, the FT reported that the Fed absorbed $475bn of excess reserves through overnight reverse repo operations in its last monetary operation of 2015, a record amount.

Overnight reverse repos allow certain non-bank financial institutions to place funds at the Fed overnight in return for USTs (yes, the ones bought in the Fed’s QE programs) and 25bps interest. The interest rate is no accident: it is the floor of the target Fed Funds rate range. These reverse repos provide competition for banks in the funding markets, forcing banks to offer higher interest rates on funds they lend to non-banks. The Fed said in December that it would make $2tn worth of USTs available as collateral for reverse repo transactions: it is actually needing to use considerably less to maintain the Fed Funds rate well above its floor. But reverse repos are only half the story. The Fed also set the interest rate it pays on excess reserves (IOER) to the top of the Fed Funds target range. This pulls the funding rate upwards, since banks will not lend reserves to each other at less than the IOER rate.

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Ambroze has been smoking. A lot. The sudden surge in China M1 in the graph looks like panic to me, and moreover, it hasn’t done any good either.

Economic Sweet Spot Of 2016 Before The Reflation Storm (AEP)

Sunlit uplands beckon. Almost $2 trillion of annual stimulus from cheap oil has been accumulating for months, pent up and waiting to be spent. It will soon come flooding through in a burst, catching the world by surprise. But beware: the more beguiling it is over coming months, the more traumatic it will be later as the reflation scare comes alive. Since the rite of New Year predictions is to stick one’s neck out, let me hazard hopefully that this treacherous moment can be deferred until 2017. The positive oil shock will hit just as austerity ends in the US, and big-spending states and cities ice the cake with a fiscal boost worth 0.5pc of GDP. Americans broke records with the purchase 1.7m new cars and trucks in December, a foretaste of blistering sales to come. There is a ‘deficit’ of 20m cars left from the Long Slump yet to be plugged.

The eurozone is nearing the sweet spot, a fleeting nirvana of 2pc growth, conjured by the trifecta of a cheap euro, budgetary break-out, and the end of bank deleveraging. Mario Draghi’s printing presses are firing on all cylinders. The ‘broad’ M3 money supply is growing at turbo-charged rates of 5pc in real terms. This is a 12-month leading indicator for the economy, so enjoy the ride, at least until the demonic Fiscal Compact returns at the dead of night to smother Europe once again. In China, the dogs bark, the caravan moves on. There will be no devaluation of the yuan this year, because there is no urgent need for it. Premier Li Keqiang has vowed to keep the new exchange basket stable. Armed with a current account surplus of $600bn, $3.5 trillion of reserves, and capitol controls, that is exactly what he will do.

The lingering hangover from the Great Chinese Recession of early 2015 has faded. The PMI services gauge has just jumped to a 15-month high of 54.4, and this is now the relevant index since the Communist Party is systematically winding down chunks of the steel, shipbuilding, and chemical industries. China’s money supply is also catching fire. Growth of ‘real true M1’ has spiked to 10pc, a giddy shot of caffeine not seen since the post-Lehman spree. Combined credit and local government bond issuance is surging at a rate of 14pc. The Communist Party cranked up fiscal spending by 18.9pc in November. Whether or not you think this recidivist stimulus is wise – given that the law of diminishing returns set in long ago for debt-driven growth – it will paper over a lot of cracks for the time being.

One thing that will not happen is a housing revival in the mid-sized T3 and T4 cities of the hinterland. It will be a long time before the latest reform of the medieval Hukou system unleashes enough rural migrants to fill the ghost towns. The stock of 4.5m unsold homes on the books of developers is frightening to behold. The epic dollar rally has come and gone. The world’s currency will drift down over coming months, and that will be a reprieve for the likes of Brazil, Turkey, South Africa, Indonesia, and Colombia. Those at the wrong end of $9 trillion of off-shore debt in US dollars may breath easier: they will not escape. The MSCI index of emerging market stocks will return from the dead, clawing back most of the 28pc in losses since last April, but only to lurch into a greater storm.

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Barely a start. But a strong sign of how much less ‘new’ jobs pay.

New Year Brings Minimum Wage Hikes For Americans In 14 States (Reuters)

As the United States marks more than six years without an increase in the federal minimum wage of $7.25 an hour, 14 states and several cities are moving forward with their own increases, with most set to start taking effect on Friday. California and Massachusetts are highest among the states, both increasing from $9 to $10 an hour, according to an analysis by the National Conference of State Legislatures. At the low end is Arkansas, where the minimum wage is increasing from $7.50 to $8. The smallest increase, a nickel, comes in South Dakota, where the hourly minimum is now $8.55.

The increases come in the wake of a series of “living wage” protests across the country, including a November campaign in which thousands of protesters in 270 cities marched in support of a $15-an-hour minimum wage and union rights for fast food workers. Food service workers make up the largest group of minimum-wage earners, according to the Bureau of Labor Statistics. With Friday’s increases, the new average minimum wage across the 14 affected states rises from $8.50 an hour to just over $9. Several cities are going even higher. Seattle is setting a sliding hourly minimum between $10.50 and $13 on Jan. 1, and Los Angeles and San Francisco are enacting similar increases in July, en route to $15 an hour phased in over six years.

Backers say a higher minimum wage helps combat poverty, but opponents worry about the potential impact on employment and company profits. In 2014, a Democratic-backed congressional proposal to increase the federal minimum wage for the first time since 2009 to $10.10 stalled, as have subsequent efforts by President Barack Obama. More recent proposals by some lawmakers call for a federal minimum wage of up to $15 an hour. Alan Krueger, an economics professor at Princeton University and former chairman of Obama’s Council of Economic Advisers, said a federal minimum wage of up to $12 an hour, phased in over five years or so, “would not have a noticeable effect on employment.”

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Many such banks did the same.

Swiss Bank Admits Cash and Gold Withdrawals Cheated IRS (BBG)

Large cash and gold withdrawals were one way Bank Lombard Odier & Co allowed U.S. clients to sever a paper trail on their assets and cheat the Internal Revenue Service, the Swiss lender admitted, agreeing to pay $99.8 million to avoid prosecution. That penalty is the second-largest paid under a program to help the U.S. clamp down on tax evasion through Swiss banks. Total penalties have reached more than $1.1 billion as banks have revealed how they helped clients hide money and where the assets went. DZ Privatbank (Schweiz) AG will also pay almost $7.5 million under accords released Thursday. The U.S. has struck 75 such non-prosecution agreements this year, with the tempo and dollar amount increasing in recent weeks as it rushes to finish. Geneva-based Lombard Odier, founded in 1796, had 1,121 U.S. accounts with $4.45 billion in assets from 2008 through 2014, according to the agreement, announced Thursday.

The bank adopted a policy in 2008 to force U.S. clients to disclose undeclared assets to the IRS or face account closures. However, the policy authorized large cash or gold withdrawals, donations to U.S. relatives or charitable institutions, resulting in further wrongdoing, according to the statement. In 2009 alone, the bank processed 14 cash withdrawals of more than $1 million each for clients closing 11 accounts, according to the non-prosecution agreement. One client closed an account by withdrawing more than $3 million in gold, the bank admitted. “These withdrawals of cash and precious metals enabled U.S. persons to sever the paper trail for their assets and further conceal their income and assets from U.S. authorities,” according to the agreement. The bank also closed at least 12 U.S. accounts worth $15.7 million with “fictitious donations” to other accounts at the bank, Lombard Odier admitted.

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“..Mr. Hugh insisted time and again that economists and policy makers were glossing over the extent to which swift austerity measures in countries like Greece, Ireland, Spain and Portugal would result in devastating recessions..”

Edward Hugh, Economist Who Foresaw Eurozone’s Struggles, Dies At 67 (NY Times)

Edward Hugh, a freethinking and wide-ranging British economist who gave early warnings about the European debt crisis from his adopted home in Barcelona, died on Tuesday, his birthday, in Girona, Spain. He was 67. The cause was cancer of the gallbladder and liver, his son, Morgan Jones, said. Mr. Hugh drew attention in 2009 and 2010 for his blog posts pointing out flaws at the root of Europe’s ambition to bind together disparate cultures and economies with a single currency, the euro. In clear, concise essays, adorned with philosophical musings and colorful graphics, Mr. Hugh insisted time and again that economists and policy makers were glossing over the extent to which swift austerity measures in countries like Greece, Ireland, Spain and Portugal would result in devastating recessions.

Mr. Hugh’s insights soon attracted a wide and influential following, including hedge funds, economists, finance ministers and analysts at the IMF. “For those of us pessimists who believed that the eurozone structure was leading to an unsustainable bubble in the periphery countries, Edward Hugh was a must-read,” said Albert Edwards, a strategist based in London for the French bank Société Générale. “His prescience in explaining the mechanics of the crisis went almost unnoticed until it actually hit.” As the eurozone’s economic problems grew, so did Mr. Hugh’s popularity, and by 2011 he had moved the base of his operations to Facebook. There he attracted many thousands of additional followers from all over the world.

If Santa Claus and John Maynard Keynes could combine as one, he might well be Edward Hugh. He was roly-poly and merry, and he always had a twinkle in his eye, not least when he came across a data point or the hint of an economic or social trend that would support one of his many theories. His intellect was too restless to be pigeonholed, but when pressed he would say that he saw himself as a Keynesian in spirit, but not letter. And in tune with his view that economists in general had become too wedded to static economic models and failed their obligation to predict and explain, he frequently cited this quotation from Keynes: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again.”

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3 million forecast for 2016.

As 2016 Dawns, Europe Braces For More Waves Of Refugees (AP)

Bitter cold, biting winds and rough winter seas have done little to stem the seemingly endless flow of desperate people fleeing war or poverty for what they hope will be a brighter, safer future in Europe. As 2016 dawns, boatloads continue to reach Greek shores and thousands trudge across Balkan fields and country roads heading north. More than a million people reached Europe in 2015 in the continent’s largest refugee influx since the end of World War II – a crisis that has tested European unity and threatened the vision of a borderless continent. Nearly 3,800 people are estimated to have drowned in the Mediterranean last year, making the journey to Greece or Italy in unseaworthy vessels packed far beyond capacity.

The EU has pledged to bolster patrols on its external borders and quickly deport economic migrants, while Turkey has agreed to crack down on smugglers operating from its coastline. But those on the front lines of the crisis say the coming year promises to be difficult unless there is a dramatic change. Greece has borne the brunt of the exodus, with more than 850,000 people reaching the country’s shores, nearly all arriving on Greek islands from the nearby Turkish coast. “The (migrant) flows continue unabated. And on good days, on days when the weather isn’t bad, they are increased,” Ioannis Mouzalas, Greeces minister responsible for migration issues, told AP. “This is a problem and shows that Turkey wasn’t able – I’m not saying that they didn’t want – to respond to the duty and obligation it had undertaken to control the flows and the smugglers from its shores.”

Europe’s response to the crisis has been fractured, with individual countries, concerned about the sheer scale of the influx, introducing new border controls aimed at limiting the flow. The problem is compounded by the reluctance of many migrants’ countries of origin, such as Pakistan, to accept forcible returns. “If measures are not taken to stop the flows from Turkey and if Europe doesn’t solve the problems of the returns as a whole, it will be a very difficult year,” Mouzalas warned. “It’s a bad sign, this unabated flow that continues,” Mouzalas said. “It creates difficulties for us, as the borders have closed for particular categories of people and there is a danger they will be trapped here.”

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Dec 142015
 
 December 14, 2015  Posted by at 9:44 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle December 14 2015


Harris&Ewing President Hoover lights Nation’s Capital community Xmas tree 1929

The New American Dream Is To Have A Job (FT)
The End Of The Bubble Finance Era (Stockman)
“It’s An Epic Bloodbath” : The 2015 Junk Bond Heatmap (ZH)
The Coincidences Are Just Too Eerie: The Last Time CCC Yields Were Here (ZH)
Yuan Declines to Four-Year Low as New Index Signals Weakness (BBG)
Oil Sinks to Lowest in Almost 7 Years as Iran Vows More Supply (BBG)
How Low Can Oil Prices Go? (Guardian)
World Markets In Fragile Mood As Yellen Prepares To Push The Button (Guardian)
Fed Officials Worry Interest Rates Will Go Up, Only to Come Back Down (WSJ)
The China Metal Exchange At Center Of Investment Scandal (Reuters)
China Local Officials Admit To Faking Economic Figures (CD)
Who’s Profiting From $1.2 Trillion of US Federal Student Loans? (BBG)
Ecuador Signs Deal With Sweden For Assange Questioning (Reuters)
Vulture Funds Price Greek Nonperforming Loans At Very Low Rates (Kath.)
Tsipras Expects Protest As Greece Agrees To Further Privatisations (Guardian)
Athens Wants To Turn Bailout Loans’ Floating Rates Into Fixed (Kath.)
Greece Seeks Help With Migrants As Tensions Rise (Kath.)
Angela Merkel Wants To ‘Drastically Reduce’ Refugee Arrivals In Germany (Reuters)
EU Border Force Plan Faces Resistance From Governments (Reuters)

“Fifth of US adults live in or near to poverty..”

The New American Dream Is To Have A Job (FT)

One in five US adults now lives in households either in poverty or on the cusp of poverty, with almost 5.7m having joined the country’s lowest income ranks since the global financial crisis. Many of the new poor, or near-poor, have become so even amid an economic recovery that is widely expected to lead the US Federal Reserve to raise interest rates next week for the first time in almost a decade. More than 45 per cent of them — almost 2.5m adults — have joined the lowest income ranks since 2011, long after the post-crisis recession was ostensibly over. The findings, contained in data prepared for a new study of the US middle class by the Pew Research Center and shared with the Financial Times, put a stark human face on the economic legacy left by the crisis and reveal how uneven the recovery has been.

They also help explain why any notion of a recovery still seems a long way off to many in the US and why the message of populist politicians such as Donald Trump that America is not working resonate on the eve of an election year. “There’s a new American dream,” says Torrey Easler, a Baptist preacher who helps feed a growing population of poor in the town of Eden, North Carolina. “The old American dream was to own a home and two cars. The new American dream is to have a job.” A large part of the shrinking of the US middle class, which for the first time in decades now forms less than a majority of the country’s adult population, has surprisingly been due to the country’s growing affluence, the Pew study found.

But the country’s lowest income group — defined by Pew for a three-person household as earning less than $31,402 a year — has also grown at more than five times the rate of the middle class in the past seven years. There are now 48.9m adults in this bracket in the US, up from 43.2m in 2008 and just 21.6m in 1971. Pew’s measure of the lowest income group is relatively broad, though it calculates that almost half of the adults in this category — 23m — fell below the $18,850 poverty line for a household of three set by the US Census Bureau. The group’s members earn half or less of Pew’s $62,804 median household income in the US last year and the $41,869 to $125,608 range Pew uses to define the American middle class. They also account for a population that, even as the struggles of the middle class draw an increasing focus, is often left out of policy discussions — as some policymakers admit.

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“..the world economy is actually going to shrink for the first time since the 1930s..”

The End Of The Bubble Finance Era (Stockman)

We are nearing a crucial inflection point in the worldwide bubble finance cycle that has been underway for more than two decades. To wit, the world’s central banks have finally run out of dry powder. They will be unable to stop the credit implosion which must inexorably follow the false boom. We will get to the Fed’s upcoming once in a lifetime shift to raising rates below, but first it is crucial to sketch the global macroeconomic context. In a word, we are now entering an epic deflation. Its leading edge is manifested in the renewed carnage in the commodity pits. This week the Bloomberg commodity index, which encompasses everything from crude oil to soybeans, copper, nickel, cotton and livestock, plunged below 80 for the first time since 1999. It is now down nearly 70% from its all-time high on the eve of the financial crisis, and 55% from its 2011 recovery high.

Wall Street bulls and Keynesian apologists for the Fed want you to believe that there isn’t much to see here. They claim it’s just a temporary oil glut and some CapEx over-exuberance in the metals and mining industry. But their assurances that in a year or so current excess supplies of copper, crude, iron ore and other commodities will be absorbed by an expanding global economy couldn’t be farther from the truth. In fact, this error is at the heart of my investment viewpoint. We believe the global economy is vastly bloated with debt-based spending that can’t be sustained. And that this distortion is compounded on the supply side by an incredible surplus of excess production capacity. As well as wasteful malinvestments that were enabled by dirt cheap central bank credit.

Consequently, the world economy is actually going to shrink for the first time since the 1930s.

That’s because the plunging price of commodities is only a prelude to what will amount to a worldwide CapEx depression — the kind of thing that has not happened since the 1930s. There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. The boom of the last two decades essentially stole output from many years into the future. So there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

The crucial point, however, is that sharp curtailment of the capital goods industries has far more destructive implications for the macro-economy than a reduction in consumer appliance sales or restaurant and bar tabs. Service operations have virtually no working inventories and the supply chains for durable consumer goods such as dishwashers and cars typically have perhaps 50 to 100 days of stocks on hand. So when excessive inventory investments accumulate, the destocking and resulting supply chain curtailments are relatively short-lived. But when it comes to capital goods the relevant inventory measure is capacity in place. That’s where the bubble finance policies of the Fed and other central banks have done so much damage.

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See if you can spot the green.

“It’s An Epic Bloodbath” : The 2015 Junk Bond Heatmap (ZH)

Ten days ago, before the world had heard about the stunning liquidation and gating of the Third Avenue Focused Credit Fund, we asked one question: Did Something Blow Up in Junk, with our question driven by the relentless collapse in triple hook-rated (CCC or below) bond prices, or alternatively, their soaring yields. A few days later we learned that the answer to our question was a resounding yes, when first Third Avenue and then Stone Lion Capital (run by two ex-Bear Stearns distressed trading heads) gated investors following what may have been a dedicated attack on the worst and most illiquid junk bonds, but was really just a marketwide puke in junk starting at the bottom and spreading to the top. Since then things for the junk space have gone from bad to worse, and as of Friday, the effectively yield on the BofA-Merrill universe of bonds rated CCC and below has soared to 17.24%, taking out the 2011 wides and trading at levels not seen since the summer of 2009… only in the wrong direction.

And yet, in a world where everyone has become an algo and thinks of performance in heatmap terms, the chart above (which we will show shortly from a far more stunning angle) hardly does justice to the absolutely bloodbath in the junk bond space. So, without further ado, here is a visualization of the change in junk bond prices since January 1, 2015. For those confused, the redder the worse. It is, for lack of a better word, an epic bloodbath, and perhaps the only question after looking at this is how have many more credit funds not gated yet. And yes, if one looks hard enough, there are a few junk bonds which actually are green for the year. See if you can spot them.

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Nice find. CCC and below=junk.

The Coincidences Are Just Too Eerie: The Last Time CCC Yields Were Here (ZH)

Yesterday, we highlighted the all too eerie coincidence that the very first hedge fund (not mutual fund) to gate investors late on Friday, was operated by none other than the two former heads of distressed/high yield trading of the bank that started it all, Bear Stearns. Today, things get even eerier, because while we already have the Bear Stearns link, an even more curious coincidence emerged when according to the BofA-Merrill index of “CCC and below” bond yields, the index just hit 17.24%, soaring nearly 2% in just the past two weeks, and rising fast.

When was the last time the same index was at precisely 17.24% and rising? The answer: the weekend Lehman Brothers filed for bankruptcy (check for yourselves: on Sept 15, 2008, the closing effective yield was 17.27%).

 

What happened next? This.

 

And while no bank has blown up this time (to the best of our knowledge) the irony is that the catalyst driving the long, long overdue blow out in yields is the trifecta of plunging oil, the soaring dollar, and of course, fears about the tightening financial conditions as a result of the an “imminent” rate hike. In other words, the Fed. And while history rhymes, it usually does so in very ironic ways, and we can’t wait to find out if indeed Yellen’s first rate hike in 9 years this Wednesday unleashes a Lehman-like neutron bomb that leads to the full collapse of the junk bond market first, and then the shockwave spreads across all asset classes leading to the same financial devastation witnessed at the end of 2008, unleashing the longest period of “free capital markets” central planning the world has ever seen.

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At what point will the IMF chime in?

Yuan Declines to Four-Year Low as New Index Signals Weakness (BBG)

China’s yuan fell to a four-year low after the central bank said the currency shouldn’t be measured by its moves against the dollar alone, a statement that is being interpreted as a sign it will allow further declines. Exchange rates are a reflection of trade and investment with multiple countries and the market has to take into account the yuan’s fluctuations against a basket of currencies, the People’s Bank of China said on Friday. The China Foreign Exchange Trade System, which is run by the PBOC to facilitate interbank trading, published a new yuan index composed of 13 currencies, with the dollar accounting for 26.4%.

The yuan dropped 0.05% to 6.4585 a dollar as of 1:37 p.m. in Shanghai [..] The PBOC Monday cut its reference rate by 0.21% to a four-year low of 6.4495. “The latest move suggests the PBOC will allow weaker yuan fixings,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “The yuan is also under pressure as the U.S. is likely to hike rates this week.” The central bank has lowered the reference rate, which limits the onshore currency’s moves to 2% on either side, on eight of the 10 trading days since winning reserve-currency status at the IMF on Nov. 30. This fueled speculation that the authority is trying to release pent-up depreciation pressure before the Federal Reserve meets Dec. 15-16.

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There’s nothing left that could lift demand. Well, other than warfare, that is.

Oil Sinks to Lowest in Almost 7 Years as Iran Vows More Supply (BBG)

Oil extended declines from the lowest price since February 2009 as Iran pledged to boost crude exports, bolstering speculation OPEC members will exacerbate the global oversupply. Futures dropped as much as 1% in New York after losing almost 11% last week, the most in a year. There’s “absolutely no chance” Iran will delay its plan to increase shipments even as prices decline, said Amir Hossein Zamaninia, the deputy oil minister for international and commerce affairs. Hedge funds and other large speculators raised bearish bets to an all-time high, U.S. Commodity Futures Trading Commission data showed.

Oil has slumped to levels last seen during the global financial crisis as OPEC effectively abandoned production limits to defend market share, fueling a record surplus. The glut will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, according to the International Energy Agency. “The price war will likely drag on until the end of next year,” Hong Sung Ki at Samsung Futures in Seoul said by phone. “Saudi Arabia won’t be able to cut its production while Iran continues to increase output.”

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Not a very interesting question, since nobody knows.

How Low Can Oil Prices Go? (Guardian)

Not only did US prices fall under $40 this week but so did the global benchmark Brent crude oil prices, for the first time since February 2009. The global supply glut of about 1.5m barrels per day is the driving factor behind the lower oil prices, with much of that overproduction because of Opec’s opening the spigots. [Jay Hatfield atr Infrastructure Capital Advisors] said there’s another factor behind the new drop in oil prices: warm weather. “The fact that you can almost go swimming in New York City right now is horrible. Absolutely horrible [for heating oil demand]. To me, that’s the straw that is breaking the camel’s back. We’re ground zero for fuel oil demand,” he said.

The El Niño weather phenomenon can bring milder winter weather to the northern part of the US, and that’s been seen in places like New York and Chicago, where December temperatures are above normal, reducing heating demand. If Opec’s disorganization continues and temperatures stay mild, that could add further pressure to prices, he said. “I thought prices would have stabilized in the $40 to $50 area, but … now it could be $35 to $40,” he said. A few factors could influence oil, such as next week’s Federal Reserve’s monetary policy meeting, where the Fed may raise interest rates for the first time in seven years. That could give the dollar another boost, and Kessens said the greenback’s strength has hit oil since it is dollar denominated.

Next week is the last full trading week of 2015, so there could be some book squaring as investment managers close up accounts before the holidays when trade volume dwindles. Daniel Pavilonis, senior commodity broker with RJO Futures, said the next target for prices is likely the 2008 low. “I see prices going lower. I wouldn’t be surprised if we saw an uptick from here next week, maybe to the $40s, but then see a sharp decline, a sell-off below $35. There’s so much supply out there. I think [prices are] going to be lower than people will perceive,” he said.

Taking out a level that’s held for so long could be jarring and may have a snowball effect, he said. On the other hand, there is likely to be some opportunistic buying simply because prices are so low. Pavilonis didn’t rule out a dip under $30 a barrel, but just how far prices may go is hard to determine. “It’s hard to call a bottom. It’s like catching a falling knife. Just let the knife fall to the side and pick it up later so you don’t get hurt,” he said.

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All that focus on the Fed is not healthy.

World Markets In Fragile Mood As Yellen Prepares To Push The Button (Guardian)

Stock market investors are braced for panic selling in New York and London ahead of what is expected to be the first rate rise by the US Federal Reserve since 2006. The US central bank will decide on Wednesday whether to raise interest rates as a mark of the US economy’s strong recovery since the 2008 banking crash. But Fed boss Janet Yellen is expected to announce the increase in borrowing costs despite a slowdown in global trade and a slump in oil and commodity prices that has pushed inflation down to near zero in most developed countries. Shares plunged on Friday and oil prices tumbled as the date neared for the Fed decision and investors became increasingly nervous of the impact on highly indebted emerging market economies.

The level of borrowing by businesses and governments in China, Thailand, Indonesia, Brazil has soared in the last decade. Borrowing by emerging market economies has quadrupled from $4tn in 2004 to over $18tn in 2014, much of it in dollars, making them vulnerable to higher US interest rates. Phil Shaw, chief UK economist at fund manager Investec, said it was almost certain the Fed would raise rates, but the question for markets was whether Yellen would signal further rate rises over the coming months. More than £73bn was wiped off the value of UK shares last week after fresh falls in the price of copper and other metals was matched by a precipitous fall in the price of oil to below $38. London’s FTSE 100 closed 135.27 points down at 5,952.78 – its lowest level since late September.

The index of Britain’s top 100 companies is now about 6.5% below its level at the start of the year, unlike the German Dax 30 and the Paris Cac 40, which are well above. A forecast from the IEA that a glut of crude will persist for another year triggered panic selling among investors, already concerned that an interest rate rise will potentially destabilise the global economy.

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Hilsenrath perparing the narrative for a way out?

Fed Officials Worry Interest Rates Will Go Up, Only to Come Back Down (WSJ)

Federal Reserve officials are likely to raise their benchmark short-term interest rate from near zero Wednesday, expecting to slowly ratchet it higher to above 3% in three years. But that’s if all goes as planned. Their big worry is they’ll end up right back at zero. Any number of factors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting and slamming the economy, or lost momentum in a business cycle which, at 78 months, is already longer than 29 of the 33 expansions the U.S. economy has experienced since 1854.

Among 65 economists surveyed by The Wall Street Journal this month, not all of whom responded, more than half said it was somewhat or very likely the Fed’s benchmark federal-funds rate would be back near zero within the next five years. Ten said the Fed might even push rates into negative territory, as the European Central Bank and others in Europe have done—meaning financial institutions have to pay to park their money with the central banks. Traders in futures markets see lower interest rates in coming years than the Fed projects in part because they attach some probability to a return to zero. In December 2016, for example, the Fed projects a 1.375% fed-funds rate. Futures markets put it at 0.76%.

Among the worries of private economists is that no other central bank in the advanced world that has raised rates since the 2007-09 crisis has been able to sustain them at a higher level. That includes central banks in the eurozone, Sweden, Israel, Canada, South Korea and Australia. “They effectively have had to undo what they have done,” said Susan Sterne, president of Economic Analysis Associates, an advisory firm specializing in tracking consumer behavior. The Fed has never started raising rates so late in a business cycle. It has held the fed-funds rate near zero for seven years and hasn’t raised it in nearly a decade.

Its decision to keep rates so low for so long was likely a factor that helped the economy grow enough to bring the jobless rate down to 5% last month from a recent peak of 10% in 2009. At the same time, waiting so long might mean the Fed is starting to lift rates at a point when the expansion itself is nearer to an end. Ms. Sterne said the U.S. expansion is now at an advanced stage and consumers have satisfied pent-up demand for cars and other durable goods. She’s worried it doesn’t have engines for sustained growth. “I call it late-cycle,” she said.

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The volumes are staggering.

The China Metal Exchange At Center Of Investment Scandal (Reuters)

The Fanya Metals Exchange was launched shortly after China, the world’s dominant producer of rare earths, imposed quotas on production and exports in a bid to support prices and attract downstream consumers to China. Fanya was keen to provide a supporting role, saying it wanted to raise the value of the whole minor metals industrial chain. It stockpiled and traded 14 metals, rapidly becoming the biggest minor metals market in the world. These metals are minor because they are a byproduct of extracting other major metals, such as zinc or copper. “Fanya prices already lead global prices, and have made China’s voice on the minor metals’ stage growing increasingly strong,” it boasted on its website in 2014. Prices for the metals traded on the exchange rose sharply and became increasingly out of sync with world prices.

Its most traded metal – indium – more than doubled between 2012 and 2015 to $1,200 per kg. Prices kept rising from the end of 2014 even as global prices headed into a rapid decline. The price difference kept traders outside of China wary of using the exchange. Now they are worried about what will happen to the accumulated stock of metals on the exchange. “It’s not clear how all this winds down, or what the local government or Beijing will do,” said David Abraham, director of the Technology, Rare and Electronic Materials Center. “There are lots of wild cards here.” As early as last year, state regulators called on local authorities to “clean up and rectify” privately run exchanges throughout China. A provincial regulator in Yunnan singled out Fanya for rule-breaking behavior, although it did not provide details.

“The risks are huge,” it said. Those risks became clear in April when investors placed a wave of sell orders, which the exchange later admitted caused liquidity problems. Looking to make good on the promise of instant redemption, investors wanted to switch their money into a stock market rally. Seeing a rush to sell, many investors were reassured their money was safe when the Yunnan government issued a statement saying Fanya remained a legal entity engaged in legal operations. Some continued to put money into the plan.

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Scapegoats.

China Local Officials Admit To Faking Economic Figures (CD)

Several local officials in China’s Northeast region sought to explain dramatic economic drops in their areas by admitting they had faked economic data in the past few years to show high growth when the real numbers were much lower, Xinhua News Agency reported on Friday. “If the past data had not been inflated, the current growth figures would not show such a precipitous fall,” one official was quoted as saying. The report cited several officials in the region who acknowledged they had significantly overstated data ranging from fiscal revenue and household income to GDP.

Three years ago Liaoning province’s GDP growth was reported at 9.5%, but its current figure -over the first three quarters of this year- is just 2.7%. Jilin’s growth was reported at 12% three years ago, but its current rate is 6.3% in the same period. The revelation about the inflated figures came as the GDP growth of the three Northeast provinces ranked the lowest nationwide. Guan Yingmin, an official in Heilongjiang province, said local investment figures were inflated by at least 20%, which translates to nearly 100 billion yuan ($15.7 billion). If the local financial reports were true, some single counties’ GDP would have surpassed Hong Kong. An earlier audit by the National Audit Office found one county in Liaoning that reported annual fiscal revenues 127% higher than the actual number.

A staff member in the Jilin provincial finance department, who asked not to be identified, told China Daily that in past years, local officials competed each other to lure external investment projects. They reported the promised investment value, whether it had been achieved or not, as the investment figure. The legacy of the command economy in the area means that there is a lack of entrepreneurship and forward thinking, said Xu Mengbo, an economics professor at Jilin University. “In terms of management ideas, there is at least 10-year gap,” he said.

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At what point does this become a criminal operation?

Who’s Profiting From $1.2 Trillion of US Federal Student Loans? (BBG)

Jody Sofia borrowed $92,500 to get a degree from Florida Coastal School of Law. Now she’s in default, her outstanding balance having ballooned to almost $144,000, and she spends her days fielding calls from government-contracted debt collectors. The companies making those calls are just one part of an ecosystem feeding on federal student loans. There are also debt servicers, refinance lenders, firms that help former students stay out of default and for-profit schools that make money as borrowers try to repay more than $1.2 trillion in government-backed education debt. Sofia is one of 7 million former students in default on a record $115 billion of federal loans, an amount that has grown almost 25% in two years, according to U.S. government data. The mountain of debt, for which taxpayers are on the hook, has provided a stream of revenue to companies at every stage of the process.

“This is not some small cottage industry,” said Rohit Chopra, the former student-loan ombudsman for the U.S. Consumer Financial Protection Bureau, which oversees loan servicers, debt collectors and private student lenders. “There is a large student-loan industrial complex. Rising costs of college and flat family incomes have created enormous business opportunity for every step of the loan process.” Sofia, who didn’t take the bar exam and never got a legal job after graduating from Florida Coastal in 2004, says the system is dysfunctional. Derailed by illness and having to care for ailing parents, most of her income has come from working as an independent insurance adjuster, the same thing she was doing before going to law school. While she has made some payments, interest on the loans keeps accruing. “There’s something really wrong with this system,” said Sofia, 45. “The government is spending all this money for these people to constantly call you. How effective is that?”

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Sweden has nothing. That’s what’ll come out of the questioning. But will they go public that way?

Ecuador Signs Deal With Sweden For Assange Questioning (Reuters)

Ecuador and Sweden have signed a pact that would allow WikiLeaks founder Julian Assange to be questioned at Ecuador’s embassy in London where he has been for more than three years, the Quito government said. The legal agreement was signed in the Ecuadorean capital after half a year of negotiations. “It is, without doubt, an instrument that strengthens bilateral relations and will facilitate, for example, the fulfillment of judicial matters such as the questioning of Mr. Assange,” the foreign ministry said in a weekend statement.

Assange, 44, took refuge in the embassy building in June 2012 to avoid extradition to Sweden, where he is wanted for questioning over allegations of sexual assault and rape against two women in 2010. The Australian denies the accusations. Assange says he fears Sweden will extradite him to the United States where he could be put on trial over WikiLeaks’ publication of classified military and diplomatic documents five years ago, one of the largest information leaks in U.S. history. Britain has accused Ecuador of preventing the course of justice by allowing Assange to remain in its embassy in the upmarket central London area of Knightsbridge.

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Forcing Greece into the hands of vulture funds is the lowest things the Troika has done so far.

Vulture Funds Price Greek Nonperforming Loans At Very Low Rates (Kath.)

Investment funds preparing to profit from Greek nonperforming loans are offering rates of between 5 and 15 cents per euro for the purchase of bad corporate loans, in anticipation of a legal framework that would allow them to enter the local market. The repayment of those loans is considered impossible, as the majority of the enterprises that have received them are at the bankruptcy stage and their assets comprise nothing more industrial real estate or equipment. By contrast, the rate for NPLs taken out by sustainable corporations with high borrowing come to 40-50 cents per euro, which factors in the writing off of half of the debt when the funds take control of their management, which would ensure that costs would be cut and the company would undergo a general tidying up ahead of their sale.

Bank officials say the rates currently being quoted in the local market have declined significantly compared to a year ago, when the prices of bad corporate loans came to 30 cents per euro, as economic conditions have deteriorated considerably in the meantime. The high country risk factor is increasing the potential cost for the distressed debt funds that are eyeing the local market with interest due to the high accumulation of bad loans in bank portfolios.

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There has better be protests.

Tsipras Expects Protest As Greece Agrees To Further Privatisations (Guardian)

The Greek prime minister, Alexis Tsipras, has warned that his government faces a new storm of protest after jumping another reform-for-aid hurdle with international creditors. After a week of rigorous negotiations with foreign lenders, Tsipras’s leftist-led government finalised a deal foreseeing further privatisations, reforming the energy sector and opening up the market to non-performing loans. The agreement is slated to unlock another €1bn (£720m) in loans for the debt-stricken country next week. Addressing Syriza’s central committee at the weekend, Tsipras warned of the perils that lay ahead. “There are forces that want to see Greece’s government fail,” he said.

Under the accord, publicised early on Saturday, Greece will retain a 51% stake in the national grid operator, Admie, and forge ahead with a host of state sell-offs through the creation of a privatisation scheme. New rules for non-performing loans, which amount to an extraordinary 60% of GDP, will also be enacted. Those belonging to big businesses as well as unpaid mortgage repayments will henceforth be sold to foreign funds. Viewed as a compromise by many in Tsipras’s once far-left Syriza party, the deal is expected to be passed in the name of national expediency. Failure to endorse the legislation would derail the country’s bailout programme and put Greece, which only narrowly survived a euro exit before clinching a third €86bn rescue package in August, at risk of national bankruptcy again.

But Tsipras is unlikely to be let off as lightly in the new year, when his fragile two-party coalition will be obliged to overhaul a dysfunctional pension system that is not only on the verge of collapse but is seen as the most expensive in Europe. Creditors are demanding the overhaul produces the equivalent of 1% of GDP, or €1.8bn, in savings next year. With Greek pensioners already having suffered 12 cuts since the outbreak of the debt crisis in late 2009, MPs are likely to balk at further austerity being meted out. The prospect of turmoil has been heightened by the government’s parliamentary majority being whittled down to a mere three seats in the 300-member house, after two deputies defected in a vote on an earlier set of milestones last month.

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Greece has no voice anymore.

Athens Wants To Turn Bailout Loans’ Floating Rates Into Fixed (Kath.)

The answers to the burning questions of whether a new arrangement for the Greek debt is necessary and what kind of measures will be required are coming through the numbers: Next year the amount Greece will have to repay for the capital of the bailout loans it has received will be almost as much as the interest on them. In total, the amount due in 2016 for servicing the debt will come to just 7.5% of gross domestic product, similar to the following years’ amounts. That is why the eurozone has been insisting on every occasion that the Greek debt does not require a haircut and that any intervention would be necessary only from 2022 onward – i.e. the year when the current grace period ends: That year Greece will need to pay €22 billion for interest alone.

Until then the state’s obligations are under control: Market observers say that the intervening years will be very much like 2016. Next year Greece will have to pay €12.5 billion, of which €6.5 billion concerns capital repayment and 6 billion the payment of interest. At this point the interest trap is hiding. Nowadays the country pays interest of some 6 billion while the loans of the European Stability Mechanism have interest that is very low, around 1%. However, in the following years the interest rates will begin to grow, given that they are floating rates, placing a significant burden on future state budgets.

For that reason Athens is requesting the conversion of the floating rates into fixed rates, which would be advantageous compared to to the current levels (some 0.5%) but still be fairly low for a long period (of at least 15-20 years) during which they would increase by at least 2-3% under normal circumstances. All this would mean that the state budget would become lighter in the future as far as the expenditure on interest was concerned, compared to what the country faces without an arrangement.

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“Concern has been mounting that thousands of migrants arriving in Greece by boat from neighboring Turkey will become trapped in the country..”

Greece Seeks Help With Migrants As Tensions Rise (Kath.)

As tensions peaked at temporary reception facilities for migrants, Citizens’ Protection Minister Nikos Toskas said over the weekend that Greece was doing all it can to tackle a relentless migration crisis which he described as “a massive problem, stretching the limits of our country and of Europe.” Toskas visited the Tae Kwon Do Stadium in Palaio Faliro, southern Athens, on Saturday following scuffles between groups of migrants from different countries. Greece cannot keep hosting thousands of migrants streaming into the country, he said. “Our country can’t handle it, our economy can’t handle it.”

Asked by reporters about a joint letter he and Migration Minister Yiannis Mouzalas sent to European Migration and Home Affairs Commissioner Dimitris Avramopoulos, Toskas said the two ministers underlined that the return of migrants from EU countries must be carried out in line with EU regulations and agreements “to keep the number of people that we can support at manageable levels.” Toskas’s comments came ahead of a European Union leaders’ summit planned for Thursday and Friday where the issue of migration is to be discussed along with plans for the creation of a new EU border force which, unlike Frontex, will not require the approval of member-states to be deployed. In an interview with Kathimerini on Sunday, Frontex’s Executive Director Fabrice Leggeri said the border agency had guards ready to dispatch to Greece as early as October but Greek authorities delayed the deployment as they had not appointed Greek officials to head the teams.

Concern has been mounting that thousands of migrants arriving in Greece by boat from neighboring Turkey will become trapped in the country as the Former Yugoslav Republic of Macedonia has tightened controls at Greece’s northern border. Thousands of migrants who had been in a makeshift camp near the FYROM border were bused to Athens last week. Most of them were moved to the Tae Kwon Do Stadium, where scuffles broke out late on Friday and on Saturday morning, prompting riot police to intervene. According to sources, the clashes were between groups of migrants from Morocco and other countries and followed allegations that some migrants had stolen cell phones and cash from others.

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Where would they go then, Angela? Remember 3 million more expected in 2016?

Angela Merkel Wants To ‘Drastically Reduce’ Refugee Arrivals In Germany (Reuters)

Chancellor Angela Merkel wants to “drastically decrease” the number of refugees coming to Germany, signalling a compromise to critics of her open-door policy from within her conservatives on the eve of a party congress. Merkel has resisted pressure from allies within her Christian Democratic Union (CDU) to put a cap on the number of refugees entering Germany, which is expected to be more than 340,000 this year. “At the same time we took on board the concerns of the people, who are worried about the future, and this means we want to reduce, we want to drastically decrease the number of people coming to us,” Merkel told broadcaster ARD on Sunday. Merkel, whose popularity has fallen over her handling of the refugee crisis, said the word “limit” did not feature in the CDU’s main resolution which will be debated at the two-day party congress starting on Monday in the southern city of Karlsruhe.

The chancellor added there was broad support in the CDU for her strategy to reduce the numbers. This included working with Turkey to fight traffickers, improving the situation at Syrian refugee camps in Turkey, Lebanon and Jordan, and strengthening control of the European Union’s outer borders. Merkel’s conservative critics want her to get the number of arrivals down before three state elections in March and say her hopes of running for a fourth term in 2017 would be in danger. Her strategy also includes finding a solution to the migration crisis on the EU level, where she is meeting resistance from member states opposed to a quota system to distribute refugees. Her critics say her decision in late August to allow Syrian asylum seekers to remain in Germany regardless which EU country they had first entered had accelerated the influx of migrants.

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The end of the EU will come through Brussels seeking to take away nations’ sovereignty.

EU Border Force Plan Faces Resistance From Governments (Reuters)

A proposal to give the EU’s executive the power to send forces unbidden into member states to defend the common European frontier will face resistance from some countries when it is published this week. The European Commission wants to be able to deploy personnel from a new European Border and Coastguard Agency without, as currently required, the consent of the state concerned, EU officials told Reuters in early December, reflecting frustration with Greek reluctance to seek help with migrants. European Union officials call it a largely theoretical “nuclear option” and stress that any infringement of national sovereignty would be balanced by the power of a majority of member states to block Commission intervention – similar to checks agreed during the euro debt crisis.

The Commission will set out the plan on Tuesday to reinforce its Frontex agency with up to six times more staff, EU officials said, following a commitment to an EU border guard in September by President Jean-Claude Juncker. “We think the current situation justifies a certain ambition,” the Commission’s chief spokesman said on Friday, expressing confidence about backing from member states. Failure to strengthen the external borders, senior officials argue, will see more states reimpose frontier controls inside the bloc, wrecking its cherished free movement area, and foster the rise of anti-EU nationalists like France’s National Front.

But while big powers France and Germany support such EU power, other EU leaders may voice concerns at a summit on Thursday. Italy has pushed for a “Europeanisation” of external frontiers to relieve the costs on itself and Greece of policing the Mediterranean. But the plan may go too far for many leaders. “This idea will face opposition from most member states,” one EU diplomat said. “We believe such a solution would interfere too deeply in member states’ internal competences.” “The Commission is testing our limits,” said another. He compared it to the Commission’s push to oblige states to take in mandatory quotas of asylum seekers, which set furious east Europeans against German Chancellor Angela Merkel.

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May 082015
 
 May 8, 2015  Posted by at 11:11 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle May 8 2015


Gottscho-Schleisner New York City views. Looking down South Street 1933

Why Are Stock Prices So High? Borrowed Money (MarketWatch)
Break Up Big Banks (Senator Bernie Sanders)
Violent Bond Moves Signal Tectonic Shifts In Global Markets (AEP)
Bond Yields, Not Political Fallout, Should Be Worrying Us Now (Independent)
Rising European Yields Are A Worry For US Stocks (CNBC)
Stocks May Find It Tough To Wiggle Out Of The Bond-Market Mess (MarketWatch)
The Great German Government Bond Sell-Off Mystery (Guardian)
98% Of Q1 US Consumer Credit Was Used For Student And Car Loans (Zero Hedge)
China Exports, Imports Fall Sharply In April (CNBC)
Varoufakis Says Greece Ready to Take EU Impasse Down to the Wire (Bloomberg)
Greece To Rehire Cleaners, School Guards Laid Off Under Austerity (Kath.)
Five Years On, Doctor and Patient Split on Greek Cure (WSJ)
Greece’s Biggest Brain Drain Since The Death Of Socrates (MarketWatch)
Greek Bank Bailout Fund CEO To Stand Trial, Asked To Resign (Kathimerini)
Greece and Britain Test the Union (Kathimerini)
Greece Sees Massive Increase In Refugees Arriving By Boat (Guardian)
Hedge Funds Aren’t Casino Capitalists. They’re Parasite Capitalists (Ind.)
The British Press Has Lost It (Politico)
Angela Merkel Under Pressure To Reveal All About US Spying Agreement (Guardian)
Chinese Warships To Join Russian Navy Drill In Black Sea, Mediterranean (RT)
Modern Slavery In Australia: Labour Exploitation Rife In Agriculture (RT)
Nepal Quake Victims’ Families Not Allowed To Leave Qatar For Funerals (Ind.)
How Climate Science Denial Affects The Scientific Community (PhysOrg)

“Despite all the claims that U.S. companies are awash with cash and have “never had it so good,”[..] in reality Corporate America has “overspent” in recent years to the tune of hundreds of billions of dollars.”

Why Are Stock Prices So High? Borrowed Money (MarketWatch)

Why are stock prices so high? Follow the borrowed money Maybe the bears and cynics and general party-poopers are all wrong. Maybe the stock market these days isn’t a giant Ponzi scheme. Maybe it’s a shell game. The cheerleaders on the Street of Shame won’t tell you this, but lurking behind the phenomenon of today’s skyrocketing stock prices is a surge in corporate borrowing. Companies have been borrowing money with both fists, and spend the money to buy back shares and in the process drive up their share prices. But what the stock market giveth, the bond market taketh away.

Despite all the claims that U.S. companies are awash with cash and have “never had it so good,” an analysis by investment bank SG Securities calculates that in reality Corporate America has “overspent” in recent years to the tune of hundreds of billions of dollars. Over the past five years, equity prices have almost doubled — but so has the net debt of nonfinancial companies. Both have outstripped a 60% rise in profits. Or, to put it another way, since March 2009, the cash pile of non-financial U.S. corporations has risen by $570 billion, but debt has risen by $1.6 trillion. Indeed over the past year net debt has risen about 20%,SG estimates — while gross cash flows have risen a more modest 4%. Indeed, “it is also those companies with the weakest sales growth that are buying back the most,” warns SG quantitative strategist Andrew Lapthorne in a new report for clients.

And that’s not all. The “net debt” figures for most of the stock market are even worse than many will tell you, for the simple reason that the overall figure is skewed by a handful of companies with big cash piles — such as Apple AAPL, +1.08% . When you remove those from the equation, the picture for the rest of the pack looks a lot worse. Many of those cash piles are sitting offshore, untaxed or lightly taxed. Net of tax, the levels are lower. And anyone who tries to give you comfort by pointing out that net debt levels aren’t too bad when compared to asset prices needs to offer a big caveat. Such ratios always look good during a boom, because asset prices get inflated. If or when the tide turns, the asset prices can tumble — but the value of the debt, alas, sticks around at its previous level.

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“The function of banking should be to provide affordable loans to businesses to create jobs. The function of banking should be to provide affordable loans to Americans to purchase homes and cars. Wall Street cannot be an island unto itself..”

Break Up Big Banks (Senator Bernie Sanders)

We don’t hear it discussed much in the media, but the reality is that the middle class of this country, once the envy of the world, is collapsing, 45 million Americans are living in poverty, and the gap between the rich and everyone else is growing wider and wider. Despite a huge increase in technology and productivity, median family income is almost $5,000 lower today than it was in 1999. There are 45 million people living in poverty and we have the highest rate of childhood poverty of any major country on earth. Half of the American people have less than $10,000 in savings and have no idea how they will retire with dignity. Real unemployment is not 5.5% – it’s close to 11%. Today, 99% of all new income goes to the top 1%.

During the last two years, the 14 wealthiest Americans saw their wealth increase by $157 billion, which is more wealth than is owned by the bottom 130 million Americans. In the midst of all this grotesque level of income and wealth inequality comes Wall Street.
As we all know, it was the greed, recklessness and illegal behavior on Wall Street six years ago that drove this country into the worst recession since the Great Depression. Millions of Americans lost their jobs, homes, life savings and ability to send their kids to college. The middle class is still suffering from the horrendous damage huge financial institutions and insurance companies did to this country in 2008. It seems like almost every day we read about one giant financial institution after another being fined or reaching settlements for their reckless, unfair, and deceptive activities.

In fact, since 2009, huge financial institutions have paid $176 billion in fines and settlement payments for fraudulent and unscrupulous activities. It should make every American very nervous that in this weak regulatory environment, the financial supervisors in this country and around the world are still able to uncover an enormous amount of fraud on Wall Street to this day. I fear very much that the financial system is even more fragile than many people may perceive. This huge issue cannot be swept under the rug. It has got to be addressed. Although I voted for Dodd-Frank, I did so knowing it was a modest piece of legislation. Dodd-Frank did not end much of the casino-style gambling on Wall Street. In fact, much of this reckless activity is still going on today. Yet, today, three out of the four financial institutions in this country (JP Morgan, BoA, and Wells Fargo) are 80% larger today than they were on September 30, 2007, a year before the taxpayers of this country bailed them out. 80%!

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“It is absolute pandemonium in the fixed income markets..”

Violent Bond Moves Signal Tectonic Shifts In Global Markets (AEP)

A wave of turmoil is sweeping through sovereign bond markets, setting off the most dramatic gyrations seen in recent years and threatening to spill over into over-heated equity markets. Yields on German 10-year Bunds spiked violently by almost 20 basis points to 0.78pc in early trading on Thursday as funds scrambled to unwind the so-called “QE trade” in Europe, with powerful ripple effects reaching Japan, Australia, Brazil and even US Treasuries. “It is absolute pandemonium in the fixed income markets,” said Andrew Roberts at RBS. “Everybody has been trying to get out of long-duration positions at the same time but the door is getting smaller.” German yields fell back just as fast to 0.58pc later, as bargain-hunters came back into the European debt markets, but are still unrecognisable from the historic lows of 0.07pc two weeks ago.

Ructions of this magnitude are extremely rare in government bond markets. Investors are nursing almost half a trillion dollars in paper losses in two weeks, a staggering sum in what is supposed to be a rock-solid repository for institutional investors. French, Italian, Spanish and Portuguese bonds have all been sold off sharply over the past two weeks, obliterating the gains in yield compression since the European Central Bank unveiled a bond purchase programme of €60bn a month in January. “Anything over-populated is being cleared out. People got too exuberant and they’re coming back to reality,” said David Bloom, currency chief at HSBC. Peter Schaffrik, at RBC Capital Markets, said rising yields can be a healthy development if the global economy is picking up speed. It is a different matter if they suddenly jump at a time of sluggish growth and disappointing figures in the US.

“It is potentially dangerous. What worries me is that we don’t have a good macro-economic back-drop driving yields higher. We don’t see a reflationary recovery,” he said. Investors already face a changed world from early April, when deflation was still on everybody’s lips and Mexico was able to sell €1.5bn of 100-year bonds at a rate of 4.2pc. The worm turned two weeks later when bond king Bill Gross declared that Bunds had become unhinged and were the “short of a lifetime”, quickly followed by warnings from Warren Buffett that bonds were “very overvalued”. The sharp moves have been exacerbated by a lack of liquidity as traditional dealers withdraw from the market to comply with stricter rules. The Institute of International Finance said this week that thin liquidity had become the top issue in talks with central banks and regulators.

It said the new rules amounted to a “dramatic revolution” that had re-engineered the global financial system and pushed risk out into the shadows, storing up outcomes that are likely to be “pretty painful and certainly unknowable”.

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“..there is a timebomb ticking away in the bond markets, with the unwinding of QE, particularly in Europe, being more difficult and destructive than most people now appreciate.”

Bond Yields, Not Political Fallout, Should Be Worrying Us Now (Independent)

I am worrying about something. No, not what will happen in the UK in the next few days, though maybe that should be a worry. It’s that there is a timebomb ticking away in the bond markets, with the unwinding of QE, particularly in Europe, being more difficult and destructive than most people now appreciate. There are, as is usual after any long bull equity run, quite a few warnings around of a forthcoming crash in share prices, and there is in any case a good chance of a correction during the summer. But what has been happening in the bond markets is rather different. Bond prices are not as interesting as share prices: a 10-basis point move in 10-year German bund yields makes a worse headline than a 3% rise in the share price of HSBC when it says it may move its headquarters out of London.

But bund yields have an impact on the cost of mortgages across the eurozone (and to some extent here), whereas the price of HSBC shares really has not that much effect on anything. The easiest way to get one’s mind round what is happening is to start with 10-year government bond yields. US treasuries yielded 2.2% and UK gilts just under 2%. Many of us think these are far too low; what is inflation going to be over the next 10 years? Say 2%. So an investor would get no real reward at all. But while these are far too low, they are not ridiculously low. For that you look at German bunds. Yesterday they yielded just over 0.5%. At that level you are bound to lose money and would be far better with just about anything else: equities obviously, or maybe buying a flat in Berlin or even Athens, the latter being rather cheap right now.

Actually bunds yielding 0.5% represent some return to sanity compared with yields in the middle of last month. As you can see from the red line in the top graph, yields dipped to 0.1% for a short period. If you were nutty enough to buy at that level you would have lost quite a lot of money by now. You could argue that German yields make sense if you think the country will dump the euro and return to the deutschmark, for investors would make a currency gain. But that is some way off and in any case the argument would not apply to French or Italian bonds, yielding 0.9% and 1.9% respectively. So ask yourself this: which country is more likely to be able to pay its debt back in 10 years’ time, Italy or the US? Not many people would say Italy. Yet Italian yields are lower than US ones. This cannot be right. So why is this happening?

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“U.S. stocks will have to sing for their supper..”

Rising European Yields Are A Worry For US Stocks (CNBC)

Over the past three weeks, the yield on the 10-year German bund has more than tripled, albeit from incredibly low levels. And that’s sending up warning signs for investors, particularly in U.S. equities. “Low interest rates have supported global equity prices during a period of very slow macro growth,” Convergex chief strategist Nicholas Colas wrote in a note Wednesday to clients. “To hold stock prices constant—or see them rise—during a period of rising rates, you need to see tangible signs of economic growth and rising corporate earnings.” The basic issue is that low bond yields support rich stock valuations, as they reduce the attractiveness of alternatives to risk assets. But U.S. yields have risen alongside European ones lately, in a move than investors have long been anticipating. If rates continues to surge, stocks will need to show some serious earnings growth.

“U.S. stocks will have to sing for their supper,” Colas wrote. “It can be a nice tune about lower interest rates, sung in the European language of your choice. Or, it can be a robust march with verses promising a vigorous domestic economy.” Others also have some concerns. Technical analyst Todd Gordon sees the recent yield move as giving the Federal Reserve license to hike rates—which could be an issue for stocks. “Why are commodities rallying? Why are bonds selling off? Why is the dollar selling off? Everything from an intermarket point of view points to inflation. … So I wonder if the Fed’s going to be move sooner rather than later,” Gordon said. “I think that may be trouble for equities if we are in fact going to get a rate hike.” Forecasting inflation is a major departure from the market’s recent milieu: The big modern concern has been disinflation or deflation, rather than inflation.

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““The Fed are fully aware that ultra-low interest rates have been a huge factor behind U.S. equities hitting all-time highs..”

Stocks May Find It Tough To Wiggle Out Of The Bond-Market Mess (MarketWatch)

Look at it this way — someday, you’ll have some great financial war stories to tell. “The latter part of 2014 and the dawn of 2015 will probably represent one of those episodes in financial history when the fixed-income markets were gripped by a confluence of factors that is unlikely to be repeated over the next hundred years,” said Jefferies’s chief equity strategist, Sean Darby. There’s fodder for your future tales of battles past this morning, as Fed Chairwoman Janet Yellen’s assets-are-bubbly comments continue to rattle global markets, which have already been duly freaked out by plummeting global bonds. She’s hit us at a tough time. While some shout, “Off with her head!”, over at IG, analyst David Madden says Yellen was probably just trying to ready investors for an eventual hike.

“The Fed are fully aware that ultra-low interest rates have been a huge factor behind U.S. equities hitting all-time highs this year, and the last thing the U.S. central bank wants is a crash when rates start to rise,” he says. Or maybe she and the rest of her Fed minions are as confused as the rest of us. That’s the theory from Ed Yardeni, chief investment strategist at Yardeni Research, who notes that Fed officials have been pretty silent since the last meeting. He says they’re probably struggling to work backups in bond yields and oil prices into their policy-making decisions. Hang on until summer, he says, when the Fed will get less confused and less confusing.

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“..the market in German government debt is meant to be deep, liquid and populated by grown-ups.”

The Great German Government Bond Sell-Off Mystery (Guardian)

It’s a head-scratcher. Why have investors suddenly decided to dump German government bonds? The sell-off, seemingly on no news, has been extraordinary, affecting the entire European bond market. Yields, which move inversely to the price of the bond, briefly hit 0.8% on 10-year German debt on Thursday. Then they fell to 0.57%, but even that represents a surge from 0.1% only a few weeks ago. A glib explanation is to say that the ultra-low yields were wrong in the first place. Deflation is a worry, not a probability, so isn’t lending to any government for a decade for a near-zero return a surefire way to destroy your capital? But that doesn’t explain the suddenness of the move: the market in German government debt is meant to be deep, liquid and populated by grown-ups.

Greece doesn’t offer a plausible answer. Grexit – if anything – seems more likely than it did a month ago, in which case you’d expect a rush into German debt. “Supply indigestion,” ran another idea – in other words, lots of European governments issuing bonds, trying to take advantage of the European Central Bank’s bond-buying programme. Possibly. But what will happen when bond yields start to rise for reasons that are easier to explain – for example, a return of modest inflation and higher interest rates. On the evidence of Thursday’s brief wobble in stock markets, it won’t be pretty for share prices.

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A sign of bankruptcy.

98% Of Q1 Consumer Credit Was Used For Student And Car Loans (Zero Hedge)

By now everyone realizes that Q1 will be the second consecutive first quarter to see a negative GDP print. Wall Street’s weathermen formerly known as “economists” have been quick to scapegoat harsh weather once again for this unprecedented “non-recessionary” contraction in the US economy, however what the actual reason for the drop is irrelevant for this specific post; what is relevant is that even in a quarter in which US GDP is set to decline consumer credit, according to the latest update from the Federal Reserve, increased by just over $45 billion. But how is it possible that with such a massive expansion in household credit there was no actual benefit to the underlying economy? Simple: 98% of the credit lent out in the first quarter, or $44.3 billion, went to student and car loans!

The amount of credit that actually made it into the broader, consumer economy, i.e., credit card or revolving credit: a negative $600 million, despite a jump in revolving credit in March, when it rose by $4.4 billion to $889.4 billion. So $889.4 billion in credit card debt: as a reminder this is the key credit amount that has to keep growing for consumers to telegraph optimism about their wages, jobs, and generally, the economy. The problem is that as of Q1, this amount was lower than both car debt, at $972.4 billion, and certainly student debt, which in Q1 rose by another $30 billion to a record $1.355 trillion! In other words, virtually every dollar lent out in Q1 went to such dead-end uses as bailed out General Motors and student loans keeping an entire generation away from the harsh reality of the labor market.

But the most troubling discovery in Q1 is that as we reported last month, America’s consumer banks, i.e. depositor institutions, have shut down the lending spigot after seeing a jump in consumer bank lending in 2014. In fact, in the first three months of 2015, depository institutions saw a $32 billion decline in the total amount of credit lent out. So who did lend? Why the US government of course, which was the source of over $39 billion in consumer credit, or the vast bulk, lent out in the first quarter. In other words, the US government lends out cash, so US consumers can either buy cars from Government Motors in one truly epic circle jerk, or stay in the safe, ivory tower confines of college, and avoid the reality of what is really going on with the US economy.

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Exports down 15% in March, another 6.4% in April. Where oh where is the 7% growth going to come from?

China Exports, Imports Fall Sharply In April (CNBC)

China’s exports and imports tumbled in April, dashing hopes of a seasonal rebound and underscoring concerns over the soggy trade picture in the world’s second biggest economy. Exports fell 6.4% in April from the year-ago period, coming in worse than the 2.4% rise forecast in a Reuters poll and following a 15% plunge in March. Imports dived 16.2% on year, also missing the 12% expected drop and after falling 12.7% in March. This brought the trade surplus for the month to $34.13 billion, compared with the $39.45 billion forecast and March’s print of $30.8 billion. The news dampened prospects for Australia, one of the mainland’s major trading partners, and the Australian dollar fell to fresh session lows on the news, easing to $0.7859.

Markets had been hoping April’s trade numbers will rebound from the depressed levels in February and March blamed on the Lunar New Year holiday. “This [Lunar New Year] effect should have fully dissipated last month, so it is slightly surprising that export growth remained in negative territory,” said Julian Evans-Pritchard, China economist with Capital Economics, in a note. “The trade data suggest that both foreign and domestic demand has softened going into the second quarter.” Weak external and domestic demand has been a key factor behind the slowing Chinese economy, which Beijing expects will grow around 7% this year.

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Every day this lasts hurts Brussels more.

Varoufakis Says Greece Ready to Take EU Impasse Down to the Wire (Bloomberg)

Greek Finance Minister Yanis Varoufakis said his government is prepared to go “down to the wire” in talks with its creditors as policy makers signal they’re losing patience with the country after months of brinkmanship. Varoufakis, who denies he’s been sidelined by Greek Prime Minister Alexis Tsipras in the negotiations, said he expects an agreement in the next two weeks, though one is unlikely to be announced when euro-area finance chiefs meet on Monday. Greece has less than a week to prove to the European Central Bank that it’s serious about reaching an agreement with international lenders. Failure to make progress in bailout talks or repay about €745 million owed to the IMF on May 12 may prompt the imposition of tighter liquidity rules on its banks.

“Europe works in glacial ways and eventually does the right thing after trying all alternatives,” Varoufakis, 54, told BBC World on Thursday. “So we probably won’t have an agreement on Monday, but certainly we’re going to have an agreement in the next couple of weeks or so.” More than 100 days of talks between Europe’s most-indebted state and its creditors have failed to produce an agreement on the terms attached to the country’s €240 billion bailout. The standoff between Greece’s governing coalition and euro-area member states has led to an unprecedented flight of deposits from Greek banks and renewed concern over the country’s future in the single currency.

“To speak of Greek exit now is profoundly anti-European because it will begin a process of fragmentation in Europe that will actually be very detrimental to Britain, let alone Greece and Europe,” said Varoufakis. “The solution is to agree on a debt sustainability analysis and a fiscal consolidation plan that makes sense, unlike the ones in the past.” Varoufakis said that while there’s convergence between the two sides, the Greek government won’t bow to creditors’ demands for more austerity. “This cycle of debt deflation and insincerity has to end,” he said in the BBC interview. “We are prepared to go all the way down to the wire.”

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Good on them.

Greece To Rehire Cleaners, School Guards Laid Off Under Austerity (Kath.)

Greece’s parliament passed a law on Thursday paving the way for the government to rehire about 4,000 public sector workers who were laid off or earmarked for dismissal under austerity cuts imposed by international creditors. The move made good on a campaign promise by Prime Minister Alexis Tsipras, who rode a wave of public anger against austerity measures to win January elections, and does not explicitly violate the terms of the EU/IMF bailout which allows Greece to hire one public employee for every five who leave. But the plan to rehire school guards, cleaning ladies and civil servants appeared to go against the spirit of the layoff scheme in the bailout, which says the firings were aimed at rejuvenating the public administration by bringing in new, motivated workers and ending the legacy of patronage hiring.

“This is an unorganised, irresponsible settlement of your party’s pre-election pledges,» opposition lawmaker Kyriakos Mitsotakis, the former administrative reforms minister who sacked many of those being rehired, told parliament. The previous government had intended for hirings this year to be focused mainly on the health and education sectors. Tsipras received a jubilant group of about 50 cleaning ladies – who protested against their dismissal outside the finance ministry for months – at his office on Thursday. “Even the Chancellor, in a meeting that we had and without me bringing it up, referred to how unfair what the previous government did to you was,” Tsipras told the group, in an apparent reference to German Chancellor Angela Merkel. “Your fight was known abroad because it was a fair fight.”

An official at the administrative reforms ministry said the reinstatement of the workers would have an annual cost of €33.5 million that was already included in the country’s 2015 budget plan approved with last year. The 3,928 workers to be rehired include 2,100 who were fired outright and another 1,900 in a so-called labour reserve where workers received partial salaries while they waited to see if they would be moved into new jobs. The state was already paying salaries for about 1,000 school guards in the reserve, limiting costs involved in their hiring, the ministry official said. Greece has pledged not to make unilateral actions reversing bailout reforms it opposes while talks with its international lenders continue.

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“Syriza ministers and lawmakers believe they have a duty to Greece and Europe to fight, even if the odds are against them.”

Five Years On, Doctor and Patient Split on Greek Cure (WSJ)

Greece and its creditors, deadlocked over fresh financing, agree on at least one thing about the country’s mammoth bailout, launched five years ago this month: It hasn’t worked as hoped. But Athens and its lenders—the eurozone and the IMF—disagree diametrically on why the bailout program has flopped. This dispute about the past five years helps explain why the players so often seem to be talking past each other today, and why reaching agreement on further aid is proving so hard. Lenders, led by Germany, believe that the bailout’s blueprint was and remains correct, but that Greece failed to follow it. Rapid deficit-cutting was the only way to cure Greece’s debt problem. The rollback of stifling regulation and unaffordable social benefits and an injection of free-market competition were unavoidable if Greece was to grow sustainably.

German leaders such as Finance Minister Wolfgang Schäuble see Greece as the patient that didn’t take its pills, unlike others in the same hospital, such as Portugal and Ireland, who swallowed the same medicine and recovered. To many Greeks, however, the eurozone seems more like the psychiatric ward in the Ken Kesey novel “One Flew Over the Cuckoo’s Nest,” where a domineering “Big Nurse” controls the inmates through punishment and humiliation. In this view, Greece under Syriza is Europe’s Randle McMurphy, the rebel inmate who rattles Big Nurse Merkel’s regimen with constant provocations, encouraging others to stand up for themselves, too. Syriza ministers and lawmakers believe they have a duty to Greece and Europe to fight, even if the odds are against them.

There is little doubt that major economic overhauls were overdue in Greece, and that painful fiscal austerity was unavoidable. Athens had lost control of its budget and nobody was prepared to finance its deficits. But most economists, and some officials on the creditors’ side, say the bailout program always suffered from at least three design flaws. Firstly, the scale and speed of austerity were unique, and proved to be an overdose, many economists say. Greek spending cuts and tax-revenue measures totaled over 30% of gross domestic product in 2010-14, according to Greek and EU data. That 30%-of-GDP austerity effort improved Greece’s primary budget balance, excluding debt interest, but only by 11 percentage points of GDP.

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Still, many, like Varoufakis, have returned recently.

Greece’s Biggest Brain Drain Since The Death Of Socrates (MarketWatch)

Ancient Greece was once a magnet for the world’s intellectual elite. Scholarly work out of Athens contributed to everything from logic and philosophy to the politics that formed the basis of modern civilization. But as the Hellenic Republic struggles to strike an agreement to repay more than €300 billion it owes international creditors, it is also facing the depletion of its most important asset: human capital. A devastating brain drain is luring away the best and brightest of Greece’s workforce, several reports showed, with estimates varying between 180,000 and 200,000 well-educated citizens leaving the cash-strapped nation. At that rate, the exodus translates to about 10% of the country’s total university-educated workforce, said Lois Lambrinidis, a professor of economic geography at the University of Macedonia.

On a macro level, this movement is a clear brain drain, said Nicholas Alexiou, a sociology professor at CUNY’s Queens College who studies Greek immigration patterns. What differentiates a brain drain from other types of migrant waves is the high percentage of skilled and educated people who leave the country, Alexiou said. In other words, Greece is losing its “youngest, best and brightest,” as a European University Institute study dated March 2014 noted. According to the study, of those who have left 88% hold a university degree, and of those, over 60% have a master’s degree, while 11% hold a Ph.D. According to the EUI report, 79% of those who left Greece during the crisis were actually employed but felt that there was “no future” in the country (50%) or no professional opportunities (25%).

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It takes time to fight a corruption so deeply entrenched.

Greek Bank Bailout Fund CEO To Stand Trial, Asked To Resign (Kathimerini)

Greece’s government late Thursday asked the chief executive of its bank bailout fund to resign, after prosecutors ordered her to stand trial for her role in bad loans issued by defunct state lender Hellenic Postbank. Anastasia Sakellariou has been chief executive of the Hellenic Financial Stability Fund (HFSF) since February 2013. She was charged last year with breach of trust for restructuring loans issued by the state lender from 2008 to 2012 and was told to stand trial on Wednesday, according to court officials. Sakellariou’s resignation means the fund is now headless after its chairman, Christos Sclavounis, stepped down in March. The new leftist government of Alexis Tsipras has not yet replaced him.

“(The government) asked Mrs. Sakellariou today to hand in her resignation,” a government official told Reuters, speaking on condition of anonymity. The HFSF, funded from Greece’s €240 billion bailout by the European Union and International Monetary Fund, has recapitalised the country’s banking sector and also used its funds to wind down non-viable lenders. The HFSF has said that, in 2012, Sakellariou was a member of a Hellenic Postbank committee that handled the restructuring of two loans. HFSF has remaining funds of €10.9 billion in European Financial Stability Fund bonds, which were handed over to the European Stability Mechanism.

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Brexit, Grexit, bring it on sooner rather than later.

Greece and Britain Test the Union (Kathimerini)

Two very different countries are challenging the European Union’s cohesion and the outcome of this test will determine the future of the greatest experiment in democracy that the world has known. Britain, a former superpower, once said that the sun never set on its imperial domain, and it is still the EU’s second-largest economy; Greece, which has been plagued by bankruptcies since its independence, is the Union’s most troubled economy. Both present problems that demand a radical shift in the way that the EU has operated over the past decades, in order to protect all that it has achieved.

Whereas Greece’s need for its partners’ support stems from the country’s inability to reform its economy, public administration and political system so as to be a viable competitor in the global economy, Britain is putting similar pressure on the EU’s cohesion in the belief that it has to insulate itself from its partners, to safeguard what it considers its special advantages. The two countries’ political systems and economies are vastly different, as is their geopolitical stature. Greece has been an enthusiastic member of the EU since it joined in 1981 and is part of its inner sanctum, the eurozone. Britain has always been at pains to opt out from too much union, avoiding the euro and abstaining from Greece’s bailout.

During the crisis, Greece has benefited from the support (with painful strings attached) of its partners, while Britain has gained enormously – from money fleeing the European periphery for what is seen as the safe haven of Britain, and from the Bank of England’s independence from the austerity dogma imposed on the rest of the EU. Both Greece and Britain have contributed to the EU in their own unique way, and each one’s relationship with the rest of the Union also shows the great tension at the heart of every association: Even as every member needs the advantages provided by the group, each fears being absorbed by the others, to the extent that it loses its independence, its special characteristics and the freedom to exploit its differences to its own advantage. Greece cannot function without financial support, yet it also cannot accept the loss of independence that this entails.

Britain, which has gained much from being “in and out” of the Union, is in danger of getting too far from the center of gravity. But a total break will leave it on its own, unable to influence EU policy. In the EU the great question today is whether countries can place the common good above their national interest. The Greek elections in January intensified the push and pull between the country and its partners, with results that are still unpredictable. Whatever the outcome of Thursday’s election, Britain, too, will test the limits of membership and the Union’s cohesion. All players should remember two simple facts: Thanks to ever closer union, Europe has enjoyed 70 years of unprecedented peace and prosperity; pulling too hard can break any bond.

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“In the first four months of the year, at least 21,745 migrants arrived in Greece by boat, compared with 33,951 in all of 2014..”

Greece Sees Massive Increase In Refugees Arriving By Boat (Guardian)

The scale of mass migration across the Mediterranean has been revealed by new figures showing that record numbers of migrants are now arriving by boat in Greece as well as Italy. Just four months into the year, the number of arrivals in Greece is already two-thirds as high as last year’s total, highlighting the volume of migration in not just the central Mediterranean, between Libya and Italy, but also at its eastern fringes. Even as the UN security council mulls using military force against smugglers in Libya, the figures suggest migrants are increasingly using other routes to break into Fortress Europe. In the first four months of the year, at least 21,745 migrants arrived in Greece by boat, compared with 33,951 in all of 2014, according to figures from the International Organisation for Migration, and compiled by the Greek coastguard.

The numbers are even higher than estimates released earlier in the year, and show almost as many migrants are arriving in Greece as in Italy. At least 26,228 have reached Italy since the start of 2015, fractionally down on last year’s equivalent level. Aid workers in the Greek islands, where most migrants travelling by sea arrive from Turkey, say the rises are all the more surprising because the peak smuggling season has not yet started. Stathis Kyroussis, head of mission in Greece for Médecins sans Frontières, which provides support to migrants, said: “It’s not just an increase, it’s an explosive increase. It’s already five times up on last year. In one island – the biggest, Kos – last year we had 72 entries in all of April. This year we had 2,110. In Leros last April we had zero. This year we had 900.”

Kyroussis said the increase in arrivals in Greece seemed to have been caused in part by a rise in Syrians making the trip. “There is a higher percentage of Syrians travelling to the Greek islands: last year it was 60%, this year it is 80%,” said Kyroussis. “So part of the increase is a change in the route of the Syrians. Instead of Italy, they’re coming through Greece.” This analysis appears to be corroborated by further IOM statistics, which show that Syrians account for only 8% of arrivals in Italy this year, compared with 25% in 2014. Theories for the rise include the civil war in Libya, which may have put Syrians off travelling there; and the worsening situation in Syria, which has persuaded many Syrian refugees in Turkey that there is no longer point in waiting for Syria’s chaos to be resolved.

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“It might not matter so much if what these funds did was socially useful. But it is not.”

Hedge Funds Aren’t Casino Capitalists. They’re Parasite Capitalists (Ind.)

Adair Turner coined a neat phrase for many of the banking industry’s activities during the financial crisis. In a biting critique he opined that they were “socially useless”. He was right. But it’s not just banking at which his criticism could be aimed. Consider the bastard child of investment banking and asset management: the hedge fund industry. It is a place where a portion of the elite of both have found homes. Multiple homes, in fact, funded by salary packages which make even the dizzying rewards on offer at the height of the big investment banks’ insanity look modest. According to a list published by Institutional Investor’s Alpha magazine, the top 25 collectively gorged upon $11.62bn (£7.6bn) in 2014.

Their bumper paydays came in a year when the industry produced returns averaging in the low single digits, even though the S&P 500 stock market index – the most reliable US benchmark – would have produced nearly 14% in dollar terms had you tracked it. The New York Times reports that just half of the top 10 earners managed to beat it. These massive rewards for mediocre performance were in part due to the industry’s structure: typically managers skim 2% of their investors’ funds every year and 20% of their profits. So when they do well the rewards are staggering. When they do less well the rewards are staggering. Just a bit less staggering.

It might not matter so much if what these funds did was socially useful. But it is not. It is true that some provide a certain Darwinian screening process by attacking under-performing companies and their complacent boards. Elliott Advisors’ assault on Alliance Trust is an example that may ultimately prove to be of benefit to a legion of small investors. However, for every Alliance Trust there is an ABN Amro. Activist funds delivered the Dutch bank to a consortium made up of Royal Bank of Scotland, Fortis and Banco Santander in a transaction which left only the latter unscathed and the taxpayers of three countries to pick up the pieces.

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Propaganda.

The British Press Has Lost It (Politico)

Fasten your seatbelt: it’s going to be a bumpy ride. With the two major parties, Conservative and Labour, neck and neck in the polls; and two new insurrectionary forces, UKIP and the Scottish National Party, set to disrupt the two-and-a-half party system that’s dominated British politics for 40 years, Thursday’s election night is going to be fought constituency by constituency, sometimes recount by recount. There will be unexpected triumphs, unforeseen disasters (“Were you up for the moment when so-and-so lost their seat?”). Only one thing is for sure. This is the election during which Britain’s press ‘lost it.’ The press just haven’t reflected reality, let alone the views of their readers. For months polls have put Conservatives and Labour close with about third of the vote each, and smaller parties destined to hold some balance of power.

But there has been no balance in the papers. Tracked by Election Unspun, the coverage has been unremittingly hostile to Ed Miliband, the Labour challenger, with national newspapers backing the Conservative incumbent, David Cameron over Labour by a ratio of five to one. Veteran US campaign manager David Axelrod finds this politicization of the print media one of the most salient differences with the US. “I’ve worked in aggressive media environments before,” he told POLITICO, “but not this partisan.” Axelrod may have ax to grind as he advises the Labour Party, but even a conservative commentator and long-serving lieutenant of Rupert Murdoch has been shocked. “Tomorrow’s front pages show British press at partisan worst,” Andrew Neil, former editor of the Sunday Times rued. “All pretense of separation between news and opinion gone, even in ‘qualities.’”

And that’s the difference. The whole newspaper industry seems to be affected by the tabloid tendentiousness trade-marked by Murdoch’s best-selling the Sun when it roared, in 1992, “It’s the Sun Wot Won It.” The Daily Mail specializes in political character assassination and the ‘Red Ed’ tag was predictable. But when the paper went on from attacking Miliband’s dead father to a hit-job on his wife’s appearance, the politics of personal destruction sank from gutter to sewer. In this precipitous race to the bottom, perhaps the Daily Telegraph had the steepest fall. Known as a bastion of the Tory thinking, it had long been respected for separating fact from comment. During this election cycle is was caught sourcing its front pages direct from Conservative Campaign HQ, seeming to confirm the parting words of its senior political commentator, Peter Oborne, that it was intent on committing “a fraud on its readership.”

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It would be quite something if she refuses to. End of credibility.

Angela Merkel Under Pressure To Reveal All About US Spying Agreement (Guardian)

Angela Merkel’s reputation as an unassailable chancellor is under threat amid mounting pressure for her to reveal how much she knew about a German-supported US spying operation on European companies and officials. The onus on her government to deliver answers over the spying scandal has only increased with the Austrian government’s announcement that it has filed a legal complaint against an unnamed party over “covert intelligence to the detriment of Austria”. EADS, now Airbus, one of the companies known to have been spied on by the BND – Germany’s foreign intelligence agency – is also taking legal action, saying it will file a complaint with prosecutors in Germany. The BND stands accused of spying on behalf of America’s NSA on European companies such as EADS, as well as the French presidency and the EU commission.

There are also suspicions that German government workers and journalists were spied on. The Social Democrats (SPD), Merkel’s government partners, along with Germany’s federal public prosecutor, Harald Range, are demanding the release of a list of “selectors” – 40,000 search terms used in the spying operations – the results of which were passed on to the NSA. “The list must be published and only then is clarification possible,” said Christine Lambrecht, parliamentary head of the SPD faction. Merkel has so far refused to allow its release. Her spokesman, Steffen Seibert, said she would make a decision on whether or not to do so only “once consultations with the American partners are completed”.

Thomas de Maizière, the interior minister and a close Merkel confidante, is under even more pressure than the chancellor over allegations he lied about what he knew of BND/NSA cooperation. On Wednesday he answered questions on the affair to a parliamentary committee investigating the row, but only in camera and in a bug-proof room. Among other alleged shortcomings over the affair, he stands accused of failing to act when the BND informed him of the espionage activities in 2008 when he was Merkel’s chief of staff. He has repeatedly been portrayed in the tabloid media with a Pinocchio nose.

Responding to journalists during a break in the proceedings, he once again vehemently denied the allegations. “As chief of staff in 2008, I learned nothing about search terms used by the US for the purposes of economic espionage in Germany,” he said. But he acknowledged knowing about American efforts to intensify the intelligence swapping, calling it “problematic cooperation”, and said the requests had been turned down by the BND.

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Balance.

Chinese Warships To Join Russian Navy Drill In Black Sea, Mediterranean (RT)

Two Chinese missile frigates will enter the Russian Black Sea naval base of Novorossiysk for the first time in history. They will then conduct joint exercises with Russia in the Mediterranean. The Linyi and the Weifang will enter the port of Novorossiysk on May 8 to take part in Victory Day celebrations, according to the Russian Defense Ministry. Each is a 4,000-ton vessel of the relatively new Type 054A (also known as Jiangkai II), which first entered service in 2007. They are accompanied by a support ship. This is the first time Chinese warships will have entered the Russian base. The ships will then head to the Mediterranean for joint drills with Russian forces.

“It is planned that the People s Liberation Army Navy warships will leave Novorossiysk on May 12 and relocate to the designated area of the Mediterranean Sea for the Russian-Chinese exercise Sea Cooperation-2015,” the Russian Defense Ministry said in a statement. The exercise will take place from May 11-21. Nine ships are scheduled to take part in total in the first drill of its kind to happen in the Mediterranean. The drills’ goal has been stated as deepening friendly cooperation between China and Russia and strengthening their combat ability in repelling naval threats. The exercise comes at a time when NATO and its allies are holding a massive wave of military drills all across Europe.

Collectively codenamed Operation Atlantic Resolve, NATO commanders and European leaders have said the training sends a message to Russia over its alleged aggression and the crisis in Ukraine. Some states are also conducting their own training maneuvers parallel to Atlantic Resolve. Russia has been conducting a series of military exercises within its territory throughout winter and in early spring, including massive drills in the Baltic Sea, Black Sea, the Arctic and the Far East.

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“Third-world bondage” down under.

Modern Slavery In Australia: Labour Exploitation Rife In Agriculture (RT)

The Australian investigative journalism program “Four Corners” has discovered that Australia’s biggest supermarkets and fast food chains are supplied with food from farms exploiting workers in slave labour-like conditions. According to Four Corners reporters, who used hidden cameras and undercover surveillance to reveal the “third-world bondage,” supermarkets such as Woolworths, Coles, Aldi, IGA and Costco and such fast food outlets as KFC, Red Rooster and Subway are implicated in the exploitative practice. The workers who are being abused are frequently migrants from Asia and Europe. They are being routinely harassed, forced to work and underpaid. Moreover, women workers are often propositioned for sex or asked to perform sexual favours in exchange for visas.

Underpayment for migrant workers gives the farms a competitive advantage over their contestants. Supermarkets prefer cheaper suppliers without paying attention to the labour conditions on their farms. This leads to a paradox: suppliers who play by the rules lose market share to those who don’t, according to ABC TV. For instance, SA Potatoes, one of the largest potato suppliers in Australia, says it has lately lost some of its contracts. “It’s gutting,” said the company’s CEO, Steve Marafioti, “They’re cheating the system…It’s not the correct thing. It’s not the right thing. It’s actually changing the shape of our industry.” Migrants come to Australia on the 417 working holiday visa system which gives them an opportunity to stay in Australia for 12 months and to work up to six months with a single employer.

However, the system is very often used to supply cheap labour in such low-skilled jobs as fruit and vegetable picking. The Four Corners investigation has prompted outrage across Australian society. “We will be known as a country that exploits vulnerable people who are looking for a better chance at life,” labour law and migration expert Joanna Howe told ABC News. She says the 417 visa should replaced with a new low-skilled work visa. “Successive governments, Labor and Liberal, have turned a blind eye to the fact that both international students and working holiday makers are being used as a low-skilled source of labour for farmers and other people across the country,” Howe said. A low-skilled work visa “would allow the whole system to be better regulated,” she added.

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More slavery.

Nepal Quake Victims’ Families Not Allowed To Leave Qatar For Funerals (Ind.)

Tens of thousands of workers on the 2022 football World Cup in Qatar cannot get home to see their families and attend funerals in the wake of last month’s Nepal earthquake. Qatar’s strict worker rules, known as kafala, mean that many of the 400,000 Nepalese workers in the country have their passports taken by employers and find it difficult to get permission to go home. The international campaign group Avaaz has written to Qatari authorities demanding compassionate leave for workers with families affected by the earthquake; it has yet to receive a response.

Sam Barratt, Avaaz’s campaign director, said: “We’re calling for these workers to be granted amnesty to go home. They are working on World Cup related infrastructure projects. Qatar was built with Nepal’s cheap labour; the least they can do is allow them to go home and grieve.” A Nepalese worker in Doha, who asked not to be named, said that his wife and children were now homeless: “My family lives in a village outside Kathmandu. Since the quake I have not been able to contact them… Two of my relatives in Kathmandu have died in the quake. My wife and two little children are sleeping on the road. I am desperate to go back… but I can’t leave because my employer won’t let me go. I can’t leave the job because I have to pay back the loan I had taken to get to Qatar.”

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“..the recent modest decrease in the rate of warming has elicited numerous articles and special issues of leading journals.”

How Climate Science Denial Affects The Scientific Community (PhysOrg)

Climate change denial in public discourse may encourage climate scientists to over-emphasise scientific uncertainty and is also affecting how they themselves speak – and perhaps even think – about their own research, a new study from the University of Bristol, UK argues. Professor Stephan Lewandowsky, from Bristol’s School of Experimental Psychology and the Cabot Institute, and colleagues from Harvard University and three institutions in Australia show how the language used by people who oppose the scientific consensus on climate change has seeped into scientists’ discussion of the alleged recent ‘hiatus’ or ‘pause’ in global warming, and has thereby unwittingly reinforced a misleading message.

The idea that ‘global warming has stopped’ has been promoted in contrarian blogs and media articles for many years, and ultimately the idea of a ‘pause’ or ‘hiatus’ has become ensconced in the scientific literature, including in the latest assessment report of the Intergovernmental Panel on Climate Change (IPCC). Multiple lines of evidence indicate that global warming continues unabated, which implies that talk of a ‘pause’ or ‘hiatus’ is misleading. Recent warming has been slower than the long term trend, but this fluctuation differs little from past fluctuations in warming rate, including past periods of more rapid than average warming. Crucially, on previous occasions when decadal warming was particularly rapid, the scientific community did not give short-term climate variability the attention it has now received, when decadal warming was slower. During earlier rapid warming there was no additional research effort directed at explaining ‘catastrophic’ warming. By contrast, the recent modest decrease in the rate of warming has elicited numerous articles and special issues of leading journals.

This asymmetry in response to fluctuations in the decadal warming trend likely reflects what the study’s authors call the ‘seepage’ of contrarian claims into scientific work. Professor Lewandowsky said: “It seems reasonable to conclude that the pressure of climate contrarians has contributed, at least to some degree, to scientists re-examining their own theory, data and models, even though all of them permit – indeed, expect – changes in the rate of warming over any arbitrarily chosen period.” So why might scientists be affected by contrarian public discourse? The study argues that three recognised psychological mechanisms are at work: ‘stereotype threat’, ‘pluralistic ignorance’ and the ‘third-person effect’.

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Feb 032015
 
 February 3, 2015  Posted by at 11:56 am Finance Tagged with: , , , , , , , , ,  10 Responses »


DPC City Hall subway station, New York 1904

US Consumer Spending Declined in December by Most in Five Years (Bloomberg)
US Household Spending Tumbles Most Since 2009 (Zero Hedge)
Q1 Energy Earnings Shocker: Then And Now (Zero Hedge)
Exxon Revenue, Earnings Down 21% From YoY, Sales Miss By $5 Billion (Zero Hedge)
BP Hit By $3.6 Billion Charge, Cuts Capex On Oil Prices (CNBC)
Greece Finance Minister Varoufakis Unveils Plan To End Debt Stand-Off (FT)
Germany Will Have To Yield In Dangerous Game Of Chicken With Greece (AEP)
The Truth About Greek Debt Is Far More Nuanced Than You Think (Telegraph)
Greece Standoff Sparks Ire From US, UK Over Economic Risks (Bloomberg)
Varoufakis Is Brilliant. So Why Does He Make Everyone So Nervous? (Bloomberg)
Greece’s Damage Control Fails to Budge Euro Officials (Bloomberg)
What is Plan B for Greece? (Kenneth Rogoff)
Why The Bank Of England Must Watch Its Words (CNBC)
More Than 25% Of Euro Bond Yields Are Negative, But … (MarketWatch)
Draghi’s Negative-Yield Vortex Draws in Corporate Bonds (Bloomberg)
China Debt Party Nears The End Of The Road (MarketWatch)
Global Deflation Risk Deepens As China Economy Slows (Guardian)
Canada Mauled by Oil Bust, Job Losses Pile Up (WolfStreet)
Aussie Gets Crushed – How Much More Pain Lies Ahead? (CNBC)

But don’t worry: nothing Bloomberg can’t spin: “Consumers are in a good mood coming into 2015, and we think that’s likely to continue..”

US Consumer Spending Declined in December by Most in Five Years (Bloomberg)

Consumer spending fell in December as households took a breather following a surge in buying over the previous two months. Household purchases declined 0.3%, the biggest decline since September 2009, after a 0.5% November gain, Commerce Department figures showed Monday in Washington. The median forecast of 68 economists in a Bloomberg survey called for a 0.2% drop. Incomes and the saving rate rose. Consumers responded to early promotions by doing most of their holiday shopping in October and November, leading to the biggest jump in consumer spending last quarter in almost nine years. For 2015, a pick-up in wage growth will be needed to ensure households remain a mainstay of the expansion as the economy tries to ward off succumbing to a global slowdown.

“Consumers are in a good mood coming into 2015, and we think that’s likely to continue,” said Russell Price, a senior economist at Ameriprise, who correctly forecast the drop in outlays. “The prospects for 2015 look very encouraging.” Stock-index futures held earlier gains after the report. Projections for spending ranged from a decline of 0.6% to a 0.2% gain. The previously month’s reading was initially reported as an increase of 0.6%. For all of 2014, consumer spending adjusted for inflation climbed 2.5%, the most since 2006. Incomes climbed 0.3% in December for a second month, the Commerce Department’s report showed. The Bloomberg survey median called for a 0.2% increase. November’s income reading was revised down from a 0.4% gain previously reported. While growth in the world’s largest economy slowed in the fourth quarter, consumption surged, with household spending rising at the fastest pace since early 2006, a report from the Commerce Department last week showed.

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Recovery.

US Household Spending Tumbles Most Since 2009 (Zero Hedge)

After last month’s epic Personal Income and Spending data manipulation revision by the BEA, when, as we explained in detail, the household saving rate (i.e., income less spending ) was revised lower not once but twice, in the process eliminating $140 billion, or some 20% in household savings… there was only one possible thing for household spending to do in December: tumble. And tumble it did, when as moments ago we learned that Personal Spending dropped in the month of December by a whopping 0.3%, the biggest miss of expectations since January 2014 and the biggest monthly drop since September 2009!

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“By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.” Just a little off.”

Q1 Energy Earnings Shocker: Then And Now (Zero Hedge)

Here is what Factset has to say about forecast Q1 energy earnings: “On September 30, the estimated earnings growth rate for the Energy sector for Q1 2015 was 3.3%. By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.” Just a little off. This is what a difference 4 months makes.

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“XOM did the best with margins and accounting gimmickry it could under the circumstances..”

Exxon Revenue, Earnings Down 21% From YoY, Sales Miss By $5 Billion (Zero Hedge)

Moments ago, following our chart showing the devastation in Q1 earning forecasts, Exxon Mobil came out with its Q4 earnings, and – as tends to happen when analysts take a butcher knife to estimates – beat EPS handily, when it reported $1.56 in EPS, above the $1.34 expected, if still 18% below the $1.91 Q4 EPS print from a year earlier. A primary contributing factor to this beat was surely the $3 billion in Q4 stock buybacks, with another $2.9 billion distributed to shareholders mostly in the form of dividends. Overall, XOM distributed $23.6 billion to shareholders in 2014 through dividends and share purchases to reduce shares outstanding.

This number masks the 29% plunge in upstream non-US earnings which were smashed by the perfect storm double whammy of not only plunging oil prices but also by the strong dollar. Curiously, all this happened even as XOM actually saw its Q4 worldwide CapEx rise from $9.9 billion a year ago to $10.5 billion, even though capital and exploration expenditures were $38.5 billion in the full year, down 9% from 2013. However, while XOM did the best with margins and accounting gimmickry it could under the circumstances, there was little it could do to halt the collapse in revenues, which printed at $87.3 billion, well below the $92.7 billion expected, and down a whopping 21% from a year ago. And this is just in Q4 – the Q1 slaughter has yet to be unveiled!

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Set to get much worse.

BP Hit By $3.6 Billion Charge, Cuts Capex On Oil Prices (CNBC)

BP revealed plans to cut capital expenditure (capex) on Tuesday, after it was hit by tumbling oil prices and an impairment charge of $3.6 billion. “We have now entered a new and challenging phase of low oil prices through the near- and medium-term,” said CEO Bob Dudley in a news release. “Our focus must now be on resetting BP: managing and rebalancing our capital program and cost base for the new reality of lower prices while always maintaining safe, reliable and efficient operations.” BP reported a replacement-cost loss of $969 million for the fourth quarter of 2014, after taking a $3.6-billion post-tax net charge relating to impairments of upstream assets given the fall in oil prices. On an underlying basis, replacement cost profit came in at $2.2 billion, above analyst expectations of $1.5 billion.

In the news release, BP said it was “taking action to respond to the likelihood of oil prices remaining low into the medium-term, and to rebalance its sources and uses of cash accordingly.” The company said that organic capex was set to be around $20 billion in 2015, significantly lower than previous guidance of $24-26 billion. Capex for 2014 came in at $22.9 billion, lower than initial guidance of $24-25 billion. “In 2015, BP plans to reduce exploration expenditure and postpone marginal projects in the Upstream, and not advance selected projects in the Downstream and other areas,” said the company.

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“Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps..”

Greece Finance Minister Varoufakis Unveils Plan To End Debt Stand-Off (FT)

Greece’s radical new government unveiled proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders. Yanis Varoufakis, the new finance minister, outlined the plan in the wake of a dramatic week in which the government’s first moves rattled its eurozone partners and rekindled fears about the country’s chances of staying in the currency union. After meeting Mr Varoufakis in London, George Osborne, the UK chancellor of the exchequer, described the stand-off between Greece and the eurozone as the “greatest risk to the global economy”.

Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps” to ease the burden, including two types of new bonds. The first type, indexed to nominal economic growth, would replace European rescue loans, and the second, which he termed “perpetual bonds”, would replace European Central Bank-owned Greek bonds. He said his proposal for a debt swap would be a form of “smart debt engineering” that would avoid the need to use a term such as a debt “haircut”, politically unacceptable in Germany and other creditor countries because it sounds to taxpayers like an outright loss. But there is still deep scepticism in many European capitals, in particular Berlin, about the new government’s brinkmanship and its calls for an end to austerity policies.

“What I’ll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda,” Mr Varoufakis, a leftwing academic economist and prolific blogger, said. “I’ll say, ‘Help us to reform our country and give us some fiscal space to do this, otherwise we shall continue to suffocate and become a deformed rather than a reformed Greece’.” [..] Mr Varoufakis said the government would maintain a primary budget surplus — after interest payments — of 1 to 1.5% of gross domestic product, even if this meant Syriza, the leftwing party that dominates the ruling coalition, would not fulfil all the public spending promises on which it was elected. Mr Varoufakis also said the government would target wealthy Greeks who had not paid their fair share of taxes during the nation’s six-year economic slump. “We want to prioritise going for the head of the fish, then go down to the tail,” he said.

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“The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. We would be in a world where anything could happen:”

Germany Will Have To Yield In Dangerous Game Of Chicken With Greece (AEP)

Finland’s governor, Erkki Liikanen, was categorical. “Some kind of solution must be found, otherwise we can’t continue lending.” So was the ECB’s vice-president Vitor Constancio. Greece currently enjoys a “waiver”, allowing its banks to swap Greek government bonds or guaranteed debt for ECB liquidity even though these are junk grade and would not normally qualify. This covers at least €30bn of Greek collateral at the ECB window. “If we find out that a country is below that rating – and there’s no longer a (Troika) programme – that waiver disappears,” he said. These esteemed gentlemen are sailing close to the wind. The waiver rules are not a legal requirement. They are decided by the ECB’s governing council on a discretionary basis. Frankfurt can ignore the rating agencies if it wishes. It has changed the rules before whenever it suited them.

The ECB may or may not have good reasons to cut off Greece – depending on your point of view – but let us all be clear that such a move would be political. A central bank that is supposed to be the lender of last resort and guardian of financial stability would be taking a deliberate and calculated decision to destroy the Greek banking system. Even if this were to be contained to Greece – and how could it be given the links to Cyprus, Bulgaria, and Romania? – this would be a remarkable act of financial high-handedness. But it may not be contained quite so easily in any case, as Mr Osborne clearly fears. I reported over the weekend that there is no precedent for such action by a modern central bank. “I have never heard of such outlandish threats before,” said Ashoka Mody, a former top IMF official in Europe and bail-out expert. “The EU authorities have no idea what the consequences of Grexit might be, or what unknown tremors might hit the global payments system. They are playing with fire.

The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. We would be in a world where anything could happen. “What they ignore at their peril is the huge political contagion. It would be slower-moving than a financial crisis but the effects on Europe would be devastating. I doubt whether the EU would be able to act in a meaningful way as a union after that.” In reality, the ECB cannot easily act on this threat. They do not have the political authority or unanimous support to do so, and historians would tar and feather them if they did. The ground is shifting in Paris, Rome and indeed Brussels already. Jean-Claude Juncker, the European Commission’s president, yielded on Sunday, accepting (perhaps with secret delight) that the Troika is dead. French finance minister Michel Sapin bent over backwards to be accommodating at a meeting with Mr Varoufakis. There is no unified front against Greece. It is variable geometry, as they say in EU parlance.

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“if Greece were to measure its debt using corporate accounting standards, which take account of interest rates and maturities, its debt burden could be lower than 70pc of GDP.”

The Truth About Greek Debt Is Far More Nuanced Than You Think (Telegraph)

“Greek debts are unsustainable” Greece’s debts are, as a proportion of GDP, higher than most countries in the eurozone. But, by the same measure, the interest rates it pays on those debts are among the lowest in the currency bloc; the maturities on its loans are the longest. Eurozone countries calculate their debt according to the Maastricht definition, which means that a liability is valued in the same way whether it is due to repaid tomorrow or in 50 years’ time. Greece’s debts are 175pc of GDP under this definition. Some people have calculated that if Greece were to measure its debt using corporate accounting standards, which take account of interest rates and maturities, its debt burden could be lower than 70pc of GDP.

Greece’s debts might actually be a distraction from bigger issues. One is the requirement that, under the bailout conditions, Greece must run a primary surplus of 4.5pc of GDP. Another is the so-called fiscal compact, which requires EU governments with debts of more than 60pc of GDP to reduce the excess by one-twentieth a year. Are Greece’s debts unsustainable? Maybe and maybe not. Are these targets unattainable? Probably.

“The eurozone can withstand ‘Grexit’ now” This rather depends on what you mean by “withstand”. It is certainly true that the eurozone is in a better financial position to deal with Greece quitting or being ejected from the euro than when the last crisis flared up in 2012. It now has a rescue fund and has embarked on a quantitative easing programme. Even as yields on Greek sovereign debt have shot up in recent weeks, those in Spain, Portugal and Italy have stayed at or near record lows, suggesting the markets believe the potential fallout from Greece won’t spread to other southern European countries.

It is less clear that the eurozone could handle the existential threat posed by a Grexit. Membership of the currency bloc would no longer by irrevocable. The markets would scent blood. And the political and diplomatic repercussions are almost impossible to predict: Would it subdue or embolden the various anti-austerity and anti-euro factions that are gaining ground elsewhere in the region? Would it help foster an Orthodox alliance between Greece and Russia? Does Brussels really want to find out?

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“Calling the meeting with Osborne a “breath of fresh air,” Varoufakis said: “we are highly tuned into finding common ground and we already have found it.”

Greece Standoff Sparks Ire From US, UK Over Economic Risks (Bloomberg)

U.S. and British leaders are expressing frustration at Europe’s failure to stamp out financial distress in Greece and the risk it poses to the global economy. U.K. Chancellor of the Exchequer George Osborne, whose government faces voters in three months, became the latest critics, following comments by Britain’s central banker, Mark Carney, and U.S. President Barack Obama. “It’s clear that the standoff between Greece and the euro zone is fast becoming the biggest risk to the global economy,” Osborne said after meeting Greek Finance Minister Yanis Varoufakis in London. “It’s a rising threat to our economy at home. Varoufakis travels to Rome Tuesday, along with Prime Minister Alexis Tsipras, in a political offensive geared to building support for an end to German-led austerity demands, a lightening of their debt load and freedom to increase domestic spending even as they rely on bailout loans.

Tsipras, who went to Cyprus on Monday, also heads to Brussels and Paris. Calling the meeting with Osborne a “breath of fresh air,” Varoufakis said, “we are highly tuned into finding common ground and we already have found it.” Osborne’s comment came a day after Obama questioned further austerity. “You cannot keep on squeezing countries that are in the midst of depression,” he said on CNN. “When you have an economy that is in freefall there has to be a growth strategy and not simply an effort to squeeze more and more out of a population that is hurting worse and worse.” Greece’s economy has shrunk by about a quarter since its first bailout package in 2010. Tsipras was elected Jan. 25 promising the end the restrictions that have accompanied the aid that has kept it afloat.

The premier issued a conciliatory statement on Jan. 31, promising to abide by financial obligations after Varoufakis said the country won’t take more aid under its current bailout and wanted a new deal by the end of May. Before his appointment as finance minister, he advocated defaulting on the country’s debt while remaining in the euro. The Greek finance minister told bankers in London he wants the country’s “European Union-related” loans to be restructured, leaving debt to the IMF and the private sector intact. “A priority for them is to address the high level of debt,” said Sarah Hewin, head of research at Standard Chartered, who was at the meeting. “They’re looking to restructure EU bilateral loans and ECB loans and leave IMF and private-sector debt alone. At the moment, they’re working at a broad case without being specific on how this restructuring will take place.”

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“Varoufakis knows as much about this subject “as anyone on the planet,” Galbraith says. “He will be thinking more than a few steps ahead” in any interactions with the troika.”

Varoufakis Is Brilliant. So Why Does He Make Everyone So Nervous? (Bloomberg)

Yanis Varoufakis, Greece’s new finance minister, is a brilliant economist. His first steps onto the political stage, though, didn’t seem to go very smoothly. Before joining the Syriza-led government, Varoufakis taught at the University of Texas and attracted a global following for his blistering critiques of the austerity imposed on Greece by its international creditors. Among his memorable zingers: Describing the Greek bailout deal as “fiscal waterboarding” and comparing the euro currency to the Hotel California, as in, “You can check out any time you like, but you can never leave.” His social-media followers seem to love the fiery rhetoric—but investors and European Union leaders are clearly less enthusiastic. Greek stock and bond markets tanked on Jan. 30 after Varoufakis said the new government would no longer cooperate with representatives of the troika of international lenders who’ve been enforcing the bailout deal.

At an awkward Jan. 30 meeting with Jeroen Dijsselbloem, head of the Eurogroup of EU finance ministers, Varoufakis appeared to make things worse by calling for a conference on European debt. “This conference already exists, and it’s called the Eurogroup,” an obviously irritated Dijsselbloem told reporters afterwards. The reaction from Berlin was even frostier, with Finance Minister Wolfgang Schaeuble saying Germany “cannot be blackmailed” by Greece. Prime Minister Alexis Tsipras appeared to be scrambling to contain the damage. “Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole,” he said on Jan. 31. But Varoufakis stayed on the offensive, with blog posts accusing news media organizations of inaccurate reporting and a BBC interview in which he blasted an anchorwoman for “rudely” interrupting him. “He may need some tips on how to handle himself on TV,” Steen Jakobsen, chief investment officer at Denmark’s Saxo Bank, wrote.

Is this really the guy Greece is counting on to negotiate a better deal with its creditors? Yes—and Varoufakis’s admirers say he shouldn’t be underestimated. “Yanis is the most intense and deep intellectual figure I’ve met in my generation,” says James K. Galbraith, an economist at the University of Texas who has worked closely with him. “Yanis knows far more about the current situation than some of the people he will be negotiating with,” adds Stuart Holland, an economist and former British Labour Party politician who has co-authored a series of papers with Varoufakis on the euro zone debt crisis. What’s more, Varoufakis’s academic specialty is game theory, the study of strategic decision-making in situations where people with differing interests try to maximize their gains and minimize their losses. Varoufakis knows as much about this subject “as anyone on the planet,” Galbraith says. “He will be thinking more than a few steps ahead” in any interactions with the troika.

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“It’s clear that the stand-off between Greece and the euro zone is fast becoming the biggest risk to the global economy..”

Greece’s Damage Control Fails to Budge Euro Officials (Bloomberg)

Greek Prime Minister Alexis Tsipras’s damage-control efforts calmed investors while failing to budge European policy makers on his week-old government’s key demands. Officials in Berlin, Paris and Madrid rejected the possibility of a debt writedown raised by Greece’s anti-bailout coalition, as they held out the prospect of easier repayment terms, an offer that has been on the table since November 2012. Greek stocks and bonds rebounded following a conciliatory statement issued by the premier Saturday. He promised to abide by financial obligations, a prelude to a tour of European capitals, after Finance Minister Yanis Varoufakis had prompted concern of a looming cash crunch by saying the country won’t take more aid under its current bailout and wanted a new deal by the end of May.

“The weekend statements sound less absurd than the noises from Athens last week,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note today. “However, the ideas of the new Greek government remain far removed from reality.” The Athens Stock Exchange index jumped 4.6%, led by Eurobank Ergasias. The yield on 10-year notes fell 22 basis points to 10.9% at 5:30 p.m. in Athens. Varoufakis was in London today, meeting Chancellor of the Exchequer George Osborne and then investors in sessions organized by Bank of America and Deutsche Bank.

“It’s clear that the stand-off between Greece and the euro zone is fast becoming the biggest risk to the global economy,” Osborne said in a statement after their talks. “It’s a rising threat to our economy at home.” Tsipras was in Cyprus before trips to Rome, Paris and Brussels, with Berlin not yet on the agenda. German Chancellor Angela Merkel wants to duck a direct confrontation and isolate him, a German government official said. In Nicosia, Tsipras repeated his finance chief’s call for an end to the committee that oversees the Greek economy. Dismantling the troika, which includes representatives of the European Commission, ECB and IMF, is “timely and necessary,” Tsipras said.

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“They might be right; then again, back in 2008, US policy makers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.”

What is Plan B for Greece? (Kenneth Rogoff)

Financial markets have greeted the election of Greece’s new far-left government in predictable fashion. But, though the Syriza party’s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery. Spanish 10-year bonds for example, are still trading at interest rates below those of U.S. Treasuries. The question is how long this relative calm will prevail. Greece’s fire-breathing new government, it is generally assumed, will have little choice but to stick to its predecessor’s program of structural reform, perhaps in return for a modest relaxation of fiscal austerity.

Nonetheless, the political, social, and economic dimensions of Syriza’s victory are too significant to be ignored. Indeed, it is impossible to rule out completely a hard Greek exit from the euro (“Grexit”), much less capital controls that effectively make a euro inside Greece worth less elsewhere. Some eurozone policy makers seem to be confident that a Greek exit from the euro, hard or soft, will no longer pose a threat to the other periphery countries. They might be right; then again, back in 2008, US policy makers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.

True, there have been some important policy and institutional advances since early 2010, when the Greek crisis first began to unfold. The new banking union, however imperfect, and the European Central Bank’s vow to save the euro by doing “whatever it takes,” are essential to sustaining the monetary union. Another crucial innovation has been the development of the European Stability Mechanism, which, like the International Monetary Fund, has the capacity to execute vast financial bailouts, subject to conditionality. And yet, even with these new institutional backstops, the global financial risks of Greece’s instability remain profound. It is not hard to imagine Greece’s brash new leaders underestimating Germany’s intransigence on debt relief or renegotiation of structural-reform packages. It is also not hard to imagine eurocrats miscalculating political dynamics in Greece.

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“‘The question’ said Humpty Dumpty, ‘is which is to be master? The words or the girl?”

Why The Bank Of England Must Watch Its Words (CNBC)

Once upon a time, it was only Alice who vanished down a rabbit hole into Wonderland. Nowadays, we’re all falling in head-first – thanks to a bunch of central bankers. But as we’re down here, in this inverted quantitative easing (QE) world, Mark Carney, governor of Britain’s central bank, should probably heed the words of Humpty Dumpty who warned Alice that she’d only gain control of reality if she became “master of words.” In Alice’s looking-glass reality, and maybe ours too, sense has become nonsense and nonsense sense – and not just because of asset bubbles. “‘The question’ said Humpty Dumpty, ‘is which is to be master?'” The words or the girl?

All central bankers worry about being imprisoned by their own words. But it will be preoccupying Carney’s thoughts more than ever as the Bank of England prepares its historic move to publish the minutes alongside the rate setting committee’s decision, due to begin in August. The frenzied over-analysis of the U.S. Federal Reserve’s choice of words could not have escaped his attention, with its decision to drop the phrase “considerable time” dominating newspaper columns and analysts notes. One economist complained privately that his job had morphed from monetary policy to structural linguistics.

Back in March 2011, Jean-Claude Trichet, the then president of the ECB got hemmed in by his own verbal signaling. Ironically, it was one of his favourite catch phrases: “strong vigilance”. It eventually forced his hand into making an ill-advised rate hike from 1% to 1.25% despite a deteriorating economic climate, duly sending the euro zone into recession. Of course, the ECB’s current boss, Mario Draghi, understands Humpty Dumpty’s lesson about making words perform the exact meaning one wants, though €1.1 trillion of QE and a crisis in Greece might now fully test “whatever it takes”.

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“Government bond yields typically fall near the beginning of central-bank led programs intended to boost shaky economies, like the ECB’s bond-buying program, due to a shortage of bonds available to meet the central bank’s demand.”

More Than 25% Of Euro Bond Yields Are Negative, But … (MarketWatch)

More than a quarter of eurozone bonds have negative yields — meaning investors are essentially paying for the privilege of lending money to a European sovereign government — but several analysts are betting that those yields will soon return to normal. The exact number of negative yielding sovereign bonds is 27%, according to Tradeweb data based on Monday’s closing rates. “We’re hoping that this is roughly the peak,” said David Keeble, head of fixed-income strategy at Crédit Agricole. “There’s certainly no reason to keep them in negative territory after five year [bonds].” So why are sovereign bond yields negative? Government bond yields typically fall near the beginning of central-bank led programs intended to boost shaky economies, like the ECB’s bond-buying program, due to a shortage of bonds available to meet the central bank’s demand.

But after two or three weeks, the effects of this stimulus programs should begin to take hold, Keeble said, resulting in stronger economic data. This in turn should whet the market’s appetite for risky assets like equities while safe investments like bonds fall out of favor. Keeble added that his prediction is contingent on the European Central Bank keeping monetary policy steady. “We’re not going to get any more rate cuts from ECB and i don’t think we’re going to see anymore QE,” Keeble added. In its latest forecast on eurozone bond yields, published Monday, Bank of America Merrill Lynch said they expect the yield on five-year eurozone bonds to fall from negative 0.05% to negative 0.10% in the second quarter, before rising in the third and fourth quarters.

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Price discovery urgently needed.

Draghi’s Negative-Yield Vortex Draws in Corporate Bonds (Bloomberg)

Credit markets are being so distorted by the European Central Bank’s record stimulus that investors are poised to pay for the privilege of parking their cash with Nestle. The Swiss chocolate maker’s securities, which have the third-highest credit ranking at Aa2, may be among the first corporate bonds to trade with a negative yield, according to Bank of America strategist Barnaby Martin. Covered bonds, which are bank securities backed by loans, started trading with yields below zero at the end of September. With the growing threat of falling prices menacing the euro-area’s fragile economy, some investors are calculating it’s worth owning Nestle bonds, even with little or no return. That’s because yields on more than $2 trillion of the developed world’s sovereign debt, including German bunds, have turned negative and the ECB charges 0.2% interest for cash deposits.

“In the same way that bunds went negative, there’s nothing, in theory, to stop short-dated corporate bond yields going slightly negative as well,” Martin said. “If investors want to park some cash, the problem with putting it in a bank or money market fund is potential negative returns, because of the negative deposit rate policy of the ECB.” Vevey-based Nestle SA’s 0.75% notes due October 2016 were quoted to yield 0.05% today, according to data compiled by Bloomberg. It isn’t the only company with short-dated bond yields verging on turning negative. Roche, the world’s largest seller of cancer drugs, issued €2.75 billion of bonds with a coupon of 5.625% in 2009. The notes, which mature in March 2016, pay 0.09%, Bloomberg data show. “The current yield is market-driven,” Nicolas Dunant, head of media relations at Basel, Switzerland-based Roche, said in an e-mail. “The bond has traded up because it has become increasingly attractive for investors in the current low-rate environment.”

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The end of omnipotence.

China Debt Party Nears The End Of The Road (MarketWatch)

Despite an interest-rate cut late last year, China’s economy has got off to a slow start, with weak factory and service-sector readings. The typical response to such data is to expect more monetary stimulus. But have we reached the point where rate cuts are no longer able to lift China’s debt-heavy economy? As China enters its third year of slowing growth, there is growing concern the debt reckoning cannot be kicked down the road any longer. Credit has been growing faster than the economy for six years, and there has always been a recognition this cannot continue indefinitely. Experience elsewhere would suggest countries coming off a multi-year, debt-fueled expansion could expect an inevitable hangover.

This would include everything from bad debts, bankruptcies and asset write-downs, together with currency weakness and perhaps a dose of austerity to restore order to finances. For China, however, we are led to expect a different economy — one where, even in a down cycle, you don’t get recessions but growth that only changes gear from double-digit to “just” 7%. While naysayers warn China’s debt binge is an accident waiting to happen, it never quite does: The bond market and shadow-banking sector have not experienced any meaningful defaults, nor has the banking system seen anything more than a limited increase in non-performing loans. China’s property market might look a lot like bubbles in the U.S., Spain or Japan at different times in history, yet here the ending is again benign, with a gentle plateauing of prices.

But elsewhere, it is possible to find evidence that an abrupt China slowdown is underway. In various global hard-commodity markets – where Chinese demand was widely acknowledged to have lifted prices in everything from iron ore to copper in the boom years — a major reversal is underway. A collection of industrial commodities has now reached multi-year lows. This suggests a lot of folk in China are already facing a hard landing. Signs are accumulating that the financial economy is now getting to a moment of reckoning. At home, slower growth puts added pressure on servicing corporate debt as profitability weakens. Overseas, tighter credit as the Federal Reserve retreats from quantitative easing means hot-money flows are no longer providing a boost to liquidity and are instead reversing.

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“The slide in global oil prices and inflation has turned out to be even bigger than anticipated..”

Global Deflation Risk Deepens As China Economy Slows (Guardian)

The risk of global deflation looms large for 2015 as surveys of China’s mammoth manufacturing sector showed excess supply and insufficient demand in January drove down prices and production. While the pulse of activity was livelier in Japan, India and South Korea, they shared a common condition of slowing inflation. “The slide in global oil prices and inflation has turned out to be even bigger than anticipated,” said David Hensley, an economist at JP Morgan, and central banks from Europe to Canada to India have responded by easing policy. “What is now in the pipeline will help extend the near-term impulse from energy to economic growth into the second half of the year.” A fillip was clearly necessary in China where two surveys showed manufacturing struggling at the start of the year.

The HSBC/Markit Purchasing Managers’ Index (PMI) inched a up a fraction to 49.7 in January, but stayed under the 50.0 level that separates growth from contraction. More worryingly, the official PMI – which is biased towards large Chinese factories – unexpectedly showed that activity fell for the first time in nearly 30 months. The reading of 49.8 in January was down from 50.1 in December and missed forecasts of 50.2. The report showed input costs sliding at their fastest rate since March 2009, with lower prices for oil and steel playing major roles. Ordinarily, cheaper energy prices would be good for China, one of the world’s most intensive energy consumers, but most economists believe the phenomenon is a net negative for Chinese firms because of its impact on ultimate demand.

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Canada joins the currency war: “The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points.”

Canada Mauled by Oil Bust, Job Losses Pile Up (WolfStreet)

Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July. On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system”.

Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel. “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity. In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.

To hang on a little longer without running out of money, these companies are going on an all-out campaign to slash operating costs and capital expenditures. The Canadian Association of Petroleum Producers estimated that oil companies in Western Canada would cut capital expenditures by C$23 billion in 2015, with C$8 billion getting cut from oil-sands projects and C$15 billion from conventional oil and gas projects. However, despite these cuts, CAPP expected oil production to rise, thus prolonging the very glut that has weighed so heavily on prices (a somewhat ironic, but ultimately logical phenomenon also taking place in the US). Then on January 21 – plot twist. The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points. So what did it see that freaked it out?

A crashing oil-and-gas sector, deteriorating employment, and weakness in housing. A triple shock rippling through the economy – and creating the very risks that it had fretted about in September. “After four years of scolding Canadians about taking on too much debt, the Bank has pretty much said, ‘Oh, never mind, we’ve got your back’, despite the fact that the debt/income ratio is at an all-time high of 163 per cent,” wrote Bank of Montreal Chief Economist Doug Porter in a research note after the rate-cut announcement. Clearly the Bank of Canada, which is helplessly observing the oil bust and the job losses, wants to re-fuel the housing bubble and encourage consumers to drive their debt-to-income ratio to new heights by spending money they don’t have.

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As predicted, Australia joins the currency race to the bottom.

Aussie Gets Crushed – How Much More Pain Lies Ahead? (CNBC)

With the Reserve Bank of Australia (RBA) leaving the door open to further rate cuts, the only way forward for the Australian dollar is down, say strategists. The Aussie plunged 1.9% against the U.S. dollar to $0.7655 on Tuesday after the central bank cut its benchmark cash rate by 25 basis points to a fresh record low of 2.25%. It was the currency’s biggest once-day loss since mid-2013, according to Reuters. “75 cents seems the natural progression point from here – I would expect that over the next two weeks if not sooner,” Jonathan Cavenagh, a currency strategist at Westpac told CNBC. “Beyond that, we’ll see how things unfold. If we see another rate cut, the Aussie could definitely be trading in the low-70 cent range,” he said.

The central bank struck a dovish tone in its policy statement highlighting below-trend growth and weak domestic demand in the economy, giving rise to expectations of additional easing. It also said the Aussie remained above fundamental value and that a lower exchange rate is needed to achieve balanced growth. In December, RBA Governor Glenn Stevens told local media that he would prefer to see the currency at $0.75 – levels not seen since early 2009. The Austrian dollar has already suffered a 26% decline against the U.S. dollar over the past two years, weighed by weak commodity prices and a stronger greenback. Paul Bloxham, chief economist for Australia and New Zealand at HSBC also expects the currency to come under further selling pressure. He forecasts the currency will head towards $0.70 going into 2016.

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