Sep 052016
 September 5, 2016  Posted by at 1:16 pm Finance Tagged with: , , , , , , , , , ,  13 Responses »

Berenice Abbott Broad St., NYC 1936



This is part 2 of a 4-part series by Nicole Foss entitled “Negative Interest Rates and the War on Cash”.

Part 1 is here: Negative Interest Rates and the War on Cash (1)

Parts 3 and 4 will follow in the next few days, and at the end we will publish the entire piece in one post.

Here, once again, is Nicole:




Closing the Escape Routes


Nicole Foss: History teaches us that central authorities dislike escape routes, at least for the majority, and are therefore prone to closing them, so that control of a limited money supply can remain in the hands of the very few. In the 1930s, gold was the escape route, so gold was confiscated. As Alan Greenspan wrote in 1966:

In the absence of the gold standard, there is no way to protect savings from confiscation through monetary inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods.

The existence of escape routes for capital preservation undermines the viability of the banking system, which is already over-extended, over-leveraged and extremely fragile. This time cash serves that role:

Ironically, though the paper money standard that replaced the gold standard was originally meant to empower governments, it now seems that paper money is perceived as an obstacle to unlimited government power….While paper money isn’t as big impediment to government power as the gold standard was, it is nevertheless an impediment compared to a society with only electronic money. Because of this, the more ardent statists favor the abolition of paper money and a monetary system with only electronic money and electronic payments.

We can therefore expect cash to be increasingly disparaged in order to justify its intended elimination:

Every day, a situation that requires the use of physical cash, feels more and more like an anachronism. It’s like having to listen to music on a CD. John Maynard Keynes famously referred to gold (well, the gold standard specifically) as a “barbarous relic.” Well the new barbarous relic is physical cash. Like gold, cash is physical money. Like gold, cash is still fetishized. And like gold, cash is a costly drain on the economy. A study done at Tufts in 2013 estimated that cash costs the economy $200 billion. Their study included the nugget that consumers spend, on average, 28 minutes per month just traveling to the point where they obtain cash (ATM, etc.). But this is just first-order problem with cash. The real problem, which economists are starting to recognize, is that paper cash is an impediment to effective monetary policy, and therefore economic growth.

Holding cash is not risk free, but cash is nevertheless king in a period of deflation:

Conventional wisdom is that interest rates earned on investments are never less than zero because investors could alternatively hold currency. Yet currency is not costless to hold: It is subject to theft and physical destruction, is expensive to safeguard in large amounts, is difficult to use for large and remote transactions, and, in large quantities, may be monitored by governments.

The acknowledged risks of holding cash are understood and can be managed personally, whereas the substantial risk associated with a systemic banking crisis are entirely outside the control of ordinary depositors. The bank bail-in (rescuing the bank with the depositors’ funds) in Cyprus in early 2013 was a warning sign, to those who were paying attention, that holding money in a bank is not necessarily safe. The capital controls put in place in other locations, for instance Greece, also underline that cash in a bank may not be accessible when needed.

The majority of the developed world either already has, or is introducing, legislation to require depositor bail-ins in the event of bank failures, rather than taxpayer bailouts, in preparation for many more Cyprus-type events, but on a very much larger scale. People are waking up to the fact that a bank balance is not considered their money, but is actually an unsecured loan to the bank, which the bank may or may not repay, depending on its own circumstances.:

Your checking account balance is denominated in dollars, but it does not consist of actual dollars. It represents a promise by a private company (your bank) to pay dollars upon demand. If you write a check, your bank may or may not be able to honor that promise. The poor souls who kept their euros in the form of large balances in Cyprus banks have just learned this lesson the hard way. If they had been holding their euros in the form of currency, they would have not lost their wealth.



Even in relatively untroubled countries, like the UK, it is becoming more difficult to access physical cash in a bank account or to use it for larger purchases. Notice of intent to withdraw may be required, and withdrawal limits may be imposed ‘for your own protection’. Reasons for the withdrawal may be required, ostensibly to combat money laundering and the black economy:

It’s one thing to be required by law to ask bank customers or parties in a cash transaction to explain where their money came from; it’s quite another to ask them how they intend to use the money they wish to withdraw from their own bank accounts. As one Mr Cotton, a HSBC customer, complained to the BBC’s Money Box programme: “I’ve been banking in that bank for 28 years. They all know me in there. You shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

In France, in the aftermath of terrorist attacks there, several anti-cash measures were passed, restricting the use of cash once obtained:

French Finance Minister Michel Sapin brazenly stated that it was necessary to “fight against the use of cash and anonymity in the French economy.” He then announced extreme and despotic measures to further restrict the use of cash by French residents and to spy on and pry into their financial affairs.

These measures…..include prohibiting French residents from making cash payments of more than 1,000 euros, down from the current limit of 3,000 euros….The threshold below which a French resident is free to convert euros into other currencies without having to show an identity card will be slashed from the current level of 8,000 euros to 1,000 euros. In addition any cash deposit or withdrawal of more than 10,000 euros during a single month will be reported to the French anti-fraud and money laundering agency Tracfin.

Tourists in France may also be caught in the net:

France passed another new Draconian law; from the summer of 2015, it will now impose cash requirements dramatically trying to eliminate cash by force. French citizens and tourists will only be allowed a limited amount of physical money. They have financial police searching people on trains just passing through France to see if they are transporting cash, which they will now seize.

This is essentially the Shock Doctrine in action. Central authorities rarely pass up an opportunity to use a crisis to add to their repertoire of repressive laws and practices.

However, even without a specific crisis to draw on as a justification, many other countries have also restricted the use of cash for purchases:

One way they are waging the War on Cash is to lower the threshold at which reporting a cash transaction is mandatory or at which paying in cash is simply illegal. In just the last few years.

  • Italy made cash transactions over €1,000 illegal;
  • Switzerland has proposed banning cash payments in excess of 100,000 francs;
  • Russia banned cash transactions over $10,000;
  • Spain banned cash transactions over €2,500;
  • Mexico made cash payments of more than 200,000 pesos illegal;
  • Uruguay banned cash transactions over $5,000

Other restrictions on the use of cash can be more subtle, but can have far-reaching effects, especially if the ideas catch on and are widely applied:

The State of Louisiana banned “secondhand dealers” from making more than one cash transaction per week. The term has a broad definition and includes Goodwill stores, specialty stores that sell collectibles like baseball cards, flea markets, garage sales and so on. Anyone deemed a “secondhand dealer” is forbidden to accept cash as payment. They are allowed to take only electronic means of payment or a check, and they must collect the name and other information about each customer and send it to the local police department electronically every day.

The increasing application of de facto capital controls, when combined with the prevailing low interest rates, already convince many to hold cash. The possibility of negative rates would greatly increase the likelihood. We are already in an environment of rapidly declining trust, and limited access to what we still perceive as our own funds only accelerates the process in a self-reinforcing feedback loop. More withdrawals lead to more controls, which increase fear and decrease trust, which leads to more withdrawals. This obviously undermines the perceived power of monetary policy to stimulate the economy, hence the escape route is already quietly closing.

In a deflationary spiral, where the money supply is crashing, very little money is in circulation and prices are consequently falling almost across the board, possessing purchasing power provides for the freedom to pursue opportunities as they present themselves, and to avoid being backed into a corner. The purchasing power of cash increases during deflation, even as electronic purchasing power evaporates. Hence cash represents freedom of action at a time when that will be the rarest of ‘commodities’.

Governments greatly dislike cash, and increasingly treat its use, or the desire to hold it, especially in large denominations, with great suspicion:

Why would a central bank want to eliminate cash? For the same reason as you want to flatten interest rates to zero: to force people to spend or invest their money in the risky activities that revive growth, rather than hoarding it in the safest place. Calls for the eradication of cash have been bolstered by evidence that high-value notes play a major role in crime, terrorism and tax evasion. In a study for the Harvard Business School last week, former bank boss Peter Sands called for global elimination of the high-value note.

Britain’s “monkey” — the £50 — is low-value compared with its foreign-currency equivalents, and constitutes a small proportion of the cash in circulation. By contrast, Japan’s ¥10,000 note (worth roughly £60) makes up a startling 92% of all cash in circulation; the Swiss 1,000-franc note (worth around £700) likewise. Sands wants an end to these notes plus the $100 bill, and the €500 note – known in underworld circles as the “Bin Laden”.



Cash is largely anonymous, untraceable and uncontrollable, hence it makes central authorities, in a system increasingly requiring total buy-in in order to function, extremely uncomfortable. They regard there being no legitimate reason to own more than a small amount of it in physical form, as its ownership or use raises the spectre of tax evasion or other illegal activities:

The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the thirty years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?

The assumption on the part of government today is that possession of large amounts of cash is indicative of involvement in illegal activity. If you’re traveling with thousands of dollars in cash and get pulled over by the police, don’t be surprised when your money gets seized as “suspicious.” And if you want your money back, prepare to get into a long, drawn-out court case requiring you to prove that you came by that money legitimately, just because the courts have decided that carrying or using large amounts of cash is reasonable suspicion that you are engaging in illegal activity….

….Centuries-old legal protections have been turned on their head in the war on cash. Guilt is assumed, while the victims of the government’s depredations have to prove their innocence….Those fortunate enough to keep their cash away from the prying hands of government officials find it increasingly difficult to use for both business and personal purposes, as wads of cash always arouse suspicion of drug dealing or other black market activity. And so cash continues to be marginalized and pushed to the fringes.

Despite the supposed connection between crime and the holding of physical cash, the places where people are most inclined (and able) to store cash do not conform to the stereotype at all:

Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens responding rationally to monetary policy. The Swiss National Bank introduced negative interest rates in December 2014. The aim was to drive money out of banks and into the economy, but that only works to the extent that savers find attractive places to spend or invest their money. With economic growth an anemic 1%, many Swiss withdrew cash from the bank and stashed it at home or in safe-deposit boxes. High-denomination notes are naturally preferred for this purpose, so circulation of 1,000-franc notes (worth about $1,010) rose 17% last year. They now account for 60% of all bills in circulation and are worth almost as much as Serbia’s GDP.

Japan, where banks pay infinitesimally low interest on deposits, is a similar story. Demand for the highest-denomination ¥10,000 notes rose 6.2% last year, the largest jump since 2002. But 10,000 Yen notes are worth only about $88, so hiding places fill up fast. That explains why Japanese went on a safe-buying spree last month after the Bank of Japan announced negative interest rates on some reserves. Stores reported that sales of safes rose as much as 250%, and shares of safe-maker Secom spiked 5.3% in one week.

In Germany too, negative interest rates are considered intolerable, banks are increasingly being seen as risky prospects, and physical cash under one’s own control is coming to be seen as an essential part of a forward-thinking financial strategy:

First it was the news that Raiffeisen Gmund am Tegernsee, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee, with a population 5,767, finally gave in to the ECB’s monetary repression, and announced it’ll start charging retail customers to hold their cash. Then, just last week, Deutsche Bank’s CEO came about as close to shouting fire in a crowded negative rate theater, when, in a Handelsblatt Op-Ed, he warned of “fatal consequences” for savers in Germany and Europe — to be sure, being the CEO of the world’s most systemically risky bank did not help his cause.

That was the last straw, and having been patient long enough, the German public has started to move. According to the WSJ, German savers are leaving the “security of savings banks” for what many now consider an even safer place to park their cash: home safes. We wondered how many “fatal” warnings from the CEO of DB it would take, before this shift would finally take place. As it turns out, one was enough….

….“It doesn’t pay to keep money in the bank, and on top of that you’re being taxed on it,” said Uwe Wiese, an 82-year-old pensioner who recently bought a home safe to stash roughly €53,000 ($59,344), including part of his company pension that he took as a payout. Burg-Waechter KG, Germany’s biggest safe manufacturer, posted a 25% jump in sales of home safes in the first half of this year compared with the year earlier, said sales chief Dietmar Schake, citing “significantly higher demand for safes by private individuals, mainly in Germany.”….

….Unlike their more “hip” Scandinavian peers, roughly 80% of German retail transactions are in cash, almost double the 46% rate of cash use in the U.S., according to a 2014 Bundesbank survey….Germany’s love of cash is driven largely by its anonymity. One legacy of the Nazis and East Germany’s Stasi secret police is a fear of government snooping, and many Germans are spooked by proposals of banning cash transactions that exceed €5,000. Many Germans think the ECB’s plan to phase out the €500 bill is only the beginning of getting rid of cash altogether. And they are absolutely right; we can only wish more Americans showed the same foresight as the ordinary German….

….Until that moment, however, as a final reminder, in a fractional reserve banking system, only the first ten or so percent of those who “run” to the bank to obtain possession of their physical cash and park it in the safe will succeed. Everyone else, our condolences.

The internal stresses are building rapidly, stretching economy after economy to breaking point and prompting aware individuals to protect themselves proactively:

People react to these uncertainties by trying to protect themselves with cash and guns, and governments respond by trying to limit citizens’ ability to do so.

If this play has a third act, it will involve the abolition of cash in some major countries, the rise of various kinds of black markets (silver coins, private-label cash, cryptocurrencies like bitcoin) that bypass traditional banking systems, and a surge in civil unrest, as all those guns are put to use. The speed with which cash, safes and guns are being accumulated — and the simultaneous intensification of the war on cash — imply that the stress is building rapidly, and that the third act may be coming soon.

Despite growing acceptance of electronic payment systems, getting rid of cash altogether is likely to be very challenging, particularly as the fear and state of financial crisis that drives people into cash hoarding is very close to reasserting itself. Cash has a very long history, and enjoys greater trust than other abstract means for denominating value. It is likely to prove tenacious, and unable to be eliminated peacefully. That is not to suggest central authorities will not try. At the heart of financial crisis lies the problem of excess claims to underlying real wealth. The bursting of the global bubble will eliminate the vast majority of these, as the value of credit instruments, hitherto considered to be as good as money, will plummet on the realisation that nowhere near all financial promises made can possibly be kept.

Cash would then represent the a very much larger percentage of the remaining claims to limited actual resources — perhaps still in excess of the available resources and therefore subject to haircuts. Not only the quantity of outstanding cash, but also its distribution, may not be to central authorities liking. There are analogous precedents for altering legal currency in order to dispossess ordinary people trying to protect their stores of value, depriving them of the benefit of their foresight. During the Russian financial crisis of 1998, cash was not eliminated in favour of an electronic alternative, but the currency was reissued, which had a similar effect. People were required to convert their life savings (often held ‘under the mattress’) from the old currency to the new. This was then made very difficult, if not impossible, for ordinary people, and many lost the entirety of their life savings as a result.


A Cashless Society?


The greater the public’s desire to hold cash to protect themselves, the greater will be the incentive for central banks and governments to restrict its availability, reduce its value or perhaps eliminate it altogether in favour of electronic-only payment systems. In addition to commercial banks already complicating the process of making withdrawals, central banks are actively considering, as a first step, mechanisms to impose negative interest rates on physical cash, so as to make the escape route appear less attractive:

Last September, the Bank of England’s chief economist, Andy Haldane, openly pondered ways of imposing negative interest rates on cash — ie shrinking its value automatically. You could invalidate random banknotes, using their serial numbers. There are £63bn worth of notes in circulation in the UK: if you wanted to lop 1% off that, you could simply cancel half of all fivers without warning. A second solution would be to establish an exchange rate between paper money and the digital money in our bank accounts. A fiver deposited at the bank might buy you a £4.95 credit in your account.



To put it mildly, invalidating random banknotes would be highly likely to result in significant social blowback, and to accelerate the evaporation of trust in governing authorities of all kinds. It would be far more likely for financial authorities to move toward making official electronic money the standard by which all else is measured. People are already used to using electronic money in the form of credit and debit cards and mobile phone money transfers:

I can remember the moment I realised the era of cash could soon be over. It was Australia Day on Bondi Beach in 2014. In a busy liquor store, a man wearing only swimming shorts, carrying only a mobile phone and a plastic card, was delaying other people’s transactions while he moved 50 Australian dollars into his current account on his phone so that he could buy beer. The 30-odd youngsters in the queue behind him barely murmured; they’d all been in the same predicament. I doubt there was a banknote or coin between them….The possibility of a cashless society has come at us with a rush: contactless payment is so new that the little ping the machine makes can still feel magical. But in some shops, especially those that cater for the young, a customer reaching for a banknote already produces an automatic frown. Among central bankers, that frown has become a scowl.

In some states almost anything, no matter how small, can be purchased electronically. Everything down to, and including, a cup of coffee from a roadside stall can be purchased in New Zealand with an EFTPOS (debit) card, hence relatively few people carry cash. In Scandinavian countries, there are typically more electronic payment options than cash options:

Sweden became the first country to enlist its own citizens as largely willing guinea pigs in a dystopian economic experiment: negative interest rates in a cashless society. As Credit Suisse reports, no matter where you go or what you want to purchase, you will find a small ubiquitous sign saying “Vi hanterar ej kontanter” (“We don’t accept cash”)….A similar situation is unfolding in Denmark, where nearly 40% of the paying demographic use MobilePay, a Danske Bank app that allows all payments to be completed via smartphone.

Even street vendors selling “Situation Stockholm”, the local version of the UK’s “Big Issue” are also able to take payments by debit or credit card.



Ironically, cashlessness is also becoming entrenched in some African countries. One might think that electronic payments would not be possible in poor and unstable subsistence societies, but mobile phones are actually very common in such places, and means for electronic payments are rapidly becoming the norm:

While Sweden and Denmark may be the two nations that are closest to banning cash outright, the most important testing ground for cashless economics is half a world away, in sub-Saharan Africa. In many African countries, going cashless is not merely a matter of basic convenience (as it is in Scandinavia); it is a matter of basic survival. Less than 30% of the population have bank accounts, and even fewer have credit cards. But almost everyone has a mobile phone. Now, thanks to the massive surge in uptake of mobile communications as well as the huge numbers of unbanked citizens, Africa has become the perfect place for the world’s biggest social experiment with cashless living.

Western NGOs and GOs (Government Organizations) are working hand-in-hand with banks, telecom companies and local authorities to replace cash with mobile money alternatives. The organizations involved include Citi Group, Mastercard, VISA, Vodafone, USAID, and the Bill and Melinda Gates Foundation.

In Kenya the funds transferred by the biggest mobile money operator, M-Pesa (a division of Vodafone), account for more than 25% of the country’s GDP. In Africa’s most populous nation, Nigeria, the government launched a Mastercard-branded biometric national ID card, which also doubles up as a payment card. The “service” provides Mastercard with direct access to over 170 million potential customers, not to mention all their personal and biometric data. The company also recently won a government contract to design the Huduma Card, which will be used for paying State services. For Mastercard these partnerships with government are essential for achieving its lofty vision of creating a “world beyond cash.”

Countries where electronic payment is already the norm would be expected to be among the first places to experiment with a fully cashless society as the transition would be relatively painless (at least initially). In Norway two major banks no longer issue cash from branch offices, and recently the largest bank, DNB, publicly called for the abolition of cash. In rich countries, the advent of a cashless society could be spun in the media in such a way as to appear progressive, innovative, convenient and advantageous to ordinary people. In poor countries, people would have no choice in any case.

Testing and developing the methods in societies with no alternatives and then tantalizing the inhabitants of richer countries with more of the convenience to which they have become addicted is the clear path towards extending the reach of electronic payment systems and the much greater financial control over individuals that they offer:

Bill and Melinda Gates Foundation, in its 2015 annual letter, adds a new twist. The technologies are all in place; it’s just a question of getting us to use them so we can all benefit from a crimeless, privacy-free world. What better place to conduct a massive social experiment than sub-Saharan Africa, where NGOs and GOs (Government Organizations) are working hand-in-hand with banks and telecom companies to replace cash with mobile money alternatives? So the annual letter explains: “(B)ecause there is strong demand for banking among the poor, and because the poor can in fact be a profitable customer base, entrepreneurs in developing countries are doing exciting work – some of which will “trickle up” to developed countries over time.”

What the Foundation doesn’t mention is that it is heavily invested in many of Africa’s mobile-money initiatives and in 2010 teamed up with the World Bank to “improve financial data collection” among Africa’s poor. One also wonders whether Microsoft might one day benefit from the Foundation’s front-line role in mobile money….As a result of technological advances and generational priorities, cash’s days may well be numbered. But there is a whole world of difference between a natural death and euthanasia. It is now clear that an extremely powerful, albeit loose, alliance of governments, banks, central banks, start-ups, large corporations, and NGOs are determined to pull the plug on cash — not for our benefit, but for theirs.

Whatever the superficially attractive media spin, joint initiatives like the Better Than Cash Alliance serve their founders, not the public. This should not come as a surprise, but it probably will as we sleepwalk into giving up very important freedoms:

As I warned in We Are Sleepwalking Towards a Cashless Society, we (or at least the vast majority of people in the vast majority of countries) are willing to entrust government and financial institutions — organizations that have already betrayed just about every possible notion of trust — with complete control over our every single daily transaction. And all for the sake of a few minor gains in convenience. The price we pay will be what remains of our individual freedom and privacy.

Sep 042016
 September 4, 2016  Posted by at 1:16 pm Finance Tagged with: , , , , , , , , , ,  7 Responses »

Irving Underhill City Bank-Farmers Trust Building, William & Beaver streets, NYC 1931



It’s been a while, but Nicole Foss is back at the Automatic Earth -which makes me very happy-, and for good measure, she starts out with a very long article. So long in fact that we have decided to turn it into a 4-part series, if only just to show you that we do care about your health and well-being, as well as your families and social lives. The other 3 parts will follow in the next few days, and at the end we will publish the entire piece in one post.

Here’s Nicole:



Nicole Foss: As momentum builds in the developing deflationary spiral, we are seeing increasingly desperate measures to keep the global credit ponzi scheme from its inevitable conclusion. Credit bubbles are dynamic — they must grow continually or implode — hence they require ever more money to be lent into existence. But that in turn requires a plethora of willing and able borrowers to maintain demand for new credit money, lenders who are not too risk-averse to make new loans, and (apparently effective) mechanisms for diluting risk to the point where it can (apparently safely) be ignored. As the peak of a credit bubble is reached, all these necessary factors first become problematic and then cease to be available at all. Past a certain point, there are hard limits to financial expansions, and the global economy is set to hit one imminently.

Borrowers are increasingly maxed out and afraid they will not be able to service existing loans, let alone new ones. Many families already have more than enough ‘stuff’ for their available storage capacity in any case, and are looking to downsize and simplify their cluttered lives. Many businesses are already struggling to sell goods and services, and so are unwilling to borrow in order to expand their activities. Without willingness to borrow, demand for new loans will fall substantially. As risk factors loom, lenders become far more risk-averse, often very quickly losing trust in the solvency of of their counterparties. As we saw in 2008, the transition from embracing risky prospects to avoiding them like the plague can be very rapid, changing the rules of the game very abruptly.

Mechanisms for spreading risk to the point of ‘dilution to nothingness’, such as securitization, seen as effective and reliable during monetary expansions, cease to be seen as such as expansion morphs into contraction. The securitized instruments previously created then cease to be perceived as holding value, leading to them being repriced at pennies on the dollar once price discovery occurs, and the destruction of that value is highly deflationary. The continued existence of risk becomes increasingly evident, and the realisation that that risk could be catastrophic begins to dawn.

Natural limits for both borrowing and lending threaten the capacity to prolong the credit boom any further, meaning that even if central authorities are prepared to pay almost any price to do so, it ceases to be possible to kick the can further down the road. Negative interest rates and the war on cash are symptoms of such a limit being reached. As confidence evaporates, so does liquidity. This is where we find ourselves at the moment — on the cusp of phase two of the credit crunch, sliding into the same unavoidable constellation of conditions we saw in 2008, but on a much larger scale.




Interest rates have remained at extremely low levels, hardly distinguishable from zero, for the several years. This zero interest rate policy (ZIRP) is a reflection of both the extreme complacency as to risk during the rise into the peak of a major bubble, and increasingly acute pressure to keep the credit mountain growing through constant stimulation of demand for borrowing. The resulting search for yield in a world of artificially stimulated over-borrowing has lead to an extraordinary array of malinvestment across many sectors of the real economy. Ever more excess capacity is being built in a world facing a severe retrenchment in aggregate demand. It is this that is termed ‘recovery’, but rather than a recovery, it is a form of double jeopardy — an intensification of previous failed strategies in the hope that a different outcome will result. This is, of course, one definition of insanity.

Now that financial crisis conditions are developing again, policies are being implemented which amount to an even greater intensification of the old strategy. In many locations, notably those perceived to be safe havens, the benchmark is moving from a zero interest rate policy to a negative interest rate policy (NIRP), initially for bank reserves, but potentially for business clients (for instance in Holland and the UK). Individual savers would be next in line. Punishing savers, while effectively encouraging banks to lend to weaker, and therefore riskier, borrowers, creates incentives for both borrowers and lenders to continue the very behaviour that set the stage for financial crisis in the first place, while punishing the kind of responsibility that might have prevented it.

Risk is relative. During expansionary times, when risk perception is low almost across the board (despite actual risk steadily increasing), the risk premium that interest rates represent shows relatively little variation between different lenders, and little volatility. For instance, the interest rates on sovereign bonds across Europe, prior to financial crisis, were low and broadly similar for many years. In other words, credit spreads were very narrow during that time. Greece was able to borrow almost as easily and cheaply as Germany, as lenders bet that Europe’s strong economies would back the debt of its weaker parties. However, as collective psychology shifts from unity to fragmentation, risk perception increases dramatically, and risk distinctions of all kinds emerge, with widening credit spreads. We saw this happen in 2008, and it can be expected to be far more pronounced in the coming years, with credit spreads widening to record levels. Interest rate divergences create self-fulfilling prophecies as to relative default risk, against a backdrop of fear-driven high volatility.

Many risk distinctions can be made — government versus private debt, long versus short term, economic centre versus emerging markets, inside the European single currency versus outside, the European centre versus the troubled periphery, high grade bonds versus junk bonds etc. As the risk distinctions increase, the interest rate risk premiums diverge. Higher risk borrowers will pay higher premiums, in recognition of the higher default risk, but the higher premium raises the actual risk of default, leading to still higher premiums in a spiral of positive feedback. Increased risk perception thus drives actual risk, and may do so until the weak borrower is driven over the edge into insolvency. Similarly, borrowers perceived to be relative safe havens benefit from lower risk premiums, which in turn makes their debt burden easier to bear and lowers (or delays) their actual risk of default. This reduced risk of default is then reflected in even lower premiums. The risky become riskier and the relatively safe become relatively safer (which is not necessarily to say safe in absolute terms). Perception shapes reality, which feeds back into perception in a positive feedback loop.



The process of diverging risk perception is already underway, and it is generally the states seen as relatively safe where negative interest rates are being proposed or implemented. Negative rates are already in place for bank reserves held with the ECB and in a number of European states from 2012 onwards, notably Scandinavia and Switzerland. The desire for capital preservation has led to a willingness among those with capital to accept paying for the privilege of keeping it in ‘safe havens’. Note that perception of safety and actual safety are not equivalent. States at the peak of a bubble may appear to be at low risk, but in fact the opposite is true. At the peak of a bubble, there is nowhere to go but down, as Iceland and Ireland discovered in phase one of the financial crisis, and many others will discover as we move into phase two. For now, however, the perception of low risk is sufficient for a flight to safety into negative interest rate environments.

This situation serves a number of short term purposes for the states involved. Negative rates help to control destabilizing financial inflows at times when fear is increasingly driving large amounts of money across borders. A primary objective has been to reduce upward pressure on currencies outside the eurozone. The Swiss, Danish and Swedish currencies have all been experiencing currency appreciation, hence a desire to use negative interest rates to protect their exchange rate, and therefore the price of their exports, by encouraging foreigners to keep their money elsewhere. The Danish central bank’s sole mandate is to control the value of the currency against the euro. For a time, Switzerland pegged their currency directly to the euro, but found the cost of doing so to be prohibitive. For them, negative rates are a less costly attempt to weaken the currency without the need to defend a formal peg. In a world of competitive, beggar-thy-neighbour currency devaluations, negative interest rates are seen as a means to achieve or maintain an export advantage, and evidence of the growing currency war.

Negative rates are also intended to discourage saving and encourage both spending and investment. If savers must pay a penalty, spending or investment should, in theory, become more attractive propositions. The intention is to lead to more money actively circulating in the economy. Increasing the velocity of money in circulation should, in turn, provide price support in an environment where prices are flat to falling. (Mainstream commentators would describe this as as an attempt to increase ‘inflation’, by which they mean price increases, to the common target of 2%, but here at The Automatic Earth, we define inflation and deflation as an increase or decrease, respectively, in the money supply, not as an increase or decrease in prices.) The goal would be to stave off a scenario of falling prices where buyers would have an incentive to defer spending as they wait for lower prices in the future, starving the economy of circulating currency in the meantime. Expectations of falling prices create further downward price pressure, leading into a vicious circle of deepening economic depression. Preventing such expectations from taking hold in the first place is a major priority for central authorities.

Negative rates in the historical record are symptomatic of times of crisis when conventional policies have failed, and as such are rare. Their use is a measure of desperation:

First, a policy rate likely would be set to a negative value only when economic conditions are so weak that the central bank has previously reduced its policy rate to zero. Identifying creditworthy borrowers during such periods is unusually challenging. How strongly should banks during such a period be encouraged to expand lending?

However strongly banks are ‘encouraged’ to lend, willing borrowers and lenders are set to become ‘endangered species’:

The goal of such rates is to force banks to lend their excess reserves. The assumption is that such lending will boost aggregate demand and help struggling economies recover. Using the same central bank logic as in 2008, the solution to a debt problem is to add on more debt. Yet, there is an old adage: you can bring a horse to water but you cannot make him drink! With the world economy sinking into recession, few banks have credit-worthy customers and many banks are having difficulties collecting on existing loans.
Italy’s non-performing loans have gone from about 5 percent in 2010 to over 15 percent today. The shale oil bust has left many US banks with over a trillion dollars of highly risky energy loans on their books. The very low interest rate environment in Japan and the EU has done little to spur demand in an environment full of malinvestments and growing government constraints.

Doing more of the same simply elevates the already enormous risk that a new financial crisis is right around the corner:

Banks rely on rates to make returns. As the former Bank of England rate-setter Charlie Bean has written in a recent paper for The Economic Journal, pension funds will struggle to make adequate returns, while fund managers will borrow a lot more to make profits. Mr Bean says: “All of this makes a leveraged ‘search for yield’ of the sort that marked the prelude to the crisis more likely.” This is not comforting but it is highly plausible: barely a decade on from the crash, we may be about to repeat it. This comes from tasking central bankers with keeping the world economy growing, even while governments have cut spending.


Experiences with Negative Interest Rates


The existing low interest rate environment has already caused asset price bubbles to inflate further, placing assets such as real estate ever more beyond the reach of ordinary people at the same time as hampering those same people attempting to build sufficient savings for a deposit. Negative interest rates provide an increased incentive for this to continue. In locations where the rates are already negative, the asset bubble effect has worsened. For instance, in Denmark negative interest rates have added considerable impetus to the housing bubble in Copenhagen, resulting in an ever larger pool over over-leveraged property owners exposed to the risks of a property price collapse and debt default:

Where do you invest your money when rates are below zero? The Danish experience says equities and the property market. The benchmark index of Denmark’s 20 most-traded stocks has soared more than 100 percent since the second quarter of 2012, which is just before the central bank resorted to negative rates. That’s more than twice the stock-price gains of the Stoxx Europe 600 and Dow Jones Industrial Average over the period. Danish house prices have jumped so much that Danske Bank A/S, Denmark’s biggest lender, says Copenhagen is fast becoming Scandinavia’s riskiest property market.

Considering that risky property markets are the norm in Scandinavia, Copenhagen represents an extreme situation:

“Property prices in Copenhagen have risen 40–60 percent since the middle of 2012, when the central bank first resorted to negative interest rates to defend the krone’s peg to the euro.”

This should come as no surprise: recall that there are documented cases where Danish borrowers are paid to take on debt and buy houses “In Denmark You Are Now Paid To Take Out A Mortgage”, so between rewarding debtors and punishing savers, this outcome is hardly shocking. Yet it is the negative rates that have made this unprecedented surge in home prices feel relatively benign on broader price levels, since the source of housing funds is not savings but cash, usually cash belonging to the bank.



The Swedish property market is similarly reaching for the sky. Like Japan at the peak of it’s bubble in the late 1980s, Sweden has intergenerational mortgages, with an average term of 140 years! Recent regulatory attempts to rein in the ballooning debt by reducing the maximum term to a ‘mere’ 105 years have been met with protest:

Swedish banks were quoted in the local press as opposing the move. “It isn’t good for the finances of households as it will make mortgages more expensive and the terms not as good. And it isn’t good for financial stability,” the head of Swedish Bankers’ Association was reported to say.

Apart from stimulating further leverage in an already over-leveraged market, negative interest rates do not appear to be stimulating actual economic activity:

If negative rates don’t spur growth — Danish inflation since 2012 has been negligible and GDP growth anemic — what are they good for?….Danish businesses have barely increased their investments, adding less than 6 percent in the 12 quarters since Denmark’s policy rate turned negative for the first time. At a growth rate of 5 percent over the period, private consumption has been similarly muted. Why is that? Simply put, a weak economy makes interest rates a less powerful tool than central bankers would like.

“If you’re very busy worrying about the economy and your job, you don’t care very much what the exact rate is on your car loan,” says Torsten Slok, Deutsche Bank’s chief international economist in New York.

Fuelling inequality and profligacy while punishing responsible behaviour is politically unpopular, and the consequences, when they eventually manifest, will be even more so. Unfortunately, at the peak of a bubble, it is only continued financial irresponsibility that can keep a credit expansion going and therefore keep the financial system from abruptly crashing. The only things keeping the system ‘running on fumes’ as it currently is, are financial sleight-of-hand, disingenuous bribery and outright fraud. The price to pay is that the systemic risks continue to grow, and with it the scale of the impacts that can be expected when the risk is eventually realised. Politicians desperately wish to avoid those consequences occurring in their term of office, hence they postpone the inevitable at any cost for as long as physically possible.


The Zero Lower Bound and the Problem of Physical Cash


Central bankers attempting to stimulate the circulation of money in the economy through the use of negative interest rates have a number of problems. For starters, setting a low official rate does not necessarily mean that low rates will prevail in the economy, particularly in times of crisis:

The experience of the global financial crisis taught us that the type of shocks which can drive policy interest rates to the lower bound are also shocks which produce severe impairments to the monetary policy transmission mechanism. Suppose, for example, that the interbank market freezes and prevents a smooth transmission of the policy interest rate throughout the banking sector and financial markets at large. In this case, any cut in the policy rate may be almost completely ineffective in terms of influencing the macroeconomy and prices.

This is exactly what we saw in 2008, when interbank lending seized up due to the collapse of confidence in the banking sector. We have not seen this happen again yet, but it inevitably will as crisis conditions resume, and when it does it will illustrate vividly the limits of central bank power to control financial parameters. At that point, interest rates are very likely to spike in practice, with banks not trusting each other to repay even very short term loans, since they know what toxic debt is on their own books and rationally assume their potential counterparties are no better. Widening credit spreads would also lead to much higher rates on any debt perceived to be risky, which, increasingly, would be all debt with the exception of government bonds in the jurisdictions perceived to be safest. Low rates on high grade debt would not translate into low rates economy-wide. Given the extent of private debt, and the consequent vulnerability to higher interest rates across the developed world, an interest rate spike following the NIRP period would be financially devastating.

The major issue with negative rates in the shorter term is the ability to escape from the banking system into physical cash. Instead of causing people to spend, a penalty on holding savings in a banks creates an incentive for them to withdraw their funds and hold cash under their own control, thereby avoiding both the penalty and the increasing risk associated with the banking system:

Western banking systems are highly illiquid, meaning that they have very low cash equivalents as a percentage of customer deposits….Solvency in many Western banking systems is also highly questionable, with many loaded up on the debts of their bankrupt governments. Banks also play clever accounting games to hide the true nature of their capital inadequacy. We live in a world where questionably solvent, highly illiquid banks are backed by under capitalized insurance funds like the FDIC, which in turn are backed by insolvent governments and borderline insolvent central banks. This is hardly a risk-free proposition. Yet your reward for taking the risk of holding your money in a precarious banking system is a rate of return that is substantially lower than the official rate of inflation.

In other words, negative rates encourage an arbitrage situation favouring cash. In an environment of few good investment opportunities, increasing recognition of risk and a rising level of fear, a desire for large scale cash withdrawal is highly plausible:

From a portfolio choice perspective, cash is, under normal circumstances, a strictly dominated asset, because it is subject to the same inflation risk as bonds but, in contrast to bonds, it yields zero return. It has also long been known that this relationship would be reversed if the return on bonds were negative. In that case, an investor would be certain of earning a profit by borrowing at negative rates and investing the proceedings in cash. Ignoring storage and transportation costs, there is therefore a zero lower bound (ZLB) on nominal interest rates.

Zero is the lower bound for nominal interest rates if one would want to avoid creating such an incentive structure, but in a contractionary environment, zero is not low enough to make borrowing and lending attractive. This is because, while the nominal rate might be zero, the real rate (the nominal rate minus negative inflation) can remain high, or perhaps very high, depending on how contractionary the financial landscape becomes. As Keynes observed, attempting to stimulate demand for money by lowering interest rates amounts to ‘pushing on a piece of string‘. Central authorities find themselves caught in the liquidity trap, where monetary policy ceases to be effective:

Many big economies are now experiencing ‘deflation’, where prices are falling. In the euro zone, for instance, the main interest rate is at 0.05% but the “real” (or adjusted for inflation) interest rate is considerably higher, at 0.65%, because euro-area inflation has dropped into negative territory at -0.6%. If deflation gets worse then real interest rates will rise even more, choking off recovery rather than giving it a lift.

If nominal rates are sufficiently negative to compensate for the contractionary environment, real rates could, in theory, be low enough to stimulate the velocity of money, but the more negative the nominal rate, the greater the incentive to withdraw physical cash. Hoarded cash would reduce, instead of increase, the velocity of money. In practice, lowering rates can be moderately reflationary, provided there remains sufficient economic optimism for people to see the move in a positive light. However, sending rates into negative territory at a time pessimism is dominant can easily be interpreted as a sign of desperation, and therefore as confirmation of a negative outlook. Under such circumstances, the incentives to regard the banking system as risky, to withdraw physical cash and to hoard it for a rainy day increase substantially. Not only does the money supply fail to grow, as new loans are not made, but the velocity of money falls as money is hoarded, thereby aggravating a deflationary spiral:

A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth. As consumers watch prices decline, they defer purchases, reducing consumption and slowing growth. Deflation also lifts real interest rates, which drives currency values higher. In today’s mercantilist, beggar-thy-neighbour world of global trade, a strong currency is a headwind to exports. Obviously, this is not the desired outcome of policymakers. But as central banks grasp for new, stimulative tools, they end up pushing on an ever-lengthening piece of string.



Japan has been in the economic doldrums, with pessimism dominant, for over 25 years, and the population has become highly sceptical of stimulation measures intended to lead to recovery. The negative interest rates introduced there (described as ‘economic kamikaze’) have had a very different effect than in Scandinavia, which is still more or less at the peak of its bubble and therefore much more optimistic. Unfortunately, lowering interest rates in times of collective pessimism has a poor record of acting to increase spending and stimulate the economy, as Japan has discovered since their bubble burst in 1989:

For about a quarter of a century the Japanese have proved to be fanatical savers, and no matter how low the Bank of Japan cuts rates, they simply cannot be persuaded to spend their money, or even invest it in the stock market. They fear losing their jobs; they fear a further fall in shares or property values; they have no confidence in the investment opportunities in front of them. So pathological has this psychology grown that they would rather see the value of their savings fall than spend the cash. That draining of confidence after the collapse of the 1980s “bubble” economy has depressed Japanese growth for decades.

Fear is a very sharp driver of behaviour — easily capable of over-riding incentives designed to promote spending and investment:

When people are fearful they tend to save; and when they become especially fearful then they save even more, even if the returns on their savings are extremely low. Much the same goes for businesses, and there are increasing reports of them “hoarding” their profits rather than reinvesting them in their business, such is the great “uncertainty” around the world economy. Brexit obviously only added to the fears and misgivings about the future.

Deflation is so difficult to overcome precisely because of its strong psychological component. When the balance of collective psychology tips from optimism, hope and greed to pessimism and fear, everything is perceived differently. Measures intended to restore confidence end up being interpreted as desperation, and therefore get little or no traction. As such initiatives fail, their failure becomes conformation of a negative bias, which increases the power of that bias, causing more stimulus initiatives to fail. The resulting positive feedback loop creates and maintains a vicious circle, both economically and socially:

There is a strong argument that when rates go negative it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money. We are already seeing this happen in Japan where citizens are clamouring for ¥10,000 bills (and home safes to store them in). People are taking their money out of the banking system to stuff it under their metaphorical mattresses. This may sound extreme, but whether paper money is stashed in home safes or moved into transaction substitutes or other stores of value like gold, the point is it’s not circulating in the economy. The empirical data support this view — the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates.

Physical cash under one’s own control is increasingly seen as one of the primary escape routes for ordinary people fearing the resumption of the 2008 liquidity crunch, and its popularity as a store of value is increasing steadily, with demand for cash rising more rapidly than GDP in a wide range of countries:

While cash’s use is in continual decline, claims that it is set to disappear entirely may be premature, according to the Bank of England….The Bank estimates that 21pc to 27pc of everyday transactions last year were in cash, down from between 34pc and 45pc at the turn of the millennium. Yet simultaneously the demand for banknotes has risen faster than the total amount of spending in the economy, a trend that has only become more pronounced since the mid-1990s. The same phenomenon has been seen internationally, in the US, eurozone, Australia and Canada….

….The prevalence of hoarding has also firmed up the demand for physical money. Hoarders are those who “choose to save their money in a safety deposit box, or under the mattress, or even buried in the garden, rather than placing it in a bank account”, the Bank said. At a time when savings rates have not turned negative, and deposits are guaranteed by the government, this kind of activity seems to defy economic theory. “For such action to be considered as rational, those that are hoarding cash must be gaining a non-financial benefit,” the Bank said. And that benefit must exceed the returns and security offered by putting that hoarded cash in a bank deposit account. A Bank survey conducted last year found that 18pc of people said they hoarded cash largely “to provide comfort against potential emergencies”.

This would suggest that a minimum of £3bn is hoarded in the UK, or around £345 a person. A government survey conducted in 2012 suggested that the total number might be higher, at £5bn….

…..But Bank staff believe that its survey results understate the extent of hoarding, as “the sensitivity of the subject” most likely affects the truthfulness of hoarders. “Based on anecdotal evidence, a small number of people are thought to hoard large values of cash.” The Bank said: “As an illustrative example, if one in every thousand adults in the United Kingdom were to hoard as much as £100,000, this would account for around £5bn — nearly 10pc of notes in circulation.” While there may be newer and more convenient methods of payment available, this strong preference for cash as a safety net means that it is likely to endure, unless steps are taken to discourage its use.

May 182016
 May 18, 2016  Posted by at 8:54 am Finance Tagged with: , , , , , , , , , ,  3 Responses »

Russell Lee South Side market, Chicago 1941

US Debt Dump Deepens In 2016 (CNN)
The Humungous Depression (Gore)
Negative Rates Are A Form Of Tax (MW)
The Negative Interest Rate Gap (Dmitry Orlov)
The EU Has “Run Its Historical Course” (ZH)
Italy Wins Brussels’ ‘Flexibility’ On Debt Reduction Targets (FT)
US Raises China Steel Taxes By 522% (BBC)
Chinas Debt Bubble Is Getting Only More Dangerous (WSJ)
China To Curb Shadow Banking Via Checks On Fund House Subsidiaries (R.)
Abenomics: The Reboot, Rebooted (R.)
Trump and Sanders Shift Mood in Congress Against Trade Deals (BBG)
Smugglers Made $5-6 Billion Off Refugees To Europe In 2015 (R.)
Refugees Will Repay EU Spending Almost Twice Over In Five Years (G.)

“There’s still this fear of ‘everything is going to fall apart.'”

US Debt Dump Deepens In 2016 (CNN)

China, Russia and Brazil sold off U.S. Treasury bonds as they tried to soften the blow of the global economic slowdown. They each sold off at least $1 billion in U.S. Treasury bonds in March. In all, central banks sold a net $17 billion. Sales had hit a record $57 billion in January. So far this year, the global bank debt dump has reached $123 billion. It’s the fastest pace for a U.S. debt selloff by global central banks since at least 1978, according to Treasury Department data published Monday afternoon. Treasuries are considered one of the safest assets in the world, but some experts say a sense of panic about the global economy drove the selloff.

“It’s more of global fear than anything,” says Ihab Salib, head of international fixed income at Federated Investors. “There’s still this fear of ‘everything is going to fall apart.'” Judging by the selloff, policymakers across the globe were hitting the panic button often and early in the year as oil prices fell, concerns about China’s economy rose and stock markets were very volatile. In response, countries may be selling Treasuries to prop up their currencies, some of which lost lots of value against the dollar last year. By selling U.S. debt, central banks can get hard cash to buy up their local currency and prevent it from losing too much value.

Also, as investors have pulled money out of developing countries, central bankers seek to replenish those lost funds by selling their foreign reserves. The leader in the selloff: China. “We’ve seen Chinese central bank foreign reserves fall dramatically,” says Gus Faucher, senior economist at PNC Financial. “Their currency is under pressure.” Between December and February, China’s central bank sold off an alarming $236 billion to help support its currency, which China is slowly letting become more controlled by markets and less by the government. In March, China sold $3.5 billion in U.S. Treasury bonds, Treasury data shows. Experts say the sell off may be slowing down now that global concerns have eased. If anything, demand is still high for U.S. Treasury bonds – it’s just coming from private investors.

Read more …

ZIRP and NIRP feed the casino.

The Humungous Depression (Gore)

Economic depressions unfold slowly, which obscures their analysis, although they are simple to understand. Governments and central banks turn recessions into depressions, which are preceded by unsustainable expansions of debt untethered from the real economy. The reduction and resolution of excess debt takes time, and governments and central banks usually act counterproductively, retarding necessary adjustments and lengthening the adjustment, and consequently, the depression. If one dates the beginning of a depression from the beginning of the unsustainable expansion of debt that preceded it, then the current depression began in 1987. Newly installed chairman of the Fed Alan Greenspan quelled a stock market crash, flooding the financial system with fiat liquidity. It was a well from which he and his successors would draw repeatedly.

Throughout the 1990s he would pump whenever it appeared the market and the US economy were about to dump. In 1999, he pumped because the Y2K computer transition might adversely affect the economy and financial system (it didn’t). If one dates the beginning of a depression from the time when the benefits of debt are, in the aggregate, outweighed by its burdens, the depression began in 2000, with the implosion of the fiat-credit fueled, high-tech and Internet stock market bubble. Unsustainable debt and artificially low interest rates lower the rate of return on productive investment and saving, increasing the relative attractiveness of speculation. Central bankers and their minions refer to this as “forcing investors out on the risk curve,” crawling way out on a limb for fruitful returns. They have no term for when markets saw off the branch, as they did in 2000 and again in 2008.

Most people don’t see 2000 as the beginning of a depression, but Washington and Wall Street cloud their vision. Stock markets were once essential avenues for raising capital and valuing corporations. Since central bankers’ remit was broadened to their care and feeding, stock markets have become engines of obfuscation. The “wealth effect” supposedly justified solicitude for markets: a rising stock market would increase wealth, spending, and economic growth. For seven years a rising market has coexisted with an anemic rebound and one hears little about the wealth effect anymore. The stock market is the preeminent symbol of economic health, so keeping it afloat has become a political exercise. Sure, central bankers and governments know what they’re doing, just look at those stock indices.

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“They impose a levy on the banking system that has to be paid by someone..”

Negative Rates Are A Form Of Tax (MW)

Central banks have slashed interest rates to nothing. They have printed money on a vast scale. Where that has not quite worked, and if we are being honest that is most places, they now have a new tool. Negative interest rates. Across a third of the global economy, money you put in the bank does not only generate nothing in the way of a return. You actually get charged for keeping it there. That is already producing strange, Alice-in-Wonderland economics, where nothing is quite what it seems. Governments want you to delay paying taxes as long as possible, the mortgage company pays you to stay in the house, and cash becomes so sought after there is even talk of abolishing it. But the real problem with negative rates may be something quite different.

As a fascinating new paper from the St. Louis Fed argues, they are in fact a form of tax. They impose a levy on the banking system that has to be paid by someone — and that someone is probably us. That may explain why central banks and governments are so keen on them. Hugely indebted governments are always in the market for a new tax, especially one that their voters probably won’t notice. But it also explains why they don’t really work — because most of the economics in trouble, especially in Europe, are already suffocating under an impossible high tax burden. Negative interest rates have, like a fast-mutating virus, started to spread across the world. The Swiss first tried them out all the way back in the 1970s.

In June 1972 it imposed a penalty rate of 2% a quarter on foreigners parking money in Swiss francs amid the turmoil of the early part of that decade, but the experiment only lasted a couple of years. In the modern era, the ECB kicked off the trend in June 2014 with a negative rate on selected deposits. Since then, they have spread to Sweden, Denmark, Switzerland (again), and more recently Japan, while the ECB has cut even deeper into negative territory. They already cover about a third of the global economy, and there is no reason why they should not reach further. The Fed might be raising rates this year, but it is the only major central bank to do so, and if, or rather when, there is another major downturn, it may have no choice but to impose negative rates as well.

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“ can an interest rate be negative? Does it become a “disinterest rate”?

The Negative Interest Rate Gap (Dmitry Orlov)

Back in the early 1980s the US economy was experiencing stagflation: a stagnant economy and an inflating currency. Paul Volcker, who at the time was Chairman of the Federal Reserve, took a decisive step and raised the Federal Funds Rate, which determines the rate at which most other economic players get to borrow, to 18%, freezing out inflation. This was a bold step, not without negative consequences, but it did get inflation under control and, after a while, the US economy stopped stagnating. Well, not quite. Wages didn’t stop stagnating; they’ve been stagnant ever since. But the fortunes of the 1% of the richest Americans have certainly improved nicely! Moreover, the US economy grew quite a bit since that time.

Of course, most of this growth came at the expense of staggering structural deficits and an explosion of indebtedness at every level, but so what? Sure, the national debt went exponential and the government’s unfunded liabilities are now over $200 trillion, but that’s OK. You just have to like debt. Keep saying to yourself: “Debt is good!” Because if everyone started thinking that debt is bad, then the entire financial house of cards would implode and we would be left with nothing. But once interest rates peaked in the early 1980s, they’ve been on a downward trend ever since, with little ups and downs now and again but an unmistakable overall downward trend.

The Federal Reserve had to do this in order to, in Fed-speak, “support economic activity and job creation by making financial conditions more accommodative.” Once it started doing this, it found that it couldn’t stop. The US had entered a downward spiral—of sloth, obesity, ignorance, substance abuse, expensive and disastrous foreign military adventures, bureaucratic insanity, massive corruption at every level—and under these circumstances it needed ever-cheaper money in order to keep the financial house of cards from imploding. And then, in late 2008, the Fed finally reached the ultimate target: the Fed Funds Rate went all the way to zero. This is known as ZIRP, for Zero Interest Rate Policy. And, unfortunately, it stayed there.

It stayed there, instead of continuing to gently drift down as before, because of a conceptual difficulty: how can an interest rate be negative? Does it become a “disinterest rate”? How can that work? After all, lenders are “interested” in lending because they get back more than they lend out (accepting some amount of risk); and depositors are “interested” in keeping money in banks because they get back more than they put in. And if these activities become “of zero interest,” why would lenders lend and depositors deposit? They wouldn’t, now, would they? They’d buy gold, or Bitcoin, or bid up real estate.

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As long as we can see things only in terms of money nothing we do has any real value.

The EU Has “Run Its Historical Course” (ZH)

None other than the former head of MI6 (the British Secret Intelligence Service) Richard Dearlove expressed his quite candid thoughts on the immigration crisis, as well as the possibility of a British exit from the EU during a speech recently at the BBC. The speech is well worth the listen. Here are some notable quotes from the speech as it relates to the immigration crisis. The former head of intelligence is quick to point out that despite what the public perception may be, the reality is that there are terrorists already among us.

“When massive social forces are at work, and mass migration is such a force, a whole government response is required, and a high degree of international cooperation.” “In the real world, there are no miraculous James Bond style solutions. Simply shutting the door on migration is not an option. History tells us that human tides are irresistible, unless the gravitational pull that causes them is removed. Edward Gibbon elegantly charted how Rome, with all it’s civic and administrative sophistication and military prowess, could not stop its empire from being overrun by the mass movement of Europe’s tribes.”

“We should not conflate the problem of migration with the threat of terrorism. High levels of immigration, particularly from the Middle East, coupled with freedom of movement inside the EU, make effective border conrol more difficult. Terrorists can, and do exploit these circumstances as we saw recently in their movement between Brussels and Paris, and to and from Syria. With large numbers of people on the move, a few of them will inevitably carry the terrorist virus.” A number of the most lethal terrorists are from inside Europe, including the UK. They are already among us.” “The EU, as opposed to its member states, has no operational counter-terrorist capability to speak of. Many of the European states look to the UK for training.”

“The argument that we would be less secure if we left the EU, is in reality rather difficult to make. There would in fact be some gains if we left, because the UK would be fully master of its own house. Counter-terrorist coordination across Europe would certainly continue, and the UK would remain a leader in the field. The idea that the quality of that cooperation depends in any significant way on our EU membership is misleading.” “Is the EU, faced with the problem of mass migration, able to coordinate an effective response from its member countries. Should the UK stay in and continue struggle for fundamental change, or do we conclude that the effort would be wasted, and that the EU in its extended form has run its historical course. For each of us, this is possibly the most important choice we may ever have to make.”

“Whether we will each be worse off, whether our national security might be damaged, even whether the economy might falter, and sterling be devalued, are subsidiary to the key question, which is whether we have confidence in the EU to manage Europe’s future. If Europe cannot act together to persuade a majority of its citizens that it can gain control of its migrant crisis, then the EU will find itself at the mercy of a populist uprising which is already stirring. The stakes are very high, and the UK referendum is the first roll of the dice in a bigger geopolitical game.”

Read more …

Unlike Greece, Italy is so big it can make or break the EU. So goalposts are moved as they go along.

Italy Wins Brussels’ ‘Flexibility’ On Debt Reduction Targets (FT)

Brussels has granted Italy “unprecedented” flexibility in meeting EU debt reduction targets, using its political leeway to the full as it cautiously polices the eurozone’s fiscal rule book. Italy has emerged as a big winner from the European Commission’s latest review of national budget policies, which is set to pull back from — or postpone — painful corrective measures it had the power to impose. The decisions have sparked an intense debate within the commission over what critics see as its record of tolerating fiscal lapses by countries such as France, Italy and Spain. Some officials were on Tuesday pushing to delay parts of the package to avoid punishing Spain and Portugal before Spain’s election on June 26.

The need for the debate on timing shows the commission under Jean-Claude Juncker has acted as a self-described political body, even at the risk of undermining the credibility of the eurozone’s strengthened fiscal regime. After months of heavy lobbying from Matteo Renzi, the Italian premier, Rome secured most of the “budgetary flexibility” it sought, helping it avoid so-called excessive deficit procedures for failing to bring down its debt levels fast enough. Italy would be allowed extra fiscal room equivalent to 0.85%of GDP — or about €14bn — this year compared with the target mandated under EU budget rules. Such “flexibility” approaches the 0.9% of GDP Italy demanded in drawn-out negotiations with Brussels.

Valdis Dombrovskis and Pierre Moscovici, the two European commissioners responsible for eurozone budget issues, said in a letter to Rome that “no other member state has requested nor received anything close to this unprecedented amount of flexibility”. Zsolt Darvas of the Bruegel think-tank said that “if the rules were taken literally” Italy would be placed under the excessive deficit procedure. Overall the EU fiscal rules “have very low credibility”, he added. “Many countries are violating the rules almost constantly from one year to the next.” Mr Renzi’s government is not completely in the clear, however. In exchange for the flexibility, the commission demanded a “clear and credible commitment” that Italy would respect its budget targets in 2017 to reduce the country’s high debt-to-GDP ratio, which stood at 132.7%of GDP last year.

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Brilliant! What’s not to like? Can’t wait for the response.

US Raises China Steel Taxes By 522% (BBC)

The US has raised its import duties on Chinese steelmakers by more than five-fold after accusing them of selling their products below market prices. The taxes specifically apply to Chinese-made cold-rolled flat steel, which is used in car manufacturing, shipping containers and construction. The US Commerce Department ruling comes amid heightened trade tensions between the two sides over several products, including chicken parts. Steel is an especially sensitive issue. US and European steel producers claim China is distorting the global market and undercutting them by dumping its excess supply abroad. The ruling itself is only directed at what is small amount of steel from China and Japan and won’t have much of an impact – but it is the politics of the ruling that’s worth noting.

It is an election year, and US presidential candidates have been ramping up the rhetoric on what they say are unfair trade practices by China. US steel makers say that the Chinese government unfairly subsidises its steel exports. Meanwhile China has been under pressure to save its steel sector, which is suffering from over-capacity issues because of slowing demand at home. China’s Ministry of Finance has not directly responded to the US ruling but on its website this morning it has said that China will maintain its tax rebate policy for steel exports as part of its efforts to help the bloated steel sector recover. These tax rebates are seen as favourable policies to shore up ailing steel companies in China, and to avoid massive job losses. Expect more fiery rhetoric from the US on China’s unfair trading practices soon.

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“..China’s richest man — at least on paper — lost half of his wealth in less than half an hour.”

Chinas Debt Bubble Is Getting Only More Dangerous (WSJ)

It would be like finding out Warren Buffett’s financial empire may have been, quite possibly, a sham. That’s what happened last year when China’s richest man — at least on paper — lost half of his wealth in less than half an hour. It turned out that his company Hanergy may well just be Enron with Chinese characteristics: Its stock could only go up as long as it was borrowing money, and it could only borrow money as long as its stock was going up. Those kind of things work until they don’t. The question now, though, is how much the rest of China’s economy has come down with Hanergy syndrome, papering over problems with debt until they can’t be anymore. And the answer might be a lot more than anyone wants to admit. Although we should be careful not to get too carried away here.

Hanergy is now a nothing that used debt to look like a very big something, while China’s economy actually is a very big something that is using debt to look even bigger. In other words, one looks like a boondoggle and the other a bubble. But in both cases, excessive borrowing — especially from unregulated “shadow banks,” such as trading firms — has made things look better today at the expense of a worse tomorrow. In Hanergy’s case, there will, of course, be no tomorrow. To step back, the first thing to know about Hanergy is that it’s really two companies. There’s the privately owned parent corporation Hanergy Group, and the publicly traded subsidiary Hanergy Thin Film Power (HTF). The latter, believe it or not, started out as a toymaker, somehow switched over to manufacturing solar panel parts, and was then bought by Hanergy Chairman Li Hejun.

And that’s when things really got strange. The majority of HTF’s sales, you see, were to its now-parent company Hanergy — and supposedly at a 50% net profit margin! — but it wasn’t actually getting paid, you know, money for them. It was just racking up receivables. Why? Well, the question answers itself. Hanergy must not have had the cash to pay HTF. Its factories were supposed to be putting solar panels together out of the parts it was getting from HTF, but they were barely running — if at all. Hedge-fund manager John Hempton didn’t see anything going on at the one he paid a surprise visit to last year. It’s hard to make money if you’re not making things to sell. But it’s a lot easier to borrow money and pretend that you’re making it. At least as long as you have the collateral to do so — which Hanergy did when HTF’s stock was shooting up.

Indeed, it increased 20-fold from the start of 2013 to the middle of 2015. But it was how more than how much it went up that raised eyebrows. It all happened in the last 10 minutes of trading every day. Suppose you’d bought $1,o00 of HTF stock every morning at 9 a.m. and sold it every afternoon at 3:30 p.m. from the beginning of 2013 to 2015. How much would you have made? Well, according to the Financial Times, the answer is nothing. You would have lost $365. If you’d waited until 3:50 p.m. to sell, though, that would have turned into a $285 gain. And if you’d been a little more patient and held on to the stock till the 4 p.m. close, you would have come out $7,430 ahead. (Those numbers don’t include the stock’s overnight changes).

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Problem is: curb shadow banks and you curb local governments. Not at all what Xi is looking for.

China To Curb Shadow Banking Via Checks On Fund House Subsidiaries (R.)

China plans to tighten supervision over fund houses’ subsidiaries and rein in the expansion of a sector worth nearly 10 trillion yuan ($1.53 trillion) as regulators target a key channel for so-called shadow banking to contain financial risks, according to a copy of the draft rules seen by Reuters. The Asset Management Association of China (AMAC) will set thresholds for fund houses to establish subsidiaries and use capital ratios to limit the subsidiaries’ ability to expand businesses, the draft rules said. Loosely-regulated subsidiaries set up by mutual fund firms have grown rapidly over the past year, managing 9.8 trillion yuan worth of assets by the end of March, according to the AMAC, and becoming a key channel for shadow banking activities.

Under the proposed rules, fund houses applying to set up subsidiaries must manage at least 20 billion yuan in assets excluding money-market funds, and have a minimum 600 million yuan in net assets. Current thresholds are much lower. The new rules would also require that a subsidiary’s net capital not be lower than the company’s total risk assets, while net assets must not be lower than 20% of its liability, in effect slashing the leverage ratio of the business. China’s prolonged crackdown on riskier practices in the lesser-regulated shadow banking system has taken on fresh urgency amid a growing number of corporate defaults as the economy struggles, and as top policymakers appear increasingly worried about the risks of relying on too much debt-fuelled stimulus.

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You don’t have to watch it to know it’s a failure. That was clear from the start.

Abenomics: The Reboot, Rebooted (R.)

Abenomics has over-promised and under-delivered. Japanese Prime Minister Shinzo Abe’s bid to revive anaemic growth, reverse falling prices and rein in government debt has relied too heavily on the central bank and been sideswiped by a global slowdown. Keeping the project alive now requires fresh boldness. When he took office in December 2012, Abe set out to lift real economic growth to 2% a year, with consumer prices rising at the same rate. His main weapons were the famous “three arrows” of aggressive monetary policy, a flexible fiscal stance, and widespread structural reform. Abe has achieved some success. Unemployment is just 3.2%, a low last seen in 1997. In his first three calendar years in office, the economy expanded about 5% in nominal terms.

A weaker yen has helped deliver record corporate earnings; as of May 13 the Topix stock index had returned 70% including dividends. Prices have inched upwards. But the core targets remain out of reach. The IMF expects Japan’s GDP to grow just 0.5% this year. Even after cutting out volatile prices for fresh food and energy, the Bank of Japan’s preferred measure of inflation is running at just 1.1%. And the central bank keeps delaying its deadline for hitting the 2% target, which it now expects to reach in the year ending March 2018. Analysts still think that optimistic. Meanwhile, the yen has rallied unhelpfully and the BOJ faces accusations it is ineffective, after unexpectedly making no change to policy at its last meeting.

One snag is psychological: the deflationary mindset is hard to shake. Firms can borrow very cheaply yet hoard lots of cash and resist big pay rises. Workers are not pushy about wage hikes, and reluctant to spend. There were errors, too. Abe faced concerns that Japan’s government debt, at 2.4 times GDP, could become unsustainable. So he kept fiscal policy relatively orthodox, promising that taxes would cover public spending, excluding interest payments, by 2020. He hiked the country’s sales tax in 2014, denting growth and confidence. And he relied heavily on BOJ Governor Haruhiko Kuroda, whose institution now buys an extraordinary 80 trillion yen a year ($740 billion) of bonds. Meanwhile, structural reforms remain far from complete – in everything from encouraging more women into the workforce to reconsidering a deep aversion to immigration.

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We can hope…

Trump and Sanders Shift Mood in Congress Against Trade Deals (BBG)

Congress has embraced free trade for two generations, but the protectionist bent of the 2016 election campaign may mark the end of that era. The first casualty may be the 12-nation Trans-Pacific Partnership, which was already facing a skeptical Congress. A European trade pact in the works may also be in trouble. Lawmakers from both parties are taking lessons from the insurgent campaigns of Donald Trump and Bernie Sanders, which have harnessed a wave of discontent on job losses by linking them to free-trade deals. Even Hillary Clinton has stepped up criticism of the pacts. While past presidential candidates have softened their stance on trade after winning election, the resonance of the anti-free-trade attacks among voters in the primaries may create a more decisive shift. Opponents of these deals are already sensing new openings.

“The gravity has shifted,” said Representative Marcy Kaptur, an Ohio Democrat. She said it could give new traction to proposals like one she’s put forth that would reopen trade deals with nations that have a trade deficit of $10 billion with the U.S. for three years in a row. The success of Trump and Sanders in Rust Belt states and elsewhere will make it even harder, if not impossible, for Congress to back TPP, even in a lame-duck session after the election. Lawmakers say it could also hamper a looming agreement between the U.S. and the EU if it looks like the next president would change course. “It’s a very heavy lift at this point,” said Representative Charlie Dent, a Pennsylvania Republican and longtime free-trade advocate, noting that all three remaining presidential contenders have expressed reservations about the TPP.

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We never stood a chance. They’re oh so cunning and devious: “..smugglers ran their proceeds through [..] grocery stores..”. My question would be: how much of this went to the Erdogan family?

Smugglers Made $5-6 Billion Off Refugees To Europe In 2015 (R.)

People smugglers made over $5 billion from the wave of migration into southern Europe last year, a report by international crime-fighting agencies Interpol and Europol said on Tuesday. Nine out of 10 migrants and refugees entering the European Union in 2015 relied on “facilitation services”, mainly loose networks of criminals along the routes, and the proportion was likely to be even higher this year, the report said. About 1 million migrants entered the EU in 2015. Most paid 3,000-6,000 euros ($3,400-$6,800), so the average turnover was likely between $5 billion and $6 billion, the report said. To launder the money and integrate it into the legitimate economy, couriers carried large amounts of cash over borders, and smugglers ran their proceeds through car dealerships, grocery stores, restaurants or transport companies.

The main organisers came from the same countries as the migrants, but often had EU residence permits or passports. “The basic structure of migrant smuggling networks includes leaders who coordinate activities along a given route, organisers who manage activities locally through personal contacts, and opportunistic low-level facilitators who mostly assist organisers and may assist in recruitment activities,” the report said. Corrupt officials may let vehicles through border checks or release ships for bribes, as there was so much money in the trafficking trade. About 250 smuggling “hotspots”, often at railway stations, airports or coach stations, had been identified along the routes – 170 inside the EU and 80 outside.

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People understand things only when expressed in monetary terms. Maybe we need a real deep collapse to change that. Meanwhile, it looks like refugees make everyone rich except for themselves.

Refugees Will Repay EU Spending Almost Twice Over In Five Years (G.)

Refugees who arrived in Europe last year could repay spending on them almost twice over within just five years, according to one of the first in-depth investigations into the impact incomers have on host communities. Refugees will create more jobs, increase demand for services and products, and fill gaps in European workforces – while their wages will help fund dwindling pensions pots and public finances, says Philippe Legrain, a former economic adviser to the president of the European commission. Simultaneously refugees are unlikely to decrease wages or raise unemployment for native workers, Legrain says, citing past studies by labour economists.

Most significantly, Legrain calculates that while the absorption of so many refugees will increase public debt by almost €69bn (£54bn) between 2015 and 2020, during the same period refugees will help GDP grow by €126.6bn – a ratio of almost two to one. “Investing one euro in welcoming refugees can yield nearly two euros in economic benefits within five years,” concludes Refugees Work: A Humanitarian Investment That Yields Economic Dividends, a report released on Wednesday by the Tent Foundation, a non-government organisation that aims to help displaced people.

A fellow at the London School of Economics, Legrain says he hopes the report will dispel the myth that refugees will cause economic problems for western society. “The main misconception is that refugees are a burden – and that’s a misconception shared even by people who are in favour of letting them in, who think they’re costly but it’s still the right thing to do,” said Legrain in an interview. “But that’s incorrect. While of course the primary motivation to let in refugees is that they’re fleeing death, once they arrive they can contribute to the economy.” While their absorption puts a short-term strain on public finances, Legrain says, it also increases short-term economic demand, which acts as a welcome fiscal stimulus in countries where demand would otherwise be low.

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May 032016
 May 3, 2016  Posted by at 9:14 am Finance Tagged with: , , , , , , , , , , ,  1 Response »

DPC French Market, New Orleans 1910

The EU Exists Only To Become A Superstate (Lawson)
US Dollar Falls To 1-Year Low (BBG)
Yen Under Pressure to Extend World-Beating Rally Against Dollar (BBG)
Kuroda Kollapse Kontinues As USDJPY Nears 105 Handle (ZH)
BOJ Chief Kuroda Warns Current Yen Strength Risks Harming Recovery (BBG)
China Factory Activity Contracts for 14th Straight Month In April (CNBC)
Fed’s Williams Sees Big Drop In Asset Prices As Systemic Risk (R.)
Apple’s Losing Streak Is Nearing Historic Levels (BBG)
No Alternative To Low Rates For Now, Draghi Says (R.)
ECB Report Says Investors May Be Profiting From Leaked US Data (FT)
Six Counterpoints About Australian Public Debt (Stanford)
‘Bank of Mum and Dad’ Behind 25% Of British Mortgages (G.)
Dominoes: Vanishing Arctic Ice Shifts Jet Stream, Which Melts Glaciers (WaPo)
Germany Wants To Extend Border Controls For Another 6 Months (AP)
Denmark Extends Controls On German Border (EN)
EU States Face Charge For Refusing Refugees (FT)
90,000 Unaccompanied Minors Sought Asylum In EU In 2015 (R.)

I don’t think I have much in common with Nigel Lawson -aka Lord Lawson of Blaby-, but it’s important that this ‘little fact’ be known and exposed. Even a superstate needs values if it is to survive. The EU ain’t got any left. Who wants to belong to that?

The EU Exists Only To Become A Superstate (Lawson)

For Britain, the issue in the coming European referendum is not Europe, with its great history, incomparable culture, and diverse peoples, but the European Union. To confuse the two is both geographically and historically obtuse. European civilisation existed long before the coming of the EU, and will continue long after this episode in Europe’s history is, hopefully, over. On the European mainland it has always been well understood that the whole purpose of European integration was political, and that economic integration was simply a means to a political end. In Britain, and perhaps also in the US, that has been much less well understood, particularly within the business community, who sometimes find it hard to grasp that politics can trump economics. The fact that the objective has always been political does not mean that it is in any way disreputable.

Indeed, the most compelling original objective was highly commendable. It was, bluntly, to eliminate the threat to Europe and the wider world from a recrudescence of German militarism, by placing the German tiger in a European cage. Whether or not membership of the EU has had much to do with it, that objective has been achieved: there is no longer a threat from German militarism. But in the background there has always been another political objective behind European economic integration, one which is now firmly in the foreground. That is the creation of a federal European superstate, a United States of Europe. Despite the resonance of the phrase, not one of the conditions that contributed to making a success of the United States of America exists in the case of the EU. But that is what the EU is all about. That is its sole raison d’être. And, unlike the first objective, it is profoundly misguided.

For the United Kingdom to remain in the EU would be particularly perverse, since not even our political elites wish to see this country absorbed into a United States of Europe. To be part of a political project whose objective we emphatically do not share cannot possibly make sense. It is true that our present Prime Minister argues that he has secured a British “opt-out” from the political union, but this is completely meaningless. “But,” comes the inevitable question, “what is your alternative to membership of the EU?” A more absurd question it would be hard to envisage. The alternative to being in the EU is not being in the EU. And it may come as a shock to the little Europeans that most of the world is not in the EU – and that most of these countries are doing better economically than most of the EU.

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Why don’t I see nobody accuse the US of currency manipulation?! That still the Shanghi Accord legacy?

US Dollar Falls To 1-Year Low (BBG)

The dollar fell to an 18-month low against the yen and touched its weakest since August versus the euro amid speculation that the U.S. won’t raise interest rates any time soon. The U.S. currency has lost ground versus most major peers over the past month as traders lowered expectations for a rate increase by the Federal Reserve in June to 12%. The Bloomberg Dollar Spot Index headed for the lowest close in almost a year, after a report showed manufacturing in the U.S. expanded less than forecast. Persistent weakness dragged the dollar down against the euro for a third straight month in April – its longest losing streak since 2013 – amid signs U.S. policy makers aren’t convinced the global and domestic economies can withstand higher borrowing costs.

It fell on Tuesday against Australia’s currency as Chinese equities climbed by the most in nearly three weeks. The U.S. has posted disappointing growth data as nascent signs of recovery emerge in Europe and China’s growth momentum accelerates. “The Fed is completely out of the picture now for the next few weeks – even with the June meeting, there’s got to be a lot of doubt about whether the Fed can raise rates,” said Shaun Osborne at Bank of Nova Scotia in Toronto. “The dollar has just not done particularly well over the past few weeks as the Fed has moved toward delaying rate hikes, and that’s a situation that definitely will continue, certainly for the near term.”

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Abe must be going nuts.

Yen Under Pressure to Extend World-Beating Rally Against Dollar (BBG)

The yen’s world-beating rally against the dollar looks to be gathering momentum, as central bank inaction on both sides of the Pacific Ocean leaves inflation expectations to drive the exchange rate. Japan’s currency extended its climb to an 18-month high Monday after Bank of Japan Governor Haruhiko Kuroda refrained from adding to stimulus on Thursday. That took its gain this year to 13%, the most among developed-market peers. The BOJ’s decision came just hours after Federal Reserve Chair Janet Yellen frustrated dollar bulls by reiterating she’s in no rush to cool the economy by raising interest rates. JPMorgan sees further yen gains after the U.S. put Japan on a new currency watch list.

With consumer price pressures building in the U.S. and dissipating in Japan, that narrows the gap in so-called real yields – the returns an investor can expect after accounting for inflation – supporting yen strength. If both central banks stay on the sidelines, Credit Suisse projects Japan’s currency could rapidly appreciate toward 90 per dollar. “So long as the Fed signals that they are being cautious in raising rates, real yields in the U.S. will decline, leading the dollar weaker,” said Hiromichi Shirakawa, the Swiss lender’s chief Japan economist and a former BOJ official. “The currency market is in a rather dangerous zone.” The BOJ’s benchmark for measuring progress toward its 2% target showed prices retreated at an annual 0.3% pace in March, the biggest decline since April 2013, the month that Kuroda initiated his stimulus program.

It had previously hovered near zero for more than a year. By contrast, the Fed’s preferred measure of inflation, based on the prices of goods and services consumers buy, rose 0.8% in the year through March. The so-called core measure, which strips out food and energy prices, climbed 1.6%. That’s seen a Treasury market gauge of inflation expectations over the coming decade – called the break-even rate – jump to 1.7% from as low as 1.2% in February. The equivalent measure in Japan is languishing at 0.3%. Benchmark 10-year Treasury Inflation Protected Securities yield around 0.1%, compared with about minus 0.5% for equivalent Japanese notes.

Japan met two of three criteria used to judge unfair practices in the U.S. report: a trade surplus with the U.S. above $20 billion, and a current-account surplus amounting to more than 3% of gross-domestic product. The third would be a repeated depreciation of the currency by buying foreign assets equivalent to 2% of gross domestic over a year. Meeting all three would trigger action by the U.S. president to enter discussions with the country and seek potential penalties. China, Germany, South Korea and Taiwan also made the watch list.

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“..Perhaps Jack Lew’s “currency manipulation” report was enough to stall the Japanese currency war for now?..”

Kuroda Kollapse Kontinues As USDJPY Nears 105 Handle (ZH)

Either The BoJ steps in soon and intervenes (even by just “checking levels”) or Kuroda-san is truly terrified of The G-20. USDJPY has now crashed 7 handles since last Thursday’s shock BoJ disappointment crashing to within 5 pips of a 105 handle tonight for the first time in 18 months…



Erasing the entire devaluation post-Fed, post QQE2…


Perhaps Jack Lew’s “currency manipulation” report was enough to stall the Japanese currency war for now? Or is China greatly rotating its Yuan devaluation pressure against another member of its basket…?


Charts: Bloomberg

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1) What recovery? 2) Abe and Kuroda are powerless prisoners to America’s dollar manipulation

BOJ Chief Kuroda Warns Current Yen Strength Risks Harming Recovery (BBG)

Bank of Japan Governor Haruhiko Kuroda warned that the yen’s biggest rally since Abenomics began risks harming the nation’s economic recovery. Speaking to reporters in Frankfurt Monday, Kuroda also reiterated that BOJ policy makers won’t hesitate to expand monetary stimulus in order to achieve their 2% inflation target. Japanese Prime Minister Shinzo Abe said the same day in Paris that rapid movements in exchange rates are undesirable, according to national broadcaster NHK. “There is a risk that the yen’s current appreciation brings an unwelcome impact on the economy,” Kuroda said on the sidelines of an annual gathering of finance chiefs from members of the Asian Development Bank, which he used to lead.

“We will be closely monitoring the impact of financial markets on the real economy and prices.” A weaker currency has been a linchpin of Abe’s program to stoke growth and exit deflation. Japan’s economy is at risk of sliding into its second recession in two years after contracting in the final three months of 2015, while inflation remains far from the BOJ’s target. One gauge showed consumer prices retreated at an annual 0.3% pace in March, the biggest decline since April 2013, the month that Kuroda initiated his stimulus program. The yen has climbed 13% against the dollar this year, the best performance among its developed-market peers. That has chipped away at the 36% decline over the previous four years, which was triggered by Abe’s pledge of unlimited monetary easy to correct yen strength.

Kuroda and his board left policy settings unchanged at a meeting Thursday, spurring a nearly 5%, two-day surge in the yen against the dollar. It reached an 18-month high of 106.05 per greenback on Tuesday, before trading at 106.19 as of 9:54 a.m. in Singapore. Japanese markets are closed for holidays Tuesday, Wednesday and Thursday this week.

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Beyond salvation.

China Factory Activity Contracts for 14th Straight Month In April (CNBC)

Activity in China’s manufacturing sector unexpectedly declined further in April, a private survey showed Tuesday, reviving doubts over the health of the world’s second-largest economy. The Caixin Manufacturing Purchasing Managers’ Index (PMI) fell to 49.4 in April from 49.7 in March, according to Markit, which compiles the index. A reading above 50 indicates expansion; one below indicates contraction. The Caixin PMI, which focuses on smaller and medium-sized enterprises, was last in expansionary territory in February 2015. The official PMI, which targets larger companies, printed at 50.2 in April, the second successive month of expansion, figures released over the weekend showed. The survey findings follow recent economic data that appeared to suggest that China’s economy was slowly regaining its poise after a torrid 12 months.

China’s exports rose at their fastest clip in a year in March, while industrial profits also picked up in the first quarter. A flurry of rate cuts and easing of reserve requirement have helped bolster sentiment, while the capital outflows that had unnerved sentiment at the start of the year have slowed. The Caixin survey, however, cast a more somber picture. Respondents reported stagnant new orders, while new export work fell for a fifth month running. Companies shed staff as client demand was muted. “The fluctuations indicate the economy lacks a solid foundation for recovery and is still in the process of bottoming out. The government needs to keep a close watch on the risk of a further economic downturn,” said He Fan at Caixin Insight Group.

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What blows up must blow down.

Fed’s Williams Sees Big Drop In Asset Prices As Systemic Risk (R.)

San Francisco Fed President John Williams reiterated Monday his view that the U.S. economy is ready for higher interest rates, but flagged the risk of broad-based declines in asset prices as a result. “It makes sense for us to be moving interest rates gradually back to more a normal level over the next couple years,” Williams said. “I actually think that’s a sign of strength for the global economy.” Speaking at a panel on systemic risk at the Milken Institute Global Conference, Williams said the biggest systemic financial risk currently is the possibility that “broad sets of assets are going to see big movements downward” as interest rates rise. “That’s an area that I think is a potential risk.” Williams did not suggest he sees another crisis brewing, adding that U.S. regulators have made “amazing” progress in shoring up banks against potential future failure.

“What I worry a lot more about is when people forget about the financial crisis, when they forget about the terrible things that happened,” he said, suggesting that may not happen for another five or ten years. The Fed raised interest rates for the first time in nearly a decade last December, but has held off raising them any further amid global stock volatility and worries over a decline in global growth. Even after the Fed resumes raising rates, Williams said, it will not be able to lift them as high as it has in the past. Most Fed officials currently think that the rate at which the economy can sustain healthy employment and steady prices has probably fallen to about 3.25% in the long run, a full %age point lower than was the case before the crisis. But there are significant downside risks to that estimate, Williams said.

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No. 1 US stock for years.

Apple’s Losing Streak Is Nearing Historic Levels (BBG)

So far in 2016, Apple is the dog of the Dow. After an underwhelming earnings report led to the shares’ worst week since January 2013, Apple stock extended its losses to kick off May, closing down 0.18% on Monday. The benchmark index’s laggard has declined by nearly 11% so far this year heading into today’s session: Bespoke Investment Group notes that Monday’s negative close marks eight straight sessions in the red for Apple—something that last happened in July 1998, and has now happened only four times in the company’s history. More than $79 billion in Apple’s market capitalization has been erased over the past eight sessions.

The company’s heavy weighting in major sector and benchmark indexes, coupled with the stock’s terrible two-week stretch, has made $4 billion in assets of exchange-traded funds evaporate over this stretch. “Smart beta” ETFs are poised to trounce their more popular peers, Bloomberg’s Eric Balchunas observes, in the event that this span of underperformance continues. There’s a possible silver lining for Apple bulls, and investors who own those market-cap-weighted ETFs: The stock tends to bounce back in earnest following these rare stretches of rotten performance. “Two of the three eight-day streaks saw the stock fall on day nine as well, but the stock has never experienced a losing streak longer than nine trading days,” Bespoke writes. “While the next day and next week returns following eight-day losing streaks lean negative, the stock has been higher over the next month all three times for a median gain of 8.01%.”

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Well, there is, but Draghi’s masters don’t want it.

No Alternative To Low Rates For Now, Draghi Says (R.)

Low interest rates are not harmless but they are only the symptom, not the cause of an underlying problem across major economies, ECB President Mario Draghi said on Monday, arguing that there was no alternative for now. “Thus the second part of the answer to raising rates of return is clear: continued expansionary policies until excess slack in the economy has been reduced and inflation dynamics are sustainably consistent again with price stability,” Draghi told a conference. “There is simply no alternative to this today.” “The only potential margin for maneuver is in the composition of the policy mix, that is, the balance of monetary and fiscal policy,” he added.

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Corruption is not a deficiency, it’s the MO.

ECB Report Says Investors May Be Profiting From Leaked US Data (FT)

US investors may be profiting from leaked economic data releases that allow them to front-run market-moving news, according to a research paper published by the ECB. Macroeconomic news announcements can move markets, as traders watch for indications about how the economy is performing. The data are released to everyone at the same time to ensure fairness but ECB researchers said they had found evidence of “informed trading” ahead of US data releases. Of the 21 market-moving announcements analysed, seven “show evidence of substantial informed trading before the official release time”, according to the paper, including two releases from the US government. The pre-release “price drift” accounts for about half of the overall price impact from the announcement.

The researchers looked at the impact on futures tracking the S&P 500 stock index and the 10-year Treasury bond for the 30 minutes preceding the announcement. The researchers also note that the price impact has become worse since 2008, and estimate that since 2008 profits in the S&P “e-mini” futures market alone amount to about $20m per year. “These results imply that some traders have private information about macroeconomic fundamentals,” said the report. “The evidence suggests that the pre-announcement drift likely comes from a combination of information leakage and superior forecasting based on proprietary data collection and reprocessing of public information.”

The paper raises questions about the safeguards used to ensure data are protected up until scheduled release time. Important economic indicators in the US are subject to the “Principle Federal Economic Indicator” guidelines, but the report notes that many distributors of the data are not subject to the same rules. “To ensure fairness, no market participant should have access to this information until the official release time,” the report added. “Yet, in this paper we find strong evidence of informed trading before several key macroeconomic news announcements.”

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Household debt is a much bigger factor is some countries than others. In Australia, it’s far bigger than government debt. But the latter is what all political talk is about. “Pumping up fear of government debt is always an essential step in preparing the public to accept cutbacks in essential public services.”

Six Counterpoints About Australian Public Debt (Stanford)

In the lead-up to today’s pre-election Commonwealth budget, much has been written about the need to quickly eliminate the government’s deficit, and reduce its accumulated debt. The standard shibboleths are invoked liberally: government must face hard truths and learn to live within its means; government must balance its budget (just like households do); debt-raters will punish us for our profligacy; and more. Pumping up fear of government debt is always an essential step in preparing the public to accept cutbacks in essential public services. And with Australians heading to the polls, the tough-love imagery serves another function: instilling fear that a change in government, at such a fragile time, would threaten the “stability” of Australia’s economy.

However, this well-worn line of rhetoric will fit uncomfortably for the Coalition government, given its indecisive and contradictory approach to fiscal policy while in office. The deficit has gotten bigger, not smaller, on their watch, despite the destructive and unnecessary cutbacks in public services imposed in their first budget. Their response to Australia’s fiscal and economic problems has consisted mostly of floating one half-formed trial balloon after another (from raising the GST to transferring income tax powers to the states to cutting corporate taxes), with no systematic analysis or framework. And their ideological desire to invoke a phony debt “crisis” as an excuse for ratcheting down spending will conflict with another, more immediate priority: throwing around new money (or at least announcements of new money), especially in marginal electorates, in hopes of buying their way back into office.

In short, the politics of debt and deficits will be both intense and complicated in the coming weeks. To help innoculate Australians against this hysteria, here are six important facts about public debt, what it is – and what it isn’t.

1. Australia’s public debt is relatively small

3. Other sectors of society borrow much more than government

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Somone should explain to these people what’s going on. Mum and Dad will lose their shirts AND their skirts. Ironically, some insist more homes must be build. Ironoc, because that would mean even steeper losses for those buying into today’s craze.

‘Bank of Mum and Dad’ Behind 25% Of British Mortgages (G.)

The “Bank of Mum and Dad” will help finance 25% of UK mortgage transactions this year, according to research. Parents are set to lend their children £5bn to help them on to the property ladder. If the lending power was of all these parents was combined, it would be a top 10 mortgage provider. Nigel Wilson, chief executive of Legal & General, which carried out the research, said the data showed a number of issues, including house prices being “out of sync with wages”. The research estimated that the Bank of Mum and Dad will provide deposits for more than 300,000 mortgages. The homes purchased will be worth £77bn and the average contribution is £17,500 or 7% of the average purchase price.

But relying on parental support might soon be unsustainable as parents could be giving away more than they can afford. Wilson said that in London the funding method was reaching “tipping point” already as parental contributions made up more than 50% of the wealth (excluding property) of the average household in the capital. He said: “The Bank of Mum and Dad plays a vital role in helping young people to take their early steps on to the housing ladder.” Not all young people have parents who can afford to help them and some who do still do not have enough to buy a place of their own, he said. He added: “We need to fix the housing market by revolutionising the supply side – if we build more houses, demand can be met at a sensible level and prices will stabilise relative to wages.”

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Positive feedback.

Dominoes: Vanishing Arctic Ice Shifts Jet Stream, Which Melts Glaciers (WaPo)

Investigating the factors affecting ice melt in Greenland — one of the most rapidly changing places on Earth — is a major priority for climate scientists. And new research is revealing that there are a more complex set of variables affecting the ice sheet than experts had imagined. A recent set of scientific papers have proposed a critical connection between sharp declines in Arctic sea ice and changes in the atmosphere, which they say are not only affecting ice melt in Greenland, but also weather patterns all over the North Atlantic. The new studies center on an atmospheric phenomenon known as “blocking” — this is when high pressure systems remain stationary in one place for long periods of time (days or even weeks), causing weather conditions to stay relatively stable for as long as the block remains in place.

They can occur when there’s a change or disturbance in the jet stream, causing the flow of air in the atmosphere to form a kind of eddy, said Jennifer Francis, a research professor and climate expert at Rutgers University. Blocking events over Greenland are particularly interesting to climate scientists because of their potential to drive temperatures up and increase melting on the ice sheet. “When they do happen, and they kind of set up in just the right spot, they bring a lot of warm, moist air from the North Atlantic up over Greenland, and that helps contribute to increased cloudiness and warming of the surface,” Francis said. “When that happens, especially in the summer, we tend to see these melt events occur.” Now, two new studies have suggested that there’s been a recent increase in the frequency of melt-triggering blocking events over Greenland — and that it’s likely been fueled by climate change-driven losses of Arctic sea ice.

A paper set to be published Monday in the International Journal of Climatology reveals an uptick in the frequency of these blocking events over Greenland since the 1980s. A team of researchers led by the University of Sheffield’s Edward Hanna used a global meteorological dataset relying on historical records to measure the frequency and strength of high pressure systems over Greenland all the way back to the year 1851. Previous analyses had only extended the record back to 1948, so the new study is able to place recent blocking events in a much larger historical context. When the researchers analyzed the data, they found that the increase in blocking frequency over the past 30 years is particularly pronounced in the summer, the time of year when blocking events are likely to have the biggest impact on ice melt.

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Clueless, rudderless, valueless.

Germany Wants To Extend Border Controls For Another 6 Months (AP)

Germany and some other EU countries are planning to ask the European Commission for an extension of border controls within the Schengen passport-free travel zone for another six months because they fear a new wave of migrants. Interior Minister Thomas de Maizere’s spokesman says a letter is being sent Monday asking for an extension of the controls on the German-Austrian border, which were implemented last year when thousands of migrants crossed into Germany daily. De Maizere has expressed concern before that an increasing number of migrants will try to reach Europe this summer by crossing the Mediterranean Sea from lawless Libya to Italy, then travel north to Austria and Germany. Germany registered nearly 1.1 million new arrivals last year and is keen to bring the numbers down in 2016.

Germany’s defense minister, meanwhile, said it was up to Italy to protect its borders but other European countries must be ready to help if needed. Ursula von der Leyen’s comments Monday touched on the potential problems Italy could have with increased arrival of migrants looking for an alternative route into the EU now that the West Balkans route is closed and Turkey has committed to taking back those arriving illegally to Greece. She said a solution must be found “together with Italy.” Austria plans to impose border controls at its main border crossing with Italy to prevent potential attempts by migrants to enter, and with Austria bordering Germany, von der Leyen’s comments indicate her country’s concern that it also may have to deal with new waves of migrants seeking entry.

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“..We have to protect ourselves against the Islamic State group..”

Denmark Extends Controls On German Border (EN)

Denmark has extended temporary controls on its border with Germany, first imposed in January to help regulate an influx of migrants. The measures have been prolonged by another month until the beginning of June. The European Commission, struggling to prevent the collapse of the Schengen agreement, has confirmed it will soon authorise more such extensions. The Danish government says it has joined several countries in writing to the Commission asking for a two-year extension. “Together with the Germans, the French, the Austrians and the Swedes I have today sent a letter to the EU commission asking for the possibility to extend the border control for the next two years,” said Inger Støjberg, Danish minister of immigration and integration.

“I have done so because we need to look out for Denmark. We have to protect ourselves against the Islamic State group, who are trying to take advantage of the situation where there are holes in borders. But also as protection against the influx of refugees coming through Europe.” The Commission could give the green light as early as Wednesday to countries within the passport-free Schengen zone wishing to extend exceptional border controls. The five countries have taken the measures because of the influx of migrants and refugees heading north via the so-called Balkans route after entering Europe via the Greek shores. Although the crisis has eased, the governments say many migrants are still camped along the route and in Greece.

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The cattle trade continues unabated. Europeans are as immoral as their leadership.

EU States Face Charge For Refusing Refugees (FT)

European countries that refuse to share the burden of high immigration will face a financial charge of about €250,000 per refugee, according to Brussels’ plans to overhaul the bloc’s asylum rules. The punitive financial pay-off clause is one of the most contentious parts of the European Commission’s proposed revision of the so-called Dublin asylum regulation, due to be revealed on Wednesday. It represents the EU’s most concerted attempt to salvage an asylum system that collapsed under the weight of a million-strong migration to Europe last year, endangering the principle of passport-free travel in the Schengen area. In recent weeks migrant flows to Greece have fallen due to tighter controls through the western Balkans and a deal with Turkey to send-back asylum seekers arriving on Greek islands.

However, the EU remains as politically divided as ever over strengthening the bloc’s asylum rules. While acknowledging these political constraints, the commission’s reforms aim to gradually shift more responsibility away from the overwhelmed frontline states, such as Greece, in future crises, primarily through an automatic system to share refugees across Europe if a country faces a sudden influx. Crucially, this is backed by a clause that allows immigration-wary countries to pay a fee — set at a deliberately high level — if they want to avoid taking relocated asylum seekers for a temporary period. According to four people familiar with the proposal, this contribution was set at €250,000 per asylum seeker in Monday’s commission draft. But those involved in the talks say it may well be adjusted in deliberations over coming days.

“The size of the contribution may change but the idea is to make it appear like a sanction,” said one official who has seen the proposal. Another diplomat said in any event the price of refusing to host a refugee would be “hundreds of thousands of euros”. Eastern European states such as Poland and Hungary would welcome alternatives to mandatory asylum quotas but will balk at the high penalties suggested. At the commission’s recommended rate, Poland would need to pay around €1.5bn to avoid its existing 6,200 quota to relocate refugees from Italy and Greece. These financial contributions are in part designed to fix incentives around migrant quotas, which have badly failed and proved almost impossible to implement even once agreed in law. The commission proposal builds on the EU’s flagship emergency scheme to relocate 160,000 refugees, which has barely redistributed 1% of its target since it was agreed last year.

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And how many did you say are unaccounted for, Europe?

90,000 Unaccompanied Minors Sought Asylum In EU In 2015 (R.)

Some 88,300 unaccompanied minors sought asylum in the EU in 2015, 13% of them children younger than 14, crossing continents without their parents to seek a place of safety, EU data showed on Monday. More than a million people fleeing war and poverty in the Middle East and Africa reached Europe last year. While that was roughly double the 2014 figure, the number of unaccompanied minors quadrupled, statistics agency Eurostat said. Minors made up about a third of the 1.26 million first-time asylum applications filed in the EU last year. EU states disagree on how to handle Europe’s worst migration crisis since World War II and anti-immigrant sentiment has grown, even in countries that traditionally have a generous approach to helping people seeking refuge.

Four in 10 unaccompanied minors applied for asylum in Sweden, where some have called for greater checks, suspicious that adults are passing themselves off as children in order to secure protection they might otherwise be denied. Eurostat’s figures refer specifically to asylum applicants “considered to be unaccompanied minors,” meaning EU states accepted the youngsters’ declared age or established it themselves through age assessment procedures. More than 90% of the minors traveling without a parent or guardian were boys and more than half of them were between 16 and 17 years old. Half were Afghans and the second largest group were Syrians, at 16% of the total. After Sweden, Germany, Hungary and Austria followed as the main destinations for unaccompanied underage asylum seekers.

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Apr 212016
 April 21, 2016  Posted by at 9:39 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle April 21 2016

G.G. Bain ‘Casino Theater playing musical ‘The Little Whopper’, NY 1920

America’s Upcoming National Crisis: Pensions (ZH)
The Secret Shame of Middle-Class Americans (Atlantic)
Soros: China Looks Like the US Before the Crisis (BBG)
China’s ‘Zombie’ Steel Mills Fire Up Furnaces, Worsen Global Glut (R.)
China Wants Ships To Use Faster Arctic Route Opened By Global Warming (R.)
Japan, Not Germany, Leads World in Negative-Yield Bonds (BBG)
ECB Slides Down Further Into ZIRP Bizarro World (CNBC)
Brexit Means Blood, Toil, Sweat And Tears (AEP)
Greece ‘Could Leave Eurozone’ On Brexit Vote (Tel.)
VW To Offer To Buy Back Nearly 500,000 US Diesel Cars (Reuters)
Public Support For TTIP Plunges in US and Germany (Reuters)
Italian ‘Bad Bank’ Fund ‘Designed To Stop The Sky Falling In’ (FT)
The Troubled Legacy Of Obama’s Record $60 Billion Saudi Arms Sale (R.)
More Than Half Of Americans Live Amid Dangerous Air Pollution (G.)
EU States Grow Wary As Turkey Presses For Action On Visas Pledge (FT)
Hungary Threatens Rebellion Against Brussels Over Forced Migration (Express)
Refugee Camp Near Athens Poses ‘Huge’ Public Health Risk (AFP)

What NIRP and ZIRP bring to the real economy. This is global.

America’s Upcoming National Crisis: Pensions (ZH)

A dark storm is brewing in the world of private pensions, and all hell could break loose when it finally hits. As the Washington Post reports, the Central States Pension Fund, which handles retirement benefits for current and former Teamster union truck drivers across various states including Texas, Michigan, Wisconsin, Missouri, New York, and Minnesota, and is one of the largest pension funds in the nation, has filed an application to cut participant benefits, which would be effective July 1 2016, as it “projects” it will become officially insolvent by 2025. In 2015, the fund returned -0.81%, underperforming the 0.37% return of its benchmark. Over a quarter of a million people depend on their pension being handled by the CSPF; for most it is their only source of fixed income.

Pension funds applying to lower promised benefits is a new development, albeit not unexpected (we warned of this mounting issue numerous times in the past). For many years there existed federal protections which shielded pensions from being cut, but that all changed in December 2014, when folded neatly into a $1.1 trillion government spending bill, was a proposal to allow multi employer pension plans to cut pension benefits so long as they are projected to run out of money in the next 10 to 20 years. Between rising benefit payouts as participants become eligible, the global financial crisis, and the current interest rate environment, it was certainly just a matter of time before these steps were taken to allow pension plans to cut benefits to stave off insolvency.

The Central States Pension Fund is currently paying out $3.46 in pension benefits for every $1 it receives from employers, which has resulted in the fund paying out $2 billion more in benefits than it receives in employer contributions each year. As a result, Thomas Nyhan, executive director of the Central States Pension Fund said that the fund could become insolvent by 2025 if nothing is done. The fund currently pays out $2.8 billion a year in benefits according to Nyhan, and if the plan becomes insolvent it would overwhelm the Pension Benefit Guaranty Corporation (designed by the government to absorb insolvent plans and continue paying benefits), who at the end of fiscal 2015 only had $1.9 billion in total assets itself. Incidentally as we also pointed out last month, the PBGC projects that they will also be insolvent by 2025 – it appears there is something very foreboding about that particular year.

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“Nearly half of American adults are “financially fragile” and “living very close to the financial edge.”

The Secret Shame of Middle-Class Americans (Atlantic)

Since 2013, the federal reserve board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49% of part-time workers would prefer to work more hours at their current wage; 29% of Americans expect to earn a higher income in the coming year; 43% of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47% of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew? Well, I knew. I knew because I am in that 47%.

I know what it is like to have to juggle creditors to make it through a week. I know what it is like to have to swallow my pride and constantly dun people to pay me so that I can pay others. I know what it is like to have liens slapped on me and to have my bank account levied by creditors. I know what it is like to be down to my last $5—literally—while I wait for a paycheck to arrive, and I know what it is like to subsist for days on a diet of eggs. I know what it is like to dread going to the mailbox, because there will always be new bills to pay but seldom a check with which to pay them. I know what it is like to have to tell my daughter that I didn’t know if I would be able to pay for her wedding; it all depended on whether something good happened. And I know what it is like to have to borrow money from my adult daughters because my wife and I ran out of heating oil.

You wouldn’t know any of that to look at me. I like to think I appear reasonably prosperous. Nor would you know it to look at my résumé. I have had a passably good career as a writer—five books, hundreds of articles published, a number of awards and fellowships, and a small (very small) but respectable reputation. You wouldn’t even know it to look at my tax return. I am nowhere near rich, but I have typically made a solid middle- or even, at times, upper-middle-class income, which is about all a writer can expect, even a writer who also teaches and lectures and writes television scripts, as I do.

And you certainly wouldn’t know it to talk to me, because the last thing I would ever do—until now—is admit to financial insecurity or, as I think of it, “financial impotence,” because it has many of the characteristics of sexual impotence, not least of which is the desperate need to mask it and pretend everything is going swimmingly. In truth, it may be more embarrassing than sexual impotence. “You are more likely to hear from your buddy that he is on Viagra than that he has credit-card problems,” says Brad Klontz, a financial psychologist who teaches at Creighton University in Omaha, Nebraska, and ministers to individuals with financial issues. “Much more likely.”

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“From a credit perspective, we’d be more comfortable with China slowing more than it is. We are getting less confident in the government’s commitment to structural reforms.”

Soros: China Looks Like the US Before the Crisis (BBG)

Billionaire investor George Soros said China’s debt-fueled economy resembles the U.S. in 2007-08, before credit markets seized up and spurred a global recession. China’s March credit-growth figures should be viewed as a warning sign, Soros said at an Asia Society event in New York on Wednesday. The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ($362 billion) last month, far exceeding the median forecast of 1.4 trillion yuan in a Bloomberg survey and signaling the government is prioritizing growth over reining in debt. What’s happening in China “eerily resembles what happened during the financial crisis in the U.S. in 2007-08, which was similarly fueled by credit growth,” Soros said. “Most of money that banks are supplying is needed to keep bad debts and loss-making enterprises alive.”

Soros, who built a $24 billion fortune through savvy wagers on markets, has recently been involved in a war of words with the Chinese government. He said at the World Economic Forum in Davos that he’s been betting against Asian currencies because a hard landing in China is “practically unavoidable.” China’s state-run Xinhua news agency rebutted his assertion in an editorial, saying that he has made the same prediction several times in the past. China’s economy gathered pace in March as the surge in new credit helped the property sector rebound. Housing values in first-tier cities have soared, with new-home prices in Shenzhen rising 62 percent in a year. While China’s real estate is in a bubble, it may be able to feed itself for some time, similar to the U.S. in 2005 and 2006, Soros said.

China’s economy gathered pace in March as the surge in new credit helped the property sector rebound. Housing values in first-tier cities have soared, with new-home prices in Shenzhen rising 62 percent in a year. While China’s real estate is in a bubble, it may be able to feed itself for some time, similar to the U.S. in 2005 and 2006, Soros said. “Most of the damage occurred in later years,” Soros said. “It’s a parabolic cycle.” Andrew Colquhoun at Fitch Ratings, is also concerned about China’s resurgence in borrowing. Eventually, the very thing that has been driving the economic recovery could end up derailing it, because China is adding to a debt burden that’s already unsustainable, he said.

Fitch rates the nation’s sovereign debt at A+, the fifth-highest grade and a step lower than Standard & Poor’s and Moody’s Investors Service, which both cut their outlooks on China since March. “Whether we call it stabilization or not, I am not sure,” Colquhoun said in an interview in New York. “From a credit perspective, we’d be more comfortable with China slowing more than it is. We are getting less confident in the government’s commitment to structural reforms.”

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Forget Tata.

China’s ‘Zombie’ Steel Mills Fire Up Furnaces, Worsen Global Glut (R.)

The rest of the world’s steel producers may be pressuring Beijing to slash output and help reduce a global glut that is causing losses and costing jobs, but the opposite is happening in the steel towns of China. While the Chinese government points to reductions in steel making capacity it has engineered, a rapid rise in local prices this year has seen mills ramp up output. Even “zombie” mills, which stopped production but were not closed down, have been resurrected. Despite global overproduction, Chinese steel prices have risen by 77% this year from last year’s trough on some very specific local factors, including tighter supplies following plant shutdowns last year, restocking by consumers and a pick-up in seasonal demand following the Chinese New Year break.

Some mills also boosted output ahead of mandated cuts around a major horticultural show later this month in the Tangshan area. Local mills must at least halve their emissions on certain days during the exposition, due to run from April 29 to October. China, which accounts for half the world’s steel output and whose excess capacity is four times U.S. production levels, has said it has done more than enough to tackle overcapacity, and blames the glut on weak demand. But a survey by Chinese consultancy Custeel showed 68 blast furnaces with an estimated 50 million tonnes of capacity have resumed production. The capacity utilization rate among small Chinese mills has increased to 58% from 51% in January.

At large mills, it has risen to 87% from 84%, according to a separate survey by consultancy Mysteel. The rise in prices has thrown a lifeline to ‘zombie’ mills, like Shanxi Wenshui Haiwei Steel, which produces 3 million tonnes a year but which halted nearly all production in August. It now plans to resume production soon, a company official said. Another similar-sized company, Jiangsu Shente Steel, stopped production in December but then resumed in March as prices surged, a company official said. More than 40 million tonnes of capacity out of the 50-60 million tonnes that were shut last year are now back on, said Macquarie analyst Ian Roper. “Capacity cuts are off the cards given the price and margin rebound,” he said.

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The fight over jurisdiction and fees will heat up. Just like the Arctic itself.

China Wants Ships To Use Faster Arctic Route Opened By Global Warming (R.)

China will encourage ships flying its flag to take the Northwest Passage via the Arctic Ocean, a route opened up by global warming, to cut travel times between the Atlantic and Pacific oceans, a state-run newspaper said on Wednesday. China is increasingly active in the polar region, becoming one of the biggest mining investors in Greenland and agreeing to a free trade deal with Iceland. Shorter shipping routes across the Arctic Ocean would save Chinese companies time and money. For example, the journey from Shanghai to Hamburg via the Arctic route is 2,800 nautical miles shorter than going by the Suez Canal. China’s Maritime Safety Administration this month released a guide offering detailed route guidance from the northern coast of North America to the northern Pacific, the China Daily said.

“Once this route is commonly used, it will directly change global maritime transport and have a profound influence on international trade, the world economy, capital flow and resource exploitation,” ministry spokesman Liu Pengfei was quoted as saying. Chinese ships will sail through the Northwest Passage “in the future”, Liu added, without giving a time frame. Most of the Northwest Passage lies in waters that Canada claims as its own. Asked if China considered the passage an international waterway or Canadian waters, Chinese Foreign Ministry spokeswoman Hua Chunying said China noted Canada considered that the route crosses its waters, although some countries believed it was open to international navigation.

In Ottawa, a spokesman for Foreign Minister Stephane Dion said no automatic right of transit passage existed in the waterways of the Northwest Passage. “We welcome navigation that complies with our rules and regulations. Canada has an unfettered right to regulate internal waters,” Joseph Pickerill said by email.

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Talk to the hand.

Japan, Not Germany, Leads World in Negative-Yield Bonds (BBG)

Europe’s central bank took the unorthodox step of cutting interest rates below zero in 2014. Japan followed suit earlier this year, and has become home to more negative-yielding debt than anywhere else, leading Germany, France, the Netherlands and Belgium.

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Crazy free money, no strings: “Banks are encouraged to extend credit to the real economy but are not penalized for not meeting their benchmark lending targets..”

ECB Slides Down Further Into ZIRP Bizarro World (CNBC)

Economists and analysts have been swooning over a new series of ultra-cheap, ultra-long bank loans announced by the ECB last month, which they believe might just kickstart the region’s fragile economy. “It’s massively positive,” Erik Nielsen, global chief economist at UniCredit, told CNBC via email regarding the new breed of “credit-easing” tactics announced by ECB President Mario Draghi. These targeted long-term refinancing operations, or TLTRO IIs, advance on a previous model announced by the central bank in 2011 and effectively give free money to the banks to lend to the real economy. They’re a series of four loans – conducted between June 2016 and March 2017 – and will have a fixed maturity of four years.

The interest rate will start at nothing, but could become as low as the current deposit rate, which is currently -0.40%, if banks meet their loan targets. This means the banks will be receiving cash for borrowing from the central bank. Banks will need to post collateral at the ECB but there’s no penalty if they fail to meet their loan targets. All that will happen is that the loans will be priced at zero for four years. Frederik Ducrozet, a euro zone economist with private Swiss-bank Pictet, called it “unconditional liquidity to banks at 0% cost, against collateral.” He said in a note last month that he expects it to lower bank funding costs, mitigate the adverse consequences of negative rates, strengthen the ECB’s forward guidance and improve the transmission of monetary policy.

Abhishek Singhania, a strategist at Deutsche Bank, added that the new LTROs “reduce the stigma” attached to their use compared to the previous model. “Banks are encouraged to extend credit to the real economy but are not penalized for not meeting their benchmark lending targets,” he said in a note last month.

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Ambrose muses on Europe: “The EU is a strategic relic of a post-War order that no longer exists, and a clutter of vested interests that caused Europe to miss the IT revolution.”

Brexit Means Blood, Toil, Sweat And Tears (AEP)

[..] The Justice Secretary is right to dismiss Project Fear as craven and defeatist. A vote to leave the dysfunctional EU half-way house might well be a “galvanising, liberating, empowering moment of patriotic renewal”. The EU is a strategic relic of a post-War order that no longer exists, and a clutter of vested interests that caused Europe to miss the IT revolution. “We will have rejected the depressing and pessimistic vision that Britain is too small and weak, and the British people too hapless and pathetic, to manage their own affairs,” he said. The special pleading of the City should be viewed with a jaundiced eye. This is the same City that sought to stop the country upholding its treaty obligations to Belgium in 1914, and that funded the Nazi war machine even after Anschluss in 1938, lobbying for appeasement to protect its loans. It is morally disqualified from any opinion on statecraft or higher matters of sovereign self-government.

Mr Gove is right that the European Court has become a law unto itself, asserting a supremacy that does not exist in treaty law, and operating under a Roman jurisprudence at odds with the philosophy and practices of English Common Law. It has seized on the Charter of Fundamental Rights to extend its jurisdiction into anything it pleases. Do I laugh or cry as I think back to the drizzling Biarritz summit of October 2000 when the Europe minister of the day told this newspaper that the charter would have no more legal standing than “the Beano or the Sun”? What Mr Gove cannot claim with authority is that Britain will skip painlessly into a “free trade zone stretching from Iceland to Turkey that all European nations have access to, regardless of whether they are in or out of the euro or the EU”.

Nobody knows exactly how the EU will respond to Brexit, or how long it would take to slot in the Norwegian or Swiss arrangements, or under what terms. Nor do we know how quickly the US, China, India would reply to our pleas for bi-lateral deals. Over 100 trade agreements would have to be negotiated, and the world has other priorities. Brexit might set off an EU earthquake as Mr Gove says – akin to the collapse of the Berlin Wall in the words of France’s Marine Le Pen – but it would not resemble his children’s fairy tale. The more plausible outcome is a 1930s landscape of simmering nationalist movements with hard-nosed reflexes, and a further lurch toward authoritarian polities from Poland to Hungary and arguably Slovakia, and down to Romania where the Securitate never entirely lost its grip and Nicolae Ceausescu is back in fashion.

Pocket Putins will have a field day knowing that they can push the EU around. The real Vladimir Putin will be waiting for his moment of maximum mayhem to try his luck with “little green men” in Estonia or Latvia, calculating that nothing can stop him restoring the western borders of the Tsarist empire if he can test and subvert NATO’s Article 5 – the solidarity clause, one-for-all and all-for-one. A case can be made that the EU has gone so irretrievably wrong that Britain must withdraw to save its legal fabric and parliamentary tradition. If so, let us at least be honest about what we face. One might equally quote another British prime minster, with poetic licence: ‘I have nothing to offer but blood, toil, tears, and sweat’.

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Greece is mor elikely to leave in the wake of a new refugee disaster.

Greece ‘Could Leave Eurozone’ On Brexit Vote (Tel.)

Greece could crash out of the eurozone as early as this summer if Britons vote to leave the European Union in the upcoming referendum, economists have predicted. The uncertainty following a ‘yes’ vote to Britain leaving the EU would put unsustainable pressure on Greece’s cash-strapped economy at a time when it is also struggling to cope with an influx of migrants escaping turmoil in the Middle East and Africa, according to a report from the Economist Intelligence Unit. The authors of the report say it is highly likely that Greece will be forced to leave the eurozone at some point within the next five years, but that if the UK votes to leave the EU in June, it could happen much sooner. Greece is already under a huge amount of pressure and a so-called Brexit could tip it over the edge.

The country has large debt payments due in mid-2016, while structural reforms recommended in Greece’s bail-out programme are “slow burners” and unlikely to deliver any significant growth in the short term. Greece’s true GDP contracted by 0.3pc last year, while unemployment stands at 24pc. The country’s overall debt-to-GDP ratio has hit 171pc. “While the region could probably handle a Brexit, Grexit or an escalation of the migrant crisis individually, it would be unlikely to navigate successfully a situation in which several of those crises came to a head simultaneously,” the report, entitled ‘Europe stretched to the limit’, said. “It is not impossible that this could happen as early as mid-2016, when the UK votes on whether or not to remain in the EU.”

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If they have to offer a similar deal in Europe, that’s curtains.

VW To Offer To Buy Back Nearly 500,000 US Diesel Cars (Reuters)

Volkswagen and U.S. officials have reached a framework deal under which the automaker would offer to buy back almost 500,000 diesel cars that used sophisticated software to evade U.S. emission rules, two people briefed on the matter said on Wednesday. The German automaker is expected to tell a federal judge in San Francisco Thursday that it has agreed to offer to buy back up to 500,000 2.0-liter diesel vehicles sold in the United States that exceeded legally allowable emission levels, the people said. That would include versions of the Jetta sedan, the Golf compact and the Audi A3 sold since 2009. The buyback offer does not apply to the bigger, 80,000 3.0-liter diesel vehicles also found to have exceeded U.S. pollution limits, including Audi and Porsche SUV models, the people said.

U.S.-listed shares of Volkswagen rose nearly 6% to $30.95 following the news. VW in September admitted cheating on emissions tests for 11 million vehicles worldwide since 2009, damaging the automaker’s global image. As part of the settlement with U.S. authorities including the Environmental Protection Agency, Volkswagen has also agreed to a compensation fund for owners, a third person briefed on the terms said. The compensation fund is expected to represent more than $1 billion on top of the cost of buying back the vehicles, but it is not clear how much each owner might receive, the person said. Volkswagen may also offer to repair polluting diesel vehicles if U.S. regulators approve the proposed fix, the sources said.

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It’ll be increasingly hard to push through in Europe. And in America too unless Hillary’s elected.

Public Support For TTIP Plunges in US and Germany (Reuters)

Support for the transatlantic trade deal known as TTIP has fallen sharply in Germany and the United States, a survey showed on Thursday, days before Chancellor Angela Merkel and President Barack Obama meet to try to breathe new life into the pact. The survey, conducted by YouGov for the Bertelsmann Foundation, showed that only 17% of Germans believe the Transatlantic Trade and Investment Partnership is a good thing, down from 55% two years ago. In the United States, only 18% support the deal compared to 53% in 2014. Nearly half of U.S. respondents said they did not know enough about the agreement to voice an opinion. TTIP is expected to be at the top of the agenda when Merkel hosts Obama at a trade show in Hanover on Sunday and Monday.

Ahead of that meeting, German officials said they remained optimistic that a broad “political agreement” between Brussels and Washington could be clinched before Obama leaves office in January. The hope is that TTIP could then be finalised with Obama’s successor. But there have been abundant signs in recent weeks that European countries are growing impatient with the slow pace of the talks, which are due to resume in New York next week. On Wednesday, German Economy Minister Sigmar Gabriel described the negotiations as “frozen up” and questioned whether Washington really wanted a deal.

The day before, France’s trade minister threatened to halt the talks, citing a lack of progress. Deep public scepticism in Germany, Europe’s largest economy, has clouded the negotiations from the start. The Bertelsmann survey showed that many Germans fear the deal will lower standards for products, consumer protection and the labor market. It also pointed to a dramatic shift in how Germans view free trade in general. Only 56% see it positively, compared to 88% two years ago. “Support for trade agreements is fading in a country that views itself as the global export champion,” said Aart de Geus, chairman and chief executive of the Bertelsmann Foundation.

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Bottom line: “..non-performing debt [..] stands at €360bn, according to the Bank of Italy. So is Atlante — with about €5bn of equity — really enough to keep the heavens in place?”

Italian ‘Bad Bank’ Fund ‘Designed To Stop The Sky Falling In’ (FT)

Atlante, a new private initiative backed by the Italian government, is designed to stop the sky falling in. The fund, which takes its name from the mythological titan who held up the heavens, will buy shares in Italian lenders in a bid to edge the sector away from a fully-fledged crisis. Last week’s announcement of the fund, which can also buy non-performing loans, led to a welcome boost for Italian banks. An index for the sector gained 10% over the week — its best performance since the summer of 2012, though it remains heavily down on the year. But Italian banks have made €200bn of loans to borrowers now deemed insolvent, of which €85bn has not been written down on their balance sheets. A broader measure of non-performing debt, which includes loans unlikely to be repaid in full, stands at €360bn, according to the Bank of Italy.

So is Atlante — with about €5bn of equity — really enough to keep the heavens in place? The Italian government has been placed in a highly unusual position. It has become much harder to directly bail out its financial institutions, as other European countries did during the crisis. Meanwhile, a new European-wide approach to bank failure, which involves imposing losses on bondholders, is politically fraught in Italy, where large numbers of bonds have been sold to retail customers. The new fund also comes in the context of an extremely weak start to the year for global markets. “In this market it is impossible for anyone to raise any capital,” says Sebastiano Pirro, an analyst at Algebris, adding that, since November last year, “the markets have been shut for Italian banks”.

The government has been forced into an array of subtle interventions to provide support. Earlier this year, details emerged of a scheme for non-performing loans to be securitised — a process where assets are packaged together and sold as bond-like products of different levels, or tranches, of risk. The government planned to offer a guarantee on the most senior tranches — those with a triple B, or “investment grade” rating.

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Support for dying empires will come at a price. The Nobel Peace Prize came free of charge.

The Troubled Legacy Of Obama’s Record $60 Billion Saudi Arms Sale (R.)

Six years ago, Saudi and American officials agreed on a record $60 billion arms deal. The United States would sell scores of F-15 fighters, Apache attack helicopters and other advanced weaponry to the oil-rich kingdom. The arms, both sides hoped, would fortify the Saudis against their aggressive arch-rival in the region, Iran. But as President Barack Obama makes his final visit to Riyadh this week, Saudi Arabia’s military capabilities remain a work in progress – and the gap in perceptions between Washington and Riyadh has widened dramatically. The biggest stumble has come in Yemen. Frustrated by Obama’s nuclear deal with Iran and the U.S. pullback from the region, Riyadh launched an Arab military intervention last year to confront perceived Iranian expansionism in its southern neighbour.

The conflict pits a coalition of Arab and Muslim nations led by the Saudis against Houthi rebels allied to Iran and forces loyal to a former Yemeni president. A tentative ceasefire is holding as the United Nations prepares for peace talks in Kuwait, proof, the Saudis say, of the intervention’s success. But while Saudi Arabia has the third-largest defence budget in the world behind the United States and China, its military performance in Yemen has been mixed, current and former U.S. officials said. The kingdom’s armed forces have often appeared unprepared and prone to mistakes. U.N. investigators say that air strikes by the Saudi-led coalition are responsible for two thirds of the 3,200 civilians who have died in Yemen, or approximately 2,000 deaths. They said that Saudi forces have killed twice as many civilians as other forces in Yemen.

On the ground, Saudi-led forces have often struggled to achieve their goals, making slow headway in areas where support for Iran-allied Houthi rebels runs strong. And along the Saudi border, the Houthis and allied forces loyal to former Yemeni president Ali Abdullah Saleh have attacked almost daily since July, killing hundreds of Saudi troops. Instead of being the centrepiece of a more assertive Saudi regional strategy, the Yemen intervention has called into question Riyadh’s military influence, said one former senior Obama administration official. “There’s a long way to go. Efforts to create an effective pan-Arab military force have been disappointing.”

Behind the scenes, the West has been enmeshed in the conflict. Between 50 and 60 U.S. military personnel have provided coordination and support to the Saudi-led coalition, a U.S. official told Reuters. And six to 10 Americans have worked directly inside the Saudi air operations centre in Riyadh. Britain and France, Riyadh’s other main defence suppliers, have also provided military assistance. Last year, the Obama administration had the U.S. military send precision-guided munitions from its own stocks to replenish dwindling Saudi-led coalition supplies, a source close to the Saudi government said. Administration officials argued that even more Yemeni civilians would die if the Saudis had to use bombs with less precise guidance systems.

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Half of Europe too, no doubt. And China. And larger cities everywhere.

More Than Half Of Americans Live Amid Dangerous Air Pollution (G.)

More than half of the US population lives amid potentially dangerous air pollution, with national efforts to improve air quality at risk of being reversed, a new report has warned. A total of 166 million Americans live in areas that have unhealthy levels of of either ozone or particle pollution, according to the American Lung Association, raising their risk of lung cancer, asthma attacks, heart disease, reproductive problems and other ailments. The association’s 17th annual “state of the air” report found that there has been a gradual improvement in air quality in recent years but warned progress has been too slow and could even be reversed by efforts in Congress to water down the Clean Air Act. Climate change is also a looming air pollution challenge, with the report charting an increase in short-term spikes in particle pollution.

Many of these day-long jumps in soot and smoke have come from a worsening wildfire situation across the US, especially in areas experiencing prolonged dry conditions. Six of the 10 worst US cities for short-term pollution are in California, which has been in the grip of an historic drought. Bakersfield, California, was named the most polluted city for both short-term and year-round particle pollution, while Los Angeles-Long Beach was the worst for ozone pollution. Small particles that escape from the burning of coal and from vehicle tail pipes can bury themselves deep in people’s lungs, causing various health problems. Ozone and other harmful gases can also be expelled from these sources, triggering asthma attacks and even premature death.

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Can Brussels survive such failure? More urgently, can Greece survive the fallout? Because it’s Greece that will suffer first, and most, if the EU pact with the devil falls through.

EU States Grow Wary As Turkey Presses For Action On Visas Pledge (FT)

European diplomats are agonising over their politically perilous promise to grant visa-free travel to 80m Turks, amid strong warnings from Ankara that the EU migration deal will fold without a positive visa decision by June. The EU’s month-old deal to return migrants from Greece to Turkey has dramatically cut flows across the Aegean, easing what had been an acute migration crisis. But the pact rests on sweeteners for Ankara that the EU is struggling to deliver – above all, giving Turkish citizens short-term travel rights to Europe’s Schengen area. Germany, France and other countries nervous of a political backlash over Muslim migration have started exploring options to make the concession more politically palatable, including through safeguard clauses, extra conditions or watered-down terms.

The political calculations are further complicated by looming EU visa decisions for Ukraine, Georgia and Kosovo. Several senior European diplomats say ideas considered include a broad emergency brake, allowing the EU to suspend the visa deal under certain circumstances; limiting the visa privileges to Turkish executives and students; or opting for an unconventional visa-waiver treaty with Turkey, which would allow more rigorous, US-style checks on visitors. Selim Yenel, Turkey’s ambassador to the EU, called the efforts to water down the terms “totally unacceptable”, saying: “They cannot and should not change the rules of the game.” One senior EU official said the search for alternatives reflected “growing panic” in Berlin and Paris over the looming need to deliver the pledge.

The various options, the official added, were “a political smokescreen” to muster support in the Bundestag and European Parliament, which must also vote on the measures. The Turkish visa issue has even flared in Britain’s EU referendum campaign, forcing David Cameron, the prime minister, to clarify on Wednesday that Turks could not automatically come to the UK if they were granted visa rights to the 26-member Schengen area. The matter could come to a head within weeks. Brussels says Turkey is making good progress in fulfilling 72 required “benchmarks” to win the visa concessions and will issue a report on May 4. This is expected to say that Turkey is on course to meet the criteria by early June, passing the political dilemma to the EU member states and European Parliament.

One ambassador in Brussels said it looked ever more likely that several states would try to block visas for Turkey – a possibility that Mr Yenel also appears to anticipate. “They are probably getting cold feet since we are fulfilling the benchmarks,” he told the Financial Times. “We expect them to stick to what was agreed, otherwise how can we continue to trust the EU? We delivered on our side of the bargain. Now it is their turn.” Signs of Brussels backtracking have already prompted angry Turkish responses. “The EU needs Turkey more than Turkey needs the EU,” President Recep Tayyip Erdogan said recently. Meanwhile, Ahmet Davutoglu, Turkey’s prime minister, has warned that “no one can expect Turkey to adhere to its commitments” if the June deadline was not respected.

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How is this any different from Europe’s long lamented bloody past?

Hungary Threatens Rebellion Against Brussels Over Forced Migration (Express)

The much-derided Schengen Area is on the brink of collapse after furious Hungary launched a rebellion against open borders. The country’s prime minister Viktor Orban is also angry at mandatory migrant quotas enforced by the European Union. He is now touring Europe’s capital cities, where he is rallying support for a new plan with greater protection for individual states, dubbed “Schengen 2.0.” Currently, EU countries are forced to comply with orders from Brussels to accept and settle a specified number of migrants. Orban has described these quotas as “wrong-headed” and is now leading a group of other countries determined to re-take control of their borders. “The EU cannot create a system in which it lets in migrants and then prescribes mandatory resettlement quotas for every member state.”

Orban also promised a referendum in Hungary on whether the country should accept these orders, warning that some of the settled migrants were unlikely to integrate, leading to social friction. He said: “If we do not stop Brussels with a referendum, they will indeed impose on us masses of people, with whom we do not wish to live together.” Other countries may follow suit in opposing these plans and hold their own referendums, taking the power from Brussels and putting it back in the hands of their residents. Slovakia and the Czech Republic have both threatened to take legal action against the EU’s orders to take in migrants. Czech Prime Minister Bohuslav Sobotka said on Sunday: “I expect the line of opposition will be wider. Let us talk about legal action against the proposal when it is necessary.”

The action plan, which will be shared with the Czech Republic, Slovakia and Poland as well as the prime ministers of several other unspecified countries, is just the latest nail in the Schengen coffin. Last week, 2,000 soldiers in Switzerland’s tank battalion were told to postpone their summer holidays in order to be ready to rush to the border with Italy to block migrants making their way from Sicily. Austria has also begun sealing off its southern border, introducing checks on the vital Brenner Cross motorway and pledging the implementation of €1m worth of border patrols and security improvements. Brussel’s most senior bureaucrat admitted yesterday that confidence in the EU was dropping rapidly across the continent. In an astonishing confession of failure, European Commission President Jean-Claude Juncker said: “We are no longer respected in our countries when we emphasise the need to give priority to the EU.”

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A team of our Automatic Earth-sponsored friends at the Social Kitchen prepares 1000s of meals for refugees daily at Elliniko. Your contributions are still as welcome as they are necessary.

Refugee Camp Near Athens Poses ‘Enormous’ Public Health Risk (AFP)

Five mayors of Athens’s coastal suburbs warned Wednesday of the “enormous” health risks posed by a nearby camp housing over 4,000 migrants and refugees. “The conditions are out of control and present enormous risks to the public health,” the mayors complained in a letter to Prime Minister Alexis Tsipras, in reference to the camp at Elliniko, the site of Athens’s old airport. A total of 4,153 people, including many families, have been held there for the last month in miserable conditions. “The number of people is much higher than the capacity of the place and there are serious hygiene problems,” local mayor Dionyssis Hatzidakis told AFP.

He and his four fellow mayors from the area cited a document from Greece’s disease prevention center KEELPNO warning of the “the danger of disease contagion due to unacceptable housing conditions” at the site which they say has no more than 40 chemical toilets. Since the migrants’ favored route through the Balkans to the rest of Europe was shut down in February, numbers have been building up in Greece, with 46,000 Syrians and other nationalities now stuck in the country. Thousands of these have been transferred from the islands they arrived at to temporary centers such as the one at Elliniko, until more suitable reception centers can be set up.

The five mayors also voiced their disquiet at the “tensions and daily violent incidents between the refugees or migrants,” calling on the interior minister to boost police numbers in the area. “We are launching an appeal for help to protect the public health and security of both the refugees and the local population,” they said in their letter. Their intervention came the day after 17-year-old Afghan woman living in Elliniko with her parents died after six days in an Athens hospital. Her death was linked to a pre-existing heart condition exacerbated by the difficult journey to Greece, the doctor who treated her was quoted as saying in the Ethnos daily. Greek island officials on Tuesday began letting migrants leave detention centers where they have been held, as Human Rights Watch heaped criticism on a wave of EU-sanctioned expulsions to ease the crisis.

Read more …

Mar 112016
 March 11, 2016  Posted by at 7:27 am Finance Tagged with: , , , , , ,  2 Responses »

Arthur Rackham “Why, Mary Ann, what are you doing out here?”1907

I’ll try and keep this gracefully short: Mario Draghi ‘unleashed’ a bazooka full of desperate tools on the financial markets yesterday and they blew up in his face faster than you could say blowback or backdraft (and that’s just the start of the alphabet). This must and will mean that Draghi’s stint as ECB head is for all intents and purposes done. But…

But there are two questions: 1) who has the power to fire him (not an easy one), and 2) who can replace him. Difficult issues because the only candidates that would even be considered for the job by the same people who hired -no, not elected- Mario -and who will still be in power after he’s gone-, under present conditions, are carbon copies of Draghi. They all went to the same schools, worked for the same banks etc.

So maybe they’ll let him sit a bit longer. Then again, the damage has been done, and Mario has done a lot of destruction, is what the markets said yesterday. But to replace him with someone who’s also already lost all credibility, because they supported Mario every step of the way, carries a very evident risk: that nobody will believe in the entire ECB itself anymore. If you ask me, it’s crazy that anyone still would, but that’s another chapter altogether.

Not that Janet Yellen and Japan’s Kuroda and China’s Zhou Xiaochuan should not also be put out by the curb. While they may -seem to- vary in approaches today, they all started from the same untested, purely theoretical and entirely clueless origins. Just saying. None of them have any idea what negative rates etc will lead to. They’re all in the same rabbit hole. And that’s not a joke, it’s deeply sad.

Ultra-low interest -even negative- rates and bond purchases to the tune of $1 trillion a year, Mario’s schtick, exist all across the formerly rich world. And they all do for the same purpose: to make the people think that they, and their economies, are still rich. Just so bankers can take from them whatever it is they still do have. Think pension funds, investment funds.

Why did this pandemonium of ZIPR and QE ever get started? Because central banks, and the economists that work within them, edged along by bankers who risked behemoth losses, said the most important thing to do was to ‘save’ the banking system, and they can always find some theory to confirm that preference.

But the banking system is where the losses are, and it’s where the risks are. Which are then both transferred to Joe and Jane Blow, who subsequently have less to spend, which defeats the alleged central bank purpose of ‘stimulating’ the economy.

Draghi’s argument for the new (water-)bazooka measures is that without them, Europe would face ‘awful’ deflation. But it’s his very measures that create and encourage deflation. So who still knows how to count beyond 101? Good question.

But anyway, I just wanted to say that Draghi’s gone in all but physical presence. And if they keep him on for a while longer, that means that what happened today will happen again, just faster. Big risk.

No Super Mario no more.

What happened with Draghi yesterday is eerily reminiscent of the ‘glorious’ Bernanke days, when ‘poor’ Ben would make one of his weighty announcements and the effects he was looking for would fizzle out within hours. In full accordance with the law of diminishing returns, Draghi’s new and far more desperate measures lost their very meaning even within the space of barely more than half an hour. This EURUSD graph says it all:

That is ugly. That has meaning. Much more than Mario -the former Goldman Sachs executive- himself and his paymasters will be willing to acknowledge. It means the financial world is now ready to bet against Draghi. Like they bet against China.

Europe’s best hope, somewhat ironically, is German resistance against Draghi, which yesterday reached a point of no return. Ambrose Evans-Pritchard gave a perfect example overnight of why that is:

Professor Richard Werner from Southampton University, the man who invented the term QE, said the ECB’s policies are likely to destroy half of Germany’s 1,500 savings and cooperative banks over the next five years. They cannot pass on the negative rates to savers so their own margins are suffering. “They are under enormous pressure from regulatory burdens already, and now they are reaching a tipping point,” he said.

These banks make up 70pc of German deposits and provide 90pc of loans to small and medium firms, the Mittelstand companies that form the backbone of German industry. Prof Werner said these lenders are being punished in favour of banks that make their money from asset bubbles and speculation.

“We have learned nothing from the financial crisis. The sooner there is a revolt in Germany, the better,” he said.

Draghi’s done. This hole is too deep for him to climb out of.

Feb 212016
 February 21, 2016  Posted by at 10:50 pm Finance Tagged with: , , , , , , , , , ,  6 Responses »

“6 gals for 99c”, Roosevelt and Wabash, Chicago 1939

That the world’s central bankers get a lot of things wrong, deliberately or not, and have done so for years now, is nothing new. But that they do things that result in the exact opposite of what they ostensibly aim for, and predictably so, perhaps is. And it’s something that seems to be catching on, especially in Asia.

Now, let’s be clear on one thing first: central bankers have taken on roles and hubris and ‘importance’, that they should never have been allowed to get their fat little greedy fingers on. Central bankers in their 2016 disguise have no place in a functioning economy, let alone society, playing around with trillions of dollars in taxpayer money which they throw around to allegedly save an economy.

They engage solely, since 2008 at the latest, in practices for which there are no historical precedents and for which no empirical research has been done. They literally make it up as they go along. And one might be forgiven for thinking that our societies deserve something better than what amounts to no more than basic crap-shooting by a bunch of economy bookworms. Couldn’t we at least have gotten professional gamblers?

Central bankers who moreover, as I have repeatedly quoted my friend Steve Keen as saying, even have little to no understanding at all of the field they’ve been studying all their adult lives.

They don’t understand their field, plus they have no idea what consequences their next little inventions will have, but they get to execute them anyway and put gargantuan amounts of someone else’s money at risk, money which should really be used to keep economies at least as stable as possible.

If that’s the best we can do we won’t end up sitting pretty. These people are gambling addicts who fool themselves into thinking the power they’ve been given means they are the house in the casino, while in reality they’re just two-bit gamblers, and losing ones to boot. The financial markets are the house. Compared to the markets, central bankers are just tourists in screaming Hawaiian shirts out on a slow Monday night in Vegas.

I’ve never seen it written down anywhere, but I get the distinct impression that one of the job requirements for becoming a central banker in the 21st century is that you are profoundly delusional.

Take Japan. As soon as Abenomics was launched 3 years ago, we wrote that it couldn’t possibly succeed. That didn’t take any extraordinary insights on our part, it simply looked too stupid to be true. In an economy that’s been ‘suffering’ from deflation for 20 years, even as it still had a more or less functioning global economy to export its misery to, you can’t just introduce ‘Three Arrows’ of 1) fiscal stimulus, 2) monetary easing and 3) structural reforms, and think all will be well.

Because there was a reason why Japan was in deflation to begin with, and that reason contradicts all three arrows. Japan sank into deflation because its people spent less money because they didn’t trust where their economy was going and then the economy went down further and average wages went down so people had less money to spend and they trusted their economies even less etc. Vicious cycles all the way wherever you look.

How many times have we said it? Deflation is a b*tch.

And you don’t break that cycle by making borrowing cheaper, or any such thing, you don’t break it by raising debt levels, and try for everyone to raise theirs too. Which is what Abenomics in essence was always all about. They never even got around to the third arrow of structural reforms, and for all we know that’s a good thing. In any sense, Abenomics has been the predicted dismal failure.

Now, I remember Shinzo Abe ‘himself’ at some point doing a speech in which he said that Abenomics would work ‘if only the Japanese people would believe it did’. And that sounded inane, to say that to people who cut down on spending for 2 decades, that if only they would spend again, the sun would rise in concert. That’s like calling your people stupid to their faces.

The reality is that in global tourism, the hordes of Japanese tourists have been replaced by Chinese (and we can tell you in confidence that that’s not going to last either). The Japanese economy simply dried out. It sort of functions, still, domestically, albeit it on a much lower level, but now that global trade is grasping for air, exports are plunging too, the population is aging fast and there’s a whole new set of belts to tighten.

So last June, the desperate Bank of Japan governor Haruhiko Kuroda did Abe’s appeal to ‘faith’ one better, and, going headfirst into the fairy realm, said:

I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it’. Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.

And that’s not just a strange thing to say. In fact, when you read that quote twice, you notice -or I did- that’s it’s self-defeating. Because, when paraphrasing Kuroda, we get something like this: ‘the moment the Japanese people doubt whether their government can save the economy, they cease forever to believe that it can’.

Now, I’m not Japanese, and I’m not terribly familiar with the role of fairy tales in the culture, but just the fact that Kuroda resorted to ‘our’ Peter Pan makes me think it’s not all that large. But I also think the Japanese understood what he meant, and that even the few who hadn’t yet, stopped believing in him and Abe right then and there.

Then again, Asian cultures still seem to be much more obedient and much less critical of their governments than we are, for some reason. The Japanese don’t voice their disbelief, they simply spend ever less. That’s the effect of Kuroda’s Peter Pan speech. Not what he was aiming for, but certainly what he should have expected, entirely predictable. Why hold that speech then, though? Despair, lack of intelligence?

In a similar vein, we chuckled out loud on Friday, first when president Xi demanded ‘Absolute Loyalty’ from state media when visiting them, an ‘Important Event’ broadly covered by those same media. Look, buddy, when you got to go on TV to demand it, someone somewhere’s bound to to be thinking you don’t have it…

And we chuckled also when the South China Morning Post (SCMP) broke the news that the People’s Bank of China, in its monthly “Sources and Uses of Credit Funds of Financial Institutions” report has stopped publishing the “Position for forex purchase”, which is that part of capital movements -and in China’s case today that stands for huge outflows- which goes through ‘private’ banks instead of the central bank itself.

It’s like they took a page, one-on-one-, out of the Federal Reserve’s playbook, which cut its M3 money supply reporting back in March 2006. What you don’t see can’t hurt you, or something along those lines. The truth is, though, that if you have something to hide, the last thing you want to do is let anyone see you digging a hole in the ground.

But the effect of this attempt to not let analysts get the data is simply that they’re going to get suspicious, and start digging even harder and with increased scrutiny. And they have access to the data anyway, through other channels, so the effect will be the opposite of what’s intended. And that too is predictable.

First, from Fortune, based on the SCMP piece:

Is China Trying to Hide Capital Outflows?

China’s central bank is making it harder to calculate the size of capital outflows afflicting the economy, just as investors have started paying closer attention to those mounting outflows, which in December reached almost $150 billion and in January around $120 billion. The central bank omitted data on “position for forex purchase” during its latest report, the South China Morning Post reported today.

The unannounced change comes at a time pundits are questioning whether outflows have the potential to cripple China’s currency and economy. Capital outflows lead to a weaker currency, which concerns the hordes of Chinese companies that borrowed debt in foreign currencies over the past few years and now have to pay it back with a weaker yuan.

The news of the central bank withholding data is important because capital outflow figures aren’t released as line items. They are calculated by analysts in a variety of ways, one of which includes using the omitted data. The Post quoted two analysts concluding the central bank’s intention was to hide the true amount of continuing outflows.

The impulse to hide bad news shouldn’t come as a surprise. China’s government has been evasive about economic matters from this summer’s stock bailout to its efforts propping up the value of the yuan. Analysts still have a variety of ways to estimate the flows, but the central bank is making it ever more difficult.

And then the SCMP:

Sensitive Financial Data ‘Missing’ From PBOC Report On Capital Outflows

Sensitive data is missing from a regular Chinese central bank report amid concerns about capital outflow as the economy slows and the yuan weakens. Financial analysts say the sudden lack of clear information makes it hard for markets to assess the scale of capital flows out of China as well as the central bank s foreign exchange operations in the banking system.

Figures on the “position for forex purchase” are regularly published in the People’s Bank of China’s monthly report on the “Sources and Uses of Credit Funds of Financial Institutions”. The December reading in foreign currencies was US$250 billion. But the data was missing in the central bank’s latest report. It seemed the information had been merged into the “other items” category, whose January figure was US$243.9 billion -a surge from US$20.4 billion the previous month.

[..] “Its non-transparent method has left the market unable to form a clear picture about capital flows,” said Liu Li-Gang, ANZ’s chief China economist in Hong Kong. “This will fuel more speculation that China is under great pressure from capital outflows. It will hurt the central bank’s credibility.”

[..] All forex-related data released by the central bank is closely monitored by financial analysts. They often read item by item from the dozens of tables and statistics to try to spot new trends and changes. China Merchants Securities chief economist Xie Yaxuan said the PBOC would not be able to conceal data as there were many ways to obtain and assess information on capital movements.

“We are waiting for more data releases such as the central bank’s balance sheet and commercial banks’ purchase and sales of foreign exchange released by the State Administration of Foreign Exchange for a better understanding of the capital movement and to interpret the motive of the central bank for such change,” Xie said.

It’s like they’ve landed in a game they don’t know the rules of. But then again, that’s what we think every single time we see Draghi and Yellen too, who are kept ‘alive’ only by investors’ expectations that they are going to hand out free cookies, and lots of them, every time they make a public appearance.

And what’s going on in Japan and China will happen to them, too: they will achieve the exact opposite of what they’re aiming for. They arguably already have. Or at least none of their desperate measures have achieved anything close to their stated goals.

They may have kept equity markets high, true, but their economies are still as bad as when the QE ZIRP NIRP stimulus madness took off, provided one is willing to see through the veil that media coverage and ‘official’ numbers put up between us and the real world. But they sure as h*ll haven’t turned anything around or caused a recovery of any sorts. Disputing that is Brooklyn Bridge for sale material.

Eh, what can we say? Stay tuned?! There’ll be a lot more of this lunacy as we go forward. It’s baked into the stupid cake.

Professor Steve Keen and Raúl Ilargi Meijer discuss central banking, Athens, Greece, Feb 16 2016

Feb 172016
 February 17, 2016  Posted by at 10:49 am Finance Tagged with: , , , , , , ,  3 Responses »

DPC Snow removal – Ford tractor Washington, DC 1925

Banks’ Balance Sheets Are Poor Guides To Actual Risks And Uncertainties (FT)
Banks Are Still The Weak Links In The Economic Chain (FT)
The Eurozone Can’t Survive Another Banking Crisis (MW)
I’m in Awe at Just How Fast Global Trade is Unraveling (WS)
Tilting At Windmills: The Faustian Folly Of Quantitative Easing (Steve Keen)
If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise (CHS)
China Turns on Taps and Loosens Screws in Bid to Support Growth (BBG)
China Debt Binge Spurs S&P Warning (BBG)
China Loses Control of the Economic Story Line (WSJ)
China’s Big Bet On Latin America Is Going Bust (CNN)
Pimco’s $12 Billion Standoff Over Austria Bad Bank (BBG)
Things Are Coming Unglued for Canadian Investors (WS)
Calgary Housing Market Collapses As “Three-Alarm Blaze” Burns In Vancouver (ZH)
What Are We Smelling? (Dmitry Orlov)
Not a game (Papachelas)

Good piece on derivatives. I’m always suspicious of claims that outstanding contracts are down $150 trillion or so. Derivatives, and certainly swaps, are a great way to hide risks and losses. Why let go of that? Who can even afford to do it?

Banks’ Balance Sheets Are Poor Guides To Actual Risks And Uncertainties (FT)

According to the latest data from the Bank for International Settlements, the central bankers’ central bank, the total amount of outstanding derivative contracts has declined from a 2012 peak of $700tn to about $550tn. To put this into perspective, the figure has fallen from just under three times the value of all the assets in the world to a little over twice the value. The largest element is interest rate swaps followed by foreign exchange derivatives. Credit default swaps, the instrument at the heart of the 2008 global financial crisis, are now relatively small – if you can accustom yourself to a world in which $15tn is a small number. It is only slightly less than US GDP (a little more than $18tn in the final quarter of 2015). Two banks, JPMorgan and Deutsche Bank, account for about 20% of total global derivatives exposure.

Each has more than $50tn potentially at risk. The current market capitalisation of JP Morgan is about $200bn (roughly its book value); that of Deutsche, $23bn (about one third of book value). From one perspective, Deutsche Bank is leveraged 2,000 times. Imagine promising to buy a house for $2,000 with assets of $1. Before you head for the hills, or the bunker, understand that there is no possibility that these banks could actually lose $50tn. The risks associated with these exposures are largely netted out — that is, they offset each other. As you promised to buy the house in question, you also promised to sell it: though not necessarily at just the same time or price or to the same person. That mismatch is the source of potential profit. How effectively are these positions netted? Your guess is as good as mine, and probably not much worse than those in charge of these institutions.

We are reliant on their risk modelling but these models break down in precisely the extreme situations they are designed to protect us against. You will not find these figures for derivative exposures in the balance sheets of banks nor do such exposures enter directly into capital adequacy calculations. The apparent lack of impact on balance sheet totals is the product of the combination of fair value accounting and the tradition of judging the security of a bank by the size of its credit exposure (counterparty risk) rather than its economic exposure (loss from market fluctuation). The fair value today of an agreement that has an equal chance of you paying me £100 or me paying you £100 is zero. Since your promise to pay or receive £100 is marked to market at nil there is no credit risk: you cannot default on a liability to pay nothing.

Under generally accepted accounting principles in the US, you are allowed even to net out exposures to the same counter party in declaring your derivative position. This is not permitted under international financial reporting standards, which is why the balance sheets of American banks appear (misleadingly) to be smaller than those of similar European institutions. The fundamental problem is accounting at “fair value” when that fair value is the average of a wide range of possible outcomes. The mean of a distribution may itself be an impossible occurrence — there are no families with 1.8 children, for example. And netting offsetting positions may also mislead. There is a large difference between being a dollar millionaire and having assets of $100m and liabilities of $99m.

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“..a vital consideration, particularly in the US market, is that Robert Shiller’s cyclically adjusted price-earnings ratio is at levels substantially exceeded only in the stock market bubbles that peaked in 1929 and 2000..”

Banks Are Still The Weak Links In The Economic Chain (FT)

Why have the prices of bank shares fallen so sharply? A part of the answer is that stock markets have declined. Banks, however, remain the weak link in the chain, fragile themselves and able to generate fragility around them. Between January 4 and February 15 2016, the Standard & Poor 500 index fell 7.5% while the index of bank stocks fell 16.1%. Over the same period, the FTSE Eurofirst 300 fell 9.5%, while the index of bank stocks fell 19.5%. The decline of European stocks was a little bigger than that of US ones but the underperformance of the European banking sector was similar. Relative to the overall US market, the index of shares in US banks fell 9.1%, while that of European banks fell 11% relative to European markets — and so only a bit more. The dire performance of European banks becomes more evident if one takes a longer view.

Bank stocks have failed to recover the huge losses they suffered in the wake of the financial crisis of 2007-09. On February 15 2015, the S&P 500 was 23% higher than on July 2 2007 but the US banking sector was still 51% below where it had been then; the FTSE Eurofirst was 21% below its 2007 level, reflecting the botched European recovery, but its banking sector was down by 71%. In the European case a decline of 40% in the value of bank stocks would return them to the 2009 nadir. So what might explain what is going on? The short answer is always: who knows? Mr Market is subject to huge mood swings. Yet a vital consideration, particularly in the US market, is that Robert Shiller’s cyclically adjusted price-earnings ratio is at levels substantially exceeded only in the stock market bubbles that peaked in 1929 and 2000. Investors might simply have realised that the downside risks to stocks outweigh the upside possibilities. Plausible worries could also have triggered such a realisation. Of such worries, there is no lack.

One might be anxious about a slowdown in the American economy, partly driven by the strong dollar, weakening corporate profits and a misguided commitment to tightening by the US Federal Reserve. One might fear the short-term damage being done by collapsing commodity prices, which are imposing economic and fiscal stresses on commodity-exporting countries and financial pressures on commodity-producing companies. One might be concerned over the need for sovereign wealth funds to liquidate assets to fund fiscally stressed governments, particularly of the oil exporters. One might worry about a big slowdown in China and the ineffectiveness of its government’s policies. One might fear a new crisis in the eurozone. One might be worried about geopolitical risks, including the threat of war between Russia and Nato, disintegration of the EU and the chance that the next US president will be a hardline populist.

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And that crisis is inevitable.

The Eurozone Can’t Survive Another Banking Crisis (MW)

In the end, it was not quite another 2008. There were no queues around the block in Hanover or Dusseldorf as people tried to withdraw their life savings from the bank, and there was no Lehman moment where angry and bewildered looking bankers were turfed out onto the streets of Frankfurt. Even so, the wobble in the German banking system over the last week, centered in particular over the stability of the mighty Deutsche Bank, was still a troubling moment for the eurozone. Why? Because it now looks like the single currency would find it very hard to survive another banking crisis. That is not because the central bank would not step up to the plate. There can be no question that Mario Draghi would print all the euros needed to bail out the banks if he had to. It is because the politics would make it impossible.

The Greek banks were allowed to close for a long period last year, and capital controls were introduced, so if the ECB were to fully rescue French and German banks while it placed restrictions on Greek ones, the contrast would become too painful to ignore. If any banks go down, they will take the euro with them. This has certainly been a bad month to be a shareholder in Deutsche Bank, or indeed any of the major eurozone lenders. Last week, shares in Deutsche fell off a cliff. From more than €20 last month, they slumped all the way down to slightly more than €13. The prices of its convertible bonds sank to an all-time low, and the cost of its credit default swaps soared, as at least some people in the market seemed to want to make a bet against its survival.

The situation became so bad that at one point its chief executive John Cryan was wheeled out to reassure everyone the bank was “rock solid,” the kind of statement that could have been purposefully designed to put everyone on edge. The carnage was even worse in the Italian banking system, always fragile at the best of times, and by the close of the week started to spread to France as well. It was not quite 2008 all over again, but it was also too close to it for comfort. The reasons for the nervousness were not hard to work out. The one thing we learned in 2008 is that the financial system is interconnected, and that losses in one market can easily turn up somewhere else. Oil and commodity prices have slumped across the world, and it would be surprising if at least some of those losses were not showing up in the banking system somewhere.

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“The decline in exports is particularly troubling for Abenomics. It never cared about consumers. To heck with them. It’s all about exports and Japan Inc. ”

I’m in Awe at Just How Fast Global Trade is Unraveling (WS)

It simply doesn’t let up. Global trade is skidding south at a breath-taking speed. China produced a doozie: The General Administration of Customs reported on Monday that in yuan terms, exports dropped 6.6% in January from a year ago while imports plunged 14.4%. In dollar terms, it was even worse due to the depreciation of the yuan since August: exports plunged 11.2% and imports 18.8%, far worse than economists had expected. And so the trade surplus, powered by those plunging imports, jumped 12.2% to a record $63.3 billion. This came on top of China’s deteriorating trade numbers last year, when exports had fallen 1.8% in yuan terms while imports had plunged 13.2%. Imports have now declined for 15 months in a row. That’s tough for the world economy.

OK, Chinese trade data can be heavily distorted by fake invoicing of “imports” from Hong Kong, a practice used to maneuver around capital controls and send money out of China. Imports from Hong Kong in January soared 108% from a year ago, even as shipments from other major trading partners declined. Bloomberg: “China has acknowledged a problem with fake invoicing in the past. In 2013, the government said export and import figures were overstated due to the phony trade to bring money into the mainland. Trade data for December suggested the practice had flared up again, this time to get money out.” In January, we have the additional fudge factor of the Lunar New Year. Chinese companies were closed all last week. It caused all kinds of front-loading in December and early January followed by a wind-down in late January and early February.

Oh, and India: “On Monday, the Ministry of Commerce and Industry in Asia’s third largest economy reported that exports of goods plunged 13.6% in January year-over-year, the 14th month in a row of declines. To blame are crummy global demand, including in the US and Europe, and as always a weaker currency somewhere, this time in China. And Japan. The economy shrank in the October through December quarter, the second quarterly decline so far this fiscal year, which started April 1. Over the past nine quarters, five booked declines; over the past 20 quarters, 10 showed declines. Most sectors got hit: consumption, housing investment, exports…. The decline in exports is particularly troubling for Abenomics. It never cared about consumers. To heck with them. It’s all about exports and Japan Inc.

But two weeks ago, the Ministry of Finance reported that in December exports had dropped 8% year over year while imports had plunged 18%. In the first half of 2015, exports still rose 7.9%; but in the second half, they declined 0.6%. Turns out, the bottom fell out during the last three months of the year: exports dropped 2.2% in October, 3.3% in November, and 8.0% in December. In December, exports to the rest of Asia plunged 10.3%! Within that, exports to China plunged 8.6%. Asia is Japan’s largest export market by far, accounting for over 52% of total exports and dwarfing exports to the US and Canada, at 23% of total exports.

Read more …

Not only is he a great guy to hang out with, everything Steve writes is must read because he corrects so many fallacies spread by economists and media.

Tilting At Windmills: The Faustian Folly Of Quantitative Easing (Steve Keen)

As I explained in my last post, banks can’t “lend out reserves” under any circumstances, which undermines a major rationale that Central Bank economists gave for undertaking Quantitative Easing in the first place. Consequently, the hope that Bernanke expressed in 2009 is “To Dream The Impossible Dream”:
To dream the impossible dream
To fight the unbeatable foe
To bear with unbearable sorrow
To run where the brave dare not go

But without the poetry: Large increases in bank reserves brought about through central bank loans or purchases of securities are a characteristic feature of the unconventional policy approach known as quantitative easing. The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets. (Bernanke 2009, “The Federal Reserve’s Balance Sheet: An Update”)

What a folly this was—almost. The one out that Bernanke gives himself from pure delusional babble is the phrase “or buy other assets”—because that’s the one thing that banks can actually do with the excess reserves that QE has generated. But rather than rescuing Central Bankers from folly, this escape clause is an unwitting pact with the devil: they are now caught in a Faustian bargain. Any attempt to terminate QE is likely to end in deflating the asset markets that it inflated in the first place, which will cause the Central Banks to once more come “riding to the rescue” on their monetary Rocinante.

While Central Bankers can personally still join Faust and ascend to Heaven—thanks to their comfortable public salaries and pensions—the rest of us have been thrust into the Hell of expanding and bursting speculative bubbles, hoist on the ill-designed lance of QE. Bernanke is a rich man’s incompetent Frank N. Furter: confronting a wet and shivering couple, he promises to remove the cause—but not the symptom:

So, come up to the lab,/ and see what’s on the slab!/ I see you shiver with antici… …pation./ But maybe the rain/ isn’t really to blame,/ so I’ll remove the cause…/ [chuckles] but not the symptom. (“Sweet Transvestite”)

Bernanke’s QE instead maintains the symptoms of the crisis, but does nothing about its cause. It generates rampant inequality, drives asset prices sky-high and causes frequent financial panics—while doing nothing to reduce the far too high a level of private debt that caused the crisis. Let’s put QE on the slab in my lab—my Minsky software—and track the logic of the monetary flows that QE can trigger.

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Crush depth is a great metaphor.

If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise (CHS)

Rather than fix what’s broken with the real economy, ZIRP/NIRP has added problems that only collapse can solve. The fundamental premise of global central bank policy is simple: whatever’s broken in the economy can be fixed with zero interest rates (ZIRP). And the linear extension of this premise is equally simple: if ZIRP hasn’t fixed what’s broken, then negative interest rates (NIRP) will. Unfortunately, this simplistic policy has run aground on the shoals of reality: if zero or negative interest rates actually fixed what’s broken in the economy, we’d all be living in Paradise after seven years of zero interest rates. The truth that cannot be spoken is that zero interest rates (ZIRP) and negative interest rates (NIRP) cannot fix what’s broken–rather, they have added monumental quantities of risk that have dragged the global financial system down to crush depth:

“Crush depth, officially called collapse depth, is the submerged depth at which a submarine’s hull will collapse due to pressure. This is normally calculated; however, it is not always accurate.” Indeed, the risk that has been generated by ZIRP and NIRP cannot be calculated with any accuracy. The sources of risk arising from NIRP are well-known:

1. Zero interest rates force investors and money managers to chase yield, i.e. seek a positive return on their capital. In a world dominated by central bank ZIRP/NIRP, this requires taking on higher risk, as higher yields are a direct consequence of higher risk. The problem is that the risk and the higher yield are asymmetric: to earn a 4% return, investors could be taking on risks an order of magnitude higher than the yield.

2. To generate fees in a ZIRP/NIRP world, lenders must loan vast sums to marginal borrowers–borrowers who would not qualify for loans in more prudent times. This forces lenders to either forego income from lending or take on enormous risks in lending to marginal borrowers.

3. The income once earned by conventional savers has been completely destroyed by ZIRP/NIRP, depriving the economy of a key income stream. Please consider this chart of the Fed Funds Rate and tell me precisely what’s been fixed by seven years of zero interest rates:

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There’s a few screws loose, alright.

China Turns on Taps and Loosens Screws in Bid to Support Growth (BBG)

China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending. The nation’s chief planning agency is making more money available to local governments to fund new infrastructure projects, according to people familiar with the matter. Meantime, China’s cabinet has discussed lowering the minimum ratio of provisions that banks must set aside for bad loans, a move that would free up additional cash for lending. Officials are upping their rhetoric too. Premier Li Keqiang said policy makers “still have a lot of tools in the box” to combat the slowdown in the world’s No. 2 economy, days after People’s Bank of China Governor Zhou Xiaochuan broke a long silence to talk up confidence in the nation’s currency, the yuan.

And to ram the message home, the biggest economic planning agencies on Tuesday promised to reduce financing costs as they rein in overcapacity. Throw in a record surge in lending in January and a picture emerges of an administration determined to put a floor under growth. “Policymakers are battling to prevent any further slowdown, which could escalate into a hard landing,” said Rajiv Biswas at IHS Global Insight in Singapore. “These additional measures will act to boost liquidity in the banking sector and increase local government spending on infrastructure development.”

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They’ll just start their own ratings agency.

China Debt Binge Spurs S&P Warning (BBG)

China’s unprecedented jump in new loans at the start of 2016 is fueling concern that excessive credit growth is piling up risks in the nation’s financial system. The increase in China’s debt relative to gross domestic product could pressure the country’s credit rating, Standard & Poor’s said on Tuesday, less than a week after the cost to insure Chinese bonds against default rose to a four-year high. Credit growth is storing up “big problems” in the economy that will weigh on the yuan and stocks, said George Magnus, an economic adviser to UBS. Mizuho Bank. warned that the threat of bad loans is rising and Marketfield Asset Management said China’s central bank may be losing its regulatory grip on credit growth.

While part of January’s surge in new debt to a record 3.42 trillion yuan ($525 billion) was caused by seasonal factors and a switch into local-currency liabilities from overseas borrowings, the risk is that bad debts will jump as companies find fewer profitable projects amid the slowest economic expansion in a quarter century. Soured loans at Chinese commercial banks rose to the highest level since June 2006 at the end of last year and the country’s biggest lenders trade at a 33% discount to net assets in the stock market — a sign that investors see further writedowns to banks’ loan books. The jump in credit growth “may help to sustain the pace of economic momentum in the short term, but it’s storing up big problems,” said Magnus, who correctly predicted in July that the rout in Chinese stocks would deepen.

“I’m not anticipating an imminent meltdown, but we’ve got a lot of warnings going on that should make us cautious about how we see the situation developing for the course of this year.” China’s ratio of corporate and household borrowing versus gross domestic product rose to 209% at the end of 2015, the highest level since Bloomberg Intelligence began compiling the data in 2003. Nonperforming loans increased 7% in the fourth quarter to 1.27 trillion yuan, data from the China Banking Regulatory Commission showed Monday.
“While corporate financial risks are not as high as what the leverage level suggests – as companies tend to hold a lot of liquid assets – the increase in the debt-to-GDP ratio still poses a systemic risk, which could potentially add pressure to ratings,” Kim Eng Tan at S&P said in an interview in Shanghai.

[..] “Although the government and other senior officials do talk about deleveraging and slowing credit creation, a lot of it is talk,” Magnus said. “We don’t see very much in the way of concrete actions to try to limit the amount of new credit going into the economy.” Marketfield Asset’s Michael Shaoul said the PBOC’s ability to prevent excessive credit growth may be waning as the country loosens regulatory control over the financial system. “How much of this is a result of deliberate policy rather than extreme moves made by the private sector is open to argument,” Shaoul said. “We increasingly suspect that the PBOC has lost substantial control of the events we are witnessing, with both the partial deregulation of financial markets and multiple conflicting policy aims making regulatory control increasingly difficult without massive unintended consequences.”

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They never had that control, but never understood that either.

China Loses Control of the Economic Story Line (WSJ)

Sentiment on China among global investors has always veered between exaggerated optimism and excessive pessimism. Even so, the latest bout of gloom is unusually severe. The economic slowdown doesn’t properly explain it. Although the official 6.9% growth last year was the slowest in a quarter century—and many economists believe the real number is more like 6%–China is still expanding faster than almost any other major economy. Banks are flush with savings. The government retains plenty of financial firepower. Unemployment is low. The reason for the startling mood swing this time goes well beyond the performance of the economy. It’s fundamentally about leadership—how the world’s second-largest economy is run.

When President Xi Jinping rose to power in 2012, investors knew the economy was ailing—“unstable, unbalanced, uncoordinated and unsustainable,” as former Premier Wen Jiabao famously described it in 2007. His blunt diagnosis of China’s broken growth model was also a kind of confessional; Mr. Wen, together with President Hu Jintao, recognized the problems early but made them much worse with wasteful government investment in heavy industry and infrastructure. Mr. Xi pledged to do vastly better. Styling himself as a reformer on a par with Deng Xiaoping, he unveiled a 60-point plan to roll back the state and cede a “decisive role” to markets as China set out to switch from investment to consumption-led growth. Yet entering year four—out of an expected 10—of Mr. Xi’s administration, the reforms are largely on hold.

Capital flooding out of China is one sign that some investors are giving up the wait. Today’s disillusion is focused largely on China’s future prospects, not its current condition. Absent the reassurance of reform progress, the expectation is that growth will stall. Only the timing is in doubt. Why the delay? Some say Mr. Xi has been too busy consolidating his power, or that he’s been consumed by his anticorruption campaign. It takes time, they point out, to build consensus on controversial overhauls to rejuvenate state-owned enterprises, open the financial system to greater competition and liberalize land and labor markets.But evidence is building that reforms have stalled for a more basic reason: Mr. Xi, despite the early hype, sees only a limited role for markets.

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“They’re so overexposed in Venezuela.”

China’s Big Bet On Latin America Is Going Bust (CNN)

China is pumping billions into Latin America, but many of its investments are tanking. Last year alone, China offered $65 billion to Latin America, it biggest bet yet. Many see the move as a power play to counter the U.S. influence in the region. Perhaps the best example of China’s growing ambitions – and problems – in the region is its plan to construct a railroad stretching 3,300 miles from Brazil’s Atlantic coast to Peru’s Pacific Coast. It’s a massive area that’s equivalent to the distance between Miami and Seattle. The Chinese government is used to implementing its vision quickly at home. Latin America moves much slower. The railroad project is fraught with challenges, such as dealing with indigenous groups and environmental concerns, not to mention the sheer scale of laying that much track.

China has tried – and failed – with this game plan before. China had “quite advanced” plans in 2011 for a railway connecting connecting Colombia’s Pacific and Atlantic coasts, according to an interview Colombia’s President Juan Manuel Santos gave the FT that year. Five years later, no such railway exists. It isn’t even under construction. This smaller railroad would be one of China’s most explicit power plays against the United States, creating direct competition with the Panama Canal. Colombia should have been easy to work with. It is one of the best-performing economies in Latin America, and it’s politically stable. “Culturally, we are very different and sometimes it stops the projects,” says Julian Salamanca, executive director of the Chamber of Colombian-Chinese Investment and Commerce.

From Mexico to Brazil, Chinese government and private projects have suffered extensive delays, been suspended or never even gotten off the ground. Corruption, cultural differences and bureaucracy in Latin America have halted momentum for many of them. China “realized that some of these projects…ended up in very unstable political destinations,” IMF economist Alejandro Werner said recently at the Council of Americas in New York. Werner has a point: China has dumped much of its cash into Brazil and Venezuela. Both are in deep recessions, and both have growing political instability. There are factions that want to impeach the current presidents, Nicolas Maduro in Venezuela and Dilma Rousseff in Brazil.

China targeted Venezuela because it has the world’s largest oil reserves. China sees a long-term energy partner. Since 2007, China has loaned $65 billion to Venezuela alone, more than any other country in the region, according to the Inter-American Dialogue, a Washington non-profit. That cash isn’t doing much. Its economy is “imploding,” says Werner. Falling oil prices have crushed Venezuela’s oil-dependent economy. Now China is trying to make sure its oil bet in Venezuela doesn’t go belly up. “They’re now giving loans to protect their previous loans,” says Boston University professor Kevin Gallagher, an expert on China-Latin America. “They’re so overexposed in Venezuela.”

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The HETA blow-up will happen at some point.

Pimco’s $12 Billion Standoff Over Austria Bad Bank (BBG)

As the health of banks roils markets anew, the last financial crisis is still playing out in Austria, with Pacific Investment Management Co. on the hook. Pimco has teamed up with hedge funds and German banks to reject an €11 billion ($12 billion) offer of 75 cents on the euro for their holdings in what remains of Hypo Alpe-Adria-Bank International AG. A multiyear Argentina-style standoff looms a month before the government-set deadline. “We’re now in a period of psychological warfare,” Austrian central bank Governor Ewald Nowotny told reporters in Brussels last week. “In a purely economic view, everybody would be well advised to take the offer. I think it’s a fair offer, and it’s an adequate offer.”

The confrontation stems from Austria’s most painful bank failure of the 2008 financial crisis: Hypo Alpe was taken over by authorities after an ill-fated expansion in the former Yugoslavia. Once it sold the assets it could, the rest was turned into Heta Asset Resolution AG to be wound down. Austrian regulator FMA moved in March 2015 after an asset review revealed a larger hole in Heta’s finances. It then halted payments on the bonds. The settlement offer came from the southern province of Carinthia, which guaranteed Hypo Alpe’s debt when it was majority owner of the bank. It needs creditors representing two-thirds of the bonds to accept its offer by the March 11 deadline so that it can impose it on the rest. Currently just under half object; the group mounting the opposition says it accounts for about €5 billion, or 45%, of Heta’s debt.

“I was surprised a broad bondholder group rejected the offer so quickly since it didn’t seem too bad,” said Otto Dichtl at Stifel Financial Corp. “Some might have committed at least for the time being to stick together, but it doesn’t necessarily always make sense and the interests differ.” Pimco, which is owned by German insurer Allianz AG, is the only major buyer of the debt in the secondary market that has disclosed ownership, according to data compiled by Bloomberg. It took a bet on the distressed securities in 2014, based on regulatory filings.

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“Canadians know that this is a bubble, that these prices are unsustainable. They know that this bubble, like all bubbles, will eventually get pricked.”

Things Are Coming Unglued for Canadian Investors (WS)

The oil price plunge is mauling Canada’s oil producers, particularly those active in the high-cost tar-sands. It’s tripping up the oil-patch economy, and contagion is spreading beyond the oil patch. The Canadian dollar has lost one third of its value against the US dollar since 2012. One of the most magnificent housing bubbles the world has ever seen appears to be peaking and is already deflating in some cities. And the Toronto stock index is down 25% since August 2014. No wonder Canadian investors are frazzled. And the semi-annual Manulife’s Investor Sentiment Index put a number on it: Canadians’ investment sentiment fell another 3 points from its beaten-down levels six months ago to 16, the lowest level since March 2009.

The index is a composite of investor perception about six asset classes – stocks, fixed income, cash, balanced funds, investment property, and investors’ own home. It has ranged from an all-time high of 34 in 2006, during the halcyon days just before the Financial Crisis when everything was still possible, to its all-time low of 5 at the end of 2008, at the depth of the Financial Crisis. By March 2009, it was at 11. Since then, it has hovered in the mid to high 20s. The survey, conducted in December, doesn’t yet include the impact of the sharp decline in oil prices to new cycle lows and the decline in stock prices since the holidays. At this point, the index hasn’t yet reached the level of desperation during the depths of the Financial Crisis, but it’s getting closer. The report:

Along with eroding investor sentiment is the feeling among Canadians that they are in a worse financial position than they were two years ago (26%). Canadians are increasingly viewing housing as a less attractive investment having dropped three points in the last year. The two largest drops were in British Columbia (13 point decrease since November 2014) and Ontario (decreased six points in the same time period).

Those two provinces are the epicenters of the Canadian housing bubble. According to the Teranet National Bank House Price Index, since the peak of the prior insane housing bubble in 2008, home prices in Vancouver have soared another 40% and in Toronto another 54%. Canadians know that this is a bubble, that these prices are unsustainable. They know that this bubble, like all bubbles, will eventually get pricked. It’s just a questions of when. In some cities, home prices are already declining. And investors, according to the report, are no longer blind to it.

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What can one do but laugh out loud?

Calgary Housing Market Collapses As “Three-Alarm Blaze” Burns In Vancouver (ZH)

New data out on Tuesday shows average property values on resold homes in the Greater Vancouver area rising by 30.9% in January while average prices in the Greater Toronto Area and in the abovementioned Waterloo rose 14.2% and 9% for the month, respectively. But oh what a difference a province makes. While the Canadian housing bubble is alive and well in Ontario and British Columbia, in the heart of Canada’s dying oil patch the picture isn’t pretty. We’ve documented the glut of vacant office space in downtown Calgary on a number of occasions. Calgary is of course in Alberta, where collapsing crude has driven WCS down to just CAD1 above marginal operating costs. That’s led employers to cut jobs. In fact, last year was the worst year for provincial job losses since 1982.

This has had a profound effect on Calgary and on Tuesday we learn that it isn’t just office space that’s sitting unoccupied. According to data from Altus Group sales of condos in the city fell a whopping 38% from 3,000 units to 4,805 units in 2015, marking the largest y/y drop since 2008. “The drop-off doesn’t bode well for 2016,” Bloomberg notes. “Calgary, the biggest city in the oil-producing province of Alberta, ended 2015 with one of the highest inventories of unsold condos, at 3,356 suites in the fourth quarter, according to Altus.” If you want to understand all of the above you need only look at the following chart which contrasts home prices in Calgary with those in Vancouver and Toronto:

Clearly, one of those things isn’t like the others. “While we continue to believe that things just can’t any hotter, markets in B.C. and Ontario continue to prove us wrong,” TD economist Diana Petramala said. “[For Toronto and Vancouver], every month of double-digit home price growth raises the risk of a deeper home price correction down the road.” “Hot doesn’t quite describe Vancouver’s three-alarm fire of a housing market,” Bank of Montreal chief economist Doug Porter remarked. So while you can’t give condos and office space away in Calgary, you for all intents and purposes have to be a millionaire to afford to live in British Columbia and especially in Vancouver which, judging by the parabolic chart shown above, is one of the most desirable locales on the face of the planet. We close by noting that the Canadian real estate “bargain” we profiled three weeks ago has indeed sold – for $102,000 more than the original asking price…

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“Donald the T-bomber.”

What Are We Smelling? (Dmitry Orlov)

On the Democratic side, we have Hillary the Giant Flying Lizard, but she seems rather impaired by just about everything she has ever done, some of which was so illegal that it will be hard to keep her from being indicted prior to the election. She seems only popular in the sense that, if she were stuffed and mounted and put on display, lots of folks would pay good money to take turns throwing things at her. And then we have Bernie, the pied piper for the “I can’t believe I can’t change things by voting” crowd. He seems to be doing a good job of it—as if that mattered.

On the Republican side we have Donald and the Seven Dwarfs. I previously wrote that I consider Donald to be a mannequin worthy of being installed as a figurehead at the to-be-rebranded Trump White House and Casino (it is beneath my dignity to mention any of the Dwarfs by name) but Donald has a problem: he sometime tells the truth. In the most recent debate with the Dwarfs he said that Bush lied in order to justify the invasion of Iraq. Candidates must lie—lie like, you know, like they are running for office. And the problem with telling the truth is that it becomes hard to stop. What bit of truthiness is he going to deliver next? That 9/11 was an inside job? That Osama bin Laden worked for the CIA, and that his death was faked? That the Boston Marathon bombing was staged, and the two Chechen lads were patsies?

That the US military is a complete waste of money and cannot win? That the financial and economic collapse of the US is now unavoidable? Even if he can stop himself from letting any more truthiness leak out, the trust has been broken: now that he’s dropped the T-bomb, how can he be relied upon to lie like he’s supposed to? And so we may be treated to quite a spectacle: the Flying Lizard, slouching toward a federal penitentiary, squaring off against the Donald the T-bomber. That would be fun to watch. Or maybe the Lizard will implode on impact with the voting booth and then we’ll have Bernie vs. the T-bomber. Being a batty old bugger, and not wanting to be outdone, he might drop some T-bombs of his own. That would be fun to watch too.

Not that any of this matters, of course, because the country’s trajectory is all set. And no matter who gets elected—Bernie or Donald—on their first day at the White House they will be shown a short video which will explain to them what exactly they need to do to avoid being assassinated. But I won’t be around to see any of that. I’ve seen enough. This summer I am sailing off: out Port Royal Sound, then across the Gulf Stream and over to the Abacos, then a series of pleasant day-sails down the Bahamas chain with breaks for fishing, snorkeling and partying with other sailors (I know, life is so hard!), then through the Windward Passage, a stop at Port Antonio in Jamaica, and then onward across the Caribbean to an undisclosed location. Please let me know if you want to crew. I guarantee that there will be absolutely no election coverage aboard the boat.

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Europe must side with Greece, not Turkey. Big mistake.

Not a game (Papachelas)

Greece’s relations with Turkey require deft handling and caution. Responsibility for this, of course, lies with Prime Minister Alexis Tsipras. One does not need to be a geostrategic analyst to see that things aren’t going at all well at the moment. Turkish President Recep Tayyip Erdogan is out of control. He is not willing to listen to anyone and has thrown himself into risky gambits. Meanwhile, the US under President Barack Obama has essentially been absent from the region and is seemingly reluctant to play its traditional role. Even if Washington did want to step in, I’m not sure that Erdogan would take a call from the US leader. The rest of Europe is treating Erdogan with a mix of panic and awe. Deep down European leaders know that they don’t have any really effective ways of putting pressure on Turkey. Erdogan knows this and is acting accordingly.

That said, our fellow Europeans are to some extent ignorant of Greek-Turkish disputes, and this carries some risk. They have no in-depth knowledge of the issues dividing the two Aegean neighbors and their response is along the following lines: “Well, if you have differences, why don’t you just sit around a table and talk them through?” Indeed, judging from the manner in which European leaders have dealt with the ongoing refugee and migrant crisis, I don’t even want to know how they would deal with a Greek-Turkish crisis. All that is happening as Greece is going through one of its worst periods. The volatile regional environment combined with Greece’s image of a powerless state inspires little optimism for the future. Some observers suggest that Greece has some strong cards up its sleeve, a reference to Israel and Russia.

Perhaps they know something that remains elusive to us mortals. However, if one thing is certain, it is that changing a country’s foreign policy dogma and interpreting international alliances or the balance of power must come with a good deal of caution and restraint. This not a game. Every time Greek leaders have made a mistake, the country has paid a heavy price. Every time they have done a good job of figuring out who our allies are and gauging outside developments, the country has moved forward. These are crucial times for the broader region. It is crucial that we play our cards right and avoid any damage to our national sovereignty. Fortunately Greece can depend on some people who have in-depth knowledge of the issues and who combine determination with wisdom.

I once asked Tsipras, while he was still in the opposition, who he would call first call in case of an incident in the Aegean. “Surely that would be Erdogan,” he said. I was not sure what to make of his answer back then and I would be interested to know what his response would be today.

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Jun 052015
 June 5, 2015  Posted by at 12:49 pm Finance Tagged with: , , , , , , , , ,  1 Response »

Dorothea Lange Farm boy at main drugstore, Medford, Oregon 1939

Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.

What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.

Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.

That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.

Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.

Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.

But the lack of scrutiny should still puzzle. How central bankers managed to pull off the move from admitting they had no idea what they were doing, to being seen as virtually unquestioned maestros, rulers of, if not the world, then surely the economy. Is that all that hard, though, if and when you can push trillions of dollars into an economy?

Isn’t that something your aunt Edna could do just as well? The main difference between your aunt and Janet Yellen may well be that Yellen knows who to hand all that money to: Wall Street. Aunt Edna might have some reservations about that. Other than that, how could we possibly tell them apart, other than from the language they use?

The entire thing is a charade based on perception and propaganda. Politicians, bankers, media, the lot of them have a vested interest in making you think things are improving, and will continue to do so. And they are the only ones who actually get through to you, other than a bunch of websites such as The Automatic Earth.

But for every single person who reads our point of view, there are at least 1000 who read or view or hear Maro Draghi or Janet Yellen’s. That in itself doesn’t make any of the two more true, but it does lend one more credibility.

Draghi this week warned of increasing volatility in the markets. He didn’t mention that he himself created this volatility with his latest QE scheme. Nor did anyone else.

And sure enough, bond markets all over the world started a sequence of violent moves. Many blame this on illiquidity. We would say, instead, that it’s a natural consequence of the infusion of fake zombie liquidity and ZIRP rates.

The longer you fake it, the more the perception will grow that you can’t keep up the illusion, that you’re going to be found out. Ultra low rates may be useful for a short period of time, but if they last for many years (fake stability) they will themselves create the instability Minsky talked about.

And since we’re very much still in uncharted territory even if no-one talks about it, that instability will take on forms that are uncharted too. And leave Draghi and Yellen caught like deer in the headlights with their pants down their ankles.

The best definition perhaps came from Jim Bianco, president of Bianco Research in Chicago, who told Bloomberg: “You want to shove rates down to zero, people are going to make big bets because they don’t think it can last; Every move becomes a massive short squeeze or an epic collapse – which is what we seem to be in the middle of right now.”

With long term ultra low rates, investors sense less volatility, which means they want to increase their holdings. As Tyler Durden put it: ‘investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This is how QE increases the likelihood of VaR shocks.’

QE+ZIRP have many perverse consequences. That is inevitable, because they are all fake from beginning to end. They create a huge increase in inequality, which hampers a recovery instead of aiding it. They are deflationary.

They distort asset values, blowing up prices for stocks and bonds and houses, while crushing the disposable incomes in the real economy that are the no. 1 dead certain indispensable element of a recovery.

You would think that the central bankers look at global bond markets today, see the swings and think ‘I better tone this down before it explodes in my face’. But don’t count on it.

They see themselves as masters of the universe, and besides, their paymasters are still making off like bandits. They will first have to be hit by the full brunt of Minsky’s insight, and then it’ll be too late.

May 172015
 May 17, 2015  Posted by at 10:35 am Finance Tagged with: , , , , , , , , , , , , ,  2 Responses »

Harris&Ewing Painless Dentist, Washington, DC 1918

Most of US Domestic Manufacturing Now in Technical Recession (Tonelson)
When Fools Rush In… (Reuters)
The Coming Crash of All Crashes – but in Debt (Martin Armstrong)
Are You Ready For The Coming Debt Revolution? (Bill Bonner)
Exit Strategy, Part One: ZIRP (Mehrling)
Why Most Gold Bugs Are Dead Wrong (Jim Rickards)
US Wakes Up To New -Silk- World Order (Pepe Escobar)
Tsipras Told Lagarde Greece Could Not Pay IMF (Kathimerini)
Alexis’s Choice (Macropolis)
German EconMin Says Greece Can Only Get More Aid If It Reforms (Reuters)
Top German Judge Says Greece Has Valid Claim Over WWII Forced Loan (Kathimerini)
The 2012 Greek-German Breakthrough That Didn’t Come (Kathimerini)
Banks Rule the World, but Who Rules the Banks? (Katasonov)
Pope Francis Extends Agenda Of Change To Vatican Diplomacy (Reuters)
China’s Amazon Railway Threatens ‘Uncontacted Tribes’ And Rainforest (Guardian)
‘Paddle in Seattle’ Arctic Oil Drilling Protest Targets Shell (BBC)
Early Human Societies Had Gender Equality (Guardian)

Not looking good.

Most of US Domestic Manufacturing Now in Technical Recession (Tonelson)

[..] the durable goods sub-sector – which represents more than half of domestic manufacturing – entered a technical recession (six months or more of cumulative real output decline), and several industries within durable goods extended their slumps. Here are the manufacturing highlights of the Federal Reserve’s new release on April industrial production:

• According to the Fed, constant dollar manufacturing production in April topped March’s level by just 0.01%. March’s real manufacturing output growth was revised up from 0.13% to 0.29%, but February’s initially revised 0.22% decrease was revised down to a 0.24% drop.

• As a result, after-inflation manufacturing output is 0.54% smaller than last November. Moreover, since January, this production has advanced by only 0.05%.

• The April Fed figures also show that durable goods manufacturing entered a technical recession (with real production down cumulatively by 0.32% since October), and such downturns grew longer in several critical durable goods sub-sectors. In particular,

• although inflation-adjusted automotive output rose by a healthy 1.30% on month in April, its production is still 4.22% lower than in July, 2014;

• thanks to a 0.85% monthly decrease in real output in April, machinery production is now down 0.52% since last August;

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“The thing about bubbles is that speculators often realize stocks are overpriced, but think they’ll get out before the crash.”

When Fools Rush In… (Reuters)

If you want to see the greater fool theory in action, look no further than at what’s happening in the stock market. Since the year 2000 the average small-cap stock in the Russell 2000 Index is up 151% while the average blue chip in the Dow Jones Industrial Average has gained only 57%. As a result, small-cap stocks now seem absurdly overpriced. According to investment research firm MSCI, the average small-cap stock’s price-earnings ratio is 29. The historical average P/E for stocks is about 15.

That’s why GMO, a well-respected mutual fund shop, recently put out one of its grimmest forecasts for small stocks — returns of -1% annualized for the next seven years or -3.2% after deducting inflation. High quality blue chips, by contrast, are expected to deliver 2.7% a year. Yet investors keep pouring money into small-caps. According to Morningstar, small-cap exchange traded funds have experienced $3.3 billion in inflows in 2015 while large-cap ones have seen $35.9 billion in outflows in 2015. The thing about bubbles is that speculators often realize stocks are overpriced, but think they’ll get out before the crash. Both fools and angels know that’s always easier said than done.

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“Banks will give secured car loans at around 4% while their cost of funds is really 0%. This is the widest spread since the Panic of 1899.”

The Coming Crash of All Crashes – but in Debt (Martin Armstrong)

Why are governments rushing to eliminate cash? During previous recoveries following the recessionary declines from the peaks in the Economic Confidence Model, the central banks were able to build up their credibility and ammunition so to speak by raising interest rates during the recovery. This time, ever since we began moving toward Transactional Banking with the repeal of Glass Steagall in 1999, banks have looked at profits rather than their role within the economic landscape. They shifted to structuring products and no longer was there any relationship with the client. This reduced capital formation for it has been followed by rising unemployment among the youth and/or their inability to find jobs within their fields of study.

The VELOCITY of money peaked with our ECM 1998.55 turning point from which we warned of the pending crash in Russia. The damage inflicted with the collapse of Russia and the implosion of Long-Term Capital Management in the end of 1998, has demonstrated that the VELOCITY of money has continued to decline. There has been no long-term recovery. This current mild recovery in the USA has been shallow at best and as the rest of the world declines still from the 2007.15 high with a target low in 2020, the Federal Reserve has been unable to raise interest rates sufficiently to demonstrate any recovery for the spreads at the banks between bid and ask for money is also at historical highs. Banks will give secured car loans at around 4% while their cost of funds is really 0%. This is the widest spread between bid and ask since the Panic of 1899.

We face a frightening collapse in the VELOCITY of money and all this talk of eliminating cash is in part due to the rising hoarding of cash by households both in the USA and Europe. This is a major problem for the central banks have also lost control to be able to stimulate anything.The loss of traditional stimulus ability by the central banks is now threatening the nationalization of banks be it directly, or indirectly. We face a cliff that government refuses to acknowledge and their solution will be to grab more power – never reform.

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“..grandparents prey on their grandchildren..”

Are You Ready For The Coming Debt Revolution? (Bill Bonner)

There is a specter haunting America… and all the developed nations of the world. It is the specter of a debt revolution. We left off yesterday talking about how the economy of the last 30 years – and especially that of the last six years – has favored the old over the young. “Rise up, ye young’uns,” we as much as said, “you have nothing to lose but your parents’ debts.” We showed how the value of U.S. corporate equity, mainly held by older people, had multiplied by 28 times since 1981. That was no honest bull market in stocks; it was a market sent soaring by an explosion of credit. But what did it do for young people whose only assets are their time and their youthful energy? Alas, the real economy has increased by only five times over the same period.

And when you look more closely at work and wages, the specter grows grimmer and more menacing. Average hourly wages have barely budged in the last 30 years. And average household incomes have fallen – from $57,000 to $52,000 – in the 21st century. But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded hand grenade: Why? Was this huge shift – of trillions of dollars of wealth from young working people to old asset holders – an accident? Was it just the maturing of a market economy in the electronic age? Was it because China took the capitalist road in 1979? Or because robots were competing with young people for jobs? Nope… on all three counts.

First, old people, not young people, control government. Ultra-wealthy campaign funders like Sheldon Adelman and the Koch brothers were all born in the 1930s. The big money comes from wealthy geezers like these, eager to buy candidates early in the season when they are still relatively cheap. Old companies fund most Washington lobbyists, too. And old people decide elections: There are a lot of them… and they vote. They know where the money is. Second, the government – doing the bidding of old people – restricts competition, subsidizes well-entrenched industries, raises the cost of employing young people, and directs its bailouts, cheap credit, and contracts to the graybeards. Third, the credit-based money system increases the profits and prices of existing capital. It encourages borrowing and spending.

This rewards the current generation while pushing the costs into the future. None of this was an accident. None of it would have happened without the active intervention of the old folks, using the government to get what they could never have gotten honestly. This is not the same as saying they were completely aware of what they were doing and what consequences their actions would have. We doubt the Nixon administration had any idea what would happen after it tore up the Bretton Woods monetary system in 1971. It was behind the eight ball, fearing foreign governments would call away America’s gold. Few in the White House realized they had made such a calamitous mistake when the president ended the convertibility of the dollar into gold.

And yet it created a world in which parents and grandparents could prey on their grandchildren… for the next 44 years. And it’s still not over. The new credit money – which could be borrowed into existence with no need for any savings or gold backing – was just what old people needed. We have estimated that it increased spending by about $33 trillion over and above what the old, gold-backed system would have allowed.

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Rates must rise first.

Exit Strategy, Part One: ZIRP (Mehrling)

The Fed has announced plans to raise rates in the imminent future, but the market does not believe it. Why not? Conventional wisdom appears to be that the Fed will chicken out, just as it did during the so-called Taper Tantrum. The Fed has signaled its appreciation that “liftoff” will involve increased volatility, and has stated its resolve this time simply to let that volatility happen, but markets don’t believe it. I want to suggest a slightly different source of disconnect, concerning expectations about what exactly will happen in the monetary plumbing when the Fed raises rates. Case in point is the recent Credit Suisse memo, apparently the first of a series, that forecasts “a much larger RRP facility–think north of a trillion” whereas the FOMC itself “expects that it will be appropriate to reduce the capacity of the [RRP] facility soon after it commences policy firming”.

That’s a pretty big disconnect. Pozsar and Sweeney (authors of the CS memo) think about the exit from ZIRP (Zero Interest Rate Policy) from the perspective of wholesale money demand, which they insist is “a structural feature of the system” and “the dominant source of funding in the US money market”. Before the crisis, that money demand was funding the shadow banking system, largely through the intermediation of repo dealer balance sheets. Now, it is funding the Fed’s balance sheet, largely through the intermediation of prime money funds and US bank balance sheets, both of which issue money-like liabilities and invest the proceeds in excess reserves held at the Fed. The big problem that now looms is that neither prime money funds nor banks want that business any more.

Capital regulations have made the bank side of the business unprofitable, and looming requirements that prime money funds mark to market (so-called floating NAV rather than constant NAV) will force them out of the business as well. Where is that money demand going to go? Pozsar and Sweeney say it will go directly to the Fed, causing the swelling of the Reverse Repo Facility pari passu with the shrinking of excess reserves. The mechanism will be a shift from prime money funds and bank deposits into government-only money funds, which will absorb the flow by accumulating RRP.

In other words, the Fed will not be able to shrink its balance sheet as part of this first stage of exit from quantitative easing. It will only be able to shift the way that balance sheet is funded–much less excess reserves held by banks, much more RRP held by government-only money funds. Nevertheless, because this shift will allow the Fed to regain control over the Fed Funds rate, it will accept that consequence. Exit from ZIRP comes before exit from QE.

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“China is not trying to destroy the old boys’ club — they are trying to join it.”

Why Most Gold Bugs Are Dead Wrong (Jim Rickards)

One of the most persistent story lines among gold bugs and market participants who foresee the collapse of the dollar goes something like this: China and many emerging markets including the other BRICS are looking for a way out of the global fiat currency system. That system is dominated today by the U.S. dollar. This dollar dominance allows the U.S. to force certain kinds of behavior in foreign policy and energy markets. Countries that don’t comply with U.S. wishes find themselves frozen out of global payment systems and find their banks unable to transact in dollars for needed imports or to get paid for their exports. Russia, Iran, and Syria have all been subjected to this treatment recently. China does not like this system any more than Russia or Iran but is unwilling to confront the U.S. head-on.

Instead, China is quietly accumulating massive amounts of gold and building alternative financial institutions such as the Asia Infrastructure Investment Bank, AIIB, and the BRICS-sponsored New Development Bank, NDB. When the time is right, China will suddenly announce its actual gold holdings to the world and simultaneously turn its back on the Bretton Woods institutions such as the IMF and World Bank. China will back its currency with its own gold and use the AIIB and NDB and other institutions to lead a new global financial order. Russia and others will be invited to join the Chinese in this new international monetary system. As a result, the dollar will collapse, the price of gold will skyrocket, and China will be the new global financial hegemon. The gold bugs will live happily ever after. The only problem with this story is that the most important parts of it are wrong. As usual, the truth is much more intriguing than the popular version.

Here’s what’s really going on. As with most myths, parts of the story are true. China is secretly acquiring thousands of tons of gold. China is creating new multilateral lending institutions. No doubt, China will announce an upward revision in its official gold holdings sometime in the next year or so. In fact, Bloomberg News reported on April 20, 2015, under the headline “The Mystery of China’s Gold Stash May Soon Be Solved,” that “China may be preparing to update its disclosed holdings…” But the reasons for the acquisition of gold and the updated disclosures, if they happen, are not the ones the blogosphere believes. China is not trying to destroy the old boys’ club — they are trying to join it.

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Precious little has been reported on Kerry’s trip to Sochi, even though it was a big turnaround.

US Wakes Up To New -Silk- World Order (Pepe Escobar)

The real Masters of the Universe in the U.S. are no weathermen, but arguably they’re starting to feel which way the wind is blowing. History may signal it all started with this week’s trip to Sochi, led by their paperboy, Secretary of State John Kerry, who met with Foreign Minister Lavrov and then with President Putin. Arguably, a visual reminder clicked the bells for the real Masters of the Universe; the PLA marching in Red Square on Victory Day side by side with the Russian military. Even under the Stalin-Mao alliance Chinese troops did not march in Red Square. As a screamer, that rivals the Russian S-500 missile systems. Adults in the Beltway may have done the math and concluded Moscow and Beijing may be on the verge of signing secret military protocols as in the Molotov-Ribbentrop pact.

The new game of musical chairs is surely bound to leave Eurasian-obsessed Dr. Zbig “Grand Chessboard” Brzezinski apoplectic. And suddenly, instead of relentless demonization and NATO spewing out “Russian aggression!” every ten seconds, we have Kerry saying that respecting Minsk-2 is the only way out in Ukraine, and that he would strongly caution vassal Poroshenko against his bragging on bombing Donetsk airport and environs back into Ukrainian “democracy”. The ever level-headed Lavrov, for his part, described the meeting with Kerry as “wonderful,” and Kremlin spokesman Dmitry Peskov described the new U.S.-Russia entente as “extremely positive”.

So now the self-described “Don’t Do Stupid Stuff” Obama administration, at least apparently, seems to finally understand that this “isolating Russia” business is over – and that Moscow simply won’t back down from two red lines; no Ukraine in NATO, and no chance of popular republics of Donetsk and Lugansk being smashed, by Kiev, NATO or anybody else. Thus what was really discussed – but not leaked – out of Sochi is how the Obama administration can get some sort of face-saving exit out of the Russian western borderland geopolitical mess it invited on itself in the first place.

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Who leaks what, and why?

Tsipras Told Lagarde Greece Could Not Pay IMF (Kathimerini)

The Greek government is hoping that it will be able to reach a technical agreement with lenders this week, paving the way for it to receive the funds that would allow it to continue meeting its obligations. The difficulty the coalition is facing in servicing its debt and paying pensions and salaries was highlighted by events a few days ago, when – as Kathimerini can reveal – Prime Minister Alexis Tsipras wrote to IMF Managing Director Christine Lagarde to inform her that Athens would not be able to pay the €750 million due to the Fund on May 12 unless the ECB allowed Greece to issue T-bills. Kathimerini understands that the letter, sent on Friday, May 8, was also delivered to European Commission President Jean-Claude Juncker and ECB President Mario Draghi.

Sources also said that Tsipras called US Treasury Secretary Jack Lew to inform him of the situation. It was only over the weekend that a decision to pay the IMF was taken after it emerged that Greece could use some €650 million denominated in Special Drawing Rights issued by the IMF and held in a reserve account to meet the debt repayment. The government provided another €90 millions from other sources to make the payment on May 12. An internal IMF memo leaked by Channel 4 in the UK indicated that Fund officials see Greece’s negotiations with its lenders as being finely balanced. They note that some progress has been made but that the “process is still problematic” as Greek negotiators seem to have “limited room” for maneuver and staff at the institutions do not have access to ministers in Athens.

The note sees progress in the areas of value-added tax, tax administration and an insolvency framework but says that there have been no advances at all in other areas, including on setting new fiscal targets. The IMF officials also express concern that the government is reversing some of the reforms implemented in previous years, especially in terms of the labor market. The memo also raises again the issue of the sustainability of Greece’s debt, saying that there is an “inverse relationship” between the reforms being asked of Greece and the sustainability of its debt. The note, however, says that the Fund is not “pushing European partners to consider a debt relief.”

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He had always already chosen his path.

Alexis’s Choice (Macropolis)

Alexis Tsipras seems to have chosen his path. Whether he will manage to reach the end of it is another matter, but the prime minister’s decision to shake up Greece’s negotiating team and to issue a common statement with European Commission President Jean-Claude Juncker last week made it clear that he prefers the option of agreeing with lenders rather than being left in limbo, or worse. Securing a deal will be some feat. The suggestion last week that the red lines on pensions and labour market reform may be crossed would mean Tsipras entering treacherous territory. It is worth remembering that less than six months ago, his predecessor Antonis Samaras was unwilling – or not able – to pass pension and labour reforms through Parliament, triggering the early presidential election and national vote.

If Tsipras is somehow able to agree to a package that includes policies in these two areas, but is also able to pass it through Parliament and keep his government intact, he will have perhaps completed the most impressive balancing act in modern Greek political history. Whether he is able to do it will depend on the content of the agreement. If most of the measures agreed are seen as restoring fairness in the way that the burden of Greece’s fiscal and structural adjustment is shared, he will have some grounds to argue with SYRIZA MPs and members that the compromise is worth making and the anxiety of the last few months has not been in vain.

However, while the party may accept some of the measures – even the creation of a single VAT rate of around 18% for almost all goods and services – it is difficult to imagine SYRIZA’s most radical personalities sitting back and accepting changes that will affect the majority of pensioners or working Greeks. There is a world of difference between slashing high-end supplementary pensions and having to implement a zero deficit rule that will lead to all of these auxiliary payments being cut or abolished – even though the vast majority come to less than €200 per month. Once Tsipras and his party go behind closed doors to mull the details of an agreement with the institutions (if one actually comes about), there can be no guarantee of what state they will be in when they come out.

There may be a mass walkout, or a few of the more principled or ideologically driven MPs could decide to turn their back on the prime minister. The first scenario would probably lead to the collapse of the government (Tsipras is unlikely to turn to PASOK or Potami to save his administration), while the second would allow the wounded prime minister to hobble on. The third option of holding a referendum to throw the decision back to the Greek electorate is a popular idea among many within SYRIZA but is unlikely to be a risk that Tsipras wants to take.

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Regurgitating parrots.

German EconMin Says Greece Can Only Get More Aid If It Reforms (Reuters)

German Economy Minister Sigmar Gabriel warned the Greek government that Greece could only get further funds if it carried out reforms in a German newspaper interview published on Sunday. Greece’s cash reserves are dwindling and negotiations between Prime Minister Alexis Tsipras’s new left-led government and its lenders over a cash-for-reforms deal have been fraught with delays for months. Asked if Greece could still be saved, Gabriel told Bild am Sonntag that this was up to Athens and said a referendum on the necessary reforms could perhaps speed up decisions. On Monday German Finance Minister Wolfgang Schaeuble suggested Greece might need a referendum to approve painful economic reforms on which its creditors are insisting, but Athens said it had no such plan for now.

Gabriel stressed that the government needed to take action in any case: “A third aid package for Athens is only possible if the reforms are implemented. We can’t simply send money there.” He warned about the consequences of Greece quitting the single currency bloc, saying: “A Greek exit would not only be highly dangerous economically but also politically.” Gabriel said if one country were to leave the euro zone, the rest of the world would look at Europe differently: “Nobody would have any confidence in Europe anymore if we break up in our first big crisis. We shouldn’t talk ourselves into a Grexit.”

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There are videos playing in Athens subway stations that deal with war reparations.

Top German Judge Says Greece Has Valid Claim Over WWII Forced Loan (Kathimerini)

A top German judge has said that Greece has a just claim in its demands for Berlin to repay a loan Athens was forced to issue its Nazi occupiers during World War II. In an interview with Der Spiegel magazine published on Saturday, Dieter Deiseroth, a judge at the Supreme Administrative Court, said that the Greek claim for compensation regarding the money given by the Bank of Greece (estimated at some 11 billion euros in today’s money) has a strong basis as “there’s a lot of evidence to suggest it was a loan.” Deiseroth also argued that private claims for compensation are also valid. “Greece has not waived its demands,” said the judge, who added that an absence of legal action from Athens so far does not constitute an abandoning of claims.

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Part 3 in a series on Merkel and Greece.

The 2012 Greek-German Breakthrough That Didn’t Come (Kathimerini)

Even after the formation of the pro-bailout government under Antonis Samaras following the June 2012 elections, eurozone hawks continued to press for a clean break from Greece. The same pressure was also being applied within the German government: The “infected limb” camp, led by Finance Minister Wolfgang Schaeuble, tried to convince Chancellor Angela Merkel that a Greek exit from the eurozone was not only manageable but also in Europe’s long-term interest. This was the time the so-called Plan Z (leaked to the Financial Times last year) was also put forward. The circle of officials who knew about this contingency plan for handling a Greek eurozone exit was tiny. Joerg Asmussen, Germany’s former state secretary at the Finance Ministry and a member of the ECB’s executive board since the start of 2012, was one of its main overseers.

Asmussen had briefed Merkel on the plan, but the Chancellery had played no role in designing it. In the opposing camp were those who feared a domino effect, arguing that a Greek exit would lead to the collapse of the eurozone. Asmussen and Merkel’s former adviser, Bundesbank chief Jens Weidmann, told the chancellor that they could not know which of the two camps was right. They questioned whether it was possible to shield Portugal from possible Grexit. Merkel became convinced that the risks of a rupture were unpredictably high. By the time she returned from her summer hiking holiday in northern Italy in mid-August, the chancellor had decided to put an end to all discussion of a Greek exit. However, she still needed a partner in Athens she could count on. A few days later she was due to meet with Samaras in Berlin, to ascertain whether he was someone she could do business with.

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A circle jerk that leaves the highest levels invisible.

Banks Rule the World, but Who Rules the Banks? (Katasonov)

These days, it is already a truism that the hegemony of the US is based on the Federal Reserve System’s (FRS) printing press. It is also more or less clear that the shareholders of the FRS are major international banks. These include not just US (Wall Street) banks, but also European banks (London City banks and several in continental Europe). During the 2007-2009 global financial crisis, the FRS quietly gave out more than $16 trillion worth of credit (virtually interest free) to various banks. The owners of the money gave out the credit to themselves, that is to the main shareholder banks of the Federal Reserve. Under strong pressure from US Congress, a partial audit of the FRS was carried out at the beginning of this decade and the results were published in the summer of 2011. The list of credit recipients is also a list of the FRS’ main shareholders.

They are as follows (the amount of credit received is shown in brackets in billions of dollars): Citigroup (2,500); Morgan Staley (2,004); Merrill Lynch (1,949); Bank of America (1,344); Barclays PLC (868); Bear Sterns (853); Goldman Sachs (814); Royal Bank of Scotland (541); JP Morgan (391); Deutsche Bank (354); Credit Swiss (262); UBS (287); Leman Brothers (183); Bank of Scotland (181); and BNP Paribas (175). It is interesting that a number of the recipients of FRS credit are not American, but foreign banks: British (Barclays PLC, Royal Bank of Scotland, Bank of Scotland); Swiss (Credit Swiss, UBS); the German Deutche Bank; and the French BNP Paribas. These banks received nearly $2.5 trillion from the Federal Reserve. We would not be mistaken in assuming that these are the Federal Reserve’s foreign shareholders.

While the makeup of the Federal Reserve’s main shareholders is more or less clear, however, the same cannot be said of the shareholders of those banks who essentially own the FRS’ printing press. Who exactly are the shareholders of the Federal Reserve’s shareholders? To begin with, let us take a good look at the leading US banks. Six banks currently represent the core of the US banking system. The ‘big six’ includes Bank of America, JP Morgan Chase, Morgan Stanley, Goldman Sachs, Wells Fargo, and Citigroup. They occupy the top spots in US bank ratings in terms of indices such as amount of capital, controlled assets, deposits attracted, capitalisation and profit. If we were to rank the banks in terms of assets, then JP Morgan Chase would be in first place ($2,075 billion at the end of 2014), while Wells Fargo is in the lead in terms of capitalisation ($261.7 billion in the autumn of 2014).

In terms of this index, incidentally, Wells Fargo came out on top not only in America, but in the world (although in terms of assets, the bank is only fourth in America and does not even figure in the world’s top twenty). There is some shareholder information on the official websites of these banks. The bulk of the big six US banks’ capital is in the hands of so-called institutional shareholders – various financial companies. These include banks, which means there is cross shareholding. At the beginning of 2015, the number of institutional shareholders of each bank were: Bank of America – 1,410; JP Morgan Chase – 1,795; Morgan Stanley – 826; Goldman Sachs – 1,018; Wells Fargo – 1,729; and Citigroup – 1,247. Each of these banks also has a fairly clear group of major investors (shareholders). These are investors (shareholders) with more than one per cent of capital each and there are usually between 10 and 20 such shareholders. It is striking that exactly the same companies and organisations appear in the group of major investors for every bank.

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Above all parties, and above all politics. A unique position.

Pope Francis Extends Agenda Of Change To Vatican Diplomacy (Reuters)

Pope Francis’ hard-hitting criticisms of globalization and inequality long ago set him out as a leader unafraid of mixing theology and politics. He is now flexing the Vatican’s diplomatic muscles as well. Last year, he helped to broker an historic accord between Cuba and the United States after half a century of hostility. This past week, his office announced the first formal accord between the Vatican and the State of Palestine — a treaty that gives legal weight to the Holy See’s longstanding recognition of de-facto Palestinian statehood despite clear Israeli annoyance. The pope ruffled even more feathers in Turkey last month by referring to the massacre of up to 1.5 million Armenians in the early 20th century as a “genocide”, something Ankara denies.

After the inward-looking pontificate of his scholarly predecessor, Pope Benedict, Francis has in some ways returned to the active Vatican diplomacy practiced by the globetrotting Pope John Paul II, widely credited for helping to end the Cold War. Much of his effort has concentrated on improving relations between different faiths and protecting the embattled Middle East Christians, a clear priority for the Catholic Church. However in an increasingly fractured geopolitical world, his diplomacy is less obviously aligned to one side in a global standoff between competing blocs than that of John Paul’s 27-year-long papacy.

This is reinforced by his status as the world’s first pope from Latin America, a region whose turbulent history, widespread poverty and love-hate relationship with the United States has given him an entirely different political grounding from any of his European predecessors. “Under this pope, the Vatican’s foreign policy looks South,” said Massimo Franco, a prominent Italian political commentator and author of several books on the Vatican. He said the pope has been careful to avoid taking sides on issues like Ukraine, where he has never defined Russia as an aggressor, but has always referred to the conflict between the government and Moscow-backed rebels as a civil war.

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China buys the world as its economy is self-destructing. How do you explain that to your grandchildren?

China’s Amazon Railway Threatens ‘Uncontacted Tribes’ And Rainforest (Guardian)

Chinese premier Li Keqiang is to push controversial plans for a railway through the Amazon rainforest during a visit to South America next week, despite concerns about the possible impact on the environment and on indigenous tribes. Currently just a line on a map, the proposed 5,300km route in Brazil and Peru would reduce the transport costs for oil, iron ore, soya beans and other commodities, but cut through some of the world’s most biodiverse forest. The six-year plan is the latest in a series of ambitious Chinese infrastructure projects in Latin America, which also include a canal through Nicaragua and a railway across Colombia. The trans-Amazonian railway has high-level backing.

Last year, President Xi Jinping signed a memorandum on the project with his counterparts in Brazil and Peru. Next week, during his four-nation tour of the region starting on Sunday, Li will, according to state-run Chinese media, suggest a feasibility study. Starting near Açu Port in Rio de Janeiro state, the proposed track would connect Brazil’s Atlantic coast with Peru’s Pacific coast, via the states of Goiás, Mato Grosso and Rondônia. The logistical challenges are considerable because the line will pass through dense forest, swamps and then either desert or mountains (there are two options for the Peruvian end of the route), as well as areas of conflict between tribes and drug traffickers.

Near the Bolivian border, it will come close to the “Devil’s Railway”, an ill-fated link built in 1912 between Porto Velho in Brazil and Guajará-Mirim in Bolivia. It cost 6,000 lives and was barely used after the collapse of the rubber industry. Financing is likely to come from the China Development Bank, with construction carried out by local firms and the China International Water and Electric Corporation. China’s involvement is partly explained by a desire to reduce freight costs, but it also hopes to create business for domestic steel and engineering firms that have been hit by the slowdown of the Chinese economy.

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Done deal. Unless prices go to $20.

‘Paddle in Seattle’ Arctic Oil Drilling Protest Targets Shell (BBC)

Hundreds of people in kayaks and small boats have staged a protest in the north-western US port city of Seattle against oil drilling in the Arctic by the Shell energy giant. Paddle in Seattle was held by activists who said the firm’s drilling would damage the environment. It comes after the first of Shell’s two massive oil rigs arrived at the port. The firm wants to move them in the coming months to explore for oil off Alaska’s northern coast. Earlier this week, Shell won conditional approval from the US Department of Interior for oil exploration in the Arctic. The Anglo-Dutch company still must obtain permits from the federal government and the state of Alaska to begin drilling. It says Arctic resources could be vital for supplying future energy needs.

A solar-powered barge – The People’s Platform – joined the protesters, who chanted slogans and also sang songs. “This weekend is another opportunity for the people to demand that their voices be heard,” Alli Harvey, Alaska representative for the Sierra Club’s Our Wild America campaign, was quoted as saying by the Associated Press news agency. “Science is as clear as day when it comes to drilling in the Arctic – the only safe place for these dirty fuels is in the ground.” The protesters later gathered in formation and unveiled a big sign which read “Climate justice now”. They mostly stayed outside the official 100-yard (91m) buffer zone around the Polar Pioneer, the Seattle Times newspaper reports. Police and coastguard monitored the flotilla, saying it was peaceful.

The demonstrators are now planning to hold a day of peaceful civil disobedience on Monday in an attempt to shut down Shell operations in the port, the newspaper adds. The port’s Terminal 5 has been at the centre of a stand-off between environmentalists and the city authorities after a decision earlier this year to allow Shell use the terminal as a home base for the company’s vessels and oil rigs. Shell stopped Arctic exploration more than two years ago after problems including an oil rig fire and safety failures. The company has spent about $6bn on exploration in the Arctic – a region estimated to have about 20% of the world’s undiscovered oil and gas.

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Agriculture killed off women’s equal status. And we’re still paying a dear price for that.

Early Human Societies Had Gender Equality (Guardian)

Our prehistoric forebears are often portrayed as spear-wielding savages, but the earliest human societies are likely to have been founded on enlightened egalitarian principles, according to scientists. A study has shown that in contemporary hunter-gatherer tribes, men and women tend to have equal influence on where their group lives and who they live with. The findings challenge the idea that sexual equality is a recent invention, suggesting that it has been the norm for humans for most of our evolutionary history. Mark Dyble, an anthropologist who led the study at University College London, said: “There is still this wider perception that hunter-gatherers are more macho or male-dominated. We’d argue it was only with the emergence of agriculture, when people could start to accumulate resources, that inequality emerged.”

Dyble says the latest findings suggest that equality between the sexes may have been a survival advantage and played an important role in shaping human society and evolution. “Sexual equality is one of a important suite of changes to social organisation, including things like pair-bonding, our big, social brains, and language, that distinguishes humans,” he said. “It’s an important one that hasn’t really been highlighted before.” The study, published in the journal Science, set out to investigate the apparent paradox that while people in hunter-gatherer societies show strong preferences for living with family members, in practice the groups they live in tend to comprise few closely related individuals.

The scientists collected genealogical data from two hunter-gatherer populations, one in the Congo and one in the Philippines, including kinship relations, movement between camps and residence patterns, through hundreds of interviews. In both cases, people tend to live in groups of around 20, moving roughly every 10 days and subsisting on hunted game, fish and gathered fruit, vegetables and honey. [..] The authors argue that sexual equality may have proved an evolutionary advantage for early human societies, as it would have fostered wider-ranging social networks and closer cooperation between unrelated individuals. “It gives you a far more expansive social network with a wider choice of mates, so inbreeding would be less of an issue,” said Dyble. “And you come into contact with more people and you can share innovations, which is something that humans do par excellence.”

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