Oct 302014
 
 October 30, 2014  Posted by at 12:14 pm Finance Tagged with: , , , , , , ,  Comments Off on Debt Rattle October 30 2014


John Collier Japanese restaurant, Monday after Pearl Harbor, San Francisco Dec 8 1941

Fed Unshaken by Global Market Turmoil Bets on Job Gains (Bloomberg)
QE: Giving Cash To The Public Would Have Been More Effective (Guardian)
Fed’s Lonesome Dove Dissents as Brighter Outlook Appeases Hawks (Bloomberg)
Number Of Billionaires More Than Doubles In 5 Years Since Financial Crisis (CNBC)
Global Financial System ‘Incendiary’ Risk To Stability: BoE (Guardian)
Zombie Foreclosures Rise In 16 States And 60 Metro Areas (MarketWatch)
Greek Bond Investors Face Rollercoaster Ride On Euro Dilemma (Bloomberg)
‘China’s Property Prices May Decline Up to 10% This Year’ (Bloomberg)
China Backs Growth in Housing Again as Slowdown Prompts U-Turn (Bloomberg)
As Inflation Deadline Looms, Bank Of Japan Runs Out Of Options (Reuters)
Japan Pension Fund To Double Domestic Stocks Holdings to 24% (Bloomberg)
A New Twist in the Argentine Debt Saga (BW)
Why Oil Prices Went Down So Far So Fast (Bloomberg)
Ukraine Gas Supplies In Doubt As Russia Seeks EU Payment Deal (Reuters)
Can Europe Keep the Lights On This Winter? (Bloomberg)
The Benefits Of Living In A Teeny House (Next Avenue)
In US Ebola Fight, No Two Quarantines Are Quite The Same (Reuters)
Ebola: Danger In Sierra Leone, Progress In Liberia (AP)

And so we boldly go.. To infinity and beyond.

Fed Unshaken by Global Market Turmoil Bets on Job Gains (Bloomberg)

Federal Reserve officials dismissed recent turmoil in global financial markets, and focused instead on “solid” employment gains that will keep them on a path toward an interest-rate increase next year. A majority of U.S. policy makers at their meeting yesterday also set aside concerns, both among their own members and in financial markets, about too-low inflation, voting to proceed with plans to end their third round of asset purchases. “The FOMC is making a pretty bold call here,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “The economy’s momentum is strong enough to push through the headwinds of slower world growth.”

While bond and commodities markets have signaled concern about a global slowdown since Fed officials last met Sept. 16-17, U.S. central bankers decided to go with the facts in hand, said Paul Mortimer-Lee, chief economist for North America at BNP Paribas in New York. “They have concentrated on what they are sure of: the labor side of the economy is improving,” Mortimer-Lee said. On inflation, the message was, “We are going to take our time and look.” The Federal Open Market Committee maintained its commitment to keep interest rates low for a “considerable time.” The committee cited “solid job gains and a lower unemployment rate” since its last gathering in September. It said “underutilization of labor resources is gradually diminishing,” modifying earlier language that referred to “significant underutilization.”

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But ….

QE: Giving Cash To The Public Would Have Been More Effective (Guardian)

It’s 2008. Your name is Ben Bernanke, the world’s most powerful central banker. The world’s financial system is going through its own version of the China Syndrome. Do you: a) do nothing and trust the self-correcting properties of capitalism; b) cut interest rates as far and as fast as you can in the hope that cheap money will avert catastrophe; or c) go for broke by trying something different? Bernanke, an expert on the 1930s, chose c). He embraced the idea of quantitative easing, which involves increasing the money supply in order to stimulate economic activity. The Bank of England quickly followed suit. Neither Bernanke nor Mervyn King wanted to be known as the central banker who failed to prevent a deep recession becoming a second Great Depression. The decision by Bernanke’s successor, Janet Yellen, to call time on QE is an appropriate juncture to ask some fundamental questions.

Has QE worked? Does it mean the end of economic stimulus? Who really gained from the policy? Were there any better alternatives? The answer to the first question is that QE has worked, up to a point. Sure, this has been a tepid recovery in the US and a non-existent recovery in Europe, but the outcome would almost certainly have been a lot worse had central banks not augmented ultra-low interest rates with their money creation programmes. The comparison between the US and Europe is telling: monetary policy has been far more proactive and expansionary in the US than it has been in the eurozone, which helps to explain the disparity in growth and unemployment rates. It is also the case, though, that the impact of QE has been blunted in the US and the UK by the combination of unconventional monetary policies with conservative fiscal policies. There has been a tug of war between stimulus and budgetary austerity.

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Don’t be fooled by the theater.

Fed’s Lonesome Dove Dissents as Brighter Outlook Appeases Hawks (Bloomberg)

To understand the direction that the Federal Reserve is taking in its new policy statement released today, look at who dissented – and who didn’t. Minneapolis Fed President Narayana Kocherlakota cast a dovish dissent, saying policy makers should have continued their asset purchases and done more to ensure inflation gets up to their 2% target. Last time it was hawkish Presidents Richard Fisher of Dallas and Philadelphia’s Charles Plosser, who voted against the September Federal Open Market Committee statement as being too downbeat about strength in the economy. “If you go by the dissents, we’re now leaning more to one side of the bird cage than the other,” said Beth Ann Bovino, chief U.S. economist at Standard & Poor’s. “We’re now seeing dissent from someone considered dovish.”

Today’s statement emphasized “solid job gains” as the FOMC ended its third round of asset purchases and kept mute about slowdowns in China and Europe. It maintained a commitment to keep interest rates low for a “considerable time.” Kocherlakota’s dissent, which echoed comments he’s made in recent speeches, cited falling inflation expectations. “The Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2% and should continue the asset purchase program at its current level,” he said, according to today’s FOMC statement.

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” … a levy of 1.5% on billionaire’s wealth over $1 billion would raise $74 billion, which would generate enough each year to get every child into school and deliver health care in the poorest countries.”

Number Of Billionaires More Than Doubles Since Financial Crisis (CNBC)

The super-rich club has become less exclusive, with the amount of billionaires doubling since the financial crisis, according to a report from global charity Oxfam. There were 1,645 billionaires globally as of March 2014, according to Forbes data cited in the Oxfam report, up from 793 in March 2009. Oxfam honed in on this figure to highlight the growing gap between the world’s rich and poor. Hundreds of millions of people live in abject poverty without healthcare or education, while the super-rich continue to amass levels of wealth they may never be able to spend. The report ‘Even it Up: Time to End Extreme Inequality’ noted that the world’s richest 85 people saw their wealth jump by a further $668 million per day collectively between 2013 and 2014, which equates to half a million dollars a minute. In January Oxfam issued a report highlighting that the world’s 85 richest people’s collective wealth is equal to that the poorest half of the world’s population.

“Far from being a driver of economic growth, extreme inequality is a barrier to prosperity for most people on the planet,” said Winnie Byanyima, international executive director of Oxfam. “Inequality hinders growth, corrupts politics, stifles opportunity and fuels instability while deepening discrimination, especially against women,” she added. The Oxfam report is the opening salvo of a fresh Oxfam campaign – Even it Up – which aims to push world leaders into helping ensure the poorest people get a fairer deal. “Action is needed to clamp down on tax dodging carried out by multinational corporations and the world’s richest individuals,” the authors of the report added. Oxfam suggests a levy of 1.5% on billionaire’s wealth over $1 billion would raise $74 billion, which would generate enough each year to get every child into school and deliver health care in the poorest countries.

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This from the Bank of England’s chief economist. Who is very much a part of the global financial system.

Global Financial System ‘Incendiary’ Risk To Stability: BoE (Guardian)

The global monetary system has become so deeply interconnected that it poses an “incendiary” threat to stability unless a radical new international approach is taken, the Bank of England’s chief economist has warned. Andy Haldane said the world is not currently equipped to deal with the “darkest consequences” of an international monetary system and said a new set of rules and tools at a multilateral level would be needed to lessen the risks it posed. “The international monetary and financial system has undergone a mini-revolution in the space of a generation as a result of financial globalisation. It has become a genuine system.

This has altered fundamentally the risk-return opportunity set facing international policymakers: larger-than-ever opportunities, but also greater-than-ever threats,” he said in a speech at Birmingham University. “Today, cross-border stocks of capital are almost certainly larger than at any time in human history. We have hit a new high-water mark. The same is probably true of cross-border flows of goods and services and is most certainly true of cross-border flows of information.” He suggested measures to improve resilience might include an enhanced role and increased resources for the International Monetary Fund, with responsibility for tracking the global flow of funds and as a quasi-international lender of last resort.

Haldane said that part of the problem was that global investors tended to behave in the same way. “There is greater co-movement among similar asset types across countries than among different asset types within countries.” He said new macro-prudential tools at an international rather than national level would also potentially help. “If credit cycles are global in nature, there may in future be a case for national macro-prudential policies leaning explicitly against these global factors. This would help curb the global credit cycle at source. It would take international macro-prudential policy co-ordination to the next level.”

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There were still some 600,000 homes in foreclosure in Q3 2014.

Zombie Foreclosures Rise In 16 States And 60 Metro Areas (MarketWatch)

Zombie foreclosures are on the decline, but they’re still scaring people in 60 metro areas and 16 states. There were 117,298 owner-vacated foreclosures nationwide in the third quarter of 2014, representing 18% of total properties in foreclosure, down from 141,406 in the second quarter of 2014 (17% of all foreclosures) and down 152,033 (23% of foreclosures) in the same period last year, according to data released Thursday by the real estate website RealtyTrac. “Zombie” foreclosures occur when the owner leaves the property, but the bank has yet to take possession of it. Contrary to this national trend, there were increases in owner-vacated foreclosure in the third quarter in 16 states, including New Jersey, where zombie foreclosures surged 75% year-over-year, North Carolina (up 65%), Oklahoma (up 37%), and New York (up 30%) and Alabama (up 29%).

The New York metro area had the most zombie foreclosures (13,366) in the third quarter, followed by Miami (9,869), Tampa (7,509), Chicago (7,326), Philadelphia (5,405) and Orlando (3,732). A short and efficient foreclosure prevents zombies, says Daren Blomquist, vice president at RealtyTrac. Some states passed laws to give homeowners more time to avoid foreclosure through face-to-face mediation and other means, which sometimes just delays the inevitable, he says. “The best antidote for a zombie foreclosure infestation is a pro-active land bank program like that in Cleveland and, more recently, Chicago designed to aggressively take possession of vacant foreclosures or demolish them.”

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That’s quite the quote: “Volatility is caused by the fear of snap elections and the possibility that these will be won by a party which is not normal.“ here’s rooting for Syriza.

Greek Bond Investors Face Rollercoaster Ride On Euro Dilemma (Bloomberg)

Greek bond investors face a rollercoaster ride for the next four months as the government tries to contain the risk of snap elections, Minister of Administrative Reform Kyriakos Mitsotakis said. Prime Minister Antonis Samaras has until February to pull together a supermajority in the national parliament to elect a new president or the anti-bailout opposition party Syriza will force a snap election. That would return Greek voters to their 2012 dilemma when the country’s membership of the single currency hung by a thread, Mitsotakis said in an interview. “The reality is that there will be a climate of uncertainty until February,” Mitsotakis, 46, said in his Athens office overlooking the Acropolis. “Volatility is caused by the fear of snap elections and the possibility that these will be won by a party which is not normal.”

A two-year rally in Greek government bonds has fizzled out over the past month, as investors wake up to the political risks still at large in Greece as Samaras struggles to hold onto office. The prime minister is trying to shake off the euro area and International Monetary Fund officials who have policed the budget cuts that have angered voters while retaining enough financial backup to keep investors onside. Asked whether investors should just dump their Greek bond holdings until the next president has been installed, Mitsotakis said: “Don’t ask me, I’m just doing my job. Ask Syriza.”

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This means millions of people will lose 10% on the bulk of their savings. Better place the army on alert right now.

‘China’s Property Prices May Decline Up to 10% This Year’ (Bloomberg)

China property prices may decline as much as 10% this year and the slump may extend into 2015, according to SouFun Holdings Ltd. “Chinese property prices are seeing an adjustment after the rapid increase in the past two years,” Vincent Mo, founder of China’s biggest real estate information website, said in a Bloomberg Television interview with Haslinda Amin in Singapore yesterday. “Prices should stabilize by the middle of next year.” China’s new-home prices fell in all but one city monitored by the government last month from August, the most since January 2011 when the way the date is compiled changed, as the easing of property curbs failed to stem a market downturn amid tight credit.

Home sales slumped 11% in the first nine months, prompting the central bank to ease mortgage restrictions on Sept. 30. All but five of the 46 cities that imposed limits on home ownership since 2010 have removed or relaxed such restrictions amid the property downturn that has dented local revenues from land sales. The People’s Bank of China’s new rules give homeowners who have paid off their mortgages and want a second property the same advantages as first-time buyers, including a 30% minimum down payment, compared with at least 60% previously.

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They can’t manipulate property prices the way they do growth numbers. Property is what people feel directly in their pockets.

China Backs Growth in Housing Again as Slowdown Prompts U-Turn (Bloomberg)

With China headed for its slowest full-year expansion in a generation, the government has listed housing as one of the six consumption areas to be encouraged after years of trying to cool the property industry. China will “stabilize” property-related consumption and make it easier for people to access mandatory housing savings, the State Council said in a statement late yesterday after Premier Li Keqiang presided at a regular meeting. The last time China’s State Council documents mentioned “stabilizing” housing consumption was in April 2009, when the government was rolling out a massive stimulus plan to shield the economy from a global slowdown. Gross domestic product expanded 7.3% in the third quarter from a year earlier, the weakest pace in more than five years.

“The announcement marks a U-turn in stance towards the property sector after years of attempts to cool it down,” Dariusz Kowalczyk, a Credit Agricole strategist in Hong Kong, wrote in a note today. It’s the first time in recent years that the central government officially declared direct support for the housing market, according to Credit Suisse Group. New-home prices fell in 69 out of 70 cities monitored by the government last month from August. Property prices may decline as much as 10% this year and the slump may extend into 2015, according to SouFun Holdings Ltd.

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Desperate illusions. Won’t be long now.

As Inflation Deadline Looms, Bank Of Japan Runs Out Of Options (Reuters)

There is almost no way the central bank can hit the two-year, 2% inflation target Kuroda set when he unleashed unprecedented monetary stimulus in April 2013. Economists think it is unlikely to even get close in the foreseeable future. That could undermine Kuroda’s so far unchallenged authority to implement radical policies and cast doubt on his money-printing drive to revive Japan’s economy, interviews with more than a dozen current and former BOJ officials and insiders show. “The board members gave Kuroda’s experiment a one-year moratorium,” said a former central bank board member who still has close contacts with incumbent policymakers. “They decided to wait-and-see for a year. But now it’s time of reckoning.”

A divided board could undermine the public confidence essential to Kuroda’s success in embedding expectations of inflation, and leave markets fretting about how authorities will deal with the central bank’s massively expanded balance sheet. Kuroda has been relentlessly optimistic even as the economy, hit by a sales tax hike in April, flirts with recession and falling oil prices threaten to pull inflation below 1%. But most of his policymaking board has always been quietly skeptical of his signature “quantitative and qualitative easing” (QQE), a policy that floods liquidity into the banking system to end 15 years of falling prices, and now the fissures are widening.

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Bitter tears and violent protests. The only possible outcome of this.

Japan Pension Fund To Double Domestic Stocks Holdings to 24% (Bloomberg)

Japan’s $1.2 trillion pension fund will double its allocation target for local stocks, according to analysts, who’ve ratcheted up expectations for equity buying while sticking with projections for a reduction in bonds. The Government Pension Investment Fund will increase its domestic equity allocation to 24% of assets from 12%, according to the median estimate of 12 fund managers, strategists and economists polled by Bloomberg over the past two weeks. That’s up from 20% in a similar survey in May. The Topix index soared 4% on Oct. 20 on a Nikkei newspaper report that the fund would set a 25% local-share target.

Speculation about the behemoth’s new strategy has held Japan’s markets in sway since a government-picked panel said almost a year ago that GPIF was too reliant on domestic bonds. The fund will slash its local debt allocation to 40% from 60%, unchanged from May, the median survey prediction shows. Credit Agricole and Barclays say anticipation for the shift is so high that equities are vulnerable to a sell-off on the announcement. “I think investors will sell Japanese stocks on the fact after buying on the rumor,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole. “Over the medium and longer term, the changes will buoy demand for shares and gradually support the market.”

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More vultures.

A New Twist in the Argentine Debt Saga (BW)

A new player has emerged in the Argentine debt drama. The question is why, and what does it mean? Last week, Kenneth Dart, the billionaire heir to a Styrofoam cup fortune, jolted the Argentine debt negotiations by asking a New York judge to force Argentina to pay his bonds in full, too. Like Elliott Management’s Paul Singer, who has led a group of holdout bond investors trying to compel the Argentine government to reach a settlement with them, Dart is known as a “vulture investor” who has made a career of buying defaulted debt and then suing to be repaid at full value. Dart, it turns out, owns more defaulted Argentine bonds through his fund EM Ltd. than Singer’s fund NML Capital does, with $595 million worth to NML’s $503 million. Until now, though, he has remained quietly behind the scenes, as Singer and four other investors publicly battled the Argentine government through the U.S. court system.

His sudden appearance shows that settling with Singer’s group of holdouts may not actually solve Argentina’s problems. Argentina went into default on July 30 after a $539 million bond payment was blocked by a federal judge who said that the country can’t pay any of its exchange bondholders, who participated in the country’s two debt restructurings, until a group of holdout hedge funds are paid on their bonds. In addition to exacerbating what is already a difficult economic climate in Argentina, it has put the country’s leaders in something of a pickle. Argentine President Cristina Fernandez de Kirchner has made her battle against the American “vulture” hedge funds a central theme of her politics. To reverse course now, and pay Singer and the others what they want, would likely come at a high political cost. The goal then, from Argentina’s perspective, is to reach a resolution with the holdouts at the lowest price possible, and that can only be accomplished by diluting their leverage.

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Anything but squeezing Russia. Not a terribly clever approach.

Why Oil Prices Went Down So Far So Fast (Bloomberg)

The reasons oil prices started sliding in June were hiding in plain sight: growth in U.S. production, sputtering demand from Europe and China, Mideast violence that threatened to disrupt supplies and never did. After three-and-a-half months of slow decline, the tipping point for a steeper drop came on Oct. 1, said Ray Carbone, president of broker Paramount Options Inc. That’s when Saudi Arabia cut prices for its biggest customers. The move signaled that the world’s largest exporter would rather defend its market share than prop up prices. “That, for me, was the giveaway,” Carbone said in an Oct. 28 phone interview. “Once it started going, it was relentless.” The 29% drop since June of the international price caught traders and forecasters by surprise.

After a steady buildup of supply and weakening demand, the outbreak of an OPEC price war is casting doubt on investments in new oil resources while helping the global economy, keeping inflation in check and giving motorists a break at the pump. Brent crude, the global benchmark, declined to $82.60 a barrel on Oct. 16, the lowest in almost four years, from $115.71 on June 19. In the U.S., West Texas Intermediate touched $79.44 on Oct. 27, the lowest since June 2012. U.S. regular unleaded gasoline is averaging close to a four-year low of $3.023 a gallon nationwide, according to AAA. The bear market exceeded the decline anticipated in exchange-traded futures, used by producers to hedge price swings. As recently as a month ago, Brent for delivery in November traded at $97.20 a barrel, 12% above the current price.

OPEC Secretary-General Abdalla el-Badri denied the existence of a price war. “Our countries are following the market,” he said yesterday at the Oil & Money conference in London. “People are selling according to the market price.” Prices stayed higher earlier this year as traders focused on the risk that armed conflicts in Libya, Iraq and Ukraine could interfere with oil production, according to Jeff Grossman, president of New York-based BRG Brokerage. The disruptions never materialized. “This one caught a few people off guard because they were still worried about some of these geopolitical things that were happening all over the world that never came to fruition,” said Grossman, a New York Mercantile Exchange floor trader. “We probably never should have been over $100.”

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Why does it take so long to get a bill paid?

Ukraine Gas Supplies In Doubt As Russia Seeks EU Payment Deal (Reuters)

Ukraine’s efforts to unblock deliveries of Russian gas as winter sets in were deadlocked on Thursday as Moscow’s negotiators were quoted demanding firmer commitments from the European Union to cover Kiev’s pre-payments for energy. EU-hosted talks were adjourned after running late into the night, Energy Minister Alexander Novak and the head of Russian gas firm Gazprom told Russian news agencies. They would resume later in the day if Ukraine and the EU had a firm financing deal in place, Gazprom head Alexei Miller said.

There has already been agreement on the price Kiev will pay for gas over the winter, the amount to be supplied and the repayment of some $3.1 billion in unpaid Ukrainian bills but Moscow, which cut off vital pipelines in June as the conflict with Ukraine and the West deepened, wants more legal assurances that Kiev can pay some $1.6 billion for new gas up front. Some critics of Russia question whether its motivation is financial or whether prolonging the wrangling with ex-Soviet Ukraine and its Western allies suits Moscow’s diplomatic agenda. Ukraine is in discussions with existing creditors the EU and the IMF and German Chancellor Angela Merkel, concerned about vital Russian gas supplies to the rest of Europe has spoken of bridging finance for Kiev. But the Russian negotiators said they wanted to see a signed agreement on EU financing for Ukraine.

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Europe is on the verge of an energy squeeze. Time for smart people to stand up. I haven’t seen them yet.

Can Europe Keep the Lights On This Winter? (Bloomberg)

Europe may struggle to keep the lights on as temperatures drop as the switch to greener sources of energy complicates the balance between supply and demand in the region. The inconvenience of brownouts, though, should have the welcome effect of forcing governments to address their attitudes toward both nuclear power and fracking for shale gas. About 7% of the world’s population lives in Europe, yet regional spending of 500 billion euros ($625 billion) on renewable energy investment between 2004 and 2013 accounts for half of total global spending on wind farms, solar installations and the like. Renewable sources now provide more than 14% of the Europe’s energy, up from 8.3% in 2004, according to a report published this week by consulting firm Cap Gemini. The bigger the contribution from renewables, though, the more difficult it is to manage power-transmission grids. And that shift to greener energy coincides with disruptions in a host of Europe’s more traditional power-generation methods.

Governments are committed to curbing carbon emissions from coal-burning plants, and there’s a post-Fukushima aversion to nuclear power. Utilities have reduced output from natural-gas fired plants in response to Europe’s economic slowdown, and the region’s aging thermal generators are being retired from service. Global politics is also a threat; 30% of Europe’s gas comes from Russia, and about half of that travels through Ukraine. The result, according to Cap Gemini, is a market in need of massive investment: This winter, security of supply is already threatened in certain European countries. The present situation of chaotic wholesale markets, with negative wholesale prices and increasing prices for retail customers, is likely to prevail in coming years.

By 2035, Europe will need to invest $2.2 trillion in electricity infrastructure alone. With the present uncertain situation and the difficult financial environment for utilities, these investments could be delayed and security of the electricity supply could be at risk in the long term also. Fracking remains almost taboo in Europe. France has banned it, with Environment Minister Segolene Royal calling it a “very dangerous technique” and the benefits of shale gas a “mirage.” Germany said in July it would ban fracking at depths of less than 3 kilometers (1.9 miles), which effectively outlaws the practice for most companies. A July joint report by Scientists for Global Responsibility and the Chartered Institute of Environmental Health said U.K. rules governing shale-gas exploration don’t do enough to safeguard public health.

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Always a sunny topic.

The Benefits Of Living In A Teeny House (Next Avenue)

What if you could live in a house that was mortgage-free and takes about 10 minutes to clean – a house that leaves you unburdened by possessions and the full-time job required to pay for them? The trade-off: Your new house is about the size of a biggish, albeit charming, storage shed. That’s the journey Dee Williams recounts in her new book, “The Big Tiny: A Built-It-Myself Memoir.” Williams got rid of her normal-size house, most of her possessions and her job as a hazardous waste inspector after suffering a heart attack 10 years ago. She built, and now lives with her dog in, an 84-square-foot house on a trailer parked in a friend’s backyard in Olympia, Wash.

Next Avenue spoke with Williams, 51, about discovering a larger life in a smaller house: Next Avenue: Your heart problems (heart attack and a congestive heart failure diagnosis) sent you into a sort of existential crisis. Williams: It wasn’t that I was unhappy in my life before my heart attack. I was clipping along building my career, hoping to meet Mr. Right and fall in love and do all of that stuff. I loved my house. I wasn’t struggling to make the mortgage. It was just that I didn’t have any freedom to be able to quit my job if I wanted to. After my heart attack, what became clear was that I wanted my time.

I wanted every minute of my day for whatever I wanted to do. And I wasn’t going to be able to get that with a $250,000 mortgage. Your solution was to build an 84-square-foot house on a trailer. This idea floated in front of me in the doctor’s office when I read an article about (tiny house builder and advocate) Jay Shafer. It seemed like a logical solution for housing for me. I wasn’t sure how long my health would last. I wasn’t sure what that would mean for me as a single person. Would I move in with my friends? Would my brother come back from Iowa and take care of me? Where would I would be most comfortable if I got sick? The other part was when I saw a little pointy-roofed house — it was so cute. I was enamored.

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If you didn’t know any better, you’d presume ebola was an American issue.

In US Ebola Fight, No Two Quarantines Are Quite The Same (Reuters)

In the U.S. battle against Ebola, quarantine rules depend on your zip zode. For some it may feel like imprisonment or house arrest. For others it may be more like a staycation, albeit one with a scary and stressful edge. If they are lucky, the quarantined may get assigned a case worker who can play the role of a personal concierge by buying groceries and running errands. Some authorities are allowing visitors, or even giving those in quarantine permission to take trips outside to walk the dog or take a jog. A month after the first confirmed case of Ebola in the United States, state and local health authorities across the country have imposed a hodgepodge of often conflicting rules.

Fears about a possible U.S. outbreak were reignited after American doctor Craig Spencer was hospitalized with Ebola in New York last Thursday after helping treat patients in West Africa, the epicenter of the worst outbreak on record. Some states, such as New York and New Jersey, have gone as far as quarantining all healthy people returning from working with Ebola patients in West Africa. Others, such as Virginia and Maryland, said they will monitor returning healthcare workers and only quarantine those who had unprotected contact with patients. In Minnesota, people being monitored by the state’s health department are banned from going on trips on public transit that last longer than three hours – the aim being to reduce exposure to others if someone does start to develop symptoms during a journey. But people with known exposure to Ebola patients will be restricted to their homes without any physical contact allowed.

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But in reality, it’s a real problem only in West Africa.

Ebola: Danger In Sierra Leone, Progress In Liberia (AP)

Liberia is making some progress in containing the Ebola outbreak while Sierra Leone is “in a crisis situation which is going to get worse,” the top anti-Ebola officials in the two countries said. The people of both countries must redouble efforts to stop the disease, which has infected more than 13,000 people and killed nearly 5,000, the officials said. Their assessments underscore that Ebola remains a constant threat until the outbreak is wiped out. It can appear to be on the wane, only to re-emerge in the same place or balloon elsewhere if people don’t avoid touching Ebola patients or the bodies of those who succumb to the disease. “We need to go ahead to stop the transmission in order to arrest the situation,” Palo Conteh said late Wednesday in the Sierra Leone capital, in his first press conference since the president this month appointed him CEO of the National Ebola Response Center. Conteh was previously the defense minister.

“Our proud country has faced so many challenges, but none more serious than today,” he said. “Today we have a new and vicious enemy, an enemy that does not wear uniform, that … attacks anyone that comes into contact with (it) and if unchecked will ravage our beautiful land and its fine people.” Although the outbreak is now hitting areas in and around Sierra Leone’s capital, posing a huge threat, Conteh noted that it is on the wane in the former Ebola hotpots of Kenema and Kailahun, across the nation in the east. “If people in other areas of the country copy the example of eastern Kailahun and Kenema Districts, then the spread of the disease will subside like in Kailahun and Kenema. As I speak, people (near the capital) are still touching people suspected with the Ebola disease, people are still burying corpses at night of those who have died of the disease,” he said.

With international assistance growing, Conteh said up to 700 beds would be set up in treatment centers and that the United Nations has four helicopters in the country. A British hospital ship is expected to dock in Freetown on Thursday. In neighboring Liberia, the rate of Ebola infections appears to be declining, perhaps by as much by 25% week over week, the World Health Organization said Wednesday.

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Oct 242014
 
 October 24, 2014  Posted by at 12:52 pm Finance Tagged with: , , , , , , , , , ,  4 Responses »


Jack Delano Family of Dennis Decosta, Portuguese Farm Security Administration client Dec 1940

The Zombie System: How Capitalism Has Gone Off the Rails (Spiegel)
Fed’s $4 Trillion Holdings Keep Boosting Growth Beyond End of QE (Bloomberg)
EU Tells Britain To Pay Extra €2.1 Billion Because It Does Well (FT)
EU Agrees To Budget Talks After £1.7 Billion Cash Demand On UK (BBC)
Renzi Vs Barroso Over EU’s Budget Letter (FT)
EU Agrees Target To Cut Greenhouse Gas Emissions by 40% in 2030 (FT)
German Lawmakers Rip ECB Over Corporate Bonds Report (Reuters)
ECB Tries for Third Time Lucky in European Stress Tests (Bloomberg)
World Faces $650 Billion Housing Problem (CNBC)
China’s Economic Growth May Slow Further, Data Show (MarketWatch)
China Local Debt Fix Hangs On Beijing’s Wishful Thinking (Reuters)
China Home-Price Drop Spreads as Easing Fails to Halt Slide (Bloomberg)
China Scores Cheap Oil 14,000 Miles Away as Glut Deepens (Bloomberg)
Saudi Arabia’s Risky Oil-Price Play (BW)
Eastern Europe Shivers Thinking About Winter Without Gas (Bloomberg)
Germany Inc. Scrutinized for Using Labor Like Paper Clips (Bloomberg)
Alabama Man Gets $1,000 In Police Settlement, His Lawyers Get $459,000 (Reuters)
Doctor With Ebola In Manhattan Hospital After Return From Guinea (Reuters)
Mali Becomes Sixth African Country To Report Ebola Case (Bloomberg)

Great, long, 4-part series from German Der Spiegel magazine.

The Zombie System: How Capitalism Has Gone Off the Rails (Spiegel)

Six years after the Lehman disaster, the industrialized world is suffering from Japan Syndrome. Growth is minimal, another crash may be brewing and the gulf between rich and poor continues to widen. Can the global economy reinvent itself?

[..] Politicians and business leaders everywhere are now calling for new growth initiatives, but the governments’ arsenals are empty. The billions spent on economic stimulus packages following the financial crisis have created mountains of debt in most industrialized countries and they now lack funds for new spending programs. Central banks are also running out of ammunition. They have pushed interest rates close to zero and have spent hundreds of billions to buy government bonds. Yet the vast amounts of money they are pumping into the financial sector isn’t making its way into the economy. Be it in Japan, Europe or the United States, companies are hardly investing in new machinery or factories anymore. Instead, prices are exploding on the global stock, real estate and bond markets, a dangerous boom driven by cheap money, not by sustainable growth. Experts with the Bank for International Settlements have already identified “worrisome signs” of an impending crash in many areas.

In addition to creating new risks, the West’s crisis policy is also exacerbating conflicts in the industrialized nations themselves. While workers’ wages are stagnating and traditional savings accounts are yielding almost nothing, the wealthier classes — those that derive most of their income by allowing their money to work for them — are profiting handsomely. According to the latest Global Wealth Report by the Boston Consulting Group, worldwide private wealth grew by about 15% last year, almost twice as fast as in the 12 months previous. The data expose a dangerous malfunction in capitalism’s engine room. Banks, mutual funds and investment firms used to ensure that citizens’ savings were transformed into technical advances, growth and new jobs. Today they organize the redistribution of social wealth from the bottom to the top. The middle class has also been negatively affected: For years, many average earners have seen their prosperity shrinking instead of growing.

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“Boosting growth”. Are we ever going to get real?

Fed’s $4 Trillion Holdings Keep Boosting Growth Beyond End of QE (Bloomberg)

Quantitative easing may turn out to be a gift that keeps on giving for the U.S. economy. As the Federal Reserve prepares to end its third round of bond buying next week, the central bank plans to hang on to the record $4.48 trillion balance sheet it has accumulated since announcing the first round of purchases in November 2008. That will continue to keep a lid on borrowing costs, helping the Fed lift inflation closer to its target and providing support to a five-year expansion facing headwinds abroad, from war in the Mideast to slowing growth in Europe and China. Holding bonds on the Fed’s balance sheet limits the supply of securities trading on the public markets, which helps keep prices up and yields lower than they otherwise would be. That provides stimulus to the economy just as a cut in the Fed’s benchmark interest rate would, according to Michael Gapen, a senior U.S. economist for Barclays in New York and former Fed Board section chief.

“Preserving it will continue to support the economy,” Gapen said. “The Fed message is we think we’ve done enough to generate momentum and keep the economy on the right track. Now we’re going to wait and see how things go.” The Federal Open Market Committee plans to end its purchases of Treasuries and mortgage bonds at the next meeting Oct. 28-29, according to minutes of the last gathering. Chair Janet Yellen opened the door to keeping a multi-trillion-dollar portfolio for years, saying a decision on when to stop reinvesting maturing bonds depends on financial conditions and the economic outlook. Shrinking the balance sheet to normal historical levels “could take to the end of the decade,” Yellen said at her press conference last month. Fed quantitative easing has provided the Treasury market with a steady and consistent buyer, helping to keep yields lower than they otherwise would be. The central bank is now the largest holder of U.S. government securities.

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Don’t even try to tell me you could have made this up: “The surcharge stems from the EU changing the way it calculates gross national income to include more hidden elements such as prostitution and illegal drugs.”

EU Tells Britain To Pay Extra €2.1 Billion Because It Does Well (FT)

Britain has been told to pay an extra €2.1 billion to the EU budget within weeks on account of its relative prosperity, a hefty surcharge that will further add to David Cameron’s domestic woes over Europe. To compensate for its economy performing better than other EU countries since 1995, the UK will have to make a top-up payment on December 1 representing almost a fifth of the country’s net contribution last year. France, meanwhile, will receive a €1 billion rebate, according to Brussels calculations seen by the Financial Times. The one-off bill will infuriate eurosceptic MPs at an awkward moment for the prime minister, who is wrestling with strong anti-EU currents in British politics that are buffeting his party and prompting a rethink of the UK’s place in Europe. Mr Cameron is determined to challenge the additional fee and last night met with Mark Rutte, the Netherlands premier, to discuss the issue. His country is also being required to make a top-up payment, though it is smaller than the UK’s.

A Downing Street source said: “It’s not acceptable to just change the fees for previous years and demand them back at a moment’s notice.” The source added: “The European Commission was not expecting this money and does not need this money and we will work with other countries similarly affected to do all we can to challenge this.” The surcharge stems from the EU changing the way it calculates gross national income to include more hidden elements such as prostitution and illegal drugs. [..] The surcharge comes on top of the net UK contribution to the EU budget, which was £8.6 billion in 2013. Britain faces by far the biggest top-up payment: the preliminary figures show that the Netherlands pays an extra €642 million, while Germany receives a rebate of €779 million, France €1 billion and Poland €316 million.

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It’s a shame the Anglo press make this about Britain. Holland pays far more extra per capita (more expensive hookers?), but what’s really fun is that Greece has to pay more too, and Italy. Let’s give the EU all the room they need to majestically screw this up.

EU Agrees To Budget Talks After £1.7 Billion Cash Demand On UK (BBC)

EU finance finance ministers have agreed to David Cameron’s call for emergency talks after the UK was told it must pay an extra £1.7bn. Mr Cameron interrupted a meeting of EU leaders in Brussels to express dismay at the demand for the UK to pay more into the EU’s coffers on 1 December. He told Commission boss Jose Manuel Barroso he had no idea of the impact it would have, Downing Street said. It will add about a fifth to the UK’s annual net EU contribution of £8.6bn. There has been anger across the political spectrum in the UK at the EU’s demand for additional money, which comes just weeks before the vital Rochester and Strood by-election, where UKIP is trying to take the seat from the Conservatives. EU leaders discussed the issue for an hour in Brussels on Friday, with Mr Cameron due to give a press conference later. Mr Cameron told Mr Barroso, who steps down next month, that the problem was not just press or public opinion but was about the amount of money being demanded.

The surcharge follows an annual review of the economic performance of EU member states since 1995, which showed Britain has done better than previously thought. Elements of the black economy – such as drugs and prostitution – have also been included in the calculations for the first time. The prime minister will do everything he can to show he’s coming out fighting over the EU budget demand. He has buttonholed Commission President Barroso. He has called for an emergency meeting. EU leaders have pondered the problem for a full hour in their meeting. The PM is proud of getting down the EU budget limit in 2013. He says it proves he can get his way in Brussels. Handing over £1.7bn to the EU would sting at any time. Doing it a few days after a crunch by-election scrap with UKIP would be agony. This could still go David Cameron’s way. If he can persuade the EU to tear up the bill, he can come out smiling. If he fails it will hurt the Conservatives badly.

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Nice side fight.

Renzi Vs Barroso Over EU’s Budget Letter (FT)

If you read the EU’s budget rules, it appears to be a cut and dried affair: if the European Commission has concerns that a eurozone country’s budget is in “particularly serious non-compliance” with deficit or debt limits, it has to inform the government of its concerns within one week of the budget’s submission. Such contact is the first step towards sending the budget back entirely for revision. As the FT was the first to report this week, the Commission decided to notify five countries – Italy, France, Austria, Slovenia and Malta – that their budgets may be problematic on Wednesday. Helpfully, the Italian government posted the “strictly confidential” letter it received from the Commission’s economic chief, Jyrki Katainen, on its website today.

But at day one of the EU summit in Brussels, the letter – and Italy’s decision to post it – suddenly became the subject of a very public tit-for-tat between José Manuel Barroso, the outgoing Commission president, and Matteo Renzi, the Italian prime minster. Barroso fired the first shot at a pre-summit news conference, expressing surprise and annoyance that Renzi’s government had decided to make the letter public. For good measure, he took a pop at the Italian press, which in recent days has been reporting that Barroso was the one pushing for a hard line against Rome, and implying he was motivated by his desire to score political points back home in Portugal, where he has long been rumoured as a potential presidential candidate after leaving the Commission:

The first thing I will say is this: If you look at the Italian press, if you look at most of what is reported about what I’ve said or what the Commission has said, most of this news is absolutely false, surreal, having nothing to do with reality. And if they coincide with reality, I think it’s by chance.

Aside from his swipe at Italian newspapers, Barroso was clearly annoyed at the Italian government, saying Katainen’s letter was intended to be private correspondence to begin talks over trying to get Italy’s budget back in line with EU rules:

Regarding the letter from vice-president Katainen yesterday, sent to his Italian colleague, the decision to publish it on the website of the ministry of finance is a unilateral decision by the Italian government. The Commission was not in favour of the publication because we are continuing consultations with various governments. These are informal consultations and in some cases they are quite technical, and we think it’s better to have this kind of consultations in an atmosphere of trust. But the Italian government contacted the Vice President Katainen telling him that he would publish the letter and of course we do not object to the publication, it is their right, but again, this is not true it is the Commission which pressed the government to publish the letter. If we wanted to publish it, the Commission could publish the letter itself.

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Hot air in every sense of the word.

EU Agrees Target To Cut Greenhouse Gas Emissions by 40% in 2030 (FT)

The EU has set the pace for a global climate agreement in Paris next year by overcoming resistance from eastern member states and agreeing a landmark target to cut greenhouse gas emissions. The 28-member bloc has been so riven by divisions over environmental policy in recent months that Brussels risked losing its status as the global leader in the fight against climate change. In the days before an EU summit on Thursday, countries as diverse as Portugal and Poland appeared liable to veto a deal on setting a new target for reducing emissions by 2030. Talks dragged on into the early hours of Friday morning before European leaders finally agreed to a cut of at least 40% from 1990 levels. Environmentalists have slammed this goal as the bare minimum required for the EU to play its role in containing global warming, but diplomats argue that it was the toughest target that could win broad political support across Europe.

“We have sent a strong signal to other big economies and all other countries: we have done our homework, now we urge you to follow Europe’s example,” said Connie Hedegaard, the EU’s climate commissioner. Green groups condemned the deal as a political fudge. Greenpeace had pushed for a cut of 55%. “It’s a deal that puts dirty industry interests ahead of citizens and the planet,” said Brook Riley of Friends of the Earth. The EU said that its 40% target would be reviewed after the UN’s Paris conference next year where a global deal on cutting emissions is expected. Some European countries had been fearful that the EU would set itself too high a target, which the U.S. and China would not follow.

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This fight ain’t over.

German Lawmakers Rip ECB Over Corporate Bonds Report (Reuters)

Senior lawmakers from Chancellor Angela Merkel’s conservative party heaped criticism on the European Central Bank on Wednesday following a Reuters report that it was considering the purchase of corporate bonds to spur growth. The report on Tuesday, citing several sources familiar with the central bank’s thinking, said the ECB could decide as soon as December to go ahead with corporate bond buys on the secondary market, with a view to starting the purchases early next year. ECB officials confirmed on Wednesday that buying corporate bonds was an option for the bank but said no final decision had been taken on whether to go ahead. “The Governing Council has taken no such decision,” an ECB spokesman said. The move would widen out the private-sector asset-buying program that it began on Monday in the hopes of encouraging more lending to businesses in the faltering euro zone economy.

“With its purchase programs, the ECB is taking unforeseeable risks onto its balance sheet,” said Norbert Barthle, a veteran lawmaker for Merkel’s Christian Democrats (CDU) who sits on the Bundestag’s budget committee. The ECB should focus on its main target of price stability and refrain from more “dubious measures” to boost the economy, Barthle warned. Hans Michelbach of the Christian Social Union (CSU), the Bavarian sister party of the CDU, said Draghi was endangering the stability of financial markets with his moves. “The ECB is turning itself into a bad bank for the euro zone’s crisis countries at an increasingly rapid pace,” said the senior conservative member of the finance committee. “The ECB needs a clear change of course.”

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It’ll be fun Sunday at noon EU time. Draft was just leaked that says 25 banks will fail. Numbers get bigger.

ECB Tries for Third Time Lucky in European Stress Tests (Bloomberg)

For the European Central Bank, success as the euro area’s financial supervisor may begin this weekend with a few failures. At noon in Frankfurt on Oct. 26, investors will learn which of the currency bloc’s 130 biggest banks fell short in the ECB’s year-long examination of their asset strength and ability to withstand economic turbulence. After two previous stress tests run by the European Banking Authority didn’t reveal problems at lenders that later failed, the ECB has staked its reputation on getting this exercise right. The two-part audit known as the Comprehensive Assessment forms one pillar of the ECB’s effort to move the euro zone forward after half a decade of financial turmoil by disclosing the extent of the damage. Since the beginning, ECB President Mario Draghi has said banks need to fail to prove the losses of the past have been dealt with.

“There will be enough for policy makers to declare victory, but the full picture will take longer to emerge because this thing is so complicated,” said Nicolas Veron, a fellow at the Bruegel research group in Brussels. “What you don’t want is to sound the all clear and then three to six months later, there’s an unpleasant surprise.” Bank-level data and an aggregate report on the Asset-Quality Review and stress test will be released on the ECB’s website at 12 p.m. Frankfurt time. The ECB stress test was conducted in tandem with the London-based EBA, which will release its results at the same time. The EBA’s sample largely overlaps the ECB’s, though it also contains banks from outside the euro area.

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The $650 billion is what people can’t afford to pay, but have to anyway.

World Faces $650 Billion Housing Problem (CNBC)

A staggering 330 million urban households around the world live in substandard housing or are so financially stretched by housing costs they forgo other basic needs like food and health care, according to McKinsey. Urban dwellers globally fork out $650 billion more per year on housing than they can afford, or around 1% of world gross domestic product (GDP), McKinsey estimated in a new report, highlighting the enormity of the affordability gap. More than two-thirds of the gap is concentrated in 100 large cities. In several low-income cities such as Lagos and Mumbai, the affordable housing gap can amount to as much as 10% of area GDP. McKinsey’s study looked at the cost of housing as a portion of household income in cities around the world to determine where urban residents were most under financial pressure For this study, it defined affordability as housing costs that consume no more than 30% of household income.

Based on current trends in urban migration and income growth, the affordable housing gap would grow to 440 million, or 1.6 billion people, within a decade. This trend will exact an enormous toll on society, the report warned. “For families lacking decent affordable housing, health outcomes are poorer, children do less well in school and tend to drop out earlier, unemployment and under-employment rates are higher, and financial inclusion is lower,” it said. McKinsey estimates that an investment of $9-$11 trillion would be required to replace today’s substandard housing and build additional units needed by 2025. Including land, the total cost could be $16 trillion. The belief that major cities no longer have land for affordable housing is a myth, it added. Even in cities such as New York there are many parcels of under-utilized or idle land—including government-owned land—that could support successful housing development, the report said.

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Bet you it’s already much lower than reported.

China’s Economic Growth May Slow Further, Data Show (MarketWatch)

September data suggest China’s economic growth may well slow further, the Conference Board said late Thursday, citing its Leading Economic Index. The index rose 0.9% in September, after a 0.7% gain in August, but a 1.3% rise in July, the association said. “The six-month growth rate of the Leading Economic Index has eased steadily throughout the third quarter, indicating increased downside risks to economic growth in the months ahead,” Conference Board China Center resident economist Andrew Polk said. “While activity in the property sector stabilized a bit, sharp weakening in demand for both bank credit and real estate point to sluggish private investment in the last quarter of 2014. Recent developments, therefore, confirm our long-term view of a soft fall of the economy,” Polk said.

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It’s the amounts of debt that are the problem, but Beijing wants to solve it by changing the kinds of debt.

China Local Debt Fix Hangs On Beijing’s Wishful Thinking (Reuters)

China is asserting control over once-chaotic local government financing by banning the use of opaque funding vehicles, but filling the gap with a huge expansion of the fledgling municipal bond market will raise a whole new set of problems. Chastened by promiscuous local investment in response to the 2008 global financial crisis, Beijing wants to restore discipline as part of its wider economic reforms, but the muni bond market, be deviled by price distortions and inadequate disclosure standards, is no quick fix. China’s State Council, the country’s cabinet-level political institution, prohibited local government financial vehicles (LGFVs) from raising funds on behalf of local authorities in a decree issued earlier this month. On Tuesday sources told Reuters the Ministry of Finance had circulated a draft document saying localities would be allowed to issue new muni bonds to pay off old debt.

“It’s not an isolated move – rather it’s part of a systematic approach to tackle the local debt issue,” said Bank of America-Merrill Lynch China strategist Tracy Tian. If the draft becomes law and localities are allowed to roll over a substantial portion of their estimated 18 trillion yuan ($3 trillion) of outstanding debt, the muni bond market would have to expand dramatically from the quota of just 109.2 billion yuan that Beijing has set for 2014. “We estimate that as much as 1 trillion yuan of new bonds may be issued to fill the financing gap in 2015,” wrote UBS economist Tao Wang in a research note this month. The market appears ill-equipped for such explosive growth. It got off to a dubious start in 2014, with impoverished and debt-ridden local governments able to issue bonds at yields below even the central government’s sovereign yield.

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It’ll be fine till panic selling starts. Then it will no longer be so fine.

China Home-Price Drop Spreads as Easing Fails to Halt Slide (Bloomberg)

China’s new-home prices fell in all but one city monitored by the government last month as the easing of property curbs failed to stem a market downturn amid tight credit. Prices dropped in 69 of the 70 cities in September from August, the National Bureau of Statistics said in a statement today, the most since January 2011 when the government changed the way it compiles the data. They fell in 68 cities in August. The central bank on Sept. 30 eased mortgage rules for homebuyers that have paid off existing loans, reversing course after a four-year campaign to contain home prices as Premier Li Keqiang seeks to prevent economic growth from drifting too far below the government’s 7.5% annual target. Home sales slumped 11% in the first nine months of this year.

“Prices will continue the downtrend for the rest of the year,” said Donald Yu, Shenzhen-based analyst at Guotai Junan Securities Co. “If sales in the fourth quarter fail to clear inventories as developers want, more price cuts are still likely in the first quarter of next year.” All but five of the 46 cities that imposed limits on home ownership since 2010 have removed or relaxed such restrictions amid the property downturn that has dented local revenues from land sales.

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Bit of ISIS oil with that, perhaps?

China Scores Cheap Oil 14,000 Miles Away as Glut Deepens (Bloomberg)

China is finding oil supplies 14,000 miles away, aided by the global rout in prices that’s left producers vying for new markets. PetroChina Co. said it bought Colombian crude for a northern refinery for the first time because it was good value. The transaction underscores how the world’s second-biggest oil consumer is benefiting as producers from the Middle East to Latin America vie for customers in Asia. Brent oil futures tumbled to the lowest level since 2010 as the highest U.S. output in almost 30 years cuts its consumption of foreign crude. OPEC’s biggest producers are reducing prices to defend their market share. China consumed the second-biggest amount of crude on record in September and imported the largest volume ever for that time of year, customs data show.

“China will just look to get the cheapest crude possible from whatever source it can,” Virendra Chauhan, a London-based analyst at Energy Aspects Ltd., said by phone Oct. 21. “I expect a lot more volumes flowing to China in particular.” The country’s crude imports rose 7.8 percent to 27.6 million tons, or 6.74 million barrels a day, in September from last year, the data show. The number of supertankers sailing toward China’s ports surged to a nine-month high last week, according to IHS Fairplay vessel-tracking signals compiled by Bloomberg as of Oct. 17.

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Lots of curious views and opinions on Saudi oil policy.

Saudi Arabia’s Risky Oil-Price Play (BW)

With the U.S. on track to become the world’s largest oil producer by next year, it’s become popular in Washington and on Wall Street to call America the new Saudi Arabia. Yet the real Saudi Arabia hasn’t relinquished its role as the producer with the most influence over oil prices. Its reserves of 266 billion barrels, ability to pump as many as 12.5 million barrels a day, and, most important, its low cost of extracting crude still make it a formidable rival to the U.S., whose shale wells are hard to exploit. “Saudi Arabia is the only one in the position of putting more oil on the market when they want to and cutting production when they want to,” says Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington. The Saudis are also the most powerful member of OPEC, the 12-member group that’s increasingly facing off against Russian, U.S., and Canadian production.

In September, despite a global oil glut developing largely because of China’s slowdown and the rapid increase in U.S. production, the Saudis boosted production half a percent, to 9.6 million barrels a day, lifting OPEC’s combined production to an 11-month high of almost 31 million barrels a day. Then, on Oct. 1, Saudi Arabia lowered prices by increasing the discount it offered its major Asian customers. The kingdom might just as easily have cut production to defend higher prices. Instead, the Saudis sent a strong signal that they were determined to protect their market share, especially in India and China, against Russian, Latin American, and African rivals. Iraq and Iran followed Saudi Arabia’s example. The news set off a bear market in oil: Brent crude, the international benchmark, fell from $115.71 a barrel on June 19 to $82.60 a barrel on Oct. 16, the lowest price in almost four years, as investors realized that the big oil states were not going to cut production.

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Better get ready to make that deal.

Eastern Europe Shivers Thinking About Winter Without Gas (Bloomberg)

As winter approaches, former Soviet satellite nations from Poland to Bulgaria are watching Russia and Ukraine’s stalled gas negotiations with growing trepidation. The lack of discernible progress is sending a collective shiver down the spine of Eastern Europe, which retains vivid memories of Russian energy cuts during unusually cold winters in 2006 and 2009. The ensuing shortages led to shuttered factories and a return to wood for heating and cooking in rural areas. Despite the two episodes, little has been done to diversify supplies within a region that remains highly dependent on energy delivery systems dating back to the Soviet era. “Parts of eastern Europe are still quite vulnerable this winter,” said Emily Stromquist, a Eurasia analyst in London. “The problem is that until recently the relations with Russia have generally been good, so perhaps there was no feeling of urgency to build quickly.”

If Moscow and Kiev don’t reach a compromise before winter and OAO Gazprom fails to restart supplies to its western neighbor, Ukraine may resort to siphoning off gas carried through its territory. As in 2009, that could prompt Russia to cut transit through Ukraine altogether, leaving parts of eastern Europe exposed to severe shortages. Poland, Hungary and especially the Balkan peninsula would be most affected. Connected to the old Soviet pipeline system that runs through Ukraine and Moldova, the Balkan countries rely on Russia for close to 100% of their needs. Moreover, they’re poorly connected with their neighbors and their underground storage isn’t sufficient to cover demand for the entire winter.

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German salaries: €48.40 ($61.27) per hour on average. This compares to €4.81 in Romania and €25.63 in the U.S.

Germany Inc. Scrutinized for Using Labor Like Paper Clips (Bloomberg)

Daimler AG is among German companies that have found a way to cut personnel costs in the high-wage country: buy labor like it’s paper clips. By purchasing certain tasks such as logistics services from subcontractors, businesses can legally keep these workers off the payroll and outside of wage agreements with unions. That’s led to growing ranks of contract workers who help boost profit at German companies by lowering labor costs. The downside is abuse of the system, which leaves some workers unprotected and even unpaid. That’s caught the attention of Labor Minister Andrea Nahles, who’s promising a crackdown, and forcing Germany Inc. to defend the practice. “We can’t pay everyone the high wage” in union deals, Wilfried Porth, Daimler’s personnel chief, said in an e-mail to Bloomberg News. “Our cost situation has deteriorated compared to the competition. We can’t afford that.”

Proponents argue hiring subcontractors to provide services keeps Germany, where labor costs in the auto industry are the highest in the world, competitive. Opponents say the widespread practice in industries that include shipbuilding, retail, logistics and construction undermines the German labor model of a partnership between employers and workers. Every third employee in the German auto industry is working either for a subcontractor or as a temporary laborer, according to a poll by IG Metall union published last November. Doing so has helped keep in check already high personnel costs, which amount to €48.40 ($61.27) per hour on average, according to the Berlin-based VDA auto industry group. This compares to €4.81 in Romania and €25.63 in the U.S.

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What a lovely example of a screwed up society. For all sorts of reasons.

Alabama Man Gets $1,000 In Police Settlement, His Lawyers Get $459,000 (Reuters)

An Alabama man who sued over being hit and kicked by police after leading them on a high-speed chase will get $1,000 in a settlement with the city of Birmingham, while his attorneys will take in $459,000, officials said Wednesday. The incident gained public attention with the release of a 2008 video of police officers punching and kicking Anthony Warren as he lay on the ground after leading them on a roughly 20-minute high-speed chase. Warren is serving a 20-year sentence for attempted murder stemming from his running over a police officer during the chase, in which he also hit a school bus and a patrol car before crashing and being ejected from his vehicle.

Under the terms of the settlement of Warren’s 2009 federal suit, in which he accused five Birmingham police officers of excessive force, his attorneys will receive $100,000 for expenses and $359,000 in fees, said Michael Choy, an attorney representing the officers on behalf of the city. The agreement was reached last month and approved on Tuesday by the Birmingham City Council. The city settled to avoid further litigation and the risk of a higher payout, Choy said.

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Riding the subway?!

Doctor With Ebola In Manhattan Hospital After Return From Guinea (Reuters)

A doctor who worked in West Africa with Ebola patients was in an isolation unit in New York on Friday after testing positive for the deadly virus, becoming the fourth person diagnosed with the disease in the United States and the first in its largest city. The worst Ebola outbreak on record has killed at least 4,900 people and perhaps as many as 15,000, mostly in Liberia, Sierra Leone and Guinea, according to World Health Organization figures. Only four Ebola cases have been diagnosed so far in the United States: Thomas Eric Duncan, who died on Oct. 8 at Texas Health Presbyterian Hospital in Dallas, two nurses who treated him there and the latest case, Dr. Craig Spencer. Spencer, 33, who worked for Doctors Without Borders, was taken to Bellevue Hospital on Thursday, six days after returning from Guinea, renewing public jitters about transmission of the disease in the United States and rattling financial markets. Three people who had close contact with Spencer were quarantined for observation – one of them, his fiancée, at the same hospital – but all were still healthy, officials said.

Mayor Bill de Blasio and Governor Andrew Cuomo sought to reassure New Yorkers they were safe, even though Spencer had ridden subways, taken a taxi and visited a bowling alley between his return from Guinea and the onset of his symptoms. “There is no reason for New Yorkers to be alarmed,” de Blasio said at a news conference at Bellevue. “Being on the same subway car or living near someone with Ebola does not in itself put someone at risk.” Health officials emphasized that the virus is not airborne but is spread only through direct contact with bodily fluids from an infected person who is showing symptoms. After taking his own temperature twice daily since his return, Spencer reported running a fever and experiencing gastrointestinal symptoms for the first time early on Thursday. He was then taken from his Manhattan apartment to Bellevue by a special team wearing protective gear, city officials said. He was not feeling sick and would not have been contagious before Thursday morning, city Health Commissioner Mary Travis Bassett said.

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“Others at risk are Benin, Cameroon, Central African Republic, Democratic Republic of Congo, Gambia, Ghana, Mauritania, Nigeria, South Sudan, and Togo.” Add Kenya.

Mali Becomes Sixth African Country To Report Ebola Case (Bloomberg)

Mali became the sixth West African country to report a case of Ebola, opening a new front in the international effort to prevent the outbreak of the deadly viral infection from spreading further. A 2-year-old girl who traveled from Kissidougou, Guinea, with her family to Mali was admitted to a hospital in Kayes yesterday, Malian President Ibrahim Boubacar Keita’s office said in a statement. Test results confirmed she had Ebola. Ebola has infected almost 10,000 people this year, mostly in Sierra Leone, Guinea and Liberia, killing about 4,900. Senegal and Nigeria, which also had cases, are now free of the virus. Disease trackers now must trace everyone the girl came in contact with and monitor them for signs of infection. Mali was one of four countries the World Health Organization said this month was at highest risk of Ebola among a group of African nations the agency said needed to be prepared for cases.

A WHO-led team has been in Mali this week helping to identify gaps in the country’s defenses. “The big issue is getting the response up in those countries so that you can prevent a travel-related case from becoming an outbreak,” Keiji Fukuda, the WHO’s assistant director-general for health security, said in a phone interview today. “We’re working with Mali to try to contain it in the same way that it was contained in Senegal and in Nigeria.” Mali, a nation of about 16.5 million people to the northeast of Guinea, is Africa’s third-largest gold producer. Ivory Coast, Senegal and Guinea Bissau also are at the top of the list of countries that need to be prepared for Ebola cases, the WHO said Oct. 10. Others at risk are Benin, Cameroon, Central African Republic, Democratic Republic of Congo, Gambia, Ghana, Mauritania, Nigeria, South Sudan, and Togo.

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Jun 102014
 
 June 10, 2014  Posted by at 6:30 pm Finance Tagged with: , ,  3 Responses »


Arthur Rothstein Drought refugees from Glendive, MT, leaving for WA July 1936

It’s common knowledge at this point, even if there’s never a shortage of voices who will insist on denying it, that many of the numbers we see allegedly describing our economic realities, are not real at all. Unemployment, GDP, the issue is familiar. And if the US government, or any government for that matter, thinks it’s such a great idea to “massage” their numbers, then to quite an extent those of us who pay attention can shrug them off as largely irrelevant, even if they greatly distort many people’s views of where we find ourselves. The nonsense comes in so fast and furious we need to realize we can’t win ’em all. But we should never be tempted into thinking much of what we read are anything else than fake, virtual zombie numbers. Still, it’s when fake numbers get real life consequences that we need to raise our voices, even if that’s for the umpteenth time. A report issued yesterday by the Boston Consulting Group (BCG) makes for such a moment. Here’s what the BBC had to say:

Global Private Wealth Rises To $152 Trillion

The amount of private wealth held by households globally surged more than 14% to $152 trillion last year, boosted mainly by rising stock markets. Asia-Pacific, excluding Japan, led the surge with a 31% jump to $37 trillion, a report by Boston Consulting Group says. [..] The report takes into account cash, deposits, shares and other assets held by households. But businesses, real estate and luxury goods are excluded. [..]

The amount of wealth held in equities globally grew by 28% during the year [..] Economies in Asia have been key drivers of global growth in the recent years. China has been the biggest driver – with private wealth in the country surging more than 49% in 2013. The wealth held in the region is expected to rise further, to nearly $61 trillion by the end of 2018.

And since the BBC missed some numbers that Bloomberg caught, and vice versa, here’s the latter as well:

China Riches Fuel Asia as World Wealth Tops $150 Trillion

China leapfrogged Germany and Japan in the past five years to trail only the U.S. in a ranking of countries by private financial wealth. China’s $22 trillion is expected to increase more than 80% to $40 trillion by 2018, while the U.S. may grow to $54 trillion from $46 trillion over the same period, BCG said. Globally, stock-market gains averaged 21% in 2013, providing the primary driver of growth in private wealth, especially in North America, Europe and Japan [..] North America wealth gained 16% to $50.3 trillion.

India, which may more than double private wealth assets to $5 trillion by 2018, and Russia, where wealth may advance more than 80% to $4 trillion. BCG expects rich households to have almost $200 trillion worldwide by 2018, with the Asia-Pacific region contributing about half of global growth.

I guess the crucial question here is: how is this wealth? What is wealth to begin with? And how did these huge surges come about in the first place? We know that central banks and governments, who typically these days are as independent from each other as your run of the mill Siamese twin can be, have a role. The Chinese communist party – what’s in a name? – has pumped an estimated $25 trillion into its economy since 2008, and let the shadow banks add another, let’s take a wild guess, $5-$10 trillion or so?! The Qingdao copper, aluminum, timber, peanut oil and what have we scheme seems to indicate a widespread and accepted practice of rehypothecating assets, whether they actually exist or not. The scheme is far too profitable to have remained some small scale thingy. I saw John Mauldin today put the total damage (or is that profit?) at $1.3 billion, but we might as well add a few zeroes.

The US added many more trillions in stimulus. I’d say $15 trillion, easily. The ECB has been a bit more cautious – which is why everyone wants them to do more -, but when you add it all up, 28 separate countries, governments and central banks and all that, put them at $10 trillion minimum. And Japan is, well, Japan, they were at it much sooner, early 1990s, and Abenomics is the everything-on-red move; I can’t see that being less than $15 trillion. And that’s just the 4 biggest economies; you think the rest didn’t chime in? This is where you’re inclined to say that before you know it you’re talking real money. But it’s not. That’s exactly what it’s not. The entire thing has been made up out of thin air, and to make matters much worse, it’s been borrowed too.

Creating credit out of thin air equals borrowing from the future. Even though we – prefer to – see that as hardly relevant. Which is a deception all by itself, insult and injury. Everything about our so called recoveries appears to be true only because of stimulus measures. We buy ourselves a feel-good time today at the expense of those who come after us. Well, unless we achieve this magical ‘escape velocity’, but how can we expect to do that when all gains since 2008, dollar for dollar when you look at the ‘stimulating’ numbers, appear to be originating in central bank inputs? Without them, we’re standing still, at best.

But the Chinese, who have issues in their housing industry, and their growth numbers, and their exports, yada yada, saw their private wealth rise by close to 50% in just one year, 2013. Now, I didn’t read the full Boston Consulting Group report, but I know for a fact that neither the BBC nor Bloomberg even hinted at a possible connection between that number and the $25+ trillion Beijing poured into China’s economy. But here’s the clincher: The Chinese can make up as much ‘money’ out of nothing as they want, and the rest of the world will accept it as currency, because they all do the same, albeit on a somewhat smaller scale. So all the zombie Middle Kingdom money gets to buy up half of Africa, the best beaches in Greece, entire streets in London and New York, and no-one in charge is batting an eye because if they doth protest, they’d have to reveal their own out of thin air deception that props up the FTSE and the S&P.

Yeah, sure, but the (not so) funny zombie yuan displaces Greeks and Londoners and New Yorkers and Africans, who if they had access to similar fake funny cash could have just stayed where they are and outbid the Chinese for their tribes’ and parents’ own properties. Now they have to leave because there’s a game or contest going on of who can out-nothing the other.

The world’s private wealth didn’t increase one bit. The entire world borrowing from their children’s future did. And that’s a recipe for zombie disaster. Only not today. Which is what is keeping us fooled, but we do we like it that way? Are we not smart enough, or don’t we want to be? That increase in wealth the BCG ‘study’ reports is a big loud bad red-flashing warning sign, but our once reliable media talk about it as if somehow it’s a good thing. And we gobble that up as gospel because we can’t face the truth about our own lives.

We’d rather have the most audacious zombie printers – both domestic and abroad – take our land and our homes and the chairs we sit in away from under our behinds than fess up that we ourselves screwed up royally. If we observe our place in the world from that angle, how can we possibly claim we do not get what we deserve? Mind you, though, that’s the only thing we’re going to get. But it gets both better and worse: the payload isn’t going to hit us most, but our kids. And I’m wondering: do you find that comforting?

What a report on zombie wealth like this tells us is not that things are getting better, it’s telling us they’re getting worse at a fast clip. The more fake numbers, the further we slip and slide away from having functioning societies. It’s not our wealth that increases, but our debt.

Global Private Wealth Rises To $152 Trillion (BBC)

The amount of private wealth held by households globally surged more than 14% to $152 trillion (£90tn) last year, boosted mainly by rising stock markets. Asia-Pacific, excluding Japan, led the surge with a 31% jump to $37tn, a report by Boston Consulting Group says. The number of millionaire households also rose sharply. The report takes into account cash, deposits, shares and other assets held by households. But businesses, real estate and luxury goods are excluded. “In nearly all countries, the growth of private wealth was driven by the strong rebound in equity markets that began in the second half of 2012,” the firm said in its report. “This performance was spurred by relative economic stability in Europe and the US and signs of recovery in some European countries, such as Ireland, Spain and Portugal.” The amount of wealth held in equities globally grew by 28% during the year, Boston Consulting Group (BCG) said.

Economies in Asia have been key drivers of global growth in the recent years. And households in the region have benefitted from this growth. Within the region, China has been the biggest driver – with private wealth in the country surging more than 49% in 2013. High saving rates in countries such as China and India has also been a key contributing factor to this surge. The wealth held in the region is expected to rise further, to nearly $61tn by the end of 2018. “At this pace, the region is expected to overtake Western Europe as the second-wealthiest region in 2014, and North America as the wealthiest in 2018,” BCG said. The pace of wealth creation in China was also evident in the growth in the number of millionaire households – in US dollar terms – in the country, rising to 2.4 million in 2013, from 1.5 million a year ago. Overall, the total number of millionaire households in the world rose to 16.3 million in 2013, from 13.7 million in 2012.

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Could?

How Europe’s Amazing Bond Rally Could End In New Crisis (The Tell)

Take a good look at the chart above. It’s a picture of investors going crazy for Spanish government bonds in a low-interest rate, loose monetary-policy environment in Europe. But buyer beware — analysts warn that the rally in peripheral Europe’s sovereign bonds could come to an abrupt end if the region’s sluggish growth rates and worringly low inflation levels don’t pick up. For the first time since April 2010, the yield on 10-year Spanish bonds on Monday fell below the borrowing costs of 10-year U.S. notes as part of a wider rally for European assets. Spain’s 10-year yield slipped to 2.556%, inching below the 2.623% recorded for the U.S. counterpart, according to Tradeweb data.

Not only is this a major improvement from Spain’s plus-7% yields from the height of the euro-zone crisis in 2012, but the current trading level is also a fresh multi-century all-time low, according to Deutsche Bank. And Spain isn’t the only euro-zone nation to see its borrowing costs comfortably decline. Irish 10-year borrowing costs fell to a record low of 2.39% on Monday as well, while Italy’s yield on 10-year bonds are around the lowest level since 1945, according to Deutsche Bank.

“If anyone is in any doubt how extraordinary this period is in economic history then please take a look,” said Deutsche Bank’s Jim Reid in a note on Monday morning.

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Answer: More theft.

The ECB & The Fed: After 5-Years Of Coordinated Theft, What Next? (Alhambra)

With Japan providing no competition for global bond assets (their 10 year yields a paltry 0.6%), the hands down winner in the global developed bond market rate competition would appear to be the US Treasury. That assumes, of course, that currency values are determined by interest rate differentials, something that is widely believed but hard to square with the available historical data. Rates do matter at some point, but one would probably be better advised to buy currencies based on expectations of economic growth. If the ECB s monetary easing is successful in raising the growth prospects of Europe, stocks there seem likely to attract a bid (not that they ve been lacking for buyers; European stocks are up 160% from the lows). That might derail Draghi’s plans for a lower Euro if the demand for European stocks outstrips the demand for bonds.

It might also depend on the effectiveness of the newly announced policies, something that is far from assured. Like the US, Europe s growth problems are mostly structural and potentially impervious to more monetary easing. And certainly, Japan s experience with unconventional monetary policy would not seem to provide any reason for optimism about its ultimate effectiveness. They’ve been trying for over two decades to escape the malaise of poor demographics, high taxation and a coddled corporate culture through monetary pumping only to find themselves deeper in debt and still searching for consistent growth. Notably, the lack of growth and the lowest interest rates in the world hasn’t been conducive to a cheaper yen (until recently) and Draghi may find himself facing the same conundrum.

Indeed, there has been a plethora of research released over the recent past suggesting that too easy monetary policy is itself causing the very deflationary tendency it is designed to combat. The Minneapolis Fed chief, Narayana Kocherlakota first mentioned the possibility way back in 2011 but quickly backed off. The St. Louis Federal Reserve s Stephen Williamson published a paper last November arguing that the Fed s purchase of so many Treasuries was actually pulling down inflation rates. Last but not least the Bank for International Settlements (the central banks central banker), taking a longer term view, said recently that the world s addiction to monetary stimulus may be expansionary in the short term but contractionary over the long term as it just steals growth from the future.

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Where the money is these days.

Currency Carry Trades Rise in ECB’s Negative-Rate World (Bloomberg)

Mario Draghi is becoming one of currency traders’ only friends. With the $5.3 trillion-a-day foreign-exchange market poised to deliver its worst first-half returns on record, the carry trade is about the only way traders are making money by exploiting differences in global borrowing costs as volatility tumbles. That strategy became more profitable after the European Central Bank president cut interest rates on June 5. “The ECB has signaled risk is on again,” Eric Busay, a Sacramento-based money manager at the California Public Employees’ Retirement System, the largest U.S. public pension fund with $294 billion in assets, said in a June 6 phone interview. “People are concerned when to exit the trade and they understand the rush to exit could be crowded. But at the same time, you have to be in it to win it.”

A Deutsche Bank AG index that measures returns from a trade that buys the world’s five highest-yielding currencies, including South Africa’s rand and the New Zealand dollar, has jumped 1.3% since Draghi’s announcement, bringing its advance to 4.4% this year. Deutsche Bank’s Currency Valuation Excess Return index that makes investments based on relative purchasing power was little changed since Draghi cut rates, while the Currency Momentum Excess Return gauge, which buys assets that are rising the fastest, declined 0.6%. The indexes gained 0.7% and lost 4.6% this year. Draghi’s announcement of rate cuts and hints of further measures to come gave markets the confidence that global central banks aren’t finished with the policies that are suppressing volatility and allowing carry trades to thrive.

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A dumb-ass assessment from Mo. Get a life …

What If the Fed Has Created a Bubble? (El-Erian)

Investors might be surprised to learn that they have a lot riding on something that they pay very little attention to: macro-prudential regulation, or what central banks and other government agencies do to reduce the risk of systemic financial disasters. The aim of such regulation is to lower both the probability and potential costs of financial accidents. It does so by enhancing the resilience of the system, establishing circuit breakers to prevent problems in one area from contaminating others and, at the extreme, containing the detrimental impact on the broader economy when failures occur.

Macro-prudential regulation has been significantly enhanced in the aftermath of the global financial crisis. Authorities around the world have imposed higher and more intelligent capital requirements, required financial institutions to value their assets more conservatively and to hold more easy-to-sell assets, placed constraints on allowable risk-taking, insisted on more stable funding, and demanded greater provisions against bad loans. The impact of the revamped regulation has gone far beyond the targeted banks and other financial companies. It has allowed central banks to be bolder in maintaining and evolving exceptional monetary and credit stimulus, which in turn has significantly bolstered the prices of stocks, bonds and other assets as a means of stimulating the economy.

The more confident central bankers are in their macro-prudential approach, the greater their willingness to persist with stimulus policies today that could involve a bigger risk of financial instability down the road — a trade-off that has been noted recently by Minneapolis Fed President Narayana Kocherlakota, Boston Fed President Eric Rosengren and former Fed Governor Jeremy Stein. Essentially, the Fed has been pushing stock and bond prices up to “bubblish” levels, in the expectation that they will inspire the kind of consumer spending, physical investments and hiring required to subsequently justify them. The hope is that the convergence will occur in the context of full employment and inflation near the Federal Reserve’s target of 2%. So far, though, the wedge between asset prices and economic reality remains large, as last week’s juxtaposition of new stock-market highs and still-anemic wage-inflation data demonstrated.

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Farrell thinks the climate will carry Hillary to the White House in a throne. What has she done lately?

The 1 Big Reason GOP Will Lose The Presidency In 2016 (Paul B. Farrell)

Warning to GOP: A new poll says you can kiss the presidency goodbye for 10 more long years: Why? “Voters have little tolerance for a presidential candidate in 2016 who doesn’t believe that climate change is caused by human activity.” More on that below. But that means the GOP is destined to be on the outside of the White House for 10 more years, playing by the same total-defense playbook that didn’t work the last two presidential elections. Why? You can’t blame the tea party. Nor voter suppression and self-defeating immigration policies. Not minimum wages, debt, taxes, abortion, gun laws, pipelines nor same-sex marriage. Not health care, inequality nor the weak recovery. Not even rapidly shifting demographics. Yes, these trends will increase your handicap, radically changing the GOP’s next-generation base. But that’s not why the GOP won’t win back the presidency.

And what about taking back the Senate? Don’t cheer too loudly. That advantage won’t last long. More defensive battles fighting an incumbent president with veto power. Bad for the image. And then, in 2016, not only the presidency is up from grabs, 23 GOP senators and only 10 Dems are up for re-election. It gets worse: From now till the 2014 elections, the GOP will double down with the same hard-right strategy that plays well to a conservative base. But then from 2014 to 2016 you must shift to a center-left strategy to appeal to the emerging new American voter if you want to win over a national fan base for 2016. But that doubling-down also puts the GOP in a double-bind: By 2016, any left-leaning candidate will anger the hard-right base that wins back the Senate in 2014. A huge dilemma.

GOP’S biggest problem 2014-2024? The one and only … Big Oil Yes, Big Oil will be the GOP’s biggest problem for years. And the big reason the GOP can kiss the presidency goodbye. Why? Big Oil won’t change. For one, they’ll fight any carbon tax. But to win the presidency, the GOP must change. A classic double bind. That’s why no Republican will occupy the White House likely till 2024. One reason: Big Oil, ExxonMobil, Shell, BP, ConocoPhillips, Chevron, and, of course, the Koch billionaires. Yes, the GOP’s in love with Big Oil. The money keeps them in Washington. They’re mutually dependent, addict-and-supplier, obsessed-and-object, master-and-servant, trapped in a symbiotic dance of death. So blindly dependent they can’t see, cannot break free of their dependency.

One has the money and power, needs to manipulate the law. The other craves money, status and an illusion of power. A classic dependency syndrome. Both hold tight, won’t wake up, till it’s too late after they bottom-out, trigger a collapse, like 2000 and 2008, that takes down the economy, forces them to create a new business model, new political game strategy. Unfortunately, the collapse will be traumatic, painful, not only for Big Oil, the GOP, also a million car owners, and the world economy. So for years to come, the so-called “Party of Big Business” will keep losing the presidency because their Big Oil suppliers control the GOP votes, dictate how to vote, and when the GOP gets its fix. But for now, Big Oil’s game plan is profitable: A pittance to politicians yields billions in tax breaks, favorable regulations, a fabulous return on investment for Big Oil.

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I have a fourth: QE.

3 Reasons The Dow Doesn’t Deserve To Be At 17,000 (MarketWatch)

We’re straddling 17,000 on the Dow Jones Industrial Average. But it just doesn’t feel right. It has to be the most unenthusiastic rally in a generation — maybe more. It’s not that there isn’t reason to be buying stocks. We are now five years into an economic recovery that began in mid-2009, according to the National Bureau of Economic Research. It’s been a slow slog. It’s been paced. Those are actually good reasons to be buying stocks. A rapidly growing economy, which coincided with the dot-com boom and the housing bubbles, usually go belly up as quickly as they rise.

And the stock market always leads the economy. Investors tend to buy cheap and ride the wave of ever-increasing earnings and premiums added to their holdings. But a 155% rise in the Dow since the 2009 nadir of the financial crisis? A 31% rise in the past 18 months? Yes, the gains look that more striking because of the lows we hit in the Great Recession. Still, that’s a fantastic run considering that last week we finally recovered the jobs lost since the financial and housing crises hit. At that point the Dow was 18% lower than it is today. There are many reasons this rally feels empty. But here are the biggest, most obvious reasons:

No one is really buying. Stock prices are edging higher, but it’s not retail investors driving the trend. Lipper reported that investors last week actually pulled $921 million from U.S. stock mutual funds in the week ended June 4, and $451 million the previous week.

Corporate earnings are flat. You’d think that as the market reaches this milestone, corporate profits would be churning, or a least growing. They aren’t. The Bureau of Economic Analysis reports that its measure of corporate profits declined 9.8% in the first quarter. It was the largest drop since the fourth quarter of 2008, and during the past four quarters, corporate profits have fallen 3%. Market analyst and adviser Doug Short noted last week that the market SPX is overvalued in the range of 51% to 85% when measured by price-to-earnings ratios and the lesser known Q ratio (total price of the market divided by replacement cost).

There are no alternative investments. Rather than higher prices for goods and services and a devalued currency, the real consequence of the Federal Reserve’s efforts to stimulate the economy through lower interest rates, bond buying and easy credit seems to be inflation in the stock market.

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Not that hard a guess to make.

Goldman Explains How The China Commodity Unwind Will Happen (Zero Hedge)

Over a year ago we were the first to bring the topic of China’s shadow banking system’s problematic rehypothecation issues to the general trading public. In “The Bronze Swan Arrives: Is The End Of Copper Financing China’s “Lehman Event”?” we explained how the Chinese commodity financing deals (CCFDs) worked and how they would inevitably be a systemic event for the nation so dependent on the shadow banking system for its credit (and its “growth”). The day has arrived when the Bronze Swan is landing (and it’s unlikely to be soft). As we have discussed recently, the probe into ‘missing’ collateral (or multiple-used collateral) at China’s Qingdao warehouse is a major problem… and now Goldman confirms, the Qingdao situation likely to continue ongoing CCFD unwind and has the potential to leave foreign banks with undercollateralized loans and/or losses. Via Goldman Sachs:

Qingdao situation and the copper market outlook – According to reports, an onshore trading company is being investigated for allegedly pledging commodities (aluminium and copper) multiple times with different banks in order to gain access to cheap FX funding (specifically via repurchase agreements, or “repo” business). This has the potential to leave foreign banks with undercollateralized loans and/or losses. Given this, a number of foreign banks may suspend their repo business in China, as well as shrink their commodity financing positions in China in general. The Qingdao issue could be a catalyst for further CCFD unwinding In our view the developments in Qingdao are likely to continue the significant scaling back of FX inflows from foreign banks into China via commodity financing business.

This would disincentivize the physical holding of commodities in bonded warehouses, increasing ‘visible’ inventories and placing more downward pressure on physical (cash prices) than upward pressure on futures prices. As foreign banks reduce their exposure to Chinese commodity financing deals (CCFDs), the profitability of these could be reduced meaningfully (via an increase of US rates and/or a lower FX loan quota to CCFD participants), more physical metal previously tied up in financing deals would be freed up for the physical market, helping ease the current temporary regional tightness. With respect to copper in particular, we expect more copper will either flow back to China or LME, depending on which market is relatively stronger. Indeed, there are signs of unwinding in near-dated tightness in the market recently, as indicated by the significant easing of both Shanghai premia and LME time spreads (Exhibits 2).

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We don’t know the half of it.

Lean Retirement Faces U.S. Generation X as Wealth Trails (Bloomberg)

Good timing is not the age group’s forte. Many took out mortgages just before prices plunged, making them the most disadvantaged by the housing crisis, while the 2008 stock-market slump dealt them a further setback. Only one-third of Generation X households had more wealth than their parents held at the same age, even though most earn more, The Pew Charitable Trusts found. When their working years end, Gen-Xers might have to live on just half of their pre-retirement income, compared with 60% for the Baby Boom generation, Pew said last year. “Generation X is at this really critical historical spot,” said Diana Elliott, a research officer in financial security and mobility at Pew, a non-profit global research and public policy organization in Washington. “They are not doing well relative to the last generation. It should give us concern as a country.” [..]

Gen-Xers lost about half of their wealth between 2007 and 2010, according to a Pew Economic Mobility analysis last year. Even before the housing collapse, they were having trouble keeping up with their parents in building assets, according to Pew, which defines Generation X as people born between 1966 and 1975. “Gen-Xers are the least financially secure and the most likely to experience downward mobility in retirement,” the Pew analysis found last year. The bursting of the dot-com bubble, which culminated in a 67% drop in the Nasdaq from 2000 to 2002, was a particularly severe blow to Gen-Xers just starting their careers. While most didn’t directly own stocks, the economy slipped into recession and unemployment for 25- to 34-year-olds in 2003 hit its highest level in almost a decade.

Student loans also slowed asset-building, said Signe-Mary McKernan, an economist at the Washington-based Urban Institute. “Under the impact of successive booms and busts, many Xers have struggled to afford a family or keep their home, much less do better than their parents,” Neil Howe, co-author with William Strauss of books on generations in American history, said at a May 8 research symposium in St. Louis. “Then came the Great Recession, which hit Xers much harder.” The median income for 35- to 44-year-olds dropped 9.1% in the three years ended in 2010, according to the Federal Reserve’s Survey of Consumer Finances. Incomes of those age 35 or less, including the youngest Gen-Xers and Millennials, fell 10.5%. While incomes of 35- to 44-year-olds deteriorated less than those of younger Americans, their net worth slumped by 54%, the most for any age group, as the value of stock holdings and properties declined. The median net worth of those younger than 35 declined 25%.

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Jobs Friday: What The Bubblevision Revelers Missed (David Stockman)

Yes, the nonfarm payroll clocked in at 138.5 million jobs and thereby retraced for the first time the point at which it stood 77 months ago in December 2007. This predictably elicited another milestone of progress squeal from the mainstream media. So you have to wonder. Did these people skip history class? Do they understand the vital idea of context ? Are they so mesmerized by paint-by-the-numbers agit prop from Wall Street and Washington that they have come to mindlessly embrace the notion that any number that is better than the last print is all that it takes regardless of composition, quality or longer-term trend? Thus, consider the ancient days of the Reagan era. Back then there were actually 15.0 million new jobs by the time that 77 months had elapsed after the June 1982 bottom.

And these were honest-to-goodness new jobs that had never before existed, not born again jobs of the type that CNBC has made a jobs Friday fetish out of ever since the Great Recession was officially declared over in June 2009. So if you want to try a little context absurdity recall this. So far we have created a trifling 100k new jobs since the last cyclical peak. During the equivalent 77 months in the Reagan era the US economy actually generated 150 times more jobs! And, no, that wasn t due to a demographic windfall of new employable bodies. During that 77 month period the civilian population age 16 and over increased by 8% or 13.3 million. This means that 113% of the growth in the pool of employable adults was converted into job-holders.= This time around, the pool of working age adults grew by quite respectable 14.4 million; and that amounted to a not shabby gain of 6% from December 2007.

But self-evidently, during the 77 months since then virtually zero percent of the labor pool growth was converted into job holders. So the yawning difference between the Reagan era and now is not a surfeit of demography, but a dearth of job creation. And this has nothing to do with Ronald Reagan hagiography since the jobs gains of the 1980s were purchased in part with grotesque peacetime deficits of a magnitude never seen previously. Nor would they be seen again until the Bush-Obama era showed what real fiscal profligacy looks like. But the larger point is that each cycle since the 1980s has generated net new jobs, albeit at a steadily declining rate. The truth of the matter is that we have now reached the point where no new payroll jobs have appeared for 77 months which is to say, over the entire span of a historically ordinary peak-to-peak business cycle. Rather than a cause for celebration, therefore, the Friday jobs print ought to stand out as a wake-up call.

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And even that …

Britain Readies ‘Last Resort’ Measures To Keep The Lights On (Telegraph)

Britain may be forced to use “last resort” measures to avert blackouts in coming winters, Ed Davey, the energy secretary, will say on Tuesday. Factories will be paid to switch off at times of peak demand in order to keep households’ lights on, if Britain’s dwindling power plants are unable to provide enough electricity, under the backstop measures from National Grid. The Grid is expected to announce that it will begin recruiting businesses that will be paid tens of thousands of pounds each simply to agree to take part in its scheme. They will receive further payments if they are called upon to stop drawing power from the grid. It is also expected to press ahead with plans to pay mothballed gas power plants to ready themselves to be fired up when needed. “Both the new demand and supply balancing services will be used only as a last resort – and are a safety net to protect households in difficult circumstances, such as a hard winter or very high surges in demand,” Mr Davey will say.

Critics have suggested the measures, which were first mooted last summer, would represent a return to 1970s-style power rationing. But Mr Davey will refute this, saying: “It is entirely voluntary. Nobody will get cut off. No economic activity will be curtailed.” Mr Davey is on Tuesday also expected to publish a new gas “risk assessment” in response to the Ukraine crisis. He said this would show Britain could “comfortably” withstand extreme cold weather or the loss of key supplies. Energy regulator Ofgem warned last summer that Britain’s spare power capacity margin – the difference between peak demand and supply – could fall as low as 2pc in winter 2015-16 as old power plants close and new ones are not yet built. The risk of blackouts could be as high as one in four unless consumers cut demand, it said.

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Your world.

Thousands Of Irish Orphans Were Used As ‘Drug Guinea Pigs’ (RT)

Over 2,000 care-home kids were secretly vaccinated against diphtheria in the 1930s in medical trials undertaken by international drugs giant Burroughs Wellcome, Irish media reveal. Among the testing sites was a recently discovered mass grave. The medical records cited by the Irish Daily Mail show that some 2,051 children and babies across several Irish care homes may have been subjected to the practice. Michael Dwyer, of Cork University’s School of History, found the data after foraging through tens of thousands of archive files and old medical journals. What he did not find is whether any consent was gained for these alleged illegal drug trials or any records of the effects on the infants involved.

Dwyer discovered that the tests were carried out shortly before the drugs were made readily available in the UK. The homes involved included Bessborough, County Cork, and Sean Ross Abbey in Roscrea, County Tipperary. “What I have found is just the tip of a very large and submerged iceberg,” Dwyer told the paper. “The fact that reports of these trials were published in the most prestigious medical journals suggests that this type of human experimentation was largely accepted by medical practitioners and facilitated by authorities in charge of children’s residential institutions.” The Newstalk Breakfast on Monday show also found out that nearly 300 children living in care homes in the 1960s and 70s were used as guinea pigs in medical trials. Ireland had no laws pertaining to medical testing until 1987.

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Jun 032014
 
 June 3, 2014  Posted by at 7:43 pm Finance Tagged with: , , , ,  2 Responses »


Arthur Rothstein General store closed on account of the drought, Grassy Butte, ND July 1936

Everyone expects Mario Draghi’s ECB to announce stimulus measures on Thursday. If the forward guidance, if we can call it that, which was ‘leaked’ by Draghi and his minions is accurate, we’ll see the bank’s main refinancing rate lowered, and the deposit rate perhaps even turned negative, with a less obvious set of measures that may include asset purchases also in the offing. The main goal must be to drive down the euro, which is still way too expensive from the point of view of exports and which therefore holds back ‘recovery’ in the eyes of policy makers, pundits and economists. But it would have to be driving down the euro without driving down stock markets at the same time.

There are a lot of things in just that one simple paragraph that are accepted as gospel, no questions asked, without having been tested or even really thought about. Now, I think that making the deposit rate negative is fine. Why would anyone want banks to be paid to store money with a central bank? Just tell them they can’t park a single eurocent with the ECB without paying a reasonable price to do so. And while you’re at it, the long-term refinancing operation (LTRO) could do with a revision. The stated aim for LTRO is to provide liquidity for banks that hold illiquid assets, but isn’t that perhaps just counter productive? If assets are still illiquid 5-6 years into the crisis, maybe it’s better to simply get rid of them, write them down, not aid and abet banks in holding onto them. It just makes it harder for anyone to know what a bank is truly worth if you help them hide their liabilities, and who needs that? Well, yes, bankers, but if you can’t get your ship and your gambling debts in order in 6 years, who needs you, really?

So trim down LTRO. And then do nothing else at all. Send a message to the world that you’re not intending to play the same game the US, Japan and China have been engaging in. If only because, well, look at where these countries find themselves. What’s to be jealous about there? And if Draghi announces “nothing else at all”, wouldn’t that drive down the euro all by itself? And yes, although we’ve seen markets ‘counter intuitively’ rise a few times recently on bad news, stock markets and other asset markets will probably get hit, perhaps even hard. But isn’t that what this world needs, isn’t it quite simply a good thing if as much of the free and cheap and zombie and ultimately empty stimulus money as possible is driven out of the system?

Zombie money is the biggest scourge of our times and our economies, not its savior, but just about everyone seems to have that completely upside down. The stated idea behind QE and other stimuli is to bring recovery through achieving an escape velocity that could help manage the debt load through – very – rapid growth, but there are no signs, other than some handpicked ones, that it is working. As long as it isn’t, the not-so-stated fact is that things are deteriorating, and quite rapidly too, since huge layers of additional debt are poured onto the already existing debt. Obviously, financial institutions and their shareholders are doing just fine at the cost of those who will have to pay back the debts.

But how does that fit in with Mario Draghi’s job description? What we have is rising stock markets and home prices – in many regions – combined with rising poverty, unemployment and not-in-the-labor-force rates. In what book is that a good direction to go in? How is creating an ever bigger divide in our societies going to help us in a recovery, or in life in general for that matter? If Draghi starts buying up sovereign bonds or asset backed paper, that may help banks and investors for a while, but at what price for the poorest in Greece, Spain or even Germany? And despite that price, there are no guarantees whatsoever that the benefits such actions may have will last. How much road to nowhere do we need to travel before we actually get there?

Tyler Durden ran a piece from The Diplomat written by Yang Hengjun today, Why Do China’s Reforms All Fail? . The reasons Yang gives, which are solidly interlocked, are the exact same as why present day central bank stimulus doesn’t work.

  • … all the reforms in Chinese history aimed to perpetuate the current system
  • … almost all of China’s reforms were done purely for the benefit of the ruler

Central banks seek to perpetuate a system that is already in place, even if it has failed dramatically and is even beyond repair, because central banks are not independent at all, no matter how much they are supposed to be. They instead control the money and credit supply of entire nations or associations of nations for the benefit of the rulers of the existing paradigm, be they political, financial and/or social. Central banks exist to make sure that if existing powers are broke or in danger, they get to feed off the wealth of the people. Therefore, while we may have democratic systems, though that is by no means assured from a political viewpoint anymore, these systems are really moot, since central bankers decide who rules and who pays for that rule, and they always pick yesterday’s favorites to hang on for another day. So if you’re looking for recovery and progress and sanity, you’re out of luck as long as Yellen and Draghi have the powers they do.

But don’t let me get ahead of myself. Draghi may still choose the way of the wiser, and do nothing on Thursday but to cut off a bunch of broke banks’ long overdue lifelines. And cause the very crisis that is the only way to get our economies and societies back on the way to real health, not the zombified kind we’ve been “living” for 6 years now. Hey, I can still dream and hope for another two days …

That’s what I said: they spent it all! No pent-up demand anywhere in sight.

Heloc Payment Jump to Take Bite Out of Consumer Spending (WSJ)

Another bill is coming due from America’s decade-old borrowing binge as payments jump on a number of home-equity credit lines taken out during the boom. Economists worry the new burden could reignite loan-payment troubles and dent consumer spending at an iffy moment in the economic recovery. At issue are home-equity lines of credit, known as Helocs, which allow homeowners to tap their equity to fund home improvement, college tuitions and other expenses. Those loans typically let borrowers make interest-only payments for the first 10 years before requiring principal payments as well. That reckoning will come this year for an estimated 817,000 borrowers owing more than $23 billion in Helocs, more than double last year’s level, according to estimates by Equifax, the credit-reporting firm, and the Office of the Comptroller of the Currency. An average of about $50 billion in loans will reset in each of the next three years.

“These resets are a very serious issue,” said Amy Crews Cutts, chief economist at Equifax. “It’s a nontrivial number of people who get smacked with a higher payment.” The added bite is another reminder of how the home-equity borrowing boom that juiced spending during the past decade still impedes the sluggish U.S. economic recovery. The problems could squeeze states such as California, Arizona, Nevada and Florida that saw the biggest surges in home prices—and borrowing—a decade ago. Equifax data show Heloc delinquency rates have doubled on loans that have already reached the end of their interest-only period. With home prices now rising, banks have begun to increase Heloc lending.

But new originations are a fraction of levels during the peak of the housing boom. And many borrowers with 10-year-old Helocs can’t readily refinance—which could extend their interest-only periods—because many home prices are below where they were when they signed the loans. A homeowner who owes $100,000 on a Heloc carrying a 3.5% interest rate would see payments rise to $715 from $292 when the interest-only loan converts to a 15-year amortizing mortgage. If interest rates were to rise by three%age points, payments would go up an additional $150. “The giant sucking sound is all of that money being taken out of consumer spending,” said Richard Redmond, a mortgage banker in Larkspur, Calif.

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The generational divide steadily grows.

Cash Deals for Homes Reach Record With Boomers Retiring (Bloomberg)

Mike Trafton bought a house in a suburb of Boise, Idaho, where he plans to retire. He made the deal without signing a stack of mortgage papers. Trafton, 55, and his wife Cindy, 54, paid $400,000 in cash for the 3,200-square-foot house in Eagle after selling their 4,400-square-foot home in a Portland, Oregon, suburb for $680,000. Like a growing number of baby boomers, born between 1946 and 1964, the Traftons had no desire to get a mortgage. “I feel better about owning my home outright,” said Trafton, who’s moving to a region with an average of 200 sunny days a year and skiing in the winter. “At this stage in our lives, we can afford it, and it’s better than having a monthly mortgage payment hanging over us.” U.S. home-price gains have restored $3.8 trillion of value to owners since the beginning of the real estate recovery in 2012, according to Federal Reserve data.

A record number of Americans are using that equity to pay cash for properties, avoiding a mortgage process that has become even more onerous in the wake of the 2007 housing collapse. In the first quarter, 29% of non-investment homebuyers used cash, the highest on record for the period, according to data compiled by Bloomberg. The majority of people making all-cash deals are baby boomers mostly because America’s largest-ever generation is beginning to retire, said Lawrence Yun, chief economist of the National Association of Realtors. In 2012, there were a record 61.8 million Americans over the age of 60, according to the Census. That compares with 46.6 million in 2000. “Cash purchases are on the rise because older homeowners who have decades of home-equity accumulation don’t want the hassle of a mortgage,” Yun said. “With the economy improving and the stock market at record highs, boomers are the ones who are driving the market.”

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A lot of trouble’s brewing below the surface.

Over 40% of 2 Million Modified Loans Facing Resets are Underwater (Mish)

Kostya Gradushy, Black Knight’s manager of Loan Data and Customer Analytics: “While the national negative equity rate as of April stands at 9.4% of active mortgages, the share of underwater modified loans facing interest rate resets is much higher — over 40%. In addition, another 18% of modified borrowers have 9% equity or less in their homes. Given that the data has shown quite clearly that equity — or the lack thereof — is one of the primary drivers of mortgage defaults, these resets may indeed pose an increased risk in the years ahead. “From a broader perspective, it’s also important to note that more than one of every 10 borrowers is in a ‘near negative equity’ position, meaning the borrower has less than 10% equity in his or her home.”

Underwater loans facing reset is one major problem. A second problem is the declining volume of new originations and home sales. A chart of new single-family homes sold will highlight the second problem.

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Not spending.

US Velocity Of Money Falls To All-Time Record Low (M. Snyder)

Let’s take a look at M2. It includes more things in the money supply. The following is how Investopedia defines M2…

A measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money” in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.

This is a highly deflationary chart. It clearly indicates that economic activity in the U.S. has been steadily slowing down. And if we are honest, we have to admit that we are seeing signs of this all around us. Major retailers are closing down stores at the fastest pace since the collapse of Lehman Brothers, consumer confidence is down, trading revenues at the big Wall Street banks are way down, and the steady decline in home sales is more than just a little bit alarming. In addition, the employment situation in this country is much less promising than we have been led to believe. According to a report put out by the Republicans on the Senate Budget Committee, an all-time record one out of every eight men in their prime working years are not in the labor force…

“There are currently 61.1 million American men in their prime working years, age 25–54. A staggering 1 in 8 such men are not in the labor force at all, meaning they are neither working nor looking for work. This is an all-time high dating back to when records were first kept in 1955. An additional 2.9 million men are in the labor force but not employed (i.e., they would work if they could find a job). A total of 10.2 million individuals in this cohort, therefore, are not holding jobs in the U.S. economy today. There are also nearly 3 million more men in this age group not working today than there were before the recession began.”

Never before has such a high percentage of men in their prime years been so idle. But since they are not counted as part of “the labor force”, the government bureaucrats can keep the “unemployment rate” looking nice and pretty. Of course if we were actually using honest numbers, the unemployment rate would be in the double digits, our economy would be considered to have been in a recession since about 2005, and everyone would be crying out for an end to “the depression”. And now we are rapidly approaching another downturn. [..] And now Fed officials are slowly scaling back quantitative easing because they apparently believe that the economy is getting “back to normal”. We shall see. Many are not quite so optimistic. For example, the chief market analyst at the Lindsey Group, Peter Boockvar, believes that the S&P 500 could plummet 15 to 20% when quantitative easing finally ends. Others believe it will be much worse than that.

Since 2008, the size of the Fed balance sheet has grown from less than a trillion dollars to more than four trillion dollars. This unprecedented intervention was able to successfully delay the coming deflationary depression, but it has also made our long-term problems far worse. So when the inevitable crash does arrive, it will be much, much worse than it could have been. Sadly, most Americans do not understand these things.

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I’ve covered this many times.

QE At Work: Pouring Cheap Debt Into The Shale Ponzi (Alhambra)

In Bernanke’s explanation, investors swap high quality MBS or Treasuries for high quality corporate bonds but reality has seen something a bit different. From 1996 to 2006, a bit over $1 trillion in junk bonds were issued. It took only 3 years to match that total in the QE era. What is more disturbing is that a large portion of that junk debt (and a lot more that isn’t reported via the bank lending channel) is being issued to fund oil and gas exploration companies for the fracking of oil and natural gas. Shale debt has at least doubled over the last four years. Why is that disturbing? Isn’t shale supposed to lead us to the nirvana of energy independence? Well, maybe not. I’ve been a critic of the industry since the boom first started and not because I’m concerned about the environmental impact (although that probably deserves more of my attention). My criticism has focused on the economics of shale.

There are two pieces of the economic puzzle when it comes to shale. First is that most shale oil deposits are not profitable to extract except at current high prices. This drilling/extraction method is not cheap. Breakeven prices vary by region but it is safe to say that no shale oil deposits are profitable below $50/barrel and most areas require much higher prices. An average might be in the range of $65 and there are plenty of areas where the price needs to be above $80 before anyone makes a nickel. I would just note that oil traded, albeit briefly, at $34 in the last recession. Second is the production profile of shale wells; production drops off rather precipitously after the first year (in contrast with traditional wells which deplete over much longer time frames). Combine high extraction costs with rapid depletion and the economics of shale become not only dubious but frankly insane.

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But there is none at the moment.

Why Central Banks Need More Volatility (Zero Hedge)

Will volatility become a policy tool? The PBOC decided that enough was enough with the ever-strengthening Yuan and are trying to gently break the back of the world’s largest carry trade by increasing uncertainty about the currency. As Citi’s Stephen Englander notes, this somewhat odd dilemma (of increasing uncertainty to maintain stability) is exactly what the rest of the world’s planners need to do – Central banks will need more FX and asset market volatility in order to provide low rates for an extended period… here’s why. Via Citi’s Stephen Englander:

Will central banks need volatility to restrain asset prices?

• Cyclical and trend growth pessimism is leading central banks to guide expectations of rates downward
• The more credible the guidance, the more risk will be bought
• To prevent asset market overheating while keeping rates low, central bankers may have to introduce more volatility into asset markets…
• …emphasizing risk and vigilance and central bank readiness to raise rates if needed

Central banks will need more FX and asset market volatility in order to provide low rates for an extended period. The argument goes like this:

1) Low realized and implied volatility have come as a surprise to investors
2) Investors are underinvested out of skepticism that the low rates, low volatility environment will persist
3) If the central bank mantra of “low rates, low vol forever” persists in asset markets, investors will buy high beta assets and add leverage
4) Asset prices will respond much more to rates incentives than (so-called) rates sensitive sectors of the economy
5) Central banks want to keep the low rates without creating an asset bubble and will purposely induce volatility to calm speculation

The big surprise this year is the reduction in FX and asset market volatility (Figures 1, 2) Realized USDBRL volatility over the last month is where EURUSD vol was in Q1 2013. Since it was unexpected, investors were underinvested and even wrongly positioned as volatility declined.

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People are not spending.

Eurozone Inflation Dives To 0.5% As ECB Poised To Act (Reuters)

Euro zone price inflation fell unexpectedly in May, increasing the risks of deflation in the currency area and sealing the case for the European Central Bank to act this week. Annual consumer inflation in the 18 countries sharing the euro fell to 0.5% in May from 0.7% in April, the EU’s statistics office Eurostat said on Tuesday. A clutch of senior sources told Reuters earlier this month that the ECB was preparing a package of policy options for its meeting on Thursday, including cuts in all its interest rates and targeted measures aimed at boosting lending to small– and mid-sized firms (SMEs). The weak rate of May price rises would seem to cement expectations that the ECB will now deliver a series of measures to make it even cheaper to borrow and help the economy.

May’s reading is back at levels last seen in March – the lowest level since November 2009 and reflecting low inflation in Germany. Inflation in the 9.5 trillion euro economy is stuck in the ECB’s ‘danger zone’ of below 1%, a sign of the fragile recovery. The ECB says it stands ready to use all tools available to fend off deflation risks and aid the economy. Core inflation, excluding energy, food, alcohol and tobacco, fell to 0.7% in May from 1.0% in April. Energy prices were flat on the year, showing no decline for the first time in five months. Global financial markets have been buoyed by the odds of cheaper money in the bloc and could react sharply if the ECB does not deliver on Thursday.

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The lowest yields in 200 years. How does that rhyme with the state our economies are in?

Napoleonic Yields No Comfort to Draghi Fighting Deflation (Bloomberg)

Europe’s lowest government bond yields since the Napoleonic Wars are signaling investors want more action from Mario Draghi. Instead of a vote of confidence, the most pronounced rally in 200 years suggests the European Central Bank president needs to stave off the risks of stagnation and deflation. Austria, Belgium, France (GFRN10) and Germany can borrow at lower rates than the U.S. as inflation less than half the ECB’s target stokes concern the euro zone will take many years to recover from its longest-ever recession. While bond, currency and derivative markets show an abatement in the contagion that began in Greece in 2009 before engulfing Spain and Italy, a closer look reveals high debt and deficits that have yet to be addressed, unemployment near record levels and a banking system still to be fixed.

ECB policy makers will share their outlook in two days, when they probably will lower the 18-nation currency bloc’s official rate toward zero and take the deposit rate negative for the first time. “The outright level of yields is suggesting an incredibly weak outlook for growth,” Russell Silberston, a London-based money manager at Investec Asset Management, which oversees $110 billion, said in a May 30 phone interview. “It’s a powerful signal telling you policy is too tight and that there’s complacency toward the risks. Not a great deal has been solved. We’ve still got bank stress tests to come, too low growth and too low inflation.”

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In times of pleanty, differences can be papered over. When they turn lean, not so much.

The Most Worrying Chart For Europe’s Stability (Zero Hedge)

While we have historically noted the explosion of youth unemployment as a key factor for instability in Europe, there appears to be an ever more concerning indicator of the potential fragility of the European Union. As Bloomberg’s Maxime Sbahi notes, the difference in economic performance (and mood) between France and Germany, often referred to as the European “engine,” is at a record high. This disparity is likely to weaken France and isolate Germany further, heightening political tensions and indecision in the euro area. And the “mood” of the people – perhaps even more contentiously – is near 30 year highs…

Via Bloomberg Brief: “The political consequences of these economic gaps are growing clearer, though the differences in underlying policy choices have been visible for some time. Last week’s European Parliament elections provided a first glimpse of the political shakeout, with the victory of the National Front in France. The country will send a record 24 euroskeptic members to the European Parliament in a total delegation of 74, compared with seven out of 96 from Germany. Disagreements between the two EU founding members are likely to intensify as past common interests are now strained by increasing economic divergence. Recently, France has repeatedly argued for a relaxation of fiscal targets and called on the European Central Bank to be more proactive to weaken the euro. Germany has retorted by insisting on the ECB’s independence and respect for fiscal discipline, directly warning France against non-compliance with budget commitments.

If the French economy continues its slide from the euro area’s core to the profile of a periphery member, new standoffs are likely to materialize, weakening the Franco-German relationship that has provided leadership in the past. This might slow down the functioning of the euro area, where decisions are mostly made between heads of government in summits. Over the long term, one of the most disturbing consequences is a potential lack of a common strategic view for the euro area’s future at a time when direction is needed more than ever. If its historic partner is downgraded to a junior status, Germany may grow even more powerful on the European stage. The country may find itself in a more isolated and uncomfortable position.”

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Profit from central banks giving away your children’s futures. What a great concept.

Buy With Central Banks Is U.S.-Japan Lesson for ECB QE Scenario (Bloomberg)

[..] … how should investors react if the ECB finally starts buying assets? Societe Generale analysts looked to the U.S. and Japan for clues. They found three patterns in both the Japanese purchase of asset-backed securities from August 2003 to September 2006 and the three rounds of quantitative easing deployed by the Federal Reserve from November 2008 to now. First, QE triggered a reallocation from bonds to equities, In Japan, that proved enough to push up the MSCI Index Japan by 76% over the three period during which the bank spent 3.8 trillion yen ($37 billion). In the U.S., the Standard & Poor’s Index 500 rose 36% in the first wave of buying until March 2010, 24% in the second round from August 2010 to the following June and 29% in QE3 since September 2012, Societe Generale strategists Alain Bokobza and Gaelle Blanchard said in a report last month.

Second, 10-year bond yields were pushed higher, to the tune of 71 basis points in Japan and a cumulative 212 basis points in the U.S. over their respective quantitative-easing periods. While that may sound counterintuitive if the central banks are buying bonds, the resulting spur to economic growth and inflation boosted long-term yields, according to Bokobza. Third, QE supported the banking sector. Japanese bank stocks improved strongly once the BOJ started quantitative easing, reducing the sector’s credit risk after bad loans had hurt their balance sheets. In the U.S., the buying helped stabilize the share performance of banks.

Such a blueprint has Societe Generale making some early recommendations if Draghi’s ECB follows the BOJ and the Fed. Investors should bet on euro-region equities to outperform rivals elsewhere. In the U.S., industrials and consumer discretionary stocks did better than the market in every QE episode, while consumer staples, utilities and telecommunications systematically underperformed. The stocks and bonds of crisis countries such as Greece and Spain and maybe even less-infected France should do well as asset purchases supports their equity markets by aiding economic activity. It’s also worth preparing for the banking outlook to turn more positive, with Societe Generale favoring Credit Agricole SA, BNP Paribas and Unicredit SpA. All that’s needed now is for Draghi to start writing checks.

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Why Do China’s Reforms All Fail? (The Diplomat)

To simplify, there are three common factors.

First, as opposed to other reforms recorded in world history, almost all of China’s reforms were done purely for the benefit of the ruler (the emperor). The reforms adjusted the ruler’s policies on how to control the people, how to manage the four classes (scholars, peasants, artisans and merchants), how to exploit the peasants’ land, and how to fill the treasury with taxes. None of the reforms touched on philosophies of holding power, or the methods of governance, much less centered around public interests.

China’s reformers saw the interests of the common people as objects of reform, rather than reforming the regime in order to benefit the people. As a result, these reforms never touched the ruling dynasty, but only caused power struggles between the interest groups involved. Compared to revolutions (which are either loved or feared), the people were generally indifferent to “reform.” And reforms without public support fail utterly once they encounter counterattacks from interest groups and opposition parties. For the common people, the failure of the reforms was nothing to mourn.

Second, many vigorous reforms in Chinese history had one thing in common: The reformers were not the highest ruler (the emperor). Many had been (provisionally) selected by the emperor to act as pioneers for the reforms — and as scapegoats when reforms failed. Reformers like Shang Yang, Wang Anshi and the late Qing Westernization school all suffered this fate. The people who held supreme power were usually governing from behind the scenes. They maintained a certain distance from the reform, which left plenty of room to maneuver. If the reforms succeed, those in charge will take the credit; if the reforms fail, they will sacrifice the reformers. Under these circumstances, the reforms would be half-hearted from the beginning — so much for “top-down” reforms. By contrast, the series of reforms conducted directly by Emperor Wu in the Han dynasty and by Tang dynasty emperors were more effective.

Third, all the reforms in Chinese history aimed to perpetuate the current system, rather than changing the existing regime. Some reforms failed, and the reformers were dismembered (like Shang Yang) or died in disgrace (Wang Anshi). But even then, leaders kept the parts of the reform policies that could help maintain the existing system, turning the reforms into cogs in the authoritarian machine.

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Oh yes it is.

China’s Debt Reckoning Is Coming (Bloomberg)

It took China to prove Friedrich Nietzsche wrong. What didn’t kill the Communist Party hasn’t made it stronger. It’s only making the inevitable crash bigger, more spectacular and needlessly dangerous. China’s debt reckoning is coming. Maybe not this quarter or this year, but Chinese President Xi Jinping’s unbridled effort to keep growth from falling below the official 7.5% target is cementing China’s fate. China is investing just as much as it did in 2008 and 2009, when authorities were desperately trying to avert a slowdown. Just as debt troubles in Japan, Europe and the U.S. ended badly, so will China’s. Why, then, with so many clear examples of financial excess leading to ruin, is Xi continuing down this road? Blame it on the ghosts of Tiananmen Square.

In the aftermath of the crackdown on student protesters on June 4, 1989, China’s leaders made a bargain with their people: We will make you richer, as long as you no longer dissent. After the crash of Lehman Brothers, the regime had to go to extraordinary lengths to keep up its end of the bargain, pumping up what was already the world’s highest investment rate. In doing so, China itself became a Lehman economy – powered by shadowy funding sources, off-balance-sheet investing and unconvincing claims that all remained well. For a while this rampant investment growth seemed to make China stronger; now that strategy is its main vulnerability. Yet Xi and Premier Li Keqiang apparently can’t bring themselves to roll back those policies and rebalance the economy away from exports and toward more consumption.

They know that if they do so, growth will slow a lot, challenging the post-Tiananmen compact — and in the Internet age, no less. As anger grows over any slowdown, Chinese censors won’t be able to delete text messages and microblog entries fast enough. It’s often said that when the U.S. sneezes, the entire world catches a cold. But the eventual popping of China’s $23 trillion credit bubble could send many nations to the emergency room. Any crash would make deflation China’s biggest export. China’s brawn is widely misunderstood. Take Donald Trump’s recent musings to Fox News about China’s rising economic dominance and the tragedy of the U.S. borrowing from Beijing to service a debt “no one ever dreamt possible.” You would think a man with Trump’s track record of bankruptcies would understand that losses from debt don’t disappear. When a company, or nation, rolls over unpaid debts without resolving them, profits – or GDP – are overstated, as China’s is today.

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“Wall Street’s biggest firms can’t get a break in the bond business.” So?

Bond Bankers Have 144 Reasons to Fret Over Underwriting Frenzy (Bloomberg)

Wall Street’s biggest firms can’t get a break in the bond business. With trading profits dwindling, more dealers than ever are fighting for assignments managing U.S. corporate-bond sales, one of the few bright spots in fixed income. Companies from the most-creditworthy to the most-indebted have been selling trillions of dollars of debt, locking in record-low borrowing costs ahead of the anticipated rise in interest rates. The increased competition is bad for JPMorgan Chase, Bank of America, Citigroup Goldman Sachs and Barclays because the top five banks won the smallest share of the assignments this year for any comparable timeframe, according to data compiled by Bloomberg. A record 144 underwriters for the period have split an estimated $4.2 billion of fees on U.S. sales, the data show.

“One business is challenged, so people have become aggressive in other businesses,” said Alison Williams, a senior financials analyst with Bloomberg Industries. While the biggest firms are still dominant, they’re losing their hold on a reliable profit center in an increasingly bleak fixed-income world. The five most-active corporate-debt underwriters this year landed 47% of the business, the smallest share on record. That’s down from 59% of the assignments for all of 2009. Smaller firms see an opportunity to break into the business as Wall Street’s behemoths unload inventories of riskier securities in the face of higher capital requirements and limits imposed by the U.S. Dodd-Frank Act’s Volcker Rule on the amount of their own money they can use to trade.

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Hey, PIMCO makes a killing on zombie money.

Pimco: Blithering About Minsky Moments And Free Money Forever (Stockman)

The single most dangerous meme now extant among the Cool-Aid drinkers is that we already had something called the Minsky Moment in 2008—so six years on its still too early for another. Fittingly, CNBC trotted out one of Pimco’s retired bond peddlers, Paul McCulley, to explain this, and why it is therefore safe to load up on bonds. That is, bonds which Bill Gross has already bought and which McCulley now invites the mullets to bid higher. After all, in a world of monetary central planning appearing on bubblevision to egg on the mullets is what bond fund economists do for a living: ‘We don’t have to be worried about the Big One. We had the Big One, and you don’t have another Big One after you have had the Minsky moment,’ he said.” Now lets see. Either the last Big One came crashing into Wall Street on the tail of a comet from deep space—in which case we need to consult the astronomical charts about the timing of the next one— or it was enabled, fueled and cheered on by the denizens of the Eccles Building.

If the latter, then it is obvious that they have done nothing differently in the last six years and, in fact, have actually doubled down and then some on Greenspan’s housing bubble maneuver. Indeed, the Fed has pegged interest rates in the money markets at essentially zero for the past 66 months—a condition that has never before happened during the history of modern financial markets. That makes Greenspan’s 24 month experiment with 1% money during 2003-2005 pale by comparison. Yet free or nearly free funding to the carry trades always and everywhere has the same effect: it incites massive leveraged speculation in the financial markets as gamblers seek to capture easy profit spreads between zero cost liabilities and “risk assets” which generate a positive yield or appreciation.

Now deep into year six of a monetary policy that is the mother’s milk of financial bubbles, there are warning signs everywhere. Margin debt reached historic peaks a few months ago; momentum driving hysteria of dotcom era intensity afflicted the bio-tech, cloud and social media stocks until they rolled-over recently; the Russell 2000 is trading at 85X reported income; junk bond issuance is at record levels and cov lite loans and booming CLO issuance–the hallmarks of the 2007-2008 blow-off top—have made an even more virulent reappearance; the LBO kings are busy strip-mining cash from portfolio companies already groaning under the weight of unrepayable debt via the device of “leveraged recaps” –another proven sign of a speculative top; and now the LBO houses are furiously buying and selling among themselves what have become permanent debt-mule companies by scalping cash from buyers who then reload more of the same debt on the sellers.

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Turn it upside down and see what it looks like.

On The False Idea That Money Is A Resource (Lisa Wade)

Watts makes a truly profound argument about what money really is. I’ll summarize it here and you can watch the full three-and-a-half minute video below if you like. Watts notes that we like to talk about “laws of nature,” or “observed regularities” in the world. In order to observe these regularities, he points out, we have to invent something regular against which to compare nature. Clocks and rulers are these kinds of things. All this is fine but, all too often, the clocks and the rulers come to seem more real than the nature that is being measured. For example, he says, we might think that the sun is rising because it’s 6AM when, of course, the sun will rise independently of our measures. It’s as if our clocks rule the universe instead of vice versa.

He uses these observations to make a comment about wealth and poverty. Money, he reminds us, isn’t real. It’s an invented measure. A dollar is no different than a minute or an inch. It is used to measure prosperity, but it doesn’t create prosperity any more than 6AM makes the sun rise or a ruler gives things inches. When there is a crisis — an economic depression or a natural disaster, for example — we may want to fix it, but end up asking ourselves “Where’s the money going to come from?” This is exactly the same mistake that we make, Watts argues, when we think that the sun rises because it’s 6AM. He says:

They think money makes prosperity. It’s the other way around, it’s physical prosperity which has money as a way of measuring it. But people think money has to come from somewhere… and it doesn’t. Money is something we have to invent, like inches. So, you remember the Great Depression when there was a slump? And what did we have a slump of? Money. There was no less wealth, no less energy, no less raw materials than there were before. But it’s like you came to work on building a house one day and they said, “Sorry, you can’t build this house today, no inches.” “What do you mean no inches?” “Just inches! We don’t mean that… we’ve got inches of lumber, yes, we’ve got inches of metal, we’ve even got tape measures, but there’s a slump in inches as such.” And people are that crazy!

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Coasting Toward Zero (Jim Kunstler)

In just about any realm of activity this nation does not know how to act. We don’t know what to do about our mounting crises of economy. We don’t know what to do about our relations with other nations in a strained global economy. We don’t know what to do about our own culture and its traditions, the useful and the outworn. We surely don’t know what to do about relations between men and women. And we’re baffled to the point of paralysis about our relations with the planetary ecosystem. To allay these vexations, we just coast along on the momentum generated by the engines in place — the turbo-industrial flow of products to customers without the means to buy things; the gigantic infrastructures of transport subject to remorseless decay; the dishonest operations of central banks undermining all the world’s pricing and cost structures; the political ideologies based on fallacies such as growth without limits; the cultural transgressions of thought-policing and institutional ass-covering.

This is a society in deep danger that doesn’t want to know it. The nostrum of an expanding GDP is just statistical legerdemain performed to satisfy stupid news editors, gull loose money into reckless positions, and bamboozle the voters. If we knew how to act we would bend every effort to prepare for the end of mass motoring, but instead we indulge in fairy tales about the “shale oil miracle” because it offers the comforting false promise that we can drive to WalMart forever (in self-driving cars!). Has it occurred to anyone that we no longer have the capital to repair the vast network of roads, streets, highways, and bridges that all these cars are supposed to run on? Or that the capital will not be there for the installment loans Americans are accustomed to buy their cars with? The global economy is withering quickly because it was just a manifestation of late-stage cheap oil. Now we’re in early-stage of expensive oil and a lot of things that seemed to work wonderfully well before, don’t work so well now.

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Good, simple, clear video.

The Federal Reserve Explained In 7 Minutes (Zero Hedge)

As members of the world’s central banks (most importantly Draghi and the ECB this week) are held up as Idols on mainstream business TV, despite their disastrous historical performances and inaccuracies, we thought it time to dust off the dark ‘reality’ behind the Federal Reserve – the uber-central bank … perhaps summed up nowhere better than in the words of former Fed Chair Alan Greenspan himself … “There is no other agency of government which can over-rule actions that we take.”

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The growth monster now lives everywhere.

India Growth Below 5% Adds Pressure on Modi to Spur Investment (Bloomberg)

India’s economy grew less than 5% for a second quarter, adding pressure on Prime Minister Narendra Modi to spur investment after winning the strongest electoral mandate in 30 years. Gross domestic product rose 4.6% in the three months ended March from a year earlier, unchanged from the previous quarter, the Central Statistical Office said in a statement in New Delhi yesterday. The median of 42 estimates in a Bloomberg News survey had been for a 4.7% gain. GDP expanded 4.7% in the fiscal year that ended March 31, compared with the previous period’s decade-low 4.5%.

Reviving growth is the new government’s immediate challenge while the central bank works to lower inflation, Reserve Bank of India Governor Raghuram Rajan said in Tokyo yesterday. The first single-party parliamentary majority in India since 1984 puts Modi in a position to take politically sensitive decisions such as cutting subsidies and hastening project approvals. “There is euphoria over the new government and some consumption uptick can happen,” said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “You can’t expect a sudden turnaround. There could be some limitations in clearing projects faster as some were stuck over court jurisdictions.” India’s GDP has been below 5% in seven of the last eight quarters. Over the last decade, growth has averaged about 8%.

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Top US CEOs Make 330 Times More Than Average Employees (RT)

The average employee in the US will have to work 331 years to earn the annual salary of an average Fortune 500 CEO, according to the AFL-CIO’s 2013 Executive Paywatch. The ratio of CEO pay to worker pay has increased by more than 500 percent in the last thirty years. In 1983, the average CEO made 46 times the average worker’s pay packet. The ratio quadrupled through the decade to 195 times in 1993. Highly paid CEOs of companies employing low wage earners are fueling economic inequality, which continues to grow.

The CEO salary data was sourced from the US Securities and Exchange Commission (SEC) and the US Bureau of Labor Statistics (BLS) data for the latest fiscal years, covering around 3,000 corporations, most listed in the Russell 3000 Index. America is considered to be the land of opportunity, however in recent decades, corporate CEOs have been taking a greater share of the economic pie. The wage of chief executives is constantly growing, while the salary of the average worker has stagnated and unemployment remains high.

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How much energy does it take to keep an ice wall going for decades or even hundreds of years?

TEPCO Starts Work On Fukushima Underground Ice Wall (RT)

Aiming to isolate radioactive water build-up, Fukushima nuclear plant’s operator, TEPCO, has started constructing a huge underground ice wall around the facility. The ambitious project will have to be maintained for well over a century to reach its goal. Tokyo Electric Power Company has launched work on the 1.5 kilometer underground ice wall, which is to be built around four reactors at the crippled Fukushima Daiichi No. 1 nuclear power plant, Kyodo news agency reports. According to Kyodo, 1,550 pipes will now be inserted into the ground to circulate coolant around the reactors, keeping the surrounding soil constantly frozen. The government funded project, which will cost an estimated 32 billion yen (US$314 million), is scheduled for completion by the end March 2015. It will then take a few more months to fully freeze the soil after the coolant starts circulating, according to TEPCO.

The work started days after Japan’s Nuclear Regulation Authority (NRA) granted the go-ahead for the project, despite earlier reservations. TEPCO reportedly managed to convince the watchdog that the ice wall – which might cause some ground to sink – will not have any significant effect on the stability of the reactor buildings. However, some experts remained skeptical of TEPCO’s plan, which is the latest move in the company’s struggle to contain the fallout of the March 2011 nuclear disaster triggered by a strong earthquake. TEPCO’s efforts have been overshadowed by revelations that the company repeatedly concealed the true radiation levels at the plant and “misreported” the radiation risks to US servicemen helping to contain the disaster. New evidence also allegedly shows that some 90% of workers were not present at the plant when the meltdown started.

While the frozen wall may indeed help to at least reduce the escape of contaminated liquid into the groundwater, it will still take decades – if not hundreds of years – for record-high radiation levels to clear away in the area, including in the ocean. Michio Aoyama, a professor at Fukushima University’s Institute of Environmental Radioactivity, told Kyodo that the Fukushima plant contains radiation equivalent to “14,000 times” the amount released in the atomic bomb attack on Hiroshima 68 years ago, and has seriously affected the ocean and the coastal area. The problem is thus left for the coming generations to tackle, stretching the impact of the accident into the future. Japan, meanwhile, is eyeing the resumption of work on some of its 20 nuclear power plants suspended or shut down after the 2011 earthquake, despite public protests. As of June, two units at Oi nuclear power plant are the only operating Japanese nuclear facilities.

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