capital flight Archives - The Automatic Earth

I have commented on Target2 liabilities before. Perhaps a Mish-modified translation from the Welt article Imbalance in the Euro System Reaches a New Record will ring a bell. The central banks of Germany’s euro partners Italy, Spain and France owe the Bundesbank almost a trillion euros . This is a new high. – more than ever before. Tendency continues to rise. There is no security for this money. Read that last line again and again until it sinks in. Italy is €464.7 billion in the hole. Spain is €376.6 billion in the hole. Creditors owe Germany, the Netherlands, and Finland over €1.157 trillion. In May, Italian liabilities increased by almost 40 billion euros.

“Capital flight to Germany is in full swing,” says Hans-Werner Sinn, longtime head of the Ifo Institute and one of the most prominent economists in the Federal Republic. Originally, Target2 was designed to facilitate cross-border transactions within the eurozone. The system achieved this goal. From the point of view of critics, this means that the Deutsche Bundesbank provides long-term unsecured and non-interest-bearing loans to the central banks of other eurozone countries , especially the central banks of southern countries Italy, Spain and Portugal.

Target2 is a fundamental problem of the Eurozone. • The ECB guarantees these loans. • As long as they are guaranteed, then hells bells, why not make more loans? Germany will pay one way or another. Here are the possibilities. 1) Germany and the creditor nations forgive enough debt for Europe to grow. This is the transfer union solution. 2) Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe 3) Breakup of the eurozone. Those are the alternatives. Germany will not allow number 1. It is unreasonable to expect number 2 to last forever. The only door left open is door number 3.

Nothing about this needs to be invented.

• The Big Italy Short Was Hiding In Plain Sight (R.)

The marriage of politics and finance in Italy regularly produces strange offspring. But a suggestion, floated over the weekend in the country’s most-respected newspaper, of a James Bond-style plot by some big investors to sink Italian financial markets added a new twist. More curious was the theory’s abrupt disappearance by Monday. The episode highlights the degree to which Europe’s most chaos-resilient economy has entered a risky new paradigm with the arrival of the most populist government since the Italian Republic’s founding in 1946. On Saturday, Corriere della Sera, the Milanese voice of the establishment, published an article which speculated that some investors betting against Italian assets might have helped engineer a market crisis.

The trigger for the Italian panic was the May 15 publication by Huffington Post’s Italian website of a draft version of the new government’s “contract”, which included language pertaining to a possible exit from the single European currency. That document, HuffPo has said, arrived in an unmarked envelope. Markets went haywire over the prospect that the government cobbled together by the two parties who gained the most seats in the March election – the right-wing League and hard-to-label 5-Star Movement – would adopt an explicitly anti-euro platform. The difference between the yields on 10-year German and Italian government bonds surged to almost 320 basis points from just around 130 basis points before the draft appeared. Any bets against Italian sovereign credit would have produced a tidy profit.

Corriere has substantially revised the story. It no longer includes language that one hedge fund, Brevan Howard, considered defamatory. That firm’s AH Master Fund, run by Alan Howard, gained 37 percent in May, thanks in part to bets on the direction of Italian assets. On Tuesday, the newspaper appended an author’s note to the piece in which it said: “We never intended to accuse or suggest that there were any kind of offenses or improper conduct by Howard in trading or in his involvement in the case of documents filtered to the Huffington Post.” In a statement to Reuters Breakingviews, the author, Federico Fubini, defended the piece. “We have run a fact-based article whose substance remains.” The paper decided “to amend the text to avert a potentially time-consuming case in foreign courts.”

EU, China protectionism.

• G7 Summit Highlights Western Leaders Hypocrisy (Lacalle)

The G7 failure to come to terms on trade highlights the problem of governments trying to macromanage trade. And no, the failure to even agree to disagree cannot be blamed on President Trump and his new-found economic nationalism. The list of countries with the largest trade surplus with the United States is led by China, which exports $375 billion more than it imports. It is followed, very far away, by Mexico ($71 billion), Japan (69 billion), Germany (65 billion), Vietnam (38 billion), Ireland (38 billion) and Italy ($31 billion). Not surprisingly, the markets with most protectionist measures against the United States are China, the European Union, Japan, Mexico and India.

These facts explain much more about the failure of the G7 summit than any Manichean analysis on Trump, Trudeau, Macron, or any of the leaders gathered there. During the last twenty years, the world has carried out a widespread practice in governments’ disastrous idea of “sustaining” GDP with demand-side policies. Build excess capacity, subsidize it, and hope to export that excess to the United States. Especially China, Germany, and Japan have economies with high state interventionism and therefore very high excess capacity, in part due to a high personal savings rate. Steel and aluminum, like the automobile industry, are examples of building unnecessary capacity and subsidizing it, country by country, hoping it will be somebody else who closes its inefficient factories to be able to export more to that country.

In Germany, the influence of the automobile industry over the government is legendary. What isn’t are the relatively high tariffs American manufacturers face when exporting to Europe and the low tariffs America itself imposes on automobile imports. What is also ironic is that modern-day protectionism didn’t start with Trump. Barriers against global trade increased between 2009 and 2016. The World Trade Organization warned, year after year, since 2010, about the increase in protectionism. The Obama administration, faced with the exponential increase in its trade deficit, was the one that introduced the highest number of protectionist measures between 2009 and 2016. The only difference between Trump and Obama was that Obama didn’t publicize this much and the mainstream media didn’t complain.

True, these deals need a sunset clause.

• Donald Trump Was Right. The Rest Of The G7 Were Wrong (Monbiot)

He gets almost everything wrong. But last weekend Donald Trump got something right. To the horror of the other leaders of the rich world, he defended democracy against its detractors. Perhaps predictably, he has been universally condemned for it. His crime was to insist that the North American Free Trade Agreement (Nafta) should have a sunset clause. In other words, it should not remain valid indefinitely, but expire after five years, allowing its members either to renegotiate it or to walk away. To howls of execration from the world’s media, his insistence has torpedoed efforts to update the treaty.

In Rights of Man, published in 1791, Thomas Paine argued that: “Every age and generation must be as free to act for itself, in all cases, as the ages and generations which preceded it. The vanity and presumption of governing beyond the grave is the most ridiculous and insolent of all tyrannies.” This is widely accepted – in theory if not in practice – as a basic democratic principle. Even if the people of the US, Canada and Mexico had explicitly consented to Nafta in 1994, the idea that a decision made then should bind everyone in North America for all time is repulsive. So is the notion, championed by the Canadian and Mexican governments, that any slightly modified version of the deal agreed now should bind all future governments.

But the people of North America did not explicitly consent to Nafta. They were never asked to vote on the deal, and its bipartisan support ensured that there was little scope for dissent. The huge grassroots resistance in all three nations was ignored or maligned. The deal was fixed between political and commercial elites, and granted immortality. In seeking to update the treaty, governments in the three countries have candidly sought to thwart the will of the people. Their stated intention was to finish the job before Mexico’s presidential election in July. The leading candidate, Andrés Lopez Obrador, has expressed hostility to Nafta, so it had to be done before the people cast their vote. They might wonder why so many have lost faith in democracy.

[..] Trump was right to spike the Trans-Pacific Partnership. He is right to demand a sunset clause for Nafta. When this devious, hollow, self-interested man offers a better approximation of the people’s champion than any other leader, you know democracy is in trouble.

Caitlin again.

• Centrists Very Concerned That Donald Fucking Trump Isn’t Hawkish Enough (CJ)

[..] by far the most common concerns being expressed about the Singapore summit are based not on a fear of this administration making insufficiently aggressive demands of Pyongyang, but on pure ridiculous nonsense. “President Trump seems to have given away two or three of the major things that Kim Jong-Un wanted,” Schumer complained at the aforementioned press conference. “A meeting. The flags next to each other. Now a delay of exercises with South Korea, without getting anything in return.” Huh? A meeting? Flags next to each other? I can kinda-sorta-almost see into Schumer’s twisted reality tunnel when it comes to temporarily suspending military drills along the DPRK’s border as an act of good faith, but on what planet is having a meeting or putting two flags next to each other a win of any kind?

Well, going by the outcry I’m seeing from Twitter pundits, the concern appears to be that it “legitimizes” Kim Jong-Un. What exactly that means is hard to fathom in terms of actual, tangible reality, but for years that term has been passed around like it has as much relevance as war or starvation sanctions. This imaginary product of “legitimacy” is, according to influential mainstream political commentators, meant to be withheld from Kim until he gives up everything he has and grovels on his belly begging for it. This just shows you the power of narrative, where repeating some meaningless placeholder syllables over and over again can create the illusion that a purely mental construct is as relevant in peace negotiations as nuclear warheads.

It isn’t hard to see through for anyone who doesn’t have a vested interest in subscribing to that narrative, though, and Pyongyang certainly has no such interest. [..] There are many, many perfectly valid things to criticize the Trump administration for. Opening up peace talks with North Korea is not one of them, and anyone who says it is is not a friend of humanity. The fact that nobody on either side of the aisle seems to have their foot anywhere near the brake pedal when it comes to war should concern us all, and we need to do something about it.

Might as well stop the whole process right now.

• May Heads Off Major Defeat After Last-Minute Climbdown To Rebels (Ind.)

Rebel Conservatives have forced Theresa May into a climbdown, handing parliament greater control of Brexit if she fails to seal a deal. After the prime minister was threatened with what could have been a damaging commons defeat, she promised key concessions in dramatic last minute talks with pro-EU rebels. It is likely to mean her accepting a deadline by which she must secure a deal with Brussels, if she wants to stay in the driving seat for negotiations. Her ministers must now spell out the detail of her compromises within days, with Tory rebels warning a failure to do so would reignite the prospect of a major commons loss destabilising her leadership.

It followed a day which started with the resignation of a minister and passed into febrile commons debate that saw ministers bargaining openly with rebels in the chamber. Rebel MP Nicky Morgan told The Independent: “The whole point of what has come about is that we are going to have a process to this, something which does not simply allow us to drift into a hard Brexit.” The row was precipitated by the Lords last month passing a plan that would have given parliament the power to direct Ms May’s actions if she failed to seal a Brexit deal later this year. Ministers were demanding Tory MPs vote it out of existence in the Commons on Tuesday, but had also refused to consider a more palatable compromise proposed by the former Conservative attorney general Dominic Grieve.

It would have instead seen Ms May being tied into a strict timetable of having to set out her own proposals if she failed to seal a deal by November, and then gain parliamentary approval for them – the stronger powers for MPs to direct her action would only come into play if a deal had still not been reached by February.

What, no new loans?

• Tesla To Cut 9% Of Staff In Profitability Drive (G.)

Tesla is slashing thousands of jobs, its chief executive, Elon Musk, announced Tuesday, as the electronic car company attempts to hit production targets and reach profitability. Musk called the job cuts, which will affect about 9% of the company’s more than 40,000 employees, “difficult, but necessary” in a tweet that contained the email he had sent to employees announcing the layoffs. “What drives us is our mission to accelerate the world’s transition to sustainable, clean energy, but we will never achieve that mission unless we eventually demonstrate that we can be sustainably profitable,” the billionaire entrepreneur wrote in the email.

The job cuts will be centered on salaried employees, not factory workers, Musk said, writing, “This will not affect our ability to reach Model 3 production targets in the coming months.” Tesla has been under intense pressure to prove that it can achieve mass production of the Model 3, its first mass market vehicle. The company has yet to reach Musk’s goal of producing 5,000 cars a week – originally promised for the end of 2017. At Tesla’s annual shareholder meeting on 5 June, Musk said he believed the company would hit the 5,000 cars-a-week goal by the end of June, and that he thought the company could be profitable later this year.

They paid off so much because they owe so much.

• Americans Just Paid Off A Ton Of Credit-Card Debt—But Here’s The Bad News (MW)

A lot of Americans paid big credit-card bills in the first quarter of 2018. And they still have a long way to go. Americans repaid $40.3 billion in credit card debt during the first quarter of 2018, according to a new analysis of data from the U.S. Census Bureau, Federal Reserve and credit agency TransUnion by the personal-finance website WalletHub. That’s the second-highest amount paid off in one quarter since the first quarter of 2009, when consumers paid off more than $44 billion. Now, the bad news: That doesn’t mean their debts are getting that much smaller. Americans ended 2017 with $91.6 billion in new credit-card debt, the largest annual amount since 2007 and 104% above the post-recession average.

Outstanding credit card debt is at the second-highest point since the end of 2008, the report said. In 2017, Americans hit a record high of $1.021 trillion in outstanding revolving debt (often categorized as credit-card debt). In April 2018, they still had more $1.030 trillion to pay off, according to the Federal Reserve. Consumers’ recent debt payoff “is not as dramatic as the dollar amount makes it seem,” said Nick Clements, the co-founder of personal finance company MagnifyMoney, who previously worked in the credit industry. The reason: The total amount of credit-card debt Americans have has also been growing.

How Monsanto sneaks in illegal seeds.

• India Farmers Sow Unapproved Monsanto Cotton Seeds, Risking Arrest (R.)

Many Indian farmers are openly sowing an unapproved variety of genetically modified (GM) cotton seeds developed by Monsanto, as the government sits on the sidelines for fear of antagonizing a big voting bloc ahead of an election next year. India approved the first GM cotton seed trait in 2002 and an upgraded variety in 2006, helping transform the country into the world’s top producer and second-largest exporter of the fiber. But newer traits are not available after Monsanto in 2016 withdrew an application seeking approval for the latest variety due to a royalty dispute with the government. The herbicide-tolerant variety, lab-altered to help farmers save costs on weed management, has, however, seeped into the country’s farms since then. Authorities say they are still investigating how that happened.

“I will only use these seeds or nothing at all,” said Rambhau Shinde, a farmer who has been cultivating cotton for nearly four decades in the western state of Maharashtra. The federal environment ministry said last year planting the seeds violated the Environment Protection Act, and farmers who did so were risking potential jail terms. But many farmers are desperate to boost their incomes after poor yields over the past few years and are willing to ignore the warnings. A government official in New Delhi, who deals with matters related to GM crops, said it was difficult to keep farmers away from something that they saw benefit in. “If you don’t allow them to plant legally, illegal planting will happen,” the official said, requesting anonymity, adding that Monsanto had yet to reapply for an approval to sell its latest variety of GM cotton in India.

Bats and cats and rats.

• One in Three British Mammal Species Could Be Gone Within A Decade (Ind.)

Populations of much-loved British mammals including hedgehogs and water voles have dropped by up to two-thirds over the past 20 years, and many more are threatened with imminent extinction. Even some apparently common creatures such as rabbits have been driven into decline by human pressures such as harmful farming activities and climate change. These findings come from a review carried out by the Mammal Society and Natural England, the first of its kind to be conducted in more than two decades. The country has undergone significant changes since the last analysis in 1995, and some of the species at risk then – including badgers and otters – have since made considerable recoveries.

However, pesticide use, invasive species and road deaths have all taken their toll, and the scientists behind the study have warned Britain is on “a precipice” and must take urgent action to save its mammals. “This is happening on our own doorstep so it falls upon all of us to try and do what we can to ensure that our threatened species do not go the way of the lynx, wolf and elk and disappear from our shores forever,” said Professor Fiona Mathews, chair of the Mammal Society. The review, which made use of data collected by members of the public as well as scientists over the course of decades, covered all 58 of the country’s land mammal species.

The scientists constructed the first ever “red list” for British mammals, and found 12 are threatened with extinction. This means animals like the wildcat, greater mouse-eared bat and even the black rat are likely to be gone forever from Britain’s shores within the next 10 years. However, they noted this is likely to be an underestimate, and the real number could be as high as one in three.

Debt Rattle March 9 2016

Mar 092016

March 9, 2016 Posted by Raúl Ilargi Meijer at 10:50 am Finance Tagged with: capital flight, China, derivatives, fake invoicing, Greece, intervention, Merkel, refugees, Turkey 1 Response »

DPC Sternwheeler Falls City, the levee, Vicksburg, Mississippi 1900

• The New Danger From Derivatives (BBG)

• The China Intervention Trade Is Back as State Funds Battle Bears (BBG)

• Fake Trade Invoicing In China Is Back (BI)

• Phantom Goods Disguise Billions in China Illicit Money Flows (BBG)

• China, Fighting Money Exodus, Squeezes Business (WSJ)

• China’s Historic $338 Billion Tech Startup Experiment (BBG)

• Schaeuble Snubs Debt Relief For Greece (AFP)

• Draghi Stimulus Fails in Stock Market as Volatility Matches 2008 (BBG)

• Why a Recession Could Mean the End of the Eurozone (BBG)

• Brussels Briefing: Turkish Rewrite (FT)

• Berlin/Ankara Migration Pact — Wrecking Ball Or Silver Bullet?

• Slovenia And Croatia Ban Transit Of Refugees To Other European Countries (AFP)

• UN Refugee Agency Criticises ‘Quick Fix’ EU-Turkey Deal (Reuters)

• UN Refugee Chief ‘Deeply Concerned’ By EU-Turkey Deal (AFP)

• Merkel Says History Won’t Look Kindly If EU Fails on Refugees (BBG)

Yeah, right. The danger is still the same. All the regulators and clearing houses are nice, but it’s all kept as opaque as ever for a reason.

• The New Danger From Derivatives (BBG)

Global regulators are turning their attention to an important piece of unfinished business: ensuring that a bad bet on derivatives can’t upset the entire financial system. They’ve hit on a good solution — as long as they can prevent it from becoming a threat in itself. The 2008 financial crisis proved that derivatives had gotten out of control. Some participants were making huge bets – say, on the likelihood of bond defaults – without putting up collateral to guarantee payment if the bets went wrong. When U.S. insurer AIG couldn’t make good on almost $50 billion in derivatives-related debts, it nearly brought down several of the world’s largest banks. In response, regulators have turned to a time-honored tool: the clearing house, which stands in the middle of trades and gathers collateral from all its members.

The U.S. has already moved most derivatives contracts to central clearing, and Europe is following. Clearing houses will play an increasingly important role in containing systemic risk, setting limits on leverage for banks, hedge funds and other investors. However, clearing houses present a risk of their own. If a crisis triggers defaults that overwhelm the posted collateral, they have little capital of their own to absorb losses. Beyond that, they’d rely on tapping a pre-paid guaranty fund and then calling in cash from the financial institutions that are their main customers – demands that in a crisis could cause distress to spread. If those resources proved inadequate, the government would likely have to step in to prevent a complete breakdown. The clearing houses are too important to fail, and the current rules governing their risk management are too lax.

Guaranty funds must cover at least two major defaults, but clearing houses are allowed to decide how much cash that actually requires – and how much capital their shareholders should pitch in to absorb the first losses. The size of this shareholder contribution matters a lot, because the fear of loss is an incentive to be prudent in setting collateral requirements in the first place. Some of the clearing houses’ biggest users – including JPMorgan Chase, Pimco and BlackRock – have noted these deficiencies, and global regulators are planning to address them this year. Greater transparency and specific capital requirements would be a good start. Regulators should publicly stress-test clearing houses as they do banks, and should require them to disclose enough information to assess the quality of their risk management (a process that has already begun). Also, research suggests that shareholder contributions to guaranty funds should probably be larger than the current average of about 3% among the leading U.S. and European clearing houses.

Just wait for the People’s Congress to end in a week’s time.

• The China Intervention Trade Is Back as State Funds Battle Bears (BBG)

The Chinese stock market has once again turned into a battleground for bearish investors and state-directed funds determined to spark a rally. During each of the past six days, the Shanghai Composite Index has recorded intraday losses before recovering to end the trading session higher, with suspected intervention targets including Industrial & Commercial Bank of China and PetroChina leading the rebound. After dropping as much as 3.1% on Wednesday, the benchmark gauge pared its loss to 1.3% at the close as ICBC jumped. The resumption of afternoon rallies, a common occurrence during the height of the government’s market rescue campaign in July, has presented traders with a quandary: Worsening economic data suggest stocks should fall, but state intervention provides an opportunity to profit from short-term gains.

It’s yet another sign of how government meddling has undermined the leadership’s own pledge to increase the role of market forces in the world’s second-largest economy. “There might be funds buying in the afternoon and pushing up the index again,” said Zhang Gang at Central China Securities. “But the market won’t be able to find a more clear direction until after” the National People’s Congress ends, Zhang said. The Shanghai Composite posted a sixth day of gains on Tuesday, extending its March rally to 7.9%, despite a worse-than-estimated plunge in exports that sent shares tumbling around the world. Some local branches of the securities regulator asked listed companies, mutual funds and brokerages to stabilize the market during annual parliamentary meetings this month, two people with direct knowledge of the situation said last week.

“Near-term data like trade is negative, and so there is selling pressure,” said Francis Cheung at CLSA. “The government is supporting the market for the NPC, so when it ends, we could see a pullback.” Banks and other major state-owned enterprises are most vulnerable to a retreat after the NPC, Cheung said. ICBC, the country’s biggest lender, climbed 9.4% this month and PetroChina, the largest oil producer, added 7.1%. The Shanghai Composite’s 6.5% gain in March compares with a 3.1% advance in the MSCI All-Country World Index. “If you look at the macro data coming out from China, you see it hasn’t been performing well,” said Ronald Wan at Partners Capital International in Hong Kong. “That has been reflected in other markets, but on the contrary it hasn’t been reflected in the A-share market.”

In reverse.

• Fake Trade Invoicing In China Is Back (BI)

Capital has been flowing out of China at unprecedented rate over the past six months. Amidst concerns about the economy and the potential for further weakness in the Chinese renminbi, many investors are running for the exits. With regulators closely monitoring cross boarder flows, heightening the risk of more stringent capital controls being put in place, investors have become increasingly inventive when it comes to getting money out of China. Take the practice of fake invoicing, for example. Based on recent anomalies between Chinese and Hong Kong trade figures, it appears many investors are now trying to get their capital out through non-traditional means, overstating the value of imported goods from Hong Kong to circumvent Chinese capital controls.

It’s the exact opposite scenario to what was seen in past years where firms in Hong Kong were overstating the value of imported goods from China in order to get capital in there, avoiding capital controls in an attempt to speculate on further strengthening in the renminbi. Here is the UBS China economics team, Ning Zhang, Jennifer Zhong and Tao Wang, on why they suspect fake invoicing is back.

Some capital outflows may have been disguised under over-invoicing of imports from Hong Kong. In the previous three months (December to February), China imports from Hong Kong jumped by 71% y/y on average, in sharp contrast with Hong Kong’s statistics of its exports to China. The difference between China and counterparty data widened visibly as a result. Among China’s imports from Hong Kong, jewellery and precious metals surged by over 200% y/y in the previous months. In light of RMB depreciation expectation and rising pressure of capital outflows in late 2015, we think it is possible that speculators have used overinvoicing of China’s import from Hong Kong again as a channel to move money out of China, though the absolute size has been relatively limited (i.e. China’s monthly average imports from Hong Kong was USD1.5 billion from December to February).

The chart below, supplied by UBS, shows the discrepancy between Chinese imports from Hong Kong, reported by Chinese customs, compared to Hong Kong exports to China, released by the Hong Kong government. Hong Kong trade data for March will be released on March 29. It will be interesting to see whether the anomaly between the two nation’s figures has continued.

“..the practice has become a key way to skirt capital controls and accounted for $328 billion of the record outflows between August and January, or 78% of the decline in China’s reserves.”

• Phantom Goods Disguise Billions in China Illicit Money Flows (BBG)

Days after the Switzerland-based Bank for International Settlements played down fears over capital flight out of China, new trade data has put the spotlight on a channel used to ferret out billions worth of illicit money flows: phantom goods. A steep rise in China’s reported imports from Hong Kong has raised concerns that trade invoices are being manipulated to get capital out of the country amid fears the yuan will continue to weaken. February data released Tuesday show those imports jumped 89% from a year earlier, even as total imports fell 14%. While the rise wasn’t as great as in January, economists said the spike follows similar patterns in recent months that point to companies using trade channels to pay for goods far in excess of their value or even that don’t exist at all.

“There has been a huge increase in payments,” said Andrew Collier, an independent China analyst in Hong Kong and former president of the Bank of China International USA. “The well-connected Chinese in state and private firms are using any tool in the shed to inflate overseas payments.” China’s capital exodus accelerated through 2015 as investors worried that policy makers would allow the yuan to weaken to cushion an ongoing slowdown in the $10 trillion-plus economy. The People’s Bank of China has insisted it isn’t contemplating a big change in currency policy and spent billions of the nation’s foreign exchange reserves defending the yuan’s value. While China has strict rules on moving capital offshore, those seeking to evade limits can disguise money flows as payment for goods exported or imported to foreign countries or territories, especially Hong Kong.

Economists have said they suspect China’s December and January trade numbers were also skewed by this activity. [..] Over-invoicing for goods gives a company or individual the opportunity to skirt China’s capital controls and shift money offshore. Authorities have responded to evidence of the activity by clamping down on the myriad of illicit channels used, from curbing purchases of overseas insurance products to stopping friends and family members from pooling their $50,000-a-year quotas to get large sums of money out. “A strong desire to get assets out of renminbi and into a foreign currency is distorting China’s official trade data at present,” economists at Fathom Financial Consulting wrote. “Our analysis suggests the scale of the problem may have grown exponentially in recent months.”

But China’s capital borders remain porous. In particular, little attention appears to have been paid to companies misreporting imports and exports, according to research by Deutsche Bank. Economists at the bank found the practice has become a key way to skirt capital controls and accounted for $328 billion of the record outflows between August and January, or 78% of the decline in China’s reserves. An estimate by Bloomberg Intelligence put the total for 2015 at $1 trillion.

“The government is already wary about loosening monetary policy to stimulate growth, as that could weaken the yuan further and send more money abroad.”

• China, Fighting Money Exodus, Squeezes Business (WSJ)

Chinese officials are trying anew to slow an unprecedented money exodus from the country, clamping down on individuals seeking to flee the yuan and making life tougher for companies that need to trade the currency for dollars to do business. China’s foreign-exchange regulator in recent months has deployed a new system to monitor individual purchases of foreign funds and has asked banks to reduce foreign-currency transactions. It has summoned bankers to its offices to give guidance and has grilled them when foreign-exchange activity spikes, according to executives at Chinese and foreign lenders. Banks, in turn, have increased scrutiny of foreign-currency transactions by businesses ranging from Chinese entrepreneurs investing abroad to companies paying overseas bills.

A European chemicals manufacturer recently faced delays in Shanghai in obtaining U.S. dollars, threatening its deadline for an overseas licensing payment. The Bank of Tianjin is having trouble getting funds from mainland investors for a planned Hong Kong public stock offering. A water-treatment company struggled to withdraw $2,000 for an engineer to travel to the U.S. “There appears to be a real crackdown on money flowing out of China,” said Jean Francois Harvey, global managing partner at Hong Kong law firm Harvey Law Corp., whose clients have had difficulty recently transferring money out of China for equipment purchases and investment. “Even normal business transactions which are ongoing are getting delayed.”

Mr. Harvey said a Chinese client is having problems wiring $15 million to a Hong Kong company that for two years has been helping it buy equipment for a South American factory. “There’s no indication that the money will go through,” he said, “and we heard from our client that it was due to restrictions on money transfer.” The clampdown comes atop Beijing’s steps after last summer to stem outflows, from restricting cross-border yuan business at foreign banks to cracking down on individuals who are flouting the country’s strict foreign-currency quotas. Economists say tightened capital controls are one reason China’s foreign reserves fell only $28.6 billion in February, less than a third the drops of the two previous months.

Spooked by slowing growth and a declining currency, Chinese businesses and consumers are trying to move money abroad where its value might hold up. Last year, some $700 billion to $1 trillion is estimated to have fled China. That is more than the economy of Switzerland and equivalent to as much as 10% of China’s massive GDP. China’s foreign-currency reserves fell by a record $107.9 billion in December from November and another $128 billion in January and February combined, putting reserves 20% lower than their June 2014 peak. The outflows destabilize the currency and make China’s decelerating economy harder to guide. The government is already wary about loosening monetary policy to stimulate growth, as that could weaken the yuan further and send more money abroad.

“They have a fantasy that if they give everyone money they’ll create entrepreneurs..” “What it will result in is catastrophic losses for the government.”

• China’s Historic $338 Billion Tech Startup Experiment (BBG)

China is getting into the venture capital business in a big way. A really, really big way. The country’s government-backed venture funds raised about 1.5 trillion yuan ($231 billion) in 2015, tripling the amount under management in a single year to 2.2 trillion yuan, according to data compiled by the consultancy Zero2IPO Group. That’s the biggest pot of money for startups in the world and almost five times the sum raised by other venture firms last year globally. The money’s in what are known as government guidance funds, where local and central agencies play some role. With 780 such funds nationwide and a lot of experimentation, there’s no set model for how they’re managed or funded. The bulk of their capital comes from tax revenue or state-backed loans.

The money is part of Premier Li Keqiang’s effort to bolster the slowing Chinese economy through innovation and reducing its dependence on heavy industry. The country began a campaign to support entrepreneurship in 2014 and has since opened 1,600 high-tech incubators for startups. The huge influx of cash raises the possibility of a boom-and-bust cycle like the government-led investment in China’s solar and wind power sectors, said Gary Rieschel, founder of Qiming Venture Partners. “They have a fantasy that if they give everyone money they’ll create entrepreneurs,” he said. But inexperienced or corrupt managers are likely to invest in dozens of regional copycats unable to get big enough to be profitable, he said. “What it will result in is catastrophic losses for the government.”

It’s unclear how quickly the funds will be deployed. Regulations and market practices remain to be finalized, Zero2IPO said in its report. But it’s clear that governments are marshaling their resources. Central China’s Wuhan, the capital of Hubei Province, is leading the push with a 200 billion yuan fund, the country’s biggest, with a mix of local and central government financing. The government there says it wants to grow that eventually to 1 trillion yuan, including private money.

After already having acknowledged it is necessary.

• Schaeuble Snubs Debt Relief For Greece (AFP)

German Finance Minister Wolfgang Schaeuble warned Tuesday he opposed debt relief for Greece, a day after eurozone ministers agreed to consider the possibility in upcoming bailout talks. “I honestly have no good argument to present German lawmakers or the German public opinion to whom I have a budgetary responsibility,” said Schaeuble, who is the most influential member of the Eurogroup of eurozone finance ministers. Speaking to journalists after talks with his EU counterparts, Schaeuble said that any discussion of Greek debt relief would be “about prestige, not substance”. However he acknowledged the debate was now opened, but that Germany, the EUs biggest economy, had “good arguments” against easing Greece’s debt burden, which has already been reduced twice since the start of the debt crisis.

Last July, Greek Prime Minister Alexis Tsipras secured Greece’s third bailout in five years, worth €86 billion, but only in return of deep reforms. However, in one of the few concessions handed to Greece, eurozone leaders agreed to also debate debt relief once key reforms pledges were met. Eurogroup chief Jeroen Dijsselbloem on Monday said Greece had made enough headway in its reforms to soon begin that discussion. Debt relief is a also a key demand of the IMF, which believes no economic program would be credible without it. Complicating matters, Schaeuble and other eurozone hardliners firmly back the idea that the pro-austerity IMF take part in Greece’s current bailout. The EU forecasts that Greece’s debt will soar to 185% of GDP in 2016 – a level generally understood to be unsustainable.

So he’ll do moar.

• Draghi Stimulus Fails in Stock Market as Volatility Matches 2008 (BBG)

Mario Draghi is having no success convincing stock investors that the European Central Bank has the firepower to reignite growth. While all economists in a Bloomberg survey expect the central bank to cut interest rates when policy makers meet Thursday, and 73% project them to boost the amount of money put into the financial system through bond purchases, fund managers aren’t optimistic about a post-decision equity rally. In the first year of quantitative easing, the Euro Stoxx 50 Index fell 17%, and volatility reached levels not seen since 2008. The gauge has dropped in each month but one following an ECB meeting since April. “It won’t be easy for Draghi to bring back confidence in the recovery,” said Andreas Nigg at Vontobel Asset Management in Zurich.

“Growth and inflation in Europe remain stuck at low levels and earnings revisions continue to fall. The market needs better earnings revisions and better economic surprises. ” Even after the central bank pumped about €720 billion into the region, manufacturing dropped to its lowest level since 2013, the inflation rate turned negative, and consumer confidence worsened. That’s led analysts to slash profit-growth estimates amid the worst earnings letdown since at least 2007. Investors are pulling money out of European equities at the fastest pace since 2014. When the central bank started its bond-buying program, shares were steaming toward a high amid growing optimism about the euro area’s recovery. But a succession of crises, starting with Greece’s near exit from the single currency, exacerbated by increasing unease over China’s slowing growth, a Volkswagen emissions scandal and the Federal Reserve’s December rate increase battered sentiment, leaving stocks up only 3.9% for 2015, from as much as 22%.

Not could, will.

• Why a Recession Could Mean the End of the Eurozone (BBG)

It was Merkel all along. She has elections coming.

• Brussels Briefing: Turkish Rewrite (FT)

It has become customary to assume EU summits aimed at tackling the ongoing refugee crisis produce much rhetoric but little meat. But last night’s gathering of European leaders with Ahmet Davutoglu, the Turkish prime minister, may prove the one that broke the rule. In talks that went on for 12 hours, the two sides emerged with the outlines of a deal that, if finalised next week, is as sweeping in its implications as it is in its substance. The German-engineered plan would allow the EU to turn back almost all migrants washing ashore in Greece and return them to Turkey. But the price will be high: in addition to billions of additional European aid to Ankara, the EU would expedite a long-dormant visa liberalisation programme that could provide Turkish nationals visa-free travel into the EU’s passport-free Schengen zone as soon as June.

That a significant deal was in the offing was clear late last week when Donald Tusk, the European Council president, travelled to Ankara and received strong signals that Mr Davutoglu was open to a massive programme of refugee returns. But the plan now on the table is significantly more ambitious than the one Mr Tusk was considering. It was driven almost entirely by Mr Davutoglu and Angela Merkel, the German chancellor, with the help of Mark Rutte, her Dutch counterpart and holder of the EU’s rotating presidency. The EU’s nominal leaders (Mr Tusk and Jean-Claude Juncker, the European Commission president) were almost entirely cut out of the deal-making, which began in earnest when the Turkish, German and Dutch leaders held a pre-summit meeting on Sunday. In her press conference, Ms Merkel acknowledged as much, saying Mr Davutoglu presented new demands at the Sunday meeting – and she endorsed them wholeheartedly.

There is still much that could go wrong. The UN and other human rights groups have questioned the legality of mass “pushbacks” of migrants before they receive an asylum hearing, a requirement in the Geneva Conventions. Plans to dub Turkey a “safe third country” – which would provide the legal basis for the deportations – are also likely to be challenged in court. Cyprus is balking at Turkish demands that EU membership talks restart in earnest before Ankara makes concessions as part of once-in-a-generation talks to reunify the long-divided island. Many diplomats were left bruised after being sidelined by the Turco-German juggernaut. We’ve compiled a long list of hurdles – but also an explanation of just how momentous the deal and the highly unorthodox diplomacy behind it – in an explainer by the FT Brussels bureau’s Alex Barker and Duncan Robinson.

All sides now have just over a week before the next EU summit, where Mr Davutoglu will return in hopes of sealing the deal. Some governments must find consensus in fractious coalitions. Others must consult their parliaments. But if Ms Merkel gets her way, EU refugee policy may well be forever changed by last night’s summit.

Two good background pieces from FT.

• Berlin/Ankara Migration Pact — Wrecking Ball Or Silver Bullet?

Of all the big-bang solutions sought for Europe’s migration crisis, a pact crafted by Germany and Turkey on Monday may rank as the most ambitious and politically explosive. The concept is breathtakingly simple: any economic migrant or Syrian refugee arriving on a Greek island would be returned to Turkey. The initiative is intended to be a short circuit for irregular migration. It will go for the bulk of the 2,000 migrants a day that are arriving on Greek beaches. The political price is the EU abandoning constraints that have framed its relations with Turkey for almost a decade. A European visa waiver for Turkish citizens could be granted by June, a pledge that glosses over the strict conditions attached; a decade-long Cypriot bar on some of Ankara’s membership chapters could be lifted; and extra funding made available in 2018 on top of a €3bn already granted by the EU.

These details must still be settled. But perhaps most difficult of all for the EU is resettlement. For every Syrian returned to Turkey from Greece, another Syrian would be accepted by EU countries. It is a programme potentially involving tens of thousands of people, at a time when the EU has managed to resettle just 3,407 in its existing scheme since July. Over time, a more permanent regime would replace it covering hundreds of thousands. Hatched against the backdrop of mounting political strife in Europe, the plan is an attempt to find a silver bullet and close off the Greece-to-Germany migration highway — at least for a few months. It has shocked many of the EU diplomats who had been working up an alternative on Sunday. “This has taken a wrecking ball to our common approach,” said one eurozone diplomat. “Everything is reopened.”

Add Serbia.

• Slovenia And Croatia Ban Transit Of Refugees To Other European Countries (AFP)

Slovenia and neighbouring Croatia will from Wednesday refuse allow the transit of most refugees through their territory in a bid to seal off the Balkan route used by hundreds of thousands of people seeking a new life in Europe. The move could set off a domino effect among Balkan states, with Serbia indicating it would follow Ljubljana’s lead and Macedonia apparently set to so the same. The attempt to shut down the main route used by refugees fleeing war and persecution outside Europe’s borders comes barely a day after the EU and Turkey agreed on a proposal aimed at easing the crisis. EU officials hailed Monday’s deal with Ankara as an important breakthrough, but the head of the UN refugee agency cast doubt on its legality, while Amnesty International said the plan “dealt a death blow to the right to seek asylum”.

Slovenia’s interior ministry said late on Tuesday that from midnight (2300 GMT), access would only be granted to “foreigners meeting the requirements to enter the country”, those wishing to claim asylum, and refugees selected “on a case by case basis on humanitarian grounds and in accordance with the rules of the Schengen zone”. Fellow EU member Croatia, which is not part of the passport-free Schengen zone, said it would follow Slovenia’s lead and refuse transit to most refugees as of midnight. “Apparently Europe has decided to start a new phase in resolving the migrant crisis. It was concluded that on the Schengen zone borders the Schengen rules would be applied,” interior minister Vlaho Orepic told RTL commercial television. Croatia, which had already limited the number allowed to enter, would now only allow in refugees with proper visas.

“The border of Europe will be on the Macedonia-Greek frontier and we will respect the decisions which were made,” he said. More than a million people from Syria, Afghanistan and Iraq have crossed the Aegean Sea into Greece since the start of 2015, most aiming to reach Germany and Scandinavia. The influx has caused deep divisions among EU members about how to deal with Europe’s worst refugee crisis since the second world war. Serbia said that following Slovenia’s move, it would “align all measures with the European Union” and impose the same restrictions at its borders with Macedonia and Bulgaria. Slovenia and Serbia, along with Austria, Croatia and Macedonia, have dramatically restricted entry to migrants in recent weeks, leaving a bottleneck of some 36,000 stuck at the Greek-Macedonian border, unable to continue their journey.

Collective insanity.

• UN Refugee Agency Criticises ‘Quick Fix’ EU-Turkey Deal (Reuters)

The UN refugee agency has said the European Union’s “quick fix” deal to send back refugees en masse to Turkey would contravene their right to protection under European and international law. EU leaders welcomed Turkey’s offer on Monday to take back all migrants who cross into Europe from its soil and agreed in principle to Ankara’s demands for more money, faster EU membership talks and quicker visa-free travel in return. Vincent Cochetel, Europe regional director of the UN high commissioner for refugees (UNHCR), said Europe’s commitment to resettle 20,000 refugees over two years, on a voluntary basis, remained “very low”. “The collective expulsion of foreigners is prohibited under the European convention of human rights,” Cochetel told a news briefing in Geneva.

“An agreement that would be tantamount to a blanket return to a third country is not consistent with European law, not consistent with international law,” he said. Europe had not even fulfilled its agreement last September to relocate 66,000 refugees from Greece, redistributing only 600 to date within the bloc, Cochetel said earlier. “What didn’t happen from Greece, will it happen from Turkey? We’ll see, I have some doubts,” he said on Swiss radio RTS. Turkey is home to nearly 3 million Syrian refugees, the largest number worldwide, but its acceptance rates for refugees from Afghanistan, Iraq and Iraq were “very low”, about 3%, Cochetel said. “I hope that in the next 10 days a certain number of supplementary guarantees will be put in place so that people sent back to Turkey will have access to an examination of their request [for asylum].”

UNHCR spokesman William Spindler said: “Legal safeguards would need to govern any mechanism under which responsibility would be transferred for assessing an asylum claim.” The UN Children’s Fund voiced deep concerns about the agreement, noting that “too many details still remain unclear”. “The fundamental principle of ‘do no harm’ must apply every step of way,” Unicef spokeswoman Sarah Crowe told the briefing. “That means first and foremost that children’s right to claim international protection must be guaranteed. Children should not to be returned if they face risks including detention, forced recruitment, trafficking or exploitation.”

It’s all so illegal it won’t go anywhere.

• UN Refugee Chief ‘Deeply Concerned’ By EU-Turkey Deal (AFP)

The head of the UN refugee agency on Tuesday said he was “deeply concerned” by a proposed deal between the EU and Ankara to curb the migrant crisis that would involve people being sent back to Turkey. “As a first reaction I’m deeply concerned about any arrangement that would involve the blanket return of anyone from one country to another without spelling out the refugee protection safeguards under international law,” UNHCR chief Filippo Grandi told the European Parliament. Lawmakers at the parliament in Strasbourg, France, applauded after he made the comment. At a summit in Brussels on Monday, EU leaders in principle backed a proposal by Turkey to take back all illegal migrants landing on the overstretched Greek islands.

Turkey also suggested a one-for-one deal under which the EU would resettle one Syrian refugee from camps in Turkey in exchange for every Syrian that Turkey takes from Greece, in a bid to reduce the incentive for people to board boats for Europe. Turkey is the main launching point for the more than one million migrants who have made the dangerous crossing to Europe since the start of 2015. It is home to 2.7 million refugees from the war in Syria, more than any other country. But Grandi said the plan did not offer sufficient guarantees under international law. He said refugees should only be returned to a country if it could be proved that their asylum application would be properly processed and that they would “enjoy asylum in accordance with accepted international standards and have full access to education, work, health care and if necessary social assistance.”

He also called for refugees to be screened before being sent away from Greece “to identify highly at-risk categories that may not be appropriate for return even if the above conditions are met.”

Double speak.

• Merkel Says History Won’t Look Kindly If EU Fails on Refugees (BBG)

German Chancellor Angela Merkel said history will judge Europe harshly unless it shares the burden of accepting refugees, taking particular aim at Hungary and Slovakia for refusing to resettle asylum seekers. The EU will face scrutiny if it turns away from an embattled region, where the Syrian civil war has displaced millions and spurred an influx of refugees into Europe, Merkel said. She compared the continent to nations in the Middle East such as Lebanon, Jordan and Turkey that have taken in millions of Syrian refugees each. “500 million Europeans today probably haven’t taken in a million Syrians,” Merkel said on a panel Tuesday in Stuttgart, Germany, adding that the EU can’t afford to isolate itself from the crisis. “I think that this won’t go well for us historically. I’m very sure of that.”

Merkel has been buffeted by criticism and sliding poll numbers at home over her open-border policy after more than a million asylum seekers entered Germany last year. Speaking a day after an EU summit sought a deal with Turkey to staunch the flow of refugees, and in return resettle Syrian asylum seekers into Europe, Merkel signaled that agreeing on EU redistribution may run up against the refusal of eastern European countries. “I have to tell you quite honestly, there will be a lot to talk about,” Merkel said. “If some countries such as Hungary and Slovakia say ‘zero – zero; we have no obligation here; we’re not responsible for sheltering; there’s no civil war in front of our door; the Syrians have to look to their neighborhood with Lebanon, Jordan and Turkey.’ That’s a position that is not mine.”

via GIPHY

Debt Rattle January 29 2016

Jan 292016

January 29, 2016 Posted by Raúl Ilargi Meijer at 9:01 am Finance Tagged with: Amazon, bad loans, BoJ, Brexit, capital flight, China, debt, durable goods, expulsion, refugees 2 Responses »

DPC Grand Central Station and Hotel Manhattan, NY 1903

• Nikkei Ends Up After Roller-Coaster Ride On BOJ’s Rate Cut (CNBC)

• US Durable Goods Orders Tumbled 5.1% in December (WSJ)

• Amazon Shares Plunge 13% As Profit Misses Estimates (Reuters)

• The Shipping News Says the World Economy Is Toast (BBG)

• Red Ponzi Ticking (David Stockman)

• China’s Debt-To-GDP Rises To A Gargantuan 346% (ZH)

• The $29 Trillion Corporate Debt Hangover That Could Spark a Recession (BBG)

• Capital Flight Is The Evil Twin Brother Of Currency War (MW)

• Hundreds of Billions of Dollars Have Fled China. Now What? (WSJ)

• China’s January Outflows Soar To Second Highest Ever (ZH)

• Cracks In America’s Economy Are Growing (CNN)

• How Italy’s Bad Loans Built Up (FT)

• Brexit Vote To Turn UK Into ‘Safe Haven’ Triggering EU Disintegration (Tel.)

• Germany Tightens Refugee Policy, Finland Joins Sweden In Deportations (Guar.)

• Mass Expulsions Ahead For Europe As Refugee Crisis Grows (AP)

• Why Europe’s Refugee Crisis May Be Getting Worse (BBG)

• Twelve Refugees Drown As Boat Sinks Off Greek Island (Reuters)

• 24 Iraqi Kurdish Refugees Drown Off Greek Island (NY Times)

• Italy Navy Recovers Six Bodies, Rescues 209 From Migrant Boats (Reuters)

Right. Stability is the goal.

• Nikkei Ends Up After Roller-Coaster Ride On BOJ’s Rate Cut (CNBC)

Asian markets climbed, with most indexes trading up, after Japan shares took a roller-coaster ride in the immediate aftermath of the Bank of Japan’s decision to adopt a negative interest rate policy. The Nikkei 225, which traded down 0.6% before the announcement, surged as much as 3.51% soon after, before tumbling as much as 1%. It then surged to close up 2.80%, or 476.85 points, at 17,518.30. After the BOJ move, the yield on the benchmark 10-year Japan government bond (JGB) fell to a record low of 0.11% from around 0.22% before the decision. There was no quick agreement on why the market outlook on the move shifted so quickly.

Gavin Parry at Parry International Trading, suggesting that a move to negative deposit rates just after a supplementary increase in Japan’s qualitative and quantitative easing (QQE) program could have been read to mean the BOJ was running out of bullets. In its statement on Friday, the central bank said it would continue with the QQE and negative interest rate policies for “as long as it is necessary for maintaining that target in a stable manner.” Marcel Thieliant at Capital Economics thought the overall complexity of the BOJ’s move may have spurred the midday selloff. “What they did announce today will be effective. It will lead to lower rates in the money market. But some people had second thoughts once they read the statement,” he said.

He noted that the BOJ had imposed a “three-tier” system on negative rates. With the huge amount of bank reserves currently sitting with the central bank, “if they impose a negative rate on all these balances, it would have a big impact on banks’ profitability,” he said, noting that existing reserves were going to be exempted, but there was likely confusion about how the amounts subject to negative rates would be increased. The dollar-yen pair gained as much as 1.52% in the aftermath of the BOJ announcement, trading as high as 121.35, from around 118.50 before the news. The pair trimmed gains to trade around 120.82 after the Japan stock market closed.

Recovery.

• US Durable Goods Orders Tumbled 5.1% in December (WSJ)

A key measure of U.S. manufacturers’ health suffered its largest annual decline since the recession ended more than six years ago, showing how global headwinds are eroding a onetime pillar of the economy. Demand for long-lasting manufactured products made in the U.S. fell 5.1% in December from a month earlier, and declined 3.5% for all of 2015, the Commerce Department said Thursday. The annual decline in durable-goods orders is the largest outside a recession on records back to 1992. The figures add to mounting evidence the manufacturing sector is contracting. And with the dollar strengthening further this month and financial-market tumult likely threatening business confidence, a factory slowdown could last well into this year. “The entire year of 2015 was pretty much a bust for durable-goods makers,” said Michael Montgomery at IHS Global Insight.

“Industries faced stiff competition from foreign rivals for U.S. market share, and exporters faced intense pressures abroad.” Thursday’s release is in line with data from Institute for Supply Management, a group of purchasing managers, showing a nearly three-year-long expansion in manufacturing came to an end in November. And the Federal Reserve’s reading on industrial production has declined in 10 of the past 12 months, putting it off nearly 2% from its peak in December 2014. A number of forces hampered U.S. factories last year. An economic slowdown in China, Brazil and other markets for U.S. goods limited foreign demand. Meanwhile, a stronger dollar made U.S. goods more expensive overseas and foreign products relatively more affordable for American consumers. And a pullback in U.S. oil production last year reversed a recent source of strength for many metal and equipment makers.

Plenty bubbles created by cheap money are still around.

• Amazon Shares Plunge 13% As Profit Misses Estimates (Reuters)

Amazon.com posted its most profitable quarter ever on Thursday but the world’s No. 1 online retailer still managed to disappoint Wall Street by badly missing estimates, sending its shares down more than 13% in after-hours trading. The results, as well as the company’s determination to invest more in new areas and its extremely low profit margins, brought back perennial questions for investors about the company’s ability to consistently earn money. “By comparative retail standards, Amazon’s level of profitability is still painfully weak,” said Neil Saunders, head of retail analyst firm Conlumino, who is still positive on Amazon’s prospects. “For every dollar the company takes, it makes just 0.75 of a cent in profit.”

Amazon’s net profit for the fourth quarter, which includes the holiday shopping season, rose to $482 million, or $1.00 per share, in the quarter ended Dec. 31, up from $214 million, or 45 cents per share, a year earlier. That figure was held back by rising operating costs. It was well below analysts’ average forecast of $1.56 per share, according to Thomson Reuters. The company’s shares plunged 13% to $551.50 after hours on Thursday, following a 9% increase in regular trading. They are still up 80% over the past 12 months. Amazon notched its third consecutive profitable quarter for the first time since 2012, but it still left Wall Street wanting more. “The growth story that investors were looking for… clearly Amazon has not been able to live up to the hype,” said Adam Sarhan, chief executive of Sarhan Capital.

But China grows 7%?

• The Shipping News Says the World Economy Is Toast (BBG)

In October 2008, as the repercussions of the financial crisis were starting to ripple through the global economy, I noticed a press release from Swedish truckmaker Volvo saying that its European order book had fallen by more than 99% between the third quarters of 2007 and 2008 – to just 155 from 41,970. That prompted me to study various other real-world activity measures ranging from shipping to air freight, and to conclude that “the news is all bad and getting worse, fast.” The same exercise today, I’m afraid to say, leads me to a similar conclusion about the growth outlook. Here’s a chart showing what’s happening to the volume of goods being shipped in containers from China’s ports, one for the country and one for Shanghai. Both indexes are compiled by the Shanghai Shipping Exchange, and cover shipments to the rest of the world including Europe, the U.S. and Africa; activity is down more than 40% from its peak in mid-2012:

The traditional global shipping measure is called the Baltic Dry Index. Shipping purists (who rival gold bugs in their dedication to minutiae) will tell you it mostly reflects how many vessels are afloat on the world’s oceans; a glut of shipbuilding means more boats available, which drives down the cost of shipping bulk raw materials such as iron ore, steel and coal. But given the fragile state of the global economy, it’s hard to shake the feeling that the index has been trying to tell us something important about global demand in recent years:

Dave in fine form:..China is the rotten epicenter of the world’s two decade long plunge into an immense central bank fostered monetary fraud..”

• Red Ponzi Ticking (David Stockman)

There is something rotten in the state of Denmark. And we are not talking just about the hapless socialist utopia on the Jutland Peninsula – even if it does strip assets from homeless refugees, charge savers 75 basis points for the deposit privilege and allocate nearly 60% of its GDP to the Welfare State and its untoward ministrations. In fact, the rot is planetary. There is unaccountable, implausible, whacko-world stuff going on everywhere, but the frightful part is that most of it goes unremarked or is viewed as par for the course by the mainstream narrative. The topic at hand is the looming implosion of China’s Red Ponzi; and, more specifically, the preposterous Wall Street/Washington presumption that it’s just another really big economy that overdid the “growth” thing and is now looking to Beijing’s firm hand to effect a smooth transition.

That is, an orderly migration from a manufacturing, export and fixed investment boom-land to a pleasant new regime of shopping, motoring, and mass consumption. Would that it could. But China is not a $10 trillion growth miracle with transition challenges; it is a quasi-totalitarian nation gone mad digging, building, borrowing, spending and speculating in a magnitude that has no historical parallel. So doing, It has fashioned itself into an incendiary volcano of unpayable debt and wasteful, crazy-ass overinvestment in everything. It cannot be slowed, stabilized or transitioned by edicts and new plans from the comrades in Beijing. It is the greatest economic trainwreck in human history barreling toward a bridgeless chasm.

And that proposition makes all the difference in the world. If China goes down hard the global economy cannot avoid a thundering financial and macroeconomic dislocation. And not just because China accounts for 17% of the world’s $80 trillion of GDP or that it has been the planet’s growth engine most of this century. In fact, China is the rotten epicenter of the world’s two decade long plunge into an immense central bank fostered monetary fraud and credit explosion that has deformed and destabilized the very warp and woof of the global economy. But in China the financial madness has gone to a unfathomable extreme because in the early 1990s a desperate oligarchy of despots who ruled with machine guns discovered a better means to stay in power. That is, the printing press in the basement of the PBOC – and just in the nick of time (for them).

What did I say about that devaluation bomb?

• China’s Debt-To-GDP Rises To A Gargantuan 346% (ZH)

In early 2015, after years of China’s massive debt pile being roundly ignored by most so-called experts (despite being profiled here many years prior), McKinsey released a report showing that not only has the world not delevered since the financial crisis, adding well over $60 trillion in debt (through 2016), but also revealing in a format so simple even an economist could grasp it, just how massive China’s all-in leverage has become. Many were shocked when they read that China’s total debt/GDP had risen by 125% in under 7 years, hitting 282% as of Q2 2014. Those same people may be just as shocked to learn that according to the head of financial markets research Asia Pacific at Rabobank, Michael Every, not only has China not begun to delever at all, but since McKinsey’s update, its debt has risen by another 70% of GDP!

According to Every, China’s 2015 debt-to-GDP might be as high as 346%, and while that is in line with wealthier developed economies but is “vastly higher” than any EM peer. Cited by Bloomberg, Every adds that the time-frame for debt accumulation pre-crisis varies, but what always follows is a major currency drop afterwards, as has happened even with reserve currencies such as dollar, yen, euro and pound. He also adds that nominal GDP needs to rise faster than debt for a sustained period if deleveraging is to truly be under way, aka Dalio’s beautiful deleveraging thesis. The problem, however, is that with even Goldman admitting that China’s real GDP growth rate is about 4.5%, China’s debt load is rising orders of magnitude faster than its underlying economy and is on the daily verge of entering the final phase of the Minsky Moment breakdown.

While no surprise to people with common sense, Every concludes that debt must be repaid with interest, which acts as a drag on economic activity, and is the reason why such monstrous debt loads always lead to an economic collapse; making matters worse is that in China cheap credit is channeled to state-owned firms with low or no profitability. So what happens next? Every believes that China has no choice but to proceed with a massive devaluation, far bigger than the prevailing consensus, and expects the Yuan to plunge to 7.60 against the dollar over the next year.

But wait: if we make interest rates negative, we can make money on being in debt, right?

• The $29 Trillion Corporate Debt Hangover That Could Spark a Recession (BBG)

There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever. Whether this debt overhang proves to be a catalyst for recession or not, one thing is clear in talking to credit-market observers: It’s a problem that won’t go away any time soon. Strains are emerging in just about every corner of the global credit market. Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies – one third globally – are failing to generate high enough returns on investments to cover their cost of funding.

Pooled together into a single snapshot, the data points show how the seven-year-old global growth model based on cheap credit from central banks is running out of steam. “We’ve never been in a cycle quite like this,” said Bonnie Baha, a money manager at DoubleLine Capital in Los Angeles, which oversees more than $80 billion. “It’s setting up for an unhappy turn.” While not as pronounced as the rout in global equity markets, losses are beginning to pile up in the bond market too. The average spread over benchmark government yields for highly rated debt has widened to 1.84 percentage points, the most in three years, from 1.18 percentage points in March, according to Bank of America Merrill Lynch indexes.

Investors lost 0.2% on global corporate bonds in 2015, snapping a string of annual gains that averaged 7.9% over the previous six years, the data show. Debt at global companies rated by Standard & Poor’s reached three times earnings before interest, tax, depreciation and amortization in 2015, the highest in data going back to 2003 and up from 2.8 times last year, according to the ratings company. Total debt at listed companies in China, the world’s second-largest economy, has climbed to the highest level in three years, according to data compiled by Bloomberg. Worsening debt profiles contributed to S&P downgrading 863 corporate issuers last year, the most since 2009. More than a third of commodity and energy companies have ratings with negative outlooks or are on credit watch with negative implications, S&P said.

“The problem, however, is that China’s competitors are employing the same tactics and their currencies have more or less shadowed the yuan’s movements against the dollar..”

• Capital Flight Is The Evil Twin Brother Of Currency War (MW)

A currency war is not all it’s cracked up to be. That is the verdict from Citi’s currency expert Steven Englander, who argues that efforts by central banks to devalue their currencies to maintain an edge over competing economies are not as effective as many are led to believe. “Policy makers and investors talk about currency depreciation as if it is the ultimate weapon of economic policy, but that overstates its importance in driving activity,” said Englander in a report. “The economic bang for the depreciating buck, or yen or euro is relatively small.” The currency strategist stressed that engaging in a currency war is mostly an exercise in futility, in part because it is not all that effective as a monetary tool. “You have to go much further than you think for much longer than you think,” he said.

And if a country has to rely on manipulating the exchange rate to prop up the economy, then it may be in worse trouble than those in charge want to admit, according to Englander. While the criticism was not specifically directed at China, the observation coincides with a continuing debate over how far Beijing will go to weaken its currency in a bid to prop up its flagging economy. Economists generally expect the Chinese government to depreciate the renminbi to bolster export competitiveness to combat a sharp economic slowdown. The People’s Bank of China officially projected GDP to grow 6.8% in 2016 versus 6.9% last year with some economists projecting GDP growth to decelerate to around 6.5%. The problem, however, is that China’s competitors are employing the same tactics and their currencies have more or less shadowed the yuan’s movements against the dollar, according to Englander.

“If the trading partners keep matching CNY depreciation at this pace, CNY will have to go a long way before any material competitive advantage emerges,” he said. That has not deterred the Chinese authorities from pushing the currency lower after its dramatic devaluation in August and analysts project the yuan-dollar pair to soften to 7 by the end of the year from 6.57 currently. Ironically, in a bid to buttress the economy via the cheap yuan, China faces the risk of accelerating capital outflows. “Capital flight is the evil twin brother of currency war,” Englander said. “If currency war is typically capital outflows encouraged by government policy, capital flight is currency war driven by the private sector with policy makers typically on the other side.”

The Institute of International Finance last week estimated that $676 billion exited China in 2015 and outflows are likely to continue this year, further exposing the yuan to speculative attacks.

“..the $700 billion decline in China’s foreign-currency reserves is bigger than the total foreign-currency reserves of all but three other central banks in the world—Japan, Switzerland and Saudi Arabia..”

• Hundreds of Billions of Dollars Have Fled China. Now What? (WSJ)

For lovers of dramatic numbers, China has long been a gift. The flood of cash leaving the country has produced another impressive statistic: We are witnessing the greatest episode of capital flight in history. China’s foreign-exchange reserves fell by $700 billion last year. The flood of cash across its borders is complicating the country’s economic transformation and is raising the risks of problems in other emerging markets, where cash already is flowing outward. “What happened in 2015 coming out of China was unprecedented in magnitude,” said Charles Collyns, chief economist for the Institute of International Finance, a global trade group for the financial industry. The size of China’s $10 trillion economy and its still-huge foreign reserves means the outflow won’t cause an immediate crisis in the country, though there are risks.

According to World Bank data, the $700 billion decline in China’s foreign-currency reserves is bigger than the total foreign-currency reserves of all but three other central banks in the world—Japan, Switzerland and Saudi Arabia. China’s outflows are the biggest in absolute terms, although other countries have had larger outflows relative to the size of their economies. The big worry is that China devalues its currency, which would come at a time that money already is flowing out of emerging markets as investors grow more risk averse and the U.S. Federal Reserve slowly begins to raise interest rates. If the yuan does fall further, it makes the economies of its Asian neighbors less competitive. That could lead to more capital flight from emerging markets, which could drain foreign-currency reserves in countries trying to keep their currencies from falling.

Places that do see their currencies tumble also could face inflation, slowing investment and tapering growth. Most historical cases of capital flight have one main cause—economic turmoil, political instability or an outside crisis that leads investors to pull their cash home. In China, however, there are several interconnected reasons that both locals and foreigners are pulling out their money, and the combination appears to be making the situation worse.

“..nearly $1.6 trillion in Quantiative Tightening is taking place just due to China’s attempts to stem capital flight..”

• China’s January Outflows Soar To Second Highest Ever (ZH)

While China’s currency devaluation has, alongside the price of commodities, become one of the two key drivers of market volatility and tubulence around the globe, when it comes to risk, one far more important Chinese metric is the actual amount of capital that leaves the nation. The reason for this is that as explained over the weekend, in a world where Quantitative Tightening by EMs and SWFs has emerged as a powerful counterforce to Quantitative Easing – or liquidity injections – by developed central banks, what matters for global risk levels is the net effect of these two opposing money flows. Of all the global “quantitative tighteners”, the biggest culprit is China, which has seen over $1 trillion in reserve selling since the summer of 2014, the direct result of a virtually identical amount in capital outflows.

Furthermore in for a “closed’ Capital Account system like is China, the selling of FX reserves is a direct function of capital outflows, so the only real data needed to extrapolate not only the matched reserve selling and thus Quantitative Tightening, but also the direct impact onglobal risk assets, is how much capital outflow has taken place. This takes place in one of two ways: by relying on official Chinese historical data, or by estimating how much outflows take place on a concurrent basis, thus allowing one to estimate how much capital is flowing out in real time. Indicatively, China’s SAFE released onshore FX settlement data for the whole banking system (PBoC+banks), suggesting some $97bn of FX outflows in Dec, which is broadly in line with the fall in official reserves.

But much more important is the question what is taking place right now, the answer to which can either wait until SAFE releases January data in several weeks… or rely on day to day estimates of outflows in the form of central bank FX intervention. Luckily, we have just that. According to a Goldman report, so far in January “there has been around $USD 185bn of intervention (with the recent intervention predominantly taking place in the onshore market)” split roughly $143 billion on the domestic side and $42 billion on the offshore Yuan side. This would make January the month with the second largest amount of intervention since August 2015, and thus the second highest month of capital outflows, and would explain the ongoing deterioration across global asset classes as China’s various FX reserve managers have been forced to sell not just government bonds but equities as well.

Goldman also calculates that “total intervention over the last 6 months, using our estimates, sums to USD 775bn.” Run-rating this amount would suggest that nearly $1.6 trillion in Quantiative Tightening is taking place just due to China’s attempts to stem capital flight. This number excludes the hundreds of billions in reserves that all other petrodollar and EM nations have to liquidate as well to prevent the rapid devaluation of their own currencies as the world remains caught in the global dollar margin call we first explained in early 2015.

Even CNN gets alarmed. Graph is not from article, but seems a good fit.

• Cracks In America’s Economy Are Growing (CNN)

America’s economy hit the brakes during the holidays. Some recent economic data even raises fears that we might be heading towards a possible U.S. recession in 2016. Big banks like Morgan Stanley estimate there’s a 20% chance of recession this year. On Friday, the government will release data that show how the U.S. economy fared in the last three months of the year. Many experts forecast that the U.S. economy barely grew – about 1% or less – between October and December of 2015 compared to a year ago. Even the Federal Reserve admitted Wednesday that the economy “slowed” at the end of last year. On Thursday, the bad news continued. A key sign of confidence is orders for new products and equipment – known as “durable goods” – placed by companies to power their business.

Orders for durable goods fell 5% between November and December, according to the Commerce Department. That was a lot below expectations that orders would be flat. It shows that some companies are delaying or deciding not to purchase any new piece of equipment they need. The news on durable goods caused Barclays (BCS) to lower its GDP forecast to 0.4% on Thursday. Capital Economics, a research firm, admitted the new data posed risks “firmly to the downside” for its estimate of 1%. Here are 3 more warning signs that the U.S. economy is heading in the wrong direction:

1. American are not spending much U.S. economic growth depends on shoppers. Consumer spending makes up two-thirds of the nation’s economic engine. Yet they’re sending mixed signals: U.S. retail sales declined a bit in December and they were negative or flat seven times last year. Consumer confidence has wavered too. It peaked at 98% in January 2015 but has since drifted down in general. Consumer confidence is currently 93%. While it’s a lot better than what it was just a few years ago, any downward movement is still a cause for concern.

2. U.S. manufacturing already in recession American factories are suffering from the global economic slowdown. Manufacturing makes up 10% of the U.S. economy, according to Morgan Stanley. The key ISM manufacturing index has declined for six straight months, and its been negative – below 50% – for the last two months. The strong dollar is making products manufactured in the U.S. more expensive overseas, lowering demand for American made goods. The slowdown in emerging market economies isn’t helping trade either.

3. Corporate America is hurting Earnings season isn’t over yet but one thing is clear: American companies are making less money than a year ago. Put together, when America’s biggest companies – and employers – suffer, the economy follows suit. The S&P 500 is down 7% so far in January. Apple, the nation’s biggest company by market size, just announced record profits with a gloomy outlook ahead. It believes iPhone sales will decline in the first quarter of this year for the first time in 13 years. Apple CEO Tim Cook expressed serious caution about the global economy. When a major American CEO raises the warning flag that’s not good for the U.S. economy. “We’re seeing extreme conditions unlike anything we have experienced before just about everywhere we look,” Cook said Tuesday.

Waiting for the final whistle..

• How Italy’s Bad Loans Built Up (FT)

The EU agreed a deal with Italy on Wednesday to help Italian banks sell off their large portfolios of non-performing loans to private investors, in the hope it will restore confidence in the country’s troubled banking system. The move came as concerns over the loans — worth 21% of GDP— sent Italian banks’ share prices into freefall, heaping pressure on the sector. A logjam of bad loans has built up over the past decade as economic stagnation, multiple recessions and a weak recovery have weighed on companies, particularly smaller businesses that account for the majority of Italy’s business make-up. According to the Italian Association of Banks, the ratio of bad loans is higher for loans to small companies than the large ones. These charts show how Italy grew as a lender of bad loans, and the banks that have been most affected.

Since the onset of the financial crisis, Italian banks have accrued a much larger exposure to non-performing loans than other large European countries. The EU average for non-performing loans as a percentage of total loans is 6%; in Italy the proportion has reached 17%. Slow growth has been a big setback. In the fourth quarter last year, Italian GDP was at the same level as at the beginning of 2000, while that of Germany and France grew 20%. Italy returned to growth at the start of 2015, but the recovery has been anaemic with quarterly growth rates below 0.5%. Until economic growth picks up strongly, any decline in the relative proportion of non-performing loans held by Italy’s banks is likely be marginal, as it was in 2015.

I’m all for it.

• Brexit Vote To Turn UK Into ‘Safe Haven’ Triggering EU Disintegration (Tel.)

A British exit from the European Union could see the UK becoming a “safe haven” amid a disintegrating Europe, Barclays has said. Analysis from the bank said a ‘leave’ vote would open a “Pandora’s Box” in the crisis-hit continent, and could dissuade Scotland from breaking away from the relative safety of the UK. Barclays said financial markets had failed to grasp the sheer “breadth” of the British vote, calling it one of “the most significant global risks of the year”, and one which could lead to the collapse of the European project. Investors have been selling off the pound in anticipation of an EU referendum, which could take place as early as the summer. Sterling has depreciated by 9pc against the single currency since November.

But if Britain voted for an EU exit, the political and institutional reverberations on the continent would be far greater than any economic fall-out, said the bank, who compared the implications to that of a “Grexit”. A number of European countries would be caught in the grip of extremist left-wing and right-wing populist parties, pushing them towards leaving the EU, they said. “If politics in the EU turned for the worse, the UK may be seen as a safe haven from those risks, reversing the euro’s exchange rate appreciation”, said the report’s authors. “In that environment, Scottish voters could be even less inclined to leave the relative safety of the UK for an increasingly uncertain EU”. The warning echoes fears that Europe, rather than the UK, would suffer the worst consequences of a Brexit.

Deutsche Bank’s chief economist said earlier this week that Brexit would be “devastating” for the continent, consigning Europe to the status of a “second rank” power. “The referendum is generally seen as a ‘UK’ issue, when it is better seen as a European issue” said Philippe Gudin of Barclays. Analysts highlighted the “emotionally charged” immigration debate as a “wildcard” which could see the UK leave the EU. Survey data shows concerns about immigration have surged to become the most important issue facing the EU, according to voters – elicpsing fears over economy, terrorism, and unemployment since the start of 2015. Should Brexit occur, this would embolden other member states who are struggling to control immigration and unleash a fresh wave of turmoil in the EU, said Barclays.

Give them something to go back to.

• Germany Tightens Refugee Policy, Finland Joins Sweden In Deportations (Guar.)

Germany has moved to toughen its asylum policies as Finland and Sweden announced plans to deport tens of thousands of people in a bid to contain the migrant crisis. Sigmar Gabriel, the vice chancellor, announced that Germany would place Algeria, Morocco and Tunisia on a list of “safe countries of origin” – meaning that migrants from those countries would have little chance of winning asylum. Some migrants would also be blocked from bringing their families to join them in Germany for two years, Gabriel said. The tougher rules come after Germany, the European Union’s powerhouse economy, took in some 1.1 million migrants in 2015 – many of them refugees fleeing conflict in Syria.

German chancellor Angela Merkel has come under fierce pressure in recent months to reverse her open-arms policy to those fleeing war and persecution, including opposition from within her own conservative camp. Finland meanwhile joined Sweden on Thursday in announcing plans to deport tens of thousands of refused asylum seekers. The two Nordic countries are both struggling to cope with an influx of refugees and migrants fleeing misery in the Middle East and elsewhere – receiving amongst the highest numbers of arrivals per capita in the EU. The Finnish government expects to deport around two thirds of the 32,000 asylum seekers that arrived in 2015, Paivi Nerg, administrative director of the interior ministry, told AFP.

“In principle we speak of about two-thirds, meaning approximately 65% of the 32,000 will get a negative decision (on their asylum applications),” she told AFP. In neighbouring Sweden, interior minister Anders Ygeman said on Wednesday that the government was planning over several years to deport up to 80,000 people whose asylum applications are set to be rejected. “We are talking about 60,000 people but the number could climb to 80,000,” he told Swedish media, adding that, as in Finland, the operation would require the use of specially chartered aircraft. He estimated that Sweden would reject around half of the 163,000 asylum requests received in 2015.

Swedish migration minister Morgan Johansson said authorities faced a difficult task in deporting such large numbers, but insisted failed asylum seekers had to return home. “Otherwise we would basically have free immigration and we can’t manage that,” he told news agency TT. The clampdown came as at least 31 more people died trying to reach the EU. Greek rescuers found 25 bodies, including those of 10 children, off the Aegean island of Samos, in the latest tragedy to strike migrants risking the dangerous Mediterranean crossing hoping to start new lives in Europe. The Italian navy meanwhile said it had recovered six bodies from a sinking dinghy off Libya – and in Bulgaria, the frozen bodies of two men, believed to be migrants, were found near the border with Serbia.

This will fail.

• Mass Expulsions Ahead For Europe As Refugee Crisis Grows (AP)

Dazzled by an unprecedented wave of migration, Sweden on Thursday put into words an uncomfortable reality for Europe: If the continent isn’t going to welcome more than 1 million people a year, it will have to deport large numbers of them to countries plagued by social unrest and abject poverty. Interior Minister Anders Ygeman said Sweden could send back 60,000-80,000 asylum seekers in the coming years. Even in a country with a long history of immigration, that would be a scale of expulsions unseen before. “The first step is to ensure voluntary returns,” Ygeman told Swedish newspaper Dagens Industri. “But if we don’t succeed, we need to have returns by coercion.” The coercive part is where it gets uncomfortable.

Packing unwilling migrants, even entire families, onto chartered airplanes bound for the Balkans, the Middle East or Africa evokes images that clash with Europe’s humanitarian ideals. But the sharp rise of people seeking asylum in Europe last year almost certainly will also lead to much higher numbers of rejections and deportations. EU officials have urged member countries to quickly send back those who don’t qualify for asylum so that Europe’s welcome can be focused on those who do, such as people fleeing the war in Syria. “People who do not have a right to stay in the EU need to be returned home,” said Natasha Bertaud, a spokeswoman for the EU’s executive Commission.

“This is a matter of credibility that we do return these people, because you don’t want to give the impression of course that Europe is an open door,” she said. EU statistics show most of those rejected come from the Balkans including Albania and Kosovo, some of Europe’s poorest countries. Many applicants running away from poverty in West Africa, Pakistan and Bangladesh also are turned away. Even people from unstable countries like Iraq, Afghanistan and Somalia can’t count on getting asylum unless they can prove they, personally, face grave risks at home.

Just numbers. That’s all you need to know.

• Why Europe’s Refugee Crisis May Be Getting Worse (BBG)

More than 50,000 refugees fleeing violence and unrest in the Middle East and Africa have arrived on Europe’s shores already this month — almost 10 times as many as in January 2015. This unrelenting influx will add to the pressure on leaders who are already reeling from the impact of the crisis. With European Union countries reintroducing border controls, chaos at Europe’s external frontiers and the threat of terrorism associated with the civil war in Syria looming over the continent’s largest cities, the dilemma has fractured European politics and frayed the social fabric. The following charts show why the worst may yet be to come.

The number of refugees fleeing to Greece by sea this month is almost 10 times what it was this time last year, according to UNHCR data through Jan. 27. Normally the winter months are quieter as migrants wait for better weather but with this January’s total almost as high as that of last June, the figures suggest that Europe will continue to face a huge inflow. As the crisis in Syria has intensified, the makeup of the refugees has changed. Whereas in 2015 more than half of the migrants arriving in Greece were men, that’s now slipped to 44% as whole families follow them to seek asylum in Europe.

And we keep on going.

• Twelve Refugees Drown As Boat Sinks Off Greek Island (Reuters)

Twelve migrants drowned when their boat sank off a Greek island close to Turkey, the Greek coastguard said on Thursday, as people continue to make crossings to Europe despite the harsh winter conditions. “A man who managed to swim to the shore told Greek authorities the boat carried 40 to 45 people,” a coastguard official said. The sinking occurred late on Wednesday north of the island of Samos in the eastern Aegean Sea, close to the Turkish coast. Nine people have been rescued so far, and Frontex and coastguard vessels are looking for other survivors. “We are not sure if the nine rescued were among the 45 or if they were on a different boat,” the official said.

On average, 8 people have reportedly drowned every single day this year.

• 24 Iraqi Kurdish Refugees Drown Off Greek Island (NY Times)

At least 24 people drowned and 11 others were missing after a boat carrying Iraqi Kurds sank off the Greek island of Samos in the Aegean Sea, close to Turkish coast, the authorities said on Thursday. More than 3,700 migrants died while trying to enter Europe via the Mediterranean last year, and the latest sinking was a reminder that the flow has not stopped in the dead of winter. Kelly Namia, an Athens-based representative of the International Organization for Migration, confirmed the death toll. According to accounts provided to the organization at a hospital, the wooden vessel was carrying 65 people, when it sank on Wednesday night, even though it had a maximum capacity of 30 people. The passengers were all Iraqi Kurds, aside from the smugglers, who were believed to be Afghans. At least one smuggler is believed to have drowned, but his body has not been located, Ms. Namia said. The Greek Coast Guard continued to search for survivors Thursday afternoon, using vessels and a helicopter.

Number of refugees fleeing to Italy rises sharply again.

• Italy Navy Recovers Six Bodies, Rescues 209 From Migrant Boats (Reuters)

Italy’s navy rescued 290 migrants and recovered six bodies from the water near a half-sunken rubber boat on Thursday, the first sea deaths recorded on the North Africa to Italy route this year, a spokesman said. The navy rescued 109 migrants from a large rubber boat in the morning, and then 107 from a second boat a few hours later. When the navy arrived at a third rubber craft, it was sinking. They managed to pull 74 to safety, but six bodies were recovered from the water. A navy helicopter is continuing to search for survivors, the spokesman said.

Italy and Greece are on the frontline of Europe’s biggest immigration crisis since World War Two, with overcrowded boats packed with migrants reaching their shores from North Africa and Turkey by the hundreds. The sea route to Italy from Africa is the most dangerous border for migrants in the world. Of the more than 3,700 migrant deaths in the Mediterranean in 2015, about 2,000 perished on the way to Italy from North Africa. After a lull in arrivals during the first three weeks of this year, Libya-based people smugglers have taken advantage of recent mild weather to send out boats. Italy’s coastguard said 1,271 migrants were rescued on Tuesday.

Debt Rattle January 27 2016

Jan 272016

January 27, 2016 Posted by Raúl Ilargi Meijer at 10:00 am Finance Tagged with: Apple, capital flight, cash, China, liquidity, refugees, yuan 1 Response »

DPC City Market, Kansas City, Missouri 1906

• Nikkei Climbs, But Shanghai Extends Fall (CNBC)

• Why China’s Capital Flight Carnage Will Continue (Telegraph)

• A China Bank Contagion Could Blow Up Global Markets (CNBC)

• China Accuses George Soros Of ‘Declaring War’ On Yuan (AFP)

• Head Of China’s Statistics Bureau Investigated For Corruption (AFP)

• Inquiry in China Adds to Doubt Over Reliability of Economic Data (NY Times)

• Cash Is King as Europe Adapts to Negative Interest Rates (BBG)

• Europe Bank Rout Erases $434 Billion In 6 Months (BBG)

• The Market’s Troubling Message (Ashoka Mody)

• EU Botched Billion Euro Bail-Outs During Financial Crisis (Telegraph)

• World’s Biggest Wealth Fund Speaks Out on Missing Liquidity at Banks (BBG)

• Apple Reaches Peak iPhone, So What Now? (MW)

• Apple: ‘Extreme Conditions Unlike Anything We’ve Experienced Before'(BBG)

• AIG To Return $25 Billion After Activist Siege (FT)

• The Black Hole of Deflation Is Swallowing the Entire World (GWB)

• The Future is Blivets (Dmitry Orlov)

• The Agonies of Sensible People (Jim Kunstler)

• Clock Ticks Down On EU Passport Free Travel Dream (AP)

• Danish Parliament Approves Plan To Seize Assets From Refugees (Guardian)

• Belgium Wants Camp for 300,000 Refugees in Athens (DM)

Europe and oil falling.

• Nikkei Climbs, But Shanghai Extends Fall (CNBC)

Asia markets were mostly higher on Wednesday after Wall Street surged overnight on a bounce in oil prices and positive earnings news, shrugging off the recent global rout, at least temporarily. China shares were volatile, erasing most early losses in late trade. “Swinging from depressive slumps to manic rallies, markets remain volatile,” Vishnu Varathan, an analyst at Mizuho Bank, said in a note Wednesday. China’s market is likely to remain the region’s sticky wicket for hopes the long global rout will end. The Shanghai Composite was down 0.46% after tumbling as much as 4.10% earlier. That followed the index’s worst day on Tuesday since the suspension of the circuit breaker rule in early January, closing down 6.4%, hitting its lowest level since December 2014. The Shenzhen Composite dropped 0.948% after trading down as much as 5.62% earlier in the session.

Amid concerns about slowing economic growth and depreciation of the yuan, shares on the mainland got an additional bit of bad news Wednesday: China’s industrial profits fell 4.7% on-year in December, declining for a seventh month. The Shanghai Composite is down more than 20% since its most recent high of 3,651.76 on December 22, leaving it in a “bear within a bear” market. The index is off more than 47% from its 52-week high of 5,166.35, set June 2015. “Chinese markets look like they will continue to sell off until their last day of trading before Chinese New Year on February 5,” Angus Nicholson at spreadbettor IG said in a note Wednesday. “There is a good chance that Chinese equities may find their cyclical bottom in the next week and half if the current pace of selloff continues.” He expects the Shanghai Composite might eventually bottom around the 2300-2400 level.

Self-fulfilling.

• Why China’s Capital Flight Carnage Will Continue (Telegraph)

Money has poured out of emerging market economies as fears that they will disappoint have continued to grow. This capital flight has put extreme pressure on emerging market currencies, driving speculation that more of these economies will have to capitulate, allowing marked devaluations of their currencies, or enforcing capital controls. $735bn was pulled out of emerging markets last year alone, according to the Institute of International Finance (IIF), up from $111bn in the preceding year. “The bulk of these outflows relate to China,” said the IIF, adding that money managers were taking out their money “in the face of concerns about a weakening currency”. Total capital outflows from the People’s Republic were thought to stand at $676bn last year.

The IIF said that it anticipated that capital would continue to leave emerging markets this year, but at a “more moderate pace”. Since Beijing’s botched readjustment of the yuan last August, investors have been anxious that a larger currency depreciation is on the way. As a result, they have taken their money out of the country in anticipation, increasing the demand for other currencies, at the expense of renminbi demand. The People’s Bank of China (PBoC) has had to intervene heavily, burning through reserves to keep the currency strong. “The recent flood of capital leaving China has been driven primarily by increased scepticism that the PBoC will hold to its pledge to keep the renminbi stable,” said Mark Williams at Capital Economics. Capital Economics estimated that outflows stood at $140bn in December alone, as firms may reassessing their expansion plans, and investors worry about the possibility of a further downturn.

“The PBoC has enough reserves to keep selling at December’s rate until mid-2018 but it would presumably throw in the towel before they were all exhausted,” said Mr Williams. “If investors think the PBoC may shift its stance in future, they have an incentive to sell renminbi assets now even if no policy change is currently being considered.” While the movements in Chinese stock markets are far removed from the real economy, and that economy does not seem to be melting down, high levels of capital flight could be toxic for the country. Helene Rey, an economics professor at the London Business School, told The Telegraph that there is a risk that investors overreact to recent moves, and negativity about China “becomes self-fulfilling”. “We know China has a lot of reserves, but when capital flows flow out at a quick rate this might have a lot of psychological consequences.” She suggested that a significant depreciation of China’s yuan would “probably not be good for the stability of a lot of emerging markets”.

Claudio Piron, a Bank of America Merrill Lynch strategist, said that China’s current problems were the result of its struggles with the impossible trinity, or “trilemma”. Policymakers cannot control capital flows, monetary policy and the currency all at the same time. Mr Piron said that the outflows have captured the “conflict between easing monetary conditions on one hand and contradictory attempts at foreign exchange intervention to target the yuan’s strength against the dollar on the other”. The policy uncertainty causing the outflows “may only be resolved once the market has regained confidence in China’s ability to restore a robust recovery and China’s monetary has come to an end”. Mr Piron suggested this would come in the final quarter of 2016 at the earliest.

In China, a bank default is a government default.

• A China Bank Contagion Could Blow Up Global Markets (CNBC)

If the dark predictions are going to come true — that the market turmoil out of China will lead to “another 2008” — it will have to be a very different kind of crisis than the original. Six months after sell-offs in Shanghai began to reverberate through markets worldwide, bond-rating agencies continue to rate Chinese banks’ credit as investment grade, suggesting that if China does lead the world into recession, it will be a different affair than the sudden, sharp downturn catalyzed by the collapse of Lehman Bros. A measure of default risk used by Moody’s Investors Service puts the risk of any of the Big Four Chinese banks — Bank of China, the Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China — defaulting in the next year at no more than 1.5%, and for some as little as 0.5%, said Samuel Malone at Moody’s Analytics.

Even with nearly $11 trillion of assets and loans that reach into all sectors of China’s $10.3 trillion economy, for now, experts see little likelihood the banks themselves will be a problem; China’s largest banks are all controlled by a government that has the determination and resources to prop them up if necessary. And their ties to U.S. institutions are narrow enough that bond-rating agencies don’t foresee anything like the financial contagion of 2008, when liquidity problems quickly spread from bank to bank and nation to nation as the extent of the mortgage crisis became clear.

“Declaring war on China’s currency? Ha ha”

• China Accuses George Soros Of ‘Declaring War’ On Yuan (AFP)

Chinese state media has stepped up a salvo of biting commentaries against George Soros and other currency traders as the yuan comes under pressure, with the billionaire investor accused of “declaring war” on the unit. At the annual World Economic Forum in Davos last week, Soros told Bloomberg TV that the world’s second-largest economy – where growth has already slowed to a 25-year low according to official figures – was heading for more troubles. “A hard landing is practically unavoidable,” he said. Soros – whose enormous trades are still blamed in some countries for contributing to the Asian financial crisis of 1997 – pointed to deflation and excessive debt as reasons for China’s slowdown.

The normally stable yuan, whose value is closely controlled by Beijing, has come under pressure in recent weeks and months in overseas markets and from capital outflows. Authorities have spent hundreds of billions of dollars to defend it. China’s official Xinhua news agency on Wednesday said that Soros had predicted economic troubles for China “several times in the past”. “Either the short-sellers haven’t done their homework or … they are intentionally trying to create panic to snap profits,” it said. An English-language op-ed in the nationalistic Global Times newspaper blamed “westerners” for not “accepting responsibility for the mess” in the world economy. The comments came after the overseas edition of the People’s Daily, the official mouthpiece of the Communist party, published a front-page article Tuesday titled “Declaring war on China’s currency? Ha ha” that was widely shared on Chinese social media.

Soros “publicly ‘declared war’ on China”, the paper said, citing the 85-year-old as saying that he had taken positions against Asian currencies. But some readers questioned whether the official rhetoric could fuel Chinese investors’ fears. “They say a lot of loud slogans, but do official media even know that Chinese investors are in hell?” said one poster on social media network Weibo. “I’m afraid that Chinese investors will die in a stampede before Soros even shows his hand.” In the 1990s Soros led speculators in bets against the Bank of England, which unsuccessfully sought to defend the pound’s exchange rate peg. “The Chinese left it too long” to change their growth model from dependence on exports to a consumer-led one, Soros said, even though Beijing had “greater latitude” than others to manage such a transition because of its currency reserves, which stand at over US$3tn.

Done just hours after he says all’s fine in the economy. Beijing must not want to restore confidence.

• Head Of China’s Statistics Bureau Investigated For Corruption (AFP)

The head of China’s statistics bureau is being investigated for corruption, the country’s watchdog said on Tuesday. “Wang Baoan is suspected of severe disciplinary violations, he is currently under investigation,” the Central Commission for Discipline Inspection said in a one-line statement on its website, using a phrase that is usually used to refer to corruption. The announcement came just hours after Wang appeared at a media briefing in Beijing on China’s economy in 2015. Last week the National Bureau of Statistics released data that showed China’s economy grew at the slowest pace in 25 years. Wang reiterated on Tuesday that the country’s GDP calculations were reliable, Chinese media reported, despite widespread criticism of the data.

Questions have repeatedly been raised about the accuracy of official Chinese economic statistics, which critics say can be subject to political manipulation. Wang was appointed head of the National Bureau of Statistics in April 2015. He previously spent about 17 years in various positions in the finance ministry. Official allegations of corruption against high-level politicians are generally followed by an internal investigation by China’s Communist party, and sometimes lead to criminal proceedings which often end in conviction. Internal investigations into high-level party officials operate without judicial oversight. Once announced, they are likely to lead to a sacking followed by criminal prosecution and a jail sentence.

They knew that in advance.

• Inquiry in China Adds to Doubt Over Reliability of Economic Data (NY Times)

The veracity of China’s economic data has been increasingly questioned as the slowing pace of the country’s growth has startled the world. And a new investigation into the official who oversees the numbers is unlikely to inspire confidence. The Communist Party’s anticorruption commission announced late Tuesday that it was looking into the head of the country’s statistics agency over what it called “serious violations.” It is unclear whether the investigation into the agency’s head, Wang Baoan, who became the director of the National Bureau of Statistics of China last April, is related to his current role or to his previous one as vice minister of finance. The commission did not release any further details about the inquiry.

China’s shrinking manufacturing sector and falling stock market have unnerved global investors. Any further doubt about its economic figures could paint an even darker picture of the health of the economy, adding to the pain in the markets. Stocks in Shanghai, which closed before the announcement, were off 6.4% on Tuesday. The statistics bureau has a variety of responsibilities that are hard to balance even in the best of times. The bureau is supposed to provide China’s leaders with an unvarnished assessment of the country’s economic strengths and weaknesses, even while reassuring the public about growth and maintaining consumer confidence. It is also supposed to release enough detailed and accurate information for investors and corporate leaders to make sound decisions about economic and financial prospects.

Few doubt that China has grown enormously over the past three decades. But economists, bankers and analysts who study the numbers believe that the bureau smooths data, underestimating growth during economic booms and overestimating it during downturns. Many economists are worried that China’s economy is not expanding anywhere close to the nearly 7% annual pace that bureau data still show. By some estimates, the pace is half of the official figures. Those skeptical about the data point, in part, to the underlying numbers. For example, electricity consumption, long a barometer of economic health and of the veracity of economic statistics, was nearly unchanged last year instead of rising in line with growth in China’s GDP. Some have cited the lack of correlation as a sign of possible fudging in the country’s economic statistics, while optimists have said that the figures may show how China is shifting away from energy-intensive manufacturing.

State news media reported last month that several officials in northeastern China had admitted to inflating investment figures and other data in previous years. Such moves, the reports indicated, helped explain steep drops in reported data from the region last year. Still, the bureau has consistently and repeatedly defended its statistics, contending that critics do not adequately understand the data or the Chinese economy. And the market impact of the investigation could be limited by the fact that many were already wondering about China’s data. “The international credibility of China’s GDP figures is anyway very low, so this probably is not a severe blow,” said Diana Choyleva at Lombard Street Research

What happened to the war on cash?

• Cash Is King as Europe Adapts to Negative Interest Rates (BBG)

Europe’s ATMs worked overtime in 2015. A record €1.08 trillion ($1.17 trillion) of banknotes were in circulation, almost double the value 10 years ago, according to data compiled by the ECB. That’s a counterargument to some bankers who say that electronic forms of cash will replace paper money sooner rather than later. The value of banknotes in circulation rose 6.5% last year, the most since 2008. There are financial reasons – including negative rates on deposits – but part of the increase could be related to the influx of refugees, who don’t have bank accounts.

“Deutsche Bank and Standard Chartered are each down more than 40% since July.”

• Europe Bank Rout Erases $434 Billion In 6 Months (BBG)

The plunge in European bank stocks over the past six months has wiped out about €400 billion ($434 billion) in market value, an amount that’s more than twice the annual economic output of Greece at current prices. The STOXX Europe 600 Banks Index, grouping 46 lenders, dropped twice as much as the region’s benchmark share index since late July. Banking stocks have fallen 14% in January alone, heading for their worst monthly performance since the depths of Europe’s sovereign-debt crisis in 2011. Deutsche Bank and Standard Chartered are each down more than 40% since July.

“..after long absences, earthquakes come in quick succession. ”

• The Market’s Troubling Message (Ashoka Mody)

Amid one of the worst market routs on record, a chorus of reassuring economic commentators insists that global fundamentals are sound and investors are overreacting, behaving like a panicked herd. Don’t be so sure. Consider how wrong economists have been about the effects of the 2008 financial debacle. In April 2010, the IMF declared the crisis over and projected annualized global growth of 4.6% by 2015. By April 2015, the forecast had declined to 3.4%. When the weak last quarter’s results are released, the reality will probably be 3% or less. Economists are used to linear models, in which changes follow a relatively gradual and predictable path. But thanks in part to the political and economic shocks of recent years, we live in a highly non-linear world. The late Danish physicist Per Bak explained that after long absences, earthquakes come in quick succession.

A breached fault line sends shock waves that weaken other fault lines, spreading the vulnerabilities. The subprime crisis of 2007 breached the initial fault line. It damaged U.S. and European banks that had indulged in its excesses. The Americans responded and controlled the damage. Euro-area authorities did not, making them even more susceptible to the Greek earthquake that hit in late-2009. Europeans kept building temporary shelters as the banking and sovereign debt crisis gathered force, never constructing anything that would hold as new fault lines opened. Enter China, which briefly held the world economy together amidst the worst of the crisis. Just in 2009, the Chinese pumped in credit equal to 30% of gross domestic product, boosting demand for global commodities and equipment.

Germans benefited in particular from the demand for cars, machine tools, and high-speed rails. This activated supply chains throughout Europe. But China is becoming more a source of risk than resilience. The number to look at is not Chinese GDP, which is almost certainly a political statement. The country’s imports have collapsed. This is troubling because it is the epicenter of global trade. Shockwaves from China can test all the global fault lines, making it a potent source of financial turbulence. Only China can undo its excesses. Its vast industrial overcapacity and ghost real estate developments must be wound down. As that happens, large parts of the financial system will be knocked down. The resulting losses will need to be distributed through a fierce political process. Even if the country’s governance structure can adapt, the required deep-rooted change could cause China’s slowdown to persist for years.

The last gasps of the EU.

• EU Botched Billion Euro Bail-Outs During Financial Crisis (Telegraph)

The European Commission mishandled government bail-outs in the wake of the financial crisis, imposing harsher conditions on member states as contagion spread across the continent, the EU’s Court of Auditors has found. In the first major assessment of the Commission’s role in “Troika” of international creditors, the ECA said Brussels was unprepared for Europe’s spiralling debt crisis as it failed to spot dangerous deficit levels in member states. The spending watchdog looked at five bail-outs from 2009 to 2011. Auditors found the Commission escalated its austerity demands as the financial crisis spread to the single currency’s periphery. Portugal was required to comply with nearly 400 conditions as part of its €78bn rescue programme in 2011, while Hungary – which was bailed-out in 2008 – was only asked to adhere to a list of only 60 demands.

“Some countries’ deficit targets were relaxed more than the economic situation would appear to justify,” said the auditors. “Countries that needed more reforms in a given field were asked to comply with fewer conditions than better-performing countries.” Greece – the eurozone’s biggest recipient of rescue cash – was not part of the audit and will be subject to its own bail-out review. The findings seem to vindicate initial fears that the EU lacked the expertise to manage a crisis which bought Europe to its knees after 2009. German chancellor Angela Merkel pushed hard for the IMF to be involved in the financial rescues of Ireland, Portugal and Greece, in a bid to enhance the credibility of the rescue programmes. Auditors said the Commission failed to spot dangerous deficit levels building up in member states before the crisis, which meant “it was not prepared for the first requests for financial assistance” when the signs of financial stress emerged.

Other shortcomings included the use of basic and “cumbersome” spreadsheets to forecast economic performance and missing documentation, which have yet to be found by authorities. “It is imperative that we learn from the mistakes which were made” said Baudilio Tomé Muguruza of the European Court of Auditors. Criticism of the Commission comes after the former president of ECB was hauled before Ireland’s parliament to explain his institution’s actions during the country’s 2010 rescue. The ECB, which formed part of the Troika along with the Commission and IMF, has been accused of forcing Dublin to assume the vast liabilities of Ireland’s failing banks – protecting senior bonholders from taking losses.

Obvious.

• World’s Biggest Wealth Fund Speaks Out on Missing Liquidity at Banks (BBG)

As some of the world’s best-known investment banks blame tougher capital rules for contributing to the lack of liquidity in financial markets, the world’s biggest sovereign wealth fund has a different take. The argument is “an excuse for something else,” Oeyvind Schanke, chief investment officer of asset strategies at Norway’s $790 billion fund, said in an interview in Oslo on Tuesday. One week after bank executives met in Davos, Switzerland, where they spent some time discussing the fallout of stricter financial requirements, Norway’s wealth fund is questioning a tendency to blame regulators. “New regulations have reduced volume on a normal day because you don’t have that type of market-making activity from the investment banks and other large players,” Schanke said.

“But in times of big movements they wouldn’t be there anyway. 2008 is a perfect example. You didn’t have any tough regulation in 2008, but somehow the fixed-income market froze up – which you would have expected because this type of activity is to facilitate normal trading days.” “Obviously they are used to making money on this activity and now they can’t make money anymore,” he said. “They’re trying to find reasons for what’s going on.” Concerns that markets face a liquidity crunch are growing as the world’s biggest investment banks retreat from capital-intensive fixed income, currency and commodities trading to meet tougher regulatory demands. Liquidity has been affected by banks committing less capital. But the same regulations that are contributing to that have made the world of finance much safer, according to Schanke. “You can’t have it all.”

Now bubble to pop.

• Apple Reaches Peak iPhone, So What Now? (MW)

Apple confirmed the worst fears of many investors Tuesday: The company has hit peak iPhone. As many on Wall Street had predicted, Tuesday’s earnings report showed that Apple revenue growth has slowed, with sales increasing less than 2% year-over-year in the all-important holiday quarter. The iPhone grew by only 0.4% year-over year, and Chief Executive Tim Cook admitted smartphone sales are likely to decline for the first time in the current quarter. Apple depends on sales of the iPhone for the bulk of its revenue, including $51.6 billion of its $75.9 billion in holiday-quarter sales. As iPhone sales have continued to grow since its introduction in 2007, Apple has become the most valuable company in the world, but a slowdown likely signals Apple’s transition from a high-growth tech stock to a value stock.

Cook presented an outlook that shows total revenue will fall along with iPhone sales in the current quarter, citing economic ”malaise in virtually every country in the world” as well as currency headwinds. Apple’s outlook for its fiscal second quarter revenue — ranging from $50 billion to $53 billion — represents a potential revenue decline of 8.6% to 13.8% from $58 billion in the fiscal second quarter of 2015. Apple shares dropped more than 2.5% in late trading. Apple’s other businesses have not stepped up to augment the iPhone. In its fiscal first quarter, Apple saw a tiny uptick in iPhone revenue but declines in its other major hardware products, as iPad revenue fell 21% and Mac revenue fell 3%.

Apple introduced its first new hardware product since the iPad in 2015, the Apple Watch, but it still offers a small, unknown sales total for the company. Revenue for other products — which includes the Apple Watch along with the Apple TV, Beats headphones, the iPod and accessories — jumped 62% year-over-year, but still brought in less than $4.4 billion. Those numbers won’t move the needle when total revenues topped $75 billion.

Maybe what you experienced before was extreme, and this is normal?!

• Apple: ‘Extreme Conditions Unlike Anything We’ve Experienced Before'(BBG)

What’s keeping the CEO of a company that just reported the most profitable quarter in history up at night? For Apple’s Tim Cook, it’s the “economic challenges all over the world.” “This is a huge accomplishment for our company especially given the turbulent world around us,” said Cook, immediately after running through the company’s quarterly financial highlights on a conference call. Ever since the surprise devaluation of the Chinese yuan in August, the potential for a hard landing in the world’s second-largest economy has been front-of-mind for investors. Cook did nothing to assuage those concerns. While pointing out that Apple had been performing quite well in China last summer—unlike some other firms—he suggested that the forward outlook was not nearly as bright.

“Notwithstanding these record results, we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong,” he said. Meanwhile, other major markets for Apple, including Brazil, Russia, Japan, Canada, southeast Asia, Turkey, and the eurozone have been roiled by slow economic growth, the downturn in commodities prices, and weakening currencies. “Our results are particularly impressive given the challenging global macroeconomic environment,” said Cook. “We’re seeing extreme conditions unlike anything we’ve experienced before just about everywhere we look.”

For Apple, which generates roughly two-thirds of its revenues outside the U.S., this is no small matter. The lofty U.S. greenback crimped revenues received abroad, with Cook specifically citing the adverse effect of weakness in the British pound, euro, Canadian dollar, Aussie dollar, Mexican peso, Turkish lira, Brazilian real, and Russian ruble. According to Cook, these foreign exchange fluctuations shaved 15% off revenues the tech powerhouse earned abroad relative to its fiscal fourth quarter.

Yeah, sure, AIG is a going concern, yada yada. Thing is, what’s the bill, and who’s paying?

• AIG To Return $25 Billion After Activist Siege (FT)

American International Group’s chief executive has pledged to return $25bn to shareholders as he defies demands from activist investors Carl Icahn and John Paulson to break up the world’s fourth most valuable insurance company. Peter Hancock on Tuesday unveiled a streamlining plan including a listing of AIG’s mortgage insurance arm, accelerated cost cutting and a separation of legacy assets in an effort to rally support from other shareholders. He said that AIG, which has already scaled back dramatically since the financial crisis and its $185bn government bailout, would be willing to make further disposals if they made financial sense — but argued that there was no case at present to shed core divisions.

“We’re absolutely open to additional divestitures beyond what we’ve talked about — even of our largest units — but you don’t make a decision of that scale without thinking very hard about the impact,” he said. Management’s refusal to acquiesce to the activists’ break-up call sets the stage for a full-scale proxy war. Mr Icahn has already said that he hopes directors “will take matters into its own hands if management still resists drastic change”. The billionaire, who has received support from Mr Paulson, believes that AIG should split apart its life and general insurance arms, highlighting that Washington plans to subject the group to tougher regulations as a “systemically important” financial institution or Sifi. Mr Hancock rejected the Sifi argument as a “complete red herring”.

“It’s maybe issue number 15 on the list,” he said. “Now is not the time to be short-sighted and simply react to the demands of those who challenge us.” Shares in AIG, whose discount to book value has made it a target for activists, rose 1.3% to $56.08 after it made its long-awaited strategic update. The $25bn of capital to be distributed via dividends and stock buybacks over the next two years is equivalent to more than a third of AIG’s $68bn market capitalisation. The group returned $12bn last year. Mr Hancock’s initiatives include a stock market launch this year of AIG’s mortgage insurance arm, United Guaranty. The group plans to float a 20% stake as a “first step towards a full separation”. The division as a whole is estimated to be worth about $6bn.

As I said many times before.

• The Black Hole of Deflation Is Swallowing the Entire World (GWB)

Many high-powered people and institutions say that deflation is threatening much of the world’s economy … China may export deflation to the rest of the world. Japan is mired in deflation. Economists are afraid that deflation will hit Hong Kong. The Telegraph reported last week: RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel. Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:”Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2% per annum; Germany is at 0.3% and the US at 0.5%. Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump. Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe: “Research Team at TDS suggests that the euro area looks set to endure five consecutive months of deflation, starting in February. “The further collapse in oil prices and what is likely spillover into core prices means the ECB’s 2016 inflation tracking is likely to be almost a full percentage point below their forecast of just six weeks ago.” (Indeed, many say that Europe is stuck in a depression.) The U.S. might seem better, but a top analyst said last year: “Core inflation in the US would be just as low as in the Eurozone if measured on the same basis”.

Funny tragedy.

• The Future is Blivets (Dmitry Orlov)

If you have been paying attention, you may have noticed that the global financial markets are currently in meltdown mode. Apparently, the world has hit diminishing returns on making stuff. There is simply too much of everything, be it oil wells, container ships, skyscrapers, cars or houses. Because of this, the world has also hit diminishing returns on borrowing money to build and sell more stuff, because the stuff we build doesn’t sell. And because it doesn’t sell, the price of stuff that’s already been made keeps going down, lowering its value as loan collateral and making the problem worse.

One solution that’s been proposed is to convert from a products economy to a services economy. For instance, instead of making widgets, everybody gives each other backrubs. This works great in theory. The backrub industry doesn’t generate an ever-expanding inventory of backrubs that then have to be unloaded. But there are some problems with this plan. The first problem is that too few people have enough money saved up to spend on backrubs, so they would have to get the backrubs on credit. Another problem is that, unlike a widget, a backrub is not a productive asset, and doesn’t help you pay off the money you had to borrow to pay for the backrub. Lastly, a backrub, once you have received it, isn’t worth very much. You can’t auction it off, and you can’t use it as collateral for a loan.

These are big problems, and one proposed solution is to create good, well-paying jobs that put money in people’s pockets—money that they can then spent on backrubs. This is best done by investing in productivity improvements: send people to school, invest in high tech and so on. It’s an intuitively obvious idea: productive workers are easier to employ than unproductive workers, because the stuff they make ends up cheaper, and people can afford to buy more of it. Whether they do buy more of it is debatable, especially if there is more than enough of it already and nobody has any extra money saved. Still, the theory makes sense.

But this theory doesn’t seem to be working all that well: no matter how much money we put into automation—robotic assembly lines, internet-based virtualization, what have you—the number of unemployed workers isn’t going down at all. And it’s even worse with driverless cars. In theory, they are great: if the driver doesn’t have to do the driving, then she can spend the time giving her passengers backrubs. But no matter how much money we throw at driverless cars, the number of unemplyed drivers, or unemployed massage therapists, isn’t going down.

The USA: “..a shameless land where anything goes and nothing matters.”

• The Agonies of Sensible People (Jim Kunstler)

I think it is fair to say that Michael Bloomberg’s success as the three-term mayor of New York City (2002 – 2013) was due almost completely to the financialization of the economy. A Niagara of money flowed into the city as banking ballooned from 5% to 40% of the US economy. As all the formerly skeezy neighborhoods of New York — the Bowery, the Meatpacking District, etc —got buffed up, the desolation in places like Utica, Dayton, Gary, and Memphis got worse. You might say New York City benefited hugely from all the assets stripped out of the flyover states. All of which is to say that that recent revival of New York City was not necessarily due to Michael Bloomberg’s genius. He presided over a very special moment in history when money was flowing in a particular way, and he went with flow.

For all that, it seems likely that he was also an able administrator as this occurred. A lot of out-front elements of city life improved visibly while he was around. Crime went down, the subways ran better, public spaces were improved. What would he be able to do in the compressive deflationary depression that I call the long emergency? Could he restore faith in authority? Could he comfort a battered public on the airwaves? Could he begin the awful task of politically deconstructing the matrix of rackets that has made it impossible for this country to move where history is taking us (smaller, finer, more local)?

Finally, on top of his Wall Street connection, Bloomberg is Jewish. (As I am.) Is the country now crazed enough to see the emergence of a Jewish Wall Streeter as the incarnation of all their hobgoblin-infested nightmares? Very possibly so, since the old left wing Progressives have adopted the Palestinians as their new pet oppressed minority du jour and have been inveighing against Israel incessantly. Well, that would be a darn shame. But that’s what you might get in a shameless land where anything goes and nothing matters. For now, anyway, the real disrupter is turning out to be Michael Bloomberg. Finally a serious man enters the stage.

There’s going to be a lot of empty offices in Brussels soon.

• Clock Ticks Down On EU Passport Free Travel Dream (AP)

Passport-free travel and hassle-free business in Europe has never been in more danger. With more than 1 million people streaming into the EU hoping for sanctuary or jobs, nations have erected fences, deployed troops and tightened border controls. “What we have worked for, for so many years, we are seeing it crumbling now in front of us,” Roberta Metsola, a leading EU lawmaker on migration, told AP on Tuesday. As draconian as they might seem, most attempts to stem the migrant flow have been within the letter, if not the spirit, of the rules governing the European travel haven known as the Schengen area, a jewel in the EUs integration crown But as of mid-May, the EU is in uncharted waters. The legal options for countries like Germany, Austria and Sweden to impose ID checks on everyone who enters, including Europeans, begin to run out.

“Our citizens have a right to feel safe,” Metsola said. “If that means that we will need to keep stock of who is crossing our borders for a specific amount of time, then we will have to do it.” The German government has signaled it’s unlikely to ease border controls on May 13, when its temporary border measures legally expire. If no other mechanism is in place by then, the Schengen rule book could effectively be suspended. Most EU nations blame Greece for this. [..] Aid groups estimate that Greece has shelter for barely 10,000 people; a little over one% of those who need it. The Greek coastguard is totally overwhelmed. Managing the country’s vast maritime border would challenge even an experienced government with a fully equipped public service. Greece, at the moment, is also consumed with a crippling economic crisis. But, Metsola said, “there is a lack of knowledge as to who is coming in and who is going out, and that automatically increases fear and increases the security concerns.

It will get much crazier than this yet.

• Danish Parliament Approves Plan To Seize Assets From Refugees (Guardian)

European states have reacted in some of the most drastic ways yet to the continent’s biggest migration crisis since the second world war, with Denmark enacting a law that allows police to seize refugees’ assets. The vote in the Danish parliament on Tuesday, which followed similar moves in Switzerland and southern Germany, came as central European leaders amplified calls to seal the borders of the Balkans, a move that would risk trapping thousands of asylum seekers in Greece. Under the new Danish law, police will be allowed to search asylum seekers on arrival in the country and confiscate any non-essential items worth more than 10,000 kroner (£1,000) that have no sentimental value to their owner.

The centre-right government said the procedure is intended to cover the cost of each asylum seeker’s treatment by the state, and mimics the handling of Danish citizens on welfare. Elsewhere in Europe, the Czech and Slovakian prime ministers condemned Greece’s inability to prevent hundreds of thousands of refugees from moving onwards to northern European countries. They jointly called for increased border protection to block the passage of refugees from Greece, a day after EU interior ministers said they were willing to consider the suspension of the Schengen agreement that allows free passage between most EU countries. Robert Fico, the Slovakian prime minister, said: “There must be a backup plan, regardless of whether Greece stays in Schengen. We must find an effective border protection.”

The idea outraged the Greek government, which must now consider the possibility of hundreds of thousands of refugees being unable to leave Greece, which is struggling with high unemployment and economic strife. Nikos Xydakis, Greece’s alternate foreign minister for EU affairs, called the idea “hysterical” and warned that it could lead to the fragmentation of Europe. “If every country raises a fence, we return to the cold war period and the iron curtain. This isn’t EU integration – this is EU fragmentation.” The Greek government faces calls to take tougher action to block the passage of the thousands of refugees arriving in Greece by boat every day, but Xydakis said the only way of stopping them would be to shoot them – an option that Greece was not willing to take, even if it meant being fenced in.

“If Europe is to put Greece in a deep humanitarian crisis, let’s see it [happen],” he said in an interview with the Guardian on Tuesday. “We are in the sixth year of a depression and [have] unemployment of 25% … But if our colleagues and partners in the EU think that we have to let people drown or sink their boats, we can’t do that. Maybe we will suffer, but we will manage.”

How about this for crazy?

• Belgium Wants Camp for 300,000 Refugees in Athens (DM)

Belgium has called for vast refugee camps holding up to 300,000 refugees to be built in Greece in a desperate attempt to stem the flow of migrants from Syria and other nations outside Europe. At an emergency summit of European leaders yesterday, Belgian migration minister Theo Francken raised the spectre of setting up ‘closed facilities’ in Greece to be operated by the EU. He said that the Greeks ‘now need to bear the consequences’ of being too weak to guard their own borders and called for Athens to face an EU ‘sanction mechanism’ under which the rising number of refugees entering the country would be forced to stay there.

Debt Rattle January 8 2016

Jan 082016

January 8, 2016 Posted by Raúl Ilargi Meijer at 9:50 am Finance Tagged with: anthropocene, Aramco, capital flight, China, circuit breaker, deflation, devaluation, refugees, Schengen, VW 7 Responses »

Unknown Charleston, SC, after bombardment. Ruins of Cathedral of St John and St Finbar 1865

• Slowing Productivity Fast Becoming A Global Problem (Lebowitz)

• Dow, S&P Off To Worst Four-Day Jan Start Ever As China Fears Grow (Reuters)

• US Stock Markets Continue Plunge (Guardian)

• China Has Not One Insolvable Problem, But Many Of Them (Mish)

• Capital Flight Pushes China To The Brink Of Devaluation (AEP)

• China Stocks Rebound as State Funds Said to Buy Equities (BBG)

• China’s Yuan Fixing Calms Markets as Asian Stocks Rally With Oil (BBG)

• The Decline Of The Yuan Destroys Belief In Central Banking (Napier)

• One Big Market Casualty: China Regulators’ Reputation (CNBC)

• China Orders Banks To Limit Dollar Buying This Month To Stem Outflows (CNBC)

• Yuan Depreciation Risks Competitive Devaluation Cycle (Reuters)

• China’s Forex Reserves Post Biggest Monthly Drop On Record (Xinhua)

• China’s Stock Market Is Hardly Free With Circuit Breakers Gone (BBG)

• Iran Severs All Commercial Ties With Saudi Arabia (Reuters)

• Saudi Arabia Considers IPO For World’s Biggest Energy Company Aramco (Guardian)

• VW Weighs Buyback of Tens of Thousands of Cars in Talks With US (BBG)

• Human Impact Has Pushed Earth Into The Anthropocene (Guardian)

• Europe’s Economy Faces Confidence Test as Borderless Ideal Fades (BBG)

• Turkey Does Nothing To Halt Refugee Flows, Says Greece (Kath.)

We’ve reached the end of a line. Not even the narrative works from here.

• Slowing Productivity Fast Becoming A Global Problem (Lebowitz)

In “The Fed And Its Self-Defeating Monetary Policy” we focused our discussion on U.S. productivity, but weak and slowing productivity growth is not just an American problem. All of the world’s leading economies are, to varying degrees, exhibiting the same worrisome pattern. And slowing productivity is something investors across asset classes should pay attention to in 2016. The graph below compares annualized productivity trends from three time periods – the 7 years immediately preceding the financial crisis, the 5 years immediately following the crisis, and the 2 most recently reported years (2013 and 2014). The black dots display the change in trend from pre to post crisis.

In all cases the black dots are below zero representing slowing productivity growth. More troublesome, the world’s largest economies are most recently reporting either negligible productivity growth or a decline in productivity. Assuming that demographics are already “baked” and debt has been over-used to produce non-productive growth since well before the crisis, good old-fashioned productivity gains are what the global economy requires to produce durable organic growth in the developed world. Central bankers, politicians and investors are well advised to understand this dynamic.

Jobs numbers today will be big.

• Dow, S&P Off To Worst Four-Day Jan Start Ever As China Fears Grow (Reuters)

U.S. stocks sold off further on Thursday, giving the Dow and S&P 500 their worst four-day starts to a year ever, dragged down by another drop in Chinese equities and oil prices at 12-year lows. China allowed the biggest fall in its yuan currency in five months, adding to investor fears about the health of its economy, while Shanghai stocks were halted for the second time this week after another steep selloff. Oil prices fell to 12-year lows and copper prices touched their lowest since 2009, weighing on energy and materials shares. Shares of Freeport McMoran dropped 9.1% to $5.61. All 10 S&P 500 sectors ended in the red, though, and the Nasdaq Biotech index fell 4.1%. “People see the weakness in China and in the overall equity market and think there’s going to be an impact on corporations here in the United States,” said Robert Pavlik at Boston Private Wealth in New York.

“When you have a market that begins a year with weakness, people are sort of suspect anyway. The economy isn’t moving all that well, the outlook is modest at best, and they don’t want to wait for the long term. China creates more uncertainty.” The Dow Jones industrial average closed down 392.41 points, or 2.32%, to 16,514.1, the S&P 500 had lost 47.17 points, or 2.37%, to 1,943.09 and the Nasdaq Composite had dropped 146.34 points, or 3.03%, to 4,689.43. The Dow has lost 5.2% since the end of 2015 in the worst first four trading days since the 30-stock index was created in 1928. The S&P 500 is down 4.9% since Dec. 31, its worst four-day opening in its history, according to S&P Dow Jones Indices, while the Nasdaq is down 6.4%.

Serious losses and serious jitters.

• US Stock Markets Continue Plunge (Guardian)

US stocks continued to fall on Thursday as fears of an economic slowdown in China spooked investors around the world. The Dow Jones industrial average fell 392.41 points, or 2.32%, capping its worst four-day start to a year in more than a century. The S&P 500 posted its largest daily drop since September, losing 47.17 points, or 2.37%, to 1,943.09 and the Nasdaq Composite dropped 146.34 points, or 3%, to 4,689.43. The falls followed another day of turmoil on the world’s stock markets amid more signs that the Chinese economy is slowing. China moved early to try to head off more panic, scrapping a new mechanism that Beijing had initially hoped would prevent sharp selloffs.

Beijing suspended the use of “circuit breakers” introduced to halt trading after dramatic selloffs. The circuit breakers appear to have exacerbated the selloffs, as would-be sellers waited for the markets to open again in order to sell. The decision came after the breaker was tripped for the second time in a week as the market fell 7% within half an hour of opening. Signs of problems in the world’s second largest economy triggered selling in Europe. The German DAX was the worst performer, falling 2.29%, as manufacturing firms were hit by fears about China’s impact on the global economy. In London the FTSE 100 staged a late rally but still ended the day down 119 points, or 1.96%, at 5,954. That’s a three-week low, which wipes around £30bn ($43.86bn) off the index.

Well put.

• China Has Not One Insolvable Problem, But Many Of Them (Mish)

Yuan and Capital Flight
• China needs to prop up the yuan to slow capital flight.
• China needs to let the yuan drop to support exports.
• China needs to float the yuan and remove capital controls to prove it really deserves to be taken seriously as a reserve currency.
• If the yuan sinks, capital flight will increase and China risks the ire of US congress and those play into protectionist sentiment, notably Donald Trump.
• Artificial stabilization of the yuan will do nothing but create an oversized move down the road as we saw in Switzerland.

SOEs and Malinvestments
• China needs to write off malinvestments in state owned enterprises (SOEs).
• If China does write off malinvestments in SOEs it will harm those investing in them, generally individual investors who believed in ridiculous return guarantees.
• If China doesn’t write off malinvestments it will have to prop up the owners of those enterprises, mainly the ruling class, at the expense of everyone else, delaying much needed rebalancing.

Property Bubble
• China needs to fill tens of millions of vacant properties, but no one can afford them.
• If China makes the properties affordable it will have to cover the losses, or builders will suffer massive losses.
• If China subsidizes losses for the builders, there are still no real jobs in in the vacant cities.
• If China does not subsidize the losses, the builders and current investors will both suffer massive damage.

Jobs
• China is losing exports to places like Vietnam that have lower wage points.
• Property bubbles, the overvalued yuan, SOEs, and capital flight all pose conflicting problems for a government desperate for job growth.

Stock Market
• China’s stock market is insanely overvalued (as are global equity markets in general). Many investors are trapped. A sinking stock market and loss of paper profits will make overvalued properties even more unaffordable.
• Propping up the market, as China has attempted (not very effectively at that), encourages more speculation.

Pollution
• Curtailing pollution will cost tens of millions of jobs.
• Not curtailing pollution will cost tens of millions of lives.

“Our new base case is that the Chinese government will simply let the debt party go on until it eventually collapses under its own weight..”

• Capital Flight Pushes China To The Brink Of Devaluation (AEP)

China is perilously close to a devaluation crisis as the yuan threatens to break through the floor of its currency basket, despite massive intervention by the central bank to defend the exchange rate. The country burned through at least $120bn of foreign reserves in December, twice the previous record, the clearest evidence to date that capital outflows have reached systemic proportions. “There is certainly a sense that the situation is spiraling out of control,” said Mark Williams, from Capital Economics. Mr Williams said the authorities botched a switch in early December from a dollar currency peg to a trade-weighted exchange basket, accidentally setting off an exodus of money. Skittish markets suspected – probably wrongly – that it was camouflage for devaluation. The central bank is now struggling to pick up the pieces.

Global markets are acutely sensitive to any sign that China might be forced to abandon its defence of the yuan, with conspiracy theories rampant that it is gearing up for currency war in a beggar-thy-neighbour push for export share. Any such move would send a powerful deflationary impulse though a world economy already on its knees, and risk setting off a chain-reaction through Asia, replicating the 1998 crisis on a larger and more dangerous scale. The confused signals coming from Beijing sent Brent crude crashing to an 11-year low of $32.20. They have also set off a parallel drama on China’s equity markets. The authorities shut the main exchange after the Shanghai Composite index plunged 7.3pc in less than half an hour, triggering automatic circuit-breakers. The crash wiped out $635bn of market capitalisation in minutes.

It was triggered by a witches’ brew of worries: a fall in China’s PMI composite index for manufacturing and services below the boom-bust line of 50, combined with angst over an avalanche of selling by company insiders as the deadline neared for an end to the share-sales ban imposed last year. Faced with mayhem, regulators have retreated yet again. They have extended the ban, this time prohibiting shareholders from selling more than 1pc of the total float over a three-month period. The China Securities Regulatory Commission said the move was to “defuse panic emotions”. The freeze on sales is an admission that the government is now trapped, forced to keep equities on life-support to stop the market crumbling. The commission said its “national team” would keep buying stocks if necessary, doubling down on its frantic buying spree to rescue the market last year.

[..] Jonathan Anderson, from Emerging Advisors Group in Shanghai, said the latest burst of stimulus – led by an 18pc rise in credit – is clear evidence that Beijing is unwilling to take its medicine and deflate the country’s $27 trillion loan bubble. “The debt ratio is rocketing upwards. China is still adding new leverage at a massive, frenetic pace,” he said. “The authorities have clearly shown that they have no intention of addressing leverage problems. Our new base case is that the Chinese government will simply let the debt party go on until it eventually collapses under its own weight,” he said.

Light. Tunnel. Oncoming freight train.

• China Stocks Rebound as State Funds Said to Buy Equities (BBG)

Chinese stocks gained in volatile trading after the government suspended a controversial circuit breaker system, the central bank set a higher yuan fix and state-controlled funds were said to buy equities. The Shanghai Composite Index rose 3% at 1:34 p.m. local time, after falling as much as 2.2% earlier. Regulators removed the circuit breakers after plunges this week closed trading early on Monday and Thursday. The central bank set the currency’s reference rate little changed Friday after an eight-day stretch of weaker fixings that roiled global markets. State-controlled funds purchased Chinese stocks on Friday, focusing on financial shares and others with large weightings in benchmark indexes, according to people familiar with the matter.

“The scrapping of the circuit breaker system will help to stabilize the market, but a sense of panic will remain, particularly among retail investors,” said Li Jingyuan, general manager at Shanghai Bingsheng Asset Management. “The ‘national team’ will probably continue to buy stocks significantly to stabilize the market.” While China’s high concentration of individual investors makes its stock-market notoriously volatile, the extreme swings this year have revived concern over the Communist Party’s ability to manage an economy set to grow at the weakest pace since 1990. The selloff has spread around the world this week, sending U.S. equities to their worst-ever start to a year and pushing copper to the lowest levels since 2009.

[..] The flip-flop in the circuit breaker rule adds to the sentiment among global investors that authorities are improvising – and improvising poorly – as they try to stabilize markets and shore up the economy. “They are changing the rules all the time now,” said Maarten-Jan Bakkum, a senior emerging-markets strategist at NN Investment Partners in The Hague with about $206 billion under management. “The risks seem to have increased.” Investors should expect more volatility in Chinese markets as the government attempts to shift away from a planned economy to one driven by market forces, Mark Mobius, chairman of the emerging markets group at Franklin Templeton Investments, wrote in a blog post on Thursday. Policy makers face a “conundrum” as they seek to maintain financial stability while at the same time loosening their grip on markets, he said.

“Global shares have lost more than $4 trillion this year..”

• China’s Yuan Fixing Calms Markets as Asian Stocks Rally With Oil (BBG)

China’s efforts to stabilize its markets showed early signs of success as the yuan strengthened and regional equities rallied for the first time in five days. Treasuries and the yen fell as demand for havens eased. The Shanghai Composite Index gained 2.4% at the midday break after the securities regulator suspended a controversial circuit-breaker system. Asia’s benchmark share index pared its biggest weekly drop since 2011. The yuan rose 0.1% in onshore trading after the People’s Bank of China ended an eight-day stretch of setting weaker reference rates. Crude oil rallied, while Treasuries and the yen headed for their first declines this week. Global shares have lost more than $4 trillion this year as renewed volatility in Chinese markets revived doubts over the ruling Communist Party’s ability to manage the world’s second-largest economy.

The tumult has heightened worries over competitive devaluations and disinflation as emerging-market currencies tumbled with commodities. Investors will shift their attention to America’s economy on Friday as the government reports monthly payroll figures, a key variable for U.S. interest rates. “The PBOC may have been surprised at how badly China and global stock markets reacted to yuan depreciation,” said Dennis Tan at Barclays in Singapore. “They may want to keep the yuan stable for a while to help calm the stock market.” The PBOC set the yuan’s daily fixing, which restricts onshore moves to a maximum 2% on either side, at 6.5636 per dollar. That’s 0.5% higher than Thursday’s onshore effective closing price in the spot market and ends an eight-day reduction of 1.42%.

China’s markets regulator abandoned the circuit breaker just days after it was introduced, as analysts blamed the new mechanism for exacerbating this week’s selloff. Mainland exchanges shut early on Thursday and Monday after plunges of 7% in the CSI 300 triggered automatic halts. Chinese shares rallied after a volatile start to the day that sent the Shanghai Composite down as much as 2.2%. Producers of energy and raw-materials led the advance as investors gravitated to some of last year’s most beaten-down stocks and state funds were said to intervene to by purchasing shares with large index weightings.

China will be exporting a crushing deflation.

• The Decline Of The Yuan Destroys Belief In Central Banking (Napier)

The key failure of control is in China because that failure will overwhelm other seeming successes. In 2012 this analyst labelled one chart “the most important chart in the world”. It was a chart of China’s foreign exchange reserves. It showed how they were declining and The Solid Ground postulated that this would produce a decline in real economic activity in China and higher real interest rates in the developed world. The result of these two forces would be deflation, despite the amount of wind puffed below the wings of the global economy in the form of QE. Of course, no sooner had this report been issued than China’s grand falconer got to work by borrowing hundreds of billions of USD through its so-called commercial banking system!

The alchemical process through which this mandated capital inflow supported the exchange rate while permitting money creation in China stabilized the global economy- for a while. However, by 2014 it was ever more difficult to borrow more money than the people of China were desperate to export and the market began to win. Since then foreign reserves have been falling and the grand falconer has tried to support the exchange rate while simultaneously easing monetary policy to boost economic growth. I’m no falconer but isn’t this akin to trying to get a bird to fly while tying back its wings? Some investors, well paid to believe six impossible things before breakfast, did not question the ability of the grand Chinese falconer to fly a falcon with tethered wings.

They changed their minds briefly as the bird plummeted earthwards in August 2015 but still the belief in the ability to reflate the economy and simultaneously support an overvalued exchange rate continued. In January 2016 this particular falcon, let’s call it the people’s falcon, was more ‘falling with attitude’ than flying. This bird does not fly and if this bird does not fly the centre does not hold. A major devaluation of the RMB is just beginning and the faith in all the falconers will wane as deflation comes to the world almost seven years after the falconers first fanned the winds of QE supposed to levitate everything.

Whack-a-mole.

• One Big Market Casualty: China Regulators’ Reputation (CNBC)

The wobbles in China that rocked financial markets this week have not only cast doubts over the economy, they’ve also shaken confidence in policymakers’ ability to stem the volatility. For two decades, China’s frenetic growth has been the source of the world’s envy, with investors placing faith in the ability of policymakers to help transform China from a manufacturing-led powerhouse to a consumer-driven economy . As the economy stutters and regulators scramble to contain wild moves in the yuan and stocks, analysts are calling out what appears to be a ham-fisted approach to managing market volatility.

“Market volatility this week suggests that nobody really knows what the policy is right now. Or if the government itself knows or is capable of implementing the policy even if there is one,” DBS said in a currency note Friday. “The market’s message was loud and clear that more clarity and less flip-flopping is needed going forward.” China-listed stocks plunged this week, with trade suspended completely in two sessions after the CSI 300 index dropped more than 7 percent, triggering a circuit breaker meant to limit market volatility. The China Securities Regulatory Commission (CSRC) suspended the circuit-breaker system, implemented for the first time on Monday, before the start of trade Friday. The quick regulatory flip-flops spurred a lot of derision among social media commentators.

“The CSRC all treated us as experiments to make history. When it failed, it concluded with ‘lacking experience,’ and that’s it,” Weibo user Li Hua posted. “I strongly call for resignation of related personnel who designed this policy! There’s no cost of failure so that decision makers can do whatever they want.” Another factor weighing on faith in China’s regulators: Policy makers at the central bank, the People’s Bank of China (PBOC), have tinkered again with its currency without providing much indication to the market about its endgame. On Thursday the PBOC allowed the yuan to fall by the most in five months, to the lowest level since the fixing mechanism was established in 2011.

Money will continue to flow out no matter what they do.

• China Orders Banks To Limit Dollar Buying This Month To Stem Outflows (CNBC)

China’s foreign exchange regulator has ordered banks in some trading hubs to limit dollar purchases this month, three people with direct knowledge said on Friday, in the latest attempt to stem capital outflows. The spread between the onshore and offshore markets for the yuan, or renminbi, has been growing since the devaluation last year, spurring Beijing to adopt a range of measures to curb outflows of capital. All banks in certain trading hubs, including Shenzhen, have been affected, the people added. China suspended forex business for some foreign banks, including Deutsche, DBS and Standard Chartered at the end of last year.

Beggar all of thy neighbors.

• Yuan Depreciation Risks Competitive Devaluation Cycle (Reuters)

The depreciation of the Chinese yuan risks triggering a cycle of competitive devaluation and is causing enormous worry in the world’s financial markets, Mexican Finance Minister Luis Videgaray said on Thursday. China allowed the biggest fall in the yuan in five months on Thursday, sending global markets down on concerns that China might be aiming for a devaluation to help its struggling exporters and that other countries could follow suit. “This is one of the worst starts of the year for all the world’s markets,” Videgaray said at an event in Mexico City. “There is a real worry that in the face of the slowing Chinese economy that the public policy response is to start a round of competitive devaluation,” he said.

Mexico has been committed to a freely floating currency since a devastating financial crisis in the mid-1990s and authorities refrain from some of the more direct forms of intervention seen in other emerging markets. Mexico’s peso slumped to a record low on Thursday, triggering two auctions of $200 million each by Mexico’s central bank to support the currency. The country’s program of dollar auctions, under which the central bank can sell up to $400 million a day, is set to expire on Jan. 29. Videgaray said policymakers would announce if the plan would be maintained or modified before that deadline. He noted the program’s goal is not to defend a certain peso level but to ensure sufficient order and liquidity in the market. “We have managed to achieve this objective in a satisfactory manner,” he said. “Up until now, there has been no decision to modify the mechanism.”

Can’t be a good sign no matter what they say.

• China’s Forex Reserves Post Biggest Monthly Drop On Record (Xinhua)

China’s foreign exchange reserves posted the sharpest monthly fall on record in December, official data showed Thursday. Foreign exchange reserves fell to $3.33 trillion at the end of last month, the lowest level in more than three years and down by 108billion dollars from November, according to the People’s Bank of China. The fall in December extended a month-on-month decline of $87.2 billion registered in November. The yuan has been heading south since the central bank revamped the foreign exchange mechanism in August to make the rate more market-based. The yuan has been losing ground as the Chinese economy is expected to register its slowest pace of growth in a quarter of a century in 2015.

Meanwhile, the United States raised interest rates in December and more rises are expected in 2016. The onshore yuan (CNY), traded in the Chinese mainland, declined 4.05% against the greenback in 2015. Li Huiyong, analyst with Shenwan Hongyuan Securities, said the faster decline indicated greater pressure for capital outflow as the yuan depreciated. On Thursday, the central parity rate of the yuan weakened by 332 basis points to 6.5646 against the U.S. dollar, its weakest level in nearly five years, according to the China Foreign Exchange Trading System. “An appropriate size for China’s forex reserves should be around 1.5 trillion U.S. dollars. There is still large room for necessary operations to sustain a stable yuan,” Li said.

They need to let it go. But won’t.

• China’s Stock Market Is Hardly Free With Circuit Breakers Gone (BBG)

China’s removal of market-wide circuit breakers after just four days still leaves investors facing plenty of restrictions in how they trade. A 10% daily limit on single stock moves and a rule preventing investors from buying and selling the same shares in a day remain in force. Volume in what was once the world’s most active index futures market is minimal after authorities curtailed trading amid a summer rout, making it more difficult to implement hedging strategies. Officials unveiled curbs Thursday on share sales by major stockholders just a day before an existing ban was due to expire. And the activity of foreign investors is limited by quotas, given either to asset managers or to users of the Hong Kong-Shanghai exchange link.

“Although there’s more ability now for offshore participation, it’s largely a market that’s restricted the domestic users,” said Ric Spooner at CMC Markets Asia Pacific. “That means it doesn’t get the arbitrage benefits that international investors bring. It’s a work in progress.” There’s also the prospect that regulators and executives will dust off last year’s playbook as they seek to stem losses. At the height of the summer rout, about half of China’s listed companies were halted, while officials investigated trading strategies, made it harder for investors to borrow money to buy equities and vowed to “purify” the market. Chinese equities seesawed in volatile trading on Friday, with the CSI Index rising 1.3% as of 10:02 a.m. local time after climbing 3.1% and sinking 1.7%.

The gauge slid 12% in the first four days of the week, two of which were curtailed as the circuit breakers triggered market-wide halts for the rest of the day. The flip-flop on using the mechanism, which was meant to help stabilize the market, is adding to investor concern that authorities are improvising. Policy makers weakened the yuan for eight days straight through Thursday, and authorities were said to intervene on Tuesday to prop up equities. Policy makers used purchases by government-linked funds to bolster shares as the CSI 300 plunged as much as 43% over the summer. State funds probably spent $236 billion on equities in the three months through August, according to Goldman Sachs.

Saudi rocket attack on embassy in Yemen.

• Iran Severs All Commercial Ties With Saudi Arabia (Reuters)

Relations between Iran and Saudi Arabia deteriorated even further on Thursday as Tehran severed all commercial ties with Riyadh and accused Saudi jets of attacking its embassy in Yemen’s capital. A row has been raging for days between Shi’ite Muslim power Iran and the conservative Sunni kingdom since Saudi Arabia executed cleric Nimr al-Nimr, an opponent of the ruling dynasty who demanded greater rights for the Shi’ite minority. Saudi Arabia, Bahrain, Sudan, Djibouti and Somalia have all broken off diplomatic ties with Iran this week, the United Arab Emirates downgraded its relations and Kuwait, Qatar and Comoros recalled their envoys after the Saudi embassy in Tehran was stormed by protesters following the execution of Nimr and 46 other men.

In a cabinet meeting chaired by Iran’s President Hassan Rouhani on Thursday, Tehran banned all imports from Saudi Arabia. Saudi Arabia had announced on Monday that Riyadh was halting trade links and air traffic with the Islamic Republic. Iran also said on Thursday that Saudi warplanes had attacked its embassy in Yemen’s capital, Sanaa, an accusation that Riyadh said it would investigate. “Saudi Arabia is responsible for the damage to the embassy building and the injury to some of its staff,” Foreign Ministry Spokesman Hossein Jaber Ansari was quoted as saying by the state news agency, IRNA. Residents and witnesses in Sanaa said there was no damage to the embassy building in Hadda district.

Aramco is so big, it may be impossible to value.

• Saudi Arabia Considers IPO For World’s Biggest Energy Company Aramco (Guardian)

Saudi Arabia is considering a stock market listing for its national oil group – the world’s biggest energy company and probably the most valuable company on the planet. Saudi Aramco is a highly secretive organisation but is likely to be valued at well over $1tn (£685bn). Any public share listing would be viewed as a potent symbol of the financial pain being wreaked by low prices on the world’s biggest crude exporting country. Prince Muhammad bin Salman, the country’s highly influential deputy crown prince, confirmed in an interview on Monday with the Economist magazine that a decision would be taken within months whether to raise cash in this way, even as oil company shares are depressed at this time.

“Personally I am enthusiastic about this step,” he said. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around.” The sale via an initial public offering (IPO) of any part of Saudi Aramco would be a major change in direction for a country, which has jealously guarded its enormous – and cheaply produced – oil reserves. Aramco’s reserves are 10 times greater than those of Exxon, which is the largest publicly listed oil company. The prince, considered the power behind the throne of his father King Salman, is keen to modernise the largely oil-based Saudi economy by privatisation or other means but it also needs to find money.

The country is under pressure, with oil prices plunging to their lowest levels in 11 years and more than 70% below where they were in June 2014. This has put huge strain on Saudi public spending plans, which were drawn up when prices were much higher and pushed the public accounts into deficit.

A long way from salvation.

• VW Weighs Buyback of Tens of Thousands of Cars in Talks With US (BBG)

Volkswagen may buy back tens of thousands of cars with diesel engines that can’t be easily fixed to comply with U.S. emissions standards as part of its efforts to satisfy the demands of regulators, according to two people familiar with the matter. Negotiations between the German automaker and the U.S. Environmental Protection Agency are continuing and no decisions have been reached. Still, a buyback would be an extraordinary step that demonstrates the challenge of modifying vehicles that were rigged to pass emission tests. VW has concluded it would be cheaper to repurchase some of the more than 500,000 vehicles than fix them, said the people, who declined to be cited by name.

One person said the number of cars that might be bought back from their owners totals about 50,000, a figure that could change as talks continue. “We’ve been having a large amount of technical discussion back and forth with Volkswagen,” EPA Administrator Gina McCarthy said Thursday, when asked about the possibility of VW having to buy back some vehicles. “We haven’t made any decisions on that.” McCarthy told reporters after an event in Washington Thursday that VW’s proposals to bring its cars into compliance with emissions standards have so far been inadequate. “We haven’t identified a satisfactory way forward,” McCarthy said. The EPA is “anxious to find a way forward so that the company can get into compliance,” she said.

“..the presence of isotopes from nuclear weapons testing..”

• Human Impact Has Pushed Earth Into The Anthropocene (Guardian)

There is now compelling evidence to show that humanity’s impact on the Earth’s atmosphere, oceans and wildlife has pushed the world into a new geological epoch, according to a group of scientists. The question of whether humans’ combined environmental impact has tipped the planet into an “anthropocene” – ending the current holocene which began around 12,000 years ago – will be put to the geological body that formally approves such time divisions later this year. The new study provides one of the strongest cases yet that from the amount of concrete mankind uses in building to the amount of plastic rubbish dumped in the oceans, Earth has entered a new geological epoch.

“We could be looking here at a stepchange from one world to another that justifies being called an epoch,” said Dr Colin Waters, principal geologist at the British Geological Survey and an author on the study published in Science on Thursday. “What this paper does is to say the changes are as big as those that happened at the end of the last ice age . This is a big deal.” He said that the scale and rate of change on measures such as CO2 and methane concentrations in the atmosphere were much larger and faster than the changes that defined the start of the holocene. Humans have introduced entirely novel changes, geologically speaking, such as the roughly 300m metric tonnes of plastic produced annually. Concrete has become so prevalent in construction that more than half of all the concrete ever used was produced in the past 20 years.

Wildlife, meanwhile, is being pushed into an ever smaller area of the Earth, with just 25% of ice-free land considered wild now compared to 50% three centuries ago. As a result, rates of extinction of species are far above long-term averages. But the study says perhaps the clearest fingerprint humans have left, in geological terms, is the presence of isotopes from nuclear weapons testing that took place in the 1950s and 60s. “Potentially the most widespread and globally synchronous anthropogenic signal is the fallout from nuclear weapons testing,” the paper says. “It’s probably a good candidate [for a single line of evidence to justify a new epoch] … we can recognise it in glacial ice, so if an ice core was taken from Greenland, we could say that’s where it [the start of the anthropocene] was defined,” Waters said.

It’s all become a joke.

• Europe’s Economy Faces Confidence Test as Borderless Ideal Fades (BBG)

Here’s the latest in a long line of threats to Europe’s economy: the border guard. Danish officers checking travel documents on the boundary with Germany this week aren’t out to stymie trade or hinder tourism – they’re under orders from politicians anxious to stem the flow of refugees. Even so, analysts are beginning to worry about what could happen to the already-embattled region when the free movement of people is called into question. Like the euro, the single currency used by 19 of the European Union’s 28 nations, the Schengen Agreement has long been touted by politicians as an irrevocable pillar of a multi-national union, allowing unimpeded travel between states for business or pleasure. So with an already fragile recovery, monetary policy stretched trying to fend off deflation and companies deferring investment, the mere threat that Schengen could unravel may be hard to shrug off.

“If in the migrant crisis Schengen were to disintegrate, this would send a disastrous signal to markets: the European project would be seen as in fact reversible,” said Wolfango Piccoli, managing director of Teneo Intelligence in London. “Nobody could blame investors if against that backdrop, they would suddenly start to re-evaluate the reliability of promises made by European institutions in the euro-zone crisis.” The EU says Europeans make over 1.25 billion journeys within the Schengen zone every year, which comprises 26 countries from the Barents Sea to the eastern Mediterranean. It also includes countries such as Iceland and Norway that aren’t part of the EU. Signed in 1985, Schengen took effect 10 years later. In normal times, it means travelers within the bloc aren’t subjected to border checks, and external citizens holding a visa for one country may usually travel without restriction to all.

These aren’t normal times and now the edifice of carefree travel across the continent is cracking. During 2015, the arrival of people fleeing wars and persecution in Asia, Africa and the Middle East exceeded 1 million, sparking political tension and public debate over how, and where, to settle the newcomers. Denmark’s decision to establish temporary controls seems, according to the EU, to be covered by Schengen rules that allow such curbs in emergencies. But it’s not the first; that move came hours after Sweden started systematic ID checks at its borders, while Germany was forced to take similar action in September along its frontier with Austria. Hungary erected a fence at its borders with Serbia and Croatia last year.

€3 billion, Angela.

• Turkey Does Nothing To Halt Refugee Flows, Says Greece (Kath.)

Turkey has not taken any action to clamp down on human traffickers and between 3,000 and 4,000 migrants and refugees are reaching Greece every day, Immigration Policy Minister Yiannis Mouzalas said Thursday. Mouzalas suggested in an interview on Skai TV that Ankara has not lived up to its pledges to stem the flow of people traveling across the Aegean to Greece. “It has not done anything to stop human trafficking, as is evident from the migratory flows.” The minister said that the high level of arrivals has continued because the news that some migrants are not being allowed through European borders has yet to filter through but, at the same time, refugees waiting to cross from Turkey are concerned that if they do not do so soon they will be prevented from reaching Central and Northern Europe.

“The high rate has to do with refugees’ fear that the borders will close for everyone,” he said, adding that he thought this possibility is “very likely.” “When the message reaches Morocco that Moroccans are not being allowed to cross into Europe but are being held and repatriated, the flows will drop.” Mouzalas said that around half of the people arriving in Greece over the last two months have been undocumented migrants.

Debt Rattle January 30 2015

Jan 302015

January 30, 2015 Posted by Raúl Ilargi Meijer at 11:20 am Finance Tagged with: capital flight, currency war, deflation, eurozone, Greece, Russia, sentient beings, Syriza 6 Responses »

Harris&Ewing “Pennsylvania Avenue with snow, Washington, DC” 1918

• Commodity Prices Collapse To Lowest In 12 Years (Telegraph)

• Cheap Oil Burns $390 Billion Hole in Investors’ Pockets (Bloomberg)

• China Shadow Banking Trusts Fuel Stocks With 28% Jump in Investment (Bloomberg)

• Europe Stocks Head for Best January Since 1989 (Bloomberg)

• Eurozone Slides Deeper Into Deflation (CNBC)

• We Must Stop Angela Merkel’s Bullying Or Let Austerity Win (Guardian)

• Lies, Damned Lies And Greece’s Debt Default (MarketWatch)

• Greece Turns Left, Europe Goes Right (Bloomberg)

• Open Letter To German Readers: What You Were Never Told About Greece (Tsipras)

• Syriza’s Original 40 Point Manifesto (Zero Hedge)

• Greece’s New Young Radicals Sweep Away Age Of Austerity (Guardian)

• It’s Time For Greece To Leave The Eurozone And Move On (Telegraph)

• Greece’s Predicament in One Scary Chart: Capital Flight (Bloomberg)

• Russia Extends Olive Branch To Greeks (CNBC)

• Japan Braces For Falling Prices As Oil Collapses (CNBC)

• The Next Shot In The Currency War Will Be Fired By… (CNBC)

• Denmark Surprises Market With Third Rate Cut In Two Weeks (Reuters)

• Denmark, Deutschland And Deflation (BBC)

• Young Workers Hit Hardest By Wages Slump Of Post-Crash Britain (Guardian)

• Gorbachev Accuses US Of Dragging Russia Into New Cold War (RT)

• China’s Anti-Corruption Campaign Boosts Suicide Rate (FT)

• Animals In France Finally Recognized As ‘Living, Sentient Beings’ (RT)

Mother of all bubbles.

• Commodity Prices Collapse To Lowest In 12 Years (Telegraph)

The world’s leading index of commodity prices has slumped to its lowest level in more than 12 years as China slows and America hints at tightening monetary policy. The Bloomberg Commodity index, which tracks the prices of 22 different commodity prices such as gold, natural gas and oil, fell 0.3pc to 99.84 in early trading, the lowest point since August 2002. The recent bout of weakness in commodity prices came as the US Federal Reserve issued an upbeat view on the state of US economy. Minutes from the Federal Open Market Committee’s December meeting said the US economy is expanding at a solid rate with strong job gains, a signal that the central bank remains on track with plans to raise interest rates.

Commodities, like all asset classes, have benefited from America’s loose monetary policy. The upbeat view from the US economy came after another sign of a slowdown in China, with official figures showing profits from the industrial sector fell 8pc in December from a year earlier. Last year, China’s annual economic growth slowed to 7.4pc—its slowest pace in nearly a quarter of a century—as the property crisis in the country holds back the economy, and there is rising debt and slower demand for its products at home and abroad. Most economists expect Beijing to set an annual-growth target for 2015 of 7pc.

“Demand was so high that the company more than doubled the size of the offering. The debt is now trading for less than 50 cents on the dollar..”

• Cheap Oil Burns $390 Billion Hole in Investors’ Pockets (Bloomberg)

Investors have a message for suffering U.S. oil drillers: We feel your pain. They’ve pumped more than $1.4 trillion into the oil and gas industry the past five years as oil prices averaged more than $91 a barrel. The cash infusion helped push U.S. crude production to the highest in more than 30 years, according to data compiled by Bloomberg. Now that oil prices have fallen below $45, any euphoria over cheaper energy will be tempered by losses that are starting to show up in investment funds, retirement accounts and bank balance sheets. The bear market has wiped out a total of $393 billion since June – $353 billion from the shares of 76 companies in the Bloomberg North America Exploration & Production index, and almost $40 billion from high-yield energy bonds, issued by many shale drillers.

“The only thing people are noticing now is that gas prices are dropping,” said Sean Wheeler at law firm Latham & Watkins. “People haven’t noticed yet that it’s also hitting their portfolios.” The money flowing into oil and gas companies around the world in the last five years came from a variety of sources. The industry completed $286 billion in joint ventures, investments and spinoffs, raised $353 billion in initial public offerings and follow-on share sales, and borrowed $786 billion in bonds and loans. The crash caught investors and lenders by surprise. Eight months ago, oil producer Energy XXI sold $650 million in bonds. Demand was so high that the company more than doubled the size of the offering, company records show. The debt is now trading for less than 50 cents on the dollar, and the stock has declined 88%.

Energy XXI, which has more than $3.8 billion in debt, is one of more than 80 oil and gas companies whose bonds have fallen to distressed levels, meaning their yields are more than 10percentage points above Treasury debt, as investors bet the obligations won’t be repaid, according to data compiled by Bloomberg. The stocks and bonds of Energy XXI and other struggling energy firms have been bought up by pension funds, insurance companies and savings plans that are the mainstays of Americans’ retirement accounts. Institutional investors had more than $963 billion tied up in energy stocks as of the end of September, according to Peter Laurelli at analytics firm eVestment, that gathers data on about $22 trillion of institutional strategies.

Mother of all bubbles’ younger sister.

• China Shadow Banking Trusts Fuel Stocks With 28% Jump in Investment (Bloomberg)

China’s trusts, part of the shadow-banking industry, fueled a stock-market rally by boosting their investments in equities by a record 122 billion yuan ($19.5 billion) in the fourth quarter. The increase, reported by the China Trustee Association on Friday, was the biggest by value in data starting in 2010. The 28% gain was the largest since the third quarter of 2010. China’s capital controls and weakness in the property market have helped to channel money into stocks, driving a 35% surge in the Shanghai Composite Index over three months. Trusts’ assets under management grew at the fastest pace in six quarters, gaining almost 8% to 13.98 trillion yuan. Investment in equities totaled 552 billion yuan. So-called umbrella trusts, which allow more leverage than broker financing, have played a role in the stock boom. At the end of last year, China had 369 “risky” trust products valued at 78.1 billion yuan, the statement showed, down from 82.4 billion yuan three months earlier.

Mother of all bubbles’ elder sister.

• Europe Stocks Head for Best January Since 1989 (Bloomberg)

European stocks were little changed, with the Stoxx Europe 600 Index heading for its best start to a year since 1989. The Stoxx 600 added less than 0.1% to 368.85 at 9:53 a.m. in London, having slipped as much as 0.3% and risen as much as 0.4%. The gauge has advanced 7.7% in January as the European Central Bank unveiled a 1.1 trillion-euro ($1.2 trillion) quantitative easing program. A report at 11 a.m. Frankfurt time is projected to show a second month of deflation in the euro area, after a German consumer-price index turned negative for the first time since 2009.

“We’ll see a pickup in growth after QE, but it will be modest,” said Henrik Drusebjerg at Carnegie Investment Bank in Copenhagen. “Most European countries still need to do more reform. We are beginning to take a look at some European companies. I’m curious how aggressive to see Greece will be on their election promises.” Greece’s ASE Index rose for a second day, paring its weekly drop to 11%. Prime Minister Alexis Tsipras promised not to spring any surprises on Greece’s troika of official creditors. The nation’s banks slid this week amid concern a coalition led by Syriza, which won Sunday’s election, will challenge austerity measures. They recovered some losses after the head of ECB’s Supervisory Board said yesterday that the nation’s lenders can survive the current market turbulence.

Stocks higher, prices lower. Makes a lot of sense.

• Eurozone Slides Deeper Into Deflation (CNBC)

The euro zone slid further into deflation in January, underlining the case for the European Central Bank’s full-blown bond-buying program, announced earlier this month. Prices fell by 0.6% year-on-year in January, official flash estimates showed Friday, below the 0.5%-slide forecast by analysts polled by Reuters. In December, the region fell into deflation for the time since 2009, when prices fell by 0.2%. January’s further slide in prices was driven by an accelerating fall in energy costs, Eurostat said. Energy prices fell by a sharp 8.9% in January, compared with 6.3% in December. Prices in January for food, alcohol, tobacco and non-energy-related industrial goods also fell; only prices for services were seen rising. January’s figures come two weeks after after the ECB announced the launch of QE.

The program’s main purpose will be to boost inflation back towards the “just under 2%” level targeted by the central bank and sovereign bond purchases will start in March. In some much-needed good news for the euro zone, however, official figures also revealed that the region’s jobless level had fallen. Eurostat announced Friday that seasonally-adjusted unemployment in the single currency zone fell to 11.4% in December — the lowest recorded in the region since mid-2012, and down from 11.5% in November. By comparison, the unemployment rate stood at 5.6% in the U.S. in December 2014.

“All Europe’s leaders have to offer is broken societies and broken people.”

• We Must Stop Angela Merkel’s Bullying Or Let Austerity Win (Guardian)

All Europe’s leaders have to offer is broken societies and broken people. Over half of young people in Spain and Greece are without work, leaving them scarred: as well as mental distress, they face the increased likelihood of unemployment and lower wages for the rest of their lives. Workers’ rights, public services, a welfare state: all won at such cost by tough, far-sighted people, all being stripped away. There is a certain smugness expressed in Britain: just look across the waters at how bad things could be. Certainly Britain has been free of the euro. It has employed quantitative easing on a grand scale – though for the benefit of banks rather than people, and in an unsustainable, credit-fuelled mini-boom. But in any case, British workers have suffered the biggest fall in their paypackets since the Victorian era, and one of the worst of any EU country.

Britain’s rulers, just like those everywhere else in Europe, have punished their own people for the actions of an ever-thriving elite. That’s why Greece has to be defended urgently – not just to defend a democratically elected government and the people who put it there. European elites know that if Syriza’s demands are fulfilled, then other like-minded forces will be emboldened. Spain’s Podemos, a surging anti-austerity movement, will be more likely to triumph in elections this year. Syriza has already achieved change: the European Central Bank’s limited quantitative easing is partly a response to its rise. Even that well-known radical Reza Moghadam, Morgan Stanley’s vice-chairman of global capital markets and ex-head of the IMF’s European department, confirms Syriza’s strong negotiating position.

The precedent of an exit from the eurozone would lead to the market punishing other members, and to calls for the erasing of half of Greece’s debt. A victory is possible, but it depends on popular pressure right across Europe. If Syriza extracts concessions, it will be a stunning victory for all anti-austerity forces, and will help shift the balance of power in Europe. But if Greece loses, as those governments and banks that will now try to suffocate Syriza at birth intend? Then austerity will triumph over democracy. The future of millions of Europeans – Greek, French, Spanish and British alike – will be bleak indeed. That is why a movement to defend the already ruined nation of Greece is so important. Defeated Germany benefited from debt relief in 1953, and we must demand that for Greece today.

We must champion Syriza’s call for the end of an austerity policy that has achieved nothing but social ruin, across Europe in favour of a strategy of growth. Syriza’s posters declared: “Hope is coming”. Its election must represent that everywhere, including in Britain, where YouGov polling reveals huge popularity for a stance against austerity and the power of big business. A game of high stakes indeed: one that, if lost, will mean countless more years of economic nightmare. This rerun of the 1930s can be ended – this time by the democratic left, rather than by the fascist and the genocidal right. The era of Merkel and the machine men can be ended – but it is up to all of us to act, and to act quickly.

“Nobody forced banks to lend money to the Greek government on nearly the same terms as they lent to, say, the German or Dutch governments.”

• Lies, Damned Lies And Greece’s Debt Default (MarketWatch)

Can we stop it, please, with the Greek debt panic? Can we stop pretending that this crisis is something it isn’t, or that it involves principles it doesn’t, or that there is no alternative other than more pain on the streets of Athens? There’s been a renewed flap following Sunday’s stunning Greek election victory for the radical Syriza party, which wants to renegotiate the country’s crippling debt burdens and escape the deflation trap imposed by external bankers. It’s time for some hard, yet simple, truths. Greece’s gross debts add up to around $320 billion in nominal value, according to the International Monetary Fund. That’s big compared to the Greek economy, but tiny compared to the world outside. It’s less than 3% of the entire eurozone economy, which is about $13.5 trillion.

So even if Greece refused to pay one more nickel of its debts — an outcome no one is suggesting — the eurozone could make up the difference with about eight days’ output … or an hour’s money-printing by the ECB. And the real value of the Greek national debt is even less than this nominal sum. That’s because the markets have already adjusted themselves sensibly to the situation. According to the National Bank of Greece, shorter-term government bonds are already trading at about 85 cents on the euro, while longer-term bonds are down to between 65 and 50 cents on the euro. According to calculations by Felix Brill at investment firm Wellershoff, publicly traded Greek government bonds are trading at an average of 70 cents on the euro. So, in real terms, a big chunk of that Greek debt has already been written off. Crisis? What crisis?

Second, the idea that a partial Greek debt default would somehow represent an earthquake in the world of finance, or endanger the eurozone, or be an improvident reward for the reckless and the feckless, is nonsense. Nobody forced German and other bankers to buy Greek government bonds at absurd prices during the bubble. Nobody forced banks to lend money to the Greek government on nearly the same terms as they lent to, say, the German or Dutch governments. And nobody forced the international honchos at the IMF, ECB or EC to take over those obligations from the banks a few years ago as a “bailout.”

“.. the worse the economy, the worse for the far right and the better for the far left.”

• Greece Turns Left, Europe Goes Right (Bloomberg)

Why has Greece chosen a far-left government at a time when discontented and frustrated voters elsewhere in Europe have turned to the far right? In northern Europe, the frustrated voters’ parties of choice are right wing and anti-immigrant. So how come frustrated Greeks made a sharp turn to the left, electing the near-communist Syriza party to lead the government? The choice of left over right is especially striking because Greece is a first port of call for so many new immigrants to Europe. If Spain’s Podemos party continues to grow, then the contrast between northern and southern Europe will be even more striking. A combination of economics, politics and history can shed light on the differences. The simplest – and most surprising – answer may be just this: the worse the economy, the worse for the far right and the better for the far left.

The southern European economies are in substantially deeper trouble than their counterparts in middle and northern Europe. This has two distinct political effects, which together explain the difference between a turn to the left and a turn to the right. First of all, Greece is facing austerity demands that come from the northern members of the European Union, especially Germany. That means the Greeks perceive the main bad guy as external, not internal, and see the neoliberalism of Angela Merkel as the immediate source of the pain. The resistance to reducing state employment, cutting budgets, and working harder for less money and shorter vacations becomes resistance to the market economy itself.

The ex-communist radical left is the natural place for such resistance: The economic program of the left simply denies that such measures will actually help, and instead holds the promise of telling Europe to get lost.In northern Europe, economies may be in the doldrums, but no external European political force is pressing for fundamental structural change. Frustrated voters who see their job benefits scaled down even moderately thus need a different target. Those who arrived recently – immigrants – are the traditional objects of blame. The social contract may seem to be breaking down as a result of neoliberalism, but because no one has forced this change on northern European societies, it’s much easier to blame immigrants for burdening the state and making the social contract too expensive. Never mind if it’s true: The point is to blame anyone other than yourself.

Written pre-election.

• Open Letter To German Readers: What You Were Never Told About Greece (Tsipras)

Alexis Tsipras’ “open letter” to German citizens published on Jan.13 in Handelsblatt, a leading German language business newspaper

Most of you, dear readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds biggotry, nationalism, even violence. In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the ‘extend and pretend’ tactic would lead my country to a tragic state. That instead of Greece’s stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself. My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to.

Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer. Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms.

Good series.

• Syriza’s Original 40 Point Manifesto (Zero Hedge)

The daily bulletin of Italy’s Communist Refoundation Party published today the apparently official program of the Greek coalition of the left, Syriza. Here the 40 points of the Syriza program.
1) Audit of the public debt and renegotiation of interest due and suspension of payments until the economy has revived and growth and employment return.
2) Demand the European Union to change the role of the European Central Bank so that it finances States and programs of public investment.
3) Raise income tax to 75% for all incomes over 500,000 euros.
4) Change the election laws to a proportional system.
5) Increase taxes on big companies to that of the European average.
6) Adoption of a tax on financial transactions and a special tax on luxury goods.
7) Prohibition of speculative financial derivatives.
8) Abolition of financial privileges for the Church and shipbuilding industry.
9) Combat the banks’ secret [measures] and the flight of capital abroad.
10) Cut drastically military expenditures.
11) Raise minimum salary to the pre-cut level, €750 per month.
12) Use buildings of the government, banks and the Church for the homeless.
13) Open dining rooms in public schools to offer free breakfast and lunch to children.
14) Free health benefits to the unemployed, homeless and those with low salaries.
15) Subvention up to 30% of mortgage payments for poor families who cannot meet payments.
16) Increase of subsidies for the unemployed. Increase social protection for one-parent families, the aged, disabled, and families with no income.
17) Fiscal reductions for goods of primary necessity.
18) Nationalization of banks.

“We will continue with our plan. We don’t have the right to disappoint our voters.”

• Greece’s New Young Radicals Sweep Away Age Of Austerity (Guardian)

One by one they were rolled back, blitzkrieg-style, mercilessly, ruthlessly, with rat-a-tat efficiency. First the barricades came down outside the Greek parliament. Then it was announced that privatisation schemes would be halted and pensions reinstated. And then came the news of the reintroduction of the €751 monthly minimum wage. And all before Greece’s new prime minister, the radical leftwinger Alexis Tsipras, had got his first cabinet meeting under way. After that, ministers announced more measures: the scrapping of fees for prescriptions and hospital visits, the restoration of collective work agreements, the rehiring of workers laid off in the public sector, the granting of citizenship to migrant children born and raised in Greece. On his first day in office – barely 48 hours after storming to power – Tsipras got to work. The biting austerity his Syriza party had fought so long to annul now belonged to the past, and this was the beginning not of a new chapter but a book for the country long on the frontline of the euro crisis.

“A new era has begun, a government of national salvation has arrived,” he declared as cameras rolled and the cabinet session began. “We will continue with our plan. We don’t have the right to disappoint our voters.” If Athens’s troika of creditors at the EU, ECB and IMF were in any doubt that Syriza meant business it was crushingly dispelled on Wednesday . With lightning speed, Europe’s first hard-left government moved to dismantle the punishing policies Athens has been forced to enact in return for emergency aid. Measures that had pushed Greeks on to the streets – and pushed the country into its worst slump on record – were consigned to the dustbin of history, just as the leftists had promised. But the reaction was swift and sharp. Within minutes of the new energy minister, Panagiotis Lafazanis, announcing that plans to sell the public power corporation would be put on hold, Greek bank stocks tumbled. Many lost more than a third of their value, with brokers saying they had suffered their worst day ever.

While yields on Greek bonds rose, the Athens stock market plunged. By closing time it had shed over 9%, hitting levels not seen since September 2012 and losing any gains it had clawed back since Mario Draghi, the European Central Bank chief, vowed to do “whatever it takes” to save the euro. By nightfall there was another blow as Standard & Poor’s revised its Greek sovereign rating outlook, taking the first step towards a formal downgrade. The agency warned that a bank run might also be in the offing, noting that “accelerated deposit withdrawals from Greek banks had created “a credit concern”. Perhaps prepared for the onslaught, Tsipras had also acted. On Tuesday, he met the Chinese ambassador to Athens to insist that while Syriza and its junior partner, the populist rightwing Independent Greeks party, would also be cancelling plans to privatise Piraeus port authority, the government wanted good relations with Beijing. China’s Cosco group, which already controls several docks in Piraeus, had been among four suitors bidding for the port.

RIght wing view of a left wing government.

• It’s Time For Greece To Leave The Eurozone And Move On (Telegraph)

The single currency was always a mistake, and I was one of a number of commentators who has always opposed its creation. Single currency areas can work only under one of three scenarios, none of which has ever been on the cards in Greece and much of Europe First, and ideally, you need an economy with radical levels of flexibility, a small government, a well-educated and motivated entrepreneurial workforce, and labour markets that adjust to shocks. A hit to demand leads to a very speedy reallocation of resources; workers are willing to take nominal pay cuts to keep their jobs; and the country bounces back quickly from shocks without suffering from massive unemployment. That is the ideal economic system — but sadly it is not on the agenda. Many libertarian economists, especially in the US but also in Europe, backed the euro because they thought it would trigger free-market reforms, but while some have taken place, they have been insufficient in scale and scope. Ultimately, you can’t impose an economic system on a reluctant society.

Second, an ultra-mobile pan-European society. In such a world — which doesn’t exist in anything like the way I’m imagining — unemployed people in Greece are able to move en masse to parts of the eurozone with better jobs prospects. This still happens to some extent in the US, where states like Texas have been fuelled by mass intra-state migration, and poor areas such as Detroit have simply lost their population. Workers do also move within the UK, and within other countries, though generally not enough. There is now lots of migration within Europe, but even the numbers we see aren’t enough to allow economies to adjust properly. There is no single European demos; people speak different languages and have different cultures. This won’t change for the foreseeable future.

Third, a massive pan-European welfare state with a federal tax system and permanent redistribution from rich to poor areas. In such a world, where the one-size-fits-all monetary policy is unable to cater for a hit to parts of the eurozone, fiscal policy kicks in. Germany and other richer parts send billions to poor states. In return, the power of nations to borrow is dramatically curtailed: member states lose much of their sovereignty. In such a world, Greece would simply not be allowed to borrow and spend as it saw fit, and many more functions currently operated by national governments would be transferred to Brussels.

Nothing sensational.

• Greece’s Predicament in One Scary Chart: Capital Flight (Bloomberg)

If the new prime minister of Greece, Alexis Tsipras, hopes to make a deal with his country’s creditors, time is of the essence. Judging from data on capital flows, Greece’s change of political course is rapidly eroding confidence that it will stay in the European currency union. Just because the 19 countries of the euro area share a currency doesn’t mean a euro in Greece is worth as much as a euro elsewhere. If, for example, Greece’s bank depositors start to worry that the country will exit the monetary union and leave them holding devalued drachma, they’ll move their money to a safer locale such as Germany, effectively trading their Greek euros for German ones. Such capital flight can be tracked (roughly) by looking at the accounts of central banks: If €1 billion moves out of Greece, the Bank of Greece records a corresponding €1 billion liability to the rest of the euro area.

Lately, the Greek central bank’s so-called intra-Eurosystem liabilities have been rising at a pace not seen since the darkest days of the European financial crisis. In December, when the previous Greek government announced the snap presidential vote that ultimately cleared the way for Tsipras and his far-left Syriza party to take power, the liabilities increased by about €7.6 billion, according to data compiled by Bloomberg. That’s more than in any month since May 2011 – and it happened even before Syriza won the Jan. 25 parliamentary election on a platform that included promises to end austerity and renegotiate the government’s onerous debts. Here’s a chart showing the estimated three-month cumulative capital flows between Greece and the euro area, as a% of Greek gross domestic product (positive numbers are inflows to Greece):

The capital flight from Greece contrasts sharply with the progress the country had been making since mid-2012, when ECB President Mario Draghi tamed markets with his promise to do “whatever it takes” to hold together the euro area. Over the two years through June 2014, the Bank of Greece’s intra-eurosystem liabilities declined by more than €75 billion as money flowed back in.

“(The) ruble weakened and as you might see, life still goes on here and we just keep on living..”

• Russia Extends Olive Branch To Greeks (CNBC)

Russian Finance Minister Anton Siluanov told CNBC that Russia would consider giving financial help to debt-ridden Greece—just days after the new Greek government questioned further European Union sanctions against Russia. Siluanov said Greece had not yet requested Russia for assistance, but he did not rule out an agreement between the two countries if Greece came asking. “Well, we can imagine any situation, so if such [a] petition is submitted to the Russian government, we will definitely consider it, but will take into account all the factors of our bilateral relationships between Russia and Greece, so that is all I can say. If it is submitted we will consider it,” Siluanov told CNBC on Thursday. Siluanov’s comments come two days after Greece’s new left-wing-led government distanced itself from calls to increase sanctions against Russia—indicating that Greece could be looking east to Russia for support.

On Tuesday, EU leaders issued a statement calling for “further restrictive measures” to be considered against Russia with regard to its involvement in the ongoing conflict in eastern Ukraine. After the statement, a representative for Greece’s newly elected Syriza party reported that the EU’s statement was made “without our country’s consent” and expressed “dissatisfaction with the handling of this.” On Thursday, Siluanov said that while Western-imposed sanctions against Russia thus far had been harmful, the country has managed to adapt. “The sanctions that have already been imposed against Russia did have (a) negative effect on us. However, Russia companies have adjusted and the Russian balance of payments has adjusted. (The) ruble weakened and as you might see, life still goes on here and we just keep on living,” he said.

Abenomics is an open festering wound.

• Japan Braces For Falling Prices As Oil Collapses (CNBC)

Japan’s consumer inflation eased in December for a fifth straight month and the rate of price rises could slow further or even turn negative as the economy adjusts to lower oil prices, analysts say. The consumer price index (CPI) rose 2.5% in December from the year-ago period, government data showed on Friday, compared with Reuters’ forecast for a rise of 2.6% and down from the 2.7% print in November. The core Tokyo CPI for January, considered a leading indicator, rose 2.2% on year, in line with expectations and easing from 2.3% in December. Excluding the effects of the sales tax hike, the nationwide consumer price index (CPI) rose 0.5%.

With the collapse in oil prices yet to be reflected in consumer inflation, analysts say the numbers will look worse in the coming months, dealing a further blow to the Bank of Japan’s ambitious inflation targets. “There is a six-month lag before global LNG prices are factored into electricity prices – and it’s electricity prices, rather than the price of oil at the pumps, that counts for Japanese households,” said Credit Suisse economist Takashi Shiono. “The electricity companies are still scheduled to raise their prices in February, so we’ll have to wait until April for the lower oil prices to filter through to the headline inflation numbers,” he added. Credit Suisse is forecasting the CPI to turn negative by April, assuming that current levels of oil and the dollar-yen holds.

Shino expects CPI to fall by up to 0.3% in April and down 0.1% for the full-year ending March 2016. The BOJ has been betting that its massive quantitative easing program unleashed since April 2013 will defeat inflation for good and bring CPI stripped of sales tax hike up to 2% by financial year ending March 2016. But market watchers see the goal increasingly unlikely especially in the wake of crashing oil prices. Earlier this month, the BOJ cut its CPI forecast for 2015/16 to 1% from an earlier projection of 1.7%, reflecting the state of oil markets. “Inflation is still likely to moderate further. Less than half of the plunge in the price of crude oil has been passed on to consumers in the form of lower gasoline prices,” Capital Economics’ Marcel Thieliant said in a research note.

New Zealand?

• The Next Shot In The Currency War Will Be Fired By… (CNBC)

The currency war is getting out of control. A snapshot of the week so far in central banking: The Monetary Authorty of Singapore surprised markets Tuesday night with a policy switch to pursue a slower pace of currency appreciation, its main policy tool. Wednesday afternoon, New Zealand’s Reserve Bank kept policy unchanged, but significantly altered its language, saying it expects to see a “further significant depreciation” for the kiwi and that “the exchange rate remains unjustified in terms of current economic conditions. Hungary’s central bank struck a decidedly dovish note, hinting at easier policy ahead. The moves follow surprise policy changes from Denmark, India Canada and Switzerland earlier this month. That includes the European Central Bank. Despite a great deal of anticipation, Mario Draghi managed to surprise and impress financial markets with the ECB’s trillion-euro bond purchase program.

“The trend of central bank surprises continues, adding volatility to markets and highlighting a more uncertain global policy stance but one that is partially centered on (foreign exchange) ahead,” Camilla Sutton, chief FX strategist at Scotiabank, wrote in a note this week. “An environment of increased volatility and uncertainty is typically U.S. dollar positive.” The U.S. dollar has been the beneficiary of those moves and easy policies. In 2015 alone, the dollar has strengthened nearly 7% against the euro, more than 7% against the Canadian dollar and 6% against the New Zealand dollar. Over the past 12 months, the moves are in the double digits, with the dollar strengthening more than 20% against Sweden’s and Norway’s currencies, more than 17% against the euro and 13% against the yen.

Can the grandstanding stop now? Denmark has real problems.

• Denmark Surprises Market With Third Rate Cut In Two Weeks (Reuters)

The Danish central bank cut its key interest rate for the third time in two weeks to another historic low after intervening in the market to keep the crown within a tight range against the euro. The central bank cut its certificate of deposit rate to -0.5% from -0.35%, making a reduction of 45 basis points since Monday last week. While analysts said last week that its actions might not be enough to weaken the crown, few expected another cut so soon, especially as Denmark’s rate went below the eurozone equivalent of -0.20%, making it less attractive than the euro. Analysts have said the central bank tends to use interest rate tools after spending 10 to 15 billion crowns in intervention.

“It has become expensive to have Danish crowns and the (upward) pressure is therefore expected to ease off, but whether the rate cuts are enough to turn off the ‘stream’ into the market is still uncertain,” Danske Bank chief economist Steen Bocian said in a note. The central bank has intervened every month since September, aside from December, as the crown has strained at the upper limit of its trading band with the euro. But crown buying accelerated after the Swiss National Bank scrapped the franc’s cap against the euro. It also cut interest rates to -0.75%. Some analysts think the Danish central bank may have more cuts up its sleeve. “The objective is to push down money market rates and make it less attractive to hold crowns,” a bank spokesman said. “We expect a reaction so we don’t need to intervene and the crown will weaken.”

“Germany was an exception to the pattern, but provisional figures for January show that is no longer the case. Deflation in Germany suggests the eurozone will experience faster falls in prices in the months ahead.”

• Denmark, Deutschland And Deflation (BBC)

There have been two important, connected economic developments in Europe. New official figures from Germany show that prices have fallen, by 0.5%, over the previous 12 months. Meanwhile the Danish Central Bank has cut one of its main interest rates for the second time in a week. It is a rate paid to commercial banks for excess funds parked at the central bank. It was already below zero. Now it is even lower – minus 0.5%. It means banks have to pay to leave money at the central bank, above certain specified limits. Negative interest rates are another example of the strange financial world that has emerged in the aftermath of the financial crisis. What is the connection between falling prices – or deflation – in Germany and the Danish central bank? It is about Denmark’s 35-year policy of tying its currency, the krone, to the euro, and before that to the German mark.

That peg has come under increasing strain as the European Central Bank, the ECB, has taken steps to combat deflation. Falling prices arrived for the eurozone as a whole last month. Germany was an exception to the pattern, but provisional figures for January show that is no longer the case. Deflation in Germany suggests the eurozone will experience faster falls in prices in the months ahead. There is a debate to be had about whether deflation really is a problem and if so how serious, but the ECB clearly thinks it is. The steps it has taken to address low inflation, and then deflation, have made it harder for financial market investors to make money in the eurozone. The ECB cut interest rates and last week launched its quantitative easing programme, which also tends to reduce returns on financial assets. So investors piled into other currencies, including the krone, pushing it higher, though not so high that it has gone above the top of the central bank’s target band.

But the economy is doing great!

• Young Workers Hit Hardest By Wages Slump Of Post-Crash Britain (Guardian)

British workers are taking home less in real terms than when Tony Blair won his second general election victory in 2001, with men and young people hit hardest by the wage squeeze that followed the financial crisis, according to new research. The Institute for Fiscal Studies thinktank said wages were 1% lower in the third quarter of 2014 than in the same period 13 years earlier after taking inflation into account. Jonathan Cribb, an author of the report, said: “Almost all groups have seen real wages fall since the recession.” However, the study finds that women have been relatively cushioned from the worst of the wage cuts because they are more likely to be in public sector jobs, where wages fell less rapidly during the early years of the downturn.

Aided at the start of the crisis by the relative stability of public sector wages, women’s average hourly pay fell by 2.5% in real terms between 2008 and 2014, the IFS found, while men’s pay fell by 7.3%. The IFS also singled out younger workers as among the biggest victims of the falling living standards that have become widespread in post-crash Britain. “Between 2008 and 2014, there is a clear pattern across the age spectrum, with larger falls in earnings at younger ages,” the thinktank found in a detailed study of the state of the labour market. Labour immediately seized on the figures as evidence that Britain was trapped in a “cost of living crisis”. Rachel Reeves, the shadow work and pensions secretary, said: “This report shows David Cameron has overseen falling wages and rising insecurity in the labour market. Only Labour has a plan to tackle low pay and to earn our way to rising living standards for all.”

“Are they completely out of their minds? The US has been totally ‘lost in the jungle’ and is dragging us there as well.”

• Gorbachev Accuses US Of Dragging Russia Into New Cold War (RT)

Mikhail Gorbachev has accused the US of dragging Russia into a new Cold War. The former Soviet president fears the chill in relations could eventually spur an armed conflict. “Plainly speaking, the US has already dragged us into a new Cold War, trying to openly implement its idea of triumphalism,” Gorbachev said in an interview with Interfax. The former USSR leader, whose name is associated with the end of the Cold War between the Soviet Union and the United States, is worried about the possible consequences. “What’s next? Unfortunately, I cannot be sure that the Cold War will not bring about a ‘hot’ one. I’m afraid they might take the risk,” he said.

Gorbachev’s criticism of Washington comes as the West is pondering new sanctions against Russia, blaming it for the ongoing military conflict in eastern Ukraine, and alleging Moscow is sending troops to the restive areas. Russia has denied the allegations. “All we hear from the US and the EU now is sanctions against Russia,” Gorbachev said. “Are they completely out of their minds? The US has been totally ‘lost in the jungle’ and is dragging us there as well.” Gorbachev suggests the situation in the EU is “acute” with significant differences among politicians and different levels of prosperity among member nations. “Part of the countries are alright, others – not so well, and many, including Germany, are excessively dependent on the US.”

“..suicide is often considered the most honorable course of action. That is because their death will bring about the end of any investigation into their alleged corruption..”

• China’s Anti-Corruption Campaign Boosts Suicide Rate (FT)

The Chinese Communist party has launched a nationwide survey to ascertain how many of its members have committed suicide since President Xi Jinping unveiled an anti-corruption campaign two years ago. The crackdown has so far led to warnings or disciplinary action for about a quarter of a million cadres but it has also been accompanied by a sharp rise in suicides among officials, according to numerous Chinese media reports. In recent days the party has sent out a questionnaire to officials across the country asking them to identify the number and details of “unnatural deaths”, including suicides, of party members since December 2012. That is when President Xi launched the graft clean-up that has become his most prominent policy since he took power in November that year.

As well as hundreds of thousands of “flies”, as party rhetoric describes low-level officials, Mr Xi’s anti-corruption drive has also netted dozens of high-ranking “tigers”, including the former head of China’s domestic security services, Zhou Yongkang, and former vice-chairman of the Chinese military, Xu Caihou. China’s state-controlled media have published several articles vilifying allegedly corrupt officials for killing themselves while under investigation but for family members and associates of these officials suicide is often considered the most honorable course of action. That is because their death will bring about the end of any investigation into their alleged corruption, protecting any accomplices or associates and allowing their families to keep their assets, ill-gotten or otherwise.

Officials found guilty of corruption are not only handed lengthy prison sentences or even the death penalty; they and their families are invariably stripped of generous state pensions and all their assets. Children of disgraced officials are also sometimes forced to leave prestigious schools or high-profile jobs. China’s main anti-corruption body, the Central Commission for Discipline and Inspection, is in effect an extralegal entity with enormous powers to detain indefinitely and “discipline” any of the country’s 87 million party members. Legal scholars, family members and rights activists in China have raised serious concerns about the prevalence of torture in CCDI investigations and several of the “suicides” reported in the past two years are believed to be cover-ups of deaths that happened during torture sessions.

“Until the motion was passed, animals in France, including domestic pets and farm animals, had the same status as a sofa.”

• Animals In France Finally Recognized As ‘Living, Sentient Beings’ (RT)

It has taken the French parliament more than 200 years to officially recognize animals as “living, sentient beings” rather than “furniture,” finally upgrading their embarrassing status that dates back to Napoleonic times. While amendments to the Civil Code were first approved in November, the National Assembly voted on the motion Wednesday, according to AFP. The Assembly had to give its final word after debate with the Senate over several clauses, including the animals’ status. Until the motion was passed, animals in France, including domestic pets and farm animals, had the same status as a sofa. When the civil code was wrapped up by Napoleon back in 1804, animals were considered as working farm beasts and viewed as an agricultural force designated as goods or furniture.

A two-year fight led by the French animal rights organization Fondation 30 Million d’Amis (Foundation of 30 Million Friends) has resulted in the long-awaited change. The charity’s president, Reha Hutin, insisted that the new legislation was needed to stop horrendous acts of cruelty toward animals. Currently, the law on the cruel treatment of animals in France comprises the punishment of a maximum two-year prison term and a 30,000-euro fine. “France is behind the times here. In Germany, Austria and Switzerland they have changed the law so it says that animals are not just objects,” Hutin told The Local. “How can the courts in France punish the horrible acts that are carried out against animals if they are considered no more than just furniture?” she said.