central bankers Archives - The Automatic Earth

There’s a chilling trend in the market, and it could wreak havoc on your portfolio, a top market watcher said. “We are seven years into a full-fledged, all out, central bankers doing everything they can to stimulate demand,” Bank of America-Merrill Lynch’s head of U.S. equity and quantitative strategy Savita Subramanian recently warned on CNBC’s “Fast Money.” “We looked at all of these indicators that have been pretty good at forecasting recessions and we extrapolated that if they follow the current trends they’re on, we’re going to hit a recession sometime in the second half of next year.” The most unsettling thing is that this recession risk isn’t discounted into the market at these levels, according to Subramanian.

The S&P is 1.8% away from its intraday all-time high of 2,193.81, hit on August 15. Subramanian’s year-end 2016 S&P 500 price target is 2000, about seven% lower than where it’s trading today. And, if she’s right, it’s about to get a lot worse next year. “What scares me is the market been so fragile. So, remember what happened in January? We got a whiff of bad news and all of the sudden the market is at 1800,” she said—a move that augured poorly for the near-term. “I think that speaks to the reaction function of the market. There are a lot of itchy trigger fingers. There’s lot of violent trades that can really roil a fairly complacent environment.”

Nice metaphor. Could be used for Trump and Hillary too.

• The Truly Scary Clowns: Central Bankers (Forsyth)

At a Grant’s Interest Rate Observer conference last week, Jeffrey Gundlach, DoubleLine’s CEO, commented on the growing belief that interest rates will “never” rise. When it’s said that something can “never” happen, it’s about to happen, he argued. Zero or negative interest rates are doing more harm than good, he continued, with the long decline in the stock of Deutsche Bank being an example. You can’t help the economy by bankrupting the banks, he contended, which is the effect of shrinking their net interest earnings. For these and other reasons, Gundlach suggested, the lows in bond yields were seen in the post-Brexit plunge in the 10-year Treasury to 1.36%, a hair under the nadir of 1.38% touched in 2012. (Some data providers have slightly different numbers, but they’re as close as “damn it” is to swearing.)

The more important inference is that major trend changes are at hand. As described by Bank of America Merrill Lynch global investment strategists led by Michael Hartnett, we may be witnessing “peak liquidity.” That is, the era of excess liquidity from central banks is ending, which is consistent with shifts in ECB and BOJ policies, the U.K. Prime Minister May’s criticism of QE, and the likelihood of a Fed interest-rate hike in December. In addition, the BofA ML strategists also point to “peak inequality,” which would spur fiscal actions, such as greater spending and income redistribution. Finally, they see “peak globalization,” as populism counters the “disinflationary free movement of capital, trade and labor.”

The sum is “peak returns” from financial assets, the BofA ML team concludes. In that scenario, they recommend “Main Street over Wall Street” for 2017, including small-capitalization stocks and commodities, real assets (including collectibles and real estate) over financial ones, and banks over capital markets. In particular, they suggest a shift from bond proxies, including utilities, telecoms, real estate investment trusts, and low-volatility stocks. These sectors, it should be noted, had tough times last week. Investors who have tilted strongly toward these investments, which have benefited from historically low interest rates, have been laughing all the way to the bank. In the future, they may be spooked by those creepy clowns, otherwise known as less-friendly central bankers.

What happens in one way streets and dead alleys.

• Far From Stepping Back, Top Central Banks Are Set To Double Down (R.)

Central banks’ repeated warnings that there are limits to what they can do to bolster the sputtering world economy could suggest they are about to pull back and pass the baton to governments. But a steady flow of research and a new tone in the debate among policymakers and advisers points in a different direction: rather than retreat, central banks are preparing for the day they may need to do more, even at the risk of antagonizing politicians who argue they already have too much power. The shift can be seen in the acknowledgment by Federal Reserve policymakers that their massive $4 trillion balance sheet will not shrink anytime soon, or that asset buying may become a “recurrent” tool of future monetary policy.

It can be seen in the comments of Bank of England officials who talk of crisis-fighting tools as now semi-permanent fixtures, or in the Bank of Japan developing a new monetary policy framework, in this case targeting long-term market interest rates. Driving those developments is an emerging consensus among policymakers who now acknowledge that the global financial crisis has led to a fundamental shift toward low inflation, tepid growth, lagging productivity and interest rates stuck near zero. “We could be stuck in a new longer-run equilibrium characterized by sluggish growth and recurrent reliance on unconventional monetary policy,” Fed Vice Chair Stanley Fischer said last week.

For years, Federal reserve and other policymakers have discounted such a scenario, arguing that temporary factors were slowing the recovery and plotting a return to conventional pre-crisis policies. Over the past months, though, that optimism has given way to an admission that such a return is increasingly elusive. Interest rates are set to stay low far longer than thought only a year ago and jumbo balance sheets accumulated through crisis-era asset purchases are now cast as a possibly permanent tool. At the annual Jackson Hole Fed conference in August the discussion had shifted from the mechanics and timing of “normalization,” to how and whether to expand the central bank footprint yet again.

They don’t talk to people telling them that.

• The World Bank and the IMF Won’t Admit Their Policies Are The Problem (G.)

The World Bank, IMF and WTO can sense that they are sitting on the edge of a volcano that could blow at any time. They fear, rightly, that a second big crash within a decade would create a backlash leading to protectionism and the rise of dark political forces that would be difficult, if not impossible, to control. That there are ingredients for a fresh crisis became apparent at various stages last week. According to the IMF, global debt has risen to a record level of $152tn – more than double global GDP – at a time when activity is sluggish. Collapsing commodity prices and weak demand from the west has meant that growth in sub-Saharan Africa is running at half the level of population increases. Companies in the emerging world loaded up on debt during the commodity boom and are vulnerable to rising US interest rates and any softening of the world economy. China is the most egregious example of debt being used to boost activity artificially.

The argument that rising debt is fine, because on the other side of ledger is an asset increasing in value, is specious. The only reason the assets are rising in price is because investors are taking on more debt to buy them. At some point, the asset bubble bursts, leaving borrowers with a major problem. This was the lesson of the sub-prime crisis and it is remarkable that memories are so short. The next big one could come from anywhere and it is good that the World Bank and IMF are aware of the risks. Even so, there was an air of unreality about the discussions in Washington last week. The reason was simple: there was not the slightest hint from the IMF or World Bank that the policies they advocated during the heyday of the so-called Washington consensus – austerity, privatisation and financial liberalisation – have contributed to weak and unequal growth, with all the political discontent that this has caused.

Even worse, Lagarde and Kim seemed oblivious to the fact that the Washington consensus approach is alive and well within their organisations. The IMF’s remedy for Greece and Portugal during the eurozone crisis has been straight out of the structural adjustment playbook: reduce public spending, cut salaries and benefits, insist that state-owned enterprises return to the private sector, reduce minimum wages and restrict collective bargaining. Between them, the IMF and the European authorities are turning Greece into a developing country. It would be fascinating to see what sort of response Lagarde would get if she tried talking about inclusive growth to homeless people huddled on the streets of Athens.

The IMF will pressure China now it’s in the basket. New meaning to ‘basket case’.

• China Must Wean Itself Off Debt Addiction To Avoid Financial Calamity-IMF (Tel.)

China is edging towards “financial calamity” and must wean itself off its debt addiction and reform if it is to avoid a crisis, the IMF has warned. Markus Rodlauer, deputy director of the IMF’s Asia-Pacific department, said the world’s second largest economy was approaching a tipping point where its rapidly growing financial sector and surge in shadow credit could undermine the state’s ability to contain the fallout from a crash. “The level of financial and corporate debt and the complexity of the financial system and rapid growth in shadow banking is on an unsustainable path,” he said. “While still manageable in its size given the size of the public assets under public control, the trend is dangerous and if it’s not corrected it will lead to a correction.

“The longer it lasts … the more serious the disturbance and the disruption might be. [The reaction could range] from a mild growth slowdown, to a sharp slowdown in growth to potentially a financial crisis.” Data show credit and financial sector leverage in China has continued to rise much faster than economic growth. The IMF’s latest World Economic Outlook said debt in China was rising at a “dangerous pace”, while its Financial Stability Report showed small Chinese banks were heavily exposed to shadow credit as a share of capital buffers, with exposure reaching nearly 600pc at some banks. Mr Rodlauer, who served as the IMF’s China’s mission chief for five years, said stronger trade ties and financial linkages between China and other countries meant the impact of a hard landing on the global economy could also be huge.

Been in the SDR basket for 10 days, and already there’s this.

• China Fixes Yuan at Six-Year Low Against the US Dollar (WSJ)

The Chinese yuan was guided toward a six-year low against the U.S. dollar on Monday, as the country’s markets returned after a weeklong holiday. In onshore trading, the currency was on track for its biggest one-day loss against the U.S. dollar since the Brexit in June. The yuan entered the basket of currencies backing the IMF’s special drawing rights, an international reserve currency, on Oct. 1. The PBOC set its daily reference rate for the yuan at 6.7008 against the U.S. dollar, a depreciation of 0.3% from its last fixing of 6.6778 on Sept. 30, before the National Day holiday. Monday’s fixing was the weakest level for the currency since September 2010.

Onshore, where the yuan is allowed to trade within 2% of the PBOC’s central reference point, the currency traded 0.5% weaker at 6.7032 in early trade. Offshore, the yuan traded 0.1% weaker at 6.7106. Many markets in Asia, including the largest offshore-yuan trading center in Hong Kong, are closed for a holiday Monday. The past week was characterized by volatility in foreign-exchange markets, including a flash crash in the British pound that saw it lose more than 6% shortly after 7 a.m. Hong Kong time Friday before recovering later in the trading day. The U.S. dollar, which accounts for about a quarter of the value of the basket of currencies the yuan tracks, has strengthened during the period.

The U.S. dollar index, which tracks its strength against a basket of six currencies, is up 1.1% so far this month. The weakness in the yuan fix reflects data released during the past week, including a faster-than-expected drawdown of $18.79 billion in China’s foreign-currency reserves during September, said Alex Wijaya, senior sales trader at CMC Markets. “For the past year, the Chinese government has been intervening in the currency and this has depleted some of its foreign-exchange reserves, and this could be one of the main contributions to the weakness in the yuan,” he said. “The U.S. dollar has been strengthening as well.”

Unlike the rest of the western world, Iceland had no austerity, but it did introduce capital controls and it did go after bankers.

• Iceland, Where Bad Bankers Go to Jail, Finds Nine Guilty in Historic Case (CD)

Iceland, which became a gold standard for corporate accountability in the wake of its 2008-2011 financial crisis, has found nine bankers guilty for market manipulation in one of the biggest cases of its kind in the country’s history. The verdict from Iceland’s Supreme Court, issued Thursday, overturns a June 2015 decision by the Reykjavik District Court, which found seven of the nine defendants guilty and acquitted two. No punishment has been handed down yet, although sentencing is set to come. The defendants worked at the major international firm Kaupthing Bank until it was taken over by the Icelandic government during the crash.

The bank’s former director Hreidar Mar Sigurdsson, who had been sentenced to five and a half years in 2013 in a separate Kaupthing case, had his punishment extended by six months in response to the verdict. The acquittals were overturned for former Kaupthing credit representative Björk Poraninsdottir and former Kaupthing Luxembourg CEO Magnuse Gudmondson, although no penalties have been meted out for them. According to the Iceland Monitor, the decision found that “[b]y fully financing share purchases with no other surety than the shares themselves, the bankers were accused of giving a false and misleading impression of demand for Kaupthing shares by means of deception and pretense.”

“..suffering Brexit’s pain through the currency may be more comfortable than through higher unemployment or other ills..”

• Pound’s Pounding Helped UK Absorb Brexit Shock (WSJ)

When the U.K. voted to leave the European Union in June, the pound took its worst beating in half a century. Many economists saw that as a good thing. Despite the shock of Brexit, more than three months later there are few tangible signs of economic distress in Britain: Employment is steady. The stock market has held up. Government bonds are strong. Houses are still being bought and sold. Consumers are still consuming. Credit, say economists, goes in large part to the decline of the British pound, which has acted as a giant shock absorber against Brexit. It fell 11% against the dollar in two trading days after the vote, and after another sudden slump last week is now down 16%. Seen from abroad, British people are one-sixth poorer and their economy is one-sixth smaller.

In the past week, figures from the IMF suggest, Britain has slid from the world’s fifth-largest economy to sixth, behind its millennium-old rival France. But suffering Brexit’s pain through the currency may be more comfortable than through higher unemployment or other ills—a luxury that wasn’t available to eurozone countries during the currency bloc’s debt crisis. Over the longer term, economic wisdom holds that a weaker currency will boost a nation’s sales abroad, so what the economy loses in the form of lower consumption—because consumers are poorer—will be recovered through higher exports. “It is important that you have a live release valve like this,” said Tim Haywood, an investment director at GAM Holding.

Italy pre-referendum.

• A Mile-High House Of Cards (IM)

According to Webster’s Dictionary, an economic depression is “a period of time in which there is little economic activity and many people do not have jobs.” Italy has had virtually no productive growth since it joined the euro in 1999. Today, the Italian economy (real GDP per person) is smaller than it was at the turn of the century. That’s almost two decades of economic stagnation. The economy today is 10% smaller than it was before its peak prior to the 2008 financial crisis. More than 25% of Italy’s industry has been lost since then. Unemployment is around 12%. Youth unemployment is around 36%. And these are only the official government statistics, which almost certainly understate the true numbers.

The IMF predicts it will take at least until 2025 for the Italian economy to return to its 2008 peak. Since nobody can accurately predict what’s going to happen next year, let alone nine years from now, the IMF is basically saying it has no idea how or when the Italian economy could ever recover. The mass media and establishment economists don’t dare call it a depression. But a depression it is. Italy’s populist Five Star Movement—or M5S, as it’s known by its Italian acronym—is now the country’s most popular political party. M5S blames Italy’s economic malaise squarely on the euro. I’d say a large plurality of Italians agree, and they have a point. They claim that, under the euro, Italian industry and exports have become uncompetitive. M5S believes a return to the lira could be the remedy.

Prior to joining the euro, Italy would regularly post large trade surpluses with Germany. Since joining, it has posted large trade deficits. Because of Italy’s structural economic problems, it should have a significantly weaker currency. But since Italy is wrapped in the euro straightjacket, it gets monetary conditions that are far too tight than appropriate for the country. [..] The Italian economy is made up of many small and medium-sized businesses. Those businesses have taken out loans from Italian banks. But as the economy is in a depression, many of those loans have gone bad or will go bad. This has created a crisis in the Italian banking system. It took years to build up, but now the situation is coming to a head. The Italian banking system is insolvent, and now everyone knows it. Shares of Italian banks have plummeted more than 50% so far this year.

No need to doubt: rest assured it’s not going to happen.

• Oil Prices Fall Over Doubts That Non-OPEC Producers Will Cut Output (R.)

Oil prices fell on Monday over doubts that an OPEC-led plan to cut output would rein in a global oversupply that has dogged markets for over two years. Brent crude futures were trading at $51.53 per barrel at 0511 GMT, down 40 cents or 0.77%, from their last settlement. WTI futures were down 44 cents or 0.88%, at $49.37 a barrel. OPEC plans to agree on an output cut by the time it meets in late November. The targeted range is to cut production to a range of 32.50 million barrels per day (bpd) to 33.0 million bpd. OPEC’s current output stands at a record 33.6 million bpd. To achieve such an agreement among its members, some of which like Saudi Arabia and Iran are political rivals, OPEC officials are embarking on a flurry of meetings in the next six weeks, starting in Istanbul this week.

However, analysts cautioned about too high expectations about the Istanbul talks this week. “A meeting between OPEC and non-OPEC producers (namely Russia) will add to oil headlines this week. Don’t expect a firm agreement from Russia, but headlines about cooperation are likely,” Morgan Stanley said on Monday. “It’s also worth noting that Iraq and Iran oil ministers will not be in attendance,” the U.S. bank added. Even if a deal is reached, analysts are unconvinced it would result in much higher prices, as doubts run high over the feasibility of a cut among rivaling members, a Reuters poll showed on Friday. Pouring cold water on expectations, OPEC’s second biggest producer Iraq said over the weekend that it wants to raise output further in 2017.

“The CDs were encoded to open the videos on RealPlayer software that connects to the Internet when it runs. It would issue an IP address that could then be tracked by US intelligence. ”

• Pentagon Spent Half a Billion On Fake Al-Qaeda Propaganda Videos (Ind.)

A former contractor for a UK-based public relations firm says that the Pentagon paid more than half a billion dollars for the production and dissemination of fake Al-Qaeda videos that portrayed the insurgent group in a negative light. The Bureau of Investigative Journalism reported that the PR firm, Bell Pottinger, worked alongside top US military officials at Camp Victory in Baghdad at the height of the Iraq War. The agency was tasked with crafting TV segments in the style of unbiased Arabic news reports, videos of Al-Qaeda bombings that appeared to be filmed by insurgents, and anti-insurgent commercials – and those who watched the videos could be tracked by US forces.

The report of Bell Pottinger’s involvement in the video hearkens back to more than 10 years ago, when the Washington-based PR firm Lincoln Group was revealed to have produced print news stories and placed them in Iraqi newspapers. According to the Los Angeles Times, who obtained the 2005 documents, the stories were intended to tout the US-led efforts in Iraq and denounce insurgent groups. Bell Pottinger was first tasked by the interim Iraqi government in 2004 to promote democratic elections. They received $540m between May 2007 and December 2011, but could have earned as much as $120m from the US in 2006. Lord Tim Bell, a former Bell Pottinger chairman, confirmed the existence of the contract with the Sunday Times.

The Pentagon also confirmed that the agency was contracted under the Information Operations Task Force, but insisted that all material distributed was “truthful”. However, former video editor Martin Wells, who worked on the IOTF contract with Bell Pottinger, said they were given very specific instructions on how to produce the fake Al-Qaeda propaganda films. “We need to make this style of video and we’ve got to use Al-Qaeda’s footage,” Mr Wells told the Bureau, recalling the instructions he received. “We need it to be 10 minutes long, and it needs to be in this file format, and we need to encode it in this manner.” According to Mr Wells’ account, US Marines would then take CDs containing the videos while on patrol, then plant them at sites during raids. “If they’re raiding a house and they’re going to make a mess of it looking for stuff anyway, they’d just drop an odd CD there,” he said.

Russis will not back down.

• Russia Says US Actions Threaten Its National Security (R.)

Russian Foreign Minister Sergei Lavrov said on Sunday he had detected increasing U.S. hostility towards Moscow and complained about what he said was a series of aggressive U.S. steps that threatened Russia’s national security. In an interview with Russian state TV likely to worsen already poor relations with Washington, Lavrov made it clear he blamed the Obama administration for what he described as a sharp deterioration in U.S.-Russia ties. “We have witnessed a fundamental change of circumstances when it comes to the aggressive Russophobia that now lies at the heart of U.S. policy towards Russia,” Lavrov told Russian state TV’s First Channel. “It’s not just a rhetorical Russophobia, but aggressive steps that really hurt our national interests and pose a threat to our security.”

With relations between Moscow and Washington strained over issues from Syria to Ukraine, Lavrov reeled off a long list of Russian grievances against the United States which he said helped contribute to an atmosphere of mistrust that was in some ways more dangerous and unpredictable than the Cold War. He complained that NATO had been steadily moving military infrastructure closer to Russia’s borders and lashed out at Western sanctions imposed over Moscow’s role in the Ukraine crisis. He also said he had heard that some policy makers in Washington were suggesting that President Barack Obama sanction the carpet bombing of the Syrian government’s military air fields to ground its air force. “This is a very dangerous game given that Russia, being in Syria at the invitation of the legitimate government of this country and having two bases there, has got air defense systems there to protect its assets,” said Lavrov.

Debt Rattle September 23 2016

Sep 232016

September 23, 2016 Posted by Raúl Ilargi Meijer at 8:05 am Finance Tagged with: Aboriginals, alchemists, arsonists, bad debt, central bankers, default, EM, homeless, Libor, world trade 3 Responses »

Harris&Ewing “Slaves reunion DC. Ages: 100, 104, 103; Rev. Simon P. Drew, born free.” 1921

• World Trade Grinds Lower, Hits 2014 Levels (WS)

• ‘When I Think Of Central Banks, I Think Of Alchemists’: Marc Faber (CNBC)

• Central Bankers Are The Arsonists That Create The Fire: Bill Fleckenstein (ZH)

• Bad Debts In Chinese Banking System 10 Times Higher Than Admitted: Fitch (AEP)

• The Coming Wave of Defaults Will Be Devastating (CH Smith)

• Time to ‘Be Alarmed’ about Emerging Market Debt: UN (DQ)

• The Ted Spread Is Dead, Baby. The Ted Spread Is Dead (WSJ)

• UK Councils ‘Building Up Dangerous Levels Of Debt And Risk’ (Ind.)

• You’re Not as Rich as You Think (Satyajit Das)

• Deutsche Bank Woes Sparks Concern Among German Lawmakers (BBG)

• Regulators Expect Monte Dei Paschi To Ask Italy For Help (R.)

• How Does A 60% Increase In NYC Homelessness Constitute A Recovery? (ZH)

• Pope Francis: Journalism Based On Gossip And Lies Is A Form Of Terrorism (G.)

• Indigenous Australians The Oldest Living Culture; It’s In Our Dreamtime (G.)

Rising health care costs prop up US GDP. We all know that’s not a good thing.

• World Trade Grinds Lower, Hits 2014 Levels (WS)

World trade in merchandise is a reflection of the global goods-producing economy. And it just can’t catch a break. The CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just released the preliminary data of its Merchandise World Trade Monitor for July. The index fell 1.1% from June to 113.4, the lowest since May 2015 – a level it had first reached on the way up it in September 2014. The chart shows that merchandise world trade isn’t falling off a cliff, as it had done during the financial crisis, when global supply chains suddenly froze up. But it’s on a slow volatile grind lower. And compared to the fanciful growth after the Financial Crisis, it looks outright dismal:

This time – after the big adjustment in values months ago – we have another statistical note. In this data release, the CPB shifted the base year of the series from 2005 to 2010, so the values of the entire index shifted down. Hopefully, the change made the series more representative of reality – because getting a good grip on reality these days is really hard, when entire data systems are carefully designed to conceal more than they reveal (such as the official inflation data). The decline in trade was sharper in the emerging economies than the advanced economies. That makes sense: The US, on whose demand the health of the entire world economy seems to depend, experienced falling imports in July, according to the data.

Data point after data point document that the goods-based economy in the US is in trouble – manufacturing, wholesale, retail… nothing is firing on all or even most cylinders. But the service-based economy is not doing all that badly. Its biggest sector – and the biggest sector overall in the US – healthcare, is doing quite well, actually. Among the health-care companies in the S&P 500, revenues rose 5.2% in the second quarter, year over year, when revenues for all S&P 500 companies fell 3.1%. Revenues rose not because people are getting more health care; they rose because health care has been getting more expensive at a breath-taking pace for many years as the industry has been consolidating into oligopolies and as outrageous prices increases on pharmaceutical products regularly grace the headlines.

“They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed..”

• ‘When I Think Of Central Banks, I Think Of Alchemists’: Marc Faber (CNBC)

Central bankers trying to spur growth are like alchemists trying to make gold and they’re just as likely to fail, said Marc Faber, the publisher of the Gloom, Boom & Doom report. “When I think of central banks, I think of alchemists,” Faber, also known as Dr. Doom for his pessimistic views, told CNBC’s “Squawk Box” on Thursday. “They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed,” he said, although he noted that some alchemists did produce other useful chemicals during their ill-fated search for the precious metal. “But the central banks are just mixing water, in other words, paper money, and the results cannot be a favourable outcome in the long run.”

Faber noted that from the 1970s to the mid-1980s, people believed inflation was “forever,” but now the same central banks that were fighting inflation were now fighting deflation. This fight was a mistake, he said, claiming that across Asia, price rises were exceeding income gains. “It’s possible that suddenly inflationary pressures will be there, that central banks should then act but they cannot because the system is so overleveraged,” he said. At the same time, Faber noted that the low and negative interest rates globally were hurting pension funds. “Pension funds, even in these beautiful years of returns, 2009 to today, they have become less funded, they have become more underfunded,” he said. “With interest rates at zero and this low, their portion that’s in bonds is never going to meet the expected returns of 7.5%. It’s physically not possible.”

Alchemists and arsonists.

• Central Bankers Are The Arsonists That Create The Fire: Bill Fleckenstein (ZH)

Having been invited on to CNBC to discuss his views of the market, famous short-seller Bill Fleckenstein explained rather eloquently that QE4 is coming and people will wake up to the fact that central bankers “are the arsonists that create the fire, not the firemen that put it out.” This non-mainstream view was treated with disdain by CNBC host Tim Seymour who slammed Fleckenstein for “missing out” on the “artificial market’s” (because even CNBC now admits that’s what it is) gains. The response was epic. “Don’t be such a jerk… I don’t ask to come on this show, you invited me… and don’t get in my face because I won’t join your party…”

A $2 trillion black hole.

• Bad Debts In Chinese Banking System 10 Times Higher Than Admitted: Fitch (AEP)

Bad debts in the Chinese banking system are ten times higher than officially admitted, and rescue costs could reach a third of GDP within two years if the authorities let the crisis fester, Fitch Ratings has warned. The agency said the rate of non-performing loans (NPLs) has reached between 15pc and 21pc and is rising fast as the country delays serious reform, relying instead on a fresh burst of credit to put off the day of reckoning. It would cost up to $2.1 trillion to clean up this toxic legacy even if the state acted today, and much of this would inevitably land in the lap of the government. “There are already signs of stress that point to NPLs being much higher than official estimates (1.8pc), most obviously the increased frequency with which the banks are writing off or offloading loans,” it said.

The banks have been shuffling losses off their balance sheets through wealth management vehicles or by classifying them as interbank credit, seemingly with the collusion of the regulators. Loans are past 90 days overdue are not always deemed bad debts. “The longer debt grows, the greater the risk of asset quality and liquidity shocks to the banking system,” said Fitch. Capital shortfalls are currently 11pc to 20pc of GDP, but this threatens to hit 33pc in a worst case scenario by the end of 2018. “Defaults in China could lead to mutual credit guarantees in the background pulling other firms into distress. A large increase in real defaults risks triggering a chain of bankruptcies that magnifies the potential for financial instability,” it said.

“Mid-tier banks have the weakest buffers, and are the most vulnerable to funding stress,” said the report, by Jonathan Cornish and Grace Wu. The damage eclipses losses during the global financial crisis in Britain and the US, where the direct costs of bank rescues were roughly 8pc of GDP. It would be closer to the trauma suffered by Ireland, Greece, and Cyprus when their banking systems collapsed, but on a vastly greater scale. The Chinese state has deep pockets but strains are mounting. Public debt has reached 55pc of GDP following the bail-out of local governments. This is now higher than among ‘A’ rated peers, mostly in the developing world. “Pressure on China’s sovereign rating could emerge if general government indebtedness were to rise significantly,” said the Fitch report.

China let rip with a fresh burst of credit growth from the middle of last year after a series of policy errors triggered a recession – with ‘Chinese characteristics’ – in early 2015. It ditched any serious effort to reform the economy and opted for stimulus as usual, cutting interest rates and the reserve requirement ratio. Credit reached 243pc of GDP by the end on last year, double the level in 2008. Banking system assets have grown by $21 trillion over that time, 1.3 times greater than the entire US commercial banking nexus.

“Defaults mean loans and bonds won’t be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.”

• The Coming Wave of Defaults Will Be Devastating (CH Smith)

In an economy based on borrowing, i.e. credit a.k.a. debt, loan defaults and deleveraging (reducing leverage and debt loads) matter. Consider this chart of total credit in the U.S. Note that the relatively tiny decline in total credit in 2008 caused by subprime mortgage defaults (a.k.a. deleveraging) very nearly collapsed not just the U.S. financial system but the entire global financial system. Every credit boom is followed by a credit bust, as uncreditworthy borrowers and highly leveraged speculators inevitably default. Homeowners with 3% down payment mortgages default when one wage earner loses their job, companies that are sliding into bankruptcy default on their bonds, and so on. This is the normal healthy credit cycle.

Bad debt is like dead wood piling up in the forest. Eventually it starts choking off new growth, and Nature’s solution is a conflagration–a raging forest fire that turns all the dead wood into ash. The fire of defaults and deleveraging is the only way to open up new areas for future growth. Unfortunately, central banks have attempted to outlaw the healthy credit cycle. In effect, central banks have piled up dead wood (debt that will never be paid back) to the tops of the trees, and this is one fundamental reason why global growth is stagnant. The central banks put out the default/deleveraging forest fire in 2008 with a tsunami of cheap new credit. Central banks created trillions of dollars, euros, yen and yuan and flooded the major economies with this cheap credit.

They also lowered yields on savings to zero so banks could pocket profits rather than pay depositors interest. This enabled the banks to rebuild their cash and balance sheets – at the expense of everyone with cash, of course. Having unleashed tens of trillions of dollars in new credit since 2008, the central banks have simply increased the likelihood and scale of the coming default conflagration. Now the amount of deadwood that’s piled up is many times greater than it was in 2008. Very few observers explore what happens after defaults start cascading through the system. Defaults mean loans and bonds won’t be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.

We’ve been alarmed about it for years.

• Time to ‘Be Alarmed’ about Emerging Market Debt: UN (DQ)

[..] It was the peak of the emerging market bubble, when the amount of debt that low-income developing economies could have sold to eager investors seemed almost limitless. The main reason for this unprecedented surge in appetite for EM debt was the huge monetary expansion unleashed in many of the world’s major economies, led by the Fed’s QE program. The result was the now-all-too-familiar reality of anemic (at best) yield opportunities in developed markets, prompting investors to seek out much riskier emerging market assets. The moment the Fed turned off the spigot, in mid-2014, the flow of funds began to reverse, according to the report, creating ripe conditions for a “prolonged commodity price shock, steep currency depreciations and worsening growth prospects,” which have “quickly driven up borrowing costs and debt-to-GDP ratios.”

For the first time since the Latin American debt crisis in the second half of the 1980s, aggregate net capital flows entered negative territory. Aggregate outflows reached $656 billion in 2015 and $185 billion in the first quarter of 2016. The capital flight was particularly pronounced in China and other parts of Asia. Note how capital flight heated up in 2014 toward the end of the Fed’s “QE Infinity”.

More consequences of unbridled manipulation of financial markets.

• The Ted Spread Is Dead, Baby. The Ted Spread Is Dead (WSJ)

A measure of stress in financial markets, whose alarm bells heralded the 2008 financial crisis, just hit its highest level in over seven years. But don’t worry. It turns out the so-called Ted Spread might be dead, an unlikely casualty of the recent changes in U.S. money-market regulation. This spread charts the difference between the London interbank offered rate and the yield on three-month U.S. Treasury bills. Libor is a dollar-denominated global gauge of private-sector credit strength, particularly that of banks, and three-month bills measure an ultrasafe bet—the U.S. government’s creditworthiness. Ted stands for Treasury-Eurodollar rate, the Eurodollar being the greenback denominated lending reflected in the Libor rate.

If the difference, or spread, between what banks charge each other increases compared with yields on safe government debt, that reflects an elevated risk of defaults in the private sector that the banking sector lends to. For the past year and a half the spread has been creeping higher, rising from 0.2 of a percentage point at the turn of 2015, to 0.653 of a percentage point on Wednesday. That is the highest it has been since May 2009, in the aftermath of the global financial crisis, surpassing other moments of extreme stress, like the euro sovereign-debt crisis around 2011. But there is a problem with that. Looming U.S. regulation of money-market funds has driven Libor higher, meaning that it isn’t quite the indicator that it once was.

Blair and Cameron’s scorched earth.

• UK Councils ‘Building Up Dangerous Levels Of Debt And Risk’ (Ind.)

Cash-strapped local councils are building up dangerous levels of risk and debt as they turn to commercial ventures in a bid to raise funds, credit agencies and campaigners have warned. Moody’s, the credit agency, warned that a series of ambitious plans to boost revenue by setting up businesses could put council tax payers at risk should they run into difficulties. The warning, in a report into local government finance, comes amid mounting evidence that local authorities are increasingly turning to borrowing after a run of tough settlements with central Government. Roshana Arasaratnam, a senior credit officer at Moody’s, said in the wake of the report’s publication:

“Borrowing to invest in commercial projects exposes local authorities to additional credit risk, as the revenues that flow from these projects are inherently uncertain. “Those adopting this strategy also face increased project execution risk, and greater competition from the private sector.” Ms Arasaratnam said such borrowing contrasted sharply with local authorities’ traditional investments in schools, housing and transport which are underpinned by government grants and do not depend on generating revenues from commercial activities. The report highlights a series of business ventures set up by councils, some of which are now on negative credit watch. They include Warrington Borough Council, which in 2015 issued £150m of bonds to support an economic development plan aimed at increasing business rate revenues.

Paper wealth is not wealth.

• You’re Not as Rich as You Think (Satyajit Das)

The idea that the world is awash in savings – one factor driving the theory of secular stagnation – is, on the surface, a persuasive one. Too bad it may not be true. Yes, the postwar generation is wealthier than any before it. But the ultimate value of any investment depends upon being able to convert it into cash and thus generate purchasing power. In fact, the world’s accumulated wealth – around $250 trillion, according to Credit Suisse’s Global Wealth Report – is almost certainly incapable of realization at its paper value. The headline number thus vastly overstates the supposed savings glut. Most of these savings are held in two forms: real estate, primarily principal residences, and retirement portfolios that are invested in stocks and bonds.

Both are rising in value. A combination of population growth, higher incomes, increased access to credit, lower rates and, in some cases, limited housing stock have driven up home prices; those who got in early have done especially well. Meanwhile, increased earnings and dividends, driven by economic growth and inflation, have boosted equity values. So have loose monetary policies designed to counteract the Great Recession since 2009. Yet the appreciating value of one’s own home doesn’t automatically translate into purchasing power. A primary residence produces no income. Indeed, maintenance costs, utility bills and property taxes – which often rise along with home prices – mean that houses are cash-flow negative.

As soon as they understand the magnitude of the numbers, they’ll look the other way.

• Deutsche Bank Woes Sparks Concern Among German Lawmakers (BBG)

Deutsche Bank’s finances, weakened by low profitability and mounting legal costs, are raising concern among German politicians after the U.S. sought $14 billion to settle claims related to the sale of mortgage-backed securities. At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Participants discussed the U.S. fine and the financial reserves at Deutsche Bank’s disposal if it had to cover the full amount, according to the people, who asked not to be identified because the meeting on Tuesday was private. While the participants – members of the junior party in Angela Merkel’s government – didn’t reach any conclusions on the likely outcome, the discussion signals that the risks have the attention of Germany’s political establishment.

The German Finance Ministry last week called on the U.S. to ensure a “fair outcome” for Deutsche Bank, citing cases against other banks where the government settled for reduced fines. Pressure on Germany’s biggest lender has increased since German Finance Minister Wolfgang Schaeuble told Bloomberg Television on Feb. 9 that he has “no concerns about Deutsche Bank.” Germany’s biggest bank was already ranked among the worst-capitalized lenders in European stress tests before U.S. authorities demanded $14 billion during initial talks to settle a probe into how it handled mortgage securities during the 2008 financial crisis. The announcement led Deutsche Bank’s riskiest bonds to plunge.

Never ending story. Because it can’t end well.

• Regulators Expect Monte Dei Paschi To Ask Italy For Help (R.)

European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, three euro zone officials with knowledge of the matter said, although Rome would strongly resist such a move if bondholders suffered losses. Less than two months after the Tuscan lender announced an emergency plan to raise €5 billion of fresh capital, having come last in a health check of 51 European banks, there is growing concern among European regulators that the cash bid will fall short. While the bank is determined to see through the capital raising, if it were to disappoint, it would be left with a capital hole. Now euro zone authorities are considering whether state support would have to be tapped after what bankers have described as slack interest in the bank’s share offer.

“There is clearly an execution risk to the capital raising,” said one official with knowledge of the rescue attempt, adding that the bank’s value, about one ninth the size of the planned €5 billion cash call, would be a turn-off for investors. That person said a “precautionary recapitalization by the Italian state” could be used to make up any shortfall once attempts to raise fresh cash from investors had concluded in the coming months. [..] Monte dei Paschi faces a considerable challenge in convincing investors to back its third recapitalisation in as many years. Further complicating the picture, a constitutional referendum, expected to be held by early December that could decide the future of Renzi, is likely to push the bank’s fund-raising into next year, the officials say. The bank’s fragile state poses a threat to confidence in other Italian lenders and even to heavily-indebted Italy, the euro zone’s third-largest economy.

There’s 24/7 propaganda and then there’s reality. It’s about air time more than anything else.

• How Does A 60% Increase In NYC Homelessness Constitute A Recovery? (ZH)

[..] ..courtesy of data from the New York City Department of Homeless Services, we have a couple of additional charts to add to the list like the one below that shows a ~60% increase in the number of NYC families living in homeless shelters over the past five years. Aside from an increse during the “great recession”, the number of New York City families living in homeless shelter remained fairly constant at around 8,000 from July 2008 through July 2011. That said, over the following 5 years beginning in August 2011 through today, NYC has experienced a nearly 60% increase in the number of families living in homeless shelters to nearly 13,000. Ironically, the increase in homelessness experienced during the “great recession” was just a blip on the radar compared to the past five years as residential rental rates in NYC have soared.

Alternatively, we offer up the following statistics from Mayor Bill De Blasio’s Fiscal 2016 “Mayor’s Management Report” highlighting a 42% increase in applications for “Emergency Rent Assistance” from New York City families at risk of losing their housing. If this is what a “recovery” looks like to Obama we would certainly like to better understand how he would define a recession.

“..journalism should not be used as a “weapon of destruction against persons and even entire peoples..“

• Pope Francis: Journalism Based On Gossip And Lies Is A Form Of Terrorism (G.)

Journalism based on gossip or rumours is a form of “terrorism” and media that stereotype entire populations or foment fear of migrants are acting destructively, Pope Francis has said . The pope, who made his comments in an address to leaders of Italy’s national journalists’ guild, said reporters had to go the extra mile to seek the truth, particularly in an age of round-the-clock news coverage. Spreading rumours is an example of “terrorism, of how you can kill a person with your tongue“, he said. “This is even more true for journalists because their voice can reach everyone and this is a very powerful weapon.“ In Italy, a number of newspapers are highly politicised and are regularly used to discredit those with differing political views, sometimes reporting unsubstantiated rumours about their private lives.

In 2009 several media outlets owned by the family of then-prime minister Silvio Berlusconi came under fire from the journalists’ guild over stories questioning the trustworthiness of a magistrate who had ruled against a company owned by the Berlusconi family. The stories were filled with insinuations about the way he dressed, including the colour of his socks, and the way he took walks in the park. The pope, who has often strongly defended the rights of refugees and migrants, said journalism should not be used as a “weapon of destruction against persons and even entire peoples“. “Neither should it foment fear before events like forced migration from war or from hunger,” he added.

A highly developed culture 10s of 1000s of years before anywhere else on the planet. Ignored as such by Europe and North American bias.

• Indigenous Australians The Oldest Living Culture; It’s In Our Dreamtime (G.)

Australia’s Aboriginal people have already been using the tag of “world’s oldest living culture” before given scientific confirmation in a recent study of the DNA of Australia’s Indigenous people. One likely response to the finding from the subjects of the research is a satisfied, “I told you so”. Scientific research often reaffirms what is in an oral history. This has been particularly so in Australia where cultural stories – often referred to as Dreamtime stories – that describe land movements and floods fit in with what later becomes known about seismic and glacial shifts from the geological record. For example, Associate Professor Nick Reid and Professor Patrick D. Nunn have analysed stories from Indigenous coastal communities and have seen a thread of discussions about the rise of tidal waters that occurred between 6,000 and 7,000 years ago.

And these are the newer stories. Other stories collected from around Cairns showed that stories recalled a time when the land covered the area that is now the Great Barrier Reef and stories from the Yorke Peninsula reference a time when there was no Spencer Gulf (it is now 50m below sea level). Reid and Nunn hypothesise that this could make these stories over 12,000 years old. So oral history and observation can reinforce what the science says. Or science can confirm what we’ve been saying all along. For many older Indigenous people, the cultural stories will seem the more trustworthy. There are historic reasons why Indigenous people remain suspicious of science practiced by Europeans, who have not yet countered the legacy of their obsessions with head measuring and blood quantum.

Aboriginal culture and traditions have been often viewed through a Eurocentric gaze that has failed to see the wisdom contained within its values and teachings. Cultural stories were often illustrated for children without looking for deeper meanings and codes. These stories didn’t just tell a tale of how the echidna got its spikes, they contained – like parables in the bible – a set of messages about the importance of sharing resources in a hunter-gatherer society and the consequences of selfishness.

Debt Rattle August 18 2016

Aug 182016

August 18, 2016 Posted by Raúl Ilargi Meijer at 8:51 am Finance Tagged with: buybacks, carnage, central bankers, genocide, Japan, nukes, oil, pilots, refugees, slaughter, TPP, Yemen 2 Responses »

NPC George W. Cochran & Co., 709 14th Street NW, Washington DC 1920

• Japanese Imports Drop -24.7%, Exports Crash -14.1% (ZH)

• A Physics Lesson for Central Bankers (BBG)

• The Idea Of The Fed Raising The Inflation Target Is Outrageous (Boockvar)

• On The Impossibility Of Helicopter Money And Why The Casino Will Crash (DS)

• US Buyback Announcements Tumble to a 2012 Low (BBG)

• Oil Drillers Have Slashed Spending For 2015-2020 By $1 Trillion

• Only 37% Of Borrowers Are Paying Down Their Student Loans (WSJ)

• Chinese Airlines Need To Hire 100 Pilots A Week For The Next 20 Years (BBG)

• Hillary Clinton Picks TPP and Fracking Advocate To Set Up Her White House (IC)

• Is US Moving Nuclear Weapons From Turkey to Romania? (EurA)

• America Is Complicit in the Carnage in Yemen (NYT Editorial Board)

• California Slaughter: The State-Sanctioned Genocide of Native Americans (NW)

• Uncovering The Brutal Truth About The British Empire (G.)

• Greek Villagers Rescued Refugees. Now They Are the Ones Suffering. (NYT)

Apparently Kuroda doesn’t buy enough yet.

• Japanese Imports Drop -24.7%, Exports Crash -14.1% (ZH)

For the 19th month in a row, Japanese Imports plunged – dropping 24.7% YoY (worse than expected), the biggest drop since Oct 2009. Exports were just as dismal, also missing expectations, plunging 14.1% YoY – worst since Oct 2009. The biggest driver of the collapse of Japanese trade was a 44% crash in the Chinese trade balance. There’s no lipstick to put on this pig… it’s a disaster.. and worse still Yen is strengthening back below 100 against the USD.

Why not simply admit that central bankers and economists alike have no idea what they’re doing?! Even if they ever had a clue, we’re now 8 years into ‘uncharted territory’, and it’s all anyone‘s guess. That’s what ‘uncharted territory’ means.

Moreover, central bankers and economists come in with dogmatic school book theories that don’t apply in ‘uncharted territory’, and those school book educations make sure they’re the very last candidates for finding creative solutions. Comparing economics to actual science does not help one bit.

• A Physics Lesson for Central Bankers (BBG)

The world is braced for the discovery of a fifth fundamental forces of nature – the four known ones being electromagnetism, gravity, and strong and weak nuclear forces – that subverts the so-called standard model of particle physics. Given the lackluster outlook for global growth, maybe economics needs a similar revolution. Quantitative easing’s failure to quash the threat of deflation is finance’s equivalent of the bump in the data that alerted physicists to the possibility of a new boson. The mismatch between economic theory and the real-world outcome of zero interest rates poses a direct challenge to the current orthodoxy that puts a 2% inflation target at the heart of monetary policy in most of the developed world.

Figures earlier this week showed inflation running at an annual pace of just 0.8% in the U.S. and 0.6% in the U.K. Consumer prices in the euro zone are rising by about 0.2% a year; in Japan, prices dropped by 0.4% in June. The consensus forecast among economists surveyed by Bloomberg News is for none of the four central banks in those regions to meet their targets in 2016, and for the ECB and the BOJ to continue falling short for at least the next year:

Years of pumping trillions of dollars, euros, yen and pounds into the economy by buying government debt and other securities hasn’t produced the rebound in inflation that economics textbooks predicted. Record low borrowing costs haven’t led to a surge in investment and spending that would lead to higher prices. That’s the kind of empirical evidence that should produce a reconsideration of what Rothschild Investment Trust Chairman Jacob Rothschild this week called “the greatest experiment in monetary policy in the history of the world.” Neil Grossman, director of Florida-based bank C1 Financial and former chief investment officer at TKNG Capital Partners, likens the need to abandon the current economic orthodoxy with the impact of quantum physics on science in the last century.

“There is no science to this 2% number, it is all art.”

• The Idea Of The Fed Raising The Inflation Target Is Outrageous (Boockvar)

I can’t let an opportunity go by without criticizing a Fed official. I believe their feet should be held to the fire after creating a huge asset price bubble and culture of debt that is dragging down economic growth. Fed President John Williams comments yesterday really got me angry. First, he suggested possibly raising the Fed’s 2% inflation target. This reflects an amazing cluelessness of the damage this would do if realized. We are in an epic bond bubble globally where higher inflation would be kryptonite. With the bond monster central bankers have created, the last thing they should want is higher inflation. Also, many U.S. citizens are literally living paycheck to paycheck and a higher cost of living without a corresponding increase in wages or any interest income would damage the largest component of the U.S. economy and the lives of millions.

Second, he said, “Conventional monetary policy has less room to stimulate the economy during an economic downturn.” This we know is true. But he then added, “This will necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance, and potentially even negative policy rates.” This last sentence proves he’s blind to the negative consequences of what unconventional tools have wrought and he believes in negative rates even in the face of all the evidence of how damaging the idea is. Let me expand on the first issue of inflation. Central banks in the U.S., Eurozone, UK and in Japan have tethered their monetary policy decisions on growth certainly but also the desire for 2% annual inflation. There is no science to this 2% number, it is all art.

The reason for this target and desire for this level of inflation is a matter of control. While they like to keep interest rates artificially low, they also understand the need to have them higher than they are in order to respond to any economic challenges. The fallacy with this theory that higher inflation is good and deflation is bad, is inflation is just a symptom of underlying supply and demand and technological improvements, and thus shouldn’t be manipulated.

Stockman: “..earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2200 or 13% higher..”

• On The Impossibility Of Helicopter Money And Why The Casino Will Crash (DS)

[..] .. the S&P 500 companies posted Q2 2016 earnings for the latest 12 month period at $86.66 per share. So at the August bubble high the market was being valued at a lunatic 25.1X. Even in a healthy, growing economy that valuation level is on the extreme end of sanity. But actual circumstances are currently more nearly the opposite. That is, earnings have now been falling for six straight quarters in line with GDP growth that has slumped to what amounts to stall speed. In fact, reported earnings for the S&P 500 peaked at $106 per share in the 12 months ended in September 2014. That means that earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2200 or 13% higher.

This is called multiple expansion in the parlance of Wall Street, but it’s hard to find a more bubblicious example. Two years ago the market was trading at just 18.4X, meaning that on the back of sharply falling earnings the PE multiple had risen by 36%! Valuation multiples are supposed to go up only when the economic and profits outlook is improving, not when it’s unmistakably deteriorating as at present. But during the spring-summer melt-up these faltering fundamentals were blithely ignored on the hopes of a second half growth spurt and, failing the latter, that the Fed would again pull the market’s chestnuts out of the fire.

Time for Yellen to buy those stocks? Buybacks were the no. 1 reason the S&P looked good till now. Better find something to replace them, or else…

• US Buyback Announcements Tumble to a 2012 Low (BBG)

Stock buybacks appear to be slowing down, suggesting either corporate America’s outlook has dimmed, stock valuations have become prohibitively high or, most optimistically, that companies are starting to listen to investors and put funds toward other uses. Buybacks announced for the second quarter’s earnings season between July 8 and August 15 totaled an average of $1.8 billion a day, the lowest volume in an earnings season since the summer of 2012, according to TrimTabs Investment Research.
Share repurchases have been a key driver of this year’s stock market rally, despite a notable deceleration relative to to the same period in 2015. In the first seven months of 2016, buybacks totaled $376.5 billion, according to TrimTabs.

That’s down 21% from $478.4 billion in the first seven months of last year. Equity buybacks last week totaled just $2.6 billion, while record highs in U.S. stocks triggered an increase in new equity offerings. “The reluctance to pull the trigger on share repurchases suggests corporate leaders are becoming less enthusiastic about what they see ahead,” David Santschi, chief executive officer of TrimTabs, said in a press release on Tuesday. That means “buybacks aren’t likely to provide as much fuel for the stock market as they have in the recent past.” According to TrimTabs, just five companies have announced buybacks of more-than $3 billion this earnings season: Biogen ($5 billion), Visa ($5 billion), CBS ($5 billion), AIG ($3 billion), and 21st Century Fox ($3 billion).

Hard to admit to something that will cost you your livelihood. They all keep hoping for rising prices.

• Oil Drillers Have Slashed Spending For 2015-2020 By $1 Trillion

Mad Dog, BP’s drilling project deep in the Gulf of Mexico, could be Exhibit A in the oil industry’s war on cost. When the British oil giant announced the project’s second phase in 2011, it put the price at $20 billion. Last month, after simplifying plans and benefiting from a sharp drop in everything from steel to drilling services, Chief Executive Officer Bob Dudley said he could do the job for $9 billion.

Across the industry, companies have taken a chainsaw to expenses, slashing spending for the 2015-to-2020 period by $1 trillion through cutting staff, delaying projects, changing drilling techniques and squeezing outside contractors, according to consulting firm Wood Mackenzie. That’s cushioned businesses as oil prices plunged 60% since 2014. Now producers seek to show they can make the savings stick, while service providers try to reverse their losses. Industry costs “may be the defining issue of the next six to 12 months,” said J. David Anderson, a Barclays analyst in New York. “As you start ramping up, the fact is you’re going to need more services and they’re going to have to come in at a higher price.”

Someone will come with an across the board forgiveness plan. But it’ll be contentious.

• Only 37% Of Borrowers Are Paying Down Their Student Loans (WSJ)

A largely overlooked report released in February by the Government Accountability Office suggests that the Obama administration’s policies have exacerbated student debt, which equals nearly a quarter of annual federal borrowing. With only 37% of borrowers actually paying down their loans, the federal student-loan program more closely resembles the payday-lending industry than a benevolent source of funds for college. As this newspaper reported in April, “43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1,” and a staggering “1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt.”

If student debt continues to skyrocket, the federal government may have to deal with as much as a $500 billion write-down when future defaults and loan-forgiveness programs are factored in. In 2010, the Obama administration dispensed with the private intermediaries that had administered federal loans since the 1960s. It put in their place Direct Lending, a program administered by the Education Department. At the time, the Congressional Budget Office estimated that Direct Lending would save $62 billion from 2010 to 2020. That didn’t happen. The program’s advocates failed to anticipate how two other Obama-backed college affordability initiatives—Income-Driven Repayment and loan forgiveness—would create a cataclysmic hit to the federal student-loan program’s finances.

There are more than 20 Income-Driven Repayment programs, but they all work essentially the same way. Students struggling financially can defer their payments. When no or limited payments are made, their balances grow. Today, over 20 million borrowers are watching their loan balances increase thanks to these programs. The average balance ballooned to approximately $25,000 in 2014 from $15,000 in 2004, according to the Federal Reserve Bank of New York, and has grown still larger since then.

In their dreams.

• Chinese Airlines Need To Hire 100 Pilots A Week For The Next 20 Years (BBG)

Chinese airlines need to hire almost 100 pilots a week for the next 20 years to meet skyrocketing travel demand. Facing a shortage of candidates at home, carriers are dangling lucrative pay packages at foreigners with cockpit experience. Giacomo Palombo, a former United Airlines pilot, said he’s being bombarded every week with offers to fly Airbus A320s in China. Regional carrier Qingdao Airlines promises as much as $318,000 a year. Sichuan Airlines, which flies to Canada and Australia, is pitching $302,000. Both airlines say they’ll also cover his income tax bill in China. “When the time to go back to flying comes, I’ll definitely have the Chinese airlines on my radar,” said Palombo, 32, now an Atlanta-based consultant for McKinsey. “The financials are attractive.”

Air traffic over China is set to almost quadruple in the next two decades, making it the world’s busiest market, according to Airbus Group SE. Startup carriers barely known abroad are paying about 50% more than what some senior captains earn at Delta Air Lines, and they’re giving recruiters from the U.S. to New Zealand free rein to fill their captains’ chairs. With some offers reaching $26,000 a month in net pay, pilots from emerging markets including Brazil and Russia can quadruple their salaries in China, said Dave Ross, Las Vegas-based president of Wasinc International. Wasinc is recruiting for more than a dozen mainland carriers, including Chengdu Airlines, Qingdao Airlines and Ruili Airlines. “When we ask an airline, ‘How many pilots do you need?,’ they say, ‘Oh, we can take as many as you bring,”’ Ross said. “It’s almost unlimited.”

Incredible, but he really said it: “..there’s not a single case where hydraulic fracking has created an environmental problem for anyone..”

• Hillary Clinton Picks TPP and Fracking Advocate To Set Up Her White House (IC)

Two big issues dogged Hillary Clinton during the Democratic primary: the Trans-Pacific Partnership trade agreement (TPP) and fracking. She had a long history of supporting both. Under fire from Bernie Sanders, she came out against the TPP and took a more critical position on fracking. But critics wondered if this was a sincere conversion or simply campaign rhetoric. Now, in two of the most significant personnel moves she will ever make, she has signaled a lack of sincerity. She chose as her vice presidential running mate Tim Kaine, who voted to authorize fast-track powers for the TPP and praised the agreement just two days before he was chosen.

And now she has named former Colorado Democratic Senator and Interior Secretary Ken Salazar to be the chair of her presidential transition team — the group tasked with helping set up the new administration should she win in November. That includes identifying, selecting, and vetting candidates for over 4,000 presidential appointments. As a senator, Salazar was widely considered a reliable friend to the oil, gas, ranching and mining industries. As interior secretary, he opened the Arctic Ocean for oil drilling, and oversaw the botched response to the BP oil spill in the Gulf of Mexico. Since returning to the private sector, he has been an ardent supporter of the TPP, while pushing back against curbs on fracking.

The TPP would enhance the ability of corporations to sue to overturn environmental regulations, but Salazar helped a pro-TPP front group, the “Progressive Coalition for American Jobs,” argue the opposite. In a November 2015 USA Today op-ed that Salazar co-wrote with Bruce Babbitt, the two men argued that the TPP would be the “the greenest trade deal ever” by promoting sustainable energy. Both Salazar and Babbitt cited their former positions as interior secretaries to boost their credibility. The following month, Salazar authored a Denver Post op-ed with two former Colorado governors also affiliated with PCAJ, arguing that the agreement would protect the state’s scenic beauty: “And as a state rich with natural wonder and a long history of conservation, Colorado can be proud that the TPP includes the highest environmental standards of any trade agreement in history.”

Shortly after leaving his post at the Obama administration, Salazar appeared at an oil and gas industry conference to argue in favor of fracking. “We know that, from everything we’ve seen, there’s not a single case where hydraulic fracking has created an environmental problem for anyone,” Salazar told the attendees, who included the vice president of BP America, another keynote speaker at the conference. “We need to make sure that story is told.”

Not confirmed. But moving them out of Turkey seems logical. Not exactly a safe third country these days.

• Is US Moving Nuclear Weapons From Turkey to Romania? (EurA)

Two independent sources told EurActiv.com that the US has started transferring nuclear weapons stationed in Turkey to Romania, against the background of worsening relations between Washington and Ankara. According to one of the sources, the transfer has been very challenging in technical and political terms. “It’s not easy to move 20+ nukes,” said the source, on conditions of anonymity. According to a recent report by the Simson Center, since the Cold War, some 50 US tactical nuclear weapons have been stationed at Turkey’s Incirlik air base, approximately 100 kilometres from the Syrian border.

During the failed coup in Turkey in July, Incirlik’s power was cut, and the Turkish government prohibited US aircraft from flying in or out. Eventually, the base commander was arrested and implicated in the coup. Whether the US could have maintained control of the weapons in the event of a protracted civil conflict in Turkey is an unanswerable question, the report says. Another source told EurActiv.com that the US-Turkey relations had deteriorated so much following the coup that Washington no longer trusted Ankara to host the weapons. The American weapons are being moved to the Deveselu air base in Romania, the source said. Deveselu, near the city of Caracal, is the new home of the US missile shield, which has infuriated Russia.

It doesn’t sit well with me at all that the NYT editors are saying this. Far too much blood on those hands. It doesn’t feel right one bit.

• America Is Complicit in the Carnage in Yemen (NYT Editorial Board)

A hospital associated with Doctors Without Borders. A school. A potato chip factory. Under international law, those facilities in Yemen are not legitimate military targets. Yet all were bombed in recent days by warplanes belonging to a coalition led by Saudi Arabia, killing more than 40 civilians. The United States is complicit in this carnage. It has enabled the coalition in many ways, including selling arms to the Saudis to mollify them after the nuclear deal with Iran. Congress should put the arms sales on hold and President Obama should quietly inform Riyadh that the United States will withdraw crucial assistance if the Saudis do not stop targeting civilians and agree to negotiate peace.

The airstrikes are further evidence that the Saudis have escalated their bombing campaign against Houthi militias, which control the capital, Sana, since peace talks were suspended on Aug. 6, ending a cease-fire that was declared more than four months ago. They also suggest one of two unpleasant possibilities. One is that the Saudis and their coalition of mostly Sunni Arab partners have yet to learn how to identify permissible military targets. The other is that they simply do not care about killing innocent civilians. The bombing of the hospital, which alone killed 15 people, was the fourth attack on a facility supported by Doctors Without Borders in the past year even though all parties to the conflict were told exactly where the hospitals were located.

In all, the war has killed more than 6,500 people, displaced more than 2.5 million others and pushed one of the world’s poorest countries from deprivation to devastation. A recent United Nations report blamed the coalition for 60% of the deaths and injuries to children last year. Human rights groups and the United Nations have suggested that war crimes may have been committed.

Today Yemen, yesterday California. Maybe if we stop trying to hide the past, we’re less likely to repeat it?!

• California Slaughter: The State-Sanctioned Genocide of Native Americans (NW)

The tally is relentlessly grim: a whole settlement wiped out in Trinity County “excepting a few children”; an Indian girl raped and left to die somewhere near Mendocino; as many as 50 killed at Goose Lake; and, two months later, as many as 257 murdered at Grouse Creek, scores of them women and children. There were the four white ranchers who tracked down a band of Yana to a cave, butchering 30. “In the cave with the meat were some Indian children,” reported a chronicle published later. One of the whites “could not bear to kill these children with his 56-calibre Spencer rifle. ‘It tore them up so bad.’ So he did it with his 38-calibre Smith and Wesson revolver.”

We might as well stop speaking about western ‘civilization’.

• Uncovering The Brutal Truth About The British Empire (G.)

Help us sue the British government for torture. That was the request Caroline Elkins, a Harvard historian, received in 2008. The idea was both legally improbable and professionally risky. Improbable because the case, then being assembled by human rights lawyers in London, would attempt to hold Britain accountable for atrocities perpetrated 50 years earlier, in pre-independence Kenya. Risky because investigating those misdeeds had already earned Elkins heaps of abuse. Elkins had come to prominence in 2005 with a book that exhumed one of the nastiest chapters of British imperial history: the suppression of Kenya’s Mau Mau rebellion. Her study, Britain’s Gulag, chronicled how the British had battled this anticolonial uprising by confining some 1.5 million Kenyans to a network of detention camps and heavily patrolled villages.

It was a tale of systematic violence and high-level cover-ups. It was also an unconventional first book for a junior scholar. Elkins framed the story as a personal journey of discovery. Her prose seethed with outrage. Britain’s Gulag, titled Imperial Reckoning in the US, earned Elkins a great deal of attention and a Pulitzer prize. But the book polarised scholars. Some praised Elkins for breaking the “code of silence” that had squelched discussion of British imperial violence. Others branded her a self-aggrandising crusader whose overstated findings had relied on sloppy methods and dubious oral testimonies. By 2008, Elkins’s job was on the line. Her case for tenure, once on the fast track, had been delayed in response to criticism of her work.

To secure a permanent position, she needed to make progress on her second book. This would be an ambitious study of violence at the end of the British empire, one that would take her far beyond the controversy that had engulfed her Mau Mau work. That’s when the phone rang, pulling her back in. A London law firm was preparing to file a reparations claim on behalf of elderly Kenyans who had been tortured in detention camps during the Mau Mau revolt. Elkins’s research had made the suit possible. Now the lawyer running the case wanted her to sign on as an expert witness. Elkins was in the top-floor study of her home in Cambridge, Massachusetts, when the call came. She looked at the file boxes around her. “I was supposed to be working on this next book,” she says. “Keep my head down and be an academic. Don’t go out and be on the front page of the paper.”

She said yes. She wanted to rectify injustice. And she stood behind her work. “I was kind of like a dog with a bone,” she says. “I knew I was right.” What she didn’t know was that the lawsuit would expose a secret: a vast colonial archive that had been hidden for half a century. The files within would be a reminder to historians of just how far a government would go to sanitise its past. And the story Elkins would tell about those papers would once again plunge her into controversy.

But not everyone has lost it: “If it happens again, everyone will do the exact same thing: We will help.”

• Greek Villagers Rescued Refugees. Now They Are the Ones Suffering. (NYT)

Stratis Valamios revved the motor on his small white boat and steered under a thumbnail moon out of the harbor of this fishing village, perched on the northern tip of Lesbos, Greece’s third-largest island. Skies were clear enough to see the purple mountains of Turkey a short distance across the Aegean Sea. It would be easy on this tranquil evening to catch calamari. These days, he needed a good haul to make ends meet. A year ago, he and other fishermen in the tiny village, Skala Sikaminias, were making a more unusual catch: thousands of sea-drenched asylum seekers who streamed across the Aegean to escape conflict and poverty in the Middle East and Africa.

As one of the landfalls in Greece that is closest to Turkey, Skala Sikaminias, with its 100 residents, fast became ground zero for the crisis, the first stop in Europe for people trying to reach Germany in a desperate bid to start new lives. “I’d be in the middle of the sea, and I would see 50 boats zigzagging toward me,” Mr. Valamios said, gazing across the narrow channel. “I would speed toward them, and they would throw their children into my boat to be saved.” Today the migrants have mostly stopped coming. The coastline, once littered with orange life vests and wrecked boats, has been cleaned to a near-spotless white. But the human drama has left an imprint here, and across all of Lesbos, in ways that have only begun to play out.

The village is nearly empty of tourists this year as Germans, Swedes and other visitors who had long flocked to the crystalline waters of Lesbos go elsewhere, wary of spending their vacations in a place now associated with human desperation. Business at the island’s hotels and tavernas has slumped around 80%, especially along the 7.5-mile stretch between Skala Sikaminias and the vacation town of Molyvos, where many of the more than 800,000 migrants who survived the crossing last year washed ashore. Mr. Valamios used to supplement his income as a fisherman by working five months of the year at Myrivilis’ Mulberry taverna, facing the bucolic port where fishermen mend yellow nets beneath oleanders and village cats prowl for fish. This year, he was asked to work just one month amid a dearth of customers. Nearly 1,000 Greeks in the area have lost seasonal employment.

[..] The villagers no longer experience the sea in the same way. When they look at the horizon, some say they think for a split second that another refugee boat is coming. “We have to be ready,” Mr. Valamios said. “If it happens again, everyone will do the exact same thing: We will help.”

Debt Rattle June 29 2016

Jun 292016

June 29, 2016 Posted by Raúl Ilargi Meijer at 8:06 am Finance Tagged with: Brexit, Cameron, central bankers, currency war, Draghi, elites, EU, oil, zombies 1 Response »

Walker Evans Shoeshine stand, Southeastern US 1936

• 16 Reasons To Celebrate Brexit’s Win (Bandow)

• Brexit, a Step in the Right Direction (OTM)

• Brexit Pulls Central Bankers In Conflicting Directions (WSJ)

• When Central Planning Fails (ZH)

• Cameron Wins Brexit Breathing Space At Gloomy EU Summit (AFP)

• Draghi Wishes for a World Order Populists Will Love to Hate (BBG)

• Exposure Of Asian Economies To UK Banks Will Cause Sharp Slowdown (SCMP)

• Japan Inc.’s Yen Nightmare Looms at Large Exporters (BBG)

• Robot Lawyer Overturns 160,000 Parking Tickets In London And New York (G.)

• Oil Is Still Heading to $10 a Barrel (A. Gary Shilling)

• A Zombie Is A Terrible Thing To Behold (Jim Kunstler)

• Elites, ‘You’re Fired!’ (Dmitry Orlov)

• The World Is Rejecting Globalization (Bernie Sanders)

• Dutch PM Rutte Wants ‘Binding’ Assurances Over EU’s Ukraine Deal (R.)

A tas less Brexit than the past few days. Since most of the ‘journalism’ is so ‘end of the world’ one-sided, let’s start with some different views.

‘Doug Bandow is a former Special Assistant to President Ronald Reagan and author of Foreign Follies: America’s New Global Empire. He is a Senior Fellow at the Cato Institute.’

• 16 Reasons To Celebrate Brexit’s Win (Bandow)

1. Average folks took on the commanding heights of politics, business, journalism and academia and triumphed. Obviously, the “little guy” isn’t always right, but the fact he can win demonstrates that a system whose pathways remain open to those the Bible refer to as “the least of these.” The wealthiest, best-organized and most publicized factions don’t always win.

2. Told to choose between economic bounty and self-governance, a majority of Britons chose the latter. It’s a false choice in this case, but people recognized that the sum of human existence is not material. The problem is not just the decisions previously taken away from those elected to govern the UK; it’s also the decisions that would have been taken away in the future had “Remain” won.

3. Those governed decided that they should make fundamental decisions about who would rule over them. The Eurocrats, a gaggle of politicians, bureaucrats, journalists, academics, lobbyists and businessmen were determined to achieve their ends no matter what the European people thought. A constitution rejected? Use a treaty. A treaty rejected? Vote again. A busted monetary union? Force a political union. And never, ever consult the public. No longer, said the British.

13. Schadenfreude is a terrible thing, but almost all of us glory in the misfortune of at least some others. The recriminations among the Remain camp in Britain are terrible to behold. Labour Party tribunes blame their leader Jeremy Corbyn, whose Euroskeptic past created suspicions inflamed by his criticisms of the EU while nominally praising it. His supporters blame the Scottish nationalists for not turning out their voters. Former Liberal-Democrat Party leader and deputy Prime Minister Nick Clegg trashed Cameron and Chancellor of the Exchequer George Osborne for seeking political advantage by holding the referendum. The Scots are mad at the English. Irish “republicans” in Northern Ireland also are denouncing the English, while their longtime unionist rivals are trashing the republicans. The young are blaming the old for ruining their futures. Apparently, America isn’t the only home for myopic bickering.

14. Sometimes the advocate of a lost cause triumphs. Nigel Farage has been campaigning against the EU forever, it seems. Yet every advance appeared to trigger a retreat. His United Kingdom Independence Party picked up support, but then had to shed some of those whose views really were beyond the pale. UKIP was able to break into the European Parliament, which it hated, but won only one seat at Westminster, despite receiving 3.9 million votes, or 12.6% of the total, in last year’s election. One reason was that Cameron and the Tories stole his issue, promising a referendum on the EU—in which they then opposed separation. Election night he admitted that it looked like the UK would choose to remain. Except the British people ended up taking his advice.

From Charles’ “correspondent” Ron. Brexit as a natural phenomenon. “I believe we have entered a critical but wonderful age, the age of reemergence of decentralization and decentralized governance; may we preserve this opportunity for the gift that it is to life, liberty and property.”

• Brexit, a Step in the Right Direction (OTM)

“Mankind’s fundamental quest is to survive and prosper by solving scarcity. BREXIT is simply a modern example of an old pattern of behavior that seeks to resolve scarcity, (the shrinking pie of economic opportunity and ownership), through reconfiguration of relationships to reallocate resources to enable more equitable equilibrium in supply and demand. As a prelude to BREXIT, housing in Britain, in particular, had become out of reach for those that have labored under the assumption that hard work, education, and a good job would lead to an ability to own a home, which many young Britons now find economically out of their reach; many Britons blame the government’s monetary policy of 0% interest rates for inflation and unaffordable housing.

In another sign of frustration, a few years ago a graffiti sign expressed a sentiment of the youth in Britain, one of them posted at Bell Lane near Liverpool St. Station, it read: ‘Sorry, the lifestyle you ordered is out of stock.’ The Bank of England has continued policies that have contributed to the exasperation expressed through the referendum, this along with the burdens of having an open country and economy that increased labor supply which in turn increased demand for housing and available credit to driving the asset bubble. This type of scarcity, being seen in Britain, is very common throughout history and is generally driven by the confluence of interests that connects and drives centralized, unified policies between bankers, merchants (in today’s world global corporations) and governments.

Turning back the clock a bit, I would like to include a couple of quotes by an amazingly brilliant and eloquent commentator in economics, Fredic Bastiat in his writings from 1850: 1) “I do not dispute their right to invent social combinations, to advertise them, to advocate them, and to try them upon themselves, at their own expense and risk. But I do dispute their right to impose these plans upon us by law – by force – and to compel us to pay for them with our taxes.” 2) “Self-preservation and self-development are common aspirations among all people. And if everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing. But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others.”

Currency wars with an twist.

• Brexit Pulls Central Bankers In Conflicting Directions (WSJ)

ECB President Mario Draghi urged central banks to better coordinate policies to confront the problem of ultralow inflation in an era of slow global growth, underscoring the conundrum he and his associates face in the wake of Britain’s vote to leave the European Union. The guardians of the global monetary system face conflicting pressures as they seek to support their economies amid new turbulence. They also run the risk that their efforts will work at odds with each other and destabilize the financial system. Central banks should examine whether their policies are “properly aligned,” Mr. Draghi said at an ECB conference in Portugal. He further warned that currency devaluations aimed at boosting national competitiveness are a “lose-lose” for the global economy.

“In a globalized world, the global policy mix matters—and will likely matter more as our economies become more integrated,” Mr. Draghi said. “The speed with which monetary policy can achieve domestic goals inevitably becomes more dependent on others.” His warning resonated as central banks try to respond to the looming Brexit. Last week’s vote sent currencies spinning, pushing up the dollar and Japanese yen and driving down the euro and the British pound. It also sent investors away from stocks and risky bond investments. Markets settled on Tuesday after two days of sharp selling of risky assets. The Bank of England faces the risk of recession paired with the threat of inflation. If it lowers interest rates to boost growth, it could put additional downward pressure on its currency which stirs inflation. If it stands still, economic growth could suffer.

Diminishing returns on the biggest debt drive in history will diminish with a vengeance.

• When Central Planning Fails (ZH)

Things have not been going according to plan for Kuroda-san and his policy-making ‘Peter-Pan’s in Japan. Since The Bank of Japan unleashed NIRP on its ‘saving’ community – which, according to the textbooks would force money to reach for riskier investments, pumping stocks up, or flush cash into inflationary consumption – stock prices have collapsed and bond prices have exploded… In fact, in six months, bonds are outperforming stocks by a central-bank-credibility-crushing 70%!!! Rate cuts…not working.

And it’s not just The BoJ that is struggling – since The Fed hiked rates, The S&P is down 3.5% and Treasuries are up 16%!!

Behind the rhetoric, the EU is powerless to demand on the timeline. Moreover, guys like Juncker and Tusk are starting to fear for their cushy jobs.

• Cameron Wins Brexit Breathing Space At Gloomy EU Summit (AFP)

EU leaders gave Britain breathing space Tuesday by accepting it needed time to absorb a shock Brexit vote before triggering a divorce but insisted the crunch move could not wait months. A humiliated Prime Minister David Cameron came face-to-face with European colleagues for the first time since last week’s vote at a Brussels summit which leaders said was “sad” but pragmatic. Trillions of dollars have been wiped off world markets since Thursday’s vote to leave the EU, while the United Kingdom’s future has been thrown into doubt after Scotland said it would push for a new independence referendum. Further shockwaves juddered through British politics as Jeremy Corbyn, leader of the main opposition Labour party, vowed to fight on despite losing a crushing no-confidence vote among his party’s lawmakers.

Thousands of people took to the streets of London, which voted overwhelmingly to stay in the EU, to protest against the referendum result, waving EU flags and placards saying: “Stop Brexit”. After hours of talks in Brussels, EU President Donald Tusk said that he understood that time was needed “for the dust to settle” in Britain before the next steps can be taken. But reflecting wider concerns of a domino effect of other states wanting to leave, EC president Jean-Claude Juncker said Britain did not have “months to meditate”. He set a clear timetable for triggering Article 50, the EU treaty clause that begins the two-year withdrawal process, after Cameron’s successor takes office in early September. Juncker said that if the new prime minister was a pro-remain figure, Article 50 should be activated “in two weeks after his appointment” – but if it was a supporter of the leave campaign, “it should be done the day after his appointment,” he added.

Note how the term ‘populist’ is regurgitated by media like Bloomberg, and then applied to anyone ‘we’ are supposed to eye with suspicion. Beppe Grillo, Nigel Farage, Hugo Chavez, Podemos, there’s a long list by now, and all they have in common is resistance to ‘The Model’. Problem of course is, when used this way, a term loses its meaning. But for now, everyone takes for granted that anyone who’s a Euroskeptic is also per definition a populist.

• Draghi Wishes for a World Order Populists Will Love to Hate (BBG)

Mario Draghi has just pushed the boundaries of central banking further into the realm of globalization, at a time when globalization is on the run. Following the work of Reserve Bank of India Raghuram Rajan and others, the ECB president on Tuesday became the most senior global central banker so far to call for more explicit policy cooperation between jurisdictions. Draghi’s aim is to mitigate the damaging cross-border side-effects brought on by the combination of monetary activism and tighter global financial links. “We have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions,” Draghi said at the ECB’s annual policy forum in Sintra, Portugal. “In a globalized world, the global policy mix matters.”

While Draghi made no explicit reference in the speech to the U.K.’s June 23 decision to quit the EU, a powerful rejection by voters of globalization, he told European leaders just hours later that he leans toward the more pessimistic forecasts of the impact of Britain’s vote on growth in the rest of the region, according to a document obtained by Bloomberg News. [..] Policy coordination is a laudable thought as long as it’s not taken too far, said Omair Sharif at Societe Generale in New York. “What he’s getting at is simply the idea that we don’t have a great understanding of all the financial linkages and capital flows,” Sharif said. “That certainly does call for better understanding among central banks, not necessarily coordinated policies.”

It was all borrowed growth anyway. And you can’t borrow growth.

• Exposure Of Asian Economies To UK Banks Will Cause Sharp Slowdown (SCMP)

Asian economies may slow down sharply and currencies may be pushed broadly lower as the Brexit contagion hits Asia, with Hong Kong likely to fall into a recession and the Chinese yuan to decline further, according to analysts. Britain’s dramatic decision to break from the European Union has roiled financial markets and sent shockwaves across the globe. Asian economies could soon feel deeper pains through several channels, including the financial sector, trade, investor confidence, and investor psychology, according to analysts from Nomura on Tuesday. “It’s not a temporary contagion. There are going to be several waves [on Asia],” said Rob Subbaraman at Nomura in a conference call.

Subbaraman said his team had slashed GDP growth forecasts for all major economies in the region and put Asia’s aggregate growth at 5.6% in 2016, down from a previous projection of 5.9%. In the region, Hong Kong may be hit the most, with its 2016 GDP likely to shrink by 0.2%, compared with a previous estimate of 0.8% growth. In 2015, Hong Kong’s economy grew by 2.4%. Singapore’s projected growth rate for 2016 was also cut sharply to 1.1%, versus an estimate of 1.8% previously. “Hong Kong and Singapore are both financial hubs and very exposed to UK banks,” said Subbaraman. “They also have managed exchange rates, which give central banks less leeway in rate policy. There is also a risk that the HIBOR (Hong Kong Interbank Offered Rate) rates could start rising.”

In particular, the reasons that they forecast an “outright recession” for the Hong Kong economy are mainly related to a stronger Hong Kong dollar, which is rising with the US dollar amid global risk aversion. Hong Kong’s reliance on exports also leaves it exposed to Brexit risks, as the city’s merchant exports to the UK and the rest of the EU accounted for 14% of GDP in 2015, the highest in Asia, Nomura analysts said.

More currency wars with more twist.

• Japan Inc.’s Yen Nightmare Looms at Large Exporters (BBG)

For a sense of how much the surging yen will hurt Japanese earnings, look at the gap between where companies expected the currency to trade and where it actually is. On average, large manufacturers calculated their earnings forecasts assuming the yen would be about 114 per dollar, based on data from the Bank of Japan. With the yen’s latest rally, the gap with that forecast is the widest since the global financial crisis in 2008.

Cities won’t be happy with this. Parking tickets are a large source of income.

• Robot Lawyer Overturns 160,000 Parking Tickets In London And New York (G.)

An artificial-intelligence lawyer chatbot has successfully contested 160,000 parking tickets across London and New York for free, showing that chatbots can actually be useful. Dubbed as “the world’s first robot lawyer” by its 19-year-old creator, London-born second-year Stanford University student Joshua Browder, DoNotPay helps users contest parking tickets in an easy to use chat-like interface. The program first works out whether an appeal is possible through a series of simple questions, such as were there clearly visible parking signs, and then guides users through the appeals process.

The results speak for themselves. In the 21 months since the free service was launched in London and now New York, DoNotPay has taken on 250,000 cases and won 160,000, giving it a success rate of 64% appealing over $4m of parking tickets. “I think the people getting parking tickets are the most vulnerable in society. These people aren’t looking to break the law. I think they’re being exploited as a revenue source by the local government,” Browder told Venture Beat. The bot was created by the self-taught coder after receiving 30 parking tickets at the age of 18 in and around London. The process for appealing the fines is relatively formulaic and perfectly suits AI, which is able to quickly drill down and give the appropriate advice without charging lawyers fees.

Shilling’s not had his strongest year so far, but duly noted.

• Oil Is Still Heading to $10 a Barrel (A. Gary Shilling)

Back in February 2015, the price of West Texas Intermediate stood at about $52 per barrel, half of its 2014 peak. I argued then that a renewed decline was coming that could drive it below $20, a scenario regarded by oil bulls as unthinkable. But prices did fall further, dropping all the way to a low of $26 in February. Since then, crude rallied to spend several weeks flirting with $50 per barrel, a level not seen since last year. But it won’t last; I’m sticking to my call for prices to decline anew to $10 to $20 per barrel. Recent gains have little to do with the fundamentals that led to the collapse in the first place.

Wildfires in the oil-sands region in Canada, output cuts in Nigeria and Venezuela due to political unrest, and hopes that American hfracking would run out of steam are the primary causes of the recent spurt. But the world continues to be awash in crude, and American frackers have replaced the OPEC as the world’s swing producers. The once-feared oil cartel is, to my mind, pretty much finished as an effective price enforcer. Even OPEC’s leader, Saudi Arabia, is acknowledging the new reality by quashing recent attempts to freeze output, borrowing from banks and preparing to sell a stake in its Aramco oil company as it tries to find new sources of non-oil revenue.

The Saudis and their Persian Gulf allies continue to play a desperate game of chicken with other major oil producers. Cartels exist to keep prices above equilibrium, which encourages cheating as cartel members exceed their allotted output and other producers take advantage of inflated prices. So the role of the cartel leader, in this case Saudi Arabia, is to cut its own output, neutralizing the cheaters to keep prices up. But the Saudis suffered market-share losses from their previous production cuts. OPEC has effectively abandoned restraints, with total output soaring to as high as 33 million barrels per day at the end of last year:

“..a zombie holding a bag of dog-shit is like unto the end of the world..”

• A Zombie Is A Terrible Thing To Behold (Jim Kunstler)

The politics of Great Britain are now falling apart landslide-style. Since just about everybody in or near power can be blamed for the national predicament, there’s nobody to turn to, at least not yet. The Labour party just acted out The Caine Mutiny, starring Jeremy Corbyn as Captain Queeg. The Tory Cameron gave three months notice without any plausible replacement in view. Now Cameron’s people are hinting in the media that they can just drag their feet on Brexit, that is, not do anything to enable it from actually happening for a while. Of course, that’s what the monkeyshines of banking and finance have done: postponed the inevitable reckoning with the realities of our time: growing resource scarcity, population overshoot, climate change, ecological holocaust, and the diminishing returns of technology.

Britain illustrates the problem nicely: how to produce “wealth” without producing wealth. It’s called “the City,” their name for the little district of London that is their Wall Street. In the absence of producing real things, the City became the driver of the UK’s economy, a ghastly parasitical organism that functioned as the central transfer station for the world’s swindles and frauds, churning the West’s dwindling residual capital into a slurry of fees, commissions, arbitrages, rigged casino bets, and rip-offs. In the process, it enabled the ECB to run the con-job that the EU became, with the fatal distortions of credit that have put its members into a ditch and sent the private European banks off a cliff, Thelma and Louise style.

The next stage of this protean global melodrama is what happens when currencies and interest rates become completely unglued from their assigned roles as patsies in financial racketeering. Sooner or later we’ll know what’s going on in the vast shadowy gloaming of “derivatives,” especially the “innovative” arrangements that affect to be “insurance” against losses in currency and interest rate “positions” — bets made on the movements of these things. When currencies rise or fall quickly, these so-called “swaps” are “triggered,” and then some hapless institution is left holding a big bag of dog-shit. A zombie is a terrible thing to behold, but a zombie holding a bag of dog-shit is like unto the end of the world.

Dmitry uses the same definition of fascism I did the other day. More people should, because it tells you who the real fascists are.

• Elites, ‘You’re Fired!’ (Dmitry Orlov)

• Patriotism is one’s love of one’s native land and people. It is a natural, organic result of growing up in a certain place among a certain people, who have also grown up there, and who pass along a cultural and linguistic legacy that they all love and cherish. This does not imply that those not of one’s family, neighborhood or region are in any way inferior, but they are not one’s own, and one loves them less.

• Nationalism is a synthetic product generated using public education and is centered around certain hollow symbols: a flag, an anthem, some yellowed pieces of paper, a few creation myths and so on. It is supported by certain rituals (parades, speeches, handing out of medals) that comprise a civic cult. The purpose of nationalism is to support the nation-state. Where nationalism serves the needs of one’s native land and people, nationalism and patriotism become aligned; when it destroys them, nationalism becomes the enemy and patriots form partisan movements, rise up and destroy the nation-state.

• Fascism is the perfect melding of the nation-state and corporations, in the course of which the distinction between public and private interests becomes erased and corporations come to dictate public policy. An almost perfect expression of fascism is the recent transatlantic and transpacific trade agreements negotiated in secret by the Obama administration, which at the moment, to everyone’s great relief, seem to be dead in the water.

It should be obvious that fascism has to be defeated, and if we were to pick just one perfectly good reason to fire the transatlantic elites then it is to thwart this corporate power grab. But it does not stop there, because nationalism and patriotism are also in play. Patriotism is a natural, core human value without which all you have is a rootless population shifting about opportunistically. Nationalism is a relatively recent innovation (nation-states are a 17th century invention) and as such a dangerous one, but in the case of some of the older and more successful nation-states it does provide significant benefits: a cherished cultural tradition anchored to a national language and literature, the ability to keep the peace and to repel outside aggression. And then there is the EU, with its flag depicting a constellation of stars that are obviously orbiting something—something that could only be a black hole, since it is invisible.

Bit by bit, Brexit gets defined in its real perspective. Bernie Sanders needs numbers too much to make his case, but the case is obvious.

• The World Is Rejecting Globalization (Bernie Sanders)

Surprise, surprise. Workers in Britain, many of whom have seen a decline in their standard of living while the very rich in their country have become much richer, have turned their backs on the EU and a globalized economy that is failing them and their children. And it’s not just the British who are suffering. That increasingly globalized economy, established and maintained by the world’s economic elite, is failing people everywhere. Incredibly, the wealthiest 62 people on this planet own as much wealth as the bottom half of the world’s population — around 3.6 billion people. The top 1% now owns more wealth than the whole of the bottom 99%. The very, very rich enjoy unimaginable luxury while billions of people endure abject poverty, unemployment, and inadequate health care, education, housing and drinking water.

Could this rejection of the current form of the global economy happen in the United States? You bet it could. During my campaign for the Democratic presidential nomination, I’ve visited 46 states. What I saw and heard on too many occasions were painful realities that the political and media establishment fail even to recognize. In the last 15 years, nearly 60,000 factories in this country have closed, and more than 4.8 million well-paid manufacturing jobs have disappeared. Much of this is related to disastrous trade agreements that encourage corporations to move to low-wage countries. Despite major increases in productivity, the median male worker in America today is making $726 dollars less than he did in 1973, while the median female worker is making $1,154 less than she did in 2007, after adjusting for inflation.

Nearly 47 million Americans live in poverty. An estimated 28 million have no health insurance, while many others are underinsured. Millions of people are struggling with outrageous levels of student debt. For perhaps the first time in modern history, our younger generation will probably have a lower standard of living than their parents. Frighteningly, millions of poorly educated Americans will have a shorter life span than the previous generation as they succumb to despair, drugs and alcohol. Meanwhile, in our country the top one-tenth of 1% now owns almost as much wealth as the bottom 90%. 58% of all new income is going to the top 1%. Wall Street and billionaires, through their “super PACs,” are able to buy elections.

This makes it look like Rutte plays hardball, or almost. In reality, he’s looking for ways to disregard the outcome of the Dutch referendum. Already, while the applicable law says that the outcome should be implemented by the government as soon as possible, Rutte just keeps pushing it forward. After July 1, when Holland is no longer chair of the EU, pressure will rise on both sides. But if Rutte tries to sign the Ukraine deal despite the referendum, ‘binding assurances’ or not, he should be voted out of office ASAP. The Dutch people said NO, and Rutte can‘t turn that into a YES.

• Dutch PM Rutte Wants ‘Binding’ Assurances Over EU’s Ukraine Deal (R.)

Dutch Prime Minister Mark Rutte asked European Union leaders on Tuesday for “legally binding” assurances to address his country’s concerns over a trade and association deal with Ukraine and said The Hague would block it otherwise. The Netherlands is the only EU state not to have ratified the bloc’s agreement on closer political, security and trade ties with Kiev following a referendum in April in which the Dutch voted overwhelmingly to reject it. The agreement with Kiev, reached after Russia annexed Crimea from Ukraine in March 2014 and then backed rebels fighting government troops in the east of the country, is being provisionally implemented now, but its future hinges on the Netherlands.

“What we need is a legally binding solution, which will address the many worries and elements of the discussion in the Netherlands leading up to the referendum,” Rutte said after an EU leaders’ summit in Brussels to discuss the aftermath of Britain’s vote last week to leave the bloc. The debate around the referendum in the Netherlands, which showed dissatisfaction with Rutte’s government and policy-making in Brussels, zeroed in on whether the agreement with Kiev would herald EU membership for Ukraine and its 45 million people. “The exact form – I don’t know yet,” Rutte said. “It could be that we have to change the text, it could be that we can find a solution which will not involve changing the text of the association agreement. I don’t know yet.

“If I am not able to achieve that … we will not sign,” he said. “We will try to find a solution, it will be difficult, the chances are small that we will get there but I think we should try.” The whole deal could be derailed should The Hague refuse to ratify it, but a senior EU official said he hoped this could be solved by the end of the year.

Debt Rattle June 22 2016

Jun 222016

June 22, 2016 Posted by Raúl Ilargi Meijer at 8:16 am Finance Tagged with: 1930s, balance sheet, Brexit, bubble, central bankers, housing, refugees, savings 1 Response »

Harris&Ewing Painless Dentist, Washington, DC 1918

• Nervy Global Investors Revisit 1930s Playbook (R.)

• Fed Warns of Commercial Real Estate Bubble (BBG)

• Federal Reserve Says US Stocks Have Gotten Expensive (MW)

• Amsterdam Housing Market Is Overheating (BBG)

• ECB Balance Sheet Hits Record High -With Stocks At 18-Month Lows- (ZH)

• Some 66 Million Americans Have ‘Zero’ Emergency Savings (MW)

• Increase In Refugees Reaching Aegean Islands Fuels Concern (Kath.)

Not a bad article, but it is really simple. 1) Centralization stops when growth does, 2) The only thing that’s really been growing for years is debt, and 3) You can’t borrow or buy growth.

• Nervy Global Investors Revisit 1930s Playbook (R.)

Global investors are once again dusting off studies of the 1930s as fears of protectionism, nationalism and a retreat of globalization, sharpened by this week’s Brexit referendum, escalate anew. With markets on tenterhooks over Thursday’s “too close to call” vote on Britain’s future in the EU, the damage an exit vote would deal business activity and world commerce is amplified by the precarious state of the global economy and its inability to absorb any left-field political shocks. As such, the Brexit vote will not be an open-and-shut case regardless of the outcome. Broader worries about global trade, frail growth and dwindling investment returns have festered since the banking shock of 2007/08 and have mounted this year.

Stalling trade growth has already led the world economy to the brink of recession for the second time in a decade, with growth now hovering just above the 2.0-2.5% level most economists say is needed to keep per capita world output stable. Three-month averages for growth of world trade volumes through March this year have turned negative compared with the prior three months, according to the Dutch government statistics body widely cited as the arbiter of global trade data. And it’s not a seasonal blip. Last year saw the biggest drop in imports and exports since 2009 and their average annual growth of 3% over the intervening seven years was itself half that of the 25 years before, according to Swiss asset manager Pictet. 2016 is set to be the fifth sub-par year in row.

A study published by the Centre For Economic Policy Research shows this paltry pace of trade growth is also below the 4.2% average for the past 200 years. Foreign direct investment growth of 2% of world output is also at its lowest since the 1990s, while the hangover from the credit crunch has seen annual growth rates in cross-border bank lending grind to a halt from some 10% in the decade to 2008.

First you blow a bubble, then you warn against it. Without using the term ‘bubble’, of course.

• Fed Warns of Commercial Real Estate Bubble (BBG)

The Federal Reserve warned that prices in the commercial real-estate market may have run up too far too fast. Valuations in commercial real estate “appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income,” the Fed said in its semiannual Monetary Policy Report to Congress. The Fed noted that prices exceed their pre-crisis peaks by some measures. The Fed included a special section on financial stability risks in the report, which accompanies Chair Janet Yellen’s testimony. The report said that even given “moderate’’ financial vulnerabilities, risks of external shocks, such as the U.K.’s possible exit from the European Union, pose stability risks. The report also highlighted issues related to credit exposures to the energy sector, money-market mutual funds and stock valuations.

The central bank said price-to-earnings ratios on a forward-looking basis for stocks have increased to a level “well above” their median for the past 30 years. “Although equity valuations do not appear to be rich relative to Treasury yields, equity prices are vulnerable to rises in term premiums to more normal levels, especially if a reversion was not motivated by positive news about economic growth,” the Fed said. The Fed said “some structural vulnerabilities are expected to persist” in money-market mutual funds even after Securities and Exchange Commission reforms go fully into effect in October. “Leverage for the non-financial corporate sector has stayed elevated and indicators of corporate credit quality, though still solid overall, continued to show signs of deterioration for lower-rated firms, especially in the energy sector,” the Fed said in its report. Strong U.S. bank capital positions contributed to the resilience of the financial system, the Fed said.

Real estate bubble, stocks bubble: the Fed ia aware of all.

• Federal Reserve Says US Stocks Have Gotten Expensive (MW)

Even the Federal Reserve is weighing in on valuations in the U.S. stock market. In its monetary policy report submitted to the Congress ahead of Federal Reserve Chairwoman Janet Yellen’s testimony, the central bank acknowledges that stock values have grown somewhat richer since the beginning of 2016. Here’s how they put it: “Forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades. Although equity valuations do not appear to be rich relative to Treasury yields, equity prices are vulnerable to rises in term premiums to more normal levels, especially if a reversion was not motivated by positive news about economic growth.”

The S&P 500 closed higher Tuesday, up 0.3% at 2,088 and it appears investors are shrugging off both the testimony and the report on valuations. Of course, not everyone views the Fed as an authority on stock values and some analysts and traders disagree with the notion that equities have gotten pricey. “No one looks to the Fed as a chief market strategist and markets have their own dynamics on valuing stocks,” said Quincy Krosby at Prudential Financial. In Crosby’s opinion “stocks are fully valued at these levels.” She says “what investors want to hear is whether companies’ earnings will start improving. Whether the Fed decides that stocks are undervalued or overvalued does not have an impact on prices.”

Wall Street tends to turn to the U.S. central bank for clues about the pace of interest-rate increases, the health of the labor market and to get a gauge on inflation. It’s rare that it offers specifics on sectors or assets but it isn’t totally unprecedented. Back in 2014, Yellen said valuations for technology stocks were stretched in her congressional testimony, resulting in a selloff in social-media names, which were booming at the time. Going back to mid-1990s, former Fed Chairman Alan Greenspan sounded the alarm on tech stocks too. But his famous “irrational exuberance” comments didn’t pop the tech bubble when he delivered them in 1996. It would take another four years before the air rushed out.

The perversity of low rates.

• Amsterdam Housing Market Is Overheating (BBG)

It’s getting hot in the Amsterdam property market. The Netherlands, the nation of tulipmania almost 400 years ago, saw prices in its capital city surge almost 21% in the first quarter. While the blame partly falls on a simple supply-and-demand imbalance, the signs are pointing to a potential squeeze. In London, by comparison, government data show prices rose about 14% from a year earlier, according to Savills Plc. In a market where almost half of properties are owned by non-profit corporations, mainly for social housing, there’s just not enough coming on to the market to satisfy buyers. After falling about 14% in five years, prices have rebounded recently and are now above pre-crisis levels.

“The Amsterdam housing market shows signs of overheating,” said Frans Schilder, who studies housing policy in the economics department at the University of Amsterdam. “The prices are absurd but I don’t expect them to fall in the near future.” Any houses coming up for sale in the Amsterdam region are scooped up immediately. The supply shortage is a hangover from the financial crisis, which restrained new building and led to more families choosing to remain in the city, as it was harder to sell properties at a profit. In the first quarter of 2016, all houses that came on the market were sold, nearly half for more than the asking price. The asking price for an average house rose 5% from a month ago in May while it was up 26% from a year earlier, the Dutch bureau of statistics said Tuesday.

Imbalance sheet.

• ECB Balance Sheet Hits Record High -With Stocks At 18-Month Lows- (ZH)

Draghi, we have a problem.

The European Central Bank's balance sheet has reached a new record high this week – surpassing the chaotic expansion peak in 2012 – as Mario Draghi prepares to unleash TLTRO-II, which will definitely increase this time (just like LTRO and NIRP didn't!)

"Fool me once" in 2011/12 but not in 2015/16.

Given the utter failure to create any 'real' economic gains via the expansion of the ECB balance sheet, the plunge in stock prices (and thus crushing the trickle-down wealth-creation mandate) leaves Draghi in the same boat as Yellen – utterly impotent.

Which is ironic because this is what Draghi just said…

*DRAGHI SAYS ECB ACTION PUT RECOVERY ON MORE SOLID FOOTING

*DRAGHI SAYS GROWTH, INFLATION WOULD BE LOWER WITHOUT ECB ACTION

Though we'll never know, can you imagine just how bad things are in reality?

Excuse me? “Accumulating emergency savings requires establishing the habit.”

• Some 66 Million Americans Have ‘Zero’ Emergency Savings (MW)

Around 28% of U.S. adults have saved “zero dollars” for an emergency, according to a survey released Tuesday of 1,000 U.S. adults by personal savings website Bankrate.com carried out by Princeton Survey Research Associates International, a polling firm. When extrapolated for the entire 234.6 million U.S. adult population, that’s equivalent to 66 million people. That’s down from 29% last year, but up from 24% in five years ago. Another 28% of adults have saved enough money to last six months, up from 22% from last year and a six-year high; 18% had some emergency savings, but not enough for six months. Generation Xers are in the worst position of all generations: 33% of 36- to 51-year-olds haven’t saved anything for an emergency.

Millions of Americans are struggling with student loans, medical bills and other debts, experts say, and although Central bankers hiked their short-term interest rate target last December to a range of 0.25% to 0.50% from near-zero, that’s still a small return for savings left in bank accounts. Many investors are behaving like another imminent rate hike is highly unlikely, MarketWatch columnist Jeff Reeves wrote this month. “Expenses grow faster than many Americans can save during the home-buying, family-raising years,” says Greg McBride, chief financial analyst at Bankrate.com. “Accumulating emergency savings requires establishing the habit.”

Slowly going very wrong – again.

• Increase In Refugees Reaching Aegean Islands Fuels Concern (Kath.)

The influx of would-be migrants into Greece from neighboring Turkey is decisively on the increase following several months during which the flow had been staunched thanks to a European Union deal with Ankara to crack down on people smuggling. Over the long weekend, 270 migrants arrived on Greek islands in the eastern Aegean while arrivals in the first 20 days of June came to 981. The renewed influx is putting increased pressure on reception facilities on the islands, which according to local authorities are already full. Meanwhile, Greek committees are continuing to process hundreds of asylum applications. Greek authorities have rejected dozens of these applications, of which 70 were upheld by appeal committees that ruled Turkey is an “unsafe country” to send migrants back to.

In an apparent bid to curb the number of rulings upholding appeals, the government passed a legislative amendment last week which removes the representative of the Hellenic League for Human Rights from the appeal committees, which feature two judges and a representative of the United Nations refugee agency. The HLHR rapped the government for changing the composition of the committees instead of applying pressure to ensure that Turkey becomes a safe country to make migrant returns viable. In a related development the UN revealed on Tuesday that the number of people displaced from their homes due to conflict and persecution last year exceeded 60 million for the first time since the organization was founded in 1945.

Debt Rattle June 21 2016

Jun 212016

June 21, 2016 Posted by Raúl Ilargi Meijer at 9:03 am Finance Tagged with: Abenomics, blackouts, Brexit, central bankers, Rothschild, Soros, whistleblower, yuan 3 Responses »

NPC District National Bank, Dupont branch, Washington, DC 1924

• The Big Guns Are Out: Soros, Rothschild Warn Of Brexit Doom (ZH)

• When Brexit Has Come And Gone, The Real Problems Will Remain (ZH)

• IMF Calls On Japan To ‘Reload’ Abenomics (Nikkei)

• India’s Rockstar Central Banker Defeated As Modi Revolution Stalls (AEP)

• Yellen Makes ‘Uncertainty’ New Mantra (R.)

• “Whatever It Takes” Wasn’t Enough (Noland)

• The World’s Newest “Reserve” Currency Is Anything But (Balding)

• China’s Developers Can’t Stop Overpaying for Property (WSJ)

• China’s ‘Land Kings’ Return as Housing Prices Rise (WSJ)

• California Power Grid Prepares For Heatwave, Power Outages (R.)

• Australia Whistleblower Loses Job After Speaking Out On Refugee Camps (G.)

Vested interests at stake.

• The Big Guns Are Out: Soros, Rothschild Warn Of Brexit Doom (ZH)

Just yesterday, we recounted the story of “Black Wednesday” when on September 16, 1992, the UK was forced out of the EU’s exchange-rate mechanism, or ERM, when the BOE tapped out and allowed the British pound to float freely, leading to 15% losses in the sterling. As we noted, this was George Soros’ infamous trade which “broke the Bank of England” and made the Hungarian richer by over $1.5 bilion. 24 years later Soros is back, and this time he is warning against the kind of devaluation that made him a billionaire and which he believes will be unleashed by Brexit, when in a Guardian Op-Ed he wrote that U.K. voters are “grossly underestimating” the true costs of a vote to leave the EU, saying that there would be an “immediate and dramatic impact on financial markets, investment, prices and jobs.”

[..] It is notable that Soros’ warning comes just days after that of Jacob Rothschild himself who said in another Op-Ed, this time for The Times, that leaving the EU could lead to a “damaging and disorderly situation” in the UK as he urged Britons to vote ‘remain’. Just like Soros, Lord Rothschild, suddenly exhibiting a rare strain of humanitarian concern, said readers should not “risk the wellbeing of our country”and European countries are “better off together”. He said that “at present we enjoy being a permanent member of the UN security council and we are essential to the G8 and Commonwealth. But diplomacy, defence, the environment and our values of being a liberal democracy will all be at risk” adding that “I can see no good reason why we should accept our playing a diminished role on the world stage,” especially if his own personal fortune would be jeopardized.

Finally, completing the doom loop, was none other than Chancellor George Osborne who, according to the Telegraph, “refused to rule out suspending trading on the London stock market if Britons vote to leave the EU on Friday morning… The threat from the Chancellor, made in an LBC radio interview on Monday evening, after the market had closed could force shares down in London as early as Tuesday morning.”

Everyone’s broke.

• When Brexit Has Come And Gone, The Real Problems Will Remain (ZH)

In a few days, Brexit will come and go, and just a few days later it will be forgotten, as either outcome will be far less dramatic than has been widely predicted by the same fearmongering economist pundits who have been wrong about everything else for the past 8 years. Ironically, the better outcome for the market is precisely a Brexit as the panic selloff will prompt central banks around the globe to boost enough monetary stimulus to send risk assets to new all time highs. What will remain, however, are the real problems. Here is SocGen with a useful reminder of just what those are, and why the market may have already forgotten that just one week ago the Fed threw in the towel when addressing precisely these problems. From SocGen’s Andrew Lapthone:

“Global equity markets continued to struggle last week, with the MSCI World index off 1.8% pushing the index back into red for the year. Big losses were seen in Japan with the Topix 500 down 6% and the volatile Mothers index crashing 18.5% over the week as the yen continued to strengthen. According to the BOE measure, the trade-weighted yen is now up more than 20% over the past year and back to where it stood three years ago. In the battle for the weakest currency, Japan looks to have thrown in the towel.

Whatever the outcome of the Brexit vote this week investors will still be facing the prospect of negative rates and negative yields on a huge range of bonds, massive corporate leverage with worryingly rising delinquencies and of course expensive equity markets and falling profits. To that extent these political events are a distraction from the main event, weak global economic growth and perverse asset markets. So whilst the market preference for the status quo might be celebrated in the short-term, actually when the fog clears all of the problems will still be there.”

Forcing companies to raise wages?!

• IMF Calls On Japan To ‘Reload’ Abenomics (Nikkei)

Japan needs bolder income policies such as penalizing profitable companies that do not increase wages, the IMF said on Monday after concluding its annual economic assessment of the country. Despite initial success, progress under Abenomics, Prime Minister Shinzo Abe’s trademark economic policies, has stalled in recent months. The inflation rate has dropped to negative territory again, while economic growth has remained anemic.The IMF now expects Japan’s economy to grow by about 0.5% in 2016, before slowing to 0.3% in 2017, with potential growth sliding to close to zero by 2030, due to the declining demographic. “Abenomics needs to be reloaded,” the IMF said in its report and argued that income policies combined with labor market reforms should “move to the forefront” of the country’s fight against lagging growth.

“The government can introduce a ‘comply or explain’ mechanism for profitable companies to ensure that they raise base wages by at least 3% and back this up by stronger tax incentives or – as a last resort – penalties,” the IMF wrote. Promoting intermediate contracts that balance job security and wage increases will “reinforce income policies,” it added. “Our perception is that much of the stasis of inflation [in Japan] comes from the legacy, the history of having negative inflation,” said David Lipton, first deputy managing director at the IMF, in a press conference in Tokyo. “Certainly firms have at this point the cash flow and resource at hand to provide some wage increases. There are wage increases evident in a wide range of companies across this economy, so our thought is to suggest that this be a broader practice and that it be more uniform.”

“..Mr Rajan has been an acerbic critic of zero rates and quantitative easing by the western central banks…”

• India’s Rockstar Central Banker Defeated As Modi Revolution Stalls (AEP)

India’s bid to become the ‘economic super-tiger’ of Asia is in serious doubt after an assault on the independence of the central bank and failure to deliver on promised reforms. The country has been the darling of the emerging market universe since the Hindu nationalist Narendra Modi swept into power in May 2014 promising a blitz of Thatcherite reform and a bonfire of the diktats, but key changes have been blocked in the legislature. The government has turned increasingly populist. Matters have come to a head with the de facto ouster of Raghuram Rajan, the superstar governor of the Reserve Bank of India (RBI), rebuked for keeping monetary policy too tight. It is part of a pattern of attacks on central banks by politicians across the world, and the latest sign that the glory days of the monetary overlords are waning.

Mr Rajan has been battling criticism for months but threw in the towel over the weekend, sending tremors through the Indian financial markets and provoking a flurry of warnings from global investors. “He has decided not to wait until he is refused a second term,” said Lord Desai from the London School of Economics. “This is ‘Rexit’ – India’s equivalent of ‘Brexit. It looks very bad for India and will not go down well in financial markets. He was defeated by the crony capitalists up against him,” he said. The government has dampened the impact with by relaxing barriers to foreign investment in the country, but it may have underestimated the totemic status of Mr Rajan outside India. He is seen by funds as the guarantor of good practice and market integrity. Mr Rajan is a former chief economist for the IMF, famed for warning that the US subprime debt bubble was out of control long before the Lehman crisis blew up in 2008.

[..] Mr Rajan has been an acerbic critic of zero rates and quantitative easing by the western central banks. He blames them for flooding the international system with excess liquidity that emerging markets could not easily control. This fueled dangerous boom-bust asset cycles. While QE might have ‘worked’ for the US, UK, and Europe – the jury is out even for them – Mr Rajan argues that the policy is a “Pareto sub-optimal” for the world as a whole, and ultimately increases the danger of a deflation-trap in the future. The Fed and the leading central banks of the West have never really answered his critique.

I was going to say the Empress has no clothes, but I don’t want that image lingering on my retina.

• Yellen Makes ‘Uncertainty’ New Mantra (R.)

The U.S. Federal Reserve’s dwindling confidence in its own outlook and resulting confusion among investors are creating a policy problem that may require chief Janet Yellen to lay out her own views more forcefully. The Fed chair’s next communications test comes on Tuesday and Wednesday during her semi-annual testimony to U.S. lawmakers, less than a week after the central bank kept interest rates unchanged near record lows and lowered its projections for hikes in 2017 and 2018. A self-described consensus builder, Yellen sees her job as reflecting the whole committee’s views rather than setting an agenda for others to follow.

“I think that’s a very laudable intent, but sometimes that produces a lack of clarity,” said former Fed staffer and current partner at Cornerstone Macro LLC Roberto Perli. “Sometimes there is a consensus for one reason and then next time there is a consensus for a different reason so the story shifts and people get confused.” In fact, Fed policymakers’ deepening uncertainty about their own projections has resulted in the central bank sending mixed messages – repeatedly ratcheting up rate hike expectations only to tone them down later.

Important point: “Whatever it takes” was orchestrated specifically to expel any market doubt with regard to the viability and sustainability of European monetary integration.

• “Whatever It Takes” Wasn’t Enough (Noland)

Back in 2012, Mario Draghi recognized how even the notion that a country might exit the euro could unleash market dynamics that would rather quickly place Europe’s markets and banking system in peril. “Whatever it takes” was orchestrated specifically to expel any market doubt with regard to the viability and sustainability of European monetary integration. On the back of a wall of liquidity and inflating securities markets, Draghi’s gambit held things together for a few years. That said, the ECB bet the ranch – and was compelled to ante up in response to market instability early this year. The outcome of the game is very much in doubt. While Britain is not even a member of the euro, Brexit provides a test of ECB policymaking. Is Europe robust or fragile?

Has relative financial stability been nothing more than a brittle ECB-fabricated façade? Are the forces mounted against integration and cooperation too powerful to disregard? Is European integration – along with the euro currency – viable long-term? It’s an untimely test, with confidence in Europe’s banks already waning. It’s furthermore an untimely test because of faltering confidence in the ECB and contemporary global central banking more generally. Global market instability has again resurfaced and there will be no resolution next week. The FOMC has confounded Fed watchers with its abrupt pivot back to ultra-dovishness. There shouldn’t be much confusion. Global market fragility has reemerged, and the Fed’s rapid retreat has confirmed the seriousness of what’s unfolding.

Central banks have thrown everything at the problem, yet markets remain as vulnerable as ever. At least the world was not facing the downside of China’s historic Credit Bubble back in 2012. The Fed has never admitted that global concerns have been dictating U.S. monetary policy since 2012. It has now become clear, throwing the analysis of policymaking into disarray. The harsh reality is also increasingly apparent: global monetary management is dysfunctional and central bankers have become perplexed – without a backup plan. Such an uncertain backdrop is pro-currency market instability and pro-de-risking/deleveraging.

Nobody has a reason to use the yuan.

• The World’s Newest “Reserve” Currency Is Anything But (Balding)

Last week’s decision by MSCI not to include Chinese shares in its primary emerging-markets stock index has been viewed – widely and rightly – as a blow to China’s hopes of internationalizing its financial sector. There’s worse news, though: Even the progress China’s made thus far is in danger of going into reverse. MSCI’s choice is a sharp contrast to the one made by the IMF last December, when it promised to begin including the Chinese yuan in its basket of “special drawing rights.” The move essentially conferred global reserve status on the currency, despite the fact that China arguably didn’t meet the conditions for inclusion: It was debatable whether the yuan could be considered “freely usable,” and in any case, it was hardly used. At its peak in August 2015, the yuan accounted for 2.79% of global payments, compared to 44.8% for the U.S. dollar.

The idea was that compromising now would encourage leaders in China to fulfill their pledges to liberalize the yuan fully by 2020. In fact, since the IMF’s decision, the yuan has if anything grown less international, not more. Since March 2015, yuan deposits in the three largest offshore centers – Hong Kong, Taiwan and Singapore – have fallen 16%, to a total of 1.24 trillion yuan or about $188 billion. The currency is being used in even fewer international transactions than before: Its share of global payments stood at 1.82% in April 2016. The fact that only a quarter of those international payments included a partner other than China or Hong Kong means that only about 0.5% of all yuan transactions are truly international in scope. This places the currency somewhere between those of Scandinavian powerhouses Norway and Denmark.

Absolutely completely madness. The casino keeps adding new slot machines and crap tables.

• China’s Developers Can’t Stop Overpaying for Property (WSJ)

If the cost of flour is higher than the price of bread, what should a baker do? Chinese property developers are choosing to buy more flour. Prices for land, the main ingredient of the property world, have hit record highs in auctions this year in many Chinese cities. The average land price per square meter for the top 100 cities in the first five months of this year jumped nearly 50% from the same period last year, according to Wind Information. Some land prices are even higher than housing prices nearby.

State-owned developer Poly Real Estate, for instance, bought a piece of land in a Shanghai suburb for 5.5 billion yuan ($835.5 million) last month. This translates to roughly 44,000 yuan per square meter of buildable space. Houses in the region meanwhile go for around 40,000 yuan per square meter. After taking into account construction costs, taxes and other expenses, property prices would have to nearly double for the developer to make money. Prime land in the biggest cities always costs a lot, but increasingly the voracious buyers are showing up in less prime locations and smaller cities. In Suzhou, a city near Shanghai, with a population of 1.1 million, land sales in the first five months of this year have already exceeded the total of last year. And average prices have doubled.

It’s the same they do with raw materials: “..After winning an auction, financial firms with access to cheap funding can apply for a loan with the land as collateral..”

• China’s ‘Land Kings’ Return as Housing Prices Rise (WSJ)

The “land kings” are back. That had been a nickname for Chinese developers paying sky-high prices for land parcels during China’s property boom earlier this decade, which left so-called ghost cities of unsold housing across China. Now, with housing prices in China’s larger cities again rising rapidly, frothy bids for land parcels are back. On June 8, Logan Property Holdings agreed to pay 14.1 billion yuan ($2.14 billion) for a piece of land in Shenzhen’s Guangming district, the largest-ever price tag in the southern Chinese city. Logan says it didn’t overpay, calling the price “relatively favorable” in a hot market. Earlier in June, a joint venture between two firms, one of which is backed by state-owned Power Construction Corp. of China, outbid 17 rivals with an 8.3 billion yuan offer for a plot in Shenzhen’s Longhua district.

The soaring land prices show the challenges facing the government as it tries to prevent property bubbles. Moves to stimulate China’s slowing economy and to trim excess housing in smaller cities across the country—such as interest-rate cuts and eased mortgage rules—have fed into speculative demand for homes in top-tier cities that are now scrambling to cool prices. Average housing prices in 70 Chinese cities were about 5% higher in May than a year earlier, the fifth straight month of increases. In top-tier cities, prices were up 19% to 53%. But land prices are shooting up not just in Shenzhen, Shanghai and Beijing, but also in lower-profile cities such as Hangzhou, Hefei and Zhengzhou. Officials face a dilemma in trying to tame land prices: Land is commonly used as debt collateral; a sharp drop in valuation could trigger defaults and produce a wave of bad loans, hurting the economy. On the other hand, runaway land prices make it harder for ordinary Chinese to afford apartments.

[..] There is also concern that financial firms with little experience as builders are viewing land as an opportunity for arbitrage. After winning an auction, financial firms with access to cheap funding can apply for a loan with the land as collateral, and use that to extend a construction loan at a higher rate to a partner, which is typically a property developer.

“Like an oil lease, you’re easily disposable..”

“Like an oil lease, you’re easily disposable,” the villainous J.R. Ewing quipped to his beauty queen wife in the 1970s television series Dallas. Readers of the latest edition of the Federal Reserve Bank of Dallas’s quarterly southwest economy publication might want to keep that quote in mind. News from the oil patch — the 11th Fed district that encompasses the shale heartland — is not encouraging, as it reveals a sharper rise in souring energy-related loans. “The persistence of relatively low oil prices has begun taking a toll on district bank customers,” the Dallas Fed said in its report.

“Oil-price hedges become less effective the longer prices stay low, and the cushion built by energy firms during the good times gets thinner. Cash flow becomes stretched and collateral loses its value, further pressuring borrowers.” That forces them closer to default unless banks are able to keep their lending spigots open. Many of these loans fall under the umbrella of commercial and industrial (C&I) lending — a category which has been surging in conjunction with commercial real estate (CRE) lending in recent years. While regulators have kept a somewhat lazy eye on rising CRE loans since even before the 2008 financial crisis (and certainly after it), the boom in C&I lending has been met with far less scrutiny — resulting in charts which look like this:

“..millions of electric customers in Southern California were warned they could suffer power outages of up to 14 days this summer..”

• California Power Grid Prepares For Heatwave, Power Outages (R.)

California will have its first test of plans to keep the lights on this summer following the shutdown of the key Aliso Canyon natural gas storage facility as temperatures in the Los Angeles area are forecast to hit triple digits this week. With record-setting heat and air conditioning demand expected in Southern California, the state’s power grid operator issued a so-called “flex alert,” urging consumers to conserve energy to help prevent rotating power outages – which could occur regardless. Electricity demand is expected to rise during the unseasonable heatwave on Monday and Tuesday, with forecast system-wide use expected to top 45,000 megawatts, said the California Independent System Operator (ISO), which manages electricity flow through the state.

That compares with a peak demand of 47,358 MW last year and the all-time high of 50,270 MW set in July 2006. That could put stress on the power grid, particularly with the shut-in of Aliso Canyon, following a massive leak at the underground storage facility in October. The facility, in the San Fernando Valley, is the second largest storage field in the western United States, according to federal data, and therefore crucial for power generation. All customers, including homes, hospitals, oil refineries and airports are at risk of losing power at some point this summer because a majority of electric generating stations in California use gas as their primary fuel. In April, millions of electric customers in Southern California were warned they could suffer power outages of up to 14 days this summer due to the closure.

“The Border Force Act gives the Australian government the power to jail, for up to two years, anybody employed by the department..”

• Australia Whistleblower Loses Job After Speaking Out On Refugee Camps (G.)

The trauma specialist who condemned the treatment of asylum seekers and refugees in Australia’s offshore detention regime as the worst “atrocity” he has seen has had his contract to work on Nauru terminated. Psychologist Paul Stevenson, whom the Australian government awarded an Order of Australia for his work counselling victims of the Bali bombings, had undertaken 14 deployments to Nauru and to Manus Island in Papua New Guinea. He was due to return to Nauru on Thursday. But after he spoke publicly to the Guardian about his experiences working within Australia’s offshore detention regime – describing conditions in the camps as “demoralising … and desperate” – he was told his contract had been summarily cancelled.

PsyCare, the company through which he was employed to provide counselling to guards working in offshore detention, informed him by email his employment had been terminated. Stevenson said the news was not unexpected. “But the public needs to hear about the consequences people face for speaking out, and to understand the level they go to in minimising access.” [..] The Border Force Act gives the Australian government the power to jail, for up to two years, anybody employed by the department or its contractors who speaks publicly about conditions inside the offshore detention regime, including doctors advocating for better healthcare, or other workers exposing sexual and physical abuse of detainees.

Where Deflation Comes From

Feb 152016

February 15, 2016 Posted by Raúl Ilargi Meijer at 2:57 pm Finance Tagged with: bankers, central bankers, Darwin, deflation, Humpty Dumpty, middle class, pitchforks, poor, Steve Keen 12 Responses »

Dorothea Lange We’ll be in California yet. We’re not going back to Arkansas 1938

Financial bubbles blown on the back of massive amounts of debt, of necessity lead to debt deflation (it’s just entropy, really). Fighting this is futile, and grossly costly to boot. The only sensible thing to do is to guide the process as best you can and try to minimize the damage, especially at the bottom rungs of society, because that’s where the deflation first takes hold, and where it spreads out from.

Attempting to boost inflation, or boost demand, before letting the debt deflation run its course through restructuring and defaults (perhaps even a -partial- jubilee) leads only to -further- distortion, and -further- impoverishes society’s poorer (at some point to a large extent the former middle classes). Whose lower spending, as nary a soul seems to comprehend, is the origin of the deflation to begin with.

All the attempts by central bankers to boost inflation that we’ve seen so far squarely ignore this, and operate on the false assumption that if only prices for financial assets and real estate can be raised even higher -artificially-, deflation can be warded off.

Thing is, deflation starts not at the top, it starts at the bottom. It’s not the banks or the bankers or the well-off who are maxed out and stop spending, but the people in the street.

They are responsible for most of the spending in an economy, and therefore for the velocity with which money moves in a society. And if the velocity of money falls below a critical point, no increase in the other side of the inflation/deflation equation -the money/credit supply- can make up for the difference. There is a point where all of the King’s horses and all of the King’s central bankers can’t put Humpty Dumpty together again.

The people in the street are not just maxed out in the sense that they have no money, they have less than no money, since they’re deep in debt. An increasing part of whatever they do still have, and what they make in their ever lower paying jobs, goes toward debt payments. Yeah, that’s the giant sucking sound.

QE and other ‘plans’ like it don’t address this even in the slightest, and are necessarily failures before they even start.

Central bank stimulus measures are all exclusively targeted at the upper rungs, and therefore miss their aim entirely. Or perhaps we should say ‘alleged’ aim, since it takes quite a leap of faith to presume that all the world’s central bankers fail to understand their own field so thoroughly that all they can all come up with is failures.

However, given that they all studied the same faulty economics textbooks, we can’t rule out this possibility. It is certainly strongly suggested -once again- by Steve Keen in Our Dysfunctional Monetary System.

Rather than effective remedies, we’ve had inane policies like QE, which purport to solve the crisis by inflating asset prices when inflated asset prices were one of the symptoms of the bubble that caused the crisis. We’ve seen Central Banks pump up private bank reserves in the belief that this will encourage more bank lending when (a) there’s too much bank debt already and (b) banks physically can’t lend out reserves.

What may also play a role is that the upper rungs tend to be blind to anything outside of their own circles, that because they 1) have their hands on a nation’s wallets and 2) they see themselves as the most important segment of any given society, they elect to try and solve the problem inside their own circles -and truly believe this is feasible-.

This can of course not possibly work. Because they’re hugely outnumbered. They don’t have nearly enough influence on money flows in their societies. If they can’t sell the bottom, let’s take a number, 80%, of society sufficient produce or gasoline or homes or trinkets, the entire society seizes up the way an engine does that runs out of oil.

The top makes its fortune for a while getting the bottom ever deeper into debt, only to inevitably find that this kills off the entire economy. Then they do some more of the same, and find ever more of their own kind becoming part of the bottom.

The problem for the rich is simple: there’s not enough of them. Well, that and they don’t understand how societies function. Let alone economies. Scraps off the table won’t do the trick. Next stop pitchforks.

Any deflationary period would have been hard no matter what. Still, none would have had to lead to what we’re facing now.

But look out there at what’s happening in politics, at who’s popular in various places. It’s all geared towards more inequality, not less, like some tooth and claw Darwin version were the world’s economics teacher, wherever you look it’s all the well-off making ever surer they will remain well-off or better.

And even if you look for instance at Bernie Sanders in the US, he wants more for the bottom of society, but that seems more for sentimental or ideological reasons than a sign he actually understands why it would raise the odds of the States being a going concern going forward.

The actual Darwin could have taught us all a lesson or two three about the role of balances in ecosystems, and in human societies. But then he actually studied them. Economists, politicians and central bankers have not.

Debt Rattle April 2 2015

Apr 022015

April 2, 2015 Posted by Raúl Ilargi Meijer at 9:39 am Finance Tagged with: California, central bankers, China, coal, Cuba, Greece, Heinz, Illusion, milk, oil, prosperity, water 3 Responses »

Marion Post Wolcott Negro woman carrying laundry between Durham and Mebane, NC 1939

• The Committee To Destroy The World (Michael Lewitt)

• Our Current Illusion Of Prosperity (Mises Inst.)

• Economic Inequality: It’s Far Worse Than You Think (Scientific American)

• Burning Down The House: Land, Water & Food (Eastwood)

• The Warren Effect: Here Is A Bluff That Needs To Be Called (Esquire)

• Companies Go All-In Before Rate Hike, Issue Record Debt In Q1 (Zero Hedge)

• Shanghai Traders Make Trillion-Yuan Stock Bet With Borrowed Cash (Bloomberg)

• Greek Defiance Mounts As Alexis Tsipras Turns To Russia And China (AEP)

• Greece Threatens Default As Fresh Reform Bid Falters (Telegraph)

• China’s Fuel Demand to Peak Sooner Than Oil Giants Expect (Bloomberg)

• The Saudis Are Losing Their Lock on Asian Oil Sales (Bloomberg)

• Reckoning Arrives for Cash-Strapped Oil Firms Amid Bank Squeeze (Bloomberg)

• Appalachia Miners Wiped Out by Coal Glut That They Can’t Reverse (Bloomberg)

• World Dairy Prices Slide 10.8% On Supply Concerns (NZ Herald)

• CFTC Charges Kraft, Mondelez With Manipulating Wheat Futures (MarketWatch)

• Brazil’s Richest Man May Reap $5.6 Billion in Kraft-Heinz Merger

• The Cuban Money Crisis (Bloomberg)

• California Orders Mandatory Water Cuts Of 25% Amid Record Drought (WSJ)

Absolute must read. And then a second time.

• The Committee To Destroy The World (Michael Lewitt)

Last month, the world mourned the death of beloved actor Leonard Nimoy. Mr. Nimoy, of course, was renowned for his portrayal of the iconic character Mr. Spock on the 1960s television series Star Trek. One of the most memorable Star Trek inventions was the transporter that allowed human beings to be beamed through space and time like light and energy. Investors expecting central bankers to solve the world’s economic problems might as well believe that Janet Yellen is capable of beaming them straight into the Marriner S. Eccles Building in Washington, D.C. Their failure to acknowledge that the Fed is failing to generate sustainable economic growth while contributing to income inequality and crushing debt burdens is inexplicable.

Central banks that purport to be promoting financial stability are actually undermining it – with the able assistance of regulators who have drained liquidity from the world’s most important markets. Negative interest rates on $3 trillion of European debt are an obvious sign of policy failure, yet the policy elite stands mute. Actually that’s not correct – the cognoscenti is cheering on Mario Draghi as he destroys the European bond markets just as they celebrated Janet Yellen’s demolition of the Treasury market. Negative interest rates are not some curiosity; they represent a symptom of policy failure and a violation of the very tenets of capitalist economics. The same is true of persistent near-zero interest rates in the United States and Japan.

Zero gravity renders it impossible for fiduciaries to generate positive returns for their clients, insurance companies to issue policies, and savers to entrust their money to banks. They are a byproduct of failed economic policies, not some clever device to defeat deflation and stimulate economic growth. They are mathematically doomed to fail regardless of what economists, who are merely failed monetary philosophers practicing a soft social science, purport to tell us. The fact that European and American central banks are following the path of Japan with virtually no objection represents one of the most profound intellectual failures in the history of economic policy history.[..]

Christopher Whalen, one of the best bank analysts on Wall Street, argued that global banks face trillions of bad off-balance sheet debts that must eventually be resolved (i.e. written off) and are dragging on economic growth. These debts include everything from loans by German banks to Greece to home equity loans in the U.S. for homes that are underwater on their first mortgage. Banks and governments refuse to restructure (i.e. write off) these bad debts because doing so would trigger capital losses for banks and governments. As Mr. Whalen explains, “the Fed and ECB have decided to address the issue of debt by slowly confiscating value from investors via negative rates, this because the fiscal authorities in the respective industrial nations cannot or will not address the problem directly.”

But in addition to avoiding the bad debt problem, these policies are causing further economic damage by depressing growth and starving savers. Per Mr. Whalen: “ZIRP and QE as practiced by the Fed and ECB are not boosting, but instead depressing, private sector economic activity. By using bank reserves to acquire government and agency securities, the FOMC has actually been retarding private economic growth, even while pushing up the prices of financial assets around the world.”

“Massive layoffs in the energy sector are now a certainty. Few realize that most of the gains in employment in the US since 2008 have been in shale states. Yet the carnage is not over.”

• Our Current Illusion Of Prosperity (Mises Inst.)

President Obama and Fed Chair Janet Yellen have been crowing about improving economic conditions in the US. Unemployment is down to 5.5% and growth in 2014 hit 2.2%. Journalists and economists point to this improvement as proof that quantitative easing was effective. Unfortunately, this latest boom is artificial and has been built by adding debt on top of debt. Total household debt increased 2.5% in 2014 — the highest level since 2010. Mortgage loans increased 1.5%, student loans 6.6% while auto loans increased a hefty 9.6%. The improving auto sales are built mostly on a bubble of sub-prime borrowers. Auto sales have been brisk because of a surge in loans to individuals with credit scores below 620. Since 2010, such loans have increased over 100% and have gone from 20% of originations in 2009 to 27% in 2013.

Yet, auto loans to individuals with strong credit scores, above 760, have barely budged over the last year. Subprime consumer borrowing climbed $189 billion in the first eleven months of 2014. Excluding home mortgages, this accounted for 41% of total consumer lending. This is exactly the kind of lending that got us into trouble less than a decade ago, and for many consumers, this will only end in tears. But we need to ask ourselves: is the current boom built on sound foundations? In other words, do we have sharp increases in productivity or real wage growth? Productivity increased less than 1% on average in the last three years and real wages have flat lined or declined for decades. From mid-2007 to mid-2014, real wages declined 4.9% for workers with a high school degree, dropped 2.5% for workers with a college degree and rose just 0.2% for workers with an advanced degree.

Is the boom being built on broad base investment in plant and equipment? The current average age of working plants and equipment in the US is one of the oldest on record. Meanwhile, it is now clear that the shale boom was an illusion of prosperity. Oil prices have dipped below $50 with some analysts calling for $20 oil by the end of the year. This is a drop from over $100 from last year. Many shale outfits need oil above $65 just to break even. Massive layoffs in the energy sector are now a certainty. Few realize that most of the gains in employment in the US since 2008 have been in shale states. Yet the carnage is not over. Induced by low interest, investment banks loaned over $1 trillion to the energy industry. The impact on the financial sector is still to be felt.

Do read.

• Economic Inequality: It’s Far Worse Than You Think (Scientific American)

In a candid conversation with Frank Rich last fall, Chris Rock said, “Oh, people don’t even know. If poor people knew how rich rich people are, there would be riots in the streets.” The findings of three studies, published over the last several years in Perspectives on Psychological Science, suggest that Rock is right. We have no idea how unequal our society has become. In their 2011 paper, Michael Norton and Dan Ariely analyzed beliefs about wealth inequality. They asked more than 5,000 Americans to guess the%age of wealth (i.e., savings, property, stocks, etc., minus debts) owned by each fifth of the population. Next, they asked people to construct their ideal distributions. Imagine a pizza of all the wealth in the United States. What%age of that pizza belongs to the top 20% of Americans?

How big of a slice does the bottom 40% have? In an ideal world, how much should they have? The average American believes that the richest fifth own 59% of the wealth and that the bottom 40% own 9%. The reality is strikingly different. The top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a paltry 0.3%. The Walton family, for example, has more wealth than 42% of American families combined. We don’t want to live like this. In our ideal distribution, the top quintile owns 32% and the bottom two quintiles own 25%. As the journalist Chrystia Freeland put it, “Americans actually live in Russia, although they think they live in Sweden. And they would like to live on a kibbutz.” Norton and Ariely found a surprising level of consensus: everyone — even Republicans and the wealthy—wants a more equal distribution of wealth than the status quo.

This all might ring a bell. An infographic video of the study went viral and has been watched more than 16 million times. In a study published last year, Norton and Sorapop Kiatpongsan used a similar approach to assess perceptions of income inequality. They asked about 55,000 people from 40 countries to estimate how much corporate CEOs and unskilled workers earned. Then they asked people how much CEOs and workers should earn. The median American estimated that the CEO-to-worker pay-ratio was 30-to-1, and that ideally, it’d be 7-to-1. The reality? 354-to-1. Fifty years ago, it was 20-to-1. Again, the patterns were the same for all subgroups, regardless of age, education, political affiliation, or opinion on inequality and pay. “In sum,” the researchers concluded, “respondents underestimate actual pay gaps, and their ideal pay gaps are even further from reality than those underestimates.”

Can man stop himself?

• Burning Down The House: Land, Water & Food (Eastwood)

I’m sure when Talking Heads wrote “Burning Down The House” that they didn’t exactly have financial collapse and environmental degradation in mind. Although with a verse like “Hold tight wait till the party’s over. Hold tight we’re in for nasty weather. There has got to be a way. Burning down the house” it’s hard not to see that song as strangely prophetic. What we are now doing to the planet and to human society is exactly that – burning down the house while we are still living in it. Everyone needs fuel, especially during a bitter winter, but only a mad man starts deconstructing the house in order to burn bits of it in the stove or fireplace. Almost as mad as that is stealing bits of other people’s houses to burn, but that at least is not soiling your own doorstep – well not at first.

In a world of limited resources and limited space we’ve now reached the point where raiding our neighbours’ houses is the same thing as raiding our own house, because the net effect is the same – disaster on an unprecedented level. Of course it’s easier to live in denial and keep on cannibalising the world’s vital resources at an ever-increasing rate and pretend that it’s business as usual, but in reality it is anything but that. The alarm bells from commentators from all sectors: science, economics, religion etc. are getting louder and more frequent, better argued and with the raw data to back it up, but we are still not listening. Of course, the alarm bell was being rung fifty or more years ago by people such as Admiral Hyman Rickover in 1957, the now retiring Lester Brown and the late Rachel Carson (author of Silent Spring).

Nobody really listened that well back then, although governments paid lip-service to these troublesome do-gooders. Now we know that what they said was entirely true, that we are headed for disaster and yet will still only get the tired old lip-service, as before or Koch Brother inspired denial. The evidence is clearly there that we are depleting all of our resources far too quickly, especially the land we use to produce food and draw raw materials from. In part a consequence of this, the fresh water supplies that are even more vital are also being depleted way too fast. Devastation of the land, especially deforestation exacerbates water loss and soil erosion. Couple this with increased damming of rivers, pollutant run-off into rivers, fracking and mining and you’ve a recipe for a water crisis, which will, in turn, lead to a food crisis.

Amen.

• The Warren Effect: Here Is A Bluff That Needs To Be Called (Esquire)

Let us be quite definite about this. Any Democratic politician who thinks this is a bad situation – or, worse, will not stand by a Democratic colleague in this situation – is not worth the hankie to blow Joe Lieberman’s nose.

Representatives from Citigroup, JPMorgan, Goldman Sachs and Bank of America, have met to discuss ways to urge Democrats, including Warren and Ohio Senator Sherrod Brown, to soften their party’s tone toward Wall Street, sources familiar with the discussions said this week. Bank officials said the idea of withholding donations was not discussed at a meeting of the four banks in Washington but it has been raised in one-on-one conversations between representatives of some of them. However, there was no agreement on coordinating any action, and each bank is making its own decision, they said.

My god, what a prodigious bluff. Also, my god, what towering arrogance? These guys own half the world and have enough money to buy the other half, and they’re threatening the party still most likely to control the White House because they don’t like the Senator Professor’s tone? Her tone? Sherrod Brown’s tone? These are guys who should be worried about the tone of the guard who’s calling them down to breakfast at Danbury and they’re concerned about the tenderness of their Savile Row’d fee-fees? Honkies, please.

The tensions are a sign that the aftermath of the 2008 financial crisis – the bank bailouts and the fights over financial reforms to rein in Wall Street – are still a factor in the 2016 elections. Citigroup has decided to withhold donations for now to the Democratic Senatorial Campaign Committee over concerns that Senate Democrats could give Warren and lawmakers who share her views more power, sources inside the bank told Reuters.

Tensions? These are the guys who should have spent the last six years going door to door apologizing to every American for blowing up the world economy and then buying up the splinters. That is, they should have been going door-to-door to apologize to all those Americans who still have doors they can call their own. Call this. Do it now. Tell them their money is no good here any more. Give these brigands the 86 the way any respectable saloonkeeper gives the heave to a chronic deadbeat who’s run up an unpayable tab. Show the country in simple (and not necessarily civil) words what these people really are.

Demonstrate, speech by speech, that they have no loyalty to the political entity that is the United States of America, that they are stateless gombeen bastards who would sell this country’s democracy off like a subprime mortgage to put another ten bucks into their pockets. They are threatening the people whom they still should be thanking for saving them from themselves. And Senator Professor Warren is only their most conspicuous target. Don’t kid yourselves, this is a message they’re sending to every politician, up and down the line, national and local. Don’t cross us. We own you. There is only one response for a democratic people to make to this ongoing gross obscenity. Bring it, motherfkers. Bring your lunch. And your lawyers.

What could possibly go wrong?

• Companies Go All-In Before Rate Hike, Issue Record Debt In Q1 (Zero Hedge)

It should come as no surprise that Q1 was a banner quarter for corporate debt issuance as struggling oil producers tapped HY markets to stay afloat, companies scrambled to max out the stock-buyback-via-balance-sheet re-leveraging play before a certain “diminutive” superwoman in the Eccles Building decides to do the unthinkable and actually hike rates, and there was M&A. As we discussed last week, rising stock prices have tipped investors’ asset allocation towards equities even as money continues to flow into bonds, meaning that yet more money must be funneled into fixed income for rebalancing purposes, which ironically drives demand for the very same debt that US corporates are using to fund the very same buy backs that are driving equity outperformance in the first place. Put more simply: the bubble machine is in hyperdrive. Not only did Q1 mark a record quarter for issuance, March supply also hit a record at $143 billion, tying the total put up in May of 2008. Here’s more from BofAML:

1Q set records for both supply and trading volumes in high grade, as new issue supply volumes reached $348bn, up from the previous record of $310bn in 1Q- 2014, whereas trading volumes averaged 15.6bn per day, up from the previous record of $14.3bn during the same quarter last year… Issuance in March totaled $143bn and it tied with May 2008 and September of 2013 for the highest monthly supply on record going back to at least 1998. September of 2013 was the month when the record $49bn VZ deal was priced… Supply in March was supported by low interest rates (encouraging opportunistic issuance on the supply side and supporting investor demand by diminishing interest rate risk concerns) and a busy M&A-related calendar. Some of these trends will continue in April, although investors are becoming more concerned about the Fed hiking cycle…

The China casino.

• Shanghai Traders Make Trillion-Yuan Stock Bet With Borrowed Cash (Bloomberg)

Shanghai traders now have more than 1 trillion yuan ($161 billion) of borrowed cash riding on the world’s highest-flying stock market. The outstanding balance of margin debt on the Shanghai Stock Exchange surpassed the trillion-yuan mark for the first time on Wednesday, a nearly fourfold jump from just 12 months ago. The city’s benchmark index has surged 86% during that time, more than any of the world’s major stock gauges. While the extra buying power that comes from leverage has fueled the Shanghai Composite Index’s rally, it’s also sending equity volatility to five-year highs and may accelerate losses if a market reversal forces traders to sell.

Margin debt has increased even after regulators suspended three of the nation’s biggest brokers from adding new accounts in January and said securities firms shouldn’t lend to investors with less than 500,000 yuan. “It’s like a two-edged sword,” said Wu Kan, a money manager at Dragon Life Insurance Co. in Shanghai, which oversees about $3.3 billion. “When the market starts a correction or falls, it will increase the magnitude of declines.” In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.

Chinese investors have been piling into the stock market after the central bank cut interest rates twice since November and authorities from the China Securities Regulatory Commission to central bank Governor Zhou Xiaochuan endorsed the flow of funds into equities. Traders have opened 2.8 million new stock accounts in just the past two weeks, almost on par with Chicago’s entire population. The outstanding balance of the margin debt on China’s smaller exchange in Shenzhen was 493.8 billion yuan on March 31. That puts the combined figure for China’s two main bourses at the equivalent of about $241 billion. In the U.S., which has a stock market almost four times the size of China’s, margin debt on the New York Stock Exchange was about $465 billion at the end of February.

Strong effort by Ambrose. He manages to look behind the obvious veil: “When Warren Buffett suggests that Europe might emerge stronger after a salutary purge of its weak link in Greece, he confirms his own rule that you should never dabble in matters beyond your ken.”

• Greek Defiance Mounts As Alexis Tsipras Turns To Russia And China (AEP)

Two months of EU bluster and reproof have failed to cow Greece. It is becoming clear that Europe’s creditor powers have misjudged the nature of the Greek crisis and can no longer avoid facing the Morton’s Fork in front of them. Any deal that goes far enough to assuage Greece’s justly-aggrieved people must automatically blow apart the austerity settlement already fraying in the rest of southern Europe. The necessary concessions would embolden populist defiance in Spain, Portugal and Italy, and bring German euroscepticism to the boil. Emotional consent for monetary union is ebbing dangerously in Bavaria and most of eastern Germany, even if formulaic surveys do not fully catch the strength of the undercurrents. This week’s resignation of Bavarian MP Peter Gauweiler over Greece’s bail-out extension can, of course, be over-played. He has long been a foe of EMU.

But his protest is unquestionably a warning shot for Angela Merkel’s political family. Mr Gauweiler was made vice-chairman of Bavaria’s Social Christians (CSU) in 2013 for the express purpose of shoring up the party’s eurosceptic wing and heading off threats from the anti-euro Alternative fur Deutschland (AfD). Yet if the EMU powers persist mechanically with their stale demands – even reverting to terms that the previous pro-EMU government in Athens rejected in December – they risk setting off a political chain-reaction that can only eviscerate the EU Project as a motivating ideology in Europe. Jean-Claude Juncker, the European Commission’s chief, understands the risk perfectly, warning anybody who will listen that Grexit would lead to an “irreparable loss of global prestige for the whole EU” and crystallize Europe’s final fall from grace.

When Warren Buffett suggests that Europe might emerge stronger after a salutary purge of its weak link in Greece, he confirms his own rule that you should never dabble in matters beyond your ken. Alexis Tsipras leads the first radical-Leftist government elected in Europe since the Second World War. His Syriza movement is, in a sense, totemic for the European Left, even if sympathisers despair over its chaotic twists and turns. As such, it is a litmus test of whether progressives can pursue anything resembling an autonomous economic policy within EMU. There are faint echoes of what happened to the elected government of Jacobo Arbenz in Guatemala, a litmus test for the Latin American Left in its day. His experiment in land reform was famously snuffed out by a CIA coup in 1954, with lasting consequences. It was the moment of epiphany for Che Guevara, then working as a volunteer doctor in the country.

Believe it or not, this thing will have to reach a conclusion soon.

• Greece Threatens Default As Fresh Reform Bid Falters (Telegraph)

The Greek government has threatened to default on its loans to the International Monetary Fund, as Athens continued its battle to convince creditors for a fresh injection of bail-out cash. Greece’s interior minister told Germany’s Spiegel magazine, his country would not respect a looming €450m loan repayment to the fund on April 9, without a release of much-needed bail-out funds. “If no money is flowing on April 9, we will first determine the salaries and pensions paid here in Greece and then ask our partners abroad to achieve consensus that we will not pay €450 million to the IMF on time,” said Nikos Voutzis. The cash-strapped government has struggled to keep up with its wage and pensions obligations having agreed a bail-out extension on February 20.

Athens insists it has enough money to last it until the middle of April, but a final agreement on any deal is unlikely to be secured before the end of the month. A Greek government spokesperson later denied the reports of a deliberate default, saying the country still hoped for a “positive outcome” to its debt negotiations. The comments came as the eurozone’s working group discussed a new 26-page plan of reforms from Athens on Wednesday. Aiming to generate an estimated €6bn in 2015, Athens has pledged a range of revenue-raising measures including cracking down on tax evasion, carrying out an audit on overseas bank transfers, and introducing a “luxury tax”. The document also warned brinkmanship on the part of the eurozone meant the “viability” of the currency union was now “in question.”

“It is necessary now, without further delay to turn a corner on the mistakes of the past and to forge a new relationship between member states, a relationship based on solidarity, resolve, mutual respect,” said the proposal. The Leftist government has continually fallen short of creditor demands, who hold the purse strings on €7.2bn in bail-out cash the government requires over the next three months. However, the latest blueprint is unlikely to satisfy lenders as it lacks details on labour market liberalisation or pensions reforms. Previous privatisations of the country’s assets were also described as a “spectacular” failure, generating far less in revenues for the state than first envisaged..

Wrong on purpose?

• China’s Fuel Demand to Peak Sooner Than Oil Giants Expect (Bloomberg)

China’s biggest oil refiner is signaling the nation is headed to its peak in diesel and gasoline consumption far sooner than most Western energy companies and analysts are forecasting. If correct, the projections by China Petroleum & Chemical, or Sinopec, a state-controlled enterprise with public shareholders in Hong Kong, pose a big challenge to the world’s largest oil companies. They’re counting on demand from China and other developing countries to keep their businesses growing as energy consumption falls in more advanced economies. “Plenty of people are talking about the peak in Chinese coal, but not many are talking about the peak in Chinese diesel demand, or Chinese oil generally,” said Mark C. Lewis at Kepler Cheuvreux. “It is shocking.”

Sinopec has offered a view of the country that should serve as a reality check to any oil bull. For diesel, the fuel that most closely tracks economic growth, the peak in China’s demand is just two years away, in 2017, according to Sinopec Chairman Fu Chengyu, who gave his outlook on a little reported March 23 conference call. The high point in gasoline sales is likely to come in about a decade, he said, and the company is already preparing for the day when selling fuel is what he called a “non-core” activity. That forecast, from a company whose 30,000 gas stations and 23,000 convenience stores arguably give it a better view on the market than anyone else, runs counter to the narrative heard regularly from oil drillers from the U.S. and Europe that Chinese demand for their product will increase for decades to come.

“From 2010 to 2040, transportation energy needs in OECD32 countries are projected to fall about 10% while in the rest of the world these needs are expected to double,” Exxon Mobil said in a December report on its view of the future. “China and India will together account for about half of the global increase.” Exxon expects most of that growth to be driven by commercial transportation for heavy-duty vehicles, specifically ships, trucks, planes and trains that run on diesel and similar fuels. BP’s latest public projection for China, released in February, sounds a similar note. “Energy consumed in transport grows by 98%. Oil remains the dominant fuel but loses market share, dropping from 90% to 83% in 2035.”

“Asian-Pacific refiners are forecast to add 5.4 million barrels a day of capacity in the next five years..”

• The Saudis Are Losing Their Lock on Asian Oil Sales (Bloomberg)

Ships carrying oil from Mexico docked in South Korea this year for the first time in more than two decades as the global fight for market share intensifies. Latin American producers are providing increasing amounts of heavy crude to bargain-hungry Asian refiners in a challenge to Saudi Arabia, the world’s largest exporter and the region’s dominant supplier. “By diversifying, more Asian refiners will be able to reduce the clout that Saudi Arabia has on the market,” said Suresh Sivanandam, a refining and chemical analyst with Wood Mackenzie Ltd. in Singapore. “They will be getting more bargaining power for sure.”

The U.S., enjoying a surge of light oil from shale formations, has raised imports of heavy grades from Canada, displacing crude from nations such as Mexico and Venezuela. That’s boosting South American deliveries to Asia even after Saudi Arabia cut prices for March oil sales to the region, its largest market, to the lowest in at least 14 years. The shale boom also has transformed the flow of oil to Asia. South Korea received its first shipment of Alaskan crude in at least eight years as output from Texas and North Dakota displaces oil that fed U.S. refineries for years. The country was one of the first to receive a cargo of the ultralight U.S. crude known as condensate after export rules were eased.

Petrobras and partner operators are also shipping to Asia and were scheduled to load nine tankers bound for the region in March, according to Energy Aspects, as Latin American oil’s discount to Middle East benchmark Dubai widens to almost double the average of the past year. Asian-Pacific refiners are forecast to add 5.4 million barrels a day of capacity in the next five years, according to Gaffney, Cline & Associates, a petroleum consultant.

“April is a crucial month for the industry because it’s when lenders are due to recalculate the value of properties that energy companies staked as loan collateral.” Calculations until now are stil based on $90 oil.

• Reckoning Arrives for Cash-Strapped Oil Firms Amid Bank Squeeze (Bloomberg)

Lenders are preparing to cut the credit lines to a group of junk-rated shale oil companies by as much as 30% in the coming days, dealing another blow as they struggle with a slump in crude prices, according to people familiar with the matter.
Sabine Oil & Gas became one of the first companies to warn investors that it faces a cash shortage from a reduced credit line, saying Tuesday that it raises “substantial doubt” about the company’s ability to continue as a going concern. About 10 firms are having trouble finding backup financing, said the people familiar with the matter, who asked not to be named because the information hasn’t been announced. April is a crucial month for the industry because it’s when lenders are due to recalculate the value of properties that energy companies staked as loan collateral.

With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend. And that will only squeeze companies’ ability to produce more oil. “If they can’t drill, they can’t make money,” said Kristen Campana at Bracewell & Giuliani LLP’s finance and financial restructuring groups. “It’s a downward spiral.” Sabine, the Houston-based exploration and production company that merged with Forest Oil Corp. last year, told investors Tuesday that it’s at risk of defaulting on $2 billion of loans and other debt if its banks don’t grant a waiver. Publicly traded firms are required to disclose such news to investors within four business days, under U.S. Securities and Exchange Commission rules.

Some of the companies facing liquidity shortfalls will also disclose that they have fully drawn down their revolving credit lines like Sabine, according to one of the people. The credit discussions are ongoing and a number of banks may opt to be more lenient, giving companies more time to prepare for bigger cuts later in the year, the people said. Credit lines for some of the companies may be reduced by as little as 10%, they said. The companies are among speculative-grade energy producers that were able to load up on cheap debt as crude prices climbed above $100 a barrel. The borrowing limits are tied to reserves, the amount of oil and gas a company has in the ground that can profitably be extracted based on its land holdings. With oil prices plunging below $50 from last year’s peak of $107 in June, some are now fighting to survive.

Commodities have been overvalued for a long time, due to crazy expectations for China growth.

• Appalachia Miners Wiped Out by Coal Glut That They Can’t Reverse (Bloomberg)

Douglas Blackburn has been crawling in and out of the coal mines of Central Appalachia since he was a boy accompanying his father and grandfather some 50 years ago. The only time that Blackburn, now a coal industry consultant, remembers things being this bad was in the 1990s. Back then, he estimates, almost 40% of the region’s mines went bankrupt. “It’s a similar situation,” said Blackburn, who owns Blackacre, a Richmond, Va consulting firm. Now, like then, the principal problem is sinking coal prices. They’ve dropped 33% over the past four years to levels that have made most mining companies across the Appalachia mountain region unprofitable. To make matters worse, there’s little chance of a quick rebound in prices. That’s because idling a mine to cut output and stem losses isn’t an option for many companies.

The cost of doing so – even on a temporary basis – has become so prohibitive that it can put a miner out of business fast, Blackburn and other industry analysts say. So companies keep pulling coal out of the ground, opting to take a small, steady loss rather than one big writedown, in the hope that prices will bounce back. That, of course, is only adding to the supply glut in the U.S., the world’s second-biggest producer, and driving prices down further. It’s become, in essence, a trap for miners. “You have this really perverse situation where they keep producing,” James Stevenson at IHS said in a telephone interview. “You’re just shoveling coal into this market that’s oversupplied.” Companies will dig up at least 17 million tons more coal than power plants need this year, Morgan Stanley estimates. Coal is burned at the plants to generate electricity. That’s creating the latest fossil fuel glut in the U.S., joining oil and natural gas.

I was just sent this. Don’t know enough about it, I must admit. The article suggests that prices are still 11% higher than 3 months ago. That would seem to mean they rose 20% or so in 2015. It doesn’t make much sense to me right now.

• World Dairy Prices Slide 10.8% On Supply Concerns (NZ Herald)

International dairy prices continued to reverse gains made early this year at this morning’s GlobalDairyTrade (GDT) auction, putting downward pressure on Fonterra’s $4.70 a kg farmgate milk price forecast and raising concerns about next season’s likely payout. The GDT price index fell by 10.8% compared with the last sale a fortnight ago, when prices dropped by 8.8%. Big falls were recorded for the key products of wholemilk powder – down 13.3% to US$2,538 a tonne, skim milk powder – down 9.9% to US$2,467/tonne. Wholemilk prices are now just 11% higher than than they were by the end of 2014. ANZ rural economist Con Williams said that with milk powder making up the bulk of New Zealand’s product mix, the GDT result suggested a payout of $4.50-4.70 a kg this year.

The largest price falls at the auction were generally seen in the longer-dated contracts, up to 6 months out – into the new season. “While these prices remain higher than those for the end of this season, the curve has flattened, suggesting less price recovery is now anticipated – not boding well for next year’s payout,” Williams said. The fall comes as the New Zealand season enters its final phase, with about 80% of production now out of the way. Most of the price weakness was put down to better-than-expected supply, with the effects of this year’s drought being offset by rain in many parts of the country.

Warren!

• CFTC Charges Kraft, Mondelez With Manipulating Wheat Futures (MarketWatch)

The Commodity Futures Trading Commission on Wednesday charged Kraft Foods and Mondelez Global with manipulating wheat futures and cash wheat prices. The CFTC says that, in response to high cash wheat prices in summer 2011, the two companies developed and executed in early December 2011 a strategy to buy $90 million of wheat futures they didn’t intend on receiving. The companies expected the market would react to their “enormous” long position in futures by lowering cash prices, the CFTC said. They later earned more than $5.4 million in profits, according to the CFTC’s complaint. The agency says litigation is continuing against the companies and it is seeking disgorgement and civil monetary penalties.

“3G, co-founded by Lemann, eliminated more than 7,000 Heinz jobs in 20 months..”

• Brazil’s Richest Man May Reap $5.6 Billion in Kraft-Heinz Merger

Brazil’s richest man Jorge Paulo Lemann may add more than $5 billion to his personal fortune after ketchup maker H.J. Heinz merges with Kraft Foods. Heinz, controlled by Lemann’s 3G Capital and Warren Buffett’s Berkshire Hathaway, agreed last week to buy the macaroni-and-cheese maker Kraft in a cash-and-stock deal. Heinz’s 51% of the combined company will be worth about $45 billion, valuing Lemann’s stake at about $9.6 billion, said Kevin Dreyer, a portfolio manager at Gabelli Equity. Lemann has invested about $4 billion through 3G Capital, according to data compiled by Bloomberg.

“A combination of synergies from the deal and the sprinkling of the magic 3G dust is giving Kraft a higher valuation than it would otherwise have,” Dreyer said in a phone interview from New York. “3G has a track record of drastically expanding margins. There’s an expectation they’ll achieve the number they put in and then some.” 3G, co-founded by Lemann, eliminated more than 7,000 Heinz jobs in 20 months after taking the company over with Berkshire Hathaway. Buffett defended the job reductions his partners at 3G have taken when they buy businesses during a March 31 interview on CNBC.

The share price of Kraft, which surged 36% the day of the deal, can be used to estimate the future value of closely held Heinz, Dreyer said. His calculation takes into account the ketchup maker’s special dividend payment and assumes a market capitalization of about $87 billion for the new company. 3G owns 48% of Heinz, co-founder Alex Behring told reporters March 25. The buyout firm contributed $4.25 billion to Heinz in 2013 and another $4.8 billion in the Kraft deal. Lemann hasn’t disclosed his personal stake in Heinz. His investments in publicly traded companies show he tends to have a larger stake than Brazilian 3G partners Marcel Telles and Carlos Alberto Sicupira..

Multiple currencies. Looks inevitable for Greece too.

• The Cuban Money Crisis (Bloomberg)

The currency crisis starts about 75 feet into Cuba. I land in the late afternoon and, after clearing customs, step into the busy arrivals hall of Havana’s airport looking for help. I ask a woman in a gray, military-like uniform where I can change money. Follow me, she says. But she doesn’t turn left, toward the airport’s exchange kiosk. Called cadecas, these government-run currency shops are the only legal way, along with banks, to swap your foreign money for Cuba s tourist tender, the CUC. Instead, my guide turns right and only comes clean when we reach a quiet area at the top of an escalator. The official rate is 87 for a hundred, she whispers, meaning CUCs to dollars. I’m giving you 90. So it’s a good deal for you.

I want to convert $500, and she doesn’t blink an eye. Go in the men’s room and count your money out, she instructs. I’ll do the same in the ladies room. The bathroom is crowded, with not one but two staff and the usual traffic of an airport in the evening. There s no toilet paper. In an unlit stall I try counting to 25 while laying $20 bills on my knees. There’s an urgent knock, and under the door I see high heels. I’m still counting, I say. She’s back two minutes later and pushes her way into my stall. We trade stacks, count, and the tryst is over. For my $500, I get 450 CUCs, the currency that’s been required for the purchase of almost anything important in Cuba since 1994. CUCs aren’t paid to Cubans; islanders receive their wages in a different currency, the grubby national peso that features Che Guevara’s face, among others, but is worth just 1/25th as much as a CUC.

Issued in shades of citrus and berry, the CUC dollarized, tourist-friendly money has for 21 years been the key to a better life in Cuba, as well as a stinging reminder of the difference between the haves and the have-nots. But that’s about to change: Cuba is going to kill the CUC. Described as a matter of fairness by President Raul Castro, the end of the two-currency system is also the key to overhauling the uniquely incompetent and centrally planned chaos machine that is the Cuban economy.

Even in Cuba there are markets, and the effects of Castro’s October announcement of a five-step plan for phasing out the CUC are already rippling out to every wallet in the country. The government has issued notifications and price conversion charts, and introduced new, larger bills to supplement the low-value national peso. Over the next year, the CUC will be invalidated what Cuban economists call Day Zero and then, in steps four and five, the regular Cuban peso will become exchangeable and be floated against a basket of five currencies: the yuan, the euro, the U.S. dollar, and two others to be named later.

But still in complete denial: “..the governor’s action won’t mean mandatory rationing for households.”

• California Orders Mandatory Water Cuts Of 25% Amid Record Drought (WSJ)

California Gov. Jerry Brown ordered unprecedented mandatory water cuts across the Golden State after the latest measurements show the state’s mountain snowpack – which accounts for roughly a third of California’s water supply – has shrunk to a record low of 5% of normal for this time of year. The Democratic governor took the action on Wednesday after accompanying state surveyors into the Sierra Nevada mountains to manually verify electronic readings that show an average snow water equivalent of 1.4 inches, the lowest ever recorded on April 1. “Today we are standing on dry grass where there should be five feet of snow,” the governor said. “This historic drought demands unprecedented action.”

Gov. Brown directed the State Water Resources Control Board to implement mandatory water reductions of 25%. Details on how the cuts would be implemented weren’t immediately released, although the governor said in his order that reductions would fall hardest in water districts that haven’t adequately followed his voluntary calls for conservation last year. According to monthly surveys of water use, conservation levels have varied widely around the state. In general, reductions have been lower in Southern California than the rest of the state, in part because of the region’s concentration of estate-sized lots homes and golf courses. A spokesman for the state water control board, which has already ordered limits in outdoor lawn watering, said the governor’s action won’t mean mandatory rationing for households.

Debt Rattle November 23 2014

Nov 232014

November 23, 2014 Posted by Raúl Ilargi Meijer at 11:30 am Finance Tagged with: Black Friday, central bankers, China, debt, deficit, food bank, holiday sales, oil, OPEC, rate cut Comments Off

Hans Behm Windy City tourists at Monroe Street near State 1908

• China’s Surprise Rate Cut Shows How Freaked Out The Government Is (Quartz)

• The End of China’s Economic Miracle? (WSJ)

• Hugh Hendry: “A Bet Against China Is A Bet Against Central Bank Omnipotence” (MW)

• Central Banks in New Push to Prime Pump (WSJ)

• Forget What Central Bankers Say: Deflation Is The Real Monster (Observer)

• “I Am 100% Confident That Central Banks Are Buying S&P Futures” (Zero Hedge)

• UK Chancellor Haunted By Deficit And £1.45 Trillion Debt Pile (Telegraph)

• Junk Bonds Whipsawed as Trading Drought Rattles Investors (Bloomberg)

• Pension Funds Lambaste Private-Equity Fees (WSJ)

• Sun Sets On OPEC Dominance In New Era Of Lower Oil Prices (Telegraph)

• Google Break-Up Plan Emerges From European Parliament (FT)

• European Season of Political Discontent Rung In by UKIP (Bloomberg)

• The Curse Of Black Friday Sales (NY Post)

• UK Retailers Pin Hopes On American Shopping Extravaganza (Independent)

• Don’t Prick The Christmas Spending Bubble, It Keeps Capitalism Alive (Observer)

• Food Banks Face Record Demand As Low-Income Families Look For Help (PA)

• Russia FM Lavrov Accuses West Of Seeking ‘Regime Change’ In Russia (Reuters)

• Rapper May Face 25 Years In Prison Over ‘Gangsta Rap’ Album (RT)

• We Need A New Law To Protect Our Wildlife From Critical Decline (Monbiot)

“The push that came to shove might have been the grim October data, which showed industrial output, investment, exports, and retail sales all slowing fast. Those data suggest it will be much harder to get anywhere close to the government’s 2014 target of 7.5% GDP growth .. ”

• China’s Surprise Rate Cut Shows How Freaked Out The Government Is (Quartz)

Earlier [this week], the People’s Bank of China slashed the benchmark lending rate by 40 basis points, to 5.6%, and pushed down the 12-month deposit rate 25 basis points, to 2.75%. Few analysts expected this. The PBoC—which, unlike many central banks, is very much controlled by the central government—generally cuts rates only as a last resort to boost growth. The government has been rigorously using less broad-based ways of lowering borrowing costs (e.g. cutting reserve requirement ratios at small banks, and re-lending to certain sectors). The fact that the government finally cut rates suggests that these more “targeted” measures haven’t succeeded in easing funding costs for Chinese firms. The push that came to shove might have been the grim October data, which showed industrial output, investment, exports, and retail sales all slowing fast.

Those data suggest it will be much harder to get anywhere close to the government’s 2014 target of 7.5% GDP growth, given that the economy grew only 7.3% in the third quarter, its slowest pace in more than five years. But wait. Isn’t the Chinese economy supposed to be losing steam? Yes. The Chinese government has acknowledged many times that in order to introduce the market-based reforms needed to sustain long-term growth and stop piling on more corporate debt, it has to start ceding its control over China’s financial sector. Things like, for instance, setting the bank deposit rate artificially low, which generally punishes savers to benefit state-owned enterprises (SOEs). But clearly, the economy’s not supposed to be decelerating as fast as it is. Tellingly, it’s been more than two years since the central bank last cut rates, when the economic picture darkened abruptly in mid-2012, the critical year that the Hu Jintao administration was to hand over power to Xi Jinping.

The all-out push to boost growth that followed made 2013 boom, but also freighted corporate balance sheets with dangerous levels of debt. But this could only last so long; things started looking ugly again in 2014. Up until now, attempts to buoy the economy have mainly focused on helping out small non-state companies, says Mark Williams, chief economist at Capital Economics, in a note. Often ineligible for state-run bank loans, small firms have mostly been paying steep rates for shadow financing. Since the benchmark rate cut affects official loans given out by mostly state-run banks, today’s cut will mainly benefit SOEs, hinting that the authorities “apparently feel larger firms are now in need of support too,” writes Williams. In addition, lowering the amount banks charge for capital makes them less likely to lend. Though that should in theory be offset by the lowering of the deposit rate, savers have been shunting their money into higher-yielding wealth management products, making deposits increasingly scarce.

“I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation.”

• The End of China’s Economic Miracle? (WSJ)

On a trip to China in 2009, I climbed to the top of a 13-story pagoda in the industrial hub of Changzhou, not far from Shanghai, and scanned the surroundings. Construction cranes stretched across the smoggy horizon, which looked yellow in the sun. My son Daniel, who was teaching English at a local university, told me, “Yellow is the color of development.” During my time in Beijing as a Journal reporter covering China’s economy, starting in 2011, China became the world’s No. 1 trader, surpassing the U.S., and the world’s No. 2 economy, topping Japan. Economists say it is just a matter of time until China’s GDP becomes the world’s largest. This period also has seen China’s Communist Party name a powerful new general secretary, Xi Jinping , who pronounced himself a reformer, issued a 60-point plan to remake China’s economy and launched a campaign to cleanse the party of corruption.

The purge, his admirers told me, would frighten bureaucrats, local politicians and executives of state-owned mega companies—the Holy Trinity of vested interests—into supporting Mr. Xi’s changes. So why, on leaving China at the end of a nearly four-year assignment, am I pessimistic about the country’s economic future? When I arrived, China’s GDP was growing at nearly 10% a year, as it had been for almost 30 years—a feat unmatched in modern economic history. But growth is now decelerating toward 7%. Western business people and international economists in China warn that the government’s GDP statistics are accurate only as an indication of direction, and the direction of the Chinese economy is plainly downward. The big questions are how far and how fast. My own reporting suggests that we are witnessing the end of the Chinese economic miracle.

We are seeing just how much of China’s success depended on a debt-powered housing bubble and corruption-laced spending. The construction crane isn’t necessarily a symbol of economic vitality; it can also be a symbol of an economy run amok. Most of the Chinese cities I visited are ringed by vast, empty apartment complexes whose outlines are visible at night only by the blinking lights on their top floors. I was particularly aware of this on trips to the so-called third- and fourth-tier cities—the 200 or so cities with populations ranging from 500,000 to several million, which Westerners rarely visit but which account for 70% of China’s residential property sales. From my hotel window in the northeastern Chinese city of Yingkou, for example, I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation—the structures left standing but no people in sight.

“China’s had a decade which has been very, very similar to that of the US in the 1920s.”

• Hugh Hendry: “A Bet Against China Is A Bet Against Central Bank Omnipotence” (MW)

Merryn Somerset Webb: That brings us, I guess, to China. You were one of the first to point out the native problems in China. Your rather amazing video wandering around empty housing estates, etc, which I think was pretty well watched. What’s your view now?

Hugh Hendry: I think my view would surprise you. Before I surprise you, I would like to seek legitimacy of my view by telling you that I have made money. It’s been my most successful profit centre in the year to date, and we’ve made over 5% trading in China-related macro themes. In terms of surprising you, I am more sanguine about China. Actually I’ve been rather impressed by their policy responses over the last two years. When I look at China, China has got two components. It’s got this manic investment gross capital formation and in something which has been deepening these global deflationary fears, because they kept expanding over capacity industries such as cement and steel and undermining prices in the rest of the world. That in itself lowers these inflation figures below Central Bank targets. It becomes reflexive and then the central bank says “Crikey, I’ve got to be radical here. I’ve got to buy equities”. So there’s been that going on.

On the other hand, there’s been a robbing Peter to pay Paul, and China’s had a decade which has been very, very similar to that of the US in the 1920s. The US, people forget this, but Liaquat Ahamed – I’ve just destroyed his name, forgive me, but the Lords of Finance author – I reread it recently and I was very taken by the notion of how mean the Fed had been in the 1920s. Again, I say it to you with cathartic crisis, the response of the rest of the world is to be long dollars invested in America and that was certainly the case in the 1920s. But America was recovering nicely from the Great War and it had this incredible productivity revolution. There was great demand for credit and so it was fine on its own.

What can you expect from Jon Hilsenrath?

• Central Banks in New Push to Prime Pump (WSJ)

Two major central banks moved Friday to pump up flagging global growth, sending stock markets soaring but raising new questions about the limitations of a seven-year effort to use monetary policy to address economic problems. The People’s Bank of China announced a surprise reduction in benchmark lending and deposit rates, the first cuts since 2012, after other measures to boost faltering growth fell short. Hours later, European Central Bank President Mario Draghi said the bank might take new measures to boost inflation, now near zero, his strongest signal yet that the ECB is getting closer to buying a broader swath of eurozone bonds.

The moves came less than two weeks after the Bank of Japan said it would ramp up its own securities-purchase program known as quantitative easing, or QE, as the Japanese economy fell into recession. The twin steps Friday, half a world apart, sent global stock prices sharply higher, bolstered the U.S. dollar and boosted oil prices. The Shanghai Composite Index rose 1.4%, while Germany’s DAX index jumped 2.6%. The Dow Jones Industrial Average finished up 0.51%, and at 17810.06 is now closing in on the 18000 threshold that has never been surpassed. The Nikkei rose 0.3%. Amid the flurry of central bank activity, the dollar was the winner among global currencies, rising 0.27% against a broad index of other currencies to put it up 9% for the year.

Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix. The steps, particularly in Europe, represent a subtle endorsement of the Federal Reserve’s easy-money approach to postcrisis economics, but come as the U.S. central bank shifts its own low-interest-rate policies. The Fed last month ended a six-year experiment with bond purchases, and it has begun talking about when to start raising short-term interest rates as the U.S. economy improves, though those discussions are early and rate increases are likely months away, at the earliest.

“Even low inflation can be damaging, particularly if it breeds the expectation that outright deflation will follow. If people expect prices to fall, they are encouraged to hold off spending.” Makes you wonder about Christmas sales.

• Forget What Central Bankers Say: Deflation Is The Real Monster (Observer)

The European Central Bank might like to update its website – specifically, its educational video to teach teenagers about the importance of keeping prices in check. In it, a spotted, fanged, snarling “inflation monster” floods money into the marketplace, making vivid the perils of prices rising too quickly. Near the end of the cartoon a much smaller, smiling, pink creature makes a brief appearance – the “deflation monster”. Fear of inflation is understandable in a continent that saw devastating hyperinflation last century – a shock seen by some as pivotal in the rise of Hitler. But look around the eurozone now and the bigger threat is deflation. Even in the UK, inflation is well below the Bank of England’s target and the central bank expects it to fall further over coming months.

Oil prices have been falling, as have other commodity prices. In Britain a supermarket price war is pushing food prices down further still. Wages are barely budging and a price freeze for energy bills should also help to keep inflation low this winter. The Bank fully admits it failed to forecast this significant drop below the government-set 2% target for inflation. Governor Mark Carney used the Bank’s latest forecasts earlier this month to warn of “some pretty big disinflationary forces”, largely coming from abroad. He predicted inflation would fall even further, to below 1% over the next six months. If it does, he will face the unenviable task of being the first governor since BoE independence in 1997 to write a letter to the chancellor explaining why inflation is so low.

All of the 14 letters written until now have been because inflation missed the target too far in the other direction, overshooting by more than 1 percentage point. Aside from the awkwardness of the Dear George moment, there are very real reasons why Carney is saying the Bank needs to get inflation back to target. The inflation monster may be scary, but the deflation monster is by no means harmless. Even low inflation can be damaging, particularly if it breeds the expectation that outright deflation will follow. If people expect prices to fall, they are encouraged to hold off spending. Economic stagnation and rising unemployment can follow.

Why would anyone doubt that?

• “I Am 100% Confident That Central Banks Are Buying S&P Futures” (Zero Hedge)

I have been an independent trader for 23 years, starting at the CBOT in grains and CME in the S&P 500 futures markets long ago while they were auction outcry markets, and have stayed in the alternative investment space ever since, and now run a small fund. I understand better than most I would think, the “mechanics” of the markets and how they have evolved over time from the auction market to ‘upstairs”. I am a self-taught, top down global macro economist, and historian of “money” and the Fed and all economic and governmental structures in the world. One thing so many managers don’t understand is that the markets take away the most amounts of money from the most amounts of people, and do so non-linearly.

Most sophisticated investors know to be successful, one must be a contrarian, and this philosophy is in parallel. Markets will, on all time scales, through exponential decay (fat tails, or black swans, on longer term scales), or exponential growth of price itself. Why was I so bearish on gold at its peak a few years back for instance? Because of the ascent of non-linearity of price, and the massive consensus buildup of bulls. Didier Sornette, author of “Why Stock Markets Crash”, I believe correctly summarizes how Power Law Behavior, or exponential consensus, and how it lead to crashes. The buildup of buyers’ zeal, and the squeezing of shorts, leads to that “complex system” popping. I have traded as a contrarian with these philosophies for some time.

The point here is, our general indices have been at that critical point now for a year, without “normal” reactions post critical points in time, from longer term time scales to intraday. This suggests that many times, there is only an audience of one buyer, and as price goes up to certain levels, that buyer extracts all sellers. After this year and especially this last 1900 point Dow run up in October, and post non-reaction, that I am 100% confident that that one buyer is our own Federal Reserve or other central banks with a goal to “stimulate” our economy by directly buying stock index futures. Talking about a perpetual fat finger! I guess “don’t fight the Fed” truly exists, without fluctuation, in this situation. Its important to note the mechanics; the Fed buys futures and the actual underlying constituents that make up the general indices will align by opportunistic spread arbitragers who sell the futures and buy the actual equities, thus, the Fed could use the con, if asked, that they aren’t actually buying equities.

“Public sector net debt, excluding public sector banks, was £1.45 trillion in October, and now represents almost 80pc of UK gross domestic product. Britain’s debt pile has increased by almost £100bn over the past year alone .. ”

• UK Chancellor Haunted By Deficit And £1.45 Trillion Debt Pile (Telegraph)

The Government’s ability to reduce the deficit this year and tame Britain’s huge debt mountain is in doubt, despite a slight fall in borrowing last month. Public sector net borrowing, excluding public sector banks, fell to £7.7bn in October, from £7.9bn in the same month a year ago. The deficit was also in line with economists’ expectations. While an across-the-board rise in tax receipts, including a 1.5pc increase in income tax to £10.5bn in October, helped to reduce borrowing last month, the deficit remains £3.7bn – or 6pc – higher this year than in 2013. The Office for Budget Responsibility had forecast a 7pc increase in income tax receipts this year, which are currently down 0.4pc compared with the same period in 2013, at £81.5bn. Income from VAT and stamp duties increased by 4.9pc and 3.6pc, to £10.3bn and £1.3bn respectively in October, while corporation tax payments also edged up, despite weak oil and gas revenues.

The OBR is expected to revise up the Government’s borrowing forecasts on December 3, when the Chancellor will present the Autumn Statement. This will reduce the likelihood of any big tax giveaways before the next election. Samuel Tombs at Capital Economics said: “This year’s poor borrowing figures limit the Chancellor’s room for manoeuvre and undermine his argument that the public finances can be restored to a sustainable position after the next election through spending cuts alone.” Robert Chote, the chairman of the OBR, said last month that the Government was likely to miss its income tax targets this year as weak pay growth and a surge in low paid jobs means the Treasury rakes in less revenue than predicted. A Treasury spokesperson said borrowing remained “in line with the Budget forecast” and stressed that the Government would continue to take steps to “build a resilient British economy”.

The Treasury and OBR expect a “sizeable” increase in income tax receipts from self-employed workers in January 2015 as distortions related to the reduction of the top rate of tax unwind. Economists were sceptical that any January boost would make up the current shortfall. Michael Saunders, chief UK economist at Citibank, expects the deficit to overshoot the OBR’s forecast by £13bn this fiscal year, taking borrowing up to £100bn this year. “The tax and benefit reforms of the last 15 years have proved very successful in boosting employment and workforce participation, but also have eroded the extent to which economic recovery generates a fiscal windfall,” he said. The size of Britain’s debt pile also continued to balloon in October. Public sector net debt, excluding public sector banks, was £1.45 trillion in October, and now represents almost 80pc of UK gross domestic product.

Britain’s debt pile has increased by almost £100bn over the past year alone, and the Treasury is expected to pay almost £1bn a week in debt interest payments this year. Debt interest payments are now close to the Goverment’s combined transport and defence budget, with payments expected to rise to £75bn in 2018-19.

Noted this before: as capital fless junk bonds, big bad things can happen.

• Junk Bonds Whipsawed as Trading Drought Rattles Investors (Bloomberg)

Junk bond investors have a bad case of the jitters. Every bit of bad news is whipsawing prices, with bonds tumbling as much as 50% in a single day. “We’ve seen some flash crashes in the market,” said Henry Craik-White, analyst at ECM Asset Management. “If you get caught on the wrong side of a name, you can get severely punished in this market.” Investors are rattled because they’re concerned that a lack of liquidity in the bond market will make it impossible for them to sell holdings in response to negative headlines. Trading dropped about 70% since 2008, with a corporate bond that changed hands almost five times a day a decade ago now only being sold once a day on average, according to Royal Bank of Scotland. Alarms started ringing in September with the collapse of British retailer Phones 4u after Vodafone and EE refused to renew contracts. The retailer shut its business and sought creditor protection on Sept. 15, sending the company’s payment-in-kind bonds down to 1.9 pence on the pound, according to data compiled by Bloomberg.

A month later, notes of Spanish online travel service EDreams Odigeo fell 57% in one afternoon when Iberia Airlines and British Airways said they were withdrawing tickets from the company’s websites. The 10.375% bonds almost fully recovered the following trading day when the airlines reinstated the tickets. Abengoa’s debt plunged as much as 32% last week amid investor confusion about how the Spanish renewable energy company accounted for $632 million of green bonds. The Seville-based company’s 8.875% notes dropped to 74 cents on the euro from 107 cents in two days and rebounded to 95 cents after Abengoa held a conference call to reassure bondholders.

” .. a Dutch pension fund for nurses and social workers that she invests for paid more than €400 million (about $500 million) to private-equity firms in 2013..”

• Pension Funds Lambaste Private-Equity Fees (WSJ)

Pension-fund managers from the Netherlands to Canada, searching for new ways to invest, lambasted private-equity executives at a conference in Paris this week for charging excessive fees. Ruulke Bagijn, chief investment officer for private markets at Dutch pension manager PGGM, said a Dutch pension fund for nurses and social workers that she invests for paid more than €400 million (about $500 million) to private-equity firms in 2013. The amount accounted for half the fees paid by the PFZW pension fund, even though private-equity firms managed just 6% of its assets last year, she said. “That is something we have to think about,” Ms. Bagijn said.

The world’s largest investors, including pension funds and sovereign-wealth funds, are seeking new ways to invest in private equity to avoid the supersize fees. Some investors are buying companies and assets directly. Others are making more of their own decisions about which funds to invest in, rather than giving money to fund-of-fund managers. Big investors are also demanding to invest alongside private-equity funds to avoid paying fees. Jane Rowe, the head of private equity at Ontario Teachers’ Pension Plan, which manages Can$141 billion (US$124.4 billion), is buying more companies directly rather than just through private-equity funds. The plan invests with private-equity firms including Silver Lake Partners and Permira, according to its annual report. Ms. Rowe told executives gathered in a hotel near Place Vendome in central Paris that she is motivated to make money to improve the retirement security of Canadian teachers rather than simply for herself and her partners.

“You’re not doing it to make the senior managing partner of a private-equity fund $200 million more this year,” she said, as she sat alongside Ms. Ruulke of the Netherlands and Derek Murphy of PSP Investments, which manages pensions for Canadian soldiers. “You’re making it for the teachers of Ontario. You know, Derek’s making it for the armed forces of Canada. Ruulke’s doing it for the social fabric of the Netherlands. These are very nice missions to have in life.”

That’ one cute graph. But any article that quotes Yergin is dead in the water.

• Sun Sets On OPEC Dominance In New Era Of Lower Oil Prices (Telegraph)

It wouldn’t be the first time that a meeting of OPEC has taken place in an atmosphere of deep division, bordering on outright hatred. In 1976, Saudi Arabia’s former oil minister Ahmed Zaki Yamani stormed out of the OPEC gathering early when other members of the cartel wouldn’t agree to the wishes of his new master, King Khaled. The 166th meeting of the group in Vienna next week is looking like it could end in a similarly acrimonious fashion with Saudi Arabia and several other members at loggerheads over what to do about falling oil prices. Whatever action OPEC agrees to take next week to halt the sharp decline in the value of crude, experts agree that one thing is clear: the world is entering into an era of lower oil prices that the group is almost powerless to change This new energy paradigm may result in oil trading at much lower levels than the $100 (£64) per barrel that consumers have grown used to paying over the last decade and reshape the entire global economy.

It could also trigger the eventual break-up of OPEC, the group of mainly Middle East producers, which due to its control of 60pc of the world’s petroleum reserves has often been accused of acting like a cartel. Even worse, some experts warn that a prolonged period of lower oil prices could reshape the entire political map of the Middle East, triggering a new wave of political uprisings in petrodollar sheikhdoms in the Persian Gulf, which depend on the income from crude to underwrite their high levels of public spending and support less wealthy client states in the Arab world. “We are now entering a new era in world oil and we will have lower prices for some time to come,” says Daniel Yergin, the Pulitzer prize-winning author of The Quest: Energy Security and the Remaking of the Modern World. “Oil was really the last commodity in the super-cycle to remain standing.” Mr Yergin spoke exclusively to The Sunday Telegraph ahead of what is being called the most important gathering of OPEC in more than 20 years.

Don’t think the Financial Times finds it a good idea.

• Google Break-Up Plan Emerges From European Parliament (FT)

The European parliament is poised to call for a break-up of Google, in one of the most brazen assaults so far on the technology group’s power. The gambit increases the political pressure on the European Commission, the EU’s executive arm, to take a tougher line on Google, either in its antitrust investigation into the company or through the introduction of laws to curb its reach. A draft motion seen by the Financial Times says that “unbundling [of] search engines from other commercial services” should be considered as a potential solution to Google’s dominance. It has the backing of the parliament’s two main political blocs, the European People’s Party and the Socialists.

A vote to effectively single out a big US company for censure is extremely rare in the European parliament and is in part a reflection of how Germany’s politicians have turned against Google this year. German centre-right and centre-left politicians are the dominant force in the legislature and German corporate champions, from media groups to telecoms, are among the most vocal of Google’s critics. Since his nomination to be the EU’s digital commissioner, Germany’s Günther Oettinger has suggested hitting Google with a levy for displaying copyright-protected material; has raised the idea of forcing its search results to be neutral; and voiced concerns about its provision of software for cars.

Google has become a lightning rod for European concerns over Silicon Valley, with consumers, regulators and politicians assailing the company over issues ranging from its commercial dominance to its privacy policy. It has reluctantly accepted the European Court of Justice’s ruling on the right to be forgotten, which requires it to consider requests not to index certain links about people’s past. The European parliament has no formal power to split up companies, but has increasing influence on the commission, which initiates all EU legislation. The commission has been investigating concerns over Google’s dominance of online search for five years, with critics arguing that the company’s rankings favour its own services, hitting its rivals’ profits.

Eh, no. UKIP did not start this.

• European Season of Political Discontent Rung In by UKIP (Bloomberg)

Some 16,867 voters in southeast England ushered in a season of European political tumult that in an extreme scenario could lead to Britain exiting the European Union, Greece quitting the euro or Catalonia seceding from Spain. Victory by the anti-EU U.K. Independence Party in a British parliamentary contest was fueled by the same sense of economic injustice and antagonism to politics-as-usual that will unsettle Europe in coming months. It also gave a flavor of the potential fallout, as the pound fell against most of its 16 major peers. “The markets have a lot to worry about,” Edmund Phelps, a Nobel Prize-winning economist at Columbia University in New York, said in an interview before the British vote. “It’s possible that we could see a swing toward the extreme right, and one must wonder what ramifications this would have for the European Union and the euro area.”

Since Greece’s runaway debt convulsed the euro region in 2010, Europe has avoided doomsday storylines like the breakup of the EU, the euro or a member state. Whether those risks were banished or merely deferred will become clearer in the next rounds of political jousting. Early elections are beckoning in Greece, Catalonia, Italy and Austria, and that’s before scheduled ballots including in the U.K. in May, Portugal in September or October and in Spain at year’s end. The re-emergence of political risk in Europe is cited by Royal Bank of Scotland Plc analysts including Alberto Gallo as among the “top trades” for 2015. Europeans rehearsed the revolt in last May’s European Parliament balloting, upping the vote count of anti-establishment parties to about 30% from 20%. The motley groups failed to form a cohesive force and mainstream parties retained control. Protest parties are now set to consolidate gains at the national level.

I’ll pay plastic, please.

• The Curse Of Black Friday Sales (NY Post)

After a tough 2014, nervous retailers couldn’t afford to wait for the traditional day after Thanksgiving to pull the trigger on holiday shopping discounts. So retail titans from Amazon to Walmart — and nearly every store in between — have been stretching the selling season with Black Friday discounts that started the day after Halloween. Macy’s, JCPenney and Toys R Us, which started opening on Thanksgiving a couple of years ago, are opening earlier than ever for Turkey Day 2014. Retail experts say the hysterical bombardment of deals both online and in stores all November long shows just how ineffective — and dysfunctional — the Black Friday business model has become. Just 28% of shoppers are expected to hit the stores the day after Thanksgiving this year, according to a survey released last week from Bankrate.com.

“Retailers know that big pop, the big Black Friday day — it’s not working,” said Bankrate.com analyst Jeanine Skowronski. Black Friday used to be the day retailers’ profit ledgers entered the black for the year. Now it’s known for chaos, stampeding crowds and deals that can be found with less hassle online or some other time. As shoppers struggle with stagnant wages and high food prices, stores are fighting to win their limited discretionary dollars and turn a profit amid all the price-cutting. Add to that, on Black Friday, picketers will be outside 1,600 Walmart stores, calling for higher wages and full-time jobs for those who want them. “Personally, I never go to a store on Black Friday—there’s no need to,” said Edward Hertzman, publisher of Sourcing Journal.

“A better sale is probably just around the corner, especially on seasonal merchandise.” Since the 2008 Black Friday trampling death of a Long Island Walmart employee by a mob of shoppers, the post Turkey Day doorbuster sales have been notorious for attracting dangerous crowds. This year, Walmart and other stores are staggering deals and trying new strategies to keep the crowds less dangerous. Stores began extending Black Friday to try to bounce back from the recession. Now, however, they have trained consumers to expect a constant stream of price cuts, and are jockeying for first place in a fiercely competitive race. The discounts may help stores reach the forecast of up to 4% revenue growth for the 2014 holiday season, but margins will suffer.

Have they incorporated Alibaba’s Singles Day yet? How about if we have one ‘special’ event every week? Would they all shop like crazy?

• UK Retailers Pin Hopes On American Shopping Extravaganza (Independent)

Black Friday begins on Monday. If that’s the sort of sentence that elicits a double-take, I can only apologise — and say, blame the Americans. Ever a nation to milk something for all it’s worth and a bit more, the US has turned the day after Thanksgiving, when retailers cut their prices, into a week-long extravaganza. So Amazon will begin its “Black Friday Deals Week” promotions from 8am on Monday, with “lighting deals” every 10 minutes and lasting until stocks run out. The climactic day will still be Friday, and this year, more than ever, Britain will be swamped with discounts online and in the High Street. Visa Europe is forecasting that £360,000 will be spent every minute, or £6000 per second on its cards next Friday.

Once the preserve of Amazon, which in 2010 brought the phenomenon of the day after Thanksgiving as the day for retailers to offer big bargains, it’s now become one of the most important dates in the retail calendar. Friday is already set to become the biggest online shopping day in the UK. [..] In the US, Black Friday got its name from Philadelphia, where the police had to cope with the collision of shoppers heading for the sales and American football fans going to the annual Army v Navy fixture. It quickly acquired another interpretation, as the day when stores moved from being in the red to the black. UK retailers are crossing their fingers and hoping that the second meaning comes true.

So all we need to do is cut our holiday shopping?

• Don’t Prick The Christmas Spending Bubble, It Keeps Capitalism Alive (Observer)

Global capitalism, as a system, simply doesn’t work. Russell Brand’s new book provides the proof. As does my new book. And the hundreds of other new books that are just out. And the Sainsbury’s advert. And all the current adverts for booze and perfume, chocolates and jewels, supermarkets and computer games. The gaudy, twinkly proof is going up all around us as the last of the leaves come down. It’s called Christmas. [..]

Christmas is an annual bubble – an irrational buying fever that’s actually scheduled. We know it will come and, like all bubbles, we know it will end. Unlike most bubbles, we also know precisely when it will end. The huge signs advertising a collapse in prices are already stacked in department stores’ stockrooms as the final spasm of Christmas Eve top-whack spending is taking place. At this time of year, the invisible hand gets delirium tremens – possibly from the number of drinks the invisible mouth is sticking away. Looked at with a Scrooge-like economist’s hat on (gift idea for an accountant!), this makes no sense. Millions of people are each buying hundreds of things they don’t need – often luxuries they can scarcely afford – and at a time when such items’ prices are artificially inflated because everyone else is also buying them.

Wait a couple of weeks and jumpers with reindeer on, chocolates in stocking-shaped presentation packs and sacks of brussels sprouts will be going for a song. The rational economic choice, even for an alcoholic gourmand who likes wearing jewels, would be to schedule a knees-up for 10 January. And, as every shopkeeper will tell you, a huge sector of our economy depends on this. Our already beleaguered high streets would be wastelands without it, the hellish out-of-town malls exist primarily to harness this “golden quarter” of spending. The capitalist dream that western economies aspire to live is sustained by a crazy retail spike caused by a bastardised form of religious observance.

And now, after three pieces on shopping crazes, here’s your moment of zen:

• Food Banks Face Record Demand As Low-Income Families Look For Help (PA)

Growing numbers of people on low incomes are turning to food banks to survive, new research has revealed. Almost 500,000 adults and children were given three days’ food in the first six months of the current financial year – a record – the Trussell Trust reported. The charity said the number of adults being referred to one of its 400 food banks had increased by 38% compared with the same period last year. Problems with social security were the biggest trigger for going to a food bank, but more than a fifth blamed low income. In the six months to September, 492,641 people were given three days’ food and support, including 176,565 children, compared with 355,982 during the same period in the previous year.

Trussell Trust chief executive David McAuley said: “Whilst the rate of new food banks opening has slowed dramatically, we’re continuing to see a significant increase in numbers helped by them. “Substantial numbers are needing help because of problems with the social security system but what’s new is that we’re also seeing a marked rise in numbers of people coming to us with low income as the primary cause of their crisis. “Incomes for the poorest have not been increasing in line with inflation and many, whether in low-paid work or on welfare, are not yet seeing the benefits of economic recovery. “Instead they are living on a financial knife-edge where one small change in circumstances or a life shock can force them into a crisis where they cannot afford to eat.”

“He said that when international sanctions had been used against other countries such as Iran and North Korea, they had been designed not to harm the national economy.”

• Russia FM Lavrov Accuses West Of Seeking ‘Regime Change’ In Russia (Reuters)

Foreign Minister Sergei Lavrov accused the West on Saturday of trying to use sanctions imposed on Moscow in the Ukraine crisis to seek “regime change” in Russia. His comments stepped up Moscow’s war of words with the United States and the European Union in their worst diplomatic standoff since the Cold War ended. “As for the concept behind to the use of coercive measures, the West is making clear it does not want to force Russia to change policy but wants to secure regime change,” Tass news agency quoted Lavrov as telling a meeting of the advisory Foreign and Defence Policy Council in Moscow. He said that when international sanctions had been used against other countries such as Iran and North Korea, they had been designed not to harm the national economy.

“Now public figures in Western countries say there is a need to impose sanctions that will destroy the economy and cause public protests,” Lavrov said. His comments followed remarks on Thursday in which President Vladimir Putin said Moscow must guard against a “colour revolution” in Russia, referring to protests that toppled leaders in other former Soviet republics. Western sanctions have limited access to foreign capital for some of Russia’s largest companies and banks, hit the defence and energy industries, and imposed asset freezes and travel bans on some of Putin’s allies.

Move over, Pussy Riot?!

• Rapper May Face 25 Years In Prison Over ‘Gangsta Rap’ Album (RT)

Brandon Duncan has no criminal record, but could face a life sentence of 25 years in prison as prosecutors say his latest album lent artistic motivation for a recent string of gang-related shootings. San Diego County prosecutors have charged Duncan, 33, with nine felonies connected to a wave of gang-related shootings in the California city. Although the musician has not been charged with discharging or providing firearms in the recent shootings, prosecutors say his musical lyrics encourage gang behavior. Duncan’s latest album, entitled “No Safety,” features a photograph of a revolver with bullets on the cover. The gangsta rapper, who is being held on $1 million bail, is scheduled to head to court in December. If found guilty of felony charges, Duncan could serve a life sentence of 25 years in prison, his lawyer said. San Diego police say Duncan is a gang member, who goes by the name TD.

In 2000, California, faced with an increase in gang-related violence, passed Proposition 21, which takes aim at individuals “who actively participates in any criminal street gang with knowledge that its members engage in or have engaged in a pattern of criminal gang activity.” Prosecutors, citing a section of the law, argued that Duncan, through his music and gang affiliations “willfully promotes, furthers, or assists in any felonious criminal conduct by members of that gang.” “We’re not just talking about a CD of anything, of love songs. We’re talking about a CD (cover)… There is a revolver with bullets,” said Deputy District Attorney Anthony Campagna, as quoted by the Los Angeles Times. Duncan’s lawyer, Brian Watkins, disputes the claim, saying the prosecution’s use of an obscure California law is “absolutely unconstitutional” and impedes his client’s First Amendment right to the freedom of speech.

“It’s no different than Snoop Dogg or Tupac,” Watkins, naming other rappers known for their controversial lyrics, said. “It’s telling the story of street life.” “If we are trying to criminalize artistic expression, what’s next, Brian De Palma and Al Pacino?” said Watkins, in reference to the 1983 movie “Scarface” directed by De Palma and starring Pacino.

“Our living wonders, which have persisted for millions of years, are disappearing in the course of decades.”

• We Need A New Law To Protect Our Wildlife From Critical Decline (Monbiot)

One of the fears of those who seek to defend the natural world is that people won’t act until it is too late. Only when disasters strike will we understand how much damage we have done, and what the consequences might be. I have some bad news: it’s worse than that. For his fascinating and transformative book, Don’t Even Think About It: why our brains are wired to ignore climate change, George Marshall visited Bastrop in Texas, which had suffered from a record drought followed by a record wildfire, and Sea Bright in New Jersey, which was devastated by Hurricane Sandy. These disasters are likely to have been caused or exacerbated by climate change.

He interviewed plenty of people in both places, and in neither case – Republican Texas or Democratic New Jersey – could he find anyone who could recall a conversation about climate change as a potential cause of the catastrophe they had suffered. It simply had not arisen. The editor of the Bastrop Advertiser told him: “Sure, if climate change had a direct impact on us, we would definitely bring it in, but we are more centred around Bastrop County.” The mayor of Sea Bright told him: “We just want to go home, and we will deal with all that lofty stuff some other day.” Marshall found that when people are dealing with the damage and rebuilding their lives they are even less inclined than they might otherwise be to talk about the underlying issues.

In his lectures, he makes another important point that – in retrospect – also seems obvious: people often react to crises in perverse and destructive ways. For example, immigrants, Jews, old women and other scapegoats have been blamed for scores of disasters they did not create. And sometimes people respond with behaviour that makes the disaster even worse: think, for instance, of the swing to Ukip, a party run by a former banker and funded by a gruesome collection of tycoons and financiers, in response to an economic crisis caused by the banks. I have seen many examples of this reactive denial at work, and I wonder now whether we are encountering another one. The world’s wild creatures are in crisis. In the past 40 years the world has lost over 50% of its vertebrate wildlife. Hardly anywhere is spared this catastrophe. In the UK, for example, 60% of the 3,000 species whose fate has been studied have declined over the past 50 years. Our living wonders, which have persisted for millions of years, are disappearing in the course of decades.