contagion Archives - Page 2 of 2 - The Automatic Earth

In the past few years, the job market has vastly improved and home prices have rebounded — yet Americans are becoming even more irresponsible when it comes to saving for emergencies. According to a survey of 1,000 adults released by Bankrate.com on Tuesday, nearly one in three (29%) American adults (that’s roughly 70 million) have no emergency savings at all – the highest percentage since Bankrate began doing this survey five years ago. What’s more, only 22% of Americans have at least six months of emergency savings (that’s what advisers recommend) – the lowest level since Bankrate began doing the survey. These findings mirror others – all of which paint an abysmal picture of Americans’ ability to withstand an emergency. For example, a survey released in March by national nonprofit NeighborWorks America also found that roughly one third (34%) of Americans don’t have emergency savings.

Greg McBride, the chief financial analyst for Bankrate.com, says these low savings reflect that households haven’t seen their incomes ramp up and thus “household budgets are tight.” Plus, he adds “people don’t pay themselves first – they wait until the end of the month to save what’s left over and then nothing is left over.” The problem with this lack of savings is that emergencies can and do happen, and when they do, you may be forced into an expensive solution like credit cards or personal loans – and in extreme cases having to declare bankruptcy. Indeed, half of Americans had experienced an unforeseen expense in the past year, according to a 2014 survey by American Express; of those, 44% had a health care-related unforeseen expense and 46% had one related to their car – both of which tend to be things you can’t avoid paying.

Thus, advisers recommend that most Americans have at least six months worth of income in their emergency fund — and more if they have children or other dependents. To build this up, “start an automatic transfer to a savings account and set a task to revisit and increase the amount in a month,” says Robert Schmansky, the founder and a financial adviser at Clear Financial Advisors. “See how much you can increase the amount until it becomes noticeable and then stop.” Scott Cole, the founder of Cole Financial Planning, says to put the money in an FDIC-insured, high-yield savings account. Schmansky says that you want this account to be separate from your checking account “to prevent frivolous withdrawals.” He adds that while it’s important to find a good rate, it’s “equally important” that the money is accessible and the bank has “a long history of paying higher than market rates” as “too many banks in the past that started out as high yield payers dropped those rates after some time.”

She’s going to blow up the whole thing. Unless someone else is first.

• Marine Le Pen: Just Call Me Madame Frexit (Bloomberg)

Marine Le Pen, a frontrunner in France’s 2017 presidential election, says a Greek exit from the euro is inevitable. And if it’s up to her, France won’t be far behind. “We’ve won a few months’ respite but the problem will come back,” Le Pen said of Greece in an interview at her National Front party headquarters in Nanterre, near Paris, on Tuesday. “Today we’re talking about Grexit, tomorrow it will be Brexit, and the day after tomorrow it will be Frexit.” Le Pen, 46, is leading first-round presidential election polls in France, ahead of President Francois Hollande, ex-leader Nicolas Sarkozy and Prime Minister Manuel Valls. She’s the only one of the four calling for France to exit the euro, banking on people’s exasperation with the Greek crisis and Britain’s proposed referendum on the European Union to win over voters.

“I’ll be Madame Frexit if the European Union doesn’t give us back our monetary, legislative, territorial and budget sovereignty,” Le Pen said. She’s calling for an orderly breakup of the common currency, with France and Germany sitting around the table to dismantle the 15-year-old monetary union. Since she took over from her father as head of the National Front in 2011, Marine Le Pen has done her best to push the anti-immigration party into the French political mainstream. She came third in the 2012 presidential race and currently has two members in the country’s National Assembly for the first time since 1997. The combination of tepid economic growth and high unemployment at home, together with hundreds of thousands of African and Middle Eastern immigrants seeking jobs or asylum in Europe, has given Le Pen increased traction.

Even German Chancellor Angela Merkel has expressed concern about the level of support Le Pen will receive in 2017 and how that power might weigh on French economic policy. “She knows perfectly well that if France leaves, there’s no more euro,” Le Pen said. Although Le Pen hasn’t given a full, detailed plan of how she would lead her country out of the euro, she says she doesn’t believe France would be shut out of the borrowing market or rejected by investors as a result.

Good to see that there are still some people awake.

• The Delphi Declaration On Greece And Europe (Paul Craig Roberts)

The Delphi Conference on the European/Russian crisis created by Washington issued a declaration repudiating the EU attack on the Greek nation. The Delphi Declaration asks the European peoples, especially the Germans, to do the right thing and object to the plunder of Greece by the One%. This appeal to good will is likely to fall on deaf ears even though the pillage of Greece will create a precedent that can then be applied to Italy, Spain, France, and even Germany.

THE DELPHI DECLARATION: European governments, European institutions and the IMF, acting in close alliance, if not under direct control of big international banks and other financial institutions, are now exercising a maximum of pressure, including open threats, blackmailing and a slander and terror communication campaign against the recently elected Greek government and against the Greek people. They are asking from the elected government of Greece to continue the “bail-out” program and the supposed “reforms” imposed on this country in May 2010, in theory to “help” and “save” it.

As a result of this program, Greece has experienced by far the biggest economic, social and political catastrophe in the history of Western Europe since 1945.It has lost 27% of its GDP, more than the material losses of France or Germany during the 1st World War. The living standards have fallen sharply, the social welfare system all but destroyed, Greeks have seen social rights won during one century of struggles taken back. Whole social strata were completely destroyed, more and more Greeks are falling from their balconies to end a life of misery and desperation, every talented person who can leaves from the country. Democracy, under the rule of a “Troika”, acting as collective economic assassin, a kind of Kafka’s “Court”, has been transformed into a sheer formality in the very same country where it was born!

Greeks are experiencing now the same feeling of insecurity about all basic conditions of its life, that French have experienced in 1940, Germans in 1945, Soviets in 1991. In the same time, the two problems which this program was supposed to address, the Greek sovereign debt and competitiveness of the Greek economy have, both, sharply deteriorated. Now, European institutions and governments are refusing even the most reasonable, elementary, minor concession to the Athens government, they refuse even the slightest face-saving formula, if it could be. They want a total surrender of SYRIZA, they want its humiliation, its destruction. By denying to the Greek people any peaceful and democratic way out of its social and national tragedy, they are pushing Greece into chaos, if not civil war.

By the way, even now, an undeclared social civil war of “low intensity” is waged inside this country, especially against the unprotected, the ill, the young and the very old, the weaker and the unlucky. Is this the Europe we want our children to live? We want to express our total, unconditional solidarity with the struggle of the Greek people for its dignity, its national and social salvation, for its liberation from the unacceptable neocolonial rule “Troika” is trying to impose on a European country. We denounce the illegal and unacceptable agreements successive Greek governments have been obliged, under threat and blackmail, to sign, in violation of all European treaties, of the Charter of UN and of the Greek constitution.

IMF has already said no.

• Berlin Insists Greek Parliament Approves All Reforms By Monday (FT)

Greece’s parliament will have only a few days to pass all the economic reforms Athens promises its creditors to unlock desperately need bailout aid, putting intense pressue on prime minister Alexis Tsipras to build domestic political support for controversial concessions. Berlin has insisted on full and immediate legislative approval of measures that may be agreed at a meeting of eurozone finance ministers on Wednesday even though officials now concede a deal may come too late for Athens to meet a €1.5bn debt repayment to the IMF due on June 30. People briefed on Berlin’s thinking said months of fraught negotiations since the radical anti-austerity government came to power have undermined trust in Greece’s ability to fuflill its promises.

German officials want Greek parliamentary approval before an extension of its bailout programme is presented to the Bundestag before it expires on Tuesday. Greek authorities have already begun preparations for a hasty and potentially rancorous parliamentary debate over the weekend amidst growing signs Mr Tsipras’ new reform plan – which would be presented to eurozone leaders on Thursday — faces fierce resistance at home. A handful of more radical members of Mr Tsipras’ governing Syriza party have already vowed to mutiny over the proposal, and thousands of Greek pensioners took to the streets of Athens on Tuesday evening to decry the plans. “We have nothing, no money, we cannot live like this anymore,” shouted Thomas Yanakakis, 63, with tears in his eyes. “Enough is enough. Everyone must take to the streets now to stop this.”

Well, unless you’re into SM.

• Europe Is Destroying Greece’s Economy For No Reason At All (WaPo)

The real question is why Europe is forcing Greece to do any more austerity at all. It’s already done so much that, before this latest showdown, it actually had a budget surplus before interest payments. And that’s all it should shoot for, really: the point at which it doesn’t need any more bailouts from Europe. Anything more than that, though, would just inflict unnecessary — and self-defeating! — harm to the economy. When interest rates are zero, like they are now, budget cuts of 3% of GDP would, by Paul Krugman’s calculation, make the economy shrink something like 7.5%. So even though you have less debt, your debt burden isn’t much better since you have less money to pay it back.

There’s only one reason to make Greece do more austerity, and it makes no sense at all. That’s to try to make it pay back what it owes. Indeed, one European official said that the entire point of this was that they “want to get our money back some day.” The problem, though, is everybody knows Greece will never do that. Its debt should have been written down in 2010, but it wasn’t because it was “bailed out” to the extent that it was given money to then give to French and German banks. The longer Europe pretends this new debt will be paid back, the longer Greece’s depression will go on. Now, it’s true that Europe has lowered the interest rates and extended the maturities on Greece’s debt so far out that, for now at least, it’s like a lot of it doesn’t exist.

But eventually it will, and at that point they’ll either need to extend-and-pretend some more or hope that Greece has returned to growth. Until then, Greece will be stuck in its economic Groundhog Day. It keeps trying to resist these pointless budget cuts that just keep it in a perpetual state of high unemployment, but then gives in at the last minute. On second thought, history is just repeating itself as tragedy over and over again.

What I hear from Athens is that this is not quite accurate, it’s what happened 3 years ago.

• Greek Public Stops Paying Off Personal Debts As Uncertainty Grows (FT)

Margarita sits cross-legged on a shiny parquet floor in a small Athens apartment, surrounded by piles of cardboard boxes. Within them are her family’s possessions. “I never expected to set up house in my late parents’ place,” the 42-year-old says. Her husband George, a banker made redundant three years ago, is overseeing workers installing security shutters in the two-bedroom, one-balcony space, while her 16-year-old daughter Christina brews coffee in a cramped kitchen. The Athenian family, who asked for their surname not to be used, moved to a downtown residential district from a villa in the northern suburbs to avoid defaulting on their mortgage. “We restructured it twice, thanks to my old colleagues at the bank but we still couldn’t keep up with the payments,” says George, now a struggling investment consultant.

“Things were looking pretty bleak but then we found a tenant so we could move out.” The family still owes a year’s worth of school fees at the private international school their daughter attended, which George admits is not a priority. He is no longer embarrassed by his inability to pay, he says, because so many other parents are in the same situation. Such strategic defaults have become a way of life among Greece’s formerly affluent middle-class. Many borrowed heavily as local banks competed to offer consumer loans at accessible interest rates after Greece joined the euro in 2001. When the crisis struck they resisted changes to their lifestyle, convinced that it was only a blip on a continuous upward path to income levels matching those of Italy and Spain.

But they have since been forced to make harsh adjustments. With their own savings depleted and the country’s immediate future so uncertain — will Greece default on its debts and leave the euro? — many have simply stopped making payments altogether, virtually freezing economic activity. Tax revenues for May, for example, fell €1bn short of the budget target, with so many Greek citizens balking at filing returns. That has put more pressure on the country’s leftwing government as it desperately scrapes up cash to pay wages and salaries and foreign creditors. The government, itself, has contributed to the chain of non-payment by freezing payments due to suppliers. That has had a knock-on effect, stifling the small businesses that dominate the economy and building up a mountain of arrears that will take months, if not years, to settle.

Business-to-business payments have almost been paused, one Athens businessman says. “They are just rolling over postdated cheques”. For Greek banks, mortgage loans left unserviced by strategic defaulters have become a particular headache, especially since the Syriza-led government says it is committed to protecting low-income homeowners from foreclosures on their properties “There’s a real issue of moral hazard… Around 70% of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners”, one banker said.

When you cut an economy by 25%, pensions automatically weigh heavier.

• A -Last- Shield Against Poverty, Pensions Are Greece’s Top Priority (AP)

Unlike most eurozone members, Greece’s welfare system is relatively weak, with effectively no social housing or rent assistance programs, while the jobless only receive benefits and state health coverage for up to one year. Families are left to provide the safety net. Pensioner Assimina Griva, who helps run a community center for the retired in a hillside suburb of Athens, illustrates what many Greeks live. With her monthly pension of €600 she gives financial assistance to her son, who was laid off from the steel industry and otherwise depends on his wife’s salary of €400. “I help my child, and I keep €100 for the whole month,” says Griva. The problem, experts agree, is that the system is speeding toward insolvency.

State spending on pensions has risen from 11.7% of GDP before the financial crisis to 16.2% as the economy shrank. The average in the European Union is about 12%. The burden on the state is set to grow dramatically as the number of pensioners — currently 2.6 million out of a total population of 11 million — is set to keep rising. Greece has the sixth oldest population in the world, according to United Nations data. Over 20% of Greeks are aged 65 and over, a share the EU statistics agency expects to jump to 33% in 2060. Added to that is the impact of the financial crisis. High unemployment, undeclared labor, and arrears from struggling businesses have hammered state revenues.

A 2012 write-down of Greece’s privately-held national debt saw pension funds’ reserves lose more than half their value, as they were required by law to buy government bonds. “The pension system in Greece is not sustainable. But how could it be?” Finance Minister Yanis Varoufakis said at a business conference in Berlin this month. “We want to reform it … (But) pensions have already been cut by 40%. Forty%! Is cutting further a reform? I don’t think it is a reform. Any butcher can take a clever and start chopping things down. We need surgery.”

At last, the world press shows some signs of working neurons.

• This Is A Deal That Heaps More Misery On Greeks (Guardian)

For Greece, the small concessions the creditors now seem prepared to make on pensions and tax increases on the poor will at least allow Alexis Tsipras to save face with his electorate and overcome the difficulty of getting the proposals through his parliament. But he will also have seen off the threat of capital controls being imposed to stop any further outflow of money from Greece and a humiliating take-it-or-leave-it message from the creditors should the ECB have pulled the plug and stopped providing emergency liquidity assistance to the beleaguered Greek banking system. Yet the reality is also that the extra austerity will now be tougher for Greece to bear and the cost of restoring the economy will be much greater.

Just as the rest of the eurozone is showing small signs of recovery the Greek economy has gone back into recession, with GDP falling by 0.4% in the last three months of 2014 and by 0.2% in the first three months of 2015. The signs are that the decline has continued, with unemployment rising again to 26%. Many companies have gone out of business as activity stalled during the uncertainty surrounding the negotiations and banks’ non-performing loans now account for some 35% of their total lending. As a result, the effort required to restore health to the economy will be much greater. It is hard to imagine it now, but strong tourist receipts last year brought the first rise in Greek GDP after a five-year decline in which the economy had slid by 25% under the IMF-inspired austerity programme.

The recent reversal has wiped out much of that progress. Years of austerity loom. More bailout money, but also more hardship and no – or very slow – growth. In itself that is not a recipe for social and political tranquillity. The creditor institutions, the old troika of the IMF, the ECB and the European commission, will be as visible as ever. So actually, not much advance on the status quo of the last few years. This gets us back to the perennial elephant in the room whenever Greece is discussed. The truth is, there won’t be sustainable growth again until the huge debt overhang (180% of GDP) is dealt with decisively. Greece would need to grow by at least 4% a year to service its current debt. If forced down that road, nothing can be seen ahead for the Greek people but continuous belt-tightening and misery.

“Einstein had a definition for this – insanity..”

• Creditors’ Economic Plan For Greece Is Illiterate And Doomed To Fail (Guardian)

One of the insights gleaned during the Great Depression was that it does not make a lot of sense for governments to try to balance budgets during a severe downturn, because tax increases and spending cuts reduce demand. That deepens the slump, leaving an even bigger hole in the public finances. In Greece, though, it as if the clock has been turned back to the pre-FDR days when Herbert Hoover was US president. Weak growth means that Athens continues to miss the deficit targets the troika sets for it. The troika responds by insisting on additional savings to put the budget back on track. Paul Krugman posted a chart last week based on IMF data that illustrates what happened to the underlying public finances of the eurozone members in 2014.

This measure of budgetary discipline looks at the primary budget surplus – the gap between revenues and spending excluding debt interest payments – adjusted for the state of the economic cycle. Measured in this way, Greece ran a surplus of more than 5% of GDP last year, comfortably higher than any other eurozone country. It is, however, not enough for the troika. In order to avoid a debt default and a run on its banks that would threaten its continued membership of the single currency, Greece has now had to table proposals that will suck an additional €8bn out of the economy in the next 18 months. Consumer spending will be hit by an increase in VAT and higher pension contributions, while investment will be dampened by a one-off levy and an increase in corporation tax.

Greece has a number of severe economic problems. It suffers from a lack of demand, and a five-year slump has pushed it into deflation. Falling prices have added to the real, inflation-adjusted burden of the government’s debt, which currently stands at 175% of GDP. A fresh dose of austerity will make all these problems worse. One way for Greece to get out of its mess would be for it to leave the euro, devalue its currency and renege on all or part of its debt. That is not an option if it stays in the single currency, which the public wants. Another way out would be for the creditors to cut Greece some slack. That would involve immediate debt relief and more realistic targets. The troika, though, will continue with policies that have failed before in the hope that they will succeed this time. Einstein had a definition for this – insanity.

“..the single currency’s most troublesome state will remain inside the euro as long as Greek nuisance value (GNV), both political and economic, is held to be lower inside the system (I) than it would be outside (O)..”

• Whatever Happens To Greece, It Will End In Contagion (MarketWatch)

Acres of column inches have been expended on Greece and the future. Here are eight succinct truths to guide observers through the next few days.

1. There will be no quick and easy end to the Greek affair. Unstable disequilibria can last a long time. For four centuries, Greece was part of the Ottoman Empire. Tonight’s unhappy meeting of eurozone leaders will not be the last time they gather to consider an intractable imbroglio.

2. Greece holds a lot of the cards. No doubt some kind of deal will be done to prevent — for the moment at least — full-scale ejection from the euro EURUSD, +0.3761% bloc.

As I wrote four months ago, the single currency’s most troublesome state will remain inside the euro as long as Greek nuisance value (GNV), both political and economic, is held to be lower inside the system (I) than it would be outside (O). For the time being, GNV-I is — just — less than GNV-O. All sorts of Greek maneuvering — whether talks with President Vladimir Putin or speculation about a Greek exit bringing down the euro “house of cards” — are useful ploys to stoke up European fears of GNV-O.

3. The funds that are now leaving Greek banks to the tune of €1 billion a day, whether being taken abroad or simply kept under the mattress, are all effectively liabilities of the European Central Bank, to be paid ultimately (if things go wrong) by European taxpayers. The ECB, as an unelected body run by technocrats, cannot by itself pull the plug on Greece and declare the banks insolvent. The Greek government has no great wish to bring in exchange controls (although soon it may be forced to) since withdrawn euros represent a negotiating tool against its creditors and a store of value that many Greeks can use to hedge against a return of the drachma.

4. The IMF is unlikely to get its money back on time. An internal IMF assessment two years ago ruled that the Fund’s exceptional loan to Greece in 2010 was made on far-too-optimistic assumptions about the country’s debt sustainability and ability to carry out adjustment, breaching the IMF’s own rules. U.S. taxpayers will lose money. So please forget any idea that Congress will agree on IMF governance and voting reforms any time in the next few years.

5. Angela Merkel, the German chancellor, will be a big loser. The pressure is on her to hold the euro area together and maintain Germany’s European credentials without damaging the pocketbooks of German taxpayers and turning the euro into an overt transfer union. This is an impossible task. Her biggest adversaries are likely to be within her own coalition with the Social Democratic Party, which, however unfairly, will publicly blame her for any unsavory outcome. Shaming Merkel over Greek debt may be unscrupulous, but if it delivers the SPD a chance of winning the 2017 election, then the party will seize it.

6. Karl Otto Pöhl, the former Bundesbank president who died in December, was right when he said, a few days after the May 2010 bailout, that it was decided to save (roughly in that order) rich Greeks, and French and German banks. The Bundesbank’s qualms over the ECB’s purchases of the bonds of Greece and other peripheral countries, publicly though impotently voiced at the time, were never likely to derail the action. But we will hear more of them now that taxpayers in Germany and other creditor countries start to weigh up the bill.

Behind the curtains.

• Tsipras: Angel Of Mercy Or Trusty Of Central Bankers’ Debt Prison? (Stockman)

Draghi and his posse of financial dimwits have created what amounts to a hideous financial scam – a disgrace to any notion of central banking which existed before 2008. Had he not announced he would massively monetize euro sovereign debt in July 2012, Greece would have been bankrupt long ago, and the peripheral borrowers like Italy, Spain and Portugal would have had their day of fiscal reckoning, too. The eurozone would have blown sky high, and the ECB would be no more. Likewise, were not the ECB now supplying $125 billion of funding to the Greek banking system—or actually more than its current level of fast vanishing deposits – the latter would have crashed and burned months ago, thereby triggering a crisis which would have eventually destroyed the euro.

Ironically, the angel of mercy now hovers in the form of Greece’s intrepid prime minister, Alexis Tsipras. Too be sure, his left-wing statist economics is a complete abomination that would cause the Greek people catastrophic suffering if were ever to be implemented. But he is absolutely correct on the matter of political self-governance: “We have no right to bury the European democracy in the land where it was born.” That’s the essence of the issue. If Greece’s democracy is to survive, it must be cut loose from the destructive regime of superstate dictation from Brussels and monetary falsification from Frankfurt. Ironically, going back to the Drachma would put Greece’s politicians right were they were before they were betrayed by the false monetary regime of eurozone central banking.

They would be forced to run a primary surplus because they would not be able to borrow on world markets after a massive default on the debt forced upon them by the eurozone, ECB and IMF. But the mix of taxing the rich, cutting the pensioners, catching the tax cheats, selling state assets, shrinking the bureaucracy and squeezing the crony capitalist leeches which feed on the Greek state would be up to them, not the inspectors and pompous bureaucrats from the IMF and European superstate. More importantly, faced with a honest bond market and real bond vigilantes, the Greek state would rediscover the requisites of sustainable fiscal governance. If they should ever again choose to run large fiscal deficits in the future, they would have to deal with an altogether different kind of committee. Namely, the pricing committee of their bond underwriters syndicate.

If the bond vigilantes needed a 15% yield to buy the state’s debt based on the facts and fiscal prospects at hand, there would not ensue months and years of can-kicking, phony restructuring plans and promises and endless PR maneuvers and leaks to the financial press. Greece’s politicians would be required to either hit the bid or cut the pension checks the very next day. Tsipras is now confronted with this kind of hard choice in an altogether different venue. If he sells out Greece one more time to the paymasters of his country’s crushing debt, it will be only a matter of time before another Greek prime minister will be forced to walk the same plank on which he now totters. By doing what’s right for Greek democracy, by contrast, he would prove to be an angel of mercy. There is no way that the euro and ECB could survive a Greexit, nor could worlwide Keynesian central banking survive the blow of their demise.

Emerging markets.

• Debt Default Risk Not Just A Greece Story (FT)

Gripped by the prospect of default in Greece? You may be looking in the wrong direction. The southern European nation may have the world’s highest debt burden, equal to 175% of its economy or gross domestic product, but according to credit rating agencies that does not make Greece the riskiest borrower for bond investors. That title is held by Ukraine, presently engaged in fighting a war with pro-Russian separatists as well as battling creditors over $15bn of debt the country says it cannot afford to service. The difference between Greece and Ukraine is reflected in the prices at which the sovereign debt of the two countries trades. Prices for Greek bonds have crashed over the past year as investors took fright at the political success of the anti-austerity Syriza party, yet they remain above 50 cents in the euro – considered a benchmark default level.

Ukraine’s equivalent bonds trade below 50 cents in the dollar, suggesting a far higher risk of a default. Indeed, this week, Ukraine was declared a “credit event”, triggering insurance payouts in the credit derivatives market. According to credit rating agency Standard & Poor’s, default is all but certain. All told, 11 countries, including Greece, are currently at serious risk of defaulting according to global credit rating agency Moody’s. Around the world the euphoric credit boom in emerging markets driven by low interest rates in the US, Europe and Japan now appears vulnerable, piling on the pressure for borrowers. A weakening trend in EM sovereign credit that began in 2013 has continued this year thanks to the slowdown in Chinese economic growth, weakness in commodity prices and higher US dollar borrowing costs, according to UBS.

Interesting two-week old piece.

• A Derivatives Bomb Exploded In The First Week Of June (IRD)

(June 9): I believe the illogical movement in 10yr Treasury yields reflects the fact the Fed is losing control of its tight grip on the bond market and longer term interest rates. Note that German bunds have also experienced a similar spike up in interest rates and volatilty. In the context of my view that there was a derivatives accident somewhere in the global banking system in the last two weeks, it could well have been an OTC interest rate swap bomb that detonated. As of the latest OCC quarterly report on bank derivatives activity (Q4 2014), JP Morgan held $63.7 trillion notional amount of derivatives, $40 trillion of which were various interest rate derivatives.

If you look at the ratio of interest rate derivatives to total holdings for the top 4 U.S. banks, they all own roughly same proportion of interest rate derivatives as % of total holdings. Deutsche Bank is reported to have about a $73 trillion derivatives book. If we assume that ratio of interest rate derivatives is likely similar to JP Morgan’s, it means that DB’s potential derivatives exposure to interest rates is around $46 trillion. Interestingly, the price of the 10yr moved abruptly higher after the Fed ended QE. This is the opposite of what many of us would have expected. It wasn’t until early February that 10yr bond price began to decline (yields move higher). The 10yr bond price also crashed through its 200 day moving average – an ominous technical signal. Both of these events happened within the last week.

Again, I believe that this action in the bond market is pointing to the fact that the Fed is losing control of the markets. I also believe that the catalyst for this loss of control is a big derivatives accident of some sort in the last two weeks. Another clear indication that something has melted down “behind the scenes” recently is an ominous market call by self-made hedge fund billionaire Paul Singer, founder and CEO of Elliott Management. In his latest letter to investors, released the last week of May, he stated that the best trade in a generation is to short “long term claims on paper money.

Too late.

• Beware Bond-Liquidity Traps When Hunting Yield, Pimco Says (Bloomberg)

Investors risk falling into liquidity traps as they seek to boost yields depressed by the ECB’s €1.1 trillion bond-buying program, according to Pimco. The search for yield has caused investors to buy riskier and less frequently traded bonds, which may be hard to sell quickly, said Mike Amey at Pimco, which oversees about $1.59 trillion of assets. Overall bond trading has slumped since the global financial crisis because banks have cut inventories to preserve capital in response to tighter regulations. “If you want to find some yield-enhancing assets, then make sure you’re paid for tighter liquidity,” said Amey, a speaker at Euromoney’s Global Borrowers & Investors Forum in London, which starts Tuesday. “If you’re going to take a liquidity premium, be prepared to hold the asset for years.”

One measure of bond-market liquidity is down 10% in the past year and 90% since 2006, RBS said in March. In the U.S., less than 5% of the market changes hands each month, down from about 20% in 2007, according to a November report by the Bank for International Settlements. “My biggest worry for the market going forward is liquidity,” said Kris Kowal at DuPont Capital Management, which oversees $30.8 billion of assets. Investors are “trading illiquidity for a bit more yield, and I don’t think that’s the right approach at this stage in Europe’s economic cycle.”

Structured securities and loans are among the most illiquid assets, said Wilmington, Delaware-based Kowal, who is also speaking at the Euromoney conference. Investors who need liquidity should hold cash or highly traded government bonds, Amey said. The ECB’s quantitative easing will continue to provide liquidity for the time being, said David Zahn, head of European fixed income at Franklin Templeton Investments, which manages about $890 billion of assets. Still, he is ensuring that his funds have enough liquidity to meet redemptions and to act on new opportunities.

Why does the right have to be the only side that gets it right?

• TTIP Is A Corporatist Scam And Not A Real Free Trade Deal: Ukip (Independent)

A proposed deal between the United States and European Union is a “corporatist scam”, Ukip’s MP has said. Douglas Carswell said that TTIP, which stands for the Transatlantic Trade and Investment Partnership, was not what its proponents made it out to be. “Ukip [is] making clear we are the most staunchly free trade party in the UK,” he tweeted. “TTIP is not free trade. It’s a corporatist scam.” Tellingly, the message was retweeted by Conservative MP Zac Goldsmith, a leading contender for his party’s nomination for Mayor of London. TTIP’s proponents say it is a free trade deal that would benefit both the United States and European Union.

One controversial aspect of drafts of the deal would be to establish a quasi-judicial trade court to which the two blocs would be subject. This could allow large corporations to ‘sue’ national governments for enacting any policy that potentially harmed their profits. Critics say that this would erode democracy and increase corporate power. The deal is also controversial because of the secret way in which it is been negotiated, with press and campaigners relying heavily on leaks to determine its direction. A Ukip spokesperson told the Independent that the party feared the destruction of public services by the deal.

“Ukip is a party that believes that free trade between people is the surest way to greater prosperity,” he said. “However the TTIP agreement is not a free trade deal, but one that favours big multinational corporates over the interests of smaller businesses, and most importantly the democratic right of people to set policy through elections. “TTIP as it currently stands could hand the NHS lock, stock, and barrel to huge corporations against the wishes of the British people.”

Long term risk.

• Will Seizure of Russian Assets Hasten Dollar Decline? (Ron Paul)

While much of the world focused last week on whether or not the Federal Reserve was going to raise interest rates, or whether the Greek debt crisis would bring Europe to a crisis, the Permanent Court of Arbitration in The Hague awarded a $50 billion judgment to shareholders of the former oil company Yukos in their case against the Russian government. The governments of Belgium and France moved immediately to freeze Russian state assets in their countries, naturally provoking the anger of the Russian government.[..] The US government is desperately trying to cling to the notion of a unipolar world, with the United States at its center dictating foreign affairs and monetary policy while its client states dutifully carry out instructions.

But the world order is not unipolar, and the existence of Russia and China is a stark reminder of that. For decades, the United States has benefited as the creator and defender of the world’s reserve currency, the dollar. This has enabled Americans to live beyond their means as foreign goods are imported to the US while increasingly-worthless dollars are sent abroad. But is it any wonder after 70-plus years of a depreciating dollar that the rest of the world is rebelling against this massive transfer of wealth? The Europeans tried to form their own competitor to the dollar, and the resulting euro is collapsing around them as you read this.

But the European Union was never considered much of a threat by the United States, existing as it does within Washington’s orbit. Russia and China, on the other hand, pose a far more credible threat to the dollar, as they have both the means and the motivation to form a gold-backed alternative monetary system to compete against the dollar. That is what the US government fears, and that is why President Obama and his Western allies are risking a cataclysmic war by goading Russia with these politically-motivated asset seizures. Having run out of carrots, the US is resorting to the stick. The US government knows that Russia will not blithely accept Washington’s dictates, yet it still reacts like a petulant child flying into a tantrum whenever Russia dares to exert its sovereignty.

The existence of a country that won’t kowtow to Washington’s demands is an unforgivable sin, to be punished with economic sanctions, attempting to freeze Russia out of world financial markets; veiled threats to strip Russia’s hosting of the 2018 World Cup; and now the seizure of Russian state assets. Thus far the Russian response has been incredibly restrained, but that may not last forever. Continued economic pressure from the West may very well necessitate a Sino-Russian monetary arrangement that will eventually dethrone the dollar. The end result of this needless bullying by the United States will hasten the one thing Washington fears the most: a world monetary system in which the US has no say and the dollar is relegated to playing second fiddle.

Golden rule: If they can do it, they will.

• Espionnage Élysée – NSA Spied On French Governments, Presidents (Wikileaks)

Today, 23 June 2015, WikiLeaks began publishing “Espionnage Élysée”, a collection of TOP SECRET intelligence reports and technical documents from the US National Security Agency (NSA) concerning targeting and signals intelligence intercepts of the communications of high-level officials from successive French governments over the last ten years. The top secret documents derive from directly targeted NSA surveillance of the communications of French Presidents Francois Hollande (2012–present), Nicolas Sarkozy (2007–2012), and Jacques Chirac (1995–2007), as well as French cabinet ministers and the French Ambassador to the United States.

The documents also contain the “selectors” from the target list, detailing the cell phone numbers of numerous officials in the Elysee up to and including the direct cell phone of the President. Prominent within the top secret cache of documents are intelligence summaries of conversations between French government officials concerning some of the most pressing issues facing France and the international community, including the global financial crisis, the Greek debt crisis, the leadership and future of the European Union, the relationship between the Hollande administration and the German government of Angela Merkel, French efforts to determine the make-up of the executive staff of the United Nations, French involvement in the conflict in Palestine and a dispute between the French and US governments over US spying on France.

A founding member state of the European Union and one of the five permanent members of the UN Security Council, France is formally a close ally of the United States, and plays a key role in a number of US-associated international institutions, including the Group of 7 (G7), NATO and the World Trade Organization (WTO). The revelation of the extent of US spying against French leaders and diplomats echoes a previous disclosure in the German press concerning US spying on the communications of German Chancellor Angela Merkel and other German officials. That disclosure provoked a political scandal in Germany, eventuating in an official inquiry into German intelligence co-operation with the United States, which is still ongoing.

And nothing will be done. Or they risk exposure of what France itself does.

• Hollande Calls Emergency Meeting After U.S. Spying Reports (Bloomberg)

French President Francois Hollande has called a high-level emergency meeting for 9 a.m. on Wednesday after WikiLeaks reported that the U.S. had spied on him and two of his predecessors. The meeting with the defense, interior, foreign and justice ministers will “evaluate the nature” of the report posted on the WikiLeaks website, said an official in Hollande’s office who asked not to be identified. WikiLeaks, which has published unauthorized documents since it started in 2006, reported that the NSA spied on Hollande, Nicolas Sarkozy and Jacques Chirac from 2006 to 2012, listening in on discussions about the euro debt crisis and French relations with German Chancellor Angela Merkel, including secret meetings of French government ministers about the possibility of Greece leaving the euro area.

The NSA also eavesdropped on French complaints about U.S. spying, WikiLeaks said. “We are not targeting and will not target the communications of President Hollande,” said Ned Price, a spokesman for the U.S. National Security Council, which advises the White House on its foreign policy. “We do not conduct any foreign intelligence surveillance activities unless there is a specific and validated national security purpose.” Sarkozy’s office didn’t respond to requests for comment. Agence France-Presse reported that his office had said the spying as reported was “unacceptable in general, and certainly between allies.” WikiLeaks has been releasing documents about U.S. wiretapping since 2010, detailing how the NSA spied on world leaders including Brazilian President Dilma Rousseff.

You betcha.

• World’s Big Economies Are About to Feel the Impact of China Slowdown (Bloomberg)

Emerging markets and commodity suppliers have grappled with reduced demand from China as a property downturn weighed on the world’s second-largest economy. U.S., Japanese and German exporters did better, supplying capital goods like machines that China still demanded. That may soon change, according to a study of global exposure to China by UBS Group AG economists Donna Kwok, Wang Tao and Jennifer Zhong. “As the multiyear Chinese property downshift continues to unfold beyond this year, we may see a longer-term decline in China’s appetite for foreign industrial imports,” the analysts wrote in a report June 22. “Commodity, reprocessing, and developed country exporters alike should brace themselves for the impact of weakening China demand this year, irrespective of whether U.S. or EU imports pick up.”

That’s not good news for a world economy increasingly reliant on China. China quadrupled the number of countries to which it was the biggest export market in the decade to 2014, the UBS analysts wrote. In the same period, the U.S. almost halved the number of countries for which it held the same title. In terms of exports as a share of GDP, nearly all countries UBS covers saw their China exposure rise; some doubled – Japan, South Korea, U.S., Brazil, Canada, Chile – while some tripled – Germany, the EU – and some even quadrupled, like Australia. For commodity exporters including South Africa, Australia, Indonesia and Brazil, the impact of a slowing China has been predictably negative.

Just to show you who’s really in power.

• Shell Fights To Prevent The Release Of Arctic Drilling Audit (Greenpeace)

Shell is fighting to prevent the public release of an audit of their Arctic drilling operations. Last week, in response to Greenpeace’s Freedom of Information Act (FOIA) request, Shell argued to government regulators that the entire document is “confidential business information” and should be kept from public disclosure. The problem is that – in order to comment on Shell’s Exploration Plan – the public should have had access to this document months ago. The deadline for that passed on 1 May yet the government department in charge – Bureau of Safety and Environmental Enforcement (BSEE) – has had the first part of Shell’s audit since November 2014. With Shell’s fleet already heading north to Alaska the failure to disclose is becoming more serious every day.

After Shell’s disastrous 2012 attempt at drilling in the Arctic Ocean — which ended with one of their drilling rigs beached on an Alaskan island and eight felony charges related to violations on the other rig — Secretary of the Interior Ken Salazar ordered a review of Shell’s operations to find out what went wrong, including an audit of Shell’s Safety and Environmental Management Systems (SEMS). The audit was designed to ensure “that the management and oversight shortcomings identified with respect to all aspects of the company’s 2012 operation have been addressed and that the company’s management structure and systems are appropriately tailored to Shell’s Arctic exploration program” – before the firm was to drill again in the Arctic.

The audit was meant to be a full third party assessment – but Shell paid for the audit and was allowed to handpick the auditor (Houston-based Endeavor Management). A SEMS audit assesses the management and operational systems put in place on offshore oil rigs to protect worker safety and the environment, such as analysing potential hazards and operating procedures. The auditor will typically review documents and systems as well as conduct interviews and site visits. It was also disclosed that the audit would be split into two parts. Stage 1 would take place in Shell’s Anchorage, AK office, and Stage 2 would take place on board the drillship Noble Discoverer once it was operating in the waters of the Alaskan Outer Continental Shelf.

The in-office portion of the audit was completed in 2014 and the audit report was provided to BSEE towards the end of that year. However, this document has never been made public and Greenpeace submitted a FOIA request for its release. Despite the promise that the audit would be a requirement “before” Shell was allowed to return to the Arctic, Stage 2 has yet to be completed and will presumably happen this summer while Shell is drilling.

Sanctions?

• Russia Surpasses Saudi Arabia as China’s Biggest Oil Supplier (Bloomberg)

Russia surpassed Saudi Arabia to become China’s top crude supplier as the fight for market share in the world’s second-largest oil consumer intensifies. China imported a record 3.92 million metric tons from its northern neighbor in May, according to data emailed by the Beijing-based General Administration of Customs. That’s equivalent to 927,000 barrels a day, a 20% increase from the previous month. Saudi sales slumped 42% from April to 3.05 million tons. China is becoming a key market for global oil exporters as surging output from shale fields from Texas to North Dakota allows the U.S., the biggest crude consumer, to rely less on overseas supplies. The Asian nation will account for more than 11% of world demand this year, the Paris-based International Energy Agency predicted this month.

“This is a clear sign of how spoilt Asia is for choice these days, with Middle Eastern crude now having to compete with oil from other regions,” Amrita Sen at Energy Aspects said in an e-mail. “Russia is increasingly looking east and the various deals made between Rosneft and China are likely to see more Russian crude head to China permanently.” Russia is China’s top crude supplier for the first time since October 2005 as it seeks new markets for its crude amid western sanctions over its dispute with Ukraine. Rosneft in 2013 agreed to supply 365 million tons over 25 years to China National under a $270 billion deal. The same year, the company agreed an $85 billion, 10-year deal with China Petrochemical. Russia isn’t the only crude shipper to overtake Saudi Arabia last month. Angola sold 3.26 million tons to China, 14% more from April, rising two places to take second spot.

As we always predicted.

• Cellulosic Ethanol is Going Backwards (Robert Rapier)

In last month’s article Where are the Unicorns?, I discussed the fact that the commercial cellulosic ethanol plants that were announced with great fanfare over the past couple of years are obviously running at a small fraction of their nameplate capacity. In fact, April was a record month for cellulosic ethanol production according to the EPA’s database that tracks this information, but that meant that at least 8 months into the learning curves for these plants actual production for that month was only about 6% of nameplate capacity. May’s numbers are now in, and the situation has gotten worse. After reporting 288,685 gallons of cellulosic ethanol in April, May’s numbers only amounted to 114,018 gallons.

This is only about 2.4% of the nameplate capacity of the announced commercial cellulosic ethanol plants. If we use year-to-date numbers, the annualized capacity is still less than 3% of nameplate capacity for facilities that cost hundreds of millions of dollars to build. Let that soak in. POET alone spent $275 million, with U.S. taxpayers footing more than $100 million of that bill. Abengoa reportedly received $229 million from taxpayers for its project. For this (plus however much that was spent by INEOS), the combined plants are running at an annualized capacity of 1.7 million gallons of ethanol, which would sell on the spot market today for $2.6 million.

We can conclude from this that the three companies with announced commercial cellulosic ethanol facilities – INEOS, POET, and Abengoa – are finding the going much tougher than expected. I believe that the costs to produce their cellulosic ethanol are higher than the price they will receive for the ethanol. This is the sort of monthly cash drain that led to the shutdown of everyone else that ever tried to produce cellulosic ethanol commercially.

Debt Rattle June 16 2015

Jun 162015

June 16, 2015 Posted by Raúl Ilargi Meijer at 10:28 am Finance Tagged with: bonds, contagion, eurozone, Greece, inequality, pillaging, pope, reform, regime change, Snowden, starvation 7 Responses »

Dorothea Lange Crossroads grocery store and filling station, Yakima, Washington, Sumac Park 1939

• Greece Accuses Europe Of Plotting Regime Change (AEP)

• Starvation Is The Price Greeks Will Pay For Remaining In The EU (PC Roberts)

• Not Just Greece, Everyone Should Leave The Euro -There’s No Point (Worstall)

• Why Greece Should Choose Eurozone Exit Rather Than Dependence (Irish Times)

• Contagion From Greek Crisis Engulfs Eurozone Bonds (Reuters)

• Defiant Tsipras Accuses Creditors Of ‘Pillaging’ Greece (FT)

• Why Can’t Greece Just Declare Bankruptcy? (Stiglitz/Guzman)

• Greece Isn’t Any Old Troubled Debtor (BBC)

• Ex-IMF Official Says ‘Errors’ By Lenders Worsened Greek Crisis (Kathimerini)

• What Is Reform? The Strange Case Of Greece And Europe (James Galbraith)

• 3% of the World’s Top Scientists are Greek (Greek Reporter)

• Sunday Times ‘Reporter’ ‘Defends’ Snowden ‘Article’ (CNN)

• IMF: Inequality Hurts Economic Growth (Guardian)

• 1% Of Households In 2014 Made Up 42% Of Total Private Global Wealth (Forbes)

• Foreign Investors Pose Threat To US Residential Real Estate (MarketWatch)

• $112 Billion Fund Manager Worries Bond-Market Fire Doors Are Locked (Bloomberg)

• Fast Track Hands the Money Monopoly to Private Banks, Permanently (Ellen Brown)

• CIA Torture Has Broken Spy Agency Rule On Human Experimentation (Guardian)

• How Pension Funds Face Huge Risk From Climate Change (Guardian)

• Pope Warns Of Destruction Of World’s Ecosystem In Leaked Encyclical (Guardian)

Brussels has experince in this.

• Greece Accuses Europe Of Plotting Regime Change (AEP)

Greek premier Alexis Tsipras has accused Europe’s creditor powers of trying to subvert Greece’s elected government after five years of “pillaging”, warning in solemn terms that his country will defend its sovereign dignity whatever the consequences. The defiant stand came as the European Commission lashed out at the Greeks and warned that the country would collapse into a “state of emergency” unless there is a deal to avert a financial crash. Germany’s EU Commissioner Guenther Oettinger said the creditor powers must draw up urgent plans to cope with social unrest in Greece and a break-down of energy supplies and medicine as soon as July. In a terse statement, Mr Tsipras called on the EU institutions and the IMF to “adhere to realism”.

He accused the creditors of “political motives” for demanding further pension cuts, hinting that their real goal is to destroy the credibility of his radical-Left Syriza government and force regime change. “We are not only carrying a historical past underlined with struggles. We are carrying our people’s dignity as well as the aspirations of all Europeans. We cannot ignore this responsibility. It has to do with democracy,” he said. Germany’s Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.

Syriza sources have told the Telegraph that Greece may seek an injunction from the European Court of Justice to stop the creditors and the EU institutions acting in a way that breaches Greek treaty rights. This would be an unprecedented move, greatly complicating the picture. Equity markets fell across the Europe and bonds sold off sharply in the high-debt Latin states as investors start to think through the dramatic implications of a Greek default, followed by EMU rupture. “The Greek saga is finally reaching its climax, we think,” said Hans Redeker from Morgan Stanley. Yields on 10-year Portuguese bonds have jumped almost 170 basis points since their lows in March, reaching an eight-month high of 3.22pc. Spain’s yields have jumped by 120 points to 2.35pc.

While these levels are nothing like the panic spikes in past spasms of the EMU debt crisis, they are approaching levels that could soon tighten borrowing conditions for companies and mortgages. It may become harder for these countries to shake off deflation. Mario Draghi, the head of the European Central Bank, said the authorities could handle the immediate fall-out from a Greek default but refused to offer any further assurances. “The consequences in medium to long term to the Union is not something we are in a position to foresee,” he said.

“Why will creating money for Greece create inflation but not for Goldman Sachs, Citibank, and JPMorganChase?”

• Starvation Is The Price Greeks Will Pay For Remaining In The EU (PC Roberts)

Syriza, the new Greek government that intended to rescue Greece from austerity, has come a cropper. The government relied on the good will of its EU “partners,” only to find that its “partners” had no good will. The Greek government did not understand that the only concern was the bottom line, or profits, of those who held the Greek debt. The Greek people are as out to lunch as their government. The majority of Greeks want to remain in the EU even though it means that their pensions, their wages, their social services, and their employment opportunities will be reduced. Apparently for Greeks, being a part of Europe is worth being driven into the ground. The alleged “Greek crisis” makes no sense whatsoever.

It is obvious that Greece cannot with its devastated economy repay the debts that Goldman Sachs hid and then capitalized on the inside information, helping to cause the crisis. If the solvency of the holders of the Greek debt, apparently the NY hedge funds and German and Dutch banks, depends on being repaid, the ECB could just follow the example of the Federal Reserve and print the money to secure the Greek debt. The ECB is already printing 60 billion euros a month to save the European financial system, so why not include Greece? A conservative might say that such a course of action would cause inflation, but it hasn’t. The Fed has been creating money hands over fists for seven years, and according to the government there is no inflation.

We even have negative interest rates attesting to the absence of inflation. Why will creating money for Greece create inflation but not for Goldman Sachs, Citibank, and JPMorganChase? Obviously, the Western world doesn’t want to help Greece. The West wants to loot Greece. The deal is that Greece gets new loans with which to repay existing loans in exchange for selling municipal water companies to private investors (water rates will go up on the Greek people), for selling the state lottery to private investors (Greek government revenues drop, thus making debt repayment more difficult), and for other such “privatizations” such as selling the protected Greek islands to real estate developers. This is a good deal for everyone but Greece.

The eurozone sinks all boats.

• Not Just Greece, Everyone Should Leave The Euro -There’s No Point (Worstall)

If the 100,000 people of my native Bath all use different currencies then trade between the citizenry is going to be rather difficult. If we all use the same currency it will be easier and there will be more trade. Since trade is what gives us Smithian growth (from Adam Smith, the specialisation and division of labour and the trade in the resultant production), makes us all richer, this is a good idea. However, it’s possible to have too much of a good thing. If we’re using the same currency then we must, by definition, have the same monetary policy. And the larger the area we cover the more likely it is that we’ll have two more more areas within which it will react differently to an external or asymmetric shock (the definition of that second simply being a shock that hits different areas in different ways).

This is what Paul Krugman has been talking about with Finland and everyone has been talking about with respect to the property booms in Ireland and Spain a decade back. All of this is background: people have been chewing over how optimal the euro area is ever since the idea was first floated (hint: it’s not optimal). However, note that the size of that optimality depends upon the strength of the two effects. And if that increased trade effect is smaller then the optimal area becomes smaller. And what this most recent research seems to be showing is that there’s no extra trade effect at all:

“More importantly, we find that the trade effects of EMU are different from other currency unions. But, most disturbingly, we find that the precise econometric methodology used to estimate the currency effect on trade matters. A lot. In the large, we find no consistent evidence that EMU stimulated trade. Indeed, we are forced to conclude that econometric methodology matters so much that it undermines confidence in our ability to estimate the effect of currency union on trade.”

A reasonable rule of thumb is that if the effect you’re looking for varies a lot dependent upon the method you’re using to look for it (assuming that all the methods you are using are reasonable) then what you’re finding is not actually the effect, but variances due entirely to the measurement method. But even putting that aside they find that there’s a small through zero to possibly even negative effect upon trade of the currency union of the euro. Or, as we might put it, there’s no benefit and we’re left just with the costs. Things that cost us but have no benefit are things that we shouldn’t be doing. Thus, clearly, we shouldn’t be having the euro. Or, as we might put it, everyone should leave it, not just Greece.

“One doesn’t have to agree with the politics of the far left in Greece to vindicate the integrity of their economic case.”

• Why Greece Should Choose Eurozone Exit Rather Than Dependence (Irish Times)

The narrative of the euro zone crisis, the epicentre of which is Greece, has been airbrushed. Germany’s insistence that the 2012 bailout programme is a realistic reference point for current discussion is misconceived. Its assertion that debt relief can be discussed only after the completion of the current programme, rather than being the obvious starting point for a new agreement, is profoundly mistaken. The tenor of the euro zone’s criticism of the government of Alexis Tsipras has shifted from the patronising to the denunciatory, from faux long-suffering indulgence with a brash upstart to near visceral condemnation. The message is that the grown-ups are “exasperated” and “running out of patience” with Greece.

Germany’s minister for economic affairs, Sigmar Gabriel, argues that “Greece’s game theorists are gambling the future of their country. And Europe’s too.” This is revisionist rhetoric. Greece is more right than its critics. One doesn’t have to agree with the politics of the far left in Greece to vindicate the integrity of their economic case. What is true of a relationship is true also for a country: dependence is never healthy. Continued membership means continued dependence. Given the pressures being exerted on Greece, exit rather than dependence would be the better option. In February German finance minister Wolfgang Schäuble insisted that Greece complete the 2012 programme, regardless of the sea change in politics since then and the evidence that austerity was taking Greece further into recession.

He warned Athens not to question the framework of existing agreements or “everything is over”. It was a calamitous misjudgment. The “negotiations” have demonstrated how big countries behave when small countries step out of line and just how easily history can be rewritten. Tsipras, in an interview with Le Monde, said the euro zone’s dominant players were, by degrees, bringing about the “complete abolition of democracy in Europe” and were ushering in a technocratic monstrosity with powers to subjugate states that refuse to accept the “doctrines of extreme neoliberalism”.

So much for ‘we have it under control’.

• Contagion From Greek Crisis Engulfs Eurozone Bonds (Reuters)

Italian, Spanish and Portuguese bond yields leapt on Tuesday in one of the most serious episodes of contagion since the height of Europe’s debt crisis after the latest breakdown in talks between Greece and its creditors. Except for a jump in May during a global bond sell-off driven by improving inflation expectations, yields on bonds issued by the eurozone’s most vulnerable states were on track for their biggest three-day move since mid-2013. Similarly sharp moves were seen in 2012 as the crisis peaked, although yields on the three countries’ bonds remain far below the highs of above 7% hit in that period.

The moves, analysts say, could impact the dynamic of the negotiations between Greece and European leaders, who may have thought that the relative calm in markets during the protracted talks was a sign that investors thought a Grexit was manageable. “A lot of people, especially in Germany, have seemed relaxed about Greece. We’ve seen comments saying that if Greece exits it’s not such a big thing,” said Jean-Francois Robin, head of rates strategy at Natixis. “The market is just showing exactly the opposite of that.”

Sociopaths.

• Defiant Tsipras Accuses Creditors Of ‘Pillaging’ Greece (FT)

Alexis Tsipras, the Greek prime minister, vowed not to give in to demands made by his country’s international creditors, accusing them of “pillaging” Greece for the past five years and insisting it was now up to them to propose a new rescue plan to save Athens from bankruptcy. Mr Tsipras’ remarks came less than 24 hours after the collapse of last-ditch talks aimed at reaching agreement on the release of €7.2bn in desperately needed rescue funds. The comments were part of a chorus of defiance in Athens that left many senior EU officials convinced they can no longer clinch a deal with Greece to prevent it from crashing out of the eurozone.

Without a deal to release the final tranche of Greece’s current bailout, Athens is likely to default on a €1.5bn loan repayment due to be paid to the IMF in two weeks, an event officials fear would set off a financial chain reaction from which Greece would be unable to recover. “One can only suspect political motives behind the fact that [bailout negotiators] insist on further pension cuts, despite five years of pillaging,” Mr Tsipras said in a statement. “We are carrying our people’s dignity as well as the aspirations of all Europeans. We cannot ignore this responsibility. It is not a matter of ideological stubbornness. It has to do with democracy.”

Reflecting the growing fears of a Greek default, Günther Oettinger, Germany’s European commissioner, called for an “emergency plan, a ‘Plan B’” in case Athens failed to reach a deal, saying this would lead to “a state of emergency” in Greece, including difficulties paying for energy, police services and medicines. The growing signs of breakdown sent the Athens stock exchange down nearly 5% and borrowing costs on Greek bonds sharply higher. The jitters appeared to spread to other peripheral eurozone bonds as well, with sell-offs in benchmark Italian, Spanish and Portuguese debt.

It can. And should.

• Why Can’t Greece Just Declare Bankruptcy? (Stiglitz/Guzman)

Governments sometimes need to restructure their debts. Otherwise, a country’s economic and political stability may be threatened. But, in the absence of an international rule of law for resolving sovereign defaults, the world pays a higher price than it should for such restructurings. The result is a poorly functioning sovereign-debt market, marked by unnecessary strife and costly delays in addressing problems when they arise. We are reminded of this time and again. In Argentina, the authorities’ battles with a small number of “investors” (so-called vulture funds) jeopardized an entire debt restructuring agreed to — voluntarily — by an overwhelming majority of the country’s creditors.

In Greece, most of the “rescue” funds in the temporary “assistance” programs are allocated for payments to existing creditors, while the country is forced into austerity policies that have contributed mightily to a 25% decline in gross domestic product and have left its population worse off. In Ukraine, the potential political ramifications of sovereign-debt distress are enormous. So the question of how to manage sovereign-debt restructuring — to reduce debt to levels that are sustainable — is more pressing than ever. The current system puts excessive faith in the “virtues” of markets. Disputes are generally resolved not on the basis of rules that ensure fair resolution, but by bargaining among unequals, with the rich and powerful usually imposing their will on others.

The resulting outcomes are generally not only inequitable, but also inefficient. Those who claim that the system works well frame cases like Argentina as exceptions. Most of the time, they claim, the system does a good job. What they mean, of course, is that weak countries usually knuckle under. But at what cost to their citizens? How well do the restructurings work? Has the country been put on a sustainable debt path? Too often, because the defenders of the status quo do not ask these questions, one debt crisis is followed by another. Greece’s debt restructuring in 2012 is a case in point. The country played according to the “rules” of financial markets and managed to finalize the restructuring rapidly; but the agreement was a bad one and did not help the economy recover.

Three years later, Greece is in desperate need of a new restructuring. Distressed debtors need a fresh start. Excessive penalties lead to negative-sum games, in which the debtor cannot recover and creditors do not benefit from the larger repayment capacity that recovery would entail.

Note: Peston rarely has anything worth quoting. But even he can see something’s amiss in the Greece ‘debate’.

• Greece Isn’t Any Old Troubled Debtor (BBC)

it is not just the quantum of austerity that divides Athens from its creditors, it is also the method of execution. So the eurozone and IMF want further pension cuts and an increase in VAT on electricity. These measures are toxic for the Greek Syriza government because they are regressive, they disproportionately hurt the poorer Greeks who elected Syriza. So “why insist on pensions?”, says Blanchard. His answer is that pension expenditure in Greece is 16% of GDP, and “transfers from the budget to the pension system are close to 10% of GDP”. Now here in Britain we would think that public spending on pensions of close to a tenth of GDP is incredibly lavish: the equivalent figure for the UK, and indeed for most anglophone countries like the US and Canada, is much lower (at around 6% of GDP in Britain).

But in the UK, US and Canada, private pension saving is much higher than on the continent of Europe. And Greece’s government spending on pensions, as a share of GDP, is very much in the ballpark of spending in the rest of the eurozone: on the basis of the last official OECD figures, which admittedly are five years old, Greece spent less than Italy, France and Austria on pensions and only a bit more than Germany. And there is another thing: in 2009 the OECD calculated that Greek government cash spending on old-age and survivors benefits was 13% of its GDP. If the equivalent figure today is 10%, which is what Blanchard seems to suggest, that implies the outlay on pensions has already been reduced by around 40%, given that Greece’s GDP has shrunk by a quarter.

That said, on the basis of the last Eurostat figures, which are for 2012, Greece’s old-age outlay – including disability and incapacity payments – was considerably higher than the euro area average. So the stats are murky. But it is worth pointing out that Greece has proportionately more old people than the eurozone average, and more poor people (thanks to five years of slump). In other words, it is not obvious that there is outrageous excess in the Greek pension system (and there certainly isn’t in comparison with provision in Blanchard’s French home).

To state the obvious, which seems however to be lost on the leaders of the eurozone, once the euro is not forever for any member, it is not forever for all members. And once that clonking penny drops for global investors, the notion that the whole project will fall apart – not tomorrow, but one day – will increasingly become the default view.

“We should have fought for this from the start.”

• Ex-IMF Official Says ‘Errors’ By Lenders Worsened Greek Crisis (Kathimerini)

Greece’s former representative at the IMF, Panayiotis Roumeliotis, appeared before the parliamentary inquiry into the country’s debt and argued that Greece’s lenders have contributed to worsening the Greek crisis through the policies they advocated. “The mistake made by lenders is that they placed emphasis on the fiscal side and high taxes, which they are continuing to do now,” he said. “This resulted in the recession.” Roumeliotis was Greece’s envoy to the IMF when the first bailout was signed in 2010 and he claimed at the hearing that there was contact at the time between German and French officials to ensure that there would not be a restructuring of Greece debt as much of it was held by German and French banks. “They took too long to restructure Greece’s debt,” he said. “We should have fought for this from the start.”

Galbraith is Varoufakis’ friend and adviser he brought with him from texas.

• What Is Reform? The Strange Case Of Greece And Europe (James Galbraith)

On our way back from Berlin on Tuesday, Greek Finance Minister Yanis Varoufakis remarked to me that current usage of the word “reform” has its origins in the middle period of the Soviet Union, notably under Khrushchev, when modernizing academics sought to introduce elements of decentralization and market process into a sclerotic planning system. In those years when the American struggle was for rights and some young Europeans still dreamed of revolution, “reform” was not much used in the West. Today, in an odd twist of convergence, it has become the watchword of the ruling class.[..]

What is missing from the creditors’ demands is, well, reform. Cuts in pensions and VAT increases are not reform; they add nothing to economic activity or to competitiveness. Fire-sale privatization can lead to predatory private monopolies as anyone living in Latin America or Texas knows. Labor market deregulation is in the nature of an unethical experiment, the imposition of pain as therapy, something the internal records of the IMF as far back as 2010 confirm. No one can suggest that wage cuts can bring Greece into effective competition for jobs in traded goods with either Germany or Asia. Instead, what will happen is that anyone with competitive skills will leave. Reform in any true sense is a process that requires time, patience, planning, and money.

Pension reform and social insurance, modern labor rights, sensible privatizations and effective tax collection are reforms. So are measures relating to public administration, the justice system, tax enforcement, statistical integrity and other matters, which are agreed in principle and which the Greeks would implement readily if the creditors would permit it – but for negotiating reasons they do not. So would be an investment program emphasizing the advanced services Greece is well-suited to provide, including in health care, elder-care, higher education, research, and the arts. It requires recognizing that Greece cannot succeed by being the same as other countries; it must be different – a country with small shops, small hotels, high culture, and open beaches. A debt restructuring that would bring Greece back to the markets (and yes, that could be done, and the Greeks have a proposal to do it) would also be, on any reasonable reckoning, a reform.

The plain object of the creditors’ program is therefore not reform. It is the doubling-down on debt collection in the face of disaster. Pension cuts, wage cuts, tax increases and fire sales are offered up on the magical thought that the economy will recover despite the burden of higher taxes, lower purchasing power, and external repatriation of profits from privatization. The magic has already been tested for five years, with no success in the Greek case. That is why, instead of recovering as predicted after the bailout of 2010, Greece has suffered a loss of over 25% of its income with no end in sight. That is why the debt burden has gone from about 100% of GDP to 180%, when measured in terms of face values. But to admit this failure, in the case of Greece, would be to undermine the entire European policy project and the authority of those who run it.

Still a very well educated people.

• 3% of the World’s Top Scientists are Greek (Greek Reporter)

Greeks may be only 0.2% of the world population but 3% of top international scientists are of Greek nationality, says a survey. John Ioannidis, Professor of Medicine at Stanford University, conducted the research and presented it on Saturday at the Panhellenic Medical Conference in Athens. Ioannidis gave a lecture in memory of prominent Doctor and Professor Dimitris Trichopoulos who died in December 2014. The title was “The exodus of Greek scientists – a meta-analysis,” and the survey showed statistics for a total of 672 scientists with Greek names who have the most influence in the international scientific bibliography. The professor used statistical data from the Google Scholar database.

On average, the 672 Greek scientists have received 17,000 reports each in the international scientific bibliography. Only one in seven of them (14%) lived or live in Greece, 86% of them live abroad where several of them were born, and 33 of them have passed away. In the wider scientific community there are about 20 million authors who have made at least one scientific publication. Greek names represent about 1% of those, meaning 200,000, while Greek names represent 3% of all scientists. The most ancient Greek scientist, Aristotle, is constantly used as a reference in the scientific bibliography. Statistically, out of the 672 leading Greek scientists, only 95 (14%) are located in Greece.

How one can not be speechless after this 4 minute video is beyond us.

• Sunday Times ‘Reporter’ ‘Defends’ Snowden ‘Article’ (CNN)

CNN’s George Howell speaks with Sunday Times correspondent Tom Harper about reports that Russia and China have decrypted files stolen by NSA leaker Edward Snowden.

As its leadership promotes more of it.

• IMF: Inequality Hurts Economic Growth (Guardian)

The idea that increased income inequality makes economies more dynamic has been rejected by an IMF study, which shows that the widening income gap between rich and poor is bad for growth. A report by five IMF economists dismissed “trickle down” economics, and said that if governments want to increase the pace of growth they should concentrate on helping the poorest 20% of their citizens. The study, covering advanced, emerging and developing countries, said technological progress, weaker trade unions, globalisation and tax policies that favoured thewealthy had all played their part in making widening inequality “the defining challenge of our time”. The IMF report said the way income is distributed matters for growth.

“If the income share of the top 20% [the rich] increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20% [the poor] is associated with higher GDP growth,” said the report. Echoing the frequent warnings about rising inequality from the Fund’s managing director Christine Lagarde, the report says governments around the world need to tackle the problem. It said: “Raising the income share of the poor, and ensuring that there is no hollowing-out of the middle class, is actually good for growth.” The study, however, reflects the tension between the IMF’s economic analysis and the harder-line policy advice given to individual countries, such as Greece, that need financial support.

During its negotiations with Athens, the IMF has been seeking to weaken worker rights, but the research paper found that the easing of labour market regulations was associated with greater inequality and a boost to the incomes of the richest 10%. “This result is consistent with forthcoming IMF work, which finds the weakening of unions is associated with a higher top 10% income share for a smaller sample of advanced economies,” said the study.

Guillotines must follow.

• 1% Of Households In 2014 Made Up 42% Of Total Private Global Wealth (Forbes)

The total number of millionaire households around the world reached a record 17.4 million in 2014, up 13.7% from 15.3 million the year before. Meanwhile, the ultra high net worth set is expected to grow at an equally impressive rate over the next five years. According to the Boston Consulting Group, wealth for the richest global families worth more than $100 million is projected to cross the $18 trillion mark by 2019. Currently, private wealth held by families with a fortune of more than $100 million total a combined $10 trillion, or roughly 6% of global wealth. Those ultra rich fortunes grew by 11% in 2014. To get to $18 trillion by 2019, the report predicts that household wealth will grow at a compound annual rate of about 12% in the next five years.

The report, published Monday, says there are more than 5,000 U.S. households worth $100 million or more. China follows with more than 1,000 ultra rich households. “This top segment is expected to be the fastest growing, in both the number of households and total wealth,” the reports’ authors wrote. In addition, the research shows that the top 1% of households in 2014 made up 42% of total private global wealth. Keep in mind, the survey only analyzes cash deposits, securities and life and pension plans. That means other big drivers of wealth like real estate, business ownership and collections aren’t included in the estimates.

Forbes’ own billionaires list, which analyzes all assets an individual can hold, counts 1,826 individuals from across the world with personal 10-figure fortunes, according to the World Billionaires list released in March. They controled an estimated $7.05 trillion at the time of the report. In the U.S. alone, Forbes estimates that there’s nearing 450 American billionaires. Many investors are “benefiting from the markets going up,” senior partner and wealth management expert Bruce Holley said at a Monday briefing. The amount of wealth held in equities rose to 64.1 trillion, up 17.5% from 2013, according to the report.

All over the Anglo world.

• Foreign Investors Pose Threat To US Residential Real Estate (MarketWatch)

U.S. real estate purchases by foreign nationals over a recent 12-month period totaled $92 billion. The negative impact of foreign investments in American residential real estate might have been badly overlooked by some U.S. government officials — and the potential harm it might cause is largely unknown to the average American. Reports from a variety of sources suggest that a housing recovery is taking place, though not at the pace expected. As of last month, it was still some 16% below its peak in 2008. Yet at the same time, some U.S. cities are experiencing an unusually high demand for residential real estate, with buyers outbidding each other, often by tens, and sometimes hundreds of thousands of dollars.

The same kind of outbidding was going on just prior to the 2007 real-estate crash where wealthy buyers, mostly foreign, were buying homes by paying for them in cash. Average American home owners, of whom one in three is on the verge of financial ruin, aren’t fueling such buying frenzies. Skyrocketing real-estate prices in America’s selected urban centers are likely the result of a foreign influx of cash, more particularly mainland Chinese money, which is now flooding major American cities in the billions of dollars. Last year, Bloomberg revealed a secret path that allows wealthy Chinese to transfer billions overseas. Before that, The Wall Street Journal outlined the questionable mechanics of moving cash out of China, where wealthy mainland Chinese bring their funds to Hong Kong and from there to other parts of the world.

Most of it ends up invested in favorite foreign destinations — namely the U.S., Australia, and Canada. Despite some Chinese banks across the border from Hong Kong allowing for a trial program (introduced in 2011) for overseas property purchases and emigration, the Bloomberg report noted that, “China’s foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 each year and ban them from transferring the currency abroad directly.” So it’s illegal for mainland Chinese to take more than $50,000 out of the country — but wealthy Chinese are smuggling out billions. You can bet your last dollar that a good chunk of that Chinese money (of dubious origin) was earmarked for residential real-estate purchases, that is, the roofs over American heads.

Let ‘er rip.

• $112 Billion Fund Manager Worries Bond-Market Fire Doors Are Locked (Bloomberg)

If you haven’t realized by now that a lot of people are worried about bond-market liquidity, then I’m not sure why you’re bothering to read me. But in the hope that you’ll at least start taking an interest in where your pension fund is hanging out these days, maybe you’ll listen when a guy who manages $112 billion tells you that if bad things happen in bond land, the fire doors might turn out to be locked. Martin Gilbert runs Aberdeen Asset Management which, as previously mentioned, manages rather a lot of money. On Monday, he explained why he’s lined up a $500 million overdraft facility and has a further $1 billion of cash: “It will get ugly. You want bank lines in place in case you have to meet a redemption and there is no market.”

Let’s pause for a second to parse that sentence. Gilbert was talking about the risk of either Greece leaving the euro or the U.S. starting to raise borrowing costs. Either or both could spook investors, who in turn might ask Aberdeen for their money back. Except Aberdeen is concerned it might not be able to sell the things it bought with their money – so it would either have to deplete its cash to make the repayments, or borrow money to meet those redemptions. Setting aside a rainy day fund of $1.5 billion, just in case, is “a substantial amount but you’ve got to be prepared,” Gilbert said.

With the benefit of hindsight, I decided a while ago that the starting gun for the credit crunch was fired on Aug. 9, 2007. That day, BNP Paribas told investors it was freezing redemptions from three of its investment funds because it had decided there was no reliable way to determine the value of the assets in the funds, which in turn would make it impossible to sell things to repay investors. In other words, to echo Aberdeen’s Gilbert, there was no market.

Permanently.

• Fast Track Hands the Money Monopoly to Private Banks, Permanently (Ellen Brown)

On June 3, 2015, WikiLeaks released 17 key documents related to TiSA, which is considered perhaps the most important of the three deals being negotiated for “fast track” trade authority. The documents were supposed to remain classified for five years after being signed, displaying a level of secrecy that outstrips even the TPP’s four-year classification. TiSA involves 51 countries, including every advanced economy except the BRICS. The deal would liberalize global trade in services covering close to 80% of the US economy, including financial services, healthcare, education, engineering, telecommunications, and many more. It would restrict how governments can manage their public laws, and it could dismantle and privatize state-owned enterprises, turning those services over to the private sector.

Recall the secret plan devised by Wall Street and U.S. Treasury officials in the 1990s to open banking to the lucrative derivatives business. To pull this off required the relaxation of banking regulations not just in the US but globally, so that money would not flee to nations with safer banking laws. The vehicle used was the Financial Services Agreement concluded under the auspices of the World Trade Organization’s General Agreement on Trade in Services (GATS). The plan worked, and most countries were roped into this “liberalization” of their banking rules. The upshot was that the 2008 credit crisis took down not just the US economy but economies globally. TiSA picks up where the Financial Services Agreement left off, opening yet more doors for private banks and other commercial service industries, and slamming doors on governments that might consider opening their private banking sectors to public ownership.

What the f*ck is this? How much Mengele literature have these bozos been reading?

• CIA Torture Has Broken Spy Agency Rule On Human Experimentation (Guardian)

The Central Intelligence Agency had explicit guidelines for “human experimentation” before, during and after its post-9/11 torture of terrorism detainees, the Guardian has learned, which raise new questions about the limits on internal oversight over the agency’s in-house and contracted medical research. Sections of a previously classified CIA document, made public by the Guardian on Monday, empower the agency’s director to “approve, modify, or disapprove all proposals pertaining to human subject research”. The leeway provides the director, who has never in the agency’s history been a medical doctor, with significant influence over limitations the US government sets to preserve safe, humane and ethical procedures on people.

CIA director George Tenet approved abusive interrogation techniques, including waterboarding, designed by CIA contractor psychologists. He further instructed the agency’s health personnel to oversee the brutal interrogations – the beginning of years of controversy, still ongoing, about US torture as a violation of medical ethics. But the revelation of the guidelines has prompted critics of CIA torture to question how the agency could have ever implemented what it calls “enhanced interrogation techniques” – despite apparently having rules against “research on human subjects” without their informed consent.

Indeed, despite the lurid name, doctors, human-rights workers and intelligence experts consulted by the Guardian said the agency’s human-experimentation rules were consistent with responsible medical practices. The CIA, however, redacted one of the four subsections on human experimentation. “The more words you have, the more you can twist them, but it’s not a bad definition,” said Scott Allen, an internist and medical adviser to Physicians for Human Rights. The agency confirmed to the Guardian that the document was still in effect during the lifespan of the controversial rendition, detention and interrogation program.

Just on of the risks to pension funds.

• How Pension Funds Face Huge Risk From Climate Change (Guardian)

The pension funds of millions of people across the world, including teachers, public sector workers, health staff and academics in the UK and US, are heavily exposed to the plummeting coal sector, a Guardian analysis has revealed. It has also found that just a dozen people, including the owner of Chelsea FC, Roman Abramovich, own coal reserves equivalent to the annual carbon emissions of China, the world’s biggest polluter. The UN, which advocates a shift to clean energy, has more than $100m (£65m) invested in coal through its own pension fund. The Guardian examined the ownership of the biggest 50 publicly traded coal companies, ranked by the reserves held which in total are equivalent to more than 11 years of global emissions.

This alone could push the planet past beyond the 2C of climate change deemed dangerous by the world’s governments. A fast-growing, global fossil fuel divestment movement, backed by the Guardian’s Keep it in the Ground campaign, is having particular success in persuading investors to dump coal stocks. The world’s largest sovereign wealth fund, held by Norway, decided earlier this month to sell off more than $8bn of coal assets. The World Bank and the Bank of England have both warned that global action to cut carbon emissions could render fossil fuel reserves worthless, as analyses show most must remain in the ground. Coal, the most polluting fuel, is particularly at risk and investment bank Goldman Sachs declared in January the fuel had reached “retirement age”.

The coal price has crashed by 60% since 2011, as gas, renewable energy and climate policies have damaged demand. Tom Sanzillo, a former New York State comptroller who oversaw a $156bn pension fund, said: “Coal is arguably the worst performing sector in the whole world. Pension funds, which have a fiduciary duty to make money, have no business owning any of these companies. It is not a prospective risk, it is a now risk.” “The coal sector is falling into a financial death spiral,” said Mark Campanale, founder of the Carbon Tracker Initiative, which has pioneered analysis of the financial risks of fossil fuels. “The members of university, healthcare and UN pension funds are smart and informed people; they will be shocked to discover just how far exposed their funds are to coal investment risk.”

How hostile will Washington be when he visits later this year?

• Pope Warns Of Destruction Of World’s Ecosystem In Leaked Encyclical (Guardian)

Pope Francis will this week call for changes in lifestyles and energy consumption to avert the “unprecedented destruction of the ecosystem” before the end of this century, according to a leaked draft of a papal encyclical. In a document released by an Italian magazine on Monday, the pontiff will warn that failure to act would have “grave consequences for all of us”. Francis also called for a new global political authority tasked with “tackling … the reduction of pollution and the development of poor countries and regions”. His appeal echoed that of his predecessor, pope Benedict XVI, who in a 2009 encyclical proposed a kind of super-UN to deal with the world’s economic problems and injustices.

According to the lengthy draft, which was obtained and published by L’Espresso magazine, the Argentinean pope will align himself with the environmental movement and its objectives. While accepting that there may be some natural causes of global warming, the pope will also state that climate change is mostly a man-made problem. “Humanity is called to take note of the need for changes in lifestyle and changes in methods of production and consumption to combat this warming or at least the human causes that produce and accentuate it,” he wrote in the draft. “Numerous scientific studies indicate that the greater part of the global warming in recent decades is due to the great concentration of greenhouse gases … given off above all because of human activity.”

The pope will also single out those obstructing solutions. In an apparent reference to climate-change deniers, the draft states: “The attitudes that stand in the way of a solution, even among believers, range from negation of the problem, to indifference, to convenient resignation or blind faith in technical solutions.” The leak has frustrated the Vatican’s elaborate rollout of the encyclical on Thursday. Journalists were told they would be given an early copy on Thursday morning and that it would be released publicly at noon following a press conference. On Monday evening, the Vatican asked journalists not to publish details of the draft, emphasising that it was not the final text. A Vatican official said he believed the leak was an act of “sabotage against the pope”.

Debt Rattle April 20 2015

Apr 202015

April 20, 2015 Posted by Raúl Ilargi Meijer at 9:12 am Finance Tagged with: bank reserves, BP, China, contagion, debt, Fed, IMF, NATO, shorts, taper 6 Responses »

DPC Broad Street lunch carts, New York 1906

• World Braces for Taper Tantrum II Even as Yellen Soothes Nerves (Bloomberg)

• Caveat Creditor As IMF Chiefs Mull Unpayable Debts (AEP)

• Fed Crisis-Liquidity Function Reviewed for Potential Use by IMF (Bloomberg)

• Draghi Tells Euro Shorts To “Make His Day”, Again (Zero Hedge)

• Greece’s Varoufakis Warns Of Grexit Contagion (Reuters)

• Can Beijing Tame China’s Bull Market? (MarketWatch)

• China Cuts Bank Reserves Again To Fight Slowdown (Reuters)

• Why China’s RRR Cut Reeks Of Desperation (CNBC)

• China to Investors: Don’t Forget That Stocks Can Lose Money Too (Bloomberg)

• China Cracks Down On Golf, The ‘Sport For Millionaires’ (NY Times)

• China’s President Xi Jinping To Unveil $46 Billion Deal In Pakistan (BBC)

• You Do Need A Weatherman (Steve Keen)

• Auckland Property: Cashed-Up And Heading Off (NZ Herald)

• Secret Files Reveal the Structure of Islamic State (Spiegel)

• Russia Has Bigger Concerns Than Oil, Ruble: Deputy PM (CNBC)

• 5 Years After BP Spill, Drillers Push Into Riskier Depths (AP)

• US Army Commander Urges NATO To Confront Russia (RT)

We should get rid of the lot.

• World Braces for Taper Tantrum II Even as Yellen Soothes Nerves (Bloomberg)

The world economy is about to discover if to be forewarned by the Federal Reserve is to be forearmed. Two years since the Fed triggered a selloff of their assets in the so-called “taper tantrum,” the finance chiefs of emerging markets left Washington meetings of the IMF praising Chair Janet Yellen for the way she is signaling plans to raise U.S. interest rates. The test now is whether developing nations have done enough to insulate their economies from the threats of a higher U.S. dollar and capital flight once the Fed boosts borrowing costs for the first time since 2006. How successful they are will help determine the strength of global growth that’s already taking a hit from weaker expansions in China and Brazil.

“The Fed is trying its best to be as transparent as possible, to explain its considerations,” Tharman Shanmugaratnam, Singapore’s finance minister, said in an interview. “But it doesn’t mean that ensures us of an orderly exit. One way or another there’s going to be some disturbance.” Yellen is seeking to avoid the May 2013 episode of her predecessor Ben S. Bernanke, when his suggestion that the Fed might soon wind down its bond-buying program prompted investors to flee the risk in emerging markets. India’s rupee and the Turkish lira both tumbled to record lows. While Yellen didn’t speak publicly during the IMF’s spring gathering, officials said her message behind closed doors was reassuring.

Russian Finance Minister Anton Siluanov told reporters that Yellen informed fellow Group of 20 officials that any U.S. rate increases would be “transparent and understandable.” The latest Bloomberg survey shows 71% of participating economists expect the Fed to raise rates from near zero in September after a slowing of U.S. activity diluted speculation it would act as soon as June. “The Fed has been very clear about saying it would be a very steady process rather than an abrupt process, and I think that should calm people down,” Reserve Bank of India Governor Raghuram Rajan said in Washington. Malaysian central bank Governor Zeti Akhtar Aziz said in an interview that markets may be calmer following the Fed’s move than before. “I believe that when this interest-rate adjustment occurs, conditions will actually stabilize,” she said.

“We must not let our rulers load us with perpetual debt.”

• Caveat Creditor As IMF Chiefs Mull Unpayable Debts (AEP)

The IMF has sounded the alarm on the exorbitant levels of debt across the world, this time literally. The theme trailer to its fiscal forum on the ‘political economy of high debt’ plays on our fears with the haunting tension of a Hitchcock thriller. A quote from Thomas Jefferson flashes across the screen in blood-red colours: “We must not let our rulers load us with perpetual debt.” We learn that public debt in the rich economies fell from 124pc of GDP at the end of Second World War to 29pc in 1973, a dream era that we have left behind. The debt burden has since climbed at a compound rate of 2pc a year, accelerating into an upward spiral to 105pc of GDP after the Lehman crash. It is as if we had fought another world war. A baby boom and surging work-force enabled us to grow out of debt in the 1950s and 1960s without noticing it.

No such outcome looks plausible today. The IMF’s World Economic Outlook describes a prostrate planet caught in a low-growth trap as the population ages across the Northern Hemisphere, and productivity splutters. Nor is this malaise confined to the West. The fertility rate has collapsed across the Far East. China’s work-force is shrinking by three million a year. The report warned of a “persistent reduction” in the global growth rate since the Great Recession of 2008-2009, with no sign yet of a return to normal. “Lower potential growth will make it more difficult to reduce high public and private debt ratios,” it said.

Christine Lagarde, the Fund’s managing-director, calls it the “New Mediocre”. The height of elegance as always, and seemingly inexhaustible as she holds court at IMF Headquarters, Mrs Lagarde has learned the hard way that something is badly out of kilter in the world. The painful ritual of her IMF tenure has been to admit at each meeting that the previous forecasts were too hopeful. First it was Europe’s debt crisis. Now it is because China, Brazil, Russia, and a host of mini-BRICS have hit the limits of easy catch-up growth. This year the curse was finally broken. There will be no downgrade. The IMF is crossing its fingers that world growth will still be 3.5pc for 2015.

Yet the Fund’s underlying message is that sky-high debt ratios and old-age populations are a dangerous mix, leaving the world prone to the “Japanese” diseases of deflation and atrophy. The monetary and fiscal buffers are largely exhausted. Authorities have little left in their policy arsenal to fight the next downturn, whenever it comes. There is of course a time-honoured way to clear unpayable debts and wipe the slate clean. It is called default. Some wicked wit at the IMF ended the Hitchcock trailer with a killer quote, this one from the Canadian poet and novelist Margaret Atwood, strangely constructed but pithy in its way: “And then the REVENGE that comes when they are not paid back.

This touches a raw nerve, for that is more or less what may happen within weeks if an angry Greece – aggrieved at the way it was sacrificed to save Europe’s banks in 2010 – becomes the first developed country to miss a payment to the IMF, and perhaps the first of a long string of debtor-nations to turn the tables on their foreign creditors. Athens is where it all begins. George Osborne said talk of a Grecian debacle was on everybody’s lips at this year’s Spring Meeting. “The mood is notably more gloomy, and it is now clear to me that a misstep or a miscalculation by either side could easily return European economies to the kind of perilous situation we saw three or four years ago. The crunch appears to be coming in May,” he said.

Yeah, more power to the IMF, that’s a great idea.

• Fed Crisis-Liquidity Function Reviewed for Potential Use by IMF (Bloomberg)

IMF member nations are discussing how to expand the lender’s mandate to include keeping markets liquid during a financial crisis, a role played by a group of major central banks led by the Federal Reserve in 2008. The IMF’s main committee of central bank governors and finance ministers is working on ways for the fund to provide a better financial “safety net” during a crisis, said Singapore Finance Minister Tharman Shanmugaratnam, who last month finished a four-year term as chairman of the panel. Singapore remains a member of the International Monetary and Financial Committee.

“In the last crisis, the Fed and some other central banks had a system of swaps that was applied to only certain financial centers, but you can’t leave it to an individual central bank to make those decisions,” he said in an interview Friday in Washington, as officials from around the world gathered for the IMF’s spring meetings. “It has to be a global player, and the IMF is the only credible institution to perform that role.” The Washington-based IMF needs to evolve into more of a “system-wide policeman” that enforces global financial stability, rather than solely a lender to individual countries that run into trouble, said Shanmugaratnam, 58, who also serves as Singapore’s deputy prime minister.\ IMF Managing Director Christine Lagarde said this month that the world could be in for a “bumpy ride” when the Fed starts raising interest rates, with commodity-exporting emerging economies likely to take a major hit.

The Fed set up foreign-exchange swap lines during the crisis with major central banks, including the ECB, Bank of Japan and Bank of Canada, as well as some smaller and emerging-market nations such as Singapore, South Korea, Mexico and New Zealand. Under the program, foreign central banks exchanged their countries’ currencies for U.S. dollars, which they loaned to local financial institutions to shore up their liquidity. Outstanding swaps peaked at almost $600 billion in late 2008. Some emerging-market economies were rebuffed for swap agreements with the Fed, including Indonesia, India, Peru and the Dominican Republic, according to the book “The Dollar Trap” by Eswar Prasad, a former IMF official.

I’d be more worried about periphery bonds perhaps. But the euro too has a ways to fall.

• Draghi Tells Euro Shorts To “Make His Day”, Again (Zero Hedge)

With a “defiant” Syriza determined to hold onto any shred of dignity and legitimacy that may remain in the wake of months of painful negotiations with its creditors and with a €5 billion advance from Russia (a large chunk of which will promptly be paid to the IMF which use it to bailout Ukraine which will hand it right back to Russia) shaping up to be the last lifeline for Greece before Athens is reduced to issuing IOUs to pay pensions and salaries, the focus is beginning to shift away from Grexit and towards contagion risk. The worry is that once Greece goes, both the credit market and periphery depositors will suddenly realize that the EMU is not “indissoluble,” but is in fact nothing more than a confederation of fixed exchange rates.

This realization could (and to a certain extent already has) cause credit investors to begin pricing redenomination risk back into sovereign spreads and, far more importantly (because as UBS recently noted, bonds don’t cause breakups, bank runs do), may lead depositors to question the wisdom of holding their euros in bank accounts where they’re earning next to no interest and where, should some “accident” occur, they are subject to conversion into a national currency that would swiftly collapse against the euro once introduced.

And so, with every sell side European credit strategist trying to figure out what happens when €60 billion in monthly asset purchases by a central bank collide head on with an unprecedented sovereign default and with speculators’ net short position on the EUR now at levels last seen in 2012, it’s time to bring out the big guns with Mario Draghi staging a sequel to his now famous “whatever it takes” speech which came in the summer of 2012, when spreads were blowing out across the periphery and when euro net shorts looked a lot like they do today. While conceding that a Greek exit from the euro would put everyone in “uncharted waters,” Draghi says he has the tools to combat contagion and as for shorting the euro, well, perhaps the best way to sum up Draghi’s position is to quote Clint Eastwood: “go ahead, make my day.”

“”Once the idea enters peoples’ minds that monetary union is not forever, speculation begins..”

• Greece’s Varoufakis Warns Of Grexit Contagion (Reuters)

Greece’s Finance Minister Yanis Varoufakis said in an interview broadcast on Sunday that if Greece were to leave the euro zone, there would be an inevitable contagion effect. “Anyone who toys with the idea of cutting off bits of the euro zone hoping the rest will survive is playing with fire,” he told La Sexta, a Spanish TV channel, in an interview recorded 10 days ago. “Some claim that the rest of Europe has been ring-fenced from Greece and that the ECB has tools at its disposal to amputate Greece, if need be, cauterize the wound and allow the rest of euro zone to carry on.”

“I very much doubt that that is the case. Not just because of Greece but for any part of the union,” he said, speaking in English. “Once the idea enters peoples’ minds that monetary union is not forever, speculation begins … who’s next? That question is the solvent of any monetary union. Sooner or later it’s going to start raising interest rates, political tensions, capital flight.” His comments were recorded before those of Mario Draghi, the European Central Bank’s president, who this weekend said the euro zone was better equipped than it had been in the past to deal with a new Greek crisis but warned of uncharted waters if the situation deteriorates.

“This bull run is taking place as the Chinese economy slumps under a sea of debt..”

• Can Beijing Tame China’s Bull Market? (MarketWatch)

Authorities in China face the delicate task of taming an equity bull market of their own making, which could now be spiraling out of control. Last week, the announcement of new measures to allow fund managers to short stocks not only hit Chinese shares, but also spooked the global markets. This was followed up by warnings from China’s securities regulator to small investors not to borrow money or sell property to buy stocks. A warning for equity bulls to cool off certainly looks overdue. Stock turnover reached a record 1.53 trillion yuan ($247 billion) on Friday, with stock-trading accounts reportedly being opened at a rate of 1 million every two days. Margin account balances reached a record 1.16 trillion yuan. But should global markets worry if day traders in Shenzhen or Shanghai are about to lose their shirts?

China’s casino-like equity markets are largely sealed off from the outside world, after all. Foreign ownership of domestic Chinese shares is still a fraction of 1%, even with new initiatives such as the recent opening of the Shanghai-Hong Kong Stock Connect. The concern for global markets, however, is not equity-market contagion but the potential hole a stock-market bust could blow in the world’s second-largest economy. This bull run is taking place as the Chinese economy slumps under a sea of debt, with exports now also going south along with the property market. This hardly sounds like conditions ripe for rallying shares — but this is no normal rally. The real wild card to consider is the fact that this bull market has the fingerprints of the ruling Communist Party all over it.

They initiated it, meaning an official policy shift could also see it reverse — although that looks unlikely for now. Official state media have been cheerleading this rally by extolling the benefits of share ownership in a series of articles since last year. But what has really unleashed “animal spirits” of day traders has been the re-opening of the domestic initial public offering (IPO) market. Thanks to systematic underpricing orchestrated by the state regulator, investors have been all but guaranteed spectacular gains. According to a first-quarter report from accountants Ernst & Young, there were 70 domestic Chinese IPOs, all of which rose by the maximum 44% allowed on the first day of trading. Average gains for IPOs have been around 200% this year.

What’s the reserve requirement over here these days? 0.05%?

• China Cuts Bank Reserves Again To Fight Slowdown (Reuters)

China’s central bank on Sunday cut the amount of cash that banks must hold as reserves, the second industry-wide cut in two months, adding more liquidity to the world’s second-biggest economy to help spur bank lending and combat slowing growth. The People’s Bank of China (PBOC) lowered the reserve requirement ratio for all banks by 100 basis points to 18.5%. The reduction is effective from April 20, the central bank said in a statement on its website www.pbc.gov.cn. The latest cut in the reserve requirement shows how the central bank is stepping up efforts to ward off a sharp slowdown in the economy.

Weighed down by a property downturn, factory overcapacity and local debt, growth is expected to slow to a quarter-century low of around 7% this year from 7.4% in 2014, even with expected additional stimulus measures. The PBOC last cut the reserve requirement ratio for all commercial banks by 50 basis points on February 4, the first industry-wide cut since May 2012. The central bank has also cut interest rates twice since November in a bid to lower borrowing costs and spur demand.

Too late: “..they don’t want to see bubble territory..”

• Why China’s RRR Cut Reeks Of Desperation (CNBC)

The People’s Bank of China (PBoC) is “desperate” to control Shanghai’s red-hot equity rally, analysts said, after the central bank slashed the reserve requirement ratio (RRR) on Sunday. The 100 basis-point RRR cut to 18.5% is the biggest since 2008 and comes in response to a sharp selloff in stock futures on Friday after the China Securities Regulatory Commission (CSRC) tightened margin trading rules. The CSRC aims to cool Shanghai’s stock market, which is up over 30% year to date at seven-year highs. Futures plunged during late trading on Friday, with the China A50 futures contract down 6% in New York.

“After the announcement on Friday, stock futures were looking horrible so something needed doing to put a floor under that from a short-term point of view. But everybody’s going to take a look at this and say ‘hold on, why are they [PBoC] overreacting so strongly?’ People are going to start sensing desperation here,” Paul Gambles, co-founder of MBMG Group, told CNBC on Monday. Indeed, policy watchers were scratching their heads over the series of conflicting announcements. The PBoC is scrambling to ensure stability in China’s notoriously volatile share market, said Mark Andersen, global co-head of Asset Allocation at UBS CIO Wealth Management. “They want to see markets go up to some extent, but not out of control. With some of this margin financing, they want to see a relatively stable capital market with property prices falling so they don’t mind equity prices moving up a bit to support the broader economy, but they don’t want to see bubble territory,” Anderson said.

Also too late. People think Beijing has it all under control, and when the markets crash, they will be very angry.

• China to Investors: Don’t Forget That Stocks Can Lose Money Too (Bloomberg)

After the longest-ever rally in Chinese equities, investors are getting a reminder that the $7.3 trillion market isn’t just a one-way bet. China’s securities regulator jolted traders after the close of local bourses Friday when it banned a source of financing for margin trades and made it easier for short sellers to wager that stocks will fall. Offshore futures and exchange-traded funds linked to the world’s second-largest stock market sank, with the iShares China Large-Cap ETF tumbling 4.2% in the U.S. While China bulls will draw some comfort from the central bank’s biggest cut to lenders’ reserve requirements since 2008 on Sunday, last week’s sell-off in offshore markets shows how vulnerable the Shanghai Composite Index is to a pullback after going 452 days without a 10% drop from a recent high.

The benchmark gauge posted an average peak-to-trough retreat of 28% after six previous rounds of policy intervention to curtail stock speculation since 1996, according to Bank of America. “Institutional investors as well as authorities have had some concerns over the sharp rise in prices and trading,” Michael Kass at Baron Capital, whose $1.53 billion emerging-markets fund has outperformed 95% of peers tracked by Bloomberg over the past three years, said by e-mail on Friday. “This will likely cool some of the recent enthusiasm.” The Shanghai Composite’s 115% surge from last year’s low on Jan. 20 is challenging authorities as they seek to weigh the benefits of rising share prices against the risk that individual investors will get burned by excessive speculation.

Traders in Shanghai have borrowed a record 1.2 trillion yuan ($194 billion) to buy equities via margin trades, while new investors have opened an unprecedented number of stock accounts this year. The Shanghai Composite trades at 16.5 times estimated earnings for the next 12 months, the highest valuation in five years, even after data last week showed economic growth slowed to the weakest pace since 2009 in the first quarter. On Friday, the China Securities Regulatory Commission prohibited the margin-trading businesses of brokerages from using so-called umbrella trusts, which allow investors to take on more leverage. Authorities also allowed fund managers to lend shares for short sales, a move that will make it easier to execute bearish bets, and expanded the number of stocks available for this kind of trading.

“..drugs, gambling, prostitution, ill-gotten wealth overflowing banquet tables and golf.” That’s the life we’re all supposed to long for, isn’t it?

• China Cracks Down On Golf, The ‘Sport For Millionaires’ (NY Times)

President Xi Jinping’s crackdown on vice and corruption in China has gone after drugs, gambling, prostitution, ill-gotten wealth and overflowing banquet tables. Now it has turned to a less obvious target: golf. In a flurry of recent reports, state-run news outlets have depicted the sport as yet another temptation that has led Communist Party officials astray. A top official at the Commerce Ministry is under investigation on suspicion of allowing an unidentified company to pay his golf expenses. The government has shut down dozens of courses across the country built in violation of a ban intended to protect China’s limited supplies of water and arable land.

And in the southern province of Guangdong, home to the world’s largest golf facility, the 12-course Mission Hills Golf Club, party officials have been forbidden to golf during work hours “to prevent unclean behavior and disciplinary or illegal conduct.” The provincial anticorruption agency has set up a hotline for reporting civil servants who violate nine specific regulations, including prohibitions on betting on golf, playing with people connected to one’s job, traveling on golf-related junkets or holding positions on the boards of golf clubs. “Like fine liquor and tobacco, fancy cars and mansions, golf is a public relations tool that businessmen use to hook officials,” the newspaper of the party’s antigraft agency declared on April 9. “The golf course is gradually changing into a muddy field where they trade money for power.”

Fresh from the Monopoly press.

• China’s President Xi Jinping To Unveil $46 Billion Deal In Pakistan (BBC)

China’s President Xi Jinping is due in Pakistan, where he is expected to announce $46bn of investment. The focus of the spending is on building a China-Pakistan Economic Corridor (CPEC), running from Gwadar in Pakistan’s Balochistan province to China’s western Xinjiang region. Pakistan hopes the investment will boost its struggling economy and help end chronic power shortages. Leaders are also expected to discuss co-operation on security. Mr Xi will spend two days holding talks with his counterpart Mamnoon Hussain, Prime Minister Nawaz Sharif and other ministers. He will address parliament on Tuesday. Deals worth some $28bn are ready to be signed during the visit, with the rest to follow. The sum significantly outweighs American investment in Pakistan.

Under the CPEC plan, China’s government and banks will lend to Chinese companies, so they can invest in projects as commercial ventures. A network of roads, railways and energy developments will eventually stretch some 3,000km (1,865 miles). Some $15.5bn worth of coal, wind, solar and hydro energy projects will come online by 2017 and add 10,400 megawatts of energy to Pakistan’s national grid, according to officials. A $44m optical fibre cable between the two countries is also due to be built. The projects will give China direct access to the Indian Ocean and beyond, marking a major advance in its plans to boost its economic influence in central and south Asia. Pakistan, meanwhile, hopes the investment will enable it to transform itself into a regional economic hub.

Ahsan Iqbal, the Pakistani minister overseeing the plan, told the AFP news agency that these were “very substantial and tangible projects which will have a significant transformative effect on Pakistan’s economy”. Mr Xi is also expected to discuss security issues with Mr Sharif, including China’s concerns that Muslim separatists from Xinjiang are linking up with Pakistani militants. “China and Pakistan need to align security concerns more closely to strengthen security co-operation,” he said in a statement to Pakistani media on Sunday. “Our cooperation in the security and economic fields reinforce each other, and they must be advanced simultaneously.”

Steve on non-linear economics.

• You Do Need A Weatherman (Steve Keen)

I’ve just come back from the annual Institute for New Economic Thinking conference in Paris, where the President of INET Rob Johnson is infamous for opening every session he chairs with an apt set of lyrics from the 1960s. I’ve aped Rob here by misquoting one of Bob Dylan’s great lines “You don’t need a weatherman to know which way the wind blows”. In fact, you do. Why? Because Weathermen know a lot more about which way the wind blows now that they did back in the 1960s, thanks to the work of a lesser-known icon of the 1960s, Edward Lorenz. A mathematician and a meteorologist, Lorenz was dissatisfied with the methods then used to predict the weather—which were a combination of looking for patterns in historical data, and using what mathematicians call linear models.

He demonstrated the importance of nonlinear effects in the weather in a seminal paper in 1963 (two years before Dylan released Subterranean Homesick Blues), and meteorologists rapidly moved from linear to nonlinear thinking. Why is nonlinear thinking better than linear? Ironically, given how defensive the Old Guard in economics is of its generally linear approach, one of the best explanations of what linear thinking is, and why it is misleading, was recently given by the chief economist at the IMF, Olivier Blanchard. Looking back at the failure of mainstream economic models to forewarn of the 2008 economic crisis, Blanchard noted that these models only made sense if “small shocks had small effects and a shock twice as big as another had twice the effect on economic activity”:

These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity.

The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations. (Blanchard, “Where Danger Lurks”, September 2014)

Then along came the economic crisis, and suddenly in the real world—unlike in their models—“the effect of a shock depended on the rest of the economic environment”, and what appeared to economists to be a small shock (the Subprime mortgage crisis) had a very large impact on the global economy. Lorenz’s criticism of linear weather models was essentially the same: linear models grossly underestimated the interconnectedness of the weather. Meteorologists took this message to heart, and developed highly nonlinear models in which “‘cause and effect’ relationships between the basic variables can become ferociously complex”. This required some very difficult work in mathematics and computing—but it was worth it, given the devastating real-world impact of an unanticipated hurricane on the real world. The world has benefited enormously from this work by meteorologists over the last half century.

They’re not all stupid.

• Auckland Property: Cashed-Up And Heading Off (NZ Herald)

As house prices in the country’s biggest city spiral out of control, Auckland homeowners are cashing in their chips and buying mansions in the regions.Thousands of property owners are now sitting on million-dollar goldmines thanks to rampant capital gain. The lure of a traffic-free, laid-back lifestyle with outdoor space for the children is proving tempting for many, and one-in-10 Hawkes Bay sales are now to ex-pat Aucklanders. The Bay of Islands and Marlborough are also drawing “Jafa” homeowners keen to escape the rat race. They have newly acquired equity thanks to soaring Auckland house prices which hit a median of $720,000 last month – a 13% jump in the past year alone.

In Marlborough, with its climate, vineyards and scenery, the median selling price last month was $316,500. Bayleys Marlborough director Andy Poswillo said the median price of a home in Auckland would buy a dated two-to-four-bedroom house or unit, with single car garaging set on a “pocket-handkerchief of lawn”.In Marlborough, the same money could buy a modern three-to-five-bedroom house, some with great views, a swimming pool, hobby orchard and up to 4000sq m of land.”It is easy to see why the temptation is there to cash up, do away with the mortgage and move down the line.”Mr Poswillo said at least eight Auckland families had bought local properties in the past three months.

Many buyers had negotiated “work from home” or satellite office arrangements to maintain their city careers. “They all share the same sentiment; they are tired of chipping away at their colossal mortgages for homes that are failing to serve their needs.”Put simply they want a better lifestyle for their kids and to dump the financial stress of living in the big smoke.”On Saturday the Weekend Herald revealed the average Auckland home had earned nearly $230 a day in the past year – nearly twice what the average worker earned from their job.

Good article.

• Secret Files Reveal the Structure of Islamic State (Spiegel)

Aloof. Polite. Cajoling. Extremely attentive. Restrained. Dishonest. Inscrutable. Malicious. The rebels from northern Syria, remembering encounters with him months later, recall completely different facets of the man. But they agree on one thing: “We never knew exactly who we were sitting across from.” In fact, not even those who shot and killed him after a brief firefight in the town of Tal Rifaat on a January morning in 2014 knew the true identity of the tall man in his late fifties. They were unaware that they had killed the strategic head of the group calling itself “Islamic State” (IS). The fact that this could have happened at all was the result of a rare but fatal miscalculation by the brilliant planner. The local rebels placed the body into a refrigerator, in which they intended to bury him.

Only later, when they realized how important the man was, did they lift his body out again. Samir Abd Muhammad al-Khlifawi was the real name of the Iraqi, whose bony features were softened by a white beard. But no one knew him by that name. Even his best-known pseudonym, Haji Bakr, wasn’t widely known. But that was precisely part of the plan. The former colonel in the intelligence service of Saddam Hussein’s air defense force had been secretly pulling the strings at IS for years. Former members of the group had repeatedly mentioned him as one of its leading figures. Still, it was never clear what exactly his role was.

But when the architect of the Islamic State died, he left something behind that he had intended to keep strictly confidential: the blueprint for this state. It is a folder full of handwritten organizational charts, lists and schedules, which describe how a country can be gradually subjugated. SPIEGEL has gained exclusive access to the 31 pages, some consisting of several pages pasted together. They reveal a multilayered composition and directives for action, some already tested and others newly devised for the anarchical situation in Syria’s rebel-held territories. In a sense, the documents are the source code of the most successful terrorist army in recent history.

Investment finance.

• Russia Has Bigger Concerns Than Oil, Ruble: Deputy PM (CNBC)

Faced with the triple whammy of plunging oil prices, currency volatility and Western sanctions, there’s no dearth of challenges for Russia’s ailing economy, but Deputy Prime Minister Arkady Dvorkovich said what hurts most is the scarcity of financing for new investments. “The shortness of financing for new investments is where the Russian economy is being hit in the most important way,” Dvorkovich told CNBC on the sidelines of World Economic Forum on East Asia in Jakarta. “How do we deal with this? We are working with new partners. This is why we are in China, in other countries, looking for new partners who can bring new investments into the country,” he added.

Russia’s economy, which grew by just 0.6% in 2014, is expected to enter a deep recession this year under the weight of lower oil prices and sanctions, which have compounded the country’s underlying structural weaknesses and undermined business and consumer confidence. Earlier this month, the IMF slashed its growth outlook for the country, forecasting a contraction of 3.8% in 2015 and 1.1% in 2016. Its earlier estimate was for a contraction of 3% this year and 1% next. Nevertheless, Dvorkovich says the country has built up enough reserves to weather the rout in the commodities market.

“We were not counting on higher oil prices in our economic policies. We were saving some money for the times like what we face now, so we have reserves that allow us to smooth this stage and to help poor families and increase unemployment benefits,” he said. As for the precipitous fall in the ruble over the past year, Dvorkovich said the implications are not all negative as it gives Russian manufacturing and agricultural exports a pricing edge in global markets. Responding to criticism over the Kremlin’s decision to lift a self-imposed ban on supplying a sophisticated missile air defense system to Iran, Dvorkovich said: “We are not breaking any sanctions.” “We will fulfill our commitments and responsibilities in full compliance with international legislations. Our partners shouldn’t doubt that we would work in that manner,” he said.

The price of oil better stay down, or they’ll do it too.

• 5 Years After BP Spill, Drillers Push Into Riskier Depths (AP)

Five years after the nation’s worst offshore oil spill, the industry is working on drilling even further into the risky depths beneath the Gulf of Mexico to tap massive deposits once thought unreachable. Opening this new frontier, miles below the bottom of the Gulf, requires engineering feats far beyond those used at BP’s much shallower Macondo well. But critics say energy companies haven’t developed the corresponding safety measures to prevent another disaster or contain one if it happens — a sign, environmentalists say, that the lessons of BP’s spill were short-lived.

These new depths and larger reservoirs could exacerbate a blowout like what happened at the Macondo well. Hundreds of thousands of barrels of oil could spill each day, and the response would be slowed as the equipment to deal with it — skimmers, boom, submarines, containment stacks — is shipped 100 miles or more from shore. Since the Macondo disaster, which sent at least 134 million gallons spewing into the Gulf five years ago Monday, federal agencies have approved about two dozen next-generation, ultra-deep wells. The number of deepwater drilling rigs has increased, too, from 35 at the time of the Macondo blowout to 48 last month, according to data from IHS Energy, a Houston company that collects industry statistics.

Department of Interior officials overseeing offshore drilling did not provide data on these wells and accompanying exploration and drilling plans, information that The Associated Press requested last month. But a review of offshore well data by the AP shows the average ocean depth of all wells started since 2010 has increased to 1,757 feet, 40% deeper than the average well drilled in the five years before that. And that’s just the depth of the water. Drillers are exploring a “golden zone” of oil and natural gas that lies roughly 20,000 feet beneath the sea floor, through a 10,000-foot thick layer of prehistoric salt — far deeper than BP’s Macondo well, which was considered so tricky at the time that a rig worker killed in the blowout once described it to his wife as “the well from hell.”

Crazed.

• US Army Commander Urges NATO To Confront Russia (RT)

US army commander in Europe says Russia is a “real threat” urging NATO to stay united. The alliance is not interested in a “fair fight with anyone” and wants to have “overmatch in all systems,” Lieutenant-General Frederick “Ben” Hodges believes. “There is a Russian threat,” Hodges told the Telegraph, maintaining that Russia is involved in ongoing conflict in eastern Ukraine. A key objective for NATO is not to let Russia outreach it in terms of capabilities, the general said. “We’re not interested in a fair fight with anyone,” General Hodges stated. “We want to have overmatch in all systems. I don’t think that we’ve fallen behind but Russia has closed the gap in certain capabilities. We don’t want them to close that gap,” he revealed.

“The best insurance we have against a showdown is that NATO stands together,” he said, pointing to recent moves by traditionally neutral Sweden and Finland to cooperate more closely on defense with NATO. Moscow has expressed “special concern” over Finnish and Swedish moves towards the alliance viewing it as a threat aimed against Russia. “Contrary to past years, Northern European military cooperation is now positioning itself against Russia. This can undermine positive constructive cooperation,” Russia’s Foreign Ministry said in a statement. Hodges also said US expects its allies to contribute financially to the security umbrella provided by the NATO alliance, as its member states have been failing to allocate 2% of every member nation’s GDP to NATO budget.

“I think the question for each country to ask is: are they security consumers or security providers?” the general demanded. “Do they bring capabilities the alliance needs?” However, the general does not believe that the world is on the brink of another Cold War, saying that “the only thing that is similar now is that Russia and NATO have different views about what the security environment in Europe should be.” “I don’t think it’s the same as the Cold War,” he said, recalling “gigantic forces” and “large numbers of nuclear weapons” implemented in Europe a quarter of a century ago. “That [Cold War] was a different situation.”

Debt Rattle New Year’s Day 2015

Jan 012015

January 1, 2015 Posted by Raúl Ilargi Meijer at 12:37 pm Finance Tagged with: bankruptcy, contagion, Draghi, ebola, eurozone, firewall, Greece, jobs, oil, Saudi 8 Responses »

DPC Gillender Building, corner of Nassau and Wall Streets, built 1897, wrecked 1910 1900

• Third Of Listed UK Oil And Gas Drillers Face Bankruptcy (Telegraph)

• Occam’s Oil (Alhambra)

• AAA Says Motorists May Save $75 Billion on Gasoline in 2015 (Bloomberg)

• Bottom On Oil’s Plunge Unknown (CNBC)

• US Eases Oil Export Ban In Shot At OPEC As Crude Price Slumps (Telegraph)

• Even $20 Oil Will Struggle To Save Self–Harming Eurozone (Telegraph)

• ECB’s Draghi Says Eurozone Must ‘Complete’ Monetary Union (Reuters)

• Greek Expulsion From The Euro Would Demolish EMU’s Contagion Firewall (AEP)

• Europe’s Shadow Budget Venture Could Lead To Spiralling Debt (Sinn)

• Implications for the ECB and Its Preparation for Sovereign QE (Elga Bartsch)

• Seven Shocking Events Of 2014 (Ugo Bardi)

• For the Wealthiest Political Donors, It Was a Very Good Year (Bloomberg)

• Pension Funds Triple Stake In Reinsurance Business to $59 Billion (NY Times)

• Inside Obama’s Secret Outreach to Russia (Bloomberg)

• Italian President to Resign, Posing Challenge for Renzi (Bloomberg)

• Rousseff Begins Second Term as Brazil Economic Malaise Hits Home

• Eyes On Saudi Succession After King Hospitalized (CNBC)

• Saudi Succession Plan About Continuity (CNBC)

• Sony Hackers Threaten US News Media Organization (Intercept)

• Next Year’s Ebola Crisis (Bloomberg ed.)

“.. 70% of the UK’s publicly listed oil exploration and production companies are now unprofitable..” We can all see what that means for the global industry.

• Third Of Listed UK Oil And Gas Drillers Face Bankruptcy (Telegraph)

A third of Britain’s listed oil and gas companies are in danger of running out of working capital and even going bankrupt amid a slump in the value of crude, according to new research. Financial risk management group Company Watch believes that 70% of the UK’s publicly listed oil exploration and production companies are now unprofitable, racking up significant losses in the region of £1.8bn. Such is the extent of the financial pressure now bearing down on highly leveraged drillers in the UK that Company Watch estimates that a third of the 126 quoted oil and gas companies on AIM and the London Stock Exchange are generating no revenues. The findings are the latest warning to hit the oil and gas industry since a slump in the price of crude accelerated in November when the OPEC decided to keep its output levels unchanged.

The decision has caused carnage in oil markets with a barrel of Brent crude falling 45% since June to around $60 per barrel. The low cost of crude has added to the financial pressure on many UK listed drillers which are operating in offshore areas such as the North Sea where oil is more expensive to produce and discover. Ewan Mitchell, head of analytics at Company Watch, said: “Many of the smaller quoted oil and gas companies were set up specifically to take advantage of historically high and rising commodity prices. The recent large falls in the price of oil and gas could leave the weaker companies in difficulties, especially the ones that need to raise funds to keep exploring.” Losses are expected to be much deeper among privately-owned oil and gas explorers, which traditionally have more debt.

Company Watch has warned that almost 90% in the UK are loss making with accounts that show a £12bn accumulated black hole in their finances. Mr Mitchell said: “Investors in this sector need to focus primarily on the strength and structure of the balance sheet. A critical question is whether the balance sheet is sufficiently robust to keep the company in business until revenues are expected to flow and, crucially are they likely to be able to rely on existing funding lines while they wait? “Our fear is sustained low oil and gas prices will put an intolerable financial burden on the weaker companies, jeopardising many livelihoods.”

The findings of the Company Watch research are the latest downbeat analysis to hit the industry, which is preparing itself for oil prices to fall below current levels of $60 per barrel. Sir Ian Wood, founder of the oil and gas services giant Wood Group, warned earlier this month that the North Sea oil industry could lose 15,000 jobs in Scotland alone and that production could fall by 10% as drillers cut back. According to energy consultancy firm Wood Mackenzie, around £55bn of oil and gas projects in the North Sea and Europe could be shelved should prices fall below their current levels. Ratings agency Standard & Poor’s recently flagged its concern of some of Europe’s biggest oil and gas groups such as Royal Dutch Shell, BP and BG Group. Its primary worry is debt levels which it says have jumped from a combined $162.9bn (£105bn) for the five largest European companies in the sector at the end of 2008 to an estimated $240bn in 2014.

It’s about demand, not supply.

• Occam’s Oil (Alhambra)

As my colleague Joe Calhoun continually reminds us, everything that happens has happened before. The ongoing “struggle” to define what is driving crude oil prices lower is perhaps another instance of a past “cycle” being reborn. With oil prices now heading much closer to the $40’s than the $60’s, consistent commentary is increasingly swept aside. The move in crude these past six months is now nothing short of astounding. At about $52 current prices (which will probably move in either direction significantly by the time this is posted) the collapse from the recent peak now equals only past, significant global recessions under the oil regime that began in the mid-1980’s.

That comparison includes the 1997-98 Asian “flu” episode where the mainstream convention was also totally convinced of only massive oversupply defining price action. This was incorporated even into the International Energy Agency’s (IEA) estimates of oil inventories, as described shortly thereafter by certain incredulous oil observers:

Fourteen months have passed since the International Energy Agency’s oil analysts alerted the world to the mystery of the “missing barrels.” This new term referred to the discrepancy between the “well-documented” imbalance between supply and demand for oil and the lack of any stock build in the industrialized world’s petroleum supply. In April last year [1998], the IEA’s “missing supply” totaled only 170 million barrels. At the time, the IEA described this odd situation an “arithmetic mystery,” but assured us that these missing barrels would soon show up. As months passed by, stock revisions occasionally too place, but often in the wrong direction. Rather than shrink, the amount of “missing barrels” grew by epochal proportions.

By the publication date of the IEA’s April 1999 Oil Market Report, the unaccounted for crude needed to confirm the IEA’s extremely bearish views of massive oversupply of oil throughout 1997 and 1998 ballooned to an astonishing 647 million barrels of oil. Two months later, the IEA’s June report still presumes that 510 million barrels of oil is still “missing”, and the IEA has officially opined that it all resides in the un-traded storage facilities in the developing countries of the world.

As the author of that analysis points out in another piece, those “un-traded storage facilities” being blamed were sometimes ridiculous notions, such as “slow-steaming tankers”, South African coal mines or even Swedish salt domes. In other words, the idea that there was this massive oversupply of oil production driving the almost 60% collapse in global crude prices in 1997 and 1998 was total bunk. Instead, what was driving prices lower was the simple fact of supply and demand balancing to achieve a physical clearing price. That meant, in the broader context far and away from Swedish salt domes, the price of oil was really trading on the collapse in global demand for it. The Asian “flu” was not simply a financial panic among “unimportant”, far-flung isolated economies of tiny nations, but rather a global slowdown across nearly every economy – which sharply lower oil prices simply confirmed.

[..] today, the Saudis are supposedly up to the same tricks, now trying to drive US shale production out of business. The fact that all those increased marginal suppliers more than survived the Asia flu tells you everything you need to know about this wild assertion of “intentional” Saudi action. It is a convoluted rumor that survives solely because it is convenient to those economists and commentators that refuse to accept these more basic connections.

“We’re buying more of it from ourselves, which is a great economic multiplier.” Well, until you start losing 1000s of jobs.

• AAA Says Motorists May Save $75 Billion on Gasoline in 2015 (Bloomberg)

Drivers in the U.S. may save as much as $75 billion at gasoline pumps in 2015 after a yearlong rout in crude oil sent prices tumbling, AAA said today. Americans already saved $14 billion on the motor fuel this year, according to Heathrow, Florida-based AAA, the country’s largest motoring group. Pump prices have dropped a record 97 consecutive days to a national average $2.26 a gallon today, the lowest since May 12, 2009, AAA said by e-mail. A global glut of crude oil and a standoff between U.S. producers and the Organization of Petroleum Exporting Countries over market share has been a boon for consumers. U.S. production climbed this year to the highest in three decades amid a surge in output from shale deposits.

Oil is heading for its biggest annual decline since the 2008 financial crisis. “Next year promises to provide much bigger savings to consumers as long as crude oil remains relatively cheap,” Avery Ash, an AAA spokesman, said by e-mail today. “It would not be surprising for U.S. consumers to save $50-$75 billion on gasoline in 2015 if prices remain low.” U.S. benchmark West Texas Intermediate crude dropped 46% this year while Brent oil, the international benchmark that contributes to the price of gasoline imports, fell 49%. “It’s getting lower because what happened? We drilled in the United States,” Peyton Feltus, president of Randolph Risk Management in Dallas, said today in a telephone interview.

“We’re buying more of it from ourselves, which is a great economic multiplier.” There is “significant uncertainty” over the cost of crude next year as lower prices may force companies to curb production and may also lead to instability in other oil-producing countries, the motoring group said. Gasoline futures fell 48% this year to close at $1.4353 a gallon today on the New York Mercantile Exchange. The average U.S. household will save about $550 on gasoline costs next year, with spending on track to reach the lowest in 11 years, the Energy Information Administration said Dec. 16. “They’ve got more disposable income and they’re going to have even more in the coming months,” Feltus said. “Gasoline prices are going to go lower than anybody thought they could.”

“It’s similar to 2008 when we knew oil at $120, $130 and $140 made no sense, but high prices became the reason for higher prices. It’s the same thing in reverse.”

• Bottom On Oil’s Plunge Unknown (CNBC)

Oil’s massive price drop continues to befuddle industry experts. “We’re at the stupid range,” Stephen Schork, editor and founder of The Schork Report, said in an interview with CNBC’s “Squawk Box.” Schork added this situation is similar to oil’s price spike in 2008 in terms of its uncertainty. “We don’t know how much lower oil can go,” Schork said. “It’s similar to 2008 when we knew oil at $120, $130 and $140 made no sense, but high prices became the reason for higher prices. It’s the same thing in reverse.” Schork also said oil’s price plunge is attracting many investors. “Bets for oil below $30 by June traded over 46,000 contracts over the past two weeks,” he said.

Also on “Squawk Box,” Boris Schlossberg, founding partner of B.K. Asset Management, said an entire year of oil selling at $50 per barrel will create problems for Russia. “Russia is in very serious trouble if oil just stays low,” he said. “We had a bounce in the ruble, and it sort of stabilized right now, but if you have oil staying at $54 for a whole year, it’s really going to create problems over there.” Schlossberg added that this could lead to more capital leaving Russia for other currencies, including the Swiss franc. “There’s a lot of money being moved into the Swiss franc as a safety trade,” he said.

“The move could signal that a full opening of the export ban, which has existed since the oil shock of the 1970s, is imminent.”

• US Eases Oil Export Ban In Shot At OPEC As Crude Price Slumps (Telegraph)

President Barack Obama has fired a shot at the Organisation of Petroleum Exporting Countries (OPEC) in the war to control global oil markets by quietly sanctioning the easing of America’s 40-year ban on exporting crude. The US government has reportedly told oil companies they can begin to export shipments of condensate – a high-grade crude produced as a by-product of gas – without going through the formal approval process. The move could signal that a full opening of the export ban, which has existed since the oil shock of the 1970s, is imminent. Brent crude fell sharply on the news, first reported by Reuters. The global benchmark opened down almost 2% in London at $56.85 per barrel as it closes in on its biggest annual drop since the financial crisis in 2008. Brent has lost 50% of its value since reaching its year-long high in June. The ending of America’s self-imposed embargo on oil exports would mark a serious escalation in the unfolding oil price war with OPEC led by Saudi Arabia.

The kingdom has made it clear that it is willing to watch the price of oil fall lower in order to protect its share of the global market. OPEC share has fallen to about a third of world supply, down from about half 20 years ago as the flood in shale oil drilling in the US and new supplies from Russia and South America have created a global glut. Meanwhile, the sharp fall in the value of oil is placing economies in major producing nations such as Venezuela and Russia under extreme strain. Venezuela – also a member of OPEC – has fallen into recession after its economy contracted for the first three quarters of the year, while inflation topped 63% in the 12 months to November. The South American oil giant’s economy shrank 2.3% in the third quarter, after contracting 4.8% in the first quarter and 4.9% in the second, the central bank has said.

Recession also looms in Russia, where the economy has fallen into decline for the first time in five years, according to official figures, which show that GDP contracted by 0.5% in the year to November. Falling oil prices are helping the US to exert pressure on the Kremlin over President Vladimir Putin’s support for separatists in Ukraine. Oil also came under pressure on the final day of the year after new data showed that China may miss its growth target for 2014. China manufacturing PMI fell to 49.6, down from final 50.0 in November. This is the first time in the second half of the year that China’s factory sector has contracted and has increased the possibility that 2014 GDP will miss the official 7.5% target. “Weak Chinese manufacturing data also damaged demand sentiment around oil as Brent breached the $57 handle,” said Peter Rosenstreich, head of market strategy at Swissquote.

“When the future arrives, prices will still be low, confounding those who have bought forward.”

• Even $20 Oil Will Struggle To Save Self–Harming Eurozone (Telegraph)

Revisiting the past year’s predictions is, for most columnists – yours truly included – a frequently humbling experience. The howlers tend to far outweigh the successes. Yet, for a change, I can genuinely claim to have got my main call for markets – that oil would sink to $80 a barrel or less – spot on, and for the right reasons, too. Just in case you think I’m making it up, this is what I said 12 months ago: “My big prediction is for $80 oil, from which much of the rest of my outlook for the coming year flows. It’s hard to overstate the significance of a much lower oil price – Brent at, say, $80 a barrel, or perhaps lower still – yet this is a surprisingly likely prospect, the implications of which have been largely missed by mainstream economic forecasters.” If on to a good thing, you might as well stick with it; so for the coming year, I’m doubling up on this forecast.

Far from bouncing back to the post crisis “normal” of something over $100 a barrel, as many oil traders seem to expect, my view is that the oil price will remain low for a long time, sinking to perhaps as little as $20 a barrel over the coming year before recovering a little. I’ve used the word “normal” to describe $100 oil, but in fact such prices are in historic terms something of an aberration. The long term, 20–year average is, in today’s money (adjusting for inflation), more like $60. It wasn’t that long ago that OPEC was targeting $25 oil, which back then seemed a comparatively high price. Be that as it may, for 15 years prior to the turn of the century Brent traded at around the $20 mark in nominal terms. Oil at $20 is a much more “normal” price than $100. The assumption of much higher prices is in truth a very modern phenomenon, born of explosive emerging market demand. For the time being, this seems to be over. Chinese growth is slowing and becoming less energy intensive.

By the by, however, the relatively high prices of the past 10 years have incentivised both a giant leap in supply – in the shape of American shale and other once marginal sources – and continued paring back of existing demand, as consumers, under additional pressure from environmental objectives, seek greater efficiency. Lots of new technologies have been developed to further these aims. Personally, I wouldn’t read much into the present deep “contango” in markets – an unusual alignment whereby futures prices are a lot higher than present spot prices. Some cite this as evidence that the price will shortly rebound. I’d say it’s just a leftover from the old “peak oil” mindset of permanently high prices. When the future arrives, prices will still be low, confounding those who have bought forward. In any case, for now we are faced with an oil glut, and there is no reason to believe that this mismatch between supply and demand is going to close any time soon.

Draghi must leave.

• ECB’s Draghi Says Eurozone Must ‘Complete’ Monetary Union (Reuters)

Euro zone countries must “complete” their monetary union by integrating economic policies further and working towards a capital markets union, European Central Bank President Mario Draghi said. In an article for Italian daily Il Sole 24 Ore on Wednesday, Draghi said structural reforms were needed to “ensure that each country is better off permanently belonging to the euro area”. He said the lack of reforms “raises the threat of an exit (from the euro) whose consequences would ultimately hit all members”, adding the ECB’s monetary policy, whose goal is price stability, could not react to shocks in individual countries.

He said an economic union would make markets more confident about future growth prospects – essential for reducing high debt levels – and so less likely to react negatively to setbacks such as a temporary increase in budget deficits. “This means governing together, going from co-ordination to a common decisional process, from rules to institutions.” Unifying capital markets to follow this year’s banking union would also make the bloc more resilient. “How risks are shared is connected to the depth of capital markets, in particular stock markets. As a consequence, we must proceed swiftly towards a capital markets union,” Draghi wrote.

“An army of critics retort that the underlying picture is turning blacker by the day. Europe’s rescue apparatus is not what it seems. The banking union belies its name. It is merely a supervision union.”

• Greek Expulsion From The Euro Would Demolish EMU’s Contagion Firewall (AEP)

We know from memoirs and a torrent of leaks that Europe’s creditor bloc came frighteningly close to ejecting Greece from the euro in early 2012, and would have done so with relish. Former US Treasury Secretary Tim Geithner has described the mood at a G7 conclave in Canada in February of that year all too vividly. “The Europeans came into that meeting basically saying: ‘We’re going to teach the Greeks a lesson. They are really terrible. They lied to us, and we’re going to crush them,’” he said. “I just made very clear right then: if you want to be tough on them, that’s fine, but you have to make sure that you’re not going to allow the crisis to spread beyond Greece.” German chancellor Angela Merkel did later retreat but only once it was clear from stress in the bond markets that Italy and Spain would be swept away in the ensuing panic, setting off an EMU-wide systemic crisis.

The prevailing view in Berlin and even Brussels is that no such risk exists today: Europe has since created a ring of firewalls; debtor states have been knocked into shape by their EMU drill sergeants. The democratic drama unfolding in Greece this month is therefore a local matter. If Syriza rebels win power on January 25 and carry out threats to repudiate the EU-IMF Troika Memorandum from their “first day in office”, Greece alone will suffer the consequences. “I believe that monetary union can today handle a Greek exit,” said Michael Hüther, head of Germany’s IW institute. “The knock-on effects would be limited. There has been institutional progress such as the banking union. Europe is far less easily blackmailed than it was three years ago.” This loosely is the “German view”, summed up pithily by Berenberg’s Holger Schmieding: “We’re looking at a Greece problem, the euro crisis is over. I do not expect markets to seriously contest the contagion defences of Europe.”

It sounds plausible. Bond yields in Italy, Spain and Portugal touched a record low this week. Yet it rests on the overarching assumption that the Merkel plan of austerity and “internal devaluation” has succeeded. An army of critics retort that the underlying picture is turning blacker by the day. Europe’s rescue apparatus is not what it seems. The banking union belies its name. It is merely a supervision union. Each EMU state bears the burden for rescuing its own lenders. Europe’s leaders never delivered on their promise to “break the vicious circle between banks and sovereigns”. The political facts on the ground are that the anti-euro Front National is leading in France, the neo-Marxist Podemos movement is leading in Spain, and all three opposition parties in Italy are now hostile to monetary union.

Creative accounting intended to fool the German court system(s). Good luck with that.

• Europe’s Shadow Budget Venture Could Lead To Spiralling Debt (Sinn)

More details about the European commission’s €315bn (£247bn) investment plan for 2015-17 have finally come to light. The programme, announced in November by the commission’s president, Jean-Claude Juncker,amounts to a huge shadow budget – twice as large as the EU’s annual official budget – that will finance public investment projects and ultimately help governments circumvent debt limits established in the stability and growth pact. The borrowing will be arranged through the new European fund for strategic investment, operating under the umbrella of the European Investment Bank. The EFSI will be equipped with €5bn in start-up capital, produced through the revaluation of existing EIB assets, and will be backed by €16bn in guarantees from the European commission. The fund is expected to leverage this to acquire roughly €63bn in loans, with private investors subsequently contributing around €5 for every €1 lent – bringing total investment to the €315bn target.

Though EU countries will not contribute any actual funds, they will provide implicit and explicit guarantees for the private investors, in an arrangement that looks suspiciously like the joint liability embodied by Eurobonds. Faced with Angela Merkel’s categorical rejection of Eurobonds, the EU engaged a horde of financial specialists to find a creative way to circumvent it. They came up with the EFSI. Though the fund will not be operational until mid-2015, EU member countries have already proposed projects for the European commission’s consideration. By early December, all 28 EU governments had submitted applications – and they are still coming. An assessment of the application documents conducted by the Ifo Institute for Economic Research found that the nearly 2,000 potential projects would cost a total of €1.3tr, with about €500bn spent before the end of 2017. Some 53% of those costs correspond to public projects; 15% to public-private partnerships (PPPs); 21% to private projects; and just over 10% to projects that could not be classified.

The public projects will presumably involve EFSI financing, with governments assuming the interest payments and amortisation. The PPPs will entail mixed financing, with private entities taking on a share of the risk and the return. The private projects will include the provision of infrastructure, the cost of which is to be repaid through tolls or user fees collected by a private operator. Unlike some other critics, I do not expect the programme to fail to bolster demand in the European economy. After all, the €315bn that is expected to be distributed over three years amounts to 2.3% of the EU’s annual GDP. Such a sizeable level of investment is bound to have an impact. But the programme remains legally dubious, as it creates a large shadow budget financed by borrowing that will operate parallel to the EU and national budgets, thereby placing a substantial risk-sharing burden on taxpayers.

A note from Morgan Stanley h/t Durden.

• Implications for the ECB and Its Preparation for Sovereign QE (Elga Bartsch)

Even though my colleagues, Daniele Antonucci and Paolo Batori, do not expect the ECB and the National Central Banks (NCBs) to be subject to haircuts in the event of a Syriza-led debt restructuring, this is unlikely to be clear-cut for some time to come. As a result, the Greek political turmoil complicates matters for the ECB and its preparation of a sovereign QE programme. In my view, a sovereign default in the eurozone and the prospect of the ECB potentially incurring severe financial losses is likely to intensify the debate on the Governing Council, where purchases of government bonds remain highly controversial. This could make a detailed announcement and the start of a buying programme already at the January 22 meeting look even more ambitious than it seemed. The spectre of default does not only make the issue of sovereign QE less certain again than the market believes, it also could create new limitations in its implementation.

One of the decisions that the Governing Council will need to take is whether to include the two programme countries (Greece and Cyprus), the only ones that are not investment grade at the moment, in its sovereign QE. In our view, it is unlikely that the ECB will deviate from the conditions imposed in the context of the ABSPP and CBPP3, i.e. the countries need to have under a troika programme (and the programme needs to be broadly on track). This would mean though that for some eurozone countries, sovereign QE would become conditional – just as OMT was. If governments across the eurozone and the financial constructs they are backing with off-balance sheet guarantees are being haircut and the resulting losses start to show up in national budgets, the political opposition to sovereign QE might increase materially.

In fact, elected politicians in creditor countries might have a preference for the ECB taking a hit as well given that the Bank has considerable risk provisioning that could absorb these losses which national budgets don’t have. This debate could also materially influence how a sovereign QE programme by the ECB is structured, notably on whether the risks associated with such a programme should be shared by all NCBs. Even ahead of the latest developments in Greece, the Bundesbank was already pushing for there not being risk-sharing in a sovereign QE programme. This position is unlikely to only relate to Greece though, I think. It is much more likely to relate to the concerns voiced by the German Constitutional Court regarding the implicit fiscal transfers between countries in the event of purchases of government bonds. In the view of Court, this could amount to establishing a fiscal transfer mechanism that is outside the ECB’s mandate.

Ugo!

• Seven Shocking Events Of 2014 (Ugo Bardi)

Being involved with peak oil studies should make one somewhat prepared for the future. Indeed, for years, we have been claiming that the arrival of peak oil would bring turmoil and big changes in the world and we are seeing them, this year. However, the way in which these changes manifest themselves turns out to be shocking and unexpected. This 2014 has been an especially shocking year; so many things have happened. Let me list my personal shocks in no particular order

1. The collapse of oil prices. Price oscillations were expected to occur near the oil production peak, but I expected a repetition of the events of 2008, when the price crash was preceded by a financial crash. But in 2014 the price collapse came out of the blue, all by itself. Likely, a major financial crisis is in the making, but that we will see that next year.

2. The ungreening of Europe. My trip to Brussels for a hearing of the European parliament was a shocking experience for me. The Europe I knew was peaceful and dedicated to sustainability and harmonic development. What I found was that the European Parliament had become a den of warmongers hell bent on fighting Russia and on drilling for oil and gas in Europe. Not my Europe any more. Whose Europe is this?

3. The year propaganda came of age. I take this expression from Ilargi on “The Automatic Earth”. Propaganda is actually much older than 2014, but surely in this year it became much more shrill and invasive than it had usually been. It is shocking to see how fast and how easily propaganda plunged us into a new cold war against Russia. Also shocking it was to see how propaganda could convince so many people (including European MPs) that drilling more and “fracking” was the solution for all our problems.

4. The Ukraine disaster. It was a shock to see how easy it was for a European country to plunge from relative normalcy into a civil war of militias fighting each other and where citizens were routinely shelled and forced to take refuge in basements. It shows how really fragile are those entities we call “states”. For whom is the Ukraine bell tolling?

5. The economic collapse of Italy. What is most shocking, even frightening, is how it is taking place in absolute quiet and silence. It is like a slow motion nightmare. The government seems to be unable to act in any other way than inventing ever more creative ways to raise taxes to squeeze out as much as possible from already exhausted and impoverished citizens. People seem to be unable to react, even to understand what is going on – at most they engage in a little blame game, faulting politicians, immigrants, communists, gypsies, the Euro, and the great world conspiracy for everything that is befalling on them. A similar situation exists in other Southern European countries. How long the quiet can last is all to be seen.

6. The loss of hope of stopping climate change. 2014 was the year in which the publication of the IPCC 5th assessment report was completed. It left absolutely no ripple in the debate. People seem to think that the best weapon we have against climate change is to declare that it doesn’t exist. They repeat over and over the comforting mantra that “temperatures have not increased during the past 15 years”, and that despite 2014 turning out to be the hottest year on record.

7. The killing of a bear, in Italy, was a small manifestation of wanton cruelty in a year that has seen much worse. But it was a paradigmatic event that shows how difficult – even impossible – it is for humans to live in peace with what surrounds them – be it human or beast.

“Our democracy just isn’t going to survive in this type of atmosphere ..”

• For the Wealthiest Political Donors, It Was a Very Good Year (Bloomberg)

Here’s a bit of perspective on the ever-rising cost of elections, and the big-money donors who finance them: Three of the country’s wealthiest political contributors each saw their net worth grow in 2014 by more than $3.7 billion, the entire cost of the midterm elections. And as the 2016 presidential election approaches, almost all of those donors have even more cash to burn. The only top political donor who lost money in 2014, Sheldon Adelson, still has a fortune greater than the annual gross domestic product of Zambia, so playing in U.S. politics remains well within his financial range. The Bloomberg Billionaires Index tracks the daily gains and losses in the net worth of the financial elite, and with the final hours of trading for this year ticking away, we’ve reviewed the bottom line for 2014 for the politically active super-wealthy. In total, 11 of the donors that Bloomberg tracks added a combined $33 billion to their wealth in a single year. (The index does not include Michael Bloomberg, founder and majority owner of Bloomberg LP.)

The tab for the House and Senate elections came to $3.7 billion, according to the nonpartisan Center for Responsive Politics in Washington. Warren Buffett, Larry Ellison, and Laurene Powell Jobs each could have covered all of that with the wealth they accumulated in the past 12 months. James Simons and George Soros would have come pretty close. Some of that wealth, combined with loosening campaign-finance restrictions and a political class growing ever more comfortable with the new world of virtually unlimited donations, could start flowing to campaigns in the next few months as candidates prepare for the 2016 presidential race. Wealthy donors will have even more giving options after Congress voted to raise the limits on how much individuals can give to political parties, creating a political landscape that horrifies some good-government groups.

They point to a reality: A wealthy donor can now almost singlehandedly bankroll a candidate, as Adelson did for former House Speaker Newt Gingrich in 2012, raising questions about whether these financial commitments ultimately will influence future policy. “Our democracy just isn’t going to survive in this type of atmosphere,” said Craig Holman, a lobbyist for Public Citizen, a group that advocates for stricter campaign-finance limits. “The United States, throughout history, has worked on a very delicate balance between capitalism in the economic sphere and democracy in the political sphere. We no longer have that balance. The economic sphere is going to smother and overwhelm the political sphere.”

David Keating, president of the Center for Competitive Politics, a group that argues the limits on political spending are arbitrary, sees it differently. “Big money in politics can actually make the electorate better informed,” he said. Besides, he added, there are enough billionaires to go around. For example, “you’ve got billionaires funding gun control and billionaires paying for groups that oppose gun control. It’s all pretty much a wash.” The sheer amount of money some donors made on paper in 2014 rewrites the context of “big” money in politics. For a political race, a $1 million cash infusion could change the outcome. For America’s big-money clique, it’s a fraction of what some billionaires can make or lose in a single day.

That’s your money.

• Pension Funds Triple Stake In Reinsurance Business to $59 Billion (NY Times)

Billions of dollars from pension funds and other nontraditional players have been moving into the reinsurance business in recent years, according to a report released on Wednesday by the Treasury Department. The report did not identify individual pension funds or other providers of what it called “alternative capital” for reinsurance. But it found that such newcomers had put about $59 billion into the $570 billion global reinsurance market as of June 30. That was more than three times their stake in 2007. The report also said that more than half the capital standing behind reinsurance innovations now comes from “pension funds, endowments and sovereign wealth funds, generally through specialized insurance-linked investment funds.” By contrast, hedge funds and private equity firms now provide about one-fourth of the money for such investments.

The report said that alternative reinsurance arrangements were increasingly being pitched to investors as “mainstream products” and said that “exposure to such risks could be problematic for unsophisticated investors.” The purpose of the Treasury report was not to assess risks or spotlight potential problems but to describe the overall state of the reinsurance industry, which is familiar to experts but almost unknown to everyone else. In fact, the report stressed that reinsurance brings many benefits and that some reinsurance programs are operated by the states, like Florida’s Hurricane Catastrophe Fund and California’s Earthquake Authority. The report was issued by the Federal Insurance Office, an arm of the Treasury established in the wake of the 2008 financial crisis.

Normally the states regulate insurance, but the Federal Insurance Office has been looking at parts of the industry that extend beyond state regulators’ reach. Reinsurance frequently transfers risks offshore, for example, to jurisdictions where the states’ capital and other requirements do not apply. Increasingly, some states have been creating alternative regulatory frameworks to attract some of the offshore reinsurance business back to the United States. That can bring investment and jobs to those states, but it has also raised concerns that a poorly understood and risky “shadow insurance” sector is taking shape. “Regulatory concerns about this widespread practice continue to receive attention within the national and international insurance supervisory community,” the report said.

Whatever anybody says, the Russians feel deeply betrayed by the west. That’s what drives their actions.

• Inside Obama’s Secret Outreach to Russia (Bloomberg)

President Barack Obama’s administration has been working behind the scenes for months to forge a new working relationship with Russia, despite the fact that Russian President Vladimir Putin has shown little interest in repairing relations with Washington or halting his aggression in neighboring Ukraine. This month, Obama’s National Security Council finished an extensive and comprehensive review of U.S policy toward Russia that included dozens of meetings and input from the State Department, Defense Department and several other agencies, according to three senior administration officials. At the end of the sometimes-contentious process, Obama made a decision to continue to look for ways to work with Russia on a host of bilateral and international issues while also offering Putin a way out of the stalemate over the crisis in Ukraine.

“I don’t think that anybody at this point is under the impression that a wholesale reset of our relationship is possible at this time, but we might as well test out what they are actually willing to do,” a senior administration official told me. “Our theory of this all along has been, let’s see what’s there. Regardless of the likelihood of success.” Leading the charge has been Secretary of State John Kerry. This fall, Kerry even proposed going to Moscow and meeting with Putin directly. The negotiations over Kerry’s trip got to the point of scheduling, but ultimately were scuttled because there was little prospect of demonstrable progress.

In a separate attempt at outreach, the White House turned to an old friend of Putin’s for help. The White House called on former Secretary of State Henry Kissinger to discuss having him call Putin directly, according to two officials. It’s unclear whether Kissinger actually made the call. The White House and Kissinger both refused to comment for this column. Kerry has been the point man on dealing with Russia because his close relationship with Russian Foreign Minister Sergei Lavrov represents the last remaining functional diplomatic channel between Washington and Moscow. They meet often, often without any staff members present, and talk on the phone regularly. Obama and Putin, on the other hand, are known to have an intense dislike for each other and very rarely speak.

Draghi for president!

• Italian President to Resign, Posing Challenge for Renzi (Bloomberg)

Italian President Giorgio Napolitano said he’ll resign “soon,” setting up a challenge for Premier Matteo Renzi, who will now need to form alliances among lawmakers to push through his own candidate for the job. “It’s my duty not to underestimate the signs of fatigue,” Napolitano, 89, said in his traditional Dec. 31 end-of-year speech, giving his age among the reasons for his resignation. He also cited the need to “return to constitutional normalcy” putting an end to his prolonged term. He gave no exact date for his resignation in the televised address. Napolitano, who took office in 2006, reluctantly accepted a second term in April 2013 after inconclusive elections led to a hung parliament which failed to strike a deal on his successor for days. The president had signaled from the start that he wouldn’t serve a full seven-year term.

Now Renzi, 39, will have to find a name appealing enough to at least half of an over 1000-member electoral college in order to push through a candidate of his liking. While Italy’s head of state is largely a ceremonial figure, the role and powers are enhanced at times of political crisis as the president has the power to dissolve parliament and designate prime minister candidates. Napolitano picked Renzi to lead a new government in February and his efforts to guarantee political stability have supported the prime minister’s reform package aimed at lifting Italy out of recession. After Napolitano steps down, Senate Speaker Pietro Grasso will act as caretaker head of state until his successor is elected.

National lawmakers and 58 regional delegates make up the electoral college of more than 1,000 members that will vote for the new president. The procedure can take several days as just two rounds of voting are held each day by secret ballot. To win in any of the first three rounds, a candidate must secure two-thirds of the vote, whereas from the fourth round a simple majority suffices. [..] Names circulated for the post so far in the Italian press include European Central Bank President Mario Draghi, former Italian Prime Minister Romano Prodi, Finance Minister Pier Carlo Padoan, and Bank of Italy Governor Ignazio Visco. Napolitano, a former communist, known for once praising the Soviet Union’s crushing of the 1956 reformist movement in Hungary, is credited with helping restore market confidence in Italy during Europe’s 2011 debt crisis.

Can she save her ass from the Petrobras scandal? She headed the company for years, for Pete’s sake.

• Rousseff Begins Second Term as Brazil Economic Malaise Hits Home

Dilma Rousseff will be sworn in today for her second term as Brazil’s president as a corruption scandal involving the country’s biggest company, above-target inflation and the slowest economic expansion in five years undermine her support. Since Rousseff took over from her mentor Luiz Inacio Lula da Silva four years ago, the budget deficit has more than doubled to 5.8% of gross domestic product and economic growth has come to a standstill from 7.5% growth in 2010. Inflation has remained above the center of the target range throughout her first term. Rousseff, who won an Oct. 26 runoff election by the narrowest margin of any president since at least 1945, has appointed a new economic team and announced spending cuts.

The central bank increased the key lending rate twice since the election to contain consumer price increases. While such measures are a first step to prevent a credit rating downgrade, the question is whether Rousseff will have the political support to hold the course, said Rafael Cortez, political analyst at Tendencias, a Sao Paulo-based consulting firm. “The economic malaise will spread to consumers and the corruption scandal will impose a negative legislative agenda,” Cortez said in a phone interview. “In a best-case scenario, she’ll manage to recover some investor credibility and pave the wave for moderate growth; the worst case is that we’ll have a lame duck president in a year or two.”

Rousseff is scheduled to be sworn in today and address Congress in Brasilia this afternoon. Designated Finance Minister Joaquim Levy pledges to pursue a budget surplus before interest payments of 1.2% of gross domestic product this year and at least 2% of GDP in 2016 and 2017, after Brazil’s credit rating in 2014 suffered a downgrade for the first time in more than a decade. The primary budget balance turned to a deficit of 0.18% of GDP in the 12 months through November, the first such annual shortfall on record. On Dec. 29 the government announced cuts to pension and unemployment benefits that will save an estimated 18 billion reais ($6.8 billion). Authorities also have increased the long-term lending rate for loans granted by the state development bank BNDES to 5.5% from 5%.

A 79-year old crown prince. And millions of unemployed 16 to 24-year old testosterone bombs. Nice contrast.

• Eyes On Saudi Succession After King Hospitalized (CNBC)

The Saudi stock market fell after King Abdullah bin Abdulaziz Al Saud was hospitalized Wednesday, but any succession for the throne would likely be smooth for the country. The Saudi royal family announced in March that 79-year-old Crown Prince Salman would succeed the king, and experts said those plans have eased most concerns about an impending transition. In fact, Saudi watchers told CNBC that the country’s oil, domestic and geopolitical policies should remain virtually unchanged when Salman takes over. “This is very predictable,” Bilal Saab, senior fellow for Middle East security at the Atlantic Council, said of the transition. Still, he reflected, “the markets just react in unpredictable ways.” Although King Abdullah has been perceived as a champion of domestic reform, his departure would not signal the reversal of any of his (relatively) progressive policies, Saab said.

Salman, who has assumed many state duties while currently serving as deputy prime minister and minister of defense, is relatively well-liked by regional neighbors and in Washington, according to Karen Elliott House, author of “On Saudi Arabia: Its People, Past, Religion, Fault Lines—and Future.” Given that the transition of duties has partially begun, experts said that there would likely be little political drama when Salman takes the throne. Still, the issue of his successor could prove a contentious moment for the perpetually stable kingdom. The royal family officially announced in March that Prince Muqrin bin Abdulaziz, the youngest surviving half brother of the king and Salman, would be given the role of deputy crown prince – in effect naming him the successor to Salman.

House said that could provide a moment of tension for the royal family: A successor has traditionally been picked by an ascending king, and some family members were reportedly less than pleased about Muqrin’s appointment. Still, those concerns pale in comparison to the current succession worries in Oman, Saab said. That country’s sultan, Qaboos bin Said Al Said, has no formal successor plan, and political chaos after his death could be problematic for the region, he said. “This is someone who has a much more influential role, not just in his country, but in the region with the Iranians,” Saab said. “The concerns over succession are much more pronounced in Oman than in Saudi Arabia”

A bit of infighting among the family’s scores of princes would be funny. Whatever happens in the family, the House of Saud faces domestic turmoil.

• Saudi Succession Plan About Continuity (CNBC)

Oil investors are closely watching the health of Saudi Arabia’s king, who was hospitalized Wednesday. However, while some wonder about how an eventual change in leadership might impact the global oil markets, two Middle East experts told CNBC they don’t expect much difference in how a new monarch would govern. “They’ll pursue the same security arrangements with the United States. They’ll maintain Saudi Arabia’s commitment to fight the Islamic State. They’ll also be pumping oil because there are broader strategic interests the kingdom is pursuing,” David Phillips, former senior advisor to the State Department and a CNBC contributor, said in an interview with “Street Signs.”

King Abdullah bin Abdulaziz Al Saud, thought to be 91, was admitted to the hospital on Wednesday for medical tests, according to state media, citing a royal court statement. A source told Reuters he had been suffering from breathing difficulties, but was feeling better and in stable condition. The news sent the Saudi stock exchange down as much as 5%, before it recovered slightly to close almost 3% lower. The king has “been in bad health for the past several years,” and the government has been anticipating his passing for some time, said Phillips, now the director of the Peace-building and Human Rights Program at Columbia University. “There are policies and personalities in place in order to maintain continuity,” he added.

From Glenn Greenwald’s people.

• Sony Hackers Threaten US News Media Organization (Intercept)

The hackers who infiltrated Sony Pictures Entertainment’s computer servers have threatened to attack an American news media organization, according to an FBI bulletin obtained by The Intercept. The threat against the unnamed news organization by the Guardians of Peace, the hacker group that has claimed credit for the Sony attack, “may extend to other such organizations in the near future,” according to a Joint Intelligence Bulletin of the FBI and the Department of Homeland Security obtained by The Intercept. Referring to Sony only as “USPER1”and the news organization as “USPER2,” the Joint Intelligence Bulletin, dated Dec. 24 and marked For Official Use Only, states that its purpose is “to provide information on the late-November 2014 cyber intrusion targeting USPER1 and related threats concerning the planned release of the movie, ‘The Interview.’ Additionally, these threats have extended to USPER2 —a news media organization—and may extend to other such organizations in the near future.”

In the bulletin, titled “November 2014 Cyber Intrusion on USPER1 and Related Threats,” The Guardians of Peace threatened to attack other targets on the day after the FBI announcement. “On 20 December,” the bulletin reads, “the [Guardians of Peace] GOP posted Pastebin messages that specifically taunted the FBI and USPER2 for the ‘quality’ of their investigations and implied an additional threat. No specific consequence was mentioned in the posting.” Pastebin is a Web tool that enables users to upload text anonymously for anyone to read. It is commonly used to share source code and sometimes used by hackers to post stolen information. The Dec. 20 Pastebin message from Guardians of Peace links to a YouTube video featuring dancing cartoon figures repeatedly saying, “you’re an idiot.”

No mention of a specific news outlet could be found by The Intercept in any of the GOP postings from that date still available online or quoted in news reports. “While it’s hard to tell how legitimate the threat is, if a news organization is attacked in the same manner Sony was, it could put countless sensitive sources in danger of being exposed—or worse,” Trevor Timm, executive director of the Freedom of the Press Foundation, told The Intercept. Timm points out, however, that media are already commonly targeted by state-sponsored hackers.“This FBI bulletin is just the latest example that digital security is now a critical press freedom issue, and why news organizations need to make ubiquitous encryption a high priority,” he said.

“Consider, first, how a competent response to Ebola might have played out ..”

• Next Year’s Ebola Crisis (Bloomberg ed.)

One of the many ways the world failed to distinguish itself in 2014 was with its response to the Ebola crisis. It cannot afford to be so late, slow and fatally inadequate next year — with Ebola, which continues to kill people in West Africa, or with the next global pandemic. Consider, first, how a competent response to Ebola might have played out: A year ago, the health workers in Guinea who saw the first cases would have had the training to recognize it and the equipment to treat it without infecting themselves and others. They didn’t, and the disease spread quickly to Liberia and Sierra Leone. Ideally, then, doctors there would have diagnosed Ebola, and traced and quarantined everyone who had contact with the victims. Crucially, they would have alerted the World Health Organization. As it happened, the WHO wasn’t told of the outbreak until March.

At that point, in a best-case scenario, with local health-care systems overwhelmed, the WHO would have intervened with a team of well-equipped doctors and nurses. Such a team didn’t exist, and it took the WHO until August even to declare a public-health emergency, and several weeks beyond that to come up with a response plan. And so the total number of infections is now more than 12,000, with some 7,700 dead. This might-have-been story reveals how countries and the WHO need to change before the next outbreak – of Ebola, SARS, bird flu or whatever it turns out to be. Every country needs hospitals and laboratories capable of diagnosing, safely treating and monitoring disease. The WHO needs improved surveillance and reporting systems, as well as the capacity to send medical teams when needed. The World Health Assembly, the international body that sets policy for the WHO, cannot waste any time seeing that these changes are made.

What’s frustrating is that world leaders have long recognized the need to be ready for outbreaks of infectious disease. In 1969, they signed a pact known as the International Health Regulations, meant to make sure preparations would be in place. The most recent update to this accord – in 2005, after the SARS epidemic – called for all 196 countries to have the laboratories, hospitals and medical expertise to detect, treat and monitor epidemics. One glaring weakness in this framework, however, is that countries have been allowed to monitor their own readiness. An outside body – either the WHO or an independent organization – must be appointed to keep track of their progress toward building sturdy medical infrastructure. And at least until all 196 countries are up to snuff, the WHO needs to have the authority to step in.

Debt Rattle December 15 2014

Dec 152014

December 15, 2014 Posted by Raúl Ilargi Meijer at 11:06 am Finance Tagged with: Congress, contagion, crash, Greece, Grexit, implosion, Japan, oil, OPEC, punchbowl 2 Responses »

Wyland Stanley REO taxicab, San Francisco 1924

• Santa Got Run Over By An Oil Tanker (MarketWatch)

• U.A.E. Sees OPEC Output Unchanged Even If Oil Falls to $40 (Bloomberg)

• The Oil-Price-Shock Contagion-Transmission Pathway (Zero Hedge)

• UK Energy Firms Go Under As Oil Price Tumbles (Guardian)

• Oil Bust Veterans Brace While Shale-Boom Newbies Swagger (Bloomberg)

• Warning Over Horrible End To Japan’s QE Blitz (AEP)

• Time to Take Away the Punchbowl in Japan (Bloomberg)

• Samaras Grexit Talk Summons Bond Vigilantes to Greece (Bloomberg)

• EU Finance Chief Flies Into Athens As Grexit Fears Mount (Guardian)

• The EU Must Face Up To Austerity’s Failures (Steve Keen)

• The Eurozone Crisis History Is Repeating Itself … Again (Guardian)

• Time For Bottom Fishing In The Eurozone? (CNBC)

• London House Prices Fall By More Than £30,000 In A Month (Guardian)

• Fed Vice-Chairman Fisher: ‘Boy, Was I Wrong’ About Banks’ Political Power (WSJ)

• Krugman Says Fed Is Unlikely to Raise Interest Rates in 2015 (Bloomberg)

• Congress Deals A Blow To Financial Reform (Bloomberg ed.)

• Shiller Sees Risk In New Push For First-Time Homebuyers (CNBC)

• China Economic Growth May Slow To 7.1% In 2015 – PBOC (Reuters)

• Australia’s Budget Deficit Blows Out Amid Commodity Slide (Reuters)

• The Implosion Of American Culture (PhoM)

• Why Milennials Are Stuck Living At Home With Parents (Dr. Housing Bubble)

“.. a stunning $1.6 trillion annual loss, at oil’s current $57 low ..” What about $50, $45, $40?

• Crashing Crude May Blow $1.6 Trillion Annual Hole In The Global Oil Sector (MW)

Santa Got Run Over By An Oil Tanker

Talk about an oil spill. The spectacular unhinging of crude oil prices over the past six months is weighing mightily on the U.S. stock market. And while it may be too early to abandon all hope that the market will stage a year-end Santa rally, it appears that if Father Christmas comes, there’s a good chance his sleigh will be driven by polar bears, instead of gift-laden reindeer. Indeed, the Dow Jones Industrial Average already endured a bludgeoning, registering its second-worst weekly loss in 2014, shedding 570 points, or 3.2%, on Friday. That’s just shy of the 579 points that the Dow lost during the week ending Jan. 24, earlier this year.

It’s also the second worst week for the S&P 500 this year, which was down about 58 points, over the past five trading days, or 2.83%, compared to a cumulative weekly loss of 61.7 points, or 3.14%, during the week concluding Oct. 10. But all that carnage is nothing compared to what may be in store for the oil sector as crude oil tumbles to new gut-wrenching lows on an almost daily basis. On the New York Mercantile exchange light, sweet crude oil for January delivery settled at $57.81 on Friday, its lowest settlement since May 15, 2009. Moreover, the largest energy exchange traded fund, the energy SPDR off by 14% over the past month and has lost a quarter of its value since mid-June.

The real damage, however, is yet to come. By some estimates the wreckage, particularly for the oil-services companies, may add up to a stunning $1.6 trillion annual loss, at oil’s current $57 low, predicts Eric Lascelles, RBC Global Asset Management chief economist. Since it’s a zero-sum game, that translates into a big windfall for everyone else outside of oil players. In his calculation, Lascelles includes the cumulative decline in oil prices since July and current supply estimates of 93 million barrels a day. It’s a fairly simplistic tally, but it gets the point across that the energy sector is facing a serious oil leak. Here’s a look at a graphic illustrating the zero-sum, wealth redistribution playing out as oil craters:

Setting the new price level in one fell swoop.

• U.A.E. Sees OPEC Output Unchanged Even If Oil Falls to $40 (Bloomberg)

OPEC will stand by its decision not to cut crude output even if oil prices fall as low as $40 a barrel and will wait at least three months before considering an emergency meeting, the United Arab Emirates’ energy minister said. OPEC won’t immediately change its Nov. 27 decision to keep the group’s collective output target unchanged at 30 million barrels a day, Suhail Al-Mazrouei said. Venezuela supports an OPEC meeting given the price slide, though the country hasn’t officially requested one, an official at Venezuela’s foreign ministry said Dec. 12. The group is due to meet again on June 5. “We are not going to change our minds because the prices went to $60 or to $40,” Mazrouei told Bloomberg at a conference in Dubai. “We’re not targeting a price; the market will stabilize itself.” He said current conditions don’t justify an extraordinary OPEC meeting. “We need to wait for at least a quarter” to consider an urgent session, he said.

OPEC’s 12 members pumped 30.56 million barrels a day in November, exceeding their collective target for a sixth straight month, according to data compiled by Bloomberg. Saudi Arabia, Iraq and Kuwait this month deepened discounts on shipments to Asia, feeding speculation that they’re fighting for market share amid a glut fed by surging U.S. shale production. The Organization of Petroleum Exporting Countries supplies about 40% of the world’s oil. Brent crude, a pricing benchmark for more than half of the world’s oil, slumped 2.9% to $61.85 a barrel in London on Dec. 12, for the lowest close since July 2009. Brent has tumbled 20% since Nov. 26, the day before OPEC decided to maintain production. U.S. West Texas Intermediate crude dropped 3.6% to $57.81 in New York, the least since May 2009.

The U.A.E. hasn’t been informed of any plan for an emergency meeting, Al-Mazrouei said. OPEC Secretary-General Abdalla El-Badri said, “we don’t know,” when asked at the same conference about the possibility of such a meeting. An increase of about 6 million barrels a day in non-OPEC supply, together with speculation in oil markets, triggered the recent drop in prices, El-Badri said, without specifying dates for the higher output by producers outside the group such as the U.S. and Russia. Prices will rebound soon due to changes in the global economic cycle, he said, without giving details. “We will not have a real picture about oil prices until the end of the first half of 2015,” El-Badri said. Price will have settled by the second half of next year, and OPEC will have a clear idea by then about “the required measures,” he said.

Bet you there’s tons of similar notes around.

• The Oil-Price-Shock Contagion-Transmission Pathway (Zero Hedge)

As we noted previously, counterparty risk concerns (and thus financial system fragility) are starting to rear their ugly heads. In the mid 2000s, it was massive one-way levered bets on “house prices will never go down again.” When the cracks started to appear, the mark-to-market losses in derivatives led to forced liquidations and snowballed systemically. In the mid 2010s, it is massively levered one-way asymmetric bets on “commodity prices [oil] will never go down again.” Meet WTI-structured-notes… the transmission mechanism for oil-price-shocks blowing up the financial system. Because nothing says exuberant ignorance like limited upside, unlimited downside OTC (illiquid) derivatives… Here’s BNP Paribas’ 1-Yr WTI-linked notes that collapse if oil drops below $70…

It’ll be a bloodbath. Or, it already is, but you can’t see it yet.

• UK Energy Firms Go Under As Oil Price Tumbles (Guardian)

The tumbling oil price has led to a trebling of insolvencies among UK oil and gas services companies so far this year, while £55bn of further oil projects reportedly under threat. Brent crude closed below $62 a barrel on Friday, a five-and-a-half-year low, amid fears of falling demand and oversupply as the global economy slows down. [..] On Sunday, the United Arab Emirates energy minister, Suhail Al-Mazrouei, said Opec would not cut crude output even if the price dropped as low as $40 a barrel. He told Bloomberg at a conference in Dubai: “We are not going to change our minds because the prices went to $60 or to $40. We’re not targeting a price; the market will stabilise itself.” A report due on Monday from accountancy firm Moore Stephens said 18 businesses in the UK oil and gas services sector had become insolvent in 2014 compared with just six last year. It said that although the increase was from a low base, it was significant because insolvencies in the sector had been rare over the last five years.

Jeremey Willmont at Moore Stephens said: “The fall in the oil price has translated into insolvencies in the oil and gas services sector remarkably quickly. The oil and gas services sector has enjoyed very strong trading conditions for the last 15 years, so perhaps they have not been quite so well prepared for a sustained deterioration in trading conditions as other sectors would have been. “There was a sharp drop in the oil price during the financial crisis, but the sense that oil prices could be depressed for some time is much more widespread this time around. “It is clear that oil and gas majors are already cutting costs. Both Shell and BP have recently announced cuts to investment in a number of major projects. Smaller players are also reconsidering their capital deployment. If this retrenchment continues the result will be less work for oil and gas services companies.”

A lot of these guys are in for a nasty surprise next time they go see their bankers.

• Oil Bust Veterans Brace While Shale-Boom Newbies Swagger (Bloomberg)

Autry Stephens knows the look and feel of an oil boom going bust, and he’s starting to get ready. The West Texas wildcatter, 76, has weathered four such cycles in his 52 years draining crude from the Permian basin, still the most prolific U.S. oilfield. Though the collapse in prices since June doesn’t yet have him in a panic, Stephens recognizes the signs of another downturn on the horizon. And like many bust-hardened veterans in this region – which has made and broken the fortunes of thousands – he’s talking about it like a gathering storm. The ups and downs of oil are a way of life in Midland and Odessa, Texas, dating all the way back to the Great Depression. It’s as much a part of the culture as Gulf Coast hurricanes, and residents often prepare accordingly.

“We’re going to hunker down and go into survival mode,” Stephens, founder of Endeavor Energy Resources LP, said in an interview from his Midland office, where visitors are first greeted by a statuette of a Texas Longhorn steer. “Stay alive is our mantra, until the price recovers.” Go about 1,300 miles (2,100 kilometers) due north and you get a very different take from the rookie oil barons in North Dakota, where crude output from the Bakken formation went from 200,000 barrels a day in 2008 to about 1.2 million today. They’re not seeing any need to take shelter, and it shows in their swagger. Rich Vestal, who’s seen his trucking business double, double again and then double one more time in the past five years, is sipping root beer out of a Styrofoam cup at the Courthouse Cafe in Williston, North Dakota.

“I would welcome a slowdown,” he says, while believing one’s not really in the works. Of all the booming U.S. oil regions set soaring by a drilling renaissance in shale rock, the Permian and Bakken basins are among the most vulnerable to oil prices that settled at $57.81 a barrel Dec. 12. With enough crude by some counts to exceed the reserves of Saudi Arabia, they’re also the most critical to the future of the U.S. shale boom. For the Texas veteran, the forecast is telling him to batten down the hatches. Up in North Dakota, oil’s new kids on the block figure there’s just a few clouds floating by. Early signs are pointing in favor of the worriers.

“The Year of Living Dangerously.”

• Warning Over Horrible End To Japan’s QE Blitz (AEP)

HSBC has warned that Japan’s barely-disguised attempt to drive down the yen is becoming dangerous and may spin out of control, leading to an exchange rate crisis next year and a worldwide currency storm. “It is entirely possible that the Yen decline becomes disorderly and swift,” said the bank, in one of the starkest criticisms so far of Japan’s radical stimulus policies. David Bloom and Paul Mackel, HSBC’s currency strategists, voiced growing concern that premier Shinzo Abe is backing away from fiscal retrenchment and may pressure the Bank of Japan (BoJ) to fund policies aimed at boosting household spending. “The temptation to drift towards increasingly generous fiscal programmes could grow. We do not expect a ‘helicopter drop’ of income into every household, but the yen would react very badly to any sign that the government is heading down a route of overt monetisation,” they wrote in a report entitled “The Year of Living Dangerously”.

The warning came as Mr Abe won a sweeping victory in Japan’s snap elections over the weekend, consolidating his power in the Diet and giving him a further mandate for deep reforms. “I promise to make Japan a country that can shine again at the centre of the world,” said Mr Abe. Japan’s recovery has faltered. Mr Abe’s Thatcherite shake-up, or Third Arrow, has yet to get off the ground, though he is now in a much stronger position to break monopolies and confront vested interests. The economy slumped back into recession in the middle of this year after a rise in the sales tax from 5pc to 8pc, a move that was clearly premature. The Abenomics experiment still depends largely on the BoJ’s asset purchases, running at 1.4pc of GDP each month, the most extreme monetary blitz ever attempted in a modern economy. Economists are deeply divided over whether this alone can overwhelm the fiscal shock, and lift the economy out a 20-year stagnation trap. HSBC said Mr Abe may succeed in driving up wages, setting off a “wage-inflation spiral”.

This may not necessarily lead to a bond rout since the Bank of Japan is effectively holding down bond yields. However, the exchange rate might take the strain instead. The worry is that this could set off a beggar-thy-neighbour devaluation process across Asia, eventually sucking in China. “The tentacle of the currency war would spread,” said the report. HSBC said China is determined to avoid joining this debasement game as it tries to wean its own economy off export-led growth, but there may be limits. The Chinese economy is slowing and is already in deep producer price deflation. Japanese exporters have been switching to a new strategy over the last six months, cutting export prices to gain market share as the yen falls, rather than pocketing the windfall as extra profit. “There are grounds to argue that China would join the currency war and devalue the yuan if currency moves elsewhere became disorderly,” it said. The warnings have raised eyebrows since HSBC has close policy ties with the Chinese authorities.

Will Kuroda dare turn on Abe?

• Time to Take Away the Punchbowl in Japan (Bloomberg)

As the world watches to see what Prime Minister Shinzo Abe does with his renewed mandate in Japan, my eyes are on Haruhiko Kuroda instead. After all, the Bank of Japan governor probably deserves about 90% of the credit for whatever success Abe’s reflation efforts have had thus far – in particular, a more than 70% rise in the benchmark Topix index. Whether the prime minister now goes further and implements the real structural reforms Japan needs depends as much on Kuroda as anyone else. Abe’s victory was not as sweeping as might appear at first glance. Amid record-low turnout, his Liberal Democratic Party ended up with a couple fewer seats than previously – although still enough for the ruling coalition to maintain its two-thirds majority in the lower house of parliament.

Not surprisingly, officials in Tokyo are talking less about politically difficult reforms and more about putting money in the hands of Japanese to spend. Analysts are expecting a rush of new fiscal stimulus early in the new year. Kuroda, too, will face pressure to one-up himself when the BOJ meets on Friday. Like addicts looking for their next fix, markets want the central bank governor to outdo his “shock-and-awe” from April 2013 and recent Halloween surprise, when he boosted bond purchases to about $700 billion annually. It’s time for Kuroda to do exactly the opposite: hold his fire and prod Abe to begin doing his part to push through his “third arrow” structural reforms. To this point, Kuroda has been a dutiful and circumspect policymaker – perhaps to a fault. Other than a brief flash of impatience with Abe’s foot-dragging in a May Wall Street Journal interview – when he said “implementation is key, and implementation should be swift” – Kuroda has held his tongue.

Yet he bears a responsibility to play the honest broker role that monetary powers have over the years – from Paul Volcker at the Federal Reserve decades ago to Raghuram Rajan at the Reserve Bank of India today. On Friday, Kuroda should tell reporters, “Now that the election is over, it’s up to Prime Minister Abe to carry out the will of the people and deregulate the economy. For now, we at the BOJ have done all we can – and are willing to do – to make Abenomics a success.” Stock traders would abhor such candor from a central bank that’s spent the last 21 months refilling the punchbowl. But a smart economist and wise tactician like Kuroda has to know this Japanese experiment will end very badly if Abe fails to encourage innovation, loosen labor markets, lower trade tariffs and cut red tape. If bond traders drive government bond yields higher and credit-rating companies pounce, the blame will fall squarely on Kuroda.

“Syriza leader Alexis Tsipras called Samaras “the prime minister of chaos” in a speech on Saturday.”

• Samaras Grexit Talk Summons Bond Vigilantes to Greece (Bloomberg)

As he enters a critical week for his premiership, Prime Minister Antonis Samaras has awoken the bond market to the dangers of a political rupture in Greece. Samaras will put forward his candidate for the presidency in the first of three votes on Dec. 17 in a process that risks toppling his government. He spent the weekend trading barbs with the Syriza party that leads in the polls, setting out the consequences of letting the anti-austerity group into power, as Syriza accused him of “begging” markets to attack Greece. A bond selloff pushed the yield on the three-year notes Greece sold earlier this year up more than 60 basis points in an hour on Dec. 11 after Samaras accused the opposition of reviving concerns that Greece could be forced out of the euro. The debt, which symbolized Greece’s financial rehabilitation when it was issued earlier this year, closed the week yielding more than 10-year bonds, a signal of the growing default risk.

“The leading party could be portraying the movement as a way to scare voters,” said Yannick Naud, a money manager at Pentalpha Capital in London. “They are blaming Syriza for the move, and rightly so, and it’s probably to tell the electorate it’s our way or chaos.” Samaras triggered the worst stock market selloff in 27 years last week when he decided to bring forward the vote in parliament on a new head of state. The prime minister will be forced to call a snap election unless he can find another 25 lawmakers for the supermajority required to confirm his nominee by Dec. 29. Samaras wrote in an article in Real News that anxiety about Greece is justified and caused by Syriza. Syriza leader Alexis Tsipras called Samaras “the prime minister of chaos” in a speech on Saturday.

“The pressure from the European commission on the electoral process of a sovereign country is unbearable, and raises serious questions about the future of democracy in Europe ..“

• EU Finance Chief Flies Into Athens As Grexit Fears Mount (Guardian)

The EU’s finance commissioner, Pierre Moscovici, flies into Athens on Monday amid mounting political uncertainty following the Greek government’s abrupt decision to bring forward the presidential elections. The Frenchman’s visit comes as the country’s radical-left opposition leader, Alexis Tsipras, steps up claims that Greece is being subjected to a campaign of “frenetic fear-mongering” not only by its Prime Minister Antonis Samaras but senior European officials ahead of this week’s ballot, the first of three polls. “An operation of terror, of lies, is underway,” the leader of Syriza told supporters on Sunday. “An operation whose only aim is to sow terror among the Greek people and MPs, and to thrust the country ever deeper into the poverty and uncertainty of the memorandum,” he said referring to the EU-IMF-sponsored rescue programme to keep the debt-stricken economy afloat.

Tsipras was speaking after government leaders reiterated fears that Greece could be forced to exit the eurozone if parliament failed to elect a new head of state by 29 December. Should the ruling alliance lose the three-round race, the Greek constitution demands that general elections are called, a vote Tsipras’s party is tipped to win. “Everything is hanging by a thread … and if it is cut, it could lead the country to absolute catastrophe,” said the deputy premier, Evangelos Venizelos, whose centre-left Pasok party is junior partner in Athens’ two-party coalition. In a re-run of the drama that haunted Greece at the height of the eurozone crisis in 2012, markets have tumbled with the country’s borrowing costs soaring on the back of revived fears of a Greek exit – called Grexit – if a Syriza-led government assumes power.

Moscovici, whose two-day visit is expected to focus on discussing stalled negotiations with the nation’s troika of creditors – the European commission, the IMF and the European Central Bank – will not be meeting Tsipras. Aides described the snub as “unbelievable”. Last week, the finance commissioner said he thought Samaras “knows what he is doing” and would win his gamble of expediting the vote for a new head of state. In an interview with Kathimerini on Sunday, he described the former EU environment commissioner Stavros Dimas, who is the government candidate for president, as “a good man.” But the newly installed president of the European commission Jean-Claude Juncker, who is a close friend of Samaras, has gone further, warning of the perils of the “wrong election result”. “I wouldn’t like extreme forces to come to power,” he said of the poll’s potential to trigger early general elections. “I would prefer if known faces show up.”

Although it is not the first time that the politics of fear have been invoked to ensure that the twice bailed-out Greece toes the line, the flagrant intervention of figures so directly linked to Athens’ €240bn financial rescue programme has been quick to stir angry reaction abroad. Rushing to the support of Syriza on Saturday, the Party of the European Left, the continent’s alliance of leftist groups, deplored what it said was evidence of declining levels of democracy in the EU. “The pressure from the European commission on the electoral process of a sovereign country is unbearable, and raises serious questions about the future of democracy in Europe,” Pierre Laurent, the organisation’s president said in a statement posted on the party’s website.

There’s one solution, and one only: Grexit. Not sure what Steve feels about that, though.

• The EU Must Face Up To Austerity’s Failures (Steve Keen)

The Greek stockmarket slumped further overnight as investors continue to digest Prime Minister Antonis Samaras’ decision to call a snap presidential election. Greek stocks fell a further 7%, bringing the market’s loss for the year to 29%. Oliver Marc Hartwich commented in Business Spectator earlier this week that the election might “allow the radical anti-austerity forces to gain power. This would not only dash any hopes of a Greek recovery, it would also force the eurozone to make a choice between the lesser of two evils: to expel Greece from the monetary union and let it default on its debt, or to continue supporting it financially, despite an end to fiscal consolidation”. If, as appears likely, the leftist Syriza Party takes over in Greece, Hartwich lamented that “then, whatever may have been achieved on budget consolidation and reform in the meantime will not be worth much anymore.” This assumes that “whatever may have been achieved on budget consolidation and reform” was worth something in the first place.

So let’s stop assuming and check the data. Figure 1 shows Greek GDP since 1996, and it has clearly collapsed since the policy of austerity was imposed. If the Greeks feel inclined to kick out the incumbent government after a more than 25% fall in nominal GDP over the last six years, could you really blame them? Supporters of austerity, such as Hartwich, point to the tiny uptick in GDP in the last six months as a sign that austerity is working. But the original proponents of austerity actually argued that it would cause the economy to grow, not shrink. Some growth. Austerity began in February 2010 in Greece (as marked on Figure 1), and since then the economy has shrunk by almost 25%. Unemployment rose from 10% when the policy began to a peak of 27.5% — worse than the US experienced during the Great Depression. Rather than seeing the slight recovery in the last six months as signs of success, supporters of austerity should be asking why their policies failed so abjectly.

“If by the time of the third vote at the end of the December, the centre right’s candidate Stavros Dimas, a former EU commissioner, has not secured 180 votes out of 300 – unlikely as things stand – there will be an election that Syriza could win.”

• The Eurozone Crisis History Is Repeating Itself … Again (Guardian)

It’s funny how history repeats itself. The inconclusive general election in 2010 took place when the economy appeared to be on the mend and against the backdrop of a crisis in the eurozone prompted by Greece. As things stand, we could be in for a repeat performance in May 2015. Be in no doubt, what’s happening in Europe matters to Britain. The eurozone is perhaps one crisis and one deep recession away from splintering. The more TV pictures of rioting on the streets of Athens or general strikes in Italy between now and the election, the better support for Nigel Farage’s UK Independence party will hold up. Stronger support for Ukip will encourage the Conservatives to adopt a more Eurosceptic approach, hardening their stance on the concessions required for them to continue supporting Britain’s membership of the EU.

Meanwhile, a permanently weak eurozone economy will push Britain’s trade balance into the red. The economic debate in the current parliament has been about sorting out the budget deficit; the debate in the next parliament will also be about sorting out the current account deficit. Let’s start with Greece, which was where the eurozone crisis began all those years ago. The French statesman Talleyrand once said of the Bourbons that they had learned nothing and forgotten nothing. The same applies to the bunch of incompetents in Brussels, Berlin and Frankfurt responsible for pushing Greece towards economic and political meltdown. Greece’s recent economic performance has been pretty good. The economy is growing, unemployment is on the decline and the debt to GDP ratio has come down a bit. Time, you might think, to cut Athens a bit of slack.

Not if you are the German government, the European commission or the European Central Bank. No, they are insisting on even more austerity and continued surveillance by the IMF. But the Greeks have had a bellyful of austerity. They have had enough of being pushed around. Predictably, support for the anti-austerity Syriza party is strong and the mood is angry. In an attempt to regain the initiative, the government in Athens brought forward the dates for the votes in parliament to elect a new president. If by the time of the third vote at the end of the December, the centre right’s candidate Stavros Dimas, a former EU commissioner, has not secured 180 votes out of 300 – unlikely as things stand – there will be an election that Syriza could win.

” .. the sorry state of the French-German couple – the stalled engine of European integration..”

• Time For Bottom Fishing In The Eurozone? (CNBC)

By taking the euro area stocks down 2.9% in the course of last Friday’s trading, markets may be signaling that recessionary and stagnant economies have set the stage for unsettling political developments throughout the monetary union. There is no safe harbor left in that troubled region. Even Germany is moving toward the eye of the storm. When you see the German Chancellor Merkel’s blistering attack on its coalition partners – the Social Democrats – for having formed the government in the federal state of Thuringia with the far Left Party (Die Linke) and the Greens, you know that German political stability is gone. In fact, she sounded like she was actively searching for a new partner when, in the same speech last Tuesday (December 9), she invited the Greens (polling at 11%) to cooperate with her center-right party CDU/CSU (polling at 41%). Germany’s current governing coalition is at odds about euro area economic policies and the economic fallout from sanctions against Russia.

More generally, it seems, Chancellor Merkel’s hostile policies toward Russia have opened ominous differences on issues of European security. It looks like a perfect deal breaker may be in the offing. And then there is Germany’s deteriorating relationship with France. Invectives and name calling are flying across the Rhine, and things are seriously amiss at the highest political level. For example, in response to Chancellor Merkel’s repeated criticisms of France’s failure to meet budget deficit targets and to implement structural reforms, the French Prime Minister Valls is saying that France is doing its reforms for its own needs rather than to please foreign governments. In other words, what France is doing, or not doing, is none of Germany’s business. That is the sorry state of the French-German couple – the stalled engine of European integration.

But asking prices are up!

• London House Prices Fall By More Than £30,000 In A Month (Guardian)

The average asking price of a home in London has tumbled by more than £30,000 over the past month, figures from property website Rightmove showed on Monday, with new sellers in all of the capital’s boroughs seemingly becoming less optimistic about the price they can achieve. Across the country, Rightmove reported the largest ever monthly fall in the price of properties coming to market, a 3.3% or nearly £9,000 decline to £258,424. Asking prices in Greater London have been falling since the summer, and the drop to an average of £570,796 from £601,180 in November, represents a 5.1% decline in sellers’ expectations over the month, the second biggest after August. Prices were down in all 32 London boroughs, with the biggest drops in Hammersmith & Fulham and Hackney, where new asking prices dropped by 7% and 6% respectively.

However despite the drop, average asking prices of homes coming onto the market across London are up by £57,000, or 11.1%, on December 2013. In Hackney, sellers are asking 22.5% more than in December last year, while in Haringey prices are 21% higher. Rightmove reported month-on-month drops everywhere except Wales, where new sellers put homes up for sale for 0.2% more than in November, at an average of £167,271. However asking prices are set to end the year up 7%, and the website said it expected further increases in the range of 4% to 5% in 2015. The falls come despite the changes to stamp duty announced in this month’s autumn statement. Estate agents have predicted the changes could lead to higher prices being paid for homes, particularly around the old “cliff edge” thresholds at which higher tax rates kicked in.

“.. we are two bad decisions away from not being an independent central bank ..”

• Fed Vice-Chairman Fisher: ‘Boy, Was I Wrong’ About Banks’ Political Power (WSJ)

Did the political influence of big Wall Street banks wane after the financial crisis? Not according to the vice chairman of the Federal Reserve. Stanley Fischer gave some unscheduled remarks Friday morning at the Peterson Institute for International Economics, waxing philosophic about the global process for setting financial-system rules. Mr. Fischer suggested rules set directly by legislatures can be imperfect, lamenting the role of Wall Street banks in shaping the 2010 Dodd-Frank financial overhaul law.
“I thought that when Dodd-Frank started, that the banks would not succeed in influencing it, having lost all the prestige they lost,” he told a crowd of several dozen at the Washington, D.C., think tank. “Boy, was I wrong.”

His remarks came less than a day after the House passed a spending bill that included a provision, long sought by banks, to scale back a Dodd-Frank requirement. Mr. Fischer also recalled how during his time leading the Bank of Israel, he felt keenly aware of political considerations. When his central bank colleagues asserted that the institution acted independently of the elected government, his reply was, “Yes. And we are two bad decisions away from not being an independent central bank.”

When did Krugman last get anything right? I still think he lost it in the Swedish schnapps he drank when picking up his Fauxbel.

• Krugman Says Fed Is Unlikely to Raise Interest Rates in 2015 (Bloomberg)

Nobel laureate Paul Krugman said the U.S. Federal Reserve is unlikely to raise interest rates next year as it struggles to meet its inflation target and global economic growth remains weak. “When push comes to shove they’re going to look and say: ‘It’s a pretty weak world economy out there, we don’t see any inflation, and the risk if we raise rates and turns out we were mistaken is just so huge’,” Krugman said in Dubai today. “It’s certainly a real possibility that they’ll go ahead and do it, but probably not.” Top Fed officials, including Vice Chairman Stanley Fischer and New York Fed President William C. Dudley, said this month they expect the drop in oil prices to spur domestic consumption, playing down the risk that it could push inflation further below the central bank’s 2% goal. Krugman, however, said he agrees with signals from financial markets suggesting that policy makers will delay raising borrowing costs.

U.S. Treasuries rallied, with 10-year yields falling the most since June 2012 on Dec. 12 while bond yields showed five-year inflation expectations fell to the lowest since 2010. The policy-setting Federal Open Market Committee, which next meets Dec. 16-17, will take energy prices into account in its assessment of inflation and the economy. While most major central banks view inflation of about 2% as the yardstick for price stability, more than a fourth of 90 economies monitored by researcher Capital Economics Ltd. are below 1%, the most since 2009. The outlook for world economic growth may deteriorate in 2015 with risks of crises in China and the euro-area, Krugman said, as the European Central Bank fails to dodge deflation and the world’s second-biggest economy struggles to bolster domestic demand. “The two scary spots are the euro-area and China,” Krugman said in a presentation about the state of the world economy at the Arab Strategy Forum in Dubai.

It’ll take a crash for people to really understand what the swaps rule demise entails. And by then it’ll be too late by a wide margin.

• Congress Deals A Blow To Financial Reform (Bloomberg ed.)

Passing a last-minute spending bill to avoid shutting down the U.S. government might be better than another self-inflicted budget crisis, but the deal on the table is nothing to be proud of. The measure approved by the House of Representatives last night and now before the Senate carries with it a set of so-called riders, which change policy in ways that haven’t been examined or discussed. One of them is especially troublesome. It weakens the Dodd-Frank financial reforms. The rider in question removes the so-called swaps push-out rule, which was intended to reduce the risks posed by the largest U.S. banks’ trading in derivatives. Without it, regulators will have to work harder in other areas to promote stability. The rule addressed a dangerous incentive created by the pre-crash regulatory system. Various government backstops, such as deposit insurance and access to emergency loans from the Federal Reserve, have given the largest banks a great advantage in the derivatives market.

Counterparties assume that the government will help them make good on their obligations. This implicit subsidy encouraged them to build huge, interconnected trading operations. Trouble at any one of them could trigger a broader panic and necessitate a rescue. The size of the business is staggering. As of June, the top four banks – JPMorgan Chase, Citigroup, Goldman Sachs and Bank of America – had written derivative contracts on the equivalent of more than $200 trillion in stocks, bonds and other assets. The rule told banks to move some of their derivatives out of federally insured, deposit-taking subsidiaries and to put them in other units instead. This was never going to make the financial system safe on its own. In the case of the biggest banks, all units, not just deposit-takers, enjoy government support, as the bailouts of 2008 and 2009 plainly demonstrated. In addition, pleading practical difficulties, banks had already succeeded in narrowing the scope of the requirement. Still, the swaps rule would have been helpful. Its demise gives regulators more work to do.

They’ll probably need to take further steps to reduce the value of the government subsidy, by making banks less likely to need it. How? First, by making sure that banks have ample capital, and plenty of cash on hand, to cope with sudden setbacks. Here, the regulators have made a start but need to do more. Second, by requiring derivatives trades to be routed transparently through new central counterparties and by setting up trading hubs that let investors transact directly with one another. This strengthening of the financial infrastructure is in train. Third, by monitoring the market for dangerous concentrations of risk, such as the credit-derivative positions that almost brought down insurance giant AIG and a number of large banks in 2008. Here, progress has been sluggish at best. The killing of the swaps rule needn’t be a disaster. That’s what it would be, though, if it proved to be the first step in a broader rollback of financial reform, and if regulators failed to use their other powers to better effect.

A ‘little risky’, clueless Robert? Check this for ‘deep thinking’: “Maybe neighborhoods are not as important. Or maybe there’s an urbanization trend going on.”

• Shiller Sees Risk In New Push For First-Time Homebuyers (CNBC)

Lax lending standards were widely faulted for triggering the 2008 financial crisis. If recent developments are any indication, those conditions may be making a comeback. In an effort to accelerate lending to lower- and middle-income borrowers, mortgage giants Fannie Mae and Freddie Mac are launching programs that will guarantee loans with down payments of as little as 3%. But could an ultralow down payment create a housing market boom, or could it lead to another mortgage bubble? A prominent housing market expert who made his name predicting the 2008 bust has at least some doubts. “It sounds a little risky,” Nobel Prize-winning economist Robert Shiller told CNBC. “Risky for the lender, and for the mortgage insurer who is going to insure” the mortgage obligations, he added.

Borrowing criteria tightened after the housing market crashed, but in recent days some of those strictures have been loosened. Lack of a big cash down payment has been cited by some as keeping many possible buyers from becoming homeowners. According to Fannie Mae and Freddie Mac, to get a mortgage with just 3% down, borrowers must have a credit score of at least 620. They must also be able to able to prove income, assets and job status, and purchase private mortgage insurance. However, Shiller still cast doubt on whether that would be the best course of action. “Because it’s only a 3% margin, if somebody defaults and they have to sell the house, they might not get all the money back.”

Although banks have implemented tighter lending standards, a spate of new borrowing programs have been aimed at first-time and lower-income homebuyers, most of whom have stayed on the sidelines of the housing market. According to recent data from the National Association of Realtors, first-time homebuyers account for just 33% of all home purchases. That’s the lowest level in 27 years. “Maybe there’s a cultural change. Our millennials spend more time on Facebook than standing over the backyard fence and talking to the neighbor,” Shiller said, attempting to explain the drop in new homebuyers. “Maybe neighborhoods are not as important. Or maybe there’s an urbanization trend going on.”

Didn’t have the guts to go below 7%, did you?

• China Economic Growth May Slow To 7.1% In 2015 – PBOC (Reuters)

China’s economic growth could slow to 7.1% in 2015 from an expected 7.4% this year, held back by a sagging property sector, the central bank said in research report seen by Reuters on Sunday. Stronger global demand could boost exports, but not by enough to counteract the impact from weakening property investment, according to the report published on the central bank’s website. China’s exports are likely to grow 6.9% in 2015, quickening from this year’s 6.1% rise, while import growth is seen accelerating to 5.1% in 2015 from this year’s 1.9%, it said. The report warned that the Federal Reserve’s expected move to raise interest rates sometime next year could hit emerging-market economies.

Fixed-asset investment growth may slow to 12.8% in 2015 from this year’s 15.5%, while retail sales growth may quicken to 12.2% from 12%, it said. Consumer inflation may hold largely steady in 2015, at 2.2%, it said. China’s economic growth weakened to 7.3% in the third quarter, and November’s soft factory and investment figures suggest full-year growth will miss Beijing’s 7.5% target and mark the weakest expansion in 24 years. Economists who advise the government have recommended that China lower its growth target to around 7% in 2015. China’s employment situation is likely to hold up well next year due to faster expansion of the services sector, despite slower economic growth, said the report.

Oz has different worries today.

• Australia’s Budget Deficit Blows Out Amid Commodity Slide (Reuters)

Australia’s government forecast its budget deficit would balloon to A$40.4 billion ($33.2 billion) in the year to June as falling prices for key resource exports and sluggish wage growth blew a gaping hole in tax revenues. Releasing his midyear budget outlook on Monday, Treasurer Joe Hockey predicted the economy would grow by 2.5% in 2014/15 before picking up to 3.5% over the next few years, while unemployment was likely to peak at 6.5%. “While there are positive signs of the Australian economy strengthening and transitioning towards broader-based drivers of growth, there is still much work to be done and budget repair will take time,” said Hockey. Just a year into office, Prime Minister Tony Abbott’s government has suffered record low approval ratings, with the economy running into strong external headwinds.

The deficit for 2014/15 had been forecasted at A$29.8 billion in the May budget, while the 2015/16 shortfall was now put at A$31.2 billion, instead of A$17.1 billion. The release was delayed for over an hour as the government reacted to a hostage siege in the heart of Sydney’s financial district, which has diverted media coverage away from the budget update and the government’s political troubles. Hockey predicted tax receipts would be A$31 billion less than first hoped in the four years to 2017/18, due largely to a slide in the price of iron ore, Australia’s biggest export earner. The government has had to cut its forecast from A$92 a ton in May, to A$60 a ton for the foreseeable future. The government has also faced problems getting unpopular cost cutting and revenue raising measures through the Senate, which Hockey said cost another A$10.6 billion.

“The Cold War was the dialectic conditioning of the whole world ..”

• The Implosion Of American Culture (PhoM)

It was widely expressed by the mainstream media of the time that the collapse of the Soviet Union and the fall of the Berlin Wall could not have been predicted. In hindsight, the stagnation and drop in oil prices should have been the obvious signs that a dramatic change was coming. And when the USSR began to borrow from western banks, the fix was in. Western banks is something of a misnomer, as no bank, or conglomerate of banking interests, can exist separate and independent of the larger international banking structure which has been built throughout the the 20th Century. Stagnating growth and the deflationary oil prices which began in 1986 acted as fine toothed methods of transferring wealth from the social trust within the Soviet Union, forcing banks within the USSR to borrow from western banks, which was in fact an exchange of assets amongst financial institutions.

The inevitable policy shifts towards “perestroika” were obvious and planned well in advance. The agricultural crisis within the country was designed to parallel the mass movement towards “glasnost”, or openness. When we consider the larger mandates of the CSI, Cultural and Socioeconomic Interception, the same machinations as “perestroika” and ‘glasnost” can be observed in the social fragmentation and devolution of the American middle class. Where the Soviet Union enacted policies which instigated the CSI changes within the country, it will be Americas lack of enacting policy change which will precipitate the implosion of its culture.

To understand what this means we must consider the expansion of American culture around the globe since 1944, which was the year the USD became the primary reserve currency used in global trade. As use of the dollar increased, so did the acceptance of western culture. Everything from McDonald’s burgers to Hollywood creations were exported around the world. America has followed the Soviet Union down the path of re-engineering its ideological culture. Russia has no more moved towards democracy than America has moved towards Communism. Both have shifted towards a new socialist middle ground where centralization has woven the macro economic system tighter around a supra-sovereign statehood. The Cold War was the dialectic conditioning of the whole world.

“Nearly half of those 25 years of age are living at home with parents. The rate is up to 30% for those 30 years of age.”

• Why Milennials Are Stuck Living At Home With Parents (Dr. Housing Bubble)

The Federal Reserve conducted a study on Millennials and tried to ascertain why so many of them are living at home. Is it too much student debt? Lower incomes? Or is it that home prices are simply unaffordable? The study finds that all of these factors have a big impact on why many Millennials are living at home and why the first time home buyer market is performing so badly. It also gives us insight into the shifting building demand of new construction. Many builders are focusing their energies on multi-unit structures to cater to an audience that will look for rentals or lower priced condos. There is a heavy renting trend undertaking this country. We are seeing a record numbers of young people living at home with mom and dad heading directly back into their childhood rooms to rock out the NES and attempting to pass Super Mario Brothers once again. There are major implications for housing because of this new structural change. First time home buying is down dramatically. Construction is catering to a lower income cohort. Let us look at what the Fed found in their report.

One of the interesting findings is that the trend of young adults living at home has continued on an upward slope going all the way back to 1999. Even the toxic mortgage days of Housing Bubble 1.0 didn’t really shift this figure by much. But the homeownership rate increased which means that the push came from older cohorts or young buyers that had the misfortune of buying near the top (and of course many were burned in epic fashion).

So let us look at the findings: Nearly half of those 25 years of age are living at home with parents. The rate is up to 30% for those 30 years of age. These are dramatic increases from 1999. There has been paltry data on the makeup of housing composition because some were saying that many were shacking up with roommates. That does not appear to be the case. If you were placing a bet, you would be in a good position putting your money on those 25 years of age living at home with parents. The first time home buyer market continues to perform pathetically. Of course, with investors pulling back we now have the FHFA trying to push for 3% down payment loans to get the juices flowing again. We are already at 5% down payments so this move to 3% will likely offer minimal help for younger Americans.

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