emerging markets Archives - The Automatic Earth

A stream of broadly upbeat US economic data is opening up fissures in the foreign exchange markets. Market participants are recognising that the balance of risk is changing. Emerging markets, which have enjoyed substantive capital inflows, will not be immune to this process, and certain currencies are already feeling the heat. Emerging markets were major beneficiaries of inward capital flows last year, as evidenced in data from the Bank for International Settlements on 30 April. Overall “foreign currency credit continued to grow during 2017, with US dollar credit rising by 8% to US$11.4 trillion and euro credit by 10% to €3 trillion (US$3.57 trillion),” the bank wrote. US dollar credit to emerging market economies rose by 10% to US$3.67 trillion in the year to end-2017, it added.

This US-dollar dominance is critical, as the main currency moving into any markets, not just emerging markers, will also be the main mover out of them. [..] It seems an age ago now but, in June 2017, Argentina could issue a US dollar-denominated 100-year government bond receiving US$9.75 billion of orders for a US$2.75 billion issue with a coupon of 7.125%. Foreign investors had a taste for Argentina but now want out. Last Friday, with inflation in Argentina in April at 25.4%, the local central bank had to raise its benchmark interest rate to 40% in an attempt to arrest the pace of the peso’s decline. It had fallen 7.83% versus the US dollar on Thursday alone.

Friday also saw the Turkish lira hit a record low against the US dollar, beset by 11% year-on-year inflation and, among other factors, investor concerns that Turkey’s central bank could come under political pressure not to tighten monetary policy as far as they might. [..] Markets can behave like predators, pursuing what they perceive as the weakest prey first. Argentina and Turkey are currently filling that not-to-be-envied role in the wider emerging markets space. But they probably won’t be the last. Billions of US dollars of capital have flowed into emerging markets in recent years but the tide may be turning. It would be easy to just characterise Argentina and Turkey as special cases but that would be naive.

Oh, sure. Never better.

• Two-Thirds Of Americans Believe It’s A Good Time To Buy A Home (MW)

House prices are soaring and, despite warnings from some analysts, most Americans believe they will continue to soar. A majority of U.S. adults (64%) continue to believe home prices in their local area will increase over the next year, a survey released Monday by polling firm Gallup concluded. That’s up 9 percentage points over the past two years and is the highest percentage since before the housing market crash and Great Recession in the mid-2000s. The level of optimism is edging closer to the 70% of adults in 2005 who said prices would continue rising. That, of course, was less than one year before the peak of the housing market bubble in early 2006, which was largely fueled by a wave of subprime lending. (Roughly one-quarter of respondents in both 2005 and 2018 said they believed house prices would remain the same.)

In 2009, during the depths of the Great Recession, only 22% of Americans believed house prices would rise. But optimism about the housing market has made a slow recovery—along with the market itself—in the intervening years. Today, only 10% in the Gallup survey believe prices will fall. That compares to 5% who felt similarly pessimistic in 2005, just two years before the crash. Opinions vary between the West and East coasts, and renters and homeowners. Some 70% of homeowners see prices continuing to rise versus 59% of renters. Only 59% of Western residents see prices increasing, compared to a range of 65% to 68% in the other parts of the U.S. (The median sale price of a home in California is more than double that in the rest of the country.)

About that house you were planning to buy…

• Obamacare Premiums May Soar As Much As 91% Next Year (ZH)

Residents of Maryland and Virginia face double-digit percentage increases in premiums for individual Obamacare plans in 2019, according to rate requests made by insurers. The largest hikes are being sought by CareFirst, which is seeking a 64% increase in Virginia, and a whopping 91% increase in Maryland for its PPO. Other insurers are following suit in the two states, with Kaiser requesting hikes of 32% and 37% respectively, followed by CareFirst’s HMO offering. “In Maryland, CareFirst wants to raise rates by 91% on a plan covering 15,000 people, Insurance Commissioner Al Redmer Jr. said. If approved, premiums for a 40-year-old could reach $1,334 a month.” -Bloomberg

That’s over $16,000 per year for an individual plan in a state with an average personal income of $59,524. “We have folks in Maryland that are struggling, that are trying to do the right thing, and they’re paying more for their health insurance than they are for their mortgage,” Redmer said on a call with reporters. “Maryland is seeking permission from the federal government to create a reinsurance program that would use $975 million in state and federal funds over five years to lower rates. That would help only temporarily, Redmer said.” -Bloomberg “I believe we’ve been in a death spiral for a year or two,” he said, adding that a permanent solution requires Congress to fix the Affordable Care Act.

Virginia and Maryland are the first two states in which 2019 rate requests – which are subject to regulatory approval and may change – have been made public, however increases are anticipated across the country as insurers adjust to the post-ACA battle. Final premium increases will need to be approved ahead of the November 1 open-enrollment period. The hikes are being blamed in part by the expectation that the elimination of the Obamacare stipulation forcing all Americans to have health coverage would leave insurers with a smaller pool of sicker clients.

“..the collusion of multiple intelligence agencies with social media companies and what used to be the respectable organs of the news..”

• Which Hunt? (Jim Kunstler)

It was refreshing to read the response of Federal Judge T. S. Ellis III to a squad of prosecutors from Robert Mueller’s office who came into his Alexandria, Virginia, court to open the case against Paul Manafort, erstwhile Trump campaign manager, for money-laundering shenanigans dating as far back as 2005. Said response by the judge being: “You don’t really care about Mr. Manafort’s bank fraud. You really care about getting information that Mr. Manafort can give you that would reflect on Mr. Trump and lead to his prosecution or impeachment or whatever.”

Judge Ellis’s concise summation was like a spring zephyr clearing out a long winter’s fog of unreality in our national politics — the idea that Mueller’s mission has been anything but the Deep State’s ongoing crusade to nullify the 2016 election. In the meantime of the past year, Mueller has been additionally burdened by obvious misconduct in the FBI and its parent agency, the Department of Justice, which makes Mueller himself look like the instrument of a cover-up, or at least a massive organized distraction from the misdeeds of the Deep State itself.

I was never a Trump supporter or voter, but it seems to me he deserves to succeed or fail as President on his own merits (or lack of). It’s much more disturbing to me to see the runaway train that federal prosecution has turned into, along with orchestrated intrigues of FBI and DOJ officials at the highest level. These are of a piece with the creeping surveillance of all Americans, and the collusion of multiple intelligence agencies with social media companies and what used to be the respectable organs of the news, especially The New York Times, The Washington Post, and CNN — all of which are behaving like Grand Inquisitors in a medieval religious hysteria.

Stockman does a Trump: “Simple Steve Mnuchin”.

• The Donald’s Fabulous Fiscal Folly, Wall Street’s Wile E. Coyote (Stockman)

There has never been a more fiscally clueless team at the top than the Donald and his dimwitted Treasury secretary, Simple Steve Mnuchin. After reading the latter’s recent claim that financing Uncle Sam’s impending trillion dollar deficits will be a breeze, we now understand how he sat on the Board of Sears for 10-years and never noticed that the company was going bankrupt. In any event, fixing to borrow upwards of $1.2 trillion in FY 2019, Simple Steve apparently didn’t get the memo about the Fed’s unfolding QT campaign and the fact that it will be draining cash from the bond pits at a $600 billion annual rate by October. After all, no one who can do third-grade math would expect that the bond market can “easily handle” what will in effect be $1.8 trillion of homeless USTs:

“U.S. Treasury Secretary Steven Mnuchin said he’s unconcerned about the bond market’s ability to absorb rising government debt after his department said it borrowed a record amount for the first quarter. ‘It’s a very large, robust market — it’s the most liquid market in the world, and there is a lot of supply,” he said… ‘But I think the market can easily handle it.’ Then again, Simple Steve is apparently not alone in his fog of incomprehension. Even if you did get the memo—like most of the Wall Street day traders—you might still be under the delusion that the Fed is your friend and that when push comes to shove, it will put QT on ice in order to forestall any unpleasant hissy-fitting in the casino.

That is, it’s allegedly still safe to buy the dips or play the swing trade between the 50-DMA and 200-DMA because the Powell Put undergirds the latter. So never fear dear punters: At about 2615 on the S&P 500 (the current 200-DMA), the Eccles Building cavalry will ride to the rescue. That would appear to be the meaning of the chart below—except it isn’t. What it really says is that after nine years of buying the dips successfully, Wall Street has essentially deputized its own cavalry. [..] there is in our judgment 15-20% of downside before the Fed relents, but by that point it will be too late.

China and Russia stand behind Iran.

• Trump To Unveil Iran Decision Tuesday; Europeans Move His Way (R.)

President Donald Trump will announce on Tuesday whether he will withdraw from the Iran nuclear deal and a senior U.S. official said it was unclear if efforts by European allies to address Trump’s concerns would be enough to save the pact. Trump has repeatedly threatened to withdraw from the deal, which eased economic sanctions on Iran in exchange for Tehran limiting its nuclear program, unless France, Germany and Britain – which also signed the agreement – fix what he has called its flaws. The senior U.S. official said the European allies had moved significantly in Trump’s direction on what he sees as the defects – the failure to address Iran’s ballistic missile program, the terms under which international inspectors visit suspected Iranian sites, and “sunset” clauses under which some terms expire.

The official did not know, however, if the Europeans had done enough to convince Trump to remain in the deal. “The big question in my mind is does he think the Europeans have moved far enough so that we can all be unified and announce a deal? That’s one option,” said the official. “Or (does he conclude) the Europeans have not moved far enough and we say they’ve got to move more?” European diplomats said privately they expected Trump to effectively withdraw from the agreement, which was struck by six major powers – Britain, China, France, Germany, Russia and the United States – and Iran in July 2015.

[..] Under the deal, formally known as the Joint Comprehensive Plan of Action (JCPOA), the United States committed to easing a series of U.S. sanctions on Iran and it has done so under a string of “waivers” that effectively suspend them. Under U.S. law, Trump has until Saturday to decide whether to reintroduce U.S. sanctions related to Iran’s central bank and Iranian oil exports. The reimposition of sanctions would dissuade foreign companies from doing business with Iran because they could be subject to U.S. penalties.

The Rudy show. There won’t be a sequel.

• State Dept.: Giuliani Doesn’t Speak For US On Foreign Policy (AP)

The Trump administration sought to distance itself Monday from Rudy Giuliani’s dramatic public statements about Iran and North Korea, saying that President Donald Trump’s new lawyer does not speak for the president on matters of foreign policy. Since joining Trump’s legal team last month and becoming its public face, Giuliani has raised eyebrows for a series of startling assertions not only about his legal strategy and the special counsel investigation, but also about global affairs and Trump’s policies. That spurred widespread confusion over whether the former New York mayor, now on Trump’s payroll, was disclosing information he’d been told by the president, stating U.S. government policy or merely describing his own impression of events.

“He speaks for himself and not on behalf of the administration on foreign policy,” State Department spokeswoman Heather Nauert said Monday. It was the clearest sign to date that Trump’s administration is seeking to draw a line between itself and Giuliani on matters of government policy, even as he continues to act as his spokesman on matters related to special counsel Robert Mueller’s Russia probe. It comes as Trump prepares for a series of high-stakes moments in the coming weeks on Iran, North Korea and the Mideast conflict — the type of delicate and potentially explosive regions where events can easily be upended by an errant remark by an emissary of the U.S. president. Giuliani’s perplexing and sometimes conflicting remarks have increasingly become a cause of consternation for Trump’s aides.

Asked last week whether Giuliani’s portfolio included foreign policy, White House spokeswoman Sarah Huckabee Sanders said simply, “Not that I’m aware of.” [..] Giuliani’s remarks have been watched with equal concern at the State Department, the Pentagon and other national security agencies, starting last week when he said on television that North Korea would release three Americans detained in the country. “We got Kim Jong Un impressed enough to be releasing three prisoners today,” Giuliani told Fox News. Although Trump has hinted that such a move could be coming, there has been no formal announcement by the U.S. government, which is in detailed talks with North Korea at the moment to plan a historic summit between Kim and Trump. The detainees have not yet been released as predicted by Giuliani.

Bullshitization.

• Are You in a BS Job? In Academe, You’re Hardly Alone (David Graeber)

For a number of years now, I have been conducting research on forms of employment seen as utterly pointless by those who perform them. The proportion of these jobs is startlingly high. Surveys in Britain and Holland reveal that 37 to 40% of all workers there are convinced that their jobs make no meaningful contribution to the world. And there seems every reason to believe that numbers in other wealthy countries are much the same. There would appear to be whole industries — telemarketing, corporate law, financial or management consulting, lobbying — in which almost everyone involved finds the enterprise a waste of time, and believes that if their jobs disappeared it would either make no difference or make the world a better place.

Generally speaking, we should trust people’s instincts in such matters. (Some of them might be wrong, but no one else is in a position to know better.) If one includes the work of those who unwittingly perform real labor in support of all this — for instance, the cleaners, guards, and mechanics who maintain the office buildings where people perform bullshit jobs — it’s clear that 50% of all work could be eliminated with no downside. (I am assuming here that provision is made such that those whose jobs were eliminated continue to be supported.) If nothing else, this would have immediate salutary effects on carbon emissions, not to mention overall social happiness and well-being.

Even this estimate probably understates the extent of the problem, because it doesn’t address the creeping bullshitization of real jobs. According to a 2016 survey, American office workers reported that they spent four out of eight hours doing their actual jobs; the rest of the time was spent in email, useless meetings, and pointless administrative tasks. The trend has much less effect on obviously useful occupations, like those of tailors, steamfitters, and chefs, or obviously beneficial ones, like designers and musicians, so one might argue that most of the jobs affected are largely pointless anyway; but the phenomenon has clearly damaged a number of indisputably useful fields of endeavor. Nurses nowadays often have to spend at least half of their time on paperwork, and primary- and secondary-school teachers complain of galloping bureaucratization.

Nice going, Boris: “..the foreign secretary dismissed May’s customs partnership proposal as “crazy” “

• Theresa May Faces Renewed Turmoil Over Brexit Options (G.)

Theresa May is facing renewed cross-party pressure to accept membership of the European Economic Area (EEA) or risk defeat in the Commons. Peers vote on Tuesday night on a series of amendments as officials work to try to find a deal on May’s preferred option of a customs relationship with Europe that is acceptable to Brexiters and remainers in her cabinet, as well as MPs and EU negotiators. The policy paper rejected by the inner cabinet on the Brexit subcommittee last week has been withdrawn for further work and will not be discussed at this week’s regular meeting.

A Downing Street source said: “It was agreed on Wednesday that more work needed to be done to flesh out the general principles agreed – no hard border and as frictionless trade as possible. “We realise the urgency. But as Greg Clark [the business secretary] said on Sunday, it is a crucial question to get right.” The prime minister also came under pressure from Boris Johnson, who is currently in Washington trying to persuade Donald Trump to stick with the Iran nuclear deal. In an interview with the Daily Mail, the foreign secretary dismissed May’s customs partnership proposal as “crazy” and said it would create massive bureaucracy. The scheme involves the UK levying border tariffs on imports on behalf of the EU and refunding them where the imported goods stay in Britain.

Johnson also condemned any system that prevented the UK from establishing its own trade policy and negotiating deals with non-EU countries, which is also the principle objection of Conservatives led by Jacob Rees-Mogg in the European Research Group. Meanwhile, the Irish government is concerned that many MPs and peers still believe that Dublin will back down at the last minute on the hard border. One parliamentarian who visited Westminster recently said he was surprised by how confident MPs were that there could be a frictionless border between north and south without a customs union. “Both May’s proposals for maximum facilitation and a customs partnership have been rejected by [the EU negotiator] Michel Barnier as magical thinking,” he said.

Horse. Barn.

• Shocks From Australian Banks’ Inquiry May Squeeze A Nation (R.)

Australia and New Zealand Banking Group last week said that in the wake of the Royal Commission, which has uncovered wide-spread examples of careless and at times fraudulent lending practices, it would likely be harder for customers to borrow money. And National Australia Bank said net interest margins on its all-important mortgage book were falling; while Westpac told Reuters it had recently increased scrutiny of borrowers’ living expenses, including asking them to disclose such items as gym memberships and pet insurance, when making loan assessments. The inquiry has come at a time when there was already a push for increased controls on lending and new capital requirements.

Those had helped spark a wave of divestments of cash-intensive wealth management, insurance and financial planning arms. Borrowers have begun to feel the squeeze, according to Sydney real estate agent Peter Wong, as banks dig through credit histories and ask borrowers for bigger deposits. “The residential sector has become very, very cautious and so, obviously, they’re making sure that they dot their i’s and cross their t’s, and before it wasn’t like that,” said Wong, who runs an agency in inner-city Chinatown. “I’ve got property on the market and I’ve had it on for over three months whereas previously, being a popular area, people would buy fairly quickly.”

Australia has an oligopoly banking system – Commonwealth Bank of Australia sits alongside Westpac, NAB and ANZ making up the so-called “Big Four” – which collectively dominate property, investment and business lending, giving Australians limited options when seeking credit.

Hudson warns China not to become the west.

• “Creating Wealth” Through Debt (Michael Hudson)

Western capitalism has not turned out the way that Marx expected. He was optimistic in forecasting that industrial capitalists would gain control of government to free economies from unnecessary costs of production in the form of rent and interest that increase the cost of living (and hence, the break-even wage level). Along with most other economists of his day, he expected rentier income and the ownership of land, natural resources and banking to be taken out of the hands of the hereditary aristocracies that had held them since Europe’s feudal epoch. Socialism was seen as the logical extension of classical political economy, whose main policy was to abolish rent paid to landlords and interest paid to banks and bondholders.

A century ago there was an almost universal belief in mixed economies. Governments were expected to tax away land rent and natural resource rent, regulate monopolies to bring prices in line with actual cost value, and create basic infrastructure with money created by their own treasury or central bank. Socializing land rent was the core of Physiocracy and the economics of Adam Smith, whose logic was refined by Alfred Marshall, Simon Patten and other bourgeois economists of the late 19th century. That was the path that European and American capitalism seemed to be following in the decades leading up to World War I. That logic sought to use the government to support industry instead of the landlord and financial classes.

China is progressing along this “mixed economy” road to socialism, but Western economies are suffering from a resurgence of the pre-capitalist rentier classes. Their slogan of “small government” means a shift in planning to finance, real estate and monopolies. This economic philosophy is reversing the logic of industrial capitalism, replacing public investment and subsidy with privatization and rent extraction. The Western economies’ tax shift favoring finance and real estate is a case in point. It reverses John Stuart Mill’s “Ricardian socialism” based on public collection of the land’s rental value and the “unearned increment” of rising land prices.

A new threatened species every single day. So far this week: mountain gorillas, right whales and koalas.

• Australia Pledges Millions To Help Save The Koala (AFP)

Australia unveiled on Monday a US$34 million plan to help bring its koala population back from the brink, following a rapid decline in the furry marsupial’s fortunes. The Australian Koala Foundation estimates there may be as few as 43,000 koalas left in the wild, down from a population believed to number more than 10 million prior to European settlement of the continent in 1788. “Koalas are a national treasure,” said Gladys Berejiklian, premier of New South Wales state, in announcing her government’s conservation plan. “It would be such a shame if this nationally iconic marsupial did not have its future secured.”

Habitat loss, dog attacks, car strikes, climate change and disease have taken their toll on one of Australia’s most recognisable animals. Studies show a 26% decline in the koala population in New South Wales over the last 15-20 years. The state lists the species as “vulnerable”, while in other parts of the country they are effectively extinct. Under the Aus$45 million plan, thousands of hectares will be set aside to preserve the marsupial’s natural habitat.

The madness of it. After 44 years of active use, they’re finally being tested (!). But their formulas remain confidential business information, so they don’t even know what they’re testing.

• Glyphosate-Based Weedkillers Much More Toxic Than Their Active Ingredient (G.)

US government researchers have uncovered evidence that some popular weedkilling products, like Monsanto’s widely-used Roundup, are potentially more toxic to human cells than their active ingredient is by itself. These “formulated” weedkillers are commonly used in agriculture, leaving residues in food and water, as well as public spaces such as golf courses, parks and children’s playgrounds. The tests are part of the US National Toxicology Program’s (NTP) first-ever examination of herbicide formulations made with the active ingredient glyphosate, but that also include other chemicals. While regulators have previously required extensive testing of glyphosate in isolation, government scientists have not fully examined the toxicity of the more complex products sold to consumers, farmers and others.

Monsanto introduced its glyphosate-based Roundup brand in 1974. But it is only now, after more than 40 years of widespread use, that the government is investigating the toxicity of “glyphosate-based herbicides” on human cells. The NTP tests were requested by the Environmental Protection Agency (EPA) after the International Agency for Research on Cancer (IARC) in 2015 classified glyphosate as a probable human carcinogen. The IARC also highlighted concerns about formulations which combine glyphosate with other ingredients to enhance weed killing effectiveness. Monsanto and rivals sell hundreds of these products around the world in a market valued at roughly $9bn.

Mike DeVito, acting chief of the National Toxicology Program Laboratory, told the Guardian the agency’s work is ongoing but its early findings are clear on one key point. “We see the formulations are much more toxic. The formulations were killing the cells. The glyphosate really didn’t do it,” DeVito said. [..] “This testing is important, because the EPA has only been looking at the active ingredient. But it’s the formulations that people are exposed to on their lawns and gardens, where they play and in their food,” said Jennifer Sass, a scientist with the Natural Resources Defense Council.

One problem government scientists have run into is corporate secrecy about the ingredients mixed with glyphosate in their products. Documents obtained through Freedom of Information Act requests show uncertainty within the EPA over Roundup formulations and how those formulations have changed over the last three decades. That confusion has continued with the NTP testing. “We don’t know what the formulation is. That is confidential business information,” DeVito said. NTP scientists sourced some samples from store shelves, picking up products the EPA told them were the top sellers, he said.

Debt Rattle May 7 2018

May 072018

May 7, 2018 Posted by Raúl Ilargi Meijer at 8:51 am Finance Tagged with: Argentina, China, collapse, collusion, Congress, Conoco, emerging markets, Greece, Merkel, middle class, Mueller, poverty, Trump 10 Responses »

John French Sloan Sunday, Women Drying Their Hair 1912

• Behold The Sudden Stop. Risk of Emerging Markets Collapse (Lacalle)

• Dollar Surge Bringing Emerging Market Rate Cut Cycle To A Halt (R.)

• WTF Just Happened to Argentina’s Peso? (Fernet)

• Remedies Trump Prescribes For Trade Problems Harm US (Xinhua)

• In the Coming Crash We’ll be Falling from a Higher Height – Nomi Prins (USAW)

• Mueller Investigation is In Jeopardy (ZH)

• Why The Justice Department Defies Congress (WSJ)

• Merkel Allies Reject Idea Of European Finance Minister (R.)

• Weak Foreign Demand Pushes Down German Industrial Orders (R.)

• A Million More UK Children In Poverty Than In 2010 (G.)

• Air France Survival In Doubt Over Strikes (BBC)

• Greece’s Incredibly Shrinking Middle Class (K.)

• Conoco Moves To Take Over Venezuelan PDVSA’s Caribbean Assets (R.)

Argentina, Turkey, Indonesia. Brazil in a bit. The list will grow. As the dollar rises, emerging countries need more dollars to pay their debt, pushing the dollar up even more. And investors pull their money out of these countries. Vicious circles everywhere.

• Behold The Sudden Stop. Risk of Emerging Markets Collapse (Lacalle)

Argentina even issued a one-hundred-year bond at a spectacularly low rate (8.25%) with a very high demand, more than 3.5 times bid-to-cover. That $ 2.5 billion issuance seemed crazy. A one-hundred-year bond from a nation that has defaulted at least six times in the previous hundred years! Worse of all, those funds were used to finance current expenditure in local currency. The extraordinary demand for bonds and other assets in Argentina or Turkey was justified by expectations of reforms and a change that, as time passed, simply did not happen. Countries failed to control inflation, deliver lower than expected growth and imbalances soared just as the U.S. started to see some inflation, rates started to rise.

Suddenly, the yield spread between the U.S. 10-year bond and emerging markets debt was unattractive, and liquidity dried up faster than the speed of light even with a modest decrease of the Federal Reserve balance sheet. Liquidity disappears because of extremely leveraged bets on one single trade – a weaker dollar, higher global growth- unwind. However, another problem exacerbates the reaction. An aggressive increase in the monetary base by the Argentine central bank made inflation rise above 23%. With an increase in the monetary base of 28% per year, and seeking to finance excess spending by printing money and raising debt to “buy time”, the seeds of the disaster were planted. Excess liquidity and the US dollar weakness stopped. Local currencies and external funding face risk of collapse.

The Sudden Stop. When most of the emerging economies entered into twin deficits -trade and fiscal deficits- and consensus praised “synchronized growth”, they were sealing their destiny: When the US dollar regains some strength, US rates rise due to an increase in inflation, the flow of cheap money to emerging markets is reversed. Synchronized indebted growth created the risk of synchronized collapse.

Is this really the end of cheap debt? It’s dangerous too: if Turkey gets into real trouble, Erdogan will seek a scapegoat.

• Dollar Surge Bringing Emerging Market Rate Cut Cycle To A Halt (R.)

A resurgent dollar and higher borrowing costs are smashing through Argentina and Turkey’s currencies like a wrecking ball and raising the likelihood more broadly that emerging markets’ three-year long interest rate cutting cycle is at an end. Emerging markets came into the year flying, riding on the back of a healthy global economy and rising commodity prices alongside tame inflation and a weak dollar. It looked more than likely that a wave of rate cuts would keep rolling, allowing a bond rally to continue. From Brazil and Russia to Armenia and Zambia, developing countries, big and small, have been on a rate cutting spree. With hundreds of rate cuts since Jan. 2015, the average emerging market borrowing cost fell under 6% earlier this year from over 7% at the time.

Fund managers’ profits too have soared in this time, with emerging local currency debt among the best performing asset classes, with dollar-based returns of 14% last year. Even in the first quarter of 2018, returns were a buoyant 4.3% Now though, almost exactly five years since the so-called taper tantrum shook an emerging market rally, these gains appear to be on the cusp of reversal. Argentina has jacked up its interest rates to 40% in response to a rout in its peso currency, while Turkey was also forced into a rate rise as its lira hit record lows against the dollar. Indonesia, after heavy interventions to stem rupiah bleeding, has also said it could resort to policy tightening.

Déja vu.

• WTF Just Happened to Argentina’s Peso? (Fernet)

If you’re watching Argentina’s economy, it hasn’t been a banner week. This week, Argentina had to raise its key interest rate three times to keep the Argentine peso from losing even more value against the dollar. Three interest rate hikes in one week is a lot – it implies the first two didn’t work, and the Central Bank is not in control. The interest rate currently sits at 40%. That means the Central Bank pays 40% per year on peso-denominated debt, which can imply that they expect the value of the peso to fall somewhere in the ballpark of 40% over a one year period. A year ago in April, the rate was closer to 26%. Yikes. And the exchange rate kicked off the week at around 20.5 ARS/USD. It jumped almost to 23 ARS/USD, and is currently hovering around 21.8 ARS/USD.

[..] When the US dollar increases in value, emerging market currencies decrease, meaning in Argentina’s case it will take increasingly more pesos to buy dollars. This then amplifies the risk that emerging markets will be unable to make payments on dollar denominated debt, causing investors to sell their emerging market investments, further amplifying the currency stress. The timing specifically in the case of Argentina is uncannily bad. Until this week, non-residents investing in Argentina were exempt from paying the equivalent of capital gains taxes across the board, including local-currency peso-denominated central bank notes, or LEBACs. This Tuesday, this exemption on LEBACs officially no longer applied, meaning foreign holders of these notes now incur a tax equal to 5% on profits.

“Increased American consumption born of an overstimulated economy..”

• Remedies Trump Prescribes For Trade Problems Harm US (Xinhua)

Remedies the Trump administration is prescribing for U.S. trade problems won’t work, and forays in trade disputes with China will harm the United States, a veteran China expert with decades of experience in bilateral relations said [in Silicon Valley] on Saturday. “I believe that Washington has misdiagnosed our trade problems, that its remedies for them won’t work, and that what it is doing will harm the United States and other countries as much or more than it does China,” said Chas Freeman, senior fellow at Brown University’s Watson Institute, when addressing the annual conference of a prominent Chinese American group, the Committee of 100 (C100).

“The United States and China are each too globalized and dynamic to contain, too big and influential to ignore, and too successful and entangled with each other to divorce without bankrupting ourselves and all associated with us,” Freeman, also former U.S. assistant secretary of defense, said in an opening keynote speech. Pointing out that there are many reasons for the United States to seek cooperative relations with a rising China, Freeman added that the Trump administration has decided “to pick a fight — to confront China both militarily and economically.” “The fact that we Americans consume more than we save means that we import more than we produce. That creates an overall trade deficit. Ironically, the Trump administration has just taken steps guaranteed to increase this deficit,” he said.

“It has reduced tax revenues and boosted deficit spending, mostly on military research, development, and procurement. These actions take the national savings rate even lower while inflating domestic demand for goods and services. They cause imports to surge,” he added. “Increased American consumption born of an overstimulated economy explains why China’s trade surplus with the United States is again rising even as its surplus with the rest of the world falls,” he said. “Unless Americans boost our national savings rate by hiking taxes or cut our consumption by falling into recession, our overall trade deficit is sure to bloat,” he said.

The Market Will Plummet if Global Central Banks Pull Plug

“..the reality is when a financial crisis happens, banks close their doors to depositors..”

• In the Coming Crash We’ll be Falling from a Higher Height – Nomi Prins (USAW)

Join Greg Hunter as he goes One-on-One with two-time, best-selling author Nomi Prins, who just released “Collusion: How Central Bankers Rigged The World.” Will the next crash be worse than the last one? Prins says, “Yes, it will because we will be falling from a higher height. The idea here is you are sinking on the Titanic as opposed to sinking on a canoe somewhere. All of this artificial conjured money is puffing up the system, along with money that is borrowed cheaply is also puffing up the system and creating asset bubbles everywhere. So, when things pop, there is more leakage to happen. The air in all these bubbles has created larger bubbles than we have had before.”

How does the common man protect himself? Prins says, “They have to own things, and by that I mean real assets, hard assets like silver and gold. That’s not as liquid, so taking cash out of banks and sort of keeping it in real things and keeping it on site . . . keeping cash physically. You need to extract it from the system because the reality is when a financial crisis happens, banks close their doors to depositors. . . . Also, basically try to decrease your debt.”

Did Flynn plead guilty because he couldn’t pay the legal bills?

How much longer until Mueller is whistled back by his superiors? Can Rosenstein keep silent as one judge after another slams the Special Counsel?

• Mueller Investigation In Jeopardy (ZH)

A funny thing happened on the way to impeaching Donald Trump. After two-years of investigations by a highly politicized FBI and a Special Counsel stacked with Clinton supporters, Robert Mueller’s probe has resulted in the resignation of National Security Advisor Michael Flynn, the arrests of Paul Manafort and Rick Gates, and the indictment of 13 Russian nationals on allegations of hacking the 2016 election – along with the raid of Trump’s personal attorney, Michael Cohen.

The nation has been on the edge of insanity waiting for that much-promised and long awaited link tying President Trump to Vladimir Putin we were all promised, only to find out that there is no link, the deck appears to have been heavily stacked against Donald Trump by bad actors operating at the highest levels of the FBI, DOJ, Obama admin and Clinton camp, and the real Russian conspiracy in the 2016 election was the participation of high level Kremlin sources used in the anti-Trump dossier that Hillary Clinton paid for. Now, as the out-of-control investigation moves from the headlines and into court, the all-encompassing “witch hunt,” as Trump calls it, may be in serious jeopardy.

As of Friday, three separate Judges have rendered harsh setbacks to the Mueller investigation – demanding, if you can believe it, facts and evidence to back up the Special Counsel’s claims – in unredacted format as one Judge demands, or risk having the cases tossed out altogether. [..] And as we noted yesterday, some have suggested that Flynn pleaded guilty due to the fact that federal investigations tend to bankrupt people who aren’t filthy rich – as was the case with former Trump campaign aide Michael Caputo, who told the Senate Intelligence Committee “God damn you to hell” after having to sell his home due to mounting legal fees over the inquiry. “Your investigation and others into the allegations of Trump campaign collusion with Russia are costing my family a great deal of money — more than $125,000 — and making a visceral impact on my children.”

Quite strong for the Wall Street Journal: “Mr. Comey, Peter Strzok, Lisa Page, Andrew McCabe – they have already shattered the FBI’s reputation and public trust.”

• Why The Justice Department Defies Congress (WSJ)

Until this week, Deputy Attorney General Rod Rosenstein and fellow institutionalists at the department had fought Congress’s demands for information with the tools of banal bureaucracy – resist, delay, ignore, negotiate. But Mr. Rosenstein took things to a new level on Tuesday, accusing House Republicans of “threats,” extortion and wanting to “rummage” through department documents. A Wednesday New York Times story then dropped a new slur, claiming “Mr. Rosenstein and top FBI officials have come to suspect that some lawmakers were using their oversight authority to gain intelligence about [Special Counsel Bob Mueller’s ] investigation so that it could be shared with the White House.”

Mr. Rosenstein isn’t worried about rummaging. That’s a diversion from the department’s opposite concern: that it is being asked to comply with very specific – potentially very revealing – demands. Two House sources confirm for me that the Justice Department was recently delivered first a classified House Intelligence Committee letter and then a subpoena (which arrived Monday) demanding documents related to a new line of inquiry about the Federal Bureau of Investigation’s Trump investigation. The deadline for complying with the subpoena was Thursday afternoon, and the Justice Department flouted it. As the White House is undoubtedly monitoring any new congressional demands for information, it is likely that President Trump’s tweet Wednesday ripping the department for not turning over documents was in part a reference to this latest demand.

Republicans also demand the FBI drop any objections to declassifying a section of the recently issued House Intelligence Committee report that deals with a briefing former FBI Director James Comey provided about former national security adviser Mike Flynn. House Republicans say Mr. Comey told them his own agents did not believe Mr. Flynn lied to them. On his book tour, Mr. Comey has said that isn’t true. Someone isn’t being honest. Is the FBI more interested in protecting the reputations of two former directors (the other being Mr. Mueller, who dragged Mr. Flynn into court on lying grounds) than in telling the public the truth?

We can’t know the precise motivations behind the Justice Department’s and FBI’s refusal to make key information public. But whether it is out of real concern over declassification or a desire to protect the institutions from embarrassment, the current leadership is about 20 steps behind this narrative. Mr. Comey, Peter Strzok, Lisa Page, Andrew McCabe – they have already shattered the FBI’s reputation and public trust. There is nothing to be gained from pretending this is business as usual, or attempting to stem continued fallout by hiding further details.

And debt pooling. So much for closer integration.

• Merkel Allies Reject Idea Of European Finance Minister (R.)

Leading politicians from Chancellor Angela Merkel’s conservatives want to pass a resolution at a meeting this week to reject any pooling of debts in Europe and any fiscal policy without national parliamentary controls, Handelsblatt reported. The daily business newspaper, citing sources from the conservative bloc’s parliamentary leadership, said the senior politicians also oppose European Commission plans for a European finance minister. The group includes the parliamentary leaders of the conservative bloc in the Bundestag, the European Parliament as well as from Germany’s 16 states, Handelsblatt reported.

Merkel will join them on Monday for a meeting in Frankfurt. The report highlights the resistance among Merkel’s conservatives to any euro zone reforms that could see more German taxpayers’ money being used to fund other member states. The conservatives are nervous about European Union reform after bleeding support to the anti-euro Alternative for Germany (AfD) party at national elections last September. Last month, Merkel called for a spirit of compromise on reforming the euro zone at a meeting with French President Emmanuel Macron, who pressed for solidarity among members of the currency union.

No smooth sailing.

• Weak Foreign Demand Pushes Down German Industrial Orders (R.)

German industrial orders unexpectedly dropped for the third month running in March due to weak foreign demand, data showed on Monday, suggesting factories in Europe’s largest economy are shifting into a lower gear. Contracts for German goods fell 0.9% after a downwardly revised drop of 0.2% the previous month, data from the Federal Statistics Office showed. Analysts polled by Reuters had on average predicted a 0.5% rise in orders. “The economy is slowing down, that’s the sure take-away from today’s industrial orders data,” VP Bank Group analyst Thomas Gitzel said, adding that some growth forecasts would soon have to be revised down.

The government last month cut its 2018 growth forecast to 2.3% from 2.4% and expressed concern about international trade tensions. “The debate about tariffs has probably created great uncertainty in Europe’s export-driven industry,” Gitzel added. As Europe’s biggest exporter to the United States, Germany is desperate to avoid an EU trade war with the United States. In the run-up to a June 1 deadline for U.S. President Donald Trump to decide on whether to impose steel and aluminum tariffs on the EU, Berlin is urging its European partners to be flexible and pursue a broad deal that benefits both sides. The drop in industrial orders was led by foreign orders which fell by 2.6%, while domestic orders rose 1.5%, the data showed.

But the government says there a million LESS people in poverty.

• A Million More UK Children In Poverty Than In 2010 (G.)

The number of children growing up in poverty in working households will be a million higher than in 2010, a new study has found. Research for the TUC estimates that 3.1 million children with working parents will be below the official breadline this year. About 600,000 children with working parents have been pushed into poverty because of the government’s benefit cuts and public sector pay restrictions, according to the report by the consultancy Landman Economics. The east Midlands will have the biggest increase in child poverty among working families, followed by the West Midlands and Northern Ireland, the research found. Frances O’Grady, the TUC general secretary, said child poverty in working households had shot up since 2010.

“Years of falling incomes and benefit cuts have had a terrible human cost. Millions of parents are struggling to feed and clothe their kids,” she said. “The government is in denial about how many working families just can’t make ends meet. We need ministers to boost the minimum wage now, and use the social security system to make sure no child grows up in a family struggling to get by.” [..] A government spokeswoman said it did not recognise the TUC’s figures. She said: “The reality is there are now 1 million fewer people living in absolute poverty compared with 2010, including 300,000 fewer children. “We want every child to get the very best chances in life. We know the best route out of poverty is through work, which is why it’s really encouraging that both the employment rate and household incomes have never been higher.”

Shares down 13% this morning.

• Air France Survival In Doubt Over Strikes (BBC)

The survival of strike-hit Air France is in the balance, according to the country’s economy minister. Bruno Le Maire’s warning that Air France could “disappear” comes as staff begin another round of industrial action over a pay dispute. Despite the French state owning 14.3% of the Air France-KLM parent group, the loss-making airline would not be bailed out, he said. On Friday Air France-KLM’s chief executive quit over the crisis. Air France-KLM is one of Europe’s biggest airlines, but has seen a series of strikes in recent weeks. Monday’s walk-out is the 14th day of action, as staff press for a 5.1% salary increase this year. The government’s response is seen as a test of labour reforms launched by French President Emmanuel Macron. There have also been strikes at the state-owned SNCF rail company.

On Sunday, Mr Le Maire told French news channel BFM: “I call on everyone to be responsible: crew, ground staff, and pilots who are asking for unjustified pay hikes. “The survival of Air France is in the balance,” he said, adding that the state would not serve as a backstop for the airline’s debts. “Air France will disappear if it does not make the necessary efforts to be competitive,” he warned. Despite the strike, the airline insisted that it would be able to maintain 99% of long-haul flights on Monday, 80% of medium-haul services and 87% of short-haul flights. On Friday, Jean-Marc Janaillac, chief executive of parent company Air France-KLM, resigned after staff rejected a final pay offer from him, which would have raised wages by 7% over four years.

That’s about 1 in 20: “From the 8.8 million individual taxpayers who submitted a declaration last year, no more than 450,000 showed a net annual income of 18,000 euros or more..”

• Greece’s Incredibly Shrinking Middle Class (K.)

For salaried workers to bring home 1,500 euros per month net on a 12-month basis, or 18,000 euros per year not including holiday bonuses, their employers need to pay 2,610 euros a month or over 31,300 euros a year, given Greece’s particularly high taxes and social security contributions. For a self-employed professional to pocket the same amount , about 18,000 euros per annum, he or she would have to earn at least 50,000 euros on a yearly basis so as to cover professional expenses, taxes and contributions. As for new pensioners, a net income of 1,500 euros/month or 18,000 euros/year can only be achieved if they worked without pause for 40 years at an average monthly salary of 2,400 euros over that entire period.

The framework that has emerged in the last three years with tax and contribution hikes, in particular, as well as the new way pensions are being calculated are drastically reducing the chances of any worker or pensioner to have a decent monthly salary or pension. Official figures already highlight the shrinking of the so-called middle class: From the 8.8 million individual taxpayers who submitted a declaration last year, no more than 450,000 showed a net annual income of 18,000 euros or more, down from 840,000 in 2010. The shrinking trend of the middle class is expected to continue both for taxation and for practical reasons.

An employer will face the same cost hiring five or six part-timers offering a total of 20-24 working hours per day as in hiring one full-timer offering eight hours of work. Particularly in sectors where there is no need for highly skilled workers, such as retail commerce or tourism, the trend to replace well paid positions has already become dominant. Among the self-employed, overtaxation is this year anticipated to reduce the number of those declaring a taxable income of over 30,000 euros per year. As for pensioners, already the first pensions issues on the basis of the new system of calculation prove that the chances for anyone to secure a benefit of 1,500 euros after retirement are next to zero, and will shrink further in the years to come.

Curious. Bonaire and St. Eustatius are part of the Dutch Kingdom. Conoco can’t move without their permission.

• Conoco Moves To Take Over Venezuelan PDVSA’s Caribbean Assets (R.)

U.S. oil firm ConocoPhillips has moved to take Caribbean assets of Venezuela’s state-run PDVSA to enforce a $2 billion arbitration award over a decade-oil nationalization of its projects in the South American country, according to two sources familiar with its actions. The U.S. firm targeted Caribbean facilities on the islands of Bonaire and St. Eustatius that play critical roles in PDVSA’s oil exports, the country’s main source of revenue. PDVSA relies on the terminals to process, store and blend its oil. “We will work with the community and local authorities to address issues that may arise as a result of enforcement actions,” ConocoPhillips said in a statement to Reuters.

Debt Rattle August 28 2015

Aug 282015

August 28, 2015 Posted by Raúl Ilargi Meijer at 11:10 am Finance Tagged with: bear market, China, emerging markets, FX, GDP, Growth, refugees, rout, swaps, Treasuries 4 Responses »

Dorothea Lange Resettlement project, Bosque Farms, New Mexico Dec 1935

• Real Chinese GDP Growth Is -1.1%, According to Evercore ISI (Zero Hedge)

• BofA: China Stock Rout To Resume As Intervention Ends (Bloomberg)

• Money Pours Out of Emerging Markets at Rate Unseen Since Lehman (Bloomberg)

• What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse (ZH)

• Global Equity Funds Witness Biggest-Ever Exodus (CNBC)

• PBOC Uses Derivatives to Tame Yuan Fall Expectations (WSJ)

• China Local Govt Pension Funds To Start Investing $313 Billion ‘Soon’ (Reuters)

• Chinese Banking Giants: Zero Profit Growth as Bad Loans Pile Up (Bloomberg)

• The Great Wall Of Money (Hindesight)

• China Will Respond Too Late to Avoid -Global- Recession: Buiter (Bloomberg)

• China’s Ongoing FX Trilemma And Its Possible Consequences (FT)

• China Has Exposed The Fatal Flaws In Our Liberal Economic Order (Pettifor)

• Albert Edwards: “99.7% Chance We Are Now In A Bear Market” (Zero Hedge)

• Who Will Be the Bagholders This Time Around? (CH Smith)

• Now’s The Right Time For Yellen To Kill The ‘Greenspan Put’ (MarketWatch)

• The Emperor Is Naked; Long Live The Emperor (Fiscal Times)

• IMF Could Contribute A Fifth To Greek Bailout, ESM’s Regling Says (Bloomberg)

• Yanis Varoufakis: ‘I’m Not Going To Take Part In Sad Elections’ (Reuters)

• For Those Trying to Reach Safety in Europe, Land can be as Deadly as Sea (HRW)

That sounds more like it.

• Real Chinese GDP Growth Is -1.1%, According to Evercore ISI (Zero Hedge)

With Chinese data now an official farce even among Wall Street economists, tenured academics, and all others whose job obligation it is to accept and never question the lies they are fed, the biggest question over the past year has been just what is China’s real, and rapidly slowing, GDP – which alongside the Fed, is the primary catalyst of the global risk shakeout experienced in recent weeks. One thing that everyone knows and can agree on, is that it is not the official 7% number, or whatever goalseeked fabrication the communist party tries to push to a world that has realized China can’t even manipulate its stock market higher, let alone its economy.

But what is it? Over the past few months we have shown various unpleasant estimates, the lowest of which was 1.6% back in April. Today we got the worst one yet, courtesy of Evercore ISI, which using its own GDP equivalent index – the Synthetic Growth Index (SGI) – gets a vastly different result from the official one, namely Chinese growth of -1.1% annually. Or rather, contraction. To wit, from Evercore:

Our proprietary Synthetic Growth Index (SG!) fell 1.1% mim in July, and was also down 1.1% y/y. No wonder global commodities are so weak. The most recent 18 months have been much weaker than the 2011-13 period. Even if we adjust our SG I upward (for too-little representation of Services — lack of data), we believe actual economic growth in China is far below the official 7.0% yly. And, it is not improving, Most worrisome to us; the ‘equipment’ portion of Plant & Equipment spending is very weak, a bad sign for any company or country. Expect more monetary and fiscal steps to lift growth.

And here is why the world is in big trouble.

With confidence gone, is there another option left?

• BofA: China Stock Rout To Resume As Intervention Ends (Bloomberg)

The rebound in China’s stocks will be short-lived because state intervention is too costly to continue and valuations aren’t justified given the slowing economy, says Bank of America. “As soon as people sense the government is withdrawing from direct intervention, there will be lots of investors starting to dump stocks again,” said David Cui at Bank of America in Singapore. The Shanghai Composite Index needs to fall another 35% before shares become attractive, he said. The Shanghai gauge rallied for a second day on Friday amid speculation authorities were supporting equities before a World War II victory parade next week that will showcase China’s military might. The government resumed intervention in stocks on Thursday to halt the biggest selloff since 1996.

China Securities Finance, the state agency tasked with supporting share prices, will probably end direct market purchases within the next month or two, Cui said. While the benchmark gauge trades 47% above the levels of a year earlier, data from industrial output to exports and retail sales depict a deepening slowdown. China’s first major growth indicator for August showed the manufacturing sector is at the weakest since the global financial crisis. Profits at the nation’s industrial companies fell 2.9% in July, data Friday showed. Equities on mainland bourses are valued at a median 51 times reported earnings, according to data compiled by Bloomberg. That’s the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor’s 500 Index. Even after tumbling 37% from its June 12 peak, the Shanghai gauge is the best-performing equity index worldwide over the past year.

This is going to be seminal.

• Money Pours Out of Emerging Markets at Rate Unseen Since Lehman (Bloomberg)

This week, investors relived a nightmare. As markets from China to South Africa tumbled, they pulled $2.7 billion out of developing economies on Aug. 24. That matches a Sept. 17, 2008 exodus during the week Lehman Brothers went under. The collapse of the U.S. investment bank was a seminal moment in the timeline of the global financial crisis. The retreat from risky assets, triggered by concern over a slowdown in China and higher interest rates in the U.S., has taken money outflows from emerging markets to an estimated $4.5 billion in August, compared with inflows of $6.7 billion in July, data compiled by Institute of International Finance show. It’s lower stock prices that people are most worried about.

Equity outflows from developing nations increased to $8.7 billion this month, the highest level since the taper tantrum of 2013 when the prospect of higher rates in the U.S., making riskier assets less attractive, first shook emerging markets. Debt inflows softened this month while remaining positive at $4.2 billion, the IIF says. “Emerging market investors have been spooked by rising uncertainty about China, and stress has been exacerbated by a combination of fundamental concerns about EM economic prospects and volatility in global financial markets,” Charles Collyns, chief economist at the IIF, said.

Interconnections.

• What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse (ZH)

Earlier today, Bloomberg – citing the ubiquitous “people familiar with the matter” – confirmed what we’ve been pounding the table on for months; namely that China is liquidating its UST holdings. As we outlined in July, from the first of the year through June, China looked to have sold somewhere around $107 billion worth of US paper. While that might have seemed like a breakneck pace back then, it was nothing compared to what would transpire in the last two weeks of August. Following the devaluation of the yuan, the PBoC found itself in the awkward position of having to intervene openly in the FX market, despite the fact that the new currency regime was supposed to represent a shift towards a more market-determined exchange rate.

That intervention has come at a steep cost – around $106 billion according to SocGen. In other words, stabilizing the yuan in the wake of the devaluation has resulted in the sale of more than $100 billion in USTs from China’s FX reserves. That dramatic drawdown has an equal and opposite effect on liquidity. That is, it serves to tighten money markets, thus working at cross purposes with policy rate cuts. The result: each FX intervention (i.e. each round of UST liquidation) must be offset with either an RRR cut, or with emergency liquidity injections via hundreds of billions in reverse repos and short- and medium-term lending ops.

It appears that all of the above is now better understood than it was a month ago, but what’s still not well understand is the impact this will have on the US economy and, by extension, on US monetary policy, and furthermore, there seems to be some confusion as to just how dramatic the Treasury liquidation might end up being. Recall that China’s move to devalue the yuan and this week’s subsequent benchmark lending rate cut have served to blow up one of the world’s most popular carry trades. As one currency trader told Bloomberg on Tuesday, “it’s a terrible time to be long carry, increased volatility – which I think we’ll stay with – will continue to be terrible for carry. The period is over for carry trades.”

Negative records being set all over.

• Global Equity Funds Witness Biggest-Ever Exodus (CNBC)

Investors yanked $29.5 billion out of global equity funds in the week that ended August 26, the biggest single-week outflow on record as markets around the world over went into meltdown mode, according to data from Citi. On a regional basis, U.S. funds suffered the highest level of outflows at $12.3 billion, followed by Asia funds, which saw $4.9 million in redemptions. Citi’s records go back to 2000. European funds, which broke their chain of 14 weeks of inflows, witnessed $3.6 billion in outflows for the week.

Concerns around the outlook for the Chinese economy and jitters around the U.S. Federal Reserve’s impending rate hike have sent global markets into a tailspin over the past week. The MSCI World Index and MSCI Emerging Market Index both slid over 7% between August 19 and August 26. China, the market at the heart of the global selloff, saw losses of a far higher magnitude. The notoriously volatile benchmark Shanghai Composite tumbled 22% over this period, leading to outflows of $1.2 billion from China and Greater China funds during the week.

Yeah, sure, add more leverage…

• PBOC Uses Derivatives to Tame Yuan Fall Expectations (WSJ)

China’s central bank used an unusual and complex financial tool Thursday to tame growing expectations for the yuan to fall, three people familiar with the matter said. The People’s Bank of China intervened in the market for U.S. dollar-yuan foreign-exchange swaps, causing their price to fall sharply, a movement that implies a stronger Chinese currency and lower interest rates in the world’s No. 2 economy in the future, said the people. The move came after waves of sharp selloffs in the Chinese currency in offshore markets, such as Hong Kong’s, where the yuan trades freely, following Beijing’s surprise nearly 2% yuan devaluation on Aug. 11.

Thanks to what each of the three people described as “massive” orders from a few commercial banks acting on the PBOC’s behalf, the so-called one-year dollar-yuan swap spread—in rough terms, a measure of the implied future differential between Chinese and U.S. interest rates—plunged to 1200 points from 1730 points Wednesday. In the offshore market, the spread dropped to 1950 points from 2310 points Tuesday, following the onshore move. A drop in the spread for dollar-yuan swaps, which consist of a spot trade and an offsetting forward transaction, would also imply a weaker spot exchange rate at a predetermined future date.

The currency derivatives are typically used by investors seeking to hedge against exchange-rate and interest-rate fluctuations. “The central bank chose a rarely used tool this time—the FX swaps—to intervene and it did so via a couple of midsize banks, instead of the usual big state lenders that serve as its agent banks,” one of the people said.

Desperation. Again, remember when pensions were limited to AAA rated assets?

• China Local Govt Pension Funds To Start Investing $313 Billion ‘Soon’ (Reuters)

China’s local pension funds will start investing 2 trillion yuan ($313.05 billion) as soon as possible in stocks and other assets, senior government officials said on Friday, in a bid to boost the investment returns of such funds. China said last weekend that it would let pension funds under local government units to invest in the stock market for the first time, a move that might channel hundreds of billions of yuan into the country’s struggling equity market. Up to 30 percent can be invested in stocks, equity funds and balanced funds. The rest can be invested in convertible bonds, money-market instruments, asset-backed securities, index futures and bond futures in China, as well as major infrastructure projects.

“We will actively make early preparations… we will formally start investment operations as soon as possible,” Vice Finance Minister Yu Weiping told a briefing. But the timing of investment will depend on preparations as the National Social Security Fund (NSSF), the manager of local pension funds, will entrust professional investment firms to make actual investments, Yu told reporters after the briefing. “When they (investment firms) will enter the market, the government will not intervene,” Yu said. You Jun, vice minister of human resources and social security, told the same news conference that pension investment will benefit the economy and the country’s capital market, but he downplayed any attempt to support the ailing stock market. “Supporting the stock market or rescuing the stock market is not the function and responsibility of our funds,” You said.

The crucial point becomes how much of this can be kept hidden.

• Chinese Banking Giants: Zero Profit Growth as Bad Loans Pile Up (Bloomberg)

The first two Chinese banking giants to report earnings this week have two things in common: zero profit growth and bad loans piling up at more than twice the pace of a year earlier. Industrial & Commercial Bank of China posted a 31% increase in bad loans in the first half, while Agricultural Bank of China had a 28% jump, their stock-exchange statements showed on Thursday. At a press briefing in Beijing, ICBC President Yi Huiman indicated that the lender may have to abandon a target of keeping its nonperforming loan ratio at 1.45% this year, citing “severe” conditions. The level at the end of June was 1.4%.

The economic weakness and $5 trillion stock-market slump that prompted the central bank to cut interest rates and lenders’ reserve requirements this week may make it harder for China’s banks to revive earnings growth and attract investors. For now, the biggest banks are trading below book value. “We are nowhere near the end of this down cycle, not with the economy wobbling like now,” said Richard Cao at Guotai Junan Securities. ICBC’s profit was little changed at 74.7 billion yuan ($11.7 billion) in the quarter ended June 30, based on an exchange filing, almost matching 74.8 billion yuan a year earlier. That compared with the 75.7 billion yuan median estimate of 10 analysts surveyed by Bloomberg. Nonperforming loans jumped to 163.5 billion yuan, the company said.

Agricultural Bank reported a profit decline of 0.8% to 50.2 billion yuan and bad loans of 159.5 billion yuan, including debt in the construction and mining industries. For ICBC, the biggest increases in nonperforming credit in the first half were in China’s western region, where coal businesses are struggling, the Yangtze River Delta and the Bohai Rim. ICBC, Agricultural Bank and another of China’s large lenders to report on Thursday, Bank of Communications, all reported declines in net interest margins, a measure of lending profitability. The rural lender had the biggest fall, a slide of 15 basis points from a year earlier to 2.78%.

Bretton Woods.

• The Great Wall Of Money (Hindesight)

China is in severe trouble and that trouble has already been reverberating around EM exporters for a number of years. It is just one of many dollar currency peg countries that have experienced tightening conditions because of higher US interest rate guidance and dollar strength. An unwelcome addition to their own domestic issues, but always a circular outcome, as they are inextricably linked to the US by their Bretton Woods II relationship. By devaluing and thus de-stabilising the ‘nominal’ anchor for Asian exchange rates, they will crush the growth engine of the developed countries on whose consumption they so rely on.

Since 2009, we have forecast and documented the unwinding of the Bretton Woods II currency system. Financialisation of our economies and markets, which escalated post-2008 at the instigation of governments and central bankers, is going to go into full reverse for all asset classes. Economies and markets are so entwined that a drop in asset classes will lead the world back into recession. In 2013, we believed the odds had tilted firmly towards increasing debt deflation at the hands of China. Large current account deficits had led to unsustainable debt creation, and as a consequence the trade deficit countries were the first to experience a severe financial crisis. However, on the other side of the equation, the surplus countries were now experiencing their reaction to the crisis.

In November 2013, we wrote: “The deleveraging process which began in 2008 has been a slow burner but is likely now in full swing. The deflationary risks are very high. China is the driver. All eyes on China.” We conceive that this slow-burner of deleveraging, which has occurred since the 2008 crisis, is potentially about to engulf all asset prices. We are beginning to think the unthinkable – that just maybe asset prices will back up 20 to 30% and fast and that through the autumn we could experience even greater price depreciation. Almost 8 years on from the GFC, the Dow Jones Industrials are perched on the edge of a sharp drop.

Will the Ghost of 1937 revisit us eight years on from the Great Crash of 1929, when U.S. stocks and the world economy got roiled all over again? This is already unfolding as we speak. The Yuan movement may well send more Chinese capital floating across the globe into financial assets and real estate, but it will be short-lived. The debt deleveraging which has been engulfing Emerging Markets has just begun to turn into a ranging inferno, which will eventually burn down all, especially overpriced, global assets. Since the GFC, ‘The Great Wall of Money’ that Bretton Woods II has furnished via its vendor-financing relationship, has masked the deleveraging of our world economy. The Great Wall is about to collapse and fall.

Not too late, but too little. Because too little is all that is left.

• China Will Respond Too Late to Avoid -Global- Recession: Buiter (Bloomberg)

China is sliding into recession and the leadership will not act quickly enough to avoid a major slowdown by implementing large-scale fiscal policies to stimulate demand, Citigroup’s top economist Willem Buiter said. The only thing to stop a Chinese recession, which the former external member of the Bank of England defines as 4% growth on “the mendacious official data” for a year, is a consumption-oriented fiscal stimulus program funded by the central government and monetized by the People’s Bank of China, Buiter said. “Despite the economy crying out for it, the Chinese leadership is not ready for this,” Buiter said in a media call hosted Thursday by the Council on Foreign Relations in New York. “It’s an economy that’s sliding into recession.”

Premier Li Keqiang is seeking to defend a 7% economic growth goal at a time when concern over slowing demand in China is fueling volatility in global markets. The true rate of expansion “is probably something closer to 4.5% or less,” Buiter said. Li has repeatedly pledged to avoid stimulus similar to the one following the global financial crisis in 2008 that led to a surge in debt for local governments and corporations. Some economists and investors have long questioned the accuracy of China’s official growth data. When Li was party secretary of Liaoning province in 2007, he said that figures for gross domestic product were “man-made” and therefore unreliable, according to a diplomatic cable published by WikiLeaks in 2010.

“They will respond but they will respond too late to avoid a recession, which is likely to drag the global economy with it down to a global growth rate below 2% – which is in my definition a global recession,” said Buiter.

“..open capital account, independent monetary policy, and stable tightly managed exchange rate”

• China’s Ongoing FX Trilemma And Its Possible Consequences (FT)

From UBS’s Tao Wang on what, post China’s surprise revaluation, is now an oft used phrase, the impossible trinity — AKA the corner China finds itself in:

“The impossible trinity says that a country cannot simultaneously have an open capital account, independent monetary policy, and stable tightly managed exchange rate. Some academics argue that since capital controls are no longer as effective in the current day world, complete monetary policy independence is still not possible without some degree of exchange rate flexibility, even without a fully open capital account – or impossibly duality. Regardless of whether it is an impossible trinity or duality, the fact is that in recent years, as a result of substantial capital controls relaxation, China has found it increasingly difficult to manage independent monetary policy while simultaneously maintaining a fixed exchange rate.

Since last year, the PBOC has had to repeatedly inject liquidity and use the RRR to offset capital outflows – its efforts to ease monetary policy have been less effective because of FX leakages, while at the same time rate cuts are reducing arbitrage opportunities to add further downward pressures on the currency. As China’s government has announced and seems to be committed to fully opening the capital account soon, these challenges will only become greater. Therefore, it is the right thing to do to break the RMB’s dollar peg and move to materially increase its flexibility. At the moment, China’s weak domestic demand and deflationary pressures necessitate further interest rate cuts, which may further fan capital outflows and depreciation pressures.

Meanwhile, not only is the RMB’s recent effective appreciation still hurting China’s tradable goods sector, but the central bank’s defence of the exchange rate is also draining substantial domestic liquidity that necessitates constant replenishing, both of which is undermining the effectiveness of overall monetary policy easing. With a more flexible exchange rate, the RMB can be weakened by outflows and depreciation pressures without draining domestic liquidity, and domestic assets will become relatively cheaper and thus more attractive than foreign assets – which may ultimately alter market expectations to reduce capital outflows.

In addition, a weaker RMB should improve China’s current account balance to also alleviate depreciation pressures. Conversely, if China’s exchange rate is allowed to appreciate along with capital inflows and appreciation pressures, it will make domestic assets more expensive and less attractive, to ultimately worsen China’s current account balance.”

“The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy.”

• China Has Exposed The Fatal Flaws In Our Liberal Economic Order (Pettifor)

How can we make sense of volatile global stock markets? Economists explained this week’s dramatic falls by pinning responsibility on China. They are at pains to assure us this is not 2008 all over again. I beg to disagree. Even though data is not reliable, it appears that China is slowing down. By 2009, the Chinese authorities were embracing the Western economic model that had just brought down much of Western capitalism. Undeterred, they launched a massive credit-fuelled investment programme. Growth soared at 10% per annum. Investment recently peaked at an extraordinary 49% of GDP. Total debt (private and public) rocketed to 250% of GDP – up 100 points since 2008, according to the IMF. Property and other asset markets boomed, as did consumption.

The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy. China’s stimulus helped keep the global economy afloat in the years following. But there are economic, ecological, social and political limits to a developing country like China continuing to support richer economies. And there are limits to Beijing’s willingness to abandon control and adopt in full the Western neoliberal economic model; the Communist Party has begun intervening. It is this intervention, we are led to believe, that spooked global markets. Yet the real reason for global weakness lies elsewhere – in the Western neoliberal economic model itself, which lay behind the global financial crisis of 2007-9.

Financial and trade liberalisation, privatisation of taxpayer-financed assets, excessive private indebtedness and wage repression constituted an explosive economic formula and blew up the Western banking system. That model has not undergone even superficial change since 2009. On the contrary: economists and financiers used the “shock and awe” generated by the crisis to buttress the model. The crisis had its origins in banks suffering severe bouts of debt intoxication. Like alcohol addicts, they could not be treated effectively until admitting to the problem: the flawed liberal, financial and economic order. Yet neither the private finance sector nor central bankers and their political friends were willing to admit to the cause of the disease. Instead, central bankers rushed to offer life support in the form of QE to private banking systems in the UK, Japan and the US.

“Although I am a bear of very little brain one thing I have learned is that most investors only realise the economy is in a recession well after it has begun. ”

• Albert Edwards: “99.7% Chance We Are Now In A Bear Market” (Zero Hedge)

Over the years, SocGen’s Albert Edwards has repeatedly expressed his skepticism of both the economy and the market (the longest US equity “bull market” since 1945) both propped up by generous central banks injecting liquidity by the tens of trillions (at this point nobody really knows the number now that the ‘black box’ that is China has entered the global “plunge protection” game) and yet never did he have as “conclusive” a call as he does today. As the following note reveals, when looking at one particular indicator, Edwards is now convinced: ‘we are now in a bear market.” First, Edwards looks east, where he finds nothing short of China’s central bank succumbing to the “wealth effect” preservation pressures of its western peers:

After holding firm last weekend and resisting pressure to give the market what it wanted namely a cut in interest rates and the reserve requirement ratio – the PBoC caved in, unable to endure the riot in the equity markets. In giving the markets what they want China is indeed acting like a fully paid up member of the international financial community. I am not thinking here about freeing up their capital account and allowing the renminbi to be more market determined. I?m thinking instead of China?s replicating the failed US policies of ramping up the equity market to boost economic growth, only to then open the monetary flood gates as equity investors turn nasty.

We disagree modestly with this assessment because as we described first on Tuesday, the RRR-cut had much more to do with unlocking $100 billion in much needed funding so that China could continue to intervene in the FX market by dumping a comparable amount of US Treasurys since its August 11 devaluation, something which as we reported earlier today, China itself has also now admitted. But the reason why we do agree, is that while the RRR-cut may have had other “uses of funds”, today’s dramatic intervention by the PBOC in both the stock market, leading to a 5.5% surge in the last hour of trading, as well as a dramatic intervention in the FX market, it is quite clear that the PBOC will do everything in its power once again to prevent any market drops. Edwards, then goes on to observe something which is sure to anger the Keynesians and monetarists out there: no matter how many trillions central banks inject, they will never replace, or override, the most fundamental thing about the economy: the business cycle.

Despite deflation fears washing westward and US implied inflation expectations diving to levels not seen since the 2008 Great Recession, there remains a touching faith that the US is resilient enough to withstand further renminbi devaluation. And if it isn’t, why worry anyway, because QE4 will be around the corner. But let me be as clear as I can: the US authorities CANNOT eliminate the business cycle, however many QE helicopters they send up. The idea that developed economies will decouple from emerging market turmoil is as ridiculous as was the reverse in the first half of 2008. Remember EM and commodities had then de-coupled from the west’s woes until they too also crashed.

Which brings us to the key point – the state of the market, and why for Edwards the signal is already very clear – the bear market has arrived:

Although I am a bear of very little brain one thing I have learned is that most investors only realise the economy is in a recession well after it has begun. The same is true of an equity bear market. We need help before it is too late to react. Hence when Andrew Lapthorne shows that one of his key predictors of a bear market registers a 99.7% probability that we are already in a bear market, there might still be time to act!

Just about everyone will.

• Who Will Be the Bagholders This Time Around? (CH Smith)

Once global assets roll over for good, it’s important to recall that somebody owns these assets all the way down. These owners are called bagholders, as in “left holding the bag.” Those running the rigged casino have to select the bagholders in advance, lest some fat-cat cronies inadvertently get stuck with losses. In China, authorities picked who would be holding the bag when Chinese stocks cratered 40%: yup, the poor banana vendors, retirees, housewives and other newly minted punters who borrowed on margin to play the rigged casino. Corrupt Chinese officials, oil oligarchs and everyone else who overpaid for flats in London, Manhattan, Vancouver, Sydney, etc. will be left holding the bag when to-the-moon prices fall to Earth.

Anyone buying Neil Young’s 2-acre estate in Hawaii for $24 million will be a bagholder. (If nobody buys it at this inflated price, Neil may end up being the bagholder.) Bond funds that bought dicey emerging market debt (Mongolian bonds, anyone?) and didn’t sell at the top are bagholders. Everyone with bonds and stocks in the oil patch who didn’t sell last summer is a bagholder. Everyone holding yuan is a bagholder. Everyone who bought euro-denominated assets when the euro was 1.40 is a bagholder at euro 1.12. Everyone with 401K emerging market equities mutual funds who didn’t sell last summer is a bagholder. Everyone who reckons “buy and hold” will be the winning strategy going forward will be a bagholder.

Anyone buying anything with borrowed money is a bagholder. Leveraging up to buy risk-on assets like Mongolian bonds and homes in vancouver is brilliant in bubbles, but not so brilliant when risk-on turns to risk-off. As the asset’s value drops below the amount borrowed to buy it, the owner becomes a bagholder. Anyone betting China’s GDP is really expanding at 7% and the U.S. economy will grow by 3.7% next quarter is angling to be a bagholder.

One of many views. My own notion is that too many people believe the Fed is looking out for the US economy, whereas they really look out for banks.

• Now’s The Right Time For Yellen To Kill The ‘Greenspan Put’ (MarketWatch)

The Federal Reserve says the timing of its first interest rate hike in nine years depends on the data, but that doesn’t mean the Fed will be digging through the jobs, growth and inflation reports for the all-clear signal. Instead, the Fed will be doing what millions of people have been doing for the past couple of weeks: Watching the stock market. Many investors have assumed that the recent selloffs in markets from Shanghai to New York meant that the Fed definitely won’t pull the trigger on a rate hike at its Sept. 16-17 meeting. Many prominent talking heads – from Suze Orman to Jim Cramer – are explicitly begging the Fed to hold off on higher interest rates as a way to protect stock prices.

It seems they still fervently believe in the “Greenspan put.” They assume that the Fed will always come riding to the rescue of the markets, as Fed Chair Alan Greenspan did so many times. You can’t blame them for believing that, because from 1987 to today, the Fed has reacted to nearly every market hiccough and tantrum by flooding markets with liquidity and reassurances. They’ve given the markets rate cuts, quantitative easing and promises that easy-money policies will continue for a long time, if not forever. This “Greenspan put” means investing in the stock market is a one-way bet. On Wednesday, New York Fed President Bill Dudley seemed to close the door on a September rate hike when he said that, “at this moment,” a rate hike next month no longer seemed as “compelling” as it once did.

Traders in federal funds futures lowered the odds of an increase in September to about 24%, down from about 50% just before the global market selloff intensified last week. But Dudley didn’t take September off the table, as many people have assumed. Indeed, he explicitly said that a September rate hike “could become more compelling by the time of the meeting as we get additional information.” And what sort of additional information would make a rate hike more compelling? Dudley said the Fed is looking at more than the economic data, widening its scope to examine everything that might impact the economic outlook. They are looking at the value of the dollar, the price of commodities, the risk of contagion from Europe, from China, and from emerging markets. And, above all, the U.S. stock market.

I believe the market selloff has made a September rate hike even more compelling than it was before, because it gives Fed Chair Janet Yellen the opportunity she needs to kill the “Greenspan put” once and for all.

Great pic.

• The Emperor Is Naked; Long Live The Emperor (Fiscal Times)

Over at Barclays, economists Michael Gapen and Rob Martin pushed back their rate hike forecast to March 2016. They admit Fed policymakers are “market dependent” and won’t tighten policy in the maw of a stock correction, even as they see “economic activity in the U.S. as solid and justifying modest rate hikes.” Should the market turmoil continue, the rate hike could be pushed past March. Alberto Gallo, head of credit research at RBS, is more direct: “Policymakers responded to the financial crisis with easy monetary policy and low interest rates. The critics — including us — argued against ‘solving a debt crisis with more debt.’ Put differently, we said that QE was necessary, but not sufficient for a recovery. We are now coming to the moment of reckoning: central bankers look naked, and markets have nothing else to believe in.”

Gallo believes an overreliance on excess liquidity has actually hindered capital investment — as companies have focused on debt-funded share buybacks and dividend hikes instead — limiting the global economy’s potential growth rate. Now, contagion from China — lower commodity prices, lower demand, currency volatility — has revealed the structural vulnerabilities. More stimulus, in his words, “could be self-defeating without fiscal and reform support.” As for Fed hike timing, Gallo sees the odds of a September liftoff at just 30%, down from 36% last week, based on futures market pricing. December odds are at 60%. The open question is: Should the Fed delay its rate hike and the People’s Bank of China ease, will stocks actually rebound? Or has the Pavlovian reaction function been broken by a loss of confidence? We’re about to find out.

The IMF would have to do a 180 on its own sustainability assessment.

• IMF Could Contribute A Fifth To Greek Bailout, ESM’s Regling Says (Bloomberg)

The IMF will probably join Greece’s third bailout and might contribute almost a fifth to the €86 billion program, the head of Europe’s financial backstop said. Speaking to reporters in Berlin on Thursday, European Stability Mechanism Managing Director Klaus Regling said “it would make sense” for the fund to use the 16 billion euros it didn’t pay out to Greece during the second bailout, which expired at the end of June. “Up to 16 billion is something I could imagine,” Regling said. “I assume with a large probability that the IMF will contribute,” though less than the third it contributed to Greece’s bailout five years ago, he said.

Regling is expressing optimism on the IMF’s participation even after Managing Director Christine Lagarde said debt relief for cash-strapped Greece must go “well beyond what has been considered so far.” The IMF has accepted the euro-region view that Greece’s debt load as a percentage of its economy isn’t a proper debt sustainability gauge as long as bond redemptions and interest payments are largely suspended thanks to the financial support, Regling said. Greece’s gross financing need will be below 15% of GDP for a decade, he said. Maturities on outstanding Greek debt can be extended and interest rates lowered to a “certain” degree to achieve the debt easing demanded by the IMF, while a nominal haircut for public creditors is not on the agenda, Regling said. One “needn’t do a whole lot” to help Greece meet the revised debt sustainability requirement, he said.

Europe-wide will not get you anywhere.

• Yanis Varoufakis: ‘I’m Not Going To Take Part In Sad Elections’ (Reuters)

Yanis Varoufakis will not take part in “sad” elections expected next month in Greece and will instead focus on setting up a new movement to “restore democracy” across Europe, the former Greek finance minister told Reuters on Thursday. The combative, motorbike-riding academic was sacked as finance minister last month after alienating euro zone counterparts with his lecturing style and divisive words, hampering Greece’s efforts to secure a bailout from partners. The one-time political rock star has since steadily attacked the bailout programme that prime minister Alexis Tsipras subsequently signed up to and the austerity policies that go with it, rebelling against his former boss in parliament.

“I’m not going to take part in these sad elections,” Mr Varoufakis told Reuters by telephone when asked about the vote likely to be held on September 20th. Mr Tsipras’s Syriza party, which hopes to return to power with a strengthened mandate, says it will not allow Mr Varoufakis and others who voted against the bailout to run for parliament under the Syriza ticket anyway. “Not only him but other lawmakers who did not back the bailout will not be part of the ticket,” a party official said. Mr Tsipras has poured scorn on Mr Varoufakis, telling Alpha TV on Wednesday that he had realised in June that “Varoufakis was talking but nobody paid any attention to him” at the height of Greece’s negotiations with IMF and EU lenders.

“They had switched off, they didn’t listen to what he was saying,” Mr Tsipras said. “He didn’t say anything bad but he had lost his credibility among his interlocutors.” Mr Varoufakis, in turn, likened Mr Tsipras to the mythical Sisyphus condemned to push a rock uphill only to have it roll back down, telling Australia’s ABC Radio the prime minister had embarked on “pushing the same rock of austerity up the hill” against the laws of economics and ethical principles. The 54-year-old Mr Varoufakis has already dismissed speculation that he would join the far-left Popular Unity party that broke away from Syriza last week, telling ABC that he had “great sympathy” but fundamental differences with them and considered their stance “isolationist”.

Instead, he told Reuters he wanted to set up a European network aimed at restoring democracy that could eventually become a party, but at the moment was just an idea that he had seen a lot of support for. “Instead of having national parties that run on a national level it will be a European network which is active on a national level,” he said. “It’s not something immediate. It’s something slow-burning … something that gradually grows roots across Europe.”

Hunderds die every day now. Blame Brussels.

• For Those Trying to Reach Safety in Europe, Land can be as Deadly as Sea (HRW)

More gruesome details will undoubtedly emerge, but we already know enough to be horrified: Up to 50 people died in what were surely agonizing deaths, locked in a truck parked on an Austrian highway, leading to Vienna. That so many should die in a single episode, so close to a European capital where ministers are meeting to discuss migration in the Western Balkans, has made this international news. But the land route into the European Union trekked by migrants and asylum seekers has claimed thousands of victims over the years. In March, two Iraqi men died of hypothermia at the border between Bulgaria and Turkey. In April, 14 Somalis and Afghans were killed by a high-speed train in Macedonia as they walked along the tracks. Last November, a 45-day-old baby died with his father on those same tracks.

While deaths in the Mediterranean capture much of the attention, the list of those who have died of suffocation, dehydration, and exposure to the elements at land borders is unconscionably long. One count puts the overall death toll at EU borders at more than 30,000 since 2000. The smugglers directly responsible for deaths and abuse should be brought to justice. Ill-treatment by border guards and police in Macedonia and Serbia adds to the perils of the journey. But there’s lots of blame to spread around. Failed EU policies, which place an unfair burden on countries at its frontiers, and Greece’s inability to handle the numbers of migrants, have contributed to the crisis at EU borders.

Instead of erecting fences, as Hungary is, the EU should expand safe and legal alternatives for people seeking entry, especially those fleeing persecution and conflict. This means increasing refugee resettlement, facilitating access to family reunification, and developing programs for providing humanitarian visas. It also requires EU governments to meet their legal obligations to provide access to asylum and humane conditions for those already present. EU countries should step up to alleviate the humanitarian crisis in debt-stricken Greece, where 160,000 migrants have arrived since the start of the year. The umbrella group European Council on Refugees and Exiles (ECRE) has called for EU countries to relocate 70,000 asylum seekers from Greece within a year, double the insufficient relocation numbers agreed by governments for both Greece and Italy in July.

Many of those traveling along the Western Balkans route and into Austria are from Syria, Somalia, Iraq, and Afghanistan – countries experiencing war or generalized violence. Others are hoping to improve their economic prospects and the lives of their children. None of them deserve to be exploited, abused, or to die.

Debt Rattle August 7 2015

Aug 072015

August 7, 2015 Posted by Raúl Ilargi Meijer at 10:18 am Finance Tagged with: arctic, China, commodities, currencies, emerging markets, oil, Portugal, refugees, Shale 2 Responses »

DPC “Wood Street, Pittsburgh, Pennsylvania.” 1905

• Emerging Market Mayhem: Gross Sees “Debacle” As Currencies, Bonds Collapse (ZH)

• China Growth Probably Half Reported Rate Or Less, Say Sceptics (Reuters)

• The World Should Worry More About China’s Politics Than The Economy (Economist)

• Another Major Pillar of the Bull Market Is Collapsing (Bloomberg)

• How America Keeps The World’s Poor Downtrodden (Stiglitz)

• Europeans Against the European Union (Village)

• Indebted Portugal Is Still The Problem Child Of The Eurozone (Telegraph)

• Greece’s Tax Revenues Collapse As Debt Crisis Continues (Guardian)

• Hollande And Tsipras Want Greek Bailout Agreed In Late August (Reuters)

• German Finance Ministry Favors Bridge Loan For Greece (Reuters)

• German Industrial Output Slumps Unexpectedly (Marketwatch)

• Corbyn’s “People’s QE” Could Actually Be A Decent Idea (Klein)

• Indonesia’s Economy Has Stopped Emerging (Pesek)

• Malaysia Mess Puts Goldman Sachs In The Hot Seat (Reuters)

• To Please Investors, Big Oil Makes Deepest Cuts in a Generation (Bloomberg)

• Inside Shell’s Extreme Plan to Drill for Oil in the Arctic (Bloomberg)

• The Shale Patch Faces Reality (Bloomberg)

• German TV Presenter Sparks Debate And Hatred With Support For Refugees (Guardian)

• Migrant Crisis Overwhelms Greek Government (Kathimerini)

• It’s Not Climate Change, It’s Everything Change (Margaret Atwood)

Again: this is just starting.

• Emerging Market Mayhem: Gross Sees “Debacle” As Currencies, Bonds Collapse (ZH)

One particularly alarming case that we’ve been keen to document lately is that of Brazil which, you’ll recall, is “up shit creek without a paddle” both figuratively and literally. For one thing, as Goldman recently noted, there’s not a single period in over a decade “with a strictly-worse growth-inflation outcome than that of 2Q2015.” In other words, “since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015.” And here is what that looks like on a scale of 100 to -100 with 100 being “high growth, low inflation” and -100 being “stagflation nightmare”:

This helps to explain why CDS spreads have blown out to post-crisis wides. For those who favor a more qualitative approach to assessing an economy’s prospects, don’t forget that the Brazilian economy recently hit its metaphorical, and literal, bottom when AP reported that, with the Brazil Olympics of 2016 just about 1 year away, “athletes in next year’s Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games.” So that’s Brazil, and while not every EM country is coping with the worst stagflation in 11 years while simultaneously trying to explain away rivers of raw sewage to the Olympic Committee, the combination of slumping commodity prices and the threat of an imminent Fed liftoff are wreaking havoc across the space.

Finally, we can let go of the nonsense? Or will the MSM keep reporting ‘official’ numbers?

• China Growth Probably Half Reported Rate Or Less, Say Sceptics (Reuters)

China’s economy is growing only half as fast as official data shows, or maybe even slower, according to foreign investors and analysts who increasingly challenge how the world’s second largest economy can be measured so swiftly and precisely. Beijing’s official statisticians reported last month that China’s economy grew by a steady 7.0% in the first two quarters of the year, spot on its official 2015 target. That statistical stability comes at a time when prices of global commodities, which China still hungers for despite a campaign to rebalance the economy away from investment and manufacturing toward consumer spending, have cratered.

But perhaps the biggest question is how a developing country of 1.4 billion people can publish its quarterly GDP statistics weeks before first drafts from developed economies like the United States, the euro zone or Britain, and then barely revise them later. “We think the numbers are fantasy,” said Erik Britton of Fathom Consulting, a London-based independent research firm and one of the more vocal critics of official Chinese data. “There is no way those numbers are even close to the truth.” The uncanny official calm in China GDP data may well be contributing to sceptics’ exit from Chinese assets just as the authorities struggle to manage a volatile stock market.

Fathom, which decided last year to stop publishing forecasts of the official GDP release and instead publish what it thinks is really happening, reckons growth will be 2.8% this year, slowing to just 1.0% next year. One issue is that so many other forecasters stick to the script. In the latest Reuters poll of mainly sell-side bank economists, based both inside and outside China, the range of opinion is 6.5-7.2%. For next year, it’s 6.3-7.5%.

China is due for epic unrest.

• The World Should Worry More About China’s Politics Than The Economy (Economist)

How much indeed has changed in China, Mr Xi might reflect, since he came to power nearly three years ago? The economy is on course for its slowest year of growth in a quarter of a century. The stockmarket, having risen to its highest level since the global financial crisis seven years ago, crashed last month. Once hailed as an economic miracle, China is now a source of foreboding: witness the latest falls in global commodity prices. Mr Xi likes to describe slower growth as the “new normal”—a welcome sign that the country is becoming less dependent on credit-fuelled investment. But debates rage within the party elite over how to keep the economy growing fast enough to prevent financial strains from erupting into a fully fledged crisis.

A year after he took over as China’s leader, Mr Xi promised to let market forces play a “decisive” role in shaping the economy. His government’s heavy-handed (and counterproductive) efforts to boost the price of shares have created doubts about his commitment to that aim. During discussions in Beidaihe, some officials will doubtless point to the stockmarket as evidence of what can go wrong when markets are given free rein. Others will suggest that, on the contrary, economic reform is still badly needed to help China avoid falling into the Japanese trap of long-term stagnation. Much depends on which camp Mr Xi heeds. During meetings in Beidaihe in 1988, China’s then leader, Deng Xiaoping, vacillated in the face of a backlash against his economic reforms.

By pandering to conservatives, he fuelled political divisions that erupted the following year into nationwide pro-democracy protests. The unrest, centred on Tiananmen Square, came close to toppling the party. It was not until 1992 that Deng was able to set his reforms back on track. China’s leadership does not appear anything like as divided as it did in the build-up to the Tiananmen upheaval. But appearances may be more deceptive now. Mr Xi is a leader of a very different hue from his predecessors. He has rewritten the rules of Chinese politics, in effect scrapping Deng’s system of “collective leadership” by taking on almost every portfolio himself, while waging a war on corruption of unprecedented scale and intensity.

The latest high-ranking official to be targeted, Guo Boxiong, was once the most senior general in the armed forces; he was expelled from the party on July 30th and now faces trial for graft. A dozen other generals, more than 50 ministerial-level officials and hundreds of thousands of lesser functionaries have met similar fates. That suggests Mr Xi is strong, but also that he has many enemies or is busy creating them. His rounding up of more than 200 civil-rights lawyers and other activists since early last month—the biggest such clampdown in years—hints at his insecurity.

” In just five stocks – Disney, Time Warner, Fox, CBS and Comcast – almost $50 billion of value was erased in two days.”

• Another Major Pillar of the Bull Market Is Collapsing (Bloomberg)

A bull market without Apple is one thing. Removing cable television and movie stocks from the 6 1/2-year rally in U.S. equities is a little harder to imagine. Ignited by a plunge in Walt Disney, shares tracked by the 15-company S&P 500 Media Index have tumbled 8.2% in two days, the biggest slump for the group since 2008. The drop erased all of 2015’s gains for a group that has posted annualized returns of more than 33% since 2009. More than technology or even biotech, media stocks have ruled the roost during the share advance that restored $17 trillion to American equity prices since the financial crisis. Companies from CBS to Tegna and Time Warner Cable are among stocks with the 60 biggest increases during the stretch.

“This sector stripped out is certainly not going to help,” Larry Peruzzi, director of international trading at Cabrera Capital Markets LLC in Boston, said by phone. “There are a lot of companies adding pressure here and there’s an argument to be made that it’s an indicator of consumer sentiment, because that’s where media revenues come from.” Disappointing results from Disney after the close of trading Tuesday sparked the two-day rout. Selling spread to other television and publishing companies as quarterly reports from CBS to 21st Century Fox Inc. and Viacom Inc. were marked by shrinking U.S. ad sales and profits propped up by stock buybacks.

Until Tuesday, media shares were the best-performing shares of the bull market, rising 531% to eclipse automakers, retail stores and banks. The industry’s market capitalization was about $650 billion, compared with $135 billion in March 2009. That value is evaporating. In just five stocks – Disney, Time Warner, Fox, CBS and Comcast – almost $50 billion of value was erased in two days. Viacom slid 14% on Thursday alone, its biggest drop since October 2008.

Interesting developments. US interests are bound to keep resisting what is inevitable.

• How America Keeps The World’s Poor Downtrodden (Stiglitz)

Much has changed in the 13 years since the first International Conference on Financing for Development was held in Monterrey, Mexico, in 2002. Back then, the G-7 dominated global economic policy making; today, China is the world’s largest economy (in purchasing-power-parity terms), with savings some 50% larger than that of the U.S. In 2002, Western financial institutions were thought to be wizards at managing risk and allocating capital; today, we see that they are wizards at market manipulation and other deceptive practices. Gone are the calls for the developed countries to live up to their commitment to give at least 0.7% of their gross national income in development aid.

A few Northern European countries – Denmark, Luxembourg, Norway, Sweden and, most surprisingly, the United Kingdom in the midst of its self-inflicted austerity – fulfilled their pledges in 2014. But the United States (which gave 0.19% of GNI in 2014) lags far, far behind. Today, developing countries and emerging markets say to the U.S. and others: If you will not live up to your promises, at least get out of the way and let us create an international architecture for a global economy that works for the poor, too. Not surprisingly, the existing hegemons, led by the U.S., are doing whatever they can to thwart such efforts. When China proposed the Asian Infrastructure Investment Bank to help recycle some of the surfeit of global savings to where financing is badly needed, the U.S. sought to torpedo the effort.

President Barack Obama’s administration suffered a stinging (and highly embarrassing) defeat. The U.S. is also blocking the world’s path toward an international rule of law for debt and finance. If bond markets, for example, are to work well, an orderly way of resolving cases of sovereign insolvency must be found. But today, there is no such way. Ukraine, Greece, and Argentina are all examples of the failure of existing international arrangements. The vast majority of countries have called for the creation of a framework for sovereign-debt restructuring. The U.S. remains the major obstacle.

Must read. Very good.

• Europeans Against the European Union (Village)

[..] since 2011, a rival, pro-European identity has emerged which is highly critical of the Troika and the increasingly undemocratic apparatus of the EU. Last month, in Greece, this movement was given a name: Generation No. The vote in Greece was striking in its breakdown. The average No voter rejecting the Troika’s ultimatum was young, working-class and held increasingly left-wing views. The percentage for ‘oxi’ under 25 was 85, under 35 was 78. These were a new generation, living in conditions of over 60% unemployment, often having to stretch out their studies over many years to afford to complete them, relying on cash from their parents to survive. But also, it is a generation increasingly willing to challenge the shibboleths of our societies – to experiment in unorthodox relationships to the economy, to housing, to politics.

The price of building up the reputation of the EU as an arena of opportunity for Europe’s periphery has been the weight of frustrated expectations when this turned out not to be the case. As a result not just in Greece but in an increasing number of states it isn’t Generation Yes which represents the future but Generation No. This shift in orientation towards the European project is not down to a turn against Europe. In fact, the Greek No vote enjoyed enormous support from across the continent – marches, direct actions, statements from social movements, trade unions, NGOs, academics and intellectuals. Instead what has happened is that the EU has been stripped back to its essence as a neoliberal economic project. Gone are the pretences of internationalism or a social element – the Greek crisis has demonstrated that bonds of solidarity stretch only as far as is profitable.

To understand why this disconnect between growing internationalism of European peoples and the European Union exists, we have to explore its economic basis. The idea of a ‘social Europe’ has never been at the heart of this market-oriented project of European integration. At the same time as Jacque Delors was seducing Europe’s social democrats into this myth in the 1980s, he was trapping them into arrangements they would never agree to without it. First in 1988 the directive mandating for extensive free movement of capital and then, in 1992, the Maastricht Treaty. These arrangements provided the foundation for the euro – a currency which was to drive the stake of neoliberalism into the heart of the European Union. The money in our pockets is the most right-wing currency ever designed, with a central bank that doesn’t care about unemployment and won’t act as a lender of last resort, modelled to work only in the free-market utopias predicted to arrive at Francis Fukuyama’s end of history.

Problems that are conveniently hidden behind ‘the Greece story’.

• Indebted Portugal Is Still The Problem Child Of The Eurozone (Telegraph)

Portugal must carry out a bold programme of deep spending cuts and tax hikes to tackle its perilously high debt levels, the IMF has warned. A former bail-out economy often hailed as a poster child for the eurozone’s austerity medicine, Portugal continues to have the highest public and private debt ratio in the eurozone at over 360pc of GDP. The IMF has now told the government to redouble its belt-tightening efforts to reduce its debt overhang and meet a mandated budget deficit target of 2.7pc of GDP this year. Should Lisbon fail to cut spending, the deficit is expected to balloon to 3.2pc of economic output. Portugal officially exited its €78bn international bail-out programme last year.

The economy is now expected to expand by 1.6pc in 2015, an upturn largely attributed to favourable external factors such as low commodity prices and a weak euro, said the IMF. Despite noting the recovery was broadly “on track”, the IMF painted a precarious picture of an economy heavily exposed to a downturn in global fortunes and fears over Greece’s future in the euro. “A sudden change in market sentiment due to concerns about the direction of economic policies or re-pricing of risk could render Portugal’s capacity to repay more vulnerable,” warned the report. Four years of Troika-imposed measures has seen government debt hit 127pc of GDP this year, leaving the country “vulnerable to any prolonged financial market turbulence”, according to the IMF’s monitoring report.

Prohibitive debt levels are now expected to dampen domestic demand, “constrain the pace of recovery and weigh on medium-term growth prospects”. In further worrying signs that the recovery has already lost steam, Portugal’s unemployment rate crept back up to 13.7pc in the first quarter of the year, up from 13.1pc in late 2014. Since the IMF’s assessment, joblessless has fallen back to 11.9pc in the three months to June. Last year, the government was forced to inject €5bn to stave off a collapse of Portugal’s biggest lender – Banco Espírito Santo. But the country’s financial system continues to be plagued by rising “bad” non-performing loans which grew by 12.3pc in the first three months of the year.

Political risk could also throw the country’s fragile recovery off track and precipate a fresh crisis for Brussels in the southern Mediterranean. Despite five years under a compliant centre-right government, progress on implementing structural reforms demanded by creditors has eased off, said the IMF. The country goes to the polls in October, where the anti-austerity Socialists are on course to win a parliamentary majority. Party leader Antonio Costa has vowed to roll back Troika-imposed reforms and end the country’s “obsession with austerity”.

The deal remains far from done. But Greece is set to receive ’emergency’ funds before it’s time to sign, and that is perhaps the pivotal event.

• Greece’s Tax Revenues Collapse As Debt Crisis Continues (Guardian)

Fresh evidence of the dramatic impact of the Greek debt crisis on the health of the country’s finances has emerged with official figures showing tax revenues collapsing. As talks continued over a proposed €86bn third bailout of the stricken state, the Greek treasury said tax revenues were 8.5% lower in the first six months of 2015 than the same period a year earlier. The bank shutdown that brought much economic activity to a halt began on 28 June. Public spending fell even more dramatically, by 12.3%, even before the new austerity measures the prime minister Alexis Tsipras has been forced to pass to win the support of his creditors for talks on a new bailout. Greece is due to make a €3.2bn repayment to the ECB on 20 August.

Talks with the quartet of creditors, which includes the ECB, the IMF, the European commission and Europe’s bailout fund, the European stability mechanism, are continuing, and Tsipras has suggested they are “in the final stretch”. However, it remains unclear whether the prime minister, who was only able to pass the latest package of austerity measures with the help of opposition MPs, will be able to win the backing of his radical Syriza party for new reforms, at a special conference due to be held next month. The IMF has made clear that it will refuse to commit any new funds until Greece has signed up to a new economic reform programme, and eurozone countries have made a concrete offer to write off part of the country’s debt burden.

Sweden’s representative on the 24-member IMF board, Thomas Östros, said there was strong support for a new Greek rescue, “but it will take time”. He told Swedish daily Dagens Nyheter: “There is going to be a discussion during the summer and autumn and then the board will make a decision during the autumn.” He also noted that Greece must adopt wide-ranging reforms first. “They have an inefficient public sector, corruption is a relatively big problem and the pension system is more expensive than other countries.” Despite the grim news on the public finances, Greek stock markets bounced back yesterday, after three straight days of decline, with the main Athens index closing up 3.65%.

Sorry, can’t really see that happen. The IMF will insist on debt relief, which the EU and ECB will resist, and SYRIZA will protest it all.

• Hollande And Tsipras Want Greek Bailout Agreed In Late August (Reuters)

A new bailout for Athens should be agreed by late August, Greek Prime Minister Alexis Tsipras and French President Francois Hollande said on Thursday. Greece is in negotiations with the European Union and International Monetary Fund for as much as €86 billion in fresh loans to stave off financial ruin and economic collapse. Tsipras said the new deal would be agreed soon after Aug. 15; Hollande said by the end of the month. The two men were speaking in Egypt on the sidelines of a ceremony to inaugurate the New Suez Canal. It will be Greece’s third bailout since its financial troubles became evident more than five years ago. Negotiations in the past have been heated, but all sides are reporting progress this time around.

An accord must be settled – or a bridge loan agreed – by Aug. 20, when a €5 billion debt payment to the ECB falls due. In a statement, Tsipras’s office in Athens said he and Hollande had agreed that the deal “should and could be concluded right after Aug. 15”. That would give enough time for the Greek parliament to approve it to enable the Aug. 20 repayment to the ECB. “They also agreed that everything should be done for the Greek economy to rebound, especially after the effects of the banking crisis,” the statement said. Greece’s banks are in need of recapitalization by €10 billion to 25 billion, according to the EU. France has been generally supportive of Greek requests for aid, contrasting with a harder line taken by Germany which has demanded stringent reform and austerity measures from Athens.

Greece can take the €10-15 billion and prepare to leave.

• German Finance Ministry Favors Bridge Loan For Greece (Reuters)

Germany’s Finance Ministry favors a bridge loan for Greece to give Athens and its creditors sufficient time to negotiate a comprehensive third bailout, the Sueddeutsche Zeitung daily reported on Friday. “A program that should last three years and be worth over €80 billion needs a really solid basis,” the paper quoted a ministry source as saying. “A further bridge loan is better than just a half-finished program.” Greece is in negotiations with the EU and IMF for as much as €86 billion in fresh loans to stave off financial ruin and economic collapse. A €3.5 billion debt payment to the ECB falls due on August 20 and without a bailout deal, Athens would need bridge financing. The reported German preference for a bridge loan contrasts with the view of Greek Prime Minister Alexis Tsipras and French President Francois Hollande, who said on Thursday a new bailout should be agreed by late August.

That “great” story is over too.

• German Industrial Output Slumps Unexpectedly (Marketwatch)

Germany’s industrial output and exports both slumped unexpectedly in June, a sign that growth in Europe’s largest economy failed to gather much momentum in the second quarter. Industrial production, adjusted for inflation and seasonal swings, declined 1.4% from May, leaving output in the second quarter flat from the previous period, the economics ministry said Friday. But strong manufacturing orders in June and healthy business sentiment indicate that “the modest upward trend in industry should be continued,” the ministry said. In a separate publication, the federal statistics office said Friday that German exports, adjusted for inflation and seasonal swings, dropped 1.0% from May; imports declined 0.5%. But Germany’s adjusted trade surplus, at €22 billion in June, remained near May’s record high of €22.6 billion, an indication that foreign demand underpinned economic activity in the second quarter.

Both the UK and US are far too focused on election entertainment.

• Corbyn’s “People’s QE” Could Actually Be A Decent Idea (Klein)

If Jeremy Corbyn becomes leader of the UK Labour Party, one positive consequence will be the ensuing discussion of the monetary policy transmission mechanism. It all started with his presentation on “The Economy in 2020” given on July 22:

The ‘rebalancing’ I have talked about here today means rebalancing away from finance towards the high-growth, sustainable sectors of the future. How do we do this? One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects: Quantitative easing for people instead of banks. Richard Murphy has been one of many economists making that case.

That passage seems to have been mostly ignored until August 3, when Chris Leslie, Labour’s shadow chancellor, attacked the policy, which in turn led to a detailed response from the aforementioned Richard Murphy (see also here and here), at which point what seems like the bulk of the British economics commentariat erupted. Just search the internet for “Corbynomics” if you don’t believe us. Much of the commentary has been negative – former Bank of England economist Tony Yates concluded, for example, that “People’s QE” would be “the first step along the road to undermining the social usefulness of money” – although Chris Dillow gave an intelligent defense. We don’t understand the negativity. Some of the specific arguments justifying the proposal may be flawed, but the core idea is sound and possesses an impressive intellectual pedigree.

In fact, it could help solve one of the most troublesome questions in central banking: how policymakers can accomplish their objectives using the tools at their disposal, without producing too many unpleasant side effects. One of the oddities of “monetary policy” is that it has almost no direct impact on how much money there is to go around. Virtually all of what we commonly think of and use as money is actually short-term debt issued and retired at will by private financial firms. Monetary policymakers can affect the incentives of these profit-seeking entities but they have little control over the amount of nominal spending occurring in the economy. Nudging the unsecured overnight interbank lending rate up and down can encourage lenders to adjust their leverage, but good luck tying that to the traditional price stability mandate.

One among many.

• Indonesia’s Economy Has Stopped Emerging (Pesek)

Indonesia has come a long way since Oct. 20, when Joko Widodo was sworn in as president. Unfortunately, the distance the country has traveled has been in the wrong direction. Expectations were that Widodo, known as Jokowi, would accelerate the reforms of predecessor Susilo Bambang Yudhoyono – upgrading infrastructure, reducing red tape, curbing corruption. Who better to do so than Indonesia’s first leader independent of dynastic families and the military? In 10 years at the helm, Yudhoyono dragged the economy from failed-state candidate to investment-grade growth star. Jokowi’s mandate was to take Indonesia to the next level, honing its global competitiveness, creating new jobs, preparing one of the world’s youngest workforces to thrive and combating the remnants of the powerful political machine built by Suharto, the dictator deposed in 1998.

After 291 days, however, Jokowi seems no match for an Indonesian establishment bent on protecting the status quo. Growth was just 4.67% in the second quarter, the slowest pace in six years. What’s more, a recent MasterCard survey detected an “extreme deterioration” in consumer sentiment, which had plummeted to the worst levels in Asia. Investors are already voting with their feet. The Jakarta Composite Index has fallen 13% from its April 7 record high, one of Asia’s biggest plunges in that time. And foreign direct investment underwhelmed last quarter, coming in at $7.4 billion, little changed from a year earlier in dollar terms. Jokowi has plenty of time to turn things around; 1,535 days remain in his five-year term. But the “halo effect” Jokowi carried into office is fast fading as Indonesia’s 250 million people flirt with buyer’s remorse.

First, Jokowi must step up efforts to battle weakening exports. Indonesia’s weak government spending, stifling bureaucracy and conflicting regulations would be impediment enough; slowing world growth makes matters much worse. Jokowi must greenlight infrastructure projects to boost competitiveness and increase the number and quality of jobs. Next, Jokowi must decide what kind of leader he wants to be: a craven populist or the modernizer Indonesia needs. He has too often resorted to nationalistic rhetoric that hearkens to the Indonesian backwater of old – a turnoff for the multinational executives Jakarta should be courting. Last month, Jokowi raised import tariffs, while asking visiting U.K. Prime Minister David Cameron to do the opposite by cutting U.K. duties for Indonesian goods. Jokowi isn’t helping his constituents by driving up prices for goods while their currency is weakening.

These things should be held against daylight, but where?

• Malaysia Mess Puts Goldman Sachs In The Hot Seat (Reuters)

An unfolding political scandal in Malaysia is starting to reverberate far from Kuala Lumpur to the downtown New York headquarters of Goldman Sachs. State fund 1Malaysia Development Berhad (1MDB) is at the centre of allegations of graft and mismanagement. The furore has prompted renewed scrutiny of hefty fees the Wall Street bank led by Lloyd Blankfein earned selling bonds for 1MDB. The affair threatens to expose a blind spot in Goldman’s processes for vetting sensitive deals. The latest uproar was triggered by reports that almost $700 million landed in the personal accounts of Najib Razak, Malaysia’s Prime Minister. Najib denies taking any money from 1MDB for personal gain. The country’s anti-corruption commission says the funds came from an unnamed donor.

Even so, the investigations into the source of Najib’s mystery money have intensified questions about the management of the fund, which borrowed heavily to buy power assets and finance investments in recent years, but is now effectively being wound down. Goldman helped 1MDB raise a total of $6.5 billion from three bond issues in 2012 and 2013. Even at the time, the deals were controversial because they were so lucrative for the bank. Goldman earned roughly $590 million in fees, commissions and expenses from underwriting the bonds, according to a person familiar with the situation – a massive 9.1% of the total raised. That was almost four times the typical rate for a quasi-sovereign bond at the time.

It exceeds what Wall Street firms can charge in what has traditionally been their most lucrative work: taking companies public in the United States. Goldman was able to book hefty fees because it put its balance sheet at risk for 1MDB, which did not yet have a credit rating. And it wanted to raise a large amount of money very quickly. Yet the bonanza has left the bank exposed to its client’s woes. Malaysian opposition politician Tony Pua said earlier this year that 1MDB had been “royally screwed” by the deals.

Goes to show how bad things are.

• To Please Investors, Big Oil Makes Deepest Cuts in a Generation (Bloomberg)

Oil companies are making the largest cost cuts in a generation to reassure investors. They’re risking their own future growth. From Chevron to Shell, producers are firing thousands of workers and canceling investments to defend their dividends. Cutbacks across the industry total $180 billion so far this year, the most since the oil crash of 1986, according to Rystad Energy. BP CEO Bob Dudley said last week his “first priority” was payouts to shareholders. Chevron CFO Patricia Yarrington said her company was committed to continuing its 27-year record of annual dividend increases. While the dividend payouts please investors, the producers risk repeating the patterns of 1986 and 1999, when prices slumped and they slashed spending.

It took years for them to rebuild their pipelines of production growth. “You need to question whether it’s optimal to base the whole strategy on keeping the dividend,” said Thomas Moore, a director at U.K. fund manager Standard Life Investments. “The response to low oil prices has been savage cost-cutting.” Exxon Mobil, Shell, Chevron, BP and Total told investors last week that future growth plans aren’t imperiled and maintained their multi-year output targets. The history of previous cost-cutting is a cautionary tale.

Crazy wager.

• Inside Shell’s Extreme Plan to Drill for Oil in the Arctic (Bloomberg)

Chevron, ConocoPhillips, ExxonMobil, Statoil, and Total have all put Arctic plans on hold. “Given the environmental and regulatory risks in the Arctic and the cost of producing in that difficult setting, assuming they ever get to producing, Shell must anticipate an enormous find—and future oil prices much higher than they are today,” says Nick Butler, a former senior strategy executive at BP who does energy research at King’s College London. “It’s a dangerous wager.” One of the most powerful women executives in a decidedly masculine industry, Pickard, 59, meets a reporter visiting Anchorage in jeans and a blue button-down shirt.

Her rise through the ranks, first at the pre-merger Mobil and since 2000 at Shell, is especially impressive as she lacks the engineering or geology pedigree normally required of senior oil industry management. She has a graduate degree in international relations and has overseen exploration and production in Africa, Australia, Latin America, and Russia. “Ann doesn’t suffer fools,” says a (male) subordinate who pleads for anonymity. In 2005, Shell put Pickard in charge of sprawling operations in Nigeria long shadowed by pipeline thievery, militant attacks, and accusations—denied by Shell—of collaboration with brutal government crackdowns. Fortune magazine in 2008 labeled her “the bravest woman in oil”—a silly accolade, perhaps, but one that accurately reflects her reputation at Shell.

Most of the world’s “easy oil” has already been pumped or nationalized by resource-rich governments, Pickard says, leaving independent producers such as Shell no choice but to pursue “extreme oil” in dicey places. “I enjoy the challenge,” she says. That’s why in 2013, when she was planning to retire to spend more time with her husband, a retired Navy commander, and their two adopted children, she changed her mind and took over the troubled Arctic project.

Living on fumes: “Next year it’s really going to come to a head.”

• The Shale Patch Faces Reality (Bloomberg)

Not long ago the oil industry looked like it had dodged a bullet. After the worst bust in a generation cut crude prices from $100 a barrel last summer to $43 in March, the oil market rallied. By June, prices were up 40%, passing $60 for the first time since December. Oil companies that had cut costs began planning to deploy more rigs and drill more wells. “We didn’t think we’d be quite this good,” Stephen Chazen, chief executive officer of Occidental Petroleum, told analysts in May. The runup was short-lived. Fears over weak demand from China, along with rising production in the U.S., Saudi Arabia, and Iraq pushed prices back below $50. In July, even as the summer driving season boosted U.S. gasoline demand close to record highs, oil posted its biggest monthly drop since October 2008.

“The much feared double-dip is here,” Francisco Blanch at Bank of America wrote in a July 28 report. The largest oil companies are reporting their worst results in years. ExxonMobil’s second-quarter net income fell 52%; Chevron’s fell 90%. ConocoPhillips lost $180 million. Billions of dollars in capital spending have been cut, and more layoffs are likely. Part of the problem facing the majors is that they’re producing in some of the most expensive places on earth: deep water and the Arctic. With their healthy cash reserves the majors can hold out for higher prices, even if they’re years away. The same can’t be said for many of the smaller companies drilling in the U.S. shale patch.

Shale producers had bought themselves time by cutting costs, locking in higher prices with oil derivatives, and raising billions from big banks and investors. Many cut drilling costs by as much as 30%, fired thousands of workers, and renegotiated contracts with oilfield service companies. “That postponed the day of reckoning,” says Carl Tricoli at Denham Capital Management. But it’s not clear what’s left to cut. The futures contracts and other swaps and options they bought last year as insurance against falling prices are beginning to expire. During the first quarter, U.S. producers earned $3.7 billion from these hedges, crucial revenue for companies that often outspend their cash flow. “A year ago, you could hedge at $85 to $90, and now it’s in the low $60s,” says Chris Lang at Asset Risk Management. “Next year it’s really going to come to a head.”

Germans need to speak up against hatred.

• German TV Presenter Sparks Debate And Hatred With Support For Refugees (Guardian)

A television presenter in Germany has triggered a huge online debate after calling for a public stand against the growth of racist attacks towards refugees. Anja Reschke used a regular editorial slot on the evening news programme to lambast hate-filled commentators whose language she said had helped incite arson attacks on refugee homes. She said she was shocked at how socially-acceptable it had become to publish racist rants under real names. “Until recently, such commentators were hidden behind pseudonyms, but now these things are being aired under real names,” she said. “Apparently it’s no longer embarrassing anymore – on the contrary – in reaction to phrases like ‘filthy vermin should drown in the sea’, you get excited consensus and a lot of ‘likes’.

If up until then you had been a little racist nobody, of course you suddenly feel great,” she said in the two-minute commentary. The segment went viral within minutes of being broadcast, and by Thursday afternoon had been viewed more than 9m times, clocked up over 250,000 likes, 20,000 comments, and had been shared more than 83,000 times on Facebook. Reschke said the “hate-tirades” had sparked “group-dynamic processes” that had led to “a rise in extreme rightwing acts”. Calling on “decent” Germans to act, she said: “If you’re not of the opinion that all refugees are spongers, who should be hunted down, burnt or gassed, then you should make that known, oppose it, open your mouth, maintain an attitude, pillory people in public.”

Her appeal came a day after the head of the intelligence service, Hans-Georg Maassen, warned that a small group of rightwing extremists was in danger of escalating a wave of anti-asylum attacks. He made specific mention of the group Der III Weg or “The Third Way”, calling them “dangerous rabble-rousers”.

Europe’s biggest moral failure continues unabated. Blaming Tsipras, though, is nonsense.

• Migrant Crisis Overwhelms Greek Government (Kathimerini)

Prime Minister Alexis Tsipras is due to chair an emergency government meeting on Friday to address the refugee crisis facing Greece, which has been compounded by serious funding problems in Athens. The meeting was called in the wake of European Commissioner for Migration and Home Affairs Dimitris Avramopoulos informing Tsipras that Greece was missing out on more than €500 million in European Union funding because it has failed to set up a service to absorb and allocate this money for immigration and asylum projects. Kathimerini understands that Avramopoulos has told the prime minister Greece will be given as a down payment 4% of the total funding due over a six-year period. This will be followed by another 3% to cover actions this year.

Tsipras is due to discuss this issue, as well as the soaring number of refugees and migrants reaching Greece, with Alternate Minister for Immigration Policy Tasia Christodoulopoulou and several other cabinet members today. Christodoulopoulou admitted Thursday that the government has so far fallen short on this matter. “At the moment, nongovernmental organizations and charities are covering the gaps left by the state,” she told Mega TV. “Without them things would be worse.” The alternate minister said efforts were continuing to prepare a plot of land in Votanikos, near central Athens, so some 400 refugees currently living in tents in Pedion tou Areos park could be housed there. Authorities are currently carrying out work aimed at making the new site livable.

The refugees, including dozens of children, will be housed in prefabricated structures as well as large tents at Votanikos. Christodoulopoulou said the new site would operate as a reception, not detention, center. This means that up to 600 people who will be able to live there will be allowed to leave and enter the camp freely. The magnitude of the problem facing Greece was underlined by the United Nations on Thursday. A UN Refugee Agency (UNHCR) official told Agence-France Presse that by the end of July, around 224,000 refugees and migrants had arrived in Europe by sea and that of those, some 124,000 landed in Greece. More than 2,100 people have drowned or gone missing.

Margaret!!

• It’s Not Climate Change, It’s Everything Change (Margaret Atwood)

Oil! Our secret god, our secret sharer, our magic wand, fulfiller of our every desire, our co-conspirator, the sine qua non in all we do! Can’t live with it, can’t right at this moment live without it. But it’s on everyone s mind. Back in 2009, as fracking and the mining of the oil/tar sands in Alberta ramped up, when people were talking about Peak Oil and the dangers of the supply giving out, I wrote a piece for the German newspaper Die Zeit. In English it was called The Future Without Oil. It went like this:

The future without oil! For optimists, a pleasant picture: let’s call it Picture One. Shall we imagine it? There we are, driving around in our cars fueled by hydrogen, or methane, or solar, or something else we have yet to dream up. Goods from afar come to us by solar-and-sail-driven ship, the sails computerized to catch every whiff of air, or else by new versions of the airship, which can lift and carry a huge amount of freight with minimal pollution and no ear-slitting noise. Trains have made a comeback. So have bicycles, when it isn t snowing; but maybe there won’t be any more winter.

We ve gone back to small-scale hydropower, using fish-friendly dams. We re eating locally, and even growing organic vegetables on our erstwhile front lawns, watering them with greywater and rainwater, and with the water saved from using low-flush toilets, showers instead of baths, water-saving washing machines, and other appliances already on the market. We’re using low-draw lightbulbs; incandescents have been banned and energy-efficient heating systems, including pellet stoves, radiant panels, and long underwear. Heat yourself, not the room is no longer a slogan for nutty eccentrics: it’s the way we all live now.

Debt Rattle August 6 2015

Aug 062015

August 6, 2015 Posted by Raúl Ilargi Meijer at 11:36 am Finance Tagged with: bonds, China, commodities, emerging markets, Fed, Greece, oil, pope, TPP 1 Response »

NPC Fire at Thomas Somerville plant, Washington DC 1926

• Commodities Are Crashing Like It’s 2008 All Over Again (Bloomberg)

• Lost Decade in Emerging Markets: Investors Already Halfway There (Bloomberg)

• Analyst Who Called Top of China Stock Rally Sees Rout Worsening (Bloomberg)

• The Fed Is Cornered And There Are Visible Market Stresses Everywhere (Haselmann)

• GDP Bonds Are Answer To Greek Debt Problem (FT)

• Greece’s Debt Burden Can And Must Be Lightened Within The Euro (Bruegel)

• Tsipras: Greece On ‘Final Stretch’ Of Talks With Creditors (Guardian)

• Tests Start On Greece’s Systemic Lenders (Kathimerini)

• Saudi Arabia May Go Broke Before The US Oil Industry Buckles (AEP)

• ECB Paper: Banks That Lobby More Likely To Get Favourable Treatment (Reuters)

• Eurozone Retail Sales Fall Sharply in June (WSJ)

• A Prescription for Peace and Prosperity (Paul Craig Roberts)

• Osborne, In Big Banks’ Pockets, Faces Wrath Of Challengers (Guardian)

• The Economist: The TPP is Dead (Naked Capitalism)

• Canada Is On The Verge Of A Recession (CNN)

• Pope Francis’ ‘Attendance’ At GOP Debate Will Help Sink The Party (Farrell)

• Most Americans Say Their Children Will Be Worse Off (MarketWatch)

• Refugee Crisis on the Beach in Greece (NY Times)

I’m thinking 2008 will turn out to have nothing on the present crash.

• Commodities Are Crashing Like It’s 2008 All Over Again (Bloomberg)

Attention commodities investors: Welcome back to 2008! The meltdown has pushed as many commodities into bear markets as there were in the month after the collapse of Lehman Brothers Holdings Inc., which spurred the worst financial crisis seven years ago since the Great Depression. Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20% from recent closing highs, meeting the common definition of a bear market. That’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon.

A stronger U.S. dollar and China’s cooling economy are adding to pressure on raw materials. Two of the index’s top three weightings – gold and crude oil – are in bear markets. The gauge itself has bounced off 13-year lows for the past month. Four commodities – corn, natural gas, wheat and cattle – have managed to stay out of bear markets, due to bad weather and supply issues. Hedge funds are growing more pessimistic as the year has gone on. Money managers have slashed bets on higher commodity prices by half this year, anticipating lower oil and gold prices.

Everything shrinks.

• Lost Decade in Emerging Markets: Investors Already Halfway There (Bloomberg)

Just 14 years ago Wall Street fell in love with the BRICs, the tidy acronym for four major emerging economies that, to many, looked like sure winners. Today, after heady runs and abrupt reversals, most of the BRICs – in fact, most developing nations – look like big-time losers. The history of emerging markets is a history of booms and busts, but the immediate future may hold something more prosaic: malaise. Investors today confront what could turn out to be a lost decade of returns, with four or five more meager years ahead. “These are very much the lean years after the bonanza decade,” said Harvard Kennedy School economist Carmen Reinhart, one of the world’s top experts on financial crises and developing economies.

Not long ago the BRICs – Brazil, Russia, India and China – were celebrated as engines of global growth. Now Brazil and Russia face deep recessions brought on by the collapse in global commodities, while China is slowing and struggling to prop up its fast-sinking stock market. The prospect of higher U.S. interest rates only adds to the gloom. Currencies from the South African rand to the Malaysian ringgit fell anew on Wednesday amid worries the U.S. Federal Reserve might move as early as September. To Ruchir Sharma, the turnabout suggests the outsize investment returns of the early 2000s – the MSCI Emerging Markets Index nearly quadrupled between 2002 and 2010 – now look like an anomaly.

“Very few emerging markets historically have ever been able to make it to the developed countries,” said Sharma, head of emerging markets at Morgan Stanley. “This is a return to normalcy.” The numbers are certainly sobering. All told, developing-nation currencies have fallen to their lowest levels since 1999, and bonds denominated in those currencies have wiped out five years’ worth of gains.

“Shanghai looks bad and the global cycle is starting to look a little weaker, and that should pressure these things.”

• Analyst Who Called Top of China Stock Rally Sees Rout Worsening (Bloomberg)

More than two decades’ experience poring over stock charts helped Thomas Schroeder lock in profits in April before Chinese companies in Hong Kong went into freefall. Now he’s bearish again, betting the slump in Chinese shares won’t stop anytime soon. The Shanghai Composite Index will decline to as low as 3,100 in two months, Schroeder said, 16% below the closing level Wednesday, despite intermittent rallies as the government steps up efforts to stabilize the market. The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong will drop about 10%, he said. To Schroeder, slowing Chinese economic growth and collapsing commodities prices are heightening the chance that the indexes will fall below key equity market support levels.

These are lines on charts that technical analysts say typically mark a floor for prices. Technical analysts use past patterns to try to predict future movements. “For now, we’re in the bear camp,” Schroeder, founder and managing director at Chart Partners, a provider of trading strategies linked to technical analysis, said by phone from Bangkok. “You’re not going to get to it right away. I’m sure the Chinese government will continue to come in and try to support the market in Shanghai. But in the next two months, you’re going to be” reaching these levels.

The former global head of technical research for SG Securities and Asian technical analysis chief at UBS is watching the 3,400 level on the Shanghai Composite. He expects the gauge to fall further if that’s breached. It closed Wednesday at 3,694.57. The H-share measure had jumped 37% from a low in October when Schroeder made his call. Though it edged up a further 5.8% to a peak on May 26, it then slumped more than 25%, while a 32% rout in Shanghai shares helped destroy about $4 trillion in mainland market value. [..] “There are some big moves coming,” said Schroeder. “Shanghai looks bad and the global cycle is starting to look a little weaker, and that should pressure these things.”

“Regulations have chased the ‘carry trades’ from the banking system into the shadow banking system where officials can’t see or measure the risk.”

• The Fed Is Cornered And There Are Visible Market Stresses Everywhere (Haselmann)

Part One, China An economic slowdown is underway in China. This is reflected in the steep drop in the commodity complex and in the currencies of emerging market countries. Large imbalances are being worked off as Beijing attempts to shift the composition of its growth. Policy decision are not always economic. New sources of growth are being sought by Beijing as deleveraging occurs. Since officials care foremost about social stability, they try to preserve as many current jobs as possible during their attempt at economic transformation. During this period, banks might be averse to calling in loans. State owned enterprises (SOEs) are pressured to keep producing, so that workers can continue to receive a pay check. The result is over-production and downward pressure on prices.

Part Two, The Seven Year Fed Subsidy The Fed’s zero interest rate policy has provided a subsidy to investors for the past 7 years. The lure of easy profits from cheap money was wildly attractive and readily accepted by investors. The Fed “put” gave investors great confidence that they could outperform their exceptionally low cost of capital. These implicit promises by central banks encouraged trillions of dollars into ‘carry trades’ and various forms of market speculation. Complacent investors maintain these trades, despite the Fed’s warning of a looming reduction in the subsidy, and despite a balance sheet expected to shrink in 2016. It has been a risk-chasing ‘game of chicken’ that is coming to an end. Changing conditions have skewed risk/reward to the downside. This is particularly true because financial assets prices are exceptionally expensive.

Maybe investors do not believe ‘lift-off’ looms, because the Fed has changed its guidance so many times. Or maybe, investors are interpreting plummeting commodity prices and the steep fall in global trade as warning signs that global growth and inflation are under pressure. Is this why the US 30 year has rallied 40 basis points in the past 3 weeks? (see my July 17th note, “Bonds are Back”) Either scenario creates a paradox for risk-seeking investors. If the US economy continues on its current slow progress pace, then the Fed will act on its warning and hike rates in September. However, if the Fed does not hike in September it is likely because problems from China, commodities, Greece, or emerging markets (etc) cause the global outlook to deteriorate further. Neither scenario should be good for risk assets.

Part Three, “Carry Trade” During the 2008 crisis, Special Investment Vehicles (SIVs) were primarily responsible for freezing the interbank lending market. SIVs were separate entities set up primarily to earn the ‘carry’ differential between short-dated loans and longer-dated assets purchased with the proceeds of the loans. This legal structure allowed banks to own billions of dollars of securities (CDOs and such) off of their balance sheets. Since the entities were wholly-owned with liquidity guarantees, the vehicles received the same attractive funding rates as the parent banks. When the housing crisis (and Lehman collapse) spurred loan delinquencies, banks had to place all of these hidden securities onto their balance sheets.

Since the magnitude of the SIV levered assets was unknown to others, bank solvency was questioned, and interbank lending froze. Many of these securities had to be sold at fire sale prices, i.e., prices well below their economic value. When the Fed begins to normalize rates, trillions in carry trades will likely begin to unwind. The similarity to 2008 is glaring, except that banks no longer own SIVs. Regulations have chased the ‘carry trades’ from the banking system into the shadow banking system where officials can’t see or measure the risk. The banking system today is, no doubt, far less exposed, but too many sellers could overwhelm the depth of the market, leading to asset price contagion that filters into the real economy.

Varoufakis proposed this in January.

• GDP Bonds Are Answer To Greek Debt Problem (FT)

It is clear that Greece cannot repay its sovereign debt as it is now structured, despite a generous dose of reprofiling, (extend and pretend), already granted by the country’s public sector creditors in the eurozone. The IMF has endorsed this view. But how can one lower the debt burden on Greece, and yet at the same time be fair to other eurozone countries with debt burdens enlarged by the global financial crisis, such as Ireland; and fair also to the taxpayers in creditor countries, some of which may well be still poorer than the Greeks? There is, I believe, a way to do so. This mechanism is to restructure most, or all, of such Greek debt into real GDP bonds.

These pay nothing so long as real per capita income is below its previous peak, but, as a quid pro quo, they pay a multiple, say twice, of any%age increase in real per capita income as it rises beyond its prior peak level. The maturity would be long, say 40 years, but there would have to be a fixed maturity, since otherwise, in a growing economy the burden could eventually become excessive. Such a switch would achieve several objectives simultaneously. First, creditors would get paid if, and only if, they helped Greece to start growing again. The present fixation with large primary surpluses and austerity would get replaced with a growth programme. So long as growth remained possible, as it surely must, nothing would have to be written off. The net present value of the debt would be a strongly positive function of future Greek growth rates.

Second, the interest/dividend repayments would become strongly contracyclical, with larger payouts in booms when tax payments are high, rather than (mildly) pro-cyclical as they are now. Nothing would be paid in a recession, such as exists at present. Third, exactly the same option, to switch existing debt into real GDP bonds, could also be offered to any other country that has had to accept a support programme, notably Ireland, Cyprus and Portugal. There is no need to give uniquely favourable terms to Greece among all those countries worst hit by the financial crisis. Countries without such a programme, such as Italy, would be allowed to switch existing debt into real GDP bonds, but only on terms agreed after negotiation with existing creditors.

Any country could, of course, issue real GDP bonds to finance current deficits. Real GDP bonds are, of course, a form of national equity. The world is currently drowning in debt, and this is but one way to move the debt/equity ratio back towards a safer and saner balance. Just as we require banks to hold a higher equity ratio, and for much the same reasons, so we should encourage countries, especially those with volatile economies, to shift from debt to equity finance.

A second proposal for GDP(-linked) bonds. COntagion?!

• Greece’s Debt Burden Can And Must Be Lightened Within The Euro (Bruegel)

Perhaps the greatest damage caused by the confrontation with Greece is a general loss of confidence. If we want to get Greece back to growth, people, companies and investors have to regain confidence in the viability of the country. For this to work, a legitimate and competent government as well as an efficient administration and judiciary are essential. Yet the issue of debt sustainability is still central, even if the debt servicing costs are negligible in the short term. No one doubts the IMF’s analysis that the sustainability of Greek government debt constitutes a key precondition for recovery. The third program, which is now being negotiated, aims to put Greece back where it stood at the end of last year: with growth expectations of almost 3%.

This third programme is intended to be the exact opposite of a transfer program. It aims to strengthen the Greek economy and thereby protect the loans and guarantees provided by the creditors. A large part of the disbursements will go into debt repayments to official creditors. This is important, but not enough. The current link between debt servicing and membership of the single currency leads to a vicious circle that increases uncertainty, weakens growth and makes full debt repayment less likely. There will be no confidence and no growth in Greece without a solution to the debt problem. We suggest breaking this vicious cycle by tying the interest rates on the loans to the growth rate of the Greek economy, together with a conditional debt moratorium.

A Greece without growth should not pay any interest or make any repayments. The stronger the growth rate, the higher the interest and repayments to European creditors. The debt moratorium would mean that Greece could push back the repayments if it has not reached a certain level of GDP by 2022, when it is scheduled to begin servicing its debts to the European creditors. Such a solution would end the uncertainty and recognise the fact that Greek growth is a joint European concern and a prerequisite for Greece to service its debts. Stability and confidence could return. Much of the cause for the current political confrontation would be gone. Meanwhile, such an approach would not reduce the incentives for reform.

It is in the self-interest of any Greek government to pursue growth-friendly reforms. Of course, it will be necessary to design the plan in such a way as to avoid moral hazard; yet this is possible and the conditions are favourable. Such a solution would also be advantageous for the creditors. Some form of debt relief is inevitable. The main advantage of our proposal is that creditors would benefit if growth resumes and thereby reclaim more of their loans than otherwise possible. At the same time, our proposal has only a negligible impact on the creditors’ current budgets and would thus have no meaningful consequences for the constitutional debt limits of member states.

Take the money and run.

• Tsipras: Greece On ‘Final Stretch’ Of Talks With Creditors (Guardian)

Greece is “in the final stretch” of talks with lenders on a multibillion-euro bailout, the country’s prime minister, Alexis Tsipras, has said, on a day when banks suffered more punishing losses on the Athens stock market. Greece and its creditors are racing to agree a complex, three-year deal worth up to €86bn by 20 August, when Athens must come up with €3.5bn to repay debts to the ECB. Both sides have said a deal is possible, although Tsipras struck the most optimistic note so far when he said on Wednesday that the deal could end the uncertainty over Greece’s place in the eurozone. He said: “We are in the final stretch. Despite the difficulties we are facing, we hope this agreement can end uncertainty on the future of Greece.”

The head of the European commission, Jean-Claude Juncker, said an agreement was likely this month. He told Agence France-Presse: “All the reports I am getting suggest an accord this month, preferably before the 20th.” Negotiations were proceeding in a satisfactory way, he said. Officials from the commission, the ECB and the IMF began meeting the Greek government in the final week of July. Experts from the European Stability Mechanism, the eurozone fund that is expected to provide €50bn towards the bailout, are also at the Athens talks, but do not have the same power as the troika of lenders to set the conditions attached to the loan. At stake is the small print on reforms Greece must carry out in order to qualify for the loan, including overhauling its pension system and introducing a sweeping privatisation programme.

[..] Failure to reach an agreement would leave officials scrambling to find another emergency bridging loan, to add to the €7bn Greece had from an EU-wide bailout fund in July. Eurozone officials are anxious to avoid another short-term loan, as the rules on using the EU-wide fund have since been tightened to placate non-euro states such as the UK that are wary of being dragged into the Greek debt crisis.

Why does Greece still have systemic lenders? Why does any country, for that matter?!

• Tests Start On Greece’s Systemic Lenders (Kathimerini)

European officials began on Wednesday the inspection that will eventually determine the extent of the recapitalization required by local banks, while the timetable is extremely tight, aiming to have the entire process to boost the lenders’ share capital completed well before the end of the year. Inspectors from the ECB and the European Stability Mechanism yesterday delved into the files of more than 4,000 corporate loans and 2,000 mortgages, as they began probing the loan portfolios of the country’s four systemic banks. The December deadline is meant to prevent the application of the new bail-in law – i.e. the haircut on deposits of more than €100,000 – which will otherwise come into force in January 2016.

The timetable is so restricted that it foresees the monitoring of the loan portfolios’ figures up to June 30 running alongside the stress tests that will examine banks’ possible responses to various economic scenarios in the next couple of years. That will bring the start of the stress tests a step closer, with the first data being drawn as soon as mid-August, so that the results of both procedures can be announced by the end of October. That will leave a period of two months for the completion of the recapitalization, which could be conducted in summary fashion at the banks’ general meetings. Bank managers are expressing concern about the size of the capital requirements, with current estimates putting the total amount between €10 and €15 billion.

However, the final amount will to a great extent depend on the macroeconomic scenarios, which will involve economic contractions and unemployment levels that will determine the capacity of households and corporations to meet their loan repayment obligations. Corporate loans will come under the scrutiny of the Asset Quality Review, with the European experts assessing a broad sample of some 1,000 loans per bank. They will also probe around 500 mortgage loans per lender, factoring in the drop in property values.

Ambrose loves the US almost as much as he does Yanis.

• Saudi Arabia May Go Broke Before The US Oil Industry Buckles (AEP)

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade. The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states. The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn. Bank of America says OPEC is now “effectively dissolved”. The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run,” said the Saudi central bank in its latest stability report. “The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” it said. One Saudi expert was blunter. “The policy hasn’t worked and it will never work,” he said. By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments. The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year – and not only by switching tactically to high-yielding wells. Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” he said. The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil. He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

What a surprise…

• ECB Paper: Banks That Lobby More Likely To Get Favourable Treatment (Reuters)

Banks that spend money on lobbying or hire former regulators are more likely to get favourable treatment from their watchdog agency, according to a ECB paper published today. While lobbying in the United States has been subject to extensive disclosure for years, European authorities only started to tighten the rules in recent months. Companies that want to meet with officials are now obliged to join a register and their meetings are logged. The ECB paper, based on data from about 780 US banks, found that lenders which have lobbied, hired a former regulator or government official, or are otherwise close to the authorities are less likely to face additional sanctions if their capital ratios fall below the minimum threshold.

They also tend to have higher Fitch Bank Support Ratings, meaning they are considered more likely to receive public-sector help if they are at risk of default, the paper found. “Increasing lobbying expenditures raise the probability of preferential regulatory treatment, but even small lobbying expenditures prove to be effective,” authors Magdalena Ignatowski, Charlotte Werger and Josef Korte wrote in the paper. “Lobbying becomes more effective by involving former politicians as lobbyists,” the paper said. “The effectiveness of proximity to the relevant legislative committee increases with the amount of campaign contributions from the financial industry that elected legislators receive.”

But lobbying and other sources of political influence cease to be effective when a bank finds itself in deep financial distress and faces being closed, the paper found. The ECB research did not account for undeclared or indirect lobbying, such as that carried out by an association of banks, which means the real effect of lobbying might be even stronger, the authors wrote. “Our evidence indicates that expenditures on lobbying are on the rise, and that banks are increasing their influence activities,” the authors of the paper wrote. “It is important to be aware that regulatory treatment is not immune to the influence of banks, and that we might expect this influence to further increase.”

And that’s NOT a surprise.

• Eurozone Retail Sales Fall Sharply in June (WSJ)

Retail sales in the eurozone fell more sharply than expected in June, a fresh sign that the currency area’s economic recovery remains too weak to quickly bring down very high rates of unemployment, or raise inflation to the ECB’s target. Separately, the final results of surveys of purchasing managers at businesses around the eurozone recorded a slowdown in activity during July, although it was less marked than first estimated. And in Italy, the eurozone’s third largest member, figures showed industrial production fell by 1.1% on the month in June, a sign that the recovery from the country’s worst postwar recession is still fragile. The EU’s statistics agency said Wednesday retail sales in the 19 countries that use the euro fell 0.6% in June from May, but were up 1.2% from the same month last year.

It was the largest month-to-month fall since September 2014. Economists surveyed by The WSJ had estimated sales fell 0.2%, having seen figures from Germany that recorded a large drop. Eurostat said sales in Germany were down 2.3% from May. That is a blow to hopes that low unemployment and rising wages in its largest member would boost the recovery in the eurozone as whole, as Germans purchased more goods and services from weaker parts of the currency area. But the weakness in retail sales wasn’t confined to Germany, and is also a setback to the ECB’s goal of raising the annual rate of inflation to its target of just under 2%.

Plenty of dreams.

• A Prescription for Peace and Prosperity (Paul Craig Roberts)

For the United States to return to a prosperous road, the middle class must be restored and the ladders of upward mobility put back in place. The middle class served domestic political stability by being a buffer between rich and poor. Ladders of upward mobility are a relief valve that permit determined folk to rise from poverty to success. Rising incomes throughout society provide the consumer demand that drives an economy. This is the way the US economy worked in the post-WWII period. To reestablish the middle class the offshored jobs have to be brought home, monopolies broken up, regulation restored, and the central bank put under accountable control or abolished. Jobs offshoring enriched owners and managers of capital at the expense of the middle class.

Well paid manufacturing and industrial workers lost their livelihoods as did university graduates trained for tradable professional service jobs such as software engineering and information technology. No comparable wages and salaries could be found in the economy where the remaining jobs consist of domestic service employment, such as retail clerks, hospital orderlies, waitresses and bartenders. The current income loss is compounded by the loss of medical benefits and private pensions that supplemented Social Security retirement. Thus, jobs offshoring reduced both current and future consumer income. America’s middle class jobs can be brought home by changing the way corporations are taxed. Corporate income could be taxed on the basis of whether corporations add value to their product sold in US markets domestically or offshore.

Domestic production would have a lower tax rate. Offshored production would be taxed at a higher rate. The tax rate could be set to cancel out the cost savings of producing offshore. Under long-term attack by free market economists, the Sherman Antitrust Act has become a dead-letter law. Free market economists argue that markets are self-correcting and that anti-monopoly legislation is unnecessary and serves mainly to protect inefficiency. A large array of traditionally small business activities have been monopolized by franchises and “big box” stores. Family owned auto parts stores, hardware stores, restaurants, men’s clothing stores, and dress shops, have been crowded out. Walmart’s destructive impact on Main Street businesses is legendary. National corporations have pushed local businesses into the trash bin.

How is it possible that people like Osborne get to make these decisions?

• Osborne, In Big Banks’ Pockets, Faces Wrath Of Challengers (Guardian)

George Osborne has cut state support for Britain’s working families and imposed a pay freeze on public sector workers. But when it comes to Britain’s big banks, the chancellor has proved himself to be a pushover. That much was evident from the strong hints by Standard Chartered that it was no longer thinking of removing its head office from the UK and relocating to east Asia. Why? Because Osborne kindly did what was asked of him and announced deep cuts in the government’s bank levy that will halve the tax take for the exchequer by the early 2020s. Rarely has the lobbying power of the established banks been more obvious. In the runup to the election, HSBC said it was reviewing whether to keep its HQ in London.

Standard Chartered let it be known that it, too, was so unhappy about the bank levy that it might up sticks. The result was that Osborne beat a hasty retreat in his summer budget. He announced changes to the taxation of banks, cutting the bank levy while at the same time announcing an additional corporation tax of 8% for those banks making profits of more than £25m. This had the effect of shifting the tax burden from global UK-domiciled banks like HSBC, Barclays and Standard Chartered to the smaller challenger banks, because the levy was related to the size of a bank’s balance sheet, not just in Britain but anywhere in the world. Smaller banks such as Metro, Tesco and Aldermore were not big enough to pay. Despite the cave-in, this is not mission accomplished for the chancellor.

He has solved one problem – the risk that London’s reputation as a global banking hub might be damaged by the departure of HSBC or Standard Chartered – but created another. The challenger banks are now faced with paying higher corporation tax in order to keep HSBC and Standard Chartered sweet. Predictably, they are furious about it and are lobbying Osborne to raise the profits threshold for paying the supplementary corporation tax to £250m. More competition in high street banking is a good idea. It is forcing the established players to treat their customers with a bit more respect. Osborne wants HSBC and Standard Chartered to stay in the UK but not at the expense of the challenger banks. It won’t be long before a second climbdown is announced.

That would be very good news.

• The Economist: The TPP is Dead (Naked Capitalism)

Leith van Onselen at MacroBusiness tells us:

The chief economist of The Economist magazine, Simon Baptist, believes that the Trans-Pacific Partnership (TPP) trade deal is dead following the failure of final round negotiations in Hawaii last week. Here’s Baptist’s latest commentary on the TPP from his latest email newsletter:

The latest talks on the Trans-Pacific Partnership (TPP) did not end well and election timetables in Canada and the US mean that the prospect of a deal being ratified before the end of 2016 (at the earliest) is remote. The usual problem of agricultural markets was prominent, headlined by Canada’s refusal to open its dairy sector. For New Zealand—one of the four founder countries of the TPP, along with Brunei, Chile and Singapore—this was a non-negotiable issue.

Dairy was not the only problem. As usual, Japan was worried about cars and rice, and the US about patent protection for its pharma companies. The TPP was probably doomed when the US joined, and certainly when Japan did. It then became more of a political project than an economic one. Big trade agreements had hitherto focused on physical goods, while the TPP had an aim of forging rules of trade beyond this in intellectual property, investment and services.

China was a notable absence, and the US and Japan, in particular, were keen to set these rules with enough of the global economy behind them such that China would be forced into line later on. For now, the shape of international standards in these areas remains up for grabs. The next step for the TPP, if anything, is whether a smaller group—such as the founding four —will break away and go ahead on their own, with a much smaller share of global GDP involved, and in the hope that others will join later.

Yves here. This conclusion is even more deadly than it seems, particularly coming from a neoliberal organ like the Economist. I have to confess to not reading the Economist much on this topic, precisely because the articles I did see hewed so tightly to party line: that the TPP and its ugly sister, the Transatlantic Trade and Investment Partnership, were “free trade” deals and therefore of course should be passed, since more “free trade” was always and ever a good thing. In fact, trade is already substantially liberalized, and the further GDP gains that economists could gin up using their models (which have overstated results) were so pathetically small as to amount to rounding error. Accordingly, contacts in DC told us that the business community was not pushing the deal hard: “Multinationals don’t see much benefit to be had from being able to sue Malaysia over environmental regulations.” The corporate support for the TPP in the US was thus much narrower than the cheerleading in the press would have you believe.

Not everyone seems to agree yet, but it’s there.

• Canada Is On The Verge Of A Recession (CNN)

The latest economic data from Canada shows that it is inching toward recession, after its economy posted its fifth straight month of contraction. Statistics Canada revealed on July 31 that the Canadian economy shrank by 0.2% on an annualized basis in May, perhaps pushing the country over the edge into recessionary territory for the first half of 2015. “There is no sugar-coating this one,” Douglas Porter, BMO chief economist, wrote in a client note. “It’s a sour result.” The poor showing surprised economists, who predicted GDP to remain flat, but it the result followed a contraction in the first quarter at an annual rate of 0.6%. Canada’s economy may or may not have technically dipped into recession this year – defined as two consecutive quarters of negative GDP growth – but it is surely facing some serious headwinds.

Attempts to rebound: Canada’s central bank slashed interest rates in July to 0.50%, the second cut this year, but that may not be enough to goose the economy. With rates already so low, there comes a point when interest rate cuts have diminishing returns. Consumer confidence in Canada is at a two-year low. There are other fault lines in the Canadian economy. Fears over a housing bubble in key metro areas such as Toronto and Vancouver are rising. “In light of its hotter price performance over the past three to five years and greater supply risk, this vulnerability appears to be comparatively high in the Toronto market,” the deputy chief economist of TD Bank wrote in a new report. A run up in housing prices, along with overbuilding units that haven’t been sold, and a high home price-to-income ratio has TD Bank predicting a “medium-to-moderate” chance of a “painful price adjustment.”

In other words, the bubble could deflate. Housing markets in the oil patch have already started losing value. The Calgary Real Estate Board predicts that the resale value of homes will fall by 0.2% by the end of the year. And total home sales could fall by 22% in 2015. That is a dramatic downward revision from the group’s prediction in January that home sales would rise by 1.6%. It’s all about oil: But that’s because the economic situation is much worse in the oil patch than many had predicted six months ago. And oil prices have crashed again, a detail not yet captured by the disappointing GDP figures. Crude oil (WTI) is now below $50 per barrel, and Canada’s heavy oil trades at a discount to even that low figure due to pipeline constraints and lower quality.

The Pope and The Donald.

• Pope Francis’ ‘Attendance’ At GOP Debate Will Help Sink The Party (Farrell)

We know this activist pope just won’t stop — he keeps ramping up his attack, hammering away at capitalism’s war against the poor and the environment: “In this third world war, waged piecemeal, which we are now experiencing, a form of genocide is taking place, and it must end.” Get it? In Pope Francis’ world view, WWIII has already begun, is raging, here, now, today. So no surprise that his relentless anticapitalism attacks are driving conservative critics crazy. A RawStory.com headline captured the voice of the party: “Rush Limbaugh goes bonkers because Pope Francis called out-of-control capitalism the dung of the devil.” Yes, the pope said that capitalism is the “dung of the devil.”

It’s so easy to imagine what he’ll say live to 300 GOP members of Congress next month when he appears before a join session of Congress. Pope Francis’s blunt delivery reminds us of a construction worker operating a loud jackhammer, hell-bent on dismantling the massive concrete edifice of American capitalism with deep, biting attacks like: “Men and women are sacrificed to the idols of profit and consumption: it is the ‘culture of waste.’ If a computer breaks it is a tragedy, but poverty, the needs and dramas of so many people end up being considered normal.” Warning, he’s now their champion inciting the rebellion.

Yes, Pope Francis will actually hear every dismissal voiced by GOP debaters, about how they’re ignoring what the pope says in matters of economics, social policy, global-warming science. Big mistake guys. The GOP’s days of playing deaf are over, the elephant on the 2015-16 political stage is the big guy in the white suit with the engaging smile. Dismissing him won’t work this election, he’s got an army of billions on his side.

Most Americans are right on at least something.

• Most Americans Say Their Children Will Be Worse Off (MarketWatch)

The next generation of Americans will be healthier, their parents say, all except for their finances. Barely more than one in 10 (13%) American adults believe their children will be better off financially than they were when their career reached its peak and just over half (52%) believe their children will have less disposable income than they did in the future, according to a survey of more than 1,100 American adults released Wednesday by life insurer Haven Life and research firm YouGov. What’s more, just 20% of Americans believe their children will have a better quality of life when they reach their age. “For the baby boomer generation, pocket money from mom and dad was only part of their early childhood,” says Yaron Ben-Zvi, CEO of Haven Life.

“Today’s parents are increasingly prepared to worry about and provide for their children’s financial well-being well far into their adulthoods.” (In fact, 40% of millennials say they get some kind of financial help from their parents, according to an April 2015 Bank of America/USA Today survey of 1,000 kids and 1,000 parents.) Why do parents believe that their children are faced with bigger financial challenges? They are saddled with more student loan debt than previous generations. The number of borrowers who default (those who are at least nine months past due) rose to 1.2 million annually in 2012 from around 500,000 per year a decade ago, according to the New York Fed. And many young people – especially those living in big cities – are still priced out of the housing market.

Studies also show that the better start children have in life in terms of financial support and education, the more likely they are to surpass their parents’ earnings. Children raised in low-income American families are more likely to have very low incomes as adults, while children raised in high-income families can anticipate a much bigger jump in income, according to a report – “Economic Mobility in the United States” – released last month by researchers at Stanford University. Their future is brighter in one way, parents say. Two thirds (66%) believe their kids will be as healthy or have a healthier lifestyle and, as such, will have a higher quality of life, the Haven Life/YouGov survey also found. Some 81% of millennials exercise regularly versus 61% of baby boomers, and millennials take more fitness classes, according to research group Nielsen. Unlike many of their parents, they’re also growing up in a country where smoking is banned by 36 states in workplaces, restaurants and bars.

Curious juxtaposition. Misery and holidays.

• Refugee Crisis on the Beach in Greece (NY Times)

Refugee camps are always sad, desperate places. I saw a lot of them when I was covering southern Africa for four years. But most were in desolate, poor places, not vacation islands like Lesbos, Greece, where thousands of refugees have been arriving in small inflatable boats, as upscale tourists do their best to unwind. The strangest part about covering this story was the constant juxtaposition of the European good life and the misery of people who, fleeing war and violence, now found themselves sitting among piles of garbage as they waited for their papers to be processed. My Greek colleague, Nikolas Leontopoulos, and I would meet with officials in the town of Mytilene, passing tourists who were busy picking out their favorite suntan lotion, and then an hour later we were in the back hills, where families had not eaten and the stench of clogged toilets was overwhelming.

At one point, we went to visit a good-hearted hotel owner who, driving along on a scorching hot day, came across a group of refugees walking the 30 miles to the processing station. She picked them up only to find herself arrested for “aiding smugglers.” But now she was a world away, supervising an evening of salsa for her guests. German mothers in skimpy dresses danced with their young children. Fathers watched with ice-cold beers in their hands. The sea just beyond the patio lapped gently on the shores. In the north, the beaches were littered with pools of black plastic — the boats the refugees arrived in and then punctured for fear they would be sent back. Nearby there was always a neat pile of abandoned life jackets and other flotation devices, many of them ridiculously flimsy — inflatable tubes decorated with fish — which would have done little good if the boats had capsized. There were also toothbrushes and abandoned backpacks and toys, too. People’s lives scattered around.

Debt Rattle July 31 2015

Jul 312015

July 31, 2015 Posted by Raúl Ilargi Meijer at 10:15 am Finance Tagged with: China, coup, emerging markets, EU, IMF, Italy, migrant, populist, rate hike, stocks, Syriza, Varoufakis 4 Responses »

Harris&Ewing Preparations for inauguration of Woodrow Wilson 1913

• September Is Looking Likelier for Fed’s First Rate Increase (NY Times)

• SYRIZA To Hold ‘Emergency’ Congress In September (DW)

• China’s Stocks Extend Slump in Worst Monthly Decline Since 2009

• Corporate Giants Sound Profits Alarm Over China Slowdown (FT)

• “The Virtuous Emerging Market Cycle Is Turning Vicious” (Albert Edwards)

• Italy Is The Most Likely Country To Leave The Euro (WaPo)

• The Greek Coup: Liquidity as a Weapon of Coercion (Ellen Brown)

• Greece Crisis Escalates As IMF Witholds Support For New Bail-Out (Telegraph)

• IMF Won’t Help Finance Greece Without Debt Relief (Bloomberg)

• Will The IMF Throw The Spanner In The Works? (Varoufakis)

• The Lethal Deferral of Greek Debt Restructuring (Varoufakis)

• A Most Peculiar Friendship (Varoufakis)

• The Defeat of Europe – my piece in Le Monde Diplomatique (Varoufakis)

• The Last Thing the Eurozone Needs Is an Ever Closer Union (Legrain)

• Bailout Money Goes to Greece, Only to Flow Out Again (NY Times)

• German FinMin Schäuble Wants To Reduce European Commission Remit (DW)

• The IMF’s Euro Crisis (Ngaire Woods)

• Deutsche Bank’s Hard Road Ahead (WSJ)

• Deutsche Bank Didn’t Archive Chats Used by Employees Tied to Libor Probe (WSJ)

• US Spied On Japan Government, Companies: WikiLeaks (AFP)

• Europe Could Solve The Migrant Crisis – If It Wanted (Guardian)

• Why The Language We Use To Talk About Refugees Matters So Much (WaPo)

Two big events in September?!

• September Is Looking Likelier for Fed’s First Rate Increase (NY Times)

The Federal Reserve remains on track to raise interest rates later this year, and perhaps as soon as its next policy meeting in mid-September, as economic growth continues to meet its expectations. The Fed issued an upbeat assessment of economic conditions on Wednesday after a two-day meeting of its policy-making committee. While growth remains disappointing by past standards, the Fed said the economy continued to expand at a “moderate” pace, which is driving “solid job gains and declining unemployment.” The statement suggested officials didn’t need to see much more progress before they started to increase their benchmark rate, which they have held near zero since December 2008.

The Fed, which said after the last meeting, in June, of the Federal Open Market Committee that it wanted to see “further improvement” in labor markets, said on Wednesday that “some further improvement” would now suffice. “The addition of the word ‘some’ may appear minor, but the Fed doesn’t add words willy-nilly to the F.O.M.C. statement,” wrote Michael Feroli at JPMorgan Chase. “It leaves the door wide open to a September liftoff, but still retains the optionality to delay hiking if the jobs reports disappoint between now and mid-September.” The decision to keep rates near zero for at least a few more weeks was unanimous, supported by all 10 voting members of the committee. But a number of those officials have said in recent months that they do not think the Fed should wait much longer.

The Fed’s policy committee next meets Sept. 16 and 17. Surveys of economic forecasters show that most expect the Fed to start raising interest rates at that September meeting. But measures of market expectations point to a December liftoff.[..] The Fed has kept its benchmark interest rate near zero as the main element in its campaign to revive economic growth and increase employment after the Great Recession. And it has repeatedly extended that stimulus campaign in the face of disappointing economic news, to avoid raising rates too soon. In recent months, however, officials including Janet L. Yellen, the Fed’s chairwoman, have suggested they are growing more worried about waiting too long. Economic growth has increased after a rough winter, and employment expanded by an average of 208,000 jobs a month during the first half of the year, dropping the unemployment rate to 5.3%.

Number 2.

• SYRIZA To Hold ‘Emergency’ Congress In September (DW)

The SYRIZA party is seen as sliding toward a split prompted by a rebellion by about a quarter of the party’s Left Platform legislators who voted against austerity measures that were part of the conditions agreed on July 13 in Brussels to secure up to €86 billion in new financing. According to analysts the party differences challenge Tsipras’ authority and complicate Greece’s bailout negotiations. It began when a faction of left wing SYRIZA legislators turned against Tsipras when Parliament voted on the bailout, which passed only with support from opposition parties. Thus the party congress that has been proposed by Prime Minister Tsipras is seen as a test of his leadership.

In a televised address to the central committee, Tsipras warned that the government could fall if it was not supported by its leftist deputies. “The first leftist government in Europe after the Second World War is either supported by leftist deputies, or it is brought down by them because it is not considered leftist,” he said. As conflicts arose in the central committee, a meeting was called to attempt to settle those differences over whether Tsipras should have accepted Greece’s third bailout from international creditors. The central committee meeting coincided with the arrival in Athens of the IMF’s head of mission, Delia Velculescu. According to a report in Thursday’s Financial Times, an internal document showed the IMF board had been told that Greece’s levels of debt and past record of slow or non-existent reform disqualify it for a third.

According to the leaked IMF document, the Washington based lender could take months to decide whether it will take part in a fresh bailout. The IMF’s Velculescu was due to join the other international creditors: the EC, the ECB and the European Stability Mechanism. The four institutions are due to meet Friday with Finance Minister Euclid Tsakalotos and Economy Minister Giorgos Stathakis.

..and drag everything down with them..

• China’s Stocks Extend Slump in Worst Monthly Decline Since 2009

China’s stocks fell, with the benchmark index heading for its worst monthly drop in almost six years, as the government struggles to rekindle investor interest amid a $3.5 trillion rout. The Shanghai Composite Index slid 0.8% to 3,677.83 at 1:02 p.m., dragged down by energy and industrial companies. The gauge has tumbled 14% this month, the biggest loss among 93 global benchmark gauges tracked by Bloomberg, as margin traders cashed out and new equity-account openings tumbled amid concern valuations are unsustainable. While unprecedented state intervention spurred a 18% rebound by the Shanghai Composite from its July 8 low, volatility returned on Monday when the gauge plunged 8.5%.

Outstanding margin debt on mainland bourses has fallen about 40% since mid-June, while the number of new stock investors shrank last week to the smallest since the government started releasing figures in May. Individuals account for more than 80% of stock trading in China. “The support measures may have been less effective than what Beijing imagined,” said Bernard Aw, a strategist at IG Asia. The Hang Seng China Enterprises Index of mainland shares in Hong Kong has tumbled 14% this month, poised for its worst loss since September 2011. The gauge rose 0.4% Friday, while the Hang Seng Index advanced 0.4%. The CSI 300 Index added 0.1%. Industrial & Commercial Bank of China has been the biggest drag on the Shanghai Composite this month, sinking 9.9%. China Petroleum & Chemical has tumbled 14%, while Ping An Insurance plunged 18%.

Turnover has fallen as volatility surged. The value of shares traded on the Shanghai exchange on Thursday was 53% below the June 8 peak, while a 100-day measure of price swings on the Shanghai Composite climbed to its highest in six years on Friday. Valuations remain elevated after a 29% drop by the benchmark equity gauge. The median stock on mainland bourses trades at 66 times reported earnings, higher than in any of the world’s 10 largest markets, according to data compiled by Bloomberg. That compares with a multiple of 13 in Hong Kong. “The volatility in A-share markets, which was boosted by the surge in margin financing, has made share price performance deviate from the value of stocks in unpredictable ways,” said June Lui, portfolio manager at LGM Investments. “We have been cautious on investing in A shares.”

“Companies thought that China was the land of opportunity, but it’s not living up to that promise..”

• Corporate Giants Sound Profits Alarm Over China Slowdown (FT)

Some of the world’s largest companies have sounded the alarm about the slowdown in the Chinese economy, warning that weaker growth would hit profits in the second half of the year. Car companies such as PSA Peugeot Citroën, Audi and Ford have slashed growth forecasts while industrial goods groups such as Caterpillar and Siemens have all spoken out on the negative impact of China. The warnings are a sign that China’s weaker growth and its stock market rout this month are creating a headache for global corporates that have long relied heavily on the world’s second-largest economy to drive revenues. Audi and France’s Renault both cited China as they cut their global sales targets on Thursday, with Christian Klingler at Audi parent Volkswagen, predicting “a bumpy road” in the country this year.

Peugeot slashed its growth forecast for China from 7% to 3% while earlier this week Ford predicted the first full-year sales fall for the Chinese car market since 1990. US companies have also been affected. “In Asia, the China market has clearly slowed,” said Akhil Johri, chief financial officer at United Technologies, the US industrial group at the company’s earnings call last week. “Real estate investment, new construction starts and floor space sold are all under pressure.” “Companies thought that China was the land of opportunity, but it’s not living up to that promise,” says Ludovic Subran, chief economist at Euler Hermes. “They realise the business environment is changing for the worse.”

China’s slowdown, which follows years of extraordinary growth, has been particularly startling in recent months, with figures last week showing that the country’s factory activity contracted by the most in 15 months in July. The poor figures coincide with a time of turbulence on the Chinese stock market. The Shanghai Composite shed 8.5% on Monday, its steepest drop since 2007. The fall came despite a string of interventions by Beijing to stem the slide in equities, including a ban on short selling and an interest-rate cut. In the consumer goods sector, brewer Anheuser-Busch InBev said on Thursday that volumes fell 6.5% in China as a result of “poor weather across the country and economic headwinds”. Among industrial goods companies, Schneider Electric, one of the world’s largest electrical equipment makers, reported a 12% fall in first-half profit and cut guidance because of “weak construction and industrial markets” in China.

As predicted here.

• “The Virtuous Emerging Market Cycle Is Turning Vicious” (Albert Edwards)

Investors are right to feel that the recent rout in commodity prices differs from that seen in the second half of last year. Back then there was more of a feeling that the decline in the oil price was just partly a catch-up with the weakness seen in other commodities earlier in the year and partly due to a very sharp rise in the dollar, most notably against the euro. Indeed the excellent Gerard Minack in his Downunder Daily points out that US$ strength and expanding supply have been headwinds over the past four years. But the recent sharp decline in prices has been noteworthy for its breadth: prices have fallen in all major currencies, and across all major commodity groups. This suggests that global growth has slowed.” But why?

One theme that has played out as we expected over the last year has been the rapidly deteriorating balance of payments (BoP) situation of emerging market (EM) countries, as reflected in sharply declining foreign exchange (FX) reserves (the BoP is the sum of the current account balance and private sector capital flows). We like to stress the causal relationship between swings in EM FX reserves and their boom and bust cycle. The 1997 Asian crisis demonstrated that there is no free lunch for EM in fixing a currency at an undervalued exchange rate. After a few years of export-led boom, market forces are set in train to destroy that artificial prosperity. Boom turns into bust as the BoP swings from surplus to deficit. Why?

When an exchange rate is initially set at an undervalued level, surpluses typically result in both the current account (as exports boom) and capital account (as foreign investors pour into the country attracted by fast growth). The resultant BoP surplus means that EM authorities intervene heavily in the FX markets to hold their currency down. We saw that both in the mid-1990s and before and after the 2008 financial crisis. Heavy foreign exchange intervention to hold an EM currency down creates money and is QE in all but name and underpins boom-like conditions on a pro-cyclical basis. Eventually this boom leads to a relative rise in inflation and a chronically rising real exchange rate even though the nominal rate might be fixed.

EM competitiveness is lost and the trade surplus declines or in extremis swings to large deficit. The capital account can also swing to deficit as fixed direct investment flows reverse as EM countries are no longer cost effective locations for plant. Ultimately as the BoP swings to deficit and FX reserves fall, QE goes into reverse, slowing the economy and exacerbating capital flight. As a virtuous EM cycle turns vicious (like now), commodity prices, EM asset prices and currencies come under heavy downward pressure – at which point it is difficult to discern any longer the chicken from the egg. In my view the egg was definitely laid a few years back as EM real exchange rates rose sharply and the rapid rises of FX reserves began to stall.

The MSM sets the tone of the debate by calling refugees ‘migrants’, and by calling SYRIZA and M5S ‘populist’. And no, Matt, Greece did not get to choose between Grexit and austerity, but obliteration and austerity.

• Italy Is The Most Likely Country To Leave The Euro (WaPo)

What do you call a country that has grown 4.6%—in total—since it joined the euro 16 years ago? Well, probably the one most likely to leave the common currency. Or Italy, for short. It’s hard to say what went wrong with Italy, because nothing ever went right. It grew 4% its first year or so in the euro, but almost not at all in the 15 years since. Now, that’s not to say that it’s been flat the whole time. It hasn’t. It got as much as 14% bigger as it was when it joined the euro, before the 2008 recession and 2011 double-dip erased most of that progress. But unlike, say, Greece, there was never much of a boom. There has only been a bust. The result, though, has been the same. As you can see below, Greece and Italy have both grown a meager 4.6% the past 16 years, although they took drastically different paths to get there.

Part of it is that Italy, as the IMF points out, has real structural problems. It’s hard to start a business, hard to expand one, and hard to fire people, which makes employers wary about hiring them in the first place. That’s led to a small business dystopia, where nobody can achieve the kind of economies of scale that would make them more productive. But, at the same time, Italy had these problems even before it had the euro, and it still managed to grow back then. So part of the problem is the euro itself. It’s too expensive for Italian exporters, and too restrictive for the government that’s had to cut its budget even more than it otherwise would have. This doesn’t make Italy unique—the euro has hurt even the best-run countries—but what does is that Italy’s populists have noticed.

Why is that? Well, more than anything else, the common currency has given Europe a severe case of cognitive dissonance. People hate austerity, but they love the euro even more—they have an emotional attachment to everything it stands for. The problem, though, is that the euro is the reason they have to slash their budgets so much in the first place (at least as long as the ECB will force their banks shut if they don’t). So anti-austerity parties have felt like they have to promise the impossible if they want any hope of gaining power: that they can end the budget cuts without ending the country’s euro membership.

But as Greece’s Syriza party found out, that strategy, if you want to call it one, only gives your people unrealistic expectations and Europe no reason to help you out. The other countries, after all, don’t want to reward what, in their view, is bad budgetary behavior, if not blackmail. And so Greece was all but given an ultimatum: either leave the euro or do even more austerity than it was originally told to do. It chose austerity.

Good piece by Ellen, and certainly not only because she quotes me.

• The Greek Coup: Liquidity as a Weapon of Coercion (Ellen Brown)

In the modern global banking system, all banks need a credit line with the central bank in order to be part of the payments system. Choking off that credit line was a form of blackmail the Greek government couldn’t refuse. Former Greek finance minister Yanis Varoufakis is now being charged with treason for exploring the possibility of an alternative payment system in the event of a Greek exit from the euro. The irony of it all was underscored by Raúl Ilargi Meijer, who opined in a July 27th blog:

The fact that these things were taken into consideration doesn’t mean Syriza was planning a coup . . . . If you want a coup, look instead at the Troika having wrestled control over Greek domestic finances. That’s a coup if you ever saw one. Let’s have an independent commission look into how on earth it is possible that a cabal of unelected movers and shakers gets full control over the entire financial structure of a democratically elected eurozone member government. By all means, let’s see the legal arguments for this.

So how was that coup pulled off? The answer seems to be through extortion. The ECB threatened to turn off the liquidity that all banks – even solvent ones – need to maintain their day-to-day accounting balances. That threat was made good in the run-up to the Greek referendum, when the ECB did turn off the liquidity tap and Greek banks had to close their doors. Businesses were left without supplies and pensioners without food. How was that apparently criminal act justified? Here is the rather tortured reasoning of ECB President Mario Draghi at a press conference on July 16:

There is an article in the [Maastricht] Treaty that says that basically the ECB has the responsibility to promote the smooth functioning of the payment system. But this has to do with . . . the distribution of notes, coins. So not with the provision of liquidity, which actually is regulated by a different provision, in Article 18.1 in the ECB Statute: “In order to achieve the objectives of the ESCB [European System of Central Banks], the ECB and the national central banks may conduct credit operations with credit institutions and other market participants, with lending based on adequate collateral.” This is the Treaty provision. But our operations were not monetary policy operations, but ELA [Emergency Liquidity Assistance] operations, and so they are regulated by a separate agreement, which makes explicit reference to the necessity to have sufficient collateral. So, all in all, liquidity provision has never been unconditional and unlimited.

Don’t forget there is a fourth ‘institution’ that’s party to the talks now, the ESM. It really is a quadriga.

• Greece Crisis Escalates As IMF Witholds Support For New Bail-Out (Telegraph)

Talks over an €86bn bail-out for Greece have been thrown into turmoil after just four days as the IMF said it would have no involvement in the country until it receives explicit assurances over debt sustainability. An IMF official said the fund would withhold financial support unless it has guarantees Greece can carry out a “comprehensive” set of reforms and will be the beneficiary of debt relief from its European creditors. The comments came after the IMF’s executive board was told that the institution could no longer continue pumping more money into the debtor nation, according to a leaked document seen by the Financial Times. The Washington-based Fund has been torn over its involvement in Greece – its largest ever recipient country.

The world’s “lender of last resort’ said it would continue talks with its creditor partners and the Leftist government of Athens, but made it clear the onus of keeping Greece in the eurozone now fell on Europe’s reluctant member states. “There is a need for difficult decisions on both sides… difficult decisions in Greece regarding reforms, and difficult decisions among Greece’s European partners about debt relief,” said the official. “One should not be under the illusion that one side of it can fix the problem.” The delay could last well into next year, forcing the other two-thirds of the Troika – the ECB abd EC – to bear the full costs of keeping Greece afloat.

Athens was forced to request a new IMF rescue package last week after its existing programme – which expired in March 2016 – no longer satisfied IMF conditions to ensure growth and a return to the financial markets for the crisis-ridden economy. IMF managing director Christine Lagarde escalated calls for a “significant debt restructuring” this week. Debt forgiveness has long been the institution’s key condition for extending its involvement in the country after five years of bail-outs. But Europe’s creditor powers – led by Germany – have resisted write-offs, insisting that talks on debt relief can only proceed once the Greek government has satisfied demands to raise taxes, cut pensions spending and privatise assets.

I’m wondering how much of this was preconceived.

• IMF Won’t Help Finance Greece Without Debt Relief (Bloomberg)

The IMF reiterated its unwillingness to provide more financing to Greece without debt relief by euro-member states and further reforms from the Greek government. The Washington-based lender’s management won’t support a new loan program unless Greece’s debt is sustainable in the medium term and the country’s budget is fully financed for 12 months, an IMF official told reporters Thursday on a conference call. The official spoke on condition of anonymity. The IMF will require an explicit, concrete commitment of debt relief from euro-member countries before moving forward with a new loan, the official said. European countries haven’t had detailed discussions with the IMF on a debt restructuring, according to the official.

Greek Finance Minister Euclid Tsakalotos asked the IMF for a new loan in a letter dated July 23 addressed to fund Managing Director Christine Lagarde. Greece has an active loan program with the IMF that expires in March and has about €17 billion that could still be disbursed. In agreeing to a bailout this month that could give Greece as much as €86 billion, most of it financed by euro-zone countries, Greece agreed to seek continued IMF financing beyond March. IMF staff told the fund’s executive board on Wednesday that Greece doesn’t currently qualify for a loan, the Financial Times reported Thursday, citing a confidential summary of the meeting.

And did it know this when Tsipras signed the latest agreement? Moreover, what does that mean legally?

• Will The IMF Throw The Spanner In The Works? (Varoufakis)

“IMF cannot join Greek rescue, board told”… reports Peter Spiegel from Brussels in today’s Financial Times. He adds:“Some Greek officials suspect the IMF and Wolfgang Schäuble, the hardline German finance minister, are determined to scupper a Greek rescue despite this month’s agreement to move forward with a third bailout. In a private teleconference made public this week, Yanis Varoufakis, the former finance minister, said he feared the Greek government would pass new rounds of economic reforms only for the IMF to pull the plug on the programme later this year. “According to its own rules, the IMF cannot participate in any new bailout. I mean, they’ve already violated their rules twice to do so, but I don’t think they will do it a third time,” Mr Varoufakis said. “Dr Schäuble and the IMF have a common interest: they don’t want this deal to go ahead.”

The key issue, of course, is not so much whether the IMF will be part of the deal – a typical fudge could, for instance, be concocted with the IMF providing ‘technical assistance’ to an ESM-only program. The issue is whether the promised debt relief which, astonishingly will be discussed only after the new loan agreement is signed and sealed, will prove adequate – assuming it is granted at all. Or whether, as I very much fear, the debt relief will be too little while the austerity involved proves catastrophically large.

4 different articles by Yanis today; he’s getting very prolific.

• The Lethal Deferral of Greek Debt Restructuring (Varoufakis)

The point of restructuring debt is to reduce the volume of new loans needed to salvage an insolvent entity. Creditors offer debt relief to get more value back and to extend as little new finance to the insolvent entity as possible. Remarkably, Greece’s creditors seem unable to appreciate this sound financial principle. Where Greek debt is concerned, a clear pattern has emerged over the past five years. It remains unbroken to this day. In 2010, Europe and the International Monetary Fund extended loans to the insolvent Greek state equal to 44% of the country’s GDP. The very mention of debt restructuring was considered inadmissible and a cause for ridiculing those of us who dared suggest its inevitability. In 2012, as the debt-to-GDP ratio skyrocketed, Greece’s private creditors were given a significant 34% haircut.

At the same time, however, new loans worth 63% of GDP were added to Greece’s national debt. A few months later, in November, the Eurogroup (comprising eurozone members’ finance ministers) indicated that debt relief would be finalized by December 2014, once the 2012 program was “successfully” completed and the Greek government’s budget had attained a primary surplus (which excludes interest payments). In 2015, however, with the primary surplus achieved, Greece’s creditors refused even to discuss debt relief. For five months, negotiations remained at an impasse, culminating in the July 5 referendum in Greece, in which voters overwhelmingly rejected further austerity, and the Greek government’s subsequent surrender, formalized in the July 12 Euro Summit agreement.

That agreement, which is now the blueprint for Greece’s relationship with the eurozone, perpetuates the five-year-long pattern of placing debt restructuring at the end of a sorry sequence of fiscal tightening, economic contraction, and program failure. Indeed, the sequence of the new “bailout” envisaged in the July 12 agreement predictably begins with the adoption – before the end of the month – of harsh tax measures and medium-term fiscal targets equivalent to another bout of stringent austerity. Then comes a mid-summer negotiation of another large loan, equivalent to 48% of GDP (the debt-to-GDP ratio is already above 180%). Finally, in November, at the earliest, and after the first review of the new program is completed, “the Eurogroup stands ready to consider, if necessary, possible additional measures… aiming at ensuring that gross financing needs remain at a sustainable level.”

Funny story.

• A Most Peculiar Friendship (Varoufakis)

Crises sever old bonds. But they also forge splendid new friendships. Over the past months one such friendship has struck me as a marvellous reflection of the new possibilities that Europe’s crisis has spawned. When I was living in Britain, between 1978 and 1988, Lord (then Norman) Lamont represented everything that I opposed. Even though I appreciated Margaret Thatcher’s candour, her regime stood for everything I resisted. Indeed, there was hardly a demonstration against her government that I failed to join; the pinnacle being the 1984 miners’ strike that engulfed me on a daily basis, in all its bitterness and glory.

For Lord Lamont, a stalwart conservative politician, an investment banker, and long standing Treasury and cabinet minister under both Margaret Thatcher and John Major, my ilk surely represented everything that was objectionable in the youth of the day. And yet since I became minister, and especially after my resignation, Lord Lamont has been steadfast in his support and extremely generous with his counsel. Indeed, I would be honoured if he allowed me to count him as a good friend. Fascinatingly, neither Lord Lamont nor I have changed our political spots much. He remains a solid conservative thinker and politician. And I continue to hold on to my erratic Marxism. Which brings me to the fascinating question: How is such a friendship possible?

The answer is simple: A common commitment to democracy and to the indispensability of Parliament’s sovereignty. Tories like Lord Lamont and lefties of my sort may disagree strongly on society’s ends. But we agree that rules and markets are means to social ends that can only be determined by a sovereign people through a Parliament in which that sovereignty is vested. We may disagree on the functioning, capacity and limits of markets, or even on the precise meaning of freedom in a social context. But we are as one in the conviction that monetary policy cannot de-politicised, not be allowed to determine the limits of a nation’s sovereignty. The notion that a people’s sovereignty ends when insolvency beckons is anathema to both.

Posted this yesterday as a pic, and awkward format. Here’s the text as Varoufakis posted it.

• The Defeat of Europe – my piece in Le Monde Diplomatique (Varoufakis)

Perhaps the most dispiriting experience was to be an eyewitness to the humiliation of the Commission and of the few friendly, well-meaning finance ministers. To be told by good people holding high office in the Commission and in the French government that “the Commission must defer to the Eurogroup’s President”, or that “France is not what it used to be”, made me almost weep. To hear the German finance minister say, on 8th June, in his office, that he had no advice for me on how to prevent an accident that would be tremendously costly for Europe as a whole, disappointed me. By the end of June, we had given ground on most of the troika’s demands, the exception being that we insisted on a mild debt restructure involving no haircuts and smart debt swaps.

On 25th June I attended my penultimate Eurogroup meeting where I was presented with the troika’s ‘take it or leave it’ offer. Having met the troika nine tenths of the way, we were expecting them to move towards us a little, to allow for something resembling an honourable agreement. Instead, they backtracked in relation to their own, previous position (e.g. on VAT). Clearly they were demanding that we capitulate in a manner that demonstrates our humiliation to the whole world, offering us a deal that, even if we had accepted, would destroy what is left of Greece’s social economy. On the following day, Prime Minister Tsipras announced that the troika’s ultimatum would be put to the Greek people in a referendum. A day later, on Friday 27th June, I attended my last Eurogroup meeting.

It was the meeting which put in train the foretold closure of Greece’s banks; a form of punishment for our audacity to consult our people. In that meeting, President Dijsselbloem announced that he was about to convene a second meeting later that evening without me; without Greece being represented. I protested that he cannot, of his own accord, exclude the finance minister of a Eurozone member-state and I asked for legal advice on the matter. After a short break, the advice came from the Secretariat: “The Eurogroup does not exist in European law. It is an informal group and, therefore, there are no written rules to constrain its President.” In my mind, that was the epitaph of the Europe that Adenauer, De Gaulle, Brandt, Giscard, Schmidt, Kohl, Mitterrand etc. had worked towards. Of the Europe that I had always thought of, ever since I was a teenager, as my point of reference, my compass.

It may be the best recipe for blowing up the Union, though.

• The Last Thing the Eurozone Needs Is an Ever Closer Union (Legrain)

‘Fuite en avant’ is a wonderful French expression that is hard to translate into English. Literally, it means “forward flight.” Better approximations include “headlong rush,” “panicky compulsion to exacerbate a crisis,” or even “unconsciously throwing oneself into a dreaded danger.” Faced with Berlin’s power grab to reshape the eurozone along German lines, Paris’s response has been quintessential fuite en avant: proposing even closer ties with Germany in order to try to mitigate the damage done by existing ones. But if a marriage is miserable and divorce is not yet in the cards, might it not be better to have separate bedrooms? To be fair to France’s president, François Hollande, a headlong rush toward greater intimacy has been the default response to previous crises thrown up by European integration, so it is the most common prescription now.

If a fiscal and political union is truly necessary for the eurozone to survive, as many argue, his proposal of a democratically elected eurozone government that would act as a fiscal counterpart to the ECB and – whisper it softly – curb German power may make sense. Italy’s finance minister has suggested something similar. But creating a eurozone government to bridge the economic and political divisions exacerbated by the crisis would be putting the cart before the horse. Or to put it differently, it would be seeking an institutional fix to a much deeper political conflict. Yes, well-functioning common institutions would make Europe’s dysfunctional monetary union work better: Federalism works fine in the United States and elsewhere.

But that is because there is broad political acceptance of those federal institutions’ legitimacy — which, in turn, is because the United States is a nation-state with enough of a sense of shared political community to accept majoritarian democratic rule. Unlike the eurozone. Germany and France sharing a government? Hard to imagine. Germany and Greece? Impossible. Huge numbers of Europeans are unhappy with how the eurozone works. Many don’t trust national elites, let alone European ones. Regrettably, the crisis has revived old stereotypes, such as lazy southerners, and has created new grievances, notably the Troika’s usurping national democracy. Is the solution really to concentrate more powers in Brussels, with France and others giving up even more control over their economic destiny? Is that what French people are clamoring for? Eurozone governance isn’t working, so let’s have more of it. Brilliant.

Even the NYT wakes up to reality.

• Bailout Money Goes to Greece, Only to Flow Out Again (NY Times)

Since 2010 other eurozone countries and the IMF have given Greece about €230 billion in bailout funds. In addition, the ECB has lent about €130 billion to Greek banks. The latest financial aid package is following a similar pattern to the previous ones. Only a fraction of the money, should Greece get it, will go toward healing the economy. Nearly 90% would go toward debts, interest and supporting Greece’s ailing banks. The European Commission has offered to set aside an additional €35 billion development aid package to jump-start the economy. But the funds are difficult to obtain and will become available only in small trickles later in the year. Greeks understandably feel that the latest bailout package is not likely to benefit them very much.

[..] Growth was never the primary consideration when Greece first started receiving bailouts. Back in 2010, political leaders in the eurozone as well as top officials of the IMF were terrified that Greece would default on its debts, imposing huge losses on banks and other investors and threatening a renewed financial crisis. The debt was largely held by Greek and international banks. And Greece, officials feared, could be another Lehman Brothers, the investment bank that collapsed in 2008, setting off a global panic. Forcing banks to take losses on Greek debt “would have had immediate and devastating implications for the Greek banking system, not to mention the broader spillover effects,” said John Lipsky, first deputy managing director of the I.M.F. at the time, during a contentious meeting of the organization’s executive board in May 2010, according to recently disclosed minutes.

To prevent Greece from defaulting on debts, creditors granted Athens a €110 billion bailout in May 2010. But that did not calm fears that other heavily indebted countries might also default. The Greek lifeline was soon followed by bailouts for Ireland and Portugal. When Greece again veered toward a default in summer of 2011, it got a second bailout worth €130 billion, not all of which has been disbursed. Instead of writing off those countries’ debts — standard practice when a country borrows more than it can pay — other eurozone countries and the I.M.F. effectively lent them more money. One of the main goals was to protect European banks that had bought Greek, Irish and Portuguese bonds in hopes of making a tidy profit.

The banks and investors did not escape the pain. In 2012, when Greece was again at risk of default, investors accepted a deal that paid them only about half the face value of their holdings. Much of the aid dispensed to Greece has revolved around banks. Since 2010, Greece has received €227 billion from other eurozone countries and the I.M.F. Of that, €48.2 billion went to replenish the capital of Greek banks. More than €120 billion went to pay debt and interest, and around €35 billion went to commercial banks that had taken losses on Greek debt.

Whether he said it or not, surely no FinMin should have any say in such matters. it’s utterly ridiculous that at least Merkel doesn’t tell him to shut up.

• German FinMin Schäuble Wants To Reduce European Commission Remit (DW)

German Finance Minister Wolfgang Schäuble wants to see the executive body of the EU, the European Commission (EC), lose some of the core fields of responsibility it has previously borne, such as the legal supervision of the EU domestic market, a newspaper reported on Thursday. The “Frankfurter Allgemeine Zeitung” quoted Brussels diplomats as saying that at a meeting of EU finance ministers two weeks ago, Schäuble had called for a quick discussion between EU states about how the EC could fulfil its original functions, which also include monitoring competition within the EU. Schäuble was concerned that the body’s increasing political activities made it incapable of carrying out its function of watching over the correct implementation of the European treaties, according to the report.

The paper said Schäuble has proposed setting up new, politically independent bodies to take over monitoring tasks in view of the EC’s increasing political activity as a “European government.” According to the paper’s report, Schäuble feels that EC president Jean-Claude Juncker exceeded the body’s remit in recent negotiations over new loans for Greece. The German finance minister has often stated that the EC was not empowered to negotiate over Greek loans, but that this was the task of the Eurogroup – made up of eurozone finance ministers – as the representative of European creditors, the paper said. Schäuble attracted much criticism during the recent negotiations on a third bailout for Greece because of his proposal for Greece to temporarily leave the common euro currency.

Juncker has often emphasized that he wants to lead a “political commission.” The German Finance Ministry has dismissed the report, saying that Schäuble merely thought it “important for the Commission to find the right balance between its political function and its role as guardian of the treaties.” This had nothing to do with a “disempowerment of the Commission,” the ministry said.

Having no morals eventually comes back to haunt.

• The IMF’s Euro Crisis (Ngaire Woods)

Over the last few decades, the IMF has learned six important lessons about how to manage government debt crises. In its response to the crisis in Greece, however, each of these lessons has been ignored. The Fund’s participation in the effort to rescue the eurozone may have raised its profile and gained it favor in Europe. But its failure, and the failure of its European shareholders, to adhere to its own best practices may eventually prove to have been a fatal misstep. One key lesson ignored in the Greece debacle is that when a bailout becomes necessary, it should be done once and definitively. The IMF learned this in 1997, when an inadequate bailout of South Korea forced a second round of negotiations. In Greece, the problem is even worse, as the €86 billion ($94 billion) plan now under discussion follows a €110 billion bailout in 2010 and a €130 billion rescue in 2012.

The IMF is, on its own, highly constrained. Its loans are limited to a multiple of a country’s contributions to its capital, and by this measure its loans to Greece are higher than any in its history. Eurozone governments, however, face no such constraints, and were thus free to put in place a program that would have been sustainable. Another lesson that was ignored is not to bail out the banks. The IMF learned this the hard way in the 1980s, when it transferred bad bank loans to Latin American governments onto its own books and those of other governments. In Greece, bad loans issued by French and German banks were moved onto the public books, transferring the exposure not only to European taxpayers, but to the entire membership of the IMF.

The third lesson that the IMF was unable to apply in Greece is that austerity often leads to a vicious cycle, as spending cuts cause the economy to contract far more than it would have otherwise. Because the IMF lends money on a short-term basis, there was an incentive to ignore the effects of austerity in order to arrive at growth projections that imply an ability to repay. Meanwhile, the other eurozone members, seeking to justify less financing, also found it convenient to overlook the calamitous impact of austerity. Fourth, the IMF has learned that reforms are most likely to be implemented when they are few in number and carefully focused. When a country requires assistance, it is tempting for lenders to insist on a long list of reforms. But a crisis-wracked government will struggle to manage multiple demands.

Split it up already.

• Deutsche Bank’s Hard Road Ahead (WSJ)

There’s an old joke in which a tourist asks the way to some pleasant town and gets the answer: “Well, I wouldn’t start from here.” Deutsche Bank’s new leadership should appreciate that more than most. John Cryan, the new chief executive, and the equally new chief financial officer, Marcus Schenck, have one of the biggest jobs among global banks in terms of the cuts needed to both its balance sheet and its cost base. They also, like many other big, global banks must wrestle with a business model in which investors seemingly have lost faith—Deutsche’s stock hasn’t traded above book value since the financial crisis.

Investors will be updated in late October on how these two think they can reshape the bank. Investors will hope for something better than a return on tangible equity of more than 10% in the medium term, which was the miserable target announced before the leadership change in April. One thing investors were told by Mr. Cryan in his first results briefing Thursday is that they shouldn’t have to stump up yet more equity following the bank’s €8 billion rights issue last year. This could prove a challenge to fulfill, though, despite the healthier activity seen in the first half. This pushed Deutsche’s revenues up 20% from a year earlier. Unfortunately, the bank’s costs remain stubbornly high. In the first half, these were equal to 70% of revenue, even excluding hefty legal charges related to the interbank lending rate scandal.

Meanwhile, cutting the bank’s complexity and inefficiencies could take years by Mr. Cryan’s admission. Until this is done, Deutsche will struggle to generate much capital. The bank is actually in a reasonable position on the risk-based capital measure: its core equity tier one capital ratio is 11.4%. However, its leverage ratio is just 3.6% against a target of 5%. And in its largest unit, the investment bank, the leverage ratio is even worse at less than 3%. Changing that will still require a big cut in the investment bank’s assets and liabilities. Mr. Cryan says he will change the bank’s fortunes by weaning it off an overreliance on the balance sheet to generate revenues.

Fine it $100 billion, see what’s left after that.

• Deutsche Bank Didn’t Archive Chats Used by Employees Tied to Libor Probe (WSJ)

A month after reaching a $2.5 billion settlement over interest rate rigging, Deutsche Bank AG told regulators its disclosures may have been incomplete because it accidentally failed to archive electronic chats involving its employees, people familiar with the matter said. The bank is working to recover the records from its systems but might have permanently lost an unknown number of chats dating back to 2005, the people said. The disclosure poses a new regulatory headache for the German lender. Deutsche Bank already has been criticized by regulators for shortcomings in retaining data, including the destruction of hundreds of audiotapes that U.K. regulators said could have been relevant to their investigation into manipulation of the London interbank offered rate, or Libor.

Deutsche Bank disclosed the problem to regulators, including the New York Department of Financial Services, in May, a month after the bank entered into the settlement with a handful of authorities in the U.S. and the U.K., the people familiar with the matter said. “After we discovered this software defect in one of our internal messaging systems, we reported it to our regulators and are presently working with them to rectify it,” the bank said in an emailed statement. “We have been able to recover a majority of the chats via a backup system.” The bank expects the recovery process to be complete in about a month, one of the people familiar with the matter said.

Deutsche Bank so far hasn’t found any communications the bank considers new or relevant to the Libor investigation, one of the people said. The Department of Financial Services, New York state’s top banking regulator, has begun a probe of the incident. It is examining whether potential violations that should have been covered by the Libor settlement weren’t reported because of the error, according to one of the people familiar with the matter. The office is also investigating whether or not the error was intentional and when the bank discovered it.

Think Abe was surprised to see this?

• US Spied On Japan Government, Companies: WikiLeaks (AFP)

The US spied on senior Japanese politicians, its top central banker and major companies including conglomerate Mitsubishi, according to documents released Friday by WikiLeaks, which published a list of at least 35 targets. The latest claim of US National Security Agency espionage follows other documents that showed snooping on allies including Germany and France. There is no specific mention of wiretapping Prime Minister Shinzo Abe but senior members of his government, including Trade Minister Yoichi Miyazawa and Bank of Japan governor Haruhiko Kuroda were targets of the bugging by US intelligence, WikiLeaks said.

Japan is one of Washington’s key allies in the Asia-Pacific region and they regularly consult on defence, economic and trade issues. The spying goes back at least as far as Abe’s brief first term, which began in 2006, WikiLeaks said. Abe swept to power again in late 2012. “The reports demonstrate the depth of US surveillance of the Japanese government, indicating that intelligence was gathered and processed from numerous Japanese government ministries and offices,” it said. “The documents demonstrate intimate knowledge of internal Japanese deliberations” on trade issues, nuclear and climate change policy, among others, it added.

Europe has no morals.

• Europe Could Solve The Migrant Crisis – If It Wanted (Guardian)

Refugees from many countries – not just Sudan but Syria, Eritrea, Afghanistan and beyond – are taking clandestine journeys across Europe in search of a country that will give them the chance to rebuild their lives. Living in Britain and watching what unfolds in Calais – such as the revelation that in recent days there have been 1,500 attempts by migrants to enter the Channel tunnel – it can seem as if they’re all heading here, but in reality Britain ranks mid-table in the proportion of asylum claims it receives relative to population. The number of refugees at Calais has grown because the number of refugees in Europe as a whole has grown. For the most part, their journeys pass unseen, until they hit a barrier – the English Channel; the lines of police at Ventimiglia on the Italy-France border; the forests of Macedonia – that creates a bottleneck and leads to scenes of destitution and chaos.

The political rhetoric that surrounds these migrants makes it harder to understand why they take such journeys. Often when government ministers are called on to comment, they will try to make a distinction between refugees (good) and “economic migrants” (bad). But a refugee needs to think about more than mere survival – like the rest of us, they’re still faced with the question of how to live. What they find when they reach Europe is a system best described as a “lottery”. In theory the EU has a common asylum system; in reality it varies hugely, with different countries more or less likely to accept different nationalities and with provisions for asylum seekers ranging from decent homes and training to support integration in some countries, to tent camps or detention centres, or being left to starve on the street, in others.

Countries that bear the brunt of new waves of migration, such as Italy, Bulgaria or Greece, find little solidarity from their richer neighbours. The EU spends far more on surveillance and deterrence than on improving reception conditions. For as long as these inequalities continue, refugees will keep on moving. This is a crisis of politics as much as it is one of migration, and I think it will develop in one of two ways. Either Europe will continue to militarise its borders and squabble over resettlement quotas of refugees as if they were toxic waste; or we will find the courage and leadership to create a just asylum system where member states pull together to ensure that refugees are offered a basic standard of living wherever they arrive.

The first option, though alluring to many, will only intensify the chaos it’s supposed to protect us from: we put up a fence at Greece’s land border with Turkey, so refugees take to the Mediterranean instead. Britain and France accuse each other of being a soft touch on asylum seekers, so they allow the situation in Calais to fester. For as long as refugees are treated as a burden, they will be the target of racism and violence.

I repeat: the MSM sets the tone of the debate by calling refugees ‘migrants’, and by calling SYRIZA and M5S ‘populist’.

• Why The Language We Use To Talk About Refugees Matters So Much (WaPo)

In an interview with British news station ITV on Thursday, David Cameron told viewers that the French port of Calais was safe and secure, despite a “swarm” of migrants trying to gain access to Britain. Rival politicians soon rushed to criticize the British prime minister’s language: Even Nigel Farage, leader of the anti-immigration UKIP party, jumped in to say he was not “seeking to use language like that” (though he has in the past). Cameron clearly chose his words poorly. As Lisa Doyle, head of advocacy for the Refugee Council puts it, the use of the word swarm was “dehumanizing” – migrants are not insects. It was also badly timed, coming as France deployed riot police to Calais after a Sudanese man became the ninth person in less than two months to die while trying to enter the Channel Tunnel, an underground train line that runs from France to Britain.

Much of the outrage over the British leader’s comments misses an important point, however: Cameron is far from alone when it comes to troubling use of language to describe the world’s current migration crisis. Language is inherently political, and the language used to describe migrants and refugees is politicized. The way we talk about migrants in turn influences the way we deal with them, with sometimes worrying consequences. Consider even the most basic elements of the language about migration. Writing in the Guardian earlier this year, Mawuna Remarque Koutonin asked why white people were often referred to as expatriates. “Top African professionals going to work in Europe are not considered expats,” Koutonin wrote. “They are immigrants.” [..]

There are worries that even “migrant,” perhaps the broadest and most neutral term we have, could become politicized. Trilling pointed out that Katie Hopkins, a controversial British writer and public figure, likened migrants to “cockroaches” in a column published in the Sun. “As both government policy and political rhetoric casts these people as undesirables — a threat to security; a criminal element; a drain on resources — the word used to describe them takes on a new, negative meaning,” Trilling says. Words such as “swarm” or “invasion” can also have implications just as negative when used in connection to refugees. James Hathaway at the University of Michigan Law School, says that these words are “clearly meant to instill fear.” That’s dangerous because the situation in Calais is already inflamed and full of fear: British tabloids are even calling for Cameron to send in the army, as if the migrants represented a foreign power preparing to invade.

Debt Rattle June 13 2015

Jun 132015

June 13, 2015 Posted by Raúl Ilargi Meijer at 9:56 am Finance Tagged with: chimps, emerging markets, euro, fast-track, Greece, Magna Carta, Merkel, Obama, Schäuble, trade bill 8 Responses »

Lewis Wickes Hine Night scene in Cumberland Glass Works, Bridgeton, NJ 1909

• Investors Yank $9.3 Billion From Emerging Markets, Most in 7 Years (WSJ)

• Fed Tantrum Sets Off Biggest Exodus From Emerging Markets Since 2008 (AEP)

• Is Deutsche Bank The Next Lehman? (NotQuant.com)

• Obama Suffers Stunning Loss As Democrats Defeat Trade Bill (LA Times)

• Trade Bill Defeat Casts Doubt On EU-US Deal (Politico)

• The Euro Won’t Survive Unless The EU Ends Greece’s Humanitarian Crisis (Bibow)

• Greece: Default Ahead? (Jacques Sapir)

• Brewing Conflict over Greece: Schäuble Mulls Taking on Merkel (Spiegel)

• Crisis Changes Greeks’ Consumer Behavior (Kathimerini)

• Happy Birthday Magna Carta (Paul Craig Roberts)

• Why Do We Celebrate Rising Home Prices? (Mises Inst.)

• Trapped In A Bubble (Golem XIV)

• Academics Attack George Osborne Budget Surplus Proposal (Guardian)

• Australian Workers ‘Stressed And Fat’ (BBC)

• California Moves To Restrict Water Pumping By Pre-1914 Rights Holders (LA Times)

• Canada, Tomorrow’s Superpower (Bloomberg)

• US Will Call All Chimps ‘Endangered’ (NY Times)

Flowing to America.

• Investors Yank $9.3 Billion From Emerging Markets, Most in 7 Years (WSJ)

Emerging markets are out of favor. Global investors have yanked $9.3 billion from stocks in developing countries in the week to Wednesday, the most since the depths of the global financial crisis in 2008. Asia has been particularly vulnerable with $7.9 billion pulled out of the region’s equity markets, the most in almost 15 years, according to data provider EPFR Global. Financial markets in emerging markets have been grinding weaker with currencies trading at their weakest levels in years, and bonds have been caught in the riptide too. Including bonds, investors have pulled out the most money since 2013’s “taper tantrum.” The dangers of emerging markets are well-known to investors and analysts, but the magnitude of this selloff has caught many by surprise.

It follows a selloff in Treasurys and German bunds that has rocked global sentiment, and comes ahead of the U.S. Federal Reserve raising interest rates later this year that is likely to send money back to developed markets. “Money is gradually leaving emerging markets, including Asia,” said Paul Chan at Invesco. “It’s a repeat of 2013, but this time we are slowly pricing in the eventual rate hike.” Mr. Chan’s fund has been cutting its investments in Southeast Asia but adding in South Korea this year. It has been overweight on China and India in recent years. Analysts say emerging-market equity-fund managers are increasingly feeling the pain of plummeting currencies in the region, which cuts into investors’ returns in stocks and bonds. “Currency is a major culprit,” Goldman Sachs analysts said. The U.S. bank forecasts another 4% drop in emerging-market currencies against the U.S. dollar over the next year.

“..a “margin call” on $9 trillion of off-shore dollar debt, a figure that has exploded from $2 trillion fifteen years ago. ”

• Fed Tantrum Sets Off Biggest Exodus From Emerging Markets Since 2008 (AEP)

Investors are withdrawing money from emerging markets at the fastest rate since the global financial crisis, raising the risk of a ‘sudden stop’ in capital flows as the US Federal Reserve prepares to turn off the spigot of cheap dollar liquidity. Data from the tracking agency EPFR show that equity funds in Asia, Latin America, and the emerging world bled $9.27bn in the week up to June 10, surpassing the exodus in the ‘taper tantrum’ in mid-2013 when the Fed first began to hint at monetary tightening. Jonathan Garner from Morgan Stanley said outflows from onshore-listed equity funds in China reached $7.12bn, the highest ever recorded in a single week. Brazil and Korea also saw large losses. The pace has quickened dramatically as the US economy gathers steam after a growth scare earlier this year.

Signs of incipient wage inflation bring forward the long-feared inflexion point when the Fed finally raises rates for the first time in eight years. Morgan Stanley said its US tracking indicator for GDP growth in the second quarter has jumped from 1.5pc to 2.7pc over the last week and a half alone as a blizzard of strong figures changes the outlook entirely. The University of Michigan’s index of consumer sentiment roared back to life in June, jumping from 90.7 to 94.6. It follows news of a surge in US retail sales in May. Small investors have been pulling funds out of emerging markets for several months but the big pension funds and institutions have until now held firm. There is a danger that these giants could suddenly start for rushing for narrow exits at the same time.

The International Monetary Fund warned in its Global Financial Stability Report in April that the asset management industry now has $76 trillion worth of investments, equal 100pc of world GDP. These funds are prone to “herding” behaviour, and have vastly increased their holdings of emerging market bonds and equities The IMF fears a “liquidity storm” once the Fed starts to tighten, causing them to pull out en masse. It has repeatedly called on EM economies to beef up their defences and curb ballooning credit before it is too late. The great worry is what will happen if Fed action causes the dollar to spike dramatically and drives up global borrowing costs, transmitting a double shock through the international financial system.

This would amount to a “margin call” on $9 trillion of off-shore dollar debt, a figure that has exploded from $2 trillion fifteen years ago. The Bank for International Settlements estimates that emerging markets now account for €4.5 trillion of this dollar debt, an unprecedented sum that escaped control over the last seven years as cheap liquidity from zero rates and quantitative easing in the West spilled into Asia, Latin America, and the rest of the EM nexus. Many of these countries were unable to defend themselves against a flood of capital, much of it on offer at a real rates of just 1pc, far too low for conditions in fast-growing countries that were then overheating. The inflows set off credit booms that are now unwinding painfully.

And to think Deutsche was bailed out at the expense of the Greek people…

• Is Deutsche Bank The Next Lehman? (NotQuant.com)

Looking back at the Lehman Brothers collapse of 2008, it’s amazing how quickly it all happened. In hindsight there were a few early-warning signs, but the true scale of the disaster publicly unfolded only in the final moments before it became apparent that Lehman was doomed. First, for purposes of drawing a parallel, let’s re-cap the events of 2007-2008: There were few early indicators of Lehman’s plight. Insiders however, were well aware: In late 2007, Goldman Sachs placed a massive proprietary bet against Lehman which would be known internally as the “Big Short”. (It’s a bet that would later profit from during the crisis). In the summer 2007 subprime loans were beginning to perform poorly in the marketplace.

By August of 2007, the commercial paper market saw liquidity evaporating quickly and funding for all types of asset-backed security was drying up. But still – even in late 2007, there was little public indication that Lehman was circling the drain. Probably the first public indication that things were heading downhill for Lehman wasn’t until June 9th, 2008, when Fitch Ratings cut Lehman’s rating to AA-minus, outlook negative (ironically, 7 years to the day before S&P would cut DB). The “negative outlook” indicates that another further downgrade is likely. In this particular case, it was the understatement of all time. A mere 3 months later, in the course of just one week, Lehman would announce a major loss and file for bankruptcy. And the rest is history.

Could this happen to Deutsche Bank? First, we must state the obvious: if Deutsche Bank is the next Lehman, we will not know until events are moving at an uncontrollable and accelerating speed. The nature of all fractional-reserve banks — who are by definition bankrupt at all times – is to project an aura of stability until that illusion has already begun to implode. By the time we are aware of a crisis – if one is in the offing — it will already be a roaring blaze by the time it is known publicly. It is by now well-established that truth is the first casualty of all banking crises. There will be little in the way of early warnings. [..]

How exposed is Deutsche Bank? The trouble for Deutsche Bank is that its conventional retail banking operations are not a significant profit center. To maintain margins, Deutsche Bank has been forced into riskier asset classes than its peers. Deutsche Bank is sitting on more than $75 Trillion in derivatives bets — an amount that is twenty times greater than German GDP. Their derivatives exposure dwarfs even JP Morgan’s exposure – by a staggering $5 trillion. With that kind of exposure, relatively small moves can precipitate catastrophic losses. Again, we must note that Greece just missed it’s payment to the IMF – and further defaults are most certainly not beyond the realm of possibility.

Not a lot of love lost there.

• Obama Suffers Stunning Loss As Democrats Defeat Trade Bill (LA Times)

President Obama’s ambitious trade agenda unraveled Friday in a stunning setback delivered by his own party as the House rejected an important piece of a package aimed at fast-tracking a controversial trade pact he is pursuing with 11 other Pacific Rim nations. Hoping to salvage what could be a key part of his legacy, Obama dashed to Capitol Hill before the vote Friday for a rare early morning meeting with Democrats. But amid fears that a trade deal would hurt American workers, even Obama’s dramatic personal intervention failed to generate the Democratic votes needed to bolster his unusual alliance with pro-trade Republicans.

The White House dismissed the vote as a “procedural snafu” and vowed to salvage the trade legislation when the House votes again next week. But the unusual defeat at the hands of the increasingly defiant liberal wing of the Democratic Party was seen as a sign of Obama’s waning influence as he approaches his final two years in office. “This is not about the president,” said Rep. Rosa DeLauro (D-Conn.), the liberal stalwart who led the opposition. “It really is all about what [lawmakers] heard from their own people, what they thought was the right thing to do.”

It could threaten all these criminal trade deals.

• Trade Bill Defeat Casts Doubt On EU-US Deal (Politico)

Japan, the European Union and other countries have been waiting years for a clear signal that President Barack Obama had the political muscle to get trade deals through Congress. They got the opposite on Friday, when Obama trekked up to Capitol Hill to plead for his trade agenda and got smacked down by fellow Democrats. That spells trouble for the proposed Trans-Pacific Partnership, a massive pact covering about 40% of world economic output. The failure of the trade bill also casts doubt on the sprawling European trade negotiations, and will make other nations less likely to trust the Obama administration’s ability to negotiate everything from auto tariffs to currency rules around the world.

Unless Obama gets the “fast track” trade promotion authority bill, there’s no end in sight for the Asia-Pacific talks between the United States, Japan, Vietnam and nine other countries, U.S. Trade Representative Michael Froman acknowledged earlier this week. Canada hasn’t even made an agricultural offer in the TPP talks and isn’t likely to do that anytime soon if Obama doesn’t get fast track. “None of the countries are willing to come to the table, have another meeting and put their final offers on the table, until they see us having TPA,” the top U.S. trade official told the President’s Export Council. “They’ve made that clear, and you can understand why. All these final issues require very difficult decisions in their own systems, and they’re only willing to do that if they feel like we have the political support here to move this forward.”

“The euro will not survive as a prison – if not a torture chamber.”

• The Euro Won’t Survive Unless The EU Ends Greece’s Humanitarian Crisis (Bibow)

It would be unfortunate for the IMF to be the party to pull the trigger in the ongoing Greek drama, just as it would be wrong for the ECB to find itself in that position. It is for no one else but Europe’s democratically elected governments to accept their shared responsibility for past mistakes – and embark on a path that promises a better future for all involved. The Greek people acknowledge that their current predicament is partly due to their society’s own failings. Even after overcoming military dictatorship and joining the EU, Greek governments generally prioritized securing the wealth and power of a small oligarchy through favoritism and corruption. This includes previous Greek governments that the “troika” chose to cooperate with in the past five years, which made no real effort to break with the past of pervasive corruption and tax evasion, and were not required to do so, either, as long as they collaborated in imposing austerity and arranging for fire sales of Greek assets.

The Syriza government has committed to reforming Greece and the ways in which it governs itself. Greece will need the support of its euro partners to erase corruption and tax evasion, for instance. The conditionality of loans should focus on what are the true structural problems of the Greek economy. And external help may well need to encompass administrative support and effective surveillance in these critical areas. But Greece does not need pressure for even deeper cuts in pensions and wages when almost half of its pensioners are already living below the poverty line, and wage cuts in the order of 20% or more have not boosted employment but propelled unemployment into inhumane territory instead.

By contrast, creditor countries, foremost Germany, have yet to acknowledge that they and their preferred austerity policies share part of the “schuld” (German for guilt) and hence should also shoulder part of the “schulden” (German for debt) that continue to suffocate Greece, preventing its renaissance and holding its people hostage in what has become Europe’s euro disgrace. German Chancellor Angela Merkel will finally need to explain to the German people what really went wrong with the euro and that the matter is truly one of shared responsibility. Failure to end Europe’s euro disgrace, the ongoing humanitarian crisis in Greece, is bound to turn the euro itself into Europe’s disgrace. The euro will not survive as a prison – if not a torture chamber. Rather, it must be a means to shared prosperity.

Quite different from the usual analysis.

• Greece: Default Ahead? (Jacques Sapir)

A Greek default would imply not only a radical devaluating of the Greek debts held bilaterally by various States of the Eurozone or held by the MES, but also the impossibility to use these titles as collateral within the mechanism of emergency liquidity assistance (ELA) created by the European Central Bank. The default would entail the immediate suspension of the ELA and would force the Greek government to use monetary instruments constituting a proto-currency and which, within weeks, would become an alternative currency. Let’s note that, in this scenario, the Greek government is compelled to create these instruments and that it can claim that it is doing so under duress, imposed by the attitude of the ECB.

Openly, the Greek government could continue to claim that it wants to stay within the Eurozone, while setting afoot the process which will in fact result in re-creating the Drachma. The Greek government could continue to claim that it did not want this default and this exit from the Euro, while preparing to cash in on the benefits from these events. And these benefits are far more considerable than what is being thought and said. The consequences of a default would be distinctly greater for the partners of Greece than for Greece itself. Considerable sums have left Greece since February. It is estimated at present that over €30 billion have left Greece since February, owned by Greek players, landing on foreign bank accounts.

Once the Drachma is created, these sums would return to Greece and, given the depreciation of the Drachma relatively to the Euro, the players (businesses and households) who had brought these liquidities out of the country, would gain in purchasing power in Greece. One can expect that the Greek government could then establish a control on exchange and skim off a small tax (5%) on these returns, which would allow households and businesses to legalize part of their assets, while giving the Greek government additional financial means to compensate that part of the population which has not been able to bring liquidities out of the country. This “return” of the money held abroad might well be the equivalent of what the Greek government asked of the European Union, that is, an investment plan.

Taking into account the amelioration in the competitiveness of Greek exports because of the depreciation of the Drachma, the positive effect of this mechanism might well be considerable. Of course, Greece will have to face an imported inflation shock. But, for a depreciation of 30% of the Drachma in relation to the Euro, this shock should not exceed 6% to 8% during the first year, and certainly less (4% to 6%) the second year. On the other hand, the positive effects on the economy (and on the sector of tourism particularly) might be quite extensive.

Merkel’s way late in confronting Schäuble.

• Brewing Conflict over Greece: Schäuble Mulls Taking on Merkel (Spiegel)

Schäuble is something of an éminence grise in the German government: He became a member of parliament in 1972, when Merkel was preparing to graduate from high school in Templin. In 1998, as head of the CDU/CSU parliamentary group in the Bundestag, he made Merkel his secretary general, but then became enmeshed in the CDU donations scandal. Merkel succeeded him in 2000. Although she’s the one in charge, he intermittently makes it clear that he remains his own man; that he doesn’t kowtow to anyone. Appointed finance minister in 2009, Schäuble remarked that Merkel likes to surround herself with people who were uncomplicated, but that he himself was not uncomplicated. He tends to be a little derisory about Merkel, admiring her hunger for power but deeming her too hesitant when the chips are down.

The euro crisis first drove a wedge between them in 2010, when they disagreed on the IMF’s contribution to the Greek rescue fund. Schäuble was against it, on the grounds that Europe should sort out its problems by itself. Merkel, however, was keen to enlist the help of a body that has clear criteria when it comes to offering aid, and which would therefore prevent the Europeans from making one concession after another. Merkel prevailed. But they’ve now traded positions. Schäuble believes that enough concessions have been made to Greece and he’s bolstered by the frustration currently rife in his parliamentary group over Merkel’s strategy. It will be hard for Merkel to secure majority support if he opposes her, so her fate is effectively in his hands.

Both of them understand the stakes, which is why they are both at pains to keep their disagreement under wraps. Whenever he’s asked if he has fallen out with Merkel, Schäuble likes to pull a shocked expression, respond with a barrage of insults and throw out terms such as “amateur economist” – although this isn’t necessarily as bad as it sounds, given that Schäuble describes himself as a “middling economist,” at least in comparison to the “great economist” Yanis Varoufakis. When it got out that Schäuble had not been invited to a recent summit at the Chancellery of the Troika, his spokesman Martin Jäger played down the snub. Government spokesman Steffen Seibert, meanwhile, insisted that “the Chancellor and the Finance Minister have an excellent working relationship that is both friendly and trusting.”

Duh!

• Crisis Changes Greeks’ Consumer Behavior (Kathimerini)

Once-profligate Greeks have radically changed their consumer habits since the start of the crisis, becoming more frugal in their purchases, even when it comes to basic necessities, and it appears that what started as a response to straitened times may become entrenched in a more permanent pattern. Indeed, as the crisis drags on, the number of Greeks who are more cautious with their purchases is on the rise, not just as a result of the toll the crisis has taken on their budgets but also to a great degree because they are starting to develop a more mature consumer conscience – albeit as a result of the violent adjustment to austerity.

The data in the latest study of consumer behavior by the Marketing Laboratory of the Athens University of Economics and Business (AUEB) are revealing. The study period began in November 2014 and ended on January 31, 2014, and was based on phone interviews with 1,437 consumers. According to the findings, seven in 10 consumers now restrict their purchases to the bare necessities, slightly more than two years ago, when the figure was six in 10. This trend has had a significant impact on the sales of products that fall into the “spontaneous purchases” category, such as sweets, snacks and chewing gum. Also 74% said they purchase fewer items.[..]

On the subject of supermarkets, the study found that poorer households with a monthly income of €1,000 or less spend more than a quarter of their income on supermarket purchases, explaining the overall change in consumer behavior noted over the past few years. The reason is simple: While prices have gone down, they have done so at a much smaller rate than incomes. [..] “What the data suggest is that the high prices at supermarkets are a much bigger social problem than high prices in other sectors of the economy as purchases there concern basic goods and the burden is heavier on the poorest households,” notes Giorgos Baltas, the coordinator of the study and director of the university’s postgraduate marketing and communication program.

“Western capitalism is a looting mechanism. Greece is being looted as was Ireland, and Italy and Spain will not escape looting unless they renege on their debts and leave the EU.”

• Happy Birthday Magna Carta (Paul Craig Roberts)

Monday, June 15, 2015, is the 800th anniversary of Magna Carta.[..] Beginning with the Clinton Administration and rapidly accelerating with the George W. Bush and Obama regimes and Tony Blair in England, the US and UK governments have run roughshod over their accountability to law. Both the US and UK in the 21st century have gone to numerous wars illegally under the Nuremberg Standard established by the US and UK following Germany’s defeat in WWII and used to execute Germans for war crimes. The US and UK claim that unlike Germany they are immune to the very international law that they themselves established in order to punish the defeated Germans. Washington and London can bomb and murder at will, but not Germany.

Both governments illegally and unconstitutionally (the UK Constitution is unwritten) spy on their citizens, and the Bush and Obama executive branches have eviscerated, with the complicity of Congress and the federal courts, the entirely of the US Constitution except for the Second Amendment, which is protected by the strong lobby of the National Rifle Association. If the gun control “progressives” have their way, nothing will be left of the US Constitution. Washington and its European satellites have subordinated law to a political and economic hegemonic agenda. Just as under the heyday of colonialism when the West looted the non-white world, today the West loots its own. Greece is being looted as was Ireland, and Italy and Spain will not escape looting unless they renege on their debts and leave the EU.

Western capitalism is a looting mechanism. It loots labor. It loots the environment, and with the transpacific and transatlantic “partnerships” it will loot the sovereign law of countries. For example, France’s laws against GMOs become “restraints on trade” and subjects France to punitive law suits by Monsanto. A new slave existence is being created in front of our eyes as law ceases to be a shield of peoples and becomes a weapon in the hands of government. Eight hundred years of reform is being overturned as Washington and its vassals invade, bomb, and overthrow governments that are out of step with Washington’s agenda. Formerly self-sufficient agricultural communities are becoming wage slaves for international agribusiness corporations. Everywhere privilege is rising above law and justice is being lost.

Because the media tell us to.

• Why Do We Celebrate Rising Home Prices? (Mises Inst.)

In recent years, home price indices have seemed to proliferate. Case-Shiller, of course, has been around for a long time, but over the past decade, additional measures have been marketed aggressively by Trulia, CoreLogic, and Zillow, just to name a few. Measuring home prices has taken on an urgency beyond the real estate industry because for many, home price growth has become something of an indicator of the economy as a whole. If home prices are going up, it is assumed, “the economy” must be doing well. Indeed, we are encouraged to relax when home prices are increasing or holding steady, and we’re supposed to become concerned if home prices are going down. This is a rather odd way of looking at the price of a basic necessity.

If the price of food were going upward at the rate of 7 or 8% each year (as has been the case with houses in many markets in recent years) would we all be patting ourselves on the back and telling ourselves how wonderful economic conditions are? Or would we be rightly concerned if incomes were not also going up at a similar rate? Would we do the same with shoes and clothing? How about with education? With housing, though, increases in prices are to be lauded, we are told, even if they outpace wage growth. But in today’s economy, if home prices are outpacing wage growth, then housing is becoming less affordable. This is grudgingly admitted even by the supporters of ginning up home prices, but the affordability of housing takes a back seat to the insistence that home prices be preserved at all costs.

Behind all of this is the philosophy that even if the home-price/household-income relationship gets out of whack, most problems will nevertheless be solved if we can just get people into a house. Once someone becomes a homeowner, the theory goes, he’ll be sitting on a huge asset that (almost) always goes up in price, meaning that any homeowner will increase in net worth as the equity in his home increases. Then, the homeowner can use that equity to buy furniture, appliances, and a host of other consumer goods. With all that consumer spending, the economy takes off and we all win. Rising home prices are just a bump in the road, we are told, because if we can just ge everyone into a home, the overall benefit to the economy will be immense.

Not surprisingly, we find a sort of crude Keynesianism behind this philosophy. In this way of thinking, the point of homeownership is not to have shelter, but to acquire something that will encourage more consumer spending. In other words, the purpose of homeownership is to increase aggregate demand. The fact that you can live in the house is just a fringe benefit. This macro-obsession is part of the reason why the government has pushed homeownership so aggressively in recent decades. The fly in the ointment, of course, is if home prices keep going up faster than wages -ceteris paribus- fewer people will be able to save enough money to come up with either the full amount or even a sizable down payment on a loan.

Excellent.

• Trapped In A Bubble (Golem XIV)

Caterpillar (CAT) had been using more and more of its cash to buy back its own shares inflating the apparent demand for them and therefore their price. It’s not illegal, but what does it do for the idea that share price indicates what a company is worth? And where was CAT getting the money with which to buy those shares? I doubt it was from profits given the long cumulative decline in sales. More likely it was from selling bonds i.e. using borrowed money. And indeed that seems to be the case. In May of 2014 CAT sold $2 billion of debt some of it dated as long as 50 years. So let’s take a look at what we have. In May of 2014, despite having already suffered a year of declining sales, CAT shares were the second best performing shares on the Dow Jones.

Who was so keen to buy all their shares? Who knows. But CAT itself had just spent $175 million in buying their own shares in the first quarter (when it was the second best performing share on the DOW) and in the last quarter of the year went on to buy another 250 million dollars worth. In fact, and perhaps most critically, in January the CAT board had authorized $12 billion for buy-back. So the market know that a lot of shares were going to be bought up…by CAT. And not at bargain basement price either. Take a look at the record of their share price above and you’ll see that the board had authorized using borrowed money to buy their shares at around the highest price they had ever been.

Hmm. Did buying all those shares encourage others to do likewise, especially knowing that CAT had a war chest of $12 billion earmarked for buying shares? Any ‘investor’ would know there was a buyer in the market who would be ready and willing to buy them back from him. The upshot would be a guaranteed buoyant market in CAT shares at a time when without such a buoyant demand a year of declining sales might just possibly have led to a steep decline in share price. Of course the official rationale for taking on debt to buy back shares is that debt costs are now low so its a good time to do it. The problem is that while in the short term it improves the look of the company’s share price and things like return on equity, it locks CAT, and any company that does the same, in to paying out interest on debt over the long term.

To paraphrase Steve Keen: Osborne’s understanding of economics is at a kindergarten level.

• Academics Attack George Osborne Budget Surplus Proposal (Guardian)

George Osborne’s plan to enshrine permanent budget surpluses in law is a political gimmick that ignores “basic economics”, a group of academic economists has warned. Responding to the chancellor’s Mansion House speech earlier this week, they said a law forcing the government to cut spending or raise taxes every year to generate a budget surplus, characterised as Micawber economics, would suck the economy dry and within a few years could trigger another credit crunch. In a letter to the Guardian, coordinated by the Centre for Labour and Social Studies, 77 of the best-known academic economists, including French economist Thomas Piketty and Cambridge professor Ha-Joon Chang, said the chancellor was turning a blind eye to the complexities of a 21st-century economy that demanded governments remain flexible and responsive to changing global events.

Piketty signed the letter alongside eminent economics professors from many of Britain’s top universities. Other signatories of the letter include former Bank of England monetary policy committee member David Blanchflower, Diane Elson, emeritus professor of economics at the University of Essex and chair of UK Women’s Budget Group alongside professors of economics from Oxford, Leeds and London universities. In a swipe at what they said was a “risky experiment with the economy in order to score political points”, they argued Osborne was guilty of adopting a gimmick designed to outmanoeuvre his opponents. The tough message follows the chancellor’s annual Mansion House speech in the City, during which he said the government should be forced by law to bring down the UK’s debt mountain to protect the economy against future shocks.

The academics said Osborne was shifting the burden of debt from the government to ordinary households because “surpluses and debts must arithmetically balance out in monetary terms”. “The government’s budget position is not independent of the rest of the economy and if it chooses to try to inflexibly run surpluses, and therefore no longer borrow, the knock-on effect to the rest of the economy will be significant,” they said. “Households, consumers and businesses may have to borrow more overall, and the risk of a personal debt crisis to rival 2008 could be very real indeed.”

“..but the US is probably a bit worse that we are.”

• Australian Workers ‘Stressed And Fat’ (BBC)

Australia’s workforce is affected “in a major way” by poor mental health, stress and obesity, a new study has found. The average Australian employee is stressed and overweight – about half the 30,000 employees surveyed were physically inactive, the report found. The study, by the University of Wollongong in partnership with Workplace Health Association Australia (WHAA), spans 10 years of data. Workers also showed other risk factors. The report found that 65.1% of the employees had reported “moderate to high stress levels” and that 41% had psychological distress levels considered to be “at risk”. The WHAA said that trends around employee health had been examined over a 5-to-10-year period and that the industries covered included banking and finance, legal, transport and storage, in both metropolitan and rural areas.

The study said its objectives were to present an analysis of employee health data from the five organisations, all members of the WHAA, who participated in the project. Dr John Lang, WHAA’s chief executive, told the BBC that the average employee “was seeing a 2.4% reduction in productivity, on average, per risk factor”. Risk factors listed in the study include high blood pressure, high cholesterol, physical inactivity, psychological distress, smoking and obesity. “So if the average employee has four risk factors – that’s four times a 2.4% reduction in productivity,” Dr Lang said. “And this means our workforce is being impacted in a major way by their poor lifestyle and physical health. It’s a global problem in the Western world, but the US is probably a bit worse that we are.”

Early Days.

• California Moves To Restrict Water Pumping By Pre-1914 Rights Holders (LA Times)

For the first time in nearly 40 years, state regulators are telling more than 100 growers and irrigation districts with some of the oldest water rights in California that they have to stop drawing supplies from drought-starved rivers and streams in the Central Valley. The curtailment order, issued Friday by the State Water Resources Control Board, has been expected for weeks. Earlier this spring, the board halted diversions under some 8,700 junior rights. With snowmelt reduced to a trickle this year, there simply isn’t enough water flowing in rivers to meet the demand of all those with even older rights predating 1914. And as flows continue to decline this summer, board officials said, they expect to issue more curtailments, stopping river pumping by more senior diverters.

The effect of the curtailments, which affect water users with rights dating to 1903, will vary. Many have water in storage that they can continue to use. Utilities can keep using flows for hydropower production as long as the water is returned to the rivers. Some growers and ranchers also have groundwater supplies that are unaffected by the order. A few communities, including Chico and Nevada City, have to stop river withdrawals under the order. But Thomas Howard, the state board’s executive director, said they have alternative supplies. “Each water-right holder has different options available to them,” he added. Still, the fact that the state is reaching back more than a century in the hierarchy of California water rights highlights the withering hold of a drought that has also led to the state’s first mandatory cuts in urban use.

Being semi-Canadian, this sort of nonsense amuses me to no end.

• Canada, Tomorrow’s Superpower (Bloomberg)

With a population of only 31.5 million (in 2013), a famously frigid climate and a below-replacement fertility rate, Canada would seem an unlikely candidate to become a superpower. But Canada has three huge, fundamental strengths that will almost certainly be telling in the long run. These are natural resources, good government and an almost unbelievably tolerant and open culture. In terms of natural resources, Canada is almost unmatched. In terms of renewable freshwater – the best candidate for the essential scarce resource of the next two centuries – Canada is exceeded only by the U.S. and Brazil. Its %age of arable land, at 4.6%, is relatively small, but this probably will increase as climate change proceeds and the glaciers retreat.

Basically, there is room for a lot more people in Canada. Good government is another hallmark of Canadian strength. Canada regularly ranks in the top 10 least-corrupt countries in the world, according to Transparency International. The U.S., in comparison, only makes it to the lower reaches of the top 20. That’s especially impressive given Canada’s rich endowment of fossil fuels, which usually causes countries to become more corrupt – a phenomenon known as the Resource Curse. Canada’s institutions, derived from the very best of the U.K., are rock solid. It is probably because of these high-quality institutions that Canada was able to implement universal health care.

Whatever you think of the merits of universal health care, it definitely requires that citizens trust their government. In a country as spread-out and diverse as Canada, attaining a level of public trust equivalent to that received by the ethnically homogeneous countries of Europe is quite a feat. And Canada’s strong institutions have allowed it to implement less controversial economic policies, such as a low corporate tax rate (15%, compared with the U. S.’s 35%). Basically, Canada can usually get things done a lot better than the U.S.

Presumably includes former presidents.

• US Will Call All Chimps ‘Endangered’ (NY Times)

All chimpanzees will be designated as endangered under the Endangered Species Act, the United States Fish and Wildlife Service announced Friday. The move follows a petition filed in 2010 by Jane Goodall, The Humane Society of the United States and other groups to eliminate a longstanding distinction between the legal status of captive chimpanzees, which were previously listed as “threatened,” and their wild counterparts, which have been deemed “endangered” for decades. With the new designations, chimpanzees held in captivity in the United States will receive the same protections as wild chimps under the Endangered Species Act. Biomedical research, interstate trade, and export and import of captive chimpanzees will now require permits issued by the Fish and Wildlife Service. The new rules will become official on June 16 and will go into effect after a 90-day grace period on Sept. 14.

The regulations do not require that people who privately own chimpanzees obtain a permit to keep them, nor do they require permits to use chimpanzees in the entertainment industry, according to Dan Ashe, the United States Fish and Wildlife Service’s director. He said that the previous distinctions sent a mixed signal to the public and created the impression that chimpanzees were not in dire need of help. “At the time we thought it was important to encourage breeding of captive chimps to expand their numbers,” said Mr. Ashe. “But we expanded a culture of treating these animals as a commodity for research, sale, import and export, and entertainment. That has undermined the conservation of chimpanzees in the wild.” Chimpanzees once numbered about a million in the early 1900s, but widespread habitat loss and poaching have caused their numbers to decline. Currently, there are estimated to be between 172,000 and 300,000 worldwide, according to the Jane Goodall Institute.

From Yellen Put To Yellen Massacre

Mar 122015

March 12, 2015 Posted by Raúl Ilargi Meijer at 9:21 am Finance Tagged with: bonds, crash, debt, dollar, emerging markets, Fed, investor, unemployment, Yellen, yield 15 Responses »

NPC Kidwell’s Market on Pennsylvania Avenue, Washington DC 1920

I think I’ll just give you a slew of quotes, and then you can figure out if you can figure out why I chose to call this the Yellen Massacre. Which consists, by the way, of two separate but linked parts, not quite the Siamese twin perhaps, but close. What links them is the upcoming Fed decision to raise interest rates, and the timing of the announcement of that decision. It will blow up both bond markets and a large swath of emerging markets. People keep saying ‘the Fed won’t do it’, or ask ‘why would they do it’, but arguably they’re already quite late. It must be half a year ago now that I wrote it would hike rates, and also told you why: Wall Street banks. First, here’s a fine little ditty published at Econmatters:

Six Days Until Bond Market Crash Begins

Early on Thursday morning, realizing this was going to be a robust selloff in equities, the ‘smart money’, i.e., the big banks, investments banks, hedge funds and the like, ran to the old staple of buying bonds hand over fist with little regard for the yield they are getting paid for stepping in front of the freight train of rate rises coming down the tracks.

Just six days away from the most important FOMC meeting in the last seven years, and another 300k employment report in the rear view mirror, this looks like an excellent place to hide for nervous investors who have far more money than they have grains of common sense. Newsflash for these investors, yes markets are over-valued, and you need to get out of Apple, and about 100 other high flying overpriced momentum stocks, but you can`t hide out in bonds this time.

That party is over, and next Wednesday`s FOMC meeting is going to make this point abundantly clear. There is no place to hide except cash. You should have thought about that before you gorged yourself on ZIRP to the point where you have pushed stocks and bonds to unsupportable price levels, and you keep begging for the Fed to stall just another six months, so you can continue to buy more stocks and bonds.

Well you have done an excellent job hoodwinking the Fed to wait until June, you should thank your lucky stars you have done such a good job manipulating the Federal Reserve; but just like the boy crying wolf, this strategy loses its effectiveness over time. Throwing another temper tantrum right before another important FOMC meeting hoping that Janet Yellen will be alarmed by these Pre-FOMC Selloffs to put off another six months the inevitable rate hike, this blackmail strategy has run its course.

The Fed is forced to finally start the Rate Hiking Cycle after 7 plus years of Recession era Fed policies by an overheating labor market. You knew this day was going to come, but most of you are still in denial. What the heck were you buying 10-year bonds with a 1.6% yield five months before a rate hike?? You only have yourself to blame for the 65 basis point backup in yields on that disaster of an “Investment”.

But really what were you thinking here?? That is the problem when the Fed has incentivized such poor investment decisions and poor allocation of capital to useful, growth oriented projects over the past 7 plus years of ZIRP that these ‘investors’ don`t think at all, they have become behaviorally trained ZIRP Crack Addicts!

They can cry over the strong dollar, have a couple of 300 point Dow Selloffs, scare monger over Europe or Emerging Market currencies, but the fact is that the due date has come on your stupidity. You bought all this crap, and now you have to sell it! Well too freaking bad, boo hoo, you shouldn’t have bought so many worthless stocks and bonds at unsustainable levels in the first place. [..]

The positioning for this inevitability is as poor as I have seen in any market. The carnage in the bond market is just going to be gruesome, the denial is so strong, the lack of historical perspective of what normal bond yields look like, and what a normalized economy represents where savers actually get paid to save money in a CD or checking account. The fact that the Fed has so de-sensitized investors to what a normalized rate economy and healthy functioning financial system looks like is probably one of the biggest drawbacks of ZIRP Methodology.

The Federal Reserve, and now the European Union have set the stage for the biggest collapse in bond markets that will make the sub-prime financial crisis look like a cakewalk.

One may question whether 6 days is carved in stone; maybe THE announcement will come the next meeting, not this one. But does it really matter? Yellen has created a narrative about the US economy, especially the (un)employment rate. About which yet another narrative has been created by the BLS, which refuses to count many millions of Americans as unemployed, for various reasons. And that leads to the article’s claim of ‘an overheating labor market’. The only way the US jobs market is overheating is that it seems to have created a huge oversupply of underpaid waiters, greeters and burger flippers.

But the narrative is now firmly in place, so Yellen and her stooges can claim they have no choice but to hike. Not just once, but three times this year, suggests Ambrose Evans-Pritchard in the following very bleak read and weep portrait of the world today. In which he also describes how all of this plays out in sync with the soaring dollar, which will have devastating consequences around the world, starting in the poorer parts of the world (what else is new?).

Global Finance Faces $9 Trillion Stress Test As Dollar Soars

The report – “Global dollar credit: links to US monetary policy and leverage” – was first published by the Bank for International Settlements in January, but its biting relevance is growing by the day. It shows how the Fed’s zero rates and quantitative easing flooded the emerging world with dollar liquidity in the boom years, overwhelming all defences.[..]

Foreigners have borrowed $9 trillion in US currency outside American jurisdiction, and therefore without the protection of a lender-of-last-resort able to issue unlimited dollars in extremis. This is up from $2 trillion in 2000. The emerging market share – mostly Asian – has doubled to $4.5 trillion since the Lehman crisis, including camouflaged lending through banks registered in London, Zurich or the Cayman Islands. The result is that the world credit system is acutely sensitive to any shift by the Fed. “Changes in the short-term policy rate are promptly reflected in the cost of $5 trillion in US dollar bank loans,” said the BIS.

Markets are already pricing in such a change. The Fed’s so-called “dot plot” – the gauge of future thinking by Fed members – hints at three rate rises this year, kicking off in June. The BIS paper’s ominous implications are already visible as the dollar rises at a parabolic rate, smashing the Brazilian real, the Turkish lira, the South African rand and the Malaysian Ringitt, and driving the euro to a 12-year low of $1.06.

The dollar index (DXY) has soared 24pc since July, and 40pc since mid-2011. This is a bigger and steeper rise than the dollar rally in the mid-1990s – also caused by a US recovery at a time of European weakness, and by Fed tightening – which set off the East Asian crisis and Russia’s default in 1998. Emerging market governments learned the bitter lesson of that shock. They no longer borrow in dollars. Companies have more than made up for them.

“The world is on a dollar standard, not a euro or a yen standard, and that is why it matters so much what the Fed does,” said Stephen Jen, a former IMF official now at SLJ Macro Partners. He says the latest spasms of stress in emerging markets are more serious than the “taper tantrum” in May 2013, when the Fed first talked of phasing out quantitative easing. “Capital flows into these countries have continued to accelerate over recent quarters. This is mostly fickle money. The result is that there is now even more dry wood in the pile to serve as fuel,” he said. Mr Jen said Asian and Latin American companies are frantically trying to hedge their dollar debts on the derivatives markets, which drives the dollar even higher and feeds a vicious circle. “This is how avalanches start,” he said.

Companies are hanging on by their fingertips across the world. Brazilian airline Gol was sitting pretty four years ago when the real was the strongest currency in the world. Three quarters of its debt is in dollars. This has now turned into a ghastly currency mismatch as the real goes into free-fall, losing half its value. Interest payments on Gol’s debts have doubled, relative to its income stream in Brazil. The loans must be repaid or rolled over in a far less benign world, if possible at all.

You would not think it possible that an Asian sovereign wealth fund could run into trouble too, but Malaysia’s 1MDM state fund came close to default earlier this year after borrowing too heavily to buy energy projects and speculate on land. Its bonds are currently trading at junk level. It became a piggy bank for the political elites and now faces a corruption probe, a recurring pattern in the BRICS and mini-BRICS as the liquidity tide recedes and exposes the underlying rot.

BIS data show that the dollar debts of Chinese companies have jumped fivefold to $1.1 trillion since 2008, and are almost certainly higher if disguised sources are included. Among the flow is a $900bn “carry trade” – mostly through Hong Kong – that amounts to a huge collective bet on a falling dollar. Woe betide them if China starts to drive down the yuan to keep growth alive.

Manoj Pradhan, from Morgan Stanley, said emerging markets were able to weather the dollar spike in 2014 because the world’s deflation scare was still holding down the cost of global funding. These costs are now rising. Even Singapore’s three-month Sibor used for benchmark lending is ratcheting up fast. The added twist is that central banks in the developing world have stopped buying foreign bonds, after boosting their reserves from $1 trillion to $11 trillion since 2000.

The Institute of International Finance (IIF) calculates that the oil slump has slashed petrodollar flows by $375bn a year. Crude exporters will switch from being net buyers of $123bn of foreign bonds and assets in 2013, to net sellers of $90bn this year. Russia sold $13bn in February alone. China has also changed sides, becoming a seller late last year as capital flight quickened. Liquidation of reserves automatically entails monetary tightening within these countries, unless offsetting action is taken. China still has the latitude to do this. Russia is not so lucky, and nor is Brazil. If they cut rates, they risk a further currency slide.

In short, Janet Yellen will go down into history as the person responsible for what may be the biggest economic crash ever, or at least delivering the final punch of the way into it, a crash that will make the rich banks even much richer. And there is not one iota of coincidence in there. Yellen works for those banks. The Fed only ever held investors’ hands because that worked out well for Wall Street. And now that’s over. Y’all are on the same side of the same trade, and there’s no profit for Wall Street that way.

Central Banks Are Crack Dealers and Faith Healers

Mar 102015

March 10, 2015 Posted by Raúl Ilargi Meijer at 11:18 am Finance Tagged with: BoJ, bonds, central banks, dollar, Draghi, ECB, emerging markets, Fed, PBOC, QE, rate hike, Tyler 11 Responses »

William Henry Jackson Tunnel 3, Tamasopo Canyon, San Luis Potosi, Mexico 1890

The entire formerly rich world is addicted to debt, and it is not capable of shaking that addiction. Not until the whole facade that was built to hide this addiction must and will come crashing down along with the corpus itself.

Central banks are a huge part of keeping the disease going, instead of helping the patient quit and regain health, which arguably should be their function. In other words, central banks are not doctors, they’re crack dealers and faith healers. Why anyone would ever agree to that role for some of the world’s economically most powerful entities is a question that surely deserves and demands an answer. But no such answer is forthcoming.

Instead, we all pretend Yellen, Kuroda and Draghi are in fact curing us of our ailments. Presumably because that feels better. That our health deteriorates in the process is simply ignored and denied. But then, that’s what you get when you allow for a bunch of shaky goalseeked economic rules to be taken as some sort of gospel. People one thought leeches healed too, or bloodletting, exorcism, burning at the stake, you name it. Same difference, just a few hundred years later.

What’s happening today is that central bankers start to find that their goalseeked ideas are no longer working. What might work for one may backfire for another. That this might be the direct result of their own mindless policies will never even cross their minds. And so they will continue making things worse, until that facade they operate on cannot hold any longer.

The EU started its braindead QE program yesterday. If it gets to purchase the entire €1.14 trillion in bonds it aims for, that will be a bad thing. If it doesn’t, that will be an arguably worse thing. Draghi should have stayed away from this heresy, but it’s too late now: the die is cast.

Why banks and funds would sell their long maturity bonds, with a relatively high yield, to him, is not clear. On the other hand, that many funds will compete with the ECB for the few bonds that are available, is clear. Draghi simply attempts to turn the sovereign bond market into casino with zero price discovery. Whether he will succeed in that is not clear. To get it done, though, he will have to make some very peculiar moves. That again is clear. Durden:

Presenting The Buyers Of Over 100% Of New German And Japanese Bond Issuance

Back in December, when the total amount of annual ECB Q€ was still up in the air and and consensus expected a lowly €500 billion annual monetization number, we calculated that based on Germany’s capital key contribution of about 26%, the ECB would monetize some €130 billion of German gross issuance, or about 90% of the total scheduled issuance for 2015. Subsequently, the ECB announced that the actual amount across all ECB asset purchasing programs, will be some 44% higher, or €720 billion per year (€60 billion per month). So what does that mean for the revised bond supply and demand across two of the most important developed markets?

Well, we already know that the Bank of Japan will monetize 100% or just over of all Japanese gross sovereign bond issuance (source). As for Germany, on a run-rate basis, and assuming allocation based on the abovementioned capital key, it means that for the next 12 month period, assuming no major funding changes in Germany, the ECB will swallow more than a whopping 140% of gross German [Bund] issuance! Or, said otherwise, the entities who will buy more than all gross German and Japanese issuance for the next 12 months, are the ECB and the Bank of Japan, respectively.

This also means that to fulfill its monthly purchase mandate, the ECB will have to push the price to truly unprecedented levels (such as the -0.20% yield across the curve discussed previously, or even lower) to find willing sellers. That said, please don’t tell your average Hinz and Kunz that more than all German bond issuance in 2015 will be monetized. It will bring back some very unpleasant memories.

Japan’s Abenomics are a huge failure, and so it looks like another double or nothing is in the offing. They’ll keep doing it until they can’t, because that’s their whole repertoire. Though it is a little weird to see Bill Pesek, and BoJ chief Kuroda, claim that Japan’s QE failed because it wasn’t big enough. Seen Japanese debt numbers lately, Bill? Not big enough yet?

Three Reasons Japan Will Get More Stimulus

With annualized growth of 1.5% between October and December after two straight quarters of contraction, Japan is hobbling out of recession far more slowly than hoped. A third dose of quantitative easing is almost certain. Here are three reasons why.

First, the initial rounds of QE weren’t potent enough. “In order to escape from deflationary equilibrium, tremendous velocity is needed, just like when a spacecraft moves away from Earth’s strong gravitation,” Kuroda recently explained. “It requires greater power than that of a satellite that moves in a stable orbit.”

Although the Bank of Japan managed to lower the value of the yen by more than 20% beginning in April 2013, that clearly hasn’t provided enough of a boost to the economy.

Maybe you can’t boost the 20-year coma the Japanese economy has been in by hammering the currency? Just a thought, Bill. And sure, Kuroda’s spacecraft metaphor is mighty cute, but what tells you economies are just like rocket ships? I like this piece from Deutsche Welle much better:

Central Bank Blues

On Monday the European Central Bank begins its long-anticipated program to buy sovereign bonds on secondary bond markets – i.e. previously issued government bonds held by institutional investors like banks or insurance funds. In central bankers’ jargon, this is called “quantitative easing,” or QE. The ECB’s plan is to pump €60 billion euros into the financial markets each month, by trading central bank reserve money (a form of electronic cash) for bonds. That’s set to continue until at least September 2016, which means at least €1.1 trillion will be put into the hands of investment managers – who will have to find some alternative investments to make with the money.

On Thursday last week, at the ECB’s governing board meeting in Nicosia on Cyprus, the central bank revised its projections for both GDP growth and inflation in the eurozone upward: The inflation rate is projected to go up to 0.7% for this year, and GDP growth from 1.0 to 1.5%. But are the new projections just a case of whistling in the dark? There are in fact serious doubts as to whether the ECB will actually be able to meet its targets, or if, instead, the bond-purchasing program will have effects that will make a structural recovery of the eurozone more difficult.

For a start, many observers doubt whether the ECB will even be able to find willing sellers for €60 billion a month of bonds. Sovereign bonds – especially those of the core eurozone member states, like Germany – may soon become rather scarce on secondary markets. Neither domestic banks and insurance funds, nor foreign central banks, will have much incentive to sell their government bond holdings to the ECB. The older bonds with long maturities and decent interest rates, in particular, will probably be held rather than sold. Moreover, experts question whether a flood of central bank reserve money, pumped into the hands of players in secondary financial markets, can generate a stimulus at all.

It probably won’t lead to any boost in their lending activities to real-economy businesses or households, for two reasons: First, banks have recently been obliged to increase their core capital reserves – the amount of shareholders’ money, including retained earnings, which is available to cover possible loan losses – and they’re still adjusting their balance sheets accordingly. That means they’re being cautious about lending.

That’s the basic question, isn’t it? “..whether a flood of central bank reserve money, pumped into the hands of players in secondary financial markets, can generate a stimulus at all.” But how do we answer it? Lots of people will want to point to the ‘success’ story of the US and the Fed, but there’s no way we can have any confidence in the numbers coming from the US. As for the EU and Japan, the failures are more obvious, but that may be because they’re less skilled in ‘massaging’ the data. All in all, the evidence, if it exists at all, is flimsy at best.

Oh, and then there’s China:

China’s ‘Money Garrote’ May Choke Us All

In this new era of all-powerful central banks, it is hard for investors to look past who will be next to take out the big gun of quantitative easing. This week, all eyes are on the ECB, which follows the Bank of Japan as the latest of the major monetary-policy makers to embark on its own aggressive bond-buying program. In contrast, China appears to be entering a “new normal” era, in which its central bank only has a pea-shooter [..] the benchmark money-supply growth target of 12% was the lowest in decades. Another part of China’s new normal is not just lower growth, but also an era where the central bank is no longer able to magically speed its money-printing presses.

Conventional wisdom holds that the People’s Bank of China (PBOC) has a gargantuan monetary arsenal, given that the country has the world’s largest stash of foreign reserves at $3.89 trillion [..] according to some analysts, this reserve accumulation is merely a byproduct of another form of quantitative easing. Rather than strength, its size indicates just how staggeringly large China’s domestic credit expansion has become in recent decades. According to strategist Albert Edwards at Société Générale, such foreign-reserve accumulation — which typically takes place in emerging markets — is equivalent to quantitative easing.

The PBOC’s historic mass-printing of money to buy foreign currency and depress the yuan’s value is little different from what the Federal Reserve and others have done, Edwards said. [..] the recent reversal in such reserve accumulation points to a significant turning point in monetary conditions. Indeed, Joe Zhang, author of “Inside China’s Shadow Banking System,” argues that China’s credit expansion has in fact been far more aggressive than the QE attempted in the U.S. or Europe.

Zhang, a former PBOC official, calculated that China’s money supply is already 372% of what it was at the beginning of 2006. And if you add up official data between 1986 and 2012, China’s benchmark M2 money supply has grown at a compound rate of 21.1%. While 7% economic growth is slow for China compared to the double-digit rates of the past, such data makes 12% money-supply growth looks positively measly. Another reason to believe that China is at the tail end of a huge monetary expansion is found in a recent study by McKinsey. They estimated that total credit in China’s economy has quadrupled since 2008, reaching 282% of GDP.

But now the conditions that enabled this debt habit have turned. Edwards argues that foreign-exchange accumulation by central banks is the key measure of global liquidity to pay attention to — and it is currently in free-fall. [..] while markets are focusing on the ECB’s easing announcement, they are missing this Chinese liquidity garrote that is strangling the global economy. Data from the IMF shows that central-bank foreign-reserve accumulation has been declining rapidly. China is at the center of this, with a $300 billion annualized decline over the last six months

The stress point for China is now its currency, which has fallen to a 28-month low against the dollar. The dilemma facing the PBOC is how to keep growth and liquidity sufficiently strong, while also maintaining its loose currency peg to a resurgent dollar. As China defends its currency regime, it must do the opposite of printing new money: using foreign reserves to buy yuan, contracting the money supply in the process.

The People’s Bank of China is a crack dealer with a client that no longer can afford its fix. Or perhaps it’s more accurate to say that all central banks are now crack dealers with such clients, and the PBOC is the first one that’s forced to admit it. And it now looks as if perhaps it can’t win back its market without spoiling it. And that is all about the dollar. A lot is about the dollar, and the looming shortage of them. And there’s nothing (central) banks can do. Not that they won’t try, mind you. Durden:

The Global Dollar Funding Shortage Is Back With A Vengeance

[..].. one can be certain that the current fx basis print around – 20 bps will most certainly accelerate to a level never before seen, a level which would also hint that something is very broken with the financial system and/or that transatlantic counterparty risk has never been greater. Unlike us, JPM hedges modestly in its forecast where the basis will end up:

.. different to previous episodes of dollar funding shortage such as the ones experienced during the Lehman crisis or during the euro debt crisis, the current one is not driven by banks. It is rather driven by the monetary policy divergence between the US and the rest of the world. This divergence appears to have created an imbalance in funding markets and a shortage in dollar funding. It is important to monitor how this dollar funding shortage and issuance patterns evolve over time even if the currency implications are uncertain.

And to think the Fed’s cheerleaders couldn’t hold their praise for the ECB’s NIRP (as first defined on these pages) policy. Because little did they know that behind the scenes the divergence in Fed and “rest of the world” policy action is leading to two things: i) the fastest emergence of a dollar shortage since Lehman and ii) a shortage which will be arb[itrage]ed to a level not seen since Lehman, and one which assures that over the coming next few months, many will be scratching their heads as to whether there is something far more broken with the financial system than merely an arbed way by US corporations to issue cheaper (hedged) debt in Europe thanks to Europe’s NIRP policies.

If and when the market finally does notice this gaping dollar shortage (as is usually the case with the mandatory 3-6 month delay), the Fed will once again scramble to flood the world with USD FX swap lines to prevent the global dollar margin call from crushing a matched synthetic dollar short which according to some estimates has risen as high as $10 trillion.

Until then, just keep an eye on the Fed’s weekly swap line usage, because if the above is correct, it is only a matter of time before they are put to full use once again. Finally what assures they will be put to use, is that this time the divergence is the direct result of the Fed’s actions…

And then, again with Tyler, we return to Albert Edwards:

“Ignore This Measure Of Global Liquidity At Your Own Peril”

With all eyes squarely on the ECB as Mario Draghi prepares to flood the EMU fixed income market with €1.1 trillion in new liquidity starting Monday, Soc Gen’s Albert Edwards reminds us that “another type of QE” is drying up thanks largely to the relative strength of the US dollar. The printing of currency to buy US dollar denominated assets in an effort to prop up “mercantilist export-led growth models [is] no different to the Fed’s QE,” Edwards says, explicitly equating EM FX intervention with the asset purchase programs employed by the world’s most influential central banks in the years since the crisis. Via Soc Gen:

Clearly when the dollar is declining sharply, global FX intervention accelerates as the Chinese central bank, for example, needs to debauch its own currency at the same rate. Conversely, when the dollar rallies strongly, as is the case now, FX intervention rapidly dries up and can even reverse, exerting a massive monetary tightening on emerging economies,

.. and ultimately the entire over-inflated global financial complex… The swing in global foreign exchange reserves is one key measure of the global liquidity tap being turned on and off, with the most direct and immediate effect being felt in emerging economies.

The bottom line is that in a world of over-inflated asset values, the strength of the dollar is resulting is a rapid tightening of global liquidity as emerging economies (and indeed the Swiss) stop printing money to buy the US dollar. This should be seen for what it is a clear tightening of global liquidity. Traditionally these periods of dollar strength are highly disruptive to emerging markets and often end in the weakest links blowing up the entire EM and commodity complex and sometimes much else besides! Investors ignore this at their peril.

So: the ECB has started doing its painfully expensive uselessness , the Fed refuses to do anymore and even threatens to derail the whole idea by hiking rates, both Japan and its central bank are so screwed after 20 years of having an elephant sitting on their lap for afternoon tea that nothing they do makes any difference anymore even short term, and China is faced with the riddle that what it thinks it should do to look better in the mirror mirror on the Great Wall, only makes it look old and bitter.

But as Edwards rightly suggests, the first bit of this battle will be fought in, and lost by, the emerging markets. And there will be nothing pretty about it. They’re all drowning in dollar denominated loans and ‘assets’, and it gets harder and more expensive all the time to buy dollars as all this stuff must be rolled over. And the game hasn’t even started yet.

The End Of Fed QE Didn’t Start Market Madness, It Ended It

Jan 152015

January 15, 2015 Posted by Raúl Ilargi Meijer at 4:17 pm Finance Tagged with: China, commodities, dollar, emerging markets, Fed, Japan, madness, QE, Yellen 2 Responses »

DPC Broadway at night from Times Square 1911

Jeff Cox at CNCB wrote a reasonable piece yesterday, but chose a 180º wrong headline for it. And that matters for understanding the topic he addresses: what is happening in the financial markets. Cox claims that “Market Madness Started With End Of Fed’s QE”, but it’s the other way around. We’ve had six years+ of madness precisely because of QE, and during that whole time people had ever less idea what anything was really worth, and price discovery, an essential element of any functioning economy, disappeared entirely.

What we see now is the recovery of price discovery, and therefore the functioning economy, and it shouldn’t be a big surprise that it doesn’t come in a smooth transition. Six years is a long time. Moreover, it was never just QE that distorted the markets, there was – and is – the ultra-low interest rate policy developed nations’ central banks adhere to like it was the gospel, and there’s always been the narrative of economic recovery just around the corner that the politico/media system incessantly drowned the world in.

That the QE madness ended with the decapitation of the price of oil seems only fitting. Our economies need oil the way people – and animals – need water. If its price falls the way it has, that’s a sure sign something is profoundly amiss. At this point, we don’t yet know the half of it. It’ll take time for price discovery to work its way through, and for people to recognize what things are really worth. For now there’s really only one that’s certain: everything is overvalued, including you.

As the zombie money injected by QE is drained from the system, deflation is the magic word. And that doesn’t mean falling prices, they will never be anything other than a lagging indicator. For a system as bloated as the one we have at present, deflation depends on two factor: the size of the money/credit supply and the velocity at which the money is spent.

The end of Fed QE shrank the former – and no, other central banks won’t make up for the difference -, while the huge decrease in personal wealth – and wages- across the west (the average American family lost 40% of their wealth since 2008) slowed down the velocity of money. Sure, US car sales are looking good on the surface, but they’re fake, since as David Stockman writes today: “consumers borrowed every dime they spent on auto purchases (and took home a few billion extra in spare change).”

Economic growth in developed nations is just a narrative, kept – zombie – alive by media and things like those subprime car loans. We can all imagine why European countries would be at risk, in various forms and stages, but the US seems to be doing good (5% ‘official’ GDP growth last quarter), right? Well, not according to Jim Clifton, Chairman and CEO of Gallup, who writes this week that “.. for the first time in 35 years, American business deaths now outnumber business births”, and: “This economy is never truly coming back unless we reverse the birth and death trends of American businesses.”

The rich world is not doing as well as the narrative – mostly successfully so far – tries to convince you it is. Not nearly as well. The price of oil should be a flashing red flag with loud sirens for everyone. And it’s not just oil. Everything gets repriced. A 12-year low in commodities, dating back to late 2002, is not a laughing matter.

Commodities Tumble to 12-Year Low as US Futures Slide

Commodities (BCOM) tumbled to a 12-year low, led by copper’s biggest decline in almost six years, as slowing global growth curbs demand. [..] Commodity prices are tumbling as a supply glut collides with waning demand, reducing earnings prospects for producers and increasing the appeal of government bonds as inflation slows. The World Bank cut its global growth outlook, citing weak expansions in Europe and China, the world’s biggest consumer of raw materials. Data today is projected to show a gain in U.S. oil inventories.

“Oversupply and falling demand are dragging down commodities beyond oil,” said Ayako Sera at Sumitomo Mitsui. “There are a lot of uncertainties and it’s hard to see a reversal in sentiment for the time being. As an investor it’s hard to proactively take on risk at the moment.” [..] “The news everywhere is doom and gloom,” said David Lennox at Fat Prophets in Sydney. “Prices are going to keep sinking.”

Note that the leading word is demand, not supply. And that in one fell swoop takes us beyond developed nations and into emerging markets. But first, let’s let Jeff Cox have his say:

Market Madness Started With End Of Fed’s QE

For nearly six years running, the U.S. stock market has withstood a myriad of body blows [..]Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding. So far, with volatility spiking, traditional correlations breaking down and the bad-news-is-good-news theme no longer in play, the early results are not particularly reassuring. “Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group.

[..] the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October. That month marked a momentary collapse in bond yields on Oct. 15, a day that also saw the Dow Jones industrial average plunge some 460 points at one juncture before slicing its losses.

In second place for monthly volatility was December, as investors pondered the meaning of “patient” in a Fed statement on when it planned to raise rates and waited for a Santa Claus rally that failed to materialize. January has proven to be an even bumpier month as investors evaluate an oil plunge that has raised questions about longer-term effects on corporate bottom lines and business investment.

Then came Wednesday’s disappointing retail sales numbers, all of which raised concerns about whether Wall Street is capable of negotiating its way through rough times with only zero-bound short-term interest rates as a backstop. “The assumption that low energy prices were unambiguously good was called into question with December retail sales,” said Art Hogan at Wunderlich Securities. “I think it’s all connected, but I’d be hard-pressed to tie it just to monetary policy.”

Should the Fed try to reinstitute QE in the face of more volatility, “their credibility would be shot.” Michael Pento predicted in an October analysis that the end of the Fed’s QE would see “inflated asset prices deflate back to normalized levels,” and believes now that the process is well under way and is likely to continue.

QE works “much better for equity prices than it does for economic growth,” Pento said. “You had a huge separation where markets went based on the Fed’s $1.7 trillion QE(3) program and where GDP growth was on a global basis. Now you’re seeing those two reconcile.” “Copper’s down over 20%. You’re looking at global yields in the toilet and oil prices down over 50%,” he added. “If you add all those things together, it adds up to global slow growth and the bursting of the commodity bubble that we saw courtesy of central banks.”

“The fuel for the fire over the last several years has been stock repurchases, and that has been fueled for the most part by the zero interest rate environment. As long as that continues, there’s still some room for the stock market to continue higher,” said Brian LaRose, a strategist at United-ICAP. “The path of least resistance is still to the upside.”

There are some good points in that article, but, as I said, the headline is upside down, and also, emerging markets are missing. I talked about their importance to the global economy a month ago in The Biggest Economic Story Going Into 2015 Is Not Oil and again last week in Price Discovery and Emerging Markets, but I think they warrant a lot more attention than they presently get. People simply don’t seem to have enough insight into either the importance of emerging markets – they’re half the global economy -, nor the state they’re in. Bill Pesek at Bloomberg has this:

For China, Even Good Numbers Don’t Add Up

.. China will have to loosen monetary policy soon in order to ensure that GDP growth stays above last year’s target of 7.5% (it’s currently around 7.3%). That’s worrisome because of a different number entirely: 251. That, in percentage terms, is Standard Chartered’s working estimate for China’s debt-to-GDP ratio. Already worryingly high compared to where Japan was 25 years ago when its own bubble burst, the number will only rise further with additional stimulus. The more China gins up growth in 2015, the more irresponsible lending it will have to service in the decade ahead.

The math simply doesn’t work out. Even if China could somehow return to the heady days of 10%-plus GDP growth, its debt mountain would by then be nearly unmanageable. “We’ve got the biggest debt bubble that the world has ever seen and credit is continuing to grow twice as fast” as output, Charlene Chu, a former Fitch Ratings analyst, said. Those who believe China can somehow grow its way out of this problem are fooling themselves.

“Mathematically, that’s impossible when something is twice as big as something else and growing twice as fast,” as Chu noted. It took Japan more than a decade after its bubble burst in 1990 to create the Resolution and Collection Corporation, modeled after America’s Resolution Trust Corporation, to dispose of bad loans. China can’t afford to wait that long to head off a full-blown crisis.[..] Yet for all the official talk about curbing borrowing and adjusting to a “new normal” of lower growth, Xi’s government still hasn’t shown the stomach necessary to bring China’s debt problems out into the open and deal with them.

Even one of the first defaults on an offshore bond by a Chinese developer last week ended happily. Kaisa missed a $23 million interest payment, but quickly received a waiver from HSBC. Since all property companies won’t get last-minute reprieves, these kind of maneuvers just delay a reckoning. Chu, now with Autonomous Research in Hong Kong, put Chinese bank assets at around $28 trillion the end of 2014, a huge increase from $9 trillion in 2008. As any 12-step program participant can attest, sobriety requires first admitting the magnitude of one’s problem – and publicly.

Whereas nations elsewhere in Asia would seem to have even larger immediate issues. It’s about the rise of the US dollar. Well, on connecting with the fact that they borrowed themselves silly in dollar denominated terms as Fed QE was happening. But that’s the thing: they’re now coming back to normalcy, albeit with a severe hangover. It’s not as of normalcy just ended.

Plunging Oil Prices, Rising Debt Leaves Asia Staring at Deflation

Asia’s rapid accumulation of debt in recent years is holding back central banks from easing monetary policy to fight the risk of deflation, endangering private investment needed to boost faltering growth, according to Morgan Stanley. Debt to GDP ratio in the region excluding Japan rose to 203% in 2013 from 147% in 2007, with most of the increase coming from companies, [..] The ratio is close to or has exceeded 200% in seven of 10 nations including China and South Korea. Deflation risk is spreading from Europe to Asia as oil prices plunge..

“When real rates are high, only the public sector or government-linked companies will take on leverage,” the Morgan Stanley economists wrote. The key concern with an approach of keeping real rates at elevated levels is that the private sector will remain hesitant to take up new investment..

India, South Korea, Indonesia, Thailand and the Philippines all held their benchmark rates last month. The Asian Development Bank in December cut the region’s economic growth forecasts for 2014 and 2015. Oil’s decline to the lowest in more than 5 1/2 years has hurt crude-exporting Asian nations like Malaysia while benefiting others like the Philippines and Indonesia.

China could tighten rules to allow faster recognition of non-performing debt in the corporate sector, Morgan Stanley said. While this could lead to a period of sharper slowdown in credit and GDP growth, it will reduce risks and open up the door for aggressive monetary as well as fiscal easing [..]

Troubled times ahead indeed. But it still simply the world reverting to normal. To functioning economies – though that doesn’t mean they’ll be doing well – and to price discovery. To get there, though, we need for trillions of dollars in zombie money to go up in thin air. It’ll be musical chairs with not nearly as many chairs as contestants.

And then the Fed can add to the damage. Which I keep thinking they will. It’ll be murder on emerging markets, and on most Americans, but Wall Street banks should be faring just fine, thank you. The Fed has been ‘leading’ its own narrative for months now, with various figures coming out of the woodwork with pro or con rate hike messages. It’s all staged, and here’s Yellen (a contradictory story will again come in a few days from some regional Fed head):

She’s No Greenspan: Yellen Signals She Won’t Babysit Markets in Turmoil

Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility. The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations.

To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad – just as a put option protects against a drop in stock prices. “The succession of Fed puts over the years has led to a wide range of distortions in financial markets,” said Lawrence Goodman at the Center for Financial Stability. “There have been swollen asset values followed by sharp declines. This is a very good time for the Fed to move away.”

So much for the stock market. But should we really be worrying about that when we know it’s all been a six-year headfake anyway? Isn’t it better to have price discovery back than to have so-called ‘investors’ trip on Bernanke blue pills? Oh well, never mind, oil made that decision for us.

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