junk bonds Archives - The Automatic Earth

Donald Trump has ordered the FBI to carry out a fresh investigation into his nominee for the Supreme Court, after Republicans were obliged to delay a full confirmation vote after being blind-sided by one of their own senators. During a day of blurred and frequently confusing drama on Capitol Hill, the Senate Judiciary Committee on Friday voted 11-10 to approve Brett Kavanaugh for a confirmation vote in the full senate. But it did so, only after an 11th hour intervention from Jeff Flake, a senator from Arizona, who said his support in the later confirmation vote was dependent on the FBI being given a week to carry out an investigation into Mr Kavanaugh, the subject of sexual assault allegations from several women, all of which he denies.

“This country is being ripped apart here,” Mr Flake told the committee, after a vote scheduled for 1.30pm was delayed. “We ought to do what we can to make sure that we do all due diligence with a nomination this important.” Mr Flake’s deeds sent senior Republicans scrambling to decide how best to proceed. The senate’s Republican chairman, Chuck Grassley, who has long said he did not see the need for an additional investigation into Mr Kavanaugh, said it was the decision of Senate majority leader Mitch McConnell on when to hold the confirmation vote.

Within a matter of hours, Mr Grassley issued a statement saying he would ask the White House to request the FBI carry out an additional background check. Shortly afterwards, White House press secretary Sarah Huckabee Sanders released a statement from the president, which read: “I’ve ordered the FBI to conduct a supplemental investigation to update Judge Kavanaugh’s file. As the senate has requested, this update must be limited in scope and completed in less than one week.”

[..] Mr Flake may have been motivated to act by the words of two protesters who confronted him in a senate elevator after it was initially announced he would back Mr Kavanaugh. “What you are doing is allowing someone who actually violated a woman to sit on the Supreme Court. This is not tolerable. You have children in your family. Think about them. I have two children,” shouted one of the women, Ana Maria Archila. “I cannot imagine that for the next 50 years they will have to have someone in the Supreme Court who has been accused of violating a young girl. What are you doing, sir?”

Plenty angles: … trial by social media…

• The Return Of The Inquisition (Simon Black)

Senator Maize Hirono of Hawaii recently stated, “Not only do women like [Kavanaugh’s accuser], who bravely come forward, need to be heard, but they need to be believed.” By definition this is neither fair nor impartial, and turns the entire process into a Kangaroo Court… which is what the Senate has become. At a certain point yesterday, one Senator introduced multiple pieces of evidence on behalf of the accuser, including ‘expert reports’ that justify her inability to remember details from the assault. This is truly bizarre. These Senators are playing the role of judge in this matter. It seems impossible to do this while simultaneously acting as advocate for the accuser.

Another Senator sat smugly and sanctimoniously, leering down at Brett Kavanaugh and demanding explanations about code words for beer and flatulence that date back to Kavanaugh’s high school days. The fact that a United States Senator would actually consider this important evidence is an utter embarrassment. Another disgusting perversion of justice is that the United States Senate actually felt compelled to negotiate with the accuser about when/how she would testify. For example, the accuser wanted to prohibit certain questions, control who could/could not ask questions, determine the order of witness testimony, etc. This is simply NOT how the justice system is supposed to work.

[..] the saddest part – this manner of Inquisition… trial by social media… has now been condoned and advanced by the United States Senate, an institution whose members have ALL taken a solemn oath to support and defend the Constitution which they are now violating in the worst way. Clearly the Senate is no longer an assembly of kings… but a brood of bickering, immature weaklings. (The only resilience displayed has been from the accused and accuser, both of whom have had to endure insane public scrutiny.) There’s obviously an agenda here.

Perhaps some Senators are trying to win points with the #metoo movement for the upcoming elections. Or they’re intentionally blocking Kavanaugh simply because he is a Trump nominee. Whatever their reasons, they may be victorious in achieving their desired outcome. But it will be a Pyrrhic victory… for it will come at the expense of establishing a dangerous new standard that destroys the most important principles of Justice.

As deficits grow, liquidity is shrinking.

• Fiscal Irresponsibility (Roberts)

Without much fanfare or public discussion, Congress has decided to push the U.S. into deeper fiscal responsibility. Earlier this week, the House passed another Continuing Resolution (CR) to keep the government from “shutting down” prior to the mid-term elections. “The House on Wednesday passed an $854 billion spending bill to avert an October shutdown, funding large swaths of the government while pushing the funding deadline for others until Dec. 7. The bill passed by 361-61, a week after the Senate passed an identical measure by a vote of 93-7.” For almost a decade, Congress has failed to pass, and operate, underneath a budget.

Of course, without any repercussions from voters in demanding that Congress “does their job,” the path to fiscal insolvency continues to grow. The Committee For A Responsible Federal Budget made the following statement: “We’re pleased policymakers have likely avoided a shutdown and actually appropriated most of this year’s discretionary budget on time. But let’s not forgot that Congress did so without a budget and had to grease the wheels with $153 billion to pass these bills. That isn’t function; it’s a fiscal free-for-all.” Of course, with trillion-dollar deficits just around the corner, the negative impact from unbridled spending and debt increases will begin to reverse the positive effects from deregulation and tax reform.

The bigger problem with the $854 billion CR just passed by the House, and awaiting the President’s signature, is that it only covers spending from now until December. Such means that by the time we get the full 2019 budget funded, with the annual automatic increases still in place, we will be looking at more than $2 Trillion in annual spending. Such will require further increases in debt issuance at a time when there are potentially fewer buys of Treasuries readily available. As shown in the chart below, with the major Central Banks reducing their balance sheets simultaneously, some of the more major buyers are being removed from the market. “Central bank balance sheets have shrunk by over half-a-trillion dollars since March. This decrease in global liquidity – in the face of a global slowdown – raises the risk of policy mistakes much higher than is commonly assumed.” – ECRI

Courtesy of your friendly neighborhood central bank.

• Junk Bonds Set For Record Winning Streak, High Grade Worst Since 2008 (ZH)

For the latest confirmation of the upside down market, look no further than corporate bonds where the riskiest, CCC-rated junk bonds are set to make a positive return for the 3rd consecutive year, the longest winning streak since records began in 1997. Not only have the lowest quality junk bonds, those rated CCC or lower, generating respectable absolute returns of 5.8% YTD, they have also outperformed higher quality debt with a 1% total return so far this month, according to Bloomberg and ICE data. Additionally, the lowest rated junk bonds have also outperformed the broader junk bond index, which has returned 1.9% YTD.

And while the key contributor to the outperformance of lowest-rated bonds is demand for, well, higher yielding paper as investors continue to chase returns, a key structural issue has been the lack of HY supply, which at $150 billion YTD is the lowest since 2009. Meanwhile, as investors scramble for any paper that promises a material yield, regardless of underlying fundamentals, investment grade corporate bond returns have, in the worlds of Bloomberg’s James Crombie “fallen from darling to deadbeat.”

Perhaps the biggest risk is that Tesla shares fall and loans have to be rolled over.

• Elon Musk Believed He Had Verbal Deal With Saudis To Take Tesla Private (WSJ)

Tesla Inc. CEO Elon Musk believes he had a verbal agreement in place with Saudi Arabia’s sovereign-wealth fund to help finance a plan to take the auto maker private, according to a person familiar with the matter, a contention that could preview how he will fight regulators’ accusation that he misled shareholders. Musk was sued Thursday by the Securities and Exchange Commission, which alleged that he misled investors when he tweeted last month that he had funding secured to lead a Tesla buyout. The agency, which is seeking to oust Musk from Tesla, said in its complaint that he “knew that he had never discussed a going-private transaction at $420 per share with any potential funding source.”

Musk believes the SEC’s effort is flawed in assuming that a written agreement and fixed price were necessary for a deal, the person said. Musk also thinks regulators aren’t taking into account that Middle Eastern businesses routinely operate using verbal agreements in principle, the person said. In addition, Musk has told people that he could have led a go-private transaction using his own stake in SpaceX, if major Tesla investors were on board. SpaceX is the privately held aerospace firm that Mr. Musk controls and is valued at tens of billions of dollars.

Tory conference soon. Spectacle.

• Labour Claims Theresa May’s Government ‘The Most Divided Ever’ (Ind.)

Labour has accused Theresa May of leading “the most divided government ever” as it released a dossier claiming a third of Conservative MPs have publicly criticised either the government or a Tory colleague within the last year. On the eve of the Conservatives’ annual conference, Labour said more than 100 Tory MPs have recently turned their fire on a colleague or on government policy. The report said 80 per cent of the attacks were directed at Ms May or her government, with 83 MPs having criticised one of the two. The dossier was released as a number of senior Conservatives spoke out against Ms May’s leadership and voiced fears about the prospects of the party.

Much of the criticism outlined in the Labour document relates to Ms May’s Chequers plan for Brexit, which has been widely condemned by both Eurosceptics and Remain supporters on the Tory benches. It has been called “unworkable” by Justine Greening, the pro-European former education secretary, while former Brexit minister Steve Baker said it could lead to a “catastrophic split” in the Conservative Party. Mike Penning, previously seen as an ally of Ms May, described the plan as “dead as a dodo”, and former cabinet minister Priti Patel said it would be “a disaster for our country”. Ms May is facing mounting pressure to ditch the proposals, which are also highly unpopular with Tory members and have been rejected by EU leaders.

EU has already thrown out Chequers.

• Boris Johnson’s ‘Super Canada’ Alternative Brexit Plan Rubbished (G.)

Furious ministers rounded on Boris Johnson for suggesting the UK could renege on its Brexit agreements over the Irish border, calling it unworkable and criticising the former foreign secretary for denouncing agreements made while he was a cabinet minister. The Department for Exiting the European Union issued a defiant statement rejecting Johnson’s alternative, laid out in a 4,000-word Telegraph article, saying it was “not a workable or negotiable plan,” less that two days before the start of the Conservative party conference in Birmingham. Government sources mocked Johnson’s disavowal of the December withdrawal agreement, when he had been part of the cabinet that approved it, dismissing his intervention as “another very lengthy article which doesn’t offer any answers”.

Speaking ahead of the conference, May said the government was on the verge of a Brexit deal, despite admitting after the EU summit in Salzburg that the two sides remained some distance apart on customs and the Northern Irish border. “The right deal is close – and with it the opportunity to make life better for ordinary working people,” she said. But Johnson continued his public intervention with a series of television interviews – his first since quitting over Chequers – criticising the prime minister, warning May that she risked betraying the wishes of leave voters if she persisted with the Chequers deal but stopping short of calling her to go. Johnson told the BBC: “If you stick with Chequers, the electorate of this country will look at what we have produced and think how on Earth was that the outcome of voting leave.”

If people want a second vote, isn’t that democratic?

• Democratizing Brexit (Varoufakis)

As deadlines approach and red lines are redrawn in the United Kingdom’s impending withdrawal from the European Union, it is imperative for the people of Britain to regain democratic control over a process that is opaque and ludicrously irrational. The question is: How? Democracy can never aspire to being more than a work in progress. Decisions made collectively must constantly be reappraised collectively in the light of new evidence. Yet, in the UK’s current circumstances, nothing would be more poisonous to democracy than revisiting Brexit by means of a second referendum.

Both sides, Leavers and Remainers, feel betrayed. Even though Brexit was meant to restore its sovereignty, Parliament has no real say in a process that will mark Britain for decades to come. The Scots and the people of Northern Ireland are hostages to a distinctly English feud that could do them serious damage. The young feel the old have hijacked their future, while the old feel that their accumulated wisdom and legitimate concerns are being ignored by insiders striking bad deals behind closed doors on behalf of vested interests. In short, British democracy is failing its latest and most stringent test.

But a fresh referendum cannot be the answer to the unfolding disaster triggered by the original referendum. In June 2016, a stark choice was available to the people of Britain: leave the EU or stay in. While one can question the wisdom of making such a collective choice via a referendum, the logical coherence of the enterprise was beyond dispute. Once the verdict came in, and the process stipulated by the Treaty of Lisbon’s Article 50 was triggered, no binary yes-or-no choice to steer Britain out of its mess became available. In fact, there are now at least five options that must be collectively appraised.

Oh, yeah, that has them worried. They want their friends spying on you, and nobody else.

• Facebook Says Nearly 50m Users Compromised In Huge Security Breach (G.)

Nearly 50m Facebook accounts were compromised by an attack that gave hackers the ability to take over users’ accounts, Facebook revealed on Friday. The breach was discovered by Facebook engineers on Tuesday 25 September, the company said, and patched on Thursday. Users whose accounts were affected will be notified by Facebook. Those users will be logged out of their accounts and required to log back in. “I’m glad we found this and fixed the vulnerability,” Mark Zuckerberg said on a conference call with reporters on Friday morning. “But it definitely is an issue that this happened in the first place. I think this underscores the attacks that our community and our services face.”

The security breach is believed to be the largest in Facebook’s history and is particularly severe because the attackers stole “access tokens”, a kind of security key that allows users to stay logged into Facebook over multiple browsing sessions without entering their password every time. Possessing a token allows an attacker to take full control of the victim’s account, including logging into third-party applications that use Facebook Login. The security breach comes at a time of significant strife for the social media company, which has faced mounting criticism over issues including foreign election interference, the flow of misinformation, hate speech, and data privacy.

I kid you not: there will be many voices labeling this as ‘opportunity’.

• Melting Arctic Ice Opens New Route From Europe To East Asia (AP)

A Danish-flagged cargo ship has successfully passed through the Russian Arctic, in a trial voyage showing that melting sea ice could potentially open a new trade route from Europe to east Asia. The Venta Maersk made the journey as a one-off trial, said Palle Laursen, the chief technical officer of A.P. Moller-Maersk, the world’s biggest shipping group. The ship, carrying a cargo of frozen fish, arrived in St Petersburg on Friday, after leaving Russia’s Pacific port city of Vladivostok on 22 August. “The trial allowed us to gain exceptional operational experience,” said Laursen, adding the ship had performed well in the unfamiliar environment.

The Northern Sea route could be a shorter journey for ships travelling from east Asia to Europe than the Northwest Passage over Canada because it will likely be free of ice sooner due to climate change. Experts say it could reduce the travel distance from east Asia to Europe from the 21,000 kilometres (13,000 miles) it takes to go via the Suez Canal, to 12,800 kilometres (8,000 miles). This would cut transit time by 10 to 15 days. It’s not the first time a cargo vessel has completed the Russian Arctic route, and Maersk underlined that the journey was “to gain operational experience in a new area and to test vessel systems”. “Currently, we do not see the Northern Sea route as a viable commercial alternative to existing east-west routes,” Laursen said.

Debt Rattle July 12 2018

Jul 122018

July 12, 2018 Posted by Raúl Ilargi Meijer at 9:09 am Finance Tagged with: Brexit, China, EU, Greece, junk bonds, NATO, recycling, Silk Road, Supreme Court, trade war, trash, Trump, wage rises 5 Responses »

Blu Mural in Rome, Italy 2015 Click to enlarge See also here

• Trade War Risk On (Hedgeye)

• Corporate Bonds Are Getting Junkier (DDMB)

• It’s Not Wage Rises That Are A Problem – It’s The Lack Of Them (Frank)

• Britain Facing ‘State Of Emergency’ If No Deal Reached – Grieve (Ind.)

• Trump Tells NATO Allies To Spend 4% of GDP On Defence (G.)

• Germans Want Trump To Pull US Troops Out Of Germany (Ind.)

• China’s Silky Charming of Arabia (Escobar)

• The Supreme Court Is Much Too Powerful (Mises.org)

• New Zealand Hospitals In Chaos As 30,000 Nurses Strike (G.)

• EU Approves ‘Enhanced Surveillance’ for Post-Bailout Greece (GR)

• Trash Piles Up In US As China Closes Door To Recycling (AFP)

Great cartoon.

• Trade War Risk On (Hedgeye)

– Global equities are retreating materially today on fears of a commensurate escalation in the burgeoning trade war between the U.S. and China. Specifically, the Trump administration released a list of goods that it may target w/ sanctions totaling some $200 billion, while China’s Commerce Ministry described the move as “totally unacceptable bullying”, and promised to lodge complaints at the WTO without detailing what its retaliatory steps would be. Are trade wars bad for growth? Of course they are. Does anyone really possess a reliable framework for quantifying the ultimate impact ex ante? Probably not.

This we do know, however: prior to the last Friday’s tit-for-tat escalation targeting $34 billion in Chinese goods and a list of [mostly] U.S. agricultural products, Export growth was trending lower in 70% of the near-50 economies we maintain detailed predictive tracking algorithms for, while 77% of Manufacturing PMI series were trending lower. This figures reflect data through MAY and JUN, respectively, and are supportive of our view that trade tensions aren’t the driving force behind Global #Divergences; they are merely adding fuel to the fire. Global equities peaked in late-JAN for a reason.

Anyone remember AAA?

• Corporate Bonds Are Getting Junkier (DDMB)

Life insurers invest heavily in high-grade corporate bonds to fund annuities, life insurance policies and other products. Here’s a look at the possibility that the issues might be affected by credit rating grade inflation… Much has been made of the degradation of the $7.5 trillion U.S. corporate debt market. High yield offers too little, well, yield. And “high grade” now requires air quotes to account for the growing dominance of bonds rated BBB, which is the lowest rung on the investment-grade ladder before dropping into “junk” status. And then there’s the massive market for leveraged loans, where covenants protecting investors have all but disappeared.

How does that break down? Corporate bonds rated BBB now total $2.56 trillion, having surpassed in size the sum of higher-rated debentures, which total $2.55 trillion, according to Morgan Stanley. Put another way, BBB bonds outstanding exceed by 50% the size of the entire investment grade market at the peak of the last credit boom, in 2007. But aren’t they still investment grade? At little to no risk of default? In 2000, when BBB bonds were a mere third of the market, net leverage (total debt minus cash and short term investments divided by earnings before interest, taxes, depreciation and amortization) was 1.7 times. By the end of last year, the ratio had ballooned to 2.9 times.

Given the marked deterioration in fundamentals, bond powerhouse PIMCO worries that “This suggests a greater tolerance from the credit rating agencies for higher leverage, which in turn warrants extra caution when investing in lower-rated IG names, especially in sectors where earnings are more closely tied to the business cycle.” [..] why not treat the BBB portion of the bond market for what it is: a high-risk slice of the corporate debt pie. Keeping count of “fallen angels,” or those investment-grade bonds that are downgraded into junk territory, will become a spectator sport.

“Except in the very tightest labour markets, workers simply don’t have the power to demand their fair share.”

• It’s Not Wage Rises That Are A Problem – It’s The Lack Of Them (Frank)

If you study the Bureau of Labor Statistics’ numbers on wages for nonsupervisory workers over the past few decades, you will notice that wage growth has been strangely slow to pick up. Hot economies usually drive wages up pretty promptly; this recovery has been running since 2009 and it has barely moved the needle. It’s even more perverse on the other side of the Atlantic. According to a 2017 story in the Financial Times, Britain was “the only big, advanced economy in which wages contracted while the economy expanded” – an amazing achievement if you think about it. And UK thinktank the Resolution Foundation has said this decade is “set to be the worst for pay growth since the Napoleonic wars”.

How could such a thing happen in this modern and enlightened age? Well, for starters, think of all that whining we’re hearing from the US’s management, who will apparently blame anyone and do anything to avoid paying workers more. Every labour-management innovation seems to have been designed with this amazing goal in mind. Every great bipartisan political initiative, from free trade to welfare reform, points the same way. When Republicans are in charge, it’s open season on working-class organisations. And you can forget about increases in the minimum wage, regardless of who’s in the White House.

Of course it’s happening the same way in the UK; be it Thatcher’s war on unions or New Labour’s “third way”, Britain has followed the US model closely. Political decisions within both countries have had highly predictable results, and we are now fated to live with them. Good times aren’t really all that good for ordinary people any more, only for the people on top – the owners of companies, of real estate, of stocks. Except in the very tightest labour markets, workers simply don’t have the power to demand their fair share. If you ask me, this is the thing to panic about: not the possibility that workers might prosper, but that they’re not prospering yet.

“..ordinary life will grind to a halt. That is the extent to which our lives are intermeshed with the lives of our European partners..”

• Britain Facing ‘State Of Emergency’ If No Deal Reached – Grieve (Ind.)

Britain will face a “state of emergency” if no Brexit deal is reached by February, Dominic Grieve has warned at an exclusive event for Independent subscribers. Appearing on a stage with other key Brexit figures, including Jacob Rees-Mogg and Gina Miller, the leading Tory rebel said “ordinary life will grind to a halt” if the talks are still deadlocked as D-Day nears. The warning came as Mr Rees-Mogg launched his most outspoken attack yet on big businesses opposing a hard Brexit, claiming they have “got everything wrong in the whole of their history”. Andrea Leadsom, the Commons leader, suggested she would not accept any further “compromises” beyond the deal struck at Chequers by Theresa May – preferring a no-deal outcome. [..]

Last month, Mr Grieve, a former attorney general, led an aborted revolt to guarantee MPs a “meaningful vote” to prevent Britain crashing out of the EU without an agreement. In his most dramatic language yet, to underline the high stakes, Mr Grieve told the audience: “If by the end of February or early March it is clear that there is no deal on anything, there will be a declaration of a state of emergency in this country. “Actually, ordinary life will grind to a halt. That is the extent to which our lives are intermeshed with the lives of our European partners, and that is what will happen if there is no deal on anything.” Mr Grieve said hardline anti-Brexit MPs had “abdicated” their responsibilities to the public by boasting that they will do “absolutely nothing while we skated off the edge of the cliff into this major national crisis”. “That is the madness that has crept into some of the discourse in parliament,” he added.

They won’t.

• Trump Tells NATO Allies To Spend 4% of GDP On Defence (G.)

Donald Trump left the opening day of the Nato summit in Brussels in disarray on Wednesday after making a surprise demand for members to raise their defence spending to 4% of GDP, and clashing with German chancellor Angela Merkel over a proposed pipeline deal with Russia. Trump left the assembled presidents and prime ministers floundering, unsure whether he was serious about the 4% target, double the existing Nato target of 2%, which many do not meet, or whether it was just a ploy. After making the announcement, Trump walked out.

The White House press secretary, Sarah Sanders, confirmed the 4% figure. “During the president’s remarks today at the Nato summit he suggested that countries not only meet their commitment of 2% of their GDP on defence spending, but that they increase it to 4%,” she said. Sanders added: “President Trump wants to see our allies share more of the burden and, at a very minimum, meet their already stated obligations.”

So there. WHy on earth would you need so many US bases?

• Germans Want Trump To Pull US Troops Out Of Germany (Ind.)

Germans would actually welcome the withdrawal of American troops stationed in their country, a new poll has found – as Donald Trump threatens to pull the plug on military support. The finding comes on the first day of a Nato summit in which the US president is urging Europe to spend more on defence if it wants to continue to receive American military protection. But far from being seen as a threat, a YouGov poll for the dpa news agency found that more Germans would welcome the departure of the 35,000-strong American force than would oppose it.

42% said they supported withdrawal while just 37% wanted the soldiers to stay, with 21% undecided. Last month the US media reported that the US government was in the process of assessing the cost of keeping troops in Germany ahead of a possible withdrawal, citing Pentagon sources. But the policy of actually pulling out of the country has not actually reached the negotiating table in his week’s Brussels summit and is not expected to be discussed as a possibility – for now.

At some point the Chinese will run into Americans there.

• China’s Silky Charming of Arabia (Escobar)

Under the radar, away from World Cup frenzy and the merger and acquisition of Cristiano Ronaldo Inc. and Fiat, the eighth ministerial meeting of the China-Arab States Cooperation Forum (CASCF), established in 2004, sailed on in Beijing, hosted by President Xi Jinping. Amid the torrential pledge of loans and aid, China committed to invest right across the Arab world in transportation infrastructure, oil and gas, finance, digital economy and artificial intelligence (AI). Significantly, Beijing will offer $15 million in aid for Palestinian economic development, as well as $91 million distributed among Jordan, Lebanon, Syria and Yemen.

A China-Arab bank consortium will be set up, with a dedicated fund of $3 billion tied up with the financial aid and loan package. Beijing also foresees importing a whopping $8 trillion from Arab states up to 2025. Predictably, once again Xi fully connected the whole Arab world with the expansion of the New Silk Roads, or Belt and Road Initiative (BRI). And careful to navigate the geopolitical minefield, he urged “relevant sides” to respect the international consensus in the Israel-Palestine confrontation, calling for justice. That may indicate a gradual, but sure departure from trademark Chinese passive or reactive policy across the Arab world, focused exclusively on energy and political non-interference.

Xi is now openly tying up Chinese financial aid and deals with nations across the Global South to an overall economic development drive; the only roadmap to solve intractable political and religious conflict. And that includes full respect of international deals. As much as the Arab world, Iran is in Southwest Asia. A day before the China-Arab forum, Premier Li Keqiang, in Berlin, was warning of “unforeseeable consequences” if the Iran nuclear deal, known as JCPOA, were to be discarded, as the Trump administration wants.

Stating the obvious.

• The Supreme Court Is Much Too Powerful (Mises.org)

The current frenzy over the vacancy on the Supreme Court in the wake of Justice Kennedy’s retirement highlights just how much power has been centralized in the hands of a small number of people in Washington, DC. The left has grown positively hysterical over the thought of yet another Trump-appointed judge being installed, who could potentially serve on the court for decades. Right-wingers who claim the left is overreacting, however, are unconvincing. One can only imagine the right’s reaction were Hillary Clinton president. She would have already had the opportunity to appoint Scalia’s replacement, and we might now be talking about her nominee to replace Justice Ginsberg.

The right-wing media would be filled with article after article about how the new court would be a disaster for health-care freedom, private gun ownership, and, of course, the unborn. But, as it is, we live in a country where five people on a court decide what the law is for 320 million people. And for some reason, many people think this is entirely normal. It’s our own American version of the Soviet politburo, but few are even bothering to ask whether it’s a good idea. After all, if it makes sense for a small handful of people to decide law for the entire country, why even bother with a House of Representatives? Even the Senate — composed primarily of multimillionaires living full-time in Washington, DC, is [by comparison] extravagantly “democratic.”

“be fair to those who care”

• New Zealand Hospitals In Chaos As 30,000 Nurses Strike (G.)

Hospitals in New Zealand have cancelled elective surgeries and discharged patients early after 30,000 nurses walked off the job in the first such nationwide strike in 30 years. The 24-hour strike began on Thursday, and comes after months of negotiations between the government and nurses broke down on Wednesday, leaving hospitals to battle winter illnesses without crucial staff. Long delays at hospital emergency departments are expected around the country. Striking nurses held rallies in major cities, chanting “be fair to those who care” in the largest public demonstrations by the health sector ever seen on the country’s streets. Nurses said they were overworked and underpaid, with unsafe working conditions leading to burnout and exhaustion.

Patient care and staff wellbeing were routinely compromised, they said. Acting prime minister Winston Peters said the government was “very, very disappointed” that its latest offer of a 12.5% increase had been rejected, and that it would take time to address nine years of neglect under the previous National government. Although the May budget delivered a surplus, Peters said the extra funds were needed to handle unforeseen spending, such as managing the spread of mycoplasma bovis, a cow disease. “We are saying give us some time … it’s not that we’re not willing to, we haven’t got the money,” said Peters. “We’ve gone as far as we can go as a government. We got hold of a negotiated arrangement which we inherited – the nurses have had a raw nine years.”

Straight jacket.

• EU Approves ‘Enhanced Surveillance’ for Post-Bailout Greece (GR)

The European Commission on Wednesday said Greece will remain under an “enhanced surveillance framework” to ensure that it meets ambitious budget targets through 2022. The country will still be subject to quarterly inspections from creditors after the bailout program ends in late August. “Greece is now able to stand on its own two feet but that doesn’t mean it has to stand alone … The reform era has not ended,” EU Financial Affairs Commissioner Pierre Moscovici said. “Enhanced surveillance is not a fourth program: it involves no new commitments or conditions. It is a framework to support the completion and delivery of ongoing reforms,” he added.

Despite returning to growth after a massive recession, Greece leaves the program still facing major difficulties. Banks are struggling to deal with a high rate of bad loans. At over 20%, Greece has the highest unemployment rate in the euro currency union. Government bonds remain below investment grade even though their yields have fallen to manageable rates. And to help reduce its debt, Greece has committed to punishingly high primary budget surpluses — that is, the budget excluding the cost of debt servicing — of above 3.5% through 2022. “Enhanced surveillance is there to help Greece build confidence with markets, investors and companies,” Commission Vice-President Valdis Dombrovskis said. “They all want stability and predictability.”

They’ll find a new dump.

• Trash Piles Up In US As China Closes Door To Recycling (AFP)

For months, a major recycling facility for the greater Baltimore-Washington area has been facing a big problem: it has to pay to get rid of huge amounts of paper and plastic it would normally sell to China. Beijing is no longer buying, claiming the recycled materials are “contaminated.” For sure, the 900 tons of trash dumped at all hours of the day and night, five days a week, on the conveyor belts at the plant in Elkridge, Maryland – an hour’s drive from the US capital – are not clean. Amid the nerve-shattering din and clouds of brown dust, dozens of workers in gloves and masks – most of them women – nimbly pluck a diverse array of objects from the piles that could count as “contaminants.”

That could be anything from clothes to cables to tree branches to the bane of all recyclers: plastic bags, which are not supposed to go in recycling bins because they snarl up the machinery. “We’ve had to slow our machinery, and hire more people” to clean up the waste, says Michael Taylor, the head of recycling operations for Waste Management, the company that runs the plant. At the end of the sorting line is the end product — huge bales of compacted waste containing paper, cardboard or plastics. These have been bought up for decades by businesses, most of them based in China, which clean them up, crush them and transform them into raw materials for industrial plants.

Last year, China bought up more than half of the scrap materials exported by the United States. Globally, since 1992, 72% of plastic waste has ended up in China and Hong Kong, according to a study in the journal Science Advances. But since January, China has closed its borders to most paper and plastic waste in line with a new environmental policy pushed by Beijing, which no longer wants to be the world’s trash can, or even its recycle bin. For other waste products such as cardboard and metal, China has set a contamination level of 0.5% — a threshold too low for most current US technology to handle. US waste handlers say they expect China will close its doors to all recycled materials by 2020 — an impossibly short deadline.

Debt Rattle June 27 2018

Jun 272018

June 27, 2018 Posted by Raúl Ilargi Meijer at 9:00 am Finance Tagged with: Brexit, children, IMF, junk bonds, May, Merkel, migrants, Ocasio, opioids, reunion, separation, trees, Trump 6 Responses »

Édouard Vuillard In bed 1891

• Judge Orders Families Reunited Within 30 Days (AP)

• 17 US States Sue Trump Administration Over Family Separation (Ind.)

• Democrats See Major Upset As Socialist Beats Top-Ranking US Congressman (G.)

• How Long Can The Federal Reserve Stave Off the Inevitable? — PCR

• Market Drop Prompts Trump To Offer China A Trade War “Olive Branch” (ZH)

• US Asset Prices Divorced From Economic Reality More Than Ever (GMM)

• IMF Sounds The Alarm Over Junk Bonds (ZH)

• France And Germany Will Block May’s Single Market Plan, Says Spain (G.)

• Merkel Calls For Direct Deals Between Countries To Fix Migration Crisis (R.)

• Misuse Of Opioids Is A ‘Global Epidemic’ -UN (G.)

• One Football Pitch Of Forest Lost Every Second In 2017 (G.)

• ‘There Is No Oak Left’: Are Britain’s Trees Disappearing? (G.)

• ‘Green Gold’: Pakistan Plants Hundreds Of Millions Of Trees (AFP)

Reason. The mother and child reunion is only a motion away.

• Judge Orders Families Reunited Within 30 Days (AP)

A judge in California has ordered U.S. border authorities to reunite separated families within 30 days. If the children are younger than 5, they must be reunified within 14 days of the order, issued Tuesday. U.S. District Judge Dana Sabraw in San Diego issued the order in a lawsuit by the American Civil Liberties Union. The lawsuit involves a 7-year-old girl who was separated from her Congolese mother and a 14-year-old boy who was separated from his Brazilian mother.

Sabraw also issued a nationwide injunction on future family separations, unless the parent is deemed unfit. More than 2,000 children have been separated from their parents in recent weeks and placed in government-contracted shelters. President Donald Trump last week issued an executive order to stop the separation of families and said parents and children will instead be detained together.

The ruling above seems to cover this?

• 17 US States Sue Trump Administration Over Family Separation (Ind.)

Seventeen US states and Washington DC are suing Donald Trump’s administration over its family separation policy at the US border. The lawsuit was filed by 18 Democratic Attorneys General and attempts to force the administration to reunite the approximately 2,000 separated children with their families. California Attorney General Xavier Becerra said in a statement that the policy to detain children away from parents was a “heartless political manoeuvre”. Though Mr Trump signed an executive order last week declaring that families would no longer be separated upon illegal entry into the US, the lawsuit stated the executive order is “so vague and equivocal that it is unclear when or if any changes will actually be made”.

The order did not reverse or end the underlying “zero tolerance” policy announced by US Attorney General Jeff Sessions was not ended. Families can also now be indefinitely detained and the policy still makes seeking asylum in the US a crime. Per US immigration law, people wanting the protected status must enter the US before applying for it. It stated that “family unity” will be maintained “where appropriate and consistent with law and available resources”. “Child internment camps in America…the Trump Administration has hit a new low. President Trump’s indifference towards the human rights of the children and parents who have been ripped away from one another is chilling,” Mr Becerra said.

The choice of headlines I’ve seen for this looks weird. Someone tweeted a list of corporations that donate to Crowley. Needed a dozen tweets to cover them. Ocasio beat the system. But watch out: the system has now woken up. They never expected to lose. The big guns will now step in. Next up: Cynthia Nixon vs Cuomo. If she can pull that off, we’re in business.

• Democrats See Major Upset As Socialist Beats Top-Ranking US Congressman (G.)

Joe Crowley, a 10-term Democrat pegged as his party’s next leader in Congress, lost his party’s New York congressional primary to a 28-year-old socialist, in one of the biggest upsets in recent American political history. With 98% reporting, Alexandria Ocasio-Cortez had 57.5% and Crowley had 42.5%, in a majority minority district that included parts of Queens and the Bronx Ocasio-Cortez, a Puerto-Rican American and former Bernie Sanders volunteer, defeated Crowley in his re-election bid Tuesday night, after hitting the incumbent on his ties to Wall Street and accusing him of being out of touch with his increasingly diverse district.

Crowley, head of the Queens county Democratic party and the fourth-ranking Democrat in the House of Representatives, was considered to be Nancy Pelosi’s likely successor as House speaker if she stepped down. [..] Ocasio-Cortez ran a grassroots campaign and made a surprise visit to the Mexican border on the eve of the election to emphasize her call to abolish the Immigration and Customs Enforcement agency (ICE). In contrast, Crowley was unwilling to go that far, simply calling the agency “fascist”.

Crowley had expressed confidence about the race in private conversations and as one national Democratic strategist told the Guardian: “The Crowley team did not raise red flags or ask allies for help with his primary.” Prior to 2018, Crowley had not even faced a primary since 2004, years before his opponent was even eligible to vote. He had raised over $3m for his campaign, 10 times the amount his opponent had.

Tariffs on US companies?

• How Long Can The Federal Reserve Stave Off the Inevitable? — PCR

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them? The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China. Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs.

Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children. In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent.

These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100). In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs. “Making America great again” means dealing with these corporations, not with China. When Trump learns this, assuming anyone will tell him, will he back off China and take on the American global corporations?

Mnuchin wants less agressive policies.

• Market Drop Prompts Trump To Offer China A Trade War “Olive Branch” (ZH)

One day after the market tanked followed media reports that the Trump administration would pursue new initiatives to limit Chinese investments in US tech industries, on Tuesday the president suggested that he will ease off demands for such new restrictions, and will rely instead on a 1988 law being updated by Congress that authorizes the government to review foreign investments for national security problems. Speaking to reporters at the White House, Trump said that “we have the greatest technology in the world, people come and steal it. We have to protect that and that can be done through CFIUS,” or the Committee on Foreign Investment in the U.S., which traditionally has screened foreign investments to see whether they endanger national security.

Trump also said that the recent WSJ article reporting that the administration was planning two further initiatives, in addition to CFIUS, to prevent Beijing from obtaining advanced U.S. technology, “a bad leak…probably just made up.” Why is this stated policy important? Because according to the WSJ it would represent a potential “olive branch” for Trump in the escalating trade war with China, and a signal that the US is willing to break the tit-for-tat escalation: If Mr. Trump’s decision holds through June 30, when the new policies are scheduled to be announced, it would represent a significant backing away from threats the president has made against China and a possible olive branch to Beijing before the July 6 impositon of tariffs on $34 billion of Chinese goods.

Meanwhile, lawmakers who have worked on a CFIUS reform bill have also been arguing in administration meetings that additional investment restrictions weren’t necessary given changes being made to CFIUS. Separately, the report notes that relying mainly on CFIUS — if that is the final decision — would be a big victory for Treasury Secretary Steven Mnuchin, National Economic Council Director Larry Kudlow and others who have tried to tamp down the burgeoning trade battle with China.

Obese tails.

• US Asset Prices Divorced From Economic Reality More Than Ever (GMM)

You would never know it listening to the market cheerleaders but asset prices, both real and financial, are, once again, at extreme valuation levels relative to the trend economy. The valuation reality coupled with the prevailing, but false, “don’t worry” market narrative sets us up for another major financial crisis. A third major crisis in 20 years? These are only supposed to happen once in every 100 or 1,000 or 10,000 years, so say the rocket scientists. Blame it on ~~fat~~ obese tails. The chart below illustrates that household net worth, as measured by real and financial assets minus liabilities, which just hit a record high at around $102 trillion, is, once again, totally divorced from the economy.

Note that one of the reasons why the highest level U.S. policymakers missed the last financial crisis is because they were too focused on this indicator, which also hit a record high in Q3 2007. They failed, or chose not to see, the massive leverage as the root cause driving up assets prices. Their error was twofold: 1) not fully recognizing or believing the risk of asymmetric mark-to-market, where asset prices are variable, while liabilities remain fixed, and 2) not understanding the economy had morphed into a giant asset-driven feedback loop, where the wealth effect drives growth (both consumption and investment confidence), which drives asset prices, which drives the wealth effect. Wash, rinse, repeat.

Well, how timely.

• IMF Sounds The Alarm Over Junk Bonds (ZH)

Ever since the start of 2018, an odd divergence has emerged in credit markets, where Investment Grade bonds have seen their spreads leak progressively wider, hitting levels not seen in 2 years, while the bid for higher yielding, and much more risky, junk bond debt has been seemingly relentless, with high yield spreads near all time lows. To be sure, many reasons have been offered, with Bank of America suggesting that IG weakness is “due to supply pressures in an environment of reduced demand that began in March and extended through last week, plus the Italian situation, which is about systemic risks running through the global IG financial system.”

Meanwhile, it believes the strength in HY is mostly due to the lack of supply of higher yielding paper. Whatever the suggested reasons, however, the underlying causes are two: an environment of artificially low interest rates created by central banks, and unyielding, pardon the pun, investor euphoria. In other words: a multi-year credit boom. And while the Fed’s “macroprudential regulation team” appears to have zero problems with what is going on in the world of junk bonds, the IMF has sounded the alarm on the troubling developments in junk bond land in particular, and capital markets in general.

In its The Chart of the Week, the IMF Blog shows the impact of a bad credit boom – one which the fund defines as followed by slower economic growth or even a recession – on economic growth in the years that follow. But first, it ask a basic question: what makes for a bad boom? The IMF’s answer: it is fueled by excessive optimism among investors. When the economy is doing well and everybody seems to be making money, some investors assume that the good times will never end. They take on more risk than they can reasonably expect to handle.

Really, guys, you should send her packing. The damage accelerates.

• France And Germany Will Block May’s Single Market Plan, Says Spain (G.)

Theresa May’s plan to protect British industry by keeping the UK in a single market for goods without respecting the free movement of people after Brexit will be rejected by an “angry” France and Germany, despite some sympathy within the EU to Downing Street’s cause, Spain’s foreign minister has said. The new Spanish government would also block such a political fix, Josep Borrell told the Guardian, ahead of both a summit of leaders in Brussels and a summer tour by the prime minister of EU capitals during which May hopes to convince leaders of her economic case. Of those member states who might see value in a deal on single market access for goods without free movement, Borrell said: “They will not win the battle. They have not enough power. Germany will say no, France will say no, Spain will say no.”

The government has been rocked by a series of warnings from industry, from Airbus to BMW, that companies will move out of the UK unless preferential access to the single market can be secured in the negotiations. Ministers have openly squabbled over how seriously they should take the threats. The business secretary, Greg Clark, urged his cabinet colleagues to “listen with respect” and the health secretary, Jeremy Hunt, called Airbus’s warnings “completely inappropriate”. The prime minister is expected to publish a white paper on the UK’s vision of the future relationship, including a proposal for regulatory alignment on goods, for the benefit of UK industry and European-wide supply chains, shortly after a meeting of the cabinet at Chequers, the prime minister’s country retreat, on 6 July.

UBS survey of 600 companies spells out Brexit “dividend”:
– 35% of companies plan to reduce UK investment post-Brexit
– 41% plan to move a large amount of capacity out of UK
– 42% plan to shift capacity to euro zone

Too late. No unity.

• Merkel Calls For Direct Deals Between Countries To Fix Migration Crisis (R.)

German Chancellor Angela Merkel said she will seek direct deals with separate EU states on migration, conceding the bloc had so far failed to find a joint solution to the issue threatening her government. Sixteen EU leaders met for emergency talks in Brussels hoping to get a deal for the full summit of all 28 states on 28 to 29 June. Ms Merkel said the meeting produced “a lot of goodwill” to resolve differences, but was clear smaller agreements may produce better results. “There will be bilateral and trilateral agreements, how can we help each other, not always wait for all 28 members,” she said.

Since Mediterranean arrivals spiked in 2015, when more than a million refugees and migrants reached the bloc, EU leaders have been at odds over how to handle them. The feud has weakened their unity and undermined Europe’s Schengen free-travel area. Wealthy Germany is where the newly-arrived mostly end up and Merkel is under pressure to curb the numbers. Her coalition partner is pushing for firmer action that could break her government. The talks were “frank and open,” but “we don’t have any concrete consequences or conclusions,” Spanish Prime Minister Pedro Sanchez said. French President Emmanuel Macron offered his backing for Ms Merkel’s proposal , saying the solution should be “European” but it could just be several states together.

But the profits!

• Misuse Of Opioids Is A ‘Global Epidemic’ -UN (G.)

The misuse of pharmaceutical opioids is fast becoming a “global epidemic”, with the largest quantities being seized in African countries for the second year in a row, according to a UN report. While huge attention has been paid to the opioid crisis in the US – where the misuse of prescription drugs like fentanyl dominates – figures released by the United Nations Office on Drugs and Crime has revealed seizures in Africa of opioids now account for 87% of the global total. Unlike in the US, the seizures – concentrated in west, central and north Africa – have largely consisted of the drug tramadol, followed by codeine.

The figures were disclosed in the latest UN world drug report, which noted that opioids were the most harmful global drug trend, accounting for 76% of deaths where drug-use disorders were implicated. The report said that while fentanyl and its analogues remain a problem in North America, tramadol – used to treat moderate and moderate-to-severe pain – has become a growing concern in parts of Africa and Asia. The report added that the global seizure of pharmaceutical opioids in 2016 was 87 tonnes, roughly the same as the quantities of heroin impounded that year.

The figures on pharmaceutical opioids were rivalled by global cocaine manufacture, which the agency said had reached the highest level ever reported in 2016, with an estimated 1,410 tonnes produced. Most of the world’s cocaine comes from Colombia, but the report also showed Africa and Asia emerging as cocaine trafficking and consumption hubs. From 2016-17, global opium production also jumped by 65% to 10,500 tonnes, the highest estimate recorded by the agency since it started monitoring global opium production nearly 20 years ago.

They convert greenhouse gases into oxygen.

• One Football Pitch Of Forest Lost Every Second In 2017 (G.)

The world lost more than one football pitch of forest every second in 2017, according to new data from a global satellite survey, adding up to an area equivalent to the whole of Italy over the year. The scale of tree destruction, much of it done illegally, poses a grave threat to tackling both climate change and the massive global decline in wildlife. The loss in 2017 recorded by Global Forest Watch was 29.4m hectares, the second highest recorded since the monitoring began in 2001. Global tree cover losses have doubled since 2003, while deforestation in crucial tropical rainforest has doubled since 2008. A falling trend in Brazil has been reversed amid political instability and forest destruction has soared in Colombia.

In other key nations, the Democratic Republic of Congo’s vast forests suffered record losses. However, in Indonesia, deforestation dropped 60% in 2017, helped by fewer forest fires and government action. Forest losses are a huge contributor to the carbon emissions driving global warming, about the same as total emissions from the US, which is the world’s second biggest polluter. Deforestation destroys wildlife habitat and is a key reason for populations of wildlife having plunged by half in the last 40 years, starting a sixth mass extinction.

“The main reason tropical forests are disappearing is not a mystery – vast areas continue to be cleared for soy, beef, palm oil, timber, and other globally traded commodities,” said Frances Seymour at the World Resources Institute, which produces Global Forest Watch with its partners. “Much of this clearing is illegal and linked to corruption.” Just 2% of the funding for climate action goes towards forest and land protection, Seymour said, despite the protection of forests having the potential to provide a third of the global emissions cuts needed by 2030. “This is truly an urgent issue that should be getting more attention,” she said. “We are trying to put out a house fire with a teaspoon.”

No, trees are not an industrial resource. They are so much more.

• ‘There Is No Oak Left’: Are Britain’s Trees Disappearing? (G.)

England is running out of oak. The last of the trees planted by the Victorians are now being harvested, and in the intervening century so few have been grown – and fewer still grown in the right conditions for making timber – that imports, mostly from the US and Europe, are the only answer. “We are now using the oaks our ancestors planted, and there has been no oak coming up to replace it,” says Mike Tustin, chartered forester at John Clegg and Co, the woodland arm of estate agents Strutt and Parker. “There is no oak left in England. There just is no more.” Earlier this month, the government appointed the first “tree champion”, who will spearhead its plans to grow 11 million new trees, and conserve existing forests and urban trees.

Sir William Worsley, currently chairman of the National Forest Company, has been given the task of overseeing trees in England and Wales, including England’s iconic national tree, and ensuring that trees are not felled unnecessarily. Worsley is a former chief of the Country Land and Business Association, which represents landowners and rural businesses. Trees were once fundamental to the British economy, from the days of Magna Carta, a large section of which concerned forestry rights, to the “Hearts of Oak” centuries of the empire-building Royal Navy, up to more recent times when millions of homes were needed, and the Forestry Commission was set up immediately after the First World War to grow the material to make them, while providing jobs for returning soldiers.

Today, forestry is a tiny business and only about 13% of the UK is covered in forest, a vast improvement on the 5% after the First World War, but far less than the European average of more than 30%.

That’s the spirit.

• ‘Green Gold’: Pakistan Plants Hundreds Of Millions Of Trees (AFP)

The change is drastic: around the region of Heroshah, previously arid hills are now covered with forest as far as the horizon. In northwestern Pakistan, hundreds of millions of trees have been planted to fight deforestation. In 2015 and 2016 some 16,000 labourers planted more than 900,000 fast-growing eucalyptus trees at regular, geometric intervals in Heroshah – and the titanic task is just a fraction of the effort across the province of Khyber Pakhtunkhwa. “Before it was completely burnt land. Now they have green gold in their hands,” commented forest manager Pervaiz Manan as he displayed pictures of the site previously, when only sparse blades of tall grass interrupted the monotonous landscape.

The new trees will reinvigorate the area’s scenic beauty, act as a control against erosion, help mitigate climate change, decrease the chances of floods and increase the chances of precipitation, says Manan, who oversaw the revegetation of Heroshah. Residents also see them as an economic boost – which, officials hope, will deter them from cutting the new growth down to use as firewood in a region where electricity can be sparse. “Now our hills are useful, our fields became useful,” says driver Ajbir Shah. “It is a huge benefit for us.” Further north, in Khyber Pakhtunkhwa’s Swat, many of the high valleys were denuded by the Pakistani Taliban during their reign from 2006 to 2009.

Now they are covered in pine saplings. “You can’t walk without stepping on a seedling,” smiles Yusufa Khan, another forest department worker. The Heroshah and Swat plantations are part of the “Billion Tree Tsunami”, a provincial government programme that has seen a total of 300 million trees of 42 different species planted across Khyber Pakhtunkhwa.

Debt Rattle June 20 2018

Jun 202018

June 20, 2018 Posted by Raúl Ilargi Meijer at 9:22 am Finance Tagged with: Assange, bodycount, children, EU, junk bonds, marijuana, migrants, refugees, smearing, social media, swifts 15 Responses »

Edward Hopper New York movie 1939

• The Smart Money Gets Ready for the Next Credit Event (WS)

• Global Debt Has Hit A High – Can Financial Regulators Cope? (Davies)

• Stock Markets Roiled As US-China Trade Dispute Escalates (G.)

• European Firms Say China Business ‘More Difficult’ (AFP)

• Canada Legalises Recreational Marijuana Nationwide (Ind.)

• Smearing A Dissident Journalist Is As Good As Killing Him (CJ)

• “Delete Your Account” Warns Virtual Reality Founding Father (ZH)

• 1 In 3 UK Primary School Teachers Provide Pupils With Toothpaste, Soap (Ind.)

• Merkel, Macron Agree On Eurozone Budget (CNBC)

• EU To Consider Plans For Migrant Processing Centres In North Africa (G.)

• EU Rebuked For €36 Billion Refugee Pushback Gambit (G.)

• 34,361 And Rising: Tallying Europe’s Migrant Bodycount (G.)

• The Vanishing Of The Swifts (G.)

Scary.

• The Smart Money Gets Ready for the Next Credit Event (WS)

As corporate indebtedness in the US has reached precarious heights, and as risks are piling up, in an environment of rising interest rates and a hawkish Fed, the smart money is getting ready. The smart money is preparing for the moment when the air hisses out of the exuberant junk-bond market, when liquidity dries up for over-indebted companies, and when their bonds collapse. The smart money is preparing for the arrival of “distressed debt” – it’s preparing now because these preparations include raising billions of dollars for their funds, and that takes some time. “Distressed debt” is defined as junk-rated debt that sports yields that are at least 10 percentage points above equivalent US Treasury yields.

Distressed-debt investors can make a killing by buying bonds for cents on the dollar during times of economic stress, of companies that they believe will make it through the cycle without defaulting. In this scenario, a distressed bond might sell for 40 cents on the dollar, and two years later, the company is still intact and the credit squeeze is resolved, and now the bond is worth face value. For those two years, the bond paid a huge yield to investors that bought at 40 cents on the dollar – and the profit might be 200% in capital gains and interest. The thing is: The junk-bond market has been booming. There’s no credit squeeze yet. And the riskiest end is flush as the “dumb money” is still chasing yield.

And for the smart money, there’s not much to pick at the moment; but down the road, the future looks bright. S&P Global tracks distressed debt in its US High Yield Corporate Distressed Bond Index. The index peaked in early July 2014, on the eve of the oil bust. Over the next 18 months, it plunged 56% as the oil bust was wreaking havoc on oil-and-gas bonds. But on February 11, 2016, the index bottomed out. New money began flowing into the oil-and-gas sector. Banks started lending again. The surviving bonds soared. And the index skyrocketed 113% in 28 months:

Really? The IMF?

• Global Debt Has Hit A High – Can Financial Regulators Cope? (Davies)

At the end of May, the International Monetary Fund launched its global debt database. For the first time, IMF statisticians have compiled a comprehensive set of calculations of public and private debt, country by country, constructing a time series stretching back to the end of the second world war. It is an impressive piece of work. The headline figure is striking: global debt has hit a new high of 225% of world GDP, exceeding the previous record of 213% in 2009. So, as the IMF points out, there has been no deleveraging at the global level since the 2007-08 financial crisis. In some countries, the composition of debt changed, as public debt replaced private debt in the post-crisis recession, but that shift has mostly stopped.

Are these large figures alarming? In aggregate terms, perhaps not. At a time when economic growth is robust almost everywhere, financial markets are relaxed about debt sustainability. Long-term interest rates remain remarkably low. But the numbers do tend to support the hypothesis that the so-called debt intensity of growth has increased: we seem to need higher levels of debt to support a given rate of economic growth than we did before. Perhaps that is partly because the growth in income and wealth inequality in developed countries has distributed spending power to those with a propensity to spend less than their income. That trend has levelled off recently, but the implications are still with us. It also seems that productivity growth has slowed, so a given quantum of investment generates less output than it used to do.

The IMF’s recommendation to governments is that they should fix the roof while the sun is shining: accumulate a fiscal surplus, or at least reduce deficits, in good times so that they are better prepared for the next downturn, which will surely come before too long. The current upturn is now quite mature. That puts the IMF on a collision course with the tax-cutting US administration and now with Italy’s new government. If the Italians’ grandiose plans for a minimum income and more public investment are implemented, they might soon find themselves in difficult discussions with the IMF. The team that has been in Athens for the past few years might soon be booked on a flight to Rome.

Keep negotiating.

• Stock Markets Roiled As US-China Trade Dispute Escalates (G.)

The trade dispute between the US and China escalated on Tuesday, with a senior Trump official accusing China of “theft” and Beijing accusing the US of blackmail. The news roiled global stock markets as investors feared that escalating tensions could trigger an international trade war. Donald Trump threatened to impose an additional $200bn in levies on Chinese goods on Monday evening, days after the US announced $50bn in tariffs aimed at punishing what the US administration sees as unfair trade practices. China has already said it will retaliate for last week’s move and said it would escalate its response if further tariffs were imposed.

In a call with reporters Peter Navarro, White House trade adviser and a longtime critic of China’s trade practices, said China had had numerous opportunities to address Washington’s concerns but had failed to do so. “Since China joined the World Trade Organisation in 2001, the working men and women of America have watched as more than 70,000 factories and millions of manufacturing jobs have moved offshore,” said Navarro. He called Trump’s plans’ “courageous” and “visionary” and said they were aimed at halting China’s plans to dominate the hi-tech industries of the future – a plan, known as China 2025, that Navarro said that would mean America “will have no economic future”.

“As its economy matures, the longstanding inefficiencies in China’s business environment are rendered all the more glaring..”

• European Firms Say China Business ‘More Difficult’ (AFP)

European companies complain they still face a tough business climate in China despite Beijing’s pledges of openness, with about half saying it has become tougher in the past year, according to a survey released Wednesday. The study comes as President Xi Jinping looks to portray the world’s number two as being at the forefront of the globalisation cause just as the United States appears to be stepping back from the world stage. Among the litany of complaints were the uncertain legal environment, higher cost of labour, regulatory headaches and the “Great Firewall” that censors much of the global internet. “As its economy matures, the longstanding inefficiencies in China’s business environment are rendered all the more glaring,” according to the report by the EU Chamber of Commerce in China.

Mats Harborn, the chamber’s president, echoed those concerns, telling journalists that “the regulatory environment is actually holding the economy back.” New cybersecurity regulations make it more costly to jump the firewall, requiring businesses to sign up for expensive government-approved virtual private networks that allow users to circumvent filters and access the global internet. Two-thirds of companies believe that censorship and blocking of certain sites has a negative impact on their business. This is the “great contradiction,” said Harborn. “We have China which claims itself a leader in globalisation, talking of the importance of integration, but the cybersecurity law is creating problems.”

Unstoppable force by now. But do follow the money.

• Canada Legalises Recreational Marijuana Nationwide (Ind.)

Canada has legalised the use of recreational marijuana nationwide, making it the first G7 country to do so. The Senate voted 52-29 on Tuesday to pass the Cannabis Act, which allows people over the age of 18 to grow, buy, and use the drug for recreational purposes. It also regulates the growth and sale of marijuana, putting strict limits on packaging and limiting home growth to four plants at a time. The bill passed the House of Commons earlier on Tuesday, and now goes to Prime Minister Justin Trudeau – an outspoken supporter of the legalisation effort – to decide when it will take effect.

The vote makes Canada the second country to legalise recreational marijuana nationwide, after Uruguay. It is the first of the world’s seven most advanced economies – also known as the G7 – to do so. Nine US states allow for recreational use, and several other G7 nations allow it for medical purposes. Medical marijuana has been legal in Canada since 2001.

Wonder what happened at the UN human rights commission talk yesterday in Geneva.

• Smearing A Dissident Journalist Is As Good As Killing Him (CJ)

As I write this, demonstrations around the world are taking place in protest of WikiLeaks editor Julian Assange’s arbitrary detention and silencing by the US-centralized power establishment that has been actively pursuing his destruction for over a decade. The demonstrations will be well-attended, but not a fraction as well-attended as they should be. They will receive international attention, but not a fraction as much attention as they should. This is because the manipulators and smear merchants who have made their careers paving the way for oligarchic agendas have been successful in killing off sympathy for the plight of Assange. As we discussed yesterday, sympathy is key for getting narratives to take hold in public consciousness.

This is why western corporate media will circulate pictures of dead children all day long when it’s in the interests of advancing longstanding imperialist agendas, but never when those children were killed by western weapons. If you can tug at someone’s heart strings while telling them a story, the story you tell them will slide right in with minimal scrutiny. And it works the other way, too: if you can prevent someone’s heart strings from being plucked while hearing about a legitimately heartbreaking story, you can prevent that story from taking hold. Kill all sympathy for a dissident journalist and you kill all belief in his side of the story.

And Assange’s side of the story is indeed devastating to the preferred narrative of the US-centralized empire. A journalist (yes, journalist, per definition) who publishes 100 percent authentic documents exposing the inner mechanics of power structures all over the world, who was forced to seek political asylum at the Ecuadorian embassy in London in order to avoid extradition by the same government which brutalized Chelsea Manning, is on its face a highly sympathetic story. And it does tremendous damage to the narrative that America and its close network of allies are freedom-loving democracies whose systems of government are nothing like those naughty, oppressive regimes they seek to topple.

“When you watch the television the television isn’t watching you. When you see the billboard the billboard isn’t seeing you… ”

• “Delete Your Account” Warns Virtual Reality Founding Father (ZH)

In a new explosive interview, Silicon Valley tech pioneer and creator of the virtual reality ‘avatar’ Jaron Lanier tells people to delete your social media accounts due to the strong correlation between persistent social media usage and a dramatic societal rise in depression, anger, and anxiety that he says is the result of internet-induced modified forms of behavior. The warning comes in the wake of his new book which details how the creators of social media and the early engineers behind the internet “foolishly laid the foundations for global monopolies.” Jaron Lanier is best known as a founding father of the field of virtual reality and throughout his polymath career has written extensively on human-computer interaction, including most recently in his book Ten Arguments for Deleting Your Social Media Accounts Right Now.

Lanier explained in a recent UK Channel 4 interview: “When you watch the television the television isn’t watching you. When you see the billboard the billboard isn’t seeing you… When you use these new designs — social media, search, YouTube — when you see these things, you’re being observed constantly and algorithms are taking that information and changing what you see next.” According to Lanier’s bio, he coined the term ‘Virtual Reality’ (VR) and in the early 1980s founded VPL Research, the first company to sell VR products. In the late 1980s he led the team that developed the first implementations of multi-person virtual worlds using head mounted displays, as well as the first “avatars,” and developed the first widely used software platform architecture for immersive virtual reality applications.

As he defiantly asserts on his personal website, Lanier himself has “no social media accounts at all and all purported ones are fake.” He’s elsewhere said that most internet and social media pioneers in Silicon Valley “have regrets right now” after perfecting what is essentially mass human behavioral engineering and that that internet addiction is not only ruining people’s lives but the political process as well. This is what I could call almost a stealthy addiction. It’s a statistical addiction. What it says is we will get the broad population to use the services a lot, we’ll get them hooked through a scheme of rewards and punishment, and the rewards are when you’re retweeted and the punishment is when you’re treated badly by others online, and then within that we’ll very gradually start to leverage that, to change them. It’s this very kind of stealthy manipulation of the population.”

Inglan is a bitch.

• 1 In 3 UK Primary School Teachers Provide Pupils With Toothpaste, Soap (Ind.)

One in three teachers are providing pupils with basic hygiene products such as toothpaste and soap amid soaring child poverty rates, a new study shows. Eight in ten primary school teachers have said they had seen a rise in the numbers of children coming to school unwashed or not looking presentable in the last five years and have found themselves intervening at an increasing rate. A survey carried out by UK charity In Kind Direct also revealed nearly one in five (18 per cent) of teachers say they have to resort to doing this every single week, with the problem starkest in London – where 50 per cent do this weekly – and in the North East, where the figure stands at 29 per cent.

It comes as child poverty rates have surged in recent years, with one million more children in working households now growing up in poverty than did so in 2010, largely because of cuts to in-work benefits and public sector pay freezes. Nicola Finney, head teacher at St Paul’s Primary School in Stoke on Trent, told The Independent around 18 per cent – or nearly one in five – of her pupils’ families were receiving products from the school, as growing numbers of households are “falling on hard times”.

And the other 17 must follow.

• Merkel, Macron Agree On Eurozone Budget (CNBC)

Chancellor Angela Merkel said she and French President Emmanuel Macron agreed on Tuesday to create a euro zone budget charged with boosting investment in the currency bloc and promoting economic convergence between its 19 member states. “We are opening a new chapter,” Merkel said after talks with Macron on European reform ahead of a June 28-29 EU summit. She said euro zone reform was the toughest issue in their talks. “We are working to make sure that the euro zone budget will be used to strengthen investment, also with the aim of strengthening convergence within the euro zone,” she added.

Like those in Libya you mean?

• EU To Consider Plans For Migrant Processing Centres In North Africa (G.)

The EU is to consider the idea of building migrant processing centres in north Africa in an attempt to deter people from making life-threatening journeys to Europe across the Mediterranean, according to a leaked document. The European council of EU leaders “supports the development of the concept of regional disembarkation platforms”, according to the draft conclusions of an EU summit due to take place next week. The EU wants to look at the feasibility of setting up such centres in north Africa, where most migrant journeys to Europe begin. “Such platforms should provide for rapid processing to distinguish between economic migrants and those in need of international protection, and reduce the incentive to embark on perilous journeys,” says the document seen by the Guardian.

Although the plan is winning influential support, it faces political and practical hurdles, with one expert saying it is not clear how the EU would get foreign countries to agree to be “vassal states”. Migration is high on the agenda of the two-day summit, which opens on 28 June. EU leaders will attempt to reach a consensus on how to manage the thousands of refugees and migrants arriving each month. The German and French leaders, Angela Merkel and Emmanuel Macron, met near Berlin on Tuesday to agree on a common approach, amid fears in their camps that the European project is unravelling. Before the meeting France’s finance minister, Bruno Le Maire, said Europe was “in a process of disintegration. We see states that are turning inward, trying to find national solutions to problems that require European solutions.”

It’s not about money, but that’s all they can think of.

• EU Rebuked For €36 Billion Refugee Pushback Gambit (G.)

The European Union is to increase its spending in Africa by more than 20% over the next seven years to a minimum of €36bn in an attempt to reduce the number of migrants and refugees crossing the Mediterranean. But a succession of reports funded by the EU or written by leading MEPs say European efforts to stem the flow is characterised by misdirected finances, lack of accountability and repeated breaches of basic human rights, including an inability to undermine the business model of human trafficking, an industry worth as much as £35bn a year. Special concern has been expressed that EU funds are being used to give bonuses to the Italian-trained Libyan coastguard to force boats back to Africa.

The arrival of millions of refugees in Europe – and the deaths of thousands more attempting the crossing – has become the continent’s biggest policy headache, now threatening the stability of the German government and the cohesion of the EU. The biggest challenge is Libya, where deepening political chaos has led to more than 500,000 people crossing into Italy in recent years, hastening the election of a populist government in Rome that is now threatening to form an anti-migrant “axis of the willing” with like-minded central and eastern European countries.

Politicians are scrambling for a new formula not just to distribute the people who have reached Europe but also to return those whose asylum claims are refused. The EU is also searching for a credible means to reduce the incentive for people to come to Europe. The fate of mainstream social democratic and centrist parties in next spring’s European elections may rest on the outcome. A detailed examination of EU efforts to tackle the issue finds a “mismatch between the grandiloquent declarations and the action actually implemented on the ground”.

The real number is much higher.

• 34,361 And Rising: Tallying Europe’s Migrant Bodycount (G.)

The vast majority of migrants who have died trying to reach Europe have drowned. Volunteers have logged more than 27,000 deaths by drowning since 1993, often hundreds at a time when large ships capsize. These account for nearly 80% of all the entries. The list points up the marked increase in drownings that occurred after 2014, when the conflict in Syria accelerated, adding to numbers from south Asia and sub-Saharan Africa. In 2013, it reports more than 900 deaths by drowning. By 2017 that number had increased to around 3,500. A wave of public sympathy for the plight of refugees in Europe was quickly displaced by a backlash against the rising number of arrivals in 2015 and 2016, when almost three million people claimed asylum in Europe.

The EU responded by trying to export the problem back to Africa, with a €2bn (£1.75bn) EU-Africa trust fund designed to encourage African countries to stop people making the journey to Europe. The figures show the impact of this policy shift: in 2014, there were around 1,700 deaths recorded in and off the coast of Africa ascribed to migrants trying to get to Europe; by 2017 this had almost doubled, while deaths in Europe halved over the same period. “Some would say there are fewer deaths in Europe, and the EU’s policy is working”, says Ann Singleton, an academic specialising in migration data at the University of Bristol. “But there’s so much that’s unknown. Deaths are less likely to be reported if they occur in remote areas of Africa, and the number of people are dying inland, or in Libyan detention camps, isn’t recorded.

“If you look at maps, it looks as though the Mediterranean is the most dangerous area of the world for migrant journeys. But we can never say if that’s true, because we simply don’t know what’s happening elsewhere,” says Singleton. For those who get to Europe, the danger is not over. The List records more than 500 deaths in the asylum process, detention centres, prisons and camps. Among this group, the most common cause of death is suicide.

Swifts eat flying insects.

• The Vanishing Of The Swifts (G.)

It is the most miraculous bird, the ultimate winged messenger, exploring our globe, spending its life on the breeze. Sickle-shaped wings silhouetted against the sky, the swift is the fastest of all birds in level flight and remains entirely airborne for 10 months, or more, feeding, sleeping and mating on the wing. These long-lived creatures can clock up 4 million miles, commuting between English summers and African winters. Something has changed though. June is erupting as gloriously as it ever did: roadsides are waving with oxeye daisies and blackbirds flute during the endless evenings. But summer is a shadow of its former self. The swifts aren’t here. Well, they are. Only not as we knew them. I heard a scream just now, felt that start of wonder, and glanced up. One swift. No – three, darting through the blue. Three birds.

It’s like returning to the place where you grew up and finding your old home bulldozed. Reality does not compute with the picture you remember. I knew the swift for its screaming parties, marvellous groups of 20 or 40 or 60 or uncountable numbers of birds racing together through the sky, flicking their wings, calling in apparent glee. But this bird is in freefall. A graph produced by the British Trust for Ornithology is terrifying: the British population declined by 51% between 1995 and 2015. And the rate of decline is increasing: down 24% in the five years to 2015. The decline of globalised animals is always global, and complicated. So the disappearance of other equally charismatic long-distance migrants such as nightingales, cuckoos and swallows is bound up in habitat loss or changes in Africa, as well as Britain, and climatic changes en route.

Living in roofs, swifts have also suffered from the conversion of derelict buildings, and our desire for more energy-efficient, impermeable homes. But the biggest cause of changes in animal populations is always food supply. And guess what? Swifts feed on flying insects. We are belatedly waking up to the global calamity that is the loss of insect life. The German study showing a 76% decline in flying insects since 1989 is no anomaly. In Britain, for instance, three-quarters of butterfly species have declined over 40 years, while moth abundance has fallen by more than 40% in the southern half of the country.

Debt Rattle May 26 2018

May 262018

May 26, 2018 Posted by Raúl Ilargi Meijer at 9:25 am Finance Tagged with: buybacks, defaults, dividend, downgrade, Italy, junk bonds, Madrid, Moody’s, summit, tax cut, Tesla, Trump 5 Responses »

Louise Dahl-Wolfe Looking at Matisse, Museum of Modern Art 1939

• S&P 500 Companies Return $1 Trillion To Shareholders In Tax-Cut Surge (R.)

• The 2020s Might Be The Worst Decade In US History (Mauldin)

• Moody’s Warns Of ‘Particularly Large’ Wave Of Junk Bond Defaults Ahead (CNBC)

• Moody’s Puts Italy On Downgrade Review, Junk Rating Possible (ZH)

• UK Economy Posts Worst Quarterly GDP Figures For Five Years (G.)

• Prospects of US-North Korea Summit Brighten (R.)

• The Real ‘Constitutional Crisis’ (Strassel)

• A Mendacious Exercise In Manufacturing Paranoia (Jim Kunstler)

• Tesla Seeks To Dismiss Securities Fraud Lawsuit (R.)

• Madrid Takes Its Car Ban to the Next Level (CityLab)

Oh, that’s what the tax cuts are for?!

• S&P 500 Companies Return $1 Trillion To Shareholders In Tax-Cut Surge (R.)

S&P 500 companies have returned a record $1 trillion to shareholders over the past year, helped by a recent surge in dividends and stock buybacks following sweeping corporate tax cuts introduced by Republicans, a report on Friday showed. In the 12 months through March, S&P 500 companies paid out $428 billion in dividends and bought up $573 billion of their own shares, according to S&P Dow Jones Indices analyst Howard Silverblatt. That compares to combined dividends and buybacks worth $939 billion during the year through March 2017, Silverblatt said in a research note. Earnings per share of S&P 500 companies surged 26 percent in the March quarter, boosted by the Tax Cuts and Jobs Act passed by Republican lawmakers in December.

Companies have been returning much of that profit windfall to shareholders via share buybacks and increased dividends at never before seen amounts, highlighted by Apple’s record $23.5 billion worth of shares repurchased in the first quarter. S&P 500 companies have also plowed some of the windfall from lower taxes into investments toward growth or becoming more efficient. First-quarter capital expenditures totaled at least $159 billion, up more than 21 percent from the year before, according to S&P Dow Jones Indices. The biggest overhaul of the U.S. tax code in over 30 years, the new law slashes the corporate income tax rate to 21 percent from 35 percent, and charges multinationals a one-time tax on profits held overseas.

Mauldin turns dark side.

• The 2020s Might Be The Worst Decade In US History (Mauldin)

I recently wrote about a looming credit crisis that’s stemming from high-yield junk bonds. The crisis itself will have massive consequences for investors. But that’s not the worst part. The crisis will create a domino effect and trigger global financial contagion, which I usually refer to as “The Great Reset.” The collapse of high-yield bonds will hit stocks and bonds. Rising defaults will force banks to reduce their lending exposure, drying up capital for previously creditworthy businesses. This will put pressure on earnings and reduce economic activity. A recession will follow. This will not be just a U.S. headache, either. It will surely spill over into Europe (and may even start there) and then into the rest of the world.

The U.S. and/or European recession will become a global recession, as happened in 2008. Europe has its own set of economic woes and multiple potential triggers. It is quite possible Europe will be in recession before the ECB finishes this tightening cycle. As always, a U.S. recession will spark higher federal spending and reduce tax revenue. So I expect the on-budget deficit to quickly reach $2 trillion or more. Within four years of the recession’s onset, total government debt will be at least $30 trillion. This will further constrain the private capital markets and likely raise tax burdens for everyone—not just the rich.

Meanwhile, job automation will intensify, with businesses desperate to cut costs. The effect we already see on labor markets will double or triple. Worse, it will start reaching deep into the service sector. The technology is improving fast. The working-class population will not like this and it has the power to vote. “Safety net” programs and unemployment benefit expenditures will skyrocket. Studies show that the ratio of workers covered by unemployment insurance is at its lowest level in 45 years. What happens when millions of freelancers lose their incomes?

We’re talking trillions. Poof!

• Moody’s Warns Of ‘Particularly Large’ Wave Of Junk Bond Defaults Ahead (CNBC)

With corporate debt hitting its highest levels since before the financial crisis, Moody’s is warning that substantial trouble is ahead for junk bonds when the next downturn hits. The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is “benign,” that won’t be the case when economic conditions worsen. The “prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality,” Mariarosa Verde, Moody’s senior credit officer, said in a report.

“The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.” Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last. Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody’s considers “highly speculative,” as opposed to “non-investment grade speculative.” In dollar terms, that translates to $3.7 trillion in total junk debt outstanding, $2 trillion of which is in the B1 or lower category.

“Strong investor demand for higher yields continues to allow all but the weakest issuers to avoid default by refinancing maturing debt,” Verde wrote. “A number of very weak issuers are living on borrowed time while benign conditions last.” The level of speculative-grade issuance peaked in the U.S. in 2013, at $334.5 billion, according to the Securities Industry and Financial Markets Association. American companies have $8.8 trillion in total outstanding debt, a 49 percent increase since the Great Recession ended in 2009.

President Mattarella has refused to accept the nominee for finance minister, Savona. He’s a euroskeptic.

Meanwhile, if Italian bonds are downgraded further, Europe has a massive problem.

• Moody’s Puts Italy On Downgrade Review, Junk Rating Possible (ZH)

In a quite direct ‘threat’ to the newly formed Italian coalition, Moody’s warned that Italy will face a downgrade from its current Baa2 rating (potentially more than one notch to junk status) due to the lack of fiscal restraint in the new “contract” and the potential for delays to Italy’s structural reforms. While Italy’s current rating is Baa2, and a downgrade would leave it at Baa3 (still investment grade), one look at Italian debt markets this week and one can be forgiven for thinking it is pricing in a multiple-notch downgrade to junk… and thus potentially making things awkward for its ECB bond-buying-benefactor and its banking system’s massive holdings of sovereign bonds.

Full Moody’s Report: Moody’s Investors Service has today placed the Government of Italy’s ratings on review for possible downgrade. Ratings placed under review are the Baa2 long-term issuer and senior unsecured bond ratings as well as the (P) Baa2 medium-term MTN programme, the (P)Baa2 senior unsecured shelf, the Commercial Paper and other short-term ratings of Prime-2/(P) Prime-2 respectively. The key drivers for today’s initiation of the review for downgrade are as follows: 1. The significant risk of a material weakening in Italy’s fiscal strength, given the fiscal plans of the new coalition government; and 2. The risk that the structural reform effort stalls, and that past reforms such as the pension reforms implemented in 2011 are reversed.

Moody’s will use the review period to assess the impact of the fiscal and economic policy platform of the new government on Italy’s credit profile, with a particular focus on the effect on the deficit and debt trajectories in the coming years. The review will also allow Moody’s to assess further whether the new government intends to continue to pursue growth-enhancing structural reforms, or conversely to reverse earlier reforms, such as the 2011 pension reform, as well as other economic policy initiatives in the coming months that may have an incidence on the country’s growth potential over the coming years.

What do you mean we can’t blame the weather?

• UK Economy Posts Worst Quarterly GDP Figures For Five Years (G.)

The weakest household spending for three years and falling levels of business investment dragged the economy to the worst quarter for five years, official statisticians have said. The Office for National Statistics confirmed its previous estimate that GDP growth slumped to 0.1% in the first quarter, while sticking to its view that the “beast from the east” had little impact. The latest figures will further stoke concerns over the strength of the UK economy, amid increasing signals for deteriorating growth as Britain prepares to leave the EU next year. Some economists, including officials at the Bank of England, thought the growth rate would be revised higher as more data became available.

Threadneedle Street delayed raising interest rates earlier this month after the weak first GDP estimate, despite arguing that the negative hit to the economy from heavy snowfall in late February and early March had probably been overblown. Instead the ONS said it had seen a longer-term pattern of slowing growth in the first three months of the year. Rob Kent-Smith of the ONS said: “Overall, the economy performed poorly in the first quarter, with manufacturing growth slowing and weak consumer-facing services.” While admitting bad weather will have had some impact, particularly for firms in the construction industry and some areas of the retail business, statisticians said the overall effect was limited, with increased online sales and heightened energy production during the cold snap.

The figures show the services industries contributed the most to GDP growth, with an increase of 0.3% in the first quarter, while household spending grew at a meagre 0.2%. The construction industry declined by 2.7% and business investment fell by 0.2%.

“..an advance team of 30 White House and State Department officials was preparing to leave for Singapore later this weekend..”

• Prospects of US-North Korea Summit Brighten (R.)

Prospects that the United States and North Korea would hold a summit brightened after U.S. President Donald Trump said late on Friday Washington was having “productive talks” with Pyongyang about reinstating the June 12 meeting in Singapore. Politico magazine reported that an advance team of 30 White House and State Department officials was preparing to leave for Singapore later this weekend. Reuters reported earlier this week the team was scheduled to discuss the agenda and logistics for the summit with North Korean officials. The delegation was to include White House Deputy Chief of Staff Joseph Hagin and deputy national security adviser Mira Ricardel, U.S. officials said, speaking on condition of anonymity.

Trump said in a Twitter post late on Friday: “We are having very productive talks about reinstating the Summit which, if it does happen, will likely remain in Singapore on the same date, June 12th., and, if necessary, will be extended beyond that date.” Trump had earlier indicated the summit could be salvaged after welcoming a conciliatory statement from North Korea saying it remained open to talks. “It was a very nice statement they put out,” Trump told reporters at the White House. “We’ll see what happens – it could even be the 12th.” “We’re talking to them now. They very much want to do it. We’d like to do it,” he said.

Through Kimberley Strassel, the Wall Street Journal distances itself ever more from the MSM.

• The Real ‘Constitutional Crisis’ (Strassel)

Democrats and their media allies are again shouting “constitutional crisis,” this time claiming President Trump has waded too far into the Russia investigation. The howls are a diversion from the actual crisis: the Justice Department’s unprecedented contempt for duly elected representatives, and the lasting harm it is doing to law enforcement and to the department’s relationship with Congress. The conceit of those claiming Mr. Trump has crossed some line in ordering the Justice Department to comply with oversight is that “investigators” are beyond question. We are meant to take them at their word that they did everything appropriately. Never mind that the revelations of warrants and spies and dirty dossiers and biased text messages already show otherwise.

We are told that Mr. Trump cannot be allowed to have any say over the Justice Department’s actions, since this might make him privy to sensitive details about an investigation into himself. We are also told that Congress – a separate branch of government, a primary duty of which is oversight – cannot be allowed to access Justice Department material. House Intelligence Committee Chairman Devin Nunes can’t be trusted to view classified information – something every intelligence chairman has done – since he might blow a source or method, or tip off the president. That’s a political judgment, but it holds no authority. The Constitution set up Congress to act as a check on the executive branch—and it’s got more than enough cause to do some checking here.

Yet the Justice Department and Federal Bureau of Investigation have spent a year disrespecting Congress—flouting subpoenas, ignoring requests, hiding witnesses, blacking out information, and leaking accusations. Senate Judiciary Chairman Chuck Grassley has not been allowed to question a single current or former Justice or FBI official involved in this affair. Not one. He’s also more than a year into his demand for the transcript of former national security adviser Mike Flynn’s infamous call with the Russian ambassador, as well as reports from the FBI agents who interviewed Mr. Flynn. And still nothing.

[..] Mr. Trump has an even quicker way to bring the hostility to an end. He can – and should – declassify everything possible, letting Congress and the public see the truth. That would put an end to the daily spin and conspiracy theories. It would puncture Democratic arguments that the administration is seeking to gain this information only for itself, to “undermine” an investigation. And it would end the Justice Department’s campaign of secrecy, which has done such harm to its reputation with the public and with Congress.

“..a malevolent secret police operation..”

• A Mendacious Exercise In Manufacturing Paranoia (Jim Kunstler)

After many months, the gaslight is losing its mojo and a clearer picture has emerged of just what happened during and after the 2016 election: the FBI, CIA, and the Obama White House colluded and meddled to tilt the outcome and, having failed spectacularly, then labored frantically to cover up their misdeeds with further misdeeds. The real election year crimes for which there is actual evidence point to American officials not Russian gremlins. Having attempted to incriminate Trump at all costs, these tragic figures now scramble to keep their asses out of jail.

I say “tragic” because they — McCabe, Comey, Rosenstein, Strzok, Page, Ohr, et al — probably think they were acting heroically and patriotically to save the country from a monster, and I predict that is exactly how they will throw themselves to the mercy of the jury when they are called to answer for these activities in a court of law. Of course, they have stained the institutional honor of the FBI and its parent Department of Justice, but it is probably a healthier thing for the US public to maintain an extremely skeptical attitude about what has evolved into a malevolent secret police operation.

The more pressing question is how all this huggermugger gets adjudicated in a timely manner. Congress has the right to impeach agency executives like Rod Rosenstein and remove them from office. That would take a lot of time and ceremony. They can also charge them with contempt-of-congress and jail them until they comply with committee requests for documents. Mr. Trump is entitled to fire the whole lot of the ones who remain. But, finally, all this has to be sorted out in federal court, with referrals made to the very Department of Justice that has been a main actor in this tale.

The most mysterious figure in the cast is the MIA Attorney General, Jeff Sessions, who has become the amazing invisible man. It’s hard to see how his recusal in the Russia matter prevents him from acting in any way whatsoever to clean the DOJ house and restore something like operational norms — e.g. complying with congressional oversight — especially as the Russia matter itself resolves as a completely fabricated dodge. The story is moving very fast now. The Pequod is whirling around in the maelstrom, awaiting the final blow from the white whale’s mighty flukes.

Gullible?

• Tesla Seeks To Dismiss Securities Fraud Lawsuit (R.)

Tesla Inc on Friday asked a court to dismiss a securities fraud lawsuit by shareholders who said the electric vehicle maker gave false public statements about the progress of producing its new Model 3 sedan. In a filing in federal court in San Francisco, Tesla said that its statements about the challenges the company faced with Model 3 were “frank and in plain language,” including repeated disclosures by Chief Executive Elon Musk of “production hell.” Tesla did not seek to hide the truth, its motion to dismiss said. The company says its Model 3 has experienced numerous “bottlenecks” from problems with Tesla’s battery module process at its Nevada Gigafactory to general assembly at its Fremont plant.

Tesla is under pressure to deliver the Model 3 to reap revenue and stem massive spending that has put Tesla’s finances in the red. The ramp of the Model 3, Tesla said in the court filing, was “the first of its kind,” with difficulties likely to crop up after it got underway. The lawsuit filed last October seeks class action status for shareholders who bought Tesla stock between May 4, 2016 through October 6, 2017, inclusive. It said shareholders bought “artificially inflated” shares because Musk and other executives misled them with their statements. Tesla made such statements during the lead-up to, and early production of, its Model 3 sedan and failed to disclose that the company was “woefully unprepared” for the vehicle’s production, the lawsuit said.

Good on ’em! Cars don’t belong in cities.

• Madrid Takes Its Car Ban to the Next Level (CityLab)

The days when cars could drive unhindered through central Madrid are coming to a close. Following an announcement this week, the Spanish capital confirmed that, starting in November, all non-resident vehicles will be barred from a zone that covers the entirety of Madrid’s center. The only vehicles that will be allowed in this zone are cars that belong to residents who live there, zero-emissions delivery vehicles, taxis, and public transit. Even on a continent where many cities are scaling back car access, the plan is drastic. While much of central Madrid consists of narrow streets that were never suitable to motor vehicles in the first place, this central zone also includes broad avenues such as Gran Via, and wide squares that have been islands in a sea of surging traffic for decades.

The plan is thus not just about making busy central streets more pleasant, but about creating a situation where people simply no longer think of bringing their cars downtown. This might come as a shock to some drivers, but the wind has been blowing this way for more than a decade. Madrid set up the first of what it calls Residential Priority Zones in 2005, in the historic, densely packed Las Letras neighborhood. Since then, a modest checkerboard of three other similar zones have been installed across central Madrid. The new area will be a sort of all-encompassing zone that abolishes once and for all the role of downtown streets as through-routes across the city.

To get people used to the idea, implementation of the non-local car ban will be staggered. In November, manual controls by police around the zone’s edge will begin. Cars that are breaching the new rules will be warned of the fine they face in the future—€90 per occurrence—without actually being charged then. In January, a fully automated system with cameras will be put in place, and from February, the €90 will be actively enforced against any cars found breaking the rules.

Debt Rattle May 25 2018

May 252018

May 25, 2018 Posted by Raúl Ilargi Meijer at 9:07 am Finance Tagged with: bailout, crypto, Facebook, GDPR, hospitals, Italy, junk bonds, North Korea, rates, summit, surveillance, Trump, Zuckerberg 8 Responses »

Wassily Kandinsky Moscow Red Square 1916

• Riskiest Junk Bonds Still Blissful in La-La Land, High-Grade Bonds Bleed (WS)

• When Rates Go Up, Stuff Blows Up (Dillian)

• Where America’s Debt Slaves Are the Most Vulnerable (WS)

• North Korea Says Still Open To Talks After Trump Cancels Summit (R.)

• Brilliant Strategy Of Offering North Korea “The Libya Model” Falls Through (CJ)

• About $1.2 Billion In Cryptocurrency Stolen Since 2017 (R.)

• Zuckerberg Set Up Fraudulent Scheme To ‘Weaponise’ Data, Court Case Alleges (G.)

• Facebook Accused Of Conducting Mass Surveillance Through Its Apps (G.)

• EU Officials Tear Into UK’s ‘Fantasy’ Brexit Negotiating Strategy (Ind.)

• Italy’s Belligerent New Coalition Is Bad News For The EU (Marsili)

• Greece’s Post-Bailout Program Contains At Least 20 Milestones For 2018-2022 (K.)

• How Rural America Became A Hospital Desert (G.)

Perhaps not a good time to chase yield?

• Riskiest Junk Bonds Still Blissful in La-La Land, High-Grade Bonds Bleed (WS)

High-grade corporate bonds have had a hard time. Yields have surged as prices have fallen. The S&P bond index for AA-rated corporate bonds is down 3.2% so far this year. Losses are concentrated on bonds with maturities of 15 years and over. They’re down 7%, according to Bloomberg. As prices have declined, yields have surged, with the average AA yield now at 3.47%, up from around 2.2% in mid to late-2016:

In the chart above of the ICE BofAML US AA Effective Yield Index, I marked some key events, in terms of the bond yield:
• The election in November 2016, after which the yield spiked.
• In December 2016, the Fed’s second rate hike in this cycle. This was when the Fed got serious and added an increasingly more hawkish – or less dovish – tone. But the market blew it off, yield fell again, and bonds returned to la-la-land.
• In September 2017, the Fed announced details of its QE unwind, and yields began to rise again and then started spiking in late-2017. This was when the bond market got serious.

But at the riskiest end of the spectrum, with corporate bonds rated CCC or below (deep into junk), there is no such pain. In fact, the S&P bond index for CCC rated bonds is up 4.3% so far this year. They’ve had a blistering 82%-run since February 2016, when Wall Street decided that the oil bust was over and plowed new money into junk-rated energy companies. The average yield of bonds rated CCC or lower is now at 9.78%, down from 12.5% in December 2016, when the Fed got serious, and down from 22% during the peak of the oil bust:

Looking for the third victim.

• When Rates Go Up, Stuff Blows Up (Dillian)

When rates go up sharply, stuff blows up, because lots of people are negatively exposed to higher rates. Households, corporates, and governments are all negatively exposed to higher rates, in different degrees. Back in 1994, we found that it was Mexico, Procter & Gamble, and Orange County, California who all suffered because of higher interest rates. Where does the risk live today? We will soon find out. There is a playbook for when interest rates go up. Rising interest rates do not necessarily cause a recession per se, but they are usually found at the scene of the crime. There was no recession in 1994, but the financial world shivered. Today, we have rising rates and a more-hawkish Fed which has shown no signs of letting up.

As usual, emerging markets are puking their guts out. I was in Argentina last week and saw the carnage first-hand. The Argentine peso declined a smooth 20% in a week. Meanwhile, Turkish President Recep Erdogan is calling himself an “enemy of interest rates.” He is an FX trader’s dream. Of course, there are idiosyncratic things going on in Argentina and Turkey, but all EM currencies and stock markets have been getting hit hard. Emerging markets was a consensus pick at the beginning of 2018, so it is making some people look a bit foolish.

“..the ratio of non-housing consumer debt to disposable income – the burden these consumers carry on the backs in relationship to their incomes – is higher than ever..”

• Where America’s Debt Slaves Are the Most Vulnerable (WS)

Many consumers are debt free and have lots of money and good jobs. Other consumers have large amounts of debt, lousy jobs or no jobs, and are paying for groceries by charging them on their credit cards. Credit problems always involve the most vulnerable consumers. During the mortgage crisis, the delinquency rate peaked at 11.5% in 2010. It wasn’t the 60% of homeowners that had significantly payed down their mortgages or owed no money on their homes who triggered that event. It was the financial mayhem among the smaller portion of the most exposed and most vulnerable. For a different view of the burden of debt, let’s look at non-housing consumer debt, because this is where the music is playing right now.

To eliminate for a moment the impact of interest rates, let’s look at the amount of debt – not the monthly payments – as percent of disposable income. And suddenly, the risks emerge a little more clearly. At year-end 2017, the ratio of non-housing debt – revolving credit such as credit card balances, plus auto loans and student loans – to disposable income reached a new record of 26.3%, up from 23% at the end of 2010, and up from 24% in 2007, the peak before it all came apart during the Great Recession:

So the ratio of non-housing consumer debt to disposable income – the burden these consumers carry on the backs in relationship to their incomes – is higher than ever, and only historically low interest rates have kept it manageable. But interest rates are now rising, and many of these consumer debts have variable rates. This explains a phenomenon that is already appearing: How this toxic mix – rising interest rates and record high consumer debt in relationship to disposable income – has now started to bite the most vulnerable consumers once again. And for them, debt service is getting very difficult. In Q1, the delinquency rate on credit card debt at banks other than the largest 100 – so at the 4,788 smaller banks – spiked to 5.9%, higher than at the peak during the Financial Crisis, and the credit-card charge-off rate spiked to 8%.

They seem more than open.

• North Korea Says Still Open To Talks After Trump Cancels Summit (R.)

North Korea responded on Friday with measured tones to U.S. President Donald Trump’s decision to call off a historic summit with leader Kim Jong Un scheduled for next month, saying Pyongyang hoped for a “Trump formula” to resolve the standoff over its nuclear weapons program. On Thursday, Trump wrote a letter to Kim to announce his withdrawal from what would have been the first-ever meeting between a serving U.S. president and a North Korean leader in Singapore on June 12. “Sadly, based on the tremendous anger and open hostility displayed in your most recent statement, I feel it would be inappropriate, at this time, to have this long-planned meeting,” Trump wrote.

Trump’s announcement came after repeated threats by North Korea to pull out of the summit over what it saw as confrontational remarks by U.S. officials. Friday’s response by North Korean Vice Foreign Minister Kim Kye Gwan was more conciliatory, specifically praising Trump’s efforts. “We have inwardly highly appreciated President Trump for having made the bold decision, which any other U.S. presidents dared not, and made efforts for such a crucial event as the summit,” Kim said in a statement carried by state media. “We even inwardly hoped that what is called “Trump formula” would help clear both sides of their worries and comply with the requirements of our side and would be a wise way of substantial effect for settling the issue,” he said, without elaborating.

Caitlin: “..Pence blathered something about it being “a fact”, not a threat, but that is because he is a fake plastic doll manufactured by Raytheon. ..”

• Brilliant Strategy Of Offering North Korea “The Libya Model” Falls Through (CJ)

Three days before President Trump announced him as the new National Security Advisor, deranged mutant death walrus John Bolton appeared on Radio Free Asia and said of negotiations with North Korea, “I think we should insist that if this meeting is going to take place, it will be similar to discussions we had with Libya 13 or 14 years ago.” Bolton has been loudly and publicly advocating “the Libya model” with the DPRK ever since. “I think we’re looking at the Libya model of 2003, 2004,” Bolton said on Face the Nation last month, and said the same on Fox News Sunday in case anyone failed to get the message.

Bolton never bothered to refine his message by saying, for example, “Without the part where we betray and invade them and get their leader mutilated to death in the streets.” He just said they’re doing Libya again. This was what John Bolton was saying before he was hired, and this was what John Bolton continued to say after he was hired. This was what John Bolton was hired to do. He was hired to sabotage peace and facilitate death and destruction. That is what he does. That is what he is for. Can openers open cans, John Bolton starts wars. You don’t buy a can opener to rotate your tires, and you don’t hire John Bolton to facilitate peace. It should have surprised no one, then, when the administration saw Bolton’s Libya comments and raised him a canceled peace talk.

“You know, there were some talk about the Libya model last week,” Vice President Pence told Fox News on Saturday. “And you know, as the president made clear, you know, this will only end like the Libya model ended if Kim Jong-un doesn’t make a deal.” “Some people saw that as a threat,” Fox’s Martha MacCallum replied, because there is no other way it could possibly be interpreted. Pence blathered something about it being “a fact”, not a threat, but that is because he is a fake plastic doll manufactured by Raytheon.

The comments here on GDPR are at least as interesting.

• About $1.2 Billion In Cryptocurrency Stolen Since 2017 (R.)

Criminals have stolen about $1.2 billion in cryptocurrencies since the beginning of 2017, as bitcoin’s popularity and the emergence of more than 1,500 digital tokens have put the spotlight on the unregulated sector, according to estimates from the Anti-Phishing Working Group released on Thursday. The estimates were part of the non-profit group’s research on cryptocurrency and include reported and unreported theft. “One problem that we’re seeing in addition to the criminal activity like drug trafficking and money laundering using cryptocurrencies is the theft of these tokens by bad guys,” Dave Jevans, chief executive officer of cryptocurrency security firm CipherTrace, told Reuters in an interview. Jevans is also chairman of APWG.

Of the $1.2 billion, Jevans estimates that only about 20 percent or less has been recovered, noting that global law enforcement agencies have their hands full tracking down these criminals. Their investigations of criminal activity will likely take a step back with the European Union’s new General Data Protection Regulation, which takes effect on Friday. “GDPR will negatively impact the overall security of the internet and will also inadvertently aid cybercriminals,” said Jevans. “By restricting access to critical information, the new law will significantly hinder investigations into cybercrime, cryptocurrency theft, phishing, ransomware, malware, fraud and crypto-jacking,” he added.

GDPR, which passed in 2016, aims to simplify and consolidate rules that companies need to follow in order to protect their data and to return control of personal information to EU citizens and residents. The implementation of GDPR means that most European domain data in WHOIS, the internet’s database of record, will no longer be published publicly after May 25. WHOIS contains the names, addresses and email addresses of those who register domain names for websites.

WHOIS data is a fundamental resource for investigators and law enforcement officials who work to prevent thefts, Jevans said. He noted that WHOIS data is crucial in performing investigations that allow for the recovery of stolen funds, identifying the persons involved and providing vital information for law enforcement to arrest and prosecute criminals. “So what we’re going to see is that not only the European market goes dark for all of us; so all the bad guys will flow to Europe because you can actually access the world from Europe and there’s no way you can get the data anymore,” Jevans said.

Facebook makes contradictory claims: First, it says it’s a neutral platform. But then it also wants full freedom to edit.

Interesting court case: the claim is Facebook stiffed 40,000 (!) companies. Reason why? It completely missed the shift to smartphones, and its ads were not ready for that at all.

• Zuckerberg Set Up Fraudulent Scheme To ‘Weaponise’ Data, Court Case Alleges (G.)

Mark Zuckerberg faces allegations that he developed a “malicious and fraudulent scheme” to exploit vast amounts of private data to earn Facebook billions and force rivals out of business. A company suing Facebook in a California court claims the social network’s chief executive “weaponised” the ability to access data from any user’s network of friends – the feature at the heart of the Cambridge Analytica scandal.A legal motion filed last week in the superior court of San Mateo draws upon extensive confidential emails and messages between Facebook senior executives including Mark Zuckerberg. He is named individually in the case and, it is claimed, had personal oversight of the scheme.

Facebook rejects all claims, and has made a motion to have the case dismissed using a free speech defence. It claims the first amendment protects its right to make “editorial decisions” as it sees fit. Zuckerberg and other senior executives have asserted that Facebook is a platform not a publisher, most recently in testimony to Congress. Heather Whitney, a legal scholar who has written about social media companies for the Knight First Amendment Institute at Columbia University, said, in her opinion, this exposed a potential tension for Facebook. “Facebook’s claims in court that it is an editor for first amendment purposes and thus free to censor and alter the content available on its site is in tension with their, especially recent, claims before the public and US Congress to be neutral platforms.”

The company that has filed the case, a former startup called Six4Three, is now trying to stop Facebook from having the case thrown out and has submitted legal arguments that draw on thousands of emails, the details of which are currently redacted. Facebook has until next Tuesday to file a motion requesting that the evidence remains sealed, otherwise the documents will be made public.

Somewhat oddly similar to the article above, also Guardian. Facebook is up against people who actually DO understand the field.

• Facebook Accused Of Conducting Mass Surveillance Through Its Apps (G.)

Facebook used its apps to gather information about users and their friends, including some who had not signed up to the social network, reading their text messages, tracking their locations and accessing photos on their phones, a court case in California alleges. The claims of what would amount to mass surveillance are part of a lawsuit brought against the company by the former startup Six4Three, listed in legal documents filed at the superior court in San Mateo as part of a court case that has been ongoing for more than two years. A Facebook spokesperson said that Six4Three’s “claims have no merit, and we will continue to defend ourselves vigorously”. Facebook did not directly respond to questions about surveillance.

Documents filed in the court last week draw upon extensive confidential emails and messages between Facebook senior executives, which are currently sealed. Facebook has deployed a feature of California law, designed to protect freedom of speech, to argue that the case should be dismissed. Six4Three is opposing that motion. The allegations about surveillance appear in a January filing, the fifth amended complaint made by Six4Three. It alleges that Facebook used a range of methods, some adapted to the different phones that users carried, to collect information it could use for commercial purposes.

“Facebook continued to explore and implement ways to track users’ location, to track and read their texts, to access and record their microphones on their phones, to track and monitor their usage of competitive apps on their phones, and to track and monitor their calls,” one court document says.

All over the place.

• EU Officials Tear Into UK’s ‘Fantasy’ Brexit Negotiating Strategy (Ind.)

Brexit negotiations have begun to dramatically sour after months of deadlock, with exasperated EU officials tearing into Britain’s “fantasy” negotiating strategy and warning that Theresa May’s latest customs plan would ruin any chance of progress. This week’s latest meetings are understood to have produced no progress on the core issues of the Northern Ireland border and customs, with last year’s business-like start to discussions having given way to bitter behind-the-scenes briefings. One senior EU official said the UK still lacked negotiating positions on a wide variety of issues and that in others it was “chasing the fantasy of denying the consequences of Brexit in a given policy area” – while a UK government source accused Brussels of trying to “insult” the British negotiating team.

Another Brussels official close to talks told The Independent they had been warned internally that there would probably be no progress by the June meeting of the European Council – which would throw off the timetable and raise the risk of a disastrous “no deal”. News that Theresa May wants to align the whole UK with the customs union and single market on a time-limited basis until 2023 as a backstop to solve the Irish border issue was particularly poorly received in Brussels. The Prime Minister is due to actually announce the new policy in the comings weeks, but people familiar with the talks confirmed it had already been raised by UK negotiators. The European Commission’s negotiators have already rejected the plan before its public announcement

Then agan, Tsipras folded too…

• Italy’s Belligerent New Coalition Is Bad News For The EU (Marsili)

As Giuseppe Conte is asked to form Italy’s next government, I walk out of a screening of Loro, the controversial portrayal of Silvio Berlusconi by Oscar-winning director Paolo Sorrentino. With images of drug-fuelled sex parties still in my mind, the uproar that accompanies the announcement about Conte appears odd. Italy has endured more than 30 years of dreadful governments. For much of the last two decades the country was led by a convicted tax fraudster. Before that, it was led by Bettino Craxi, a politician so corrupt that he ended his days as a fugitive in Tunisia. Why worry now? Part of the answer lies in the outsider nature of the new governing parties. Italian elites have traditionally been very adept at assimilating political newcomers.

Who, in turn, have been willingly co-opted by the system. But the new coalition of the Five Star Movement and far-right League appears peculiarly unconnected to Italy’s high establishment: the risk of loss of influence is real enough. Previous governments were quick to guarantee policy continuity, maintaining a neoliberal economic stance, overall respect for EU obligations, and a US-aligned foreign policy. The coalition promises to break away from this consensus, ushering in an era of fiscal expansion, resentment at Italy’s eurozone membership and closer ties to Russia. The key question now is: will the new government abandon its fiery stance or stick to it? Both alternatives are unfortunately dreadful.

The capitulation scenario is a familiar one. Just like Alexis Tsipras, who turned into a reliable implementer of austerity measures in Greece, so Conte’s government might decide to set aside its promises. The gulf is wide: the coalition programme contains at least €60bn of additional yearly expenses, or 3.5% of Italy’s GDP, while the EU is demanding a 0.6% deficit reduction for 2018. A bargain might look strikingly similar to what Matteo Renzi has achieved in recent years: a moderate loosening of deficit targets allowing for an insignificant fiscal expansion. In other words: business as usual.

Cuts, cuts, cuts, taxes and sell-offs.

• Greece’s Post-Bailout Program Contains At Least 20 Milestones For 2018-2022 (K.)

The sweeping agreement for the conclusion of the fourth bailout review, publicized early on Thursday by the European Commission, contains binding commitments for Greece until 2022. It more or less constitutes an extension to the bailout agreement for another four years, but without the inflow of money, while rendering the coalition government’s rhetoric regarding a “clean exit” and its so-called “holistic plan for growth” irrelevant. The text uploaded by the Commission on its website leaves open the possibility for the income tax discount reduction to be brought forward by 12 months to January 2019, and provides for the monitoring of the deal’s implementation in the context of the enhanced surveillance to be agreed in the next Eurogroup meeting on June 21.

Besides the almost 90 milestones that need to be implemented in the next three weeks for the completion of the program, the government is undertaking at least 20 post-program obligations to be applied by 2022. The post-program milestones start from the fiscal side: Apart from the well-known primary budget surplus of 3.5% of GDP, the adjusted bailout agreement calls for additional interventions should any court decisions annul any austerity measures in place.

The text also contains the reduction of pensions from 2019 to save 1% of GDP, the full abolition of the EKAS benefit for people on low pensions, the completion of the National Cadaster by June 2021, the implementation of privatizations such as the gas network operator (DESFA), the 17% stake in PPC, and the Elliniko development, among others, and ceilings on civil servant employment and salaries by 2022. The document further refers to the need to improve labor mediation to avert recourse to arbitration, the completion of the process for hiring general and special secretaries for ministries, and the immediate transfer of railway property company GAIAOSE and the company managing the Olympic Sports Center of Athens to the privatizations hyperfund.

Don’t let accountants run your health care.

• How Rural America Became A Hospital Desert (G.)

It makes sense to sell this old place now, but he can’t bring himself to leave her ashes. Barry Gibbs lives alone in a single-story home among the loblollies of Hyde County in eastern North Carolina. The army veteran collects a small disability check after he tore tendons in his shoulder during a fall at his maintenance job at the local school. He winces every time he stands up. He’s 64 years old and the closest hospital is more than an hour away, a distance he came to understand too damn well on the day she needed help. Their wedding portrait still hangs on the living room wall. It’s one of those 1980s shots with the laser beam backgrounds, her hair big and his mustache combed, his hand on her shoulder.

The interior of the house is almost as she left it four years ago: white oak floors, paintings of black bears, family Christmas photos on end tables. Outside along the driveway, a line of cypress trees shades a headstone that marks where Barry cut a ditch and spread Portia’s ashes, right where she asked to be. Everybody called her Po. She was picking up sticks from the yard on 7 July 2014, five days shy of her 49th birthday, when she felt a sharp pain in her chest. Six days earlier, their community hospital had closed. Pungo district hospital was 47 miles west of their house, in Belhaven, and had served the county since 1949, back when crab-picking plants and lumber mills kept these small waterfront communities working.

If you’re an accountant, hospitals are only as good as the number of paying patients. Belhaven’s population is about half what it was then. And Hyde county is now the fifth-sparsest county on the east coast, with nine people per square mile. This spongy stretch of North Carolina’s inner banks represents the suffering side of a modern migration pattern in which southern cities are flourishing, but rural areas are shrinking and losing healthcare options. Since 2010, 53 rural hospitals have closed in 11 southern states, compared with 30 in the other 39 states.

Debt Rattle August 4 2017

Aug 042017

August 4, 2017 Posted by Raúl Ilargi Meijer at 8:34 am Finance Tagged with: central banks, Greece, IMF, immolation, inflation, junk bonds, property, tomatoes, Trump, war 2 Responses »

Acropolis and Temple of Jupiter Olympus Athens 1862

• Australia Slams the Brakes on Property Investment (BBG)

• Toronto Home Prices Suffer Worst Monthly Decline in 17 Years (BBG)

• Toronto Housing Market Implodes: Prices Plunge Most On Record (ZH)

• Euro Junk Bonds and “Reverse Yankees” Go Nuts (WS)

• Global Inflation Hits Lowest Level Since 2009 (WSJ)

• Japan Buries Our Most-Cherished Economic Ideas (BBG)

• Britain’s Finance Sector Will Double In Size In 25 Years – Mark Carney (G.)

• London’s “Land Banking” Ventures Expose Startling Wealth Inequality (O.)

• Russian Ban On Turkish Tomatoes Bears Domestic Fruit (R.)

• Trump Will Now Become the War President (Paul Craig Roberts)

• IMF Admits Disastrous Love Affair With Euro and Immolation Of Greece (Tel)

• Why Have No IMF Officials Been Prosecuted For Malpractice In Greece? (Bilbo)

It’s just words. The illusion of well-managed control. When property goes down, and it must at some point, it will take the entire Australia economy down with it.

• Australia Slams the Brakes on Property Investment (BBG)

One of the key engines of Australia’s five-year housing boom is losing steam. Property investors, who have helped stoke soaring home prices in Australia, are being squeezed as regulators impose restrictions to rein in lending. The nation’s biggest banks have this year raised minimum deposits, tightened eligibility requirements and increased rates on interest-only mortgages – a form of financing favored by people buying homes to rent out or hold as an investment. Australia’s generous tax breaks for landlords, combined with record-low borrowing costs, have made the nation home to more than 2 million property investors. Demand from those buyers has contributed to a bull run that has catapulted Sydney and Melbourne into the ranks of the world’s priciest property markets. Now, signs are emerging that the curbs are starting to deter speculators – and home prices are finally starting to cool. [..]

The biggest banks have hiked rates on interest-only mortgages by an average of 55 basis points this year, according to Citigroup [..] ..property auction clearance rates in Sydney have held below 70% in seven of the past eight weeks, compared to as high as 81% in March before the curbs were imposed. And investor loans accounted for 37% of new mortgages in May, down from this year’s peak of 41% in January. That’s helping take the heat out of property prices, particularly in Sydney, the world’s second-most expensive housing market. Price growth in the city slowed to 2.2% in the three months through July, down from a peak of 5% earlier this year, CoreLogic said Tuesday. In Melbourne, rolling quarterly price growth has eased to 4.2%. “There have been some signs that conditions in the Sydney and Melbourne markets have eased a little of late,” the Reserve Bank of Australia said on Friday.

Now, with costs increasing, and price growth slowing, property may lose some of its luster as an investment asset. [That] changes “reduce investors’ ability to pay, and means they have to pay owner-occupier values rather than investor values,” said Angie Zigomanis, senior manager, residential property, at BIS Oxford Economics in Melbourne. The restrictions will take “some of the bubble and froth” out of the market, he said, forecasting median Sydney house prices will decline 5% by the end of mid-2019 as investors retreat.

[..] banks may need to get even tougher on lending standards in order to meet the regulator’s order to restrict interest-only loans to 30% of new residential loans by September. Interest-only loans are seen as more risky because borrowers aren’t paying down any principal and may look to sell en-masse if property prices decline.

Bubble? Nah…

• Toronto Home Prices Suffer Worst Monthly Decline in 17 Years (BBG)

The benchmark Toronto property price, which tracks a typical home over time, dropped 4.6% to C$773,000 ($613,000) from June. That’s the biggest monthly drop since records for the price index began in 2000, according to Bloomberg calculations, and brings prices down to roughly March levels. Prices are still up 18% from the same month a year ago, according to the Toronto Real Estate Board. Transactions tumbled 40% to 5,921, the biggest year-over-year decline since 2009, led by detached homes. The average price, which includes all property types, rose 5% to C$746,218 from July 2016. That compares with a 17% increase at this time last year.

“..transactions tumbled 40.4%..”

• Toronto Housing Market Implodes: Prices Plunge Most On Record (ZH)

Until mid 2017, it appeared that nothing could stop the Toronto home price juggernaut:

And yet, In early May we wrote that “The Toronto Housing Market Is About To Collapse”, when we showed the flood of new home listings that had hit the market the market, coupled with an extreme lack of affordability, which as we said “means homes will be unattainable to all but the oligarchs seeking safe-haven for their ‘hard’-hidden gains, prices will have to adjust rather rapidly.”

Exactly three months later we were proven right, because less than a year after Vancouver’s housing market disintegrated – if only briefly after the province of British Columbia instituted a 15% foreign buyer tax spooking the hordes of Chinese bidders who promptly returned after a several month hiatus sending prices to new all time highs – just a few months later it’s now Toronto’s turn. On Thursday, the Toronto Real Estate Board reported that July home prices in Canada’s largest city suffered their biggest monthly drop on record amid government efforts to cool the market and the near-collapse of Home Capital Group spooked speculators. The benchmark Toronto property price, while higher 18% Y/Y, plunged 4.6% to C$773,000 ($613,000) from June. That was biggest monthly drop since records for the price index began in 2000, and brought prices down in the metro area to March levels.

More troubling than the price drop, however, was the sudden paralysis in the market as buyers and sellers violently disagreed about fair clearing prices and transactions tumbled 40.4% to 5,921, the biggest year-over-year decline since 2009, led by the detached market segment.

Wolf Richter with a good example of just how detructive Draghi’s -and other central bankers’- QE really is. The bonds may go nuts, but Draghi IS nuts. Or rather, Europeans are nuts not to stop him.

• Euro Junk Bonds and “Reverse Yankees” Go Nuts (WS)

The ECB’s efforts to buy corporate bonds as part of its stupendous asset buying binge has not only pushed a number of government bond yields below zero, where investors are guaranteed a loss if they hold the bond to maturity, but it has also done a number – perhaps even a bigger one – on the euro junk-bond market. It has totally gone nuts. Or rather the humans and algorithms that make the buying decisions have gone nuts. The average junk bond yield has dropped to an all-time record low of 2.42%. Let that sink in for a moment. This average is based on a basket of below investment-grade corporate bonds denominated in euros. Often enough, the issuers are junk-rated American companies with European subsidiaries – in which case these bonds are called “reverse Yankees.”

These bonds include the riskiest bonds out there. Plenty of them will default, and losses will be painful, and investors – these humans and algos – know this too. This is not a secret. That’s why these bonds are rated below investment grade. But these buyers don’t mind. They’re institutional investors managing other people’s money, and they don’t need to mind. [..] The average yield of these junk bonds never dropped below 5% until October 2013. In the summer of 2012, during the dog days of the debt crisis when Draghi pronounced the magic words that he’d do “whatever it takes,” these bonds yielded about 9%, which might have been about right. Since then, yields have plunged (data by BofA Merrill Lynch Euro High Yield Index Effective Yield via St. Louis Fed). The “on the Way to Zero” in the chart’s title is only partially tongue-in-cheek:

The chart below gives a little more perspective on this miracle of central-bank market manipulation, going back to 2006. It shows the spike in yield to 25% during the US-engineered Financial Crisis and the comparatively mild uptick in yield during the Eurozone-engineered debt crisis:

How does this fit into the overall scheme of things? For example, compared to the US Treasury yield? US Treasury securities are considered the most liquid and the most conservative investments. They’re considered as close to a risk-free financial instrument as you’re going to get on this earth. Turns out, from November 2016 until now, the 10-year US Treasury yield has ranged from 2.14% to 2.62%, comfortably straddling the current average euro junk bond yield of 2.42%.

If you want to earn a yield of about 2.4%, which instrument would you rather have in your portfolio, given that both produce about the same yield, and given that one has a significant chance of defaulting and getting you stuck with a big loss, while the other is considered the safest most boring financial investment out there? The answer would normally be totally obvious, but not in the Draghi’s nutty bailiwick. That this sort of relentless and blind chase for yield – however fun it may be today – will lead to hair-raising losses later is a given. And we already know who will take those losses: The clients of these institutional investors, the beneficiaries of pension funds and life insurance retirement programs, the hapless owners of bond funds, and the like.

In terms of the broader economy: When no one can price risk anymore, when there’s in fact no apparent difference anymore between euro junk bonds and US Treasuries, then all kinds of bad economic decisions are going to be made and capital is going to get misallocated, and it’s going to be Draghi’s royal mess.

Hint for central bankers: look at money velocity. People don’t spend, they borrow. Keyword: debt.

• Global Inflation Hits Lowest Level Since 2009 (WSJ)

Inflation in the Group of 20 largest economies fell to its lowest level in almost eight years in June, deepening a puzzle confronting central banks as they contemplate removing post-crisis stimulus measures. The OECD said Thursday that consumer prices across the G-20—the countries that accounts for most of the world’s economic activity—were 2% higher than a year earlier. The last time inflation was lower was in October 2009, when it stood at 1.7%, as the world started to emerge from the sharp economic downturn that followed the global financial crisis. The contrast between then and now highlights the mystery facing central bankers in developed economies as they attempt to raise inflation to their targets, which they have persistently undershot in recent years.

According to central bankers, inflation is generated by the gap between the demand for goods and services and the economy’s ability to supply them. As the economy grows and demand strengthens, that output gap should narrow and prices should rise. Right now, the reverse appears to be happening. Across the G-20, economic growth firmed in the final three months of 2016 and stayed at that faster pace in the first three months of 2017. Growth figures for the second quarter are incomplete, but those available for the U.S., the eurozone and China don’t point to a slowdown. Indeed, Capital Economics estimates that on an annualized basis, global economic growth picked up to 3.7% in the three months to June from 3.2% in the first quarter.

At what point are mainstream economists going to admit they have no clue as to what’s going on? It all sounds like if reality doesn’t fit their models, something must be wrong with reality.

• Japan Buries Our Most-Cherished Economic Ideas (BBG)

Japan is the graveyard of economic theories. The country has had ultralow interest rates and run huge government deficits for decades, with no sign of the inflation that many economists assume would be the natural result. Now, after years of trying almost every trick in the book to reflate the economy, the Bank of Japan is finally bowing to the inevitable. The BOJ’s “dot plot” shows that almost none of the central bank’s nine board members believe that the country will reach its 2% inflation target. Accordingly, the bank has pushed back the date at which it expects to hit its 2% target. That’s a little comical, since by now it should be fairly obvious that the date will only get pushed back again and again. If some outside force intervenes to raise inflation to 2%, the BOJ will declare that it hit the target, but it’s pretty clear it has absolutely no idea how to engineer a deliberate rise in inflation.

The bank will probably keep interest rates at zero indefinitely, but if decades of that policy haven’t produced any inflation, what reason is there to think that decades more will do the trick? Some economists think more fiscal deficits could help raise inflation. That’s consistent with a theory called the “fiscal theory of the price level,” or FTPL. But a quick look at Japan’s recent history should make us skeptical of that theory – even as government debt has steadily climbed, inflation has stumbled along at close to 0%. Japan’s situation should also give pause to economists who want to resurrect the idea of the Phillips Curve, which purports to show a stable relationship between unemployment and inflation. Japan’s persistently low inflation comes even though essentially everyone in Japan who wants a job has one.

Yeah sure, and then double again the next 25 years.

• Britain’s Finance Sector Will Double In Size In 25 Years – Mark Carney (G.)

The governor of the Bank of England has predicted that the financial sector could double in size to be 20 times as big as GDP within the next 25 years, but warned that the government must hold its nerve and resist pressure to water down regulation after Brexit. Speaking to the Guardian to mark the 10th anniversary of the start of the global financial crisis in August 2007,[..] eant repeating the risky speculation of a decade ago. Carney dismissed suggestions that London could become a financial centre with only light-touch regulation – often dubbed Singapore-on-Thames – in order to attract business after the UK left the EU. He said the size of the financial sector would increase relative to the size of the economy if things went according to plan after Brexit and that meant there could be no going back to the lax regime that existed before 2007.

The Bank, he said, was aware that “we have a financial system that is ten times the size of this economy … It brings many strengths, it brings a million jobs, it pays 11% of tax revenue, it is the biggest export industry by some token … All good things. But it’s risky”. He went on: “We have a view… that post-Brexit the level of regulation will be at least as high as it currently is and that’s a level that in many cases substantially exceeds international norms. “There’s a reason for that, because we’re not going to to go the lowest common denominator in a system that is 10 times size of GDP. If the UK financial system thrives in a post-Brexit world, which is the plan, it will not be 10 times GDP, it will be 15 to 20 times GDP in another quarter of century because we will keep our market share of cross-border capital flows. Well then you really have to hold your nerve and keep the focus.”

I told you: feudal. UK needs full reset.

• London’s “Land Banking” Ventures Expose Startling Wealth Inequality (O.)

No place is feeling the bite of the UK housing crisis quite as savagely as London. While homelessness, social housing heartbreak and painfully high housing costs reveal the harsh reality of living in Britain’s capital, empty property numbers in London stand at their highest level in 20 years. Who are the culprits? Many would argue it’s the billionaires, whose “land banking” ventures are becoming ever more profitable. At a time when wealthy people purchase property and leave it empty, only to make a huge profit when they sell their investment, ordinary citizens are living in the throes of a 21st century housing crisis that is crippling the capital. Recent government figures show around 1.4 million homes have been lying vacant in the UK for at least six months – the highest level of “spare” homes in two decades.

At the same time, London has witnessed a staggering 456% increase in “land banking” over the last 20 years. Kensington and Chelsea – London’s richest borough, where the Grenfell Tower tragedy took place – has the highest number of empty homes. Land banking in London has long been exploited by the super-rich. In 2014, one-third of the mansions stood empty on Bishops Avenue, a single street in north London that has been dubbed “Billionaires Row,” which ranked as the UK’s second most expensive street with an estimated £350 million worth of empty properties. The famous row of mansions – believed to be owned by members of the Saudi royal family – has stood virtually unused since being bought by investors between 1989 and 1993.

Putin says he likes globalization, but his country increasingly takes care of itself. The sanctions work to strengthen Russia, the opposite of what America hopes to achieve. Hopefully Russia doesn’t turn tomatoes into some large industrial thing.

• Russian Ban On Turkish Tomatoes Bears Domestic Fruit (R.)

A ban on Turkish tomato imports that was motivated by geopolitics has inspired Russia to become self-sufficient in tomato production, a windfall for companies who invested in the technology that would increase year-round production. Russia has been ramping up production of meats, cheese and vegetables since it banned most Western food imports in 2014 as a retaliatory measure for sanctions meant to punish Russia’s support of rebels in eastern Ukraine and annexation of Crimea. After Turkey shot down a Russian jet near the Syrian border in November 2015, Moscow expanded the ban to include Turkish tomatoes, for which Russia was the biggest export market. Ties between Ankara and Moscow have since largely normalized but the ban remains in place and may not be lifted for another three to five years, officials have said.

That may be too late for Turkish exporters if Russian efforts to ramp up domestic production bear fruit. Greenhouse projects being built with state support are key to Russia’s plans to become self-sufficient for its 144 million population by 2020, industry players, analysts and officials say. Although Russia only imports about 500,000 tonnes of the 3.4 million tonnes of tomatoes consumed annually, the country’s notoriously harsh winters have limited its ability to ramp up to full capacity, IKAR agriculture consultancy said. Currently only 620,000 tonnes of production comes from “protected ground”, or greenhouses, IKAR said. The remainder comes from “open ground” productive only from June to September, and most of that comes from private plots maintained and used by individual families or sold at local farmers’ markets.

This is what I wrote the other day I fear will happen if Americans don’t stop the demonization of Trump. Really, you should all think again, or you’ll find yourself in a war that nobody can oversee.

• Trump Will Now Become the War President (Paul Craig Roberts)

President Trump has been defeated by the military/security complex and forced into continuing the orchestrated and dangerous tensions with Russia. Trump’s defeat has taught the Russians the lesson I have been trying to teach them for years, and that is that Russia is much more valuable to Washington as an enemy than as a friend. Do we now conclude with Russia’s Prime Minister Dmitry Medvedev that Trump is washed up and “utterly powerless?” I think not. Trump is by nature a leader. He wants to be out front, and that is where his personality will compel him to be. Having been prevented by the military/security complex, both US political parties, the presstitute media, the liberal-progressive-left, and Washington’s European vassals from being out front as a leader for peace, Trump will now be the leader for war. This is the only permissible role that the CIA and armaments industry will permit him to have.

Losing the chance for peace might cost all of us our lives. Now that Russia and China see that Washington is unwilling to share the world stage with them, Russia and China will have to become more confrontational with Washington in order to prevent Washington from marginalizing them. Preparations for war will become central in order to protect the interests of the two countries. The situation is far more dangerous than at any time of the Cold War. The foolish American liberal-progressive-left, wrapped up as they are in Identity Politics and hatred of “the Trump deplorables,” joined the military/security complex’s attack on Trump. So did the whores, who pretend to be a Western media, and Washington’s European vassals, not one of whom had enough intelligence to see that the outcome of the attack on Trump would be an escalation of conflict with Russia, conflict that is not in Europe’s business and security interests.

Washington is already raising the violence threshold. The same lies that Washington told about Saddam Hussein, Gadaffi, Assad, Iran, Serbia and Russia are now being told about Venezuela. The American presstitutes duly report the lies handed to them by the CIA just as Udo Ulfkotte and Seymour Hersh report. These lies comprise the propaganda that conditions Western peoples to accept the coming US coup against the democratic government in Venezuela and its replacement with a Washington-compliant government that will permit the renewal of US corporate exploitation of Venezuela.

As the productive elements of American capitalism fall away, the exploitative elements become its essence. After Venezuela, there will be more South American victims. As reduced tensions with Russia are no longer in prospect, there is no reason for the US to abandon its and Israel’s determination to overthrow the Syrian government and then the Iranian government. The easy wars against Iraq, Libya, and Somalia are to be followed by far more perilous conflict with Iran, Russia, and China This is the outcome of John Brennan’s defeat of President Trump.

Two pieces on the IMF’s own internal report.

• IMF Admits Disastrous Love Affair With Euro and Immolation Of Greece (Tel)

The IMF’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory. This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions. “Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located” It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking breakdown in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation.

The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way European Union insiders used the fund to rescue their own rich currency union and banking system. The three main bailouts for Greece, Portugal and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000pc of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the fund between 2011 and 2014. In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff,” it said. “The IMF remained upbeat about the soundness of the European banking system… this lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value..” [..] “Before the launch of the euro, the IMF’s public statements tended to emphasise the advantages of the common currency,” it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled.

[..] In Greece, the IMF violated its own cardinal rule by signing off on a bailout in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery, and many suspected from the start that it was doomed. The organisation got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion. “The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package, but by then it was a fait accompli.

Bill Mitchell read the whole thing.

• Why Have No IMF Officials Been Prosecuted For Malpractice In Greece? (Bilbo)

I have just finished reading the 474-page Background Papers that the IEO released in 2016 and which formed the basis of its June 2016 Evaluation Report – The IMF and the Crises in Greece, Ireland, and Portugal. It is not a pretty story. It seems that the incompetence driven by the blind adherence to Groupthink that the earlier Reports had highlighted went a step further into what I would consider to be criminality plain and simple. The IEO found that IMF officials and economists violated the rules of their own organisation, hid documents, presumably to hide their chicanery and generally displayed a high level of incompetence including failing to under the implications of a common currency – pretty basic errors, in other words. The IEO Report sought to evaluate: “… the IMF’s engagement with the euro area during these crises in order to draw lessons and to enhance transparency..”

The period under review was 2010 to 2013, which covered the “2010 Stand-By Arrangement with Greece, the 2010 Extended Arrangement with Ireland, and the 2011 Extended Arrangement with Portugal.” The IEO noted that the IMF involvement with the Troika was quite different to its normal operations. 1. “the euro area programs were the first instances of direct IMF involvement in adjustment programs for advanced, financially developed, and financially open countries within a currency union”. 2. “they involved intense collaboration with regional partners who also were providing conditional financial assistance, and the modality of collaboration evolved in real time.” 3. “the amounts committed by the IMF … were exceptionally large … exceeded the normal limits of 200% of quota for any 12-month period or 600% cumulatively over the life of the program. In all three countries, access exceeded 2,000% of quota.”

So one would think that the IMF would have exercised especial care and been committed to transparency, given that for the “financial years 2011-14, these countries accounted for nearly 80% of the total lending provided by the IMF”. It didn’t turn out that way. Interestingly, the IEO for all its independence was set upon by “several Executive Directors and other senior IMF officials” at the outset of the evaluation process (when establishing the Terms of Reference), who claimed that the 2012 Bailout was just a “continuation of the 2010 SBA” and so it was not possible to evaluate them separately. In other words, the IMF was trying to close down assessment of its activities.

Debt Rattle January 2 2016

Jan 022016

January 2, 2016 Posted by Raúl Ilargi Meijer at 10:09 am Finance Tagged with: Amazon, China, default, diamonds, junk bonds, minimum wage, oil, refugees, short, yields 6 Responses »

Earl Theisen Walt Disney oiling scale model locomotive at home in LA 1951

• After a Tumultuous 2015, Investors Have Low Expectations for Markets (WSJ)

• Will Corporate Investment and Profits Rebound This Year? (WSJ)

• A Year of Sovereign Defaults? (Carmen Reinhart)

• The Next Big Short: Amazon (Stockman)

• The Real Financial Risks of 2016 (Taleb)

• High-Yield Bonds: Worthy of the Name Again (WSJ)

• Slowdown In Chinese Manufacturing Deepens Fears For Economy (Guardian)

• Opinion Divided On State Of Chinese Economy, But Not Its Importance (Guardian)

• ‘Indigestion’ Hits Diamond Companies: Too Much Supply, Too Little Demand (FT)

• Iraq Says It Exported More Than 1 Billion Barrels of Oil in 2015 (BBG)

• The Federal Reserve’s Brave New Interest Rate World (Coppola)

• Economic Sweet Spot Of 2016 Before The Reflation Storm (AEP)

• New Year Brings Minimum Wage Hikes For Americans In 14 States (Reuters)

• Swiss Bank Admits Cash and Gold Withdrawals Cheated IRS (BBG)

• Edward Hugh, Economist Who Foresaw Eurozone’s Struggles, Dies At 67 (NY Times)

• As 2016 Dawns, Europe Braces For More Waves Of Refugees (AP)

Watch out below.

• After a Tumultuous 2015, Investors Have Low Expectations for Markets (WSJ)

After a year of disappointment in everything from U.S. stocks to emerging markets and junk bonds, investors are approaching 2016 with low expectations. Some see the past year as a bad omen. Two major stock indexes posted their first annual decline since the financial crisis, while energy prices fell even further. Emerging markets and junk bonds also struggled. Others view the pullback as a sensible breather for some markets after years of strong gains. While large gains were common as markets recovered in the years after the 2008 financial crisis, many investors say such returns are growing harder to come by, and expect slim gains at best this year.

“You have to be very muted in your expectations,” said Margie Patel, senior portfolio manager at Wells Fargo Funds who said she expects mid-single percentage-point gains in major U.S. stock indexes this year. “It’s pretty hard to point to a sector or an industry where you could say, well, that’s going to grow very, very rapidly,” she said, adding that there are “not a lot of things to get enthusiastic about, and a long list of things to be worried about.” As the year neared an end, a fierce selloff hit junk bonds in December, while U.S. government bond yields rose only modestly despite the Federal Reserve’s decision to raise its benchmark interest rate in December, showing investors weren’t ready to retreat from relatively safe government bonds.

For the U.S., 2015’s rough results stood in contrast to three stellar years. After rising 46% from 2012 through 2014, the Dow Jones Industrial Average fell 2.2% last year. The S&P 500 fell 0.7%. While most Wall Street equity strategists still expect gains for U.S. stocks this year, they also once again expect higher levels of volatility than in years past. Of 16 investment banks that issued forecasts for this year, two-thirds expect the S&P 500 to finish 2016 at a level less than 10% above last year’s close, according to stock-market research firm Birinyi Associates. Some investors say a pause for stocks is normal for a bull market of this length, which has been the longest since the 1990s. Including dividends, the S&P 500 has returned 249% since its crisis-era low of 2009.

How could they? On what? “This recovery still stinks.”

• Will Corporate Investment and Profits Rebound This Year? (WSJ)

In 2015, the American corporate landscape was dominated by activist investors, buybacks, currencies and deals. This year, the question is whether U.S. businesses will shake off the weight of a strong dollar and lower commodity prices to expand profit growth, end their dependence on boosting returns with buybacks, and turn to investing in their operations. The Federal Reserve had enough confidence in the economic recovery to raise interest rates in December, but it remains unclear whether global growth will be buoyant enough reverse weak business investment. Many big companies are reining in spending. 3M, with thousands of products from Scotch tape to smartphone materials, forecasts capital spending roughly unchanged from 2015.

Telecom companies AT&T and Verizon both plan to hold capital spending generally level in the coming year. Meanwhile, industrial giants like General Electric and United Technologies are aggressively cutting costs and seeking to squeeze more savings from suppliers. Capital expenditures by members of the S&P 500 index fell in the second and third quarters of 2015 from a year earlier, the first time since 2010 that the measure has fallen for two consecutive quarters, according to data from S&P Dow Jones Indices. Another measure of business spending on new equipment—orders for nondefense capital goods, excluding aircraft—was down 3.6% from a year earlier in the first 11 months of 2015, according to data from the U.S. Department of Commerce.

More broadly, only 25% of small companies plan capital outlays in the next three to six months, according to a November survey of about 600 firms by the National Federation of Independent Business. That compares with an average of 29% and a high of 41% since the surveys began in 1974. “Our guys are in maintenance mode,” said William Dunkelberg, chief economist for the trade group. “This recovery still stinks.” Profit growth for the constituents of the S&P 500 index stalled in 2015 thanks to a combination of a strong dollar and falling prices for steel, crude oil and other commodities. Deutsche Bank estimates total net income for companies in the index fell 3% in 2015, while sales declined 4%. For 2016, Deutsche Bank forecasts net income growth of 4.3% and a 4% increase in revenue.

Given the reliance on dollar-denominated low interest loans, it seems all but certain.

• A Year of Sovereign Defaults? (Carmen Reinhart)

When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”). If history is a guide, such conversations may be happening a lot in 2016. Like so many other features of the global economy, debt accumulation and default tends to occur in cycles.

Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults. The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors. Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts.

But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions. And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. As my recent work with Vincent Reinhart and Christoph Trebesch reveals, peaks and troughs in the international capital-flow cycle are especially dangerous, with defaults proliferating at the end of a capital-inflow bonanza.

Big call from Dave.

• The Next Big Short: Amazon (Stockman)

If you have forgotten your Gulliver’s Travels, recall that Jonathan Swift described the people of Brobdingnag as being as tall as church steeples and having a ten foot stride. Everything else was in proportion – with rats the size of mastiffs and the latter the size of four elephants, while flies were “as big as a Dunstable lark” and wasps were the size of partridges. Hence the word for this fictional land has come to mean colossal, enormous, gigantic, huge, immense or, as the urban dictionary puts it, “really f*cking big”. That would also describe the $325 billion bubble which comprises Amazon’s market cap. It is at once brobdangnagian and preposterous – a trick on the casino signifying that the crowd has once again gone stark raving mad.

When you have arrived at a condition of extreme “irrational exuberance” there is probably no insult to ordinary valuation metrics that can shock. But for want of doubt consider that AMZN earned the grand sum of $79 million last quarter and $328 million for the LTM period ending in September. That’s right. Its conventional PE multiple is 985X! And, no, its not a biotech start-up in phase 3 FDA trials with a sure fire cancer cure set to be approved any day; its actually been around more than a quarter century, putting it in the oldest quartile of businesses in the US. But according to the loony posse of sell-side apologists who cover the company – there are 15 buy recommendations – Amazon is still furiously investing in “growth” after all of these years.

So never mind the PE multiple; earnings are being temporarily sacrificed for growth. Well, yes. On its approximate $100 billion in LTM sales Amazon did generate $32.6 billion of gross profit. But the great builder behind the curtain in Seattle choose to “reinvest” $5 billion in sales and marketing, $14 billion in general and administrative expense and $11.6 billion in R&D. So there wasn’t much left for the bottom line, and not surprisingly. Amazon’s huge R&D expense alone was actually nearly three times higher than that of pharmaceutical giant Bristol-Myers Squibb. But apparently that’s why Bezos boldly bags the big valuation multiples.

Not so fast, we think. Is there any evidence that all this madcap “investment” in the upper lines of the P&L for all these years is showing signs of momentum in cash generation? After all, sooner or later valuation has to be about free cash flow, even if you set aside GAAP accounting income. In fact, AMZN generated $9.8 billion in operating cash flow during its most recent LTM period and spent $7.0 billion on CapEx and other investments. So its modest $2.8 billion of free cash flow implies a multiple of 117X.

“Zero interest rates turn monetary policy into a massive weapon that has no ammunition.”

• The Real Financial Risks of 2016 (Taleb)

How should we think about financial risks in 2016? First, worry less about the banking system. Financial institutions today are less fragile than they were a few years ago. This isn’t because they got better at understanding risk (they didn’t) but because, since 2009, banks have been shedding their exposures to extreme events. Hedge funds, which are much more adept at risk-taking, now function as reinsurers of sorts. Because hedge-fund owners have skin in the game, they are less prone to hiding risks than are bankers. This isn’t to say that the financial system has healed: Monetary policy made itself ineffective with low interest rates, which were seen as a cure rather than a transitory painkiller. Zero interest rates turn monetary policy into a massive weapon that has no ammunition.

There’s no evidence that “zero” interest rates are better than, say, 2% or 3%, as the Federal Reserve may be realizing. I worry about asset values that have swelled in response to easy money. Low interest rates invite speculation in assets such as junk bonds, real estate and emerging market securities. The effect of tightening in 1994 was disproportionately felt with Italian, Mexican and Thai securities. The rule is: Investments with micro-Ponzi attributes (i.e., a need to borrow to repay) will be hit. Though “another Lehman Brothers” isn’t likely to happen with banks, it is very likely to happen with commodity firms and countries that depend directly or indirectly on commodity prices.

Dubai is more threatened by oil prices than Islamic State. Commodity people have been shouting, “We’ve hit bottom,” which leads me to believe that they still have inventory to liquidate. Long-term agricultural commodity prices might be threatened by improvement in the storage of solar energy, which could prompt some governments to cancel ethanol programs as a mandatory use of land for “clean” energy.

Yield rises with risk. Risk leads to losses.

• High-Yield Bonds: Worthy of the Name Again (WSJ)

By mid-2014, some were starting to wonder whether the high-yield bond market needed to find a new name for itself. U.S. yields fell below 5%, while European yields dipped beneath 4%, according to Barclays indexes. But at the end of 2015, the market once again has an appropriate moniker. U.S. yields are ending the year at 8.8%, the Barclays index shows, returning to levels last seen in 2011. They have risen by about 2.3 percentage points this year. European yields stand at 5% — not huge in absolute terms, but high relative to ultralow European government bond yields. Of course, for existing investors that has been bad news. The ride—including the high-profile meltdown of Third Avenue Management’s Focused Credit Fund, which shook the market in December—has been rough.

It has taken its toll on borrowers too. The U.S. high-yield bond market has recorded the slowest pace of fourth-quarter issuance since 2008, when the collapse of Lehman Brothers essentially shut the market down, according to data firm Dealogic. Global issuance has fallen 23% this year to $366.5 billion, the lowest level since 2011. The market is likely to face further tests in 2016. Defaults are set to rise, and companies may find it tougher to get financing. But at least investors will now get chunkier rewards for taking risk. Arguably, high-yield investors should always be focused on absolute rather than relative yields, given the need to compensate for defaults. From that point of view, 2015 was the year high-yield bonds got their mojo back.

China will find it much harder to keep up appearances in 2016.

• Slowdown In Chinese Manufacturing Deepens Fears For Economy (Guardian)

A further slowdown in China’s vast manufacturing sector has intensified worries about the year ahead for the world’s second largest economy. The latest in a string of downbeat reports from showed that activity at China’s factories cooled in December for the fifth month running, as overseas demand for Chinese goods continued to fall. Against the backdrop of a faltering global economy, turmoil in the country’s stock markets and overcapacity in factories, Chinese economic growth has slowed markedly. The country’s central bank expects growth in 2015 to be the slowest for a quarter of a century. After growing 7.3% in 2014, the economy is thought to have expanded by 6.9% in 2015 and the central bank has forecast that it may slow further in 2016 to 6.8%.

A series of interventions by policymakers, including interest rate cuts, have done little to revive growth and in some cases served only to heighten concern about China’s challenges. Friday’s figures showed that the manufacturing sector limped to the end of 2015. The official purchasing managers’ index (PMI) of manufacturing activity edged up to 49.7 in December from 49.6 in November. The December reading matched the forecast in a Reuters poll of economists and marked the fifth consecutive month that the index was below 50, the point that separates expansion from contraction. “Although the PMI slightly rebounded this month, it still lies below the critical point and is lower than historic levels over the same period,” Zhao Qinghe, a senior statistician at the national bureau of statistics, said.

Analysts said the latest manufacturing PMI pointed to falling activity, but that some hope could be taken from the improvement on November’s three-year low. The small rise “suggests that growth momentum is stabilising somewhat … however, the sector is still facing strong headwinds,” said Zhou Hao at Commerzbank. “In order to facilitate the destocking and deleveraging process, monetary policy will remain accommodative and the fiscal policy will be more proactive.”

Can China let go of the peg and let the yaun plunge, while it’s in the IMF basket?

• Opinion Divided On State Of Chinese Economy, But Not Its Importance (Guardian)

It was perhaps fitting that China’s latest lacklustre industrial survey was the first fragment of financial data to greet the new year. Economists are divided about the risks facing the vast Chinese economy, but agree that how they play out will have profound consequences for the rest of the world in 2016. The optimists point to China’s large and growing middle class, the vast foreign currency reserves that give Beijing ample ammunition to respond to any crisis that emerges, and the authoritarian regime that allows its policymakers to force through economic change. And official figures do suggest that economic growth may have stabilised at about 6.5% – considerably weaker than the double-digit pace that was the norm before the financial crisis, but not the feared “hard landing”.

Yet pessimists argue that the official figures radically overestimate the true pace of growth: using alternative indicators such as freight volumes and electricity usage, City analysts Fathom calculate that growth could be below 3%. And last summer’s share price crash, and the chaos that surrounded Beijing’s decision to devalue the yuan, suggested there is no reason to think Chinese policymakers are any more in control of the forces of capitalism than their western counterparts were in the run-up to the financial crisis. China’s latest five-year plan involves a conscious attempt to switch growth away from the export-led model that has driven its rise to the economic premier league, and towards more sustainable, domestic consumption-led growth.

But with many of the country’s powerful state-owned enterprises loaded up with debt, property bubbles deflating and the knock-on effects of the share price crash still being felt, domestic demand has so far failed to pick up the slack. The challenge of maintaining politically acceptable rates of economic growth may become tougher in 2016, particularly if the US Federal Reserve presses ahead with its bid to return interest rates to somewhere near normal. The value of the Chinese yuan is not allowed to move too far out of line with the dollar, under a “crawling peg” – effectively a semi-fixed exchange rate.

But as the greenback moves upwards to reflect the strengthening US economy and rising rates, it is taking the yuan with it, and making it harder for Chinese exporters to compete. As the dollar continues to appreciate, it may become increasingly tempting for policymakers to abandon the peg and let the currency plunge, returning to the familiar export-led pattern of growth. And if Beijing does devalue sharply, it would damage China’s exporting rivals, and send deflation rippling out through the global economy, increasing the risk of a lengthy period of economic weakness. China’s true fragility is impossible to gauge; but it matters.

Not a good sign for gold.

• ‘Indigestion’ Hits Diamond Companies: Too Much Supply, Too Little Demand (FT)

De Beers was hoping its “Live your love today” campaign would entice Chinese consumers to buy diamond jewellery this holiday season. It is unlikely to be enough to turn round the miner’s fortunes. While auction prices set records for some big gems in 2015 — Lucara Diamond found one of the largest stones to date — the sector has had its toughest year since the global financial crisis as it struggles with too much supply and too little demand. Miners including De Beers, which is owned by Anglo American, and Canada’s Dominion Diamond have acknowledged falling revenues and lower prices for rough diamonds. In China, the big jewellers are suffering. Chow Tai Fook, the largest by market value, reported a 42% fall in net profits in interim results.

But the pain has been most acute for the trade’s “midstream”, the hundreds of cutters and polishers, mostly in India, which buy rough stones from miners and supply retailers. “The raw [rough] diamond price is still high but the polishers [like us] have to sell cheaper because of the drop in demand,” said Chirag Kakadia of Sheetal, an Indian diamond polisher, speaking at a Hong Kong trade show. “We are forced to purchase higher but sell lower. Our production has dropped 40% from 2014 but our sales are 50% less.” Companies such as Sheetal have been hit by a bout of what Johan Dippenaar, chief executive of Petra Diamonds, has described as industry “indigestion”, stemming from an over-optimistic assessment of demand from China.

Retailers that had geared up for years of growth were caught out by a slowing economy and an anti-corruption drive, with officials banned from receiving gifts. A person in the industry who asked not to be named said demand in Hong Kong and Macau had been “absolutely mullered” by the corruption crackdown. The lack of interest from consumers has left cutters and polishers holding too much stock. In turn, their need to buy from miners has declined, forcing down rough prices. Analysts said that, even if midstream groups wanted to restock, many would find it hard to do so. Much of the credit in the sector has been withdrawn as banks have grown wary of lending to businesses that are family-owned and tend to be opaque. The question is whether the market will bounce back or be altered for good.

De Beers, which has lost much of its power as a supplier but remains a dominant participant, says the industry does not face a long-term bust and once the temporary oversupply is dealt with equilibrium will be restored. Philippe Mellier, chief executive, told industry analysts in December: “This is a stock crisis, not a demand crisis.” De Beers has allowed midstream companies to put regular purchases on hold. “We just want our customers to buy what they need and not increase the stock problem,” said Mr Mellier. The miner has also cut production and closed two diamond mines. Consultants at Bain say the diamond pipeline should return to normal functioning once midmarket businesses and retailers clear excess inventories, provided that miners and polishers manage supplies adroitly.

And now Iran will follow.

• Iraq Says It Exported More Than 1 Billion Barrels of Oil in 2015 (BBG)

Iraq said it exported 1.097 billion barrels of oil in 2015, generating $49.079 billion from sales, according to the oil ministry. It sold 99.7 million barrels of oil in December, generating $2.973 billion, after selling a record 100.9 million barrels in November, said oil ministry spokesman Asim Jihad. The country sold at an average price of $44.74 a barrel in 2015, Jihad said. Iraq, with the world’s fifth-biggest oil reserves, needs to keep increasing crude output because lower oil prices have curbed government revenue. Oil prices have slumped in the past year as OPEC defended market share against production in the U.S. OPEC’s second-largest crude producer is facing a slowdown in investment due to lower oil prices while fighting a costly war on Islamist militants who seized a swath of the country’s northwest. The nation’s output will start to decline in 2018, Morgan Stanley said in a Sept. 2 report, reversing its forecast for higher production every year to 2020.

The real rate rise is still substantially lower than 0.25%, though.

• The Federal Reserve’s Brave New Interest Rate World (Coppola)

On December 17th, 2015, the FOMC raised interest rates for the first time since the 2008 financial crisis. To be sure, it had little choice. The Fed had been signalling an interest rate rise persistently for months, and had already disappointed markets twice by delaying rate rises in September and October. It had painted itself into the same corner as the ECB did over QE earlier in the year. The ECB signalled for months that it was going to start QE, and backed off several times, to the disappointment of market participants. Eventually, ECB was forced to start QE for the simple reason that NOT doing so threatened financial stability, because markets had already priced it in. So with the FOMC. Encouraged by broadly good economic data, and by the Fed’s approving noises, markets priced in a 25bps interest rate rise.

The FOMC was all but obliged to act, simply to avoid sparking a market rout. It was yet another fine example of markets being willing to let the Fed guide them along the road that they were already travelling. Since that small but oh-so-significant rate rise, the Fed Funds rate has obediently remained firmly within its new 25 to 50 bps corridor. Indeed, it has hovered persistently around the midpoint of the range. Given that the system is still awash with excess reserves and the Fed Funds rate therefore has little effect on bank lending, it is remarkable that the rate has stayed both elevated and stable. How has this been achieved? Yesterday, the FT reported that the Fed absorbed $475bn of excess reserves through overnight reverse repo operations in its last monetary operation of 2015, a record amount.

Overnight reverse repos allow certain non-bank financial institutions to place funds at the Fed overnight in return for USTs (yes, the ones bought in the Fed’s QE programs) and 25bps interest. The interest rate is no accident: it is the floor of the target Fed Funds rate range. These reverse repos provide competition for banks in the funding markets, forcing banks to offer higher interest rates on funds they lend to non-banks. The Fed said in December that it would make $2tn worth of USTs available as collateral for reverse repo transactions: it is actually needing to use considerably less to maintain the Fed Funds rate well above its floor. But reverse repos are only half the story. The Fed also set the interest rate it pays on excess reserves (IOER) to the top of the Fed Funds target range. This pulls the funding rate upwards, since banks will not lend reserves to each other at less than the IOER rate.

Ambroze has been smoking. A lot. The sudden surge in China M1 in the graph looks like panic to me, and moreover, it hasn’t done any good either.

• Economic Sweet Spot Of 2016 Before The Reflation Storm (AEP)

Sunlit uplands beckon. Almost $2 trillion of annual stimulus from cheap oil has been accumulating for months, pent up and waiting to be spent. It will soon come flooding through in a burst, catching the world by surprise. But beware: the more beguiling it is over coming months, the more traumatic it will be later as the reflation scare comes alive. Since the rite of New Year predictions is to stick one’s neck out, let me hazard hopefully that this treacherous moment can be deferred until 2017. The positive oil shock will hit just as austerity ends in the US, and big-spending states and cities ice the cake with a fiscal boost worth 0.5pc of GDP. Americans broke records with the purchase 1.7m new cars and trucks in December, a foretaste of blistering sales to come. There is a ‘deficit’ of 20m cars left from the Long Slump yet to be plugged.

The eurozone is nearing the sweet spot, a fleeting nirvana of 2pc growth, conjured by the trifecta of a cheap euro, budgetary break-out, and the end of bank deleveraging. Mario Draghi’s printing presses are firing on all cylinders. The ‘broad’ M3 money supply is growing at turbo-charged rates of 5pc in real terms. This is a 12-month leading indicator for the economy, so enjoy the ride, at least until the demonic Fiscal Compact returns at the dead of night to smother Europe once again. In China, the dogs bark, the caravan moves on. There will be no devaluation of the yuan this year, because there is no urgent need for it. Premier Li Keqiang has vowed to keep the new exchange basket stable. Armed with a current account surplus of $600bn, $3.5 trillion of reserves, and capitol controls, that is exactly what he will do.

The lingering hangover from the Great Chinese Recession of early 2015 has faded. The PMI services gauge has just jumped to a 15-month high of 54.4, and this is now the relevant index since the Communist Party is systematically winding down chunks of the steel, shipbuilding, and chemical industries. China’s money supply is also catching fire. Growth of ‘real true M1’ has spiked to 10pc, a giddy shot of caffeine not seen since the post-Lehman spree. Combined credit and local government bond issuance is surging at a rate of 14pc. The Communist Party cranked up fiscal spending by 18.9pc in November. Whether or not you think this recidivist stimulus is wise – given that the law of diminishing returns set in long ago for debt-driven growth – it will paper over a lot of cracks for the time being.

One thing that will not happen is a housing revival in the mid-sized T3 and T4 cities of the hinterland. It will be a long time before the latest reform of the medieval Hukou system unleashes enough rural migrants to fill the ghost towns. The stock of 4.5m unsold homes on the books of developers is frightening to behold. The epic dollar rally has come and gone. The world’s currency will drift down over coming months, and that will be a reprieve for the likes of Brazil, Turkey, South Africa, Indonesia, and Colombia. Those at the wrong end of $9 trillion of off-shore debt in US dollars may breath easier: they will not escape. The MSCI index of emerging market stocks will return from the dead, clawing back most of the 28pc in losses since last April, but only to lurch into a greater storm.

Barely a start. But a strong sign of how much less ‘new’ jobs pay.

• New Year Brings Minimum Wage Hikes For Americans In 14 States (Reuters)

As the United States marks more than six years without an increase in the federal minimum wage of $7.25 an hour, 14 states and several cities are moving forward with their own increases, with most set to start taking effect on Friday. California and Massachusetts are highest among the states, both increasing from $9 to $10 an hour, according to an analysis by the National Conference of State Legislatures. At the low end is Arkansas, where the minimum wage is increasing from $7.50 to $8. The smallest increase, a nickel, comes in South Dakota, where the hourly minimum is now $8.55.

The increases come in the wake of a series of “living wage” protests across the country, including a November campaign in which thousands of protesters in 270 cities marched in support of a $15-an-hour minimum wage and union rights for fast food workers. Food service workers make up the largest group of minimum-wage earners, according to the Bureau of Labor Statistics. With Friday’s increases, the new average minimum wage across the 14 affected states rises from $8.50 an hour to just over $9. Several cities are going even higher. Seattle is setting a sliding hourly minimum between $10.50 and $13 on Jan. 1, and Los Angeles and San Francisco are enacting similar increases in July, en route to $15 an hour phased in over six years.

Backers say a higher minimum wage helps combat poverty, but opponents worry about the potential impact on employment and company profits. In 2014, a Democratic-backed congressional proposal to increase the federal minimum wage for the first time since 2009 to $10.10 stalled, as have subsequent efforts by President Barack Obama. More recent proposals by some lawmakers call for a federal minimum wage of up to $15 an hour. Alan Krueger, an economics professor at Princeton University and former chairman of Obama’s Council of Economic Advisers, said a federal minimum wage of up to $12 an hour, phased in over five years or so, “would not have a noticeable effect on employment.”

Many such banks did the same.

• Swiss Bank Admits Cash and Gold Withdrawals Cheated IRS (BBG)

Large cash and gold withdrawals were one way Bank Lombard Odier & Co allowed U.S. clients to sever a paper trail on their assets and cheat the Internal Revenue Service, the Swiss lender admitted, agreeing to pay $99.8 million to avoid prosecution. That penalty is the second-largest paid under a program to help the U.S. clamp down on tax evasion through Swiss banks. Total penalties have reached more than $1.1 billion as banks have revealed how they helped clients hide money and where the assets went. DZ Privatbank (Schweiz) AG will also pay almost $7.5 million under accords released Thursday. The U.S. has struck 75 such non-prosecution agreements this year, with the tempo and dollar amount increasing in recent weeks as it rushes to finish. Geneva-based Lombard Odier, founded in 1796, had 1,121 U.S. accounts with $4.45 billion in assets from 2008 through 2014, according to the agreement, announced Thursday.

The bank adopted a policy in 2008 to force U.S. clients to disclose undeclared assets to the IRS or face account closures. However, the policy authorized large cash or gold withdrawals, donations to U.S. relatives or charitable institutions, resulting in further wrongdoing, according to the statement. In 2009 alone, the bank processed 14 cash withdrawals of more than $1 million each for clients closing 11 accounts, according to the non-prosecution agreement. One client closed an account by withdrawing more than $3 million in gold, the bank admitted. “These withdrawals of cash and precious metals enabled U.S. persons to sever the paper trail for their assets and further conceal their income and assets from U.S. authorities,” according to the agreement. The bank also closed at least 12 U.S. accounts worth $15.7 million with “fictitious donations” to other accounts at the bank, Lombard Odier admitted.

“..Mr. Hugh insisted time and again that economists and policy makers were glossing over the extent to which swift austerity measures in countries like Greece, Ireland, Spain and Portugal would result in devastating recessions..”

• Edward Hugh, Economist Who Foresaw Eurozone’s Struggles, Dies At 67 (NY Times)

Edward Hugh, a freethinking and wide-ranging British economist who gave early warnings about the European debt crisis from his adopted home in Barcelona, died on Tuesday, his birthday, in Girona, Spain. He was 67. The cause was cancer of the gallbladder and liver, his son, Morgan Jones, said. Mr. Hugh drew attention in 2009 and 2010 for his blog posts pointing out flaws at the root of Europe’s ambition to bind together disparate cultures and economies with a single currency, the euro. In clear, concise essays, adorned with philosophical musings and colorful graphics, Mr. Hugh insisted time and again that economists and policy makers were glossing over the extent to which swift austerity measures in countries like Greece, Ireland, Spain and Portugal would result in devastating recessions.

Mr. Hugh’s insights soon attracted a wide and influential following, including hedge funds, economists, finance ministers and analysts at the IMF. “For those of us pessimists who believed that the eurozone structure was leading to an unsustainable bubble in the periphery countries, Edward Hugh was a must-read,” said Albert Edwards, a strategist based in London for the French bank Société Générale. “His prescience in explaining the mechanics of the crisis went almost unnoticed until it actually hit.” As the eurozone’s economic problems grew, so did Mr. Hugh’s popularity, and by 2011 he had moved the base of his operations to Facebook. There he attracted many thousands of additional followers from all over the world.

If Santa Claus and John Maynard Keynes could combine as one, he might well be Edward Hugh. He was roly-poly and merry, and he always had a twinkle in his eye, not least when he came across a data point or the hint of an economic or social trend that would support one of his many theories. His intellect was too restless to be pigeonholed, but when pressed he would say that he saw himself as a Keynesian in spirit, but not letter. And in tune with his view that economists in general had become too wedded to static economic models and failed their obligation to predict and explain, he frequently cited this quotation from Keynes: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again.”

3 million forecast for 2016.

• As 2016 Dawns, Europe Braces For More Waves Of Refugees (AP)

Bitter cold, biting winds and rough winter seas have done little to stem the seemingly endless flow of desperate people fleeing war or poverty for what they hope will be a brighter, safer future in Europe. As 2016 dawns, boatloads continue to reach Greek shores and thousands trudge across Balkan fields and country roads heading north. More than a million people reached Europe in 2015 in the continent’s largest refugee influx since the end of World War II – a crisis that has tested European unity and threatened the vision of a borderless continent. Nearly 3,800 people are estimated to have drowned in the Mediterranean last year, making the journey to Greece or Italy in unseaworthy vessels packed far beyond capacity.

The EU has pledged to bolster patrols on its external borders and quickly deport economic migrants, while Turkey has agreed to crack down on smugglers operating from its coastline. But those on the front lines of the crisis say the coming year promises to be difficult unless there is a dramatic change. Greece has borne the brunt of the exodus, with more than 850,000 people reaching the country’s shores, nearly all arriving on Greek islands from the nearby Turkish coast. “The (migrant) flows continue unabated. And on good days, on days when the weather isn’t bad, they are increased,” Ioannis Mouzalas, Greeces minister responsible for migration issues, told AP. “This is a problem and shows that Turkey wasn’t able – I’m not saying that they didn’t want – to respond to the duty and obligation it had undertaken to control the flows and the smugglers from its shores.”

Europe’s response to the crisis has been fractured, with individual countries, concerned about the sheer scale of the influx, introducing new border controls aimed at limiting the flow. The problem is compounded by the reluctance of many migrants’ countries of origin, such as Pakistan, to accept forcible returns. “If measures are not taken to stop the flows from Turkey and if Europe doesn’t solve the problems of the returns as a whole, it will be a very difficult year,” Mouzalas warned. “It’s a bad sign, this unabated flow that continues,” Mouzalas said. “It creates difficulties for us, as the borders have closed for particular categories of people and there is a danger they will be trapped here.”

Debt Rattle December 14 2015

Dec 142015

December 14, 2015 Posted by Raúl Ilargi Meijer at 9:44 am Finance Tagged with: border force, bubble, China, Fed, junk bonds, oil, refugees, vulture fund, yields Comments Off

Harris&Ewing President Hoover lights Nation’s Capital community Xmas tree 1929

• The New American Dream Is To Have A Job (FT)

• The End Of The Bubble Finance Era (Stockman)

• “It’s An Epic Bloodbath” : The 2015 Junk Bond Heatmap (ZH)

• The Coincidences Are Just Too Eerie: The Last Time CCC Yields Were Here (ZH)

• Yuan Declines to Four-Year Low as New Index Signals Weakness (BBG)

• Oil Sinks to Lowest in Almost 7 Years as Iran Vows More Supply (BBG)

• How Low Can Oil Prices Go? (Guardian)

• World Markets In Fragile Mood As Yellen Prepares To Push The Button (Guardian)

• Fed Officials Worry Interest Rates Will Go Up, Only to Come Back Down (WSJ)

• The China Metal Exchange At Center Of Investment Scandal (Reuters)

• China Local Officials Admit To Faking Economic Figures (CD)

• Who’s Profiting From $1.2 Trillion of US Federal Student Loans? (BBG)

• Ecuador Signs Deal With Sweden For Assange Questioning (Reuters)

• Vulture Funds Price Greek Nonperforming Loans At Very Low Rates (Kath.)

• Tsipras Expects Protest As Greece Agrees To Further Privatisations (Guardian)

• Athens Wants To Turn Bailout Loans’ Floating Rates Into Fixed (Kath.)

• Greece Seeks Help With Migrants As Tensions Rise (Kath.)

• Angela Merkel Wants To ‘Drastically Reduce’ Refugee Arrivals In Germany (Reuters)

• EU Border Force Plan Faces Resistance From Governments (Reuters)

“Fifth of US adults live in or near to poverty..”

• The New American Dream Is To Have A Job (FT)

One in five US adults now lives in households either in poverty or on the cusp of poverty, with almost 5.7m having joined the country’s lowest income ranks since the global financial crisis. Many of the new poor, or near-poor, have become so even amid an economic recovery that is widely expected to lead the US Federal Reserve to raise interest rates next week for the first time in almost a decade. More than 45 per cent of them — almost 2.5m adults — have joined the lowest income ranks since 2011, long after the post-crisis recession was ostensibly over. The findings, contained in data prepared for a new study of the US middle class by the Pew Research Center and shared with the Financial Times, put a stark human face on the economic legacy left by the crisis and reveal how uneven the recovery has been.

They also help explain why any notion of a recovery still seems a long way off to many in the US and why the message of populist politicians such as Donald Trump that America is not working resonate on the eve of an election year. “There’s a new American dream,” says Torrey Easler, a Baptist preacher who helps feed a growing population of poor in the town of Eden, North Carolina. “The old American dream was to own a home and two cars. The new American dream is to have a job.” A large part of the shrinking of the US middle class, which for the first time in decades now forms less than a majority of the country’s adult population, has surprisingly been due to the country’s growing affluence, the Pew study found.

But the country’s lowest income group — defined by Pew for a three-person household as earning less than $31,402 a year — has also grown at more than five times the rate of the middle class in the past seven years. There are now 48.9m adults in this bracket in the US, up from 43.2m in 2008 and just 21.6m in 1971. Pew’s measure of the lowest income group is relatively broad, though it calculates that almost half of the adults in this category — 23m — fell below the $18,850 poverty line for a household of three set by the US Census Bureau. The group’s members earn half or less of Pew’s $62,804 median household income in the US last year and the $41,869 to $125,608 range Pew uses to define the American middle class. They also account for a population that, even as the struggles of the middle class draw an increasing focus, is often left out of policy discussions — as some policymakers admit.

“..the world economy is actually going to shrink for the first time since the 1930s..”

• The End Of The Bubble Finance Era (Stockman)

We are nearing a crucial inflection point in the worldwide bubble finance cycle that has been underway for more than two decades. To wit, the world’s central banks have finally run out of dry powder. They will be unable to stop the credit implosion which must inexorably follow the false boom. We will get to the Fed’s upcoming once in a lifetime shift to raising rates below, but first it is crucial to sketch the global macroeconomic context. In a word, we are now entering an epic deflation. Its leading edge is manifested in the renewed carnage in the commodity pits. This week the Bloomberg commodity index, which encompasses everything from crude oil to soybeans, copper, nickel, cotton and livestock, plunged below 80 for the first time since 1999. It is now down nearly 70% from its all-time high on the eve of the financial crisis, and 55% from its 2011 recovery high.

Wall Street bulls and Keynesian apologists for the Fed want you to believe that there isn’t much to see here. They claim it’s just a temporary oil glut and some CapEx over-exuberance in the metals and mining industry. But their assurances that in a year or so current excess supplies of copper, crude, iron ore and other commodities will be absorbed by an expanding global economy couldn’t be farther from the truth. In fact, this error is at the heart of my investment viewpoint. We believe the global economy is vastly bloated with debt-based spending that can’t be sustained. And that this distortion is compounded on the supply side by an incredible surplus of excess production capacity. As well as wasteful malinvestments that were enabled by dirt cheap central bank credit.

Consequently, the world economy is actually going to shrink for the first time since the 1930s.

That’s because the plunging price of commodities is only a prelude to what will amount to a worldwide CapEx depression — the kind of thing that has not happened since the 1930s. There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. The boom of the last two decades essentially stole output from many years into the future. So there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

The crucial point, however, is that sharp curtailment of the capital goods industries has far more destructive implications for the macro-economy than a reduction in consumer appliance sales or restaurant and bar tabs. Service operations have virtually no working inventories and the supply chains for durable consumer goods such as dishwashers and cars typically have perhaps 50 to 100 days of stocks on hand. So when excessive inventory investments accumulate, the destocking and resulting supply chain curtailments are relatively short-lived. But when it comes to capital goods the relevant inventory measure is capacity in place. That’s where the bubble finance policies of the Fed and other central banks have done so much damage.

See if you can spot the green.

• “It’s An Epic Bloodbath” : The 2015 Junk Bond Heatmap (ZH)

Ten days ago, before the world had heard about the stunning liquidation and gating of the Third Avenue Focused Credit Fund, we asked one question: Did Something Blow Up in Junk, with our question driven by the relentless collapse in triple hook-rated (CCC or below) bond prices, or alternatively, their soaring yields. A few days later we learned that the answer to our question was a resounding yes, when first Third Avenue and then Stone Lion Capital (run by two ex-Bear Stearns distressed trading heads) gated investors following what may have been a dedicated attack on the worst and most illiquid junk bonds, but was really just a marketwide puke in junk starting at the bottom and spreading to the top. Since then things for the junk space have gone from bad to worse, and as of Friday, the effectively yield on the BofA-Merrill universe of bonds rated CCC and below has soared to 17.24%, taking out the 2011 wides and trading at levels not seen since the summer of 2009… only in the wrong direction.

And yet, in a world where everyone has become an algo and thinks of performance in heatmap terms, the chart above (which we will show shortly from a far more stunning angle) hardly does justice to the absolutely bloodbath in the junk bond space. So, without further ado, here is a visualization of the change in junk bond prices since January 1, 2015. For those confused, the redder the worse. It is, for lack of a better word, an epic bloodbath, and perhaps the only question after looking at this is how have many more credit funds not gated yet. And yes, if one looks hard enough, there are a few junk bonds which actually are green for the year. See if you can spot them.

Nice find. CCC and below=junk.

• The Coincidences Are Just Too Eerie: The Last Time CCC Yields Were Here (ZH)

Yesterday, we highlighted the all too eerie coincidence that the very first hedge fund (not mutual fund) to gate investors late on Friday, was operated by none other than the two former heads of distressed/high yield trading of the bank that started it all, Bear Stearns. Today, things get even eerier, because while we already have the Bear Stearns link, an even more curious coincidence emerged when according to the BofA-Merrill index of “CCC and below” bond yields, the index just hit 17.24%, soaring nearly 2% in just the past two weeks, and rising fast.

When was the last time the same index was at precisely 17.24% and rising? The answer: the weekend Lehman Brothers filed for bankruptcy (check for yourselves: on Sept 15, 2008, the closing effective yield was 17.27%).

What happened next? This.

And while no bank has blown up this time (to the best of our knowledge) the irony is that the catalyst driving the long, long overdue blow out in yields is the trifecta of plunging oil, the soaring dollar, and of course, fears about the tightening financial conditions as a result of the an “imminent” rate hike. In other words, the Fed. And while history rhymes, it usually does so in very ironic ways, and we can’t wait to find out if indeed Yellen’s first rate hike in 9 years this Wednesday unleashes a Lehman-like neutron bomb that leads to the full collapse of the junk bond market first, and then the shockwave spreads across all asset classes leading to the same financial devastation witnessed at the end of 2008, unleashing the longest period of “free capital markets” central planning the world has ever seen.

At what point will the IMF chime in?

• Yuan Declines to Four-Year Low as New Index Signals Weakness (BBG)

China’s yuan fell to a four-year low after the central bank said the currency shouldn’t be measured by its moves against the dollar alone, a statement that is being interpreted as a sign it will allow further declines. Exchange rates are a reflection of trade and investment with multiple countries and the market has to take into account the yuan’s fluctuations against a basket of currencies, the People’s Bank of China said on Friday. The China Foreign Exchange Trade System, which is run by the PBOC to facilitate interbank trading, published a new yuan index composed of 13 currencies, with the dollar accounting for 26.4%.

The yuan dropped 0.05% to 6.4585 a dollar as of 1:37 p.m. in Shanghai [..] The PBOC Monday cut its reference rate by 0.21% to a four-year low of 6.4495. “The latest move suggests the PBOC will allow weaker yuan fixings,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “The yuan is also under pressure as the U.S. is likely to hike rates this week.” The central bank has lowered the reference rate, which limits the onshore currency’s moves to 2% on either side, on eight of the 10 trading days since winning reserve-currency status at the IMF on Nov. 30. This fueled speculation that the authority is trying to release pent-up depreciation pressure before the Federal Reserve meets Dec. 15-16.

There’s nothing left that could lift demand. Well, other than warfare, that is.

• Oil Sinks to Lowest in Almost 7 Years as Iran Vows More Supply (BBG)

Oil extended declines from the lowest price since February 2009 as Iran pledged to boost crude exports, bolstering speculation OPEC members will exacerbate the global oversupply. Futures dropped as much as 1% in New York after losing almost 11% last week, the most in a year. There’s “absolutely no chance” Iran will delay its plan to increase shipments even as prices decline, said Amir Hossein Zamaninia, the deputy oil minister for international and commerce affairs. Hedge funds and other large speculators raised bearish bets to an all-time high, U.S. Commodity Futures Trading Commission data showed.

Oil has slumped to levels last seen during the global financial crisis as OPEC effectively abandoned production limits to defend market share, fueling a record surplus. The glut will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, according to the International Energy Agency. “The price war will likely drag on until the end of next year,” Hong Sung Ki at Samsung Futures in Seoul said by phone. “Saudi Arabia won’t be able to cut its production while Iran continues to increase output.”

Not a very interesting question, since nobody knows.

• How Low Can Oil Prices Go? (Guardian)

Not only did US prices fall under $40 this week but so did the global benchmark Brent crude oil prices, for the first time since February 2009. The global supply glut of about 1.5m barrels per day is the driving factor behind the lower oil prices, with much of that overproduction because of Opec’s opening the spigots. [Jay Hatfield atr Infrastructure Capital Advisors] said there’s another factor behind the new drop in oil prices: warm weather. “The fact that you can almost go swimming in New York City right now is horrible. Absolutely horrible [for heating oil demand]. To me, that’s the straw that is breaking the camel’s back. We’re ground zero for fuel oil demand,” he said.

The El Niño weather phenomenon can bring milder winter weather to the northern part of the US, and that’s been seen in places like New York and Chicago, where December temperatures are above normal, reducing heating demand. If Opec’s disorganization continues and temperatures stay mild, that could add further pressure to prices, he said. “I thought prices would have stabilized in the $40 to $50 area, but … now it could be $35 to $40,” he said. A few factors could influence oil, such as next week’s Federal Reserve’s monetary policy meeting, where the Fed may raise interest rates for the first time in seven years. That could give the dollar another boost, and Kessens said the greenback’s strength has hit oil since it is dollar denominated.

Next week is the last full trading week of 2015, so there could be some book squaring as investment managers close up accounts before the holidays when trade volume dwindles. Daniel Pavilonis, senior commodity broker with RJO Futures, said the next target for prices is likely the 2008 low. “I see prices going lower. I wouldn’t be surprised if we saw an uptick from here next week, maybe to the $40s, but then see a sharp decline, a sell-off below $35. There’s so much supply out there. I think [prices are] going to be lower than people will perceive,” he said.

Taking out a level that’s held for so long could be jarring and may have a snowball effect, he said. On the other hand, there is likely to be some opportunistic buying simply because prices are so low. Pavilonis didn’t rule out a dip under $30 a barrel, but just how far prices may go is hard to determine. “It’s hard to call a bottom. It’s like catching a falling knife. Just let the knife fall to the side and pick it up later so you don’t get hurt,” he said.

All that focus on the Fed is not healthy.

• World Markets In Fragile Mood As Yellen Prepares To Push The Button (Guardian)

Stock market investors are braced for panic selling in New York and London ahead of what is expected to be the first rate rise by the US Federal Reserve since 2006. The US central bank will decide on Wednesday whether to raise interest rates as a mark of the US economy’s strong recovery since the 2008 banking crash. But Fed boss Janet Yellen is expected to announce the increase in borrowing costs despite a slowdown in global trade and a slump in oil and commodity prices that has pushed inflation down to near zero in most developed countries. Shares plunged on Friday and oil prices tumbled as the date neared for the Fed decision and investors became increasingly nervous of the impact on highly indebted emerging market economies.

The level of borrowing by businesses and governments in China, Thailand, Indonesia, Brazil has soared in the last decade. Borrowing by emerging market economies has quadrupled from $4tn in 2004 to over $18tn in 2014, much of it in dollars, making them vulnerable to higher US interest rates. Phil Shaw, chief UK economist at fund manager Investec, said it was almost certain the Fed would raise rates, but the question for markets was whether Yellen would signal further rate rises over the coming months. More than £73bn was wiped off the value of UK shares last week after fresh falls in the price of copper and other metals was matched by a precipitous fall in the price of oil to below $38. London’s FTSE 100 closed 135.27 points down at 5,952.78 – its lowest level since late September.

The index of Britain’s top 100 companies is now about 6.5% below its level at the start of the year, unlike the German Dax 30 and the Paris Cac 40, which are well above. A forecast from the IEA that a glut of crude will persist for another year triggered panic selling among investors, already concerned that an interest rate rise will potentially destabilise the global economy.

Hilsenrath perparing the narrative for a way out?

• Fed Officials Worry Interest Rates Will Go Up, Only to Come Back Down (WSJ)

Federal Reserve officials are likely to raise their benchmark short-term interest rate from near zero Wednesday, expecting to slowly ratchet it higher to above 3% in three years. But that’s if all goes as planned. Their big worry is they’ll end up right back at zero. Any number of factors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting and slamming the economy, or lost momentum in a business cycle which, at 78 months, is already longer than 29 of the 33 expansions the U.S. economy has experienced since 1854.

Among 65 economists surveyed by The Wall Street Journal this month, not all of whom responded, more than half said it was somewhat or very likely the Fed’s benchmark federal-funds rate would be back near zero within the next five years. Ten said the Fed might even push rates into negative territory, as the European Central Bank and others in Europe have done—meaning financial institutions have to pay to park their money with the central banks. Traders in futures markets see lower interest rates in coming years than the Fed projects in part because they attach some probability to a return to zero. In December 2016, for example, the Fed projects a 1.375% fed-funds rate. Futures markets put it at 0.76%.

Among the worries of private economists is that no other central bank in the advanced world that has raised rates since the 2007-09 crisis has been able to sustain them at a higher level. That includes central banks in the eurozone, Sweden, Israel, Canada, South Korea and Australia. “They effectively have had to undo what they have done,” said Susan Sterne, president of Economic Analysis Associates, an advisory firm specializing in tracking consumer behavior. The Fed has never started raising rates so late in a business cycle. It has held the fed-funds rate near zero for seven years and hasn’t raised it in nearly a decade.

Its decision to keep rates so low for so long was likely a factor that helped the economy grow enough to bring the jobless rate down to 5% last month from a recent peak of 10% in 2009. At the same time, waiting so long might mean the Fed is starting to lift rates at a point when the expansion itself is nearer to an end. Ms. Sterne said the U.S. expansion is now at an advanced stage and consumers have satisfied pent-up demand for cars and other durable goods. She’s worried it doesn’t have engines for sustained growth. “I call it late-cycle,” she said.

The volumes are staggering.

• The China Metal Exchange At Center Of Investment Scandal (Reuters)

The Fanya Metals Exchange was launched shortly after China, the world’s dominant producer of rare earths, imposed quotas on production and exports in a bid to support prices and attract downstream consumers to China. Fanya was keen to provide a supporting role, saying it wanted to raise the value of the whole minor metals industrial chain. It stockpiled and traded 14 metals, rapidly becoming the biggest minor metals market in the world. These metals are minor because they are a byproduct of extracting other major metals, such as zinc or copper. “Fanya prices already lead global prices, and have made China’s voice on the minor metals’ stage growing increasingly strong,” it boasted on its website in 2014. Prices for the metals traded on the exchange rose sharply and became increasingly out of sync with world prices.

Its most traded metal – indium – more than doubled between 2012 and 2015 to $1,200 per kg. Prices kept rising from the end of 2014 even as global prices headed into a rapid decline. The price difference kept traders outside of China wary of using the exchange. Now they are worried about what will happen to the accumulated stock of metals on the exchange. “It’s not clear how all this winds down, or what the local government or Beijing will do,” said David Abraham, director of the Technology, Rare and Electronic Materials Center. “There are lots of wild cards here.” As early as last year, state regulators called on local authorities to “clean up and rectify” privately run exchanges throughout China. A provincial regulator in Yunnan singled out Fanya for rule-breaking behavior, although it did not provide details.

“The risks are huge,” it said. Those risks became clear in April when investors placed a wave of sell orders, which the exchange later admitted caused liquidity problems. Looking to make good on the promise of instant redemption, investors wanted to switch their money into a stock market rally. Seeing a rush to sell, many investors were reassured their money was safe when the Yunnan government issued a statement saying Fanya remained a legal entity engaged in legal operations. Some continued to put money into the plan.

Scapegoats.

• China Local Officials Admit To Faking Economic Figures (CD)

Several local officials in China’s Northeast region sought to explain dramatic economic drops in their areas by admitting they had faked economic data in the past few years to show high growth when the real numbers were much lower, Xinhua News Agency reported on Friday. “If the past data had not been inflated, the current growth figures would not show such a precipitous fall,” one official was quoted as saying. The report cited several officials in the region who acknowledged they had significantly overstated data ranging from fiscal revenue and household income to GDP.

Three years ago Liaoning province’s GDP growth was reported at 9.5%, but its current figure -over the first three quarters of this year- is just 2.7%. Jilin’s growth was reported at 12% three years ago, but its current rate is 6.3% in the same period. The revelation about the inflated figures came as the GDP growth of the three Northeast provinces ranked the lowest nationwide. Guan Yingmin, an official in Heilongjiang province, said local investment figures were inflated by at least 20%, which translates to nearly 100 billion yuan ($15.7 billion). If the local financial reports were true, some single counties’ GDP would have surpassed Hong Kong. An earlier audit by the National Audit Office found one county in Liaoning that reported annual fiscal revenues 127% higher than the actual number.

A staff member in the Jilin provincial finance department, who asked not to be identified, told China Daily that in past years, local officials competed each other to lure external investment projects. They reported the promised investment value, whether it had been achieved or not, as the investment figure. The legacy of the command economy in the area means that there is a lack of entrepreneurship and forward thinking, said Xu Mengbo, an economics professor at Jilin University. “In terms of management ideas, there is at least 10-year gap,” he said.

At what point does this become a criminal operation?

• Who’s Profiting From $1.2 Trillion of US Federal Student Loans? (BBG)

Jody Sofia borrowed $92,500 to get a degree from Florida Coastal School of Law. Now she’s in default, her outstanding balance having ballooned to almost $144,000, and she spends her days fielding calls from government-contracted debt collectors. The companies making those calls are just one part of an ecosystem feeding on federal student loans. There are also debt servicers, refinance lenders, firms that help former students stay out of default and for-profit schools that make money as borrowers try to repay more than $1.2 trillion in government-backed education debt. Sofia is one of 7 million former students in default on a record $115 billion of federal loans, an amount that has grown almost 25% in two years, according to U.S. government data. The mountain of debt, for which taxpayers are on the hook, has provided a stream of revenue to companies at every stage of the process.

“This is not some small cottage industry,” said Rohit Chopra, the former student-loan ombudsman for the U.S. Consumer Financial Protection Bureau, which oversees loan servicers, debt collectors and private student lenders. “There is a large student-loan industrial complex. Rising costs of college and flat family incomes have created enormous business opportunity for every step of the loan process.” Sofia, who didn’t take the bar exam and never got a legal job after graduating from Florida Coastal in 2004, says the system is dysfunctional. Derailed by illness and having to care for ailing parents, most of her income has come from working as an independent insurance adjuster, the same thing she was doing before going to law school. While she has made some payments, interest on the loans keeps accruing. “There’s something really wrong with this system,” said Sofia, 45. “The government is spending all this money for these people to constantly call you. How effective is that?”

Sweden has nothing. That’s what’ll come out of the questioning. But will they go public that way?

• Ecuador Signs Deal With Sweden For Assange Questioning (Reuters)

Ecuador and Sweden have signed a pact that would allow WikiLeaks founder Julian Assange to be questioned at Ecuador’s embassy in London where he has been for more than three years, the Quito government said. The legal agreement was signed in the Ecuadorean capital after half a year of negotiations. “It is, without doubt, an instrument that strengthens bilateral relations and will facilitate, for example, the fulfillment of judicial matters such as the questioning of Mr. Assange,” the foreign ministry said in a weekend statement.

Assange, 44, took refuge in the embassy building in June 2012 to avoid extradition to Sweden, where he is wanted for questioning over allegations of sexual assault and rape against two women in 2010. The Australian denies the accusations. Assange says he fears Sweden will extradite him to the United States where he could be put on trial over WikiLeaks’ publication of classified military and diplomatic documents five years ago, one of the largest information leaks in U.S. history. Britain has accused Ecuador of preventing the course of justice by allowing Assange to remain in its embassy in the upmarket central London area of Knightsbridge.

Forcing Greece into the hands of vulture funds is the lowest things the Troika has done so far.

• Vulture Funds Price Greek Nonperforming Loans At Very Low Rates (Kath.)

Investment funds preparing to profit from Greek nonperforming loans are offering rates of between 5 and 15 cents per euro for the purchase of bad corporate loans, in anticipation of a legal framework that would allow them to enter the local market. The repayment of those loans is considered impossible, as the majority of the enterprises that have received them are at the bankruptcy stage and their assets comprise nothing more industrial real estate or equipment. By contrast, the rate for NPLs taken out by sustainable corporations with high borrowing come to 40-50 cents per euro, which factors in the writing off of half of the debt when the funds take control of their management, which would ensure that costs would be cut and the company would undergo a general tidying up ahead of their sale.

Bank officials say the rates currently being quoted in the local market have declined significantly compared to a year ago, when the prices of bad corporate loans came to 30 cents per euro, as economic conditions have deteriorated considerably in the meantime. The high country risk factor is increasing the potential cost for the distressed debt funds that are eyeing the local market with interest due to the high accumulation of bad loans in bank portfolios.

There has better be protests.

• Tsipras Expects Protest As Greece Agrees To Further Privatisations (Guardian)

The Greek prime minister, Alexis Tsipras, has warned that his government faces a new storm of protest after jumping another reform-for-aid hurdle with international creditors. After a week of rigorous negotiations with foreign lenders, Tsipras’s leftist-led government finalised a deal foreseeing further privatisations, reforming the energy sector and opening up the market to non-performing loans. The agreement is slated to unlock another €1bn (£720m) in loans for the debt-stricken country next week. Addressing Syriza’s central committee at the weekend, Tsipras warned of the perils that lay ahead. “There are forces that want to see Greece’s government fail,” he said.

Under the accord, publicised early on Saturday, Greece will retain a 51% stake in the national grid operator, Admie, and forge ahead with a host of state sell-offs through the creation of a privatisation scheme. New rules for non-performing loans, which amount to an extraordinary 60% of GDP, will also be enacted. Those belonging to big businesses as well as unpaid mortgage repayments will henceforth be sold to foreign funds. Viewed as a compromise by many in Tsipras’s once far-left Syriza party, the deal is expected to be passed in the name of national expediency. Failure to endorse the legislation would derail the country’s bailout programme and put Greece, which only narrowly survived a euro exit before clinching a third €86bn rescue package in August, at risk of national bankruptcy again.

But Tsipras is unlikely to be let off as lightly in the new year, when his fragile two-party coalition will be obliged to overhaul a dysfunctional pension system that is not only on the verge of collapse but is seen as the most expensive in Europe. Creditors are demanding the overhaul produces the equivalent of 1% of GDP, or €1.8bn, in savings next year. With Greek pensioners already having suffered 12 cuts since the outbreak of the debt crisis in late 2009, MPs are likely to balk at further austerity being meted out. The prospect of turmoil has been heightened by the government’s parliamentary majority being whittled down to a mere three seats in the 300-member house, after two deputies defected in a vote on an earlier set of milestones last month.

Greece has no voice anymore.

• Athens Wants To Turn Bailout Loans’ Floating Rates Into Fixed (Kath.)

The answers to the burning questions of whether a new arrangement for the Greek debt is necessary and what kind of measures will be required are coming through the numbers: Next year the amount Greece will have to repay for the capital of the bailout loans it has received will be almost as much as the interest on them. In total, the amount due in 2016 for servicing the debt will come to just 7.5% of gross domestic product, similar to the following years’ amounts. That is why the eurozone has been insisting on every occasion that the Greek debt does not require a haircut and that any intervention would be necessary only from 2022 onward – i.e. the year when the current grace period ends: That year Greece will need to pay €22 billion for interest alone.

Until then the state’s obligations are under control: Market observers say that the intervening years will be very much like 2016. Next year Greece will have to pay €12.5 billion, of which €6.5 billion concerns capital repayment and 6 billion the payment of interest. At this point the interest trap is hiding. Nowadays the country pays interest of some 6 billion while the loans of the European Stability Mechanism have interest that is very low, around 1%. However, in the following years the interest rates will begin to grow, given that they are floating rates, placing a significant burden on future state budgets.

For that reason Athens is requesting the conversion of the floating rates into fixed rates, which would be advantageous compared to to the current levels (some 0.5%) but still be fairly low for a long period (of at least 15-20 years) during which they would increase by at least 2-3% under normal circumstances. All this would mean that the state budget would become lighter in the future as far as the expenditure on interest was concerned, compared to what the country faces without an arrangement.

“Concern has been mounting that thousands of migrants arriving in Greece by boat from neighboring Turkey will become trapped in the country..”

• Greece Seeks Help With Migrants As Tensions Rise (Kath.)

As tensions peaked at temporary reception facilities for migrants, Citizens’ Protection Minister Nikos Toskas said over the weekend that Greece was doing all it can to tackle a relentless migration crisis which he described as “a massive problem, stretching the limits of our country and of Europe.” Toskas visited the Tae Kwon Do Stadium in Palaio Faliro, southern Athens, on Saturday following scuffles between groups of migrants from different countries. Greece cannot keep hosting thousands of migrants streaming into the country, he said. “Our country can’t handle it, our economy can’t handle it.”

Asked by reporters about a joint letter he and Migration Minister Yiannis Mouzalas sent to European Migration and Home Affairs Commissioner Dimitris Avramopoulos, Toskas said the two ministers underlined that the return of migrants from EU countries must be carried out in line with EU regulations and agreements “to keep the number of people that we can support at manageable levels.” Toskas’s comments came ahead of a European Union leaders’ summit planned for Thursday and Friday where the issue of migration is to be discussed along with plans for the creation of a new EU border force which, unlike Frontex, will not require the approval of member-states to be deployed. In an interview with Kathimerini on Sunday, Frontex’s Executive Director Fabrice Leggeri said the border agency had guards ready to dispatch to Greece as early as October but Greek authorities delayed the deployment as they had not appointed Greek officials to head the teams.

Concern has been mounting that thousands of migrants arriving in Greece by boat from neighboring Turkey will become trapped in the country as the Former Yugoslav Republic of Macedonia has tightened controls at Greece’s northern border. Thousands of migrants who had been in a makeshift camp near the FYROM border were bused to Athens last week. Most of them were moved to the Tae Kwon Do Stadium, where scuffles broke out late on Friday and on Saturday morning, prompting riot police to intervene. According to sources, the clashes were between groups of migrants from Morocco and other countries and followed allegations that some migrants had stolen cell phones and cash from others.

Where would they go then, Angela? Remember 3 million more expected in 2016?

• Angela Merkel Wants To ‘Drastically Reduce’ Refugee Arrivals In Germany (Reuters)

Chancellor Angela Merkel wants to “drastically decrease” the number of refugees coming to Germany, signalling a compromise to critics of her open-door policy from within her conservatives on the eve of a party congress. Merkel has resisted pressure from allies within her Christian Democratic Union (CDU) to put a cap on the number of refugees entering Germany, which is expected to be more than 340,000 this year. “At the same time we took on board the concerns of the people, who are worried about the future, and this means we want to reduce, we want to drastically decrease the number of people coming to us,” Merkel told broadcaster ARD on Sunday. Merkel, whose popularity has fallen over her handling of the refugee crisis, said the word “limit” did not feature in the CDU’s main resolution which will be debated at the two-day party congress starting on Monday in the southern city of Karlsruhe.

The chancellor added there was broad support in the CDU for her strategy to reduce the numbers. This included working with Turkey to fight traffickers, improving the situation at Syrian refugee camps in Turkey, Lebanon and Jordan, and strengthening control of the European Union’s outer borders. Merkel’s conservative critics want her to get the number of arrivals down before three state elections in March and say her hopes of running for a fourth term in 2017 would be in danger. Her strategy also includes finding a solution to the migration crisis on the EU level, where she is meeting resistance from member states opposed to a quota system to distribute refugees. Her critics say her decision in late August to allow Syrian asylum seekers to remain in Germany regardless which EU country they had first entered had accelerated the influx of migrants.

The end of the EU will come through Brussels seeking to take away nations’ sovereignty.

• EU Border Force Plan Faces Resistance From Governments (Reuters)

A proposal to give the EU’s executive the power to send forces unbidden into member states to defend the common European frontier will face resistance from some countries when it is published this week. The European Commission wants to be able to deploy personnel from a new European Border and Coastguard Agency without, as currently required, the consent of the state concerned, EU officials told Reuters in early December, reflecting frustration with Greek reluctance to seek help with migrants. European Union officials call it a largely theoretical “nuclear option” and stress that any infringement of national sovereignty would be balanced by the power of a majority of member states to block Commission intervention – similar to checks agreed during the euro debt crisis.

The Commission will set out the plan on Tuesday to reinforce its Frontex agency with up to six times more staff, EU officials said, following a commitment to an EU border guard in September by President Jean-Claude Juncker. “We think the current situation justifies a certain ambition,” the Commission’s chief spokesman said on Friday, expressing confidence about backing from member states. Failure to strengthen the external borders, senior officials argue, will see more states reimpose frontier controls inside the bloc, wrecking its cherished free movement area, and foster the rise of anti-EU nationalists like France’s National Front.

But while big powers France and Germany support such EU power, other EU leaders may voice concerns at a summit on Thursday. Italy has pushed for a “Europeanisation” of external frontiers to relieve the costs on itself and Greece of policing the Mediterranean. But the plan may go too far for many leaders. “This idea will face opposition from most member states,” one EU diplomat said. “We believe such a solution would interfere too deeply in member states’ internal competences.” “The Commission is testing our limits,” said another. He compared it to the Commission’s push to oblige states to take in mandatory quotas of asylum seekers, which set furious east Europeans against German Chancellor Angela Merkel.

Debt Rattle December 13 2015

Dec 132015

December 13, 2015 Posted by Raúl Ilargi Meijer at 9:54 am Finance Tagged with: Assange, bear, EU, junk bonds, Le Pen, oil, rate hike, refugees, steel 7 Responses »

Marion Post Wolcott “Center of town. Woodstock, Vermont. Snowy night” 1940

• Why A 0.25% Rate Hike Should Have Big Banks Nervous But Probably Won’t (Bern)

• “Coppock Guide” Signals A Bear Market Is At Hand (ZH)

• Junk-Bond Rout Deepens, Sends Shockwaves Through Stocks, Other Markets (WSJ)

• Junk-Bond Fund’s Demise Highlights SEC Mutual-Fund Worries (WSJ)

• China Steel Output Slumps to a One-Year Low as Prices Collapse (BBG)

• Missing Chinese Billionaire ‘Assisting Authorities in an Investigation’ (WSJ)

• US Senators Close in on Oil-Export Deal Amid Tax-Break Talks (BBG)

• EU Powerless to Stop Nationalist Ascendancy as Terror Fears Rise (BBG)

• French Vote for Regions as Main Parties Seek to Shut Out Le Pen (BBG)

• Julian Assange May Face Swedish Interrogation Within Days (Guardian)

• James Hansen, Father Of Climate Change Awareness: Paris Talks ‘A Fraud’ (Guar.)

• No Mention In Paris Of Refugees: Global Issues Live In Separate Boxes (Betts)

• The Athens Lawyer Who Became A Guardian To Refugee Camp Children (Guardian)

The fixed game.

• Why A 0.25% Rate Hike Should Have Big Banks Nervous But Probably Won’t (Bern)

Current excess reserves at the Fed earn interest – The big banks hold a lot of excess reserves at the Federal Reserve [Fed]. The current interest rate paid by the Fed on both required and excess reserves is 0.25%, or 25 basis points. The rate is subject to change by the Fed Board. No surprise that this policy was set forth in the Federal Reserve Regulatory Relief Act of 2006 which was scheduled to go into effect October 1, 2011. Also, no surprise was the advanced effective date of October 1, 2008 when relief for banks was imperative.

The current profit stream that banks count on – According to the St. Louis Fed, depository institutions (banks) held over $2.5 trillion in excess reserves at the Fed in November. At a mere 25 basis points in interest that $2.5 trillion in excess reserves earns big banks about $6.25 billion a year in risk-free revenue. All of that amount may not go directly to the bottom line, though. How much depends upon what interest rate the Fed charges banks to borrow those funds (the fed funds rate). The effective fed funds rate has ranged between 7 basis points and 16 basis points over most of the last five years. The average borrowing rate of big banks since January 1, 2015 has been 12.27 basis points, or 0.1227%.

The banks have earned about $5.73 billion so far in 2015 on excess reserves. The cost to borrow those reserves has been approximately $3.07 billion. The net income earned from those borrowed reserves is $2.66 billion in 2015 thus far. That works out to an average of $725 million per quarter in extra earnings just for borrowing the money and leaving it parked at the Fed. Now, this may not seem like much to you, but I would not mind getting in on that action.

What happens when the fed funds rate rises by 25 basis points? – Let’s be honest about the rate hike, okay? The current fed funds rate is officially set at between zero and 25 basis points. So, if the Fed raises the official fed funds rate to 25 basis point, if that is the actual outcome, then it really will not be raising the rate by a full 25 basis points. The increase will be something more like about 13 basis points over the actual rate since the beginning of the year. Now, if the Fed raises the official rate to between 25 basis points and 50 basis points, then the difference could be closer to 25 basis points. But, it still depends on where within that range the actual fed funds rate lands. If it lands closer to the minimum of the range then the increase is more like 13 to 15 basis points. If it lands in the middle, then we have an actual increase in rates of about 25 basis points as advertised.

I do not really expect the actual rate to rise much, if any, above the 25 basis points threshold. So, my expectation is for a real rate increase of about 15 basis points. But that would mean that the earnings by the big banks could fall to zero. Somehow I do not expect the big banks to take this lying down. I could be wrong, but I also expect another, less publicized change in rate policy by the Fed. If the fed funds rate increases to 25 basis points or more, then the “profits” earned by banks on excess reserves will evaporate into thin air and potentially turn into an expense. Unless…

If the Fed decides to raise the fed funds rate by 25 basis points to the range between 25 and 50 basis points the banks would either decide to reduce reserves (to avoid paying the Fed interest on borrowed funds) or the Fed would need to change the rate paid to depository institutions upward to 50 basis points. Banks would need to put that money to work at a higher level of risk or just pay off the loans from the Fed used to fund reserves. Most likely some of the excess reserves would be withdrawn and banks would attempt to make up the lost earnings by adding more risk to balance sheets. More risk in the financial system is not something we need right now. I do not think the banks really want to take on more risk at the moment either. And since the banks own the Fed, guess which route I expect the Fed to take?

Psychology.

• “Coppock Guide” Signals A Bear Market Is At Hand (ZH)

With Emerging Market currencies, bonds, and stocks collapsing, US corporate debt crashing, and carry trades unwinding everywhere (ahead of the $800 billion liquidity withdrawal that looms from next week’s 25bps hike from The Fed), it is no surprise that US equities are beginning to shudder (even the FANGs are not immune). But, as InvesTech Research notes, among its 6 compelling reasons to be cautious in 2016, the so-called Coppock Guide may be close to confirming that a bear market is at hand…:

In March 2015, the Coppock Guide was signaling that both primary and secondary momentum had peaked and this continues to be the case today. The Coppock Guide is a valuable tool to gauge the emotional state of a market index as it transitions from one psychological extreme to another. It was developed more than 50 years ago by Edwin S. Coppock and it measures momentum by taking a 10-month weighted moving total of a 14-month rate of change plus a 11-month rate of change of a market index. The Coppock Guide is typically most useful at market bottoms, when market indexes reverse sharply as psychology shifts. It signals a “Best Buy” opportunity when the index turns upward from below “0” (see black dashed lines). The last such buy signal came within 60 days after the March 2009 market bottom.

Early in a bull market, momentum runs high and often peaks early. For this reason, the Coppock Guide isn’t as effective in identifying market tops. In fact, the initial peak in the Coppock Guide was seen during the first 18 months of this lengthy bull market, with a secondary peak in March 2014. When a double-top occurs in an extended bull market without the Coppock falling below “0”, it signals that psychological excess could be at an extreme. And when that momentum finally peaks (see red dashed lines), it usually means a bear market isn’t far behind. This phenomenon was first observed by a market technician named Don Hahn in the late 1960s. Since 1929, there have been only eight instances of a double-top, and each one was followed by bear market losses of 30% or more.

It’ll be an interesting week.

• Junk-Bond Rout Deepens, Sends Shockwaves Through Stocks, Other Markets (WSJ)

U.S. junk bonds posted their steepest decline since 2011, intensifying fears that a six-year bull market in stocks and other risky assets is nearing an end. The largest high-yield exchange-traded fund, the $15 billion iShares iBoxx $ High Yield Corporate Bond ETF, dropped 2%, to close at $79.52, its lowest since July 2009. Friday’s trading volume of 53 million shares doubled a record set Tuesday. The retreat punctuated a day of heavy selling across markets, with the Dow Jones Industrial Average tumbling 310 points and U.S.-traded crude dropping 3.1%, to $35.62 a barrel. Oil’s 11% decline was its biggest weekly fall since March. Traders said much of Friday’s decline was triggered by the abrupt closure of a high-profile junk-bond mutual fund.

Investors in the Third Avenue Focused Credit Fund learned this week that they won’t get all their cash back for months or more, as Third Avenue liquidates the $789 million fund. The action crystallized long-standing fears about the vulnerability of the stock and bond markets to a broad shift in sentiment. The spreads between U.S. junk bonds and Treasury securities have widened sharply over the past week, underscoring investors’ sense that the risk of default by companies with high levels of debt is on the rise. The Federal Reserve is expected next week to raise interest rates for the first time since 2006, a development that traders said wasn’t a large part of Friday’s selloff but that has increased general market anxiety.

Some hedge funds are taking similar steps as Third Avenue. Hedge-fund firm Stone Lion Capital, a distressed-debt specialist, said it suspended redemptions in its credit hedge funds after many investors asked for their money back. Investors said it was a rare move in the hedge-fund industry since the financial crisis. This fall, Carlyle Group’s struggling Claren Road took a similar action. Some investors said that while they are concerned that falling commodity and junk-bond prices could point to economic turmoil ahead, U.S. consumer and jobs data have been mostly comforting. But even these investors said they are looking for ways to reconcile conflicting signs.

Never a ‘run’. Until now?!

• Junk-Bond Fund’s Demise Highlights SEC Mutual-Fund Worries (WSJ)

The demise of a Third Avenue junk-bond fund last week underscores financial regulators’ concerns about risks in mutual funds and highlights Washington’s urgency in trying to address those worries. Recently proposed rules are aimed at addressing the problems for investors exposed by the high-risk mutual fund’s struggles, but those regulations are unlikely to take effect until 2017 at the earliest. The Securities and Exchange Commission earlier this fall proposed new rules aimed at preventing the very types of problems that caused Third Avenue’s fund to essentially declare bankruptcy and bar investor withdrawals while it liquidates its high-yield Focused Credit Fund.

Those problems boiled down to the junk fund’s inability to raise sufficient cash to meet a sudden flood of investor redemptions without resorting to fire sales of its assets. The concern from regulators is that mutual funds and other asset managers fail to adequately foresee economic shocks, such as rising interest rates, which cause a fund to drop in value and prompt investors to bolt for the door. Widespread redemptions, in theory, could strain a fund’s ability to convert quickly assets into cash for redeeming shareholders, particularly during a crisis. “Nothing is more fundamental and important…than redeemability,” said SEC Commissioner Kara Stein in September. Ms. Stein’s remarks came as the SEC proposed, for the first time, to force fund managers to develop formal plans for their liquidity, or ability to easily buy and sell fund assets.

The measure also includes provisions aimed at dampening investor flight by allowing funds to charge fees to investors who bolt in periods of market stress. If those rules had been in place earlier, Third Avenue would have had to establish a “liquidity” plan and as part of it, set aside more assets that could be readily converted to cash. It may have faced charges for a poorly developed plan or for deviating from it. The fund industry has been quick to note that there hasn’t been a “run” on a long-term mutual fund in their 75 years of existence, through numerous interest-rate and market cycles. Large outflows from particular funds can occur, but never a “run” on the broader asset class.

“Exports climbed 22% to 102 million tons in the first 11 months [..]. That’s almost as much as Japan, the world’s second-biggest producer, made in the whole of last year..”

• China Steel Output Slumps to a One-Year Low as Prices Collapse (BBG)

Steelmakers in China reined in production last month as prices collapsed and the onset of winter in the largest producer curbed demand already hurt by a cooling economy. Crude steel output fell 1.6% to 63.32 million metric tons from a year earlier, according to data from the statistics bureau released Saturday. So far this year, production has dropped 2.2% to 738.38 million tons. China makes about half of the world’s steel. Demand in China is weakening as policy makers seek to steer Asia’s biggest economy away from investment-led growth to one driven by consumer demand and services. China’s steel sector contracted further last month, while an industry association said demand was shrinking at an unprecedented speed.

Determined to maintain output as growth cools, mills have flooded the world with exports, shipping more than 100 million tons this year. “The downtrend in steel output should continue as weak credit and demand conditions do not support expansion,” Huang Huiwen at Shanghai Cifco Futures said before the data was released. “Demand also goes into a seasonal lull, with some mills shutting for winter as construction slows.” As prices of some steel products slumped to records, mills in the country sought out overseas markets where their supplies may be sold at more competitive rates. Exports climbed 22% to 102 million tons in the first 11 months, according to customs data. That’s almost as much as Japan, the world’s second-biggest producer, made in the whole of last year, according to World Steel Association data.

One a week?!

• Chinese Billionaire Said to Be Assisting Authorities in an Investigation (WSJ)

Guo Guangchang became a billionaire by investing where China’s economy was going over the past two decades, pouring money into steel, property and finance while turning his gaze increasingly overseas. On Friday, Mr. Guo indicated authorities are holding him in connection with an investigation, a stark illustration of how Chinese business and finance is coming under intense scrutiny. After nearly two days of mystery over the whereabouts of the man who styles himself a Chinese Warren Buffett, a vague statement near midnight issued by his flagship investment conglomerate, Fosun International, said he is “assisting in certain investigations” by Chinese judicial authorities. The statement, which was signed by Mr. Guo, didn’t divulge his location, but said he is still able to participate in “major matters” before the company.

There was no indication of what the investigations were about or whether Mr. Guo could be implicated himself. Chinese investigators have broad powers to detain both suspects and potential witnesses even when they don’t face accusations of wrongdoing. A Chinese Foreign Ministry spokeswoman said Friday she had no information. Since a midyear stock-market crash exposed weaknesses in China’s financial system, authorities have detained senior stockbrokers, fund managers and bankers from a handful of the country’s top firms, saying little about the progress or findings of their investigations. About a dozen of the most senior people at the biggest brokerage, Citic Securities, have been held for questioning by authorities for months, and the firm says it is cooperating with investigations.

Jitters are particularly high in Shanghai, China’s largest city, where the biggest markets are based. In addition, the Communist Party’s antigraft agency put a vice mayor in Shanghai under official investigation last month, then named certain local brokerages, insurers, a private-equity firm and business schools as targets of its next inspections. With a proud mercantile tradition that has produced the largest regional economy in China, Shanghai has long celebrated business champions. And few stand taller than Mr. Guo, a 48-year-old with a steely focus on building asset values. A standard-bearer for private entrepreneurs, Mr. Guo’s personal fortune was estimated this year at $7.8 billion by Shanghai research firm Hurun Report, putting him at No. 17 on its list of China’s wealthiest people.

Perfect timing re: CON21.

• US Senators Close in on Oil-Export Deal Amid Tax-Break Talks (BBG)

Senate negotiators are nearing a deal to allow unfettered U.S. crude oil exports for the first time in 40 years, though differences remain on renewable-energy tax credits that Democrats are demanding in return, according to people close to the discussions. While any agreement could still collapse in the coming days – the deal faces opposition in the House – lawmakers are weighing the extension of solar and wind tax credits for as long as five years in exchange for lifting the crude-export restrictions, which were established to counter the energy shortages of the 1970s. Tax breaks are part of the discussion, though lawmakers are still negotiating the length of wind- and solar-energy tax extensions and whether they should be phased out, said a Senate Democratic leadership aide.

If agreed to and approved by Congress, repeal of the nation’s ban on most crude oil exports would mark the most significant shift in U.S. oil policy in more than a generation. Repeal, benefiting oil producers including ConocoPhillips, Hess Corp. and Continental Resources Inc., would come at a time when the industry is cutting jobs to deal with a global glut in crude oil and the lowest prices in seven years. Talks for a deal are under way as envoys from 195 nations reached an agreement to limit fossil-fuel pollution and curb the effects of climate change. Congress is considering lifting the export ban as part of either a package to extend expiring tax provisions or to finance the government through Sept. 30 before current funding authority expires Dec. 16.

Among the items being discussed are a 9% manufacturing tax credit for refiners and an extension of the U.S. Land Water Conservation Fund, according to at least three lobbyists close to the negotiations. Even if such a deal is struck by Republicans and Democrats in the Senate, House Democrats, who are vital to reaching an agreement, have suggested they won’t go along unless a provision for indexing the Child Tax Credit, which allows taxpayers to reduce federal income taxes for each qualifying child, is added to the mix. And it’s unclear whether House Republicans will support a deal if they assess that the price Democrats are seeking is too high.

The EU causes nationalism.

• EU Powerless to Stop Nationalist Ascendancy as Terror Fears Rise (BBG)

From Viktor Orban in the east to Marine Le Pen in the west, defiance of the European Union’s multilateral, multicultural, open-borders traditions is on the rise. But with issues like refugees and terrorism at the top of the agenda, there’s little the 28-nation EU can do about it. The popular clamor for security has strengthened the cult of the insular state that Orban champions in Hungary and Le Pen espouses in France. Europe’s multiple crises – first debt, then migration, now terrorism, all festering simultaneously – have put the established order on trial, from the former communist east to historically tolerant Sweden and EU-exit candidate Britain. The upshot is an existential threat that risks unpicking the union.

The collective blame lies with EU leaders for looking the other way, according to Sophie In ’t Veld, a Dutch member of the European Parliament, who says it is time to upgrade the bloc’s “very weak instruments” to enforce civil liberties and democratic due process. “People are beginning to lose faith in European integration,” In ’t Veld said in an interview on Thursday in Brussels. “We have all these wonderful values, and then it turns out that in practice they’re not being upheld.” The EU reached for literary heights to mark its eastern expansion on May 1, 2004, commissioning Nobel Prize-winning Irish poet Seamus Heaney to compose an ode to unity and inclusion: “On a day when newcomers appear, let it be a homecoming.”

That the newcomers didn’t feel at home became clear by 2010, when Orban returned as prime minister of Hungary and set out to build a more centralized state. Once a communist-era freedom fighter, Orban came to view democracy with its plurality of voices as a recipe for gridlock, for not getting things done. He championed the ideology of untrammeled majority rule – provided he had the majority – along with the rejection of multiculturalism in what he termed the “illiberal state.” Now Poland has elected a religiously tinged, anti-foreigner, anti-gay, family-values party, capturing the east’s discontent with the Europe it got after breaking free of Soviet domination. It has sought to pack Poland’s supreme court with party faithful, triggering a constitutional impasse.

Breakthroughs by anti-immigration parties across northwestern Europe – reaching an interim peak with the successes of Le Pen’s National Front in the first round of French regional primaries — showed that eastern Europe doesn’t have a patent on the more virulent strains of nationalism. The decisive runoff in France is on Sunday. The anti-European moment may pass, but for now, its originators are feeling vindicated. “The export of Western democracy has failed,” Orban said on Dec. 2, in remarks directed at the U.S. but applicable more broadly. “It’s time for realpolitik. The era based on the export of democracy and human rights is coming to an end.”

This election or the next one, she’ll get there. Thanks to the EU.

• French Vote for Regions as Main Parties Seek to Shut Out Le Pen (BBG)

French voters go to the polls Sunday to elect regional leaders in the last scheduled nationwide ballot before the next presidential contest in April 2017. President Francois Hollande, his predecessor Nicolas Sarkozy and the National Front’s Marine Le Pen are all jockeying for position in the race, which offers them the chance to establish regional bases and vaunt their credibility with an electorate battered by near-record unemployment and concerns over terrorism. Le Pen aims to build on the first-round result that showed her anti-euro, anti-immigrant party leading in the composite the national vote with prospects to win executive power in three of 13 regions for the first time. Sarkozy needs his party, The Republicans, to blunt her advance and show he has answers to France’s problems, while Hollande faces a judgment on his handling of the attacks that killed 130 in and around Paris one month ago.

“For many French voters, the stakes have changed,” said Jim Shields, a professor of politics at Aston University in Birmingham, England. “For years, elections have been fought on the question of who could best revitalize France’s ailing economy and bring down unemployment. Now, the paramount question is who can keep the French safe. That shift of priority plays to the advantage of the National Front.” Even so, as voters cast their ballots in the second-round runoff, Le Pen’s party is hobbled by its lack of allies from which it can draw fresh support. France’s two main parties are even working together in some districts to keep Le Pen out of power. Prime Minister Manuel Valls, a Socialist like Hollande, said on Friday that he was “convinced” his party’s supporters would engage in tactical voting to defeat Le Pen.

The latest polling suggests the National Front will fail to take either Nord-Pas de Calais-Picardie in the north or Provence-Alpes-Cote d’Azur in the south, both regions it looked set to take after the first round last Sunday. In the east, the party’s third target, the race is too close to call. Le Pen now looks to be losing her grip on the northern region that she is contesting personally. A BVA institute survey in Friday’s La Voix du Nord newspaper suggested she’ll lose out to the The Republic candidate, Xavier Bertrand, Sarkozy’s former labor minister. Marion Marechal Le Pen, the National Front leader’s niece, is also looking doubtful in the southern region.

They can’t frustrate their own laws forever.

• Julian Assange May Face Swedish Interrogation Within Days (Guardian)

The WikiLeaks founder, Julian Assange, may be questioned in London within days about alleged sexual offences after Ecuador indicated it had reached a bilateral deal with Sweden. Assange has been wanted for questioning by Swedish authorities since 2010, but was granted asylum by Ecuador and has been in the country’s London embassy for more than three years. In April, the activist said he consented to the Swedish prosecutor’s conditions for the interrogation procedure to take place in the Kensington embassy. The agreement refers specifically to Assange and Sweden’s intention to question him in London and will come into effect “in the coming days”, a statement from the Ecuadorian foreign ministry said.

Assange’s Swedish lawyer, Per Samuelson, told the Guardian that Sweden needed to formally approve the deal and he understood those discussions would take place on Thursday. Negotiations began in June this year between Ecuador’s acting foreign minister, Xavier Lasso, and the Swedish justice ministry’s international affairs chief, Anna-Carin Svensson. The Ecuadorian government statement said: “The agreement, without any doubt, is a tool that strengthens bilateral relations and facilitates, for example, the execution of such legal actions as the questioning of Mr Assange, isolated in the Ecuadorian embassy in London.”

The deal would ensure “the implementation and enforcement of national legislation and principles of international law, particularly those relating to human rights, to further the full exercise of national sovereignty in any event of legal assistance that may be required between Ecuador and Sweden”. The agreement would be the final step towards interviewing Assange in London, with a request to the UK for legal assistance having already been granted, according to previous statements from the Swedish prosecutor’s office. Assange sought refuge at the embassy in June 2012 after losing his final legal attempt to avoid extradition. Sweden’s director of public prosecutions, Marianne Ny, said in March this year that she would allow Assange to be interviewed in London if agreement could be reached with Ecuador.

Not sure about carbon pricing. The last attempt was a disgrace.

• James Hansen, Father Of Climate Change Awareness: Paris Talks ‘A Fraud’ (Guar.)

Mere mention of the Paris climate talks is enough to make James Hansen grumpy. The former Nasa scientist, considered the father of global awareness of climate change, is a soft-spoken, almost diffident Iowan. But when he talks about the gathering of nearly 200 nations, his demeanor changes. “It’s a fraud really, a fake,” he says, rubbing his head. “It’s just bullshit for them to say: ‘We’ll have a 2C warming target and then try to do a little better every five years.’ It’s just worthless words. There is no action, just promises. As long as fossil fuels appear to be the cheapest fuels out there, they will be continued to be burned.”

The talks, intended to reach a new global deal on cutting carbon emissions beyond 2020, have spent much time and energy on two major issues: whether the world should aim to contain the temperature rise to 1.5C or 2C above preindustrial levels, and how much funding should be doled out by wealthy countries to developing nations that risk being swamped by rising seas and bashed by escalating extreme weather events. But, according to Hansen, the international jamboree is pointless unless greenhouse gas emissions aren’t taxed across the board. He argues that only this will force down emissions quickly enough to avoid the worst ravages of climate change.

Hansen, 74, has just returned from Paris where he again called for a price to be placed on each tonne of carbon from major emitters (he’s suggested a “fee” – because “taxes scare people off” – of $15 a tonne that would rise $10 a year and bring in $600bn in the US alone). There aren’t many takers, even among “big green” as Hansen labels environment groups.

Refugees don’t make for the same kind of feel good fodder.

• No Mention In Paris Of Refugees: Global Issues Live In Separate Boxes (Betts)

While the United Nations climate change talks in Paris struggled to elicit credible commitments, notably missing from the debate was “environmental displacement” – people fleeing their homes on account of natural disaster. As temperatures and sea levels rise, and land-use patterns change, there will be significant consequences for human mobility within and across borders. However, public and media debate scarcely discussed the issue, and the only references in the Paris summit’s negotiated outcome document are vague to the point of meaninglessness. This absence is especially striking in a year in which refugees and migration have otherwise been so high on the political agenda. This political dissonance is of a piece with the compartmentalised way in which we approach many global issues.

During a frenzied summer, media coverage and political attention focused almost exclusively on refugees. Now, with saturation point reached, the circus has moved on. Climate change has, instead, become the de rigueur liberal issue of the day. Remarkably, the global focus on refugees was insufficient to influence the debate in Paris. When we shift our attention so dramatically, we risk missing important analytical connections and, with them, opportunities for meaningful solutions. To be clear, the so-called European refugee crisis was certainly not caused by climate change. But it is symptomatic of a global protection crisis, with climate change as one key component. That crisis is partly the result of numbers: there are more people displaced around the world than at any time since the second world war.

It is partly the result of political will: asylum is being undermined by governments around the world. However, it is above all a reflection of a growing gap between the contemporary nature of displacement and the institutions that govern forced migration. In the aftermath of the second world war, governments created the 1951 Convention relating to the Status of Refugees. It ensures that states have a reciprocal obligation towards people fleeing a well-founded fear of persecution. This framework was well adapted to the refugee movements of the 20th century. It continues to be relevant, but it leaves gaps.

Greece has many good souls.

• The Athens Lawyer Who Became A Guardian To Refugee Camp Children (Guardian)

Christina Dimakou is not yet 30, but she has four children, one of whom is 17. She shares neither a nationality nor a past with any of them. Two of them are from Syria: the 17-year-old girl fled Damascus after soldiers attempted to kidnap her and her brother, who escaped conscription; there’s a 10-year-old from Iran who longs to go to school for the first time; and a young girl from Afghanistan who has lost her family. For now Dimakou is their guardian. She cares for them within the confines of Moria, a makeshift hilltop camp for refugees on the Greek island of Lesbos. Her charges spend their days behind chain-linked fences where a discarded Minnie Mouse in a torn pink dress, caught in the razor wire, is the only indication that this is the children’s area.

More than 700,000 refugees have entered Europe through Greece this year, most of them wet and bedraggled arrivals on its eastern Aegean islands. Their coming has shaken Europe and changed the life of this determined lawyer. Instead of practising law in Athens, where she passed the bar exam, Dimakou has moved her life to an island now famous for the refugees who wash up on its shores. It’s a life with few of the trappings of the metropolitan middle class with whom she grew up. Her working outfit is an aid worker’s bib, her hair tied back. She shuttles between the crumbling neoclassical architecture of the port city of Mytilene and the crowded refugee reception centre at Moria in a battered Toyota loaded with translators and the dirt from a thousand strangers’ shoes.

She is one of only a dozen members of the guardianship network, a fledgeling programme run by the Athens-based charity Metadrasi, designed to help the countless lost children who have arrived alone. Some have been separated from their families while fleeing Syria, others have taken it upon themselves to strike out and find a new home for relatives who will follow later. Many of them have been told they carry their family’s only hope. To explain her decision Dimakou uses the allegory of the little boy and the starfish. Every day he would go to the beach and throw a few of the dying starfish he found back into the sea. When asked, in the face of the thousands of starfish that would wash up, whether he really made a difference, he would reply: “I make a difference to the ones I throw back.”

“I cannot save the world or make everything better,” Dimakou admits, “but I can affect the things around me. If everyone does this then the world becomes better. And we become better.” In legalese her starfish are known as “unaccompanied minors” and no one can be sure how many of them there are. It is the responsibility of officials from the Greek police and the European borders agency, Frontex, to ensure that all under-18s who arrive are taken into care if they are found to be without a parent or relative. The reality is that since the surge began earlier this year only a fraction of the true number of lost children have been caught in this shredded safety net.

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