middle class Archives - Page 2 of 2

Prime Minister Alexis Tsipras will outline his plans to keep Greece financially afloat while breaking free from its bailout program when he addresses the nation’s parliament on Sunday. “It is very unlikely that the euro zone will give new money to Greece for months, as the Greek positions are uncertain and significant negotiation is necessary,” Nicholas Economides, professor of economics at New York University’s Stern School of Business, said by e-mail. “This puts cash-strapped Greece in a very dire position.” Jeroen Dijsselbloem, head of the group of 19 euro-area finance ministers, on Friday rejected a short-term financing agreement while Greece negotiates a successor program to its current bailout provided by the EU and IMF. The prime minister will need to address doubts about Greece’s ability to pay its bills, possibly as early as the end of the month.

Tsipras will set out measures for the government to take from now until the end of June, corresponding to the bridge program it has requested from country’s creditors, a government official said after a cabinet meeting Saturday. The prime minister will also set out policies for the next 3 1/2 years, said the official, who commented by e-mail and asked not to be identified in line with policy. The speech is scheduled to start at 7 p.m. local time. Tsipras, 40, will be addressing lawmakers exactly two weeks after his Syriza party swept into power with a promise to reject EU demands for more budget austerity. “Faced with financial reality, the new Greek government will have to reverse or severely pare down its pre-election program,” Economides said. “Already, in a major U-turn, the government has abandoned the position that Greece will not fully pay its debt.”

The next showdown with Greece’s EU partners is scheduled for Feb. 11 in Brussels, when Finance Minister Yanis Varoufakis faces his 18 euro-area counterparts in an emergency meeting. Standard & Poor’s lowered Greece’s long-term credit rating one level to B- and kept the ratings on CreditWatch negative. The rating downgrade to B- pushes Greece’s debt six levels into non-investment grade, or junk status. S&P said it plans to “update or resolve” the CreditWatch status by next month. “We could lower our ratings on Greece if we perceive that the likelihood of a distressed exchange of Greece’s commercial debt has increased further because official funding has been curtailed, government borrowing requirements have deteriorated beyond our expectations, or Greece’s external financing has come under greater stress,” S&P said in a statement on Friday.

“In France and Germany, the mainstream center-left parties have dropped any pretense of fighting the neoliberal orthodoxy that dominates EU economic policy and have been punished by voters accordingly.”

• Europe’s Revolt Isn’t Just In Greece Or Spain (MarketWatch)

Greek voters crowded into Athens’ Syntagma Square to celebrate the landslide election of the leftist Syriza party last month, just as they had the victory of the center-left Pasok party in 1981, which ushered in Greece’s first leftist government after it threw off military dictatorship in 1974. The tens of thousands of Spanish voters who filled Madrid’s Puerta del Sol last Saturday also wanted to celebrate the leftist victory in Greece and rally support for a similar result for Spain’s new left-wing party, Podemos, in parliamentary elections at the end of this year. But the electoral victory of Syriza and the rise of Podemos are not signs of a resurgence of the left in Europe. The huge square in Madrid was also filled with demonstrators in May 2011 when a wave of protests opposed the Socialist government’s willingness to go along with European Union austerity policies.

One of the major ironies of the eurozone crisis, in fact, is that the historic left-wing parties in Europe have been so compromised by the austerity policies dictated by Brussels and Berlin that they have lost significant voter support or collapsed altogether. The once-celebrated Pasok, for instance, which led the government when the euro crisis erupted in 2009, has seen its electoral support plunge from its zenith of 48% in 1981 to a paltry 4.7% in last month’s election. The Spanish Socialist Party, which governed Spain for 14 years under Felipe Gonzalez, has seen its support fall from 48% in 1982 to just 22% in the most recent polls, putting it in third place behind Podemos, which is just one-year-old.

In France and Germany, the mainstream center-left parties have dropped any pretense of fighting the neoliberal orthodoxy that dominates EU economic policy and have been punished by voters accordingly. French Socialist President François Hollande, who swept into office with a parliamentary majority in 2012 on pledges that he would fight German-imposed austerity, saw his approval ratings plummet below 20% when he failed to deliver on that promise. Germany’s Social Democrats, too timid to resist the popularity of conservative Chancellor Angela Merkel, have not only been co-opted into her stringent view of European economic policy but into most every aspect of domestic policy as part of a coalition government.

“Greece “will be the first country to go bankrupt over €5 billion.”

• Greece Could Run Out of Cash in Weeks (WSJ)

Greece warned it was on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro. Greek Economy Minister George Stathakis said in an interview with The Wall Street Journal that a recent drop in tax revenue and other government income had pushed the country’s finances to the brink of collapse. “We will have liquidity problems in March if taxes don’t improve,” Mr. Stathakis said. “Then we’ll see how harsh Europe is.” Government revenue has declined sharply in recent weeks, as Greeks with unpaid tax bills hold back from settling arrears, hoping the new leftist government will cut them a better deal. Many also aren’t paying an unpopular property tax that their new leaders campaigned against. Tax revenue dropped 7%, or about €1.5 billion ($1.7 billion), in December from November and likely fell by a similar percentage in January, the minister said.

Other senior Greek officials said the country would have trouble paying pensions and other charges beyond February. Greece has made no secret of its precarious financial position, but the minister’s comments suggest the country has even less time than many policy makers thought to resolve its standoff with Europe. Eurozone officials have asked Greece to come up with a specific funding plan by Wednesday, when finance ministers have called a special meeting to discuss the country’s financial situation. The country needs €4 billion to €5 billion to tide it over until June, by which time it hopes to negotiate a broader deal with creditors, Mr. Stathakis said, adding that he believes “logic will prevail.” If it doesn’t, he warned, Greece “will be the first country to go bankrupt over €5 billion.” If the Greek government runs out of cash, the country would be forced to default on its debts and reintroduce its own currency, thus abandoning the euro.

Most of the €240 billion in aid that Europe and the International Monetary Fund have pumped into the country would be lost. Greece’s new, leftist government has been in a tug of war with its European creditors for days over relaxing strictures of its bailout program. Athens is pressing for less-onerous terms so it can reverse some of the austerity measures weighing on the country, but its partners in the euro currency area, led by Germany, have refused. Before the two sides can address Greece’s broader bailout framework, however, they need to quickly find a way to keep the country solvent. Mr. Stathakis said Athens has asked for €1.9 billion in profits from Greek bonds held by other eurozone governments. In addition, the government wants the eurozone to allow Greece to raise an additional €2 billion by issuing treasury bills, he said. Both proposals clash with the rules governing Greece’s bailout and eurozone officials have dismissed them.

Very long in-depth analysis of the eurozone by Pettis.

• Syriza and the French indemnity of 1871-73 (Michael Pettis)

1. The euro crisis is a crisis of Europe, not of European countries. It is not a conflict between Germany and Spain (and I use these two countries to represent every European country on one side or the other of the boom) about who should be deemed irresponsible, and so should absorb the enormous costs of nearly a decade of mismanagement. There was plenty of irresponsible behavior in every country, and it is absurd to think that if German and Spanish banks were pouring nearly unlimited amounts of money into countries at extremely low or even negative real interest rates, especially once these initial inflows had set off stock market and real estate booms, that there was any chance that these countries would not respond in the way every country in history, including Germany in the 1870s and in the 1920s, had responded under similar conditions.

2. The “losers” in this system have been German and Spanish workers, until now, and German and Spanish middle class savers and taxpayers in the future as European banks are directly or indirectly bailed out. The winners have been banks, owners of assets, and business owners, mainly in Germany, whose profits were much higher during the last decade than they could possibly have been otherwise

3. In fact, the current European crisis is boringly similar to nearly every currency and sovereign debt crisis in modern history, in that it pits the interests of workers and small producers against the interests of bankers. The former want higher wages and rapid economic growth. The latter want to protect the value of the currency and the sanctity of debt.

4. I am not smart enough to say with any confidence that one side or the other is right. There have been cases in history in which the bankers were probably right, and cases in which the workers were probably right. I can say, however, that the historical precedents suggest two very obvious things. First, as long as Spain suffers from its current debt burden, it does not matter how intelligently and forcefully it implements economic reforms. It will not be able to grow out of its debt burden and must choose between two paths. One path involves many, many more years of economic hell, as ordinary households are slowly forced to absorb the costs of debt — sometimes explicitly but usually implicitly in the form of financial repression, unemployment, and debt monetization. The other path is a swift resolution of the debt as it is restructured and partially forgiven in a disruptive but short process, after which growth will return and almost certainly with vigor

5. Second, it is the responsibility of the leading centrist parties to recognize the options explicitly. If they do not, extremist parties either of the right or the left will take control of the debate, and convert what is a conflict between different economic sectors into a nationalist conflict or a class conflict. If the former win, it will spell the end of the grand European experiment.

“Distrust of the masses is in the EU’s genome.”

• Democracy Could Have Saved Europe From The Disastrous Single Currency (Hannan)

“Elections change nothing,” said Wolfgang Schäuble, Germany’s tough-minded finance minister. He was talking about Greece, but he could have been talking about the entire EU racket. The Europhile elites have a guarded and contingent attitude towards democracy. It has its place, to be sure, but it must never be allowed to slow the process of political integration. As the President of the European Commission, Jean-Claude Juncker, put it in response to Syriza’s election victory, “There can be no democratic choice against the European treaties”. He means it. In 2011, in order to keep the euro intact, the EU connived at the toppling of two elected prime ministers: Silvio Berlusconi in Rome and George Papandreou in Athens. Both men were replaced by Eurocrats who presided over, in effect, Brussels-approved civilian juntas.

Although their regimes were called “national governments”, their purpose was to drive through policies that would be rejected at the ballot box. Distrust of the masses is in the EU’s genome. Its founders had lived through the horrors of the Second World War, and associated democracy – especially in its plebiscitary form – with the demagoguery and fascism of the 1930s. They made no bones about vesting supreme power with a group of Commissioners who were immune to public opinion. Sure enough, those Commissioners and their successors saw it as their role to step in when the voters got it wrong – as when, for example, they voted against closer integration in referendums. I could easily fill the rest of this column with either anger or mockery; but I’d rather do Eurocrats the courtesy of taking their argument seriously.

Their contention is, in effect, that voters often misjudge things – that they are likely simultaneously to demand higher spending and lower taxes, and then complain when the money runs out. As José Manuel Barroso, Mr Juncker’s predecessor, put it four years ago, at the height of the economic crisis: “Governments are not always right. If governments were always right we would not have the situation that we have today. Decisions taken by the most democratic institutions in the world are very often wrong.” At first glance, the recent Greek election seems to sustain that view. Here, after all, is a country brought to ruin by excessive spending and borrowing. Yet its voters have just opted for a party that offers more of the medicine that sickened them: a 50% hike in the minimum wage, higher pensions, free electricity for 300,000 households and other fantasies.

[..] When the EU assumed responsibility for the Greek economy, it licensed Greeks to behave irresponsibly. If voters are treated like recalcitrant teenagers, they will behave like recalcitrant teenagers, storming petulantly at the parents whom they none the less expect to pay their phone bills. Greece is an example, not of too much democracy, but of too little. Had the Hellenic Republic been a sovereign country, wholly accountable to its own electorate, things would have worked out very differently. But for the euro, the debt crisis would never have got so badly out of hand: the markets would have imposed their own discipline years ago.

Dead on: “we must find the means to create a peacekeeping force to protect Russian speakers in Ukraine.” and “It is not destined to join the EU; Ukraine must preserve its role as a bridge between Europe and Russia.”

• Sarkozy: Crimea Cannot Be Blamed For Joining Russia (RT)

Crimea cannot be blamed for seceding from Ukraine – a country in turmoil – and choosing to join Russia, said former president of France, Nicolas Sarkozy. He also added that Ukraine “is not destined to join the EU.” “We are part of a common civilization with Russia,” said Sarkozy, speaking on Saturday at the congress of the Union for a Popular Movement Party (UMP), which the former president heads. “The interests of the Americans with the Russians are not the interests of Europe and Russia,” he said adding that “we do not want the revival of a Cold War between Europe and Russia.” Regarding Crimea’s choice to secede from Ukraine when the country was in the midst of political turmoil, Sarkozy noted that the residents of the peninsula cannot be accused for doing so.

“Crimea has chosen Russia, and we cannot blame it [for doing so],” he said pointing out that “we must find the means to create a peacekeeping force to protect Russian speakers in Ukraine.” In March 2014 over 96% of Crimea’s residents – the majority of whom are ethnic Russians – voted to secede from Ukraine to reunify with Russia. The decision was prompted by a massive uprising in Ukraine, that led to the ouster of its democratically elected government, and the fact that the first bills approved by the new Kiev authorities were infringing the rights of ethnic Russians. Concerning Kiev’s hopes of joining the EU in the near future Sarkozy voiced the same position as had been previously expressed by some EU leaders.

“It is not destined to join the EU,” he said. “Ukraine must preserve its role as a bridge between Europe and Russia.” While the West has been criticizing Russia’s stance on Crimea, the Russian Foreign Minister said on Saturday that the peninsula’s residents had the right to “self-determination” citing the March referendum. He gave the example of Kosovo, which despite not holding a referendum, was allowed to leave Serbia and create its own state. “In Crimea what happened complies with the UN Charter on self-determination,” Lavrov said during his speech at the Munich security conference. “The UN Charter has several principles, and the right of a nation for self-determination has a key position.”

I still don’t get this bit after reading it multiple times: “Obama won’t authorize weapons deployment if Merkel signals that she will not publicly condemn individual nations from arming Ukraine..” Does that mean he will if she will?

• Merkel Objection to Arms for Ukraine May Spur Backlash for Obama (Bloomberg)

Germany’s rejection of supplying weapons to Ukrainian forces fighting pro-Russian rebels may heighten the domestic pressure on a reluctant U.S. President Barack Obama to deliver the arms. Increasing numbers of senior military and State Department officials are joining Republican lawmakers in a push to arm Ukraine – an option the commander-in-chief personally opposes, according to three people familiar with the dynamics in the Obama administration. They asked not to be named due to sensitivity of the matter.
German Chancellor Angela Merkel, who made an impassioned case against shipping lethal military support to Ukraine in a speech Saturday at the Munich Security Conference, will discuss the issue with Obama in Washington on Monday. U.S. Secretary of State John Kerry said he’s confident Obama will make his decision soon after the meeting.

Obama’s delay in making his move until after Merkel’s visit reflects not only the gravity of the situation and the dueling arguments, but his emphasis on international alliances, his own deliberative nature and the degree to which he’s concentrated power on foreign policy in the White House. Obama won’t authorize weapons deployment if Merkel signals that she will not publicly condemn individual nations from arming Ukraine, the three people said. If she opposes any unilateral supplying of weapons, Obama will explain his decision to follow her lead by citing the importance of keeping a united front against Russian President Vladimir Putin and the risk of triggering a proxy war with him, the people said. [..]

Merkel in her Saturday speech said, “The progress that Ukraine needs cannot be achieved by more weapons.” Instead, she evoked the perseverance of the U.S. and European diplomatic efforts in confronting the Soviet Union during four decades of Cold War that ended with collapse of communism. Like then, that approach needs staying power and unity, said Merkel, who grew up in communist East Germany. “The problem is that I cannot envisage any situation in which an improved equipment of the Ukrainian army leads to a situation where President Putin is so impressed that he will lose militarily,” she said, reiterating the importance of a negotiated peace without military intervention. “I have to put it in such a blunt manner.” Facing Ukraine President Petro Poroshenko in the audience, she said: “There’s no way to win this militarily — that’s the bitter truth. The international community has to think of a different approach.”

“Our partners in the West have closed their eyes to everything that the Kiev government has said and done, which includes xenophobia.”

• Lavrov: US Escalated Ukraine Crisis At Every Stage, Blamed Russia (RT)

Sergey Lavrov has lashed out at the US for their double standards over Ukraine and taking steps that “only promoted further aggravation” of the conflict. He added Russia is ready to guarantee agreements between Kiev and the self-proclaimed republics. One of the major sticking points of the crisis so far has been the failure of Kiev to engage in talks with militia leaders in the East of the country. Lavrov is staggered the US, who talked with the Taliban during their invasion of Afghanistan, through channels in Doha, Qatar, is unable to put pressure on Kiev to engage in discussions. “In the case of Libya, Afghanistan, Iraq, Yemen and Sudan our partners actively asked governments to enter into dialogue with the opposition, even if they were extremists. However, during the Ukrainian crisis, they act differently, making up excuses and try to justify the use of cluster bombs,” the Russian Foreign Minister said, who was speaking at a security conference in Munich on Saturday.

The issue of the far right’s rise in Ukrainian politics has been swept under the carpet by the US and EU. Some members of the Ukrainian parliament have promoted ideas such as exterminating Russians and Jews. However, these haven’t been reported or caused any alarm in the West, Russia’s foreign minister added. “Our partners in the West have closed their eyes to everything that the Kiev government has said and done, which includes xenophobia. Some have advocated an ethnically clean Ukraine.” Throughout the Ukrainian crisis, the West has viewed Russia as the aggressor. The Kremlin has been accused of arming eastern Ukrainian militia and even sending Russian troops to reinforce them – claims Moscow has repeatedly denied. It has stated on many occasions that despite the damning rhetoric no sufficient evidence has been ever presented.

On the contrary, Lavrov says the US has been the destabilizing factor in Ukraine. “Through every step, as the crisis has developed, our American colleagues and the EU under their influence have tried to escalate the situation,” Lavrov maintained. He pointed to the failure of the EU to engage Russia about Ukraine signing an economic association agreement with the bloc, Western involvement during the Maidan protests, the failure of the West to condemn Ukraine for calling its own citizens terrorists and for supporting a coup, which led to the toppling of a democratically elected president. “The US made it public it brokered the transit of power in Ukraine. But we know perfectly well what exactly happened, who discussed candidates for the future Ukrainian government on the phone, who was at Maidan, and what is going on (in Ukraine) right now,” Lavrov said.

The west and its press are no longer even capable anymore of discussing Russia without accusing it of a whole range of alleged misdeeds.

• Europeans Laugh as Lavrov Talks Ukraine (Bloomberg)

In the span of 45 minutes today, Russian Foreign Minister Sergei Lavrov rewrote the history of the Cold War, accused the West of fomenting a coup in Ukraine and declared himself a champion of the United Nations Charter. The crowd here in Germany laughed at and then booed him, but he didn’t seem to care. When Lavrov took the stage Saturday morning at the Munich Security Conference, he knew it was going to be a tough crowd. He was speaking just after German Chancellor Angela Merkel and ahead of U.S. Vice President Joseph Biden. For two days, almost all of the panelists at the conference had railed against Russia’s actions in Ukraine. The debates were not over whether Russia was a bad actor spoiling international security, but rather how to deal with that consensus view.

He looked nervous, perhaps because Sergei Ivanov, chief of staff to Russian President Vladimir Putin and Lavrov’s superior, was sitting in the front row, staring at him as if to warn him not to mess up. But none of that kept him from turning in an audacious performance. “In any situation, the United States is trying to blame Russia for everything,” he said. “Russia will be committed to peace. We are against combat. We would like to see a withdrawal of heavy weapons.” Lavrov then accused the U.S. of supporting military attacks against innocent Ukrainians. (He chose not to mention the Russian heavy weaponry in Eastern Ukraine or the hundreds of Russian military advisers on the ground.) Lavrov accused the Ukrainian military and government of being anti-Jewish and said that the Hungarian minority in Ukraine was being mistreated.

He called out the U.S. for negotiating with the Afghan Taliban but – in his view – not supporting negotiations between the Ukraine government and the Eastern separatists. Talking about the possibility of the U.S. giving lethal aid to the Ukrainian military, Lavrov leveled a thinly veiled threat that the Russians might invade Ukraine outright, as they did Georgia seven years ago after what they saw as provocation from President Mikheil Saakashvili. “I don’t think our Ukrainian colleagues should hope the support they are receiving will solve their problems,” he said. “That support … is going to their heads in the way it did for Saakashvili in 2008, and we know how that ended.” The crowd took that in stride, but then burst out laughing when Lavrov said that the annexation of Crimea, which was invaded by unmarked Russian troops, was an example of international legal norms working well.

“Conditions are likely to come together that will allow the Federal Reserve to hike short-term interest rates anytime “from June on,” said Dennis Lockhart, the president of the Atlanta Fed.”

• 4 Reasons Stocks Aren’t Soaring After That Stellar Jobs Report (MarketWatch)

Why isn’t the stock market ripping higher Friday after that stellar jobs report? The S&P 500 and Dow industrials were up only moderately by around midday, then they turned negative to roughly flat in a hurry. Here are four factors:

1) A rally into the jobs report: Stocks already were showing big gains for the week before the jobs report came out. The S&P 500 is still up 3.4% for the week at last check. The Dow is coming off a four-day winning streak that had it up 720 points for the week as of Thursday’s close. So Friday’s lackluster action probably won’t change a positive weekly trend.

2) Fresh Greek worries: A downgrade of Greece by Standard & Poor’s on Friday afternoon may have sparked a move away from riskier assets like stocks. S&P cut the troubled nation’s long-term rating to B-minus from B, meaning further into junk territory. The folks at ZeroHedge, known for spotlighting the negative, say what’s “scariest” is that S&P itself is mentioning capital controls and bank runs. But other market watchers have been playing down the significance of the latest Greek drama, and they note Friday’s downgrade is similar to an earlier one by Moody’s Investors Service. That said, there are mounting concerns that Greece must get tidy its economic house or risk roiling the market.

3) Rate hikes ahead: The strong jobs report has boosted expectations around the Fed’s rate hikes, and higher rates ought to peel some investors away from stocks. Investors now think the Federal Reserve will raise rates one more time by December 2016 than they expected before Friday’s January job report, as MarketWatch’s Gregg Robb notes. Robb also reports on a notable Fed speech on Friday afternoon. Conditions are likely to come together that will allow the Federal Reserve to hike short-term interest rates anytime “from June on,” said Dennis Lockhart, the president of the Atlanta Fed.

4) A lagging indicator: The January jobs report reveals a lot, but it is important to realize the labor market is often a lagging indicator. Don’t let the stellar report make you forget about real challenges facing the U.S. economy, says MarketWatch’s Steve Goldstein. In a similar vein, Barry Ritholtz at Bloomberg View argues investors might want to ignore every monthly jobs report, since trading off it requires guessing not just the results, but also how much it is already reflected in stock prices.

And then we go and call that a recovery.

• America’s Shrinking Middle Class Is Holding On For Dear Life (MarketWatch)

Middle America is holding on for dear life. The share of Americans who are part of middle-income households has plunged to 51% in 2013 from 61% in 1970, according to new research by the Pew Research Center, a nonpartisan, nonprofit think tank in Washington, D.C. And from 1990 to 2013, the share of adult Caucasians and Asians living in middle-income households decreased the most of any ethnic group, from 58% to 53% (for Caucasians) and from 56% to 50% (for Asians). The decline was less pronounced among Hispanics (from 48% to 47%) and African-Americans (from 47% to 45%). Over the same period, the share of the country that qualifies as ‘lower-income’ has also grown: they make up 29% of all households in 2013, after comprising 25% of all households in 1970.

The share of upper income households, on the other hand, rose from 14% in 1970 to 20% in 2013. (To fall in those categories in 2013, household incomes had to be: $166,623 a year for upper income, $71,014 a year for middle income, and $23,659 a year for lower income.) About one-in-four white and Asian adults are upper income versus just one-in-10 Hispanic and black adults, and there was “no meaningful change in these gaps in the past two decades,” Pew found. What’s more, the median incomes of all households fell by 7% during the “lost decade” of 2000 to 2013. In the last three years (between 2010 and 2013), however, the share of middle-income families has remained steady.

“While the muddled recovery has yet to bolster the middle, this flat trend might actually be good news because, for now, it stems a decades-long slide,” it concluded. Not everyone sees this as a reason for celebration. “Marching in place after the recession is a bit like saying, ‘We survived.’ But who has thrived?” says Mark Hamrick, Washington, D.C. bureau chief at personal finance website Bankrate.com. “The problem is that the middle class hasn’t made much headway over the past decade or so.” High-earning Americans have fared better than Middle America, he says. “Ultimately this is an economic problem that presents itself thoroughly across our society. It helps explain why the interests of the middle class have not been well attended to.”

“The low oil price is bringing to a halt the world’s great engine of supply growth over the last five years..”

• Fears For US Economy As Shale Industry Goes Into Hibernation (Observer)

America’s fracking revolution is becoming a victim of its own success. The controversial boom in shale gas and oil has driven the US economic recovery and helped lower world crude prices. But a price plunge from $115 (£75) a barrel last June to just above $50 last week means many shale operations no longer pay. Rigs across the US are being deactivated at a rate of nearly 100 a week. In the final week of January, 94 were pulled offline – the most since 1987, according to oil services company Baker Hughes. The number of active rigs fell by from 1,609 in October to 1,223 in January and some experts predict fewer than 1,000 will remain by the end of the year. “The low oil price is bringing to a halt the world’s great engine of supply growth over the last five years,” said James Burkhard at IHS Energy. “The US upstream is very responsive to changes in price and drilling is likely to slow down further until prices recover.

“The great revival of US production has been from intensive onshore drilling. These aren’t massive $7bn projects that can’t be stopped: these are mostly onshore fracking that be started and stopped much more easily.” Burkhard said the US fracking boom accounted for more than half of global oil supply growth over the last five years, and it is the easiest tap to turn off while the world waits for the oil price to recover. The US has built up its largest stockpile of crude in 84 years. The profitability of onshore US wells varies considerably, with some only turning a profit when oil price is as high as $90 while others can make money at $30. IHS says nearly 30% of new wells started in 2014 can break even at $81 a barrel. By comparison, Morgan Stanley says some Middle Eastern onshore production is profitable at $10 per barrel.

Oil companies big and small have been knocked by falling prices. Chevron last month reported a 30% fall in quarterly profits (its worst since 2009), while oil exploration company ConocoPhillips swung to a loss as its average realised price fell 19% to $52.88 per barrel. Continental Resources, one of the largest drillers in North Dakota’s Bakken shale, said late last year it would cut its active rigs by 40% this year, with three-quarters of cuts coming by April. North Dakota’s Department of Mineral Resources says the state’s producers need a wellhead price of around $55-$65 to sustain current output of 1.2m barrels per day. If similar cuts were made across the industry, the rig count would fall below 1,100 by the end of March and 950 by the end of the year. A collapse in US oil production – now at 12m barrels a day after rising from 5m in 2008 – is likely to have a big impact on the nation’s economy. The fracking boom has made millionaires out of landowners, strengthened the country’s energy security and created hundreds of thousands of well-paid jobs.

“Bob Dudley, CEO of BP, warned last week that the industry had to prepare for a “new phase” of lower prices that could last months, even years.”

• Bitter Economic Winds Hasten Oil Industry Retreat From North Sea (Observer)

For one oil industry veteran, the dismantling of the Brent oil field in the North Sea prompts mixed feelings. There is gratitude for the livelihood earned from Britain’s post-war energy boom. And relief that it means farewell to “hell on Earth”. “Brent kept me and my family in gainful employment, so I have something to be grateful for, but these platforms are from an era long gone,” says Jake Molloy, who was a production assistant on the Brent Delta platform. Describing the structure, which Shell plans to remove from the North Sea, Molloy adds: “Putting people down platform legs [which store pumps and vessels] is really bad. You could climb down thousands of steps to the bottom with 40 pounds of breathing apparatus on your back only for the alarms to go off and you had to go all the way back again. It was the worst working environment – horrendous, hell on earth.”

Shell’s announcement that it plans to remove the platform was just one of many symbolic retreats staged by the oil industry last week. A day after the Brent proposals, Shell’s rival BP said it was taking a $4.5bn (£3bn) hit in its quarterly accounts to pay for the cost of bringing forward the closure of some unprofitable UK fields, partly due to lower oil prices. Situated 115 miles east of the Shetland Islands, Brent is estimated to have produced 10% of all North Sea oil and gas while generating £20bn of tax revenues since it opened in 1976. Brent is not the first North Sea field to face decommissioning and BP has been planning closures for some time. But the timing makes the closures all the more pointed. Shell’s field gave its name to a benchmark that has plummeted over the past year.

The price of a barrel of Brent crude has dived from $115 in June last year to less than $50 last month. The price has bounced back in the past two weeks to $58 but Bob Dudley, CEO of BP, warned last week that the industry had to prepare for a “new phase” of lower prices that could last months, even years. There will be more cost-cutting moves by the global oil industry over the next 12 months. BP is halving its exploration activity, slashing its capital expenditure by 20% and spending $1bn on making staff redundant after recording a $1bn loss in the last quarter. The $4.5bn writedown for its North Sea operations includes “increases in expected decommissioning costs” – an accounting footnote viewed by Iain Reid at BMO Capital Markets, as an inevitable outcome of low oil prices. “It’s bound to lead to North Sea field shutdowns being brought forward,” he says.

“..the levels of crude oil in storage have soared to a record. Which will pressure prices further.”

• US Oil Rig Count Plunges 29% from Peak. Halfway to Bottom? (WolfStreet)

In the US, oil companies have been laying off workers and cutting capital expenditures at a feverish pace. With revenues dropping as a function of the price of oil that has fallen by over half since June, preserving cash is suddenly a priority. Wall Street, after years of handing out money no questions asked, shut off the spigot for junk-rated drillers that need new money the most. So it’s crunch time. The number of rigs actively drilling for oil in the US, reported by Baker Hughes every Friday, is a preliminary gauge of these changes. And during the last reporting week, that rig count plunged by 83 to 1,140 rigs, after having plunged by an all-time record of 93 in the prior week. The rig count is now down 469 rigs, or 29%, from the high of 1,609 in October.

And it’s down 359 rigs over the six reporting weeks so far this year. Never before has the rig count plunged this fast this far. During the financial crisis, the oil rig count fell 60% from peak to trough. If this oil bust plays out the same way on a percentage basis, the count would drop to 642 rigs! The bloodletting in the exploration and production sector would be enormous. Having cut the rig count by 29% already since the October peak, the sector might already be about halfway there. But production of oil from existing and recently completed wells continues to set records, and wells to be completed in the near future will add to it. Demand in the US has been slack. And the levels of crude oil in storage have soared to a record. Which will pressure prices further.

“Floating exchange rates and resulting depreciation can cause the debt burden of firms and fiscal budgets to bloat overnight.”

• Bracing for Another Storm in Emerging Markets (Kevin Gallagher)

In 2012, Brazilian President Dilma Roussef scolded U.S. Federal Reserve Chairman Ben Bernanke’s monetary easing policies for creating a “monetary tsunami”: Financial flows to emerging markets that were appreciating currencies, causing asset bubbles, and generally exporting financial instability to the developing world. Now, as growth increases in the United States and interest rates follow, the tide is turning in emerging markets. Many countries may be facing capital flight and exchange-rate depreciation that could lead to financial instability and weak growth for years to come. The Brazilian president had a point. Until recently U.S. banks wouldn’t lend in the United States despite the unconventionally low interest rates. There was too little demand in the U.S. economy and emerging market prospects seemed more lucrative.

From 2009 to 2013, countries like Brazil, South Korea, Chile, Colombia, Indonesia, and Taiwan all had wide interest rate differentials with the United States and experienced massive surges of capital flows. The differential between Brazil and the U.S. was more than 10 percentage points for a while—a much better bet than the slow growth in the United States. According to the latest estimates from the Bank for International Settlements (BIS), emerging markets now hold a staggering $2.6 trillion in international debt securities and $3.1 trillion in cross border loans—the majority in dollars. Official figures put corporate issuance at close to $700 billion since the crisis, but the BIS reckons that the figure is closer to $1.2 trillion when counting offshore transactions designed to evade regulations. Now the tide is turning.

China’s economy is undergoing a structural transformation that necessitates slower growth and less reliance on primary commodities. Oil prices and the prices of other major commodities are stabilizing or on the decline. It should be no surprise then that many emerging-market growth forecasts are continually being revised downward. Meanwhile, growth and interest rates are picking up in the United States. The dollar gains strength; the value of emerging market currencies fall. [..] Floating exchange rates and resulting depreciation can cause the debt burden of firms and fiscal budgets to bloat overnight. Given that most of the capital inflows were in dollars, depreciating currencies mean that nations and firms will need to come up with ever-more local currency to pay debt—but in a lower growth environment.

“..imports slumped by 19.9%..”

• China’s Exports Slump, Imports Crash In January, Record Trade Surplus (Reuters)

China’s exports fell 3.3% in January from a year earlier, while imports slumped by 19.9%, both missing expectations by a wide margin, and resulting in a record monthly trade surplus of $60 billion. Thinking that easing measures in Europe would boost demand for Chinese goods, analysts polled by Reuters had expected to exports to rise by 6.3%, and imports to fall by only 3%, to give a trade deficit of $48.9 billion. Instead, exports slid 12% on a monthly basis, while imports dove 21.1%, according to the data released by the Customs Administration said on Sunday. The decline was led by a sharp slide in commodities imports, in particular imports of coal which dropped nearly 40% to 16.78 million tonnes, down from December’s 27.22 million tonnes, as well as a scale back in crude oil imports, which slid 7.9%.

While the trade data augured badly for an economy that suffered its slowest economic growth in 24 years in 2014, analysts say strong seasonal distortions due to the Lunar New Year holiday make it difficult to interpret the data. Last year the holiday fell in January, and this year it falls in February. China’s export numbers tend to be erratic, sharp moves in opposite directions are common and the combined January and February figures are often a more accurate gauge of the overall trend, analysts say. [..] During 2014, China’s total trade value increased by 3.4% from a year earlier, short of the official target of 7.5%, and some analysts have raised questions about whether export data was inflated by fake invoicing as firms speculated in the currency and commodities markets.

“Value of crude oil imports fell 41.8% from a year earlier, iron ore imports dropped 50.3% and coal plummeted 61.8%.” [..] “We are going to see more of these alarming data in the next few months.”

• China’s Record Trade Surplus Highlights Weak Domestic Demand (Bloomberg)

China registered a record trade surplus last month as imports plunged on falling commodity prices and weak domestic demand. Imports fell by the most in more than five years, declining 19.9% from a year earlier. That compared with estimates for a 3.2% drop in a Bloomberg survey of analysts. Exports slid 3.3%, leaving a trade surplus of $60 billion, the customs administration in Beijing said. A property downturn and a stall in manufacturing are signals the government may need to step up measures to stimulate the economy, as domestic demand for commodities including crude oil and iron ore declines. The record trade surplus, combined with declines in exports and imports, complicates the government’s management of exchange rates after January’s depreciation.

“It seems that sharp decline in commodity prices, weak domestic demand and weak external demand, reflected in processing imports, all played a role in the decline in imports,” said Wang Tao at UBS in Hong Kong. “Trade data again creates a dilemma for the exchange rate. A record trade surplus is supposed to add appreciation pressure, but declining exports would say otherwise.” It’s not in China’s interest to let the yuan depreciate sharply, Liu Ligang and Zhou Hao at ANZ wrote in a note. “China’s central bank will continue to use a slew of instruments, including fixing rates, open market operations, and direct interventions, to prevent the RMB from weakening sharply,” they wrote.

Value of crude oil imports fell 41.8% from a year earlier, iron ore imports dropped 50.3% and coal plummeted 61.8%. Quantities of the commodities declined as well. Imports declined from all major trade partners, including the EU and US. Falling prices have cut the dollar value of imports and contributed to a prolonged decline in factory gate prices, which may extend to a record 35 months, according to economist estimates. “The slump in imports means a slump in the overall situation of the economy,” said Hu Yifan at Haitong in Hong Kong. “We are going to see more of these alarming data in the next few months.”

Extensive NYT reasearch project. This reflects very poorly on New York, the US, the UK and London.

• Stream of ‘Dark’ Foreign Wealth Flows to Elite New York Real Estate (NY Times)

On the 74th floor of the Time Warner Center, Condominium 74B was purchased in 2010 for $15.65 million by a secretive entity called 25CC ST74B L.L.C. It traces to the family of Vitaly Malkin, a former Russian senator and banker who was barred from entering Canada because of suspected connections to organized crime. Last fall, another shell company bought a condo down the hall for $21.4 million from a Greek businessman named Dimitrios Contominas, who was arrested a year ago as part of a corruption sweep in Greece. A few floors down are three condos owned by another shell company, Columbus Skyline, which belongs to the family of a Chinese businessman and contractor named Wang Wenliang. His construction company was found housing workers in New Jersey in hazardous, unsanitary conditions.

Behind the dark glass towers of the Time Warner Center looming over Central Park, a majority of owners have taken steps to keep their identities hidden, registering condos in trusts, limited liability companies or other entities that shield their names. By piercing the secrecy of more than 200 shell companies, The New York Times documented a decade of ownership in this iconic Manhattan way station for global money transforming the city s real estate market. Many of the owners represent a cross-section of American wealth: chief executives and celebrities, doctors and lawyers, technology entrepreneurs and Wall Street traders. But The Times also found a growing proportion of wealthy foreigners, at least 16 of whom have been the subject of government inquiries around the world, either personally or as heads of companies. The cases range from housing and environmental violations to financial fraud.

Four owners have been arrested, and another four have been the subject of fines or penalties for illegal activities. The foreign owners have included government officials and close associates of officials from Russia, Colombia, Malaysia, China, Kazakhstan and Mexico. They have been able to make these multimillion-dollar purchases with few questions asked because of United States laws that foster the movement of largely untraceable money through shell companies. Vast sums are flowing unchecked around the world as never before whether motivated by corruption, tax avoidance or investment strategy, and enabled by an ever-more-borderless economy and a proliferation of ways to move and hide assets. Alighting in places like London, Singapore and other financial centers, this flood of capital has created colonies of the foreign super-rich, with the attendant resentments and controversies about class inequality made tangible in the glass and steel towers reordering urban landscapes.

Lovely.

• Twitter Execs Enrich Themselves At Shareholders’ Expense (MarketWatch)

In October, we pointed out that the $170 million in stock-based compensation dished out to Twitter employees during the third quarter represented 47% of the company’s third-quarter revenue. That was an outsized amount — much higher than the most recently reported payouts for any company included in the S&P 1500 Composite Index. Twitter suffered a third-quarter net loss of $175 million, owing almost entirely from the stock awards. (Twitter is not yet included in the S&P 1500, presumably because it has been publicly traded for only a little over a year.)

Following a memo to employees in which Twitter CEO Dick Costolo said the company was doing a poor job preventing abuse over its messaging platform, the company said on Thursday that for the fourth quarter, its stock-based compensation totaled $177 million, or 37% of revenue. The company reported a net loss of $125.4 million, or 20 cents a share, but would have shown a profit of $79.3 million, or 12 cents a share, if the non-cash stock awards were excluded. The good news for Twitter was that its fourth-quarter revenue totaled $479.1 million, rising from $361.3 million the previous quarter and $242.7 million a year earlier. The company beat consensus estimates for earnings and revenue, though it reported a slowdown in subscriber growth. Twitter said it expects growth to pick up, and investors believed it, sending the shares up 13% on Friday.

“We’re slowly poisoning America’s food supply, poisoning the whole world’s food supply.”

• Peak Food Is The World’s No. 1 Ticking Time Bomb (Paul B. Farrell)

Global food poisoning? Yes, We’re maxing out. Forget Peak Oil. We’re maxing-out on Peak Food. Billions go hungry. We’re poisoning our future, That’s why Cargill, America’s largest private food company, is warning us: about water, seeds, fertilizers, diseases, pesticides, droughts. You name it. Everything impacts the food supply. Wake up America, it’s worse than you think. We’re slowly poisoning America’s food supply, poisoning the whole world’s food supply. Fortunately Cargill’s thinking ahead. But politicians are dragging their feet. They’re trapped in denial, protecting Big Oil donors, afraid of losing their job security; their inaction is killing, starving, poisoning people, while hiding behind junk-science.

The truth is, America, Big Ag worldwide farm production can’t feed the 10 billion humans forecast on Planet Earth by 2050. Can we wait till 2050 for the fallout? No. The clock’s ticking on the Peak Food disaster dead ahead. We’re at the critical tipping point, the planet is boiling over. Conservative Greg Page, executive chairman of the Cargill food empire, has that great can-do spirit of capitalism: At $43 billion, Cargill is America’s largest privately held company, launched during the Civil War with one grain warehouse. An unabashed optimist, Page was sounding a loud battle cry in Burt Helm’s New York Times op ed, “The Climate Bottom Line:”

Page is a powerful leader, optimistic, realistic, experienced … admits he “doesn’t know … or particularly care … whether human activity causes climate change … doesn’t give much serious thought to apocalyptic predictions of unbearably hot summers and endless storms.” Page wants action, results. Yes, he’s no left-wing environmentalist. Far from it. This is business, jobs, profits, because it’s a fact, climate’s already damaging huge sectors of America’s agricultural business … dust bowls in the heartland, in California’s bone dry central valley, all over … Georgia, North Carolina, Texas, all farm economics are affected. Meanwhile, our politicians dilly-dally, drifting, dragging their feet, in denial, playing petty ideological games.

Debt Rattle January 24 2015

Jan 242015

January 24, 2015 Posted by Raúl Ilargi Meijer at 12:24 pm Finance Tagged with: deflation, drought, Greece, housing, middle class, oil, pope, Syriza 6 Responses »

Unknown Goodyear service station, San Francisco Sep 14 1932

• Ripped Off, Poor, Suicidal: The Greek Farmers Turning To Syriza (Channel4)

• Syriza’s Rise Fueled by Professors-Turned-Politicians (WSJ)

• Economist Vatikiotis: Syriza Proposals Don’t Go Far Enough for Greece (Truthout)

• Tsipras Aims For Deal With Lenders By This Summer (Kathimerini)

• German Finance Minister To Greece: We Support You (CNBC)

• Nothing Is Going to Save the US Housing Market (A. Gary Shilling)

• Central Banks Powerless To Prevent Steep Rise In Real Rates (Russell Napier)

• Will ECB’s Bazooka Be A Game Changer For Emerging Markets? (CNBC)

• Head West for Best Look at US Oil Drillers’ Pain (Bloomberg)

• Ruble Colluding With Oil Brews Russian Toxic Loan Morass (Bloomberg)

• Spain Finance Minister: We Have The ‘Good Kind’ Of Deflation (CNBC)

• Italy Central Bank: We Are Lagging Behind The World (CNBC)

• States Where the Middle Class Is Dying (24/7 Wall St)

• Labor-Force Participation May Hold Key To Fed Moves (MarketWatch)

• Billions in Lost 401(k) Savings, Abusive Brokers Under Scrutiny (Bloomberg)

• RT Equated To ISIS For ‘Daring To Advocate A Point Of View’ (RT)

• Brazil’s Most Populous Region Faces Worst Drought In 80 Years (BBC)

• Pope Francis’s US Tour Will Set Off Economic Fireworks (Paul B. Farrell)

“They keep saying if Syriza wins we’ll be like North Korea or Venezuela. The politicians who tried that line are making a laughing stock of themselves.”

• Ripped Off, Poor, Suicidal: The Greek Farmers Turning To Syriza (Channel4)

There’s pizzazz tonight at the election rally of the Greek conservatives. There is a lot of money riding on their victory. But right now it looks like the election is slipping away from Prime Minister Antonis Samaras. Two polls last night put Syriza ahead – one, by the usually authoritative Mega channel, has the far left on 32.5% against New Democracy’s 26.5%. More polls today tell the same story: a widening Syriza lead. If Greece does elect Alexis Tsipras as the first far-left prime minister in Europe since the 1930s, then the place where it’s lost and won will not be Athens. Syriza is making inroads into towns and provinces that have traditionally voted right. In the gulf of Corinth there are a whole string of mountain villages that have traditionally been known as “castles” for the two main parties – ND and the centre-left Pasok. But Pasok has collapsed, and even some conservative voters are swinging over to support the left.

In Assos, a sleepy farming village Giannis Tsogkas, a grape farmer aged 56, explains why the place has swung towards the left. “Two-thirds of the land here has been mortgaged to the banks. Now we can’t pay our debts and we’re in constant fear of repossession. These are the worst times we’ve ever seen. We’re at a point where we can’t afford anything. “We used to go to the supermarket three times a week, now we only go once every two weeks – and we count every single cent we spend. It never used be like this: we had money, we were.. We produced, we sold, we had an income.” There’ve been a string of suicides, he tells me. And not just because of austerity. Every year, he alleges, the merchants who buy their grapes refuse to pay, or go bust. The legal system is so decrepit that it cannot help them. For the farmers in Assos the problems of falling incomes and a political system they see as corrupt merge into one.

“They shoved us into austerity with the IMF. The small farmer will die, that’s it. People here keep committing suicide. So we looked for someone to protect us, and we found it in Syriza.” Ten years ago Syriza got a grand total of 121 votes in the village – just over 2%. In the June 2012 general election it came second, with 22%. Last year, in the Euro elections it topped the polls with 27% – and Mr Tsogkas believes it will win easily on Sunday. It’s anger like this that has seen poll swings to Syriza in rural areas, suburban communities, and even regions like Thessaly that were once strongly right-wing. The government, which had relied on a fear strategy to stop Syriza, seems bereft of strategy. In the local coffee shop in Assos we meet other farmers, once staunch supporters of the centrist Pasok party. “They keep saying if Syriza wins we’ll be like North Korea or Venezuela. The politicians who tried that line are making a laughing stock of themselves. I don’t care who governs us, I care about Greece,” one man says angrily.

Greece’s best and brightest come home to save the nation.

• Syriza’s Rise Fueled by Professors-Turned-Politicians (WSJ)

Wearing suit pants and a jacket, Costas Lapavitsas stood Wednesday afternoon on the floor of a steel-fabricating shop here and addressed a few dozen workers and small-business owners who smoked while sitting in plastic chairs. “I am not a career politician,” he began. Indeed. Mr. Lapavitsas’s political career is only a few weeks old. In Greece’s elections Sunday, he is a parliamentary candidate for the leftist opposition party Syriza, which leads Prime Minister Antonis Samaras ’s conservative party in the polls and could roil politics throughout Europe if it wins. For more than 20 years, the 54-year-old Mr. Lapavitsas has taught economics at the University of London’s School of Oriental and African Studies. Now, he is part of the cadre of academics-turned-politicians forging Syriza’s economic thinking. European economic orthodoxy, led by Germany, has fought Greece’s debt crisis with painful austerity—public-spending cuts and tax hikes—and other strict reforms.

Syriza’s rise is the most potent challenge yet to that orthodoxy. If Syriza wins, it could embolden left-wing parties in other countries, especially Spain, where political tensions also are boiling. It could even result in a rift with Germany that ruptures the euro. The economic plan advanced by Mr. Lapavitsas and other professors aligned with Syriza is rooted in the core principles of debt forgiveness and higher government spending, which Germany has rejected. “We need to renegotiate the logic,” says Yanis Varoufakis, a visiting professor at the University of Texas at Austin until a few days ago. He describes himself as a “libertarian Marxist” and has been recruited by Syriza to run for a seat in Greece’s parliament. A few years ago, Syriza was a fringe coalition of leftists. It jumped into the political mainstream in 2012 because of populist fervor and the party’s charismatic young leader, Alexis Tsipras. But a muddy economic message left Syriza in second place—and out of power.

It has honed its focus since then, and Mr. Lapavitsas describes the party’s platform as “a Keynesian program with redistribution attached, with some Marxist view of the world.” He adds: “We are not ashamed of that.” In the tradition of John Maynard Keynes, Syriza advocates public spending to reignite economic growth. Greece can afford to spend more if some of its debt is forgiven by other countries. Nikolaos Chountis, a Syriza candidate in Athens, ticks off the party’s spending priorities: food and electricity subsidies for impoverished households, a pension boost for the poorest retirees, a hike in the minimum wage and tax cuts for low earners. “The legislation is ready..” Since 2010, Greece’s economic policy has largely been dictated by the “troika” of technocrats appointed by Europe and the International Monetary Fund to supervise Greece’s €240 billion ($280 billion) bailout. The troika wields a memorandum that minutely details what Greece must do in return for the rescue. Section 5.1.2.6.ii. commits Greece to reviewing customs procedures for canned peaches and four other products.

Worth perusing.

• Economist Vatikiotis: Syriza Proposals Don’t Go Far Enough for Greece (Truthout)

Economist Leonidas Vatikiotis, previously a European Parliament candidate with Greece’s Antarsya political party, shares his take on the upcoming elections in Greece, the economic proposals put forth by main opposition party Syriza, and the need, in his view, for Greece to depart from the eurozone. Michael Nevradakis: We left off before the holidays in the midst of the election for a new president of the Hellenic Republic, and we are now in the new year and in the midst of a snap parliamentary election in Greece. There are many government politicians, pro-government analysts and Greek and international media outlets who keep talking about the irresponsible, as they characterize it, stance of the opposition in not voting in favor of the government’s candidate for the presidency of the republic and for not averting these snap elections. How do you view this issue?

Leonidas Vatikiotis: To characterize as irresponsible a position adopted by several political parties that are represented in parliament, simply because they exercised their constitutional right not to vote for the government’s candidate for the presidency, is an insult to even the most basic democratic ideals. Syriza, the Communist Party of Greece, and the Independent Greeks exercised their constitutional right, and if we want to get to the heart of the matter, what Greek society as well as the political parties in parliament learned from this is that the government did not wish to simply extend its term in office. We were told that the government wished, through the election of its candidate for the presidency of the republic, Stavros Dimas, to extend its hold on power and complete its full four-year term. However, what the government of Antonis Samaras and Evangelos Venizelos also wanted was, essentially, the acceptance by Greek society of a new, and more severe, memorandum agreement.

“The troika leaked to the press that Greece still needed to ratify over 1,000 measures which it had agreed to with the troika but which had not yet been passed legislatively through the Greek parliament.” We should note where the negotiations between the Greek government and its lenders left off, at the Eurogroup meeting on December 8. At that time, the eurozone refused to continue negotiations to complete its review of the Greek economy, pending the election of a new government in Greece. On December 8, the negotiation cycle, which began during the summer of 2014, came to a close, and this was a period during which the government and the prime minister himself, Antonis Samaras, proclaimed that Greece had emerged from the crisis, that the memorandum agreements were a thing of the past, and that better days were ahead, that troika oversight of the Greek economy, which had been in place since May of 2010, would cease.

The intentions of Greece’s lenders, however, were quite different: The troika leaked to the press that Greece still needed to ratify over 1,000 measures which it had agreed to with the troika but which had not yet been passed legislatively through the Greek parliament. This was the point where the Samaras-Venizelos government did not continue its negotiations, knowing that there was no way that it could fulfill the demands of the troika and pass these measures through parliament.

Nice detail: “..he suggested that he would negotiate with representatives of European Union institutions, rather than troika officials.”

• Tsipras Aims For Deal With Lenders By This Summer (Kathimerini)

SYRIZA leader Alexis Tsipras will aim to conclude an agreement with Greece’s international lenders by the summer if his party is able to form a government after Sunday’s elections. In a televised news conference Friday, Tsipras sketched out his plans for government and revealed that he had no specific plans for meeting German Chancellor Angela Merkel if he becomes prime minister. The SYRIZA chief suggested that his government would enter negotiations with Greece’s eurozone partners after being elected and would aim to wrap up talks on the way forward in the relationship between the two sides by July or August, when Greece has a series of debt obligations to meet.

Tsipras said that he is aiming to achieve a “sustainable, mutually acceptable solution for Greece and for Europe.” However, he suggested that he would negotiate with representatives of European Union institutions, rather than troika officials. “Austerity is not enshrined in European treaties,” said Tsipras, adding that his government would recognize Greece’s “institutional obligations” toward the EU but not the “political commitments”» made by the outgoing government. When asked where he would make his first official trip to if elected prime minister, Tsipras said it would be Cyprus. He added that he would not seek direct talks with Merkel. “I do not recognize Mrs Merkel as being any different from the other leaders,” he said. “She is one of 28 so I will not rush to meet her.”

The Greeks know what that is worth. Germany keeps saying: ‘Better do what we tell you to do’.

• German Finance Minister To Greece: We Support You (CNBC)

Germany’s finance minister Wolfgang Schaueble denied that the country has started preparations for a Greece exit from the euro zone, ahead of a key election in the turbulent Mediterranean country on Sunday. “We did whatever could be done to support Greece in difficult times, again and again,” Schaueble told a CNBC panel at the World Economic Forum in Davos, Switzerland. “We had to convince the IMF to make very extraordinary conditions so that we could support this,” he said of the frantic discussions between International Monetary fund and European Union authorities around the $147 billion bailout of Greece in 2010. “There were endless discussions.”

Now, talk among commentators and politicians in Germany suggests the government is more open to the idea of a Greek exit from the single currency region – even though Chancellor Angela Merkel and other senior politicians still want it to stay. “We don’t need any problems,” Schaueble said. “We will wait on the elections in Greece.” The possibility of a Greek exit from the euro zone, if left-wing Syriza, which campaigns on an anti-austerity platform, gains power next week, is only one of many potential political events which could cause turmoil in markets this year. “Most of the disturbing things today that can go wrong are political,” legendary investor George Soros warned in Davos.

How many Americans do you think see this Shilling’s way?

• Nothing Is Going to Save the US Housing Market (A. Gary Shilling)

U.S. housing activity remains weak despite six years of federal government aid, strong interest from overseas buyers, rock-bottom interest rates and massive purchases of mortgage bonds by the Federal Reserve. Does this mean housing may never spring back to its pre-recession levels? Many signs point to yes. Don’t blame the Chinese, who are showing an abundance of interest. Their share of foreign purchases leaped to 16% in the year ending March 2014, from 5% in 2007. They paid a median price of $523,148, higher than any other nationality and more than double the $199,575 median price of all houses sold. The value of home sales to all foreigners rose 35% last year to $92 billion, up more than 50% since 2007 and accounting for 7% of all existing home sales. Foreigners view U.S. homes as safe investments and U.S. schools as good places to teach their children English.

But such robust foreign purchases can’t overcome what ails the U.S. housing market. Activity is weak even now that banks are no longer tightening mortgage-lending standards, according to a Fed survey. Banks are searching for new lines of business since the Dodd-Frank reform law and regulations are depriving them of revenue from proprietary trading, derivative origination and investing and off-balance sheet activities. The end of the mortgage refinancing surge has added to the pressure on banks. By necessity, banks remain selective about the mortgages they’ll underwrite, having paid huge penalties for originating and selling bad mortgages pre-crisis. Banks are also being careful to avoid the high cost of mortgage defaults now that they must repurchase loans with underwriting defects. The result can be seen in foreclosure data: In the third quarter, banks began foreclosure proceedings on only 0.4% of mortgages, far below the 1.4% level in the peak of the financial crisis.

Fed Chair Janet Yellen worries about the negative effects of tight credit standards on housing. While she admits that lenders should have raised their standards earlier, “any borrower without a pretty positive credit rating finds it awfully hard to get a mortgage,” she said in July. Even Ben Bernanke, her predecessor, was turned down when he tried to refinance his mortgage. With the federal funds rate at essentially zero and the Fed having ended its purchases of mortgage securities, the central bank can’t do much to help housing now. The Barack Obama Administration, however, is reversing some of the government post-crisis tightening of lending standards. Fannie Mae and Freddie Mac, which remain under government control and now guarantee about 90% of all new mortgages, have reduced the underwriting standards on packages of mortgages they guarantee, including allowing loans with as little as 3% down payments.

“..central bankers cannot fix very much..”

• Central Banks Powerless To Prevent Steep Rise In Real Rates (Russell Napier)

The Swiss National Bank (SNB) failed to ‘fix’ the exchange rate between the Swiss Franc and the Euro. The simple lesson which investors must learn from this is – central bankers cannot fix very much. The inability of the Swiss National Bank to ‘fix’ the exchange rate will come to be seen as the end of the bull market in the omnipotence of central bankers. Think for just a moment of all the key variables which you believe are ‘fixed’ (made firm), fixed (repaired) , fixed (circumvention of the laws of supply and demand) or fixed (dosed with monetary narcotics) by central bankers. These various fixes by central bankers across the world can also fail. That process of failure began in Bern and Zurich early one morning on January 15th 2015.

As the OED entries for the word ‘fix’ make clear, the failure of the SNB to fix the exchange rate was on many levels. It failed to ‘ fix’ the exchange rate in terms of making the Swiss Franc ‘firm’ to the Euro and hence ‘deprive it of volatility or fluidity’. It failed to ‘fix’ the exchange rate as the ‘laws‘ of supply and demand were ultimately not circumvented. For many, particularly Swiss exporters, the material appreciation of the Swiss Franc on the international exchanges will not ‘fix’ the currency in terms of making it ‘ready for use’. Finally, the adjustment in the exchange rate removes, rather than administers, the dose of monetary ‘narcotic’ in the form of excess growth in Swiss Franc liquidity and cheap funding for speculators in Euro. The monetary ‘fix’, which was the by-product of fixing the exchange rate, has ceased to be and the price of equities has collapsed.

“..the weaker euro reduces the purchasing power of the Europeans and therefore their ability to import from Asia..”

• Will ECB’s Bazooka Be A Game Changer For Emerging Markets? (CNBC)

The ECB bold bond-buying scheme is set to provide a temporary boost to Asian equities but is no game changer for the region’s markets, say analysts. After months of speculation, the ECB on Thursday pledged to buy €60 billion ($70 billion) worth of private and public bonds each month until September 2016 in a program that could amount to €1.1 trillion. This was more aggressive than the €50 billion in monthly asset purchases analysts expected. Investors applauded the move, sending European and U.S. equities higher overnight.The positive sentiment carried over into the Asian trading session on Wednesday, with South Korea’s KOSPI rising 0.8% and Indonesia’s Jakarta Composite up 1%. But, analysts expect the lift will be short-lived.”I doubt the increased liquidity will be driving a lot of fund inflows into Asia [over the medium-term],” Stephen Sheung at SHK Private told CNBC.

“A lot of that amount of money will likely be stuck in European banking system rather than flowing out,” he said.Funds that do flow out are likely to go into the U.S. or U.S. dollar assets instead of Asian stocks, Sheung said, citing deteriorating growth in the region.”We have growth problems here in Asia, U.S. economic conditions are on a much more stable footing, and there are prospects for further U.S. dollar appreciation,” he said. Nicholas Ferres, investment director at Eastspring Investments points out that the ECB’s action may have negative implications for European demand for Asian goods, due to the weakening euro. This does not bode well for Asian exporters. “[On the negative side], the weaker euro reduces the purchasing power of the Europeans and therefore their ability to import from Asia,” Ferres said.

The euro sank to a more than 11-year low against the dollar and a three-month low against the yen on Thursday following the ECB’s announcement.”On the positive side, it will likely improve risk perceptions and risk appetite and that might help cheap cyclical stocks rally,” he said.More than liquidity finding its way into Asia markets, Sheung says the ECB action is likely to drive Asian intuitional investors and large corporations to make investments in Europe.”With liquidly abundant and the euro cheaper, it makes investments more attractive,” he said.”Asian investors won’t necessarily look at equities or debt but more at direct investments in projects or infrastructure. This has been a hot topic for the past two to three quarters.”

“Within the past four weeks, drillers idled half of their rigs in the state..”

• Head West for Best Look at U.S. Oil Drillers’ Pain (Bloomberg)

Little is going right for California’s oil industry. Turns out the state’s shale formation holds less promise than producers expected. Aging conventional wells are drying up. And a rebound in output that cost drillers as much as $3 billion annually to create has been overshadowed by shale oil gushing from wells in North Dakota and Texas. Then, of course, came the collapse in oil prices – a seven-month, 57% drop that was exacerbated by OPEC’s refusal to cut output in order to squeeze the U.S. shale drillers. No state is feeling that pressure more than California. Drillers there have idled more rigs – on a proportional basis – than those in any other part of the country.

“We spent a lot of money to go out and drill and use new technologies just to stop production from depleting in our mature fields,” Rock Zierman, chief executive officer of trade group California Independent Petroleum Association, said by phone. “It took us a lot of capital to basically run in place and now we’re looking at crude prices under $40 a barrel.” While U.S. benchmark West Texas Intermediate oil has fallen by more than half since June, California’s heavy Kern River crude has lost 65% of its value. The spot price of that oil slid to $34.87 a barrel on Jan. 22, below Gulf Coast crudes, below Bakken in North Dakota and under Alaska North Slope oil.

Falling prices haven’t been all bad for California. Governor Jerry Brown said in an interview with Bloomberg News Jan. 15 that while the decline in California’s oil drilling is “of concern,” drivers are benefiting. Gasoline is under $2.50 a gallon for the first time since 2009 in a state that’s usually home to some of the most expensive fuel in the country. Relief at the pump will save the average California household $675 this year, said Patrick DeHaan, a Chicago-based senior petroleum analyst at GasBuddy Organization Inc. “The oil price decline goes right into consumer spending,” Brown said at his Oakland office. “So there will be trade-offs.” Within the past four weeks, drillers idled half of their rigs in the state, dragging the total down to the lowest since 2009. Oil output, which had been creeping up since 2011, is now little changed and a slide will probably follow.

Messy.

• Ruble Colluding With Oil Brews Russian Toxic Loan Morass (Bloomberg)

An increasingly toxic mixture of high interest rates, spiraling inflation and plunging oil means Russian banks will probably need a lot more than the $18 billion set aside last year to protect against bad loans. Russia is facing an “extremely widespread” banking crisis in 2015, and lenders may need to boost provisions for souring debts to $50 billion should oil stay in the mid-$40s, according to Herman Gref, the head of the nation’s biggest lender, Sberbank. That’s after banks increased reserves by 42% last year, compared with 27% in Turkey and 7.5% in Poland in the first 11 months, official figures show. Seven of Russia’s 10 worst-performing bonds this year are from banks as policy makers raised rates by the most since 1998 to shore up the ruble, whose 47% slide over the past 12 months deepened the burden of loan payments for consumers and businesses.

With the economy foundering after crude’s decline and sanctions over Ukraine, the ratio of bad debt will double from the third quarter of 2014 to as much as 13% by year-end, according to Liza Ermolenko at Capital Economics in London. “Bad loans will continue to pile up,” Yulia Safarbakova, an analyst at BCS Financial Group, said by phone. “Companies can’t refinance because of the rate increase and the ruble devaluation has hit them hard.” Lenders are on the front line of Russia’s economic crisis, bearing the brunt of oil’s slump and sanctions over President Vladimir Putin’s annexation of Crimea from Ukraine in March. The turmoil that followed forced the central bank to raise interest rates six times to shore up the ruble, choking loan growth to an almost four-year low, while retail deposits declined and bank profits tumbled 41%. The currency’s slide helped drive inflation to a five-year high of 11.4% in December, curtailing the central bank’s ability to reduce borrowing costs even as executives of the biggest Russian banks warn of the strain they are under.

Certified idiot.

• Spain Finance Minister: We Have The ‘Good Kind’ Of Deflation (CNBC)

The specter of growth-sapping deflation may have finally arrived in the euro zone but you won’t find policymakers in Spain panicking anytime soon. The country has made some “bold reforms” in the last three years, Luis de Guindos, the country’s finance minister told CNBC on Friday, shrugging off the weak consumer price data and blaming it on the dramatic fall in the price of oil. “This is positive, this is a positive sign. In Spain, oil prices are reducing the inflation rate. And it’s not because we have deflation. It’s totally different, inflation is like cholesterol. There are two kinds of deflation. The bad one and the good one. In Spain, you know, we have the good kind,” Luis de Guindos, told CNBC at the World Economic Forum in Davos.

This is the deflation that is filling the pockets of the households, he added, and has been fueled by the reforms Spain has taken in the energy markets and the cheaper price of oil at the pump, he said. Prices in the euro zone fell 0.2% year-on-year in December, marking the first time since 2009 that prices have dipped into negative territory. But the statistics for Europe showed that energy was indeed weighing massively on prices with an annual fall of 6.3%. In Spain, annual consumer prices fell around 1% in December. As well as energy reforms, de Guindos boasted that Spain’s new policies were the perfect example of the reforms that the euro zone is looking for.. “We were on the brink three years ago…we have started to reap the rewards of those policies,” he said.

Couldn’t possibly be even partly his fault, could it?

• Italy Central Bank: We Are Lagging Behind The World (CNBC)

The governor of the central bank of Italy has said slowness to reform and political uncertainty in Italy has left it “lagging behind” other nations, partly due to the political instability the country has faced in recent years. Speaking from the World Economic Forum in Davos, Switzerland, Bank of Italy Governor Ignazio Visco said during his time in office at the central bank, he has seen five separate finance ministers come and go, which has dented foreign investment in the country. “While (German finance minister) Mr. Schauble has been in office (in Germany) for the three years I have been governor of the Bank of Italy, I have had 5 finance ministers. This is a major problem – we need certainty for investment,” he told CNBC. “We are lagging behind a number of sectors, areas in innovation and technological change. We have had enormous change at the global levels in the last 20 years and we should really cut the distance.

This is why you need stability in a number of areas, among them price stability and this is what we are trying to deliver,” he said. Visco also dismissed concerns that the euro could slide below the U.S. dollar, adding that euro dollar exchange rate, which has seen the euro fall to 11-year lows against the greenback after European Central Bank President Mario Draghi unveiled a new stimulus package on Thursday, was not a level central bankers monitored.. “Parity is a figure of imagination really. I have been the chief economist at the OECD when the euro was introduced, we were foreseeing that from $1.19 it should go to £1.30, it went to $0.80, so it’s better not to talk about what is the target,” he said. “We do not target the euro, there is no question. This is a channel of transmission of monetary policy, we are doing monetary policy the old fashioned way, we are simply supplying money to the economy,” Visco added.

“..a decoupling of productivity and wages..”

• States Where the Middle Class Is Dying (24/7 Wall St)

The American economy is by many measures well on the road to full recovery. The national unemployment rate was 6.2% in 2013, down from 9.3% in 2009; U.S. gross domestic product grew 5% in the third quarter of 2014; and the S&P 500 recently reached its all time high. And yet the middle class, which historically was the driver of economic growth, is falling behind. The average income among middle class families shrank by 4.3% between 2009 and 2013, while incomes among the wealthiest 20% of American households grew by 0.4%. Based on average pre-tax income earned by the third quintile, or the middle 20% of earners in each state, middle class incomes in California declined the most in the country. Incomes among middle class Californian households fell by nearly 7% between 2009 and 2013, while income among the state’s fifth quintile, or the top 20% of state earners, grew by 1.3%. [..]

According to Joe Valenti, director of asset building at the Center for American Progress, the American middle class is essential for economic growth because middle income families are spending relatively large shares of their incomes on goods and services. “An additional dollar in the hands of a middle income earner is going to drive a lot more spending than an additional dollar in the hands of someone in that top quintile,” Valenti said. While households in the top quintile are able to spend enormous sums of money, “at some point there’s only so much that an individual can spend, even on all different kinds of luxury goods.” While the middle class is the most important cohort in terms of spending and has in the past been essential for economic growth, middle income families have been the victims of wage stagnation. Valenti argued that as early as the 1970s, American companies started becoming much more productive.

However, because of “a decoupling of productivity and wages,” wages among many workers have remained stagnant, and many in the middle class “have not been able to reap the benefits of higher productivity,” Valenti explained. Instead, returns from higher productivity have gone to owners and investors and not to the workers, he said. Many of the beneficiaries of these returns are likely part of the wealthiest 20% of households, whose incomes have grown in recent years. Much of the income growth among the highest earning households is likely due to stock market gains. As Thomas Piketty argues in “Capital in the 21st Century,” income inequality results from a higher return on capital — money used to make more money in the stock market or other revenue-generating assets — than wage and GDP growth. With the rich holding a disproportionate share of money in the stock market, their incomes have recovered much faster than those of middle class workers.

Not very strong, Barry.

• Labor-Force Participation May Hold Key To Fed Moves (MarketWatch)

Economic historian Barry Eichengreen has spent a lifetime looking at mistakes that economic policymakers have made, especially in his best known work about the Great Depression. In an interview with MarketWatch, Eichengreen, an economics professor at the University of California, Berkeley, discussed some of the challenges facing the Fed, and a recent example of a policy mistake by the Swiss National Bank. He also warns that Washington’s tepid response to the financial crisis makes another, even bigger crisis, a possibility.

MarketWatch: Do you think the Fed will be able to lift interest rates this year?

Eichengreen: I have been skeptical for a while about the market consensus that the Fed is likely to move in June. I’ve been wondering whether the labor force participation rate may begin to rise again, in which case inflationary pressures will remain subdued and the unemployment rate will not continue to fall. And that rise in the labor force participation rate could indeed happen, we simply don’t know. I think the Fed will wait and see before it moves. Now we have in addition a strong dollar that may grow even stronger. That’s going to create headwinds for economic growth in the U.S. and I think it is quite conceivable that it could lead the Fed to wait longer. Finally there is volatility. There is the Swiss National Bank, kind of reminding us that volatility happens. It’s important to recall that the SNB is a small central bank of a small country in the grand scheme of things. If [the SNB] making a surprise move can wrong foot the market so dramatically, imagine what could happen if a big central bank pulled a surprise. So it’s quite possible, in my view, there is more volatility coming, and the Fed will have to deal with that too.

MarketWatch: What are the lessons for the Fed from the Swiss National Bank decision? The Fed has to be cautious and certain before it moves?

Eichengreen: I think the silver lining here is that at the cost of a recession in Switzerland and deflation in Switzerland, the SNB having made a serious mistake, it has reminded us that financial markets are not as liquid as they have been in the past, and there can be very big market moves as a result of a central bank surprise. So people will be looking more closely at the shadow banking system then they have been in the last relatively complacent year. We can thank the SNB for that if nothing else. And secondly, I think central banks have had a reminder about the importance of good communications policy, which we did not have coming out of Switzerland last week. The Yellen Fed has been very focused on the importance of communications and they will be even more focused as a result of last week, which can only be a good thing.

“The current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year.”

• Billions in Lost 401(k) Savings, Abusive Brokers Under Scrutiny (Bloomberg)

One of President Barack Obama’s top economic advisers said abusive trading practices are costing workers billions of dollars in retirement savings each year and called for stricter rules on Wall Street brokers. Jason Furman, chairman of Obama’s Council of Economic Advisers, drafted a Jan. 13 memo citing research that says some broker practices, such as boosting commissions with excessive trading, cost investors $8 billion to $17 billion a year. The document was circulated to senior aides and indicates the White House may support tighter oversight of brokers who handle retirement accounts. The memo, obtained by Bloomberg News, makes the case for a Labor Department regulation that would impose a fiduciary duty on brokers handling retirement accounts, requiring them to act in their clients’ best interest.

Under current rules, brokers are held to a ‘suitability’ standard, meaning they must reasonably believe their recommendation is right for a customer. “Consumer protections for investment advice in the retail and small-plan markets are inadequate,” Furman wrote in the memo, also signed by Betsey Stevenson, another member of the economic council. “The current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year.” Wall Street has spent more than four years lobbying against the Labor rule. Led by firms like Morgan Stanley and Bank of America, the industry has argued that costlier regulations would take away options for smaller investors, who would lose access to advice as well as investment choices.

A White House official said the document, titled “Draft Conflict of Interest Rule For Retirement Savings,” shouldn’t be seen as a new turn in the Labor Department’s rulemaking. That process, the official said, would include a comment period if the administration moves forward. The Labor Department last year indicated that its proposal could come as soon as this month. A fiduciary duty on brokers would provide “meaningful protections” to investors, according to the memo.

Anything goes in America these days.

• RT Equated To ISIS For ‘Daring To Advocate A Point Of View’ (RT)

Following comments from the US overseas broadcasting chief listing RT as a challenge alongside the Islamic State and Boko Haram, critics said the outlet was singled out for “daring to advocate a point of view,” as well as for “competing for viewership.” On Wednesday, the new chief of the US Broadcasting Board of Governors (BBG), Andrew Lack, told the New York Times that RT posed a significant challenge – putting the broadcaster in a list alongside the Islamic State and Boko Haram terror groups. The comments have since been denounced on social networks and across the media spectrum. Speaking to RT, legal analyst and media commentator Lionel said the channel was being outrageously singled out and equated to the Islamic State for “daring to advocate a point of view.” “In the history of incoherent statements, this might be the granddaddy of them all.

In reading this, he alleges that Russia Today pushes… ‘a point of view,’” he told RT’s Ameera David. Georgetown University journalism professor Chris Chambers added that Lack’s words were “supremely silly and careless,” especially considering his media background. Lack previously worked for NBC, Bloomberg, and Sony Music. “This is a guy who has some media savvy, supposedly, even though he’s moved around a lot – maybe this is one reason he’s moved around,” Chambers told RT. “But this was a very careless and silly thing to say considering the prevalence of corporate media here in the United States, and the purpose of BBG’s constitutes like Voice of America, who are supposed to put out all kinds of views.” While Lack’s comments were roundly criticized, Steven Ellis of the International Press Institute said he was right in one way. “Mr. Lack could have phrased his comments more carefully: RT does indeed pose a challenge to US international broadcasting in terms of competing for viewership,” he said.

“Brazil is supposed to be in the middle of its rainy season but there has been scant rainfall in the south-east and the drought shows no sign of abating.”

• Brazil’s Most Populous Region Faces Worst Drought In 80 Years (BBC)

Brazil’s Environment Minister Izabella Teixeira has said the country’s three most populous states are experiencing their worst drought since 1930. The states of Sao Paulo, Rio de Janeiro and Minas Gerais must save water, she said after an emergency meeting in the capital, Brasilia. Ms Teixeira described the water crisis as “delicate” and “worrying”. Industry and agriculture are expected to be affected, further damaging Brazil’s troubled economy. The drought is also having an impact on energy supplies, with reduced generation from hydroelectric dams. The BBC’s Julia Carneiro in Rio de Janeiro says Brazil is supposed to be in the middle of its rainy season but there has been scant rainfall in the south-east and the drought shows no sign of abating. The crisis comes at a time of high demand for energy, with soaring temperatures in the summer months.

“Since records for Brazil’s south-eastern region began 84 years ago we have never seen such a delicate and worrying situation,” said Ms Teixeira. Her comments came at the end of a meeting with five other ministers at the presidential palace in Brasilia to discuss the drought. The crisis began in Sao Paulo, where hundreds of thousands of residents have been affected by frequent cuts in water supplies, our correspondent says. Sao Paulo state suffered similar serious drought problems last year. Governor Geraldo Alckmin has taken several measures, such as raising charges for high consumption levels, offering discounts to those who reduce use, and limiting the amounts captured by industries and agriculture from rivers. But critics blame poor planning and politics for the worsening situation. The opposition says the state authorities failed to respond quickly enough to the crisis because Mr Alckmin did not want to alarm people as he was seeking re-election in October 2014, allegations he disputes.

Should be fun.

• Pope Francis’s US Tour Will Set Off Economic Fireworks (Paul B. Farrell)

Pope Francis headlines are hard-hitting, targeted, staccato twitters, you get the whole truth in a series of blastings. First, starting with: “Pope Francis Has Declared War on Climate Deniers,” New Republic. Then, at the Week we read: “Republican Party’s war with Pope Francis has finally started,” Yes, 2015 is now a war zone: GOP conservatives at war with the Vatican. Then the Federalist, a conservative website, waves a red flag warning: “Don’t Pick Political Fights With Pope Francis.” Why? “Conservatives have everything to lose and nothing to gain from getting mad at Pope Francis for his public comments on homosexuality, global warming, free speech, and more.” Yes, conservatives warning Republicans: Don’t go to war with Pope Francis, you will lose.

He’s got an army of 1.2 billion faithful worldwide including 78 million American Catholics. Francis will win. A huge army. More important, Francis has a direct link to a heavenly power source. As the 266th descendent of the first leader of Christians, St. Peter, the pontiff will be touring America this fall. First stop, Philadelphia. Ring the Liberty Bell. Yes, Francis is actually on a campaign tour, selling his new economic mandate. And watch out. Behind that sweet smile and happy demeanor, this former boxer is attacking everything conservatives, capitalists, Big Oil, energy billionaires and Republicans love, cherish and believe as gospel. And they can’t defend their agenda nor counterpunch him directly.

From Philly, the pontiff’s campaign march heads for New York City where he’ll address the United Nations General Assembly, pushing his anticapitalist, anti-inequality, anti-the-superrich, anti-global warming, pro-climate-change, pro-the poor, pro-do-the-right-thing moral agenda. Then Francis will jet to Washington and our nation’s capitol, where a grumbling John Boehner and stoic Mitch McConnell have no choice but to invite Pope Francis to address a joint session of Congress. They may wish Pope Francis would quietly disappear. But that just isn’t going to happen, not after six million just attended his mass in the Philippines. He’s a seasoned campaigner, selling a powerful new economic agenda.

Debt Rattle November 25 2014

Nov 252014

November 25, 2014 Posted by Raúl Ilargi Meijer at 10:47 am Finance Tagged with: BoJ, dismal, ECB, failure, Fed, GMO, hedge funds, middle class, oil, traumatized 3 Responses »

Taylor Deluxe Kauneel auto trailer, Bay City, Michigan May 1936

• “We Are Starting To Break Down”: Why So Many Americans Feel Traumatized (Salon)

• Buy the All Time High (James Howard Kunstler)

• The Dismal Economy: 148 Million Government Beneficiaries (Lance Roberts)

• The Mystery Of America’s “Schrodinger” Middle Class (Zero Hedge)

• Overvalued, Overbought, Overbullish, Extremely Vulnerable Markets (Hussman)

• Canada Moving Toward American-Style Inequality (CTV)

• Oil Seen Dropping Another $30 by ICAP on Commodity, Dollar Cycle (Bloomberg)

• Market Manipulation Of Oil Prices Backfires On Those That Start It: Putin (RT)

• Global Growth To Get $200 Billion Kick From Oil Price Crash (Telegraph)

• How The Fed Has Boxed US Into An Easy-Money Corner (Satyajit Das)

• The Week That Shook the Fed (Gretchen Morgenson)

• Eurozone Yields Hit Record Lows: Is ECB Trumping Reality? (CNBC)

• Bundesbank’s Weidmann Warns Of ‘Legal Limits’ On Further Moves By ECB (Reuters)

• German Bond Yields To Trump Japan As ECB Battles Deflation (AEP)

• Greece Bailout Talks Resume Amid Concerns Over Exit (Reuters)

• Britain’s EU Retreat Means German Hegemony Warns Prodi (AEP)

• BOJ Minutes Show Bazooka Is All About The Message (CNBC)

• Kuroda Tells Japan Inc. to Stop Hoarding Cash as Costs to Rise (Bloomberg)

• Hedge Funds Lose Money for Everyone, Not Just the Rich (Bloomberg)

• Dudley Defense Leaves Senators Unimpressed as Fed Scrutiny Rises (Bloomberg)

• Even Brazil’s President Is Involved In The Petrobras Scandal (CNBC)

• Summit of Failure: How the EU Lost Russia over Ukraine (Spiegel)

• In Wake Of China Rejections, GMO Seed Makers Limit US Launches (Reuters)

An absolute must read by Lynn Stuart Parramore.

• “We Are Starting To Break Down”: Why So Many Americans Feel Traumatized (Salon)

Recently Don Hazen, the executive editor of AlterNet, asked me to think about trauma in the context of America’s political system. As I sifted through my thoughts on this topic, I began to sense an enormous weight in my body and a paralysis in my brain. What could I say? What could I possibly offer to my fellow citizens? Or to myself? After six years writing about the financial crisis and its gruesome aftermath, I feel weariness and fear. When I close my eyes, I see a great ogre with gold coins spilling from his pockets and pollution spewing from his maw lurching toward me with increasing speed. I don’t know how to stop him. Do you feel this way, too?

All along the watchtower, America’s alarms are sounding loudly. Voter turnout this last go-round was the worst in 72 years, as if we needed another sign that faith in democracy is waning. Is it really any wonder? When your choices range from the corrupt to the demented, how can you not feel that citizenship is a sham? Research by Martin Gilens and Benjamin I. Page clearly shows that our lawmakers create policy based on the desires of monied elites while “mass-based interest groups and average citizens have little or no independent influence.” Our voices are not heard.

When our government does pay attention to us, the focus seems to be more on intimidation and control than addressing our needs. We are surveilled through our phones and laptops. As the New York Times recently reported, a surge in undercover operations from a bewildering array of agencies has unleashed an army of unsupervised rogues poised to spy upon and victimize ordinary people rather than challenge the real predators who pillage at will. Aggressive and militarized police seem more likely to harm us than to protect us, even to mow us down if necessary. Our policies amplify the harm. The mentally ill are locked away in solitary confinement, and even left there to die. Pregnant women in need of medical treatment are arrested and criminalized. Young people simply trying to get an education are crippled with debt. The elderly are left to wander the country in RVs in search of temporary jobs. If you’ve seen yourself as part of the middle class, you may have noticed cries of agony ripping through your ranks in ways that once seemed to belong to worlds far away.

[..] A 2012 study of hospital patients in Atlanta’s inner-city communities showed that rates of post-traumatic stress are now on par with those of veterans returning from war zones. At least 1 out of 3 surveyed said they had experienced stress responses like flashbacks, persistent fear, a sense of alienation, and aggressive behavior. All across the country, in Detroit, New Orleans, and in what historian Louis Ferleger describes as economic “dead zones” — places where people have simply given up and sunk into “involuntary idleness” — the pain is written on slumped bodies and faces that have become masks of despair. We are starting to break down.

Brilliant piece by buddy Jim: “All of these evil systems have to go and must be replaced by more straightforward and honest endeavors aimed at growing food, doing trade, healing people, traveling, building places worth living in, and learning useful things.”

• Buy the All Time High (James Howard Kunstler)

Wall Street is only one of several financial roach motels in what has become a giant slum of a global economy. Notional “money” scuttles in for safety and nourishment, but may never get out alive. Tom Friedman of The New York Times really put one over on the soft-headed American public when he declared in a string of books that the global economy was a permanent installation in the human condition. What we’re seeing “out there” these days is the basic operating system of that economy trying to shake itself to pieces. The reason it has to try so hard is that the various players in the global economy game have constructed an armature of falsehood to hold it in place — for instance the pipeline of central bank “liquidity” creation that pretends to be capital propping up markets.

It would be most accurate to call it fake wealth. It is not liquid at all but rather gaseous, and that is why it tends to blow “bubbles” in the places to which it flows. When the bubbles pop, the gas will tend to escape quickly and dramatically, and the ground will be littered with the pathetic broken balloons of so many hopes and dreams. All of this mighty, tragic effort to prop up a matrix of lies might have gone into a set of activities aimed at preserving the project of remaining civilized. But that would have required the dismantling of rackets such as agri-business, big-box commerce, the medical-hostage game, the Happy Motoring channel-stuffing scam, the suburban sprawl “industry,” and the higher ed loan swindle.

All of these evil systems have to go and must be replaced by more straightforward and honest endeavors aimed at growing food, doing trade, healing people, traveling, building places worth living in, and learning useful things. All of those endeavors have to become smaller, less complex, more local, and reality-based — rather than based, as now, on overgrown and sinister intermediaries creaming off layers of value, leaving nothing behind but a thin entropic gruel of waste. All of this inescapable reform is being held up by the intransigence of a banking system that can’t admit that it has entered the stage of criticality. It sustains itself on its sheer faith in perpetual levitation. It is reasonable to believe that upsetting that faith might lead to war.

The numbers are getting insane.

• The Dismal Economy: 148 Million Government Beneficiaries (Lance Roberts)

.. the Federal Reserve has stopped their latest rounds of bond buying and are now starting to discuss the immediacy of increasing interest rates. This, of course, is based on the “hopes” that the economy has started to grow organically as headline unemployment rates have fallen to just 5.9%. If such activity were real then both inflation and wage pressures should be rising – they are not. According to the Congressional Budget Office study that was just released, approximately 60% of all U.S. households get more in transfer payments from the government than they pay in taxes.

Roughly 70% of all government spending now goes toward dependence-creating programs. From 2009 through 2013, the U.S. government spent an astounding 3.7 trillion dollars on welfare programs. In fact, today, the percentage of the U.S. population that gets money from the federal government grew by an astounding 62% between 1988 and 2011. Recent analysis of U.S. government numbers conducted by Terrence P. Jeffrey, shows that there are 86 million full-time private sector workers in the United States paying taxes to support the government, and nearly 148 million Americans that are receiving benefits from the government each month.

Yet Janet Yellen, and most other mainstream economists suggests that employment is booming in the U.S. Okay, if we assume that this is indeed the case then why, according to the Survey of Income and Program Participation conducted by the U.S. Census, are well over 100 million Americans are enrolled in at least one welfare program run by the federal government. Importantly, that figure does not even include Social Security or Medicare. (Here are the numbers for Social Security, Medicaid and Medicare: More than 64 million are receiving Social Security benefits, more than 54 million Americans are enrolled in Medicare and more than 70 million Americans are enrolled in Medicaid.) Furthermore, how do you explain the chart below? With roughly 45% of the working age population sitting outside the labor force, it should not be surprising that the ratio of social welfare as a percentage of real, inflation-adjusted, disposable personal income is at the highest level EVER on record.

This is how you can pretend to have a recovery.

• The Mystery Of America’s “Schrodinger” Middle Class (Zero Hedge)

On one hand, the US middle class has rarely if ever had it worse. At least, if one actually dares to venture into this thing called the real world, and/or believes the NYT’s report: “Falling Wages at Factories Squeeze the Middle Class.” Some excerpts:

For nearly 20 years, Darrell Eberhardt worked in an Ohio factory putting together wheelchairs, earning $18.50 an hour, enough to gain a toehold in the middle class and feel respected at work. He is still working with his hands, assembling seats for Chevrolet Cruze cars at the Camaco auto parts factory in Lorain, Ohio, but now he makes $10.50 an hour and is barely hanging on. “I’d like to earn more,” said Mr. Eberhardt, who is 49 and went back to school a few years ago to earn an associate’s degree. “But the chances of finding something like I used to have are slim to none.” Even as the White House and leaders on Capitol Hill and in Fortune 500 boardrooms all agree that expanding the country’s manufacturing base is a key to prosperity, evidence is growing that the pay of many blue-collar jobs is shrinking to the point where they can no longer support a middle-class life.

In short: America’s manufacturing sector is being obliterated: “A new study by the National Employment Law Project, to be released on Friday, reveals that many factory jobs nowadays pay far less than what workers in almost identical positions earned in the past.

Perhaps even more significant, while the typical production job in the manufacturing sector paid more than the private sector average in the 1980s, 1990s and early 2000s, that relationship flipped in 2007, and line work in factories now pays less than the typical private sector job. That gap has been widening — in 2013, production jobs paid an average of $19.29 an hour, compared with $20.13 for all private sector positions. Pressured by temporary hiring practices and a sharp decrease in salaries in the auto parts sector, real wages for manufacturing workers fell by 4.4% from 2003 to 2013, NELP researchers found, nearly three times the decline for workers as a whole.

How is this possible: aren’t post-bankruptcy GM, and Ford, now widely touted as a symbol of the New Normal American manufacturing renaissance? Well yes. But there is a problem: recall what we wrote in December 2010: ‘Charting America’s Transformation To A Part-Time Worker Society:”

.. one of the most important reasons for lower pay is the increased use of temporary workers. Some manufacturers have turned to staffing agencies for hiring rather than employing workers directly on their own payroll. For the first half of 2014, these agencies supplied one out of seven workers employed by auto parts manufacturers. The increased use of these lower-paid workers, particularly on the assembly line, not only eats into the number of industry jobs available, but also has a ripple effect on full-time, regular workers. Even veteran full-time auto parts workers who have managed to work their way up the assembly-line chain of command have eked out only modest gains.

“QE only misallocates capital toward more speculation and low-quality debt .. ”

• Overvalued, Overbought, Overbullish, Extremely Vulnerable Markets (Hussman)

.. iwhen concerns about default are rising, default-free, low-interest rate money is not considered to be an inferior asset, and as a result, its increased availability does not provoke risk-seeking behavior. If we observe narrowing credit spreads and stronger uniformity in market internals, we will be able to infer a shift toward risk-seeking (and in turn, a greater likelihood that monetary easing will provoke further speculation). That won’t make stocks any cheaper, and downside risk will still need to be managed, but our immediate concerns would be less dire. At present, current market conditions and the lessons of history encourage us to be aware that very untidy market outcomes could unfold in very short order. [..] QE only misallocates capital toward more speculation and low-quality debt (primarily junk and leveraged loan issuance), without much impact on real growth. [..]

The upshot is this. Quantitative easing only “works” to the extent that default-free, low interest liquidity is viewed as an inferior holding. When investor psychology shifts toward increasing risk aversion – which we can reasonably measure through the uniformity or dispersion of market internals, the variation of credit spreads between risky and safe debt, and investor sponsorship as reflected in price-volume behavior – default-free, low-interest liquidity is no longer considered inferior. It’s actually desirable, so creating more of the stuff is not supportive to stock prices. We observed exactly that during the 2000-2002 and 2007-2009 plunges, which took the S&P 500 down by half in each episode, even as the Fed was easing persistently and aggressively. A shift toward increasing internal dispersion and widening credit spreads leaves risky, overvalued, overbought, overbullish markets extremely vulnerable to air-pockets, free-falls, and crashes.

It hurts to see Canada become so much like the US in so many ways.

• Canada Moving Toward American-Style Inequality (CTV)

A prominent U.S. political economist says Canada is moving toward American-style inequality, and believes austerity economics and tax cuts for corporations are making the problem worse. Robert Reich, the secretary of labor during Bill Clinton’s presidency, now writes extensively on income equality and was in Canada this week speaking at an event for the Broadbent Institute. “The United States economy and the Canadian economy are going on parallel courses,” Reich said in an interview on CTV Question Period. With Japan moving into an official recession and much of Europe still mired in a slowdown, there’s still an idea that countries need to cut government spending during the recovery.

That kind of thinking, Reich says, has the effect of worsening the ratio of debt to the total economy. “Austerity economics does not work,” Reich said. “If you slow down the economy because government is cutting down so much that there’s not enough demand to keep the economy going, then you end up with a worse ratio of debt to GDP.” The U.S. and Canadian economies are growing too slowly, he says. And many wealthy people or corporations, he said, are putting their money in places where they can get the highest return – but that kind of investment isn’t what creates jobs. “Without customers, businesses are not going to create jobs,” he said.

“The long-term cycle points to the dollar moving higher and the euro declining into 2016, while commodities move lower through 2016 and 2017.”

• Oil Seen Dropping Another $30 by ICAP on Commodity, Dollar Cycle (Bloomberg)

New York-traded crude oil will probably drop another $30 in the next two years as long-term cycles in commodities and currencies converge, no matter what happens at this week’s OPEC meeting and Iran nuclear talks, according to brokerage United-ICAP. West Texas Intermediate crude, the U.S. benchmark, has collapsed five times since the contract’s introduction in 1983, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey. The plunges in 1986, 1991, 1998, 2001 and 2008 coincided with an OPEC price war, recessions and financial crises, and were also tied to cycles in commodities or the dollar, said Zimmerman, who was calling for a drop in oil prices as early as April. “This time we have both.”

“Crude is heading lower, with the high $40s or low $50s being touched by 2017,” Zimmerman said. The long-term cycle points to the dollar moving higher and the euro declining into 2016, while commodities move lower through 2016 and 2017, he said. The average drop during the previous five major declines was about 62%, according to Zimmerman. Oil prices have dropped 32% from the year’s high in June amid slower economic growth and surging production in the U.S. and OPEC members. The Bloomberg dollar index is up 10% since the low in May and the euro is down 12%. The Bloomberg Commodity Index dropped 17% to a five-year low this month.

“What is the profitability of this production like? It’s from $65 to $83 per barrel. Now when the price of a barrel of oil has fallen below $80, shale gas production becomes unprofitable.” said Putin.”

• Market Manipulation Of Oil Prices Backfires On Those That Start It: Putin (RT)

The modern world is interdependent and there is no guarantee that sanctions, a sharp fall in oil prices, or the depreciation of the ruble won’t backfire on those who provoked them, says Russian President Vladimir Putin. “If undercharging for energy products occurs deliberately, it also hits those who introduce these limitations. Problems arise, they will continue to grow, worsening the situation, and not only for Russia but also for our partners, including oil and gas producing countries,” said Putin in an interview to TASS. The Russian leader suggested that the fall in oil prices is due to the sharp increase in the production of shale oil and gas by the United States, but questioned its commercial viability. “What is the profitability of this production like? It’s from $65 to $83 per barrel. Now when the price of a barrel of oil has fallen below $80, shale gas production becomes unprofitable.” said Putin.

The President said he sees objective reasons for the decline in oil prices. “The supply has increased from Libya, surprising as it may seem it produces more, Iraq as well, despite all the problems … ISIS sell oil illegally at $30 per barrel on the black market, Saudi Arabia increased its production and consumption decreased due to a period of stagnation or, say, a decrease compared with the forecasts of global economic growth,” he said. Talking about the Russian economy and the weakening ruble, Putin said the situation with oil prices doesn’t hit the budget as hard as expected. “…we are confident in solving social issues. Including the ones of the defense industry. Russia has its own base for import substitution,” he said. “Thank God, we’ve received a lot from previous generations, and that we’ve done much to modernize the industry over the past decade and a half. Does it damage us? Partly, but not fatally,” Putin concluded.

SocGen is way off target here, any benefits will vanish along the way. The biggest problem all around today is deflation. Lower oil prices will exacerbate the problem, not solve it. People are simply not going to drive twice as much.

• Global Growth To Get $200 Billion Kick From Oil Price Crash (Telegraph)

Global economies are set for a lift of more than $200bn (£127.4bn) within the next year, thanks to a “once in a generation downturn” in oil prices. Brent – an oil classification that serves as a global benchmark – has already plummeted by as much as 30pc from a peak of $115 a barrel in June. The decline of oil, and the effect that has on lower energy costs, will serve to boost growth and keep inflation contained, according to French bank Societe Generale. The lender’s economists have calculated that a $20 a barrel fall in oil prices could increase global output by an extra 0.26 percentage points after the first year of the shock, with producers in North America and Asia reaping much of the benefit.

This decline in oil has been “a major correction” said Michael Haigh, head of commodities research at the French bank. The downturn differs from previous falls because of its root cause – an oversupply of oil that “is not temporary in nature”, Mr Haigh argued. “We believe that we’re in the middle of a very fundamental change in the oil markets – the type of change that only happens every decade or two”, he added. Oil’s recent fall to around $80 a barrel has been driven “by both weak demand and increased supply”, said Michala Marcussen, Societe Generale’s global head of economics. A marked increase in Libyan oil production alongside a structural rise in US volumes, as a result of the shale boom in North America, have contributed to higher supply. With energy accounting for approximately 9pc of global inflation, a reduction in oil prices should also result in more subdued price growth.

If Brent Crude fell as low as $70 a barrel, this would reduce Societe Generale’s forecast for UK inflation by 0.3 percentage points for the whole of next year. But gains from weaker prices are unlikely to act as a panacea for nations suffering from lower growth. “Policy makers hoping that low oil prices will salvage growth should think twice,” Ms Marcussen cautioned. “In particular euro area leaders would do well to act resolutely on the European Central Bank’s calls for structural reforms at an accelerated pace.”

” .. a 3% increase in government bond rates would result in a change in the value of outstanding government bonds ranging from a loss of around 8% of GDP for the U.S. to around 35% for Japan.”

• How The Fed Has Boxed US Into An Easy-Money Corner (Satyajit Das)

Despite the Federal Reserve ending its purchases of Treasury bonds, U.S. monetary policy remains accommodative — and will be for a long time to come. The downside is too great. Withdrawing fiscal stimulus would slow economic activity. Reduction in government services and higher taxes hits disposable incomes, especially when wage growth is stagnant. In turn, this leads to a sharp contraction in consumption. Slower growth, exacerbated by high fiscal multipliers, makes it difficult to correct budget deficits and control government debt levels. Accordingly, the Fed’s ability to reverse an expansionary fiscal policy is restricted, at best, corroborating economist Milton Friedman’s sarcastic observation: “There is nothing so permanent as a temporary government program.”

The Fed is basically stuck. Its ZIRP and QE policies are difficult to change. Normalization of interest rates, reducing purchases of government bonds, and the reduction of central bank holdings of securities, all risk risks higher rates and reduced available funding for economic expansion. Low rates, meanwhile, allow overextended companies and nations to maintain or increase borrowings. Central banks also cannot sell government bonds and other securities held on their balance sheet. The size of these holdings means that disposal would lead to higher rates, resulting in large losses to the central bank as well as commercial banks and investors. The reduction in liquidity would tighten the supply of credit, destabilizing a fragile financial system.

In 2013, the Federal Reserve’s tentative “taper,” in effect a slight reduction in bond purchases, triggered market volatility. Resulting higher mortgage rates slowed the rate of refinancing of existing mortgages and the recovery of the housing market. A 1% rise in rates would increase the debt-servicing costs of the U.S. government by around $170 billion. A rise of 1% in G-7 interest rates would increase the interest expense of the G-7 countries by around $1.4 trillion. Higher interest rates would also affect indebted consumers and corporations. In the U.S., for example, a 1% increase in interest rates, according to a McKinsey Global Institute Study, would increase household debt payments collectively to $876 billion from $822 billion, a rise of 7%. According to the Bank of International Settlements, a 3% increase in government bond rates would result in a change in the value of outstanding government bonds ranging from a loss of around 8% of GDP for the U.S. to around 35% for Japan.

“But it was a good week for anyone interested in understanding how this secretive institution works. Or doesn’t.”

• The Week That Shook the Fed (Gretchen Morgenson)

The Federal Reserve Board prefers to operate in a shroud of secrecy, and its officials really don’t like having to answer to anybody. So it was fascinating to learn last week that the Fed is embarking on a soul-searching campaign. Its inspector general will take up the astonishing questions of whether the Fed’s big-bank examiners have what they need to do their jobs and whether they receive the support of their superiors when they challenge bank practices. Or, as the Fed put it, whether “channels exist for decision-makers to be aware of divergent views” among the Fed’s bank examination teams. Asking such questions is an about-face for the Fed, whose officials have long maintained that it is the most sophisticated and enlightened of financial regulators. And given that the Fed received extensive new regulatory powers under the Dodd-Frank financial reform law, it is troubling indeed that it may not be certain that its bank examiners have what they need to do their jobs.

The Fed announcement looks an awful lot like damage control. It came late Thursday afternoon, directly after one Senate hearing that was critical of Fed practices and before another on Friday. It also came after a bill proposed by Senator Jack Reed, a Rhode Island Democrat, that would change the way the head of the most powerful of the 12 district banks — the Federal Reserve Bank of New York — is appointed. Currently, the president of the New York Fed is selected by its so-called public board members — those not affiliated with financial institutions. Senator Reed’s proposal would give the president of the United States, with Senate approval, responsibility for naming the president of the New York Fed. Clearly, last week was not a good one for the Fed. But it was a good week for anyone interested in understanding how this secretive institution works. Or doesn’t.

The periphery is loaded with zombies.

• Eurozone Yields Hit Record Lows: Is ECB Trumping Reality? (CNBC)

It’s hard to believe it’s just a few years since countries like Ireland and Spain had to go cap-in-hand to international lenders – at least if you look at their bond yields. Ireland’s 10-year bond yield, usually reflective of a country’s economic performance, hit a record low of 1.477% Monday, while Spanish 10-year bond yields fell below 2% for the first time ever. Ireland is expected to have one of the strongest economic rebounds in the euro zone, with 3.7% growth in GDP this year, according to Deutsche Bank forecasts. Yet it is also facing plenty of headwinds. There are increasing concerns that the current administration may not last for its maximum five-year term, as disputes over water charges and the recording of phone calls to police stations have destabilized the coalition.

Taoiseach Enda Kenny’s Fine Gael party would get just 22% of the vote now, down from 36% in the 2011 elections, according to a Red C/Sunday Business Post opinion poll published at the weekend. Polls suggest a large swing towards Sinn Fein, formerly better known as the political wing of the Irish Republican Army but now a growing voice of dissent from the main parties in Dublin. Independent candidates, often campaigning in direct opposition to a single government policy, have also been boosted by the waning popularity of the two traditionally dominant parties, Fine Gael and Fianna Fail. The troika of the International Monetary Fund, European Commission and ECB, who bailed-out Ireland and its banks during the credit crisis, warned on Friday that its current budget “makes less progress than desirable” towards reducing its budget deficit – and that its recovery is at risk if there is a further slowdown in the euro zone.

“This would be a radical change in the structure of the global financial system.”

• German Bond Yields To Trump Japan As ECB Battles Deflation (AEP)

German bond yields are to fall below Japanese levels and plumb depths never seen before in history as Europe becomes the epicentre of global deflationary forces, according to new forecast from the Royal Bank of Scotland. “We are seeing `Japanification’ setting in across Europe,” said Andrew Roberts, the bank’s credit strategist. “We expect 10-year Bund yields to cross the 10-year Japanese government bond and we are amply positioned for such an outcome.” Mr Roberts said it is a “weighty win-win” situation for investors. If the European Central Bank launches full-blown quantitative easing, it will almost certainly have to buy large amounts of German Bunds, and these are becoming scarce. “Net supply in Germany is zero since they are in budget surplus this year and next, and they have written a balanced-budget amendment into their constitution. There are simply fewer and fewer Bunds to buy, and everybody wants them,” he said.

It is assumed that if the ECB buys sovereign bonds, it will have to buy them evenly in accordance with its capital “key”. This implies that 28pc would have to be German debt. Yet if the ECB fails to deliver on hints that it will expand its balance sheet by €1 trillion, the damage would be so enormous that Europe would be sucked into a depressionary vortex, according to the bank. Bund yields would fall for different reasons, as debt markets began to reflect a Japanese-style deflation trap. The bank’s credit team is betting that the ECB will act more quickly and on a greater scale than widely assumed, launching purchases of corporate bonds as soon as early December and full sovereign QE in February once the European Court has ruled on a previous debt rescue plan (OMT). “We think Germany will be dragged to the table, kicking and screaming all the time,” said Mr Roberts.

Japanese yields are just 0.45pc, which is steeply negative in real terms now that ‘Abenomics’ is driving up Japan’s inflation rate. This is a deliberate strategy to whittle away a public debt that has reached 245pc of GDP. German yields are 0.78pc. RBS expects the two bonds to cross as Japanese yields rise while German yields fall. This would be a radical change in the structure of the global financial system.

Some German court at some point will strike Draghi down.

• Bundesbank’s Weidmann Warns Of ‘Legal Limits’ On Further Moves By ECB (Reuters)

The European Central Bank could encounter “legal limits” if it pursued additional steps to combat low inflation, the president of Germany’s Bundesbank said on Monday, calling for a focus on growth rather than any government bond buying. “Instead of focusing on the purchasing program, we should focus on how you find growth,” Jens Weidmann told an audience in Madrid, when asked about the possibility of the ECB buying government bonds, a step known as quantitative easing. He warned that it would be difficult to pursue such steps to tackle low inflation. “Of course there are other measures which are more difficult, because they are untested, because they are less clear … and of course they hit the legal limits of what you can do,” said Weidmann, who sits on the ECB’s Governing Council. “This is why discussions are so intense,” he added.

There is nothing good left for Greece in the eurozone. It’s as simple as that.

• Greece Bailout Talks Resume Amid Concerns Over Exit (Reuters)

Greece’s government will resume stalled talks with EU/IMF lenders in Paris on Tuesday, as Athens pushes to conclude a crucial review by inspectors so it can make an early exit to an unpopular bailout programme. Athens had set a 8 December deadline to complete the review. But talks floundered over a projected budget gap for next year and EU/IMF inspectors did not return as expected to Athens this month, leading to concerns that a delayed review would derail Greece’s plan to quit its bailout by the end of the year. The two sides will meet in Paris “to advance the review and examine the framework for the day after”, the bailout ends, the Greek Finance Ministry said in a statement. A ministry official declined to say if the talks would continue beyond Tuesday, but said the bailout would not be extended past the end of the year.

Greece’s government has staked its own survival on abandoning the €240bn (£190bn) bailout programme, which has entailed unpopular austerity measures, ahead of schedule. Prime minister Antonis Samaras needs to push through his candidate in a presidential vote in February to avoid being forced to call early elections; he is is hoping that leaving the bailout will help win him enough support to survive the vote. But the final bailout review, like most reviews before it, has struggled amid rows over reforms and austerity cuts. Athens and its foreign lenders have been at loggerheads over the projected deficit for next year, with the lenders arguing Greece will miss the target of 0.2% of gross domestic product because of a new payback plan for austerity-hit Greeks who owe money to the state. The Greek government, however, has so far resisted changes demanded by the inspectors, going so far as to submit its 2015 budget to parliament last week without the approval of lenders.

You guys

Brexit or Grexit, if one leaves more will follow.

• Britain’s EU Retreat Means German Hegemony Warns Prodi (AEP)

Britain is already a lame duck within the EU’s internal governing structure and is losing influence “by the day” in Brussels, even before David Cameron holds a referendum on withdrawal. This self-isolation has upset the European balance of power in profound ways, leading ineluctably to German hegemony and a unipolar system centred on Berlin. It is made worse by the near catatonic condition of France under Francois Hollande. Smaller states no longer form clusters of alliances around a three-legged diplomatic edifice made up of Germany, France, and Britain. They are instead scrambling to adapt to a new European order where only one state now counts. So too is the EU’s permanent civil service and the institutional machinery in Brussels and Luxembourg. Such is the verdict of Roman Prodi, the former Italian premier and ex-president of the European Commission.

I pass on his thoughts because the Brexit debate in the UK invariably dwells on what the consequences might or might not be for Britain, while taking it for granted that Europe itself would somehow sail on sedately as if nothing had changed. But everything would change, and we can already discern it. “France is ever more disoriented and Britain is losing power by the day in Brussels after its decision to hold a referendum on EU membership,” he said. “All the countries that previously maintained an equilibrium between Germany, France, and Britain (from Poland, to the Baltic States, passing through Sweden and Portugal) are regrouping under the German umbrella,” he told the Italian newspaper Il Messaggero. “Germany is exercising an almost solitary power. The new presidents of the Commission and the Council are men who rotate around Germany’s orbit, and above all there is a very strong (German) presence among the directors, heads of cabinet and their deputies. The bureaucracy is adapting to the new correlation of forces,” he said. [..]

The EU is either a treaty club of democracies and equals, or it is nothing.

As Abe said at some point last year: all it takes for Abenomics to succeed is for people to believe in it. Well, they don’t. So now what, Shinzo?

• BOJ Minutes Show Bazooka Is All About The Message (CNBC)

Latest minutes from the Bank of Japan (BOJ) released Tuesday reveal that the central bank’s surprise move in October to expand its already-massive stimulus program was about sending the message that it will do whatever it takes to “conquer deflation.” “The BOJ intended to send a strong message, beyond the financial markets, to jolt the wider economy,” said Shun Maruyama, Chief Japan Equity Strategist at BNP Paribas. “Consumer and business leaders remain unmoved by monetary policy.” Consumer inflation looks set to stall at around 1%, half of the BOJ’s stated target, he added, noting capital investments are picking up but not by enough to boost economic growth.

The BOJ’s commitment to pull the country out of two decades of deflation remains “unshakable”, according to the minutes from its policy meeting on October 31, when the central bank expanded its asset purchase program by 30 trillion yen to 80 trillion yen. “If no policy action was taken at this meeting, this could be understood as a breach of the commitment (to achieve its inflation target of 2%), thereby possibly impairing the Bank’s credibility significantly,” said one board member. The members that supported further monetary easing argued that the BOJ needed to “convey the bank’s unwavering resolve to conquer deflation.” In a tight ballot, five members backed the latest measures, and four voted against.

The BOJ kept its goal to boost the inflation rate to 2% by next year, but falling oil prices could put the target in question. When stripped of the effect of April’s consumption tax hike, Japan’s core inflation rate rose 1% in September from the year-ago period, its lowest pace in nearly a year. “The year-on-year rate of increase in the CPI (all items less fresh food) was likely to be at around 1% for some time, mainly due to the effects of the decline in crude oil prices,” board members said.

The hoarding meme in economics is a red flag. Bernanke’s Asian ‘savings glut’ all over again.

• Kuroda Tells Japan Inc. to Stop Hoarding Cash as Costs to Rise (Bloomberg)

Bank of Japan chief Haruhiko Kuroda urged business leaders to use profits more productively, saying hoarding cash will become costly as the central bank stamps out deflation. Companies could boost investment in facilities and jobs, taking advantage of a weaker yen, Kuroda said today in a speech in Nagoya. At the same time, the BOJ will continue to spur price gains, adjusting its unprecedented easing policy as needed to achieve its inflation goal, he said. Japanese companies are headed toward their highest profits ever as a weaker yen resulting from the BOJ’s stimulus boosts Toyota and other exporters. Japan Inc. holds near-record cash while capital spending in the second quarter was more than 50% lower than a peak in the first three months of 2007. “Kuroda is making it clear it’s companies’ turn to act,” said Mari Iwashita, an economist at SMBC Friend Securities.

“Capital spending, wages and price settings are all vital for the BOJ but are out of its hands. Kuroda must convince companies the economy will get better and deflation will end.” Kuroda last week secured a wider board majority for easing that the BOJ boosted on Oct. 31, and warned the central bank’s key gauge of inflation could fall below 1% after the world’s third-largest economy slid into recession. Falling prices over two decades of stagnation made holding cash a viable option for companies looking for safety and real returns on capital. The BOJ has been making steady progress in shaking a “deflationary mindset,” Kuroda said. Kuroda called on business leaders to take “action” that looks toward an economy that has overcome deflation. “As a corporate strategy, using their profits in a more productive manner is imperative,” Kuroda said. “I have great interest in developments in wages and price settings through spring of next year.”

“Guess what the hedge fund firms are doing now? Hunting for new, less skeptical customers.”

• Hedge Funds Lose Money for Everyone, Not Just the Rich (Bloomberg)

When Douglas Kobak was an adviser at a large brokerage firm, he suggested his wealthiest clients buy a hedge fund promising to be “a very conservative alternative to bonds.” Then the credit crisis hit in 2008, the fund imploded and investors got 45 cents on the dollar — as long as they promised not to sue. Since then, mediocrity is more common than blow-ups. Hedge funds have lagged behind stocks while still charging fees of up to 2% of assets and 20% of gains. For the rich and their advisers, “the sex appeal of hedge funds has worn off,” says Kobak, now head of Main Line Group Wealth Management. Guess what the hedge fund firms are doing now? Hunting for new, less skeptical customers.

While only those with at least $1 million are allowed to invest in hedge funds, anyone can buy a mutual fund with a hedge fund strategy. Unfortunately, these “alternative” funds come with the same disadvantages hedge funds have: high fees, inconsistent performance and strategies that take a PhD to decipher. By starting alternative funds, mutual fund companies get a chance to bring in revenue they’re losing to cheap index funds and exchange-traded funds. In a deal announced Nov. 18, Blackstone Alternative Asset Management is coming up with hedge-fund-like products for mutual fund company Columbia Management. They’ll join 11 other U.S. mutual funds and ETFs classified by Bloomberg as “alternative,” which together hold $68 billion in assets. One in five of those assets is held by the largest fund, the MainStay Marketfield Fund. Started in 2007, it’s one of the oldest alternative funds, and one of the most disappointing.

After a good start from 2007 to 2009, the fund mostly matched the stock market in 2010 and 2011, and then lagged behind it in 2012 and 2013. This year, it has dropped almost 11%, a mirror image of the S&P 500’s 11.6% gain. Unreliable and disappointing performance is getting to be as common among alternative funds as among hedge funds. The Bloomberg Global Aggregate Hedge Fund index is up 2% year-to-date. The average return of an alternative fund open to all investors is 1.1%, behind the inflation rate. High-quality corporate bonds have returned 70% more than the median alternative fund over the last three years. The stock market has brought in eight times as much as alternatives. And these blah results don’t come cheap. The MainStay Marketfield Fund has been losing money while charging an expense ratio of 2.6% per year. That’s pricier than 99% of all funds, though it’s not as extreme among alternative funds. They charge an average of 1.74% per year, 20 times as much as the cheapest index funds.

“Goldman Sachs, the Wall Street bank where Dudley was chief U.S. economist for a decade.”

• Dudley Defense Leaves Senators Unimpressed as Fed Scrutiny Rises (Bloomberg)

Federal Reserve Bank of New York President William C. Dudley’s defense of his record on financial supervision is unlikely to appease lawmakers seeking to tighten their oversight of the central bank. In a tense exchange with Senator Elizabeth Warren at a Nov. 21 hearing, Dudley rejected her assertion that there had been a “long list” of regulatory failures at the New York Fed. Warren, a Massachusetts Democrat, suggested that if Dudley doesn’t fix a “cultural problem” at the bank, “we need to get someone who will.” While the Senate doesn’t have the authority to appoint or remove Fed presidents, the exchange was a sign of growing frustration among Republicans and Democrats alike. Republicans, who have been critical of the Fed’s loose monetary policy, will take control of the Senate in January, adding to pressure on the Fed from Democrats who see the central bank as too close to the Wall Street banks it supervises.

“The Fed is as vulnerable as any time since the 1980s,” when then-Chairman Paul Volcker drew the ire of politicians for driving up interest rates to levels that threw the country into a recession, said Karen Shaw Petrou, managing partner of Federal Financial Analytics. The next Congress will be “really challenging for the Fed.” Last week’s hearing before a subcommittee of the Senate Banking Committee was prompted by allegations made by a former New York Fed bank examiner, Carmen Segarra, who said her colleagues were too deferential to Goldman Sachs, the Wall Street bank where Dudley was chief U.S. economist for a decade.

She headed the board of directors as the money laundering and organized crime (those are the charges) were going on. And of course now says she had no idea. Which makes one wonder what she has no idea of now she leads the government. Ignorance doesn’t come high on a president’s list of job qualifications.

• Even Brazil’s President Is Involved In The Petrobras Scandal (CNBC)

Energy giant Petrobras is engulfed in a corruption scandal that could prove to be Brazil’s biggest, threatening to engulf the country’s most senior politicians—including its president. Even the company is not downplaying the events. In a news release last week to explain why it had delayed its upcoming financial report, Petrobas said it was “undergoing a unique moment in its history, in light of the accusations and investigations of the “Lava Jato Operation” (Portuguese for “Operation car wash”) being conducted by the Brazilian Federal Police, which has led to charges of money laundering and organized crime.” CNBC takes a look at the facts behind the scandal and the implications for other oil companies and Brazil itself. [..]

Petrobras executives are alleged to have paid politicians for contracts, using money skimmed from company profits. The head of the country’s budget watchdog, Joao Augusto Nardes, has said the kickbacks may total as much as 4 billion Brazilian reais ($1.6 billion), according to the WSJ. The company has neither confirmed nor denied the allegations. It has hired independent auditors to investigate further, in addition to the official investigation by the Brazilian Federal Police. The country’s most senior politicians are implicated, including recently re-elected President Dilma Rousseff, who previously headed the Petrobras board of directors.

Der Spiegel provides a lengthy history of how failure decided the future of Ukraine, and the German magazine doesn’t spare Merkel.

• Summit of Failure: How the EU Lost Russia over Ukraine (Spiegel)

One year ago, negotations over a Ukraine association agreement with the European Union collapsed. The result has been a standoff with Russia and war in the Donbass. It was an historical failure, and one that German Chancellor Angela Merkel contributed to.

Only six meters separated German Chancellor Angela Merkel and Ukrainian President Viktor Yanukovych as they sat across from each other in the festively adorned knight’s hall of the former Palace of the Grand Dukes of Lithuania. In truth, though, they were worlds apart. Yanukovych had just spoken. In meandering sentences, he tried to explain why the European Union’s Eastern Partnership Summit in Vilnius was more useful than it might have appeared at that moment, why it made sense to continue negotiating and how he would remain engaged in efforts towards a common future, just as he had previously been. “We need several billion euros in aid very quickly,” Yanukovych said. Then the chancellor wanted to have her say. Merkel peered into the circle of the 28 leaders of EU member states who had gathered in Vilnius that evening. What followed was a sentence dripping with disapproval and cool sarcasm aimed directly at the Ukrainian president.

“I feel like I’m at a wedding where the groom has suddenly issued new, last minute stipulations.” The EU and Ukraine had spent years negotiating an association agreement. They had signed letters of intent, obtained agreement from cabinets and parliaments, completed countless diplomatic visits and exchanged objections. But in the end, on the evening of Nov. 28, 2014 in the old palace in Vilnius, it became clear that it had all been a wasted effort. It was an historical earthquake. Everyone came to realize that efforts to deepen Ukraine’s ties with the EU had failed. But no one at the time was fully aware of the consequences the failure would have: that it would lead to one of the world’s biggest crises since the end of the Cold War; that it would result in the redrawing of European borders; and that it would bring the Continent to the brink of war. It was the moment Europe lost Russia.

Even Reuters cheerleading can’t prevent this.

• In Wake Of China Rejections, GMO Seed Makers Limit US Launches (Reuters)

China’s barriers to imports of some U.S. genetically modified crops are disrupting seed companies’ plans for new product launches and keeping at least one variety out of the U.S. market altogether. Two of the world’s biggest seed makers, Syngenta and Dow AgroSciences, are responding with tightly controlled U.S. launches of new GMO seeds, telling farmers where they can plant new corn and soybean varieties and how can the use them. Bayer CropScience told Reuters it has decided to keep a new soybean variety on hold until it receives Chinese import approval. Beijing is taking longer than in the past to approve new GMO crops, and Chinese ports in November 2013 began rejecting U.S. imports saying they were tainted with a GMO Syngenta corn variety, called Agrisure Viptera, approved in the United States, but not in China.

The developments constrain launches of new GMO seeds by raising concerns that harvests of unapproved varieties could be accidentally shipped to the world’s fastest-growing corn market and denied entry there. It also casts doubt over the future of companies’ heavy investments in research of crop technology. The stakes are high. Grain traders Cargill and Archer Daniels Midland, along with dozens of farmers, sued Syngenta for damages after Beijing rejected Viptera shipments, saying the seed maker misrepresented how long it would take to win Chinese approval. In the weeks since Cargill first sued on Sept. 12, Syngenta’s stock has touched a three-year low. ADM in its lawsuit last week alleged the company did not follow through on plans for a controlled launch of Viptera corn. Syngenta says the complaints are unfounded.

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