rate cut Archives - Page 2 of 2 - The Automatic Earth

Consumer spending fell in December as households took a breather following a surge in buying over the previous two months. Household purchases declined 0.3%, the biggest decline since September 2009, after a 0.5% November gain, Commerce Department figures showed Monday in Washington. The median forecast of 68 economists in a Bloomberg survey called for a 0.2% drop. Incomes and the saving rate rose. Consumers responded to early promotions by doing most of their holiday shopping in October and November, leading to the biggest jump in consumer spending last quarter in almost nine years. For 2015, a pick-up in wage growth will be needed to ensure households remain a mainstay of the expansion as the economy tries to ward off succumbing to a global slowdown.

“Consumers are in a good mood coming into 2015, and we think that’s likely to continue,” said Russell Price, a senior economist at Ameriprise, who correctly forecast the drop in outlays. “The prospects for 2015 look very encouraging.” Stock-index futures held earlier gains after the report. Projections for spending ranged from a decline of 0.6% to a 0.2% gain. The previously month’s reading was initially reported as an increase of 0.6%. For all of 2014, consumer spending adjusted for inflation climbed 2.5%, the most since 2006. Incomes climbed 0.3% in December for a second month, the Commerce Department’s report showed. The Bloomberg survey median called for a 0.2% increase. November’s income reading was revised down from a 0.4% gain previously reported. While growth in the world’s largest economy slowed in the fourth quarter, consumption surged, with household spending rising at the fastest pace since early 2006, a report from the Commerce Department last week showed.

Recovery.

• US Household Spending Tumbles Most Since 2009 (Zero Hedge)

After last month’s epic Personal Income and Spending data manipulation revision by the BEA, when, as we explained in detail, the household saving rate (i.e., income less spending ) was revised lower not once but twice, in the process eliminating $140 billion, or some 20% in household savings… there was only one possible thing for household spending to do in December: tumble. And tumble it did, when as moments ago we learned that Personal Spending dropped in the month of December by a whopping 0.3%, the biggest miss of expectations since January 2014 and the biggest monthly drop since September 2009!

“By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.” Just a little off.”

• Q1 Energy Earnings Shocker: Then And Now (Zero Hedge)

Here is what Factset has to say about forecast Q1 energy earnings: “On September 30, the estimated earnings growth rate for the Energy sector for Q1 2015 was 3.3%. By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.” Just a little off. This is what a difference 4 months makes.

“XOM did the best with margins and accounting gimmickry it could under the circumstances..”

• Exxon Revenue, Earnings Down 21% From YoY, Sales Miss By $5 Billion (Zero Hedge)

Moments ago, following our chart showing the devastation in Q1 earning forecasts, Exxon Mobil came out with its Q4 earnings, and – as tends to happen when analysts take a butcher knife to estimates – beat EPS handily, when it reported $1.56 in EPS, above the $1.34 expected, if still 18% below the $1.91 Q4 EPS print from a year earlier. A primary contributing factor to this beat was surely the $3 billion in Q4 stock buybacks, with another $2.9 billion distributed to shareholders mostly in the form of dividends. Overall, XOM distributed $23.6 billion to shareholders in 2014 through dividends and share purchases to reduce shares outstanding.

This number masks the 29% plunge in upstream non-US earnings which were smashed by the perfect storm double whammy of not only plunging oil prices but also by the strong dollar. Curiously, all this happened even as XOM actually saw its Q4 worldwide CapEx rise from $9.9 billion a year ago to $10.5 billion, even though capital and exploration expenditures were $38.5 billion in the full year, down 9% from 2013. However, while XOM did the best with margins and accounting gimmickry it could under the circumstances, there was little it could do to halt the collapse in revenues, which printed at $87.3 billion, well below the $92.7 billion expected, and down a whopping 21% from a year ago. And this is just in Q4 – the Q1 slaughter has yet to be unveiled!

Set to get much worse.

• BP Hit By $3.6 Billion Charge, Cuts Capex On Oil Prices (CNBC)

BP revealed plans to cut capital expenditure (capex) on Tuesday, after it was hit by tumbling oil prices and an impairment charge of $3.6 billion. “We have now entered a new and challenging phase of low oil prices through the near- and medium-term,” said CEO Bob Dudley in a news release. “Our focus must now be on resetting BP: managing and rebalancing our capital program and cost base for the new reality of lower prices while always maintaining safe, reliable and efficient operations.” BP reported a replacement-cost loss of $969 million for the fourth quarter of 2014, after taking a $3.6-billion post-tax net charge relating to impairments of upstream assets given the fall in oil prices. On an underlying basis, replacement cost profit came in at $2.2 billion, above analyst expectations of $1.5 billion.

In the news release, BP said it was “taking action to respond to the likelihood of oil prices remaining low into the medium-term, and to rebalance its sources and uses of cash accordingly.” The company said that organic capex was set to be around $20 billion in 2015, significantly lower than previous guidance of $24-26 billion. Capex for 2014 came in at $22.9 billion, lower than initial guidance of $24-25 billion. “In 2015, BP plans to reduce exploration expenditure and postpone marginal projects in the Upstream, and not advance selected projects in the Downstream and other areas,” said the company.

“Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps..”

• Greece Finance Minister Varoufakis Unveils Plan To End Debt Stand-Off (FT)

Greece’s radical new government unveiled proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders. Yanis Varoufakis, the new finance minister, outlined the plan in the wake of a dramatic week in which the government’s first moves rattled its eurozone partners and rekindled fears about the country’s chances of staying in the currency union. After meeting Mr Varoufakis in London, George Osborne, the UK chancellor of the exchequer, described the stand-off between Greece and the eurozone as the “greatest risk to the global economy”.

Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps” to ease the burden, including two types of new bonds. The first type, indexed to nominal economic growth, would replace European rescue loans, and the second, which he termed “perpetual bonds”, would replace European Central Bank-owned Greek bonds. He said his proposal for a debt swap would be a form of “smart debt engineering” that would avoid the need to use a term such as a debt “haircut”, politically unacceptable in Germany and other creditor countries because it sounds to taxpayers like an outright loss. But there is still deep scepticism in many European capitals, in particular Berlin, about the new government’s brinkmanship and its calls for an end to austerity policies.

“What I’ll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda,” Mr Varoufakis, a leftwing academic economist and prolific blogger, said. “I’ll say, ‘Help us to reform our country and give us some fiscal space to do this, otherwise we shall continue to suffocate and become a deformed rather than a reformed Greece’.” [..] Mr Varoufakis said the government would maintain a primary budget surplus — after interest payments — of 1 to 1.5% of gross domestic product, even if this meant Syriza, the leftwing party that dominates the ruling coalition, would not fulfil all the public spending promises on which it was elected. Mr Varoufakis also said the government would target wealthy Greeks who had not paid their fair share of taxes during the nation’s six-year economic slump. “We want to prioritise going for the head of the fish, then go down to the tail,” he said.

“The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. We would be in a world where anything could happen:”

• Germany Will Have To Yield In Dangerous Game Of Chicken With Greece (AEP)

Finland’s governor, Erkki Liikanen, was categorical. “Some kind of solution must be found, otherwise we can’t continue lending.” So was the ECB’s vice-president Vitor Constancio. Greece currently enjoys a “waiver”, allowing its banks to swap Greek government bonds or guaranteed debt for ECB liquidity even though these are junk grade and would not normally qualify. This covers at least €30bn of Greek collateral at the ECB window. “If we find out that a country is below that rating – and there’s no longer a (Troika) programme – that waiver disappears,” he said. These esteemed gentlemen are sailing close to the wind. The waiver rules are not a legal requirement. They are decided by the ECB’s governing council on a discretionary basis. Frankfurt can ignore the rating agencies if it wishes. It has changed the rules before whenever it suited them.

The ECB may or may not have good reasons to cut off Greece – depending on your point of view – but let us all be clear that such a move would be political. A central bank that is supposed to be the lender of last resort and guardian of financial stability would be taking a deliberate and calculated decision to destroy the Greek banking system. Even if this were to be contained to Greece – and how could it be given the links to Cyprus, Bulgaria, and Romania? – this would be a remarkable act of financial high-handedness. But it may not be contained quite so easily in any case, as Mr Osborne clearly fears. I reported over the weekend that there is no precedent for such action by a modern central bank. “I have never heard of such outlandish threats before,” said Ashoka Mody, a former top IMF official in Europe and bail-out expert. “The EU authorities have no idea what the consequences of Grexit might be, or what unknown tremors might hit the global payments system. They are playing with fire.

The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. We would be in a world where anything could happen. “What they ignore at their peril is the huge political contagion. It would be slower-moving than a financial crisis but the effects on Europe would be devastating. I doubt whether the EU would be able to act in a meaningful way as a union after that.” In reality, the ECB cannot easily act on this threat. They do not have the political authority or unanimous support to do so, and historians would tar and feather them if they did. The ground is shifting in Paris, Rome and indeed Brussels already. Jean-Claude Juncker, the European Commission’s president, yielded on Sunday, accepting (perhaps with secret delight) that the Troika is dead. French finance minister Michel Sapin bent over backwards to be accommodating at a meeting with Mr Varoufakis. There is no unified front against Greece. It is variable geometry, as they say in EU parlance.

“if Greece were to measure its debt using corporate accounting standards, which take account of interest rates and maturities, its debt burden could be lower than 70pc of GDP.”

• The Truth About Greek Debt Is Far More Nuanced Than You Think (Telegraph)

“Greek debts are unsustainable” Greece’s debts are, as a proportion of GDP, higher than most countries in the eurozone. But, by the same measure, the interest rates it pays on those debts are among the lowest in the currency bloc; the maturities on its loans are the longest. Eurozone countries calculate their debt according to the Maastricht definition, which means that a liability is valued in the same way whether it is due to repaid tomorrow or in 50 years’ time. Greece’s debts are 175pc of GDP under this definition. Some people have calculated that if Greece were to measure its debt using corporate accounting standards, which take account of interest rates and maturities, its debt burden could be lower than 70pc of GDP.

Greece’s debts might actually be a distraction from bigger issues. One is the requirement that, under the bailout conditions, Greece must run a primary surplus of 4.5pc of GDP. Another is the so-called fiscal compact, which requires EU governments with debts of more than 60pc of GDP to reduce the excess by one-twentieth a year. Are Greece’s debts unsustainable? Maybe and maybe not. Are these targets unattainable? Probably.

“The eurozone can withstand ‘Grexit’ now” This rather depends on what you mean by “withstand”. It is certainly true that the eurozone is in a better financial position to deal with Greece quitting or being ejected from the euro than when the last crisis flared up in 2012. It now has a rescue fund and has embarked on a quantitative easing programme. Even as yields on Greek sovereign debt have shot up in recent weeks, those in Spain, Portugal and Italy have stayed at or near record lows, suggesting the markets believe the potential fallout from Greece won’t spread to other southern European countries.

It is less clear that the eurozone could handle the existential threat posed by a Grexit. Membership of the currency bloc would no longer by irrevocable. The markets would scent blood. And the political and diplomatic repercussions are almost impossible to predict: Would it subdue or embolden the various anti-austerity and anti-euro factions that are gaining ground elsewhere in the region? Would it help foster an Orthodox alliance between Greece and Russia? Does Brussels really want to find out?

“Calling the meeting with Osborne a “breath of fresh air,” Varoufakis said: “we are highly tuned into finding common ground and we already have found it.”

• Greece Standoff Sparks Ire From US, UK Over Economic Risks (Bloomberg)

U.S. and British leaders are expressing frustration at Europe’s failure to stamp out financial distress in Greece and the risk it poses to the global economy. U.K. Chancellor of the Exchequer George Osborne, whose government faces voters in three months, became the latest critics, following comments by Britain’s central banker, Mark Carney, and U.S. President Barack Obama. “It’s clear that the standoff between Greece and the euro zone is fast becoming the biggest risk to the global economy,” Osborne said after meeting Greek Finance Minister Yanis Varoufakis in London. “It’s a rising threat to our economy at home. Varoufakis travels to Rome Tuesday, along with Prime Minister Alexis Tsipras, in a political offensive geared to building support for an end to German-led austerity demands, a lightening of their debt load and freedom to increase domestic spending even as they rely on bailout loans.

Tsipras, who went to Cyprus on Monday, also heads to Brussels and Paris. Calling the meeting with Osborne a “breath of fresh air,” Varoufakis said, “we are highly tuned into finding common ground and we already have found it.” Osborne’s comment came a day after Obama questioned further austerity. “You cannot keep on squeezing countries that are in the midst of depression,” he said on CNN. “When you have an economy that is in freefall there has to be a growth strategy and not simply an effort to squeeze more and more out of a population that is hurting worse and worse.” Greece’s economy has shrunk by about a quarter since its first bailout package in 2010. Tsipras was elected Jan. 25 promising the end the restrictions that have accompanied the aid that has kept it afloat.

The premier issued a conciliatory statement on Jan. 31, promising to abide by financial obligations after Varoufakis said the country won’t take more aid under its current bailout and wanted a new deal by the end of May. Before his appointment as finance minister, he advocated defaulting on the country’s debt while remaining in the euro. The Greek finance minister told bankers in London he wants the country’s “European Union-related” loans to be restructured, leaving debt to the IMF and the private sector intact. “A priority for them is to address the high level of debt,” said Sarah Hewin, head of research at Standard Chartered, who was at the meeting. “They’re looking to restructure EU bilateral loans and ECB loans and leave IMF and private-sector debt alone. At the moment, they’re working at a broad case without being specific on how this restructuring will take place.”

“Varoufakis knows as much about this subject “as anyone on the planet,” Galbraith says. “He will be thinking more than a few steps ahead” in any interactions with the troika.”

• Varoufakis Is Brilliant. So Why Does He Make Everyone So Nervous? (Bloomberg)

Yanis Varoufakis, Greece’s new finance minister, is a brilliant economist. His first steps onto the political stage, though, didn’t seem to go very smoothly. Before joining the Syriza-led government, Varoufakis taught at the University of Texas and attracted a global following for his blistering critiques of the austerity imposed on Greece by its international creditors. Among his memorable zingers: Describing the Greek bailout deal as “fiscal waterboarding” and comparing the euro currency to the Hotel California, as in, “You can check out any time you like, but you can never leave.” His social-media followers seem to love the fiery rhetoric—but investors and European Union leaders are clearly less enthusiastic. Greek stock and bond markets tanked on Jan. 30 after Varoufakis said the new government would no longer cooperate with representatives of the troika of international lenders who’ve been enforcing the bailout deal.

At an awkward Jan. 30 meeting with Jeroen Dijsselbloem, head of the Eurogroup of EU finance ministers, Varoufakis appeared to make things worse by calling for a conference on European debt. “This conference already exists, and it’s called the Eurogroup,” an obviously irritated Dijsselbloem told reporters afterwards. The reaction from Berlin was even frostier, with Finance Minister Wolfgang Schaeuble saying Germany “cannot be blackmailed” by Greece. Prime Minister Alexis Tsipras appeared to be scrambling to contain the damage. “Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole,” he said on Jan. 31. But Varoufakis stayed on the offensive, with blog posts accusing news media organizations of inaccurate reporting and a BBC interview in which he blasted an anchorwoman for “rudely” interrupting him. “He may need some tips on how to handle himself on TV,” Steen Jakobsen, chief investment officer at Denmark’s Saxo Bank, wrote.

Is this really the guy Greece is counting on to negotiate a better deal with its creditors? Yes—and Varoufakis’s admirers say he shouldn’t be underestimated. “Yanis is the most intense and deep intellectual figure I’ve met in my generation,” says James K. Galbraith, an economist at the University of Texas who has worked closely with him. “Yanis knows far more about the current situation than some of the people he will be negotiating with,” adds Stuart Holland, an economist and former British Labour Party politician who has co-authored a series of papers with Varoufakis on the euro zone debt crisis. What’s more, Varoufakis’s academic specialty is game theory, the study of strategic decision-making in situations where people with differing interests try to maximize their gains and minimize their losses. Varoufakis knows as much about this subject “as anyone on the planet,” Galbraith says. “He will be thinking more than a few steps ahead” in any interactions with the troika.

“It’s clear that the stand-off between Greece and the euro zone is fast becoming the biggest risk to the global economy..”

• Greece’s Damage Control Fails to Budge Euro Officials (Bloomberg)

Greek Prime Minister Alexis Tsipras’s damage-control efforts calmed investors while failing to budge European policy makers on his week-old government’s key demands. Officials in Berlin, Paris and Madrid rejected the possibility of a debt writedown raised by Greece’s anti-bailout coalition, as they held out the prospect of easier repayment terms, an offer that has been on the table since November 2012. Greek stocks and bonds rebounded following a conciliatory statement issued by the premier Saturday. He promised to abide by financial obligations, a prelude to a tour of European capitals, after Finance Minister Yanis Varoufakis had prompted concern of a looming cash crunch by saying the country won’t take more aid under its current bailout and wanted a new deal by the end of May.

“The weekend statements sound less absurd than the noises from Athens last week,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note today. “However, the ideas of the new Greek government remain far removed from reality.” The Athens Stock Exchange index jumped 4.6%, led by Eurobank Ergasias. The yield on 10-year notes fell 22 basis points to 10.9% at 5:30 p.m. in Athens. Varoufakis was in London today, meeting Chancellor of the Exchequer George Osborne and then investors in sessions organized by Bank of America and Deutsche Bank.

“It’s clear that the stand-off between Greece and the euro zone is fast becoming the biggest risk to the global economy,” Osborne said in a statement after their talks. “It’s a rising threat to our economy at home.” Tsipras was in Cyprus before trips to Rome, Paris and Brussels, with Berlin not yet on the agenda. German Chancellor Angela Merkel wants to duck a direct confrontation and isolate him, a German government official said. In Nicosia, Tsipras repeated his finance chief’s call for an end to the committee that oversees the Greek economy. Dismantling the troika, which includes representatives of the European Commission, ECB and IMF, is “timely and necessary,” Tsipras said.

“They might be right; then again, back in 2008, US policy makers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.”

• What is Plan B for Greece? (Kenneth Rogoff)

Financial markets have greeted the election of Greece’s new far-left government in predictable fashion. But, though the Syriza party’s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery. Spanish 10-year bonds for example, are still trading at interest rates below those of U.S. Treasuries. The question is how long this relative calm will prevail. Greece’s fire-breathing new government, it is generally assumed, will have little choice but to stick to its predecessor’s program of structural reform, perhaps in return for a modest relaxation of fiscal austerity.

Nonetheless, the political, social, and economic dimensions of Syriza’s victory are too significant to be ignored. Indeed, it is impossible to rule out completely a hard Greek exit from the euro (“Grexit”), much less capital controls that effectively make a euro inside Greece worth less elsewhere. Some eurozone policy makers seem to be confident that a Greek exit from the euro, hard or soft, will no longer pose a threat to the other periphery countries. They might be right; then again, back in 2008, US policy makers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.

True, there have been some important policy and institutional advances since early 2010, when the Greek crisis first began to unfold. The new banking union, however imperfect, and the European Central Bank’s vow to save the euro by doing “whatever it takes,” are essential to sustaining the monetary union. Another crucial innovation has been the development of the European Stability Mechanism, which, like the International Monetary Fund, has the capacity to execute vast financial bailouts, subject to conditionality. And yet, even with these new institutional backstops, the global financial risks of Greece’s instability remain profound. It is not hard to imagine Greece’s brash new leaders underestimating Germany’s intransigence on debt relief or renegotiation of structural-reform packages. It is also not hard to imagine eurocrats miscalculating political dynamics in Greece.

“‘The question’ said Humpty Dumpty, ‘is which is to be master? The words or the girl?”

• Why The Bank Of England Must Watch Its Words (CNBC)

Once upon a time, it was only Alice who vanished down a rabbit hole into Wonderland. Nowadays, we’re all falling in head-first – thanks to a bunch of central bankers. But as we’re down here, in this inverted quantitative easing (QE) world, Mark Carney, governor of Britain’s central bank, should probably heed the words of Humpty Dumpty who warned Alice that she’d only gain control of reality if she became “master of words.” In Alice’s looking-glass reality, and maybe ours too, sense has become nonsense and nonsense sense – and not just because of asset bubbles. “‘The question’ said Humpty Dumpty, ‘is which is to be master?'” The words or the girl?

All central bankers worry about being imprisoned by their own words. But it will be preoccupying Carney’s thoughts more than ever as the Bank of England prepares its historic move to publish the minutes alongside the rate setting committee’s decision, due to begin in August. The frenzied over-analysis of the U.S. Federal Reserve’s choice of words could not have escaped his attention, with its decision to drop the phrase “considerable time” dominating newspaper columns and analysts notes. One economist complained privately that his job had morphed from monetary policy to structural linguistics.

Back in March 2011, Jean-Claude Trichet, the then president of the ECB got hemmed in by his own verbal signaling. Ironically, it was one of his favourite catch phrases: “strong vigilance”. It eventually forced his hand into making an ill-advised rate hike from 1% to 1.25% despite a deteriorating economic climate, duly sending the euro zone into recession. Of course, the ECB’s current boss, Mario Draghi, understands Humpty Dumpty’s lesson about making words perform the exact meaning one wants, though €1.1 trillion of QE and a crisis in Greece might now fully test “whatever it takes”.

“Government bond yields typically fall near the beginning of central-bank led programs intended to boost shaky economies, like the ECB’s bond-buying program, due to a shortage of bonds available to meet the central bank’s demand.”

• More Than 25% Of Euro Bond Yields Are Negative, But … (MarketWatch)

More than a quarter of eurozone bonds have negative yields — meaning investors are essentially paying for the privilege of lending money to a European sovereign government — but several analysts are betting that those yields will soon return to normal. The exact number of negative yielding sovereign bonds is 27%, according to Tradeweb data based on Monday’s closing rates. “We’re hoping that this is roughly the peak,” said David Keeble, head of fixed-income strategy at Crédit Agricole. “There’s certainly no reason to keep them in negative territory after five year [bonds].” So why are sovereign bond yields negative? Government bond yields typically fall near the beginning of central-bank led programs intended to boost shaky economies, like the ECB’s bond-buying program, due to a shortage of bonds available to meet the central bank’s demand.

But after two or three weeks, the effects of this stimulus programs should begin to take hold, Keeble said, resulting in stronger economic data. This in turn should whet the market’s appetite for risky assets like equities while safe investments like bonds fall out of favor. Keeble added that his prediction is contingent on the European Central Bank keeping monetary policy steady. “We’re not going to get any more rate cuts from ECB and i don’t think we’re going to see anymore QE,” Keeble added. In its latest forecast on eurozone bond yields, published Monday, Bank of America Merrill Lynch said they expect the yield on five-year eurozone bonds to fall from negative 0.05% to negative 0.10% in the second quarter, before rising in the third and fourth quarters.

Price discovery urgently needed.

• Draghi’s Negative-Yield Vortex Draws in Corporate Bonds (Bloomberg)

Credit markets are being so distorted by the European Central Bank’s record stimulus that investors are poised to pay for the privilege of parking their cash with Nestle. The Swiss chocolate maker’s securities, which have the third-highest credit ranking at Aa2, may be among the first corporate bonds to trade with a negative yield, according to Bank of America strategist Barnaby Martin. Covered bonds, which are bank securities backed by loans, started trading with yields below zero at the end of September. With the growing threat of falling prices menacing the euro-area’s fragile economy, some investors are calculating it’s worth owning Nestle bonds, even with little or no return. That’s because yields on more than $2 trillion of the developed world’s sovereign debt, including German bunds, have turned negative and the ECB charges 0.2% interest for cash deposits.

“In the same way that bunds went negative, there’s nothing, in theory, to stop short-dated corporate bond yields going slightly negative as well,” Martin said. “If investors want to park some cash, the problem with putting it in a bank or money market fund is potential negative returns, because of the negative deposit rate policy of the ECB.” Vevey-based Nestle SA’s 0.75% notes due October 2016 were quoted to yield 0.05% today, according to data compiled by Bloomberg. It isn’t the only company with short-dated bond yields verging on turning negative. Roche, the world’s largest seller of cancer drugs, issued €2.75 billion of bonds with a coupon of 5.625% in 2009. The notes, which mature in March 2016, pay 0.09%, Bloomberg data show. “The current yield is market-driven,” Nicolas Dunant, head of media relations at Basel, Switzerland-based Roche, said in an e-mail. “The bond has traded up because it has become increasingly attractive for investors in the current low-rate environment.”

The end of omnipotence.

• China Debt Party Nears The End Of The Road (MarketWatch)

Despite an interest-rate cut late last year, China’s economy has got off to a slow start, with weak factory and service-sector readings. The typical response to such data is to expect more monetary stimulus. But have we reached the point where rate cuts are no longer able to lift China’s debt-heavy economy? As China enters its third year of slowing growth, there is growing concern the debt reckoning cannot be kicked down the road any longer. Credit has been growing faster than the economy for six years, and there has always been a recognition this cannot continue indefinitely. Experience elsewhere would suggest countries coming off a multi-year, debt-fueled expansion could expect an inevitable hangover.

This would include everything from bad debts, bankruptcies and asset write-downs, together with currency weakness and perhaps a dose of austerity to restore order to finances. For China, however, we are led to expect a different economy — one where, even in a down cycle, you don’t get recessions but growth that only changes gear from double-digit to “just” 7%. While naysayers warn China’s debt binge is an accident waiting to happen, it never quite does: The bond market and shadow-banking sector have not experienced any meaningful defaults, nor has the banking system seen anything more than a limited increase in non-performing loans. China’s property market might look a lot like bubbles in the U.S., Spain or Japan at different times in history, yet here the ending is again benign, with a gentle plateauing of prices.

But elsewhere, it is possible to find evidence that an abrupt China slowdown is underway. In various global hard-commodity markets – where Chinese demand was widely acknowledged to have lifted prices in everything from iron ore to copper in the boom years — a major reversal is underway. A collection of industrial commodities has now reached multi-year lows. This suggests a lot of folk in China are already facing a hard landing. Signs are accumulating that the financial economy is now getting to a moment of reckoning. At home, slower growth puts added pressure on servicing corporate debt as profitability weakens. Overseas, tighter credit as the Federal Reserve retreats from quantitative easing means hot-money flows are no longer providing a boost to liquidity and are instead reversing.

“The slide in global oil prices and inflation has turned out to be even bigger than anticipated..”

• Global Deflation Risk Deepens As China Economy Slows (Guardian)

The risk of global deflation looms large for 2015 as surveys of China’s mammoth manufacturing sector showed excess supply and insufficient demand in January drove down prices and production. While the pulse of activity was livelier in Japan, India and South Korea, they shared a common condition of slowing inflation. “The slide in global oil prices and inflation has turned out to be even bigger than anticipated,” said David Hensley, an economist at JP Morgan, and central banks from Europe to Canada to India have responded by easing policy. “What is now in the pipeline will help extend the near-term impulse from energy to economic growth into the second half of the year.” A fillip was clearly necessary in China where two surveys showed manufacturing struggling at the start of the year.

The HSBC/Markit Purchasing Managers’ Index (PMI) inched a up a fraction to 49.7 in January, but stayed under the 50.0 level that separates growth from contraction. More worryingly, the official PMI – which is biased towards large Chinese factories – unexpectedly showed that activity fell for the first time in nearly 30 months. The reading of 49.8 in January was down from 50.1 in December and missed forecasts of 50.2. The report showed input costs sliding at their fastest rate since March 2009, with lower prices for oil and steel playing major roles. Ordinarily, cheaper energy prices would be good for China, one of the world’s most intensive energy consumers, but most economists believe the phenomenon is a net negative for Chinese firms because of its impact on ultimate demand.

Canada joins the currency war: “The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points.”

• Canada Mauled by Oil Bust, Job Losses Pile Up (WolfStreet)

Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July. On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system”.

Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel. “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity. In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.

To hang on a little longer without running out of money, these companies are going on an all-out campaign to slash operating costs and capital expenditures. The Canadian Association of Petroleum Producers estimated that oil companies in Western Canada would cut capital expenditures by C$23 billion in 2015, with C$8 billion getting cut from oil-sands projects and C$15 billion from conventional oil and gas projects. However, despite these cuts, CAPP expected oil production to rise, thus prolonging the very glut that has weighed so heavily on prices (a somewhat ironic, but ultimately logical phenomenon also taking place in the US). Then on January 21 – plot twist. The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points. So what did it see that freaked it out?

A crashing oil-and-gas sector, deteriorating employment, and weakness in housing. A triple shock rippling through the economy – and creating the very risks that it had fretted about in September. “After four years of scolding Canadians about taking on too much debt, the Bank has pretty much said, ‘Oh, never mind, we’ve got your back’, despite the fact that the debt/income ratio is at an all-time high of 163 per cent,” wrote Bank of Montreal Chief Economist Doug Porter in a research note after the rate-cut announcement. Clearly the Bank of Canada, which is helplessly observing the oil bust and the job losses, wants to re-fuel the housing bubble and encourage consumers to drive their debt-to-income ratio to new heights by spending money they don’t have.

As predicted, Australia joins the currency race to the bottom.

• Aussie Gets Crushed – How Much More Pain Lies Ahead? (CNBC)

With the Reserve Bank of Australia (RBA) leaving the door open to further rate cuts, the only way forward for the Australian dollar is down, say strategists. The Aussie plunged 1.9% against the U.S. dollar to $0.7655 on Tuesday after the central bank cut its benchmark cash rate by 25 basis points to a fresh record low of 2.25%. It was the currency’s biggest once-day loss since mid-2013, according to Reuters. “75 cents seems the natural progression point from here – I would expect that over the next two weeks if not sooner,” Jonathan Cavenagh, a currency strategist at Westpac told CNBC. “Beyond that, we’ll see how things unfold. If we see another rate cut, the Aussie could definitely be trading in the low-70 cent range,” he said.

The central bank struck a dovish tone in its policy statement highlighting below-trend growth and weak domestic demand in the economy, giving rise to expectations of additional easing. It also said the Aussie remained above fundamental value and that a lower exchange rate is needed to achieve balanced growth. In December, RBA Governor Glenn Stevens told local media that he would prefer to see the currency at $0.75 – levels not seen since early 2009. The Austrian dollar has already suffered a 26% decline against the U.S. dollar over the past two years, weighed by weak commodity prices and a stronger greenback. Paul Bloxham, chief economist for Australia and New Zealand at HSBC also expects the currency to come under further selling pressure. He forecasts the currency will head towards $0.70 going into 2016.

Debt Rattle November 23 2014

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

Hans Behm Windy City tourists at Monroe Street near State 1908

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

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

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

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

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

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

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

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

• Pension Funds Lambaste Private-Equity Fees (WSJ)

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

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

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

• The Curse Of Black Friday Sales (NY Post)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What can you expect from Jon Hilsenrath?

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

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

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

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

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

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

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

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

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

Why would anyone doubt that?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Pension Funds Lambaste Private-Equity Fees (WSJ)

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

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

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

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

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

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

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

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

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

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

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

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

Eh, no. UKIP did not start this.

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

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

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

I’ll pay plastic, please.

• The Curse Of Black Friday Sales (NY Post)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Move over, Pussy Riot?!

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

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

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

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

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

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

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

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

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

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