The Automatic Earth

Christopher Helin Franklin car on slope, San Francisco. 1920

A few days ago, I wrote an essay about how ECB head Mario Draghi seeks to redefine the definitions of certain words and terms, like the one that define financial instruments, because he needs to find hundreds of billions in new spending money in Europe without adding to the behemoth existing debt (Germany won’t let him do that). And yes, that is indeed as impossible and meaningless as you think it is. But these are desperate times.

Thing is, I called that essay Draghi To Save Europe With Semantics , and maybe I shouldn’t have, because it’s obviously not the most sexy and catchy title on the planet, but my problem there was, it captures what I was talking about. And it’s all much broader and bigger than that, but then that’s what the article tries to explain.

Moreover, the financial press also catches up. To the fact that semantics and re-defining are the flavor du jour, once again, just like they were in 2005-6-7. When ratings agencies used the confusion about what things actually mean to stamp AAA ratings on everything including your kids’ snot nose tissues and toilet paper. And that is an important development, if you care about preserving some of your remaining wealth. Which I think you’d like to do, so please bear with me.

Three months ago, Tracy Alloway stated the obvious at FT:

Doubts Raised Over Rating Agency Reform

Fitch, one of three big rating agencies, this week criticised credit ratings given by its competitors to a securitisation containing a loan secured by the Westin – the latest instance of agencies sparring with each other over so-called structured finance deals. Such deals bundle together a wide variety of loans into bonds that can be sold to large fund managers who use the evaluations of credit rating agencies to help inform their investment decisions.

Typically, these opinions are paid for by the financial firms that create the deals. But, since the financial crisis, regulators have encouraged credit rating agencies to give “unsolicited” opinions on deals that they are not hired to evaluate, as part of an effort to avoid the “ratings shopping” that proliferated before 2008.

However, as the rating agencies trade public barbs amid a resurgence of certain types of structured products, questions are being raised as to whether these unsolicited opinions actually have much effect on investors’ thinking. And are the banks that securitise loans simply taking their deals to the agencies likely to give them the highest ratings?

Translation: nothing has changed. The ratings agencies are too powerful, because the parties that pay them to issue ratings pay them too much to get rid of or even reform.

Which seamlessly takes us to Tracy Alloway today:

‘Ratings Shopping’ Makes A Comeback In The US

Sales of subprime mortgage bonds have withered since the financial crisis, but fresh concerns are arising as issuance of some other types of securitisations surges. Sales of bonds backed by loans used to finance car purchases undertaken by the least creditworthy borrowers have reached pre-crisis levels in the US, prompting a Department of Justice investigation. While losses on subprime auto asset-backed securities (ABS) remained low during the crisis, there are concerns that new specialised lending companies are making riskier loans which are then being bundled into the bonds.

Fitch Ratings has been hired to rate only four of the 29 subprime auto ABS deals sold so far this year, after telling issuers that the vast majority of the bonds did not deserve the triple-A ratings reserved for the highest-quality credits. Fitch – one of the “big three” agencies alongside Moody’s and Standard & Poor’s – warns that a flood of new entrants into the subprime auto lending market are lending to riskier borrowers as they seek to establish a foothold in the market. The creators of such securitisations typically pad the debt with extra cash or introduce other safety features – known as “credit enhancement” – to generate higher ratings on bonds comprised of riskier loans.

“The idea that recent loss history plus credit enhancement ‘heals all wounds’ can be short-sighted,” said Kevin Duignan, global head of securitisation at Fitch. “It’s often last one in, first one out in subprime.” He added: “We believe the risks associated with small lender sustainability are being underestimated by the market and some other rating agencies.”

US sales of commercial mortgage-backed securities, or CMBS, have also staged a recovery with $102bn worth of the deals sold last year – the highest amount since the $231bn issued in 2007, according to Dealogic data. At the same time, some market participants have been warning that the quality of the loans that underpin the bonds – typically secured by shopping malls, office buildings and other commercial properties – has been slipping.

You don’t have to be particularly smart to see here this is going. The floodgates are open, once more, and nothing at all, other than semantics and lip service, has been done to make them more secure. Because that would risk the flow of credit, which is the same as debt, and today gets habitually mistaken for money.

The boys in the banks are at it again, and this time their biggest supporters, if not clients, are central banks and treasury departments. If they can bring down investment requirements for pension funds enough from AAA, and they can at the same time – once again – label mezzanine (aka subprime) tranches of complex instruments ‘AAA’, they got it made. How can you go wrong when you have Mario Draghi himself begging you to to play this game?

Germany refuses to allow Draghi to buy sovereign bonds and add to the taxpayers’ risk, but what if you can simply shift it all to pension funds by moving the goalposts on what AAA really means?

We went through this 2007-8, and it ended badly, but apparently it’s just too tempting to leave alone. What is there to say? Insanity takes on entirely new proportions. It’s not just doing the same thing time and again, and expecting a different outcome, it’s doing the same thing and pretend it’s something new, because you give it a different name.

So now we get this concerted effort, the central banks are involved, the ratings agencies are too, to just about force pensions funds, the only store of real wealth left on the planet, to put their trillions into opaque and extremely risky instruments. Because Mario Draghi needs to find money, or whatever we should label it.

Draghi’s ABS-Market Revival Set for Boost From Global Regulators

Mario Draghi is trying to rebuild the market for asset-backed securities in Europe. Global regulators are set to lend him a hand. The International Organization of Securities Commissions will present criteria for marketable ABS to finance ministers from the Group of 20 nations this week, said Chairman Greg Medcraft.

Iosco wants to help create standards that would encourage non-bank investors to buy. A broader ABS market could improve companies’ access to financing and spur growth. That’s the goal behind the European Central Bank’s plan to purchase “simple and transparent” bundled securities with underlying assets including residential mortgages, Draghi said this month. “What we’ve done is develop criteria of what we consider to be simple, transparent and consistent securitization,” Medcraft said. “We’re looking at providing a framework that actually assists the market.”

The European market for ABS, like that in the U.S., was brought close to extinction in the financial panic of 2008, which was fueled in part by banks taking heavy losses on securitized U.S. subprime mortgage debt even though the tranches they held had been considered high quality. It has been slow to recover. Draghi said on Sept. 4 that the ECB will buy senior tranches – the least risky – of simple and transparent packaged securities. “We want to make sure that these ABS are being used to extend credit to the real economy,” he said.

[..] Medcraft said ABS in the right hands is a “fabulous technology.” “You look at the U.S., the auto-loan sector is booming in securitization,” he said. “I think the market is maturing, but it’s about winning back investors. We don’t want to regulate it. We want to provide a nudge.”

“ABS is a fabulous technology”. As we saw in 2008. Absolutely Fabulous. “The auto-loan sector is booming in securitization”, says one of the Three Stooges. And yes, US subprime auto loans are way up. True enough. Whether we should be happy about that is an entirely different story. It’s still subprime, homes or cars. You’re still lending to people with a huge risk that they can’t pay you back. Because they may be fired from their jobs as burger flippers. But yeah, until they are, the numbers look good.

That’s what Draghi’s policy is, going forward: squeeze the money Merkel won’t let him create out of thin air, out of fixed income, by moving the goalposts on definitions and semantics. It’s a poor man’s game played by one of the world’s post eminent central bankers, and all the rest, the ratings agencies and Wall Street banks, just play along. Draghi gives credence to anything they do. He’s a desperate man.

And by the way, the excesses and insanity of cheap credit don’t stop there either.

Banks See ‘Art of Possible’ in $100 Billion Deal

One year after pulling off the largest bond offering ever, Wall Street debt underwriters are pitching their clients on the possibility of something even bigger.

With investors clamoring for higher-yielding assets and companies on the biggest acquisition spree since 2007, bankers are talking up the ability of credit markets to fund a “mega deal” that Citigroup Inc. says could be backed by $100 billion or more of financing. That’s stoking speculation debt investors stand ready to fund potential takeovers such as a purchase by Anheuser-Busch InBev of rival beermaker SABMiller.

“We are prompting issuers to think outside of the box – in terms of the art of the possible,” said Tom Cassin, co-head of investment-grade finance at JPMorgan, the biggest underwriter of corporate bonds worldwide. “We have got clients that are certainly intrigued by it and interested in it.”

Bankers are pitching the “mega deal” even as investors brace for the 30-year rally in bonds to come to an end. They are telling companies that after fueling $18 trillion in corporate bond sales globally the past six years, including single deals bigger than the gross domestic product of countries from Slovenia to Iceland, appetite isn’t tapering.

Investors have poured about $49.4 billion into mutual funds that buy taxable bonds this year after pulling $20.6 billion in 2013, according to the Investment Company Institute. The added cash has helped shrink the extra yield that investment-grade debt worldwide pays above government securities by 15 basis points to 109 basis points, or 4 basis points from a seven-year low, according to Bank of America Merrill Lynch index data.

I doubt that anyone will have any trouble understanding what this is, and where it goes. The whole shebang is busy re-interpreting and re-defining until there are no more legal barriers for your pension money to be ‘invested’ in subprime loans packaged in ‘securities’ of whatever shape and from. So some trader in the Hamptons can make more wads of cash, through ultra low rates, off of beer brewers buying each other where they would never even have thought of that that at normal interest rates.

This is where our economies are perverted. It’s the final excesses and steps of a broke society. It’s madness to the power of infinity. The only thing that’s certain is that in the end, your money will all be gone. That’s how Mario Draghi ‘saves’ the EU for a few more weeks, and that’s how the big boys of finance squeeze more from what little you have left (which is already much less than you think).

A world headed for nowhere.

Beware.

• Only A Monetary ‘Nuclear Bomb’ Can Save Italy Now (AEP)

The OECD has drastically cut its growth forecast for Italy. The depression will drag on though most of 2015. The economy will contract by 0.4pc this year. It will remain stuck in the doldrums next year with growth of just 0.1pc. If so, Italy’s public debt will spiral to dangerous levels next year, ever further beyond the point of no return for a country without its own sovereign currency and central bank. “This is catastrophic for the finances of the country. We’re heading for a debt ratio of 145pc next year,” said Antonio Guglielmi, global strategist for Mediobanca. “Who knows the maximum number that the market will tolerate? The number is already scary, but for the time being Draghi’s poker game is proving successful, and there is now the smell of QE keep the game going for a bit longer.” “It is going to take a nuclear bomb to turn this around. If Draghi ends up doing almost nothing – and there is a lot of scepticism about the ECB’s plans – Italy is dead,” he said.

It has been an abominable few days for the Italian economy. ISTAT said today that industrial output fell by 1pc in July (m/m), and 1.8pc from a year ago. It is down a fifth since 2008. Exports from the regions fell 2.5pc in the second quarter (q/q). The figures for the South were nothing less than catastrophic: Sicilia (-11.1), Sardegna (-11.2), Basilicata (-24.6). It seems that the Mezzogiorno is falling off the bottom of the Italian economy. The OECD also slashed France’s growth by half a percentage point to 0.4pc this year. It cut Brazil by 1.5pc to 0.3pc. The Brazilian miracle is by now a structural wreck. Yet it is the eurozone that remains the epicentre of hopelessness. “The recovery in the euro area has remained disappointing, notably in the largest countries: Germany, France and Italy. Confidence is again weakening, and the anaemic state of demand is reflected in the decline in inflation, which is near zero in the zone as a whole and negative in several countries.” It called for QE, yet again, but such pleas are meaningless without a concrete number.

Italy’s debt reached 135.6pc of GDP in the first quarter, galloping upwards at a rate of 5pc of GDP each year. This is happening despite – or because of – a series of austerity packages, and even though the country is running a large primary budget surplus of 2pc-3pc of GDP. Plans to stabilise the debt have been blown to pieces. Note that the Monti government said three years ago that the ratio would end 2014 at 115pc. That Panglossian estimate is likely to be wrong by 25 percentage points of GDP. That is a staggering error in such a short space of time. Was it bad luck, or were those crafting policy in denial about the fundamental nature of Italy’s EMU-rooted crisis? Zolt Darvas from the Bruegel think tank in Brussels said Italy’s nominal GDP is flat or contracting, meaning that it must sustain a rising debt load on a static base. This is a classic debt-compound trap. “The OECD forecast for Italy is a negative shock. Everything now depends on growth dynamics, and that depends on the ECB. I don’t think the ECB is yet doing enough,” said Mr Darvas.

He said markets are mistaken if they think that the forthcoming blast of ECB lending (TLTROs) will act as super-stimulus merely because it boosts the ECB’s balance sheet (perhaps by €1 trillion over time). “The balance sheet is not a meaningful indicator. It has very few implications for monetary policy. Only purchases of assets will really make a difference,” he said. Exactly so, and we don’t yet know whether that will be a token gesture – like its earlier purchases of €60bn of covered bonds – or on a relevant scale. The ECB’s Yves Mersch said in a speech last week that this would be nothing like Anglo-Saxon QE, and nor is it intended to be. It is worth reading for a salutary cold douche. Italy’s rock star leader Matteo Renzi must by now have realised that his first gamble has failed. He thought he could ride a wave of recovery after snatching power in February in a remarkably audacious move in February, only to discover that Europe is not in fact recovering, and that his country is trapped, with no way out under the current deflationary/contractionary policies of the EMU regime.

If Italy slashes wages and deflates the economy further to regain lost competitiveness within EMU, the “denominator effect” will automatically cause the debt ratios to rise. There is no plausible remedy to this unless EMU switches tack to massive reflation, which the ECB is not in fact about to do. Mr Renzi will soon have to make a second gamble, whether to go along meekly with further austerity and fiscal cuts – chasing his tail in a perpetual vicious circle – and suffer the disastrous fate of French leader Francois Hollande. Or think of a better idea. I hand it over to Italian readers to suggest which of the two he might choose given his tempestuous character.

Read more …

“Ireland, which comprises less than 1% of Europe’s population, shouldered 43% of the net cost of the banking crisis across all 27 EU member states”.

• IMF Debt Deal Would Be Another Humiliation For Ireland At Hands Of EU (Ind.ie)

Two years ago, Taoiseach Enda Kenny spoke of a seismic shift in EU policy which would finally separate banking debt and sovereign debt. Today, that seismic shift has been long forgotten – and the government’s spin merchants are instead peddling some new snake oil. Finance Minister Michael Noonan is being lauded as some kind of conquering hero for convincing the IMF to allow us to repay them €18bn early. You see, when the IMF bailed the country out it attached a hefty interest rate to the repayments. The minister plans to take advantage of Ireland’s low borrowing costs on private markets to repay this money and save between €300m and €400m a year. This has all been agreed with the IMF, but there’s a snag. Noonan needs to get permission from our chums in the EU and the ECB for the deal to go ahead. The deal won’t actually cost them anything, or affect them in any material way, yet we still have to go crawling and begging for their permission.

So, for the last week breathless reports from financial journalists have been detailing the allegedly tense negotiations that are under way in order for the deal to get the green light. If it does go ahead the minister – by all accounts – will be in line for a canonisation, with economist Stephen Kinsella writing in this newspaper yesterday that “he will have sealed his place in history”. Which begs the question, has everybody lost their minds? Or is the country just suffering from a particularly acute case of amnesia. If so, allow me to remind you of some painful facts and figures that no one in government is too eager to trumpet. According to Eurostat, Ireland, which comprises less than 1% of Europe’s population, shouldered 43% of the net cost of the banking crisis across all 27 EU member states – €41bn out of €96.2bn.

As a percentage of GDP, that figure amounts to a staggering 25.8% for Ireland. To put that into perspective, the next highest percentage is 3.3% for Latvia. It means that the cost of the bank bailout was €8,956 for every man, woman and child in Ireland, compared to an EU average of €191. It gets worse. The €41bn figure cited by Eurostat doesn’t take into account the €20.7bn from the National Pension Reserve Fund that was used to bail out banks, because that figure wasn’t added to the national debt. In total, about €64bn was shovelled into the bloated corpses of Irish banks, around 40% of GDP.

Read more …

• Subprime Car Loans Bring ‘Ratings Shopping’ Back To The US (FT)

A practice derided for exacerbating the credit boom has returned with a bang as financial firms that sell securitised bonds seek out the rating agencies likely to give their deals the most favourable evaluations. So-called “ratings shopping” was blamed for helping conceal dangers in subprime mortgage bonds in the years before 2008, with agencies accused of handing out rosy ratings to risky bonds in an attempt to gain more business. Sales of subprime mortgage bonds have withered since the financial crisis, but fresh concerns are arising as issuance of some other types of securitisations surges. Sales of bonds backed by loans used to finance car purchases undertaken by the least creditworthy borrowers have reached pre-crisis levels in the US, prompting a Department of Justice investigation. While losses on subprime auto asset-backed securities (ABS) remained low during the crisis, there are concerns that new specialised lending companies are making riskier loans which are then being bundled into the bonds.

Fitch Ratings has been hired to rate only four of the 29 subprime auto ABS deals sold so far this year, after telling issuers that the vast majority of the bonds did not deserve the triple-A ratings reserved for the highest-quality credits. Fitch – one of the “big three” agencies alongside Moody’s and Standard & Poor’s – warns that a flood of new entrants into the subprime auto lending market are lending to riskier borrowers as they seek to establish a foothold in the market. The creators of such securitisations typically pad the debt with extra cash or introduce other safety features – known as “credit enhancement” – to generate higher ratings on bonds comprised of riskier loans. “The idea that recent loss history plus credit enhancement ‘heals all wounds’ can be short-sighted,” said Kevin Duignan, global head of securitisation at Fitch. “Our bigger concern in subprime is related to lender sustainability and longevity. It’s often last one in, first one out in subprime.”

Read more …

This is the level of Bloomberg: “Banks take cash from depositors and lend it to people to buy houses.” No, they don’t.

• Banks Turn Cash Into Mortgages and Back Into Cash (Bloomberg)

A quite wonderful post by Tracy Alloway at FT Alphaville about the Federal Home Loan Banks and the Liquidity Coverage Ratio. The issue, as it always is, is that:

• everyone wants banks to be safe, but
• everyone wants banks to do banking stuff.

The particular flavor of “safe” here is: Look, the big systemic risk of banks is runs on the bank. The way (a way) to reduce the risk of runs is for banks to just have a bunch of cash lying around. That way, if everyone comes into the bank yelling for their money back, you can just give them their money back. But of course there’d be no point to a bank that just has a bunch of cash lying around. The whole point of a bank is to take cash from depositors and use it to do stuff. The particular flavor of stuff at issue here is mortgage loans. Banks take cash from depositors and lend it to people to buy houses. That’s good, that’s what they’re supposed to do. But then the banks aren’t safe, because if there’s a run on the bank all the money is in mortgage loans, and you can’t give depositors back mortgage loans, there is actually a movie about that.

So obviously what you should do is find a way for banks to take in cash, use it to make mortgage loans and then magically transmute it back into cash. And the U.S. financial system, being wonderful, has a way to do just that. It’s called an advance from a Federal Home Loan Bank. Basically the FHLBs are government-sponsored enterprises that lend banks cash, at very low subsidized variable rates,1 secured by the banks’ mortgages. The FHLBs get the money by selling bonds, which are implicitly government guaranteed.2 So the system is, schematically:

Depositor deposits $1 at bank.
Bank makes $1 mortgage loan.
Bank borrows $1 against mortgage loan from FHLB.
Bank has $1 in cash.
FHLB borrows $1 from the market for safe agency bonds.

Read more …

• European Banks Feel Effects Of Fed’s ‘Reverse Repo’ (FT)

The Federal Reserve’s testing of a new liquidity tool has altered a longstanding financing relationship between money market funds and banks. Money market funds appear to be eschewing certain transactions undertaken with European banks in favour of the reverse repo programme, or RRP, tool created by the US central bank last September so as to help it wind down its emergency economic policies. The Fed has been regularly testing the RRP with numerous money market funds, ahead of eventually tightening monetary policy. Under a RRP, the central bank lends bonds from its vast portfolio of assets to large investors and these types of deals are expected to help the Fed better control short-term interest rates when it begins draining money from the financial system.

But the growing role of the Fed in the repo market has generated controversy, with some market participants worried that the central bank is absorbing repo business from banks, with the growing risk of distorting some markets in periods of stress. Traditionally money market funds have undertaken repo transactions with large private banks such as JPMorgan Chase and Deutsche Bank, lending them cash in return for their assets pledged as collateral. Repo transactions are an oft-ignored but crucial segment of the financial system that help lubricate other markets. A new analysis by Fitch Ratings shows that use of the RRP by government and prime money funds has risen sharply to a peak of $275bn at the end of the second quarter, up from $45bn in late September last year, according to the Fitch data. The funds appear to be switching out of repo transactions and certain deposits held at European banks in favour of the new Fed facility – especially around the end-of-quarter period, Fitch said.

Read more …

• Draghi’s ABS-Market Revival Set for Boost From Global Regulators (Bloomberg)

Mario Draghi is trying to rebuild the market for asset-backed securities in Europe. Global regulators are set to lend him a hand. The International Organization of Securities Commissions will present criteria for marketable ABS to finance ministers from the Group of 20 nations this week, said Chairman Greg Medcraft. Iosco wants to help create standards that would encourage non-bank investors to buy. A broader ABS market could improve companies’ access to financing and spur growth. That’s the goal behind the European Central Bank’s plan to purchase “simple and transparent” bundled securities with underlying assets including residential mortgages, Draghi said this month.

“What we’ve done is develop criteria of what we consider to be simple, transparent and consistent securitization,” Medcraft said. “We’re looking at providing a framework that actually assists the market.” The European market for ABS, like that in the U.S., was brought close to extinction in the financial panic of 2008, which was fueled in part by banks taking heavy losses on securitized U.S. subprime mortgage debt even though the tranches they held had been considered high quality. It has been slow to recover. Draghi said on Sept. 4 that the ECB will buy senior tranches — the least risky — of simple and transparent packaged securities. “We want to make sure that these ABS are being used to extend credit to the real economy,” he said.

Read more …

What better reason is there to vote Yes than seeing Greenspan, McCain and Zoellick get involved on the No side?

• US Alarmed By Prospect Of Scottish ‘Yes’ In Independence Vote (FT)

A “Yes” vote for independence would be an economic mistake for Scotland and a geopolitical disaster for the west, senior U.S. figures – including Alan Greenspan – tell the Financial Times as Washington wakes up to the chance that its closest ally could break up this week. Having assumed for months that “No” would win comfortably,Washington has reacted with alarm to opinion polls showing that Thursday’s referendum is going down to the wire. “We have an interest in seeing the U.K. remain strong, robust and united,” said Josh Earnest, the White House spokesman. Mr Greenspan, former chairman of the U.S. Federal Reserve, said the economic consequences of independence would be “surprisingly negative for Scotland, more so than the Nationalist party is in any way communicating”. “Their [nationalist] forecasts are so implausible they really should be dismissed out of hand,” said the normally circumspect Mr Greenspan, noting the pace of decline in North Sea oil production.

Despite Nationalist claims to the contrary, he said there was no chance of London agreeing to a currency union. Differing fiscal policies would also cause any Scottish attempt at using the pound regardless to “break apart very quickly”. “There’s no conceivable, credible way the Bank of England is going to sit there as a lender of last resort to a new Scotland,” said Mr Greenspan. Many U.S. officials combine ancestral roots in Scotland and knowledge of the Scottish Enlightenment’s influence on the U.S. constitution with strong emotional ties to the UK, an ally the U.S. has fought alongside for 100 years. “Like many Americans, and given that my name is Robert Bruce, I have an admiration for the Scots, their heritage, and their role in U.S. and world history,” said Robert Zoellick, the former deputy secretary of state and World Bank president.

Read more …

Lovely essay.

• Is This The End Of Britishness? (Guardian)

I suspect many people must love Scotland more than I do, as an entity and as a destiny. I don’t want to compete with them. My friend and former colleague Neal Ascherson wrote eloquently in a recent issue of Prospect about his decision to vote yes, and in his essay evoked a memorable image, worthy of Pixar. “Put it like this,” he wrote:

“In every Scottish brain, there has been a tiny blue-and-white cell which secretes an awareness: ‘My country was independent once.’ And every so often, the cell has transmitted a minute, almost imperceptible pulse: ‘Would it not be grand, if one day … ’ But this stimulated other larger, higher-voltage cells around it to emit suppressor charges: ‘Are you daft? Get real; we’re too wee, too poor, that shite’s for Wembley or the movies.’ One way of describing what’s happening now is to say that the reaction of these inhibitor cells has grown weak and erratic. Whereas the other pulse, the blue-white one, is transmitting louder, faster, more insistently. This is why the real referendum question is no longer: ‘Can we become independent?’ It is: ‘Yes, we know that we can – but do we want to?’”

As I drove one evening last month on a road that follows the River Tweed, which for some of its length marks the English-Scottish border, I wondered why I had never felt the pulse of this blue-and-white cell. And I wondered why Neal, who has spent as much of his life in England as I have, if not more, always seems to have felt it murmuring away like an old song, though the institutions that shaped and opened up his life – schools, universities, regiments, publishers, broadcasters, employers – were at the very least British, when not downright English, in their atmospheres and influences. But none of us is a rational actor in these things, untainted by our upbringing. In his essay, Neal remembers how he often heard the patriotic verse from Walter Scott’s The Lay of the Last Minstrel ringing round the kitchen in his mother’s cut-glass English:

“Breathes there the man with soul so dead
Who never to himself hath said
This is my own, my native land!”

Read more …

Tick tock…

• China’s Leaders Refuse To Blink As Economy Slows Drastically (AEP)

China’s leaders have brushed aside warnings of an incipient credit crunch in the Chinese economy, determined to purge excesses from the financial system despite falling house prices and the deepest industrial slowdown since the Lehman crisis. Industrial production dropped 0.4pc in August from a month earlier, a rare event that highlights how quickly China is coming off the boil. The growth of fixed asset investment fell to record lows. “It is a shockingly sharp deceleration,” said Wei Yao, from Societe Generale. “What is surprising is the calm response from Beijing. The new leadership’s tolerance for short-term pain seems to have jumped by another big notch.” Electricity output has dropped 2.2pc over the past year as the authorities continue to force dinosaur industries into closure, chipping away at excess capacity. New credit has fallen 40pc, and there has been an outright contraction of trust loans and undiscounted bankers acceptances over the past two months, the result of a clampdown on parts of the shadow banking nexus.

“The shrinking stock of trust loans is particularly dangerous to property developers,” she said. Fleming Nielsen, from Danske Bank, said there are signs of a “credit crunch” – albeit one engineered by regulators – with bond spreads for low grade corporate debt trading at pre-default levels. He said credit has slowed so much over recent months that it is no longer growing faster than nominal GDP, a crucial inflexion point. The property market remains dazed, with sales down 13.4pc in August. House prices have fallen for the past five months, with the effects spreading to related industries. The output of washing machines is down 7.5pc over the past year. Chang Chun Hua, from Nomura, said China’s central bank will have to step in to prevent overkill, predicting five successive cuts of 50 basis points in the Reserve Requirement Ratio (RRR) by the end of next year, and perhaps more radical measures if this fails to do the trick.

Read more …

Bit late?

• Australia Central Bank Warns About Housing Prices (CNBC)

Australia’s central bank warned of speculative demand in the country’s real estate sector, triggered by record low interest rates, signaling that further monetary policy easing is unlikely in the near term. The Reserve Bank of Australia (RBA) issued the statement Tuesday in the minutes from its latest policy meeting on September 2, when it kept interest rates at 2.5% for a 13th straight month. “For investors in housing, the pick-up in housing credit growth had been more pronounced than for owner-occupiers, with investor demand particularly strong in Sydney and to a less extent in Melbourne,” RBA said.

“Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later,” it added. Australia’s home prices have risen more than 10% so far this year, driven especially by demand for investment properties. On the Australia dollar, the RBA maintained that the currency remains “above its fundamental value,” despite the Aussie’s recent dramatic fall against the U.S. dollar, dipping below the 90-cent handle this week for the first time since March.

Read more …

Huh? Tony just wants money …

• Russia’s Challenge To An Oil-Hungry World (FT)

The oil price may be falling and global demand is “remarkably” subdued, according to a report last week from the International Energy Agency. But this has not stopped the former chief executive of BP, Tony Hayward, from issuing an uncomfortable warning. In an interview with the FT, Mr Hayward, who these days runs an oil company in Iraqi Kurdistan, worries that international sanctions against Russia’s oil sector are storing up trouble for the west. They risk cutting investment and damaging supplies from the world’s third-largest producer. The threat may have been masked by increases in American liquid petroleum production, which has surged above its 1970 zenith. But the US may not go on rising for ever, Mr Hayward notes. And when that happens, where will the world find its next new source of supply? It is a good question. Producing oil has become harder both for reasons of geology and politics; a crude price stuck around $100 per barrel is evidence enough. It may become harder still.

Talk about an “age of abundance” is justified only from a North American perspective. Elsewhere it is a different story: one of decline in fading regions such as the North Sea, and political and security threats in countries from Iraq to Iran and Venezuela. Since 2005, all of the increase in the world’s crude production has come from the US. Looking ahead a few years, nothing is likely to change. Global oil demand will continue to go up over the long term as the emerging economies become steadily wealthier. Supply, however, will not rise in lockstep. The IEA predicted last year that over 2012-18 the largest contributors of new supplies to world markets, after the US and Canada, would be Iraq and Brazil. But companies in Brazil are struggling with the technical challenges of its deepwater fields and political interference. Iraq is in chaos. Neither country can be relied upon.

Mr Hayward is right to worry about security of supply. Fortunately, however, the developed world need not panic quite yet. The new sanctions on Russia will take time to bite. They do not yank existing barrels off the market. Rather, they make it harder for Russia to develop shale or push out the frontiers of exploration into the Arctic – activity that will only drive production some years in the future. The risk that Mr Hayward identifies is more akin to a slow-moving ratchet than a 1973-style sudden price spike. The west has time to plot its response.

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• Former BP Chief Tony Hayward Warns On Russia Sanctions, $150 Oil (FT)

US and EU sanctions against Moscow are in danger of turning round and biting the west by constraining global oil supply and pushing up prices in coming years, the former chief executive of BP has warned. Tony Hayward said that cutting off capital markets from Russia’s energy groups, which would eventually lead to less investment in Russian oil production, was likely to damage long-term supply. He said the US shale boom had obscured the growing risks to the world’s supply picture, but its effect would wear off, leaving the global economy dangerously exposed to potential disruptions in the flow of oil. His comments came as the US and Europe expanded sanctions against Russia on Friday with the US adding Gazprom, Europe’s leading energy provider, and Lukoil, the privately owned oil group, to the list of companies deprived of US goods, technology and services for deepwater, Arctic offshore and shale projects.

EU and US sanctions have also imposed restrictions on financing for some state-owned Russian energy companies. “The world has been lulled into a false sense of security because of what’s going on in the US,” Mr Hayward said in an interview with the Financial Times, referring to the shale boom that has driven a 60% increase in US crude output since 2008. But he asked: “When US supply peaks, where will the new supply come from?” As output from mature basins such as the North Sea and Alaska’s North Slope declines, the world had been banking on new barrels from places such as Canada, Iraq and Russia. But the latter’s future production from untapped resources in the Arctic and the vast shale reserves of Siberia are under threat because of sanctions, Mr Hayward said. “Because of financial sanctions, the big gorillas are going to start cutting their activities,” he said.

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It’ll be either full indepedence or full war.

• Ukraine President’s Days Numbered After ‘Caving to Russia’ (Zero Hedge)

While Europe has been banging the populist drums over ever-escalating Russian sanctions, it quietly and without much fanfare folded in the one place where Russia could have been truly hurt, the Free Trade (DFCTA) agreement between Ukraine and the EU. But while Europe would have loved for nobody to notice, some did, and not just on these pages: far more importantly, so did the citizens of Ukraine where as the WSJ reports, Ukrainian President Petro Poroshenko faces rising criticism for his decision to delay implementation of part of a European Union deal to avoid threatened Russian retaliation. And this is why neither side can afford to blink, because the moment one side folds, its domestic support collapses. And blinking is precisely what Ukraine just did and with that it set in motion the events that will likely terminate prematurely the brief, irrelevant presidency of Ukraine’s “Chocolate Baron” Poroshenko.

From WSJ: “A senior diplomat resigned in protest over the weekend, and pro-European politicians who are competing with Mr. Poroshenko’s party in parliamentary elections next month blasted the decision as caving to Russia, which wants Ukraine to give up the deal and remain in its orbit. The tensions highlight how difficult it will be for Mr. Poroshenko to manage the competing pressures of a Kremlin that isn’t backing down and a domestic electorate that wants closer ties to Europe and no concessions to Moscow. On Friday, Ukraine and the EU agreed to put off implementing a landmark trade deal, which is part of a broader pact aimed at strengthening their ties, after Moscow threatened trade restrictions that would have crippled Ukraine’s already limping economy.

A cease-fire in the east, where Russia-backed rebels hold several towns and cities, is still largely holding despite scattered fighting. A government spokesman said Sunday that Ukrainian troops had repelled an assault on Donetsk airport by 200 pro-Russia rebels. In Kiev, pro-Western rivals of Mr. Poroshenko’s party railed against the president’s move to compromise at congresses to announce candidates for snap parliamentary elections scheduled for Oct. 26.”

It got so bad over the weekend, that former Prime Minister Yulia Tymoshenko, who was the person least actively supported by the CIA and US state department in Ukraine’s less than peaceful transition in February, and thus lost a May presidential election to Mr. Poroshenko, said the delay in implementing the EU free-trade part of the pact until 2016 was “a betrayal of national interests.” “There can’t be a single day of applying the brakes on our path to Europe,” she told a party meeting. She also called a referendum on potential membership of the North Atlantic Treaty Organization. So as the public mood suddenly and dramatically shifts in its impotent rage directed at Putin up until this point, into a domestic direction in general, and at the new president in particular, Poroshenko appears set to antagonize the public even more, following his disclosure moments ago that he proposes temporary self-governance in separatist-held areas in eastern regions of Donetsk, Luhansk, news service Ukrayinska Pravda reports, citing copy of draft law.

Bloomberg has the details:
• Local elections would be held in those districts this yr on Nov. 9
• Local authorities in special districts would have right to participate in appointment of local prosecutors, judges
• People’s militia would be created from local citizens in special districts
• Kiev authorities wouldn’t open criminal cases against participants of uprising in east
• Kiev guarantees right to use, learn Russian language; grants it equal status in special areas, for all Ukrainian citizens
• Ukraine to allocate annual budget spending to rebuild infrastructure, create jobs, back economical development of eastern regions
• Ukraine to allow areas’ “good neighborly relations” w/ Russia to deepen and strengthen
• Law, if approved, to remain in effect for 3 yrs from date of approval
• Parliament may consider draft law among other issues on Sept. 16. Lawmakers have received copy of draft

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US needs to fire both Pyatt and Nuland. Pronto.

• US Envoy To Ukraine Geoffrey Pyatt Caught Posting Fake Images On Twitter (RT)

US ambassador to Ukraine Geoffrey Pyatt has been caught posting unverified images on his Twitter feed Monday, as he was showing off the ongoing US-Kiev military exercises in Ukraine. Ambassador Pyatt first uploaded a picture of US and Ukrainian troops, which he said was taken in the morning at the military exercises in western Ukraine. Internet users quickly pointed out that the photo had already beenpublished as early as July 31. The ambassador then posted a picture of a German tank allegedly taking part in the drills. His tweet said that the Leopard 2 tank is taking part in Rapid Trident exercises near Lvov. However, Twitter users found out that the posted image was actually taken from a YouTube video uploaded nearly one year ago – in October 2013.

UK journalist and RT contributor Graham Phillips called Pyatt out on Twitter, calling the ambassador a “liar” for posting old photographs. This is not the first time ambassador Pyatt has been caught in a controversy over Ukraine’s internal affairs. Earlier this year, a leaked conversation between Pyatt and US Assistant Secretary of State for Europe Victoria Nuland revealed the two of them discussing Ukrainian opposition leaders’ roles in the country’s future government. “F**k the EU,” Nuland allegedly said in the phone call with Pyatt, which was taped and posted on YouTube in February.

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“We have the same prosecutor”.

• Snowden, Assange, Greenwald & Dotcom Team Up (RT)

In the first-ever gathering of the world’s leading whistleblowers, Wikileaks founder Julian Assange, ex-NSA contractor Edward Snowden and journalist Glenn Greenwald joined internet entrepreneur Kim Dotcom to discuss threats to privacy worldwide. The whistleblowers came out in support of Dotcom’s campaign against unaccountable surveillance by the NZ government, at an event to promote Dotcom’s Internet party at upcoming elections. “We share the same prosecutor,’ Assange told Dotcom, referring to attempts by authorities in Washington to extradite both men to face charges in the United States. Assange accused the US of trying to enforce its laws worldwide. By trying to control other countries’ law enforcement systems, the US is “annexing other countries,” the whistleblower said. The participants of the conference lashed out at the so-called “Five Eyes” alliance – the US, UK, Canada, Australia, and New Zealand – with Julian Assange describing it as “not an alliance of countries but an alliance of intelligence agencies operating within those countries.”

Dotcom said the activists at the conference wanted “to close one of the Five Eyes,” referring to New Zealand, which currently is facing a fierce debate on mass surveillance with Prime Minister John Key, denying it has taken place, while whistleblowers accuse him of lying. John Key had a war of words with Greenwald over the surveillance issue. The prime minister accused the journalist of being paid by Kim Dotcom to make his accusations, and then referred to Greenwald as a “loser.” “If this loser is going to come to town and try and tell me, five days before an election, staying at the Dotcom mansion with all the Dotcom people and being paid by Dotcom, that he’s doing anything other than Dotcom’s bidding – please don’t insult me with that,” Key told Mike Hosking at the Newstalk ZB Breakfast. Greenwald has denied being paid by Dotcom, and has accused Key of constantly changing his story. The journalist wrote on Twitter that he was “not going to sink to the Prime Minister’s level by name-calling.”

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Must read.

• Instant Gratification (American Scholar)

In the 1970s, social critics such as Daniel Bell, Christopher Lasch, and Tom Wolfe warned that our growing self-absorption was starving the idealism and aspirations of the postwar era. The “logic of individualism,” argued Lasch in his 1978 polemic, The Culture of Narcissism, had transformed everyday life into a brutal social competition for affirmation that was sapping our days of meaning and joy. Yet even these pessimists had no idea how self-centered mainstream culture would become. Nor could they have imagined the degree to which the selfish reflexes of the individual would become the template for an entire society. Under the escalating drive for quick, efficient “returns,” our whole socioeconomic system is adopting an almost childlike impulsiveness, wholly obsessed with short-term gain and narrow self-interest and increasingly oblivious to long-term consequences.

This new impulsiveness is most obvious in the business world, where an increasingly fanatical and self-justifying emphasis on quarterly earnings, share price, and executive bonuses has led to a pattern of self-serving, high-risk strategies. This “short-termism,” as economists call it, helped bring down financial markets in 2008—and it continues to destabilize the economy and the job market and undercut the future of the middle class. French economist Thomas Piketty blames rising inequality on capital’s natural tendency to replicate faster than the overall economy. But the more immediate culprit may be the institutionalization of an economic model so focused on quick, self-serving rewards, and so inured to long-term social costs, that it is destroying the economic foundations on which real prosperity depends. This industrial-scale impulsiveness isn’t confined to the business world. The media, academia, nonprofits, and think tanks—the very institutions that once helped counter the individual pursuit of quick, self-serving rewards—are themselves obsessed with the same rewards.

Most troubling, our political institutions, once capable of mobilizing resources and people to win wars, solve problems, and drive real progress, now settle for rapid wins while avoiding complex, perennial challenges, such as education reform, climate change, or preventing the next financial meltdown. The worst recession in three quarters of a century should have led us to rethink an economic model based on automatic upgrades and short-term gains. Instead, we’ve continued to focus our economic energies, entrepreneurial talents, and innovation on getting the biggest returns in the shortest time possible. Worse, we’ve done so even though fewer and fewer of us can afford to keep up with the Sisyphean pursuit of ever-faster gratification—a frustration expressed in the angry populism now paralyzing our politics. From top to bottom, we are becoming a society ruled by impulse, by the reflexive reach for quick rewards. We are becoming an Impulse Society.

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Wise man.

• Babson’s Warning (Jeff Thomas)

”[A] crash is coming, and it may be terrific. …. The vicious circle will get in full swing and the result will be a serious business depression. There may be a stampede for selling which will exceed anything that the Stock Exchange has ever witnessed. Wise are those investors who now get out of debt.”

The above words could easily have been stated by me or another of the (very) few others who currently predict the coming of crashes in the markets. But they were not. The statements above were made by investor Roger Babson at a speech at the Annual Business Conference in Massachusetts on 5th September, 1929. Mr. Babson’s prediction was not a sudden one. In fact, he had been making the same prediction for the previous two years, although he, in September of 1929, felt the crash was much closer. News of his speech reached Wall Street by mid-afternoon, causing the market to retreat about 3%. The sudden decline was named the “Babson Break.” The reaction from business insiders was immediate. Rather than respond by saying, “Thanks for the warning—we’ll proceed cautiously,” Wall Street vilified him. The Chicago Tribune published numerous rebuffs from a host of economists and Wall Street leaders. Even Mr. Babson’s patriotism was taken into question for making so rash a projection.

Noted economist Professor Irving Fisher stated emphatically, “There may be a recession in stock prices, but not anything in the nature of a crash.” He and many others repeatedly soothed investors, advising them that a resumption in the boom was imminent. Financier Bernard Baruch famously cabled Winston Churchill, “Financial storm definitely passed.” Even President Herbert Hoover assured Americans that the market was sound. But, 55 days after Mr. Babson’s speech, on 29th October, 1929, the market suddenly went into a free-fall, dropping 12% in its first day. Today, most people have the general impression that on Black Friday, the market crashed and almost immediately, there were breadlines. Not so. In the Great Depression, as in any depression, the market collapsed in stages. The market did not reach its bottom of 89% losses until July of 1932.

[..] This time around, the crash and its byproducts will be more extreme than in 1929, as the bubble itself is more extreme. And Wall Street can count on television and a media that has a vested interest in keeping the charade going as long as possible. It will also be more extreme, as the governments of much of the world are now broke and can only worsen their respective economies through the customary “solutions” that governments always employ—tariffs, confiscations, greater government control, etc. Finally, the aftermath will be more extreme, as—unlike in 1929, when most people actually believed in the government—this time around, there will be dramatic unrest. Just as in 1929, those who are declaring that “the Emperor has no clothes” are few in number, and their viewpoint is most certainly not put forth in the conventional media. For this reason, it’s understandable that the great majority of people invariably ignore the Babsons of the world as Chicken Littles and blithely charge toward the cliff like lemmings.

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That’s an insane number.

• US State Department Orders 160,000 Ebola Hazmat Suits (Jones)

The U.S. State Department has ordered 160,000 Hazmat suits for Ebola, prompting concerns that the federal government is anticipating the rapid spread of a virus that has already claimed an unprecedented number of lives. In a press release posted by Market Watch, Lakeland Industries, a manufacturer of industrial protective clothing for first responders, announced that it had signaled its intention “to join the fight against the spread of Ebola” by encouraging other suppliers to meet the huge demand created by the U.S. State Department’s order of 160,000 hazmat suits. “With the U.S. State Department alone putting out a bid for 160,000 suits, we encourage all protective apparel companies to increase their manufacturing capacity for sealed seam garments so that our industry can do its part in addressing this threat to global health,” states the press release.

The huge bulk order of hazmat suits for Ebola has stoked concerns that the U.S. government expects the virus to continue to ravage countries in west Africa and may also be concerned about an outbreak inside the United States. Although the State Department has announced that it is planning a “surge” of emergency medical personnel into western Africa, only 1400 federal workers are currently in the region, suggesting that the 160,000 figure is far higher than what would be required merely for sending medical workers abroad. In a related story, sources from within the Department of Defense have questioned why the Obama administration is implementing a military response to the Ebola epidemic when USAID and the Centers for Disease Control and Prevention are already involved in relief efforts. “We don’t need to be taking planners away from the CT [counterterrorism] mission, and that is what is going on,” the Defense Department source told Fox News.

As we reported last week, top German virologist Jonas Schmidt-Chanasit caused consternation when he suggested that the battle against Ebola in Sierra Leone and Liberia was lost and that the virus would eventually kill 5 million people. Evidence that the virus has mutated has led to fears that Ebola could have gone airborne to at least a limited extent. In an op-ed for the New York Times, Michael T. Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota, notes that, “there has been more human-to-human transmission in the past four months than most likely occurred in the last 500 to 1,000 years.” Osterholm says the premise that Ebola could mutate to become transmissible through the air is a possibility “that virologists are loath to discuss openly but are definitely considering in private.”

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The numbers are scary.

• What We’re Afraid to Say About Ebola (Osterholm)

The Ebola epidemic in West Africa has the potential to alter history as much as any plague has ever done. There have been more than 4,300 cases and 2,300 deaths over the past six months. Last week, the World Health Organization warned that, by early October, there may be thousands of new cases per week in Liberia, Sierra Leone, Guinea and Nigeria. What is not getting said publicly, despite briefings and discussions in the inner circles of the world’s public health agencies, is that we are in totally uncharted waters and that Mother Nature is the only force in charge of the crisis at this time. There are two possible future chapters to this story that should keep us up at night.\ The first possibility is that the Ebola virus spreads from West Africa to megacities in other regions of the developing world. This outbreak is very different from the 19 that have occurred in Africa over the past 40 years. It is much easier to control Ebola infections in isolated villages. But there has been a 300 percent increase in Africa’s population over the last four decades, much of it in large city slums.

What happens when an infected person yet to become ill travels by plane to Lagos, Nairobi, Kinshasa or Mogadishu — or even Karachi, Jakarta, Mexico City or Dhaka? The second possibility is one that virologists are loath to discuss openly but are definitely considering in private: that an Ebola virus could mutate to become transmissible through the air. You can now get Ebola only through direct contact with bodily fluids. But viruses like Ebola are notoriously sloppy in replicating, meaning the virus entering one person may be genetically different from the virus entering the next. The current Ebola virus’s hyper-evolution is unprecedented; there has been more human-to-human transmission in the past four months than most likely occurred in the last 500 to 1,000 years. Each new infection represents trillions of throws of the genetic dice. If certain mutations occurred, it would mean that just breathing would put one at risk of contracting Ebola. Infections could spread quickly to every part of the globe, as the H1N1 influenza virus did in 2009, after its birth in Mexico.

Why are public officials afraid to discuss this? They don’t want to be accused of screaming “Fire!” in a crowded theater — as I’m sure some will accuse me of doing. But the risk is real, and until we consider it, the world will not be prepared to do what is necessary to end the epidemic. In 2012, a team of Canadian researchers proved that Ebola Zaire, the same virus that is causing the West Africa outbreak, could be transmitted by the respiratory route from pigs to monkeys, both of whose lungs are very similar to those of humans. Richard Preston’s 1994 best seller “The Hot Zone” chronicled a 1989 outbreak of a different strain, Ebola Reston virus, among monkeys at a quarantine station near Washington. The virus was transmitted through breathing, and the outbreak ended only when all the monkeys were euthanized. We must consider that such transmissions could happen between humans, if the virus mutates.

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At last.

• US Deploys 3,000 Military Personnel to Fight Ebola (NY Mag)

Amid calls for a more aggressive U.S. response to the Ebola outbreak in West Africa, President Obama is expected to announce during a trip to the federal Centers for Disease Control and Prevention on Tuesday that the U.S. is ramping up its efforts to contain the virus. According to the Wall Street Journal, the plan involves sending about 3,000 U.S. military personnel to the region to coordinate the international effort, build treatment centers, and train healthcare workers. The first order of business will be setting up a headquarters in Monrovia, Liberia, and U.S. forces are expected to be on the ground there within two weeks. The military will then help build 17 treatment centers throughout the region, each with 100 beds, along with a facility to train up to 500 healthcare workers a week. The U.S. government will provide 400,000 Ebola home treatment kits in Liberia, and tens of thousands of kits to allow people to test themselves to see if they’re infected.

AP reports that the effort will cost about $500 million, and will come out of funds the Pentagon already requested from Congress to finance humanitarian efforts in Iraq and West Africa. Dr. Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota, told the New York Times that while this is an important step, it still won’t be enough. He said the effort is too focused on Liberia, though the outbreak has spread to Sierra Leone, Guinea, Nigeria, and Senegal as well. “We should see all of West Africa now as one big outbreak,” he said. “It’s very clear we have to deal with all the areas with Ebola. If the U.S. is not able or not going to do it, that’s all the more reason to say the rest of the world has to do it.” It looks like that may happen later this week. Samantha Power, the U.S. ambassador to the United Nations, has called for an emergency meeting of the U.N. Security Council on Thursday. “This is a perilous crisis but one we can contain if the international community comes together to meet it head on,” Power said.

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