SOE Archives - The Automatic Earth

This is going to be an exciting year for monetary policy. In fact, it already is, thanks to Europe and Japan. Investors were taken aback last week when the Bank of Japan bought fewer bonds and the ECB revealed – shock, horror – its language would have to evolve with the euro region’s economy. Both developments, and the reaction, were welcome. They say a lot about the strength of global growth and how it still surprises many people. First to Japan: Investors were wrong to interpret the reduced purchases as a sign that a policy shift is imminent. They were, however, right about the long-term direction of policy. It isn’t going to get looser. Will it remain accommodative as far as the eye can see? Yes.

With Japan’s economic sunny patch extending and inflation headed in the right direction – if still way too low – it’s not a stretch to see Governor Haruhiko Kuroda or his successor ease up a little on the stimulus. Just not right now. That was Jan. 9. Two days later, the fever struck in Europe. The proximate cause was the release of minutes from the ECB’s December meeting and the implication contained therein that communications would have to reflect a stronger growth terrain and improving, albeit still low, inflation. The euro jumped and German bond yields climbed. It feels like we just got through a big change from the ECB: the taper of bond purchases to 30 billion euros a month until September. (Remember when officials hated the word “taper”?) Now, here were policymakers flagging further revisions.

What’s the thread linking these two happenings? Despite all the data and pronouncements about a robust global economy and a synchronized upswing, people are still taken aback by signs that (a) it’s a reality and (b) policy is bound to react. I’m not saying policy is going to change overnight. But if you start with a global framework – we are in a global marketplace, are we not? – key to that framework really ought to be the direction of policy. Ask yourself: Are monetary chieftains going to make policy more easy or less easy, assuming the upswing in growth is sustainable? The answer has to be “less.”

Because it’s by far the biggest, and it’s a debt bubble, not a gossip one.

• The Bubble That Could Break the World (Rickards)

The credit-driven bubble has a different dynamic than a narrative-bubble. If professional investors and brokers can borrow money at 3%, invest in stocks earning 5%, and leverage 3-to-1, they can earn 6% returns on equity plus healthy capital gains that can boost the total return to 10% or higher. Even greater returns are possible using off-balance sheet derivatives. Credit bubbles don’t need a narrative or a good story. They just need easy money. A narrative bubble bursts when the story changes. It’s exactly like The Emperor’s New Clothes where loyal subjects go along with the pretense that the emperor is finely dressed until a little boy shouts out that the emperor is actually naked. Psychology and behavior change in an instant.

When investors realized in 2000 that Pets.com was not the next Amazon but just a sock-puppet mascot with negative cash flow, the stock crashed 98% in 9 months from IPO to bankruptcy. The sock-puppet had no clothes. A credit bubble bursts when the credit dries up. The Fed won’t raise interest rates just to pop a bubble — they would rather clean up the mess afterwards that try to guess when a bubble exists in the first place. But the Fed will raise rates for other reasons, including the illusory Phillips Curve that assumes a tradeoff between low unemployment and high inflation, currency wars, inflation or to move away from the zero bound before the next recession. It doesn’t matter. Higher rates are a case of “taking away the punch bowl” and can cause a credit bubble to burst.

The other leading cause of bursting credit bubbles is rising credit losses. Higher credit losses can emerge in junk bonds (1989), emerging markets (1998), or commercial real estate (2008). Credit crack-ups in one sector lead to tightening credit conditions in all sectors and lead in turn to recessions and stock market corrections. What type of bubble are we in now? What signs should investors look for to gauge when this bubble will burst? My starting hypothesis is that we are in a credit bubble, not a narrative bubble. There is no dominant story similar to the Nifty Fifty or dot.com days. Investors do look at traditional valuation metrics rather than invented substitutes contained in corporate press releases and Wall Street research. But even traditional valuation metrics can turn on a dime when the credit spigot is turned off.

BTC recovered somewhat overnight.

• South Korea Considers Shutting Down Domestic Cryptocurrency Exchanges (R.)

South Korean policymakers joined the global chorus of virtual-coin critics on Thursday, saying Seoul is considering shutting down domestic virtual currency exchanges as the new breed of market exposes users to speculative frenzy and crime. The country’s tough stance comes as policymakers from the United States to Germany struggle to come up with stricter regulation against money laundering and other crimes. Responding to questions in parliament, South Korea’s chief of the Financial Services Commission said: “(The government) is considering both shutting down all local virtual currency exchanges or just the ones who have been violating the law.” Separately, Bank of Korea Governor Lee Ju-yeol told a news conference that “cryptocurrency is not a legal currency and is not being used as such as of now.”

Regulators around the world are still debating how to address risks posed by cryptocurrencies, as bitcoin, the world’s most popular virtual currency, soared more than 1,700% last year. Prices have plummeted since South Korea announced last week it may ban domestic cryptocurrency exchanges. On Wednesday, bitcoin slid 18%. According to Bithumb, South Korea’s second-largest virtual currency exchange, the nation’s bitcoin trading price stood at 15,697,000 won ($14,690.69) as of 0314 GMT on Thursday. On the Luxembourg-based Bitstamp exchange, bitcoin was traded at $11,750. [..] On Thursday, the BOK governor said the central bank had begun looking into the market’s impact on the economy. “We have started looking at virtual currency from a long-term standpoint, as central banks could start issuing digital currencies in the future. This sort of research has begun at the Bank of International Settlements and we are part of that research.”

“Studies have shown that over 90% of the media’s coverage of President Trump is negative…”

• Trump Reveals Winners Of Controversial ‘Fake News Awards’ (AFP)

Donald Trump unveiled the winners of his much-touted “Fake News Awards” late Wednesday, escalating his already persistent attacks on a number of major US media outlets. The awards dropped hours after a senator from Trump’s own Republican party hurled a stinging rebuke at the president, accusing the US leader of undermining the free press with Stalinist language. The brash Republican president announced the ten “honorees” using his preferred medium of Twitter, linking to a list published on the Republican Party’s website that crashed minutes after his big reveal. The “winners” of the spoof awards included top networks and newspapers CNN, The New York Times and The Washington Post, all of which have been regular targets of Trump’s ire.

Nobel-prize winning economist Paul Krugman, who writes a regular opinion column for The New York Times, nabbed the number one spot. The administration said he merited the award for writing “on the day of President Trump’s historic, landslide victory that the economy would never recover.” Following the former reality star’s stunning rise to power, Krugman had written that Trump’s inexperience on economic policy and unpredictability risked further damaging the weak global economy. The list also pointed to a reporting error from ABC’s veteran reporter Brian Ross, who was suspended for four weeks without pay after he was forced to correct a bombshell report on ex-Trump aide Michael Flynn.

[..] 11. And last, but not least: “RUSSIA COLLUSION!” Russian collusion is perhaps the greatest hoax perpetrated on the American people. THERE IS NO COLLUSION!

“We’re talking about big damages. We’re talking about numbers that you haven’t even thought about,” Trump said.”

• Trump Considers Big ‘Fine’ Over China Intellectual Property Theft (R.)

President Donald Trump said on Wednesday the United States was considering a big “fine” as part of a probe into China’s alleged theft of intellectual property, the clearest indication yet that his administration will take retaliatory trade action against China. In an interview with Reuters, Trump and his economic adviser Gary Cohn said China had forced U.S. companies to transfer their intellectual property to China as a cost of doing business there. The United States has started a trade investigation into the issue, and Cohn said the United States Trade Representative would be making recommendations about it soon. “We have a very big intellectual property potential fine going, which is going to come out soon,” Trump said in the interview.

While Trump did not specify what he meant by a “fine” against China, the 1974 trade law that authorized an investigation into China’s alleged theft of U.S. intellectual property allows him to impose retaliatory tariffs on Chinese goods or other trade sanctions until China changes its policies. Trump said the damages could be high, without elaborating on how the numbers were reached or how the costs would be imposed. “We’re talking about big damages. We’re talking about numbers that you haven’t even thought about,” Trump said.

U.S. businesses say they lose hundreds of billions of dollars in technology and millions of jobs to Chinese firms which have stolen ideas and software or forced them to turn over intellectual property as part of the price of doing business in China. The president said he wanted the United States to have a good relationship with China, but Beijing needed to treat the United States fairly. Trump said he would be announcing some kind of action against China over trade and said he would discuss the issue during his State of the Union address to the U.S. Congress on Jan. 30. Asked about the potential for a trade war depending on U.S. action over steel, aluminum and solar panels, Trump said he hoped a trade war would not ensue. “I don’t think so, I hope not. But if there is, there is,” he said.

This is not going to work. It’s a one way ticket back to Mao.

• China’s Communists Take More Stakes In Private Companies (BBG)

After tightening the Communist Party’s grip on state-owned enterprises, President Xi Jinping’s administration is signaling an increasing presence in private companies. Xi has called state enterprises the “backbone” of China’s socialist economy. But most of the giants were founded before the boom in technology-driven industries over the past two decades. That’s created a large swathe of the economy that’s largely private – think tech and consumer champions like Alibaba, Tencent and Baidu, along with innovators in sectors from finance to automation. Now, SOEs are on track to take stakes in private companies. “China wants to maintain state control over every aspect of the national economy, and it needs to keep up with the changes in the economic structure,” said Chen Li at Credit Suisse.

“How can it overlook the most important industries to the future economy?” Much of the overhaul of state-owned enterprises under Xi has focused on a consolidation in the hundreds of sprawling units across the country, such as those that have reshaped the shipping and train-making industries. But a lesser-noticed part of the broad “mixed ownership” initiative features SOEs being encouraged to take stakes in private companies. This part of the initiative has yet to gather pace, though equity strategists anticipate moves to come. They would showcase how China continues to develop its own path toward developed-nation status – not entirely state dominated, but with more control by political authorities than in countries like France that have nurtured state champions.

The head of the Beijing agency that oversees China’s SOEs, Xiao Yaqing, reiterated the push in a People’s Daily article on state enterprise reforms Dec. 13. The private stakes will be acquired through various means, he and other top officials have said. The mechanism has already been applied in the case of the state’s crackdown on financier Xiao Jianhua’s Tomorrow Holding empire. The government ordered the holding company to divest from many of its financial assets, people with knowledge of the matter said this month. State-owned Citic Guoan Group Co. bought a $1.4 billion stake in Hengtou Securities – known as Hengtai on the mainland – with a large part of the purchase coming from Tomorrow Group. Investors applauded the move, in a sign of what could happen when the state invests elsewhere. Hengtou has jumped more than 20% this year after announcing the stake sale.

More Trump success.

• Apple Expects to Pay $38 Billion Tax on Repatriated Cash (BBG)

Apple said it will bring hundreds of billions of overseas dollars back to the U.S., pay about $38 billion in taxes on the money and invest tens of billions on domestic jobs, manufacturing and data centers in the coming years. The iPhone maker plans capital expenditures of $30 billion in the U.S. over five years and will create 20,000 new jobs at existing sites and a new campus it intends to open, the Cupertino, California-based company said Wednesday in a statement. “We are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” Chief Executive Officer Tim Cook said in the statement, which alluded to unspecified plans by the company to accelerate education programs.

In its December approval of the most extensive tax-code revisions since 1986, Congress scrapped the previous international tax system for corporations — an unusual arrangement that allowed companies to defer U.S. income taxes on foreign earnings until they returned the income to the U.S. That “deferral” provision led companies to stockpile an estimated $3.1 trillion offshore. By switching to a new system that’s designed to focus on domestic economic activity, congressional tax writers also imposed a two-tiered levy on that accumulated foreign income: Cash will be taxed at 15.5%, less liquid assets at 8%. Companies can pay over eight years. Apple has the largest offshore cash reserves of any U.S. company, with about $252 billion in at the end of September, the most recently reported fiscal quarter.

The company, which opened a new headquarters in Cupertino last year, said it also plans to open another site in the U.S. focused initially on employees who provide technical support to Apple product users. Apple said it will announce the location of the new campus at a later date. The company already has a sprawling campus in Austin, Texas, for supply chain and technical support employees.

Or maybe not.

• Apple May Not Hire 20,000 New Workers, or Bring Back Its Overseas Cash (MW)

Apple announced a series of plans Wednesday that were celebrated as promises to hire thousands of workers and bring home billions of dollars in cash. Well, not necessarily. Apple said in its release that the company planned to “create over 20,000 new jobs through hiring at existing campuses and opening a new one.” The key word there is “create,” which Apple really likes to use when discussing jobs: The company even has a portion of its website dedicated to “job creation” that claims it is “responsible for 2 million jobs” in the United States, most of which are jobs “attributable to the App Store ecosystem.” Apple currently employs 84,000 people in the U.S., it said Wednesday, while an October filing with the Securities and Exchange Commission said that it has a total of 132,000 full-time employees worldwide, suggesting that about a third of its employees work abroad.

A quarter of the 2 million jobs Apple claims responsibility for are positions through Apple’s U.S.-based suppliers. “From the people who manufacture components for our products to the people who distribute and deliver them, Apple directly or indirectly supports hundreds of thousands of U.S. jobs,” Apple says on the page. [..] Many also took Apple’s promise to pay $38 billion in repatriation taxes as a promise that Apple would bring home more than a quarter-trillion dollars it currently has overseas. However, Apple does not have to bring home that money, and much of it is tied up in long-term investments that would make it unlikely. The company has to pay taxes on overseas earnings whether it brings the money back to the United States or not, so paying the tax does not mean the money is coming home.

What I wrote about last week: “digital super states” like Facebook and Google have been working to “re-establish discourse control”.

• Assange Keeps Warning Of AI Censorship (CJ)

In a statement that was recently read during the “Organising Resistance to Internet Censorship” webinar, sponsored by the World Socialist Web Site, Assange warned of how “digital super states” like Facebook and Google have been working to “re-establish discourse control”, giving authority over how ideas and information are shared back to those in power. Assange went on to say that the manipulative attempts of world power structures to regain control of discourse in the information age has been “operating at a scale, speed, and increasingly at a subtlety, that appears likely to eclipse human counter-measures.”

What this means is that using increasingly more advanced forms of artificial intelligence, power structures are becoming more and more capable of controlling the ideas and information that people are able to access and share with one another, hide information which goes against the interests of those power structures and elevate narratives which support those interests, all of course while maintaining the illusion of freedom and lively debate. In an appearance via video link at musician and activist M.I.A.’s Meltdown Festival last June, the WikiLeaks editor-in-chief expounded in far more detail about his thoughts on the potential for artificial intelligence to be used for controlling online information and discourse in a way human intelligence can’t hope to keep up with.

Pointing out how AI can already outmaneuver even the greatest chess players in the world, he describes how programs which can operate with exponentially more tactical intelligence than the human intellect can manipulate the field of available information so effectively and subtly that people won’t even know they are being manipulated. People will be living in a world that they think they understand and know about, but they’ll unknowingly be viewing only establishment-approved information. “When you have AI programs harvesting all the search queries and YouTube videos someone uploads it starts to lay out perceptual influence campaigns, twenty to thirty moves ahead,” Assange said. “This starts to become totally beneath the level of human perception.”

Sell sell sell.

• Australia’s Household Debt-to-Income Ratio Reaches 200% (AFR)

The closely tracked Australian household debt-to-income ratio has now reached the 200% level, and analysts at UBS are concerned about rising pressures among borrowers. The increase was because of the Australian Bureau of Statistics revision to include self-managed superannuation debt. That resulted in a 3% rise in household debt from “extremely elevated levels”, and pushed the ratio to income to 199.7%, “one of the highest in the world,” according to UBS. “With subdued growth in household income expected to continue, this implies household leverage is likely to rise further in the near term,” it said. “As a result we expect total household debt to disposable income to peak around 205% before the slow deleveraging process begins.”

High household debt levels will constrain further borrowing and weigh on prospects for earnings growth at the big banks, analysts Jonathan Mott and Rachel Bentvelzen said as they downgraded their forecasts for housing credit growth. House prices, which have begun to decline in Sydney, are expected to slide further as a result of tighter lending standards, the retreat of foreign buyers, lending limits imposed by regulators and concerns about proposed changes to negative gearing and capital gains tax that have been tabled by the Opposition. “Sentiment for investment into the housing market is waning, with the ‘fear of missing out’ euphoria fading quickly, especially in Sydney,” the analysts said in a note to clients.

The insanity of today.

• Mario Draghi Told To Drop Membership Of Secretive Bankers’ Club (G.)

The president of the European Central Bank has been told by the EU’s watchdog he should drop his membership of a secretive club of corporate bankers, after claims the group had been given an inside seat from which it could influence key policies. Following a year-long investigation, Mario Draghi was informed on Wednesday by the European ombudsman, Emily O’Reilly, that his close relationship with the Washington-based G30 group threatened the reputation of the bank, despite his assurances to the contrary. Members of the exclusive club, of which only two of the current 33 are women, are chosen by an anonymous board of trustees, it emerged during the ombudsman’s investigation. Only the identity of the chair of the trustees, Jacob A Frenkel, the chairman of JPMorgan Chase, has been made public.

O’Reilly noted the group’s secrecy and lack of transparency over the content of its meetings. She additionally called for a ban on all future presidents of the ECB taking up membership of the club, previously named the Consultative Group on International Economic and Monetary Affairs. The ruling followed a complaint by the Corporate Europe Observatory (CEO), a Brussels-based NGO, which claimed Draghi’s close relationship to G30 was in contravention of the ECB’s ethical code. During his presidency of the ECB, Draghi, an Italian economist who previously worked at Goldman Sachs, has attended four G30 meetings, in 2012, 2013 and twice in 2015.

O’Reilly said there was a danger that the bank’s independence could be perceived to have been compromised by Draghi’s involvement with the group, whose members include a number of central bank governors, private sector bankers and academics. The governor of the Bank of England, Mark Carney, is a member. But O’Reilly said there was no evidence of sensitive information being shared. The ombudsman said: “The ECB takes decisions that directly affect the lives of millions of citizens. In the aftermath of the financial crisis, and in consideration of the additional powers given to the ECB in recent years to supervise member state banks in the public interest, it is important to demonstrate to that public that there is a clear separation between the ECB as supervisor and the finance industry which is affected by its decisions.”

Not one word about emissions. Not one. Oh wait, “continuous improvements to its safety, security, efficiency and environmental footprint “. Pants on fire.

• Global Air Traffic At New Record (AFP)

Budget carriers continued to push global air traffic to new record levels last year, the International Civil Aviation Organization (ICAO) said on Wednesday. Scheduled air services carried “a new record” of 4.1 billion passengers in 2017, an increase of 7.1% over the previous year, ICAO said, citing preliminary data. The figure compares with 6% growth in 2016. “The sustainability of the tremendous growth in international civil air traffic is demonstrated by the continuous improvements to its safety, security, efficiency and environmental footprint,” ICAO Council president Olumuyiwa Benard Aliu said in a statement from the Montreal-based agency.

Early this month, two industry studies showed that last year was the safest for civil aviation since plane crash statistics were first compiled in 1946. A total of 10 crashes of civil passenger and cargo planes claimed 44 lives, said the Aviation Safety Network. A separate report from the To70 agency said no major airline crashed a plane in 2017. ICAO, a United Nations agency, said Wednesday that low-cost carriers flew an estimated 1.2 billion passengers or about 30% of the global total last year. The budget airline sector “consistently grew at a faster pace compared to the world average growth, and its market share continued to increase, specifically in emerging economies,” ICAO said.

Missed opportunity: including the emissions of electric cars.

• Europe’s Microwave Ovens Emit Nearly As Much CO2 As 7 Million Cars (G.)

Popping frozen peas into the microwave for a couple of minutes may seem utterly harmless, but Europe’s stock of these quick-cook ovens emit as much carbon as nearly 7m cars, a new study has found. And the problem is growing: with costs falling and kitchen appliances becoming “status” items, owners are throwing away microwaves after an average of eight years, pushing rising sales. A study by the University of Manchester worked out the emissions of carbon dioxide – the main greenhouse gas responsible for climate change – at every stage of microwaves, from manufacture to waste disposal. “It is electricity consumption by microwaves that has the biggest impact on the environment,” say the authors.

“Efforts to reduce consumption should focus on improving consumer awareness and behaviour to use appliances more efficiently. For example, electricity consumption by microwaves can be reduced by adjusting the time of cooking to the type of food.” Each year more microwaves are sold than any other type of oven in the EU: annual sales are expected to reach 135m by the end of the decade. David Reay, professor of carbon management at the University of Edinburgh, pointed out that the damage done by microwaves is still a fraction of that done by cars. “Yes, there are a lot of microwaves in the EU, and yes they use electricity,” he said.

“But their emissions are dwarfed by those from cars – there are around 30m cars in the UK alone and these emit way more than all the emissions from microwaves in the EU. Latest data show that passenger cars in the UK emitted 69m tonnes of CO2 equivalent in 2015. This is ten times the amount this new microwave oven study estimates for annual emissions for all the microwave ovens in the whole of the EU.” The energy used by microwaves is lower than any other form of cooking. uSwitch, the price comparison website, lists microwaves as the most energy efficient, followed by a hob and finally an oven, advising readers to buy a microwave if they don’t have one. However, they urge owners to switch them off at the wall after use, to avoid powering the clock.

The Guardian can try to chest thump as much as it wants, but it too got triggered for real only through David Attenborough’s Blue Planet II, just like Theresa may et al.

• 1 Million Tonnes A Year: UK Supermarkets Shamed For Plastic Packaging (G.)

Britain’s leading supermarkets create more than 800,000 tonnes of plastic packaging waste every year, according to an investigation by the Guardian which reveals how top chains keep details of their plastic footprint secret. As concern over the scale of unnecessary plastic waste grows, the Guardian asked Britain’s eight leading supermarkets to explain how much plastic packaging they sell to consumers and whether they would commit to a plastic-free aisle in their stores. The chains have to declare the amount of plastic they put on the market annually under an EU directive. But the information is kept secret, and Tesco, Sainsbury’s, Morrisons, Waitrose, Asda and Lidl all refused the Guardian’s request, with most saying the information was “commercially sensitive”. None committed to setting up plastic-free aisles – something the prime minister called for last week.

Only two supermarkets, Aldi and the Co-op, were open about the amount of plastic packaging they put on to the market. Using their data, and other publicly available market share information, environmental consultants Eunomia estimated that the top supermarkets are creating a plastic waste problem of more than 800,000 tonnes each year – well over half of all annual UK household plastic waste of 1.5m tonnes. The 800,000 tonnes of waste from food and beverage products would fill enough large 10-yard skips to extend from London to Sydney, or cover the whole of Greater London to a depth of 2.5cm. The revelations will add to mounting public concern about the damage that plastic does to the natural world. The Guardian has already revealed the vertiginous growth in plastic production, and the heavy environmental toll it exacts.

Dominic Hogg, chairman of Eunomia, said the figures could be higher. “The data reported for plastic packaging put on the market as a whole is an underestimate in our view,” said Hogg. Supermarkets in the UK keep their plastic footprint secret with a confidentiality agreement signed with the agencies involved in the British recycling compliance scheme. It means the amount of plastic packaging created by each supermarket and the money they pay towards its recycling is kept out of the public domain. One leading supermarket manager is calling for the whole system to be made more transparent and targeted to make the irresponsible producers pay more. Iain Ferguson, head of sustainability at the Co-op, said Britain should adopt the French system of “bonus-malus”, where supermarkets are taxed more for using material which is not easily recyclable and less for sustainable and recyclable packaging.

And it really is this simple.

• The Plastic-Free Stores Showing The Big Brands How To Do It (G.)

In the past few weeks Richard Eckersley has noticed a change in the type of people who come into his shop. The former Manchester United footballer, who turned his back on the game to set up the the UK’s first “zero waste” store on Totnes high street in Devon, says it is no longer only committed environmentalists who pop in, looking for a cleaner way to shop. “We thought January might be a bit quieter but it has been crazy,” says Eckersley, who set up the Earth.Food.Love shop with his wife Nicola in March. “A lot of new people are coming in – people who have not necessarily been involved in green issues before … it really feels like this [concern about plastic waste] is starting to break out of the environmental bubble.”

Last week Theresa May put cutting plastic pollution at the heart of the government’s 25-year environmental plan, and although critics said it was short on detail she did call for supermarkets to introduce plastic-free aisles to offer customers more choice. But Eckersley says many consumers are already way ahead of politicians. He and his wife have helped people who are planning to set up similar stores in Wales, Birmingham and Bristol. “We are getting calls every week from around the country from people wanting to set up something similar in their towns … it feels like this has really tapped into something that is growing all the time.” More than 200 miles away, Ingrid Caldironi shares the enthusiasm. She set up the plastic-free Bulk Market in east London last year. It has proven so popular that it is now moving to bigger, permanent premises at the end of the month.

“We have had an amazing response, especially in the last couple of months,” she says. Eckersley and Caldironi are at the vanguard of a burgeoning anti-plastics movement in the UK that has been fuelled by newspaper investigations including the Guardian’s Bottling It series, the Blue Planet television series and a general alarm at the damage plastic is doing to the natural environment. But their enthusiasm is not shared by big supermarkets, which have thus far shown little inclination to reduce their plastic waste. “For a nation of shopkeepers we are lagging behind in this race,” says Sian Sutherland, founder of the campaign A Plastic Planet which led the calls for plastic-free aisles. “The most exciting thing is that politicians and industry are no longer claiming that we can recycle our way out of the plastic problem,” she added. “Banning the use of indestructible plastic packaging for food and drink products is the only answer.”

Debt Rattle September 8 2016

Sep 082016

September 8, 2016 Posted by Raúl Ilargi Meijer at 9:27 am Finance Tagged with: bad loans, cash, ECB, FBI, Fed, Fukushima, Hanjin, jobless, P2P, recession, SOE Comments Off

Harris&Ewing The Post Office building in Washington DC 1911

• US Recession Jitters Stoke Fears of Impotent Fed and Fiscal Paralysis (AEP)

• One In Six Prime-Age American Men Has No Job (NPR)

• GDP – Even Less Than Meets The Eye (720 Global)

• It Won’t Be Long Now – The End Game Of Central Banking Is Nigh (Stockman)

• China’s $1 Trillion Makeover Of Bloated SOEs Attracts Skeptics (BBG)

• China’s Massive Infrastructure Investment Is A Model To Avoid (MW)

• P2P Lenders Push Chinese Students To Borrow At Exorbitant Rates (BBG)

• Collapse Of Hanjin Leaves $14 Billion Worth Of Goods Adrift (BBG)

• EU Regulators: Bad Loans Are Systemic Challenge for European Banks (BBG)

• America’s Quiet War on Cash (TAM)

• FBI Records on Financial Crisis Requested by U.S. Lawmaker (BBG)

• Clinton Foundation: False Philanthropy (Ortel)

• Former Japan PM Accuses Abe Of Lying Over Fukushima (G.)

Picture of failure.

• US Recession Jitters Stoke Fears of Impotent Fed and Fiscal Paralysis (AEP)

An ominous paper by the US Federal Reserve has become the hottest document in high finance. It was intended to reassure us that the world’s hegemonic central bank still has ample firepower to overcome the next downturn. But the author was too honest. He has instead set off an agitated debate, and rattled a lot of nerves. David Reifschneider’s analysis – ‘Gauging the Ability of the FOMC to Respond to Future Recessions’ – more or less concedes that the Fed has run out of heavy ammunition. The Federal Open Market Committee had to cut interest rates by an average of 550 basis points over the last nine recessions in order to break the fall and stabilize the economy. It could not possibly do so right now, or next year, or the year after.

QE in its current form cannot compensate, and nor can forward guidance. They are largely exhausted in any case. “One cannot rule out the possibility that there could be circumstances in the future in which the ability of the FOMC to provide the desired degree of accommodation using these tools would be strained,” he wrote. This admission is painfully topical as a plethora of data suggest that the US economy may have hit a brick wall in August. The ISM gauge of manufacturing plunged below the boom-bust line to 49.4, and the services index dropped to a six-year low, with new orders crashing nine points. My own tentative view is that these ISM readings are rogue surveys. The Atlanta Fed’s ‘GDPNow’ tracker points to robust US growth of 3.6pc in the third quarter. The New York Fed version is coming in at 2.8pc.

Yet the US expansion is already long in the tooth after 87 months, and late-cycle chemistry is notoriously unpredictable. Warning signs certainly abound. Corporate profits have been slipping for six quarters, the typical precursor to an abrupt slump in business spending. “The only thing keeping the US out of recession is the US consumer. If consumption stalls then we really are in trouble,” says Albert Edwards from Societe Generale. I am willing to bet against him for now. The M1 money supply – often a good leading indicator – has picked up after a weak patch earlier this year and is now surging at a rate of 10.1pc. This pace would normally signal burst of torrid growth a few months later. It is in stark contrast to the monetary contraction before the Lehman crisis.

My presumption is that the day of reckoning has been pushed well into 2017, but in the dead of the night I have a horrible sweaty feeling that Mr Edwards may be right. It is not a time to be chasing stock markets already at vertiginous levels. The Reifschneider paper argues that the Fed can probably muddle through, so long as it succeeds in pushing interest rates back up to 3pc or so before the next recession hits. Even then it might have to launch a further $4 trillion of QE and stretch its balance sheet to a once unthinkable $8.5 trillion.

” In the 1960s, nearly 100% of men between the ages of 25 and 54 worked..”

• One In Six Prime-Age American Men Has No Job (NPR)

At 4.9%, the nation’s unemployment rate is half of what it was at the height of the Great Recession. But that number hides a big problem: Millions of men in their prime working years have dropped out of the workforce — meaning they aren’t working or even looking for a job. It’s a trend that’s held true for decades and has economists puzzled. In the 1960s, nearly 100% of men between the ages of 25 and 54 worked. That’s fallen over the decades. In a recent report, President Obama’s Council of Economic Advisers said 83% of men in the prime working ages of 25-54 who were not in the labor force had not worked in the previous year. So, essentially, 10 million men are missing from the workforce.

“One in six prime-age guys has no job; it’s kind of worse than it was in the depression in 1940,” says Nicholas Eberstadt, an economic and demographic researcher at American Enterprise Institute who wrote the book Men Without Work: America’s Invisible Crisis. He says these men aren’t even counted among the jobless, because they aren’t seeking work. Eberstadt says little is known about the missing men. But there are factors that make men less likely to be in the labor force — a lack of college degree, being single, or being black. So, why are men leaving? And what are they doing instead?

“GDP as most commonly used can be a flawed measurement if one tries to infer that the size or growth of economic activity is well correlated to the prosperity of its people..”

• GDP – Even Less Than Meets The Eye (720 Global)

The most common statistic used to measure the size and growth rate of a nation’s economy is Gross Domestic Product (GDP). However, GDP as most commonly used can be a flawed measurement if one tries to infer that the size or growth of economic activity is well correlated to the prosperity of its people. Consider China and the United States for example. The U.S. has a GDP of approximately $16.5 trillion and a population of roughly 325 million while China has a GDP of nearly $11 trillion and a population of approximately 1.4 billion.

One could say that China’s economy is about two-thirds the size of the U.S. economy, however when one considers how that activity is spread amongst the citizens, China’s economy is only one-seventh that of the U.S. Accordingly, Chinese citizens are clearly less productive and prosperous than U.S. citizens GDP per capita (per citizen), as demonstrated above, is a valid way to measure the efficiency of one nation’s economic output versus another and is also an important statistic to gauge the productivity and prosperity trends in one country. We have frequently shown the declining trend in secular GDP growth in charts like those shown below.

Above, GDP is plotted on an absolute basis and does not take into account the amount of economic activity or economic growth per person. Below, we show the ten-year growth rate of GDP per capita.

As one easily notices GDP on a per capita basis is more worrisome than when viewed on a total basis as in the first two graphs. The economic growth rate per person is currently below one half of one%. More concerning, it is below levels seen during the great financial crisis in 2008 and it is still trending lower. This graph confirms our macroeconomic concerns and helps explain, in part, why so many U.S. citizens feel like they are being left behind. Factor in that many of the economic spoils are not evenly distributed, as assumed in this analysis, but are largely accruing to the wealthy, and the problem only worsens. As such, the growing social anxiety and trend towards populism, be it conservative or liberal leaning, will not likely dissipate if the aforementioned economic trends continue.

Centralization as a whole is going the way of the dodo.

• It Won’t Be Long Now – The End Game Of Central Banking Is Nigh (Stockman)

As Contra Corner readers recognize the only consistent way forward for America at this late stage of the game is a return to free markets, fiscal rectitude, sound money, constitutional liberty, non-intervention abroad, minimalist government at home and decentralized political rule. Unfortunately, that is not about to happen any time soon—–even if by some miracle Donald Trump is elected President. But what the book does claim is that the tide is turning against the failed Wall Street/Washington bipartisan consensus. I call this insurrection the “revolt of the rubes” in Flyover America. This uprising against the rule of the financial and political elites has counterparts abroad among those who voted for Brexit in the UK, against Merkel in the recent German elections in her home state, and among the growing tide of anti-Brussels sentiment reflected in polls throughout the EC.

Needless to say, the political upheaval now underway is largely an inchoate reaction to the policy failures and arrogant pretensions of the establishment rulers. Like Donald Trump himself, it does not reflect a coherent programmatic alternative. But my contention is that liberation from our current ruinous policy regime has to start somewhere—and that’s why the Trump candidacy is so important. He represents a raw insurgency of attack, derision, impertinence and repudiation. If that leads to throwing out the beltway careerists, pettifoggers, hypocrites, ideologues, racketeers, power seekers and snobs who have brought about the current ruin then at least the decks will be cleared.

So doing, the Trump candidacy—win or lose—is paving the way for an honest debate about the Fed’s war on savers and wage earners, the phony Bubble Finance prosperity it has bestowed on the bicoastal elites and Imperial Washington’s delusionary addiction to debt, war and special interest racketeering. In addition to the political revolt of the rubes, the establishment regime is now imperiled by another existential threat. To wit, the world’s central bankers have finally painted themselves into the mother of all corners. Literally, they dare not stop their printing presses because the front-runners and robo-traders have taken them hostage. Recent developments at all three major central banks, in fact, provide powerful evidence that the end of the current Bubble Finance regime is near.

Beijing control trumps efficiency, and that’s not going to change.

• China’s $1 Trillion Makeover Of Bloated SOEs Attracts Skeptics (BBG)

To grasp the scale of the challenges facing Chinese leaders in revamping their sprawling and inefficient state-owned enterprises, consider this: The combined revenue of 100-plus government-owned firms, spanning from train makers to banks and power companies, rivals Japan’s entire $4.1 trillion economy. China’s SOE sector, traditionally a source of political patronage and economic power for the Communist Party, accounts for about 40% of China’s industrial assets and 18% of total employment, according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik. These government creations are also dragging down growth, with their return on assets in 2015 estimated to be at 2.8%, versus 10.6% for private sector-firms.

Cutting SOEs down to size and improving their profitability is critical to President Xi Jinping and Premier Li Keqiang’s signature economic policy of rebalancing the $10 trillion economy away from an over-reliance on debt-fueled infrastructure investment and exports to one powered more by services and consumer spending. One strategy has been to embrace mergers – about $1 trillion of asset combinations have been announced since late 2014. The broad government sector overhaul adds up to a major triage effort, keeping healthy or strategic state firms like banks, energy and telecoms under tight control while orchestrating supersized consolidation among ailing giants in shipping, cement and metals to improve efficiency and slash over-capacity. Without a major overhaul, China’s low labor productivity growth – now less than a tenth of European, Japanese and U.S. levels – isn’t likely to improve.

[..] Despite the pressure to turn around, there are about 50 or so “too-big-to-fail” state enterprises in energy, technology and defense that are deemed to be so strategic that they will continue to receive generous government support, according to Lin Boqiang, director of Xiamen University’s energy economics research center. For the rest, Xi’s SOE makeover will be a gradual process with progress coming in fits and starts. Combing two inefficient firms doesn’t necessarily create a healthy one without some forceful leadership to eliminate overlap and excess capacity, as could be the case in the steel industry. “When you combine BaoSteel and Wuhan Steel, two companies thousands of kilometers apart, I’m not sure what they could do together that they couldn’t do separately,” according to Lardy.

Too much wasted.

• China’s Massive Infrastructure Investment Is A Model To Avoid (MW)

Some leading U.S. politicians and economists including President Obama have admired China’s massive investment in new transportation projects and wished America could do the same. Yet a new research paper suggests China’s approach is “a model to avoid” and one that could trigger a global crisis unless dramatically altered. In a paper, four professors at Oxford University assert that a majority of large Chinese investment projects over the past three decades have underestimated costs, failed to deliver the promised benefits and played a smaller role than conventional wisdom suggests in making the country more prosperous.

“China is not a model to follow for other economies – emerging or developed – as regards infrastructure investing, but a model to avoid,” wrote professors Atif Ansar, Bent Flyvbjerg, Alexander Budzier and Daniel Lunn. Many Western lawmakers and economists have long praised China’s investment in new roads, rail, bridges and airports as means to improve the nation’s growth and reduce unemployment. Some have also suggested authoritarian governments are better able than democracies to get projects off the ground. “How do we sit back and watch China and Europe build the best bridges and high-speed railroads and gleaming new airports, and we’re doing nothing?” Obama complained in a speech several years ago urging Congress to spend more on infrastructure.

Jim Millstein, a former Treasury Department official from 2009-2011, makes a similar argument Wednesday, in a Washington Post column. “A well-designed program of new infrastructure spending can be just the catalyst the U.S. economy needs to get out of its rut,” he argued. Yet the Chinese approach is much costlier and less beneficial than it appears, the researchers contend. In many cases projects are subject to special-interest manipulation, poorly designed or shoddily implemented to meet political edicts. Quality, safety and environmental issues are not uncommon and the Chinese government is heavy-handed when obtaining land, even displacing masses of citizens from seized homes and property.

The power of shadow banks.

• P2P Lenders Push Chinese Students To Borrow At Exorbitant Rates (BBG)

Across college campuses in China, a small army of marketers is recruiting students to borrow money at interest rates many times that charged by the nation’s banks. Those without a credit history or parental approval can borrow money to buy a smartphone, pay for holidays, or get the latest sneakers through a raft of apps such as Fenqile. The market leader, whose name literally means Happy Installment Payments, has 50,000 part-time marketers across more than 3,000 universities and proudly touts the slogan “Wait no more; love what I love.” Welcome to the regulatory gray area where peer-to-peer lending meets e-commerce in China.

In the last three years, tens of millions of students have taken out micro-loans with the tap of a button to buy things. Once just the realm of startups, the sector has attracted heavy hitters in China’s online industry, including Alibaba’s finance affiliate and JD.com, which are pouring hundreds of millions of dollars into the lending model. In a nation with 37 million college students, the market is expected to reach $15 billion, according to the Beijing-based market research firm Analysys. While traditional banks, the biggest of which are state-owned, have long been regulated, such peer-to-peer lenders have not, though Fenqile at least says it welcomes more oversight.

Sounds like a huge global overcapacity. Which of course is in line with shrinking global trade.

• Collapse Of Hanjin Leaves $14 Billion Worth Of Goods Adrift (BBG)

Suppliers to companies such as Nike Inc. and Hugo Boss AG are scrambling to ensure their T-shirts and sneakers reach buyers in time for the year-end holiday season after the collapse of Hanjin Shipping Co. left an estimated $14 billion worth of goods adrift. Esquel Group, a Hong Kong-based manufacturer for fashion brands including Nike, Hugo Boss and Ralph Lauren, is hiring truckers to move four stranded containers of raw materials to its factories near Ho Chi Minh City as soon as they can be retrieved from ports in China. Liaoning Shidai Wanheng, a Chinese fabrics importer and a supplier to Marks & Spencer, has made alternative arrangements for shipments that were scheduled with Hanjin.

“Our production lines are waiting,” said Kent Teh, who runs Esquel’s Vietnam business. “We potentially have to take airfreight to deliver the garment items to clients in the U.S. and U.K.” Apparel, handbags, televisions and microwave ovens are among goods stranded at sea after Korea’s largest shipping company filed for bankruptcy protection last week, setting off a series of events that roiled the global supply chain. A U.S. Court on Tuesday provided a temporary reprieve, which may help vessels call on ports such as Los Angeles without the fear of getting impounded. Any major bottlenecks ahead of Thanksgiving and Christmas could put a dent in the two-month shopping season, which netted some $626 billion of sales last year in the U.S.

“The ratio varies widely, from close to 50% in Cyprus to around 1% in Sweden.” Italy is the big fish here.

• EU Regulators: Bad Loans Are Systemic Challenge for European Banks (BBG)

European regulators are sounding the alarm about the persistence of bad loans weighing on the balance sheets of banks in the region. In a report Wednesday on financial risks, the European Union agencies that set rules and technical standards for banks, insurers and markets called for a joint effort to tackle non-performing loans. “Insufficiently addressed asset quality concerns and persistent high level of NPLs are a significant driver of uncertainty in the EU banking sector,” they said. “Given the widespread, and thus systemic, nature of the significant challenges related to NPL, European supervisors, regulators and legislators should consider pursuing a coordinated, articulated and more decisive approach to this matter.”

Supervisors such as the European Central Bank need to raise pressure on banks to account for and reduce NPLs “in a more proactive and bold fashion,” the report says. Banks should adopt “a conservative provisioning policy, a prudent valuation of loans and collateral” and commit “to a NPL resolution plan with time-bound targets.” [..] European banks have the highest ratio of bad loans among developed countries, and progress to lower the share has been slow. According to the report, 5.7% of all loans were overdue on average in the first quarter, more than three times the ratio in the U.S. or Japan. The ratio varies widely, from close to 50% in Cyprus to around 1% in Sweden. High NPL levels are a capital constraint, hurt profits and limit new lending, according to the agencies.

In line with Nicole’s article series we’re currently running.

• America’s Quiet War on Cash (TAM)

Government campaigns of intimidation – like the wars on drugs, terror, and poverty – have been used to extort the public for decades. Despite the previous failures of institutional “wars,” a new war on cash is being waged that threatens freedom in a more subversive way than ever before. Banks and governments around the world are cracking down on the use of paper money, and in turn, eliminating any anonymity left in the current system. Through strict rules on cash transactions and civil asset forfeiture laws, for example, the system has already instituted penalties for using cash. But as payments evolve into a purely digital network, the consequences of this new paradigm are being brought into the spotlight.

The ability to track, record, and mediate transactions of all individuals is a power dictators throughout history could have only dreamed of. Those who value privacy are turning to alternatives like cash, cryptocurrencies, and precious metals, but these directly threaten central bank dominance. This ongoing tug-of-war in financial innovation will determine whether we enter an age of individual empowerment or centralized enslavement. As mundane as it may seem, the main reason for this push to go cashless is directly tied to what world central banks are doing to prop up their economies. The manipulation of interests rates to zero or even negative has left central banks no ammunition to fight off the next recession. Without the ability to cut interest rates even further, stimulating economic growth is nearly impossible.

The decisions made in response to the 2008 crisis have led to a perverted environment in which customers could be charged just for holding money in their accounts. As long as individuals have the ability to move their funds into paper currency and escape the losses, banks are still limited to how far they can push the envelope. Regardless, the federal government continues to pressure banks into issuing “Suspicious Activity Reports” for withdrawals of even as little as $5,000. That amount will undoubtedly decrease if and when more people resort to stuffing cash under their mattresses.

Perhaps a little late?

• FBI Records on Financial Crisis Requested by U.S. Lawmaker (BBG)

FBI files on the firms that contributed to the 2008 financial crisis should be released to help the public understand why no senior executives were charged, a U.S. congressman from New Jersey said. Democrat Bill Pascrell asked FBI Director James Comey for witness interview transcripts, notes, reports and memos from the agency’s probes into the crisis, according to a letter dated Tuesday. Pascrell said the FBI initiated criminal inquiries into at least 14 companies as part of its investigation into the origins of the crisis, which was ignited when prices of subprime-mortgage bonds plummeted after home-loan defaults soared. “Here we are eight years later – do you think the public knows how this happened? Do you think the public knows all of the recommendations made to the Justice Department?” Pascrell said Wednesday in an interview.

“Why are Hillary Clinton’s e-mails any more important?” The FBI earlier this month released a summary investigation and interview with Clinton to provide context on its recommendation that the Justice Department not prosecute Clinton or her aides for using a private e-mail system. The Democratic presidential nominee was interviewed by FBI agents and federal prosecutors for 3 1/2 hours on July 2 in Washington. Pascrell, who sits on both the budget and ways and means committees, said in many cases it would be too late to bring legal actions. Releasing the information would increase transparency and provide a public service, he said.

“..it is a case study in international charity fraud, of mammoth proportions…”

• Clinton Foundation: False Philanthropy (Ortel)

To informed analysts, the Clinton Foundation appears to be a rogue charity that has neither been organized nor operated lawfully from inception in October 1997 to date–as you will grow to realize, it is a case study in international charity fraud, of mammoth proportions. In particular, the Clinton Foundation has never been validly authorized to pursue tax-exempt purposes other than as a presidential archive and research facility based in Little Rock, Arkansas. Moreover, its operations have never been controlled by independent trustees and its financial results have never been properly audited by independent accountants.

In contrast to this stark reality, Bill Clinton recently continued a long pattern of dissembling, likening himself to Robin Hood and dismissing critics of his “philanthropic” post-presidency, despite mounting concerns over perceived conflicts of interest and irregularities. Normally, evaluating the efficacy of a charity objectively is performed looking closely into hard facts only -specifically, determining whether monies spent upon “program service expenditures” actually have furthered the limited, authorized “tax-exempt purposes” of entities such as the Bill, Hillary, and Chelsea Clinton Foundation, its subsidiaries, its joint ventures, and its affiliates (together, the “Clinton Charity Network”).

But, popular former presidents of the United States retain “bully pulpits” from which they certainly can spin sweet-sounding themes to a general audience and media that is not sufficiently acquainted with the strict laws and regulations that do, in fact , tether trustees of a tax-exempt organization to following only a mission that has been validly pre-approved by the Internal Revenue Service, on the basis of a complete and truthful application. This Executive Summary carries forward a process of demonstrating that the Clinton Foundation illegally veered from its IRS-authorized mission within days of Bill Clinton’s departure from the White House in January 2001, using publicly available information which, in certain cases, has been purposefully omitted or obscured in disclosures offered through the Clinton Foundation website, its principal public portal.

Fukushima is too big to be papered over. But that’s all that happens.

• Former Japan PM Accuses Abe Of Lying Over Fukushima (G.)

Japan’s former prime minister Junichiro Koizumi has labelled the country’s current leader, Shinzo Abe, a “liar” for telling the international community that the situation at the wrecked Fukushima Daiichi nuclear power plant is under control. Koizumi, who became one of Japan’s most popular postwar leaders during his 2001-06 premiership, has used his retirement from frontline politics to become a leading campaigner against nuclear restarts in Japan in defiance of Abe, a fellow conservative Liberal Democratic party (LDP) politician who was once regarded as his natural successor. Abe told members of the International Olympic Committee (IOC) in Buenos Aires in September 2013 that the situation at Fukushima Daiichi nuclear power plant was “under control”, shortly before Tokyo was awarded the 2020 Games.

IOC officials were concerned by reports about the huge build-up of contaminated water at the Fukushima site, more than two years after the disaster forced the evacuation of tens of thousands of residents. “When [Abe] said the situation was under control, he was lying,” Koizumi told reporters in Tokyo. “It is not under control,” he added, noting the problems the plant’s operator, Tokyo Electric Power (Tepco), has experienced with a costly subterranean ice wall that is supposed to prevent groundwater from flowing into the basements of the damaged reactors, where it becomes highly contaminated. “They keep saying they can do it, but they can’t,” Koizumi said. He went on to claim that Abe had been fooled by industry experts who claim that nuclear is the safest, cleanest and cheapest form of energy for resource-poor Japan.

“He believes what he’s being told by nuclear experts,” Koizumi said. “I believed them, too, when I was prime minister. I think Abe understands the arguments on both sides of the debate, but he has chosen to believe the pro-nuclear lobby.” After the Fukushima crisis, Koizumi said he had “studied the process, reality and history of the introduction of nuclear power, and became ashamed of myself for believing such lies”. [..] Koizumi, 74, has also thrown his support behind hundreds of US sailors and marines who claim they developed leukaemia and other serious health problems after being exposed to Fukushima radiation plumes while helping with relief operations

Debt Rattle May 24 2016

May 242016

May 24, 2016 Posted by Raúl Ilargi Meijer at 9:40 am Finance Tagged with: bailout, China, debt, derivatives, Deutsche, Greece, iron, NIRP, refugees, SOE, yen, yuan Comments Off

Lewis Hine A heavy load for an old woman. Lafayette Street below Astor Place, NYC 1912

• ‘Massive Bailout’ Needed in Debt-Saddled China: Charlene Chu (BBG)

• SOE Debt Could Easily Overwhelm China’s Banking System (Abc.au)

• China Takes Back Control Over Yuan (WSJ)

• Negative Rates Prompt Japan Banks to Opt Out Via Derivatives (BBG)

• Iron Ore Price Falls 27% In Past Month (BI)

• Deutsche Bank Ratings Cut by Moody’s (BBG)

• Greece Is Never Going To Grow Its Way Out Of Debt (Coppola)

• Austerity Means Privatizing Everything We Own (G.)

• US Court Opens Door Over Libor Claims (FT)

• Italy Helps Rescue 2,600 Migrants From Sea In 24 Hours (R.)

• Greece Starts Clearing Makeshift Refugee Camp On Border (R.)

Selling vehicles to vehicles: “The WMPs [wealth management product] used to be predominantly sold to the public, but now they’re increasingly being sold to banks and other WMPs.”

• ‘Massive Bailout’ Needed in Debt-Saddled China: Charlene Chu (BBG)

Charlene Chu, a banking analyst who made her name warning of the risks from China’s credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation’s economy. Speaking eight days after a Communist Party newspaper highlighted dangers from the build-up of debt, Chu, a partner at Autonomous Research, said she was yet to be convinced the government is serious about deleveraging and eliminating industry overcapacity. She also argued that lenders’ off-balance-sheet portfolios of wealth-management products are the biggest immediate threat to the nation’s financial system, with similarities to Western bank exposures in 2008 that helped to trigger a global meltdown.

The former Fitch Ratings analyst uses a top-down approach to calculating China’s bad-debt levels as the credit to GDP ratio worsens, requiring more credit to generate each unit of GDP. She’s on the bearish side of the debate about the outlook for China and has sounded warnings since the nation’s credit binge began in 2008. “China’s debt problems are large and severe, but in some respects a slow burn. Over the near term, we think the biggest risk is banks’ WMP [wealth management product] portfolios. The stock of Chinese banks’ off-balance-sheet WMPs grew 73% last year. There is nothing in the Chinese economy that supports a 73% growth rate of anything at the moment.

Regardless of all of the headlines and announcements about the authorities cracking down on WMPs, they have done very little, really, and issuance continues to accelerate. “We call off-balance-sheet WMPs a hidden second balance sheet because that’s really what it is – it’s a hidden pool of liabilities and assets. In this way, it’s similar to the Special Investment Vehicles and conduits that the Western banks had in 2008, which nobody paid attention to until everything fell apart and they had to be incorporated on-balance-sheet. “The mid-tier lenders is where these second balance sheets are very large. China Merchants Bank is a good example. Their second balance sheet is close to 40% of their on-balance-sheet liabilities. Enormous.”

“Although contributing to less than one-third of economic output and employment, SOEs take up nearly half of bank lending..”

• SOE Debt Could Easily Overwhelm China’s Banking System (Abc.au)

Chinese banks are looking down the barrel of a staggering RMB 8 trillion – or $1.7 trillion – worth of losses according to the French investment bank Societe Generale. Put another way, 60% of capital in China’s banks is at risk as authorities start the delicate and dangerous process of reining in the debt-bloated and unprofitable state-owned enterprise (SOE) sector. Disturbingly though, debt is not only not shrinking, it is accelerating, making the eventual reckoning far worse. China’s overall non-financial debt grew by 15.2% in 2015 to RMB 167 trillion ($35 trillion) or almost 250% of GDP. That is up from 230% of GDP the year before and the 130% it was eight years ago before the global financial crisis hit.

The problem is largely centred on China’s 150,000 or so SOEs, which suck-up an entirely disproportionate amount of the nation’s capital. “Although contributing to less than one-third of economic output and employment, SOEs take up nearly half of bank lending (RMB 37 trillion) and more than 80% of corporate bond financing (RMB 9.5 trillion),” Societe Generale found. “While the inefficiency of SOEs is gradually dragging down economic growth, recognising even a small share of SOEs’ non-performing debt would easily overwhelm the financial system.” Despite their moribund financial performance, the SOEs still enjoy a considerable advantage in access to funding through the banking system than the private sector.

“To put things into perspective, a quarter of SOEs’ loans and bonds are equivalent to the entire capital base of commercial banks plus their loan-loss reserves, equivalent to 23% of GDP,” Societe Generale’s China economist Wei Yao said. On the bank’s figures, if just 3% of loans to SOEs sour, commercial banks’ non-performing loans would double.

Wanting to control the yuan exchange rate is a threat to reserves.

• China Takes Back Control Over Yuan (WSJ)

Behind closed doors in March, some of China’s most prominent economists and bankers bluntly asked the People’s Bank of China to stop fighting the financial markets and let the value of the nation’s currency fall. They got nowhere. “The primary task is to maintain stability,” said one central-bank official, according to previously undisclosed minutes of the meeting reviewed by The Wall Street Journal. The meeting left little doubt China’s top leaders have lost interest in a major policy shift announced in a surprise move just nine months ago. In August 2015, the PBOC said it would make the yuan’s value more market-based, an important step in liberalizing the world’s second-largest economy.

In reality, though, the yuan’s daily exchange rate is now back under tight government control, according to meeting minutes that detail private deliberations and interviews with Chinese officials and advisers who spoke with The Wall Street Journal about the country’s currency policy. On Jan. 4, the central bank behind closed doors ditched the market-based mechanism, according to people close to the PBOC. The central bank hasn’t announced the reversal, but officials have essentially returned to the old way of adjusting the yuan’s daily value higher or lower based on whatever suits Beijing best. The flip-flop is a sign of policy makers’ deepening wariness about how much money is fleeing China, a problem driven by its slowing economy.

For now, at least, officials believe the benefits of freeing the yuan are outnumbered by the number of threats. Re-emphasizing the yuan’s stability would also bring a sigh of relief to trading partners who worried a weaker currency would boost Chinese exports at the expense of those produced elsewhere. Freeing the yuan, the biggest overhaul of China’s currency policy in a decade, was meant to empower consumers and help invigorate the economy. The negative reaction, from financial markets world-wide and Chinese who sped their efforts to take money out of the country, was so jarring that the top leadership, headed by President Xi Jinping, began to have second thoughts.

At a heavily guarded conclave of senior Communist Party officials in December, Mr. Xi called China’s markets and regulatory system “immature” and said “the majority” of party officials hadn’t done enough to guide the economy toward more sustainable growth, according to people who attended the meeting. To the central bank, there was only one possible interpretation: Step on the brakes.

Turns out, it can still get worse.

• Negative Rates Prompt Japan Banks to Opt Out Via Derivatives (BBG)

Japanese banks reluctant to pay for the privilege of lending are opting out by using derivatives. The options set a floor on rates used to determine interest on loans, and the holder will be paid if the rates fall below that level, according to Aozora Bank and Tokyo Star Bank. The benchmark three-month Tokyo interbank offered rate has plunged to a record low of 6 basis points since the Bank of Japan announced it would start charging fees on some lenders’ reserves in January. Options with floors at zero% or minus rates have been traded recently, according to Aozora Bank. “There’s a need to hedge against money-losing lending that could happen if the Tibor falls to negative levels,” said Tetsuji Matsuka, the head of the ALM planning treasury department at Tokyo Star Bank.

“We think demand will increase” for such products, he said. Japanese banks are getting hurt as the negative-rate policy compresses their lending margins, with the top-three firms including Mitsubishi UFJ Financial forecasting this month that net income will fall a combined 5.2% in the year started April 1. The BOJ’s radical stimulus has already dragged yields on more than 70% of Japanese government bonds to below zero, meaning that investors will have to effectively pay a fee to hold such debt to maturity. In the yen London interbank offered rate market, where some rates are already below zero, options have been traded with floors as low as minus 1%, according to Nobuyuki Takahashi, the general manager of the derivatives sales division at Aozora Bank.

The three-month yen Libor was at minus 0.02% on Friday. Companies that borrow at floating rates may also be able to use floor options to ensure that interest-rate swaps they use to hedge against rising rates don’t end up costing them due to negative rates, Takahashi said. Actual trades of such derivatives are still not that common because the contracts are expensive to buy now, he said. “It will be hard to price these options unless we get more liquidity,” said Tateo Komatsu, a deputy general manager of global markets at Sumitomo Mitsui Trust Bank Ltd. “It will take time for the market to get used to minus rates.”

Roller coaster in a casino.

• Iron Ore Price Falls 27% In Past Month (BI)

The iron ore price is imploding. Following the ugly lead provided by Chinese futures on Monday, the spot iron ore price followed suit, suffering one of the largest declines seen in years. According to Metal Bulletin, the spot price for benchmark 62% fines fell by 6.69%, or $3.67, to $51.22 a tonne, leaving it down 27.3% from the multi-year peak of $70.46 a tonne struck on April 21. The decline was the third-largest in percentage terms in the past two years, and left the price at the lowest level seen since March 3 this year. The losses in physical and futures markets followed news that Chinese iron ore port inventories swelled to over 100 million tonnes last week, leaving them at the highest level seen since March last year.

That followed the revelation that Chinese crude steel output contracted in April after hitting a record high in March, declining marginally according to figures released by the China Iron and Steel Association (CISA). Given the increasing correlated relationship between the two, it’s also clear that an unwind of speculative positioning in Chinese iron ore futures is also impacting prices in the physical iron ore market. After watching prices in many bulk commodity futures rally more than 50% in less than two months, regulators at both the Dalian Commodities Exchange and Shanghai Futures Exchange introduced measures in recent weeks to discourage excessive levels of speculation in these markets.

Slow death?!

• Deutsche Bank Ratings Cut by Moody’s (BBG)

Deutsche Bank had its credit rating cut by Moody’s Investors Service, which said the German lender faces mounting challenges in carrying out its turnaround. The bank’s senior unsecured debt rating was lowered to Baa2 from Baa1, Moody’s said Monday in a statement. That left the grade two levels above junk. The firm’s long-term deposit rating fell to A3 from A2. “Deutsche Bank’s performance over the last several quarters has been weak, and substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm,” Moody’s said in the statement. CEO John Cryan’s planned overhaul of the bank, laid out in October, ran into an industrywide slump in trading and investment banking, as well as interest rates that have gone from low to negative in parts of Europe and Asia.

Net income fell 61% in the first quarter, leaving the company at risk of a second straight annual loss this year as it tries to resolve legal cases. Results so far and the challenges ahead, including a chance of further slumps in retail and market-linked businesses, will probably force Deutsche Bank to balance restructuring costs with the need to amass capital for stiffened regulatory requirements, Moody’s wrote. “The plan they’re trying to execute is a good plan for the bondholder in the long run, but they face some pretty challenging headwinds when you look at the current operating environment,” Peter Nerby, a senior vice president at Moody’s, said in a phone interview. “They’re working on it, but it’s tougher than it was.”

“A whole generation will have been consigned to the scrapheap.”

• Greece Is Never Going To Grow Its Way Out Of Debt (Coppola)

The IMF has just released its latest Debt Sustainability Analysis (DSA) for Greece. It makes grim reading. Greece is never going to grow its way out of debt. And the 3.5% primary surplus to which the Syriza government seems hell-bent upon committing is frankly unbelievable: the IMF thinks sustaining even 1.5% would be a stretch. Banks will need another €10bn (on top of the €43bn the Greek government has already borrowed to bail them out). Asset sales are a lost cause, mainly because the banks – which were a large proportion of the assets up for sale – won’t be worth anything for the foreseeable future. Like it or not, debt relief will be necessary. If there is no debt relief, by 2060 debt service will soar to an impossible 60% of government spending. Of course, Greece would default long before that – but that would make the situation in Greece even worse.

None of this is news. The IMF has been saying for nearly a year now that Greece will need debt relief. This latest DSA is designed to shock the Europeans into giving it serious consideration. It is not surprising, therefore, that the debt sustainability projections are significantly worse than in previous DSAs. No doubt the European creditors will disagree with them, the Syriza government will side with the Europeans because the only alternative is Grexit, and the European Commission will claim there is “progress” when all that is really happening is that a very battered can is being kicked once again. But buried in the IMF’s report are some very unpleasant numbers indeed – the IMF’s projections for population and employment out to 2060. And I think the world should know about them. Here is what the IMF has to say about the outlook for Greek unemployment:

Demographic projections suggest that working age population will decline by about 10 percentage points by 2060. At the same time, Greece will continue to struggle with high unemployment rates for decades to come. Its current unemployment rate is around 25%, the highest in the OECD, and after seven years of recession, its structural component is estimated at around 20%. Consequently, it will take significant time for unemployment to come down. Staff expects it to reach 18% by 2022, 12% by 2040, and 6% only by 2060. So even if the Greek economy returns to growth and its creditors agree to debt relief, it will take 44 years to reduce Greek unemployment to something approaching normal. For Greece’s young people currently out of work, that is all of their working life. A whole generation will have been consigned to the scrapheap.

Think Britain is bad? Try Greece.

• Austerity Means Privatizing Everything We Own (G.)

Almost everyone who gives the matter serious thought agrees that George Osborne and David Cameron want to reshape Britain. The spending cuts, the upending of the NHS, even this month’s near-miss over the BBC: signs lie everywhere of how this will be a decade, maybe more, of massive change. Yet even now it is little understood just how far Britain might shift – and in which direction. Take austerity, the word that will define this government. Even its most astute critics commit two basic errors. The first is to assume that it boils down to spending cuts and tax rises. The second is to believe that all this is meant to reduce how much the country is borrowing. What such commonplaces do is reduce austerity to a technical, reversible project.

Were it really so simple all we would need to do is turn the spending taps back on and wash away all traces of Osbornomics. Austerity is far bigger than that: it is a project irreversibly to transfer wealth from the poorest to the richest. It’s doing the job very nicely: while the typical British worker is still earning less after inflation than he or she was before the banking crash, the number of UK-based billionaires has nearly quadrupled since 2009. Even while he slashes benefits, Osborne is deep into a programme to hand over much of what is still owned by the British public to the wealthiest. Privatisation is the multibillion-pound centrepiece of Osborne’s austerity – yet it rarely gets a mention from either politicians or press. The Queen mentioned it in her speech last week, but the headline writers ignored it.

And if you don’t know that this Thursday is the closing date for consultation on the sale of the Land Registry, our public record of who owns what property, that’s hardly your fault – I haven’t spotted it in the papers, either. But without getting rid of prize assets, Osborne’s austerity programme falls apart. At a time when tax revenues are more weak stream than healthy flood, those sales bring much-needed cash into the Treasury and make his sums add up. The independent Office for Budget Responsibility has ruled that the only reason the chancellor met his debts target last year was because he flogged off our public assets. And what a fire sale that was, with everything from our last remaining stake in the Royal Mail to shares in Eurostar shoved out the door in the biggest wave of privatisations of any year in British history.

And maybe sometime in the next century something will be done. But they’re all still too big to fail.

• US Court Opens Door Over Libor Claims (FT)

A US appeals court has opened the door for more claims against the big banks for rigging benchmark interest rates, by overturning a three-year-old ruling which threw out a host of private antitrust-related lawsuits. Monday’s decision by the 2nd US Circuit Court of Appeals in Manhattan could be a setback for the likes of Bank of America, JPMorgan Chase and Citigroup, which had hoped that most of the wave of post-crisis litigation was behind them. The decision reverses a lower court decision from 2013, in which US District Judge Naomi Reice Buchwald dismissed claims on the grounds that the plaintiffs had failed to plead antitrust injury.

The lawsuits had accused 16 major banks of collusion in manipulating the London interbank offered rate, or Libor, which approximates the average rate at which a select group of banks can borrow money. Beginning in 2007, the plaintiffs argued, the banks engaged in a horizontal price-fixing conspiracy, with each submitting an artificially low cost of borrowing US dollars in order to drive Libor down. At the time of her rejection, Judge Buchwald reasoned that the Libor-setting process was co-operative rather than competitive, and so any attempt to depress the rate did not cause investors to suffer anti-competitive harm. At best, she said, investors had a fraud claim based on misrepresentation.

But the appeals court on Monday disagreed and sent the case back to the lower court for further proceedings. A three-judge panel found that price-fixing was an antitrust violation in itself, and therefore needed no separate plea of harm. “The crucial allegation is that the banks circumvented the Libor-setting rules, and that joint process thus turned into collusion,” the panel said. The private suits are separate from the criminal and civil probes into Libor rigging, which have ensnared banks and traders around the world and drawn about $9bn so far in penalties.

Do we even still notice?

• Italy Helps Rescue 2,600 Migrants From Sea In 24 Hours (R.)

Italian vessels have helped rescue more than 2,600 migrants from boats trying to reach Europe from North Africa in the last 24 hours, the coastguard said on Monday, indicating that numbers are rising as the weather warms up. Some 2,000 migrants were rescued off the Libyan coast from 14 rubber dinghies and one larger boat in salvage operations by the Italian navy and coastguard, the medical charity Medecins Sans Frontieres and an Irish navy vessel, the coastguard said. Another 636 migrants were rescued from two boats in Maltese waters, in operations involving Maltese and Italian vessels, it said. It gave no information about the nationalities of those saved. More than 31,000 migrants have reached Italy by boat so far this year, slightly fewer than in the same period of 2015.

Humanitarian organizations say the sea route between Libya and Italy is now the main route for asylum seekers heading for Europe, after an EU deal on migrants with Turkey dramatically slowed the flow of people reaching Greece. Officials fear the numbers trying to make the crossing to southern Italy will increase as conditions improve in warmer weather. More than 1.2 million Arab, African and Asian migrants fleeing war and poverty have streamed into the European Union since the start of last year. Most of those trying to reach Italy leave the coast of lawless Libya on rickety fishing boats or rubber dinghies, heading for the Italian island of Lampedusa, which is close to Tunisia, or toward Sicily.

Peaceful until now.

• Greece Starts Clearing Makeshift Refugee Camp On Border (R.)

Greek police started moving migrants and refugees out of a sprawling tent camp on the sealed northern border with Macedonia on Tuesday where thousands have been stranded for months trying to get into western Europe. Reuters witnesses saw several bus loads of migrants leaving the makeshift camp of Idomeni early on Tuesday morning, with about another dozen buses lined up. It appeared to be mainly families who were on the move. Greek authorities said they planned to move individuals gradually to state-supervised facilities further south in an operation expected to last several days. “The evacuation is progressing without any problem,” said Giorgos Kyritsis, a government spokesman for the migrant crisis.

A Reuters witness on the Macedonian side of the border said there was a heavy police presence in the area but no problems were reported as people with young children packed up huge bags with their belongings. Media on the Greek side of the border were kept at a distance and a group of people dressed as clowns waved balloon hearts and animals as the buses drove past. “Those who pack their belongings will leave, because we want this issue over with. Ideally by the end of the week. We haven’t put a strict deadline on it, but more or less that is what we estimate,” Kyritsis told Reuters. At the latest tally, 8,199 people were camped at Idomeni after a cascade of border shutdowns throughout the Balkans in February barred migrants and refugees from central and northern Europe. More than 12,000 lived in the camp at one point.

Debt Rattle November 3 2015

Nov 032015

November 3, 2015 Posted by Raúl Ilargi Meijer at 9:45 am Finance Tagged with: acidification, buybacks, Canada, China, delusion, ECB, Lesvos, refugees, repo, SOE, VW 3 Responses »

Jovcho Savov Guernica 2015

• The Market May Have Had Enough of Share Buybacks (Bloomberg)

• Debt Traders Send Warning On Corporate America’s Balance Sheet Fiesta (BBG)

• Money Is Flooding Out Of Canada At The Fastest Pace In The Developed World (BBG)

• The Self-Defeating, ‘Grand Delusion’ of Monetary Policy (WSJ)

• Foreign Banks Use US Repo Deals To ‘Window-Dress’ Risk (FT)

• China State Owned Enterprise Debt Explodes By $1 Trillion In September (Chiecon)

• Six Ways to Gauge How Fast China’s Economy Is Actually Growing (Bloomberg)

• China Financial Crackdown Intensifies as Funds, Banks Targeted (Bloomberg)

• VW Emissions Scandal Widens To Include Porsche, Audi Claims (Guardian)

• ECB Officials Met Regularly With Financial Institutions on Key Moments (WSJ)

• Standard Chartered Cuts 15,000 Jobs And Raises $5.1 Billion (BBC)

• TransCanada Requests Suspension of US Permit for Keystone XL Pipeline (WSJ)

• Coywolf: Greater Than The Sum Of Its Parts (Economist)

• Melting Ice In West Antarctica Could Raise Seas By 3 Meters (Guardian)

• Abrupt Changes In Food Chains Predicted As Southern Ocean Acidifies Fast (SMH)

• October’s Migrant, Refugee Flow To Europe Matched Whole Of 2014 (Reuters)

• Merkel Rejects Shutting Border Amid Standoff With Party Critics (Bloomberg)

• Erdogan’s Election Win Means He Can Dictate Terms To EU On Refugees (Guardian)

• Winter Is Coming: The New Crisis For Refugees In Europe (Guardian)

• No Place Left On Lesvos To Bury Dead Refugees (AP)

• Powerful Gestures: America and Refugees (New Yorker)

What will Apple do now?

• The Market May Have Had Enough of Share Buybacks (Bloomberg)

It’s no secret that companies have been borrowing in the bond market to pay their shareholders through generous buybacks. But Citigroup credit analysts, led by Stephen Antczak, suggest that the robbing Peter to pay Paul dynamic that has dominated the investment landscape in recent years may be coming to an end as the credit cycle begins to turn and a meaningful pickup looms in the corporate default rate. In fact, they say, there is evidence this is already happening.

“The three-fold increase in share buybacks in the past five years has been the key driver of corporate re-leveraging. In large part, buybacks have been the result of strong incentives provided to corporate managers by activists in particular and equity investors in general … Companies that spent more on shareholder handouts and less on investments have tended to get higher price/earnings ratios in the market. But there are signs that this may be changing. Recent conversations that we’ve had with equity [portfolio managers] suggest that they have become far more focused on revenue growth, and are placing far less of a premium on any financially engineered EPS growth. The fact that a basket of stocks that [has] been reducing shares outstanding is meaningfully underperforming the S&P 500 on a beta-adjusted basis suggests that this view may not be that of just the investors we talk to, but far more broadbased (Figure 1).”

The theory here is that as the credit cycle turns and the prospect of an increase in the corporate default rate becomes a reality for the first time in many years, shareholders who have a claim on the future cash flows of companies will stop rewarding behavior that might meaningfully jeopardize those cash flows. Corporate leverage, or company indebtedness, has already been rising, much to the detriment of bond investors.

If the Fed doesn’t raise rates, the markets will.

• Debt Traders Send Warning On Corporate America’s Balance Sheet Fiesta (BBG)

Credit traders are sending an ominous message to U.S. companies: Either stop borrowing so much money or prepare to face some serious consequences. Investors are now demanding a 61% bigger premium over benchmark rates to own top-rated bonds of industrial companies compared with June 2014. Such debt has lost 4.2% in the period when stripping out gains from benchmark government rates, with relative yields rising to 1.8 percentage points from 1.1 percentage points 16 months ago, BoAML index data show. Part of this is just saturation in the face of yet another year of record-breaking bond sales. Investment-grade companies have issued more than a trillion dollars of bonds so far in 2015 on top of the $5 trillion in the previous five years, data compiled by Bloomberg show.

But this year’s weakness in credit markets isn’t just a technical blip; it highlights a significant deterioration in corporate balance sheets. After all, what have these companies done with the money they’ve raised? They’ve bought back their own shares and paid dividends to their shareholders. What they haven’t done is use the money to improve their businesses. It’s getting to the point where even stockholders are tiring of their companies’ repurchasing shares and borrowing money simply because it’s cheap. [..] equity investors are essentially asking corporations to be more conservative with their balance sheets. Here’s why: Top-rated non-financial companies have increased their median leverage to 2.2 times debt relative to income, compared with 1.6 times in 2011, according to JPMorgan Chase.

Bond investors, meanwhile, are still buying top-rated issues, because what else are they going to buy? Central banks from China to Europe are injecting more stimulus into their economies, driving yields lower even as the Federal Reserve debates raising benchmark rates in the U.S. All-in yields of 3.4% on U.S. investment-grade company bonds look pretty generous when compared with the 0.5% yields on 10-year German government bonds. “There are some fundamental problems here,” said Lisa Coleman, head of global investment-grade credit at JPMorgan Asset Management. “This is representative of late-cycle growth. We’re more cautious on credit.” Cracks are starting to form, and they’re getting deeper. This is the first year since 2009 that credit-rating downgrades are significantly outpacing upgrades. Also, the more debt these companies pile on, the more vulnerable they become to a bad blowup that will leave them with extremely bloated balance sheets relative to revenues.

Where will the loonie go?

• Money Is Flooding Out Of Canada At The Fastest Pace In The Developed World (BBG)

Money is flooding out of Canada at the fastest pace in the developed world as the nation’s decade-long oil boom comes to an end and little else looks ready to take the industry’s place as an economic driver. Canada’s basic balance — a measure of national accounts that spans everything from trade to financial-market flows – swung from a surplus of 4.2% of GDP to a deficit of 7.9% in the 12 months ending in June, according to analysis from Kamal Sharma at Bank of America Merrill Lynch. That’s the fastest one-year deterioration among 10 major developed nations. More recent data on where companies and mutual-fund investors are putting their money show the trend extended into the second half of the year, suggesting demand for the Canadian dollar and the country’s assets is still ebbing.

The currency is already down 11% this year, after touching an 11-year low against the U.S. dollar in September. “This is Canadian investors that are pushing money abroad,” said Alvise Marino at Credit Suisse in New York. “The policy in Canada the last 10 years has greatly favored investments in energy. Now the drop in oil prices made all that investment unprofitable.” Crude oil, among the nation’s biggest exports, has collapsed to about half its 2014 peak. The slump has derailed projects this year in Canada’s oil sands — one of the world’s most expensive crude-producing regions. Shell’s decision to put its Carmon Creek drilling project on ice last week lengthened that list to 18, according to ARC Financial.

Canadian companies, meanwhile, have been looking abroad for acquisitions. Royal Bank of Canada is expected to close its US$5.4 billion purchase of Los Angeles-based City National Corp. Monday, its biggest-ever takeover. It’s part of a net outflow of $73 billion this year for mergers and acquisitions, both completed and announced, according to Credit Suisse data. Nine of the 10 best-performing companies on the country’s benchmark stock index in the past two years have favored buying growth abroad rather than expanding at home. Individuals are following suit. While international appetite for Canadian financial securities has held steady this year, domestic mutual-fund investors have pulled money from Canada-focused funds and plowed it into global choices for six straight months, the longest streak in two years, according to data compiled by Bank of Montreal.

Central banks need to have their powers cut.

• The Self-Defeating, ‘Grand Delusion’ of Monetary Policy (WSJ)

Signs persist that the global economy isn’t well. In China, the official manufacturing PMI remained at 49.8, under the 50-line that delineates expansion and contraction. In the U.S., the ISM’s October manufacturing survey fell to 50.1, its lowest rate in two years. Both reports are just the latest in what has largely been a string of disappointing data. Six years after the market bottomed, the data also highlights the struggles the world’s central banks have had lighting a fire under the global economy. The Fed alone has pumped more than $3.5 trillion into the economy since the financial crisis. Yet economic growth has continually fallen short of expectations. Now a growing chorus is arguing that these central-bank policies appears to be self-defeating.

The zero-rate environment is hampering the economy, J.P. Morgan’s David Kelly argued in a paper last week, by short-circuiting the kinds of fundamental trends that usually attend to healthy economies – savings, for example, and the wealth that comes from investment income when rates are higher. It also sends a distinctive signal about the Fed’s own expectations for the economy. Why should anybody feel confident, invest in their future, if the Fed itself isn’t confident enough to take rates off the floor? Through a series of granular arguments, he arrives at the conclusion that the Fed needs to start raising rates. Not aggressively, but modestly. It will encourage savings, which will improve wealth growth, since higher rates will lead to higher interest income for savers. It will encourage borrowing, as borrowers will want to lock in lower rates while they can.

It will also send a strong message that the Fed is confident in the economy. All this will ultimately boost demand, Mr. Kelly says, not sap it. “The most urgent point is simply that, right now, the economy could do with a little more demand,” he said. “We believe that the positive impacts of income, wealth, confidence and expectations effects are only slightly offset by negative price effects and thus the first few rate increases would actually boost demand.” He isn’t holding his breath, however. He doesn’t expect the Fed will at all be swayed by his arguments.

“After almost seven years full years of a zero-interest rate policy, this seems like wishful thinking,” he said. “Sadly, it is probably more likely that we get stuck in a ‘stagnation equilibrium’ where a zero interest rate policy actually reduces demand in the economy, prompting the Federal Reserve to prescribe even further doses of a medicine that, for a longtime, has been impeding rather than promoting economic recovery.” Ultimately, he says the Fed is operating from a false premise: that raising rates will hurt demand. Or he could have stated it more bluntly, as Ed Yardeni of Yardeni Research did in his Monday note: the Fed’s notion that it can control the business cycle, he said, is a “grand delusion.”

“..routinely cutting about $170bn of balances at the end of each quarter to appear safer and more profitable..”

• Foreign Banks Use US Repo Deals To ‘Window-Dress’ Risk (FT)

Foreign banks operating in the US short-term debt markets are “window-dressing” their accounts, routinely cutting about $170bn of balances at the end of each quarter to appear safer and more profitable, says a new study. The study from the Office of Financial Research describes a pattern of behaviour that has prevailed since July 2008, and suggests that the banks are carrying more risk than their investors or customers can easily see. The study examines the vast market for repurchase agreements, or repos, where banks lend out assets in return for short-term financing. It finds that dealers sell heavily to customers in the last days of the quarter, and immediately buy assets back once the new quarter starts. By trimming their balance-sheets over that brief period, the foreign banks can report better quarter-end ratios of capital to total assets.

US banks, which have to report average daily balances over the quarter, do not make similar adjustments, the study found. This abrupt, seasonal rhythm .. is consistent with a pattern of ‘window-dressing’, wrote Greg Feldberg at the OFR, in a blog post. Analysts said the behaviour outlined in the study has shades of the notorious “Repo 105” trades that Lehman Brothers used to bring down its reported leverage in the quarters leading up to its collapse. In that programme, the broker accepted a relatively high 5% fee in order to count its repo transactions as true sales, even though it remained under a contractual obligation to buy the assets back. Joshua Ronen at New York Stern School of Business said the OFR’s study – which did not cite individual banks by name – showed that lenders with the lowest capital ratios were making the biggest quarter-end reductions.

One bank pointed out that foreign banks will have to adopt US-style daily leverage reporting requirements by January 2018, and that many had already begun to adjust their repo activities to comply with daily averaging — including reducing the absolute amounts and quarter-end adjustments. For now, though, outsiders should take the banks’ reported ratios with a pinch of salt, said Mayra Rodriguez Valladares of MRV Associates, a former official at the Federal Reserve Bank of New York. “If they’re moving assets around to look better it is a big problem for us, as we don’t get to see the day-to-day information,” she said.

China is a Ponzi.

• China State Owned Enterprise Debt Explodes By $1 Trillion In September (Chiecon)

China’s state owned enterprises added almost 6 trillion yuan (around 1 trillion dollars) of debt in September, described by Luo Yunfeng, an analyst at Essence Securities, as “an unprecedented increase in leverage”. This means that not only is the government abandoning its deleverage policy, it is actually increasing leverage. Latest Ministry of Finance data shows that by the end of September total SOE debt had reached 77.68 trillion yuan, representing a increase of 5.93 trillion yuan on August, and an increase of over 11 trillion yuan in 2015. According to Luo “it’s possible that debt that was originally classified as government debt, has been reallocated as SOE debt”. This might be a reflection of how the government plans to tackle its massive debt.

Luo mentions that one of the obstacles to managing government debt is that it remains difficult to draw a line between government and SOE debt. The crux of current reform plans to increase the role of market forces is aimed at resolving this issue. If it really is the case of shifting government debt to SOEs, then it represents a step forward for this reform, and the prospect of revaluing credit risk. Another implication, it seems unlikely there will be a pause in government debt increase over the fourth quarter. This raises the more important question of what will be the impact of this enormous debt? Over the past few years credit expansion has surpassed economic growth, and with the governments aggressive leverage, will this lead to a greater waste of resources?

In order to protect economic growth, the Chinese government has increased leverage since 2008. According to calculations by The Economist, the proportion of total debt to GDP has risen sharply, already standing at more than 240%, with total debt reaching 161 trillion yuan ($25 trillion). In the past four years, this debt to GDP ratio increased by nearly 50%. The Economist points out this is a double-edged sword, as the incremental growth effects diminish with increasing leverage. Whereas in the six years prior to the financial crisis an increase in debt of 1 yuan resulted in Chinese economic output increasing by 5 yuan, these days it only results in an increase of 3 yuan.

Even if this is the case, with China experiencing slowing economic growth, and no turnaround on the horizon, its seems likely the Chinese government will continue to increase leverage. In September, China Merchants Securities stated that since Chinese government debt leverage ratio is still low, lower than the US, Europe and Japan, there is still more room for leverage. Haitong Securities said at the start of the year that in order to prevent systemic risk the focus over the next few years will be on government leverage. Based on the experience of other countries, monetary easing almost certainly follows an increase in government leverage, with interest rates in the long term trending to zero.

No, I will not apologize for picking the lowest two estimates. I’m too inclined to think the likes of Bloomberg will be reluctant to publish really bad numbers, lest Beijing will restrict their access.

• Six Ways to Gauge How Fast China’s Economy Is Actually Growing (Bloomberg)

Statistics with Chinese characteristics make it difficult to get a handle on how well the world’s second-largest economy is doing. In particular, questions surrounding the way China adjusts its growth figures into real terms often leave investors searching for a better way to judge its economic momentum. Thankfully, Wall Street economists have developed a number of proxies, using an array of indicators, to gauge Chinese growth better. Recently, Bloomberg Intelligence Chief Asia Economist Tom Orlik compiled six of these metrics in a report for Bloomberg Briefs. “All of the proxies suggest growth in 2015 has been lower than the 6.9% reported by the National Bureau of Statistics for the third quarter,” he wrote.

“Most show an increasing divergence with the last year or two, suggesting the official numbers may be upward biased during downturns.” One common problem for economists in constructing these proxy indexes: the dearth of data on the Chinese services sector. Orlik notes that this may serve as a partial explanation for the difference between the proxy gauges and the official data, as the tertiary sector has been gaining ground on the industrial segments of the economy.

Capital Economics draws on five indicators to build its proxy for Chinese activity: freight volume, passenger numbers, electricity output, seaport cargo volume, and the area of floor space currently under construction. “The China Activity Proxy suggested that the official figures were broadly accurate until around 2012,” wrote chief Asia economist Mark Williams. “Since then, it has added weight to the view that the official GDP data overstate the true rate of economic growth—most recently by a couple of percentage points or more.” According to this metric, Chinese GDP growth came in at 4.4% in the third quarter, the slowest pace of expansion implied by all the proxies featured in the brief.

Lombard Street employs a novel approach in putting together its estimate for Chinese growth. The official statistics for real GDP growth have been too smooth over the years, economist Michelle Lam and head of research Diana Choyleva believe, suggesting that the manner in which the data are adjusted might be faulty. As such, the pair uses nominal GDP (not adjusted for price changes) as its starting point, then uses a range of price indexes to deflate the figures into “real” terms. “Our preliminary estimates show growth at an annual rate of just 2.9% in the third quarter of 2015, way lower than the official 7.4%,” they wrote.

A typical newsline: “Agricultural Bank of China President Zhang Yun was taken away to assist authorities with an investigation..”

• China Financial Crackdown Intensifies as Funds, Banks Targeted (Bloomberg)

China’s crackdown on its financial industry is intensifying as authorities investigate strategies blamed for exacerbating a $5 trillion stock-market rout. Shanghai police raided hedge fund Zexi Investment on Sunday, taking away computers and other materials, according to a person familiar with the matter. General manager Xu Xiang was detained, the official Xinhua news agency reported. Executives at Yishidun International Trading and Huaxin Futures were arrested, Xinhua said in a separate report. Adding to evidence that a clampdown on the financial industry is spreading, Agricultural Bank of China President Zhang Yun was taken away to assist authorities with an investigation, people familiar with the matter said on Monday, without giving details.

The Communist Party’s Central Commission for Discipline Inspection is carrying out its first broad checks on the finance industry since President Xi Jinping became the party’s head in November 2012. The summer’s stock-market rout in China has triggered investigations that have snared executives from the country’s biggest securities firm as well as a fund managers and a top regulatory official. “The biggest-ever storm is brewing for China’s financial industry and more heads will roll,” said Hu Xingdou, an economics professor at the Beijing Institute of Technology. Xu, who founded the top-performing hedge fund firm Zexi, was detained on charges including insider trading and stock manipulation, the Xinhua reported.

Two executives at Jiangsu-based Yishidun International Trading and the technical director at Shanghai-based Huaxin Futures were arrested after a police investigation showed they made 2 billion yuan ($316 million) in “illegal profit,” Xinhua reported separately, citing the Ministry of Public Security. Sina.com reported earlier on Monday that Agricultural Bank’s Zhang had been taken away and didn’t attend a disciplinary committee meeting. Assisting with an investigation doesn’t mean Zhang is accused of wrongdoing.

The lies keep coming. A sign that things are set to get much worse, that there’s lots more in the closet?

• VW Emissions Scandal Widens To Include Porsche, Audi Claims (Guardian)

The Volkswagen diesel emissions scandal has deepened after US authorities accused the carmaker of installing defeat devices into luxury sports cars including Porsches. The Environmental Protection Agency (EPA), which uncovered the initial emissions rigging at VW, claims the carmaker installed defeat devices in VW, Audi and Porsche vehicles with three-litre engines in models with dates ranging from 2014 to 2016 This marks the first time that Porsche, which is owned by VW, has been dragged into the scandal. It is troubling for the new chief executive of VW, Matthias Müller, because he ran Porsche before becoming boss of the group.

The EPA has made the allegations after conducting further tests on diesel vehicles in the US since VW admitted in September it had used defeat devices to cheat emissions tests. The new allegations include the 2015 Porsche Cayenne as well as the 2014 VW Touareg and the 2016 Audi A6 Quattro, A7 Quattro, A8, A8L, and Q5. In total, it involves 10,000 vehicles in the US. In a statement VW denied it had fitted any devices on the vehicles. The statement said: “Volkswagen AG wishes to emphasise that no software has been installed in the 3-liter V6 diesel power units to alter emissions characteristics in a forbidden manner. Volkswagen will cooperate fully with the EPA clarify this matter in its entirety.”

VW has already admitted fitting a defeat device to 11m vehicles worldwide, but this related to cars with smaller engines and did not include any Porsche cars or SUVs. Cynthia Giles, assistant administrator for the office for EPA’s enforcement and compliance assurance, said: “VW has once again failed its obligation to comply with the law that protects clean air for all Americans. All companies should be playing by the same rules. EPA, with our state, and federal partners, will continue to investigate these serious matters, to secure the benefits of the Clean Air Act, ensure a level playing field for responsible businesses, and to ensure consumers get the environmental performance they expect.”

Almost normal.

• ECB Officials Met Regularly With Financial Institutions on Key Moments (WSJ)

Top officials from the European Central Bank met regularly with representatives from financial institutions over the past 15 months, including one meeting that occurred on the same day as a key gathering of the ECB’s governing board, according to documents released Monday by the ECB. The disclosure of the appointment calendar of the ECB’s six-member executive board, as part of a public-access request, came amid changes to the ECB’s communications policies following the release of market-sensitive information in May to a closed-door conference that included hedge-fund managers. Such meetings aren’t unusual, but the calendar points to the delicate balance for officials who benefit from the market intelligence provided by private-sector economists and investors but must also avoid the perception that individual banks are benefiting from this access.

According to the calendars, ECB executive board member Benoît Coeuré met with representatives of BNP Paribas on the morning of Sept. 4, 2014, hours before the ECB announced a reduction in its interest rates and the creation of a new four-year lending program for banks. The day before that two-day meeting began, Mr. Coeuré met with UBS on Sept. 2, as did another executive board member, Yves Mersch, according to the meeting calendars. Mr. Mersch also met with BNP Paribas on Sept. 4 last year, although that was after the ECB meeting concluded. “The ECB does not operate in a vacuum. Regular contacts with different groups, including representatives from the financial sector help us understand the dynamics of the economy and financial markets. We make sure that at such meetings no financial market-sensitive information is disclosed,” an ECB spokeswoman said.

Banks no longer need bankers.

• Standard Chartered Cuts 15,000 Jobs And Raises $5.1 Billion (BBC)

Standard Chartered, the Asia-focused UK bank, is to cut 15,000 jobs and raise $5.1bn to create a “lean, focused and well-capitalised” group. About $3bn being raised in the rights issue will cover restructuring costs. The strategic review was announced as Standard Chartered reported a “disappointing” third-quarter operating loss of $139m for the three months to September. That figure compared with a profit of $1.5bn a year earlier. Bill Winters, who replaced Peter Sands as Standard Chartered’s chief executive in June this year, announced a strategic review of the bank’s organisational structure when he took over. He put a new management team in place in July and analysts have been expecting the bank to seek additional capital to shore up its balance sheet for some time.

Standard Chartered shares fell 4% on the Hang Seng stock exchange in Hong Kong. Mr Winters acknowledged the challenging business environment within which the lender was operating. Growing regulatory costs and controls in the wake of the financial crisis have weighed on big lenders in the UK, US and Australia. Standard Chartered has already shed some businesses, in Hong Kong, China and Korea, to help improve its capital position. Among its various plans outlined on Tuesday, Standard Chartered said a “step-up in cash investment” by more than $1bn would be used to help reposition its retail banking, private banking and wealth management businesses, as well as upgrade its Africa franchise and yuan services.

“This comprehensive programme of actions will result in a lean, focused and well capitalised international bank, poised for growth across our dynamic and growing markets in Asia, Africa and the Middle East,” Mr Winters said. Temasek, Singapore’s state investor and Standard Chartered’s largest shareholder, supported the share sale, the bank said. Standard Chartered employs 86,000 people and makes about 90% of its profits from operations across Asia, the Middle East and Africa.

It’s dead.

• TransCanada Requests Suspension of US Permit for Keystone XL Pipeline (WSJ)

The company behind the Keystone XL pipeline on Monday asked the U.S. government to suspend its permit application, throwing the politically fraught project into an indefinite state of limbo, beyond the 2016 U.S. elections. In a letter, TransCanada asked the State Department, which reviews cross-border pipelines, to suspend its application while the company goes through a state review process in Nebraska it had previously resisted. The move comes in the face of an expected rejection by the Obama administration and low oil prices that are sapping business interest in Canada’s oil reserves. “In order to allow time for certainty regarding the Nebraska route, TransCanada requests that the State Department pause in its review of the presidential permit application,” the Calgary, Alberta, company said in the letter.

TransCanada’s move comes as the State Department was in the final stages of review, with a decision to reject the permit expected as soon as this week, according to people familiar with the matter. It must now decide whether to accept the company’s request or proceed with a final decision. TransCanada in September signaled it was shifting its strategy when it dropped state legal challenges and efforts to seize land in Nebraska for the pipeline. Company officials hoped those moves would extend the review process in Washington—perhaps until a potential Republican administration in 2017 would approve the project—while details on the Nebraska portion of the route were worked out.

“As well as having small territories, coywolves have adjusted to city life by becoming nocturnal. They have also learned the Highway Code, looking both ways before they cross a road.”

• Coywolf: Greater Than The Sum Of Its Parts (Economist)

Like some people who might rather not admit it, wolves faced with a scarcity of potential sexual partners are not beneath lowering their standards. It was desperation of this sort, biologists reckon, that led dwindling wolf populations in southern Ontario to begin, a century or two ago, breeding widely with dogs and coyotes. The clearance of forests for farming, together with the deliberate persecution which wolves often suffer at the hand of man, had made life tough for the species. That same forest clearance, though, both permitted coyotes to spread from their prairie homeland into areas hitherto exclusively lupine, and brought the dogs that accompanied the farmers into the mix Interbreeding between animal species usually leads to offspring less vigorous than either parent—if they survive at all.

But the combination of wolf, coyote and dog DNA that resulted from this reproductive necessity generated an exception. The consequence has been booming numbers of an extraordinarily fit new animal spreading through the eastern part of North America. Some call this creature the eastern coyote. Others, though, have dubbed it the “coywolf”. Whatever name it goes by, Roland Kays of North Carolina State University, in Raleigh, reckons it now numbers in the millions. The mixing of genes that has created the coywolf has been more rapid, pervasive and transformational than many once thought. Javier Monzón, who worked until recently at Stony Brook University in New York state (he is now at Pepperdine University, in California) studied the genetic make-up of 437 of the animals, in ten north-eastern states plus Ontario. He worked out that, though coyote DNA dominates, a tenth of the average coywolf’s genetic material is dog and a quarter is wolf.

The DNA from both wolves and dogs (the latter mostly large breeds, like Doberman Pinschers and German Shepherds), brings big advantages, says Dr Kays. At 25kg or more, many coywolves have twice the heft of purebred coyotes. With larger jaws, more muscle and faster legs, individual coywolves can take down small deer. A pack of them can even kill a moose. Coyotes dislike hunting in forests. Wolves prefer it. Interbreeding has produced an animal skilled at catching prey in both open terrain and densely wooded areas, says Dr Kays. And even their cries blend those of their ancestors. The first part of a howl resembles a wolf’s (with a deep pitch), but this then turns into a higher-pitched, coyote-like yipping.

The animal’s range has encompassed America’s entire north-east, urban areas included, for at least a decade, and is continuing to expand in the south-east following coywolves’ arrival there half a century ago. This is astonishing. Purebred coyotes never managed to establish themselves east of the prairies. Wolves were killed off in eastern forests long ago. But by combining their DNA, the two have given rise to an animal that is able to spread into a vast and otherwise uninhabitable territory. Indeed, coywolves are now living even in large cities, like Boston, Washington and New York. According to Chris Nagy of the Gotham Coyote Project, which studies them in New York, the Big Apple already has about 20, and numbers are rising.

Interesting seemingly contradictory reports.

• Melting Ice In West Antarctica Could Raise Seas By 3 Meters (Guardian)

A key area of ice in west Antarctica may already be unstable enough to cause global sea levels to rise by 3m, scientists said on Monday. The study follows research published last year, led by Nasa glaciologist Eric Rignot, warning that ice in the Antarctic had gone into a state of irreversible retreat, that the melting was considered “unstoppable” and could raise sea level by 1.2m. This time, researchers at Germany’s Potsdam Institute for Climate Impact Research pointed to the long-term impacts of the crucial Amundsen Sea sector of west Antarctica, which they said “has most likely been destabilised.” While previous studies “examined the short-term future evolution of this region, here we take the next step and simulate the long-term evolution of the whole west Antarctic ice sheet,” the authors said in the Proceedings of the National Academy of Sciences.

They used computer models to project the effects of 60 more years of melting at the current rate. This “would drive the west Antarctic ice sheet past a critical threshold beyond which a complete, long-term disintegration would occur.” In other words, “the entire marine ice sheet will discharge into the ocean, causing a global sea level rise of about 3m,” the authors wrote. “If the destabilisation has begun, a 3m increase in sea level over the next several centuries to millennia may be unavoidable.” Even just a few decades of ocean warming can unleash a melting spree that lasts for hundreds to thousands of years. “Once the ice masses get perturbed, which is what is happening today, they respond in a non-linear way: there is a relatively sudden breakdown of stability after a long period during which little change can be found,” said lead author Johannes Feldmann.

The authors noted that Antarctica’s situation presents the largest uncertainty in sea level projections for the coming centuries, and that studying the vast region poses many challenges. And indeed, just days before the PNAS study was released, another scientific paper used Nasa satellite data form 2003 to 2008 to show that Antarctic ice had gained mass, and had packed on enough to exceed the amount lost in other areas. “We’re essentially in agreement with other studies that show an increase in ice discharge in the Antarctic peninsula and the Thwaites and Pine Island region of west Antarctica,” said a statement by Jay Zwally, a glaciologist with Nasa Goddard Space Flight centre whose study was published on 30 October in the Journal of Glaciology.

“Our main disagreement is for east Antarctica and the interior of west Antarctica – there, we see an ice gain that exceeds the losses in the other areas.” According to climatologist Michael Mann, who was not involved in either study, the use of older satellite data could be the cause for the disconnect. “It sounds to me as if the key issue here is that the claims are based on seven-year-old data, and so cannot address the finding that Antarctic ice loss has accelerated in more recent years,” he told AFP.

We would do well to get a lot more material on acidification.

• Abrupt Changes In Food Chains Predicted As Southern Ocean Acidifies Fast (SMH)

The Southern Ocean is acidifying at such a rate because of rising carbon dioxide emissions that large regions may be inhospitable for key organisms in the food chain to survive as soon as 2030, new US research has found. Tiny pteropods, snail-like creatures that play an important role in the food web, will lose their ability to form shells as oceans absorb more of the CO2 from the atmosphere, a process already observed over short periods in areas close to the Antarctic coast. Ocean acidification is often dubbed the “evil twin” of climate change. As CO2 levels rise, more of it is absorbed by seawater, resulting in a lower pH level and reduced carbonate ion concentration. Marine organisms with skeletons and shells then struggle to develop and maintain their structures.

Using 10 Earth system models and applying a high-emissions scenario, the researchers found the relatively acidic Southern Ocean quickly becomes unsuited for shell-forming creatures such as pteropods, according to a paper published Tuesday in Nature Climate Change. “What surprised us was really the abruptness at which this under-saturation [of calcium carbonate-based aragonite] occurs in large areas of the Southern Ocean,” Axel Timmermann , a co-author of the study and oceanography professor at the University of Hawaii told Fairfax Media. “It’s actually quite scary.” Since the Southern Ocean is already close to the threshold for shell-formation, relatively small changes in acidity levels will likely show up there first, Professor Timmermann said: “The background state is already very close to corrosiveness.”

Below a certain pH level, shells of such creatures become more brittle, with implications for fisheries that feed off them since pteropods appear unable to evolve fast enough to cope with the rapidly changing conditions. “For pteropods it may be very difficult because they can’t run around without a shell,” Professor Timmermann said. “It’s not they dissolve immediately but there’s a much higher energy requirement for them to form the shells.” Given the sheer scale of the marine creatures involved, “take away this biomass, [and] you have avalanche effects for the rest of the food web”, he said.

“Certainly in 2016, we have to expect this level of arrivals to continue, and that’s because the facts that are causing people to move aren’t going away..”

• October’s Migrant, Refugee Flow To Europe Matched Whole Of 2014 (Reuters)

The number of migrants and refugees entering Europe by sea last month was roughly the same as that for the whole of 2014, United Nations refugee agency UNHCR said on Monday. The monthly record of 218,394 also outstripped September’s 172,843, UNHCR spokesman Adrian Edwards said. “That makes it the highest total for any month to date and roughly the same as the entire total for 2014,” he said. The UNHCR puts 2014 arrivals by sea at about 219,000. At the peak, 10,006 arrived in Greece’s shores on a single day, Oct. 20. The vast majority of refugees and migrants to Europe have traveled via Turkey to Greece, a switch from the previously more popular African route via Libya to Italy. The largest group by nationality are Syrians, accounting for 53% of arrivals, as a result of the civil war that has driven hundreds of thousands from their homes.

Afghans come second, making up 18% of the total. The flow of refugees into Europe, however, is still dwarfed by the numbers in Syria’s neighbors. Turkey, Lebanon and Jordan have Syrian refugee numbers exceeding 2 million, 1 million and 600,000 respectively. Globally, 60 million people are refugees or displaced within their own country, not counting economic migrants. UNHCR said in October that it was planning for up to 700,000 refugees in Europe this year and a similar or greater number in 2016. But that plan has already been eclipsed, with 744,000 arriving so far. Some 3,440 are estimated to have died or gone missing in the attempt to escape to Europe. “Certainly in 2016, we have to expect this level of arrivals to continue, and that’s because the facts that are causing people to move aren’t going away,” said Edwards. “It is the new reality that we all have to deal with.”

Merkel needs to call a ‘heavy’, highest-level UN emergency summit. Obama needs to be there, and Putin, Xi Jinping. Assad perhaps, Erdogan. Tsipras. Tens of billions of dollars must be assigned.

• Merkel Rejects Shutting Border Amid Standoff With Party Critics (Bloomberg)

Angela Merkel refused to bow to pressure to shut borders even as the German leader struggles to fix a rift in her governing coalition over how to tackle the country’s biggest influx of migrants since World War II. Facing unrest from within her Christian Democratic Union, the chancellor fielded questions from party members at an event Monday in the western city of Darmstadt. “I’m working, just as you expect, to ensure that the number of refugees goes down,” Merkel told CDU members. “But to all those who say we should shut the German border to Austria, I don’t think that will solve the problem.”

As Germany braces for as many as a million people seeking shelter from war and poverty this year, Merkel said the country can’t afford to turn inward, but has to instead embrace geopolitical challenges “much more actively.” The refugee crisis shows that Germany can’t resist the globalizing forces around it. “We’re experiencing something we’ve never experienced before, that conflicts that appear to be far away suddenly are here on our doorstep,” Merkel said. With public concern mounting and party support on the slide, the political veteran is navigating yet another stormy week as lawmakers return to Berlin for a parliamentary session that will again be dominated by the crisis. A Tuesday caucus meeting will provide a baromoter of anti-Merkel sentiment even if she’s in no immediate political danger.

After meeting for some 10 hours over the weekend with Bavarian Prime Minister Horst Seehofer, her biggest internal critic, Merkel offered qualified support for so-called transit zones to weed out economic migrants. Sending back migrants from safe-origin countries wouldn’t end the turmoil because “there are so many” making their way to Germany, she said. With Bavaria the main gateway to Germany for those pouring over the border from Austria, Seehofer has said the state government would take unspecified action if Merkel didn’t meet his demands. In the last two months, 344,000 refugees entered Bavaria, according to the state’s interior ministry. “The number of refugees has to be urgently limited or reduced,” Seehofer said.

The EU is prepared to sell European souls and refugees’ lives to the devil.

• Erdogan’s Election Win Means He Can Dictate Terms To EU On Refugees (Guardian)

Europe is praying that the return of Turkey s ruling Justice and Development party (AKP) to a solid parliamentary majority will help it cope with the mass movement of people northwards and westwards from the Middle East. There is a strong chance the prayers will end in tears. On Monday the European commission had only good things to say about the triumph of Recep Tayyip Erdogan, Turkey s irascible leader. Sunday’s election ‘reaffirmed the strong commitment of the Turkish people to democratic processes’, Brussels said. The EU will work with the future government to enhance the EU-Turkey partnership and cooperation across all areas.

The main area is immigration since Turkey is the pivotal country between Europe and Syria and is the main source of the hundreds of thousands trekking up the Balkans to the gates of the EU. Brussels and Berlin are desperate to get Erdogan onside to stem the flow. At home, he is walking tall again. Thirteen years after leading his party into power, he has secured another parliamentary majority despite suffering a major setback to his ambitions in a stalemated poll in June. The power equation in the troubled Ankara-Brussels relationship has also just tilted decisively in his favour. The three weeks preceding Sunday s election saw an unseemly rush to Turkey by European politicians, the busiest bout of diplomacy between the two sides in years, solely driven by the migration crisis.

The German chancellor, Angela Merkel, cleared her diary to get to Istanbul. Erdogan came to Brussels. The commission watered down and delayed publication of a critical report on Turkey s authoritarian drift under Erdogan, while drafting in record time an ‘action plan for immigration control with Turkey’. Jean-Claude Juncker, the commission president, brushed aside concerns about human rights abuses and media crackdowns. He tried to get Turkey added to an EU list of third countries deemed to be safe for refugees. Merkel, too, is known to believe that when it comes to the immigration emergency and Turkey, European interests may have to hold sway over European values. It is arguable whether the sudden EU wooing of Erdogan helped him to his surprise majority.

The photo opportunities with Merkel, at the very least, did no harm. But while there was no proper government sitting in Ankara (which had been the case since June), it was clear there could be no quick deal on refugees. That has now changed. Erdogan rules the roost at home and he is a strong exponent of the winner-takes-all school of politics. He will also be dictating the terms for the Europeans. The price for any pact to contain the flow will be extortionate.

How can Europe survive this?

• Winter Is Coming: The New Crisis For Refugees In Europe (Guardian)

Record numbers of migrants and refugees crossed the Mediterranean to Europe in October – just in time for the advent of winter, which is already threatening to expose thousands to harsh conditions. The latest UN figures, which showed 218,000 made the perilous Mediterranean crossing last month, confirm fears that the end of summer has not stemmed the flow of refugees as has been the pattern in previous years, partly because of the sheer desperation of those fleeing an escalating war in Syria and other conflicts. The huge numbers of people arriving at the same time as winter is raising fears of a new humanitarian crisis within Europe’s borders. Cold weather is coming to Europe at greater speed than its leadership’s ability to make critical decisions.

A summit of EU and Balkan states last week agreed some measures for extra policing and shelter for 100,000 people. But an estimated 700,000 refugees and migrants, have arrived in Europe this year along unofficial and dangerous land and sea routes, from Syria, Eritrea, Afghanistan, Iraq, north Africa and beyond. Tens of thousands, including the very young and the very old, find themselves trapped in the open as the skies darken and the first night frosts take hold. Hypothermia, pneumonia and opportunistic diseases are the main threats now, along with the growing desperation of refugees trying to save the lives of their families. Fights have broken out over blankets, and on occasion between different national groups. Now sex traffickers are following the columns of refugees, picking off young unaccompanied stragglers.

The United Nations refugee agency, UNHCR, is distributing outdoor survival packages, including sleeping bags, blankets, raincoats, socks, clothes and shoes, but the number of people it can reach is limited by its funding, which has so far been severely inadequate. Volunteer agencies have tried to fill the gaping hole in humanitarian provisions in Europe. Peter Bouckaert, the director of emergencies for Human Rights Watch, said that all the way along the route into Europe through the Balkans “there is virtually no humanitarian response from European institutions, and those in need rely on the good will of volunteers for shelter, food, clothes, and medical assistance”.

Europe has found itself ill-prepared to deal with its biggest influx of refugees since the second world war. It is hurriedly improvising new mechanisms so that it can respond collectively as a continent rather than individual nations, but it is a race against time and the elements – a race Europe is not guaranteed to win. “There is a risk of collapse”, said Federica Mogherini, the EU foreign policy chief. “Because when you’re facing a challenge and you don’t have the instruments to do it, you risk failing. So it could be that if we don’t manage to create common instruments to deal with this on a European level, we fall back on the illusion that we can face it through national instruments, which we see very clearly doesn’t work. Mogherini added: “Either we take this big step and adapt or yes, we do have a major crisis. I would say even an identity crisis”.

Can it get any sadder?

• No Place Left On Lesvos To Bury Dead Refugees (AP)

The mayor of the Greek island of Lesvos says theres no more room to bury the increasing number of asylum-seekers killed in shipwrecks of smuggling boats coming in from nearby Turkey. Mayor Spyros Galinos told Greece’s Vima FM radio Monday there were more than 50 bodies in the morgue on his eastern Aegean island that he was still trying to find a burial location for. Galinos said he was trying to fast-track procedures so a field next to the main cemetery could be taken over for burials. Hundreds of thousands of people have made the short but dangerous crossing from Turkey to Greek islands this year. With rougher fall weather coming on, the bodies of 19 people were recovered from the Aegean in three separate incidents on Sunday alone.

“In the end, the U.S. admitted more than a million Southeast Asian refugees.”

• Powerful Gestures: America and Refugees (New Yorker)

President Jimmy Carter championed human rights, but his Administration had been reluctant to open America’s doors to Cambodians fleeing starvation and fighting between Vietnam’s army of occupation and the guerrillas of the Khmer Rouge. In late 1979, as the crisis turned catastrophic, Carter came under pressure from his Democratic rival, Senator Edward Kennedy, and he sent his wife to the chaotic border camps. Rosalynn Carter walked among the hungry and the dying, trailed by a hundred and fifty reporters. She held a starving baby in her arms while speaking to the infant’s mother, who lay on the ground. “Give me a smile,” she told another woman, kissing her forehead. Afterward, Mrs. Carter said that she wanted to hurry home “and tell my husband.” The spotlight that her trip shone on the camps helped to mobilize international aid and resettlement efforts.

In the end, the U.S. admitted more than a million Southeast Asian refugees. Most of them proved adaptable to American values. It’s easy to forget that every act of American generosity toward refugees has had to overcome stiff resistance based in ignorance. Historically, Presidential action has made the difference. After the Second World War, Congress passed legislation that made resettlement in the U.S. harder for Jewish victims of Nazism than for Germans uprooted by the war Hitler started. The chairman of the Senate’s immigration subcommittee, Chapman Revercomb, of West Virginia, wrote, “Many of those who seek entrance into this country have little concept of our form of government. Many of them come from lands where Communism had its first growth and dominates the political thought and philosophy of the people.”

It took the angry persistence of President Harry Truman to get Congress to expand the numbers and remove the discriminatory provisions. There are four million refugees from the Syrian civil war, surpassing the staggering Indochinese numbers, and making this one of the biggest humanitarian crises since the end of the Second World War. Last month, as many as nine thousand people a day were crossing the Mediterranean to Europe. But the U.S. has accepted fewer than two thousand Syrians. In September, President Obama announced an increase in the quota for the coming year to ten thousand. That figure represents just half the monthly total of Indochinese refugees brought here in 1980. One refugee advocate called it “an embarrassingly low number.” And yet even this humble goal is unlikely to be reached.