by ilene - April 21st, 2015 2:50 am
Courtesy of The Automatic Earth.
Alfred Palmer Women as engine mechanics, Douglas Aircraft, Long Beach, CA 1942
That Europe let almost 1000 people die in the Mediterranean in one night shouldn’t be a surprise to anyone, at least not to those who are still occasionally awake. The Club Med migrant crisis has been going on for a long time, and the EU’s only reaction to it has been to slash its budget and operations in the area, not to expand them.
So when the New York Times opens with “European leaders were confronted on Monday with a humanitarian crisis in the Mediterranean..”, they’re a mile and a half less than honest. Brussels has known what was going on for years, and decided to do less than nothing.
The onus was put on Italy, Malta, Greece and a handful of private compassionate activists to handle the situation, as if it was some sort of local, or even tourist, issue, while Europe’s finest went back to festive gala openings of their €1 billion+ ‘official’ edifices, and back to forcing more austerity on member nations. Somebody has to pay for those buildings.
The EU took over rescue operations from Italy late last year and promptly cut the budget by two-thirds. Saving migrant lives was deemed just too expensive. You don’t survive in European politics if you don’t get your priorities straight.
On March 8, I wrote ‘Europe, The Morally Bankrupt Union’, and things have only deteriorated from there. If the international press, and various world leaders, wouldn’t have called them out over the weekend, the Brussels class would still not do a thing about the migrant drama, and would still feel comfortable hiding behind the factoid that most migrants drown outside European waters.
In their meeting on Monday, a bunch of EU interior and foreign ministers once again didn’t reach any meaningful conclusions; it’ll be up to presidents and prime ministers to do this on Thursday. One might almost hope for another huge tragedy before that date, just so the cynical hypocrisy that rules Europe would be exposed once again for all to see. From my March 8 piece:
To its south, the EU faces perhaps its most shameful -or should that be ‘shameless’? – problem, because it doesn’t do anything about it: the thousands of migrants who try to cross
by ilene - April 20th, 2015 11:50 pm
By John Mauldin
I think it was almost two years ago that I was in Cyprus. Cyprus had just come through its crisis and was still in shell shock. I was there to get a feel for what it was like, and a number of my readers had courteously arranged for me to meet with all sorts of people and do a few presentations. A local group arranged for me to speak at the lecture hall of the Central Bank of Cyprus in Nicosia.
There were about 50 people in the room. I was busily working on Code Red at the time and had money flows, quantitative easing, and currency wars at the front of my brain. As part of my presentation, I talked about how countries would seek to use currency devaluation in order to gain an advantage over other countries – that we were getting ready to enter an era of currency wars, which would be disguised as monetary policy trying to create economic growth. Which is exactly what we have today. Every now and then I get a few things right.
After my short presentation, during the question and answer period, I pointed to a distinguished-looking gentleman to ask the fourth question. Before he could get his question out, my host stood up and said, “John, I just want to give you fair warning. This is Christopher Pissarides. He recently won the Nobel Prize in economics and is a professor at the London School of Economics, as well as being a Cypriot citizen.”
Professor Pissarides preceded his question by citing a great deal of literature, some of it his own, which showed that a country could not gain a true advantage by engaging in currency manipulation. “So why do you think there would be currency wars? What would it gain anybody?” he asked.
We proceeded to have a conversation that basically boiled down to the old Yogi Berra maxim: In theory, theory and practice are the same thing. In practice they differ.
by ilene - April 20th, 2015 11:44 pm
Courtesy of Joshua Brown
The Chinese stock market has effectively doubled over the past year and a full-scale mania has gotten underway with mainland individual investors opening millions of brokerage accounts a month. This is a good thing, not a bad thing, as the remaining phase of China’s economic rebalancing must include a consumer component to offset the declining growth from infrastructure and state-sponsored real estate development.
But even good things can go too far.
As of last month, Chinese stock market investors (traders?) had built up $375 billion in margin loans, a massive increase over the levels just six months ago. The Chinese securities regulators aren’t sitting back and watching, they’re acting. They’re cutting out some of the more extreme forms of margin lending and leverage and making it easier for short-sellers to come into the markets.
Allowing funds to lend their stock holdings will expand the pool of equities available to short sellers, who have relied primarily on brokerages to supply them with the stock needed to execute the bearish bets.
While short selling on the Shanghai bourse climbed more than threefold in the past nine months and reached a record 7.46 billion yuan last week, the amount still pales in comparison to China’s $7.3 trillion market capitalization. The CSRC said Friday it also expanded the number of stocks available for short selling to 1,100.
China should cool off a bit but this does not mean investor enthusiasm needs to be completely crushed. Instead, we’re simply watching a market mature and become sophisticated enough to keep expanding. This is in-line with similar moves to rein in wild behavior by the new Chinese president Xi Jinping, such as the corruption crackdown and the cooling off of the Macau casino boom. It’s smart.
by ilene - April 20th, 2015 11:07 pm
Courtesy of Mish.
I had the pleasure of being interviewed one again by Gordon Long as part of his financial repression series. The topic of this interview was “America’s Pension Problem“.
Synopsis – By Gordon Long – Edited by Me
Mish Shedlock talks about the magnitude of the mounting Pension Problem in America and uses his home state of Illinois as a prime example. According to a State Budget Solutions, last year’s state unfunded pensions reached an all-time high of $4.7 trillion. This funding gap state public pension plans are underfunded by $4.7 trillion, up from $4.1 trillion in 2013. Overall, the combined plans’ funded status has dipped three percentage points to 36%. Split among all Americans, the unfunded liability is over $15,000 per person.
Pending Pension Crisis
“Illinois Pension’s in general are 39% funded. This is after this massive rally we have had since 2009 in financial assets. Some of the worst ones are only about 20% funded.”
“Various cities in Illinois have problems, Chicago being one of them. The City of Chicago has a huge pension crisis right now. We have things in Illinois like “Home Rule Taxes” where cities can levy their own taxes in addition to the state. That is why we have varying sales tax that range anywhere from 6.25% to 10%, depending on locality.”
“I have been working with the Illinois Policy Institute on pension and bankruptcy issues. There are a number of cities in Illinois that are ready to file bankruptcy. The problem is they can’t file bankruptcy because the state doesn’t allow it.”
“The fundamental problem is they have made more promises than they can possibly keep”
Gaming the System
The problem is “you have police and fire workers who can retire after 20 years and collect up to 70% of their earnings based on the 5 highest years salaries. We see a lot of pension spiking in the last few years where for example police work overtime (which counts towards their best five years) so these workers stand to collect far more in retirement (total years in retirement) than they actually ever made while working (total years worked)….
Noam Chomsky: “The Idea Of A Media Which Does Not Repeat US Propaganda Is Intolerable To American Leaders”
by ilene - April 20th, 2015 9:45 pm
Few individuals polarize the public with their opinions, statements and mere presence, like Noam Chomsky. The 86 year old linguist, philosopher, cognitive scientist, logician, political commentator, social justice activist, and anarcho-syndicalist advocate, has strong opinions (and in some cases, entire schools of thought) on everything from philosophy, to sociology, to linguistics, but he is perhaps best known in recent years for his political activism which has led to death threats due to his staunch and far-reaching criticism of US foreign policy (allegedly the Anti-Defamation League "spied on" Chomsky's appearances).
His broader outlook is a peculiar version of libertarianism (he describes himself as an anacrho-syndicalist), in which he asserts that authority is inherently illegitimate, and that the burden of proof is on those in authority. If this burden can't be met, the authority in question should be dismantled. Authority for its own sake is inherently unjustified. He contends that there is little moral difference between chattel slavery and renting one's self to an owner or "wage slavery." He holds that workers should own and control their workplace.
He is has also repeatedly stated his opposition to ruling elites, among them institutions like the IMF, World Bank, and GATT.
In other words, the present, in which ruling elites (whether the BIS and "Troika) and ubiquitous US intervention in every possible foreign affair (courtesy of a State Department which, as it has now been revealed, had until recently worked on behalf of the highest foreign bidder) determine the fate of the entire world, should provide Chomsky with endless material for contemplation.
Conveniently, overnight we got a glimpse into his current thought process, courtesy of the following extended interview conducted by RT with the famed linguist and anti-establishmentarian, in which topics such as the "weaponization" of media and information, America's paradoxical propaganda machine, the immunity of the US from the set of rules it creates for everyone else (but itself), and America's conversion from a democracy into a plutocracy, as well as many more, are touched upon.
Whether one agrees or disagrees with Chomsky, he always provides a unique and interesting perspective on current (and future) events.
by ilene - April 20th, 2015 6:15 pm
The Republican Schism Over Taxes (BloombergView)
Since the fall of the Berlin Wall in 1989 eliminated the threat of global communism, the one glue that held together Republicans has been cutting top marginal tax rates to promote economic growth.
That Velcro is cracking.
The Republican presidential candidate Marco Rubio has proposed a huge tax cut. The centerpiece would be a new $2,500-per-child credit. This family-centric provision would amount to a $1.5 trillion tax reduction over 10 years. The top individual rate would be reduced to 35 percent from 39.6 percent, and it would kick in at a lower income level than the current 35 percent rate does. (More)
Jonathan Litt, who’s pushing MGM Resorts International to put its properties into a real estate investment trust, stepped up his criticism of the casino company and accused a director of retaliating against one of his board nominees. (Continue)
The Ibovespa rose for the first time in three days as Chinese stimulus measures fueled optimism that Brazil’s exporters will benefit from growth in the nation’s biggest trading partner.
Iron-ore miner Vale SA rallied. State-controlled oil producer Petroleo Brasileiro SA contributed the most to the index’s advance after approving financing of 4.5 billion reais ($1.5 billion) with Banco do Brasil SA. Homebuilder Direcional Engenharia SA slumped after saying cancellations exceeded contracted sales in the first quarter. (More here)
As mainland Chinese investors rush to buy Hong Kong stocks, backers of some of the city’s biggest companies are doing the opposite. (Read more)
The grip of the world’s biggest banks on the $5.3-trillion-a-daycurrency market is under attack.
by ilene - April 20th, 2015 5:48 pm
Courtesy of EconMatters
China is now firmly in stimulus mode when PBOC announced on Sunday to cut the reserve-requirement ratio by 1% to 18.5% effective April 20. This is the second reduction this year and the largest since November 2008 during the global financial crisis. The reserve-requirement ratio represents the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves in cash.
The new 18.5% ratio required by China is still higher than the typical global standard and than the current 10% cap by the U.S. Federal Reserve. The PBOC also announced an additional 100 bps cut for rural credit cooperatives and village banks, as well as a 200 basis point cut for the China Agricultural Development Bank.
Graphic Source: WSJ, Feb. 2015
1Q15 The 'Darkest Period'
Bloomberg quoted Larry Hu, head of China economics at Macquarie in Hong Kong call 1Q15 the “darkest period” this year for China's economy. GDP was 7% in Q1, the slowest since 2009, while industrial production in March rose at the slowest rate since November 2008, and inflation turned negative for the first time since 2009. (Read: Bloomberg Analyst Returned From China 'Terrified for the Economy')
Hu now expects further easing with an interest-rate cut within a month (PBOC has already cut interest rates twice since November), increasing infrastructure spending and a relaxation of home-purchasing rules.
My contacts in China and Hong Kong indicated that the new crackdown by Xi on corruption and state largess has put a fairly large portion of the nation's businesses (in mainland and Hong Kong) once catering to the 'elite' rich class in China out of commission. This is one of the major contributing factors to the nation's slowing growth.
$100 Billion Liqudity
WSJ estimated that the reduction in bank reserve-requirement-ratio could freed up more than $100 billion for China's banks to lend. This suggests increasing liquidity compounding the social economic issue of wealth gap (which should be Beijing's primary concern), similar to the 3 QE programs by the U.S. Fed.
Shanghai Composite Index
by ilene - April 20th, 2015 4:17 pm
Courtesy of Mish.
Greece to Seize Local Government Cash
Robbing Peter to pay Paul took another leap forward in Greece today as Tsipras to Seize Public-Sector Funds to Keep Greece Afloat.
Running out of options to keep his country afloat, Greek Prime Minister Alexis Tsipras ordered local governments to move their funds to the central bank.
“Central government entities are obliged to deposit their cash reserves and transfer their term deposit funds to their accounts at the Bank of Greece,” according to the decree issued Monday on a government website. The “regulation is submitted due to extremely urgent and unforeseen needs.“
Credit-default swaps suggested about an 81 percent chance of Greece being unable to repay its debt in five years, compared with about 67 percent at the start of March, according to CMA data.
The move is a sign of the “dire liquidity situation for the Greek financial system as the government pools all liquidity available,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. The “next step may be forcing all public-sector entities, including public-sector companies to do the same,” he said.
Greek officials, including Deputy Prime Minister Yannis Dragasakis, remained defiant over the weekend, saying the government won’t betray its electoral promises and worsen the pain that came from previous austerity measures.
Somehow Tsipras labeled this event as “unforeseen” even though it was blatantly obvious the moment the Troika refused to relax terms on Greece back in January.
Stealing money from cities like Athens to pay state workers will ensure city workers don’t get paid. Precisely what good will that do but prolong the shell game?
Two Year Bond Yield Tops 28%
The bond market is getting increasingly jittery over the current state of affairs as yield on two-year Greek bonds is now over 28%….
by ilene - April 20th, 2015 2:58 pm
Courtesy of Lance Roberts via STA Wealth Management
With "tax day" now firmly behind us, it is expected that 2015 will show a record level of tax collections. This is a good thing, right? Maybe not.
Over the weekend, an economist friend of mine sent me an interesting piece of analysis discussing the record level of tax receipts as a percentage of the economy. This is something that I have written about in the past.
While the current push higher in tax collections partially due to economic growth, it is primarily due to higher tax rates brought on by the "2011 Budget Control Act." That bill imposed automatic tax increases and spending cuts beginning in 2013. It is worth noting that then chairman of the Federal Reserve, Ben Bernanke, launched "QE 3" specifically to offset the potential risks of the "fiscal cliff" imposed by the "debt ceiling deal."
The good news is that those tax increases and automatic spending cuts led to a massive shrinkage of the deficit which has declined from a record of $1.35 Trillion in 2010 to just $559 billion as of the end of 2014.
While it is certainly good news that the budget deficit is shrinking from a "fiscal" perspective, the economic ramifications are not so great.
The reason: "The economy is not growing strongly enough to offset the drag caused by fiscal austerity."
Government spending was a support of economic growth prior to the onset of the fiscal cliff. While the President currently takes credit for the shrinkage of the deficit, it was due to no actions of his own but rather a complete "SNAFU" brought about by the ongoing guerilla warfare between the Democrats and Republicans.
The austerity measures automatically imposed by the Budget Control Act of 2011 became a drag on economic growth as the rise in tax collections reduced the consumptive/reinvestment effect of those dollars in the economy. The chart below shows the surge in tax receipts as a percentage of GDP.
(Note: The surge in receipts at the end of 2013 was due to a massive payout in bonuses and dividends due to the onset of the "fiscal cliff" in order to take those funds at lower tax
by ilene - April 20th, 2015 2:11 pm
Courtesy of Mish.
At long last the deniers have thrown in the towel. Grexit is now the base case as Europe Braces for Messy Greek Endgame.
It’s still possible that Greece can remain in the eurozone—though that is no longer the base case for many policy makers. At the very least, most fear the situation is going to get much, worse before it gets any better. No one now expects a deal to unlock Greek bailout funding at this week’s meeting of eurozone finance ministers in Riga—originally set as the final deadline for a deal. The new final, final deadline is now said to be a summit on May 11.
But among European politicians and officials gathered in Washington DC last week for the International Monetary Fund’s Spring Meetings, there was little optimism that a deal will be agreed by then.
The two sides are no closer to an agreement than when the Greek government took office almost three months ago. “Nothing, literally nothing has been achieved,” says an official. In fact, it is worse than that: so far, the bulk of Athens’s reform plans would actually cost money or reduce government revenues, according to eurozone officials.
They say that when you add up all the government’s proposals, the budget surplus required under the current program turns into a 10-15% deficit while debt soars far above the 120% of GDP targeted for 2022. There is no way that the eurozone—let alone the IMF—could disburse funds on the basis of such fantastical numbers.
The bottom line is that Athens won’t get any money unless it can reach a deal that satisfies the IMF that Greek debt is on a sustainable path and that it has a medium-term funding plan in place. The eurozone won’t disburse its own bailout funds without a deal that carries this IMF seal of approval.
The likely scenario is exactly the same as it was in 2010, 2011, 2012, 2013, and 2014: default.
Various can-kicking exercises simply lasted that long.
So why now?
- The election of Syriza
- ECB belief that Grexit will not cause contagion.
Bear in mind, Grexit could cause a very messy breakup for the eurozone. That