Thursday, August 20, 2015

Today's Links

Pam Martens:  The historic collapse in commodity prices, the currency wars, China’s devaluation, global central banks still trying to resuscitate their economies seven long years after the Wall Street collapse, all point to... an epic failure of government policy designed under corporate dictate rather than public interest.


Former World Bank analyst Peter Koenig :  "The US-led standoff with Iran has nothing to do with nuclear weapons...The issue is: will Iran eventually sell its huge reserves of hydrocarbons in other currencies than the dollar, as they intended to do in 2007 with an Iranian Oil Bourse? That is what instigated the American-contrived fake nuclear issue in the first place."


President Franklin D. Roosevelt explained the causes of the Great Depression as follows. President Obama would be wise indeed to heed these words.


“…our basic trouble was not an insufficiency of capital. It was an insufficient distribution of buying power coupled with an over-sufficient speculation in production. While wages rose in many of our industries, they did not as a whole rise proportionately to the reward to capital, and at the same time the purchasing power of other great groups of our population was permitted to shrink. We accumulated such a superabundance of capital that our great bankers were vying with each other, some of them employing questionable methods, in their efforts to lend this capital at home and abroad. I believe that we are at the threshold of a fundamental change in our popular economic thought, that in the future we are going to think less about the producer and more about the consumer. Do what we may have to do to inject life into our ailing economic order, we cannot make it endure for long unless we can bring about a wiser, more equitable distribution of the national income.”




1--Keep Your Eye on Junk Bonds: They’re Starting to Behave Like ‘08


According to data from Bloomberg, corporations have issued a stunning $9.3 trillion in bonds since the beginning of 2009. The major beneficiary of this debt binge has been the stock market rather than investment in modernizing the plant, equipment or new hires to make the company more competitive for the future. Bond proceeds frequently ended up buying back shares or boosting dividends, thus elevating the stock market on the back of heavier debt levels on corporate balance sheets.


Now, with commodity prices resuming their plunge and currency wars spreading, concerns of financial contagion are back in the markets and spreads on corporate bonds versus safer, more liquid instruments like U.S. Treasury notes, are widening in a fashion similar to the warning signs heading into the 2008 crash. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam.
The big fear this time around is who is going to provide the liquidity in the junk bond market if too many investors head for the exits at the same time


2--Buckle Up! Financial World Is Rapidly Changing


the biggest cautionary warnings – rising junk bond yields and the rising spread in yields between junk and U.S. Treasuries – are commanding far less attention than they should be. Widening credit spreads served as an early red flag to the 2008 financial crash and implosion of iconic Wall Street firms.
As of last Wednesday, a Bank of America Merrill Lynch index showed yields on U.S. energy junk bonds reaching 11.8 percent. Even the yields on investment grade corporate debt are rising, while some distressed energy debt is yielding 30 to 40 percent.


Last Thursday, Thomson Reuters’ Lipper service reported that U.S. based high-yield (junk) bond funds and U.S. based investment-grade bond funds posted their third straight week of outflows of investor cash. Where the money went is also revealing, with $6 billion of inflows last week into U.S. based money market funds, which are typically perceived as a short-term, liquid parking place when market uncertainty reigns.


Back on May 22, 2013, in remarks to the Joint Economic Committee of Congress, then Fed Chairman Ben Bernanke referred to the risks building up in higher risk bond markets. Bernanke explained:
“…the Committee is aware that a long period of low interest rates has costs and risks. For example, even as low interest rates have helped create jobs and supported the prices of homes and other assets, savers who rely on interest income from savings accounts or government bonds are receiving very low returns. Another cost, one that we take very seriously, is the possibility that very low interest rates, if maintained too long, could undermine financial stability. For example, investors or portfolio managers dissatisfied with low returns may ‘reach for yield’ by taking on more credit risk, duration risk, or leverage. The Federal Reserve is working to address financial stability concerns through increased monitoring, a more systemic approach to supervising financial firms, and the ongoing implementation of reforms to make the financial system more resilient.” 


The situation has been deteriorating in southeastern Ukraine as of late.


Despite the ceasefire declared in accordance with the Minsk agreements, the Ukrainian military have increased their shelling of the Donetsk and Lugansk proclaimed people’s republics many times over, using all kinds of weapons. As a result, civilians continue to die and sustain injuries of varying severity, and residential houses and social infrastructure facilities are being destroyed.
The shelling is focused on the districts of Donetsk, the Donetsk Airport, as well as towns, such as Spartak, Gorlovka and Debaltsevo, to name a few.


Information continues to come in regarding numerous cases of the armed forces of Ukraine building up their heavy weapons, in violation of the agreements to withdraw them along the demarcation line. The details of such violations are put on record, including by the OSCE observers.


Having refused to pull back tanks and artillery up to 100 mm and mortars up to 120 mm 15 km away from the contact line on each side, which was agreed within the Contact Group, Kiev has not only begun to return and use heavy artillery and missile systems in the conflict zone, but has also launched a rigorous propaganda campaign blaming the militias for the deteriorating situation.


Ukraine's current bellicose rhetoric, encouraged by a number of its foreign patrons, causes major concern and clearly demonstrates the intention to get public opinion ready for another attempt to resolve the Ukraine crisis militarily


4---Thumbs up on Turkish Stream (and) we'll "not buying oil from ISIS" like the US says


Turkish Energy Minister Taner Yıldız added that he was awaiting a response after sending a draft inter-governmental agreement to Russia on the proposed Turkish Stream project. The controversial plan would see a pipeline built via the Black Sea, through Turkey and on to southern Europe, bypassing Ukraine. But it has been beset with problems.


“We haven't signed an agreement with Moscow yet. But I don't predict any problems. We will be signing it in either Ankara or Moscow. Turkey is not going to be the side that causes any delay in Turkish Stream,” he said....


Turkish Energy Minister Taner Yıldız has dismissed claims of Turkey buying oil from the terrorist Islamic State in Iraq and the Levant (ISIL) and stressed that the US officials who Yıldız had asked to show evidence of these claims have repeatedly failed to prove the allegations.....
Smuggling oil is one of the main sources of money for ISIL, as the group controls large swaths of territory in Syria and Iraq, including some oil fields. Turkey has long been faced with allegations of facilitating ISIL's oil smuggling, but Turkish officials deny any involvement in buying and selling ISIL's oil.


5--The Baby Boom Will Never Retire - Half Have No Retirement Savings At All


6---Iran Accord, War and the Doomed Dollar


That scenario was hinted at this week by US Secretary of State John Kerry. Speaking in New York on August 11, Kerry made the candid admission that failure to seal the nuclear deal could result in the US dollar losing its status as the top international reserve currency.
"If we turn around and nix the deal and then tell [US allies], 'You’re going to have to obey our rules and sanctions anyway,' that is a recipe, very quickly for the American dollar to cease to be the reserve currency of the world."


...
American writer Paul Craig Roberts said that the US-led sanctions on Iran and also against Russia have generated a lot of frustration and resentment among Washington's European allies.
"US sanctions against Iran and Russia have cost businesses in other countries a lot of money," Roberts told this author.
"Propaganda about the Iranian nuke threat and Russian threat is what caused other countries to cooperate with the sanctions. If a deal worked out over much time by the US, Russia, China, UK, France and Germany is blocked, other countries are likely to cease cooperating with US sanctions."
Roberts added that if Washington were to scuttle the nuclear accord with Iran, and then demand a return to the erstwhile sanctions regime, the other international players will repudiate the American diktat.
"At that point, I think much of the world would have had enough of the US use of the international payments system to dictate to others, and they would cease transacting in dollars."
The US dollar would henceforth lose its status as the key global reserve currency for the conduct of international trade and financial transactions


"The US-led standoff with Iran has nothing to do with nuclear weapons," says Koenig. The issue is: will Iran eventually sell its huge reserves of hydrocarbons in other currencies than the dollar, as they intended to do in 2007 with an Iranian Oil Bourse? That is what instigated the American-contrived fake nuclear issue in the first place."
Former World Bank analyst Peter Koenig says that if the nuclear accord unravels, Iran will be free to trade its oil and gas — worth trillions of dollars — in bilateral currency deals with the EU, Japan, India, South Korea, China and Russia, in much the same way that China and Russia and other members of the BRICS nations have already begun to do so.
That outcome will further undermine the US dollar. It will gradually become redundant as a mechanism of international payment.

 Koenig argues that this implicit threat to the dollar is the real, unspoken cause for anxiety in Washington. The long-running dispute with Iran, he contends, was never about alleged weapons of mass destruction. Rather, the real motive was for Washington to preserve the dollar's unique global standing."

           Group Was Supposed to Focus on ISIS, Members Have Other Ideas 
                       
The massively expensive and massively unsuccessful US training program in Syria continues to go off the rails today, as members of the group, which is called either “Division 30″ or the “New Syrian Forces’ depending on who is talking about them, look to pick a fight with the Assad government ....


Now the “secular” US rebels are endorsing al-Qaeda publicly, declaring themselves to support the other “holy warriors” in the civil war, and in an interview today with CNN, openly talk about their desire to go after the Assad government, irrespective of US wishes.


The US didn’t technically say they couldn’t fight Assad, either, they just told them to go after ISIS but made it clear they could “fight whoever fights them.” Picking a fight with the Syrian military then is as easy as driving into one of their districts and waiting for the shooting to start. With the US committing itself to providing air support for this rebel faction whoever they’re fighting, this could be a quick and dirty way to shoehorn the US war against ISIS into a war for regime change in Syria which already failed to get Congressional approval.


8--Down memory lane: Greenspan says ARMs might be better deal
http://usatoday30.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm


9-Greenspan says homeowners have enough equity to withstand downturn  "-it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.
http://www.federalreserve.gov/boardDocs/Speeches/2005/200509262/default.htm



10--Warnings of jihadists among Syria’s rebels came early, were ignored


Extensive interviews with Syria policymakers from the Obama administration, some of whom spoke on the record and others who requested anonymity so as to freely describe the administration’s behind-the-scenes debates, reveal that the Obama administration was warned early on that al Qaida-linked fighters were gaining prominence within the anti-Assad struggle.
Senior officials chose to look the other way, however, and flog a misleading narrative of a viable moderate force. Today, the same extremists have seized wide swaths of Syria and Iraq, uprooting millions of people, threatening the stability of U.S. regional allies, and sucking the United States into another open-ended conflict in the Middle East.  [ . . . ]


11--According to economist and author Henry Liu, the same thing happened just prior to the Great Depression:

"The problem in 1929 was, as it is in 2008, that asset prices buoyant by speculation had outstripped the purchasing power of stagnant income of consumers. Assets and commodities in the economy were valued at price levels that aggregate wage income could not sustain. The solution was not to inject more useless liquidity to sustain inoperative price levels, which will only make the problem worse, but to INTRODUCE DEMAND MANAGEMENT THROUGH FULL EMPLOYMENT AND LET WAGES QUICKLY RISE BACK UP TO THE LEVEL OF WAGE-PRICE EQUILIBRIUM. This was the policy objective of Roosevelt's New Deal Program, an objective not yet recognized by policymakers in 2008 even amid a revival of populist rhetoric


12---When will housing return to normal?


Perhaps one or two of these metrics may be low or declining due to unusual and short-lived circumstances, but a healthy, “normal” market would see strength in these areas. Unfortunately, we witness the following


  • 20-year lows in home ownership
  • 6-year lows in home sales
  • 30-year lows in first-time homebuyer participation
  • 20-year lows in purchase mortgage originations
  • New home construction less than 50% of normal
  • Household formation less than 50% of normal
  • Doesn’t the word recovery imply improvement? When people recover from illness, their health improves; shouldn’t a housing recovery show improvement in multiple areas, not just price? So far, price is the only indicator of improvement, assuming high prices are better than affordable prices, of course


    13--Erdoğan’s declaration of 'system change’ outrages Turkey’s opposition | Hürriyet Daily News |
    President Recep Tayyip Erdoğan’s declaration of a de facto shift in Turkey’s administrative system to a presidential system has infuriated opposition leaders, who say the declaration indicates “rule by diktat.”
    In remarks delivered in his hometown, the Black Sea province of Rize, on Aug. 14, Erdoğan said Turkey had witnessed a change in the president’s new role and asked for the constitution to be updated to recognize his de facto deployment of enhanced powers.
    “There is a president with de facto power in the country, not a symbolic one. The president should conduct his duties for the nation directly, but within his authority. Whether one accepts it or not, Turkey’s administrative system has changed. Now, what should be done is to update this de facto situation in the legal framework of the constitution,” he said.


    13--Will Israel join Turkey-Saudi coalition?


    Meanwhile, various groups of Israeli and Turkish entrepreneurs continue to set their sights on a pipeline that would transport natural gas found in reserves off Israel’s coast to Turkey and from there to Europe. Those same groups of businessmen are trying yet again to find a solution acceptable to both parties that will allow the reconciliation process to move forward. Some of these entrepreneurs are acting rather openly, while others are more circumspect in their search for the magic words that will win them entry into the two leaders’ hearts and minds. The apprehensions these two leaders share over the emerging agreement with Iran and their common interests in Syria are the most prominent banners that these intermediaries are raising.
    Netanyahu has since formed a new government. With the most vociferous opponent of any reconciliation process with Turkey — former Foreign Minister Avigdor Liberman — out of the picture, Netanyahu will find it much easier to complete the process if he so desires. There is still an election underway in Turkey, the fourth since the Marmara incident. In the upcoming election for the Turkish parliament scheduled for June 7, Erdogan hopes to win a two-thirds majority, which will enable him to entrench his rule. Yet, in contrast to his brusque verbal attacks on Israel in previous elections, this time Erdogan is holding back. The little criticism of Israel from his Prime Minister Ahmet Davutoglu is much more moderate than before as well. Or at least it has been more moderate as of this writing.


    14--David Cay Johnston: 21 Questions for Trump on Kickbacks, Busting Unions, the Mob & Corporate Welfare


    15--The oil bottom is in when the handcuffs come out


    Oil has already plunged 34 percent from its recent peak of about $62 a barrel in early May to now hovering barely above $40. This latest move lower seems to have finally extinguished hopes for a rebound in prices to the triple-digit levels seen as recently as last June, when West Texas benchmark crude was trading at more than $107 a barrel.
    In turn, 85 percent of the S&P 500 energy sector has now succumbed to a bear market, marked by declines of 20 percent or more. Exxon and Chevron, two of the 30 blue chip components of the Dow Jones industrial average, have shed more than a quarter of their market value since their July 2014 highs. ...


    The history of these supercycles, or bubbles, isn't kind on how they end.
    "It will end in panic liquidation," longtime investor Dennis Gartman said Wednesday on CNBC. "It will end when you've had an announcement of five or six bankruptcies. It will end when mergers and acquisitions step in and take over."...


    Some even argue the commodities crash could actually be a good thing for the U.S. economy, longer term, by lowering the cost of fuel and other raw materials.


    16--No, Iran does not get to inspect its own facilities


    17--With prices down, drilling is down over 50%, and production is beginning to fall as well. At the same time, gasoline consumption and miles driven are both up. Therefore, some of the money saved due to lower prices is being spent to buy more gasoline, which, with domestic production falling, means more imported oil and gasoline, which does nothing for the economy. And works to weaken the $US.


    18--Banks have treated our housing market like a Ponzi scheme, and it's about to bust


    Between 2002 and 2015, the mortgage books of National Australia Bank, ANZ, Commonwealth Bank and Westpac grew by 388%, 435%, 475% and 554% respectively. Put another way, the big four’s mortgage books escalated from a combined $242bn to a whopping $1.13tn, surging at such a consistent rate it would make Bernie Madoff proud.


    What the Australian banking system has developed is an uninterrupted growth model which shares a similar risk profile as a Ponzi or pyramid scheme by lending ever-larger sums of debt to homebuyers and property investors year after year. If this growth model is interrupted, however, and banks cannot expand their mortgage books further, housing price inflation halts and will then plunge


    19--China stocks slump again despite signs of govt support
    On Wednesday, the indexes had reversed sharp losses to end higher, as roughly 30 Chinese listed companies, many small caps, disclosed holdings by government-backed investors in an apparent attempt to sooth market panic following the previous session's 6 percent tumble.
    "Even as the government has the will to put a floor under the market, whether it has the ability to do so is in doubt," said Hou Yingmin, analyst at AJ Securities, citing adversities including an anaemic economy, capital outflows and ugly technical patterns.


    "Without fresh money inflows, any rebound is not sustainable


    20--China Central Bank Injects Most Funds Since February as Money Rates Increase


    21--China Crashing
    The one thing China hasn’t yet had is a full-blown financial crisis. But the plunging Shanghai stock market has raised fears that that quintessential capitalist experience has finally arrived in China.....


    the Chinese banking system and its satellites lent like crazy to any company and many individuals, and one of the biggest credit bubbles in history—possibly the biggest ever—took off. In 2010, the increase in private debt in China was equivalent to 35% of GDP. That dwarfs the rate of growth of credit in both Japan and the USA prior to their crises: Japan topped out at just over 25% per year, and the USA reached a “mere” 15% of GDP per year—see Figure 4....


    As I have argued for a decade now, crises begin when the rate of growth of credit slows down in heavily indebted countries. China was not heavily indebted in 2008, which is why it could take the credit growth path out of the Global Financial Crisis. But now it is more heavily indebted than America was when its crisis began—even relying on official statistics which undoubtedly understate the real situation—and the momentum of debt may well carry it past the peak level reached by Japan after its Bubble Economy collapsed in the early 1990s (see Figure 5).


    So China is having its first fully-fledged capitalist crisis. To date its response to it has been to try to sustain the unsustainable: to transfer the bubble from housing to the stockmarket, and to keep the stockmarket rising like some production target for wheat from the bad old days before the fall of the Gang of Four. It can’t be done. At some point, the Chinese government is going to have to make the transition from generating a credit bubble to trying to contain its aftermath.











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