Friday, July 29, 2016

Evans-Pritchard: "IMF admits disastrous love affair with the euro and apologises for the immolation of Greece"

From the Telegraph:
The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.

This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions.

It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking breakdown in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation.

The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way European Union insiders used the fund to rescue their own rich currency union and banking system.

The three main bailouts for Greece, Portugal and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000pc of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the fund between 2011 and 2014.

In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive "ad-hoc task forces". Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff," it said.

The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen.

“Before the launch of the euro, the IMF’s public statements tended to emphasise the advantages of the common currency," it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled.
“After a heated internal debate, the view supportive of what was perceived to be Europe’s political project ultimately prevailed,” it said.

This pro-EMU bias continued to corrupt their thinking for years. “The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro-area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value,” it said....MUCH MORE

Thursday, July 28, 2016

Handy Hints: Use Your Competitor's Genetic Information To Get Ahead

Do you compete in the blood sport of office politics?
Time to step up your game.

From Motherboard:

What Can A Hacker Do With Your Genetic Information?
Learning about the genetic markers stored in your DNA can be an illuminating experience, even a life-altering one. Now that direct-to-consumer genetic testing companies such as 23andMe have made these tests more accessible and affordable, it’s no wonder that more than 1 million people have shipped their spit off to be genotyped, and have all their genetic information catalogued (and sold) in the process.

When a massive cache of private information is all stored in one place, it will naturally be a target for hackers. Though there hasn’t been a hack of any consumer genetic testing company yet, it may just a matter of time before someone breaches one of these sites and gains access to not just your credit card, but also your genetic markers.

So how concerned should we be, and what might happen if a hacker ever did get his or her hands on your DNA?

“You can imagine scenarios where unsavory people could try to use this stuff in personal ways,” said Dr. Robert Green, the director of the Genomes to People research program at Brigham and Women's Hospital, Broad Institute and Harvard Medical School.

Green told me while a massive hack might be able to execute a data dump of genetic information, unless the hacker was also able to connect that information to individuals (personal information is encrypted, according to 23andMe’s privacy policy) it wouldn’t be particularly useful. Even if the genetic information was linked to customers’ identities, on a mass scale it wouldn’t mean much.
What would be more detrimental would be a targeted attack to collect your genetic information specifically, orchestrated by somebody you know.

“If there were variants that put someone at risk for Alzheimer’s disease and you were vying with that person in a corporation for a job, you could somehow try to use that information to suggest that they might be unfit,” Green told me over the phone. “You could be in a custody battle where DNA could suggest there’s a predisposition to psychiatric illness, for example.”

Green has previously studied how genetic information like this could be used in politics, citing the obsession and concern over Senator John McCain’s age and vitality in the 2008 election. But if someone were targeting you specifically, there are way less complicated and risky ways of getting your genetic information than breaching the entire 23andMe database....MORE
http://images.memes.com/meme/1107548

BlackRock Now Expects NEGATIVE Annualized Returns From 10-Year Treasuries, Lowers Expectations On Most Other Asset Classes

10-year yield 1.5110%
From BlackRock, Jul 25, 2016:
Key points
  • We have lowered our five-year return assumptions for most asset classes, on a fall in yields and global growth expectations.
  • The S&P 500 reached a new high last week, as many large-cap U.S. companies reported revenues above analysts’ expectations.
  • We see the Federal Reserve (Fed) on hold this week, while the Bank of Japan (BoJ) may delay actions until September.
We have lowered many of our capital market assumptions in our latest quarterly update. We now assume lower U.S.-dollar returns from most asset classes over the next five years, following a fall in both yields and global growth expectations.
BlackRock's five-year asset class return assumptions, July 2016
Our five-year return assumptions have steadily moved lower since the financial crisis, amid weak global growth prospects, easy monetary policy and rising valuations. Most are now well below long-run averages.
Uncovering relatively higher returns We have lowered our assumed returns for most fixed income assets, following a drop in yields (and rise in valuations) in the second quarter. We see holders of long-duration U.S. Treasuries losing more than 1% annually over the next five years as yields rise. Our analysis also shows less than 10% of the global fixed income universe offering annual returns of 3% or more over the next five years, with the higher returns concentrated in riskier assets such as hard-currency emerging market (EM) debt and high yield. We view EM debt as especially attractive versus Treasuries over the next five years.

Our return assumptions for U.S. stocks are unchanged — but are low from a historical perspective due to high valuations (the U.S. market is currently trading near 19 times earnings). We see non-U.S. equities offering higher potential returns, along with higher risk. We have, however, downgraded our return assumptions for pan-European stocks due to the likely impact of a Brexit on UK and eurozone economic growth. To generate higher returns, investors must be ready to accept more market risk or more illiquidity risk (e.g. alternatives). Within riskier assets, EM debt and dividend growth are worth considering. Government bonds can still play an important diversification role in portfolios — but at a greater cost. We see investment grade credit offering attractive risk-adjusted returns for investors looking for safety....MORE
HT: Barron's Income Investing 

Related: Tuesday's FT Alphaville "A friendly reminder that return is 'not really a function of yield'".

Population, Income and Growth: "Is the Semi-Permanent "Gunpowder Empire" Historical Scenario Plausible? Perhaps Not..."

From Brad DeLong:
Riffing off of yesterday's: : "'Gunpowder Empire': Should We Generalize Mark Elvin's High-Level Equilibrium Trap?"...

A generation ago Michael Kremer wrote a superb paper: Michael Kremer (1993): "Population Growth and Technological Change: One Million B.C. to 1990", Quarterly Journal of Economics 108:3 (August), pp. 681-716 http://tinyurl.com/dl20160727a.

Kremer saw human populations as growing at an increasing rate over time. Population reached approximately 4 million by 10000 BC, 50 million by 1000 BC, and 170 million by the year 1. Population then reached 265 million by the year 1000, 425 million by 1500, and 720 million by 1750 before the subsequent explosion of the British Industrial Revolution and the subsequent spread of Modern Economic Growth.

Michael Kremer then developed this association between higher global population levels and faster population (and global real GDP, and global total factor productivity) growth into a "two heads are better than one" theory of long-run economic growth:
No matter where the economy starts, it winds up in region B.... Once the trajectory is in region B, it remains there, with population and income both increasing indefinitely.
Income must eventually reach y*, the [demographic transition] level above which population growth slows.... As income rises above y*, population growth rates decline. If Φ = 1, so that the level of technology enters the research production function linearly, growth rates of technology continue to increase because population continues to increase.
If 1 > Φ... growth rates of technology are likely to continue to increase for some period.... In summary, if population adjusts to income at finite speed... income will gradually rise over time... there will eventually be a demographic transition... [followed by] steady state growth rates of population, technology, and income...
In Kremer's model, population will grow and eventually population will be high enough that research and development will proceed fast enough to push income per capita high enough to trigger the demographic transition and thus break the Malthusian proportional link between resources and technology on the one hand and population on the other. After that link is broken, economic growth will predominantly take the form not of Malthusian increases in population but rather Industrial Revolution and Modern Economic Growth increases in living standards and labor productivity.
The breakthrough to an Industrial Revolution, Modern Economic Growth, and our present prosperous global post-industrial economy is therefore baked into the cake. It is an all-but-inevitable event in human history produced by the simple fact that when it comes to generating useful ideas two heads are better than one: "the fundamental nonrivalry of technology as described by Paul Romer (1986)..."

The alternative view to the inevitability of the breakthrough is that the breakthrough to the Industrial Revolution and the subsequent knock-on transition to Modern Economic Growth was a lucky throw of the historical dice--that while Kremer's model has something like our economic world today as our inevitable destiny, the world might well be substantially otherwise and remain substantially otherwise for millennia if not longer. The current poster child for British-Industrial-Revolution-a-lucky accident is Robert Allen, and his excellent "The British Industrial Revolution in Global Perspective":
It was not Newtonian science that inclined British inventors and entrepreneurs to seek machines that raised labour productivity but the rising cost of labour... due to... Britain’s success in the global economy... in part the result of state policy... [and] Britain['s] vast and readily worked coal deposits.... The necessary R&D was profitable in Britain (under British conditions) but unprofitable elsewhere....
The theory advanced here explains the technological breakthroughs of the industrial revolution in terms of the economic base of society–natural resources, international trade, profit opportunities. Through their impact on wages and prices, these prime movers affected both the demand for technology and its supply...
Why did the industrial revolution lead to modern economic growth?... Wouldn’t the French, or the Germans, or the Italians, have produced an industrial revolution by another route? Weren’t there alternative paths to the twentieth century?... The nineteenth century engineering industry was a spin-off of the coal industry.... The British inventions of the eighteenth century–cheap iron and the steam engine, in particular–were so transformative... because of the possibilities they created for the further development of technology. Technologies invented in France–in paper production, glass, knitting–did not lead to general mechanization or globalization....
There is no reason to believe that French technology would have led to the engineering industry, the general mechanization of industrial processes, the railway, the steam ship, or the global economy. In other words, there was only one route to the twentieth century–and it went through northern Britain...
Allen may be right and he may be wrong. But let's explore what the consequences are of assuming that he is right--that the British Industrial Revolution was a lucky, discontinuous break. Suppose that without the British Industrial Revolution global economic history would have continued along a business-as-usual track, suppose that the British Industrial Revolution required British commitment to its fiscal-military state followed by the victories at sea that wound up funneling the globe's mercantile profits into the island, and so raising wages. What would the world have looked like had the Protestant Winds of 1588 and 1689 not blown, and Britain been ruled by a Catholic Stuart Dynasty French- or Spanish-subsidized client dynasty unwilling to fight the Second Hundred Years War?

Kremer's (1993) model then allows us to ask the question: How long would it have taken--in the absence of eighteenth century Britain--to get the ball rolling....MUCH MORE

Big Money: "An Auction House Learns the Art of Shadow Banking"

From Bloomberg, July 27:
  • Lending by Sotheby’s tripled to $682 million in four years
  • Malaysian financier in money-laundering probe got a loan
A year before he got caught up in a U.S. money-laundering investigation, Malaysian financier Jho Low was looking to borrow more than $100 million without having to answer all the nosy know-your-customer questions required by U.S. banks such as JPMorgan Chase & Co.

“Prefer the boutique banks that can move fast vs the large ones like JPM,” Low wrote on March 13, 2014, to an employee of a private art dealership that had sold him a painting by Claude Monet for $35 million a few months earlier. The lender “can take all the art no problems,” he wrote the next day. “All in Geneva free port. Speed is the most important and one with a fairly quick and relaxed kyc process.”

Low got his money a month later, not from a bank but from Sotheby’s, an auction house that isn’t subject to the same money-laundering scrutiny by regulators. He pledged 17 works of art, valued between $191.6 million and $258.3 million, to secure a $107 million loan, according to a U.S. Justice Department complaint filed July 20 in an effort to seize more than $1 billion of assets allegedly siphoned from a Malaysian state fund.

As prices for art skyrocketed, Sotheby’s and other firms have become shadow banks, making millions of dollars of legal loans outside the regulated financial system and raising concerns that such financing could facilitate money laundering. Sotheby’s tripled lending to $682 million over the four years ended in 2015. Last year it almost doubled, to $1 billion, a revolving credit facility provided by banks including JPMorgan and HSBC Holdings Plc that it can use to make loans.

Art Crime
“One way to launder is to use art as a security for a loan,” said David Hall, who spent 10 years as a special prosecutor for the Federal Bureau of Investigation’s Art Crime Team and is now a partner at law firm Wiggin & Dana LLP. Hall, who wouldn’t comment about Sotheby’s or the Low case, said the aim is to use ill-gotten funds to purchase assets that can be used as collateral for a loan. “The level of scrutiny you’ll receive from a bank is much higher than you will receive from an auction house.”
Sotheby’s says it has a rigorous compliance program, and the firm hasn’t been accused of wrongdoing in connection with the government investigation. While the company underwrites loans on the basis of the value and title of the artwork, it has a parallel process that looks into a client’s source of wealth and evaluates risk in a manner analogous to banks, according to Lauren Gioia, a spokeswoman. The compliance program is headed by Jane Levine, a former federal prosecutor who worked with the FBI’s art-crime unit.

“This process was in place at the time the loan to Mr. Low was extended,” Gioia said. “As outlined in the complaint, Sotheby’s, like many other entities, including prominent law firms, major banks, real estate companies and corporations in other industries, fell victim to a complex web of transactions designed to hide and disguise the alleged illegal source of funds.”

Indeed, some of the money used to buy Low’s art flowed through a U.S. account at JPMorgan, according to the complaint.

Financing Lifestyles
Art financing has expanded not just at Sotheby’s but at banks including Bank of America Corp. and JPMorgan as well as boutique firms. Art-secured lending has increased by 15 percent to 20 percent annually over the past five years to become a $15 billion to $19 billion market in the U.S., according to Deloitte’s Art & Finance Report 2016....MORE
HT: Art News who also refer us to:

Taikang Life, one of China’s biggest insurers, now holds a 13.5 percent stake in Sotheby’s worth around $233 million. [CNN]
Here's our May post "Deloitte Luxembourg's Art & Finance Report 2016".

And some others that may be of interest:
Carlyle and Banque Pictet Hook Up For Art Financing Action
Art: War Between the 'Freeport King' and the Oligarch and How Dmitry Rybolovlev Made a Quick $300 Million
"Oligarchs and Orchestras: Inside Luxembourg’s Secretive Low-Tax ‘Fortress of Art’ Warehouse"
"(Sm)art Investing: Rich Move Assets from Banks to Warehouses" ($4 trillion in 'treasure' assets)
What's the Scam? Why Did Deloitte Set Up Their Art & Finance Practice In Luxembourg?
"Private Banks Boost Art Advisory Units"
Super Wealth: Barron's Penta Calls For Avoidance Of Geneva-style Freeports
If it were a museum, some say that it would probably be the best museum in the world
Art (and money laundering): Swiss Government's Tough New Controls On Freeports Effective January 1 
In "Liechtenstein Is Using One of the World's Finest Art Collections to Market Its Private Bank to the Chinese" I took the not-too-controversial position that "'Prince of Liechtenstein' is a very good gig."
I'm thinking that Grand Duke of Luxembourg ain't too shabby either.

The Dollar and Oil Contango: Expect the Return of Storage Builds

Both WTI and Brent are down over a half-percent, $41.63 and $43.16 respectively.
This while the dollar index is down 0.29% and the buck is weaker against the euro at 1.1099.

From Alhambra Partners:
It isn’t just that oil prices are falling, that is only one dimension of the full oil spectrum concentrating in the spot market. The more interesting and important information is contained within the whole WTI futures curve. As “dollar” funding pressure has built up since the front month peak on June 8, it has steepened the curve into deeper contango; raising expectations for even more crude heading toward storage in the near future.

That process continues, but in the past few weeks the entire WTI curve has again been influenced by the front. As we have seen in prior episodes, the “dollar” “wins” by pulling down the shorter maturities first so that those expectations for storage become paramount at the back end (so much oil inventory reduces the willingness of anyone who might be willing to buy and store crude to sell at a future date, therefore a lower price further into the future).
ABOOK OilDollar WTI Curve 2016
This is all familiar stuff, of course, as the same thing occurred June to July last year. While the scale was a bit larger and more condensed in terms of time (primarily, I think, due to the fact that second surge in oil inventory to start 2016 may have kept a lid on how far oil prices could retrace after February 11, China or no China), the effect on the whole WTI curve is immediately recognizable heading toward the events of last August.
 ABOOK OilDollar WTI Curve 2015
So what seems like clear “dollar” influence should be corroborated by other “dollar” proxies, particularly those that have been especially helpful in sorting out the eurodollar condition during the “rising dollar” period: CNY and JPY. Nothing, however, is ever that simple. Though seasonality and pattern repetition are undoubtedly underlying influences, history only rhymes.

If we take the action in crude oil prices to be a measure of the “dollar”, then we would expect to find CNY falling, too. It isn’t. In fact, CNY has been rather tame and sideways since around July 11. That Monday, the exchange rate to the dollar was just under 6.70. It was also the day that Japanese rumors rekindled 2013-style love of central banking (if only in rump format). Since Japanese banks have been, I believe, a (perhaps “the”) significant source of “dollar” liquidity in China, a hard reversal like that might explain CNY’s much calmer demeanor since then....MORE

International Grain Council Expects Near Record Production (on top of huge carryover)

There is just so much of the stuff.


Last Chg
Corn 340-4-2-4
Soybeans 984-2-1-6
Wheat 412-0-2-6

From Agrimoney:

World grains harvest upgraded to 1m tonnes from record high
World grains production will come just 1m tonnes from its record high, the International Grains Council said, lifting in particular its forecast for output of corn, in which it ditched an estimate of a drop in stocks.
The intergovernmental group hiked by 20m tonnes to 2.046bn tonnes its forecast for global output of coarse grains and wheat in 2016-17, taking the figure within an ace of the record high set two seasons ago.
The upgrade reflected in part an increase of 6m tonnes, to 735m tonnes, in the estimate for world wheat output, as improved estimates for former Soviet Union and US crops offset a downgrade to expectations for the European Union harvest.
"Wheat harvests are significantly exceeding expectations in the US and [former Soviet Union], but results have been poorer than predicted in parts of the EU, particularly in France," the council said.
Indeed, in the EU, "there is increasing evidence of yield and quality damage following untimely rains".
'Solid rebound'
However, the bulk of the grains upgrade was down to an increase of 14m tonnes to 1.017bn tonnes in the forecast for world corn output, taking the estimate 1m tonnes from the 2014-15 record high.
"After last year's decline, a solid rebound in global corn output is anticipated, with most of the gain in the major exporters," the IGC said.
"Better crop prospects in the US account for most of the change for corn."
'Historically elevated stocks'
Estimates for grain demand were raised too, with the IGC saying that "global grains consumption is seen surpassing 2bn tonnes for only the second time, with food, feed and industrial demand all potentially at new all-time peaks"....
...MORE 

Color Revolution: "Does China Think America Is Using a 'Wedge Strategy'?"

Watching some of the Kagan-Nuland diplo-bros it's more of a wedgie strategy. Bunch of clowns.

From The National Interest:

“The Qianlong Emperor in Ceremonial Armour on Horseback” by Giuseppe Castiglione. Wikimedia Commons/Public domain
The permanent court of arbitration (PCA) ruling from The Hague earlier in July once again has directed the world’s attention to a set of rocks and reefs in the South China Sea. One of the valuable roles of this ruling is to reinforce the notion that these features are indeed “rocks” and not “islands” that would have been entitled to an exclusive economic zone (EEZ). In theory, the resulting negotiations should now be considerably simpler.

However, in practice many see the future scope for a negotiated settlement as actually having become more complicated. That conclusion derives from the basic fact, well known to readers on this forum for realists that power remains the key arbiter of outcomes in world affairs and not international law. Such a world may be far from ideal, but that is the one we live in. In fact, China’s humiliation or “loss of face” (丢面子), when combined with heated nationalism at home and the gradually shifting military balance in the western Pacific, suggests that Beijing may lean ever more heavily on coercive tools in this dispute.

If an escalating situation in the South China Sea inaugurates a more alarming Cold War-type rivalry between Beijing and Washington, it is more than just academically interesting to wonder what form such a strategic competition might actually adopt. A spring 2016 article from the Chinese-language journal China’s Foreign Affairs (中国外交) may offer some hints regarding Beijing’s possible embrace of “dark arts” within such an escalating rivalry. The article, “Research on Wedge Strategies:  Review and Evaluation” discussed in this edition of Dragon Eye is by author Ling Shengli, a scholar at the Foreign Affairs College (外交学院) in Beijing. There is reason to view the article as significant, since it was published earlier in the prestigious journal World Economics and Politics (世界经济与政治) and was supported by government research grants.

The article’s very first, crisp sentence illustrates the author’s analytical inclinations: “The struggle for power is the normal state of international relations.” (权利竞争是国际政治的常态). In a similarly straightforward tone, Ling states that a “wedge strategy” (楔子战略) is one that a state (or group of states) employs to block the formation of a potentially hostile alliance or to “separate, destroy, or collapse a hostile alliance that has already been formed. . . ” (分化, 破坏, 瓦解已经形成的敌对联盟). Above all, the author seems focused on “decreasing the possibility for containment.”

Like most Chinese international relations scholars, Ling demonstrates an impressive acquaintance with Western theorizing in this area. He, for instance, takes a special interest in the scholarship of Timothy Crawford among others. He also notes that “divide and rule” (分而治之) is one of many strategies discussed in Chinese classics of strategy, including by Sun Zi (or Sun Tzu as it is often spelled in Western translations). He explains that the Qing Dynasty emperor Kangxi successfully employed a wedge strategy to prevent a countervailing coalition, but dwells more on modern examples. Bismarck’s diplomacy at the time of German unification in the mid-nineteenth century receives especially high marks for the “continuous employment of the wedge strategy to forestall [Prussia’s] foremost opponents from uniting with other powers.”

In a fascinating section that must hit close to home, the author describes the Sino-Soviet split during the Cold War as “the most exemplary [case]” of a successful wedge strategy. Ling suggests that most scholarship on the Sino-Soviet dispute has focused on the divide between the two parties (CPSU and CCP), and has not paid adequate attention to the U.S. role in fostering the split—a role he claims is clearly revealed in now declassified U.S. documents.

Looking at the current environment, Ling contends that Washington continues to press wedge strategies against both Russia and China. In particular, he sees the United States promoting “colored revolutions” in regions bordering Russia and China....MORE

Wednesday, July 27, 2016

The Annotated Fed Statement

A handy format from The Aleph Blog:
June 2016July 2016Comments
Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate.FOMC shades GDP down and employment up, which is the opposite of last time.
Although the unemployment rate has declined, job gains have diminished.Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Sentence moved up in the statement.  Expresses less confidence in the labor market.
Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft.Household spending has been growing strongly but business fixed investment has been soft.Drops comments on the housing sector and net exports.
Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.No change.
Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.No change.  TIPS are showing higher inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 1.65%, up 0.18% from March.  Undid the significant move from earlier in 2016.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen.The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen.No change.
Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.No change. CPI is at +1.1% now, yoy.

...MORE

"Economists React to the Fed Statement: ‘Leans Less Dovish’"

From Real Time Economics:

Analysts split on whether a brighter view of the economy signals a potential September rate rise
The Federal Reserve held rates steady Wednesday but signaled a brighter outlook for the U.S. economy, suggesting another rate increase in the months ahead. Fed officials said near-term risks to the economy “have diminished” and pointed to better jobs numbers and “moderate” economic growth. Here are some early reactions to the news.

“The Fed was never going to provide a definitive steer on future rate decisions at this week’s [Fed] meeting, particularly not when Chair Janet Yellen is due to speak at the Jackson Hole symposium in late August. Nevertheless, the language added to today’s statement that ‘near-term risks to the economic outlook have diminished’ is a clear indication that a September rate hike might be coming.” —Paul Ashworth, Capital Economic

The policy statement embodied no new information about the timing of the next rate hike in the normalization process but leans less dovish than June by nature of the more optimistic assessment of the economy and a specific reference a diminution of near-term risks to the economy. The language in the first paragraph and the addition of one sentence on the risk to the outlook are more direct and less obtuse than has been typical of prior policy statements.  We suspect that this reflects an effort to improve communication.” —Ward McCarthy, Jefferies LLC

The July [Fed] statement went farther in the direction of hinting at the potential for future rate hikes than we anticipated. We had assumed that the capsule summary of economic conditions in the first paragraph would be updated to reflect the recent improvement in the economic data, which we thought would be a sufficient reminder that the Fed remained inclined to tighten further this year. However, the [Fed] also altered the second paragraph by inserting a line saying that ‘near-term risks to the economic outlook have diminished.’ While innocuous in itself, that is the kind of minor but deliberate wording change that the Fed has been using lately to signal a bias in its thinking one way or the other.” —Economists at Wrightson ICAP

“On balance, this was a less dovish statement than the June edition, and it points to diminished downside risks to the economy relative to June. However, the overall thrust of the message is that the Fed remains in a wait-and-see mode, though the ‘near term’ downside risks to growth are seen as diminished. As a result, we continue to expect the Fed to keep rates unchanged until mid-2017, though a further easing in risk factors and evidence of firming inflation could bring the timing of that move closer. However, there is nothing in this communiqué to suggest that the Fed is prepping the market for a September hike.” —Millan L. B. Mulraine, TD Securities USA
...MORE

"Oil Crashes To $41 Handle After Surprise Inventory Build, Production Rise"

There is just so much of the stuff, in its various states of refinement, around.
And once again the reported API figure for crude had the opposite sign from the EIA number. I mean it's one thing to be at variance but when the signs are not even pointing in the same direction (draw or build) you understand why we've stopped reporting the Tuesday evening API number.

As reprised in one of 2013's "Today in the Financial Crisis, Sept. 6, 2008--Yikes!" 5th anniversary of the Financial Crisis commemorations:

Saturday September 6, 2008 was the day the action really began and I dutifully made my way into the office very early.

The first post of the day was "Friday Fannie, Freddie Bail Out Round Up (FNM; FRE)" with an intro by Lao Tzu and Bill Goldman:

Those who know do not speak,
those who speak do not know.
-Lao Tzu
The Tao Te Ching

Nobody knows anything
-William Goldman
Adventures in the Screen Trade
We'll have more throughout the weekend. For now this is what some smart people are saying....
I'm sticking with Bill Goldman.

From ZeroHedge:
Despite last night's API-reported surge in Cushing inventories, oil futures surged into this morning's DOE data on the heels of terrible durable goods data. However, a shocking build in overall crude levels (+1.67mm vs -2mm) breaking crude's record 9-week streak of draws, sent crude prices reeling. Cushing also saw a major build as did Gasoline and production rose for the 3rd week in a row.
API
  • Crude -827k (-2mm exp)
  • Cushing +1.4mm (+750k exp)
  • Gasoline -420k
  • Distillates +292k
DOE
  • Crude  +1.67mm (-2mm exp)
  • Cushing +1.11mm (+750k exp)
  • Gasoline +452k
  • Distillates -780k
This week's crude build ends the 9-week drop in overall crude inventories in a row... the longest streak of declines in US history (since 1982 Bloomberg EIA data - 8 week streaks in June 2015, Jan 2008, Sept 2004, Sept 1998)...

... Crude production rose for the 3rd week in a row...

... MORE, including some of Reuters' John Kemp's charts.

WTI $41.86 down $1.06 after trading as low as $41.73:

"EU Plans Database of Bitcoin Users with Identities and Wallet Addresses"

From Softpedia:

EU gets closer to ending Bitcoin anonymity
The European Commission is proposing the creation of a database that will hold information on those using virtual currencies and that will record data on the users' real-world identity, along with all associated wallet addresses.

This is the first proposal part of an action plan that the EU got rolling after the Paris November 2015 terror attacks and that it officially put forward in February 2016 and later approved at the start of July 2016.

As we wrote in our article from a few weeks back, the action plan, a reform of the Anti-Money Laundering Directive (AMLD) so it would also include the terms "virtual currency," was only approved by the (EU President) Juncker Commission.

New AMLD will end anonymous Bitcoin transactions in the EU
This action plan is now making its way through the rest of the EU regulatory body, with the European Commission now in charge of putting the reformed AMLD to paper. As expected, the first draft of the AMLD now includes mentions to virtual currencies.

Besides recognizing crypto-currencies as another form of money, the draft also includes a set of regulations that would provide FIUs (financial intelligence units) with the tools needed to keep track of digital currencies, in the same way they do with fiat currencies.

To combat money laundering via digital currencies, EU officials plan to create a database that links Bitcoin and other crypto-currency addresses with real-world individuals, essentially putting an end to the anonymity that accompanies such payments.

FIUs across member states will have the power to create and then manage such databases, but users will also be allowed to register on their own, as a sign of good faith. The current AMLD draft reads:
The report shall be accompanied, if necessary, by appropriate proposals, including, where appropriate, with respect to virtual currencies, empowerments to set-up and maintain a central database registering users' identities and wallet addresses accessible to FIUs, as well as self-declaration forms for the use of virtual currency users.  
EU: Database needed to fight terrorism
As mentioned when ministers from various countries met in Brussels last year, the EU is interested in regulating Bitcoin and similar currencies so that it would be harder for terrorists and cyber-criminal groups to use the currency to hide their operations and move large sums of money across borders....MORE

Agricultural Commodities: "Rabobank sees wheat and corn on 'race to the bottom'"

Rabo is historically better on this stuff than most of the other big banks.
For today however the headline crops are neck-and-neck to the upside.


Last Chg
Corn 343-0+3-4
Soybeans 989-0+15-2
Wheat 418-4+3-4

From Agrimoney:
Rabobank slashed its outlook for feed grain prices, citing a "global feed grain glut".

Chicago feet[?] wheat and corn are on a 'race-to-the-bottom, thanks to heavy supplies and big harvests.
Rabobank forecast corn and wheat price well below the current forward curve.

Exceptional US harvest
Rabobank lowered its forecast for Chicago wheat prices, "record projected global feed supplies, ensuring a particularly competitive export environment". 

"Wheat prices fell significantly through late June, as exceptional US harvest prospects and heightened confidence in the US corn crop sparked a price race-to-the-bottom across feed grain cash markets," Rabobank said. 

"Both record US yields and near-record ending stocks… plus an impending EU feed-quality crop will contribute to a 2016-17 global feed grain glut," said the bank.

"Following the Northern Hemisphere harvest, wheat is expected to follow the corn market more closely, as both grains compete for demand."

Undershooting the curve
And Rabobank warned that the USDA's latest forecast for Chinese 2016-17 wheat feeding, at 15m tonnes "is somewhat optimistic in our opinion". 

"Government intentions to auction domestic corn stocks, having also removed the price support mechanism, should result in high availability of competitively priced Chinese feed corn, which could force a further 2m to 3m tonnes of wheat onto the global balance sheet," the bank said. 

Rabobank forecast Chicago wheat prices averaging $4.00 a bushel in the July to September period, and $4.30 a bushel in the October to November period....MORE
Meanwhile Inside Futures is in awe of the yields:
Wheat Treading Water

CURRENT STATE:
WHEAT: The latest provided by the Kansas City Harvest Report is only confirming what I’ve been claiming for the past six weeks, that is, this year is the mother of all harvests. The crop is now nearly 70 percent (average across states; Wyoming around 25 percent, South Dakota around 70 percent) harvested and my estimates of yield-per-acre are right in line with the actual as suggested by the harvest reports that are surfacing. Some farms in the Midwest (and as I’ve stated in earlier reports) are seeing up to 80+ bushels an acre. This is of course an anomaly when considering historical yields.
...MORE

Richard Koo on Why Helicopter Money Just Won’t Work (as God is my witness I thought turkeys could fly)

From FT Alphaville:

Koo on why helicopter money just won’t work
Helicopter money won’t work in Japan, says Nomura’s Richard Koo in a note on Tuesday, because when the typical Japanese citizen finds a 10,000-yen note lying on the ground, she will turn it in at the nearest police station rather than spend it.
Put differently, a helicopter money policy can only work if the people in a country have little sense of right and wrong.
Koo, of course, is talking about the effectiveness of actual banknotes being thrown out of helicopters in the sky. It’s one of four ways he thinks helicopter money policy could be implemented — since the real challenge with helicopter money is how it would be distributed, and to whom.
The first option really is throwing bags of money out of the sky. But here be unintended social consequences. For example :
No seller would exchange products for money that fell from the sky.
Another critical omission from the argument that helicopter money will resuscitate the economy is that it focuses exclusively on the logic of buyers while ignoring the logic of sellers.
Unethical buyers may try to go shopping with money that has fallen from the sky, but there is no reason for sellers to accept such money.
Sellers are willing to take money in exchange for goods and services only because the supply of that money is strictly controlled by the central bank. If money starts falling from the sky, sellers will refuse to accept it as payment for their products.
If the authorities actually began dropping money from helicopters, shops would either close their doors or demand payment in foreign currency or gold, and the economy would quickly collapse. There is no economy so wretched as one that no longer has a national currency the people trust.
Because it plainly ignores the psychology of sellers in the market, literal helicopter money is not, in Koo’s opinion, the ultimate form of monetary accommodation. Taking it to this extreme would only lead to an economy’s collapse, not its recovery. More so, there’s no case in recorded history where an economy without a credible national currency outperformed an economy with one.

There are three other distribution options/forms of helicopter money out there — but these probably won’t be any more effective, Koo says....MORE 
From WKRP (Cincinnati):

The Thanksgiving episode "Turkeys Away"



"It's a helicopter, and it's coming this way. It's flying something behind it, I can't quite make it out, it's a large banner and it says, uh - Happy... Thaaaaanksss... giving! ... From ... W ... K ... R... P!! No parachutes yet. Can't be skydivers... I can't tell just yet what they are, but - Oh my God, Johnny, they're turkeys!! Johnny, can you get this? Oh, they're plunging to the earth right in front of our eyes!

PIMCO: "Commodity Investing: A New Take on Equities Versus Futures"

Roll yield! Sharpe ratios!! Risk!!!

From Pacific Investment Management Co:

A combination of commodity futures and broad stocks seems to provide better return per unit of risk than natural resource equities.

Grantham Mayo Van Otterloo's Mean Reversion Strategy Is Tested In Today's Market

From Institutional Investor:

Jeremy Grantham and Ben Inker have a long track record of successfully calling market bubbles, but their investment strategy can take a long time to play out.
Finding a truly exceptional asset manager is challenging, even for the most sophisticated investor. A clear and differentiated strategy, strong track record, history of great calls and willingness to learn are just a few of the indicators that tell the story. Competitiveness, confidence and conviction are also important, but, in the end, investing with anyone is a bet on risk.

Most investment managers try to work around these concerns by leading with the opportunities they see in the market or pointing to lofty end goals for those that invest with them. It’s not often, then, that you go into a meeting with an asset manager and they open with risks: risks to the market, risks to your investments and, indeed, risks to your career if you follow their ideas all the way through. But that’s what you get with Grantham, Mayo, Van Otterloo & Co., the Boston-based shop co-founded by famed value investor Jeremy Grantham.

Using an approach created by the British-born Grantham, GMO’s managers look at asset valuation trends over the entire history of the market and use those as the basis for determining fair value. Within those historical trends GMO has identified a consistent pattern: Asset classes have average values that don’t really change much over time. Valuations may go up or down for certain periods, but they always come back to the mean. Because the firm sees markets through this mean-reversion lens, GMO tracks how bubbles are forming and the risks if they burst. The firm’s managers invest by looking for low-risk, cheap assets that are likely to perform well as bubbles form and easy to get out of just before the inevitable happens. The firm’s seven-year forecast, which it releases publicly, provides a live snapshot of how markets are changing over time.

Over its 39-year history, GMO has built a reputation for being the smartest guys in the room when it comes to long-term value, having successfully called all of the bubbles in recent memory — but that comes at the expense of almost everything else. When you walk through GMO’s front door, you’ll find an outlier not just among value shops but among investment firms. There are no fancy presentations touting a wealth of golden opportunities, no branded golf balls to take away. What you get instead feels a bit more like a visit to a think tank, with researchers who are on the brink of their next great discovery and only want investors willing to stay on until they find it.

Oil: The Saudi's 'Take-the-Money-and-Run' Strategy

We've seen this argument made in relation to either a fear on the part of the royals of ISIS or of a global warming 'keep it in the ground' dikat from some supranational body. Regardless of the motivation, Professor Hanke gives a very clear overview of this Occam's Razor explanation of what the Saudi's are up to..

From ZeroHedge, July 26:

The Economics of the Saudi's "take-the-money-and-run" Strategy
As the Financial Times reported on 12 July, Saudi Arabia’s oil-output reached record highs in June 2016. Increasing production 280,000 barrels/day to 10.6m b/d, Saudi Arabia has once again waved off OPEC’s request not to glut the market with oil.

As it turns out, economic principles explain why the Saudis began, in late 2014, to pump crude as fast as they could – or close to as fast as possible. In fact, there is a good reason why the Saudi princes are panicked and pumping.

Let’s take a look at the simple analytics of production. The economic production rate for oil is determined by the following equation: P – V = MC, where P is the current market price of a barrel of oil, V is the present value of a barrel of reserves, and MC is the marginal recovery cost of a barrel of oil.

To understand the economics that drive the Saudis to increase their production, we must understand the forces that tend to raise the Saudis’ discount rates. To determine the present value of a barrel of reserves (V in our production equation), we must forecast the price that would be received from liquidating a barrel of reserves at some future date and then discount this price to present value. In consequence, when the discount rate is raised, the value of reserves (V) falls, the gross value of current production (P – V) rises, and increased rates of current production are justified.

When it comes to the political instability in the Middle East, the popular view is that increased tensions in the region will reduce oil production. However, economic analysis suggests that political instability and tensions (read: less certain property rights) will work to increase oil production.
Let’s suppose that the real risk-adjusted rate of discount, without any prospect of property expropriation, is 20% for the Saudis. Now, consider what happens to the discount rate if there is a 50-50 chance that a belligerent will overthrow the House of Saud within the next 10 years. In this case, in any given year, there would be a 6.7% chance of an overthrow. This risk to the Saudis would cause them to compute a new real risk-adjusted rate of discount, with the prospect of having their oil reserves expropriated. In this example, the relevant discount rate would increase to 28.6% from 20% (see the accompanying table for alternative scenarios). This increase in the discount rate will cause the present value of reserves to decrease dramatically. For example, the present value of $1 in 10 years at 20% is $0.16, while it is worth only $0.08 at 28.6%. The reduction in the present value of reserves will make increased current production more attractive because the gross value of current production (P – V) will be higher.
So, the Saudi princes are panicked and pumping oil today – a take the money and run strategy – because they know the oil reserves might not be theirs tomorrow. As they say, the neighborhood is unstable. In consequence, property rights are problematic. This state of affairs results in the rapid exploitation of oil reserves.
In other news, "Author apologizes after controversial post about oil, lesbians, and Saudi Arabia".

Tuesday, July 26, 2016

Nest Thermostats Go Offline During Heat Wave

From The Next Web:

Nest error is breaking remote control on some thermostats and smoke detectors
Nest's app has run into some sort of problem today that's causing it to lose control of some thermostats and smoke detectors. The error is causing Nest Thermostats and Nest Protects to appear offline within the app, leaving them out of owners' remote control.

While the app is unable to remotely control those devices right now, Nest tells The Verge that they should otherwise continue to function, sticking to existing schedules and adjusting to changes made manually inside the home. Nest says that only a "small percentage" of owners are affected....MORE
Not to worry though, you can still adjust them manually.

See also: Butz Thermo-Electric Regulator Company, 1885, now known as Honeywell.

Knowledge@Wharton: "Are Italy’s Banks a ‘Doom-Loop’ Risk that Could Bury the Eurozone?"

From K@W:
Eight years after the global financial crisis, Italy’s economy remains weak and the country’s banks have a very high rate of shaky – or non-performing — loans at about 18%. That compares with rates of 5% in France and 1.5% in the United Kingdom. Since Italy is the third-largest economy in the European Union, a breakout of loan defaults or a run on bank deposits could quickly spread eurozone-wide, where many banks have been struggling, in part because of record-low interest rates cutting profit margins. What’s more, companies in Europe depend on bank loans far more than in the U.S., so struggling banks can mean that even successful companies face a credit squeeze.

This has led to fears of a “doom loop,” where the potential failure of Italy’s banking system might require a state rescue at a time when the country is already heavily indebted at around 135% of GDP. And that is complicated by the fact that, as of January, new regulations require European banks to bail-in shareholders and bondholders – use their holdings to recapitalize a troubled bank — before any taxpayer-funded bailout can occur. 

Yet in Italy, many bondholders are actually small investors who were duped into buying bank bonds under the impression that they were as safe as insured deposits, explains Franklin Allen, an emeritus finance professor at Wharton and a finance professor at Imperial College in London. If small investors start to take a hit, it could spark a run on bank deposits and kick off a major crisis. In this Knowledge@Wharton interview, he looks at the big picture regarding risky Italian banks, assesses the odds of significant problems breaking out, and considers how officials might avoid a major new financial crisis.

An edited transcript of the conversation appears below:

Knowledge@Wharton: A new rule passed by the European Central Bank that takes effect next year calls for bank authorities to tap stockholders and bondholders for recapitalization before they would tap taxpayers for any bailout. This so-called “bail-in” is in contrast to what happened after the financial crisis when the U.S. bailed out its banks using taxpayer money. But many of the bondholders in Italy are small investors. They are similar to small depositors in the U.S. [and the small bondholders in Italy] thought that buying bonds would be a safe investment. These smaller holders may not be aware of the precarious financial position they are in because of these underperforming loans held by the Italian banks. Do you agree with this context? And what are the risks of these bondholders suddenly panicking, if they were to realize that the banks are in a fragile condition, and starting a run on deposits?

Franklin Allen: I agree completely that this is a very important issue and I think it’s off the radar screen of most people who aren’t involved in the financial sector. People in the financial sector realize that this is a potentially existential problem for the European Union. The reason is that Italian banks are very big and if they need to be bailed out by taxpayers, large amounts would be required. But the problem is that the Italian government is already heavily indebted, so there’s what people sometimes call “the doom loop” between banks and the sovereign. That’s the general background.
“These systemic problems can arise out of nowhere — or out of small beginnings — and take over very quickly…. This problem with the Italian banks has that potential….”
You laid out very well that under the new rules — the [European Union] Bank Recovery and Resolution Directive — the banks need to bail in shareholders and bondholders before they can get state funds. This is problematic because it seems as though many small investors were missold. In other words, they were not really told the truth about what they were buying. In many cases, they thought they were buying something that was equivalent to insured deposits. But these subordinated and other kinds of debt are not like that. They have the potential to be bailed in.

I think everybody agrees that it’s fine to bail in the shareholders, but it’s problematic to bail in these small bondholders. Politically, this represents a big problem for Italian Prime Minister Matteo Renzi’s government. There was a case at the end of last year where four small banks were bailed in and the same problem occurred there in that many didn’t realize what they had. There was a tragic case of a retired pensioner who lost his life savings and was so distraught that they committed suicide. This obtained quite a lot of publicity, as you would expect.

But I think you’re right, there are still many people who don’t fully understand what they’re holding. It seems that if there are bail-ins, the Italian government is going to recompense the small savers who have this kind of debt. But we get back to this problem of, can they afford to do that? And who exactly will get compensated? Will they go back and compensate the people in the banks that had the bail-ins last year? How far will it go?

Knowledge@Wharton: If that were to escalate up, if they weren’t able to contain it on a local level, then you start to open up all of the things that people have worried about for the last several years since the last financial crisis, which is this whole idea of systemic risk. This could spread to other banks in Europe that are facing some lean times and would have difficulties dealing with big challenges. One in particular is Deutsche Bank. Could you talk about the risk of systemic contagion and Deutsche Bank, in particular?

Allen: In Italy itself, there are a number of banks that have problems. Banca Monte dei Paschi di Siena, which is the oldest bank in the world dating back to the 15th century, has been bailed out twice already but is still on the ropes. The first question is, what will happen to them? They are the No. 3 bank in Italy, so they’re significant. They’re not huge in a global sense. The bank that is globally important in Italy is UniCredit, and it has operations in many other parts of Europe and the rest of the world. They have had a big drop in their equity price since the beginning of the year. This represents the fact that people are worried about these issues that you’ve talked about, the nonperforming loans and how the government will deal with them if they get into trouble.

I think if there is a meltdown, particularly if it spreads to UniCredit, then other banks in Europe will also face problems. I think Deutsche Bank has potential to have problems. The nature of their business is such that the very low interest rates and the fact that there isn’t much different between long-term rates and short-term rates is problematic for them because of their business model. So, there is likely to be some contagion....MORE
Today's fun fact:

Creditanstalt's failure in 1931 precipitated the worst stage of the Great Depression.
After the rescue of the bankrupt corpus and a couple mergers, Creditanstalt became part of Italy's Unicredit in 2006.
Another part of the operation, Creditanstalt-Bankverein, was taken over by Deutsche Bank just prior to the 1939 unpleasantness. 

See also the Financial Times a couple hours ago: "UniCredit shakes up senior management".
History in the making.

Australia's Biggest Grain Exporter Plans 'Emergency' Storage For Bumper Harvest

Today it seems to be wheat's turn to get sold off.
These figures are approaching all-in cost of production meaning they aren't the floor that cash-cost provides, the current situation can go on for a while if yields stay up or farmers don't do maintenance or scrimp on other variable costs.


Last Chg
Corn 339-4-1-6
Soybeans 975-6+9-4
Wheat 415-2-13-6

From Agrimoney

CBH Group, Australia's biggest grain exporter, revealed it was building "emergency" storage capacity to deal with a 2016 harvest which could prove the strongest ever, helped by a timely moisture for spring sowings.
The co-operative - which handles the vast majority of the grains harvest in Western Australia, Australia's top wheat growing state – said it was to construct 400,000 tonnes in short-term storage capacity, on top of site enhancements being enacted during a scheduled Aus$750m maintenance and upgrade programmes.
The decision comes amid expectations of a "bumper year" for the state's gain growers, "with the current crop estimates sitting at 14m-16m tonnes", potentially eclipsing the current all-time high of 15.9m tonnes set three years ago.
Abares, the official Australian commodities bureau, has forecast the state achieving a harvest of some 15.5m tonnes this year, a rise of more than 800,000 tonnes year on year, including 513,000 tonnes of lupins, besides major crops such as barley, canola and wheat.
'High yields'
The upbeat prospects reflect unusually strong rainfall in Western Australia, which has a history of patchy moisture, getting crops off to strong start....

...MORE