Daily updates on climate change and the global economy.

Economy 4 Oct 2018 IMF sounds the alarm on global economy

The IMF joins the UN, the Bank of International Settlements and, er, Gordon Brown, in sounding the alarm on the global economy. A blind man could see this coming:

“The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reforms needed to protect the system from reckless behaviour, the International Monetary Fund has warned.

“With global debt levels well above those at the time of the last crash in 2008, the risk remains that unregulated parts of the financial system could trigger a global panic, the Washington-based lender of last resort said…

“A dramatic rise in lending by the so-called shadow banks in China and the failure to impose tough restrictions on insurance companies and asset managers, which handle trillions of dollars of funds, are highlighted by the IMF as causes for concern.

“The growth of global banks such as JP Morgan and the Industrial and Commercial Bank of China to a scale beyond that seen in 2008, leading to fears that they remain “too big fail”, also registers on the IMF’s radar.

“The warning from the IMF Global Financial Stability report echoes similar concerns that complacency among regulators and a backlash against international agreements, especially from Donald Trump’s US administration, has undermined efforts to prepare for another downturn.

“The former UK prime minister Gordon Brown said last month that the world economy was “sleepwalking into a future crisis,” and risks were not being tackled now “we are in a leaderless world”.”


“The total number of global equity issuances fell sharply from 1,344 in Q2 2018 and 1,288 in Q3 2017 to just 1,129 in Q3 2018. Like we mentioned earlier, this trend can be attributed partially to the fact that the third quarter is seasonally slow period. However, there was a noticeable weakness in global equity markets over the most recent quarter due to growing fears of a trade war.”


“One has to be surprised at the equanimity of both U.S. policymakers and world financial markets about the deepening Italian economic crisis. This is particularly the case considering that, unlike Greece, Italy is too big an economy to fail for the euro to survive and too big and costly an economy for its European partners to save… Italy has the world’s third-largest sovereign debt market with more than $2.5 trillion in outstanding government debt.”


“Perhaps the clearest indicator of the rising fear about Italy is the yield on the country’s benchmark 10-year government bond. Yields reflect the surety with which investors think they will get their money back, and they tend to move in tandem with the stability of a country’s economic and political situation…

“Italian bond yields have jumped more than 20% in just over a week.”


“Greek banking shares are down sharply amid investor fears over lenders’ needs to reduce their large stock of bad loans resulting from the financial crisis.

“The index of bank stocks was down 10 percent in Athens on Wednesday. Piraeus Bank led the losses, at about 27 percent….”


“Just as Iceland looks back at a decade of recovery since its financial and economic collapse, the north Atlantic island is once again grappling with an existential challenge for one of its key industries. Tourism and the foreign cash it provides was instrumental in digging the 340,000-person nation out of its deep hole. Now, the industry is cooling fast and problems are mounting for its airlines after years of rapid expansion. Rewind to 10 years ago, and a similar tale could be told about the nation’s banks.”


“Primera Air, a Denmark-based airline owned by Icelandic businessman Andri Már Ingólfsson, has filed for bankruptcy and ceased operating, RÚV reports. Arion Banki has lost the equivalent of millions of US dollars in the venture. The sudden collapse on Monday left passengers stranded on both sides of the Atlantic…”


“The chief executive of the partly taxpayer-owned Royal Bank of Scotland has said a no-deal Brexit could lead to recession. Ross McEwan, appointed CEO in October 2013, told the BBC any dip in growth would affect the bank’s profits and share price.

“UK Government Investments holds a 62.4% of RBS shares after the 2008 bailout and subsequent disposals.”


“Tesco has warned that opportunities to stockpile food in order to prepare for a no-deal Brexit are “very, very limited”.

“Chief executive Dave Lewis said that ensuring supplies of food remain uninterrupted was the “single biggest challenge” facing supermarkets as the UK prepares to leave the EU.”


“New car sales crashed by 20 per cent last month, the worst performance for the British motor trade since the collapse of Lehman Brothers bank, the financial crisis and the dislocation of the world economy ten years ago.

“It means that car sales this year in the UK are now running much lower than expected…”


“Major auto makers, with the exception of Fiat Chrysler, posted lower U.S. sales last month behind the ongoing slump in the car market and softer retail demand, even amid elevated incentive levels…

“…signaling an anticipated second-half slowdown continued in September.”


“Brazilians headed to the polls this weekend are finding it tougher to afford the basics than they have in years. Nearly one in three (32%) say they did not have enough money to afford food they needed in the past year, while a quarter (25%) say they lacked enough money for shelter.

“Both figures are about twice as high as they were before the 2014 election and the subsequent recession.”


“Pakistan’s economy is in deep financial crisis and exploring bailout package from the International Monetary Fund (IMF). Pakistan is also seeking investment from friendly countries to reduce debt which includes China and Saudi Arabia.

“Islamabad needs to arrange a whopping $20 billion instantly to avoid a major financial crisis.”


“India is facing an “economic crisis” due to its huge oil imports, two local TV channels cited Transport Minister Nitin Gadkari as saying on Thursday, ahead of a meeting of key ministers to discuss the falling rupee and the nation’s widening trade deficit. India, the world’s third biggest oil importer, depends on overseas markets to meet 80 percent of its oil needs.”


“The financial squeeze on India’s farmers is set to worsen because of record high fuel prices and surging costs of fertilisers, posing a challenge to Indian Prime Minister Narendra Modi in an election that must be held by May.”

Great picture from Quartz.


“India’s housing market has struggled for growth in recent years and if the central bank raises interest rates this week, there could be a further slowdown in the sector, experts told CNBC.

“A rate hike would “definitely have a negative impact” on the housing market outlook, Ramesh Nair, CEO and country head at real estate services firm JLL India, told CNBC.”


““Global trade outlook continues to look challenging as China-US trade tension shows no sign of easing. Hong Kong – as a major entrepôt for mainland China – is another indicator for broader regional trade and a more sensitive indicator as well,” HSBC said in a recent research note…

“China’s housing market is expected to slow throughout early 2019.”


“China is planning to sell $3 billion in U.S. dollar bonds this month, wooing foreign investors at a time of heightened trade tensions with the U.S. and turbulence in its own stock market. If successful, it would be the country’s second dollar-bond sale in a year… The offering is coming at a delicate time for the world’s second-largest economy. China’s gross domestic product growth is slowing, and the pace of investment in factories and public-works projects has cooled this year.”


“Australia’s housing slump has increased the possibility of debt downgrades for the country’s big banks, according to a report from Pacific Investment Management Co. “We have grown more cautious with the external credits of Australian banks,’’ according to a note to clients from Pimco that was written by analysts and portfolio managers including Taosha Wang. “The probability of a market-moving agency downgrade that causes major banks to lose their AA- rating for the first time in history is now higher than before.’’”


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Economy 3 Oct 2018 EU on the rocks

“The Italian deputy prime minister, Matteo Salvini, has threatened to sue Jean-Claude Juncker for damages, accusing the EU president of pushing up Rome’s cost of borrowing by likening Italy to Greece.

“Salvini, who is also Italy’s interior minister and leader of the far-right League party, was speaking after Juncker’s comments helped send the yield on Italian benchmark bonds to a four-and-a-half year high of 3.4%, while shares in Italian banks plunged.

“He said: “The European commission president Juncker, by equating Italy with Greece, sends the spread [gap] crazy. He could have spared us that.”

“Salvini added: “He should drink two glasses of water before opening his mouth, and stop spreading non-existent threats. Or we’ll ask him for damages.”

“Juncker said earlier this week that the Italian governing coalition’s pledge to press ahead with a budget deficit that will breach European Union rules threatens the euro’s existence.

“Salvini said Brussels was exaggerating the impact of Rome pushing ahead with its planned 2.4% budget shortfall for at least the next three years.

“He said the rising cost of financing Italy’s debts was the fault of EU officials who had spooked investors and increased the gap, also known as spread, between Italian and German borrowing costs.””

The Italian deputy prime minister, Matteo Salvini, has threatened to sue Jean-Claude Juncker for damages, accusing the EU president of pushing up Rome’s cost of borrowing by likening Italy to Greece.

Salvini, who is also Italy’s interior minister and leader of the far-right League party, was speaking after Juncker’s comments helped send the yield on Italian benchmark bonds to a four-and-a-half year high of 3.4%, while shares in Italian banks plunged.

He said: “The European commission president Juncker, by equating Italy with Greece, sends the spread [gap] crazy. He could have spared us that.”


“Leaders of the medieval enclave of San Marino are preparing to ask the International Monetary Fund for a €250m (£222m) loan to bolster its banks, still weighed down by bad debts 10 years after the global financial crisis.

“The microstate, which is landlocked within central Italy, has struggled to recover from the effects of the 2008 crisis…”


“The money laundering scandal engulfing Danske Bank A/S has Denmark’s political establishment on edge.

“After living through the crisis of 2008, and the populist wave that followed, some of Denmark’s most prominent political figures say it’s now imperative that voters aren’t left with the same sense of indignation that they felt roughly a decade ago.”


“In handing down his interim report last week at the financial services royal commission, the Honourable Kenneth Hayne was damning in his criticism of the behaviour of Australian bankers.

“It wasn’t a lack of laws, guidelines or codes of conduct that led to the richest banks stealing from the poorest Australians, the commissioner argued, it was simply greed.”


“But even the cheapest [Manhattan] homes are now struggling to sell, according to a report released Tuesday by Douglas Elliman Real Estate. It found that the number of sales fell for a fourth straight quarter, by 11%, during the July-September period on a year-over-year basis. The lower end of the market is starting to soften too in an indication that a reset is taking place, according to the author of the report, Jonathan Miller, the CEO of the real-estate appraiser Miller Samuel.”


“Past 2020, “it’s really going to hit the fan,” Caranci said. “At that point you have high level of indebtedness combined with income stress happening simultaneously.

“So we are definitely not out of the woods.” The next recession for Canada will be different than the previous because it will be “a household led recession,” Caranci said.”


“Although Nicaragua’s Central Bank has not yet publicly acknowledged it, the country will fall formally in recession as of today, October first, when two consecutive quarters are completed without the Gross Domestic Product (GDP) showing signs of growth.”


“For years, Venezuela has been in the headlines for its economic woes, including chronic shortages of food and medicine. Inflation may hit the one million per cent mark this year and 2.3 million people have fled the country, becoming economic refugees.

“The government of Nicolas Maduro has responded with a raft of policies – some of them very unorthodox – to try to deal with what is arguably the worst economic crisis of the decade.”


“”It (the polarisation) worries me a lot … there is much radicalism going on and it is something very sick,” Analice Moreira, a market stall holder, said. “I ask God to change this, because the country is broken and I’m afraid,” the 56-year-old added. Rising crime rates, a faltering economy and several high-level corruption scandals have unsettled Brazil in recent years.”


“Economists predicted inflation in Argentina would reach 44.8 percent by the end of 2018, compared to an expected 40.3 percent estimated last month, a central bank poll showed on Tuesday.

“Economists also expect Argentina’s gross domestic product to contract 2.5 percent by the end of 2018 compared with a previous estimate of a contraction of 1.9 percent last month, the monthly poll said.”


“Risks to Zambia’s inflation have heightened as the copper producer effects a long overdue fuel price hike effective midnight of 02 October… The kwacha has lost 22% in value year to date as dollar demand soared in light of negative sentiment and a strong dollar environment. The rise in pump prices is expected to cause a spiral cost push effect that will push inflation higher.”


“Bahati explained that the increase in public debt reflects the increased government budget priorities which he said have necessitated an increase in the level of government debt since Uganda’s tax revenue efforts have remained stagnate. “It has left no option for government to finance its programme in order to achieve its objectives as set out in the national development plans and the NRM manifesto other than by debt.””


“Interestingly, as analysts have pointed out, a slump in oil prices usually tends to trigger a crisis in the banking industry in these parts. For instance, in the wake of the 1998 oil slump, 28 banks went under. Also, following a sharp drop in the price of oil in 2009, the Nigerian economy, which depends on oil exports for over 90 per cent of government revenue, was severely impacted, resulting in a crisis that led to 10 banks collapsing and CBN intervening in a major way to restore stability to the industry.

“Similarly, on September 21 this year, CBN at a joint press conference with the Nigeria Deposit Insurance Corporation (NDIC) announced the revocation of Skye bank’s operating license as well as the establishment of a bridge bank, known as Polaris Bank, to immediately assume the assets and liabilities of the then ailing lender.”


“The International Monetary Fund (IMF) has called for further monetary tightening by Tunisia to tackle the North African country’s record levels of inflation. Tunisia’s inflation rate stabilized at 7.5 percent in August, unchanged from July, after hitting 7.8 percent in June.”


“Turkey’s rate of inflation surged to nearly 25 per cent last month as the crisis engulfing the country’s currency hit consumers with huge increases in prices… Turkey’s lira has lost 40 per cent of its value so far this year amid the dispute, and now shoppers are feeling the effect, according to data from the Turkish Statistical Institute.”


“An increase of 44.4% was registered in the Producer Price Index in the Iranian month of Shahrivar (Aug. 23-Sept. 22) compared with the similar month of last year, the latest report of the Central Bank of Iran announced. The PPI (using Iranian year to March 2017 as the base year for the first time) stood at 157.8 in Shahrivar, indicating a 9.4% rise compared with the previous month.”


“Philippine annual inflation rate likely continued to climb in September, keeping the pressure on the central bank to raise interest rates further to prevent consumer prices from spiralling out of control. The consumer price index in September was seen to have risen by 6.8 per cent, a Reuters poll of 12 economists showed, faster than the 6.4 per cent increase reported in August, due to rising global oil prices…”


“South Korean money market funds (MMFs) have suffered huge capital outflow due to growing worries over a financial crisis in Turkey, data showed Wednesday. The MMFs had a combined 91.27 trillion won (US$81.5 billion) under their management as of Friday, the lowest since January 5, 2015, according to the data from the Korea Financial Investment Association.”


As a global trade hub, Singapore is a canary in the coalmine:

“The private sector in Singapore slipped into contraction in September, the latest survey from Nikkei revealed on Wednesday with a PMI score of 49.6. That’s down from 51.1 in August, and it falls beneath the boom-or-bust line of 50 that separates expansion from contraction. Individually, there were sharp declines in both output and new orders – while export sales also tumbled further.”


“Directors and top executives of Infrastructure Leasing and Financial Services Ltd (IL&FS) desperately pleaded with government officials and the central bank for an urgent bailout just days before the centre moved in to seize control of the debt-laden financier, two people with direct knowledge of the matter said. “We are in dire straits… please help us,” Hari Sankaran (the ousted vice chairman and managing director of IL&FS) told finance ministry officials as recently as 10 days ago…”


“Risk premiums on U.S. junk-rated bonds have tumbled to the lowest level since the start of the global financial crisis, in a move that signals to some that markets are in the late stages of a long bull run. A dearth of fresh supply, as well as continued investor inflows and rising U.S. government-debt yields, helped push the yield spread on sub-investment grade U.S. bonds over benchmark Treasuries to 3.09 percentage points Monday — the lowest since July 2007.”


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Economy 2 Oct 2018 global factory activity plunges

“Factory activity plunged from Asia to Europe in September, reflecting how few countries are left unaffected by a U.S.-led shake-up of international trade policies.

“Chinese manufacturers said output took a hit amid the worst contraction in export orders since 2016, leading similar trends across Taiwan, Vietnam, and Indonesia. Confidence continued to plummet at Japanese firms, while euro-area factory output struggled as companies voiced concerns over global protectionism.”


“Worldwide manufacturers reported the first fall in global export orders for over two years in September, according to the latest PMI surveys. “The slowdown in trade acted as a further drag on factory output, order book growth and hiring.”


“Christine Lagarde used a speech in Washington on Monday to drop the broadest possible hint that the IMF would cut its global growth forecast when it unveils its latest health check on the world economy next week.”


“Corporate and emerging market bond sales fell in the third quarter due to rising borrowing costs and trade tensions, while volatility crimped fund managers’ emerging debt appetite.”


“Indonesia’s rupiah weakened past 15,000 per dollar for the first time in 20 years amid a souring of sentiment toward emerging-nation assets and as oil prices jumped.

“The currency has tumbled almost 10 percent this year as rising U.S. interest rates have boosted the dollar… Crude prices have almost tripled since February 2016, putting pressure on the oil-importing nation.”


“As of today beleaguered infrastructure finance company Infrastructure Leasing & Financial Services Ltd. has a new board. Six members, including two bankers, a former regulator, two veteran bureaucrats and a corporate leader, who closely witnessed a similar rescue not ten years ago… A statement from the Finance Ministry pulls no punches when outlining what went wrong at IL&FS.”


“The Consumer Price Index (CPI) inflation general increased by 5.1% on year-on-year basis in September 2018 as compared to an increase of 5.8% in the previous month and 3.9% in September 2017, Pakistan Bureau of Statistics (PBS) reported on Monday.”


“The number of Turkey companies who applied for bankruptcy protection due to market volatility amid the country’s financial crisis has exceeded 3000, according to Sözcü newspaper columnist Nedim Türkmen… Türkmen stressed that the number of applications for bankruptcy protection which have been responded to has surpassed 3000 while the number of companies awaiting a response on their application and preparing to apply is between 5000-7000.”


“After shying away from the international financial market, Egypt may well be forced by heavy funding needs to tap it just as turbulence pushes up rates, threatening to undermine its deficit-cutting ambitions. The country, which has borrowed heavily from abroad since it drew up an economic reform program with the IMF in 2016, faces a tough foreign repayments schedule over the next two years as well as a rising bill from relentlessly more expensive oil imports.”


“For economic watchers, Central Bank of Nigeria’s [recession] warnings are not coming as a surprise considering that the issue of economic contractions, when juxtaposed against the nation’s N22.4 trillion debt stock and shrinking reserves, show clearly that Nigeria is in dire straits. Worse still, the passage and full implementation of annual budgets have constantly been immersed in the dirty waters of politics at the expense of the economy.”


“South Africa may be driven to the International Monetary Fund if its rising debt goes unchecked without the buffer of savings or new sources of tax revenue, the country’s National Planning Commission said. Debt is increasing against a backdrop of weak economic growth and higher joblessness, a diminishing global-market presence and weakening investments.”


“Nearly two million people have fled Venezuela’s economic and political crisis since 2015, according to the UN which called for a “non-political” response to an exodus that is straining regional resources. “Some 5,000 people are now leaving Venezuela daily – the largest population movement in Latin America’s recent history,” UN refugee agency (UNHCR) chief Filippo Grandi told the organisation’s executive committee on Monday.”


“Italian Finance Minister Giovanni Tria’s effort to promote his government’s new fiscal strategy ended in failure on Monday, with the head of the European Commission warning of a Greek-style crisis and the nation’s bonds dropping to their weakest level in more than four years.”


“The eurozone economy may face a sharper-than-expected slowdown, key economic indicators suggest, after Italian populists roiled markets by pushing ahead with a wallet-busting budget. Movements in money supply, a key indicator for future GDP growth, have raised concerns about the economic outlook for the bloc.”


“EU citizens will no longer be given priority to live and work in Britain, in a radical overhaul of immigration policy after Brexit which Theresa May said “ends freedom of movement once and for all”… The announcement of the tough new system comes before a speech by the former foreign secretary Boris Johnson, a harsh critic of the prime minister’s Brexit plans, which had been expected to dominate the third day of the Conservative party’s conference in Birmingham.”


“House prices in London have fallen for the fifth quarter in a row as high prices, stamp duty changes and Brexit uncertainty put off buyers. The average price of a home in the capital fell by 0.7% in the third quarter, compared with the same period last year, to £468,544, according to Nationwide. It followed a 1.9% drop in prices in the second quarter.”


“House prices dropped by their largest monthly fall since the global financial crisis in September, as a new report warns the amount home buyers can borrow could be slashed by a third if banks are forced to tighten their lending standards after the royal commission. Figures released on Monday showed the major capital cities have not had the usual spring bounce, with Sydney house prices down 6.1 per cent from the same time last year…”


“There is nothing normal or natural about the recovery in the US and world economies. Everything that has happened, all the recovery and growth, has been done with a decade’s worth of free money.

“This situation is abnormal, unnatural and without precedent in at least 5000 years.”


“Our research strongly indicates long term US interest rates are at a secular decision point, one that is likely to eventually be resolved by significantly – if not surprisingly — higher borrowing costs over the next one to several quarters.”


“Oil jumped to the highest level in nearly four years as a slowdown in American drilling added to concern over supply losses from Iran and Venezuela… “The supply situation looks fragile indeed,” said Norbert Ruecker, head of macro and commodity research at Julius Baer Group Ltd. in Zurich.”


Divided we fall… Unsurprisingly, political polarisation has been worsening in the US since the peaking of US conventional crude production in the early seventies:

“Party polarization is even worse than most people think, according to a new Michigan State University study.

“And neither party can shoulder the blame, as it doesn’t matter which party is in charge, said Zachary Neal, associate professor of psychology and global urban studies.

““What I’ve found is that polarization has been steadily getting worse since the early 1970s,” he said. “Today, we’ve hit the ceiling on polarization. At these levels, it will be difficult to make any progress on social or economic policies.””


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Economy 1 Oct 2018 China slowdown worsens

“Beijing will likely take steps to mitigate the impact of the trade war with the U.S. as recent economic indicators from China point to a slowdown, an economist said on Monday.

“”We were calling for some slowdown, but the degree is much more than what we expected,” said Jeff Ng, chief economist for Asia at Continuum Economics, a research firm.”


“Even if trade tensions between the U.S. and China can quickly be ironed out, Asia is stuck with a much deeper problem: The trade boom of years past may be hard to replicate in years to come.

“If anything, the sputtering export engine will continuously lose torque.”


“Billionaire investor Stanley Druckenmiller warned that dollar-denominated borrowing by emerging markets, like Turkey, Argentina and others, meant they already are facing “a shrinkage of liquidity” as the US central bank raises interest rates.”


“The Philippines’ outstanding debt hit record high of 7.104 trillion pesos (131.498 billion U.S. dollars) in the first eight months of 2018 on the back of high foreign borrowings amid the issuance of yen-dominated debt bonds.”


“Emerging Asia economies that were already under stress amid a Federal Reserve policy-tightening cycle, stronger dollar and global trade tensions are bracing once again for a resurgence in inflation pressures as oil and gas prices tick higher.”


India’s Lehman Bros moment?

“IInfrastructure Leasing & Financial Services (IL&FS) has again defaulted on repaying loans — this time the amount in question is about Rs 2.7 billion — even as it received the shareholders’ nod to raise up to Rs 150 billion through debentures [India].”


“Pakistan raised its key rate to the highest in three years, making it Asia’s most aggressive interest-rate hiker this year as the country’s finances continue to dwindle. The target policy rate was raised for the third straight meeting to 8.5 percent from 7.5 percent, the State Bank of Pakistan said in a statement on Saturday.”


“Turkish manufacturing activity hit its lowest level in nine years in September, contracting for the sixth consecutive month, as output and new orders slowed on the back of a currency crisis, a business survey showed on Monday.”


“Increased uptake of commercial loans may plunge the country into a debt crisis, a parliamentary advisory team has warned. The Budget Office, a professional unit within the National Assembly which advises legislators on financial, budgetary and economic matters, is worried the contraction of expensive loans will put pressure on Kenya’s dollar reserves.”


“The President and Chairman of Groupe Ndoum, Dr. Papa Kwesi Ndoum, has called on Ghanaians to have confidence in the country’s financial sector… His comments come at a time when there is a seeming loss of confidence in Ghana’s financial institutions due to the challenges some are presently facing. Seven local banks have collapsed within the last one year, as government moved to sanitize the sector.”


“Timdi, 33, and Douglas are among thousands of African migrants who, after failing to reach Europe in search of a better life, have been flown home from North Africa by the International Organization for Migration (IOM), with funding from the European Union… seven to 10 months after going home to Cameroon, returning migrants interviewed by the Thomson Reuters Foundation are struggling to get their lives back on track. Many are battling alone the trauma of the torture, sexual violence and slavery they endured in Libya.”


“It would be an understatement to say that the Argentine economy finds itself once again in very serious trouble despite record International Monetary Fund (IMF) support. In the three months since announcing a $50 billion IMF stabilization program in June 2018, the Argentine peso has managed to lose around a further third of its value. This has contributed to a renewed spike in inflation to over 40 percent and to ever-increasing signs that the Argentine economy is yet again succumbing to a serious economic recession.”


“Hundreds of thousands of Brazilians rallied for and against controversial front-runner Jair Bolsonaro ahead of next week’s presidential elections, in what some analysts called a worrying sign of society’s deep divisions. Much of the country is now polarized between the corruption-racked leftist Workers’ Party and former army captain Mr. Bolsonaro, who is known for his offensive comments about women and gay people.”


“Jair Bolsonaro, Brazil’s firebrand right-wing presidential candidate, said on Friday that he would not accept the outcome of next month’s election if he loses, as polls suggest he will. “From what I see in the streets, I won’t accept any result that is not my election,” the populist politician told Brazilian broadcaster TV Band.”


“Let there be no doubt, the budget that the Italian government is about to pass is a remarkable act of economic self-harm. It could take a long time to repair… Italy’s public debt stands at more than 130 percent of GDP — the largest in the euro zone after Greece. For the past few years, Italy has benefited from ultra-low interest rates thanks to the European Central Bank’s quantitative easing. The ECB is now pulling back from net purchases…”


“Italy’s powerful deputy prime minister Matteo Salvini said Saturday “I do not care” if the European Commission rejects a budget plan that would worsen Rome’s already mammoth debt burden. “No one in Brussels can tell me it is not time,” the head of the far-right League party told a meeting in the Italian capital. “If Brussels says I cannot do it, I do not care, I will do it anyway,” the outspoken leader vowed.”


“Uncertainties over Brexit are causing business activity and optimism levels in the financial industry to fall sharply. A survey of 100 leading financial firms found a “widespread” deterioration in sentiment, with investment managers reporting a “striking loss of momentum” since the start of the year. Profits tumbled in several sectors, with investment managers reporting the steepest drop since the financial crisis…”


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Economy 28 Sept 2018 cold turkey for junkie economy

The junkie economy will freak out when you take its methadone away, unsurprisingly:

“On Wednesday, the U.S. Federal Reserve hiked its benchmark interest rate by a quarter-percentage point to 2% – 2.25%, which is the highest level since April 2008. As rates continue to climb off their post-Great Recession record lows, market participants and commentators are showing almost no signs of fear as the stock market is hitting records again and complacency abounds.

“Unfortunately, “soft landings” after rate hike cycles are as rare as unicorns and virtually all modern rate hike cycles have resulted in a recession, financial, or banking crisis. There is no reason to believe that this time will be any different….

“When central banks set interest rates and hold them at low levels in order to create an economic boom after a recession (as our Federal Reserve does), they interfere with the organic functioning of the economy and financial markets, which has serious consequences including the creation of distortions and imbalances. By holding interest rates at artificially low levels, the Fed creates “false signals” that encourage the undertaking of businesses and other endeavors that would not be profitable or viable in a normal interest rate environment [in other words, malinvestments]….

“Though it can be difficult to tell precisely which investments or businesses are malinvestments in a central bank-distorted economy, a quote by Warren Buffett is extremely applicable: “only when the tide goes out do you learn who’s been swimming naked.” For the purpose of this discussion, “the tide going out” refers to rising interest rates. The mass failure of malinvestments in an economy as interest rates rise typically results in recessions or banking/financial crises.”


One such malinvestment is the fracking industry, which had in aggregate, from mid-2012 to mid-2017, negative free cash flow of $9 billion per quarter, and which has been propped up by over-ambitious equity issuance and artificially low interest rates.


Or it could be the various property bubbles that have been inflated around the world:


“Washington rewrote the rulebook for Wall Street after the 2008 financial crisis, but dangerous lending is still eluding regulators. Take Bomgar Corp., which just lined up $439 million in loans. The deal marked the software company’s third trip to the debt markets this year. By one estimate, Bomgar’s leverage could soon spike to 15 times its earnings, raising questions about whether the firm could ever pay it off.”


“Investor confidence is at its lowest level in more than five years, and is weakest in North America, according to a US bank. State Street’s Global Investor Confidence Index (ICI) gave a score of 88.3 for September, below the neutral score of 100. This is down 5.7 points from 94.0 in August and is the lowest measure since March 2013.”


“The odds of a recession in 2019 are large and growing, according to a pair of veteran market watchers quoted by Barron’s. They see interest rate hikes by the Federal Reserve and rising trade tensions as the main catalysts for a downturn.”


“Hyman Minsky, a much-neglected economist, warned about the psychology of the business cycle. His concerns focused on what happens next after a prolonged period of stability: people fall into the trap of believing that calm will persist indefinitely. In a sense, stability becomes a kind of bubble itself.”


“A measure of global trade weakened this month, dropping to the lowest since 2016 and indicating a slower pace of growth in the months ahead. DHL cited “rising political tensions” for the slump in its trade barometer, as the tariff battle between the U.S. and China escalated.”


“A widely watched private survey of China’s factory activity is expected to show further slowdown in the manufacturing sector’s growth in September, as the country’s trade dispute with the U.S. escalates.”


“Eurozone manufacturers grew less upbeat about their prospects in September, as French businesses saw a slowdown in new orders and pared back production expectations. Consumer confidence also weakened, largely as a result of a gloomier assessment of the economic outlook in France, where growth slowed sharply in the first six months of the year, and Spain.”


“Nearly two-thirds of businesses have yet to do any risk assessment of a no-deal outcome in the Brexit negotiations as “Brexit fatigue” sets in, the British Chambers of Commerce has found. Adam Marshall, the director general of the BCC, said: “Too many businesses across the UK are still not ready for Brexit. Many smaller firms don’t have the capacity to scenario plan, don’t think they’ll be affected or have simply switched off from the process altogether.”


From the cynical British standpoint, this is helpful because it removes focus from Brexit and onto the overall viability of the EU, and helps strengthen the struggling £ relative to the Euro.

“The Italian government agreed to a 2019 budget deficit target at 2.4% of GDP on Thursday night in a move that was celebrated by leaders but could bring the heavily indebted country into conflict with the European Union.”


“IL&FS’s defaults have highlighted the risk of a sharp growth slowdown in the world’s fastest growing major economy, as lenders pare their exposure to the shadow banking space, or what are called non-banking finance companies (NBFCs) in India.”

As per yesterday’s feed, India’s growth has been propped up on excessive and shaky debt and has not provided a commensurate increase in employment, so calling it robust is a stretch.


“Turkey’s economic confidence index has taken a nosedive to its lowest level in nearly 10 years, the Turkish Statistical Institute revealed on Thursday.

“Economic confidence index decreased by 15.4% compared to previous month decreasing from 83.9 to 71 in September.”


“Drug gangs and addicts are a common scourge in the Villa Zavaleta slum in Buenos Aires, where even before the recent economic crisis brought them to their knees, the 1,200 families faced a daily struggle just to eat.

“Rubbish and excrement fill the streets where a dog chews on a cow’s jaw bone and a drugged woman staggers about.”


“Thousands in the capital Harare have been infected by [cholera]… The rise in prices of basic goods, coupled with persistent fuel shortages, has revived fears of economic collapse from hyperinflation that occurred in 2008…

“Recently, [President] Mnangagwa acknowledged Harare’s water is contaminated with raw sewage.”


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Economy 27 Sept 2018 world economy on shaky ground

“The world economy remains on shaky ground a decade after the 2008 financial crisis, with trade wars a symptom of a deeper malaise, according to UNCTAD’s Trade and Development Report 2018: Power, Platforms and the Free Trade Delusion.

“While the economy has picked up since early 2017, growth remains spasmodic, and many countries are operating below potential, states the report. This year is unlikely to see a change of gear.

The world economy is again under stress,” UNCTAD Secretary-General Mukhisa Kituyi said. “The immediate pressures are building around escalating tariffs and volatile financial flows but behind these threats to global stability is a wider failure – since 2008 – to address the inequities and imbalances of our hyperglobalized world…”

“With downside risks increasing and financial fault lines widening in several countries, the report sees economic storm clouds gathering.

“Today’s $250 trillion debt stock – 50% higher than at the time of the crisis – is three times the size of the global economy. Private debt, particularly corporate debt, has been behind this surge in borrowing but without stimulating business investment – a disconnect that spells trouble ahead.

“Even as advanced economies have not done enough to rebalance the global economy, there are concerns that their “normalizing” monetary policies could send new shock waves through capital and currency markets, with a vicious economic spiral in more vulnerable economies already looking possible…”


“An “explosion” in corporate and household debt across the developing world since the financial crisis has left some of the world’s poorest countries with little protection against Donald Trump’s trade wars and a slowdown in global growth.”


“The report [showing that China’s household debt has reached a record high] comes amid rising concerns over China’s debt-fuelled spending in the wake of the global financial crisis…”


“Despite direct orders from Beijing to cut leverage, China’s local governments continued to create illegal debt this year in part to offset the impact of the trade war with the United States, according to the National Audit Office… However, any attempt to clamp down on local government debt could also adversely affect financing for local infrastructure projects, a key part of the central government’s plan to stabilise the economy amid the trade war with the United States.”


“Congress spokesperson Manish Tewari claimed the company was on the verge of bankruptcy and warned if that happened it would have a domino effect and “far reaching consequences” oon the country’s economy. “This could be termed as the ‘Lehman Brothers moment of India’, as the collapse of Lehman Brothers in United States led to the ‘great economic meltdown’ of 2008…Something similar is happening in India today,” he said, warning that “the Indian economy may plunge into a very deep crises”.”


“…a raft of reports of firms like Commonwealth Bank, NAB, ANZ and Westpac issuing dodgy financial advice, life insurance and fraudulent mortgages forced a reluctant business-friendly government to call for a Royal Commission late last year. Since then, a series of hearings involving almost 10 000 submissions and more than 100 witnesses has stunned even hardened observers. They included accounts of NAB staff accepting cash-stuffed envelopes… while staff at Commonwealth Bank —Australia’s largest firm —charged fees to customers who had died up to a decade before.”


“Expanding what was already the largest bailout in its history, the International Monetary Fund said it will raise Argentina’s $50 billion credit line to $57 billion in an attempt to stem a crisis that has roiled Latin America’s third-largest economy. The revised standby agreement, which still needs approval from the executive board, is “aimed at bolstering confidence and stabilizing the economy,” IMF Managing Director Christine Lagarde said Wednesday in a joint statement with Argentine Economy Minister Nicolas Dujovne.”


“There are several reasons why the [UK] housing market is slowing down, particularly in the capital. Extra taxes on landlords, tighter lending restrictions and high prices have put off would-buyers in recent years, while last month’s rise in interest rates must also be factored in by buyers.”

[Brexit anxiety not helping either]


“EU leaders last week rejected British Prime Minister Theresa May’s proposals for post-Brexit trade, standing firm on their position that the plan would undermine their cherished single market. “The British made their choice, that’s fine. Excuse me to say so brutally, but there are more important things for us than the future of the United Kingdom. It’s the future of the European Union,” Le Maire told a small group of foreign journalists on Tuesday.”


“Rents in Spain are soaring post-crisis, fuelling concerns of a new “bubble” in a country still traumatised by the collapse of its housing sector….

“…more and more Spaniards are having trouble paying their rising rents, with many forced to move, particularly in Madrid and Barcelona, as they struggle on low salaries or benefits.”


“Contemporary Italian society is awash in resentment and fear, and this mindset is an obstacle to economic growth, Italy’s Center for Social Investments Studies said in a statement on Wednesday… The think tank attributed this mindset to the poverty of young families headed by individuals under 35, whose average income is 15 percent lower and whose personal wealth is 41 percent lower than the national average.”


“The Federal Reserve raised U.S. interest rates for the third time this year, in a bid to prevent inflation from surging as President Donald Trump’s tax cuts fuel economic growth. The central bank’s monetary-policy committee, led by Chairman Jerome Powell, raised rates by 0.25 percentage point to a range between 2% and 2.25%, according to a statement Wednesday.”


Possible causes of the next crash:

1.) Interest Rates Jump – “Risk-taking and leveraging have exploded. Interest rate increases that are faster than expected could push down stocks and commodities and trigger a domino effect.”

2.) Certifiably Crazy World Leaders with Their Finger on the Trigger – “The threats posed by countries like North Korea and Iran are very real… and very unpredictable.”

3.) Cyber Attacks and Disruptions to the Power Grid – Attacks by countries like China, North Korea, Russia, and Iran are becoming more common and more debilitating.

4.) Emerging Markets in Distress or Chaos – “Countries from Turkey to Argentina and South Africa are experiencing market and currency plunges, along with interest rate and recession woes which could spread to other countries.”

5.) China Could Crack – China has so far weathered the threats of a trade war and a rising But a real-estate crash or defaults of local government-owned financing vehicles could be the breaking point and would impact our economy.

6.) Trump Might Be Impeached – Although he would likely stay in office, confidence in the bull market that really took off when Trump got elected could be undermined.

7.) Very Tight Labor Market – An incredibly tight labor market has resulted in 911 emergency call centers not being able to get enough people to answer the phones. And prisons are now training inmates to be coders. What could possibly go wrong with that?


“Climate change could punch huge holes in bank balance sheets and trigger panic on a scale similar to the 2008 crisis, the Bank of England has warned… Thirty per cent of banks dismiss climate change as a corporate social responsibility issue rather than treat it as a financial risk and only 11 per cent are taking action in the long-term interests of the firm. The findings came from a survey of 90 per cent of the British banking sector, representing £11 trillion of assets.”


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