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Daily Archives: December 18, 2013

China Confirms Near-Collision Of US, Chinese Warships, Accuses US Of “Deliberate Provocation” | Zero Hedge

China Confirms Near-Collision Of US, Chinese Warships, Accuses US Of “Deliberate Provocation” | Zero Hedge.

Last Friday we reported of a freak near-incident in the South China Sea, when a US warship nearly collided with a Chinese navy vessel, operating in close proximity to China’s only aircraft carrier, the Liaoning, although details were scarce. Today, with the usual several day delay, China reported what was already widely know, admitting that “an incident between a Chinese naval vessel and a U.S. warship in the South China Sea, after Washington said a U.S. guided missile cruiser had avoided a collision with a Chinese warship maneuvering nearby.” According to experts this was the most significant U.S.-China maritime incident in the disputed South China Sea since 2009. Which naturally warranted the question: whose actions nearly provoked a potential military escalation between the world’s two superpowers. Not surprisingly, China’s version is that it was all the US’ fault.

Reuters reports:

China’s Defense Ministry said the Chinese naval vessel was conducting “normal patrols” when the two vessels “met”.

“During the encounter, the Chinese naval vessel properly handled it in accordance with strict protocol,” the ministry said on its website (www.mod.gov.cn).

“The two Defense departments were kept informed of the relevant situation through normal working channels and carried out effective communication.”

But China’s official news agency Xinhua, in an English language commentary, accused the U.S. ship of deliberately provocative behavior.

“On December 5, U.S. missile cruiser Cowpens, despite warnings from China’s aircraft carrier task group, broke into the Chinese navy’s drilling waters in the South China Sea, and almost collided with a Chinese warship nearby,” it said.

“Even before the navy training, Chinese maritime authorities have posted a navigation notice on their website, and the U.S. warship, which should have had knowledge of what the Chinese were doing there, intentionally carried on with its surveillance of China’s Liaoning aircraft carrier and triggered the confrontation.”

On the other hand, and just as logically, the US said it was China’s fault as the US ship had to take evasive action:

Washington said last week its ship was forced to take evasive action to avoid a collision.

Then again, one wonders just what a lone US warship was doing in such close proximity to China’s aircraft carrier on its maiden voyage: “The Liaoning aircraft carrier, which has yet to be fully armed and is being used as a training vessel, was flanked by escort ships, including two destroyers and two frigates, during its first deployment into the South China Sea.”

The United States had raised the incident at a “high level” with China, according to a State Department official quoted by the U.S. military’s Stars and Stripes newspaper.

China deployed the Liaoning to the South China Sea just days after announcing its air Defense zone, which covers air space over a group of tiny uninhabited islands in the East China Sea that are administered by Japan but claimed by Beijing as well.

Leaving aside the question of what the US’ response would be if a Chinese warship was circling just outside of the San Diego Naval Base, even if in “international waters”, assuming China’s account of the story is correct, and if indeed the US chain of command did tongue-in-cheekly suggest the creation of a modest incident (with or without escalation), then one should pay very careful attention to the development in the South China Sea, which the US apparently has picked as the next hotzone of geopolitical risk flaring.

 

The Real Numbers Behind America’s Phony Recovery |

The Real Numbers Behind America’s Phony Recovery |.

The Real Numbers Behind America’s Phony Recovery

Wednesday is the big day. Investors are on the edges of their seats, waiting to find out what the Fed will do. Taper? No taper? Or maybe it will taper on the tapering off?

Our guess is the Fed will not commit to a serious program of reducing its support to the bond, equity and housing markets. It’s too dangerous. Ben Bernanke – the man who didn’t see the housing crash coming – won’t want to see the stock market collapse just before he leaves office. He’ll want to go out on a high note…

…and that means guaranteeing more liquidity.

Investors don’t seem worried. On Monday, the Dow rose 130 points. Gold was up $10 an ounce. Most of the reports we read tell us the economy is improving. Unemployment is going down. Meanwhile, manufacturing levels are rising. Compared to Europe, the US is a powerhouse of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence.

How much do investors love the US? Let us count the ways:

1. GDP per capita is running 7% – ahead of where it was in 2007. Among the world’s major developed economies only Germany can boast of anything close. All the rest are falling behind.

2. The budget deficit – which was running at about 10% of GDP – is now down to just 4% of GDP.

3. Unemployment is going down, too. Heck, just 7 out of 100 Americans are officially jobless. Didn’t Bernanke say he would tighten up when it hit that level?

4. And look at prices. Consumer price inflation is running at just 1% over the last 12 months. No threat from inflation, either.

 

 

Statistical Folderol

But wait …

What if all these things were delusions… statistical folderol… or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along?

Well, dear reader, you surely expect us to tell that the US economy is a hidden disaster… and we won’t disappoint you. GDP? Carmen Reinhart studied the performance of rich economies following a financial crisis. Her paper, “After the Fall,” showed that, six years after a crisis, per capita GDP was typically 1.5 percentage points lower than in the years before the crisis. But in the US, per capita GDP growth is running 2.1% lower than its pre-crisis level – significantly worse than average.

Deficits? Super-low interest rates have helped debtors everywhere. “Never have American companies brought a greater share of their sales to the bottom line,” writes Bill Gross. How did they do that? Largely by taking advantage of the Fed’s interest rate suppression program. But hey, the US government is the world’s biggest debtor. It is the primary beneficiary of the Fed’s miniscule rates.

That’s part of the reason why deficits are low. Let the yield on the 10-year T-bond return to a “normal” 5%, and we’ll see deficits soar again. (Interest payments, under this scenario, would add an additional $360 billion a year to the deficit.) Besides, it’s not only the deficit that counts. It’s also the total level of debt… and particularly the debt financed with funny money from the Fed.

Only twice in US history has the ratio of US Treasurys held at the Fed gone over 10% – once in 1944 and again today. The first time, it was a national emergency: World War II. Now, the Fed is merely fighting to protect a credit bubble.

Inflation? Yes, consumer price inflation is low. But what that shows is that real demand is still in a deleveraging trough. The money multiplier – the ratio of money supply to the monetary base – collapsed in 2008. It has not come back. Neither has the economy.

Unemployment? The rate has been doctored by removing people from the labor pool. The workforce is now smaller – as a percentage of the eligible pool – than at any time since 1978.

Besides, what is important is not the rate, but what people get from employment. On that score, it is a catastrophe. According to a Brookings Institution study, the average man of working age earns 19% less in real (inflation adjusted) terms today than he did during the Carter administration!

 

A Strange Kind of Recovery

What kind of economy is it that reduces a man’s wages over a 43-year period? We don’t know. But it’s not likely to win any prizes. But why, with so many strikes against it, does the US economy still have the bat in its hands?

It’s partly because the Fed has pumped up stock, bond and house prices – not to mention net corporate profit margins (by reducing the interest expenses on corporate debt) and consumer spending (through entitlement programs funded through the Treasury with ultra-low interest rates). So, the averages look pretty good… and they mask the ugliness beneath them.

The rich got richer on the Fed’s EZ money. But the average “capita” is actually poorer. The bottom 90% of the population – people in 9 houses out of 10 – have 10% less income than they had 10 years ago.

This is not a success story. It’s a disaster. And not one that tempts us into an overvalued US stock market.

 

Spanish Bad Loans Jump To New Record As Banks Come Clean Over Mortgage Defaults | Zero Hedge

Spanish Bad Loans Jump To New Record As Banks Come Clean Over Mortgage Defaults | Zero Hedge.

Spanish loan delinquencies as a percentage of the total have risen for the 8th straight month to a new record high of 13.00% (even as sovereign bond spreads continue to plunge to multi-year lows signaling all is well). With unemployment rates stuck stubbornly high, however, reality is starting to dawn in the Spanish banking system as mortgage defaults are rising following the Bank of Spain’s order for lenders to review their portfolios. As Bloomberg reports, the default rate for Banco Santander alone jumped to 7% (from 3.1%) following its “reclassification” of loans that it had refinanced (never expecting to be repaid) and with home prices still falling, “there is an urgency to come clean” as regulators see the need for banks to cover a further EUR5 billion shortfall in provisions.

The slow-and-steady rise in deliquencies smacks of an industry that is dripping out there problems – hiding facts from reality and the spike for Banco Santander is merely highlighting the mis-statement…

Via Bloomberg,

With Spain’s persistently high unemployment rate now at 26 percent, the couple is among the 350,000 homeowners who may be foreclosed upon by lenders in the next two years as the housing crisis worsens, according to AFES, a Madrid-based association that advises on restructuring debt. Since 2008, about 150,000 families have been hit with a foreclosure.

“We refinanced three years ago, but now the noose is around our necks,” Males, 42, said. “Not only do we still owe more than the original loan. We’re losing our home as well.”

As mortgage defaults rise, lenders will have to set aside money to cover losses, hurting profits, according to Juan Villen, head of mortgages at Spanish property web site Idealista.com. Spanish banks absorbed 87 billion euros ($120 billion) of impairment charges last year after Economy Minister Luis de Guindos forced them to record more defaults on loans to developers. The government took 41 billion euros in European assistance to shore up its failing lenders.

Defaults are rising partly because of changes required by the Bank of Spain that force lenders to book more soured mortgages.

“When the real estate bubble burst in 2008, banks used refinancing en masse to cover up non-performing residential mortgage loans,”

Which led to a broad loan review…

In April, the Bank of Spain ordered lenders to review their portfolios of refinanced loans, including mortgages, to make sure they’re classified in a uniform way. Lenders had 208 billion euros of loans on their books that they’d restructured or refinanced as of the end of 2012, according to the regulator.

The review led the regulator to the preliminary conclusion that classifying all refinanced loans correctly would cause a 21 billion-euro increase in defaults. Lenders would need to generate a further 5 billion euros of provisions to cover the losses.

The default rate for Banco Santander SA (SAN)’s Spanish mortgages jumped to 7 percent in September from 3.1 percent in June as it reclassified loans that it had refinanced.

“As a bank this will be the main focus area, whether you are properly recording your non-performing loans, especially the refinanced ones,” said Alexander Pelteshki, an analyst at ING Financial Markets in Amsterdam. “There is an urgency to come clean.”

But it’s not going to get better any time soon…

“Until Spain starts creating jobs and credit starts flowing again, house prices aren’t going to recover,” Beatriz Toribio, head of research at Fotocasa, said. “We expect further price declines, albeit smaller than in previous years, in 2014.”

 

Japan set to buy $240B worth of hi-tech weapons | StratRisks

Japan set to buy $240B worth of hi-tech weapons | StratRisks.

Source: NewsInfo

Japan set to buy $240B worth of hi-tech weapons

TOKYO—Japan announced on Tuesday that it would buy stealth fighters, drones and submarines as part of a splurge on military hardware that would beef up defense of far-flung islands amid a simmering territorial row with China.

The Cabinet of hawkish Prime Minister Shinzo Abe agreed to spend 24.7 trillion yen ($240 billion) between 2014 and 2019 in a strategic shift toward the south and west of the country—a 5-percent boost to the military budget over five years.

The shopping list is part of efforts by Abe to normalize the military in Japan, which has been officially pacifist since its defeat in World War II. Its well-equipped and highly professional services are limited to a narrowly defined self-defensive role.

Abe’s plan to upgrade Japan’s military capability comes with the establishment of a US-style National Security Council that is expected to concentrate greater power in the hands of a smaller number of senior politicians and bureaucrats.

Fears are growing in Japan over the rising power of China, with the two countries embroiled in a dispute over the sovereignty of a group of islands in the East China Sea, and the perennial menace posed by an unpredictable North Korea.

Joint defense force

New guidelines approved by the Cabinet on Tuesday said Tokyo would introduce a “dynamic joint defense force,” intended to help air, land and sea forces work together more effectively.

Abe said the shift would allow Japan’s military to better shoulder its responsibilities on the global stage, through what he has promoted as “proactive pacifism.”

“We hope to make further contributions to the peace and stability of the international community through proactive pacifism,” he said. “This shows with transparency our country’s diplomatic and defense policies.”

Spending will be raised to 24.7 trillion yen over five years from April 2014, up from the present 23.5 trillion yen over the five years to March 2014, but the figure could be trimmed by up to 700 billion yen if the defense ministry can find savings and efficiencies.

New hardware will include 3 drones, 52 amphibious vehicles, 17 Osprey hybrid choppers and 5 submarines—all designed to boost maritime surveillance and bolster defense of islands.

The spending will also encompass two destroyers equipped with the Aegis antimissile system and 28 new F-35 fighter jets, a stealth plane far superior to the F-15s that Japan currently has in service.

Analysts noted that much of this kit will replace obsolete equipment, but the shift in military priorities is evident.

“The guidelines underscore a clear shift of Japan’s major defense focus to the protection of its islands in the East China Sea,” said Hideshi Takesada, an expert on regional security at Takushoku University in Tokyo.

During the Cold War, Japan’s military was largely static, with the majority of resources in the north and east to guard against any invasion by Russia.

Changing dynamics

But changing dynamics and in particular the rise of China—where double-digit rises in defense spending are the annual norm—mean that Japan’s armed forces need to be located further south and to be able to deploy to the country’s many far-flung islands.

“The guidelines show Japan’s readiness for practical defense if China’s bluff turns to be real military action,” Takesada said.

Regional tensions were ratcheted up last month when China abruptly declared a new air defense identification zone over the East China Sea, including overdisputed Tokyo-controlled islands called Senkaku in Japanese and Diaoyu in Chinese.

Abe on Saturday denounced the declaration and demanded Beijing retract it immediately and unconditionally, after a summit with Southeast Asian leaders where a joint statement called for freedom of travel on the seas and in the air.

Beijing issued a sharp rebuke, singling out Abe for “slanderous remarks.”

The guidelines also call for Japan to boost its missile defense system to counter “a grave and imminent threat” from North Korea.

 

peak oil climate and sustainability: When will US LTO(light tight oil) Peak?

peak oil climate and sustainability: When will US LTO(light tight oil) Peak?.

The rapid rise in oil output since 2008 has the mainstream media claiming that the US will soon be energy independent.  US Crude oil output has increased about 2.8 MMb/d (56%) since 2008 and about 2 MMb/d is from the shale plays in North Dakota ( Bakken/Three Forks) and Texas (Eagle Ford). My modeling suggests that a peak from these two plays may be reached by 2016, other shale plays (also known as light tight oil [LTO] plays) may be able to fill the gap left by declining Bakken and Eagle Ford output until 2020, beyond that point we will see a rapid decline.

US Light Tight Oil to 2040

fig 1

There are two main views:

  1. There will be little crude plus condensate (C+C) output from any plays except the Bakken/Three Forks in North Dakota and Montana and the Eagle Ford of Texas.
  2. The other LTO plays will come to the rescue when the Bakken and Eagle Ford reach their peak and keep LTO near these peak levels to about 2020 with a slow decline in output out to 2040.
Where are these “other LTO plays”?  There are a couple of these in Oklahoma and Texas (in the Permian basin, Granite Wash, Mississippian basin), the Appalachian, the Niobrara in Colorado, and others (see slide 17 of the USGS presentation link below).  Is it possible for these LTO plays to offset future declines in the Bakken and Eagle Ford?  I hope to answer that in this post.
When doing my modeling of the Eagle Ford, I needed an estimate of the technically recoverable resource(TRR) for that play.  The April 2013 USGS Bakken Three Forks Assessment roughly doubled their earlier assessment of that play (mostly this was due to not including the Three Forks in their earlier assessment.)
see slide 17 at the USGS Bakken/Three Forks Assessment presentation.
   In light of this I decided to increase the earlier (1.73 Gb) Eagle Ford estimate of undiscovered technically recoverable resources(TRR) from the USGS by a factor of 2.3 to 4 Gb.  To determine total TRR, the proved reserves and oil already produced need to be added to the undiscovered TRR, in the case of the Eagle Ford output to the end of 2011 was only 0.1 Gb and proved reserves were about 1 Gb (check the EIA data on the change in proved reserves since 2009 in districts 1 and district 2 of Texas):

So for the Eagle Ford estimated TRR would be 4+1=5 Gb.

For the North Dakota Bakken undiscovered TRR is 5.8 Gb, 2.2 Gb of proven reserves, and 0.5 Gb of oil produced for a Total TRR of 8.5 Gb. See my previous post for more details.

For the rest of the US we can deduct Bakken (7.38 Gb), Eagle Ford(1.73 Gb), and Alaska(0.94 Gb) from the US total (13 Gb) which leaves about 3 Gb, now assume that a reassessment by the USGS increases this by a factor of 2.3 to 7.2 Gb, then add the Montana Bakken/Three Forks (1.6 Gb) and reserves from the Permian basin and other plays (1.3 Gb) to get 9.2 Gb for a TRR estimate for US “other LTO”(Total LTO minus [North Dakota Bakken/Three Forks plus Eagle Ford play]). Total TRR for all US LTO is 22.7 Gb. (I have assumed LTO from Alaska’s North Slope will not be produced.)

For the North Dakota Bakken/Three Forks and Eagle Ford plays we use the following economic assumptions to find the Economically Recoverable Resource (ERR):

OPEX (operating expenditure) is $4/barrel, royalty and tax payments are 24.5 % of wellhead revenue, annual discount rate is 12 % (used to find the net present value[NPV] of a well over its 30 year life). Transport costs are $12/barrel for the Bakken and $3/barrel for the Eagle Ford.  Well costs are 9 million for the Bakken in Jan 2013 and fall by 8% per year to 7 million in 2016 and for the Eagle Ford well costs are $8 million in Jan 2013 and fall 8% per year to $6.5 million in mid 2017.  Real oil prices follow the EIA’s 2013 Annual Energy Outlook reference case to 2040 and then continue to rise at the 2030 to 2040 rate to the end of the scenario.  All costs and prices are in May 2013$ so they are real prices rather than nominal prices.
The concept of ERR is discussed in detail in the Sept, 2013 post after figure 3.

Figure 1

fig 2
I will use the Eagle Ford play as my template because it has ramped up much more quickly than the Bakken, this is a very optimistic scenario and it is unlikely that there will be greater output from US LTO than the scenario I will present.

The underlying assumptions are:
-the average well will look like the average Eagle Ford well
-ramp up of additional wells will be slow until the peak of combined Bakken and Eagle Ford output
-in 2015 the Bakken and Eagle Ford peak and reach break even levels of profitability by 2016
-in response to reaching break even the number of new wells per month added in both the ND (North Dakota) Bakken and the Eagle Ford are reduced substantially.
-new wells added in the other US LTO plays ramp up as the rate that wells added to the Bakken and EF are reduced
As before we adjust the decrease in new well EUR (both when it begins and how long it takes to reach its maximum) so that the TRR matches our estimate of 9.2 Gb.  In this case the EUR starts to decrease in July 2018 and reaches its maximum monthly rate of decrease of 2.37 % in June 2020. The “other LTO” peaks in 2020 at about 2 MMb/d.
To determine ERR we make identical economic assumptions as our Eagle Ford case above except that we assume transport costs are $5/barrel on average ($3/barrel in EF case).

Figure 2

fig 3

When we combine our North Dakota Bakken/Three Forks, Eagle Ford, and “other LTO” models we get the following chart:

Figure 3

fig 4

This scenario is indeed optimistic, but not nearly as optimistic as the EIA’s scenario for LTO in the 2013 Annual Energy Outlook.  For comparison I computed the ERR for 2013 to 2040 for my US LTO scenario, it was 17.6 Gb over that period, the EIA scenario has a total output of 24.5 Gb over the same period, 40% higher output than an already optimistic scenario.  My guess is that reality will lie between the blue curve and the green curve with the most likely peak around 2018+/- 2 years at about 3.1+/- 0.2 MMb/d.

Dennis Coyne

 Appendix Bakken and Eagle Ford Details
I am still working on this section, check back for details
Using the USGS TRR estimates as our guide we assume new well estimated ultimate recovery (EUR) eventually decreases as the room for new wells in the most productive areas (the sweet spots) starts to run out.  If new wells are producing an average of 450 kb over 30 years before this decrease begins, we assume at some point, say June 2014 the new well EUR starts to decrease maybe by 0.4% per month, the rate of decrease continues to increase for 18 months so that after 18 months the new well EUR is decreasing at a monthy rate of 7.2 %.

fig 5

fig 6

The Rumored Chase-Madoff Settlement Is Another Bad Joke | Matt Taibbi | Rolling Stone

The Rumored Chase-Madoff Settlement Is Another Bad Joke | Matt Taibbi | Rolling Stone.

Just under two months ago, when the $13 billion settlement for JP Morgan Chasewas coming down the chute, word leaked out that that the deal was no sure thing. Among other things, it was said that prosecutors investigating Chase’s role in the Bernie Madoff caper – Chase was Madoff’s banker – were insisting on a guilty plea to actual criminal charges, but that this was a deal-breaker for Chase.

Something had to give, and now, apparently, it has. Last week, it was reported that the state and Chase were preparing a separate $2 billion deal over the Madoff issues, a series of settlements that would also involve a deferred prosecution agreement.

The deferred-prosecution deal is a hair short of a guilty plea. The bank has to acknowledge the facts of the government’s case and pay penalties, but as has become common in the Too-Big-To-Fail arena, we once again have a situation in which all sides will agree that a serious crime has taken place, but no individual has to pay for that crime.

As University of Michigan law professor David Uhlmann noted in a Times editorial at the end of last week, the use of these deferred prosecution agreements has explodedsince the infamous Arthur Andersen case. In that affair, the company collapsed and28,000 jobs were lost after Arthur Andersen was convicted on a criminal charge related to its role in the Enron scandal. As Uhlmann wrote:

From 2004 through 2012, the Justice Department entered into 242 deferred prosecution and nonprosecution agreements with corporations; there had been just 26 in the preceding 12 years.

Since the AA mess, the state has been beyond hesitant to bring criminal charges against major employers for any reason. (The history of all of this is detailed in The Dividea book I have coming out early next year.) The operating rationale here is concern for the “collateral consequences” of criminal prosecutions, i.e. the lost jobs that might result from bringing charges against a big company. This was apparently the thinking in the Madoff case as well. As the Times put it in its coverage of the rumored $2 billion settlement:

The government has been reluctant to bring criminal charges against large corporations, fearing that such an action could imperil a company and throw innocent employees out of work. Those fears trace to the indictment of Enron’s accounting firm, Arthur Andersen . . .

There’s only one thing to say about this “reluctance” to prosecute (and the “fear” and “concern” for lost jobs that allegedly drives it): It’s a joke.

Yes, you might very well lose some jobs if you go around indicting huge companies on criminal charges. You might even want to avoid doing so from time to time, if the company is worth saving.

But individuals? There’s absolutely no reason why the state can’t proceed against the actual people who are guilty of crimes.

If anything, the markets might react positively to that kind of news. It certainly did so in the Adelphia case, in which the government dragged cable company executives John, Timothy and Michael Rigas out of their beds and publicly frog-marched them in handcuffs on the streets of the Upper East Side at 6 a.m.

The NYSE had been on a four-day slump up until those arrests. After they hit the news, it surged to its second-biggest one-day gain in history. From the AP report on July 25, 2002:

Although stocks began the day by extending a four-day losing streak, the arrest of top Adelphia Communications Corporation executives for allegedly looting the cable TV company triggered a broad rally that intensified as the session wore on.

Of course, that was an isolated example, and the broad market rally that day didn’t save Adelphia, which had already gone bankrupt by the time of the Rigas arrests. But certainly it gave credence to the sensible argument that the markets generally would rather see the government punish criminals than not.

Anyway, it’s hard to not notice the fact that crude Ponzi schemers like Madoff (150 years)and Allen Stanford (110 years) drew enormous penalties – essentially life terms for both – while no one from any major firm has drawn any penalty at all for abetting those frauds.

That’s an enormous discrepancy, life versus nothing. But it makes an awful kind of sense. Madoff and Stanford were safe prosecutorial targets. There was no political fallout to worry about for sending up two guys who mostly bilked other rich people out of money. Also, there were no “collateral consequences” in the form of major job losses that had to be considered, just a couple of obnoxious families that would lose their jets and their ski vacations.

But most importantly, Madoff and Stanford were simple scam artists who could have come from any generation. There was nothing systemic about their crimes. It was possible to throw them in jail without exposing widespread corruption in our financial system.

That’s what’s so disturbing about this latest Justice Department cave. It underscores the increasingly obvious fact that the federal government is not interested in getting to the bottom of our financial corruption problem. They seem more to be treating bank malfeasance as a PR issue for the American financial markets that has to be managed away, instead of a corruption problem to be thoroughly investigated and fixed.

In a way, the administration seems to have the same motivation as Chase itself – as CEOJamie Dimon put it last week, “We have to get some of these things behind us so we can do our job.”

Madoff’s con was comically crude: He never executed a single trade for a client, and instead just dumped all of their money into a single checking account. To say, as Madoff himself did, that his bank “had to know” what he was up to seems a major understatement.

Remember, independent investigator Harry Markopolos figured the whole thing outyears before the Ponzi collapsed without the benefit of complete access to Madoff’s financial information. Markopolos really needed just one insight to penetrate the Madoff mystery.

“You can’t dominate all markets,” Markopolos said, years ago. “You have to have some losses.”

That this basic truth eluded both the SEC (which somehow failed to notice the world’s largest hedge fund never making a single trade) and Madoff’s own banker for years on end points to horrific systemic problems. A prosecutor who actually cared would floor it in court against everyone who made that fraud possible until he or she got to the bottom of how these things can happen.

Our response was different. We gave 150 years to the main guy, and now it seems we’re quietly taking a check to walk away from the rest of it. It’s not going to be a surprise when it happens again.

 

Rajan Holds India Rate in Surprise on Hazy Inflation Outlook – Bloomberg

Rajan Holds India Rate in Surprise on Hazy Inflation Outlook – Bloomberg.

India’s central bank unexpectedly left the policy interest rate unchanged to support growth while saying it will act if Asia’s fastest consumer-price inflation fails to ease in the nation of 1.2 billion people.

Governor Raghuram Rajan kept the repurchase rate at 7.75 percent, theReserve Bank of India said today, as only five of 31 analysts predicted in a Bloomberg News survey. The rest expected an increase to 8 percent. He had increased the rate by 50 basis points since taking charge of the RBI in September.

“We won’t react to every spike in inflation that is temporary,” Rajan told reporters in Mumbai after the decision. “It shouldn’t be taken that we are on hold. We are waiting for more data.”

Rajan’s effort to support expansion, which accelerated from a four-year low last quarter, risks exacerbating consumer inflation of more than 11 percent as the cost of everything from onions to clothing climbs. Prime Minister Manmohan Singh has struggled to revive investment while overseeing four straight quarters of economic growth below 5%, hurting his ruling Congress party’s popularity ahead of elections next year.

“The central bank can’t keep raising rates when growth is weak and inflation is driven by food prices,” said Gaurav Kapur, a senior economist at Royal Bank of Scotland Group Plc in Mumbai, who predicted the decision. “Going forward, the rate action will depend on the price situation and the impact of the Fed taper on the rupee.”

Photographer: Dhiraj Singh/Bloomberg

A roadside vendor displays a flower garland to passing pedestrians in Bangalore…. Read More

Rupee Strengthens

The rupee declined 0.1 percent to 62.105 per dollar at the close in Mumbai and has depreciated about 11.5 percent this year. The S&P BSE Sensex index of shares climbed 1.2 percent. The yield on the 10-year government note maturing November 2023 slid to 8.79 percent from 8.91 percent yesterday.

Indications that vegetable prices may fall combined with a more stable exchange rate and lag effects from the previous rate increases give reason to hold the rate even though inflation is “too high,” the central bank said in a statement. The RBI will act, possibly on off-policy dates, if headline or core inflation does not ease in the next round of data releases, the RBI said.

“We are vigilant for the possibility that food inflation may be more entrenched,” Rajan told reporters. “We are not ignoring food inflation, but we would like to see through the noise. And for that, we want to wait for a month more.”

Risks to pausing include the possibility that the Federal Reserve will disrupt markets by tapering monetary policy, as well as perceptions that the RBI is soft on inflation, according to the statement, which called the move “a close one.”

Fed Decision

Rajan’s decision comes ahead of a U.S. Federal Reserve announcement today on whether to start curtailing $85 billion in monthly bond purchases. Thirty-four percent of economists surveyed by Bloomberg Dec. 6 predicted the Fed will start reducing purchases this month, while 26 percent forecast January and 40 percent said March.

India is better prepared for the Fed to taper stimulus than earlier this year, Rajan said last week. The rupee plunged in August amid an exodus of funds from emerging markets on concern that the purchases would end.

India’s consumer prices rose 11.24 percent in November from a year earlier, the fastest among 17 Asia-Pacific economies tracked by Bloomberg. Wholesale inflation was 7.52 percent, a 14-month high. Gross domestic product grew 4.8 percent in the three months to Sept. 30.

“The RBI has done a smart balance between inflation targeting and incentivizing growth,” India’s Economic Affairs Secretary Arvind Mayaram said in an interview in Seoul today. That will help boost sentiment, he added.

Prices Rise

Companies are facing cost pressures even as demand moderates. Hyundai Motor Co.’s Indian unit said yesterday it would raise prices across all models starting next month.

Rajan, 50, unexpectedly raised the repo rate by a quarter point in his first policy review on Sept. 20 and boosted it again by 25 basis points on Oct. 29. He’s lowered the marginal standing facility rate to 8.75 percent from 10.25 percent, the level reached when his predecessor boosted it 200 basis points on July 15 to curb the supply of rupees.

“We are very uncomfortable with the current level of inflation,” Rajan told reporters on Dec. 12. “Clearly growth is weaker than we would like, inflation is higher than we would like. It would be wonderful if we had the normal situation of extremely high growth and high inflation and extremely low growth and low inflation, in which case policy is very easy.”

Opposition Momentum

Voters punished Singh’s party in recent state elections, with the main opposition Bharatiya Janata Party winning the most seats in four of five polls. Rajan last week called on political parties to ensure that the government that emerges after elections can pass measures necessary to support the economy.

The BJP is set to win the most seats in the national election due by May while falling short of an outright majority, according to a survey by C-voter polling agency, India TV and Times Now television published in October, the most recent available.

Rajan said today the government will have to cut some expenses to meet a deficit target of 4.8 percent of GDP. Tighter spending in the fourth quarter of the fiscal year ending March 31 add to concerns over economic growth, the central bank said in a statement.

India’s credit rating may be cut to junk next year unless the general election leads to a government capable of reviving economic expansion, Standard & Poor’s said last month.

Tesco Investment

Singh received a fillip yesterday for his effort to bolster investment when Tesco Plc, the U.K.’s largest supermarket company, said it plans to become the first global chain to enter India since the government allowed foreign companies to invest in multibrand retail more than a year ago. The company said it will probably invest about $110 million in a joint venture.

The narrowing of the trade deficit since June through November should bring down the current-account deficit to a more sustainable level for the year, the RBI said. Inflows into a swaps window opened by the RBI from August to November provided stability to the foreign-exchange market and helped build resilience to external shocks, the central bank said.

The rupee has climbed about 11 percent versus the dollar since reaching a record low in August after Rajan offered concessional swaps to banks to encourage them to raise dollars. The facility, now closed, attracted $34 billion.

India’s current-account deficit narrowed to $5.2 billion in July through September, the lowest level since 2010, compared with $21.8 billion for the prior quarter.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net

 

UK unemployment rate slips to four-and-a-half year low of 7.4% | Business | theguardian.com

UK unemployment rate slips to four-and-a-half year low of 7.4% | Business | theguardian.com.

Bank of England governor Mark Carney

Under Bank of England governor Mark Carney’s policy of forward guidance, the MPC will not to consider raising rates until unemployment has fallen below 7%. Photograph: Shannon Stapleton/Reuters

Britain’s unemployment rate has slipped to a four-and-a-half year low of 7.4%, edging closer to the “threshold” at which the Bank of England has said it will consider raising interest rates.

The Office for National Statistics (ONS) said that unemployment in the three months to October was 2.39 million, or 7.4% of the working age population, down from 7.6% in the three months to September.

Under the Bank’s policy of forward guidance, governor Mark Carneypromised that borrowing costs would remain on hold at least until unemployment has fallen below 7%.

When the policy was announced in August, the Bank’s monetary policy committee expected that to take three years; but their latest prediction is that it could be as soon as 2015.

“The jobless rate is falling far faster towards the Bank of England’s 7% threshold than policymakers envisaged when establishing the marker back in the summer,” said Chris Williamson, chief economist at City data-provider Markit. “Employment is surging higher and unemployment collapsing in the UK as the economic recovery has moved into a higher gear.”

Sterling jumped after the unemployment data was released, rising by almost a cent against the dollar, to $1.635, as investors bet on an earlier-than-expected rate rise. A stronger pound was one of the concerns of the Bank’s nine-member monetary policy committee at their December meeting, according to minutes also published on Wednesday.

The MPC pointed out that the value of sterling has risen by 9% against the currencies of the UK’s major trading partners since March, and warned that “any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery”.

The minutes suggested the latest evidence pointed to a “burgeoning recovery” in the UK; but one which was unlikely to prove sustainable unless productivity picked up, finally lifting real incomes. The MPC voted unanimously to leave rates on hold at their record low of 0.5%, and the stock of assets bought under quantitative easing unchanged at £375bn.

MPC member Martin Weale suggested last week that if unemployment is falling rapidly at the point when the 7% threshold is breached, he would regard that as a reason to tighten policy.

The details of the jobs data reinforced the view that the labour market has strengthened markedly over the past six months. The number of people employed across the economy has hit a fresh record high above 30 million, while there are more vacancies than at any time since the summer of 2008, before the UK slipped into recession.

On the claimant count, which measures the number of people in receipt of out-of-work benefits, unemployment fell to 1.27 million in November, its lowest level since January 2009.

John Philpott, director of consultancy the Jobs Economist, described the data as “wonderful”. “The quarterly 250,000 net increase in total employment is as big as one might once have expected in a full year. Employment is up in all parts of the UK, except Northern Ireland, with a sharp rise in job vacancies helping an additional 50,000 16 to 24-year-olds into work. And while the overall figure of more than 30 million people in work still leaves the UK employment rate (72%) below the pre-recession rate (73%) it is a landmark worth celebrating,” he said.

Despite the improving conditions in the labour market, there is little evidence that the prolonged squeeze on wages is easing. The ONS said total pay rose at an annual rate of 0.9% in October, or 0.8% including bonuses. That compares with an inflation rate of 2.2% in the same month, suggesting that on average, living standards are continuing to fall. Frances O’Grady, general secretary of the TUC, said: “These are undoubtedly positive figures, but we should not forget how far we still have to go to restore pre-crash living standrards through better pay and jobs”.

Rachel Reeves, Labour’s shadow work and pensions secretary, said: “Today’s fall in unemployment is welcome, but families are facing a cost-of-living crisis and on average working people are now £1,600 a year worse off under this out-of-touch government.”

 

U.S. Oil Production To Grow Faster Than Thought, Threatening Oilsands

U.S. Oil Production To Grow Faster Than Thought, Threatening Oilsands.

Domestic U.S. oil production is expected to grow much faster than was thought just a few months ago, according to a new report from the U.S. federal government, placing an even larger question mark on the future of Canada’s oilsands.

The U.S. Energy Information Administration’s preliminary outlook for 2014 predicts U.S. oil imports next year will be one million barrels per day less than previously forecast.

By way of illustration, Alberta’s total oil exports to the U.S. were 1.3 million barrels per day in 2011.

With growth in both oil and natural gas production, we see the U.S. moving closer toward self-sufficiency, and there are some very interesting economic and geopolitical implications to all that,” EIA head Adam Sieminski said at a briefing, as quoted at Inside Climate News.

One of those “geopolitical implications” could be that President Barack Obama feels less pressure to approve the Keystone XL pipeline, the news site reported.

The news comes as Keystone builder TransCanada prepares to start operating the southern leg of the pipeline, which runs from an oil terminal in Cushing, Okla., to Gulf Coast ports in Texas.

At the same time, Canada’s oil industry is facing another competitive threat: The opening up of Mexico’s state-controlled oil industry. Mexico’s Congress recently passed a bill allowing foreign investment in the oil industry, whose production has been controlled by state-run Pemex for decades. It’s expected new investment will boost Mexican oil production.

Adding Mexico’s oil and gas resources to world markets, given the U.S.’s tight oil and gas and Canadian oil sands, could have dramatic implications in the medium and long term,” Barclays analyst Michael Cohen wrote in a note to clients quoted at the National Post.

Between booming oil production from unconventional domestic sources, the oilsands and now Mexican oil exports, the U.S. will be spoiled for choice when it comes to sources of oil in the coming years.

Canadian oil has been selling at a “discount” in the U.S. for years, sometimes trading for 30 per cent below U.S. crude oil prices. Keystone backers say the pipeline will fix that by giving Canadian oil access to new markets, but the EIA’s report makes that less certain.

If there’s a bright spot for Canadian oil exporters in this, it’s that the U.S.’s oil boom won’t last that long. The EIA forecasts that domestic production will start leveling off in 2016, and then start declining in 2020.

The share of oil and other liquid fuels that comes from imports will fall to 25 per cent in 2016, the EIA said, but will then start to climb, reaching 32 per cent by 2040.

But natural gas production will continue to climb for decades after that, and that — combined with greater fuel efficiency for cars — means the U.S. will continue to become less reliant, overall, on energy imports through 2040, the EIA said.

Opponents of the Keystone XL pipeline were quick to seize on the report.

“We simply don’t need this tar sands pipeline,” Anthony Swift of the Natural Resources Defence Council — a major Keystone opponent — told Inside Climate News.

Shawn Howard, a spokesman for Keystone builder TransCanada, begged to differ.

“Our customers have signed long-term commercial contracts because they understand the need for the oil that Keystone XL will bring to U.S. refineries,” he said. “We have a waiting list of customers interested in securing capacity on Keystone XL if it becomes available.”

Not all Keystone XL customers feel this way anymore. Harold Hamm, the CEO of Continental Resources, which signed up to use the Keystone XL, said this week the pipeline is no longer needed.

But Continental Resources is betting that oil-by-rail, rather than pipelines, will be the solution going forward. Many observers have argued, in the wake of the Lac-Megantic disaster, that pipelines are a safer option than rail for transporting oil.

Chinese woman dies from bird flu strain new to humans – World – CBC News

Chinese woman dies from bird flu strain new to humans – World – CBC News.

The H5N1 bird flu virus has killed 384 people worldwide since 2003.The H5N1 bird flu virus has killed 384 people worldwide since 2003.

Chinese authorities said Wednesday that a 73-year-old Chinese woman died after being infected with a bird flu strain that had sickened a human for the first time, a development that the World Health Organization called “worrisome.”

China’s Centre for Disease Control and Prevention confirmed the woman in the city of Nanchang had been infected by the H10N8 bird flu virus, a strain that had not previously been found in people, the Jiangxi province health department said on its website.

This is the second new bird flu strain to emerge in humans this year in China. In late March, the H7N9 bird flu virus broke out, infecting 140 people and killing 45, almost all of them on the mainland. The outbreak was controlled after the country closed many of its live animal markets — scientists had assumed the virus was infecting people through exposure to live birds.

Timothy O’Leary, spokesman for the World Health Organization’s regional office in Manila, said WHO officials were working closely with Chinese authorities to better understand the new virus. He said though its source remains unknown, birds are known to carry it and it would not be surprising if another human case was detected.

“It’s worrisome any time a disease jumps the species barrier from animals to humans. That said, the case is under investigation (by Chinese authorities) and there’s no evidence of human-to-human transmission yet,” O’Leary said by phone.

In the new case, the Jiangxi health department said the woman had severe pneumonia before dying Dec. 6 in a hospital in Nanchang.

She had suffered high blood pressure, heart disease and other underlying health problems that lowered her immunity, the health department said. Her medical history showed that she had been in contact with live poultry.

The health department said “no abnormalities” have been found in people who had close contact with her. It did not say if they had been tested or quarantined, though China has in previous outbreaks taken those measures.

Experts are cautious when it comes to bird flu viruses infecting humans. They have been closely watching the H5N1 bird flu virus, which has killed 384 people worldwide since 2003. The virus remains hard to catch with most human infections linked to contact with infected poultry, but scientists fear it could mutate and spread rapidly among people, potentially sparking a pandemic.

 

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