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Marc Faber Fears “A Vicious Circle To The Downside” Is Just Beginning | Zero Hedge
Marc Faber Fears “A Vicious Circle To The Downside” Is Just Beginning | Zero Hedge.
“It’s not just tapering that is putting pressure on markets,” Marc Faber warns in thie brief clip. “Emerging economies have practically no growth and we have a slowdown in China that is more meaningful than strategists are willing to believe,” he adds and this is “causing a vicious circle to the downside” in inflated asset markets as most of the growth in the world over the last five years has come from emerging markets. Faber suggests Treasuries as a safe haven in the short-term; but is nervous of their value in the long-term as “debt is becoming burdensome on the system.”
“A lot of economic growth was driven by soaring asset prices”
On Treasuries:
“For the next three to six months probably they are a better place to be than equities,”
“I don’t like [10-year Treasurys] for the long-term because the maximum you can earn is something like 2.65 percent per annum for the next 10 years, but Treasurys are expected to rally because of economic weakness and a stock market decline. In the last few years at least there was a flight into quality – that is, a flight into Treasurys.”
On China and shadow banking defaults:
“China can handle it by printing money but it will again have unintended negative consequences… but the
problem is real… but it’s not just in China…”
Faber warned of the risks of the present global credit bubble and said another slowdown could follow on the back of rising consumer debt levels – which had previously helped to create growth.
“Total credit as a percent of the global economy is now 30 percent higher than it was at the start of the economic crisis in 2007, we have had rapidly escalating household debt especially in emerging economies and resource economies like Canada and Australia and we have come to a point where household debt has become burdensome on the system—that is, where an economic slowdown follows.”
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Australian Report Trumpeted By Coal Bosses Does Not Say What They Want You To Think It Says | DeSmogBlog
WHAT follows are some thoughts about coal from a report just published in Australia.
A longer-term concern relates to the environmental impacts of large-scale coal use, especially its climate consequences….
Coal is a carbon-intensive fuel and the environmental consequences of its use can be significant, especially if it is used inefficiently and without effective emissions and waste control technologies. Such environmental consequences include emissions of pollutants such as sulphur and nitrogen oxides, particulates, mercury, and carbon dioxide, the main greenhouse gas. Indeed coal-sourced pollution remains the largest source of greenhouse gas emissions from fossil fuel combustion. Hence most forecasts show a very wide range of future coal demand, based on differing degrees of environmental policy implementation.
Now who might have written that? An environmental campaigner? An anti-coal activist in a less bombastic mood? Maybe they’re the words of an advocate for action on climate change?
Actually, these are the views of Ian Cronshaw, a long-standing advisor to the International Energy Agency who was commissioned by the Energy Policy Institute of Australia to write a report about coal and its future economic outlook.
The Energy Policy Institute of Australia’s board includes a number of figures who have spent their careers in and around the fossil fuel industry.
The paper, The Current and Future Importance of Coal in the World Energy Economy, consists of just three pages, as well as a header page and a biography page at the back.
Most of the contents are drawn from the various reports put out by the International Energy Agency.
So how was this pamphlet greeted by Australia’s coal industry? The only media report of note came from The Australian newspaper, which ran the headline: “Coal will ‘dominate global power sector for decades‘” on its front page.
Here are the first two lines of that story, to give you a flavor.
COAL will dominate the power sector globally for decades to come, according to a paper that miners say undermines campaigns by green activists to “demonise” coal.
The paper – written by an International Energy Agency consultant and to be sent to Industry Minister Ian Macfarlane – says coal will remain the dominant power-sector fuel for at least the next quarter of a century despite efforts to diversify power sources and concerns about slower economic growth.
The report in The Australian does not mention Cronshaw’s observations about coal and climate change.
In fact, the words climate change or global warming don’t appear anywhere in the story, even though it takes up almost a third of the three pages of Cronshaw’s analysis. The Australian also chose to quote two coal industry representatives, who took the report’s publication as an opportunity to criticise environmental campaigners.
Graham Bradley, who amongst other things is the chairman of the advisory board for coal company Anglo American Australian, was reported as saying:
Much of the green polemic is not grounded in the fundamental reality that the world needs the lowest-cost energy and at the end of the day the economics will prevail and investment will follow.
Brendan Pearson, chief executive of the industry lobbyists the Minerals Council of Australia which recently subsumed the lobbying work of the Australian Coal Association, said:
Activist campaigns seeking to demonise Australian coal fail to acknowledge that it will be the principal global energy source for decades – transforming economies and helping eliminate poverty.
Both commentators also touted how the report predicted a rosy future for the coal industry in long term. The report does do this, but with a number of large caveats. It is far from the slam dunk which the media report and the quotes might have you believe. For example, there’s this from the Cronshaw report:
The current economic outlook remains very clouded, with many regions either stagnant or seeing slower economic growth. This will naturally impact heavily on global power use and coal consumption. However, most forecasters remain confident that, over the longer term, energy demand growth in non-OECD countries, the key determinant of coal demand growth, will be strong.
The report does map out the strong growth in the use of coal in non-OECD countries, including India and China, and predicts this is where much of the future demand will come from.
In two sentences, the report also points out the benefits of electricity — which, remember, can and is generated from renewable sources as well as polluting coal. The report says:
Such access to electricity is crucial to economic growth; it means food can be stored in refrigerators, children can do their homework, small businesses can function. And overwhelmingly, this electricity has come from coal.
Cronshaw also makes it clear that under the policies currently in place, coal has a strong future. But this is precisely why climate change campaigners are pushing back hard on the mining and the use of coal, because they see these policies as being far too weak.
One analysis of current climate pledges by governments around the world, released during the recent Warsaw UN climate talks, suggested that pledges on the table will currently deliver about 4C of global warming by the end of the century — a gaping chasm between stated ambitions and reality.
Cronshaw again:
It is worth observing that the IEA’s Current Policies Scenario, essentially a business as usual scenario, has global levels of coal demand more than 20% above the central scenario, in which a range of climate policies are cautiously implemented. The power sector is clearly the key coal market, but this sector must also be the focus of any successful climate change mitigation efforts.
That last line is worth reading twice. The coal sector “must also be the focus of any successful climate change mitigation efforts.”
Cronshaw also says the industry could make early gains in cuts in emissions by improving efficiency, but says that, “In reality, the penetration of the most efficient coal-fired power generation technologies is constrained by technical considerations, additional costs and the absence of a global price on carbon.”
The Australian government is in the process of trying to repeal the country’s carbon price, which would have linked to the European emissions trading scheme.
But again, Cronshaw is clear that coal’s future does depend on environmental policy down the line.
Environmental policy will play a decisive role in future coal consumption. In some countries, coal use may be encouraged for economic, social or energy security reasons. If action were taken to provide electricity access by 2030 to the 1.3 billion people in the world without it today (almost all in non-OECD countries), coal could be expected to account for more than half of the fuel required to provide additional on-grid connections. In other countries, policies may encourage switching away from coal to more environmentally benign or lower carbon sources. While a global agreement on carbon pricing has been elusive, a growing number of countries are taking steps to put a price on carbon emissions, including in China where there are several pilot schemes underway, although current pricing levels seen for example in Europe, are too low to materially affect energy choices.
When Graham Bradley from Anglo American Australia says “at the end of the day the economics will prevail and investment will follow” he seems to be ignoring the view expressed in the report which he lauds, which says that in fact, “Environmental policy will play a decisive role in future coal consumption.”
The paper also has a few words to say about so-called “clean coal” technologies – known as Carbon Capture and Storage. The paper points out that while some progress has been made “CCS has yet to be demonstrated on a large scale in an integrated fashion in the power and industrial sectors, and so costs remain uncertain.”
Cronshaw adds that:
The success of governments globally in encouraging greater energy diversity, improved efficiency, and the development and deployment of clean coal technologies will have a profound bearing on the role of coal in the longer term.
This is an interesting observation, given that both the former and current Australian governments have continued to slash hundreds of millions of dollars from CCS programs.
Despite what you might read in The Australian or through the mouths of vested interests, the future of coal is far from certain.
Just ask the president of the World Bank, Jim Yong Kim, who earlier this weekencouraged governments and institutional investors to take their money out of fossil fuels. Or maybe try one group of philanthropists with $1.8 billion in their coffers, who also this week pledged to divest from fossil fuels.
Or how about the US Export-Import Bank – a government institution that approved more than $35 billion in investments in 2012 – which has said it won’t invest in coal projects abroad unless they are fitted with CCS (which as yet, doesn’t really exist commercially).
Clearly coal will continue to be burned for energy, but as even this report the industry cites explains, emissions need to come down, environmental policies will dictate how quickly and that carbon pricing will drive early efficiency gains.
You can of course see this report two ways, depending upon which side you butter your bread. One way is that the report shows how the current suite of policies to cut greenhouse gas emissions are either too few or are not up to the job — probably both.
Another option is to use the three-page pamphlet as a way to instill confidence in potential investors in coal and to convince politicians that it’s an industry worth supporting.
That second group of people just have to hope that policymakers either fail to actually read the report, or don’t take the risks of climate change anywhere near seriously enough.
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Scrambling Gold Mints Around The World Plead: ‘We Can’t Meet The Demand” | Zero Hedge
Scrambling Gold Mints Around The World Plead: ‘We Can’t Meet The Demand” | Zero Hedge.
One of the big disconnects over the past year has been the divergence between the price of paper gold and the seemingly inexhaustible demand for physical gold, from China all the way to the US mint. Today we get a hint on how this divergence has been maintained: it now appears the main culprit is the massive boost in supply by gold mints around the world working literally 24/7, desperate to provide enough supply to meet demand at depressed prices in order to avoid a surge in price as bottlenecked supply finally catches up with unprecedented physical demand.
Bloomberg reports that “global mints are manufacturing as fast as they can after a 28 percent drop in gold prices last year, the biggest slump since 1981, attracted buyers of physical metal. The demand gains helped bullion rally for five straight weeks, the longest streak since September 2012. That won’t be enough to stem the metal’s slump according to Morgan Stanley, while Goldman Sachs Group predicts bullion will “grind lower” over 2014.” Odd – one could make the precisely opposite conclusion – once mints run out of raw product, the supply will slow dramatically forcing prices much higher and finally letting true demand manifest itself in the clearing price.
More from Bloomberg:
“The long-term physical buyers see these price drops as opportunities to accumulate more assets,” said Michael Haynes, the chief executive officer of American Precious Metals Exchange, an online bullion dealer. “We have witnessed some top selling days in the past few weeks.”
The propaganda is well-known: “Prices are likely to drop further as global economic conditions are stabilizing and tapering worries continue,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “There is no doubt that physical demand has improved, but it will not be enough to support prices.” Uhm, yeah. That makes no sense: what happens when global mints are hit by capacity bottlenecks from gold miners for whom it is becoming increasingly more economic to just halt production at sub-cost levels.
Meanwhile, here is a case study of how individual mints are working overtime to plug the unprecedented demand comes from Austria:
Austria’s mint is running 24 hours a day as global mints from the U.S. to Australia report climbing demand for gold coins even while Goldman Sachs Group Inc. says this year’s price rebound will end.
Austria’s Muenze Oesterreich AG mint hired extra employees and added a third eight-hour shift to the day in a bid to keep up with demand. Purchases of bullion coins at Australia’s Perth Mint rose 20 percent this year through Jan. 20 from a year earlier. Sales by the U.S. Mint are set for the best month since April, when the metal plunged into a bear market.
It’s not just Austria. Presenting the US Mint:
The U.S. Mint, the world’s largest, sold 89,500 ounces so far this month. The Austrian mint that makes Philharmonic coins, saw sales jump 36 percent last year and expects “good business” for the next couple of months, Andrea Lang, the marketing and sales director of Austria’s Muenze Oesterreich AG, said in an e-mail.
“The market is very busy,” Lang said. “We can’t meet the demand, even if we work overtime.”
The price for the Austrian mint’s 1-ounce Philharmonic gold coin slumped 27 percent last year, according to data from the Certified Coin Exchange.
“It’s been a very bad year for gold,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “People who bought coins have lost value, but they are not looking at short-term gains, and hope springs eternal.”
Tell that to China.
That said, keep an eye on GLD ETF holdings – for now the biggest marginal setter of gold price remains the paper ETF, whose “physical” gold holdings have cratered in the past year. Once this resumes going higher, buy.
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Is a Major Gold Scandal Going Mainstream? Washington’s Blog
Is a Major Gold Scandal Going Mainstream? Washington’s Blog.
Allegation that Central Banks Have Rehypothecated, Leased or Outright Sold the Gold They Claim to Have Is Gaining Momentum
We noted in 2012 that there are serious questions as to whether the Fed and other central banks really have the gold holdings which they claim.
This story is starting to go mainstream.
The Financial Times writes today (h/t Zero Hedge):
A year ago the Bundesbank announced that it intended to repatriate 700 tons of Germany’s gold from Paris and New York. Although a couple of jumbo jets could have managed the transatlantic removal, it made security sense to ship the load in smaller consignments. Just how small, and over how long, has only just become apparent.
Last month Jens Weidmann, Bundesbank president, admitted that just 37 tons had arrived in Frankfurt. The original timescale, to complete the transfer by 2020, was leisurely enough, but at this rate it would take 20 years for a simple operation. Well, perhaps not so simple. While he awaits delivery, Herr Weidmann is welcome to come and look through the bars in the Federal Reserve’s vaults, but the question is: whose bars are they?
In the “armchair farmer” fraud you are told: “Look, this is your pig, in the sty.” It works until everyone wants physical delivery of their pig, which is why Buba’s move last year caused such a stir. After all nobody knows whether there are really 260m ounces of gold in Fort Knox, because the US government won’t let auditors inside.
The delivery problem for the Fed is a different breed of pig. The gold market is far more than exchanging paper money for precious metal. Indeed the metal seems something of a sideshow. In June last year the average volume of gold cleared in London hit 29m ounces per day. The world’s mines are producing 90m ounces per year. The traded volume was many times the cleared volume.
The paper gold in the London Bullion Market takes the familiar forms that bankers have turned into profit machines: futures, options, leveraged trades, collateralised obligations, ETFs . . . a storm of exotic instruments, each of which is carefully logged, cross-checked and audited.
Or perhaps not. High-flying traders find such backroom work tedious, and prefer to let some drone do it, just as they did with those money-market instruments that fuelled the banking crisis. The drones will have full control of the paper trail, won’t they? There’s surely no chance that the Fed’s little delivery difficulty has anything to do with the cat’s-cradle of pledges based on the gold in its vaults?
John Hathaway suspects there is. He worries about all the paper (and pixels) linked to gold. He runs the Tocqueville gold fund (the clue is in the name) and doesn’t share the near-universal gloom of London’s gold analysts, who a year ago forecast an average $1700 for 2013. It is currently $1,260.
As has been remarked here before, forecasting the price is for mugs and bugs. But one day the ties that bind this pixelated gold may break, with potentially catastrophic results. So if you fancy gold at today’s depressed price, learn from Buba and demand delivery.
And last week, Glenn Beck – hate him or love him, he’s got the 594th most popular website in the world and many viewers on Dish network and various cable providers – did an entire 20-minute episode on the issue:
This story hasn’t yet made it to the New York Times, the Washington Post or network television … but it is gaining momentum.
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Stinking Hot Down Under
The numbers are in: 2013 was the hottest year on record in Australia since records began.
WHO: Will Steffen, Australian National University, Canberra Australia
- Highest average temperature across the country 1.20oC higher than the 1961-90 baseline years
- Highest mean maximum temperature across the country 1.45oC above the baseline years
- Mean minimum temperature across the country of 0.94oC above baseline years
- Hottest January on record
- Hottest summer on record (Dec 2012-Feb 2013)
- Hottest winter day on record – August 31st 29.92oC
- Hottest September on record of 2.75oC above baseline
- Hottest spring on record
- Hottest December on record
- South Australia broke their spring monthly average temperature record by 5.39oC
- New South Wales broke their spring monthly average temperature record by 4.68oC
- Alice Springs had their hottest October day ever of 42.6oC
- Canberra’s October was 2.5oC above average
- West Kimberly in Western Australia was a shocking 4oC above average for October
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Bank of America Is Actively Preparing For The Chinese January 31 Trust Default | Zero Hedge
Bank of America Is Actively Preparing For The Chinese January 31 Trust Default | Zero Hedge.
Last week we were the first to raise the very real and imminent threat of a default for a Chinese wealth management product (WMP) default – specifically China Credit Trust’s Credit Equals Gold #1 (CEQ1) – and its potential contagion concerns. It seems BofAML is now beginning to get concerned, noting that over 60% of market participants expects repo rates to rise if a trust product defaults and based on the analysis below, they think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and back-coupon on the day. Crucially, with the stratospheric leverage ratios now engaged in such products, BofAML warns trust companies must answer some serious questions: will they stand back behind every trust investment or will they have to default on some or potentially many of them? BofAML believes the question needs an answer because investors and Trusts can’t have their cake and eat it too. The potential first default, even if it’s not CEQ1 on 1/31, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event.
For those who have forgotten, below is a quick schematic of what a WMP looks like:
And as we previously noted,
…borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).
Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.
Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.
So the PBOC’s efforts are merely exacerbating the situation for the worst companies… and as BofAML notes below, this is a major problem…
The 3bn CNY Beast Knocking
via BofAML’s Bin Gao
CNY stands for the currency, and also a beast
CNY represents China’s official currency. It also stands for Chinese New Year, the biggest holiday for the country and the occasion for family reunions and celebration. But less familiar for many, however, the Year (?) itself actually stood for a beast which comes out every 365 days and eats everything along the way from bugs to humans. The holiday tradition started as a way for people to fend off the beast by getting together and lighting up the firecrackers.
At the same time, custom dictated that people also to paid their due to avoid becoming the beast’s target. In particular, it has been a tradition to settle all debt before the New Year. From the perspective of such folk culture, the trust product Credit Equals Gold #1, referred as CEQ1 hereafter, by China Credit Trust planned poorly for having the maturing date on the New Year, leaving a 3bn CNY beast running wild.
High probability for the trust product to default
Though the term default is used quite frequently, there are actually confusions on what constitutes a default in this case when talking to investors and especially onshore investment professionals. To simplify the issue, we define a default as failing to pay the promised contractual amount on time.
The product, CEQ1, is straightforward. It is CNY3.03bn financing with senior tranches of CNY3bn and junior tranche of CNY30mn. In principle, the senior tranches are also equity investment, but the junior tranche holder pledged assets for repurchasing senior investment at a premium. The promised rate was indexed to PBoC’s deposit rate with a floor for three classes of senior tranches at 9.5%, 10% and 11%, paid annually (detailed structure is illustrated below).
In a sense, the product is in technical default already. The last coupon payment in December, with nearly all the money (CNY80mn) left in the trust account, came in at only 2.7%, falling far short of the promised yield. The bigger trouble is the CNY3bn principal payment, along with the delinquent coupon, on 31 January.
We see high probability of default on 31 January
Political or economic consideration: ultimately, given the government’s strong grip on financial institutions, default may be a political decision as much as an economic decision. From that perspective, CEQ1 would be a good candidate for default. The minimum investment in CEQ1 is CNY3mn, much more than the typical amount required for other trust investment and 75 times of per capita GDP in China. If defaults were to be used to send a warning signal to shadow banking investors, this group of rich investors may have been a good target because the government does not need to worry too much of them demonstrating in front of government offices.
Timing: there is never a good timing for deleverage because of risks involved. But the current job market situation provides a solid buffer should defaults and subsequent credit contraction slow down the economy growth. The government planned 9mn jobs last year; instead it has created more than 12mn by November. So the system could withstand a potential shock.
Financial capability: China Credit Trust has a bit over CNY10bn net assets, which some analysts cite as evidence of the trust company’s capability to fully redeem the product first and recover from the collateral asset later. However, the assets might not be liquid enough, so the net asset is not the best measure. Based on its 2012 annual report, the company has liquid asset of CNY3bn and short-term liability of CNY1.35bn, leaving liquid accessible fund of CNY1.65bn at most. ICBC for certain has much deeper pocket, but it has declared that it won’t be taking major responsibility.
Career concern: To certain extent, the timing was unfavorable for another reason, the ongoing anti-corruption campaign. It is reported that there are around 700 investors involved. On CNY3bn senior tranche investment, it averages CNY4.3mn per investor. We do not know the exact identity but with CNY3mn entry point, we know no one is a small-scale investor. Legally unjustified, if either China Credit Trust or ICBC decided to pay 100% with their capital, the decision maker would have to ensure that he does not have any business deals with any of the 700. Because if he does, his career or even his freedom could be in jeopardy in the current environment of ongoing anti-corruption campaign and strict scrutiny of shady deals/personal favors.
Questionable asset quality and uncertain contingent claim: There are cases in the past of near default, but most of them involved collateral of real estate assets, which have at least appreciated over the years. The appreciation of collateral assets makes it easier for the third party to step in by paying back investors and taking over the collateral assets. This particular product involves coal-mining assets whose value has been decreasing over the last couple of years. Moreover, there have been multiple claimants on these assets, as exemplified by the sale of Yangjiagu coal mine. Although the mine was 51% pledged through two levels of ownership structure, only 20% of the sales proceed accrued to trust investors (Exhibit 1 above). Such a low percentage would be a deterrence and concern to whoever contemplating a takeover of the collateral assets.
Other cases less relevant: In the past, one way to deal with the issue was for banks to lend to shareholders of the existing collateral asset owners for them to payback investors, with explicit or implicit local government guarantees. Shangdong Hailong’s potential default on bond was avoided this way last year. However, in the current case, the owner has been arrested for illegal fund raising, making the past precedence less applicable.
Putting all the above reasons together, we think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and backcoupon on the day.
Immediate impact would be for China rates curve to flatten
The case has been widely covered in the media. However, many still believe one way or the other the involved parties will find a last minute solution to fully redeem the maturing debt. So if the trust is not paid, we believe it will be a big shock to the market.
China rates market reaction, however, might not be straightforward. On the one hand, default would likely lead to risk-averse behavior, arguing for lower rates. On the other hand, market players would likely hoard cash in such an event, leading to tighter liquidity condition and pushing money rates higher.
We think that both movements are likely to ensue initially, meaning higher repo/SHIBOR rates and lower CGB yield if default were to realize. We suggest positioning likewise by paying 1y IRS and long 5y CGB. On the swap curve itself, we think the immediate reflection will be a bear flattening move.
Interestingly, an informal survey conducted on WeChat among finance professionals suggests the same kind of repo rate reaction (Chart 1). We think this survey is important because we believe these investment professionals will likely behave accordingly because the default event is not priced in and hard to hedge a priori.
Trust company can’t have their cake and eat it too
Of course, we can’t rule out that the involved parties do find a solution to avoid default. However, with a case as clear cut to us as this one favoring default, we believe such outcome would send a strong signal to investors that the best investment is to buy the worst credit.
Thus, we believe the near term market reaction with no default would be for the AA credit to shine brightly since this segment has been under pressure for quite some time. Trust investment would be met with enthusiasm and trust assets would likely expand further.
However, we see a fundamental problem in the industry; the leverage ratio has gone to a level which requires investors and trust companies to answer some serious questions: will trust company stand back behind every trust investment or will trust company have to default on some or potentially many of them? We believe the question needs an answer because the trust companies can’t have their cake and eat it too.
For the industry, the AUM/equity ratio has nearly doubled from 23 to 43 in less than three years during the period of 4Q2010 to 3Q2013 (Chart 2). Some in the industry has argued that one should only count the collective trusts since other trusts are originated by non-trust players like banks. Thus, trust companies have no responsibility for paying investors other than collective trusts.
We see two problems.
Even if we accept the trust companies’ argument, it is still questionable whether trust companies would be able to pay even a reasonable amount of default. The growth of leverage on collective trusts was much more aggressive. Collective trust AUM/equity ratio was 2.7 in 1Q2010 and 4.7 in 4Q2010 (Chart 2). It rose to 10 by 3Q2013, more than doubled in less than three years and more than tripled in less than four years. Along the way, the average provision has dropped from 84bp to 34bp when measured against collective AUM.
As the case of CEQ1 illustrates, as long as full redemption is on the table, no involved party could walk away totally clean. CEQ1 is a case of collective trust, but the ICBC still faces the pressure to pay. If the bank is being pressured to pay in the case of collective trust default, trust companies will likely be pressured to pay as well should some non-collective trusts get into trouble. If trust companies are on the line for the total AUM, their financial condition is even shakier, with average provision covering barely 7bp of total AUM as of 3Q2013.
On longer term market trend
Based on the analysis in the above section, we see a possibility for trust companies to have to let some trust products default with such high leverage and so few provisions. This is especially likely the case given that there will be more and more trust redemption this year and next year as a result of the fast expansion of this industry over the last couple of years and short duration of such products.
The heaviest redemption in collective trusts this year will arrive in the 2Q (Chart 3). Given that the financial system is stretched thin and there were more cases of near defaults on smaller amount of redemption last year (three cases in December alone), we believe some form of default is almost inevitable in the near term.
The potential first default, even if it’s not CEQ1 on 31 JANUARY, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event. Over the last year, China appeared to be mirroring what happened in the US during 2007, the spike of money rate (much higher repo/SHIBOR), the steepening of money curve (14d money much more expensive than overnight and 7d), and small accidents here and there (junior tranches of a few wealth management products offered by Haitong Securities losing more than 60%, a few small trusts and now CEQ1’s redemption difficulty).
Theoretically, China’s risk is best expressed using a China related instrument, but we also think the more liquid expression of China goes through the south pacific. The following points list our longer views on China and Australia rates.
- We have liked using Australia rates lower as a way to express our China concern and we continue recommending doing so as a theme.
- We recommend long CGB and underweight credit product. The risk for such positioning in the near term is no CEQ1 default. But we believe any pain suffered due to overt market manipulation to avoid default will be short lived since it has become much harder to keep the debt-heavy system in balance and the credit spread is bound to widen.
- After a brief flattening on CEQ1 default, we see swap curve steepening as being more likely on more default threatening growth leading to easy monetary policy and more issuance going to the bond market.
- We look for higher CCS rates due to the fact that the currency forward will more likely start expressing the risk.
As Michael Pettis, Jim Chanos, Zero Hedge (numerous times), George Soros, Barclays, and now BofAML have explained… Simply put –
“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.”
The “eerie resemblances” – as Soros previously noted – to the US in 2008 have profound consequences for China and the world – nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector.
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Exclusive: Mont Pelerin Society Revealed As Home To Leading Pushers Of Climate Science Denial | DeSmogBlog
THERE’S a popular talking point coming from climate change denialists that all people who accept the science and the need to act on it are somehow blinded by faith.
In Australia, climate science contrarian columnists can barely touch their keyboards without typing out the words “global warming faith” or explaining how human-caused global warming is some sort of “new religion”.
This “climate religion” narrative often goes hand-in-hand with another favourite denialist talking point where climate scientists are only doing what they do because there’s a dollar in it.
Presumably the laws of physics, the melting ice sheets, the increasing risk of bushfires, the hottest decades on record and the acidifying oceans are also waiting for their cash.
Maurice Newman, the man hand-picked by Australian Prime Minister Tony Abbott to be the government’s top business advisor, loves both of these debating points.
Newman has described climate scientists as being a “global warming priesthood” and belonging to a new “religion”. In a second opinion column in two weeks in The Australian, Newman repeats his cynicism over the IPCC and climate scientists, describing them as a “cartel” that “will deny all contrary evidence”. Newman even repeats the myth that in the 1970s scientists were certain the world was heading for global cooling, when in fact, as this study shows, a healthy majority of scientific papers were predicting the opposite.
Yet Newman has a deep belief system of his own, having long been associated with a form of “classic liberalism” – a particular world view which advocates small government and low regulation of the activities of businesses.
Not only that, but he is a member of a global society of influential business people, academics and think tank associates known as the Mont Pelerin Society who share the same broad ideology.
The Mont Pelerin Society
The Mont Pelerin Society was established in 1947 by free market economist and philosopher Friedrich von Hayek.
Maurice Newman, a Mont Pelerin member since 1976, has long been an admirer of the work of Hayek and fellow free market economist Milton Friedman, a past president of the Mont Pelerin Society.
Newman was responsible for bringing Friedman to Australia in the mid-1970s, at a time when Newman was helping to set up the Centre for Independent Studies – a Sydney-based free market think tank.
Mont Pelerin’s website explains that while all members don’t agree on everything, “they see danger in the expansion of government, not least in state welfare, in the power of trade unions and business monopoly, and in the continuing threat and reality of inflation.”
The Society, which holds a meeting annually in different parts of the world, also explains how its members see their society “as an effort to interpret in modern terms the fundamental principles of economic society as expressed by those classical economists, political scientists, and philosophers who have inspired many in Europe, America and throughout the Western World.”
To become a member, individuals have to be nominated by a current member and then seek endorsement by the membership committee before being endorsed.
DeSmogBlog has obtained a full list of the society’s members that includes senior representatives of many of the world’s foremost “free market” think tanks actively pushing back on proposed policy solutions to tackle climate change.
The list, from 2010, includes almost 500 people from 52 countries, with the bulk of members coming from the United States and the United Kingdom. The 70-page list includes private contact details. DeSmogBlog has decided to publish only extracts with contact details redacted.
Among the notable members is Charles Koch (list excerpt here), the US oil billionaire who has been a Mont Pelerin Society member since 1970.
Charles and his brother David have used their charitable foundations to funnel tens of millions of dollars into free market think tanks which fight environmental protection and deny the dangers of human-caused climate change.
In Australia, Mont Pelerin Society members include John Roskam (list excerpt here), executive director of the Institute of Public Affairs; Greg Lindsay (list excerpt here) , executive director of the Centre for Independent Studies; and mining magnate Ron Manners, executive director of the pro-mining think tank the Mannkal Economic Education Foundation.
All three organisations have actively pushed climate science scepticism and denial or heavily understated the risks of continuing to burn record amounts of fossil fuels.
Lindsay is a former president of the Mont Pelerin Society. In his 2008 “Presidential Address,” published in a Mont Pelerin newsletter, Lindsay claimed that climate change research had become an “industry” which lacked integrity.
His conspiracy theory was that scientists “have a vested interest in supporting the theory, so that the funding drip becomes a torrent.”
Lindsay also used the popular denial talking point that people who accepted the science of climate change were blinded by belief.
He said: “As many critics have pointed out, their belief in the theory, in too many instances, borders on the superstitious and mystical. The fact that so many minds are closed to any doubt strongly suggests that we are dealing with a new species of the kind of religious dogma which the Enlightenment developed to counter.”
The argument put by Lindsay back in 2008 is identical to that put by Tony Abbott’s chief business advisor Maurice Newman in recent columns, the latest only a few weeks ago.
Mont Pelerin in the United States
The US cohort of Mont Pelerin members includes many senior staff associated with “free market” think tanks that have manufactured doubt about the science of human-caused climate change or the need to act quickly.
Alongside Charles Koch, DeSmogBlog’s document shows that Mont Pelerin Society members include senior staff, directors and associates from groups his family foundations have helped to fund. These include the Cato Institute, Heritage Foundation, the Acton Institute, the Reason Foundation and the American Enterprise Institute.
Other members include Wall Street Journal editor and columnist Mary O’Grady and John O’Sullivan, a columnist with the conservative National Review.
The UK and Mont Pelerin
Members of UK free market think tanks including The Adam Smith Institute, CIVITAS and the Institute of Economic Affairs have also gained membership with the Mont Pelerin Society.
Long-standing climate science sceptic Julian Morris is also listed as a member.
Another UK member is Linda Whetstone, the daughter of Antony Fisher who founded the influential UK neo-liberal think tank, the Institute of Economic Affairs.
Antony Fisher established the Atlas Economic Research Foundation – a vast network of about 400 think tanks around the world that share the ideals of limiting the power of government. Alejandro Chafuen, the current president of Atlas, is also listed as a 2010 Mont Pelerin Society member.
Global network
The Mont Pelerin Society got its name from the location of the very first meeting in Switzerland, and members continue to have ample chance to network in their annual meetings.
In recent years, members have travelled to the Galapagos Islands, Prague (former Czech president Vaclav Klaus is a member), New York, Morocco, Tokyo, Sydney, Buenos Aires and Stockholm.
The opportunity for this powerful and influential group to share ideas is obvious.
In 2010, when members held a meeting in Australia, Perth-based mining magnate and member Ron Manners extended an invitation to those making the long trip down under.
A 2010 Mont Pelerin Society newsletter obtained by DeSmogBlog explained how Manners, whose think tank has hosted climate science denier Christopher Monckton, had organised a “fascinating tour” of mining and energy sites including a day tour of the remote Pilbara region described as the “ground zero” of the mining boom.
It should come as no surprise that the Mont Pelerin Society has more than its fair share of climate science deniers within its ranks.
Research has shown that belief in free market ideology is a predictor of the rejection of climate change science. This link was also revealed in Merchants of Doubt, a book by science historians Erik Conway and Naomi Oreskes.
About four out of every five climate denial books ever published, according to one study, have links to conservative and free market think tanks either through the authors or the publishers.
When it comes to efforts to block meaningful policy to tackle climate change, it seems free market groups and societies extolling their version of “freedom” are in fact a “ground zero” for climate science denial.
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Time to stop investing in carbon capture and storage
Time to stop investing in carbon capture and storage.
Abstract: Government investment in carbon capture and storage (CCS) is a large and expensive fossil-fuel subsidy with a low probability of eventual societal benefit. Within the tight resource constrained environments that almost all governments are currently operating in, it is irresponsible to sustain this type of subsidy. CCS has been promoted as a ‘bridging’ technology to provide CO2reductions until non-fossil-fuel energy is ramped up. But the past decade of substantial government investment and slow progress suggests that the challenges are many, and it will take longer to build the CCS bridge than to shift away from fossil-fuels. Optimism about the potential of CCS is based primarily on research on technical feasibility, but very little attention has been paid to the societal costs of governments perpetuating fossil-fuels or to the sociopolitical requirements of long-term regulation of CO2 stored underground. Deep systemic change is needed to alter the disastrous global fossil-fuel trajectory. Government investment in CCS and other fossil-fuel technologies must end so that the distraction and complacency of the false sense of security such investments provide are removed. Instead of continuing to invest billions in CCS, governments should invest more aggressively in technologies, policies, and initiatives that will accelerate a smooth transition to non-fossil-fuel-based energy systems. We need to divest from perpetuating a fossil-fuel infrastructure, and invest instead in social and technical changes that will help us prepare to be more resilient in an increasingly unstable and unpredictable future.
INTRODUCTION
For over a decade, billions of dollars of government investment in carbon capture and storage (CCS) technology have provided a glimmer of hope for reconciling carbon dioxide (CO2) emissions and global growth in fossil-fuel use.[1, 2] CCS has offered a vision of a future in which the impacts of growing fossil-fuel reliance are minimized by capturing and storing the CO2 instead of allowing it to accumulate in the atmosphere.[3, 4] Many have projected that CCS is a technology critical to ‘solving’ climate change while continuing our reliance on fossil-fuels.[5-10]
But it is becoming increasingly clear that investing in CCS is not money well spent. As the global climate-energy situation becomes increasingly dire, bold measures with near-term influence are needed to reduce, rather than sustain, fossil-fuel reliance. Governments around the world need to divest in fossil-fuel technology and stop subsidizing CCS and other fossil-fuel technologies. Instead of continuing to invest billions in CCS, governments should be investing more aggressively in technologies, policies, and initiatives that will accelerate a smooth transition to non-fossil-fuel-based energy systems. Despite the challenges of envisioning a less-fossil-fuel-dependent energy future, we know that an eventual move away from fossil-fuels is inevitable. A decrease in investment in fossil-based energy technology coupled with an increase in innovation investment in non-fossil-based energy systems will help us prepare for this transition promoting gradual change and reducing the likelihood of an abrupt, disruptive shift away from fossil-fuels.
A FALSE SENSE OF OPTIMISM
Given the magnitude of society’s reliance on fossil-fuels, the technological vision of CCS has had a powerful influence on governmental action on climate change.[11, 12] The emergence of the possibility of CCS over 10 years ago enabled many fossil-fuel dependent actors, particularly individuals and institutions in coal-dependent regions of the world, to stop denying the existence of climate change; CCS provided the possibility of continuing coal use while also addressing climate change.[13] Now with recent increases in natural gas reliance, CCS similarly offers the possibility of reconciling climate mitigation goals with growth in natural gas power plants. But this vision of CCS has also enabled complacency about the growing dangers of sustained fossil-fuel dependence. And the billions of dollars in government funds devoted to CCS has reduced the level of investment in non-fossil-fuel energy including initiatives and technologies with more concrete, near-term societal benefits. As the need to reduce fossil-fuel reliance is increasingly acknowledged for climate and many other reasons, CCS investments are dangerous as they further incentivize and legitimize continued use of fossil-fuels, and they create a false sense of optimism that our current energy systems can be safely perpetuated.
Beyond acknowledging CCS investment as an additional fossil-fuel subsidy,[14] many other factors indicate that the time has come for governments to stop investing in CCS. First, despite the billions of dollars already invested, widespread CCS deployment remains a distant, far-fetched, extremely expensive possibility.[15-17] The slow progress and long-time horizon for realizing any potential societal benefits from CCS investments is problematic because the CCS strategy has a limited lifetime.[18] CCS has been promoted as a ‘bridging’ technology to provide some CO2 reductions until non-fossil-fuel energy is ramped up. But the past decade of steady investment but slow progress suggests that it will take longer to build this bridge than to shift away from fossil-fuels.[16] Australia’s recent cuts and deferred investment in its CCS programs reflects recognition of this time-scale problem; Australia cut its investment in its long-term CCS strategy to provide near-term budgetary relief and also to offset costs of the country’s emission trading scheme, which represents a more direct, near-term approach to reducing atmospheric CO2 (the future of Australia’s cap-and-trade system is now uncertain following the September 2013 election).
In the current global economic situation, government expenditure of the magnitude required to advance CCS is no longer justifiable. A single CCS demonstration plant is estimated to cost on the order of 1 billion dollars, and those advocating for more investment in CCS are asking governments to spend $3–4 billion each year for the next decade.[9, 19] Reallocation of this level of funding to promoting non-fossil-fuel energy would be a much less-risky more responsible and justifiable way for government to invest public money.
The amount of energy required to capture and store CO2 is often not adequately recognized in optimistic perceptions of the potential of CCS. This so-called energy penalty has been estimated to be about 30% with a range from 11 to 40%.[20] This means roughly that for every three coal-fired power plants utilizing CCS an additional power plant would be required simply to supply the energy needed to capture and store the CO2. The magnitude of this energy penalty (including even the lower estimates) is so high that it is difficult to imagine a future scenario in which consuming this much additional energy to enable CCS would actually make sense.
In addition, CCS is unlikely to ever become an effective global CO2 reduction strategy because of the political difficulties of managing and preventing leakage of the underground storage of CO2 for thousands of years after it is injected.[21] Optimism about the potential of CCS is based primarily on research on technical feasibility, but very little attention has been paid to the sociopolitical requirements of regulating and enforcing long-term monitoring and maintenance of CO2 stored underground.[22] Global institutional structures with capacity to enforce liability for thousands or even hundreds of years do not exist. And political instability, corruption, and inevitable tensions among countries create severe and constant risks of any proposed global CO2 storage management scheme.[23]
The health and safety costs of perpetuating fossil-fuels represent another reason to end government investment in CCS.[24] The large, industrial-scale, fossil-fuel power plants that CCS is being designed to enable cause major health and safety risks to both the communities surrounding the plant (including water and air pollution) and to the communities impacted by fossil-fuel extraction (including coal mining, hydraulic fracturing for natural gas extraction, and fossil-fuel transport).[25] In addition, strong public concern about the health and safety risks of storing CO2 underground has derailed several large-scale CCS demonstration projects in the past 4 years including the Vattenfall project in Germany and the Barendrecht project in the Netherlands.[26] Concern about earthquakes triggered by injection of large volumes of CO2 underground is contributing to technical understanding of the risks of leakage.[27, 28] The private sector has recognized the many risks of CCS and has only been willing to invest in CCS in conjunction with strong government investment.
ENCOURAGING COMPLACENCY WITH CLAIMS OF ‘SOLVING’ CLIMATE CHANGE
A final critical reason to end government investment in CCS relates to the impossibility of claims that CCS is critical to ‘solving’ climate change. Climate science now tells us very clearly that no matter what is done to curb greenhouse gas emissions the climate is changing irreversibly to a new and different reality.[29] So any claims that a specific technology like CCS is critical to ‘solving’ climate change is misleading and perpetuates a false sense of complacency about the realities and risks of climate change. This complacency coupled with optimism that CCS provides a ‘solution’ to climate change is dangerous, and it detracts from the increasingly urgent need for systemic changes that are now desperately needed to prepare us for the changing climate regime.
Continued CCS investment appears to fuel optimism in the face of the dire global energy realities including rapid recent growth in coal-fired power plants in developing countries.[30] During the past decade global coal consumption has grown by more than 50% with much of that growth concentrated in China and India. Maintaining optimism about this situation is extremely difficult, but the assumption and hope that one day these new coal-fired power plants might be retrofitted with CCS has been an important mechanism for remaining positive.[31-33]
CHALLENGING ASSUMPTIONS OF INEVITABILITY OF SUSTAINED COAL USE
For many climate and energy experts around the world, CCS has become the holy-grail of climate mitigation. Advocating for government support for CCS technology has become a passion for many deeply committed, technologically optimistic energy professionals. This optimism seems to make sense for those who believe the dominant narrative that continuing growth of coal is inevitable due to its low cost, abundance, and reliability.[30] In this narrative coal offers unique potential to continue to expand electricity access in the developing world providing unparalleled economic development opportunity. The problem with this narrative is that the extreme negative social, economic, environmental, and human health impacts of coal[24] are dismissed and not adequately considered. The time has come for energy analysts and governments to recognize that sustained growth of coal use is NOT inevitable. If governments invest in and focus on alternative visions, mainstream energy projections based on dominant current assumptions become increasingly unlikely.
The case for substantial government investment in CCS seems to have sustained such broad appeal because many assume that the economic, political, and social hurdles of advancing CCS are lower than the hurdles of moving away from fossil-fuels. CCS advocates frequently point out that CCS is preferable to moving away from fossil-fuels because CCS does not demand a radical alteration of national economies, global trade, or personal lifestyles. But radical systemic change in our energy systems is needed now more than ever before, and investments that slow down this transition are a dangerous distraction.
POLITICAL LOCK-IN
From a technological perspective, it has been suggested that the infrastructural requirements and inflexibility of CCS would exacerbate ‘technological lock-in’ to fossil-fuel use.[11] From a political perspective, it now seems that the sunk-costs associated with the amount of money already invested in CCS is creating a difficult ‘political lock-in’. For governments that have already invested millions or billions of dollars and considerable political capital to advance CCS, ending this support is politically challenging. And the billions of dollars already spent has created a large and powerful CCS advocacy coalition that includes multiple institutions and individuals around the world whose professional responsibilities include advocating for more government funding for CCS.[34, 35] The technically optimistic focus of these CCS advocates has limited consideration of the societal risks of CCS investments and the societal value of investing instead in alternative non-fossil-fuel-based strategies.
FOSSIL-FUEL DIVESTMENT
For the well-being of societies around the world, divestment from fossil-fuels needs to become a governmental priority. Despite the obvious political challenges of resisting the powerful fossil-fuel establishment, a subtle but definite signal of movement toward such a rebellious idea was given by President Obama last summer when he mentioned ‘divestment’ in his speech on climate.[36] Although the US officially continues to espouse an ‘all of the above’ energy strategy which includes investing in CCS, the time has come for the United States and other governments who have invested in CCS to exercise their influence to selectively divest in fossil-fuels and invest more heavily in non-fossil-fuel energy technologies. The perceived need for CCS has already been reduced in the EU where regulations now in place incentivize moving away from fossil-fuels by putting a price on CO2 emissions. And proposed new CO2 regulations in the United States have already changed firmly held assumptions of sustained long-term coal use in the United States and reduced expectations of widespread deployment of CCS.[37]
Government investment in CCS is a large, expensive, and unnecessary fossil-fuel subsidy with an extremely low probability of eventual societal benefit. In the tight, resource constrained environment that almost all governments are operating within, it is irresponsible for governments to sustain this type of subsidy. Deep systemic change is required to alter the disastrous global fossil-fuel trajectory. Government investment in CCS and other fossil-fuel technologies must end, so that the distraction and complacency of the false sense of security such investments provide are removed.
Albert Einstein famously pointed out that problems cannot be solved with the same mindset in which they were created. We need to move beyond the powerful fossil-fuel mindset, and let go of the false sense of optimism that CCS investments provide. We also need to end the perception that CCS or any specific mix of technologies has the potential to ‘solve’ climate change. We need to divest from perpetuating a fossil-fuel infrastructure, and instead invest in social and technical changes that will help us prepare to be more resilient in an increasingly unstable and unpredictable future.
REFERENCES
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Thanks to Dredging and Coal, the Great Barrier Reef Is More Threatened Than Ever | Motherboard
Thanks to Dredging and Coal, the Great Barrier Reef Is More Threatened Than Ever | Motherboard.
Satellite image of the reef, courtesy NASA
On December 10, the Australian government approved the expansion of a coal port at Abbot Point in Northern Queensland. A victory for Australia’s booming coal economy, it may also massively wound the nearby Great Barrier Reef.
That decision, however, has proved so massively controversial that the Great Barrier Reef Marine Park Authority has now delayed its decision on whether to grant permits to dump the dredge spoil in the Great Barrier Reef Marine Park until January 31.
Expansion of the coal port will entail dredging 3 million cubic meters of mud from the site, which will then be dumped into land infill projects. Australia’s environment minister Greg Hunt told Reuters that the current agreement was reduced from 38 million cubic meters of dredging to protect the environment, while Greenpeace countered that any dredging on this scale will have disastrous effects on the reef. Adding to the environmental toll is the 120 million tonnes of added coal shipping capacity the port’s four new terminals will provide.
Abbot Point will handle exports from the Galilee Basin, a geological depression that boasts massive coal reserves, but which up to now has lacked export infrastructure. The project will also create a coal-shipping highway directly through the Great Barrier Reef for thousands of ships to export coal to energy-hungry Asia. According to the Christian Science Monitor, Australia’s coal exports, already the largest in the world, have increased by 30 percent within the last year alone.
Indian firm Adani Group, seeking resources for the subcontinent’s similarly massive energy demands, will helm the Abbot Point project. Greenpeace estimates that the number of ships passing through the reef will increase from 1,700 a year to 10,150 by 2020. An $18 billion liquid gas facility and pipeline will also be built at nearby Curtis Island.
Construction of the Abbot Point coal port reached provisional approval directly following the election of Prime Minister Tony Abbott—a climate denier—whose conservative Liberal-National coalition took power in September amid promises of mining and gas industry expansion. Hunt approved the construction of the coal port along with the proviso that it will be built with the “strictest conditions in Australian history.”
Despite those assurances, both environmentalists and the Australian tourism industry were enraged by the December 11 decision. According to a report from the reef’s government authority, the Great Barrier Reef boosted the Australian economy by $5.68 billion from 2011-2012, and created 69,000 full-time jobs, mostly in tourism. Those numbers, however, are dwarfed by the $20 billion a year in tax revenues paid by Australia’s coal industry into federal and state budgets.
If the dumping permits are granted, it’s just the latest blow to the Great Barrier Reef. The world’s largest structure constructed by living beings, the reef stretches 1,400 miles along the east coast of Australia, and can be seen from space. It’s also a Unesco World Heritage Site. The Great Barrier Reef, and coral reefs like it, are among the world’s most diverse ecosystems, playing host to about a quarter of marine life, despite only covering 0.2 percent of the ocean’s total area.
While the dredging problem will likely remain relatively localized, the Great Barrier Reef has already been hit hard by climate change, and massive growth in the Australian coal industry will only make the problem worse. The reef’s coral cover has declined by 50 percent over the last three decades due to pollution, ocean acidification, floods, cyclones and the epidemic spread of the crown-of-thorns starfish, which eats coral. Atmospheric carbon dioxide has also made it increasingly difficult for marine animals, including corals, to produce shells. That’s on top of nearly a century of reef-killing agricultural runoff and development. Charlie Veron, chief scientist of the Australian Institute of Marine Science, has predicted that the Great Barrier Reef has no more than 20 years left.
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The US and China’s Common Interest: Cyber Spying | The Diplomat
The US and China’s Common Interest: Cyber Spying | The Diplomat.
A recent report released by U.S. computer security firm FireEye revealed that Chinese hackers had accessed computers at the foreign ministries of five European countries. The New York Times identified the five countries as the Czech Republic, Portugal, Bulgaria, Latvia, and Hungary. As Nart Villeneuve, a researcher for FireEye, also told the Times, Chinese hacking attempts have in the past targeted Japanese and Indian firms, Tibetan activists, and even the finance ministers of G20 nations. According to James A. Lewis, a senior fellow and director at the Center for Strategic and International Studies, Chinese hackers have also tapped the foreign ministries of Australia, Britain, Germany, France, India, and Canada. FireEye reported that these disparate hacking jobs all used similar code, which was written in Chinese and tested on Chinese-language computers. The report concluded that these “seemingly unrelated cyberattacks” could actually be “part of a broader offensive fueled by shared development and logistics infrastructure.”
The laundry list of hacking targets mirrors the recent avalanche of accusations leveled at the U.S. National Security Agency (NSA). Ever since Edward Snowden fled the country and began leaking evidence of covert NSA cyber-espionage campaigns, hardly a month goes by without new revelations of the depth and breadth of NSA activity. According to Snowden’s documents, the NSA is responsible for monitoring the cell phone and internet metadata of U.S. citizens, tapping into German Chancellor Angela Merkel’s cell phone, and using the embassies of the United States and its allies to conduct covert surveillance operations in foreign countries ranging from Italy to Indonesia.
The lists of alleged hacking by both the U.S. and China are a bit puzzling, in that the reported targets seem of relatively little value. Why, for example, would the Chinese be particularly interested in hacking into the foreign ministries of Eastern European nations? And why would the U.S. be eager to tap the cell phone of Angela Merkel and to spy on Italian leaders? Both China and the U.S. have far more critical security concerns.
This suggests that the targets revealed so far are only part of a far more widespread cybersecurity espionage campaign. If the United States is indeed monitoring the activities of world leaders in Germany, Brazil and Italy, then why wouldn’t it be conducting similar surveillance in countries about which the U.S. has serious strategic concerns — countries like Iran, Russia, and, yes, China? The same logic applies to China. If Chinese hackers (who have not, it should be noted, been definitively tied to the Chinese government) are targeting small Eastern European countries, there is every reason to believe they are also monitoring countries of more strategic interest closer to home, such as Japan, Korea, and the U.S.
Instead of asking themselves why they should conduct cyber-espionage on targets of relatively low interest, the U.S. and China seem to be asking, “Why not?” As James Lewis of CSIS told The New York Times, “It is so easy to hack foreign targets, intelligence agencies can’t resist.” As hacking allegations mount against the U.S. and China, it seems that both countries are disinclined to rein in their intelligence agencies.
China’s Foreign Ministry customarily deflects accusations of hacking by saying that China is also a victim, which is almost certainly true. However, this obviously doesn’t preclude China from also being a perpetrator of such attacks. In his regular press conference, Foreign Ministry spokesman Hong Lei responded to the hacking accusations: “U.S. cyber security companies have long been interested in hyping up the so-called ‘cyber threat from China’ with no solid proof.” Hong Lei also said that “China has been engaged in a wide range of international cooperation to combat cyber crimes.” Despite these denials, there is little disagreement in the U.S. policy community that China is engaged in widespread cyber-espionage.
Meanwhile, the U.S. government has tried to defend its own hacking activities by drawing a line between “acceptable” and “unacceptable” cyber-espionage. According to the U.S.’s formulation, cyber-espionage is acceptable when applied to government or military institutions. In fact, National Intelligence Director James Clapper’s main defense for U.S. surveillance of foreign governments was that such practices are commonplace. He called it “a basic tenet” to monitor foreign leaders and politicians. This type of cyber-espionage falls under the realm of “national security” and is, in the U.S.’s view, tolerable.
However, the U.S. government wants to classify cyber-intrusions against private corporations or institutions as a different type of hacking, one that is “out of bounds,” as Vice President Biden put it in July. Conveniently, the U.S. most often accuses China of this latter type of hacking. Even this defense has worn thin after Snowden’s claims that the U.S. has hacked into private organizations, including universities, phone companies, and telecommunications companies.
As we move further into the 21st century, the U.S. and China will be the major rule-makers for the new global order. As such, the U.S. and China will together help define what is acceptable behavior in the cyberspace. There have already been calls for the U.S. and China to discuss limits on hacking activities and to define clear “rules of the road” for cyberspace. Unfortunately, it seems that (though neither would admit it) the U.S. and China have very similar ideas on cyberspace — anything goes.
Olduvaiblog: Musings on the coming collapse 
