zaterdag 19 mei 2018

Gaza Violence Surges In Palestinian 'Great March For Return' Into Israel

Dozens of residents of Gaza were killed, and over 2000 injured, in a clash with Israeli troops in what Palestinians are calling "The Great March for Return," resulting in the greatest surge of violence in Gaza since the 2014 war between Israel and Hamas. Israel said some 40,000 Palestinians had taken part in "violent riots" at 13 locations along the Gaza Strip security fence. Monday's march is the culmination of six weeks of similar marches that began late in March. The pattern is always the same. Thousands of Gazans march to the border with Israel, threatening to break through the fence into Israel. Israel's army tries to stop them, first using tear gas, then rubber bullets, and eventually using live fire, resulting in casualties. Hamas, the government authority of Gaza, has been calling these demonstrations the "Great March for Return," meaning that it's accompanied by demands for "Right of Return," the demand that Palestinians be permitted to return to the land that they lost in the Arab-Jewish war in 1948. Times of Israel
For that reason, the attempt by thousands of Gazans to breach the fence and cross over into Israel is considered an existential threat to Israel by the Israelis. According to reports by both media and Israeli officials, Hamas directed women and children to sit near the border fence, and then the men used the women and children as shields while throwing rocks and Molotov cocktails over the fence at soldiers. I cannot think of any explanation for this except Palestinian politics, to incite as many killings of women and children as possible, in order to international condemnation of Israel.... Ma'an News (Palestine) and BBC

New Ebola Outbreak In Major DR Congo City Is Called Potentially 'Explosive'

The Democratic Republic of Congo (DRC) was only marginally affected by the massive Ebola epidemic that struck western Africa (Sierra Leone, Liberia and Guinea) in 2014-2016. DRC itself has had its own Ebola outbreaks 9 times since 1976, but all of them have occurred in rural villages, where they were easily contained. What's different now is that a new Ebola outbreak has spread to a large, densely packed port city, with the possibility of rapid transmission within the city, as well as transmission along the Congo River to other countries. As far as is currently known, the latest outbreak began in a small inland village called Ikoko Impenge, accessible only by motorbike. However, the outbreak only became known on May 8, when the DRC notified the World Health Organization (WHO) that there were two confirmed cases identified in another inland village, Bikoro. STAT News and BBC
By Thursday, 23 deaths had occurred from Ebola cases in isolated rural villages, giving authorities a better chance of ring-fencing the outbreak before it could spread. On Thursday, the World Health Organization announced that the Ebola outbreak had reached a "new phase," as new Ebola cases were identified in Mbandaka, a large heavily populated urban city of about 1.2 million people. It's believed that the disease was brought to Mbandaka by two or three people who had attended the funeral of an Ebola victim in Bikoro. The spread of the outbreak to Mbandaka is "explosive," according to senior WHO official Peter Salama: "This is a major development in the outbreak. We have urban Ebola, which is a very different animal from rural Ebola. The potential for an explosive increase in cases is now there. This puts a whole different lens on this outbreak and gives us increased urgency to move very quickly into Mbandaka to stop this new first sign of transmission." There are two reasons why the outbreak in Mbandaka could be explosive:
# With a large, densely packed population, it will be easy for the virus to spread from person to person through human contact. Once infected, a person may not show symptoms for as many as 21 days, meaning that an infected person could infect many other people before he even knows of his own infection. It's theoretically possible that this has already happened, and that there will be many new cases in the next 3-4 weeks.
# Mbandaka is a port city on the Congo River, one of the longest and deepest rivers in the world, almost 3,000 miles long. With heavy traffic traveling from port to port along the river, the infection could spread to DRC's capital city Kinshasa, with a population of 11.6 million, or it could spread to Brazzaville, population 2 million, the capital city of the neighboring country, the Republic of The Congo (sometimes called Congo-Brazzaville to distinguish it from DRC). Kinshasa and Brazzaville are situated opposite each other on the Congo River south of Mbandaka, and once Ebola reaches those two cities, it could spread further to other countries, or to other continents.
The World Health Organization on Friday is convening an emergency meeting to “consider the international risks” of the Ebola outbreak, and to decide whether to officially declare an international emergency. Al Jazeera and World Health Organization and United Nations
*) Applying lessons learned, WHO and MSF move quickly to contain Ebola outbreak. The World Health Organization (WHO) was heavily criticized for moving too slowly to contain the Ebola outbreak in Guinea, Sierra Leone and Liberia from 2014 to 2016, and so is now moving quickly to try to contain the new outbreak in DRC. The Emergency Committee meeting that WHO is convening on Friday will decide whether to declare a "public health emergency of international concern," which would mean getting access to more resources. So this step may be taken even though the outbreak is still confined to DRC. Médecins Sans Frontières (MSF, Doctors Without Borders) has sent multiple teams to hospitals in Mbandaka and Bikoro. MSF is sending tons of supplies to Mbandaka, including medical kits; protection and disinfection kits containing isolation items such as protective clothing, gloves, and boots; logistical and hygiene kits containing items such as plastic sheets, chlorine spray kits, and water treatment kits; and palliative drugs to treat Ebola symptoms, such as strong painkillers, anti-anxiety drugs, and antibiotics. TRT World and Doctors Without Borders
A new experimental Ebola vaccine has been developed since the 2014-2016 outbreak, and MSF has 4,000 doses available to use to control the outbreak in Mbandaka. A vaccine cannot help someone who is already sick, but it will be used in conjunction with the methodology of "contact tracing." Once a potential victim is identified, then contact tracing means that potential contacts ae located, and their contacts are located, and so forth, and all of those people could be given the new vaccine. However, it's not clear that any of these methods will prevent an explosive spread of Ebola. In 2014, Ebola spread rapidly in Liberia's capital city Monrovia, particularly in the West Point slum area, with more than 70,000 people crowded together on a peninsula, with no running water, sanitation or garbage collection. If there is a similar slum area in Mbandaka, Kinshasa, or Brazzaville, then the spread could be equally massive.... AP and World Health Organization

Taiwan, In Cooperation With The U.S, Strengthens Defenses Against China

Last week, China conducted an "innovative joint operation" where Chinese warplanes flew in opposite directions around Taiwan. New Su-35 fighter jets flew with H-6K strategic bombers south of Taiwan, and J-11 fights flew with KJ-200 early warning aircraft north of Taiwan. These operations involved two theatre commands for exercises that involved early warning systems, detection and assaults. China's government said Wednesday that the country’s military exercises around Taiwan are intended as a direct threat to Taiwan, following any moves toward independence. According to the Chinese government spokesman: "It is a strong warning to Taiwan independence separatist forces and their activities. It demonstrates our determination and capabilities to safeguard national sovereignty and territorial integrity. China has the firm will, full confidence and sufficient capabilities to block moves toward Taiwan’s formal independence." China has conducted frequent missions by air force fighters, bombers and surveillance planes to circle Taiwan. South China Morning Post (Hong Kong) and AP
Also, China has repeated sailed its sole operating aircraft carrier through the Taiwan Strait. China is using a "carrot and stick" to deal with Taiwan. The "carrot" is that China is introducing 31 "preferential policies" for Taiwan, in the fields of legal rights, education, culture and tourism, with the objective of charming the Taiwanese people by improving their lives. China is making it easy for Taiwanese businesses to borrow money and invest in high-tech enterprises on the mainland. China has provided internships and jobs for nearly 9,000 Taiwanese youth as of the end of 2017. Perhaps most important, Taiwanese entrepreneurs and businessmen who are complaining about low pay and Taiwan are being offered higher wages and bigger markets on mainland China, resulting in a "brain drain" in Taiwan. The "stick" is a Chinese invasion of Taiwan. Military experts say the balance of power between Taiwan and mainland China has now shifted decisively in the mainland's favor, and they would overwhelm Taiwan unless US forces quickly came to Taiwan's rescue. The United States is bound by law to provide Taiwan with the means to defend itself, but it is unclear whether the US would take military action to defend Taiwan, and have an all-out war with China. South China Morning Post and Xinhua and Reuters (21-Apr) 
# Last week for the first time, the annual Taiwan-U.S. Defense Business Forum was hosted in Taiwan, in order to "bring together US and Taiwan companies to discuss granular challenges of bilateral cooperation in the defense industry supply chain." The objective is to allow business executives and government officials from both countries to discuss defense cooperation in the shipbuilding, cybersecurity, and aerospace industries. China, as usual, reacted with fury. Zhu Songling, a professor at the institute of Taiwan studies in Beijing Union University, that the event was dangerous, and could lead to war: "The deepening US defense cooperation with Taiwan is an act of gross interference in China's domestic affairs. It's a very serious matter for the Chinese mainland. Further moves that promote concrete military exchanges will invoke a strong response from the mainland, even prompt the Chinese mainland to use non-peaceful means to resolve the Taiwan question." Reuters (24-Apr) and Asia Times
A particular worry for the Taiwanese are China's J-20 stealth fighter jets. These are not detectable using ordinary radar, and if J-20s were among the warplanes circling Taiwan last week, Taiwan's military was not aware of it. Taiwan is developing, for operational testing this year, and with mass production and deployment expected by 2020, the P01-180514-pic1BA mobile passive radar system developed by the island’s Chungshan Institute of Science and Technology. This system would be able to detect, track and lock on to targets at long range. Finally, Taiwan scheduled its own military drills late in April. These drills simulate repelling an invading force, emergency repairs of a major airbase and using civilian-operated drones as part of military exercises. The descriptions of these drills do not mention China, but instead refer to "offensive forces invading Taiwan".... The Diplomat and Global Times (Beijing, 8-May)

zaterdag 12 mei 2018

As US Dollar And Interest Rates Rise, All Heck Breaks Loose In Emerging Market Currencie

When the “hot money” gets antsy, a currency crisis morphs into a debt crisis. You just don’t lend Argentina’s government money. Not in its own currency, because it relentlessly destroys that currency, and not in a foreign currency, because it will default on it. Lending money to Argentina is like trying to run across a 16-lane freeway with traffic zooming by at 70 mph. You just don’t do it. You might get through it. But there’s a good chance it’s going to cost you, and perhaps dearly, and you shouldn’t be surprised if it does. But just after Argentina settled with the “holdouts” in 2016 on defaulted dollar-bonds dating from its last default, it sold new foreign-currency bonds, in all kinds of issuances, including in June last year $2.75 billion of 100-year bonds at a yield of 7.9% and in January this year $9 billion of bonds, composed of five-year bonds at a yield of 4.625%, 10-year bonds at a yield of 6%, and 30-year bonds at a yield of 7%. The Ministry of Finance said the yields of the bonds sold in January, however juicy they may have seemed to NIRP and ZIRP-mauled investors, were the lowest in Argentina’s history. It had received $21.4 billion in orders for those $9 billion of bonds.
But these eager investors were trying to cross the 16-lane freeway. And now they act surprised that they got hit so quickly and before they could get out of those bonds. Argentina’s peso is now in free-fall even though the Central Bank raised its interest rate three times last week to a stunning 40% to halt the plunge. Inflation is 25% and might get worse. And on Tuesday, the government began begging the IMF for a bailout to help deal with its currency crisis that is morphing into a dollar-denominated-debt crisis. Investors are ruing the day. The daily chart below shows the cliff-dive Argentina’s peso has undertaken. Since early February, the ARS has fallen 16%, and since late April 11%, most of it over the last eight trading days, despite the efforts by the central bank to stem the fall by selling scarce foreign exchange reserves and by jacking up its policy rate to 40%. This morning, the currency is at a new record low of 22.68 ARS to the USD. Seen the other way around, 1 peso is now worth just 4.4 cents...

# But it’s not just Argentina. Former Federal Reserve Vice Chairman Stanley Fischer said on Wednesday that the turbulence from the rising dollar and from rising US interest rates that make the dollar more attractive hit emerging markets “a little more quickly than I had anticipated, and now that one sees it, one sees a couple of countries, which are closer to being in trouble and having to take strong policy measures.” He didn’t specify which “couple of countries,” but one of them clearly is bond-investor darling, Argentina. Will the situation be “stabilized,” he wondered. “Well, it requires a lot of people to do the right thing at the right time, and the right time is pretty soon for many of them.” So OK, maybe it won’t be “stabilized.” Among the other standouts, the Mexican peso has fallen 12.5% since February 20, half of that since April 19, to 19.56 pesos to the USD on Wednesday evening. Looking at it the other way, this daily chart shows the value of the MXN in USD, where 1 peso has fallen to just 5.1 cents...

The Brazilian real has dropped 12% against the dollar since the end of January...

The Turkish lira has dropped 13% against the USD since early February...

The Russian ruble has dropped 11.5% since early February, despite the surge in the price of oil since then...

Other emerging-market currencies have not been hit as much. For example, the Indian rupee and the Indonesian rupiah are both down a little over 5% since early February. And clearly, there are going to be some bounces in the future, of the type that have already occurred, visible in the charts above. After the mini-turmoil in 2015 and early 2016, the emerging markets once again became a sought-after destination for the hot money. Conservative sounding EM bond mutual funds touted huge yields to US-based investors, powered by dollar-denominated EM bonds, such as the 100-year bonds from Argentina. But these foreign currency bonds get increasingly difficult to service for these countries when the local currency crashes. And that’s on the horizon now. That’s how a currency crisis becomes a debt crisis. These open-end bond mutual funds have to sell the underlying bonds when bond-fund holders are getting cold feet and begin selling that mutual fund. Hedge funds have plowed into EM investments that are now looking iffy, and they’re trying to pull out. This type of selling in an illiquid market drives bond prices down further, and thus pushes yields up to where the affected countries have trouble selling new foreign-currency bonds to service the existing foreign-currency bonds.
That’s when they go begging to the IMF, as Argentina is now doing. These investors were betting on, and secretly praying for, a falling dollar and continued low interest rates, figuring that the Fed would never be able to raise rates beyond the first few tries. The dollar cooperated in 2017 by falling sharply, but in February this year it reversed course. And the Fed has been methodically tightening since late 2016. But the dollar and rising US interest rates are just icing on the cake. Countries like Argentina and Turkey, whose fiscal and economic policies tend to melt down their own currencies, have their own massive problems, unrelated to the dollar and US interest rates, and neither the dollar nor US interest rates can be blamed for those problems, though they create a more unforgiving fiscal environment and narrowed the wriggle room. Rising interest rates in the US has unleashed competition among banks for deposits for the first time in a decade, and the Fed is allowing it to happen. ...

Israel-Iran Missile Barrages In Syria Take A Pause

The military battle between Iran and Israel that began on Wednesday evening and continued through the night has taken a pause, with many signs that the pause will be only temporary. According to Israel's military, the battle was triggered when Iran's Quds Force, in Syria near the border with Israel, fired 20 missiles at Israeli military positions in the Golan Heights border area separating western Syria from northern Israel. According to Israel, this was the first ever direct Iranian rocket attack on its troops. This triggered the most intensive attack ever on Iranian positions and assets in Syria. Israel retaliated with what appeared to be surface-to-surface missiles, and multiple Syrian anti-aircraft batteries were launched to try to intercept them. Officials said that the response targeted almost all of Iran's military infrastructure inside Syria, including dozens of weapons storage sites and intelligence centers used by elite Iranian forces, as well as Syrian air defense systems. Israel struck more than 50 Iranian targets, in its most extensive operation in Syria since 1974. Jerusalem Post and Independent (London)
Israeli Defense Minister Avigdor Lieberman said, "They need to remember the saying that if it rains on us, it'll storm on them. I hope we finished this chapter and everyone got the message." Iran said that it had no desire to escalate the military conflict. Iran's president Hassan Rouhani said, "Iran has always sought to reduce tensions in the region, trying to strengthen security and stability." Israel informed both Russia and the US of its plans ahead of the retaliatory strikes. Israeli officials say that Iran still has long-range capabilities in Syria with which to strike Israel, suggesting that the battle has not ended.... CNN and Debka (Israel)

Turkey Tightens Grip On Syria's Afrin And Continues To Threaten Manbij

Turkey is continuing to tighten its grip on the northern Syria city Afrin, on Turkey's border, following the successful completion of Operation Olive Branch. Turkey's military Operation Olive Branch began on January 20 and took place over several months, with the objective of regaining control of Syria's border city of Afrin from the Kurdish People's Protection Units (YPG). The YPG is linked to the Kurdistan Workers' Party (PKK), which is considered by the US and Europe as a terrorist organization, and has conducted numerous terrorist attacks within Turkey over a thirty year period. The operation was executed by Arab militias in the Free Syrian Army (FSA), backed by Turkish armed forces. Turkey declared the operation successfully completed on March 18. Since then, Turkey has been tightening its control on Afrin. On April 10, Turkey announced plans to open a new border crossing from Turkey to the Syrian city of Afrin with the objective of speeding up delivery of humanitarian aid to the city. However, at the same time, the new border crossing gives Turkey complete control over Afrin. Syria's president, Bashar al-Assad, backed by Russia and Iran, is demanding that Turkey return control of Afrin back to the Syrian regime. However, Turkey is showing no signs of being willing to do so. Daily Sabah (Ankara) and Reuters
On Wednesday, Turkey announced that 600 Syrian police, aged 18 to 45, have received a month's training in Turkey, and are now trained and ready to be deployed back to Afrin to provide security as local police officers, "in an effort to return daily life to normal in the recently liberated city." They received training in intervention in social incidents, police regulations, general discipline, residential district, operation education, destroying improvised explosives and crime scene investigation. Turkey's president Recep Tayyip Erdogan has repeatedly promised on numerous occasions that once the operation in Afrin had been completed, the FSA forces would move east to perform a similar operation in the city of Manbij, and continue from there to the Euphrates River and beyond to Iraq. That was always going to pose big problems, since the YPG in Manbij and further east were US allies that were the principal fighters that ejected the so-called Islamic State (IS or ISIS or ISIL or Daesh) from Raqqa and other regions in eastern Syria. Thus, an FSA assault on the YPG in Manbij risked a military clash with US forces. U.S. protection of the YPG in Manbij has now been formalized. On Wednesday, it emerged that U.S. forces had set up a new base in Manbij three months ago, shortly after Turkey launched its assault on Afrin. The new base will house both US and French troops, who will have the responsibility of patrolling the border to prevent clashes between the Turkish-backed forces and the YPG in Manbij.... Yeni Safak (Ankara) and Daily Express (London)
# Israel has struck Iranian missile depots and other Iranian military targets in Syria several times in the last few weeks, promising to prevent Iran and Hezbollah from building up a force capable of attacking Syria. For several weeks, Israel has been stepping up its military forces on the border with Lebanon, in anticipation of a retaliatory strike on Israel by Iran. That Iranian attack has apparently happened, and there have been several hours of artillery exchanges over the Golan Heights that are continuing at this writing. The Israeli attacks on Syria have been more intense than they were in the past. There are reports that the city of Damascus is without power. At least 20 heavy rockets have been fired from Syria at Israeli forces, but there are no reports yet of Israeli damage or casualties.... Reuters and Washington Post and AFP and BBC

Climate Change Activists Struggle To Replace US Climate Change Money

After two weeks, an international climate change conference in Bonn Germany, attended by delegates of over 200 countries, has ended in failure, without agreeing on the major issues of finance and transparency. Climate change finance has been in trouble from the beginning. The 2015 climate change conference that produced the famous "Paris Climate Change Accord" dictated that the "rich countries" of the world would provide $100 billion per year to the "developing countries," starting in 2020. Even before the election of Donald Trump, it was highly unlikely that that requirement would be met. However, since Trump has pulled the US out of the Paris agreement, other "rich countries" now have to find a way to fill the gap that was created. Climate Change News

Brown coal open-pit mining Garzweiler in front of a power plant near the city of Grevenbroich in western Germany, on 3-Apr-2014. (AP)

As I've described many times in the past, the climate change has never actually accomplished anything, that is, you have leaders of one country after another taking a holier-than-thou attitude toward the United States about the Paris accord, but their carbon go down little if at all. In the case of Germany, where Chancellor Angela Merkel has had the most holier-than-thou attitude of all, carbon emissions haven't declined for nearly a decade, and have been increasing for the last three years. I first wrote about this subject in 2007 in "UN Climate Change conference appears to be ending in farce". That conference was held at a Bali Beach Resort where 159 countries sent delegates to sip mai tais on the beach and attend an occasional meeting. The rich countries would have to contribute $100 billion to a fund for developing countries. The United Nations would control this money and administer the fund. At that time, digging a little deeper, it turned out that Louis Redshaw, Head of Environment Markets, Barclays Capital, was leading an effort to issue synthetic securities to trade in carbon credits. It was predicted that the carbon-trading market would top $1 trillion within a decade. Readers might recall that 2007 was the year that the subprime mortgage financial crisis was starting. In the last 11 years since that conference, nothing has changed. Climate change has accomplished nothing except as a financial scam... Reuters and Washington Post and Heritage
# China backs out of its climate change commitments with 'bifurcation'. The climate change conference in Bonn that ended on Thursday was supposed to resolve many issues, including two major ones: finance and transparence. When Trump pulled the US out of the Paris climate accord, there were international cries that without the leadership of the United States, other countries must assume leadership. The European Union took on the role of becoming the leader of the "rich" or developed countries, while China would be the leader of the developing countries. China has the 2nd largest economy in the world, and Chinese people brag that centrally-planned economy is stronger than any other economy in the world. China is implementing its "Belt and Road Initiative" in countries throughout Asia by lending them money to build infrastructure and sending Chinese workers to provide the labor. China is spending its enormous wealth by setting debt traps in all these countries with huge debts that they won't be able to repay. China is also growing into the worst climate change violator in the world, building a new coal plant every week. And yet, when it comes to climate change, they climb into their pathetic loser shells and claim to be a "developing country," so they won't have to provide funding under the Paris accord. So China is failing in climate change finance. BBC and Climate Change News
What we're seeing at the climate change conference in Bonn this last week is that they're also failing in climate change transparency. China is demanding that it not be held to any climate change standards whatsoever. In return for all the money they're getting from the rich countries starting in 2020, the developing countries are supposed to start reducing emissions in 2020. The issues are transparency and bookkeeping. Each country is required to open its accounting books to prove that it's meeting its emission reduction commitments. But China is now demanding "bifurcation." This is a technical term meaning that the transparency and bookkeeping rules apply only to the rich countries, not to the developing countries. This means that the "rich" developed countries have to pay all the money and also meet the transparency and bookkeeping rules to prove that they meeting their emission commitments. But the developing countries just have to sit back and collect money, and claim that they're reducing emissions without having to provide any evidence. China can go on building a new coal power plant every week, and just claim that it's magic coal that reduces emissions rather than increasing them. This is so completely f--ked up that it's almost unbelievable. But that's the way the world is today. With idiots like these running the world, it's no wonder we're headed for a new World War.... Bloomberg and Climate Change News

donderdag 10 mei 2018

The State Of The American Debt Slaves, Q1 2018

After the party, the hangover. Total consumer credit rose 5.1% in the first quarter, compared to a year earlier, or by $184 billion, to $3.824 trillion (not seasonally adjusted), according to the Federal Reserve. This includes credit-card debt, auto loans, and student loans, but not mortgage-related debt. That 5.1% year-over-year increase isn’t setting any records, in 2011, year-over-year increases ran over 11%. But it does show that Americans are dealing with the economy and their joys and woes the American way: by piling on debt faster than the overall economy is growing. The chart below shows the progression of consumer debt since 2006. In line with seasonal patterns for first quarters, consumer credit (not seasonally adjusted) edged down from Q4, as the spending binge of the holiday shopping season turned into hangover, an annual American ritual...

Note how the dip after the Financial Crisis, when consumers deleveraged mostly by defaulting on those debts, didn’t last long. Over the 10 years since Q1 2008, consumer debt has now surged 47%. Over the same period, the consumer price index has increased 16.9%. Auto loans and leases for new and used vehicles rose by 3.8% from a year ago, or by $41 billion, to $1.118 trillion. It was one of the smaller increases since the Great Recession: The peak year-over-year jumps occurred at the peak of the new vehicle sales boom in the US in Q3 2015 ($87 billion or 9%). However, the still standing records were set in Q1 and Q2 2001 near the end of the recession, with each quarter adding around $93 billion, or 16%, year-over-year. Loan balances are impacted by prices of vehicles, number of vehicles financed, the average loan-to-value ratio, duration of prior loans (when they’re paid off), and other factors. So this chart is not necessarily a reflection of how many new and used vehicles were sold...

The green line in the chart indicates the old data. In September 2017, the Federal Reserve implemented a big adjustment of consumer credit data going back through Q4 2015. This adjustment was based on survey data collected every five years. So routine. The adjustments hit auto-loan balances disproportionately, knocking them down by $38 billion retroactively for Q4 2015. To show the distortive effect of the adjustment, and to show that it wasn’t the collapse of the car business, I added the old data in green. Credit card debt and other revolving credit in Q1 rose 5% year-over-year (not seasonally adjusted) to $977 billion. This growth rate was down from the 5.6%-6.8% Trump-bump increases that started in Q4 2016 and ran through Q4 2017. So it was somewhat of a disappointment for those wanting to see consumers drown in high-cost (or high-profit) debt. On a quarterly basis, and in line with seasonal patterns, revolving credit card balances fell by $52 billion from the shopping season debt-pile up in Q4, as the annual hangover began. In dollar terms it was the steepest Q4-Q1 plunge since Q1 2010. In percentage terms (-5.1%), it was the steeped since Q1 2012. But wait, Q4 credit card balances of $1.03 trillion had been an all-time record, finally beating the record of Q4 2008. And Q1 2018, at $977 billion, set a record for any first quarter, beating Q1 2008 by a smidgen ($973 billion). So Americans did their job piling on high-profit debt...

Student loans in Q1 jumped by 5.4% ($77.8 billion) year-over-year to $1.51 trillion. While a shocking increase, it was the slowest year-over-year percent increase going back to 2007, the beginning of the data series: In fact, between 2007 and Q3 2012, these year-over-year increases ranged from 11% to 15%! But it’s not like more people are going to college. Higher-education enrollment had peaked in 2010 and declined at least through 2015, according to the last data available from the National Center for Education Statistics. And yet, over the 10 years from Q1 2008 to Q1 2018, student loan balances soared by 146%, from $619 billion to $1.521 trillion. Over the same period, the consumer price index rose 16.9%...

Students added $902 billion to their debts over the past 10 year, a debt that will dog them for decades to come. And for most of this debt, taxpayers are on the hook. But who obtained the money? A whole economy has sprung up around this bonanza, with entire industries getting fat: Investors in private colleges; the student housing industry, which has become an asset class within commercial real estate; companies like Apple that supply students with whatever it takes; the textbook industry; overpaid top administrators; construction companies and affiliated industries building university-owned projects, from mega-stadiums to glitzy administrative buildings; Wall Street by making it all possible; and many more. But hey, that’s how you get GDP and corporate profits to grow. It’s a dirty job, but some’s got to do it....

Bank Of Canada: 8% Of Canadian Households Owe More Than 20% of the $2.1 Trillion In Debt

These Canadians are in a “highly vulnerable” position. Canadian real estate debt hit a new high, and the news gets worse as they explain it further. The Bank of Canada (BoC) updated household debt numbers for March. In a speech this week, BoC’s Governor Stephen Poloz also gave further insights on the numbers. The record debt levels are concentrated in a smaller segment of Canadians. These Canadians are now in a “highly vulnerable” position, and they’re f**ked if they don’t start preparing for higher rates now.
# 8% of Canadians Have Mortgage Debt Over 3.5x; What They Make; In a speech this week, the BoC gave us further insights on the Canadian debt problem, and it’s worse than we thought. It turns out 8% of households have mortgage debt that’s more than 350% of their gross income. This segment of borrower represents “a bit more than 20 percent of total household debt.” BoC Governor Poloz stressed that these households need to understand how “personally vulnerable” they are, as rates rise. Rising rates are already putting the pinch on households, and it should get worse. The BoC reiterated the “neutral rate,” which is the rate where policy is no longer expansionary, is between 2.5% and 3.5%. Assuming no “shock” to the economy, rates will get there. Currently we’re at 1.25%, so that would mean rates will double over the next few years. You know, if we don’t face a major recession. Then you’re in the clear on rates, but a whole other bag of issues will crop up. On that note, onto those climbing debt numbers.
Canadian Households Owe More Than $2.1 Trillion Dollars; Total household debt hit a new record, but the annual pace of growth continued to decline. The total balance at the end of March stood at a whopping $2.129 trillion, up $3.4 billion from the month before. The annual rate of growth is now 5.25%. While it’s a new all-time high, it’s also the slowest pace of growth since November 2015. Let’s break this down into the two major components, mortgages, and consumer credit...

# Canadians Owe Over $1.52 trillion Worth of Mortgage Debt; Outstanding residential mortgage credit is also at a new high. The total outstanding balance of residential mortgages hit $1.52 trillion, up $1.88 billion from the month before. That brings the annual rate of growth to 5.27%, the lowest since March 2015. The slowing rate of growth is being attributed to B-20 stress tests, and isn’t the good news people think it is...

# Canadian Owe More Than $603 Billion In Consumer Credit; It’s not just mortgage debt those crazy Canucks are diving into, consumer credit is also at an all-time high. The total balance of outstanding consumer credit stood at $603 billion, up $1.54 billion from the month before. The annual rate of growth is now 5.2%, the lowest its been since July 2017. Consumer debt growth is the closest to beating mortgage growth, since 2010. That’s a special moment for all of us...

High levels of household debt are a concern, that gets even worse when you realize how concentrated it is. It’s also created a debt trap for the BoC. Continued economic growth will send rates higher, putting these households at further risk. Lowered growth will send debt levels higher, putting even more households at risk....

Fed’s QE Unwind Accelerates Sharply

These are getting to be serious amounts. The QE Unwind is ramping up toward cruising speed. The Fed’s balance sheet for the week ending May 2, released this afternoon, shows a total drop of $104 billion since the beginning of the QE Unwind in October, to the lowest level since June 11, 2014. During the years and iterations of QE, the Fed acquired $3.4 trillion in Treasury securities and mortgage-backed securities. The mortgages underlying those MBS are guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The “balance sheet normalization,” as the Fed calls it, was nudged into motion last October. But the pace accelerates every quarter until it reaches up to $50 billion a month in Q4 this year. This would trim the balance sheet by up to $420 billion this year, and by up to $600 billion in 2019 and every year going forward, until the Fed considers the balance sheet to be adequately “normalized”, or until something big breaks, whichever comes first. In April, the scheduled maximum pace was $30 billion (up from $20 billion in January, February, and March): $20 billion in Treasuries and $10 billion in MBS.
# Treasury securities; The balance of Treasury securities fell by $17.6 billion in April. This is up 60% from March, when $11 billion “rolled off.” Since the beginning of the QE-Unwind, $70 billion in Treasuries “rolled off.” Now at $2,395 billion, the balance of Treasuries has hit the lowest level since June 18, 2014...

Just like the Fed “tapered” its monthly QE purchases in 2014 before ending them altogether in October that year, the Fed is ramping up the QE Unwind in a similar manner, but somewhat more slowly: The stair-step pattern in the chart above is caused by how the Fed unloads securities. It doesn’t sell them outright but allows them to “roll off” when they mature. Treasuries mature mid-month or at the end of the month. Hence the stair-steps. In April, no Treasuries on the Fed’s balance sheet matured mid-month. But at the end of April, $30.4 billion matured, and that’s when the action took place. The Fed replaced $12.8 billion of the maturing Treasuries with new ones directly via its arrangement with the Treasury Department that cuts out its primary dealers and Wall Street. In other words, those $12.8 billion were “rolled over.” But it did not replace $17.6 billion of maturing Treasuries. They “rolled off.” The blue arrow in the chart above shows the April 30 roll-off.
# Mortgage-backed securities; Residential MBS are different from regular bonds. Holders receive principal payments on a regular basis as the underlying mortgages are paid down or are paid off. At maturity, the remaining principal is paid off. Over the years, to keep the MBS balance from declining, the New York Fed’s Open Market Operations (OMO) has been continually buying MBS. But settlement of those trades occurs two to three months later. The Fed books the trades on an as-settled basis. The time lag between the trade and settlement causes the large weekly fluctuations on the Fed’s balance sheet. And it also delays when MBS that “rolled off” actually disappear from the balance sheet. These timing mismatches cause the jagged line in the chart below. So we’re looking for lower highs and lower lows. Today’s balance sheet reflects MBS that matured somewhere around January and February, when $8 billion in MBS were supposed to have rolled off per month. Today’s balance fell by $9.5 billion, to $1,744.9 billion, from low to low over the past month. This “roll off” pace is up 70% from March, when $5.6 billion rolled off. In total, the balance of MBS shrank by $25.5 billion from low to low since the beginning of the QE Unwind. So the roll-offs from earlier months are starting to show up on the balance sheet...

# The Fed’s total assets; The QE-Unwind only relates to Treasuries and MBS. Since the beginning of the QE Unwind, they dropped $70.3 billion and $25.5 billion respectively for a combined decline of $95.8 billion. The Fed has other roles that can impact assets and liabilities of the balance sheet. For example, it acts as the bank of the US Treasury Department and holds “Foreign Official Deposits” by other central banks and government entities. But these and other activities are unrelated to QE or the QE-Unwind. Total assets on the Fed’s balance sheet dropped by $30 billion in April, and by $104 billion since the beginning of the QE-Unwind, to $4,356 billion. This is the lowest since June 11, 2014. Note that total assets are now down by $160 billion from the peak in January 2015...

The pace of the QE Unwind has accelerated sharply in April, as planned. And it’s unlikely that the Fed will try to prop up the stock market by pausing its QE Unwind machine, even during a sell off. The Fed is targeting “elevated” asset prices, and sell-offs are part of the deal, as long as panic doesn’t freeze up the credit markets, as it did during the Financial Crisis. But currently, credit market conditions are ultra-loose as a result of years of QE and zero-interest-rate policy. So the QE Unwind has a big job ahead to reverse part of what QE has done, which is what “balance sheet normalization” ultimately means....

Toronto’s Splendid Housing Bubble Turns To Bust

Market freezes up at the top. Average price of detached house plunges C$175,000 in 12 months. Home sales in the Greater Toronto Area (GTA), Canada’s largest housing market, and among the most inflated in the world, plunged 32% in April, compared to a year ago, to 7,792 homes, according to the Toronto Real Estate Board (TREB), a real estate lobbying group. The sales plunge affected all types of homes, even the once red-hot condos:
* Detached houses -38.4%
* Semi-detached houses -29.3%
* Townhouses -22.1%
* Condos -26.0%.
The sales slowdown was particularly harsh at the higher end: Sales of homes costing C$2 million or more collapsed by 64%. The market is freezing up at the top. Prices follow volume. Both types of prices the TREB publishes, the average price and its proprietary MLS Home Price Index based on a “composite benchmark home”, fell from April last year. This is a confusing experience for the real estate industry, sellers, and buyers, since prices have ballooned for 18 years, interrupted by only one brief dip during the Financial Crisis, and the rule has been that prices will always go up and that you cannot lose money in real estate. The average price in April for the Greater Toronto Area (GTA) plunged 12.3% year-over-year to C$804,584. A drop of C$113,600. By market:
* In Toronto itself: -8.2% (-C$76,860) to C$865,817.
* In the rest of the GTA without Toronto: -15.2% (-C$137,070) to C$767,359.
Detached houses, which are generally more expensive than other home types, got hit the hardest:
- Detached houses -14.4% to C$1,030,103 (down by C$175,000)
- Semi-detached houses -6.4% to C$792,385
- Townhouses -7.8% to C$645,172
- Condos +3.2% to C$559,343
While Condo prices still gained 3.2%, that gain was down from a 6.1% gain in March, and down from double-digit gains earlier. The average price was impacted by two factors, the TREB said: by “changes in market conditions,” and by the sales collapse at the higher end of the market, which changed the mix of sales, and therefore affected the average price. The TREB’s proprietary Home Price Index, which is based on a “composite benchmark home,” and which “strips out” the impact of these changes in mix, “was down by only 5.2%” year-over-year. The inventory of homes for sale surged 41% from a year ago, to 18,206 active listings. At the rate of sales in April, this worked out to a supply of 2.3 months, up from 2.1 months in March. The average days-on-the-market before the home is sold or before the listing is pulled without sale more than doubled to 20 days, up from 9 days in April last year. Months’ supply and days-on-the-market show that the market is cooling from its red-hot phase, that sellers aren’t panicking just yet, and that potential buyers are somewhat more cautious and reluctant, as the “fear of missing out” is being wrung out of the market. The TREB tried to put a positive spin on the declining home prices: “April’s price level represents a substantial gain over the past decade.”
That’s true, as noted above, prices surged without much interruption for the past 18 years. But all good price bubbles come to an end. And there is always hope to somehow keep the bubble inflated: “A strong and diverse labor market and continued population growth based on immigration should continue to underpin long-term home price appreciation.” So too bad for the millennials who’ve been shafted by this housing bubble, and too bad for systemic risk to the financial system, but the housing bubble must go on. The TREB outlines its lobbying efforts. Even as the Bank of Canada and policy makers and regulators at federal and provincial levels have been trying for over a year to cool the runaway housing bubble with interest rate hikes, policy changes, and tax changes, the TREB, lamenting the “current policy-based volatility,” wants them to back off, and exhorts its members to fan out and apply pressure on politicians and policy makers:
* With a provincial election campaign about to begin, GTA REALTORS® hope that all of the provincial parties will make housing issues a priority. In recent months and years, there has been significant intervention in housing markets by all levels of government, through regulatory changes and taxation. We believe the next step should be tax relief, especially from Land Transfer Taxes…. 
Because no one is allowed to try to tamp down on a housing bubble that is threatening the financial system and has elevated Canadian households to top levels of the world biggest debt slaves....

That’s Fast: Mortgage Rates Jump To 2011 Levels

What will Housing Bubble 2 do when mortgage rates hit 6%? Wow, this was fast. The average interes rate for 30-year fixed-rate mortgages with conforming loan balances; $453,100 or less with 20% down) jumped to 4.80% for the week ending April 27, from 4.73% in the prior week, and from 4.66% two weeks ago, the Mortgage Bankers Association reported...

At 4.80%, the average 30-year fixed rate is now equal to the highest rate since September 2013. And the last time, the rate was higher than 4.80% was in 2011...

That date with 2011 has already happened...
# The average interest rate for 30-year fixed-rate mortgages backed by the FHA jumped 10 basis points in the week, to 4.81%, the highest since July 2011.
# The average interest rate for 15-year fixed-rate mortgages jumped 8 basis points in the week, to 4.21%, the highest since February 2011.
*) "Points", the upfront fees, such as origination fees, that are usually rolled into the mortgage balance, rose 4 basis points during the week to 0.53% of the mortgage balance (mortgages with 20% down), after having already risen 3 basis points to 0.49% in the prior week. The Mortgage Bankers Association (MBA) obtains this data from weekly surveys of over 75% of all US retail residential mortgage applications handled by mortgage bankers, commercial banks, and thrifts. The MBA’s measure of the average mortgage rate is headed for 5% in the near future and to 5.5% later in the year. The Fed is on its rate-hike path, which pushes up shorter-term yields, and longer-term yields are following with delays and in wild spasms. The Fed is also unwinding QE, which puts pressure on long-term yields. It has eased into the QE Unwind, starting last October, just like it gradually tapered QE out of existence. But the QE Unwind is picking up speed. The US Treasury yield, currently near 3%, is setting up for the next spasm higher. This will push the 30-year fixed rate to 5%. At 5.2%, the average mortgage rate will hit the highest level since 2010; 5.5% would take it to the highest level since 2008.
The big difference between 2010 and now, and between 2008 and now, is that home prices have skyrocketed since then in many markets, by over 50% in some markets, such as Denver, Dallas, or the five-county San Francisco Bay Area, for example, according to the Case-Shiller Home Price Index. In other markets, increases have been in the 25% to 40% range. This worked because mortgage rates zigzagged lower over those years, thus keeping mortgage payments on these higher priced homes within reach for enough people. But that ride is ending. For now, demand for mortgages continues, as homebuyers are trying to make deals before rates rise even further. The MBA’s Purchase Index, which tracks the number of mortgages taken out to purchase a home (as opposed to refis) increased 5% compared to the same week a year ago, after last week’s 11% increase. A 5% mortgage rate will trim off some homebuyers at the margin but is unlikely to derail demand at this point. The real pain for homebuyers, and the housing market, will likely start closer to 6%. While 6% is still a historically low 30-year fixed-rate, home prices are historically high, and the equation has changed. It’s unlikely to get to 6% in 2018, but next year is a candidate. In terms of rents, the housing market is veering off in all kinds of directions. In Chicago, asking rents have collapsed by 30%. In New York City, they’re swooning. But they’re soaring in Southern California. And the US average hides all the drama on the ground....

Rift Grows Between Saudi Arabia And UAE In Yemen

The internationally recognized government of Yemen is led by President Abdu Rabu Mansour Hadi, who has been hiding out in Saudi Arabia because of the war with the Houthis. While the Houthis are backed by Iran, Hadi's government is backed by an coalition led by Saudi Arabia. As the war has continued for years with no end in sight, we reported in January, that there has been a split between coalition members Saudi Arabia and UAE. This has resulted in military clashes between Saudi and UAE forces in the southern port city of Aden. The UAE has been backing the Southern Transitional Council (STC), a separatist faction calling for the division of Yemen into Northern Yemen and Southern Yemen, and claiming Aden as the capital city of Southern Yemen. The split between Saudi Arabia and UAE is potentially dangerous because UAE is attempting to extend its influence well beyond its borders into much of what the STC would like to be Southern Yemen. UAE's move to exert control over Socotra is seen as a further move in that direction.... Anadolu (Turkey) and Middle East Eye (12-May-2017) and Press TV (Iran)

Brexit Negotiations In Crisis As Deadlines Approach With No Agreements

Britain's foreign secretary Boris Johnson on Monday declared that the proposal by prime minister Theresa May to resolve Brexit issues was "crazy." This has caused quite a sensation, because a high level cabinet minister is not supposed to openly criticize a major policy of the prime minister unless he wants to be fired. The policy in question, called a "Customs Partnership," is indeed delusional, but in today's highly polarized world, where a man can lose his career for saying the wrong thing about whether he supports Trump, then you have to be willing to support even delusional policies if you want to keep your job. In this case, however, May's spokesman said that the prime minister had "full confidence" in Johnson, and told officials "to do more work" on the proposal. I've written about Brexit issues many times since the Brexit referendum passed almost two years ago, on June 23 2016, and the intractable, insoluble problem is always the same: Keeping a "frictionless border" between Northern Ireland and (Southern) Republic of Ireland, despite the fact that Northern Ireland will be part of the UK, and Ireland will be part of the EU. BBC and Reuters
Everyone says that there must be a frictionless border, so that people, trucks and goods can continue to flow freely back and forth between the two. The current open border was the result of the Good Friday agreement of 1999 that ended years of "The Troubles," bloody fighting between the indigenous ethnic Irish Gaelics (the Catholic Republicans) and the descendants of the English and Scottish invaders (the Protestant Unionists). Today there are a lot of people who genuinely fear that fighting will resume in full force. This is not a trivial concern, in that there's still a great deal of hatred between some Gaelics and some English, and there are still walls separating neighborhoods in the province of Ulster, which spans both Northern Ireland and the Republic of Ireland, and where there are still occasional flashes of violence. Officially, Britain is scheduled to leave the EU in March 2019. There are huge unsolved problems having to do with trade, migration, citizens' rights, and Ireland for which solutions are nowhere in sight. Ireland and the EU are demanding a proposal on the Ireland "frictionless border" by June, and it will not be met. Other deadlines are approaching as well. Concerns are widespread that the Brexit process is collapsing into a huge, unmanageable mess. And why wasn't Boris Johnson fired? For that matter, why hasn't Theresa May lost her job as well. The answer, according to many analysts I hear, is that nobody else wants these jobs, under the current circumstances.... Express (London) and RTE (Ireland)

Boris Johnson and Theresa May (PA)

# Theresa May's two delusional proposals, Customs Partnership and Maximum Facilitation. Any Brexit proposal by Britain also has to be approved by the EU27, the 27 nations of the EU excluding the UK. Theresa May has two proposals both of which are delusional for many reasons, not the least of which is that there is no chance that the EU27 will approve either of them. But the British politicians and the British press keep talking about them without even considering whether the EU will approve them. One proposal is called the "Customs Partnership." Businesses shipping goods from foreign countries into Britain will be charged tariffs according to EU rules. The goods will then be tracked, and if they stay in Britain, then the businesses can claim a rebate of any overpayment. If not, then Britain forwards the tariff to the EU. This leaves the Irish border frictionless, since goods can flow across the border freely, since the tariff has already been paid. This is the plan that Boris Johnson is calling "crazy," because Britain would still be bound by EU rules that the whole Brexit plan was supposed to free them of:
* "It’s totally untried and would make it very, very difficult to do free trade deals. If you have the new customs partnership, you have a crazy system whereby you end up collecting the tariffs on behalf of the EU at the UK frontier. If the EU decides to impose punitive tariffs on something the UK wants to bring in cheaply there’s nothing you can do. That’s not taking back control of your trade policy, it’s not taking back control of your laws, it’s not taking back control of your borders and it’s actually not taking back control of your money either, because tariffs would get paid centrally back to Brussels." Daily Mail (London)
He said that the plan would create "a whole new web of bureaucracy," and would not meet the key test of Britain "taking back control" from Brussels. In other words, the Customs Partnership would defeat the whole purpose of Brexit. Theresa May's second proposal is called "Maximum Facilitation." Shipping firms would operate as "trusted traders" so they can move goods freely as EU tariff is only paid when goods arrive in destination country. Goods would be electronically tracked and pre-cleared with tax authorities. There would be a frictionless border in Ireland, because goods would move freely back and forth, and would be tracked by means of some yet to be developed technology. The EU has dismissed this proposal as "magical thinking," because it assumes that "trusted traders" can be trusted, and because the required technology is not possible in the foreseeable future.... The Week (UK) and Guardian (London)

European Politicians Have A Lot To Learn From North And South Korean Leaders

It is true that the barycenter of the world is moving to the east, not only economically but above all politically. Our politicians would do well to pay attention to how high-level politics is done in the east, since they would learn something. The most recent masterful lesson of international diplomacy comes from the sadly famous demilitarized zone (DMZ), the scar of the cold war that runs along the 38th parallel and which divides the Korean peninsula in two. The dictator Kim Jong-un, considered crazy and bloody until four months ago, took part in a historic summit in South Korea, still 'enemy' territory, and where neither his father nor his grandfather ever set foot. He did it with all the honors reserved for a great head of state. The South Korean president Moon Jae-in, who has spent the last twenty years to get this meeting, is the country's spokesman. Meanwhile, Kim has used every political strategy, including the diplomacy of the Olympics, to get closer to the common goal: the peace agreement between the two nations.
The peace between these two countries, which for three thousand years have been a unique geographical and linguistic expression, a single culture, a sovereign nation with the same people, will open the doors to economic and commercial cooperation. The model will be that of the old European Common Market: exploiting the economic interdependencies and the resources of both to modernize the North and produce well-being throughout the peninsula. The union has the potential to give life to an economy much stronger than Japan's. North and South, therefore, have common interests that they can pursue jointly. The obstacles are many. First of all, even if both have signed a peace armistice, the two countries are still at war. The People's Republic of North Korea is a buffer state for China, while South Korea is a very important US military base in the Pacific. In short, to get to shake hands on the 38th parallel and plant the tree of peace the two Korean leaders have had to convince Washington and Beijing to let them do it.
# Brexit and other European fiascos in diplomacy. If we compare this lesson of international diplomacy with European post-electoral fiascos, the last nation to prove incapable of forming a government on the basis of electoral results is Italy, and animosities within the European Union, for example, Brexit, we realize why the axis of the world is moving to the east. To complete the sad picture of the decadence of politics in Europe, there are relations of subjugation with Washington. What about Macron crossing the ocean to present to Trump the European iron will to go ahead with the agreement with Iran and then change his mind twenty four hours after landing? Remarkable is the difference with President Moon (whose wife does not dress Chanel like the first French and American ladies), Moon is a politician of substance, who has clear ideas about the future of his nation, is not a populist. Of course there is always Angela Merkel who clearly told Trump, who continued to bomb the world with twitter triumphalists on the Korean summit presented as a creation, not to trust Kim Jong-un. Yes, Merkel is a clever politician, but she has to play in a team of wives and has no interlocutor to work with seriously. Here are some forecasts: Trump and Kim will meet, possibly in June. The peace agreement between the two leaders will be endorsed by the White House, at which point they will begin to work at the ceremony for the signing of the treaty, which will take place before November 2018, namely the mid-term US elections.
Trump will be credited with all the glory but will Kim and Moon let him do that? The North Korean dictator seems less inclined than the South Korean president to stroke Trump's ego. But he should be very careful, as the US president may walk away from the summit and Kim and Moon would end up with no deal. But if things go according to plans, Kim will reiterate the commitment to freeze nuclear warheads and details of denuclearization will be postponed to another summit, which will take place in 2019. Meanwhile, North and South Korea will quietly start to cooperate economically, despite international sanctions. Southern investors will therefore have priority access to the process of modernizing the north. In Europe the bickering on Brexit will not disappear. The tensions between the right-wing populism of Eastern Europe and Brussels will increase, risking the implosion of the whole structure. Italy will most likely revive, but the results will not be better. In short, the scenarios are not at all positive. The last detail: Kim's haircut will continue to be more and more fashionable, while Merkel's will be considered passé.

Israel, Iran And Syria Exchange Fire In First Direct Military Confrontation

As this is being written on Wednesday evening ET, there is news of missile and artillery exchanges in Syria and in and around the Golan Heights, as well as airstrikes by Israel's air force. Israel has struck Iranian missile depots and other Iranian military targets in Syria several times in the last few weeks, promising to prevent Iran and Hezbollah from building up a force capable of attacking Syria. For several weeks, Israel has been stepping up its military forces on the border with Lebanon, in anticipation of a retaliatory strike on Israel by Iran. That Iranian attack has apparently happened, and there have been several hours of artillery exchanges over the Golan Heights that are continuing at this writing. The Israeli attacks on Syria have been more intense than they were in the past. There are reports that the city of Damascus is without power. At least 20 heavy rockets have been fired from Syria at Israeli forces, but there are no reports yet of Israeli damage or casualties.... Reuters and Washington Post and AFP and BBC

zaterdag 5 mei 2018

Don Quijones; UK Bank’s IT Disaster Enters 2nd Week, Contagion Fears Rise

“This turned what was a super-hard systems job [into] a clusterfuck in the making.” Customers of UK bank TSB have probably lost track of the number of times the bank has declared its new online system, Proteo4UK, to be operational, only to find that they cannot log on. Even today, seven days after the system was supposed to be up and running and ten days after work to complete the migration began, and six days after we lambasted the banks for this fiasco, many of the customers are still unable to access their online accounts or make payments. At the end of last week, TSB’s CEO Paul Preston announced he was drafting in a crack unit of IT technicians from IBM to “put things right” once and for all, no doubt at substantial extra cost to the bank. It was a bif snub for TSB’s parent company, Banco Sabadell, which oversaw the platform switch and claims (or at least claimed) to be a wizard in the art of migrating data. Indeed, TSB’s data migration was intended as a showcase to the world of Sabadell’s savoir faire in the IT department. Initially, the IBM team had until the end of Saturday to fix the IT problems Sabadell helped to create, yet on Monday morning (April 30), the online system appeared to be no less broken than it was on Thursday when Preston succinctly told ITV News that the bank was “on its knees.”
On Sunday night a spokesperson for the bank warned customers that Internet banking is still operating at around 50% capacity. “For every 10 customers who try to access our internet banking, five will be able to access this service.” And five won’t. As each day goes by, the costs, both material and reputational, continue to mount. The fact that the bank chose to execute the data migration at the end of the month, when companies usually pay their workers and suppliers, has merely added to the chaos. Moody’s has warned that the bank’s IT migration difficulties raise the risk of customer defections while increasing costs as management tries to patch up customer relationships. As part of its damage-limitation charm offensive the lender has pledged to waive overdraft fees and interest charges have been waived for the month of April. It has also raised the interest on its saving account from 3% to 5%. Estimates suggest this could cost the bank an extra £30 million a year. TSB has also announced that it will consider claims from non-TSB customers who suffered losses as a result of banking services being lost. This is all happening at a bank that is not exactly in the finest fettle. On Thursday it reported first quarter results showing a 39% fall in pre-tax profits to £19.3 million. Much of that was blamed on the extra rental fees TSB’s new parent company, Spain’s Banco Sabadell, had to pay TSB’s former parent company, Lloyds, to use its old IT system, which skyrocketed in 2017 from £92 million to £214 million.
As part of its acquisition of TSB in 2015, Sabadell received a £450 million lump-sum ‘IT dowry’ from Lloyds to help pay for the migration of company data. Nonetheless, with each month that went by without a new system in place Sabadell was having to pay out almost £20 million in fees to Lloyds. And that gave very clear incentives to management at both Sabadell and TSB to hurry the IT upgrade process along, even it meant cutting big corners and taking big risks with customer data. “The time period to develop the new system and migrate TSB over to it was just 18 months,” one insider has complained to The Guardian. “I thought this was ridiculous. TSB people were saying that Sabadell had done this many times in Spain. But tiny Spanish local banks are not sprawling legacy systems” like Lloyds Banking Group’s. To compound matters, the Sabadell development team did not have full access to or control of the system they were trying to migrate customer data and systems from, since Lloyds Banking Group was still the supplier. “This turned what was a super-hard systems job into a clusterfuck in the making,” the insider said. If, as the insider alleges, the disastrous roll-out of Proteo4UK at TSB was foreseeable a long time ago, at least to many of the tech workers involved in the project, and yet the management went ahead anyway, adopting a hope-and-pray attitude, TSB, and by extension Sabadell, are likely to pay an even higher price for this epic IT disaster, especially if, as feared, some records are indeed lost or corrupted.
There are also reports that “gremlins” have now hit Lloyd’s IT system, which raises the prospect of contagion spreading from TSB to its much larger former parent company (of which I am a customer). The UK financial ombudsman and the Financial Conduct Authority have launched investigations into the scandal and executives at TSB and Sabadell are scheduled to be quizzed by the Treasury Committee on Wednesday. The longer the outage lasts, the higher the fines will get, the more damage will be done to TSB’s already tattered reputation, and the more likely it is that the bank’s customers will switch to one of its rivals. In the absolute worst case scenario, TSB’s senior management may even lose their bonuses....

Rate Hike Ammo

Fed’s favorite inflation gauge spikes, consumer spending holds up solidly. Consumer spending on goods and services, which includes anything from toys to rent and which accounts for over two-thirds of GDP, rose by 4.4% in March from a year ago, according to the Bureau of Economic Analysis this morning. This growth rate is in the upper third of the range of the past few years. Solid but not spectacular comes to mind...

In terms of dollars, the seasonally adjusted annual rate in March (which shows what the total amount of consumer spending would be for the entire year at the rate March was going) reached a record of $13.82 trillion, and remains on the same trajectory of the past few years. The seasonally adjusted annual rate in March is 36% above the mini-peak in July 2008...

But these numbers of consumer-spending growth do not include the impact of inflation, and inflation is stirring. The BEA also released the PCE price index this morning, the Fed’s favorite inflation measure because it usually tracks lower than the Consumer Price Index and thus further understates the deterioration of the purchasing power of the dollar as consumers experience it. The PCE price index rose by 2.0% from a year ago, which is right smack-dab on the Fed’s target. And it’s up from 1.7% in February. Note that the Fed’s target of 2% inflation isn’t a minimum, but a target...

The Fed is even more focused on the PCE price index without food and energy, not because food and energy are not important to consumers, but because their prices can gyrate wildly. And this core PCE price index jumped by 1.9% from a year ago. Up from an increase of 1.6% in February. And the spike-like trend looks worrisome. In the chart below, also note the low point in core inflation last summer, when Fed Chair Janet Yellen said that this was “transitory,” and she pointed at some specific factors, even as the financial media and Wall Street pooh-poohed her and clamored for the Fed to back off its rate hike path...

The PCE and core PCE inflation measures came in as widely expected. That inflation is now rising is no longer surprising anyone. It has been documented in numerous data points, including earlier this month when the Consumer Price Index for March surged 2.4% year-over-year, and the core CPI (without food and energy) rose by 2.1%. Price pressures are building up in the pipeline to the point where companies are beginning to fret about it. Just today, the ISM Chicago Business Barometer reported ominously that the indicator for input prices paid by companies surged 22.8% compared to a year ago: Input material prices continued to rise in April, soaring to a near-seven-year-high. Up 22.8% on the year, the Prices Paid indicator surpassed the 70-mark in April for only the third time since 2012. A wide range of inputs were reported as more expensive on the month and some firms felt uncertainty was driving prices higher.
These kinds of anecdotal and not so anecdotal tidbits on rising price pressures, including the surge in transportation costs, are now forming a steady drumbeat. This isn’t just one item, such as energy, or just a seasonal thing, or whatever: It’s broad based and ongoing and is working its way through the economy. And the Fed sees this too. Today’s data is the kind of data the Fed will drag out to justify further rate hikes, spaced more closely together, though it will continue to use the word “gradual.” But for now, the Fed remains on its track of only hiking rates at meetings that are followed by a press conference. There are four of those meetings a year. The FOMC’s meeting this week will not be followed by a press conference, and therefore I don’t expect a rate hike, a rate hike during that meeting or any non-press-conference meeting, would be a “monetary shock.” And this Fed is not likely to dish them out, especially not with four of the seven slots on the Fed’s Board of Governors still being vacant. But I do expect a word or two about inflation approaching its target....

Fight For Deposits Erupts Among Banks, With Winners And Losers

But it’s a godsend for savers. The three biggest banks combined, JPMorgan Chase, Bank of America, and Wells Fargo, increased their deposits by $118 billion in 2017 from the prior year, according to a Wall Street Journal analysis today of FDIC data. At the same time, 10 of the 22 major regional banks lost deposits. But some regional banks went all-out, and their deposits surged. This brought the tally for the 22 regional banks combined to an increase in deposits of about $55 billion...

Competition for cash has returned with a vengeance, after the Fed stifled it in 2008 to keep the cost of funding for banks to near zero so that they could maximize their profits in order to rebuild their capital after teetering on the verge of collapse. Savers paid for it. On Friday, I described the all-out scramble to attract deposits from my boots-on-the-ground view, with Wells Fargo out-competing other banks by offering 2.25% for 13-month FDIC-insured CDs, and more for CDs with longer maturities, but only through brokers (“brokered CDs”), and not to its existing customers, with whom the bank is exceptionally stingy. This newly aggressive approach to gaining deposits has some impact on other banks. M&T Bank Corp, third from the bottom in the chart above, experienced a 6% drain of its deposits in Q1, after having experienced a 2.9% drop in 2017. “It’s a big concern for us and the industry,” CFO Darren King told the Wall Street Journal. Wells Fargo, according to my own analysis of its Q1 earnings report, showed surging deposits in its “community banking” category (consumer and small business), but declining deposits in its “wholesale banking” category, and plunging deposits in its Wealth and Investment Management (WIM) category. “Average deposits” in Q1 compared to a year earlier:
- Community banking: +4.1% (+$30 billion), to $747.5 billion.
- Wholesale banking: -4.1% (-$19.3 billion), to $446 billion.
- WIM: -10% (-$19.6 billion) to $178 billion
Of these deposits, $359 billion were “non-interest bearing” altogether. And many of the $938 billion in “interest-bearing” deposits carried only minuscule interest, so minuscule that it’s essentially zero. But “brokered” CDs with which Wells Fargo is aggressively trying to recruit new money from non-customers helped push its average “deposit cost” up by 100% year-over-year, albeit from a minuscule 0.17% in Q1 2017 to a still minuscule 0.34% in Q1 2018. Deposits are a crucial and very cheap source of funding for banks, which make money by lending to their customers at higher rates than their cost of funding. So the name of the game is to keep “deposit costs” down while attracting enough deposits to lend out. And Wells Fargo’s still near-zero average deposit cost, even after the interest rate increases in the market, shows just how well this equation is working. While deposits in checking and savings accounts can be volatile, as people might draw their money out all at once (run on the bank), CDs provide much needed funding stability, so banks are willing to pay a little more. But if deposits dwindle at a bank, it might have to pay a lot more for funding from other sources, or it might have to curtail lending, which would crimp its profits.
The Wall Street Journal today observed in reference to the efforts by the biggest banks, such as JPMorgan Chase, Bank of America, and Wells Fargo, to attract deposits: Welcome to the new world of Main Street banking, where deposits are starting to head out the door after years of growth. This month, major regional banks reported the increasing competition for deposits in their first-quarter earnings. Some lenders, including Dallas’s Comerica Inc. and Regions Financial Corp. of Birmingham, Ala, lost deposits compared with a year ago. Others are still adding deposits, but at a much slower pace than recent years. But it’s not just the regional banks that have watched their deposits drain, according to the Journal: The smallest U.S. banks, which tend be community lenders with a handful of branches, have also seen deposits decline, according to an analysis by investment bank FIG Partners. And these declines in deposits at some banks, while other banks are aggressively pursuing and gaining deposits, “could mark the start of an important industry shift where deposits become less plentiful and Main Street banks do more to compete for them.” That competition, however much banks may hate it, is a godsend for savers and small businesses that have placed a total of $9.1 trillion in “savings deposits” at all “depository institutions”, which includes credit unions , in the US.
If rates rise across the board by one percentage point, it would amount to about $91 billion a year in extra income and thus extra spending money for these people and businesses. For most banks, running short on deposits to lend out isn’t a huge issue just yet: At the end of 2017, about 72% of the deposits were lent out. So on average there’s some room left, though for some banks, it might be getting tight. Banks are focused on another issue: Rising interest rates. By this time next year, short-term rates might be a full percentage point higher than today. And Wells Fargo might have to offer 3.25% on a 13-month CD to attract more deposits, or else deposits might start draining from its “community banking” category. So if it can get customers to buy its currently offered 25-months CD at 2.75%, it locks in this source of funding for two years at a lower overall rate. And the fact that banks are now fighting over deposits, and that they’re outbidding each other, shows that they take the likelihood of higher interest rates, and higher funding costs in future years very seriously, and are preparing for it....

Israel Reveals Intelligence Coup On Iran's Nuclear Weapons Program

Israel's prime minister Benjamin Netanyahu on Monday revealed the results of a massive intelligence coup by Israel's intelligence agency Mossad. In February 2016, spies from Mossad discovered the top-secret location of a warehouse in Iran's capital city Tehran where thousands of documents related to Iran's past nuclear weapons developments were stored. Mossad operatives broke into the building one night in January of this year, removed half a ton of archived documents, and smuggled them back to Israel the same night. The material included 55,000 pages and another 55,000 files on 183 CDs. The archived material was of Iran's nuclear program that began in the 1980s, and ended in 2003, when the Iraq war revealed that Saddam Hussein was not developing WMDs. The trove of intelligence data is being used in the debate over what the Trump administration should do on May 12, when it must decide whether to abandon the nuclear deal that the West signed with Iran, known as the Joint Comprehensive Plan of Action (JCPOA). Those who favor continuing to support the JCPOA say that there's nothing in the trove of data that indicates that Iran has violated any of its obligations under the treaty, and that appears to be true. Those who oppose continuing to support the JCPOA say that Iran lied about the extent of its nuclear weapons program that ended in 2003. In particular, they say that Iran claimed that the nuclear development was only for peaceful purposes, while the intelligence data provides extensive technical information on how Iran was developing nuclear weapons. Those who favor continuing to support the JCPOA say nothing revealed in the intelligence haul was new, and that in fact it was known and published in a 2011 document from the International Atomic Energy Agency (IAEA). Times of Israel
# Israel's prime minister Benjamin Netanyahu stands next to a facsimile of the intelligence archive that Mossad had taken from a Tehran warehouse in January...

Israel's prime minister Benjamin Netanyahu stands next to a facsimile of the intelligence archive that Mossad had taken from a Tehran warehouse in January (Times of Israel)

Those who oppose continuing to support the JCPOA say that the 2011 IAEA document contains only a small fraction of the information that was revealed in the intelligence trove, and that furthermore Iran had not destroyed all the work in its nuclear weapons program, as it had promised. So this is all going to be a major heated and sometimes acrimonious debate between now and May 12, when President Trump will announce the administration's decision on whether to continue to support the JCPOA. It's also worth noting that in October 2015, Hashemi Rafsanjani, the head of Iran's Expediency Council, said in a televised interview that Iran had begun developing nuclear weapons in the 1980s during the Iran/Iraq war, and continued development for many years. International Atomic Energy Commission-IAEA (PDF,2011) and Times of Israel
# Importance of 2003 Iraq War revealed by the Iranian intelligence coup. Even by the extremely low to nonexistent standards of today's journalists and today's politicians, the statements made about the Iraq war on a daily basis are abysmally ignorant, saying that it was a catastrophe and the worst war in American history and other idiotic things. Actually, it's the people who opposed the Iraq war in 2003 who owe the world an apology, since they were unwilling to stop Saddam Hussein from using WMDs to kill thousands of people. The new intelligence trove from Iran provides further evidence that NOT pursuing the Iraq war could have been a catastrophe. We now know that the Iran had a very aggressive nuclear weapons development program that began in the 1980s during the Iran/Iraq war, at a time when Saddam Hussein was using mustard gas and other WMDs on Kurds and Iranians. This program continued until October 2003, when Iran's Supreme Leader Seyed Ali Khamenei issued a fatwa ending all nuclear weapons development. The fatwa was issued because the American invasion of Iraq and the defeat of Saddam Hussein had ended any possibility of Iraq developing nuclear weapons.
Iran had already been victimized by Saddam's WMDs, and in 2003 Saddam was refusing IAEA inspections, so without the Iraq war there was little doubt that Saddam would continue development of WMDs, and possibly nuclear weapons. If it hadn't been for the Iraq war, then Iran would have continued nuclear weapons development, and would be a major nuclear weapons power in the Mideast today. Furthermore, since Iran has been working with North Korea, North Korea would also be a major nuclear weapons power today. Saudi Arabia would not have simply tolerated a nuclear Iran, so it would have obtained its own nuclear weapons from Pakistan. Saddam Hussein would undoubtedly at least continued development of WMDs. So the Mideast and the world would be very different and infinitely more dangerous places today if it hadn't been for the Iraq war.... Bloomberg