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reality is only those delusions that we have in common...

Saturday, October 1, 2016

week ending Oct 1

(preview)

Fed Watch: December Looking Good. But...  FOMC doves squeezed out another victory at last week’s meeting. But can they do it again in December? As was widely expected, the Fed held rates steady at the September FOMC meeting. That said, the meeting was clearly divisive, with three dissents, all from regional bank presidents. And the accompanying statement leaned in a hawkish direction – the committee noted that near-term risks were “balanced” and that the case for a rate hike had “strengthened.” Moreover, only three of the participants did not expect a rate hike before year end. And if that was not enough, during her press conference, Federal Reserve Chair Janet Yellen suggested the bar to a December rate hike was low: …most participants do expect that one increase in the federal funds rate will be appropriate this year and I would expect to see that if we continue on the current course of labor market improvement and there are no major new risks that develop and we simply stay on the current course. Sounds like December is a go. But markets are not entirely convinced, with participants pricing in a roughly 60% chance of a rate hike. Perhaps this pricing reflects post-election economic risk. Or perhaps it reflects the possibility that the doves can stare down the hawks one more time before the composition of the Board changes next year. Can they? That question requires understanding what happened to squash the parade of Fed presidents looking for a rate hike in September. What happened were Federal Reserve Governors Lael Brainard and Daniel Tarrullo. Brainard in particular laid down the intellectual framework ahead of the FOMC meeting, arguing that the potential for further labor market improvement and asymmetric policy risks justified a steady hand at this meeting. Yellen and the rest of the Board bought into this story. The hawks could squawk all they wanted, but the votes just weren’t going to go in their favor. This episode provided two important lessons. The first is that if you haven’t been taking Brainard seriously this past year – ever since her bombshell speech last October – you have been doing it wrong. The second is that a small group of governors can have a much larger influence on policy than a large group of presidents. There are lots of presidents, and they talk a lot, so their message is louder. But the power rests in the Board.

 Yellen Says Fed Buying Stocks Is "A Good Thing To Think About" --Having hinted overnight that The Fed could buy stocks "maybe in the future," Janet Yellen blurted out confirmation that buying assets other than long-term U.S. debt is on the table. Despite the total and utter failure of SNB and BOJ direct equity buying to create increased consumption, Yellen explained "it could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions." Speaking via videoconference in response to questions raised at forum of Kansas City Fed minority bankers, Fed Chair Janet Yellen says there could be benefits to Fed buying equities or corporate bonds, yet would also likely be costs that have to be considered. The idea of expanding into areas like equities might be “good thing to think about,” yet is not “something we need now,” Yellen said, noting that (for now) The Fed is more restricted in which assets it can purchase than other central banks. "If we found, I think as other countries did, that they could reach the limits in terms of purchasing safe assets like longer-term government bonds, it could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions."

 The Stakes of the Helicopter Money Debate: A Primer: The swelling wave of argument and discussion around "helicopter money" has two origins: First, as Harvard's Robert Barro says: there has been no recovery since 2010. The unemployment rate here in the U.S. has come down, yes. But the unemployment rate has come down primarily because people who were unemployed have given up and dropped out of the labor force. Shrinkage in the share of people unemployed has been a distinctly secondary factor. Moreover, the small increase in the share of people with jobs has been neutralized, as far as its effects on how prosperous we are, by much slower productivity growth since 2010 than America had previously seen, had good reason to anticipate, and deserves. The only bright spot is a relative one: things in other rich countries are even worse. The wave's second origin comes in an institutional change that took place in rich countries around the year 1980, back in the era in which Paul Volcker took control of the Federal Reserve. Back then we changed our economic policy institutions. The stagflation of the 1970s convinced many that the political branches of government were incompetent at managing the business cycle. The business cycle disturbed inflation, unemployment, and short run growth. The political branches had tried to use the tools they controlled to manage the business cycle. The stagflation of the 1970s convinced many that they had failed and could not but fail. And the stagflation of the 1970s also convinced the political branches that they did not want responsibility for managing the business cycle—that to assume responsibility was to accept blame, because it would go badly.

PCE Price Index, Headline and Core, Rose in August -The BEA's Personal Income and Outlays report for August was published this morning by the Bureau of Economic Analysis. The latest Headline PCE price index rose 0.14% month-over-month (MoM) and is up 0.96% year-over-year (YoY). The latest Core PCE index (less Food and Energy) came in at 0.18% MoM and 1.69% YoY. Core PCE remains below the Fed's 2% target rate.  The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. The first string of red data points highlights the 12 consecutive months when Core PCE hovered in a narrow range around its interim low. The second string highlights the lower range from late 2014 through 2015. Core PCE has been higher in 2016 and the latest month is the highest since September 2014.  The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. Also included is an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. The two percent benchmark is the Fed's conventional target for core inflation. However, the December 2012 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place. More recent FOMC statements now refer only to the two percent target. The index data is shown to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted. For a long-term perspective, here are the same two metrics spanning five decades.

Q2 GDP Revised Up to 1.4% Annual Rate -- From the BEA: Gross Domestic Product: Second Quarter 2016 (Third Estimate) Real gross domestic product increased at an annual rate of 1.4 percent in the second quarter of 2016 (table 1), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.8 percent. The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 1.1 percent. With the third estimate for the second quarter, the general picture of economic growth remains the same. The most notable change from the second to third estimate is that nonresidential fixed investment increased in the second quarter; in the previous estimate, nonresidential fixed investment decreased ... Here is a Comparison of Second and Advance Estimates. PCE growth was revised down from 4.4% to 4.3%. (Solid PCE).  Non-Residential investment was revised up from -0.9% to +1.0%. This was close to the consensus forecast.

U.S. economy less sluggish in second quarter; companies investing more | Reuters: U.S. economic growth was less sluggish than previously thought in the second quarter as exports grew more than imports and businesses raised their investments, hopeful signs for the economic outlook. Gross domestic product expanded at a 1.4 percent annual rate, the Commerce Department said on Thursday in its third estimate of GDP. That was up from the 1.1 percent rate it reported last month and higher than analysts' expectations. The revision incorporated data that showed businesses cut investments in buildings and equipment less than the government previously estimated, while they sank more money into research and development. Other data released by the Commerce Department showed America's trade deficit for goods shrank in August, boding well for third-quarter growth. "It now appears that growth is slowly making its way back on to firmer ground," said Michael Feroli, an economist at JPMorgan in New York. Growth in overall business investment was revised to show a 1 percent annual rate of expansion, the first gain since the third quarter of last year, suggesting the worst of an energy-sector-led slump in business investment might be over.The economy has struggled to regain momentum since output started slowing in the last six months of 2015 and the overall growth rate for GDP in the second quarter remained below historically normal rates. That could give grist to Republican Presidential candidate Donald Trump's argument that the economy has sickened under the Obama administration. At the same time, consumer spending, which makes up more than two-thirds of U.S. economic activity, was robust in the second quarter, rising at a 4.3 percent annual rate, while growth in exports outstripped that of imports enough to boost GDP by the most since the third quarter of 2014. But companies continued to run down their inventories aggressively, reducing stocks by $50.2 billion and subtracting from GDP growth, while home building also sank. The U.S. dollar was little changed against a basket of currencies while yields on U.S. government debt were higher.

GDP Report Shows Modest Gains -  (7 graphs) There has been a rash of recent data showing the U.S. economy growing stronger. Rising incomes,  stronger domestic demand, and rising net exports are signaling a more robust economy. The upward revisions to second quarter GDP support that view and the hope and reasonable expectation is that the third quarter will be stronger still setting the table for a Fed rate hike later this year. The third estimate for second quarter GDP growth, released this morning by the BLS (link) estimates that the US economy grew at an annualized rate of 1.4% in the second quarter, up from a previous estimate of 1.1%, and up from the first quarter, in which the rate was 0.8%. These gains were largely accrued from increases in personal consumption expenditures, which increased at an annualized rate of 4.3%, exports, which grew at a rate of 1.8%, and fixed nonresidential investment, which grew at a rate of 1.0%. Offsetting these gains were declines in residential investment, of 7.7%, government spending (national fell 0.4%, while state and local fell 2.5%), and imports, which rose 0.2%. It should be noted that the levels of the categories that grew dwarf the levels of those that declined, leading to the overall increase in headline numbers.As noted, personal consumption expenditures (PCE) played the largest role in GDP growth last quarter. This bucked a trend over the previous four quarters in which percent growth in the component had fallen, while still remaining positive. Growth in the component more than doubled over the Q1 figure, and was nearly at its highest rate of growth since the Great Recession. This is a strong indication that US consumers are confident in the direction of the US economy. For comparison, many European economies have not seen consumption growth of 4.3% in total since the beginning of the Great Recession: Which shows the importance that the US economy has as a global driver of growth. In total, changes in PCE would have caused a 2.88% increase in GDP, all else equal. Residential and non-residential investment swapped growth trends, with non-residential investment ticking positive for the first time in three quarters, and residential investment turning negative for the first time since 2013Q4. Nonresidential investment was driven up by increases in expenditures on industrial equipment, and intellectual property products, with the latter increasing by 9.0% at an annualized rate. Overall, Gross Private Domestic Investment caused a decline in GDP of 1.34%, if all other components were held constant.

Third Estimate 2Q2016 GDP Revised Upward. Corporate Profits Down.: The third estimate of second quarter 2016 Real Gross Domestic Product (GDP) was revised upward to 1.4 %. This improvement was mainly due to upward revision to the inventory adjustment (see table below). Getting real, the economy grew because the population grew - per capita GDP hardly grew. There is little good news in this third release except this slight improvement in GDP from the second to third estimate may be showing slight economic acceleration. Headline GDP is calculated by annualizing one quarter's data against the previous quarters data (and the previous quarter was relatively strong in this instance). A better method would be to look at growth compared to the same quarter one year ago. For 2Q2016, the year-over-year growth is 1.3 % (up from the 1.2% in second estimate) - moderately down from the 1Q2016's 1.6 % year-over-year growth. So one might say that the rate of GDP growth decelerated 0.3% from the previous quarter. This third estimate released today is based on more complete source data than were available for the "second" estimate issued last month. (See caveats below.) Real GDP is inflation adjusted and annualized - the economy was statistically unchanged on a per capita basis. The table below compares the previous quarter estimate of GDP (Table 1.1.2) with the this quarter which shows:

  • consumption for goods and services improved.
  • trade balance improved
  • there was significant inventory change removing 1.16% from GDP
  • there was slower fixed investment growth
  • there was less government spending

The table below highlights the significant differences the previous quarter and current quarter's estimate (green = improvement, red = decline).

Final Q2 GDP Comes At 1.4%: US Set To Grow At Slowest Pace Since Financial Crisis -- While the second quarter is now ancient history and the debate is how much the predicted rebound in Q3 GDP will fade into Q4 which is set to begin in just three days, moments ago the BEA released its final revision for Q2 GDP, according to which real GDP increased 1.4% in the second quarter of 2016, 0.3 % higher than the “second” estimate released in August, and fractionally higher than the 1.3% expected. In the first quarter, real GDP rose 0.8 percent. As we have reported previously, the increase in real GDP was more than accounted for by an increase in consumer spending which amounted to more than 200% of the bottom line annualized GDP print. Spending on nondurable goods increased, notably on food and beverage grocery items. Spending on durable goods increased, notably on recreational goods and vehicles. And spending on services increased,  notably on health care (thanks Obamacare) and on housing and utilities.  The increase in consumer spending was offset by a decline in inventory investment. GDP less inventory investment (real final sales of domestic product) increased 2.6 percent in the second quarter, compared with 1.2 percent in the first quarter. Also partly offsetting contributions to real GDP growth in the second quarter, housing investment declined, as did state and local government spending.  Perhaps most notable was the data on corporate profits, which as expected, were down -0.6% in Q2, after increasing 3.4% in the first quarter. and have contracted for fifth time in past 6 quarters.  Profits of domestic nonfinancial corporations decreased 4.6% after increasing 7.4 percent.  Profits of domestic financial corporations increased 1.3 percent after increasing 1.9 percent. Profits from the rest of the world increased 10.3 percent after decreasing 6.8 percent.Over the last 4 quarters, corporate profits decreased 4.3 percent.  Expect further margin compression on policy changes.  Putting the US economy data in context, over the last 12 months real GDP continues to drop, sliding to 1.28% even with the modest upward revision, and has been below 2% in the last three quarters.

  Soybeans Are Fueling U.S. Economic Growth (But Not for Long)  --U.S. agricultural exports have surged the past two months, helping cut the trade deficit and boosting the outlook for short-term economic growth. One big factor? Soybeans. Bumper harvests at home, crop shortfalls in South America and solid demand—especially from China—have propelled international feed sales.  “Soybean exports will add about 1% to [third-quarter] GDP growth,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients. Mr. Shepherdson is forecasting 4% annualized growth in third-quarter gross domestic product, a broad measure of economic output. Other economists also have taken note of the shifting trade outlook. (When the Commerce Department calculates GDP, exports add to the headline number and imports subtract. So a smaller deficit implies a stronger reading for the overall economy.)J.P. Morgan Chase revised its outlook to 3% annualized growth in the third quarter, up from its earlier estimate of 2%, after reports out Wednesday on trade and inventories. Amherst Pierpont Securities boosted its forecast to 3.7% from 3.5%. Macroeconomic Advisers raised its tracking forecast by three-tenths to 3.1%. Barclays inched up to 2.6% from 2.4%. That’s a big improvement from 1.4% GDP growth in the second quarter and 0.8% in the first. But it does little to alter the longer-term outlook. First, exports are likely to return to trend while depleted crop inventories would be a drag on GDP. Second, the economy has averaged a modest 2.1% growth rate over the course of the expansion, a trajectory that seems unlikely to change despite some noise from quarter to quarter. “The soybean boost is indeed a one-time thing. It has no implications for trend growth and likely will reverse over the next couple quarters,” Mr. Shepherdson said.

Atlanta Fed Q3 GDP Estimate Tumbles To 2.4% From A High Of 3.8% --Just over a month ago, The Atlanta Fed surprised economic watchers when in early August it unveiled that its Q3 GDP tracker was predicting that the US economy would grow at a blistering annualized pace of 3.6% (and as high as 3.80%) a rather dramatic rebound from the "deplorable" 0.8% and 1.4% growth rates in Q1 and Q2, respectively.  Many expressed surprise at the underlying assumptions that would send US economic growth soaring in the second half: after all, it was a near record surge in consumer spending that boosted first half GDP -  and kept it positive - as all other components, most notably Capex, tumbled into a non-consumer recession. Alas, the spending surge that boosted first half growth has now fizzled, as today's disappointing personal spending data confirmed, so it stood to reason that these overoptimistic estimates for GDP growth would ultimately be revised substantially lower. Sure enough, moments ago in the latest revision to the Atlanta Fed forecast, the model has just slashed its formerly exuberant GDP growth estimate again, down to a paltry by comparison 2.4%,  below last Friday's 2.9%, and down to the lowest in this particular series' lifetime. This is what the Atlanta Fed said:  The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate)in the third quarter of 2016 is 2.4 percent on September 30, down from 2.8 percent on September 28. The forecast of third-quarter real consumer spending growth declined from 3.0 percent to 2.7 percent after this morning's personal income and outlays report from the U.S. Bureau of Economic Analysis (BEA). Following yesterday's GDP revision from the BEA and the Advance Economic Indicators release from the U.S. Census Bureau, the forecast of the contribution of inventory investment to third-quarter growth decreased from 0.60 percentage points to 0.26 percentage points and the forecast of the contribution from net exports increased from -0.13 percentage points to 0.13 percentage points.

ECRI Weekly Leading Index: Little Changed from the Previous Week - Today's release of the publicly available data from ECRI (Economic Cycle Research Institute) puts its Weekly Leading Index (WLI) at 139.0, up 0.1 from the previous week. Year-over-year the four-week moving average of the indicator is now at 6.49%, up from 6.31% the previous week and at its highest since August 2013. The WLI Growth indicator is now at 8.8, unchanged to one decimal from the previous week.  ECRI's latest website feature is an article on the Fed's unsurprising refusual to hike the FFR. The ongoing slowdown in the US economy makes a future rate cut more likely than a hike. Read the full article here.  Below is a chart of ECRI's smoothed year-over-year percent change since 2000 of their weekly leading index. The latest level is above where it was at the start of the last recession.

Donald Trump Would Boost Debt More Than Hillary Clinton, Report Says -- A new analysis estimates Hillary Clinton’s tax and spending proposals would have a relatively modest effect on the national debt, while Donald Trump’s fiscal plans would sharply boost deficits and the debt over the next decade. The report from the Committee for a Responsible Federal Budget, a nonpartisan group that advocates debt reduction, examines the fiscal proposals of both candidates as of Sept. 21. It finds Mrs. Clinton’s proposed tax increases, primarily on businesses and the wealthiest American households, would cover most of the cost of $1.65 trillion in new proposed spending over the next decade, including $500 billion on college education and $300 billion each on infrastructure and paid family leave. The plan would boost spending by $200 billion over the next decade relative to current policy, leaving the national debt at around 86% of gross domestic product in a decade. That is up from around 75% today and in line with the level that the Congressional Budget Office estimates the debt will hit if no changes are made to spending and revenue over the coming decade. The report finds that Mr. Trump, on the other hand, would cut spending by around $1.2 trillion over the next decade while reducing revenues by $5.8 trillion through his plans to cut taxes and repeal other taxes imposed by the Affordable Care Act. The spending estimate takes into account large cuts from repealing the health-care law and from slashing nondefense discretionary spending. Partially offsetting those cuts are big increases in spending on defense, veterans’ programs and child care. The estimate of Mr. Trump’s tax cuts is based on part from an analysis conducted by the Tax Foundation, a separate think-tank, and it could rise or fall by another $750 billion depending on unspecified details in Mr. Trump’s proposals to reduce taxes for certain pass-through businesses. Including the costs of additional federal borrowing from Mr. Trump’s plans, the national debt would rise by $5.3 trillion over a decade relative to current policy, pushing the debt-to-GDP ratio to 105%, which is significantly higher than either Mrs. Clinton’s policies or the current trajectory for the debt, though it is lower than an earlier estimate from the CRFB.

Shutdown deadline looms over Congress -- So much for that early getaway.Instead, Congress now has just four days to avert a government shutdown on Saturday.   It’s not in the interest of either party to let a shutdown happen a month before Election Day. But rather than reaching a compromise and returning to the campaign trail earlier than scheduled, lawmakers are finding themselves ever closer to the funding deadline without a clear path forward.The Senate will take its first procedural vote on the short-term spending bill Tuesday. Republicans, trying to pressure Democrats into supporting the legislation, argue they will be responsible for shutting down the government if the measure fails to pass.  Democrats balked over the legislation, noting they did not sign off on the proposal from Majority Leader Mitch McConnell(R-Ky.).  "Senator McConnell repaid our good faith by trying to jam us with a bill we haven't seen and blocking amendment votes," said Adam Jentleson, a spokesman for Minority Leader Harry Reid(D-Nev.).  Democrats are demanding that funds to help the city of Flint, Mich., deal with its tainted drinking water be included in the 10-week spending bill. They argue it’s unfair for the stopgap measure to set aside funds to help flood victims in Louisiana, West Virginia and Maryland, but not Flint. “One hundred thousand people in Flint, Mich., are still waiting for their water to be clean and safe,” Sen. Barbara Mikulski(D-Md.) said on the Senate floor. “Nine thousand children have already had lead exposure that can cause permanent and irreversible damage. It tells Michigan to keep waiting in line.”

McConnell threatens shutdown to keep corporate political spending secret | TheHill: Most Americans are worried about too much secret corporate money in politics, and this week, Republicans in Congress seem to be doing everything in their power to justify those fears. In the midst of a close national election, Senate Republicans are risking a government shutdown at midnight on Oct. 1 for two reasons: to keep the citizens of Flint, Michigan from getting long-needed federal aid and to keep corporate political spending hidden from the voters. As Congress and the White House negotiate over the final details of a continuing resolution (CR) to avoid a government shutdown, Senate Majority Leader Mitch McConnell (R-Ky.) is demanding the inclusion of a poison pill policy rider to keep political money from big corporations a secret. The rider would block the Securities and Exchange Commission (SEC) from working on a rule to require publicly traded companies to disclose their political spending. This rider is one of the main sticking points standing in the way of a deal to keep the government open.Congressional Democrats have called for the exclusion of the rider, and the White House announced that it will not likely agree to a CR that includes a provision keeping special interest money secret.McConnell's push to include the rider in the CR is a clear marker of its importance to congressional Republicans and undoubtedly to the big donors and corporate-funded super-PACs who back their campaigns. Setting aside the horrendous optics of threatening a shutdown to hide the identities of big corporate donors, it is also highly irregular and profoundly inappropriate to include significant policymaking provisions of any kind in a CR, which is simply supposed to extend status quo funding levels. With the deadline for a deal just days away, it is imperative that Congress reject poison pill policy riders — including the SEC disclosure rider — to avoid a disruptive and costly government shutdown. Even if this rider remains in the CR for the next two months, it must be taken out of the omnibus funding package to be negotiated later in the year.

House approves stopgap funding, averting costly shutdown | TheHill: The House on Wednesday approved a bill to fund the federal government through December 9, averting a costly shutdown two days ahead of the deadline. The 10-week bill, which passed comfortably 342 to 85, now heads to the president’s desk and sends lawmakers back to their district early for campaigning. A majority of the Republican conference backed the bill, with just 75 Republicans opposing it. Ten Democrats voted against the bill.Lawmakers agreed to keep federal agencies running through Dec. 9, while also funding a $1.1 billion emergency aid package to halt the spread of the Zika virus. Flood-stricken regions in Louisiana, West Virginia and Maryland will also receive a half-billion dollars. The months-long marathon to fund the government turned into a sprint Wednesday as lawmakers raced toward the exits. The pre-election adjournment comes just a few weeks after Congress was out of session for a two-month summer recess. The Wednesday evening vote caps a dramatic 24 hours of deal-making led by House Speaker Paul Ryan(R-Wis.) and Minority Leader Nancy Pelosi (D-Calif.). Both chambers signed off on the stopgap spending bill, just one day after the same bill was soundly rejected in the Senate. The bill collapsed in the upper chamber on Tuesday mostly due to Democrats’ gripes about Republicans leaving out money to deal with lead contamination in Flint, Michigan while agreeing to fund flood relief in other states. The dispute over Flint funding was swiftly – and quietly – resolved late Tuesday evening by Ryan and Pelosi, who huddled twice to work out an agreement. House GOP leaders agreed to waive a budget rule to put $170 million for Flint in a separate water resources bill in exchange for Democratic support to clear the continuing resolution. A bipartisan amendment authorizing the Flint aid sailed through the House Wednesday afternoon on a 284-141 vote.

 It is Time to Drive a Stake into the Heart of the American Credibility Myth - One of the most common criticisms of President Obama is that he has damaged American credibility. Obama’s foreign policy decisions have been thoroughly denounced by Republicans, some members of his own party, and even former members of his administration. When the United States opted not to respond with military action to the 2013 chemical weapons attacks in Syria, many people argued that failing to punish the Syrian regime would diminish U.S. credibilitySimilar critiques were leveled when Russia annexed the Crimea and the United States responded with economic sanctions instead of force.  “How can we expect other states to take us seriously if we fail to act in these cases?” these critics asked.  In other words, tomorrow’s threats will fail if the United States does not follow through on today’s commitments. In fact, the record of American coercion is entirely inconsistent with this simplistic view of the role of credibility and reputation in international politics.  To examine this issue, I studied every international crisis between 1945 and 2007 in which the United States was involved. I found that the real world does not operate in the way that these critics of U.S. inaction seem to think it does. It is foolish for the United States to undertake military action for the primary purpose of reinforcing its reputation. Refraining from acting when U.S. interests are not directly engaged will not diminish America’s “credibility” or its ability to wield power effectively.  Others have argued that states do not evaluate reputation and credibility in the straightforward manner described by critics of the Obama administration’s response to Russia’s annexation of Crimea.  In this article, however, I draw on my original dataset of U.S. coercion to evaluate the role of reputation in international politics.  When a theory is both as prominent in the national debate about American foreign policy and as wrong about explaining the world as the reputation theory, we must exploit all the information at our disposal to dispel these myths about credibility and effective coercion.

Meet Mike Morrell—-Hillary’s Favorite Demented, Creepy CIA Warmonger  -- It’s really quite embarrassing on a global scale when members of our own government seem to be deliberately trying to pick fights with people who aren’t interested in fighting with us. If you’ve traveled outside of the United States much, you probably know that we Americans have a rather negative reputation off of our own shores. Now, generally speaking, that isn’t our fault as individuals. You and I don’t create headlines that make waves throughout Europe and Asia. While average Americans aren’t directly responsible for this, our federal officials are. I’ve written recently about President Obama doing things in Syria that are worsening the conflict there. I’ve also written about the fact that he and Russian President Vladimir Putin are starting to butt heads. And finally, I’ve warned time and time again that war is upon us – and everyone knows but the US. Michael Morell is the director of the CIA. Here’s a little blurb from Wikipedia about him.Michael Joseph Morell (born September 4, 1958) is an American intelligence analyst. He served as the deputy director of the Central Intelligence Agency as well as its acting director twice, first in 2011 and then from 2012 to 2013. Since November 2013, he has been a Senior Counselor to Beacon Global Strategies LLC. He is a proponent of the CIA’s use of enhanced interrogation techniques which many consider to be torture, and is also a proponent of the CIA’s targeted killings by drones.Wow, and just think. He’s a guy that has almost unfettered power to call a hit on anyone in the world.This video shows us how the global situation is being manipulated towards war by our own Central Intelligence Agency. Watch as Michael Morell boasts about how the CIA operates – and then watch as his boasting comes to life. This is the creepy, sadistic little puppetmaster that is going to deliberately get our sons and daughters sent off to fight the next war “for our freedom.” This is just more proof that nothing we see on the mainstream news is as it seems and that the federal alphabet agencies are never what they present themselves to be.

 Trump sees big gains from trade, energy, reg reform - A pair of advisers to Donald Trump are out with a new paper that forecasts the Republican’s trade, energy and regulatory reforms would generate about $2.4 trillion in government revenue over 10 years, making up nearly all of the $2.6 trillion in lost revenue from his proposed tax cuts. “At $1.74 trillion, trade policy reforms provide the largest revenue gain,” Trump advisers Peter Navarro, an economics professor at University of California, Irvine, and billionaire Wilbur Ross, an investor in distressed assets, say in the report, which comes ahead of the first debate tonight between Trump and his Democratic rival Hillary Clinton. “This is followed by regulatory reforms at $487 billion and energy policy reforms at $147 billion.” The nonpartisan Tax Foundation has previously estimated Trump’s proposals to cut taxes would cost $2.6 trillion over 10 years. But combined with proposed spending cuts, “the overall Trump economic plan is revenue neutral” because of higher revenues that come from trade, energy and regulatory reforms, Navarro and Ross say. Others have been far more critical of Trump’s plan to hike tariffs on China, Mexico and other trading partners unless they agree to renegotiate bilateral and global trade pacts. Last week, an analysis from the Peterson Institute for International Economics concluded Trump’s trade policies “could unleash a trade war that would plunge the U.S. economy into recession and cost more than 4 million private sector American jobs.” Another recent study by Oxford Economics estimated Trump’s trade plans would shrink the U.S. economy by $1 trillion dollars by 2021.

Donald Trump vs. Hillary Clinton on Tax Cuts for the Rich -- Hillary Clinton came to Monday night’s debate with a label for Donald Trump’s tax plan, twice calling it “trumped-up, trickle-down” economics. Mr. Trump’s defense: It works.The candidates quickly touched on other tax issues that divide them: business taxation, estate taxes and what Mr. Trump’s plan would do to middle-class households. But they lingered longest on the issue where they want to go in completely opposite directions: what should happen to the tax burden on high-income, high-wealth households. Voters saw the clear choice they have between two plans and two competing theories of the economy.Mr. Trump wants to repeal the estate tax, lower the top individual tax rate from 39.6% to 33%, repeal taxes on high-income households that took effect in 2013 and lower business taxes. That plan would increase the after-tax income of the top 1% of households by between 10.2% and 16%, according to the conservative-leaning Tax Foundation.“Trickle-down did not work. It got us into the mess we were in, in 2008 and 2009,” Mrs. Clinton said, referring to the idea that tax cuts on high-income households can spur economic growth. “Slashing taxes on the wealthy hasn’t worked. And a lot of really smart, wealthy people know that.”The connection between the George W. Bush tax cuts and the financial crisis is tenuous, though the tax cuts in 2001 and 2003 obviously didn’t prevent the recession. Democrats more typically point to the economic growth after the 1993 and 2013 tax increases as evidence that tax hikes don’t harm the economy and look to the recent Kansas policy changes as proof that tax cuts don’t create economic booms.Mr. Trump didn’t put up much of a challenge to the idea that upper-income families would fare well under his plan. He harked back to the economic growth after President Ronald Reagan’s tax cuts in the early 1980s. “I’m really calling for major jobs, because the wealthy are going create tremendous jobs,” he said. “They’re going to expand their companies. They’re going to do a tremendous job.”

Analysis: Trump tax plan would cost at least $4.8T -- Donald Trump's revised tax plan would lower federal revenue by at least $4.8 trillion over a decade, and some low- and middle-income families would see their taxes increase under the proposal, an analysis released Monday by the liberal-leaning Citizens for Tax Justice (CTJ) found.The Republican presidential nominee's proposed cuts to individual income and payroll taxes would cost $2.1 trillion; his plans to cut corporate taxes would cost $2.4 trillion; and his plan to repeal the estate tax would cost $300 billion, according to the analysis. CTJ Director Bob McIntyre said that while Trump's revised plan costs less than his original plan, “This new tax plan is in the same spirit as Trump’s initial proposal. "He would cut taxes for the rich, cut taxes for businesses, provide minuscule tax cuts for lower-income groups, and then claim it’s a populist plan that helps working families."Trump's revised plan, released earlier this month, would lower the top individual rate from 39.6 percent to 33 percent and the corporate tax rate from 35 percent to 15 percent. He would increase the standard deduction and create a new exemption for families with children ages 13 and under, but he would eliminate the current personal exemptions.CTJ found that every income group would receive an overall tax cut under Trump's plan. Taxpayers in the top 1 percent of income would receive an average tax cut of 5.1 percent of their income, while low- and middle-income taxpayers would see tax cuts averaging between 1.3 percent and 1.7 percent of their income. However, some low- and middle-income families would receive tax increases under Trump's plan because the bottom individual tax rate would increase from 10 percent to 12 percent and their taxable income might increase. Those who might see tax increases include childless couples who itemize their deductions and families with children over the age of 13, CTJ said.

Trade, trickle down, and the Fed: Revisiting three points from the big debate --Jared Bernstein --Before the first presidential debate fades into the next news cycle, there are three economic points that bear revisiting: We need a new paradigm for trade policy. The outsider campaigns of Trump and Sanders, along with the realities of many people and communities hurt by globalization, have elevated international trade as a major issue in this election. Trump advertises an unrealistic nostalgia, a return to a time when trade flows were a fraction of their current size. His word salad on the issue the other night underscores the fact that there is no coherent plan to get back there even if we wanted to. Clinton correctly points out that “we are 5 percent of the world’s population; we have to trade with the other 95 percent.” She aspires to reshape, not restrain, globalization. What’s needed is a framework for the type of “smart, fair trade deals” that Clinton says should be the norm. Yes, that framework should include enforceable disciplines against other countries’ currency management, something both candidates support. But much more is needed. Trade expert Lori Wallach and I just published our proposals in this space, which include both process reforms and new negotiating objectives.  Our ideas, if adopted, would increase the transparency of trade negotiations, reduce corporate influence over the eventual agreements, discontinue protectionist practices and provisions that put sovereign laws and taxpayer dollars at risk, and strengthen environmental, health, and labor standards both here and abroad.  Trickle-down economics still doesn’t work. Trump bragged that his “tax cut is the biggest since Ronald Reagan” and asserted that “[i]t will create tremendous numbers of new jobs.” To say the least, the empirical record belies that assertion, as I and others have often noted.  The graph below shows that, on the individual side of the tax code, there is no historical correlation between the United States’ top marginal tax rate and employment growth, a far different relationship than you’d expect to see if claims like Trump’s were correct. Federal Reserve policy matters and deserves discussion during election season. As I recently wrote, Trump’s comments about the Fed’s decision-making were completely wrong.  But the fact that the Fed came up in the debate was a positive; “there’s no reason such an important public institution – one with such a large impact on people’s lives – should be off limits in political debates.”  It was also great to see some discussion of the Fed during the Democratic primary, when both Bernie Sanders and Clinton indicated support for making the nation’s largest bank more representative of the general population.

How the IRS Helps the Rich Get Richer - The top 1 percent of Americans as measured by income rake in 17 percent of all U.S. income on an annual basis—before taxes, of course. And that caveat is important, according to a new analysis by the Tax Policy Center (TPC),1 because that select group of citizens gets 27 percent of the tax breaks doled out by the federal government. The TPC’s calculations show an estimated $1.17 trillion in federal revenue last year going to individual tax expenditures (a fancy way of saying taxes we didn’t have to pay because of deductions, like for giving old clothes to the Salvation Army—or, in this case, collections to the Metropolitan Museum of Art). While the wealthy see an outsize benefit compared with their share, the lowest-income households get just about 4 percent of federal tax breaks, close to their portion of all pretax income. That same trend holds for taxpayers in middle- and upper-middle-income households.  Those 1.1 million folks in the 1 percent, as measured by the TPC, have annual income that averages a little less than $700,000. The top one-tenth of that group, some 110,000 households, average about $3.6 million, according to Howard Gleckman, a senior fellow at the TPC.2 The middle of the pack, some 33 million people, have pretax income ranging from $45,000 to $80,000. The lowest one-fifth of taxpayers, a universe of about 47 million Americans, have income up to about $24,000. Among the biggest of these givebacks, courtesy of the Internal Revenue Service (well, really Congress), are capital gains and dividends—these are the biggest way the wealthiest benefit. Characterizing capital gains and dividends as government spending is somewhat controversial, noted Gleckman. “The IRS considers them a tax expenditure, but there is a question of whether they really are. There are tax-preferential rates, but are those preferential rates really a government spending program?” The terminology does sound like it’s already government money, and only if your accountant finds the appropriate deduction can you have some back. Using the IRS nomenclature, the top 1 percent got more than 60 percent of the benefit from a basket of subsidies including the preferential tax rates on capital gains and dividends, the step-up basis for inherited assets, and the exemption of most gains from the sale of a primary residence. The top 1 percent also gets a big serving of benefits from itemized deductions, which include gifts to charitable organizations, gobbling up 32 percent of that category. That’s a lot of old Chanel suits.

Freeing corporate profits from their fair share of taxes is not the deal America needs - There’s obviously plenty to criticize regarding Donald Trump’s claims and characterizations about the problems facing the U.S. economy during last night’s debate. But one thing that stuck out clearly was his peddling the myth that profits of U.S. corporations are “trapped” offshore by U.S. tax policy, and that these profits “can’t” be returned to the United States “until a deal is struck.” Now, Trump’s presentation of this argument during the debate was a characteristic dumpster fire of incoherence, but on the substance he was actually just trying to explain what has become a depressing conventional wisdom.  So, let’s provide a quick explainer about why these profits are not “trapped” abroad and why the only deal that needs to be cut is closing a loophole in the U.S. corporate income tax. This loophole allows U.S. multinational firms to defer paying the corporate income tax on profits earned overseas until these profits are “repatriated,” or returned to shareholders in the United States. By now, about $2.4 trillion in profits sits offshore, and there would be about $700 billion in taxes if it were repatriated. Obviously this deferral is a huge deal.

Corporate profits are way up, corporate taxes are way down --Since 1952, corporate profits as a share of the economy have risen dramatically (from 5.5 percent to 8.5 percent), while corporate tax revenues as a share of the economy have plummeted (from 5.9 percent to just 1.9 percent). This trend has worsened since the end of the Great Recession. Between 2010 and 2015, corporate profits averaged 9.2 percent of gross domestic product, while corporate income tax revenue averaged just 1.6 percent. The driving force behind the recent erosion of the corporate income tax base is the largest corporate loophole— deferral of taxes paid on profits booked abroad. Deferral allows corporations to stash billions of dollars offshore to avoid paying taxes on them. As outlined in a new Americans for Tax Fairness and EPI Chartbook, deferral will drain the U.S. Treasury of about $1.3 trillion in tax revenue over ten years. The crucial point is, however, that these profits have not actually been earned abroad. They are, in fact, offshore only on paper. Reed College professor of economics Kimberly Clausing estimates that seven tax havens are responsible for 50 percent of all foreign profits, but account for only 5 percent of their foreign employment. If the next president and Congress decided to tackle corporate tax reform, perhaps the single largest priority should be closing the gaping deferral loophole, which not only causes the federal government to hemorrhage revenue, but also provides an incentive for U.S. companies to shift production and large profits offshore.

 How Short-Termism Saps the Economy - Joe Biden - Short-termism—the notion that companies forgo long-run investment to boost near-term stock price—is one of the greatest threats to America’s enduring prosperity. Over the past eight years, the U.S. economy has emerged from crisis and maintained an unprecedented recovery. We are now on the cusp of a remarkable resurgence. But the country can’t unlock its true potential without encouraging businesses to build for the long-run. Private investment—from new factories, to research, to worker training—is perhaps the greatest driver of economic growth, paving the way for future prosperity for businesses, their supply chains and the economy as a whole. Without it robust growth is nearly impossible. Yet all too often, executives face pressure to prioritize today’s share price over adding long-term value. The origins of short-termism are rooted in policies and practices that have eroded the incentive to create value: the dramatic growth in executive compensation tied to short-term share price; inadequate regulations that allow share buybacks without limit; tax laws that designate an investment as “long-term” after only one year; a subset of activist investors determined to steer companies away from further investment; and a financial culture focused on quarterly earnings and short-run metrics. Consider the evolution in the structure of CEO compensation. In the 1980s, roughly three-fourths of executive pay at S&P 500 companies was in the form of cash salary and bonuses, and the rest in investment options and stock, according to an article in the Annual Review of Financial Economics. The Omnibus Budget Reconciliation Act of 1993 included a provision to link executive pay to the performance of the company. But it didn’t work as intended. By the time I became vice president, only 40% of executive pay was in cash, with the bulk being tied to investment options and stock. Now more than ever, there is a direct link between share price and CEO pay. Performance-based pay encourages executives to think in the short-term. Ever since the Securities and Exchange Commission changed the buyback rules in 1982, there has been a proliferation in share repurchases. Today buybacks are the norm.

Standard Chartered Faces U.S. Probe Over Indonesian Investment - WSJ: The Justice Department is investigating Standard Chartered STAN -2.84 % PLC over allegations that an Indonesian power company controlled by the London-based bank paid bribes to win contracts. An internal audit at Maxpower Group Pte. Ltd., a power-plant builder in Southeast Asia, found evidence of possible bribery and other misconduct, findings that were echoed in a separate review by a law firm hired by Maxpower, according to copies of those reports reviewed by The Wall Street Journal. U.S. prosecutors are looking into whether Standard Chartered is culpable for not stopping the alleged misconduct, people with knowledge of the investigation said. Maxpower’s chief executive worked at Standard Chartered until last year, and the bank holds three seats on the power company’s board. The investigation compounds the legal concerns of the Asia-focused bank and its chief executive, Bill Winters, who was hired last year to clean up the bank’s balance sheet, governance and culture. The bank struck a deferred-prosecution agreement with the Justice Department in 2012 over alleged Iranian sanctions breaches, under which it could be prosecuted if it commits a federal crime. It admitted wrongdoing and has tripled spending on compliance. Standard Chartered is one of the world’s biggest banks for financing global trade, and it is dependent on access to the U.S. financial system. Its private-equity unit profited for years by investing directly in Asian companies, but now is facing underperforming commodities investments and higher costs from regulation. The unit lost $167 million in this year’s first half and Standard Chartered is considering ways to exit the business, people familiar with the plans said.

BofA Fined $12.5 Million For Creating At Least 15 Mini "Flash Crashes" - One of our recurring activities over the past few years was, in collaboration with Nanex, to point out the countless mini-flash crashes that take place almost on a daily basis across the equity market. Although not as dramatic as the far more popular major flash crashes of May 2010 or August 2015, these recurring events merely served to underscore just how broken and fragment the market plagued by HFTs has become. And while the HFT lobby was quick to point out that mini flash crashes do not really take place and it is all just a fabrication by the "anti-HFT crusaders", moments ago the SEC validated our previous observations, when it announced that Merrill Lynch has agreed to pay a $12.5 million penalty for unleashing at least 15 mini flash crashes between 2012 and 2014, as a result of maintaining "ineffective trading controls that failed to prevent erroneous orders from being sent to the markets." An SEC investigation found that Merrill Lynch caused market disruptions on at least 15 occasions from late 2012 to mid-2014 and violated the Market Access Rule because its internal controls in place to prevent erroneous trading orders were set at levels so high that it rendered them ineffective.  For example, Merrill Lynch applied a limit of 5 million shares per order for one stock that only traded around 79,000 shares per day.  Other trading strategies had limits set as high as 25 million shares, which Merrill Lynch reduced to 50,000 shares after the SEC’s investigation began.

How many Wells Fargo employees were fired for NOT committing fraud? -- When Wells Fargo fired 5,300 employees for opening 2,000,000 accounts in its customers name (stealing their cash and trashing their credit scores in the process), it wanted us all to know that it had cleaned house, because this was just 5,300 people who, without any help from senior management, all happened to coincidentally engage in the same fraud. Today, we know better. For more than a decade, Wells Fargo has set unsustainable sales-targets for its low-level staffers, firing those who don't perform and turning a blind eye to the cheating the remainder have to do in order to keep their jobs (the last time this happened, those unrealistic sales-targets and brutal firings put Wells into so much trouble it needed a $36 billion taxpayer-funded bailout). Since at least 2011, Wells Fargo had been warned of the fraud by whistleblowers, who were illegally fired for coming forward. But despite the culture of criminality and the shoot-the-messenger approach to whistleblowing, CEO John Strumpf insists that nothing is wrong with the bank -- particularly, that the $200 million he was paid for the bank's seemingly excellent performance during the fraud is his by rights, because he did nothing wrong (when the bank thrives, it's because of the CEO's leadership; when it fails, it's because of the low-level employees' moral failures). All this raises an important question. Given that employees were forced into committing fraud in order to make sales targets -- and that those who missed those targets lost their jobs -- how many of Wells Fargo's employees were fired for not committing fraud? Is it more than 5,300? Did Wells Fargo start by purging all their bravest employees, then move on to purging the ones who were so desperate they broke the law to keep their jobs? At this point, it may be that only John Strumpf knows. Or maybe Carrie Tolstedt knows -- she's the top exec who supervised the fraud, taking at taxpayer-subsidized $125 million bonus with her when she "retired" mere weeks before the crimes came to light. "CNNMoney spoke to a total of four ex-Wells Fargo workers" who think they were fired for whistle-blowing, and "another six former Wells Fargo employees told CNNMoney they witnessed similar behavior." That is presumably a sample rather than an exhaustive list, and you can begin to construct a hypothetical list of the incentives facing Wells Fargo consumer bankers:

  • 1. Open fake accounts to meet sales goals: Maybe get fired.
  • 2. Don't open fake accounts, miss sales goals: Probably get fired.
  • 3. Tell executives about all the fake accounts: Definitely get fired really fast.

Class Action Suit Claims Wells Fargo Penalized Employees Who Followed the Rules -- Two former Wells Fargo employees filed a class action lawsuit against the company on Thursday in California, arguing they were penalized for failing to meet sales quotas while following the rules and not engaging in fraud. The suit is seeking $2.6 billion for current or former Wells Fargo employees in the state who were demoted, fired or forced to resign after not meeting what the lawsuit characterized as “unrealistic quotas,” Reuters reported. Wells Fargo agreed to pay $190 million in penalties and customer payouts this month after revelations that the bank created credit, savings and other accounts in customers’ names without their knowledge. The class-action lawsuit filed Thursday in California Superior Court argues that the company promoted employees who opened fraudulent accounts, while penalizing those who did not, according to Reuters.

Class Action Lawsuit Against Wells Fargo Seeking $2.6 Billion for Wrongful Terminations Unlikely to Go Very Far - Yves Smith - I hate to be a nayayer when individuals seek redress for wrongdoing. And while it ought to be possible to make a case on behalf of employees who were fired by Wells for refusing to meet or failing to meet unrealistic sales targets, the lawsuit filed in California state court last Friday, Polonsky v. Wells Fargo Bank & Co., does not appear to be that case.  The lawsuit is on behalf of two former Wells employees, and seeks class action status for other Wells employees who were fired or demoted for failing to meet sales quotas because they would not break the law.  I’ve embedded the filing at the end of this post. Here’s a recap from Bloomberg: The lawsuit offers details of how low-level bankers were allegedly pushed to create at least 10 new accounts a day in a sales initiative that has blown up into a scandal and prompted U.S. lawmakers to call for Chief Executive Officer John Stumpf’s resignation. Bankers were “coached” to secretly open fee-generating accounts and often resorted to using false customer contact information like NoName@WellsFargo.com on accounts so they couldn’t be traced back, according to the complaint. It would help if the reporters who write up these cases were up on the state of play, or would even search their own archives. This lawsuit has simply repackaged allegations from the Los Angeles City Attorney’s complaint last year. The “details” that this Bloomberg story cites are not new, as a story by Bloomberg’s own Matt Levine demonstrates.  The novel element is that this suit takes these allegations (which have never been proven to be true, recall that this case was settled without any admissions being made by Wells Fargo) and uses them to contend that the real victims were the employees that were terminated or demoted by Wells for not meeting sales targets.  While that claim may seem obvious, it needs to be carefully argued and supported to hold up in court. This filing doesn’t come close to having Big Building Law Firm fit and finish. It repeatedly makes overly broad assertions that will not be hard for Wells Fargo to knock down. And that’s not surprising. The lawsuit is by a solo practitioner who specializes in employment law.

 Did Wells Fargo target seniors with its bogus-account scheme? - Wells Fargo may have gone out if its way to take senior citizens to the cleaners when the bank’s workers fraudulently opened as many as 2 million accounts without customers’ permission. At least that’s the suspicion of Democratic Sen. Claire McCaskill of Missouri and Republican Sen. Susan Collins of Maine, the top members of the Senate Special Committee on Aging. They’ve called upon the Consumer Financial Protection Bureau to determine whether seniors in particular were preyed upon because older Wells Fargo customers may have been more susceptible to manipulation or likely visited branches more frequently than tech-savvy younger people who prefer online banking. “As Wells Fargo begins the long process of identifying and making restitution to the consumers who were defrauded, I want to ensure that seniors — who are often the targets of fraud and who also can be harder to find and make whole — are adequately protected,” McCaskill said.She and Collins said in a letter to CFPB Director Richard Cordray that they’re concerned about “the impact this activity has had on our nation’s senior population, especially those who do not conduct their financial business on the Internet.”

Wells Fargo May Claw Back Millions From Carrie Toldstedt, John Stumpf As Soon As Today -- If banking villain du jour Carrie Toldstedt thought she had managed to sneak away quietly into the night, with her recently topped off bank accounts intact before Wells Fargo's biggest consumer fraud scandal in years became front page news, she may want to think again... and the same goes for CEO John Stumpf, who while not quitting just yet, may find himself departing quite soon. According to the WSJ, Wells Fargo's board is actively considering whether to claw back pay from former retail-banking head Carrie Tolstedt as well as from Chief Executive John Stumpf.Following the recent kangaroo court in the Senate, in which Elizabeth Warren Stumpf almost accused Stumpf of being a criminal and urged him to quit, the Wells board could make a decision as soon as Tuesday on whether to clawback compensation from the two disgraced executives. The board wants to take action before Mr. Stumpf returns to Capitol Hill; he is scheduled to testify Thursday before the House Financial Services Committee.As we reported at the time, clawbacks, or rather their absence, was a key focus of the Senate Banking Committee hearing last week, in which Stumpf and the bank were roundly criticized for firing 5,300 employees over five years yet taking no action against top executives. But while Stumpf took the heat, it was the recently departed Carrie Tolstedt, head of the infamous "sandbagging" group within Wells, who became a point of focus at the Senate hearing because she oversaw the bank’s retail banking operations during the time in which regulators allege “widespread illegal” practices took place. She stepped down from her role in July and is set to retire at the end of the year. Her total compensation, including accumulated stock and options earned over her 27 years at the bank, could run about $90 million, according to a letter Wells Fargo sent senators last week.

Wells Fargo Claws Back $41 Million From CEO John Stumpf — Wells Fargo says CEO John Stumpf and the executive who ran the bank’s consumer banking division will forfeit tens of millions of dollars in bonuses as it tries to stem a scandal over its sales practices. The board of directors at the nation’s second-largest bank said Tuesday that Stumpf will forfeit $41 million in stock awards, while former retail banking executive Carrie Tolstedt will forfeit $19 million of her stock awards, effective immediately. Both are also giving up any bonuses for 2016. The San Francisco-based bank’s independent directors are also launching their own investigation. Wells Fargo has agreed to pay $185 million to settle allegations its employees opened millions of accounts without customers’ permission to reach aggressive sales targets. Stumpf has faced bipartisan outrage for his handling of the scandal.

Wells Execs Forfeit $60 Million; May Be Just The Beginning -- Earlier today we noted that Wells Fargo's board was actively considering whether to claw back pay from former retail-banking head Carrie Tolstedt as well as from Chief Executive John Stumpf.  Now, just a few short hours later it looks like we have our answer with a Special Committee of Independent Directors announcing that they have hired Sherman Sterling as counsel to conduct a thorough review of the bank's retail banking sales practices and that both Stumpf and Tolstedt will be forfeiting salary, stocks options and 2016 bonuses.  More specifically, CEO John Stumpf will forfeit unvested equity awards valued at approximately $41mm, will forgo salary during the Special Committee's investigation and will not receive a bonus for 2016.  Meanwhile, Carrie Tolstedt, who was head of community banking before recently departing, will forfeit all of her outstanding unvested equity awards valued at $19m, will not be paid a severance and will not receive any retirement enhancements in connection with her separation from the Company.  Tolstedt has also agreed that she will not exercise her outstanding options during the course of the investigation.

 Wells Fargo CEO Stumpf, Head of Community Bank Hit With Multi-Million in Clawbacks: Labor Department Opens -  Yves Smith - Financial news outlets tonight gave prominent play to the fact that Wells Fargo CEO John Stump is giving up $41 million in compensation, and the former head of community banking, Carrie Tolstedt, who ran the unit that perpetrated the creation of over 2 million in fake accounts, will sacrifice roughly $19 million in pay. Even though the board was trying to assert that it was taking responsible action in the face of the widening crisis, it didn’t help that the Labor Department had just announced it has opened a “top-to-bottom review” of how Wells treated workers tasked to meet unrealistic sales targets. In addition to covering these developments, we’ll also discuss how an influential commentator went wide of the mark on this story, and why that matters.  Wells’ board, awfully late in this drama, has hired Sherman & Sterling to conduct an investigation, which in effect calls into question the adequacy and completeness of an internal probe performed earlier, on behalf of the bank and not the board, by Skadden Arps and Accemture, which provided much of the information on which the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Los Angeles City Attorney based their joint $185 million settlement.  While the Bloomberg takes up the face saving line that Stumpf took in a letter to employees, that “that he offered to give up $41 million in unvested stock, which reflected his performance back to 2013, and the board accepted,” Andrew Ross Sorkin of the New York Times reports that the board did in fact claw back Stumpf’s and Tolstedt’s pay, relying on the bank’s clawback policies: The action represented one of the first times since the 2008 financial crisis that a chief executive has been forced to give up compensation. Many large companies have adopted clawback provisions at the urging of regulators and shareholder advocates, but boards have been hesitant to invoke them…. Only a relatively small portion of the compensation of Wells Fargo’s executives can be clawed back. The bank’s clawback provisions are specific about the circumstances in which it can recoup money from executives — most hinge on misconduct that forces the company to significantly revise its financial results or pay that was received based on inaccurate financial information. Neither is the case here. But it took advantage of a clause that allows the company to retract performance-based stock awards if an executive causes significant “reputational harm” to the company…. The $41 million Mr. Stumpf is forfeiting represents all of his unvested equity awards, but he already held nearly 5.5 million shares of stock owned outright or vesting imminently as of March, when Wells Fargo filed an annual disclosure of his holdings.  The Financial Times noted: “Ms Tolstedt…agreed to not cash in any outstanding options during the review. Ms Tolstedt will not be paid severance, and neither she nor Mr Stumpf will receive a bonus for this year.”

California Suspends ‘Business Relationships’ With Wells Fargo - Bloomberg: California, the nation’s largest issuer of municipal bonds, is barring Wells Fargo & Co. from underwriting state debt and handling its banking transactions after the company admitted to opening potentially millions of bogus customer accounts. The suspension, in effect immediately, will remain in place for 12 months. A "permanent severance" will occur if the bank doesn’t change its practices, State Treasurer John Chiang said Wednesday. The state also won’t add to its investments in Wells Fargo securities. Chiang already replaced Wells Fargo with Loop Capital for two muni deals totaling about $527 million that will be sold next week. "Wells Fargo’s venal abuse of its customers by secretly opening unauthorized, illegal accounts illegally extracted millions of dollars between 2011 and 2015," Chiang said in a news conference in San Francisco. "This behavior cannot be tolerated and must be denounced publicly in the strongest terms." The move by California is the latest to punish the bank, which is facing a national furor over the fraudulent accounts. San Francisco, the home of Wells Fargo, last week removed it from a banking program for low-income residents. Authorities including the U.S. Consumer Financial Protection Bureau fined Wells Fargo $185 million on Sept. 8 for potentially opening about 2 million deposit and credit-card accounts without authorization. Chief Executive Officer John Stumpf has forfeited $41 million in pay.Connecticut decided last week to add Morgan Stanley to serve as lead underwriter with Wells Fargo on a state bond issue planned for next month to help ensure a successful sale, according to the state treasurer’s office. Connecticut is reviewing its relationship with the bank. New York’s Metropolitan Transportation Authority voted to hold off on approving Wells Fargo as a underwriter until the agency completes its analysis of the company’s practices, according to an online broadcast of a board meeting Wednesday. Federal prosecutors in New York and San Francisco have opened criminal inquiries, a person familiar with the matter has said. Wells Fargo already faces a raft of lawsuits by fired or demoted workers, customers and investors.

California Sanctions Wells Fargo - Suspends Up To $2 Trillion Banking Relationship For Next 12 Months --Treasurer John Chiang says in letter to Wells Fargo’s John Stumpf, board that he’s ordered suspension of WFC’s participation in “its most highly profitable business relationships” with California. Bloomberg reports: The California Treasurer oversees ~$2t in annual state banking transactions; manages $75b investment pool; is largest U.S. issuer of municipal debt

  • Sanctions include:
    • Suspending investments by Treasurer’s office in all WFC securities
    • Suspending using WFC as broker-dealer for purchasing investments
    • Suspending WFC as managing underwriter on negotiated sales of Calif. state bonds (where Treasurer appoints underwriter)
  • Sanctions take effect immediately, will remain in place for next 12 months
    • WFC may face tougher sanctions “up to and including complete and permanent severance of all ties” with Treasurer’s Office if WFC fails to demonstrate compliance with consent orders or “evidence surfaces” has engaged in same behavior
  • Calif. will work with Calpers, Calstrs to pursue governance reforms ensuring “this type of behavior and systemic corruption” doesn’t reoccur
    • Notes the 2 pension systems have >$2.3b invested in WFC fixed income securities, equity
  • Chiang will seek:
    • Separation of CEO/chair positions
    • Appointment of consumer ombudsman
    • Development of anonymous ethics reporting process/whistleblower protection program
    • Review of WFC compensation practices
    • Clawbacks

Wells Fargo Troubles Mount With Penalty for Soldiers’ Loans - Bloomberg: Wells Fargo & Co., reeling from weeks of pummeling over fraudulent customer accounts, was sanctioned by the Justice Department over improperly repossessing cars owned by members of the military. Federal authorities are punishing the San Francisco-based lender for as many as 413 alleged violations of the Servicemembers Civil Relief Act, according to a statement Thursday from the Justice Department, which said the bank agreed to pay more than $4 million to compensate borrowers involved in unlawful repossessions spread over seven years. The bank’s regulator, the Office of the Comptroller of the Currency, also fined the company $20 million for a decade of transgressions, the agency said in a statement. “Wells Fargo Bank unlawfully repossessed hundreds of servicemembers’ cars without the proper process, and the bank will now rightfully pay for its violations,” Bill Baer, the Justice Department’s No. 3 official, said in a statement. The department “is committed to protecting our country’s servicemembers as they continue to fight for our freedom.” The enforcement actions against the bank follow a $185 million settlement over more than two million unauthorized accounts that may have been opened to meet sales goals. The matter has sparked weeks of sharp criticism, congressional hearings and the forfeit of tens of millions in bonuses for top executives. Wells Fargo’s stock declined 1.5 percent to close at $44.37 after Bloomberg News reported on the car-seizure sanctions Thursday afternoon -- at the same time that Chairman and Chief Executive Officer John Stumpf answered questions in a House hearing on the accounts scandal.

Wells Fargo CEO Slammed at House Committee Hearing: — Angry lawmakers heaped another round of blistering criticism on Wells Fargo’s CEO, pressing Thursday for details about what senior managers knew about allegedly illegal sales practices and when any concerns were disclosed.Chief Executive John Stumpf, newly stripped of tens of millions in compensation, told the House Financial Services Committee that the bank is expanding its review of accounts and will evaluate executives’ roles. But as during the grilling he received last week from a Senate panel, Stumpf remained on the defensive.Several lawmakers, both Republican and Democrat, alleged that Wells Fargo’s sales practices may have violated federal laws, including the federal racketeering laws, which would constitute a criminal offense. Federal regulators have not said if they have referred the Wells Fargo case to the Department of Justice. “Fraud is fraud. Theft is theft,” committee head Rep. Jeb Hensarling, R-Texas, told Stumpf.Stumpf reiterated his words of last week, that he was “deeply sorry.” He said the bank was looking at accounts further back, to 2009, and that bank executives’ roles will be reviewed “across the board” in an inquiry by Wells Fargo’s outside directors.U.S. and California regulators have fined San Francisco-based Wells Fargo $185 million, saying bank employees trying to meet sales targets, opened up to 2 million fake deposit and credit card accounts without customers’ knowledge. Regulators said they issued and activated debit cards, and signed people up for online banking without permission. The abuses are said to have gone on for years, unchecked by senior management.Stumpf came under a sustained assault from lawmakers, who face re-election in a little over a month. He insisted that Wells Fargo had taken actions prior to 2013 to bolster its legal compliance and maintain high ethical standards. He bristled at depictions of the culture of Wells Fargo — a bank with origins in the California gold rush — as elevating sales and profits at the expense of ethics.

Stumpf is Still Faking It – Claims 75% Couldn’t Resist Wells Fargo Credit Cards --In a not-exactly-shocking development of the ongoing Wells Fargo account faking scandal (see our previous coverage here, here and here if you’re late to the party and need a quick catch-up) CEO John Stumpf, fighting a rear-guard action, is making outlandish claims about how, having begun the process of contacting customers who it has cause to believe may have either been mis-sold a product — or even not “sold” one at all and merely had an account opened without their knowledge on the back of faked paperwork and signatures — Wells’ is starting to conclude that only a relatively small minority of the cases they have reviewed have shown there was anything amiss. According to Stumpf’s statement Wells Fargo has “talked” to 20,000 customers about their credit card product, but only 25% said they didn’t want a credit card or don’t recall asking for one. From the New York Times: Wells Fargo has said it is contacting all of the customers who may have been affected. So far, the bank has contacted 20,000 customers with questionable credit cards. About a quarter of them have said that they did not apply for the card or could not remember if they had, Mr. Stumpf said at the hearing.  There are two main problems with Wells’ tale of hearing no evil from its customers and contending that there is no evil to be seen.  Firstly, while the claim is that “only” 25% of customers who were contacted might need further follow-up because there is strong evidence of a fake account, this figure is definitely going to be an underreporting of the true proportion.   It is though tantamount to admitting to the lack of any waterproofing of what the employees of Wells Fargo had got up to by routinely sampling a percentage of claimed sales. But the real problem for regulators and lawmakers is that they will likely lack the level of subject matter expertise to challenge sophisticated and mercenary financial service industry players such as Wells Fargo and put the results being claimed by Wells’ into their proper context. Those running investigations into the Wells Fargo scandal would probably not think to check just how high the level of churn in this type of product (credit cards) is. According to the FCA, each year around 14% of customers with a credit card take out a new one. The figures for the US market are almost certainly higher, because there is less consumer protection around oversolicitation.  Customers, regardless of credit-worthiness, are constantly plied with new products with features like teaser offers, reward gimmickry and other similar a-la-carte product design such as fee waivers, insurance-add-ons or payment holidays.

Wells Fargo CEO Stumpf Tries to Brazen Out Fraud as Congressmen Call Wells a “Criminal Enterprise,” Demand Breakup - Yves Smith - John Stumpf is the gift that keeps giving to bank reformers. The embattled CEO of Wells Fargo put in another poor showing in the House Financial Services Committee today, as Stumpf largely reprised his performance from the Senate last week:

  • Asserting that he would “make it right” to all harmed customers, when the bank’s plans obviously fall well short
  • Attempting to doctor the record, as our retail banking expert Clive describes in an accompanying post today, by having employees trying to obtain ex post facto consent for credit cards opened in their name without their approval
  • Pinning the blame on low-level employees while depicting Wells as a stellar corporate citizen
  • Refusing to acknowledge harm to employees who were fired whistleblowing or for failing to meet sales targets that were unattainable by honest means
  • Having a conveniently thin knowledge of many practices in his bank

Committee chairman Jeb Hensarling gave a blistering opening statement, that “Millions were ripped off…Fraud is fraud, theft is theft, there’s no other ways to describe it,” and followed by listing laws that he believed Wells has broken. He also pointed out that employees had filed wrongful termination lawsuits as far back as 2009, describing dodgy sales methods, adding that it was “beyond credibility that somebody up the food chain didn’t order, condone or turn a blind eye to it.” He promised a full investigation, including more hearings, and other committee members urged him to call wronged customers and former employees. Ranking member Maxine Waters provided evidence of questionable sales activities in 2007 and 2008, as well as Fed sanctions in 2011. Later in the hearing, she called for the bank to be broken up.  Carolyn Maloney called out Stumpf for making his largest stock sale just as he got word of the scandal. From the Financial Times:…she brandished documents showing a big sale of Wells stock by Mr Stumpf in October 2013 — right after the bank “was turned into a school for scoundrels” — and challenged the CEO to explain it…Mr Stumpf denied that the sale of shares worth $13m — his biggest on the open market since becoming CEO — was related to the fake-account matter, and said that it was done with “proper approvals”  This looks bad. Stumpf later claimed he first learned of the fake accounts abuses in “summer-fall” of 2013.

Lawmakers suggest Wells Fargo chief should face criminal charges | TheHill: The head of Wells Fargo took a brutal drubbing before a House panel Thursday as members of both parties called for his job and suggested he should face criminal charges. John Stumpf, the CEO and chairman of the board at the bank, was roundly criticized for over four hours before the House Financial Services Committee as he sought to apologize and explain how his company spent years creating potentially up to 2 million fake accounts to meet sales goals. But clear from the hearing was that Stumpf would find no quarter from either party, as lawmakers repeatedly painted his bank as having violated the public trust. Several described it as a “criminal enterprise.” On a committee that is usually strictly divided along partisan lines, there was broad unity in anger toward Stumpf and his bank. “Fraud is fraud, and theft is theft, and what happened at Wells Fargo over several years cannot be described any differently,” said Chairman Jeb Hensarling (R-Texas). “Let’s call it really what it is: some of the most egregious fraud we’ve seen since the foreclosure crisis,” said Rep. Maxine Waters (Calif.), the top Democrat on the panel. “Executive conduct at Wells Fargo deserves a thorough investigation.” Waters even went so far as to say she now wants to break up Wells Fargo, calling it too large to effectively manage. “This is a focused problem. We can get our arms around this, and we will,” Stumpf said. But that argument found little purchase among lawmakers, who refused to believe that years of fraudulent activity somehow escaped the attention of top executives. In fact, several lawmakers openly suggested that the bank had blatantly violated the law, with some going so far as to assert that Stumpf himself would be facing criminal charges in the near future. “You think today is tough? It’s coming. When prosecutors get a hold of you, you’re going to have a lot of fun,” said Rep. Michael Capuano (D-Mass.).

 Justice Dept. to Banks: Cooperate in Civil Investigations; Or Else | American Banker: The Department of Justice wants banks to more fully cooperate with civil investigations. Companies now are expected to "materially assist" the agency in providing documents, access to witnesses and even inculpatory documentary evidence such as emails and text messages. "A company that offers meaningful cooperation and timely victim relief should be afforded a more favorable resolution than a company that fights kicking and screaming until the end," said Bill Baer, the principal deputy associate attorney general at the Justice Department.

Wells Fargo’s Scandal Is a Harbinger of Doom - Rana Foroohar - In the financial sector, scandal is the gift that keeps on giving. Publicly shamed by Senator Elizabeth Warren after his bank opened as many as 2 million unauthorized accounts to goose profits, Wells Fargo CEO John Stumpf, who had been reluctant to part with any of his own compensation following revelations of the scandal, has finally agreed to give up unvested equity worth about $41 million, and forgo his $2.8 million salary while the bank is being investigated. Warren called the act “a small step in the right direction, but nowhere near real accountability,” and said he should return every dime he’s made during the period where fraud was happening.Wells itself is of course losing value, its market cap dropping by a tenth since the scandal began.  “We will hold the largest organizations to exceptionally high standards,” Yellen testified before the House Financial Services committee when asked whether the Fed would break up Wells Fargo. She also told Congress that the Fed is considering raising capital requirements for big banks (even as the companies have already added quite a bit of capital in recent years) and said that regulators were considering an overhaul of the stress test system. More capital is nothing but a good thing, though I’ve always been somewhat skeptical about the ability of stress tests to gauge the full range of financial disaster scenarios. In fact, as an interesting new paper from Brookings, co-written by (of all people) former Treasury Secretary and finance-friendly economist Larry Summers points out, the fall in market value of the banks themselves is becoming a risk, because even if they deleverage their own balance sheets, their decreasing value in the marketplace could make it harder for them to pony up enough equity in the event of a crisis.  Of course, the irony is that the Wells case isn’t about anything as complicated as Tier 1 capital requirements. It’s about straight-up fraud — tellers were incentivized to make profits above all else. But why did the trouble come in the consumer division, as opposed to any of the more complicated areas of the business? That’s where the story becomes more interesting, illuminating a more fundamental problem in the business model of banking. Finance has moved away from its original model of supporting companies (and thus, economic growth), and now makes the majority of its money buying and selling existing assets, as well as issuing corporate and consumer debt.

Wells Fargo To Be Sanctioned By DOJ For Improperly Seizing Soldiers' Cars  - And the hits just keep on coming. The full court press on Wells Fargo continues, on the heels of California's sanctions, Bloomberg reports the bank is now facing a Justice Department sanction over improperly repossessing cars owned by members of the military, according to two people with knowledge of the investigation. As Bloomberg details, Federal prosecutors and the bank’s regulator, the Office of the Comptroller of the Currency, are planning to punish the San Francisco-based lender for alleged violations of the Servicemembers Civil Relief Act, said the people, who asked not to be named because the investigation isn’t public. A penalty of as much as $20 million is expected from the OCC, one of the people said. That’s an unusually large fine for abuse of this law, which in most cases requires that firms obtain court orders before seizing vehicles from soldiers, sailors, airmen and Marines who are delinquent on their loans. Shielding soldiers from financial stress has been a priority for lawmakers, and the Justice Department has recently stepped up enforcement actions against banks for taking assets illegally. Banco Santander SA’s U.S. unit agreed to pay $9 million last year over allegations that it improperly confiscated more than 1,000 vehicles from military members, the largest settlement ever obtained in a case involving repossessions of automobiles with delinquent loans. Wells Fargo -- which was the world’s most valuable bank before the account scandal hurt its stock price -- has branches on eight U.S. military bases, include Fort Bliss in Texas, Georgia’s Fort Benning, Fort Dix in New Jersey and Hill Air Force Base in Utah. On its website, the bank says it has “a history of making banking easier for our servicemen and servicewomen.”The bank has previously been accused of not adhering to the military lending law, which Congress approved decades ago to protect soldiers from legal hassles while they’re on active duty. Wells Fargo agreed to pay $28 million along with four other mortgage servicers that were fined for improper home foreclosures, according to a statement issued by the Justice Department last year. It didn’t admit or deny the allegations.

Illinois Suspends "Billions Of Dollars" Of Investment Activity With Wells Fargo --Just when you thought you could relax into the weekend knowing that the US (and world) banking system was 'fixed' again thanks to a rumor from French press, Wells Fargo take another hit. Following California's decision to sever all banking ties with the bank, Illinois State Treasurer Michael Frerichs has confirmed his state's plans to suspend billions of dollars of investment activity with Wells Fargo. As Bloomberg reports,

  • News conference will be held on Monday at 10:00 a.m. at the James R. Thompson Center in Chicago to share details about the moratorium
  • Treasurer’s office comments in a statement

We estimate the score now to be Wells Fargo 0 - 4 Elizabeth Warren (clawbacks, soldier car repo fines, California sanctions, and now Illinois suspending banking)

 Strange Deaths of JPMorgan Workers Continue --Pam Martens Last Thursday, September 22, 2016, the body of Ann Korkki, a Senior Administrative Assistant in the Wealth Management division of JPMorgan Chase in Denver, Colorado was found with the body of her sister, Robin Korkki, inside their luxury vacation villa at the Maia Resort on Seychelles, an island in the Indian Ocean off the East African coast. Ann Korkki, like many of the other JPMorgan workers who died under unusual circumstances, was in her 30s. According to her LinkedIn profile, she had worked for JPMorgan Chase since April 2015 and was “responsible for the needs of a team” of nine in the “Asset Management portion of the Private Bank.”The other deceased sister, Robin Korkki, had an extensive history as a futures trader in Chicago according to her past registration history at the self-regulatory body, Finra.  Her LinkedIn profile says she is the head of foreign exchange (FX) and currency trading at Allston Trading.  According to the Allston Trading web site, it was founded in 2002 by former floor traders on the Chicago Mercantile Exchange (CME) and “is owned by its current and former employees, a retired founder, and long-term institutional backers Sequoia Capital and Francisco Partners.”In 2014, Wall Street On Parade reported on a Federal lawsuit that had been filed in Chicago against Terrence (Terry) Duffy, the Executive Chairman and President of the CME Group, the Chicago Mercantile Exchange, the Chicago Board of Trade and other individuals involved in leadership roles at the CME Group. The lawsuit mentioned by name Allston Trading as one of the firms receiving secret incentive payments from CME Group. The complaint alleged the following:“Defendants have entered into clandestine incentive/rebate agreements in established and heavily traded contract markets with favored firms such as DRW Trading Group and Allston Trading, paying up to $750,000.00 per month in one of the most heavily traded futures contracts in the world.  At no time during the Class Period have Defendants voluntarily revealed to the trading public that these material agreements exist in established markets.  Defendants through their lawyers have repeatedly ridiculed the suggestion that clandestine agreements exist.” The lawsuit also made the bombshell allegation that an estimated 50 percent of all trading on the Chicago Mercantile Exchange was coming from illegal wash trades.

Shadow Banking Bounces Back - Tim Taylor - "Shadow banking" refers to financial organizations that in various ways receive funds from savers and lend money in financial markets--but are not banks. For example, a money market mutual fund receives money from investors, who can be thought of as "depositors," and then invest the money in bonds, which can be thought of as lending the money to whatever government or private entity issued the bonds. But it's not a bank! Alex Muscatov and Michael Perez of the Federal Reserve Bank of Dallas offer a nice quick overview of this sector  in "Shadow Banking Reemerges, Posing Challenges to Banks and Regulators" (Economic Letter, July 2016).  They offer a helpful table of sic types of nonbank financial entities: retirement funds, mutual funds, broker-dealers, alternative investment funds, financing firms, and insurance companies. Here's a chart with a short description of each category and how it can be connected to traditional banks. Our national conversation about financial regulation is often focused on banks, but when you think back to the big meltdowns of financial firms that stressed the economy back in 2008, there are a lot of non-bank financial companies like Lehman Brothers, Bear Stearns, the insurance company AIG, the mutual fund Reserve Primary Fund, and others. Indeed, the importance of shadow banking is growing. Muscatov and Perez write: The  NBI’s [non-bank intermediaries] importance has increased over the past four decades (Chart 1). In 1980, it accounted for roughly 40 percent of the domestic financial sector. As mutual funds’ prominence increased and life insurance companies fueled the markets for corporate bonds and commercial real estate, NBI growth greatly outpaced that of banks. By 1990, NBI accounted for two-thirds of the intermediation market and has continued to slowly gain share. Here's the Chart 1 to which they were referring. The red dashed line is the total liabilities of traditional banks. The shaded areas show the shadow banking or "nonbank intermediation" firms. Notice that before the financial crisis in 2008, liabilities of banks don't soar; after the crisis, they don't fall. The financial crisis instead happened in the shadow banking sector, where you can see the sharp rise in liabilities before the crisis circa 2008 and the sharp fall afterwards.

Cash Funding Shortage Soars To Highest Since Financial Crisis In Repo - Two days ago we noted that as we approached the quarter end's window dressing, when the financial system's balance sheet most closely approaches what it would be like without Fed backstops if only for regulatory purposes, General Collateral - a closely followed indicator of dollar funding costs and thus of cash availability - spiked to the highest in 7 years, surging to 0.85% after opening the day at 0.68%. We expected this number to keep rising as we neared the Sept 30 quarter end, and sure enough it did not disappoint: as SMRA points out, as of this morning, the overnight general collateral rate has soared to 1.25% - indicative of where funding would be had the Fed hiked not once but three times in 2016 - from an average of 0.89% yesterday. This is the highest that the GC rate has been since the financial crisis. For those unfamiliar with GC repo, here is a quick primer from the ICMA: General collateral or GC is the range of assets that are accepted as collateral by the majority of intermediaries in the repo market, at any particular moment, at the same or a very similar repo rate --- the GC repo rate. In other words, the repo market as a whole is indifferent between general collateral securities. They are close substitutes for each other. GC assets are high quality and liquid, but none is subject to exceptional specific demand compared with very similar assets. The GC repo rate is therefore driven purely by the supply of and demand for cash(not by the supply of and demand for individual assets). In other words, GC repo can be said to be cash-driven. As such, the GC repo rate should be closely correlated to other money market rates, eg LIBOR, EURIBOR, etc, although trading at a spread representing the lower credit and liquidity risks in repo. Said otherwise, a spike in GC repo is indicative of not only some major plumbing blockage in the repo market, but a funding shortage, the kind that we showed earlier today in Europe.

Financial industry faces extreme disruption in payments — FT.com -A few weeks before the Olympic Games started in Brazil this summer, ATB Financial, based in Edmonton, Alberta, sent C$1,000 to Germany’s Reise Bankover a platform developed by Ripple, the San Francisco-based specialist in blockchain, the shared database technology that underpins the digital currency bitcoin.  The banks claimed this was the first real international money transfer using blockchain technology. It took only 20 seconds to complete, compared to the several days that most international bank transfers take to clear, underlining the technology’s potential. Payments have long been a backwater of finance, pleasantly profitable yet placid. Now all that is changing. The trend for people to pay for more things on mobile devices, and combined with the growth of online shopping, has produced a spurt of growth in this once staid sector. The consultancy McKinsey predicts that global payments revenues will rise from $1.8tn in 2014 to $2.3tn in 2019. However, the industry is entering a period of extreme disruption. The dominant players — the banks and credit card companies — face an uncertain future. A fast-growing group of upstart financial technology, or “fintech”, companies are lining up to challenge the incumbent payment providers by offering to meet customer demand for faster, cheaper and easier-to-use services — many of them using the blockchain. Allied to this, regulators are ratcheting up pressure on banks to cut the juicy fees they earn from processing payments while forcing them to be more co-operative with the fintech challengers. At the same time, traditional providers of payment services are facing an onslaught of cyber attacks from an army of increasingly sophisticated hackers and digital criminals.

Blockchain: Many Bankers, Bureaucrats And Lawyers Could Become Redundant -- Blockchain’s existence as a digital decentralized currency allows transactions to be executed in a decentralized network, instant, frictionless and anonymous. The process is initiated by distributing trust from powerful intermediaries to a wide global network, through cryptography and mass collaboration. The supporters of this technology believe that blockchain technology will allow collaborators to work side by side rather than in the current centralized organization model. It will create co-workers in a controlled environment rather than employees in hierarchical organizations. This technology can truly turn current organizational models within companies upside down, in particular in governmental bodies, banks, and the likes. The judicious and prudent roles of “control” within an organization would be contained within the blockchain. These roles include managing transactions, agreements and contracts. Businesses might start cutting back (heavily) on this type of staffing once Blockchain becomes mainstream.  There are still a large number of technical glitches to be solved. Moreover, the exact ways in which blockchain could bring innovation and change might be too soon predict at this stage. But, one thing is clear, blockchain is a technology that will bring disruptive change once the technical and legal framework become stable. Fundamentally, the disruptive power behind blockchain is simple: rather than facilitating a human, the task will be taken over by a system. As we enter the second generation of the Internet, blockchains may radically cut transaction costs. Smart contracts on blockchains will reduce the costs of enforcing contracts and making payments. Autonomous agents on the blockchain eliminate agency and coordinating costs leading to highly distributed enterprises with no management. Last year, Microsoft introduced blockchain to run their business more efficiently. Similarly, small sized firms are designing various apps using the power of blockchain. Nasdaq, being the first major exchange operator used the technology to issue and transfer the shares of  privately held organizations. Ethereum runs on Blockchain’s ledger functionality, similar to Google Docs. “Smart contracts” enclosed in the blockchain allow you to do securely business with people with whom you are not familiar. Blockchain adds value of trust by allowing companies to reduce staff and organizational functions. “The Internet as we know is flawed when it comes to privacy and commerce. Blockchain is the only application for this great innovation that can hold any legal document from marriage licenses to deeds. The personal information is secure and reconciled by mass collaboration and stored in code on a digital ledger. Trust is itself built in the system”,

Banks struggle to make blockchain fast and secure - Blockchain has become the financial markets’ biggest buzzword as banks seek modern ways to resolve old problems. But the technology is overshadowed by questions about how it can be made both secure and fast enough for large financial institutions. The blockchain concept aims to combine the peer-to-peer computing ethos of Silicon Valley with the money management of Wall Street, automating the networks of trust on which modern finance sits. Blockchain works as an electronic ledger of payments that is continuously maintained and verified in “blocks” of records. The ledger is shared between parties on computer servers and protected from tampering by cryptography, doing away with the need for a central authority.Its supporters believe blockchain could cut billions of dollars of hidden costs in the financial system by eliminating inefficiencies and the need for trade insurance. Switching to a blockchain system could speed up services such as global payments, trade finance, syndicated loans and equity clearing.The World Economic Forum estimates that more than 25 countries are investing in blockchain technology, filing more than 2,500 patents and investing $1.3bn. In one example last month UBS, Deutsche Bank, Santander, BNY Mellon and interdealer broker ICAP pioneered a blockchain-based digital token, which they hope could form the industry standard to clear and settle trades.To date, the most notable use of blockchain has been as a mechanism to distribute bitcoin, an electronic currency. The credibility of bitcoin has been undermined, however, by a series of scandals, from theft of assets to concerns it could be used to fund criminal activity.The financial services industry says its blockchains will have to be built on very different foundations. Huw van Steenis, an analyst at Morgan Stanley, points out that banks still need to comply with rules about verifying the identity of customers and preventing money laundering.

The diminishing returns of blockchain fetishism - Izabella Kaminska - Economists Robert Gordon and Robert Solow have long warned that digital information systems may not be cultivating the same sort of productivity gains that inventions of the past have done. Where gains have been registered, meanwhile, they’ve usually been associated with the roll-out of spreadsheet technologies which greatly reduced the resources companies had to spend on clerks and administrators.. And yet, as Gordon alluded to in his 2012 paper, even here it’s worth asking how longstanding such gains are likely to be:  The multiplying power of computer chips was matched by increasing complexity of software, leading to the light-hearted verdict that “What Intel Giveth, Microsoft Taketh Away.”  Information gains, essentially, look and feel fairly zero sum. Once everyone is elevated to a more organised and inter-operable information processing system, the relative advantages begin to be lost on society. To the contrary, all we end up with is a need to cultivate faster and faster systems, because –in the style of an arms race — whatever fresh capacity is freed up is immediately exploited in increasingly spammy ways. Arguably, however, it’s even worse than that because every digital innovation tends also to increase complexity, oftentimes undermining the productivity gains achieved when the original compatible and interoperable systems were introduced.  In some sense, it’s a tragedy of the commons effect, best expressed by the much trumpeted internet scare story that in the last year alone we used up more data than in the course of all human history. (Or something like that.) Point being, if the cheap capacity is built, we the public will come and abuse it (whether it’s with DDoS attacks, email spam, dog and cat pictures, social media, bad talent videos or cryptocurrency blockchains). And nowhere is this productivity-undermining arms race more acute than in the banking sector. To wit, via the WSJ’s Telis Demos this week, a flavour of the unfolding systems chaos in the banking sector: Besides cost, there is complexity. Christian Nentwich, chief executive of Duco, a technology firm that works with banks to integrate disparate data feeds, said one bank he worked with “had setups where 20 to 30 systems were all touched in the life cycle of a single trade.” And many of those systems produced data in different formats, sometimes resulting in different names for the same trading partner.

Banks Will Start Actually Using Blockchain Next Year: IBM Report | American Banker: For banks eyeing blockchain technology, 2016 has been the year of tests, trials and proofs of concept. By this time next year, however, some 15% of them could be running blockchain solutions in the wild, according to research by IBM. The technology giant's Institute for Business Value interviewed 200 global banks for a study entitled "Leading the Pack in Blockchain: Banking Trailblazers Set the Pace,” which is set to be released Wednesday. It found 15% of bank respondents intend to have fully implemented, full-scale commercial solutions in 2017. Behind them, another 65% indicated they plan to have blockchain solutions in production over the next three years. "First movers are setting business standards and creating new models that will be used by future adopters of blockchain technology," Likhit Wagle, IBM's general manager of global banking and financial markets, said in a press release. "We’re also finding that these early adopters are better able to anticipate disruption, fighting off new competitors along the way” such as startup nonbanks. About 80% of banks indicated trade finance, corporate lending and reference data have the greatest opportunity to improve using blockchain technology. Some 56% indicated regulatory constraints are among the top barriers to the success of blockchain implementation, followed by the immaturity of the technology and the lack of clear return on investment.  As part of the Hyperledger Project, IBM has been collaborating with financial services and technology firms to create a common blockchain fabric on which companies can build their own blockchain applications, such as logging transactions between banks and international businesses or allowing the two to share recordkeeping systems. Bluemix, IBM's cloud-based development environment, aims to help banks to identify fintech firms to work with, ensure those startups meet regulatory requirements and plug them into the banking platform without a complicated, expensive integration. More than 40% of Bluemix users are banks, IBM has said.

Payments networks battle new breed of criminals in cyber attacks - Plugging weak links in authentication is crucial but has a way to go. When $81m was stolen by cyber criminals from the Bangladeshi central bank earlier this year, it was not just the money that was lost, but trust in the Swift global payments network relied on by 11,000 members. Gottfried Leibbrandt, Swift’s chief executive, said the business of protecting money had been changed completely now that criminals did not need “guns and blow torches” to break into banks but simply a PC. Payments networks are having to work out new ways to keep up with a rapidly changing set of digital threats. Swift, the messaging service that allows the transfer of money between banks, found a “good number” of attacks after the heist from the Bangladeshi central bank in February at banks in Vietnam, the Philippines and Ecuador.Pushing its members to tighten their security, it pointed the finger in a letter: “The targeted customers have, however, shared one thing in common; they have all had particular weaknesses in their local security.”Payments networks — whether Swift or the latest peer-to-peer money transfer app — are only as trustworthy as their weakest link. Even if data are encrypted in transit, each bank or individual on a network must be able to reliably prove who they are — and authentication in payments still has a way to go.The Swift attacks did not come as a surprise to people in the industry, says Justin Clarke-Salt, co-founder of Gotham Digital Science, a cyber security company. The attacks played on a weakness in the system: that not every institution protects access to Swift in the same way. “They are going after low hanging fruit. Attackers often attack people who are easier to attack,” he says. “So far from what we know has been publicly reported, they have very much targeted smaller financial institutions. This is probably because they have less sophisticated controls.”

Swift Announces Further Anti-Fraud Measures | American Banker: Swift announced Tuesday additional efforts to beef up security on its network, following highly publicized hacks of member banks earlier this year. The global financial messaging system said it is introducing "mandatory" core security standards for its customers, along with an associated "assurance framework." Banks that use the Swift network will be required to demonstrate their compliance annually against the specified controls set out in the assurance framework, Swift said. Last week, Swift separately announced it would also start producing daily validation reports in December. The reports are designed to help banks quickly detect fraud, the network said, and each report would contain a daily rundown of banks' message flows so they can verify them independently, detect unusual patterns and potentially cancel transfers they find to be fraudulent. Swift's recent efforts come after several cyberattacks on Swift members, beginning with a February incident where $81 million was stolen from the Bangladesh Bank's account at the Federal Reserve Bank of New York. Swift has maintained its core software was not compromised, and placed the onus on member banks to ensure their systems are secure. "While customers remain responsible for protecting their own environments, Swift is fully committed to helping strengthen customers' security and helping them improve their security measures," said Gottfried Leibbrandt, chief executive of Swift, in a press release Tuesday. "Our aim in setting out this framework is to support customers by helping to drive awareness and improvements in the industry's overall security."

 The Real Unbundling Threat Is Rebundling | Bank Think --For years, bankers have been warned about fintech companies making banks irrelevant. This threat boils down to the much-hyped "unbundling" of banks.As the story goes, the days of customers treating their banks as one-stop shops for all of their financial products and services are coming to an end. Instead, customers will supposedly cherry-pick what they want from the thousands of different fintech companies that focus on a single digital financial product or service. Fintech companies, as the thinking goes, will simply provide better options for customers than banks that are struggling to offer everything at once.On the surface, this seems like an insurmountable threat for many banks. How can individual institutions keep up with the pace of innovation in the fintech sector? In reality though, fintech companies that only focus on a single product or service are not so well positioned to replace banks. In fact, they often rely on partnerships with banks to bring their products and services to market.Such partnerships have been forming for years and they are among the strategies banks have deployed toget ahead of the unbundling phenomenon. Rather than get displaced by fintech companies that specialize in one specific product category, banks can leverage these partnerships to upgrade their own offerings while maintaining customer relationships.Rather than startups that unbundle banking services, the major threat for banks will come when fintech companies are able to parlay their success in their core product into other categories of financial services.A handful of the most successful fintech companies are already doing this: Social Finance, a marketplace lender, is offering wealth management services to its lending customers; Square and PayPal are providing commercial loans to their merchants; and the much-beloved Venmo is offering in-store mobile payments, and therefore, moving beyond peer-to-peer payments.

Can AI Be Programmed to Make Fair Lending Decisions? | American Banker: As lenders dabble with artificial intelligence in credit decisions, debate has stirred around whether AI and even more traditional decision-making algorithms can be trusted to make sound decisions. In an earlier article, we posited that the use of AI in underwriting machines could have unintended consequences — such as shutting disadvantaged people out of the financial system. That's because AI machines can learn on their own, are not strictly governed by rules, and they can make their own rules and assumptions. Marc Stein, CEO of Underwrite.io, provider of an AI underwriting platform used by several alternative lenders, took issue with this claim. "There's a flaw in this logic: the program doesn't decide on its own," he said. "The program is constrained by the same regulations as human underwriters. Racial or gender discrimination doesn't become legal because it's done by a machine. It is incumbent on the developer of the algorithm to insure that the results can't evince illegal bias. When discussing algorithmic lending with major banks, the first question they ask is, 'How does this algorithm prevent disparate impact?'" Cathy O'Neil, author of the new book "Weapons of Math Destruction," argues that in the process of informing AI engines with new sources of information, unintended bias can emerge.She offers as an example ZestFinance, the online installment lender. "They brag that they score people in part based on their ability to use punctuation, capitalization and spelling, which is obviously a proxy for quality of education," said O'Neil, a former math professor. "It has nothing to do with creditworthiness. Someone who is illiterate can still pay their bills." (ZestFinance did not respond to a request for an interview.  Founder and CEO Douglas Merrill has said, "If you fill in your name in all caps, you're a much higher risk.")

IBM Shakes Up AI Race for Banking by Buying Promontory — IBM has agreed to buy Promontory Financial Group — a consultancy so influential it has been dubbed the industry's "shadow regulator" — in a move that could extend artificial intelligence into every aspect of banking.Under the deal, which was announced Thursday, Promontory's stable of ex-regulators and former industry executives will be tasked with teaching IBM's Watson to address risk management and compliance issues at banks. The goal is to create an AI capable of sifting through reams of data collected by banks to find potential problems and suggest solutions."We can very quickly help financial institutions have a much more complete and continuously updated view of what the landscape is," Alistair Rennie, a general manager for industry solutions at IBM, said in an interview. "There are systems now that throw out alerts all the time. The work of going through which ones need follow-up and documentation is very manual and very inefficient. We believe we can absolutely solve that problem with a cognitive solution. We can make it far more effective, far more automated."Gene Ludwig, the founder and chief executive of Promontory, said the deal will ultimately produce a system that can help banks of all sizes manage the massive compliance load facing them. While it's already clear big banks would be interested in such a system, he said the reach goes well beyond the larger institutions."For community and regional banks, this is a potential lifeline," Ludwig said in an interview. For many banks, it is an "enormous burden just to keep up. Watson offers the opportunity to have a world-class partner."Rennie added that the system can be scalable."We will make this affordable," he said. "We expect this to be highly consumable for institutions of all different sizes."

IBM Buying Promontory Clinches It: Regtech Is Real | American Banker  -- IBM's deal to buy Promontory Financial Group portends a dramatic change in the roles computers and humans play in regulatory compliance — and perhaps banking generally. If the deal announced Thursday goes through, the 600 consultants at Promontory will have the task of teaching Watson, IBM's massive artificial intelligence engine, how to handle risk management and compliance chores for financial services firms. Such automation may not make bank compliance officers obsolete, but it could mean that far fewer of them will be needed in the future, and that their time will be devoted to higher-level tasks. "I immediately thought of all the lawyers and former government regulators that work at Promontory being replaced by computers," said Ryan Gilbert, partner at Propel Venture Partners. "If truly the purpose of this acquisition is to take the human knowledge and effectively store it in AI or Watson, it will have a huge effect on this industry." AI is a hot topic for banking in general. Banks are thinking about or using artificial intelligence technology and its sidekick, robotic process automation, throughout their organizations: in lending, in detecting fraud, in operations, in human resources, account opening, complex payments and elsewhere. Essentially any place humans are doing mundane, routine work, someone's thinking about deploying AI to do it instead. Eugene Ludwig, the founder and CEO of Promontory, said that just as Watson assists with medical diagnoses without putting doctors out of work, neither would it fully automate the work of bankers or compliance officers."There will always be a need for hands-on, bespoke solutions to individual problems," said Ludwig, a former comptroller of the currency. "For us, we will continue to do the hands-on work that we do today."IBM's plan for Watson to absorb the collective wisdom of Promontory's brain trust is part of a recent phenomenon known as regtech. Like fintech, this field attempts to digitize outdated analog processes, replacing stacks of paper and hours spent looking things up and cross-checking with fields of data and fast answers."Many compliance vendors are looking to beef up their products with inorganic intelligence technologies, and they're increasing their efforts and footprints in the financial services space," said David Weiss, a senior analyst at Aite Group.

“No hidden fees” fintech lender settles with CFPB for, amongst other things, charging hidden fees -- LendUp CEO Sasha Orloff tells me they’re giving the startup time to build a long-standing brand in finance “the right way”, rather than squeezing as much profit as possible from its customers in the short-term. “Everything has to be transparent. There is no fine print. No hidden fees. And everything has to get someone to a better place” Orloff insists. That’s from a TechCrunch story in January about LendUp, a payday lender backed by Andreessen Horowitz, Google Ventures, QED and Kapor Capital, with debt funding from Victory Park Capital. And this is from a press release just put out by the California Department of Business Oversight: The California Department of Business Oversight (DBO) today signed a settlement with Flurish, Inc. (LendUp) that requires the firm to pay $2.68 million to resolve allegations it charged illegal fees and committed other widespread violations of payday and installment lending laws. About $1.6m of that money is refunds, the rest going to the DBO. The alleged payday loan law violations occurred from LendUp’s founding in February 2012 until May 2014, while the alleged installment lending law violations went on between June 2012 and August 2014. As per the DBO:LendUp charged borrowers what it called “expedited fees” to receive loan proceeds the same day they were approved. Such fees are unlawful under both lending laws.LendUp did not disclose the expedited fees as finance charges and, as a result, understated annual percentage rates. This violated the state’s installment lending statute as well as the federal Truth in Lending Act.LendUp charged payday borrowers a fee to extend their payment period from 15 days to 30 days. The payday lending statute prohibits such fees.LendUp required customers to take out both a payday loan and an installment loan. Both lending laws prohibit conditioning the provision of a loan on the customer buying other goods or services.LendUp wrongly calculated interest rates, in violation of the California installment loan statute, resulting in overcharges to borrowers.  But probably the most egregious allegations, given LendUp’s claims to be making life better for poor people, comes from the Consumer Financial Protection Bureau, which announced a separate $3.63m settlement with LendUp, about half of which is refunds to over 50,000 customers:

Are Consumer Protection Regulations Harming the Middle Class? - A new paper by Franceso D'Acunto and Albert Rossi, both at the University of Maryland's Department of Finance, contends that the Dodd-Frank Act resulted in "a substantial redistribution of credit from middle-class households to wealthy households", as lenders reacted to regulations by reducing credit to middle-class households and increasing it to wealthy households.  This conclusion is based on a regression analysis of loan and ZIP-code level HMDA data.  The redistribution point is a serious charge to be leveled at the Dodd-Frank Act, and you can bet that this paper is going to be repeatedly cited by Congressional Republicans in their attempts to repeal Dodd-Frank.   Unfortunately, the paper is founded on a pair of mistaken factual claims about the legal landscape that are so staggering that I am puzzled how they could have been made in good faith. Once these mistakes are corrected, it becomes apparent that the paper's analysis cannot actually support its claims because it is testing the wrong thing.  The paper is observing changes in the mortgage market that pre-date the implementation of Dodd-Frank.  By definition, then, these changes cannot have been caused by Dodd-Frank.  What the paper shows (without realizing it) is that there has been a redistribution of credit from middle class households to wealthy ones, but that it wasn't caused by Dodd-Frank.  Whoops.  Here's the problem.  If you want to test the impact of the Dodd-Frank Act on the mortgage market, you need to test the impact of the regulations enacted under Dodd-Frank.  While Dodd-Frank was enacted in late July 2011, the statute is not self-executing.  Instead, it required extensive rulemakings by various government agencies.  In the case of mortgages, the most important rulemakings were those by the CFPB.  The CFPB did not propose its regulations under title XIV of Dodd-Frank (the mortgage title) until 2013, and those regulations did not go into effect until mid-January 2014.  That means that the earliest year for which Dodd-Frank could have affected the mortgage market would be 2014.  The paper, however, looks at market changes around either side of the enactment of Dodd-Frank in 2011.  The paper's data is from 2007-2014, but rather than look at say changes in the market from 2013 to 2014 or 2012 to 2014, the paper looks at changes between 2011 and 2014, which would not seem to be driven by Dodd-Frank regulations.

Fed To Force JPMorgan, Citi, BofA, Other Top Banks To Hold More Capital - Federal Reserve stress tests of the nation's eight largest banks just became a bigger impediment to issuing dividends and buying back shares, but the first exam under the new rules won't hit until 2018. In a Monday speech, Fed Governor Daniel Tarullo said that the eight U.S.-based banks important to the global financial system will face increased capital requirements under the new testing regime. Those eight banks are Bank of America (BAC), Bank of New York Mellon, Citigroup, Goldman Sachs Group, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo. The biggest banks, with the highest capital requirements, will face the biggest impact from the change. Meanwhile, stress-testing and record-keeping will become somewhat less burdensome for banks with less than $250 billion in assets, Tarullo said. The changes to the stress-testing regime are consistent "with the principle that financial regulation should be progressively more stringent for firms of greater importance, and thus potential risk, to the financial system," he said. Shares of Goldman Sachs sank 2.2% on the stock market today, piercing its 50-day moving average after back-to-back days of negative regulatory news. On Friday, the Fed released a proposed rule that would require Goldman, Morgan Stanley and other banks that take physical possession of commodities in metals and energy markets to hold more capital.

Fed to Ease Stress Tests for Regional Banks - WSJ: The Federal Reserve proposed easing “stress-test” requirements for banks with less than $250 billion in assets, a major piece of good news for U.S. regional banks. Fed governor Daniel Tarullo, speaking at Yale University on Monday, said banks with less than $250 billion in assets that don’t conduct significant nonbank or international activity would be exempt from the “qualitative” part of the Fed’s annual stress tests. The 2010 Dodd-Frank financial-overhaul law compels banks with more than $50 billion in assets to undergo stress tests. More than 30 U.S. banks take the tests every year. The exams have become costly undertakings for banks, particularly for firms closer to the $50 billion line. The Fed is also considering a separate proposal, to be issued at a later date, that would have the effect of raising capital requirements for the largest U.S. banks considered “systemically important” to the global economy, while reducing them for other banks taking the stress tests, Mr. Tarullo said. “In pulling this package of modifications together, we have consciously shaped them in accordance with the principle that financial regulation should be progressively more stringent for firms of greater importance, and thus potential risk, to the financial system,” Mr. Tarullo said.Fed officials have previously said they were looking to ease requirements for regional banks while raising capital requirements for large, globally systemically important banks by incorporating a capital surcharge into the stress tests. Mr. Tarullo reiterated that intention Monday, but said the surcharge would be “somewhat less than half offset” by other changes the Fed is considering, such as allowing banks to make more liberal assumptions about how they would return capital to shareholders during a stressful period.

Fed seeks more capital from big banks, relief for regional lenders | Reuters: The Federal Reserve will seek significantly more capital from the largest U.S. banks and give some relief to smaller lenders as it updates its annual stress test, Fed Governor Daniel Tarullo said on Monday. The reforms will include a new capital buffer to better protect the financial system from a shock at the nation's largest lenders like JPMorgan Chase, Bank of America and Wells Fargo. "In pulling this package of modifications together, we have consciously shaped them in accordance with the principle that financial regulation should be progressively more stringent for firms of greater importance," Tarullo said in a speech at Yale University in New Haven, Connecticut. Under the plan, roughly 25 regional banks including Regions Bank and SunTrust Bank would face less scrutiny during the annual stress test. Specifically, because of their size, those lenders would be spared a costly review of risk management, internal controls, and governance practices. The largest eight or so U.S. banks would still face such scrutiny. Eventually, they would also be subject to the capital buffer rule. The Fed, which regulates the banking and financial services sector, expects to outline the new capital plan next year. It will not impact the 2017 stress test, officials said.

Transparent stress tests? - Cecchetti & Schoenholtz - This month, the Committee on Capital Market Regulation (CCMR) published a paper criticizing the procedures the Federal Reserve uses in conducting its stress tests. The claim is that, in its annual Comprehensive Capital Analysis and Review (CCAR), the Fed is violating the Administrative Procedures Act of 1946 (APA). The CCMR’s proposed solution is more transparency. As big fans of both stress tests and transparency in general, and of the CCAR in particular, we find this legal challenge very troubling. We believe that making the stress tests more transparent in the ways that the CCMR suggests would make them much less effective. This would do serious damage to financial stability policy and (ultimately) increase the likelihood of another crisis. Modern stress testing builds on the U.S. experience during the crisis. In late 2008, the solvency of the largest American intermediaries was in doubt. That uncertainty made their own managers cautious about taking risk and it made potential creditors, counterparties, and customers wary of doing business with them. Those doubts contributed to the extreme fragility in many financial markets, leading to a virtual collapse of interbank lending. A critical part of the remedy was a special disclosure procedure in which the Federal Reserve conducted an extraordinary set of “stress tests” of the 19 largest banks and, in May 2009, published the results. The 2009 tests evaluated on a common basis the banks’ prospective capital needs in light of the deep recession that was under way. While observers questioned whether the tests were stringent enough—the “stress” scenario quickly turned into the central forecast—the results were sufficient to reassure the government, market participants, and the banks themselves that most of the institutions were in fact solvent. Partly as a consequence, conditions in financial markets rapidly improved. And, armed with the stress-test evidence of their wellbeing, most large banks were able to attract new private capital for the first time since the Lehman failure the previous September. Stress tests are, in our view, one of the most powerful prudential tools available for safeguarding the resilience of the financial system. They take seriously the fact that when a large common shock hits, there is no one to sell assets to or raise capital from. Ensuring that each systemic intermediary can withstand significant stress raises the likelihood that the system can survive. And, importantly, by adjusting the scenarios, prudential authorities can maintain a chosen level of resilience. At least in principle, stress tests can both account for changes in the distribution of the shocks that can hit the system and contain the propagation mechanisms that amplify the impact of the shocks on the economy.

Wells Fargo, Glass-Steagall and ‘Do you want fries with that?’ banking - You might not see the connection at first, but two bank-related matters that have made headlines of late are quite closely connected. The first matter is what I call "Do You Want Fries with That?" banking — the practice of "cross-selling" unwanted products to captive customers that has now landed Wells Fargo in hot water. The second matter is the Glass-Steagall Act — a New Deal era statute that, in the wake of the great stock market crash of 1929, separated depository banking institutions from high-rolling Wall Street financial firms until its repeal in 1999. "Fries with That" banking is making news at the moment thanks to recent revelations that thousands of Wells Fargo employees, under pressure from higher management to cross-sell up to eight "products" per customer, have been opening phantom accounts for customers who have not asked for them. Because customers are charged fees for each "product" they receive, and because the practice of opening phantom accounts often involves misuse and misappropriation of confidential client information, the charges against Wells Fargo are both serious and apt to result in quite costly lawsuits. And this will be atop the $185 million fine that the Department of Justice has already announced it will levy on Wells Fargo.  Glass-Steagall, for its part, has been making news — again – periodically over the past several years for several reasons. The most conspicuous such reason is the crash of 2008-09, which many have blamed in significant measure on Glass-Steagall's repeal in 1999. But there have been other reasons in recent years. Sens. Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.), for example, introduced the 21st Century Glass-Steagall Act in the summer of 2013, and have periodically touted it ever since.  But now how might these two matters connect, you might ask. If you ask this, you're probably thinking that Glass-Steagall was and is prompted by one basic concern — the concern to insulate depository institutions, which hold Mom and Pop's hard earnings and make up the backbone of our payments system, from high-risk Wall Street financial practices.  But it was — and is — also prompted by more. Another of Glass-Steagall's concerns was to limit the cheap funds that bank affiliates would make available to speculative non-bank investors whose activities inflate asset price bubbles like those which burst in 1929 and 2008. Yet another was to maintain market integrity, which is easily compromised when too few firms control too much finance. And yet another was to maintain a level playing-field among non-financial firms operating in the "real" economy, since firms of that sort held by financial conglomerates always enjoy unearned funding advantages. But I still haven't finished. For there are at least two more concerns that prompt calls for reenactment of Glass-Steagall — and these two take us straight on to Wells Fargo and its "Fries with That" banking practices.

Wells Fargo Scandal Exposes Need for Bank Loan Officer Licensing - The recent revelations about Wells Fargo opening unauthorized bank accounts have great potential to undermine consumer confidence once again in our financial sector. Requiring mortgage loan officers in depository institutions to pass the Secure and Fair Enforcement for Mortgage Licensing Act exam is a small but essential step to help restore the confidence essential to the success and sustainability of the mortgage industry. Wells Fargo undertook a major effort to pressure its staff to cross-sell products, and created financial incentives for them to do so. Offering a wide range of products to their customers is one of the strengths of banks, and Community Home Lenders of America has no issue with banks in this regard. However, consumers have a right to work with individuals knowledgeable about the products they sell, and who can prove that through full certification and licensure. As the housing crisis was developing in 2008, Congress adopted the SAFE Act. It requires all loan officers working at nondepository institutions to: (a) pass the SAFE Act mortgage competency and ethics test, (b) pass an independent background check, (c) complete 20 hours of SAFE Act pre-licensing courses and (d) complete eight hours of continuing education annually. But the SAFE Act was passed before Lehman Brothers failed in September 2008, and before Congress was fully aware of the significant contribution Wall Street banks' marketing of subprime mortgage-backed securities had on the financial crisis. As a result, loan originators working at banks — even the largest Wall Street banks — were excluded from the SAFE Act requirements cited above, in spite of the fact that bank employees selling insurance or securities to their customers have to take a similar test. Virtually all other mortgage and real estate professionals, such as Realtors and appraisers, have licensure or certification qualification requirements similar to the SAFE Act.

Why Garbagemen Should Earn More Than Bankers -  The best salaries are paid to the people whose professions add the least value to society. Why Garbagemen Should Earn More Than Bankers by @rcbregmanhttps://t.co/9R9v57pZWg pic.twitter.com/xPlyVRnoBA — Evonomics (@EvonomicsMag) September 28, 2016 I know, I know. Lots of people are capable of being garbagemen, but not everyone has the skills to be a parasitic financial criminal.  I agree....Imagine, for instance, that all of Washington’s 100,000 lobbyists were to go on strike tomorrow. Or that every tax accountant in Manhattan decided to stay home. It seems unlikely the mayor would announce a state of emergency. In fact, it’s unlikely that either of these scenarios would do much damage. A strike by, say, social media consultants, telemarketers, or high-frequency traders might never even make the news at all.When it comes to garbage collectors, though, it’s different. Any way you look at it, they do a job we can’t do without. And the harsh truth is that an increasing number of people do jobs that we can do just fine without. Were they to suddenly stop working the world wouldn’t get any poorer, uglier, or in any way worse. Take the slick Wall Street traders who line their pockets at the expense of another retirement fund. Take the shrewd lawyers who can draw a corporate lawsuit out until the end of days. Or take the brilliant ad writer who pens the slogan of the year and puts the competition right out of business. Instead of creating wealth, these jobs mostly just shift it around...Read the entire article (it is excellent): Why Garbagemen Should Earn More Than Bankers.

The New Banking Crisis — In Two Frightening Graphs -- Pam Martens - After repeated, but ignored, warnings over the past two years from researchers at the U.S. Treasury’s Office of Financial Research (OFR), the new banking crisis has arrived with a vengeance and at a most inopportune time – when confidence is already draining from the financial system because of two U.S. presidential candidates with the highest disapproval ratings in modern history.  Yesterday, Germany’s largest financial institution, Deutsche Bank, lost 7.06 percent by the close of trading on the New York Stock Exchange. That plunge in one of the most globally-interconnected banks dragged down the shares of every major Wall Street bank yesterday: Bank of America lost 2.77 percent; Morgan Stanley declined by 2.76 percent; Citigroup lost 2.67 percent; Goldman Sachs shed 2.21 percent; and JPMorgan Chase closed down 2.19 percent. Deutsche Bank, whose shares traded at more than $120 pre-crisis in 2007, closed at $11.85 yesterday in New York and was down another 3 percent in overnight trading in Europe. At yesterday’s close, Deutsche Bank had $16.344 billion in market value with a balance sheet of $1.9 trillion in assets as of the end of 2015. If that doesn’t sound like a replay of the Citigroup debacle that spiraled out of control in 2008 and took down other bank shares, we don’t know what does. But the big picture is actually worse than even this suggests.  The first graph above comes from a report released in June of this year by the International Monetary Fund (IMF). The report singled out Deutsche Bank as “the most important net contributor to systemic risks.” The researchers wrote: m“Notwithstanding moderate cross-border exposures on aggregate, the banking sector is a potential source of outward spillovers. Network analysis suggests a higher degree of outward spillovers from the German banking sector than inward spillovers. In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country… “Among the G-SIBs [Global Systemically Important Banks], Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse…The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures, as well as rapidly completing capacity to implement the new resolution regime.”  Has there been “close monitoring” of the Global Systemically Important Banks by U.S. Federal regulators like the Federal Reserve and Office of the Comptroller of the Currency? Based on the reports released by the U.S. Treasury’s Office of Financial Research, the Federal regulators are just as asleep at the switch this time around as they were in the lead up to the Wall Street banking crash of 2008.

Even High School Kids Can See That Massive Systemic Risk That Deutsche Bank Represents -- I was discussing the US Department of Justice $14B fine levied at Deutsche Bank with my 15 year old son last week. I told him the fine amounted to roughly 70% of Deutsche's market cap, while a similar retroactive tax levy from the EU towards Apple for $14B was about 3% of their cash on hand or a quarter's operating profit.  My son said, "Whoah! Waitaminute! I thought Deutsche Bank was a big company like Apple. Didn't you say that they had trillions of euros of assets on their balance sheet?".  Indeed, I did say such, and he brings up a very valid point that is missed by many a so-called professional. DB is valued at 14.5 billion euros by Mrs Market, yet that amount controlls 1.8 trillion euros worth of assets, and 1.415 trillion after netting and credit adjustments, etc. And to think, some people think a 90 LTV loan is pushing the leverate limiit. Let's take a look at this from a graphica perspective to illustrate just how absurd it is...  Over time, the accounting expression of equity diverges significantly from the markets perception of the bank's equity value.  Somebody is most assuredly mistaken! As of today, DB's books are carrying equity value at 3x that of the stock market.

Deutsche Bank Unlikely to Get Much of a Break From the DoJ’s $14 Billion Mortgage Fine Target - Yves Smith - By way of background, the Wall Street Journal reported that it was seeking a settlement of $14 billion with Deutsche Bank for mortgage-related abuses. The Journal also noted that the bank’s thinking was that it should pay only $2 or $3 billion. The day after the story broke, the German bank took the unusual step of saying no way would it pay anything close to $14 billion. That seemed like an unwise move, particularly since in the JP Morgan and Bank of America settlements, there were also leaks about the amount the government was seeking, and the final deals came in not all that much lower than the figures bruited about in the press.  Deutsche Bank also tried arguing that it was being treated unfairly, and pointed to smaller settlements by other banks. However, TheStreet (hat tip Jon M) looked at Deutsche’s CDO activity relative to that of other banks that settled, and found that it is consistent with that of other settlements.  Mind you, the press stories so far have characterized the settlement as being about mortgage liability, which would make readers think of mis-selling of residential mortgage backed securities, and Deutsche was not a top player in that market. However, it was one of the big kahunas in the subprime CDO market. And as we explained at length in ECONNED, it was hybrid (part composed of actual bond tranches, part “synthetic,” meaning of CDS) that enabled BBB risk to be sold largely at AAA prices which not only kept the subprime party going well beyond its natural sell-by date, but actually drove demand to the very worst mortgages.  And not only was Deutsche a major actor, it was a particularly bad actor. Deutsche worked actively with the subprime shorts like Magnetar and John Paulson, who were creating CDOs for the express purpose of betting against subprime, meaning they wanted the CDO to reference the dreckiest mortgage securitizations they could find. As Greg Zuckerman explained in his book, The Greatest Trade Ever, Paulson was up front about his intent to create CDOs that would fail. Even Bear Stearns, not known for having lofty moral principles, turned him down, but Goldman and Deutsche had no such scruples.  TheStreet also says that Deutsche could get a break if the German government were to intervene. But as we pointed out in Links yesterday, via Michael Shedlock, the German press is reporting that Merkel will not intervene on behalf of the beleagured bank, either to give it a bailout or to press to have the DoJ back off. This is consistent with what I’ve heard from German contacts, although they don’t think official thinking is terribly realistic. The plan is to stay hands off, at least through the German elections in 2017. However, it is hard to see how the slow-moving Italian banking crisis can be kept under control that long. Deutsche is next in line if Italian banks start keeling over.

Deutsche Bank debt is taking a beating - Deutsche Bank’s bonds are getting hammered, but have held above lows reached in February.  When it comes to Deutsche Bank, credit investors are understandably nervous. And they’re selling corporate debt issued by Europe’s largest lender across all risk levels and maturities. Fears that a potential U. S.fine over the bank’s dealings in mortgage-related securities could, in a worst-case scenario, be the final blow that puts the lender out of business have sparked a selloff in tradable credit securities issued by Deutsche Bank, with the riskiest bonds seeing the sharpest moves.  Deutsche’s share price has plummeted to record lows, dropping by more than half since the end of last year. Frankfurt- and U.S.-listed shares saw a brief pop higher Tuesday after a Justice Department official signaled that banks can lower fines by cooperating with authorities, but soon returned to negative territory. Though they largely remain above record lows reached in February, the bank’s credit products have taken a beating in recent days.  Below, we look at pricing of corporate bonds from different levels of the bank’s credit stack. All pricing data was gleaned from Finra’s trade reporting and compliance engine, or TRACE, a mechanism for publicly reporting price moves in over-the-counter securities like corporate debt, which don’t trade on an exchange.

Deutsche Bank’s Clients Take Steps to Cut Exposure - WSJ: Some Deutsche Bank clients, among them several big and influential hedge funds, have moved to pull billions of dollars from the bank amid concerns about its stability and their exposure, said people close to clients and the bank. The funds have taken steps to withdraw securities or cash from the bank, dial back their trading activities or both, the people said. They include AQR Capital Management LLC, Capula Investment Management LLP, Citadel LLC, Luxor Capital Group LP, Magnetar Capital LLC and Millennium Management LLC. Shares in the bank dropped as much as 8% in early trading in Frankfurt on Friday before recovering some ground to trade down about 5% in the afternoon.The client moves, which have mounted in recent days, don’t mean the hedge funds have stopped doing business with Deutsche Bank, but that they have taken steps to transfer some of their accounts, financing arrangements and trading to other banks as questions about Deutsche Bank’s capital position have intensified, the people said. The amount of assets recently withdrawn or earmarked for potential withdrawal is in the billions of dollars, one of the people said. That is a small piece of the hundreds of billions in balances analysts say Deutsche Bank has in its so-called prime-brokerage business alone—and a tiny fraction of its more than $600 billion in customer deposits overall. Still, the retreat by clients is a sign of nervousness about Deutsche Bank’s ability to weather its challenges, some of which are specific to the bank and others wrought by economic conditions plaguing European banks as a group.

 U.S. Faults Foot-Dragging Banks Amid Deutsche Bank Talks – The Justice Department, locked in settlement talks with Deutsche Bank AG, said that several lenders caught up in long-running mortgage securities investigations had dragged out the government’s work by failing to cooperate and have only themselves to blame for the “cloud of uncertainty” that hung over them.Bill Baer, the department’s No. 3 official said, used a speech in Chicago on Tuesday to recount the “stunning breakdown of ethics” and compliance among banks that packaged and sold faulty residential mortgage bonds at the heart of the 2008 financial crisis. Without help from the banks in several instances, he said, the government was forced to build cases from the ground up.“Each prolonged the period in which a cloud of uncertainty hung over the institution. And each paid a lot more than it would have if it had cooperated early on,” Baer said.Investors are monitoring the Justice Department for signals on how it’s handling negotiations with Deutsche Bank to settle an inquiry into the lender’s residential mortgage-backed securities operation. The U.S. opened settlement talks with a request for a $14 billion penalty, the bank has said. That’s more than the bank, which faces multiple U.S. investigations into its operations, says it’s willing to pay. Deutsche Bank, which didn’t have a comment on Baer’s remarks, reiterated that its settlement negotiations had just begun and that it “expects an outcome similar to those of peer banks which have settled at materially lower amounts.”

Why People Have Been Worrying About Deutsche Bank, in 12 Charts - Bloomberg - How do you solve a problem like Deutsche Bank AG? Its share price fell to an all-time low this week amid concerns that the bank may lack the capital to service litigation costs and meet stricter regulatory standards. The catalyst for the recent selloff appears to be Chancellor Angela Merkel's comments, reported by Focus magazine last week, in which she ruled out state assistance for the bank. Earlier this month Deutsche was hit by a $14 billion U.S. Department of Justice claim to settle the allegedly fraudulent selling and origination of mortgage-backed securities before the financial crisis.  Chief Executive Officer John Cryan has said the lender has no intention of paying a figure of that magnitude, and is redoubling efforts to both cut costs and sell assets. On Wednesday, the bank's shares opened higher for the first time in almost a week after it agreed to sell its U.K. insurance unit Abbey Life Assurance Co. — a move which will boost the bank's Tier 1 capital ratio by about 10 basis points. Rejecting bearish prognostications about the lender's financial health, Cryan told Bild in an interview published late on Tuesday that capital "is currently not an issue," and rejected the notion of German government support.  Here, we paint a picture of the bank's financial health in a dozen charts. 

The Contagion Deutsche Bank Is Spreading Is All About Derivatives – Pam Martens -One day after Federal Reserve Chair Janet Yellen failed to reassure the House Financial Services Committee that too-big-to-fail banks no longer pose a threat to the U.S. financial system, Germany’s largest bank had a dizzy spell and Wall Street banks swooned under a collective anxiety attack. The writing has been on the wall for a very long time that this scenario was going to eventually play out given the lack of serious reform of Wall Street. What was notable about yesterday’s market activity is that among the major Wall Street banks, Goldman Sachs fared worst, falling 2.75 percent, followed by Morgan Stanley which shed 2.30 percent and Citigroup, which lost 2.28 percent. All of the major Wall Street banks were dragged down by the 6.67 percent decline in the shares of Deutsche Bank by the close of trading on Thursday on the New York Stock Exchange. Since last October, Deutsche Bank shares have lost 62 percent of their market value, leaving the bank with a common equity market value of $15.8 billion to anchor assets of $1.9 trillion. (See Is Deutsche Bank as Dangerous to Financial Stability as Citigroup Was in 2008.) Why Goldman Sachs, Morgan Stanley and Citigroup shed more equity value than Wall Street banks with much larger balance sheets like JPMorgan Chase and Bank of America was foretold on February 12, 2015 when the research agency created under the Dodd-Frank financial reform legislation issued a report with the above troubling graph. The report from the Office of Financial Research (OFR) was titled Systemic Importance Indicators for 33 U.S. Bank Holding Companies: An Overview of Recent Data. The above graphed data from the report indicates that Morgan Stanley, Goldman Sachs and Citigroup had the highest OTC derivatives values as a percent of their total exposures.  Deutsche Bank has a boatload. Deutsche Bank characterized its net derivatives exposure as follows in its 2015 annual report:  “At December 31, 2015, the notional related to the positive and negative replacement values of derivatives and off balance sheet commitments were € 255 billion, € 606 billion and € 31 billion respectively.”  That’s at a bank with a stock market capitalization of $15.8 billion – a market cap that is evaporating like a snow cone in July. This is also the bank that the International Monetary Fund said in a June report was “the most important net contributor to systemic risks.” In a graph accompanying that IMF report, every major Wall Street Bank was identified as having potential outward spillover impacts from troubles at Deutsche Bank..

 Will Deutsche Bank's Collapse Be Worse Than Lehman Brothers? --Few analysts noted it, but the $USD actually staged its second strongest day of the year the Friday before last. The only other day in which the $USD rallied more was on the day of BREXIT, a black swan event that featured EXTREME currency volatility. This move tells us something BIG is afoot “behind the scenes” in the financial system I believe that something is a banking crisis in the EU. The clear signal is coming from Deutsche Bank (DB). DB is the proverbial “canary in the coalmine” for Europe. Perched atop the largest derivatives book in Europe, DB has ties to most major financial institutions in the region. Which is why as soon as DB starts nose-diving, you know something big is up.DB shares are down 16% since September 15th and nearly 20% from September 9th. Put another way, this bank has lost a FIFTH of its market cap in less than two weeks.   Bear in mind, Deutsche Bank is considerably larger than Lehman Brothers. It’s derivatives book is 20 times German GDP. And the long-term chart is VERY disturbing.  We believe the global markets are on the verge of another Crisis. 2008 was Round 1. This next round, Round 2, will be even worse.

 Deutsche Bank Yield Curve Inverts As Counterparty Risk Hedging Spikes Despite DoJ Rumors -- As the mainstream media attempts to mollify the ignorant masses with rumors of reduced DoJ fines for DB (as if that the problem now), professionals are buying counterparty risk protection at the fastest pace in history. If you are a leveraged fund with client relationships with Deutsche Bank, you have a number of options including: 1) Reduce excess cash (already saw yesterday as hedge funds begin run), 2) Demand tri-party arrangements (i.e. force DB to allow you not to face them as a counterparty - which we have also already seen), or 3) Reduce risk (unwind positions or hedge potential for loss from counterparty risk)  And now that final hedging of Counterparty Risk is occurring at a rapid pace.  While the stock price bounces on completely unconformed reports of DOJ reducing its DB fines (which is irrevelant now that DB has become a liquidity issue), Professionals are ploughing into protection, pulling cash, and demanding tri-party. This has inverted the DB yield curve - a very ominous sign. It took a global coordinated money flood to save the world systemically in Feb... what happens next?

Credit Suisse, Barclays Said to Be in Mortgage-Settlement Talks - Bloomberg: Deutsche Bank AG isn’t the only lender wrestling with the U.S. to resolve an investigation into toxic mortgage bonds: Credit Suisse Group AG and Barclays Plc are also each in settlement talks with the Justice Department, according to people familiar with the matter. A Credit Suisse deal could be announced within several weeks, one of the people said. The people all asked not to be named because the negotiations are confidential. The talks bring to at least three the number of banks in active discussions to settle investigations into mortgage-backed securities dealings that sparked the 2008 financial crisis. The negotiations are taking place as one top official expressed exasperation, in a speech this week, over lack of cooperation from some lenders in the long-running civil investigation. With about four months remaining before a new administration takes over, officials are eager to wrap up the pending cases, one of the people said. It’s possible the talks could drag out or fall apart, sending the cases to civil trial. The figures under discussion with each bank couldn’t immediately be learned. The government already has secured $46 billion in penalties, compensation and consumer relief from six firms related to the marketing of mortgage-backed securities. Credit Suisse, based in Zurich, has set aside 1.76 billion francs ($1.62 billion) to cover litigation expenses as of the end of the second quarter, according to quarterly filings. In addition to the mortgage-securities claims, the bank also faces allegations of rigging financial benchmarks and criminal complaints in Switzerland by clients. London-based Barclays has set aside 2.5 billion pounds ($3.3 billion) for investigations and litigation in the two years ended in June and hasn’t specified a provision for a U.S. mortgage settlement. Credit Suisse, Barclays and the Justice Department declined to comment.

More Mortgages in 2015 Despite Fewer Lenders: HMDA Data - The number of new mortgages issued in 2015 rose 22% — reversing a more than 30% decline in mortgage originations the previous year — even as the number of originating institutions declined and nonbanks accounted for a greater share of new loans, according to housing finance data released Thursday. In its annual issuance of Home Mortgage Disclosure Act data, the Federal Financial Institutions Examination Council said that the total number of new mortgages rose to 7.4 million, up from 6.1 million in 2014. That increase reflected "strong" growth in both new home mortgages and refinances, with new first-lien home loans increasing to 3.7 million from 3.2 million in 2014 and refinances increasing to 3.2 million from 2.4 million in 2014. The proportion of loans being made by non-depository independent mortgage companies continued its upward trend, the report said, with nonbanks originating 50% of new first-lien mortgages and 48% of refinances in 2015 — the highest levels, the report said, since 1995. Data showed that racial minorities remain disproportionately more likely to be rejected for a mortgage, but the proportion of nonwhite homeowners rose steadily. In 2015, 5.5% of homeowners were African-Americans — up from 5.2% in 2014, but below its peak of 8.7% in 2006, the data said. Similarly, the number of Hispanic borrowers went up 4% in 2015, to 8.3% of all mortgage holders (down from the 2006 peak of 11.7%). The report said that its analysis concluded that "sharp reductions in lending to individuals with low credit scores can explain much of the decrease in black and Hispanic white market shares." New higher-priced mortgages also declined in 2015, making up only 3% of new first-lien mortgages and 2% of refinances. But the report showed that smaller banks and credit unions made up by far the largest proportion of lenders offering higher-priced mortgages.

The Big Banks Shouldn't Inherit Our Housing Finance System - Eight years after high-risk, deceptive lending practices precipitated a near-meltdown of the global economy, we learned that at least 5,300 Wells Fargo employees created 2 million sham accounts that its customers apparently did not want, need or understand. Those unwitting Wells customers paid at least $1.5 million in fees. But if only the bad-news stories about big banks ended there, and if only policymakers weren’t threatening to help big banks boost their profits even more. Observers should take note of recent proposals to revamp the housing finance system into a more bank-centric model, which could benefit the largest institutions to the detriment of other mortgage market participants. At Wells, employees were incentivized by sales goals to open as many accounts as possible. The executive who oversaw this operation, Carrie Tolstedt, has recently retired with a reported $124.6 million package. But what about the thousands of customers her team defrauded?And yet, the Wells episode is just one example of the biggest banks’ inability to stay out of the news. The scandal came on the heels of Bank of America’s agreement in June to pay $430 million for misusing customers’ cash. About a week after the Wells story broke, it was also reported that the Department of Justice was seeking $14 billion from Deutsche Bank to settle claims about the bank’s sale of mortgage-backed security. In the meantime, Deutsche Bank is also mired in a scandal involving $10 billion of suspicious trades out of its Russian unit that resemble money-laundering.How can this still be happening? In the eight years since the financial crisis, there have been dozens of congressional hearings, thousands of news stories, a host of best-selling books and a blue-ribbon commission promised to help us understand what went wrong and how to prevent a recurrence. The Dodd-Frank Act was heralded as a means of "constrain[ing] the growth of the largest financial firms" and ensuring that the "irresponsible lending" that led to the financial crisis "never happens again." But since then, the nation’s "too big to fail" banks have only gotten bigger, and, as this newest Wells Fargo episode demonstrates, old habits die hard. Rather than preventing "too big to fail," we’ve doubled down. In fact, since President Obama signed the deeply flawed Dodd-Frank in 2010, the banks regarded as too big have grown by 30%. The six largest banks now control assets of approximately $10 trillion, equal to almost 60% of our country’s GDP (compared with 17% in 1995). In contrast, small community-focused lenders are being squeezed out of existence. There are at least 1,500 fewer banks with assets under $1 billion than prior to the financial crisis.

U.S. Commercial, Multifamily Mortgage Debt Hits $2.9 Trillion in Mid 2016 - According to the Mortgage Bankers Association's latest Commercial/Multifamily Mortgage Debt Outstanding Report released this week, the level of commercial and multifamily mortgage debt outstanding increased by $39.9 billion in the second quarter of 2016, as three of the four major investor groups increased their holdings.Total commercial/multifamily debt outstanding rose 1.4 percent over the first quarter of 2016 to $2.90 trillion at the end of the second quarter.  Multifamily mortgage debt outstanding rose to $1.09 trillion, an increase of $27.6 billion, or 2.6 percent, from the first quarter of 2016.  "The amount of commercial and multifamily mortgage debt outstanding grew to a new record during the second quarter, despite a record drop in the balance of CMBS loans outstanding," said Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research.  "The CMBS market is seeing far more loans paying-off and paying down than new loans being originated.  At the same time, banks, Fannie Mae, Freddie Mac, life companies and others continue to increase their holdings of commercial and multifamily mortgages."The four major investor groups are: bank and thrift; commercial mortgage backed securities (CMBS), collateralized debt obligation (CDO) and other asset backed securities (ABS) issues; federal agency and government sponsored enterprise (GSE) portfolios and mortgage backed securities (MBS); and life insurance companies. MBA's analysis summarizes the holdings of loans or, if the loans are securitized, the form of the security.  For example, many life insurance companies invest both in whole loans for which they hold the mortgage noteand in CMBS, CDOs and other ABS for which the security issuers and trustees hold the note (and which appear here under CMBS, CDO and other ABS issues).  Commercial banks continue to hold the largest share of commercial/multifamily mortgages, $1.1 trillion, or 39 percent of the total.

MBA Details HAMP Successor Program: The Mortgage Bankers Association has detailed the features of a proposal to succeed the soon-to-be-defunct Home Affordable Mortgage Program. The proposed successor program is currently called "One Mod" and was developed by an MBA task force focused on the future of loss, which included representatives from 20 member companies. The program would offer at least a 20% payment reduction for eligible borrowers. "MBA's task force recognizes that the industry, borrowers and investors need a successor to HAMP that is consistent and can be widely scaled," said Pete Mills, MBA senior vice president of residential policy and member services, in a news release Friday. "Application of the task force's principles and the 'One Modification' or 'One Mod' will go a long way towards offering deep payment relief for struggling homeowners and a positive economic outcome for investors." The program proposal features 10 principles along four themes: accessibility, affordability, sustainability and transparency. For instance, One Mod would only require consumers to submit documents related specifically to their eligibility for a modification. Additionally, the program would provide modification options based on criteria that has a noted effect on default rates and that aims to maximize relief received with the first offer. The decrease in mortgage payments would also be immediate following modification. The program would also work to differentiate between short- and long-term financial hardships and would engrain disclosure regarding the loss mitigation options available and why consumers received an approval for a particular option.

Dismal Deja Vu: Fannie & Freddie Lower Lending Standards -- Stop me if you’ve heard this one before, but Fannie Mae and Freddie Mac are lowering mortgage standards.  On Monday, the two government-backed housing giants revealed a new program designed to boost mortgage origination among first time buyers and those with low to medium incomes. The new program, which will initially be limited two non-bank lenders, will allow borrowers to include the income of residents that aren’t actually on the mortgage, as well as make it easier for borrowers to include income from second jobs. While these changes may strike some as sensible, anyone who has seen The Big Short would have valid concerns in the oversight of these looser lending standards – especially when you consider that the companies responsible for mortgage origination will not be the ones holding the mortgages, Fannie Mae and Freddie Mac will. It’s always easier to make loans when you know the taxpayers are the ones that will be holding the risk.  Not only does this program increase taxpayer risk, it does nothing to solve the real issues in the housing market. While it’s true that America’s home ownership rate is at a 51-year low, this has less to do with current lending standards and has more to do with housing prices rising much faster than household income.  One of the factors contributing to this is interest rate policy, which disincentives traditional savings and has driven would-be savers to look for higher yield investments. With growing concerns about a bubble in stocks, many Americans have turned to housing with investment-home sales increasing 7% in 2015, the first increase in five years.

 Freddie Mac: Mortgage Serious Delinquency rate declined in August, Lowest since July 2008 --Freddie Mac reported that the Single-Family serious delinquency rate declined in August to 1.03%, down from 1.08% in July.  Freddie's rate is down from 1.45% in August 2015.This is the lowest rate since July 2008. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  These are mortgage loans that are "three monthly payments or more past due or in foreclosure".   (graph)  Although the rate is generally declining, the "normal" serious delinquency rate is under 1%.   The Freddie Mac serious delinquency rate has fallen 0.42 percentage points over the last year, and at that rate of improvement, the serious delinquency rate could be below 1% in next month (September).

 MBA: "Mortgage Applications Decrease in Latest Weekly Survey" --From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey Mortgage applications decreased 0.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 23, 2016. ... The Refinance Index decreased 2 percent from the previous week. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index remained unchanged from the previous week and was 10 percent higher than the same week one year ago... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.66 percent from 3.70 percent, with points decreasing to 0.33 from 0.38 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.The first graph shows the refinance index since 1990. Refinance activity has increased this year since rates have declined. The second graph shows the MBA mortgage purchase index. The purchase index was "10 percent higher than the same week one year ago".

Low Rates Keep Housing Market Strong as Affordability Erodes: Low interest rates are keeping the housing market strong even as affordability keeps declining, according to the latest Freddie Mac Multi-Indicator Market Index. July's index is 85.1, a gain of 0.14% from June and up 4.7% from July 2015. Since bottoming out in October 2010, the index has increased 43%. When compared with June, the purchase component gained 0.45% to 77.8, but the payment-to-income index declined 1.72% to 67.3. "Despite rising house prices, the majority of housing markets have sustained their momentum due in large part to low mortgage rates. For example, purchase applications, as measured by MiMi, were up more than 17% year-over-year in July and remaining at their highest level since December 2007," said Len Kiefer, Freddie Mac deputy chief economist, in a press release. The states with the most improvement in their index values from June were Illinois (1.72%) and Nevada (1.36%). These states had nowhere to go but up as Illinois has the 48th (including the District of Columbia) lowest index at 77 while Nevada has the lowest at 67.3. Florida had the largest year-over-year increase in its index at 10.03%.

Case-Shiller: National House Price Index increased 5.1% year-over-year in July --S&P/Case-Shiller released the monthly Home Price Indices for July ("July" is a 3 month average of May, June and July prices). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the monthly National index. Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs. From S&P: Home Price Gains in July Slow According to the S&P CoreLogic Case-Shiller Indices The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.1% annual gain in July, up from 5.0% last month. The 10-City Composite posted a 4.2% annual increase, down from 4.3% the previous month. The 20-City Composite reported a year-over-year gain of 5.0%, down from 5.1% in June. ..Before seasonal adjustment, the National Index posted a month-over-month gain of 0.7% in July. The 10-City Composite recorded a 0.5% month-over-month increase while the 20-City Composite posted a 0.6% increase in July. After seasonal adjustment, the National Index recorded a 0.4% month-overmonth increase, the 10-City Composite posted a 0.1% decrease, and the 20-City Composite remains unchanged. After seasonal adjustment, 12 cities saw prices rise, two cities were unchanged, and six cities experienced negative monthly prices changes. The first graph shows the nominal seasonally adjusted Composite 10, Composite 20 and National indices (the Composite 20 was started in January 2000). The Composite 10 index is off 11.1% from the peak, and down slightly in July (SA). The Composite 20 index is off 9.2% from the peak, and down slightly (SA) in July. The National index is off 2.2% from the peak (SA), and up 0.4% (SA) in July. The National index is up 32.1% from the post-bubble low set in December 2011 (SA). The second graph shows the Year over year change in all three indices. The Composite 10 SA is up 4.2% compared to July 2015. The Composite 20 SA is up 5.1% year-over-year. The National index SA is up 5.1% year-over-year. Note: According to the data, prices increased in 12 of 20 cities month-over-month seasonally adjusted.

Home Prices Rose 5.0% Year-over-Year, Slow Gains in July --With today's release of the July S&P/Case-Shiller Home Price we learned that seasonally adjusted home prices for the benchmark 20-city index were unchanged month over month.  The seasonally adjusted year-over-year change has hovered between 4.4% and 5.4% for the last twelve months. The adjacent column chart illustrates the month-over-month change in the seasonally adjusted 20-city index, which tends to be the most closely watched of the Case-Shiller series. It was unchanged from the previous month. The nonseasonally adjusted index was up 5.0% year-over-year.Investing.com had forecast a -0.1% MoM seasonally adjusted decrease and 5.1% YoY nonseasonally adjusted for the 20-city series. Here is an excerpt of the analysis from today's Standard & Poor's press release."Both the housing sector and the economy continue to expand with home prices continuing to rise at about a 5% annual rate,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The statement issued last week by the Fed after its policy meeting confirms the central bank’s view that the economy will see further gains. Most analysts now expect the Fed to raise interest rates in December. After such Fed action, mortgage rates would still be at historically low levels and would not be a major negative for house prices,"The S&P CoreLogic Case-Shiller National Index is within 0.6% of the record high set in July 2006. Seven of the 20 cities have already set new record highs. The 10-year, 20-year, and National indices have been rising at about 5% per year over the last 24 months. Eight of the cities are seeing prices up 6% or more in the last year. Given that the overall inflation is a bit below 2%, the pace is probably not sustainable over the long term. The run-up to the financial crisis was marked with both rising home prices and rapid growth in mortgage debt. Currently, outstanding mortgage debt on one-to-four family homes is 12.6% below the peak seen in the first quarter of 2008 and up less than 2% in the last four quarters. There is no reason to fear that another massive collapse is around the corner." [Link to source]The chart below is an overlay of the Case-Shiller 10- and 20-City Composite Indexes along with the national index since 1987, the first year that the 10-City Composite was tracked. Note that the 20-City, which is probably the most closely watched of the three, dates from 2000. We've used the seasonally adjusted data for this illustration.

US Home Price Growth Slowest In A Year -- US home prices grew at a disappointing 5.02% YoY in July (missing expectations of 5.10% and the lowest since Aug 2015). All 20 cities in the index showed year-over-year gains, but six cities showed seasonally adjusted price declines in July compared with the prior month, also including New York, Atlanta and Detroit. Growth is slowing as we saw in sales data this month..  Portland, Seattle, and Denver reported the highest year-over-year gains among the 20 cities over each of the last six months. In July, Portland led the way with a 12.4% year-over-year price increase, followed by Seattle at 11.2%, and Denver with a 9.4% increase. Nine cities reported greater price increases in the year ending July 2016 versus the year ending June 2016. David Blitzer, chairman of the S&P index committee, said in a statement: “Both the housing sector and the economy continue to expand,”  While some cities are seeing rapid price gains, “there is no reason to fear that another massive collapse is around the corner” because mortgage debt is rising at a relatively slow pace. So that's nice then - nothing to worry about at all.

Real Prices and Price-to-Rent Ratio in July -- Here is the earlier post on Case-Shiller: Case-Shiller: National House Price Index increased 5.1% year-over-year in July. The year-over-year increase in prices is mostly moving sideways now around 5%. In July, the index was up 5.1% YoY. In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted). Case-Shiller, CoreLogic and others report nominal house prices. As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation (37%). That is why the second graph below is important - this shows "real" prices (adjusted for inflation). It has been almost ten years since the bubble peak. In the Case-Shiller release this morning, the National Index was reported as being 2.2% below the bubble peak (seasonally adjusted). However, in real terms, the National index is still about 16.6% below the bubble peak. The first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through June) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to December 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to June 2005 levels, and the CoreLogic index (NSA) is back to July 2005. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. CPI less Shelter has declined over the last two years pushing up real house prices. In real terms, the National index is back to January 2004 levels, the Composite 20 index is back to October 2003, and the CoreLogic index back to November 2003. In real terms, house prices are back to late 2003 levels.On a price-to-rent basis, the Case-Shiller National index is back to July 2003 levels, the Composite 20 index is back to April 2003 levels, and the CoreLogic index is back to June 2003. In real terms, and as a price-to-rent ratio, prices are back to late 2003 - and the price-to-rent ratio maybe moving a little more sideways now.

 "Home Prices Are Out Of Hand Again"  - U.S. home prices appear to be getting out of hand again as the gap between home price growth and household real income growth is close to where it was just before the housing collapse. It’s also notable, and worrying, that the housing market is back in a “flipping frenzy” with non-bank actors climbing aboard to fund the speculation. Since 1999 year-end through 2015 home prices have risen 76% while household mean real income has grown less than 2%; the millennium-to-date gap between the two growth rates peaked at 84% during 2005-2006 and has risen back to 74% as of 2015 year-end. Gap at year-end 2007 was 75%. This millennium through 2015 has seen average new and existing home sale prices rise 84% and 55%, respectively, despite the lack of income growth. Existing and new home sales average prices peaked at $280.2k in June 2015 and $384k in Oct. 2014, respectively; both peaks exceeded levels seen during housing boom. Over the same period outstanding home mortgage debt has risen 14%, though it’s notable that with the end of easy mortgage credit it has fallen 11% from its June 2008 peak. Concurrent with this 11% fall, the homeownership rate (63.8% at 2015 year-end) has slid back to levels last seen in the mid-1960s. Monthly U.S. single-family home price y/y growth hit a post-crisis peak of 10.85% in Oct. 2013 and has since leveled off at ~5% each month since July 2015; this is still easily outpacing growth in real income. The disconnect between home price growth and the lack of real income growth has led homebuilders’ to turn to the higher-end of the market and for Ginnie Mae to take the lead in mortgage lending. GNMA offers taxpayer-guaranteed loans to first-time homebuyers who have lower credit scores and smaller down payments than those who obtain loans through Fannie Mae or Freddie Mac. Whereas from 2005-2007 GNMA pct share of net MBS issuance was ~2% each year, during 2014, 2015 and 2016 YTD it is ~67%, according to BofAML data.

Zillow Forecast: Expect Similar YoY Growth in August for the Case-Shiller Indexes  - The Case-Shiller house price indexes for July were released Tuesday. Zillow forecasts Case-Shiller a month early, and I like to check the Zillow forecasts since they have been pretty close.From Zillow: August Case-Shiller Forecast: New Home Price Peaks Within SightAccording to Zillow’s August Case-Shiller forecast, the national index and both smaller 10 and 20-city indices look set to keep growing at a very similar rate as they have been for the past few months. After two full years of steady growth around 5 percent annually, the U.S. National Case-Shiller home price index is within striking distance of reaching its July 2006 peak levels, just 0.6 percent off those levels, according to today’s data.The August Case-Shiller National Index is expected to grow 5.2 percent year-over-year and 0.5 percent month-to-month (seasonally adjusted). We expect the 10-City Index to grow 4.1 percent year-over-year and to stay flat (SA) from July. The 20-City Index is expected to grow 4.9 percent between August 2015 and August 2016, and rise 0.1 percent (SA) from July. Zillow’s August Case-Shiller forecast is shown in the table below. These forecasts are based on today’s July Case-Shiller data release and the August 2016 Zillow Home Value Index (ZHVI). The August S&P CoreLogic Case-Shiller Indices will not be officially released until Tuesday, October 25. The year-over-year change for the 20-city index will probably be slightly lower in the August report than in the July report.  The change for the National index will probably be slightly higher.

New Home Sales decreased to 609,000 Annual Rate in August - The Census Bureau reports New Home Sales in August were at a seasonally adjusted annual rate (SAAR) of 609 thousand.  The previous three months were revised down by a total of 4 thousand (SAAR). "Sales of new single-family houses in August 2016 were at a seasonally adjusted annual rate of 609,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.6 percent below the revised July rate of 659,000, but is 20.6 percent above the August 2015 estimate of 505,000." The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Even with the increase in sales since the bottom, new home sales are still fairly low historically. The second graph shows New Home Months of Supply. The months of supply increased in August to 4.6 months. The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal). "The seasonally adjusted estimate of new houses for sale at the end of August was 235,000. This represents a supply of 4.6 months at the current sales rate." Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed. The third graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale is still low, and the combined total of completed and under construction is also low.

August New Home Sales Down to 7.6% Month-over-Month, Better Than Forecast - dshort - Advisor Perspectives: This morning's release of the August New Home Sales from the Census Bureau came in at 609K, down 7.6% month-over-month from a revised 659K in July. Seasonally adjusted estimates for May, June, and July were revised. The Investing.com forecast was for 600K. Here is the opening from the report: Sales of new single-family houses in August 2016 were at a seasonally adjusted annual rate of 609,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.6 percent (±10.7%)* below the revised July rate of 659,000, but is 20.6 percent (±14.8%) above the August 2015 estimate of 505,000. The median sales price of new houses sold in August 2016 was $284,000; the average sales price was $353,600. The seasonally adjusted estimate of new houses for sale at the end of August was 235,000. This represents a supply of 4.6 months at the current sales rate. [Full Report] For a longer-term perspective, here is a snapshot of the data series, which is produced in conjunction with the Department of Housing and Urban Development. The data since January 1963 is available in the St. Louis Fed's FRED repository here. We've included a six-month moving average to highlight the trend in this highly volatile series.

August 2016 New Home Sales Decline On Lower Median Sales Prices.: The headlines say new home sales declined. The median sales price for homes was down - and inventory was up insignificantly. This data series is suffering from methodology issues which manifest as significant backward revision - but this month they were fairly small. Overall, year-over-year rate sales growth moderated from supersonic rates to subsonsic (you see little growth today at 22% year-over-year). Home sales move in spurts and jumps - so this is why we view this series using a three month rolling average (rolling averages improved). Interesting that the median home prices declined this month - this suggests either discounting or market supply at lower price points. Home inventory is up slightly from one year ago - but not significantly so that one could read something into that number. Overall I view this as a good report, which was above market expectations. Econintersect analysis:

  • unadjusted sales growth decelerated 10.6 % month-over-month.
  • unadjusted year-over-year sales up 22.0 %.. Year-over-year growth rate this month was was above the range of growth seen last 12 months.
  • three month unadjusted trend rate of growth accelerated 3.3 % month-over-month - is up 24.2 % year-over-year.

New Home Sales Tumble As Prices Hit 2-Year Lows ----Following July's exuberant spike, August saw new home sales tumbled 7.6% MoM (better than expected 8.3% drop) catching down to Existing and Pending Home Sales (and Housing Starts) plunge. Perhaps more problematic, the median new home price slipped to $284k, its lowest since September 2014.Spot the odd one out... As Home prices tumble...  The median sales price decreased 5.4 percent from August 2015 to $284,000.  Purchases fell in three of four regions, including a 12.3 percent slump in the South, the area that makes up the bulk of nationwide sales. Purchases declined 2.4 percent in the Midwest, and climbed 8 percent in the West to the highest level since September 2007.  The supply of homes at the current sales rate rose to 4.6 months from 4.2 months in the prior month. There were 235,000 new houses on the market at the end of August.  Probably a good time to hike interest rates... Charts: Bloomberg

 A few Comments on August New Home Sales --The new home sales report for August was strong at 609,000 on a seasonally adjusted annual rate basis (SAAR) - the highest for the month of August since 2007 - and the second highest sales rate since January 2008 (only last month was higher).  However combined sales for May, June and July were revised down slightly. Sales were up 20.6% year-over-year (YoY) compared to August 2015. And sales are up 13.3% year-to-date compared to the same period in 2015. This is very solid year-over-year growth. And new home sales are much more important for jobs and the economy than existing home sales. Since existing sales are existing stock, the only direct contribution to GDP is the broker's commission. There is usually some additional spending with an existing home purchase - new furniture, etc - but overall the economic impact is small compared to a new home sale.  This graph shows new home sales for 2015 and 2016 by month (Seasonally Adjusted Annual Rate).  Sales to date are up 13.3% year-over-year, because of very strong year-over-year growth over the last five months.Overall  I expected lower growth this year, in the 4% to 8% range.  Slower growth seemed likely this year because Houston (and other oil producing areas) will have a problem this year.   It looks like I was too pessimistic on new home sales this year.And here is another update to the "distressing gap" graph that I first started posting a number of years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to close over the next several years

 Lawler: Renter Share of Single-Family Market Declined Slightly in 2015 -- Data from the 2015 American Community Survey suggest thatFor the first time since 2006, the number of single-family housing units occupied by renters declined slightly last year. The share of occupied single-family (detached and attached) housing units occupied by renters, which went up from 14.8% in 2006 to 18.9% in 2014, declined very slightly to 18.8% in 2015.   ACS estimates suggest that the number of owner-occupied single-family homes declined by about 260,000 from 2006 to 2014, while the number of renter-occupied single-family homes increased by almost 3.9 million. On the owner-occupied single-family front, from 2010 to 2015 the share of owned homes occupied by households 65 years or older rose from 25.5% to 29.8%. Some analysts believe that the combination of a high renter-share and a high “old-folks” share of the single-family market is at least partly responsible for the relatively low level of single-family homes for sale.  CR Note: My view is these are two of the key reasons existing home inventory is low: 1) As Lawler notes, a large number of single family home and condos were converted to rental units. Most of these rental conversions were at the lower end, and that is limiting the supply for first time buyers. and 2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80, in another 10 to 20 years for the boomers).

  NAR: Pending Home Sales Index decreased 2.4% in August, down 0.2% year-over-year - From the NAR: Pending Home Sales Retreat in August After bouncing back in July, pending home sales cooled in August for the third time in four months and to their lowest level since January, according to the National Association of Realtors®.  The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 2.4 percent to 108.5 in August from a downwardly revised 111.2 in July and is now slightly lower (0.2 percent) than August 2015 (108.7). With last month's decline, the index is now at its second lowest reading this year after January (105.4)...The PHSI in the Northeast rose 1.3 percent to 98.1 in August, and is now 5.9 percent above a year ago. In the Midwest the index decreased 0.9 percent to 104.7 in August, and is now 1.7 percent lower than August 2015.Pending home sales in the South declined 3.2 percent to an index of 119.8 in August and are now 1.5 percent lower than last August. The index in the West fell 5.3 percent in August to 102.8, and is now 0.6 percent lower than a year ago. This was well below expectations of a 0.5% increase for this index.  Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in September and October.

 Rural Housing Agency Launches New Construction Loan Program: The Rural Housing Service has quietly launched a new construction loan program designed to increase the availability of new homes in rural areas. The program was launched in March, but many industry representatives weren't aware of it until last week when it was discussed at a recent conference hosted by Ginnie Mae. Under the program, construction-to-permanent financing for low- and moderate-income families can be securitized and sold to Ginnie investors. The RHS loan guarantee goes into effect right after the first closing. "We don't wait until construction is completed or until the certificate for occupancy is issued. We don't wait for that," said Joaquin Tremols, the single-family director for the RHS, at the conference. The maximum loan-to-value ratio is 100% and a down payment is not required. "We are encouraging new construction in rural areas," Tremols said. He said the program could help revitalize housing stock, which in many rural areas is very old. Additionally, new construction will stimulate business activity and development in rural areas. RHS is part of the U.S. Department of Agriculture's Rural Development division.

 Personal Income increased 0.2% in August, Spending increased less than 0.1% --The BEA released the Personal Income and Outlays report for August:  Personal income increased $39.3 billion (0.2 percent) in August according to estimates released today by the Bureau of Economic Analysis. ... personal consumption expenditures (PCE) increased $6.2 billion (less than 0.1 percent).... Real PCE decreased 0.1 percent. The PCE price index increased 0.1 percent. Excluding food and energy, the PCE price index increased 0.2 percent.  The August PCE price index increased 1.0 percent year-over-year and the August PCE price index, excluding food and energy, increased 1.7 percent year-over-year. The following graph shows real Personal Consumption Expenditures (PCE) through August 2016 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change. The dashed red lines are the quarterly levels for real PCE. The increase in personal income was at consensus expectations.  And the increase in PCE was below the 0.2% increase consensus. Using the two-month method to estimate Q3 PCE growth, PCE was increasing at a 3.1% annual rate in Q3 2016. (using the mid-month method, PCE was increasing 2.6%). This suggests decent PCE growth in Q3, even with the weak August report.

August 2016 Personal Consumption and Income Year-over-Year Growth Slows.: The headline data this month showed NO consumer expenditure growth. This is a negative for 3Q2016 GDP. Income growth was also anemic. The trend lines keep moving around due to backward revision but the data this month was soft and expenditures were well below expectations, Year-over-year growth for both personal income and expenditures declined with expenditures now growing faster than income..With consumer spending the only real engine in GDP, look for another downgrade of 3Q2016 GDP forecasts.

  • The monthly fluctuations are confusing. Looking at the inflation adjusted 3 month trend rate of growth, disposable income growth rate trend was unchanged while consumption's growth rate is decelerating.
  • Real Disposable Personal Income is up 2.4 % year-over-year (published 2.7 % last month - now revised to 2.6 %), and real consumption expenditures is up 2.6 % year-over-year (published 3.0 % last month - now revised to 2.9%)
  • this data is very noisy and as usual includes moderate backward revision - this month the changes modified the year-over-year trends.
  • The third estimate of 2Q2016 GDP indicated the economy was expanding at 1.4 % (quarter-over-quarter compounded). Expenditures are counted in GDP, and income is ignored as GDP measures the spending side of the economy. However, over periods of time - consumer income and expenditure grow at the same rate.
  • The savings rate continues to be low historically, and was unchanged at 5.7 % this month.

US Spending Disappoints In August As Savings Rate Rises For Second Month -- After personal spending growth slowed modestly one month ago, rising 3.8% Y/Y, in August US consumption once again disappointed, staying flat in the month, below the 0.1% expected sequential rebound, although this was offset by an upward revision to the last month's data from 0.3% to 0.4%. On an inflation adjusted basis, as feeds into the GDP beancount, Real PCE dipped -0.1% in August, well below July's 0.3% bounce, missing the expectation of a 0.1% rise while the Core PCE Index was inline with the 1.7% expected on a Y/Y basis. At the same time, Personal Income was in line with expectations, rising 0.2% sequentially, half the July growth rate of 0.4%, or a nominal increase of $39 billion, down from $66 billion last month, of which wages comprised just $13.3 billion while personal current transfers, aka government benefits mostly in the form of Medicaid, contributed over $10 billion in income. As the chart below shows, the trendline in income and spending remains fixed in its long-running channel: And since incomes rose more than spending, the personal saving rose to $808 billion from $782 billion a month ago, resulting in another monthly pickup in the savings rate, which rose from a revised 5.6% to 5.7% in July, the highest since May, suggesting the the dramatic spending spree observed in Q1 and part of Q2 has so far to make any notable comeback.

Real Disposable Income Per Capita in August Remains Unchanged - With the release of today's report on August Personal Incomes and Outlays we can now take a closer look at "Real" Disposable Personal Income Per Capita.  At two decimal places, the nominal 0.15% month-over-month increase in disposable income was essentially unchanged (-0.01%) when we adjust for inflation. The year-over-year metrics are 2.56% nominal and 1.59% real.  The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. This indicator was significantly disrupted by the bizarre but predictable oscillation caused by 2012 year-end tax strategies in expectation of tax hikes in 2013. The BEA uses the average dollar value in 2009 for inflation adjustment. But the 2009 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.  Nominal disposable income is up 69.7% since then. But the real purchasing power of those dollars is up only 25.8%.

Real Median Household Income Virtually Changed in August - The Sentier Research median household income data for August, released this morning, came in at $57,380. The nominal median was up $190 month-over-month but only $940 year-over-year. In percentages, the August number is up 0.3% MoM and 1.7% YoY. Adjusted for inflation, the latest income was up $76 MoM but only $322 YoY. The real numbers equate to changes of 0.1% MoM and 0.6% YoY. In real dollar terms, the median annual income is 1.6% lower (-$951) than its interim high in January 2008 but well off its low in August 2011. The first chart below is an overlay of the nominal values and real monthly values chained in the dollar value as of the latest month. The red line illustrates the history of nominal median household, and the blue line shows the real (inflation-adjusted value). Callouts show specific nominal and real monthly values for the January 2000 start date and the peak and post-peak troughs. In the latest press release, Sentier Research spokesman Gordon Green summarizes the recent data: “Median annual household income in 2016 has not been able to maintain the momentum that it achieved during 2015. So far, the median this year has declined by 0.8 percent, from $57,817 in January 2016 to $57,380 in August 2016. We continue to monitor the course of inflation, as this has a significant effect on the trend in real median annual household income. We are now at a point now where median household income is about at the same level as the beginning of the great recession in December 2007, and 0.9 percent lower than January 2000, the beginning of this statistical series.”

69 Percent Of Americans Have Less Than One Thousand Dollars In Savings: A new survey has revealed that the vast majority of savings accounts across the United States contain $1,000 or less. GoBanking conducted the research, finding that 7 in 10 Americans have less than $1,000 stashed away for the future. A small portion of people, 15 percent, are astute savers with over $10,000 in their savings accounts. This chart shows responses to the question "how much money do you have in your savings account?"

Consumer Confidence Highest Since Recession - The latest Conference Board Consumer Confidence Index was released this morning based on data collected through September 15. The headline number of 104.1 was an increase from the final reading of 101.8 for August, an upward revision from 101.1. Today's number was substantially above the Investing.com consensus of 99.0. This is the highest since August 2007. Here is an excerpt from the Conference Board press release. "Consumer confidence increased in September for a second consecutive month and is now at its highest level since the recession," said Lynn Franco, Director of Economic Indicators at The Conference Board. "Consumers’ assessment of present-day conditions improved, primarily the result of a more positive view of the labor market. Looking ahead, consumers are more upbeat about the short-term employment outlook, but somewhat neutral about business conditions and income prospects. Overall, consumers continue to rate current conditions favorably and foresee moderate economic expansion in the months ahead." The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end we have highlighted recessions and included GDP. The regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator. Statisticians may assign little significance to a regression through this sort of data. But the slope resembles the regression trend for real GDP shown below, and it is a more revealing gauge of relative confidence than the 1985 level of 100 that the Conference Board cites as a point of reference.

Consumer Confidence Is The Highest In 9 Years (& The Lowest Since 2015) -- Just days after Bloomberg's Consumer Comfort index plunged to its lowest since 2015, The Conference Board reports a spike in Consumer Confidence to 104.1 - the highest since Sept 2007 (right before the market topped out). You decide...  Consumers' assessment of current conditions improved in September. Those stating business conditions are "good" decreased from 30.3 percent to 27.4 percent. However, those saying business conditions are "bad" declined from 18.2 percent to 16.2 percent.Consumers' appraisal of the labor market was more positive than last month. Those stating jobs were "plentiful" increased from 26.8 percent to 27.9 percent, while those claiming jobs are "hard to get" declined from 22.8 percent to 21.6 percent.Consumers' optimism regarding the short-term outlook was more favorable in September. The percentage of consumers expecting business conditions to improve over the next six months decreased from 17.6 percent to 16.5 percent. However, those expecting business conditions to worsen also declined from 11.4 percent to 10.2 percent. Lynn Franco, Director of Economic Indicators at The Conference Board."Consumer confidence increased in September for a second consecutive month and is now at its highest level since the recession,""Consumers' assessment of present-day conditions improved, primarily the result of a more positive view of the labor market. Looking ahead, consumers are more upbeat about the short-term employment outlook, but somewhat neutral about business conditions and income prospects. Overall, consumers continue to rate current conditions favorably and foresee moderate economic expansion in the months ahead."   Consumers plans to buy Cars, Homes, and Major Appliances all dropped... and forward income expectations tumbled.

Michigan Consumer Sentiment: September Final Up Slightly -  The University of Michigan Final Consumer Sentiment for September came in at 91.2, up slightly from the Preliminary reading. Investing.com had forecast 90.0. Surveys of Consumers chief economist, Richard Curtin, makes the following comments: Confidence edged upward in September due to gains among higher income households, while the Sentiment Index among households with incomes under $75,000 has remained at exactly the same level for the third consecutive month. Importantly, the data provide no evidence of an upward trend as the average level of the Sentiment Index since the start of 2016 is nearly identical with the September level (91.4 versus 91.2). All of the September gains were concentrated in the Expectations Index, while assessments of current economic conditions were slightly less favorable. Fewer reports of recent income gains were counterbalanced by an uptick in income gains expected during the year ahead. The larger recent gains among upper income households was partly due to continued declines in their inflation expectations. Buying plans edged downward mainly due to the declining availability of price discounts. Real personal consumption expenditures can be expected to increase by 2.7% through mid 2017. [More...] See the chart below for a long-term perspective on this widely watched indicator. Recessions and real GDP are included to help us evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.

How would a Fed rate hike affect consumers? -- We don’t really understand how changes in the level of short-term interest rates affect things we actually care about, such as growth and employment. There are too many moving parts and leaps of logic required, many of which are based on bogus assumptions about how the world works. So it’s always nice to find new research into a small piece of the monetary transmission mechanism that’s grounded in facts. Researchers at TransUnion, the credit reporting company, looked at which American consumers would be exposed to an increase in the Federal Reserve’s policy rate corridor and the dollar magnitude of the impact of different tightening paths. We recently had a chance to discuss their findings with Nidhi Verma, who led the project. They began by looking at the entire universe of Americans with debt — excluding obligations to loan sharks and other characters who wouldn’t bother notifying a credit reporting firm. That was 217 million people at the end of 2015. Of those 217 million people, fewer than two-thirds are directly exposed to changes in short rates. All car loans in America have fixed interest rates, as do nearly all mortgages. Home equity lines of credit and credit cards are the main types of debt with floating rates. As a result somewhere between 134 million and 137 million Americans have the potential to be affected directly by changes in Fed policy. But even this overstates the extent of the Fed’s direct transmission mechanism to normal Americans. Of the 134-137 million with floating-rate credit products, only 87-92 million would be directly affected by rate hikes. At the high end, that’s just 43 per cent of all borrowers.

Digging into the Downward Trend in Consumer Inflation Expectations – Cleveland Fed - Since mid-2014, the long-run inflation expectations of consumers have been declining. Many commentators blame the decline on gasoline prices, which have also been falling since that time, but we argue that this explanation is incomplete. We analyze University of Michigan Surveys of Consumers microdata and find that a decline in uncertainty about future inflation is a modest part of the story over this period—but it represents the entire story when considering changes in expectations since 2012. The long-run inflation expectations of consumers, as measured by the University of Michigan Surveys of Consumers (“UM survey”), have been on a steady downward trend since the third quarter of 2014.1 The downward movement is attracting attention because expected inflation is at the center of the macroeconomic theory used by central banks around the world, and it is also an important input into many macroeconomic forecasting models. Anchored or stable long-term inflation expectations are important for promoting short-run inflation stability and for facilitating central bank efforts to achieve output stability, and are often suggested as an explanation of the “missing disinflation” puzzle.2,3 The decline in expectations began at about the same time as a sharp drop in gasoline prices, and many have drawn a connection between these movements. But we find that explanation incomplete at best and consider whether a decline in inflation uncertainty is also playing a role. Answering this question involves looking at the individual responses of consumers in the UM survey and making a few calculations: First, following Binder (2016a), we deduce the probability that each respondent is highly uncertain; we then estimate overall uncertainty, and sort respondents into two groups, highly uncertain or not highly uncertain. Second, we calculate the inflation forecasts of each group over time, and third, we estimate the separate contributions of each group’s forecast and that of uncertainty to the overall inflation forecast.  We find that uncertainty has declined since 2014, and this decline can explain part of the drop in inflation expectations since then. However, we also find that uncertainty has actually been falling since 2012; but in between then and now, inflation forecasts of both groups rose and then fell back. Our decomposition indicates that from 2012:H1 to 2014:H1, the effect of declining uncertainty—which by itself reduces inflation expectations—was more than offset by an increase in the inflation expectations of both types of consumer. Since each group’s expectations are back to where they were in 2012, the entire drop in average expectations since 2012 is explained by a decline in uncertainty.

Vehicle Sales Forecast: Sales to Rebound in September - The automakers will report September vehicle sales on Monday, October 3rd. Note:  There were 25 selling days in September, the same as in September 2015. From WardsAuto: Forecast: U.S. SAAR to Rebound in September The forecast 17.6 million SAAR is greater than 16.9 million from prior-month and the 17.2 million over the first eight months of the year.  This graph shows light vehicle sales since the BEA started keeping data in 1967.  The dashed line is the August sales rate. Sales for 2016 - through the first eight months - were up slightly from the comparable period last year.  After increasing significantly for several years following the financial crisis, auto sales are now mostly moving sideways.

New Cars Are Being Discounted at the Highest Levels Ever -- After a blockbuster year for new car sales in 2015, growth in the auto industry has slowed in 2016. U.S. sales in August for General Motors and Ford were down 5.2% and 8.4%, respectively, compared with the same month in 2015. But automakers aren’t accepting the downturn passively: to juice sales in September, incentive spending is at the highest levels ever. According to a J.D. Power report, automakers have been trying to boost sales by increasing incentives significantly. The average incentive in September is at a record high of $3,923 per unit. The beats the previous peak of $3,753 in December 2008—back when the Great Recession was kicking in to full effect, the economy retrenched dramatically, and dealerships were particularly desperate to move vehicles off their lots. Even with increased discounts, however, retail sales of new cars are on pace to be down 1.3% through September 2016, compared with the same period a year ago. Sales just for September look to be about 1% lower than the same month in 2015. At first glance, car buyers might assume that the record-high incentive levels mean that right now is a terrific time to scoop up a new vehicle at a discount. And indeed, there are some great deals to be had. Edmunds.comrecently pointed to dozens of cars that can be leased for $199 per month or less.  What comes as a surprise, though, is that while the discounts are high, so too are the final purchase prices being paid by buyers. The J.D. Power study noted that the average retail transaction price for a new car was $30,665, an all-time high for the month. The main explanation for why this is so is that drivers today are especially likely to skip affordable small sedans and fuel-efficient hybrids and subcompacts in favor of SUVs and trucks.  Nearly 61% of new-vehicle retail sales in September have been trucks (SUVs included), according to J.D. Power. That matches the all-time high for trucks as a percentage of all sales, set just a couple of months ago in July 2016. Pickup trucks alone have accounted for 16% of all sales this September. Because these trucks have much higher sticker prices than their smaller commuter car counterparts, they can be more heavily discounted and yet still result in high transaction prices for dealerships.

ATA Trucking Index increased Sharply in August - This was released last week by the ATA: ATA Truck Tonnage Index Jumped 5.7% in August American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 5.7% in August, following a 2.1% decline during July. In August, the index equaled 141.8 (2000=100), up from 134.2 in July. The all-time high was 144 in February. Compared with August 2015, the SA index rose 5.9%, the largest year-over-year gain since May also 5.9%. In July, the year-over-year increase was 0.2%. Year-to-date, compared with the same period in 2015, tonnage was up 3.5%....“Volatility continues to reign in 2016. This month’s tonnage reading highlights this fact and underscores the difficulty in determining any real or clear trend in truck tonnage,” said ATA Chief Economist Bob Costello. “What is clear to me is that normal seasonal patterns are not holding in 2016.”...“Despite a difficult to read August, I expect the truck freight environment to be softer than normal as well as continued choppiness until the inventory correction is complete. With moderate economic growth forecasted, truck freight will improve as progress is made with the inventory overhang,” he said.Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

Recession Watch: US Freight Drops To Worst Level Since 2010 --When FedEx announced its quarterly earnings today, it included some telling tidbits. In its largest segment, FedEx Express, domestic shipping volume edged up merely 1%. In its smaller FedEx Ground Segment, shipping volume jumped 10%, “driven by e-commerce and commercial package growth.” Sales by e-commerce retailers jumped 15.8% year-over-year in the second quarter, according to the Census Bureau, and companies involved in getting the packages to consumers and businesses have seen growth in those segments. For the rest, not so much – as the goods-based economy is getting bogged down.And this has been showing up in broader shipping data. The Cass Freight Index for August, released today, fell 1.1% from a year ago, to 1.115, the worst August since 2010! The 18th month in a row of year-over-year declines! “Overall shipment volumes (and pricing) are persistently weak, with increased levels of volatility as all levels of the supply chain (manufacturing, wholesale, retail) continue to try and work down inventory levels,” Donald Broughton, Chief Market Strategist at Avondale Partners, wrote in the report.The Cass Freight Index is based on “more than $26 billion” in annual freight transactions by “hundreds of large shippers,” according to Cass Transportation. It does not cover bulk commodities, such as oil and coal but is focused on consumer packaged goods, food, automotive, chemical, OEM, and heavy equipment. It’s not seasonally adjusted, so it shows strong seasonal patterns. In the chart below, the red line with black markers is for 2016. The multi-color spaghetti above it represents the years 2011 through 2015. So here’s how dismal the “economic recovery” has looked in 2016 so far:

Rail Week Ending 24 September 2016: Data Is Mixed: Week 38 of 2016 shows same week total rail traffic (from same week one year ago) contracted according to the Association of American Railroads (AAR) traffic data. However, the data was mixed compared to last week. We review this data set to understand the economy. If coal and grain are removed from the analysis, rail has recently been declining around 5% - but this week was -4.6%. Under normal circumstances one should consider this recessionary as trucking tonnages are down also. This also correlates to the contraction in manufacturing and the wholesale sectors - so rail is not an outlier. It does appear that the downward slide in the one year rolling averages will pause shortly as the rate of increase in the rate of decline is becoming smaller. The contraction in rail counts began over one year ago, and now rail movements are being compared against weaker 2015 data - and this is the cause periodic acceleration in the short term rolling averages. Still, rail is weak to very week compared to previous years.A summary of the data from the AAR: For this week, total U.S. weekly rail traffic was 539,609 carloads and intermodal units, down 4.8 percent compared with the same week last year. Total carloads for the week ending September 24 were 268,524 carloads, down 6.1 percent compared with the same week in 2015, while U.S. weekly intermodal volume was 271,085 containers and trailers, down 3.5 percent compared to 2015. Four of the 10 carload commodity groups posted an increase compared with the same week in 2015. They included grain, up 13.4 percent to 25,129 carloads; miscellaneous carloads, up 3.6 percent to 10,488 carloads; and chemicals, up 2.3 percent to 30,194 carloads. Commodity groups that posted decreases compared with the same week in 2015 included petroleum and petroleum products, down 20.2 percent to 10,379 carloads; coal, down 13.9 percent to 87,486 carloads; and forest products, down 13.2 percent to 9,928 carloads. For the first 38 weeks of 2016, U.S. railroads reported cumulative volume of 9,460,059 carloads, down 10.7 percent from the same point last year; and 9,811,598 intermodal units, down 3.2 percent from last year. Total combined U.S. traffic for the first 38 weeks of 2016 was 19,271,657 carloads and intermodal units, a decrease of 7 percent compared to last year.

Chemical Activity Barometer indicated "Solid Growth in September" - Bill Mcbride - Here is an indicator that I'm following that appears to be a leading indicator for industrial production. From the American Chemistry Council: Chemical Activity Barometer Continues Solid Growth in September The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), expanded 0.4 percent in September following a 0.4 percent gain in August and a 0.7 percent gain in July and June. Accounting for adjustments, the CAB is up 3.7 percent over this time last year, an improvement over prior months. All data is measured on a three-month moving average (3MMA). On an unadjusted basis the CAB climbed 0.2 percent in September, following a 0.4 percent gain in August. ... Applying the CAB back to 1912, it has been shown to provide a lead of two to fourteen months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.   This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production.  It does appear that CAB (red) generally leads Industrial Production (blue).

Durable Goods New Orders Unchanged in August 2016: The headlines say the durable goods new orders were statistically unchanged this month. The unadjusted three month rolling average declined this month and remains in contraction. There was a big gain in defense spending or this month would have been real ugly. This series has wide swings monthly so our primary metric is the three month rolling average which continued to decline. There was a big jump year-over-year on the unadjusted single month metric - and we will have to wait a few months to see if this is a possible change in trends. This sector has been in the doldrums for the last two years. Econintersect  Analysis:

  • unadjusted new orders growth accelerated 9.0 % (after decelerating a revised 0.1 % the previous month) month-over-month , and is up 2.2 % year-over-year.
  • the three month rolling average for unadjusted new orders decelerated 0.8 % month-over-month, and down 3.8 % year-over-year.
  • Inflation adjusted but otherwise unadjusted new orders are down 0.4 % year-over-year.
  • Backlog (unfilled orders) decelerated 0.2 % month-over-month, but is contracting 2.0 % year-over-year.
  • The Federal Reserve's Durable Goods Industrial Production Index (seasonally adjusted) growth decelerated 0.6 % month-over-month, down 0.1 % year-over-year [note that this is a series with moderate backward revision - and it uses production as a pulse point (not new orders or shipments)] - three month trend is decelerating, but the trend over the last year is relatively flat.

US Durable Goods Orders Unchanged For August, Reaction Limited: US durable goods orders were unchanged for August following a downwardly-revised 3.6% gain the previous month, originally reported as 4.4%, and was slightly stronger than the expected reading of a 1.0% decline on the month. Despite tentative evidence of a recovery, a sustained run of stronger data will be needed to trigger a shift in sentiment surrounding investment. Excluding transport, there was a 0.4% monthly decline following a 1.0% gain previously, which was in line with expectations. On a year-on-year basis, there was 0.6% decline in orders, while the underlying decline excluding transport was 1.1%. Manufacturing shipments fell 0.8% on the month after being unchanged in July. Unfilled orders edged lower by 0.1% following a 0.2% July decline. There was a 0.1% increase in inventories after a 0.4% gain the previous month with a 2.2% annual gain. New orders for non-defence capital goods declined 4.4% for August, although this was distorted by a decline in transport orders. Excluding aircraft, there was a third successive monthly increase in capital goods orders with a 0.6% gain following a 0.8% increase the previous month, which was originally reported as a 0.2% decline. Excluding transport, there was still a 4.0% annual decline due to previous weakness. The Federal Reserve remains concerned surrounding investment levels in the economy given persistent weakness over the past two years. The latest release, on balance, was marginally stronger than expected and a sustained improvement in core capital goods orders is certainly a positive development. Both the Federal Reserve and markets will want evidence of much stronger data before concluding that there is an overall recovery in capital spending levels.

August Durable Goods Orders Hold Steady MoM But Down YoY - The Advance Report on Manufacturers’ Shipments, Inventories and Orders released today gives us a first look at the August durable goods numbers. Here is the Bureau's summary on new orders: New orders for manufactured durable goods in August decreased $0.1 billion or virtually unchanged to $226.9 billion, the U.S. Census Bureau announced today. This decrease, down three of the last four months, followed a 3.6 percent July increase. Excluding transportation, new orders decreased 0.4 percent. Excluding defense, new orders decreased 1.0 percent.Electrical equipment, appliances, and components, down following two consecutive monthly increases, drove the decrease, $0.2 billion or 2.5 percent to $9.6 billion. Download full PDFThe latest new orders number at 0.0% (-0.04% to two decimal places) month-over-month (MoM) was above the Investing.com consensus of -1.4%. However, the series is down 1.3% year-over-year (YoY). If we exclude transportation, "core" durable goods came in at -0.4% MoM, which matched the Investing.com consensus. The core measure is down 1.1% YoY. If we exclude both transportation and defense for an even more fundamental "core", the latest number is down 1.8% MoM and down 3.7% YoY.Core Capital Goods New Orders (nondefense capital goods used in the production of goods or services, excluding aircraft) is an important gauge of business spending, often referred to as Core Capex. It posted a gain of 0.6% MoM but is down 3.1% YoY. For a look at the big picture and an understanding of the relative size of the major components, here is an area chart of Durable Goods New Orders minus Transportation and Defense with those two components stacked on top. We've also included a dotted line to show the relative size of Core Capex.

Core Durable Goods Orders Contract For 20th Straight Month - Longest Non-Recessionary Streak In US History -- In the last 60 years, the US economy has never suffered such a long contraction in core durable goods orders (20 months) without officially being in recession. US Durable Goods New Orders Ex Transports YoY down for the 20th straight month... Headline (short-term) data beat thanks to notably lower revisions.

  • Durable Goods Orders unchanged MoM (exp -1.5%, prior revised markedly lower from +4.4% to +3.6%)
  • Durables Ex Trans -0.4% MoM (exp -0.5%, prior revised lower from +1.3% to +1.1%)
  • Capital Goods New Orders Non-Defense, Ex-Aircraft +0.6% (-0.1% exp but prior revised from +1.5% to +0.8%)

But for the 4th month in a row, Capital Goods Shipments (Ex Air) fell MoM - down 0.4%, missing expectations of a 0.1% rise, and historical data was revised lower. Thank the lord of war for saving the economy again...

  • 5.8% drop in Computer new orders
  • 0.5% drop in Machinery
  • 0.5% drop in Fabricated products
  • 2.0% drop in Communication equipment
  • 2.5% drop in Electrical equipment and appliances
  • 21.9 drop in Nondefense aircraft and parts
  • 23.6% surge in defense capital goods new orders

 The "Real" Goods on the August Durable Goods Data - Earlier today the Census Bureau posted the Advance Report on the latest Durable Goods New Orders. This series dates from 1992 and is not adjusted for either population growth or inflation.  Let's now review Durable Goods data with two adjustments. In the charts below the gray line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index for All Commodities, chained in today's dollar value. This gives us the "real" durable goods orders per capita and thus a more accurate historical context in which to evaluate the conventional reports on the nominal monthly data. We've included a callout in the upper right corner to document the decline from the latest month from the all-time peak for the series.  Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time based on the nominal data. We've also included a dotted line to show the relative size of the Core Capex subset, which we'll illustrate in more detail below.

 Dallas Fed Manufacturing Outlook: General Index Increased in September, Still Negative --This morning the Dallas Fed released its Texas Manufacturing Outlook Survey (TMOS) for September. The latest general business activity index increased in September, up 3 points, coming in at -3.7 from -6.2 in August. This is its 21st consecutive negative month.  Here is an excerpt from the latest report: Texas factory activity increased markedly in September, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose 12 points to 16.7, suggesting output picked up at a notably faster pace this month. Some other measures of current manufacturing activity also reflected faster expansion, while the survey's demand indicators dipped back into negative territory. The capacity utilization and shipments indexes posted double-digit gain to reach 13.5 and 20.1, respectively. These reading represent the highest readings for these indexes in roughly two years. The new orders index fell from 5.3 to -2.9 in September, and the growth rate of orders index fell to -5.8 after pushing into positive territory last month. Perceptions of broader business conditions were mixed. The general business activity index remained negative for a 21st consecutive month, although it edged up to -3.7. The company outlook index reflected optimism as it pushed into positive territory for the first time since November 2015, coming in at 6.7. Monthly data for this indicator only dates back to 2004, so it is difficult to see the full potential of this indicator without several business cycles of data. Nevertheless, it is an interesting and important regional manufacturing indicator.

 "My Order Book Is Abysmal" - Dallas Fed Contracts For 21st Straight Month --  For the 21st month in a row, Dallas Fed's manufacturing outlook remains stuck in contraction (-3.7 vs -2.5 exp). This is the longest streak outside of recession in the survey's history as new orders cratered (one respondent noting "my order book is abysmal")and inventories tumbling (not good for GDP). Probably nothing... The respondents had some very clear insight into the state of the 'recovery': The labor pool we draw from is the same as construction home building. Since that segment is going strong, we have had to hand out more money to our senior employees in order to keep them. Finding qualified skilled and unskilled workers continues to be a problem. Customers want price reductions and employees want higher wages; neither will be satisfied.It appears our customers are basically on hold waiting for the election and for the Saudis to determine the direction of oil prices. The market continues to be very soft, and competitors are pricing extremely aggressively to simply stay in business. I am expecting that several of our suppliers will go out of business after the first of the year unless business picks up significantly. We have seen a somewhat muted seasonal pickup in new orders.Sales of food service equipment are projected to slow down slightly over the next 12 months. Spending by fast food chains, convenience stores and big box retail are all slowing. Most chain growth is outside of North America, led by India. We are very pessimistic about the deep-water drilling industry. We've tried to hold on to a critical mass, but the slowdown has now reached a point where we have to cut so much of our staff that we'll be only a fraction of a company going forward. My order book is abysmal. I've had a couple of vendors go into bankruptcy and a few more that are precariously sitting on the edge of bankruptcy.

Richmond Fed: Regional Manufacturing Activity "Still Soft" in September -- From the Richmond Fed: Manufacturing Sector Activity Still Soft in September; Employment Index at 36-Month Low   Manufacturing activity in the Fifth District continued to soften in September, but somewhat less so than in August, according to the Richmond Fed's latest survey. ...
Overall manufacturing activity, as measured by the composite index, gained three points but continued to indicate some contraction, with a reading of −8 following last month’s reading of −11. ...Hiring activity at District manufacturing firms weakened in September. The manufacturing employment indicator lost 20 points to end at a reading of −7, while the average workweek index improved from a reading of −4 in August to 1 in September. The wage index lost eight points to end at a reading of 13 for the month. ... 
This was the last of the regional Fed surveys for September.  Here is a graph comparing the regional Fed surveys and the ISM manufacturing index: The New York and Philly Fed surveys are averaged together (yellow, through September), and five Fed surveys are averaged (blue, through September) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through August (right axis).  It seems likely the ISM manufacturing index will show expansion in September.

Richmond Fed Manufacturing: Slight Increase in September, But Still Negative - Today the Richmond Fed Manufacturing Composite Index increased 2 points to -8 from last month's -11. Investing.com had forecast -2. Because of the highly volatile nature of this index, we include a 3-month moving average to facilitate the identification of trends, now at -3.0, indicates contraction. The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. Here is a snapshot of the complete Richmond Fed Manufacturing Composite series.  Here is the latest Richmond Fed manufacturing overview. Manufacturing activity in the Fifth District continued to soften in September, but somewhat less so than in August, according to the Richmond Fed's latest survey. New orders and shipments decreased this month at a slower pace, while backlogs decreased at about the same pace as last month. Hiring activity weakened across firms and wage increases were less widespread. Although raw materials prices rose at a somewhat faster pace in September, prices of finished goods barely increased in the month. Looking ahead six months, producers' expectations about future business conditions have softened compared to last month's readings. Manufacturers expected softer growth in shipments and in the volume of new orders as well as backlogs of orders. Fewer survey participants expected vendor lead times to lengthen. Expectations for increased capacity utilization softened somewhat. Manufacturing firms anticipate more modest hiring and continued wage increases in the months ahead. Firms expected faster growth in prices received and prices paid in the next six months. Link to Report  Here is a somewhat closer look at the index since the turn of the century.

Chicago PMI Increased in September - The Chicago Business Barometer, also known as the Chicago Purchasing Manager's Index, is similar to the national ISM Manufacturing indicator but at a regional level and is seen by many as an indicator of the larger US economy. It is a composite diffusion indicator, made up of production, new orders, order backlogs, employment, and supplier deliveries compiled through surveys. Values above 50.0 indicate expanding manufacturing activity. The latest report for Chicago PMI came in at 54.2, a 2.8 point increase from last month's 51.5.Here is an excerpt from the press release:“Economic growth in the US appears to have picked up a little at the end of the third quarter and although the Employment component fell, this was on the back of a relatively strong showing in the previous month. Note Employment usually lags changes in orders and output, so it was not that surprising to see this component weakening in September,” said Lorena Castellanos, senior  economist at MNI Indicators. [Source] Let's take a look at the Chicago PMI since its inception.

Chicago PMI increase in September, Final Sept Consumer Sentiment at 91.2 -- Chicago PMI: September Chicago Business Barometer Up 2.7 Points to 54.2 The MNI Chicago Business Barometer increased 2.7 points to 54.2 in September from 51.5 in August, recovering most of lost ground experienced in the previous month. In response to September’s special question, 79% of Chicago panellists said the run-up to November Presidential Elections is having a negligible impact on business. “Economic growth in the US appears to have picked up a little at the end of the third quarter and although the Employment component fell, this was on the back of a relatively strong showing in the previous month. Note Employment usually lags changes in orders and output, so it was not that surprising to see this component weakening in September,” said Lorena Castellanos, senior economist at MNI Indicators This was above the consensus forecast of 52.0. The final consumer sentiment reading was 91.2 in September, up from 89.8 in August.  "Confidence edged upward in September due to gains among higher income households, while the Sentiment Index among households with incomes under $75,000 has remained at exactly the same level for the third consecutive month. Importantly, the data provide no evidence of an upward trend as the average level of the Sentiment Index since the start of 2016 is nearly identical with the September level (91.4 versus 91.2). " This was above the consensus forecast.

Markit Services PMI -- The August US Services Purchasing Managers' Index conducted by Markit came in at 51.9, up 0.9 from the final July estimate. The Investing.com consensus was for 51.1. Markit's Services PMI is a diffusion index: A reading above 50 indicates expansion in the sector; below 50 indicates contraction. Here is the opening from the latest press release: Adjusted for seasonal influences, the Markit Flash U.S. Services PMI Business Activity Index rose to 51.9 in September from the previous month’s final reading of 51.0. This signalled the fastest monthly rise in activity since April, albeit one that was still relatively modest. Activity has now increased in each of the past seven months. Where higher activity was recorded, this was widely linked by panellists to ongoing new business growth. [Press Release] Here is a snapshot of the series since mid-2012.

 US Services PMI Bounces But Employment Hits 33-Month Lows - US Services PMI bounced in September (flash) to 51.9 - the highest since April, but a weaker expansion of new business had a negative impact on employment growth in September.Staffing levels continued to rise. Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said: “The service sector sent mixed signals in September, with faster growth of activity during the month offset by gloomy forward-looking indicators. Although business activity showed the largest monthly rise since April, inflows of new business slowed and employment growth was the weakest for three-and-a-half years. A drop in optimism about the year ahead to a near post-crisis low meanwhile cast a shadow over the outlook.   What’s more, even with the latest uptick in activity, the overall rate of economic growth remains subdued. Add these service sector results to the manufacturing data and the PMI surveys suggest that the economy is growing at an annualised rate of only around 1% again in the third quarter. “The slowdown in hiring means the survey results are consistent with a 120,000 rise in non-farm payrolls in September, which is a solid rate of expansion but somewhat disappointing compared to the gains seen earlier in the year. “The slowdown in hiring is perhaps a natural symptom of the economy reaching full employment, but companies also reported a reduced appetite to hire and job losses due to weaker inflows of new business and worries about the outlook.

 Weekly Initial Unemployment Claims at 254,000 - The DOL reported: In the week ending September 24, the advance figure for seasonally adjusted initial claims was 254,000, an increase of 3,000 from the previous week's revised level. The previous week's level was revised down by 1,000 from 252,000 to 251,000. The 4-week moving average was 256,000, a decrease of 2,250 from the previous week's revised average. The previous week's average was revised down by 250 from 258,500 to 258,250. There were no special factors impacting this week's initial claims. This marks 82 consecutive weeks of initial claims below 300,000, the longest streak since 1970. The previous week was revised down. The following graph shows the 4-week moving average of weekly claims since 1971.

Employment picture darkens for journalists at digital outlets - It probably comes as no surprise that jobs for journalists at newspapers continue to disappear. But in a disturbing development, digital news jobs that had been replacing some of the legacy positions appear to have hit a plateau. Earlier this year, the Bureau of Labor Statistics released a chart showing the total number of employees working in the newspaper industry is now lower than those working in the “internet publishing and broadcasting” sector. Given the struggles of the newspaper industry, and the increasing popularity of “digital native” news publishers, such figures may seem intuitive. Yet it only captures how many employees work in these industries—not how many journalists.With digital native websites becoming more prominent, it is worth exploring how many journalists work in this sector and whether its growth is likely to offset losses in the newspaper industry. Because the American Society of News Editors (ASNE) recently announced it will no longer estimate the size of the newspaper workforce, and no organization surveys digital outlets to measure the size of its workforce, I sought out a new data source to explore these figures.Based on my analysis of data from the Bureau of Labor Statistics’ Occupational Employment Statistics ( OES) program, the number of journalists at digital native publishers has more than tripled in the past decade. This growth, however, pales in comparison to the number of journalists laid off in the newspaper industry. And in recent years, the number of journalists at digital-only publishers seems to have actually plateaued. With fewer journalists working today, reporters are becoming increasingly concentrated in coastal cities, investigative journalism and local statehouse reporting is declining, and the ratio of journalists to public relations specialists is widening. Previously, the Pew Research Center’s census of editorial staff at digital native news publishers estimated there were about 5,000 full-time staff members in 2014. This in-depth analysis provides important insight, but it is unable to speak to longitudinal trends.

Self-driving trucks threaten one of America’s top blue-collar jobs -Trucking paid for Scott Spindola to take a road trip down the coast of Spain, climb halfway up Machu Picchu, and sample a Costa Rican beach for two weeks. The 44-year-old from Covina now makes up to $70,000 per year, with overtime, hauling goods from the port of Long Beach. He has full medical coverage and plans to drive until he retires.But in a decade, his big rig may not have any need for him. Carmaking giants and ride-sharing upstarts racing to put autonomous vehicles on the road are dead set on replacing drivers, and that includes truckers. Trucks without human hands at the wheel could be on American roads within a decade, say analysts and industry executives.At risk is one of the most common jobs in many states, and one of the last remaining careers that offer middle-class pay to those without a college degree. There are 1.7 million truckers in America, and another 1.7 million drivers of taxis, buses and delivery vehicles. That compares with 4.1 million construction workers.While factory jobs have gushed out of the country over the last decade, trucking has grown and pay has risen. Truckers make $42,500 per year on average, putting them firmly in the middle class.On Sept. 20, the Obama administration put its weight behind automated driving, for the first time releasing federal guidelines for the systems. About a dozen states already created laws that allow for the testing of self-driving vehicles. But the federal government, through the National Highway Traffic Safety Administration, will ultimately have to set rules to safely accommodate 80,000-pound autonomous trucks on U.S. highways. In doing so, the feds have placed a bet that driverless cars and trucks will save lives. But autonomous big rigs, taxis and Ubers also promise to lower the cost of travel and transporting goods. It would also be the first time that machines take direct aim at an entire class of blue-collar work in America. Other workers who do things you may think cannot be done by robots — like gardeners, home builders and trash collectors — may be next.

 Floods Sharpen Economic Pain in Southern Louisiana Cities - The severe floods that hit Louisiana last month added to the economic pain of southern cities already struggling with job losses amid a slowdown in the energy sector. The Lafayette and Houma-Thibodaux metro areas of the Pelican State saw some of the sharpest job losses nationwide in August, according to Labor Department data released Wednesday. Employment in Lafayette was down by 3,300, or 4.1%, from a year earlier and 3,300, or 3.4%, in Houma-Thibodaux.Those cities have been shedding jobs for months alongside a falloff in energy-sector activity in the Gulf of Mexico. They have seen nonfarm payrolls fall from a year earlier every month since January 2015.Lafayette was hit hard by the floods while the parishes surrounding Houma largely escaped. But heavy rains and related damage wiped out some crops in the state and could ripple through other sectors of the region’s economy. Insurer Aon Benfield forecast total economic losses related to the flooding at $10 billion to $15 billion.Baton Rouge, La., another city hit hard by the flooding, added jobs compared with a year earlier.Elsewhere in the U.S., employment rose and the unemployment rate fell in most metropolitan areas in August, a sign of steady if uneven economic progress across the country.Unemployment rates were lower than a year earlier in close to two-thirds of the nation’s 387 metropolitan areas. It rose in 123 metros, and was unchanged in 22.More than 80% of cities added jobs over the year.There were few overarching themes in the latest snapshot of cities and their suburbs. Big metros like New York, Dallas, Los Angeles and W ashington, D.C., added the most jobs. As a percentage of the workforce, smaller locales such as St. George, Utah, and Madera, Calif., saw particularly strong growth.

As Their Numbers Grow, Home Care Aides Are Stuck at $10.11 - The analysts at P.H.I., a nonprofit research and consulting group, sift through federal data each year to see how the nation’s swelling corps of home care workers is faring.That’s how we know that the aides who care for disabled people and older adults in their homes — helping them bathe and dress, preparing their meals, doing laundry and housekeeping — earned a national median of $10.21 an hour in 2005, adjusted for inflation.P.H.I. published its most recent findings this month, so we also know that a decade later home care aides earn even less: $10.11 an hour.This helps explain why Patricia Walker, 55, a certified nursing assistant who works for a Tampa home care agency and provides care for two older men — and hasn’t received a raise in five years — must rely on $194 in food stamps each month.Still, working only 16 hours a week while hoping for more, at $10 an hour, means she can’t afford a place to live. “I would love to be able to put a key in my own door and know this is mine,” she said. Instead, she pays friends $50 every other week to rent a room in their apartment. Home care aides, mostly women and mostly of color, represent one of the nation’s fastest-growing occupations, increasing from 700,000 to more than 1.4 million over the past decade. Add the independent caregivers that clients employ directly through public programs, and the total rises to more than two million.

 U.S. Real Wage Growth: Fast Out of the Starting Blocks – NY Fed - First of two posts - Much has been written about the aging of the U.S. population, but the importance of this trend for the economy and its evolution can easily be overlooked. This week, we focus on the aging of the labor force and explore its implications for the behavior of real wage growth. In this first post, we examine estimated real wage profiles of workers and document how their levels and growth rates differ across demographic characteristics such as sex, race/ethnicity, education level, and age. Moreover, we argue that the demographic trends predict a slower pace of real wage growth for an increasing fraction of the workforce. Our second post combines the implied real wage growth rates and changing demographics of the U.S. labor force to derive a "cyclically neutral" aggregate real wage growth series. We show that this series has been steadily declining since the mid-1980s.   To investigate real wage growth patterns, we look at the hourly wage rates of all employed individuals aged sixteen or older in the Current Population Survey (CPS). We use both the CPS Outgoing Rotation Group samples, which provide monthly data from January 1982 through May 2016, and the May Extracts, which provide annual data from 1969 through 1981. Combining these two data sources gives us 12.7 million total observations on individuals, their employment status, and their nominal hourly earnings (if employed). In cases where actual hourly wages are missing, we infer the implied hourly wage using the individuals' reported "usual" weekly earnings and actual number of hours worked per week. We use the CPI to convert nominal hourly wages to real hourly wages in first-quarter 2014 dollars.

U.S. Real Wage Growth: Slowing Down With Age - NY Fed - Second of two posts -In Monday’s post, we described the estimation of real wage growth rates for different cohorts of U.S. workers. We showed that the life-cycle pattern of real wage growth is characterized by high growth early in a worker’s career, little to no growth in mid-career, and negative growth as workers near retirement. We also documented that a growing fraction of the U.S. adult population is transitioning into the flat to negative real wage growth phases of their careers. Here, we turn our attention to estimating the effect of this demographic shift on the economy-wide average real wage growth rate. Our analysis shows that this economy-wide average real wage growth rate has declined by a third since the mid-1980s.  As discussed in our recent post, real wages, holding constant any cyclical effects, show positive growth that is concentrated early in a worker’s career. By age 40, real wage growth has typically declined to around zero. The following chart, reproduced from Monday’s post, depicts this pattern for the five cohorts of white males born in the 1950s by different education levels.

 Wolf Richter: “Negative Growth” of Real Wages is Normal for Much of the Workforce, and Getting Worse – New York Fed -- The New York Fed published an eye-opener of an article on its blog, Liberty Street Economics, seemingly about the aging of the US labor force as one of the big economic trends of our times with “implications for the behavior of real wage growth.” Then it explained why “negative growth” – the politically correct jargon for “decline” – in real wages is going to be the new normal for an ever larger part of the labor force. If you’re wondering why a large portion of American consumers are strung out and breathless and have trouble spending more and cranking up the economy, here’s the New York Fed with an answer. And it’s going to get worse.The authors looked at the wages of all employed people aged 16 and older in the Current Population Survey (CPS), both monthly data from 1982 through May 2016 and annual data from 1969 through 1981. They then restricted the sample to employed individuals with wages, which boiled it down to 7.6 million statistical observations.Then they adjusted the wages via the Consumer Price Index to 2014 dollars and divide the sample into 140 different “demographic cohorts” by decade of birth, sex, race, and education. As an illustration of the principles at work, they picked the cohort of white males born in the decade of the 1950s. That the real median income of men has declined 4% since 1973 is an ugly tidbit that the Census Bureau hammered home in its Income and Poverty report two weeks ago, which I highlighted in this article – That 5.2% Jump in Household Income? Nope, People Aren’t Suddenly Getting Big-Fat Paychecks – and it includes the interactive chart below that shows how the real median wage of women rose 36% from 1973 through 2015, while it fell 4% for men:

A Quick Pay Check: Wage Growth of Full-Time and Part-Time Workers --  Atlanta Fed's macroblog - In the last macroblog post we introduced the new version of the nominal Wage Growth Tracker, which allows a look back as far as 1983. The following chart shows the extended full-time/part-time median wage growth time series at an annual frequency. The chart shows that the median wage increase for part-time workers is generally lower than for full-time workers, with the average gap about 1 percentage point. The reason for the presence of a gap is a bit puzzling. Could it be that part-time workers have lower average productivity growth than full-time workers? It is true that a part-time worker in our data set is more likely to lack a college degree than a full-time worker, and the median wage level for part-time workers is lower than for full-time workers. But interestingly, a reasonably systematic wage growth gap still exists after controlling for differences in the education and age of workers. So even highly educated prime-age, part-time workers tend to have lower median wage growth than their full-time counterparts. If it's a productivity story, its subtext is not easily captured by observed differences in education and experience. Changes in economic conditions might also be playing a role. The wage growth gap exceeded 2 percentage points in the early 1980s and again between 2011 and 2013, both periods of considerable excess slack in the labor market, as we recently discussed here. In fact, in each of 2011, 2012, and 2013, half of the part-time workers in our dataset experienced no increase in their rate of pay at all.To explore this possibility further, it's useful to separate part-time workers into those who work part-time because of economic conditions (for example, because of slack work conditions at their employer or their inability to find full-time work) from those who work part-time for noneconomic reasons (for example, because they have family responsibilities or because they are also in school). The following chart shows the median wage growth for full-time, voluntary part-time, and involuntary part-time workers.

Why Garbagemen Should Earn More Than Bankers - Evonomics: Union spokesman John DeLury addresses the multitude on February 2, 1968. When he announces that the mayor has refused further concessions, the crowd’s anger threatens to boil over. As the first rotten eggs sail overhead, DeLury realizes the time for compromise is over. It’s time to take the illegal route, the path prohibited to sanitation workers for the simple reason that the job they do is too important. It’s time to strike. The next day, trash goes uncollected throughout the Big Apple. Nearly all the city’s garbage crews have stayed home. “We’ve never had prestige, and it never bothered me before,” one garbageman is quoted in a local newspaper. “But it does now. People treat us like dirt.” When the mayor goes out to survey the situation two days later, the city is already knee-deep in refuse, with another 10,000 tons added every day. A rank stench begins to percolate through the city’s streets, and rats have been sighted in even the swankiest parts of town. In the space of just a few days, one of the world’s most iconic cities has started to look like a slum. Still the mayor refuses to budge. He has the local press on his side, which portrays the strikers as greedy narcissists. It takes a week before the realization begins to kick in: “New York is helpless before them,” the editors of The New York Times despair. Nine days into the strike, when the trash has piled up to 100,000 tons, the sanitation workers get their way.Imagine, for instance, that all of Washington’s 100,000 lobbyists were to go on strike tomorrow. Or that every tax accountant in Manhattan decided to stay home. It seems unlikely the mayor would announce a state of emergency. In fact, it’s unlikely that either of these scenarios would do much damage. A strike by, say, social media consultants, telemarketers, or high-frequency traders might never even make the news at all. When it comes to garbage collectors, though, it’s different. Any way you look at it, they do a job we can’t do without. And the harsh truth is that an increasing number of people do jobs that we can do just fine without. Were they to suddenly stop working the world wouldn’t get any poorer, uglier, or in any way worse. Take the slick Wall Street traders who line their pockets at the expense of another retirement fund. Take the shrewd lawyers who can draw a corporate lawsuit out until the end of days. Or take the brilliant ad writer who pens the slogan of the year and puts the competition right out of business.

 Is Inequality Rising or Falling? - James Kwak -- Last week, Council of Economic Advisers chair Jason Furman took to the Washington Post to announce that President Obama has “narrowed the inequality gap.” Furman’s argument, bolstered by charts and data from a recent CEA report, has won over some of the more perceptive commentators on the Internet, including Derek Thompson, who concludes that Obama “did more to combat [income inequality] than any president in at least 50 years.” In 538, the headline on Ben Casselman’s summary reads, “The Income Gap Began to Narrow Under Obama.”But is it true? I already wrote about the key misdirection in Furman’s argument: his measures of reduced inequality compare the current world not against the world of eight years ago, but against a parallel universe in which, essentially, the policies of George W. Bush remained in place. (This is not something either Thompson or Casselman fell for; they both realized what Furman was actually arguing.) Today I want to address the larger question of whether inequality is actually getting worse or better. First, let’s orient ourselves. At a high level, there are two sets of forces that affect income inequality. The first set is underlying economic factors that determine inequality of pre-tax income: skills gap, globalization, bargaining power of labor, and so on. The second set is government policies that affect the distribution of income, often referred to as taxes and transfers; these policies take pre-tax income inequality as an input and produce after-tax income inequality as an output. (This isn’t a perfect distinction, since tax and transfer policies also affect the distribution of pre-tax income, but I think it’s good enough for explanatory purposes.) Furman’s argument is that Obama has improved that second set of policies. That’s what this chart really shows; remember, it’s comparing the effect of taxes and transfers next year against the effect of taxes and transfers under George W. Bush policies.

The decline of the middle class is causing even more economic damage than we realized: Larry Summers: I have just come across an International Monetary Fund working paper on income polarization in the United States that makes an important contribution to the secular stagnation debate. The authors ... find that polarization has reduced consumer spending by more than 3 percent or about $400 billion annually. If these findings stand up to scrutiny, they deserve to have a policy impact.  This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus program. Alone it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 percent more, there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession.  What is the policy implication? Principally, it is the macroeconomic importance of supporting middle class incomes. This can be done in a range of ways from promoting workers right to collectively bargain to raising spending on infrastructure to making the tax system more progressive. ...

Black-white wage gaps expand with rising wage inequality --What this report finds: Black-white wage gaps are larger today than they were in 1979, but the increase has not occurred along a straight line.    As of 2015, relative to the average hourly wages of white men with the same education, experience, metro status, and region of residence, black men make 22.0 percent less, and black women make 34.2 percent less. Black women earn 11.7 percent less than their white female counterparts. The widening gap has not affected everyone equally. Young black women (those with 0 to 10 years of experience) have been hardest hit since 2000. What it means for policy: Wage gaps are growing primarily because of discrimination (or racial differences in skills or worker characteristics that are unobserved or unmeasured in the data) and growing earnings inequality in general. Thus closing and eliminating the gaps will require intentional and direct action:

  • Consistently enforce antidiscrimination laws in the hiring, promotion, and pay of women and minority workers.
  • Convene a high-level summit to address why black college graduates start their careers with a sizeable earnings disadvantage.
  • Under the leadership of the Bureau of Labor Statistics, identify the “unobservable measures” that impact the black-white wage gap and devise ways to include them in national surveys.
  • Urge the Equal Employment Opportunity Commission to work with experts to develop metropolitan area measures of discrimination that could be linked to individual records in the federal surveys so that researchers could directly assess the role that local area discrimination plays in the wage setting of African Americans and whites.
  • Address the broader problem of stagnant wages by raising the federal minimum wage, creating new work scheduling standards, and rigorously enforcing wage laws aimed at preventing wage theft.
  • Strengthen the ability of workers to bargain with their employers by combatting state laws that restrict public employees’ collective bargaining rights or the ability to collect “fair share” dues through payroll deductions, pushing back against the proliferation of forced arbitration clauses that require workers to give up their right to sue in public court, and securing greater protections for freelancers and workers in “gig” employment relationships.
  • Require the Federal Reserve to pursue monetary policy that targets full employment, with wage growth that matches productivity gains.

How the Jim Crow internet is pushing back against Black Lives Matter - Police killings of African-Americans on social media have become the visual hallmark of our time. This decade will be recalled through blurry cellphone and dash-cam videos of shootings. But how will it be remembered? From my scholarship on visual culture, most recently on the visual tactics of political protest, it is clear that this marks a transition that I call the rise of the Jim Crow internet. It’s not all of the internet, of course, but a self-referential, wide-ranging and increasingly influential slice of it, from Breitbart to Blue Lives Matter and all over Twitter. Visible on cable TV, Google searches, Twitter and other social media, the Jim Crow internet is challenging the way race in general and police violence in particular are understood, pushing back against the gains made by Black Lives Matter.Who wins this struggle over cultural and political meaning may determine our political future. Because there is a political and cultural divide as to how we see and what we make of it, cameras in themselves solve nothing. Terence Crutcher, 40, was shot in Tulsa, Oklahoma on Sept. 19. In the official account, Police Officer Betty Shelby describes getting scared when he “locks his eyes on her.” Under Jim Crow, the allegation of “reckless eyeballing” meant any look from a black person at a white person, especially a woman. It was used to justify deadly force. Looking a police officer in the eye also got Freddie Gray into trouble in Baltimore, leading to his still unexplained death in a police van. The dash-cam video in Crutcher’s case suggests that the windows of his car were closed. The indicted shooter claims they were open, causing her to fear that he was reaching for a weapon. Her case depends on how we interpret what she thought she saw, against what the video shows.

 “There Ought to be a Law….” Why Prison is the American Way  --You’ve heard of distracted driving? It causes quite a few auto accidents and it’s illegal in a majority of states. Well, this year, a brave New Jersey state senator, a Democrat, took on the pernicious problem of distracted walking. Faced with the fact that some people can’t tear themselves away from their smartphones long enough to get across a street in safety, Pamela Lampitt of Camden, New Jersey, proposed a law making it a crime to cross a street while texting. Violators would face a fine, and repeat violators up to 15 days in jail. Similar measures, says the Washington Post, have been proposed (though not passed) in Arkansas, Nevada, and New York. This May, a bill on the subject made it out of committee in Hawaii.  That’s right. In several states around the country, one response to people being struck by cars in intersections is to consider preemptively sending some of those prospective accident victims to jail. This would be funny, if it weren’t emblematic of something larger. We are living in a country where the solution to just about any social problem is to create a law against it, and then punish those who break it. I’ve been teaching an ethics class at the University of San Francisco for years now, and at the start of every semester, I always ask my students this deceptively simple question: What’s your definition of justice?   For some students, justice means “standing up for the little guy.”  For many, it involves some combination of “fairness” and “equality,” which often means treating everyone exactly the same way, regardless of race, gender, or anything else. Others display a more sophisticated understanding.  For most of my students — for most Americans in fact — justice means establishing the proper penalties for crimes committed. “Justice for me,” says one, “is defined by the punishment of wrongdoing.” Students may add that justice must be impartial, but their primary focus is always on retribution. “Justice,” as another put it, “is a rational judgment involving fairness in which the wrongdoer receives punishment deserving of his/her crime.” When I ask where their ideas about justice come from, they often mention the punishments (“fair” or otherwise) meted out by their families when they were children. These experiences, they say, shaped their adult desire to do the right thing so that they will not be punished, whether by the law or the universe. Religious upbringing plays a role as well. Some believe in heavenly rewards for good behavior, and especially in the righteousness of divine punishment, which they hope and generally expect to escape through good behavior.

Baltimore man dies after being beaten by cops following 911 call to take him to the hospital: 21-year-old man, who was beaten by police after they responded to a 911 call requesting medical assistance for him, died in a Baltimore area hospital on Wednesday, reports the Guardian. Tawon Boyd was pronounced dead after doctors failed to revive him following his encounter with the police where he was allegedly punched multiple times and choked by an officer. According to initial reports from the Baltimore County Police Department, officers responded to a 911 emergency call from Boyd’s girlfriend Deona Styron, but an attorney for Boyd’s family states that the victim is the one who placed the call. Attorney Latoya Francis-Williams claims Boyd made the call requesting an ambulance because he was feeling disoriented and wanted to be taken to the hospital. “They really were supposed to be there to get him to the nearest healthcare facility,” Francis-Williams said in a statement.Responding officers stated that Boyd appeared “confused and paranoid” and asked them to enter his house to see who was inside after telling them that his girlfriend, “got him intoxicated and is secretly recording him while someone else is in the home.” While police were on the scene, Boyd tried to climb into two different police cruisers before running to a neighbor’s house where he banged on the door and pleaded with them to call the police. According to Boyd’s attorney, the police attempted to restrain Boyd, describing it as an “attack.” “He is literally attacked. And by attacked, I mean the witness [Styron] is describing that he struck many times and struck to the ground,” Francis-Williams explained. “Officer Bowman is the one that when he arrived, really started wailing on Mr. Boyd, meaning Mr. Boyd was on the ground in a prone position and Bowman sat on him, almost straddled his back, and put his left arm under Boyd’s neck and pulled his head up in a choking fashion.”  In the police report, they describe Boyd being struck by twice in the head by an officer with a closed fist. The police report states, “officers were able to get him under control by using our body weight to keep him on the ground. Officer Bowman controlled Suspect Boyd’s head and arms by holding him down with his arms while I held Suspect Boyd down by leaning on his buttocks/thigh area with my knees and using my arms.” “According to the witness, Mr Boyd was screaming ‘stop stop, I can’t breathe.’ That could have been from the choking but at the same time, Officer Bowman is punching and striking Mr Boyd in the face and in the neck area,” Francis-Williams said of her conversation with Boyd’s girlfriend who witnessed the incident. “The witness described that after a little she’s screaming stop and Mr Boyd is kind of foaming at the mouth or spitting and his body goes limp.”

 New FBI data: Murders up 10.8% in biggest percentage increase since 1971 - Murders in the US rose 10.8% last year, the biggest single-year percentage jump since 1971, according to data released Monday by the FBI. The rising violence was driven by an increase in the murders of black men, and by an increase in the number of gun murders. At least 900 more black men were killed in 2015 than in 2014, according to FBI data. There were roughly 1,500 additional firearm murders in 2015. No other type of weapon saw a comparable increase. The number of knife murders dropped slightly. The percentage of murders committed with guns increased to 71.5%. The net increase in murders, which follows a two-decade downward trend, erased the gains of the past few years, and put the number of murders back at 15,696, about the same number as in 2009. Murder and violent crime are still dramatically lower than they were at the peak of the violent crime wave of the late 1980s and early 1990s. The national murder rate last year was about half what it was in 1991. Even as murders rose, the country’s overall crime rates did not increase as substantially. There was a 3.9% increase in the estimated number of violent crimes, but a 2.6% decrease in the estimated number of property crimes. Speaking at a violence prevention conference in Little Rock, Arkansas, attorney general Loretta Lynch said that, despite an “overall increase” in violent crime, 2015 still represented “the third-lowest year for violent crime in the past two decades”. Her prepared remarks did not mention the 10.8% increase in murders. “We still have so much work to do,” Lynch said. A third of the murder increase was driven by upticks in just ten larger cities: Baltimore, Chicago, Houston, Washington DC, Milwaukee, Philadelphia, Nashville, Kansas City, Missouri, St Louis, and Oklahoma City.

FBI Crime Report Reveals Massive Surge In Murder Rates In Several Large U.S. Cities - Earlier this year the Brennan Center for Justice released a report analyzing violent crime data in America's 30 largest cities for the calendar year of 2015.  While the report noted modest increases in violent crime in Baltimore, Chicago and Washington D.C., it concluded that, on the whole, reports of a national crime wave were premature and unfounded, and that “the average person in a large urban area is safer walking on the street today than he or she would have been at almost any time in the past 30 years.”  Now, just a few short months later, the folks at the Brennan Center have updated their study with crime statistics through September 2016 and they're wishing they could have a "do over" on that previous conclusion after finding that the national murder rate is now projected to increase 31.5% from 2014 to 2016.  Oops. Moreover, while spikes in violent crime were limited to just a few large cities in 2015, so far in 2016 11 out of 22 of the largest cities in the country, for which the Brennan center was able to collect data, reported a YoY increase of over 20% in murder rates.  To be fair, cities like San Jose reported a large percentage increase off a very low base but a 71% increase is still significant. Finally, while we often write about murder rates in Chicago, due to the shear number of deadly crimes, when reviewed on a per capita basis the crime rate even in Chicago pales in comparison to Detroit and Baltimore.

Food Hardship in America > Households with Children Especially Hard Hit.(pdf) The Food Research & Action Center (FRAC) has been issuing reports for several years that analyze the answers to a survey question asked by Gallup about food hardship, which is the inability of American households to afford adequate food. Most recently, in June 2016, FRAC published an analysis (pdf) of answers to Gallup’s survey in 2015 reporting national, state, and metropolitan statistical area (MSA) rates of food hardship. In this report, FRAC looks at the data separately for households with children and households without children. For the national analysis, FRAC looks at data year-by-year. For the state and MSA analyses, FRAC combined 2014 and 2015 data, in order to have adequate sample sizes and smaller error rates. The question Gallup asks is, “Have there been times in the past 12 months when you did not have enough money to buy food that you or your family needed?” That question is part of the Gallup-Healthways Well-Being Index survey, which also asked respondents how many children lived in their household. In 2015, 176,313 respondents answered these questions, while 176,212 answered them in 2014. FRAC counts “yes” answers to the former question as evidence of food hardship. Given how high child poverty rates are, compared to poverty rates for households without children, it is unsurprising that the food hardship rate is considerably higher in households with children. The difference, however, underscores how broad the harm is to children from poverty and hunger in our society. This report also shows that the size of the disparities varies widely — in some MSAs, the gap is remarkably large, while in others, it is quite small. Indeed, in a small number of MSAs, households without children are more likely to face food hardship.

Islam might be removed from 7th grade social studies classes  (AP) — School officials have dropped most of the Tennessee middle school social studies standards involving Islam as part of newly proposed standards. The Kingsport Times-News reports that an entire section on Islam currently taught to seventh-graders has been removed from the state Board of Education’s draft, which went online for public review Sept. 15. Most of the sections involving Christianity, Judaism, Buddhism, Hinduism and other religions have remained in the draft in some form. Public comment is open through Oct. 28. A Standards Recommendation Committee will make the ultimate recommendation for new social studies standards to the board in early 2017, with implementation taking place in the 2019-20 school year. State Board of Education Director of Policy and Research Laura Encalade says the new standards are more manageable and “age-appropriate.”

EXCLUSIVE: Elected officials sign letter praising NYC charter schools as ‘world-class education’ prior to rally - Nineteen elected officials signed a letter throwing their support behind the city’s charter schools days ahead of an upcoming demonstration in favor of the publicly funded, privately run schools. Elected officials from every borough signed the letter, including Brooklyn Rep. Hakeem Jeffries and Bronx Borough President Ruben Diaz Jr., who are both speaking at the Wednesday rally organized by charter lobby group Families for Excellent Schools. “We are proud to stand with the thousands of families attending Wednesday’s march in Brooklyn,” reads the letter. “Public charter schools have a proven record of providing a world-class education to our city’s highest-need children.” Charter schools enroll roughly 100,000 city students but have drawn criticism from educators and elected officials who accuse them of taking resources from traditional public schools.

Introducing the Military-Industrial-Elementary School Complex -- What’s so uniquely tragic about the the intrusion of the police state into America’s schools, is it appears the parents themselves are the ones demanding it. This is in contrast to an overbearing surveillance state implemented by government in secret, as well as by private corporations via lengthy terms of service agreements nobody actually reads.  What follows are excerpts from a very important article published at The Nation, The School-Security Industry Is Cashing In Big on Public Fears of Mass Shootings“Security was the number-one factor for me in choosing a school,” explained one of the mothers I met late last winter at a Montessori preschool in an affluent suburb of Salt Lake City. A quality-control expert at a dietary-supplement company, the woman said she vividly remembers the jolt of horror she felt when she first learned of the Columbine massacre in 1999. So when the time came to send her child to preschool, she selected one that markets itself not only as creative, caring, and nurturing, but also as particularly security-conscious.  To get the front door of the school to open, visitors had to be positively ID’d by a fingerprint-recognition system. In the foyer, a bank of monitors showed a live feed of the activity in every classroom. After drop-off, many parents would spend 15 minutes to half an hour staring at the screens, making sure their children were being treated well by their teachers and classmates. Many of the moms and dads had requested Internet access to the images, but the school had balked, fearing that online sexual predators would be able to hack into the video stream. All of the classroom doors had state-of-the-art lockdown features, and all of the teachers had access to long-distance bee spray—which, in the case of an emergency, they were instructed to fire off at the eyes of intruders. The playground was surrounded by a high concrete wall, which crimped the kids’ views of the majestic Wasatch Mountains. The imposing front walls, facing out onto a busy road, were similarly designed to stop predators from peering into the classrooms.  “I fear a gunman walking into my child’s school and gunning up the place,” the mother continued. (I have withheld her name, and that of the school, upon request.) “And I fear someone walking onto the playground and swiping a kid. And I fear an employee of the school damaging my child. These things happen more commonly than people expect.” Actually, they don’t. Despite the excruciating angst suffered by this woman and so many other parents, school violence is a rarity in America. According to the National Center for Education Statistics, 34 children in the United States were murdered while in school during the 1992–93 school year. From 2008 to 2013, the most recent years for which the NCES provides data, the average annual figure was 19. In recent decades, the numbers have waxed and waned, hitting 34 again in 1997–98 and going as low as 11 in 2010–11. Generally, the trend has been downward.

Moody's drops Chicago schools' credit rating deeper into junk | Reuters: Moody's Investors Service dropped the credit rating for the Chicago Board of Education deeper into the junk level on Monday, citing the school district's liquidity and budget woes. The downgrade to B3 with a negative outlook from B2 is due to the district's "increasingly precarious liquidity position and acute need for cash flow borrowing to support ongoing operations," Moody's said in a statement. The nation's third-largest public school system has $6.8 billion of general obligation bonds outstanding. The Chicago Public Schools (CPS) is struggling with escalating pension payments that will jump to about $720 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency. Moody's said the district has a "deepening structural deficit," as well as spending plans dependent on "unrealistic expectations" of financial assistance from the state of Illinois. The $5.46 billion fiscal 2017 budget includes a one-time $215 million infusion of state money contingent on the Illinois legislature's passage of state-wide pension reform by January. The spending plan also banks on teachers agreeing to relinquish 7 percent of their earnings to devote to pensions, a proposal that was soundly rejected by a Chicago Teachers Union bargaining team in February. Moody's noted the power of the union to impede cost cutting. On Monday, the teachers' union announced overwhelming support by its members for a strike. The credit rating agency said the rating could fall even further down the junk scale should the district fail to make debt service or pension payments on schedule.

As Chicago Staunches Fiscal Bleed, Schools Are Awash in Red Ink - The Chicago Board of Education is facing a potential strike by its teachers, which could further strain its coffers. The third-largest U.S. school district’s budget counts on state aid and union concessions that may not come. And this week, Moody’s Investors Service cut its rating deeper into junk, citing its “precarious liquidity” and reliance on borrowed money, as preliminary data showed an enrollment drop of almost 14,000 students -- a loss that may cut into its funding. The chronic financial strains may lead investors to demand higher interest rates from the debt-dependent district. With $6.8 billion of general-obligation debt, it’s already paying yields of as much as 9 percent, according to Moody’s. More than 10 percent of this year’s $5.4 billion budget is eaten up by principal and interest costs. In August, the board authorized issuing as much as $945 million of bonds and drawing on a $1.6 billion credit line to pay bills. "To say that they’re challenged is an understatement,” "The problems that they’re having poses risks to continued operations and the timely repayment of liabilities.” The school board’s situation has worsened as its fund balance and reserves shrink, according to Moody’s. “Because the reserves and the liquidity have weakened steadily over the past few years, there’s less room for uncertainty in the budget,” said Rachel Cortez, vice president at Moody’s in Chicago. “They don’t have any cash left to buffer against revenue or expenditure assumptions that don’t pan out.”

Don’t Take a Test on a Hot Polluted Day -- Taking a test on a hot and polluted day can result in a measurably lower score which, if the test is for something like a university entrance exam, can have permanent consequences. I find both of these results hard to believe which doesn’t necessarily mean that they shouldn’t be believed.

    • Heat Stress and Human Capital Production How does temperature affect the human capital production process? Evidence from 4.6 million New York City high school exit exams suggests that heat stress on exam days reduces test scores and educational attainment by economically significant magnitudes, and that cumulative heat exposure during the school-year prior may affect the rate of learning. Taking an exam on a 90°F day relative to a 72°F day leads to a 0.19 standard deviation reduction in exam performance, equivalent to a quarter of the Black-White achievement gap, and a 12.3% higher likelihood of failing an exam. Teachers clearly try to offset the impacts of exam day heat stress by selectively boosting grades just below passing thresholds, while existing air conditioning seems to have a limited protective effect.
    • The Long-Run Economic Consequences of High-Stakes Examinations: Evidence from Transitory Variation in Pollution - Cognitive performance during high-stakes exams can be affected by random disturbances that, even if transitory, may have permanent consequences. We evaluate this hypothesis among Israeli students who took a series of matriculation exams between 2000 and 2002. Exploiting variation across the same student taking multiple exams, we find that transitory PM2.5 exposure is associated with a significant decline in student performance. We then examine these students in 2010 and find that PM2.5 exposure during exams is negatively associated with postsecondary educational attainment and earnings. The results highlight how reliance on noisy signals of student quality can lead to allocative inefficiency.

Free college isn’t the solution: How the push for “college for all” sets up students to fail - Salon.com: Despite the evidence that we already have too many students in higher education, the hot new idea among the political class is to double down by pushing for “free college tuition.” The problem with the “free college” idea is, however, not merely financial. It also reinforces the myth that college is appropriate or even possible for all students. That myth already has destructive consequences for both the quality of higher education and for some of the students caught up in what has become a multi-billion dollar hoax. As unrealistic as it is, the idea that everyone should attend college has been embraced by Americans. By 1992, 95 percent of high school seniors said they planned to go on to college — even though half of them lacked even basic 9th grade math and verbal skills. These aspirations, however, had dramatic real-world consequences: In 1979 fewer than half of high school graduates enrolled in college. By 2012, that number had soared to more than two-thirds, and even with the dumbed-down curricula and inflated grades, many of them would have a rude encounter with reality.How bad is it? Of the 1.8 million students assessed for college readiness in 2014, ACT found that only 26 percent met college-ready benchmarks in all four subjects (English, reading, math and science). Education critic Charles Murray notes that a study of 41 institutions of higher learning shows that an SAT score of 1180 will give a college freshman a 65 percent chance of maintaining a 2.7 grade point average. But that is a score that only about one in ten 18-year-olds could achieve. “So,” writes Murray, “even though college has been dumbed down, it is still too intellectually demanding for a large majority of students.” Even so, in recent decades, 30 percent of students with C grades in high school and 15 percent with a grade point average of C minus or lower have been admitted into four-year colleges. That has consequences both for the students and for the institutions, which often have to adjust their standards to the new demographic realities. One result is that nearly one in five students in four-year institutions and more than half of students in two-year colleges end up in remedial courses.

Trends In Expenditures By US Colleges And Universities, 1987-2013 - Cleveland Fed - Why have college costs been rising in recent years? One set of explanations is related to questionable spending on amenities for students, salaries for administrators, or other expenditures that are outside the traditional teaching and research focus of colleges and universities. Other explanations are related to economy-wide forces that the higher education industry has little direct influence over. For example, higher education may be an industry that is impacted by Baumol's cost disease.  Under this idea, productivity improvements in some sectors of the economy lead to higher wages in those sectors. But then other sectors will also need to raise wages in order to compete for workers, even if these other sectors - and higher education may be one example - do not experience productivity improvements of their own. An earlier Economic Commentary (Hinrichs 2016) studied the employment mix in higher education. That piece found that the proportion of college faculty who are full-time employees has declined over time and that, contrary to popular belief, there has not been a large change in the share of employees who hold administrative positions. These employment results may provide some insight into changes in spending by higher education institutions, but they do not provide the complete picture. First, not all spending by colleges is paid out to employees. Second, there may be changes in wages or salaries for employees that impact the overall wage bill for colleges but are not reflected in employment counts.This Economic Commentary studies trends in spending by US colleges and universities in broad expenditure categories between 1987 and 2013. Although this exercise does not provide a complete answer to the question of why the cost of college has been rising, it may help in identifying channels through which the spending increase has occurred. The results reveal that spending per student has risen in most major spending categories. This is true for both public institutions and private institutions. However, spending has risen more dramatically in some categories than others. For example, research is one category that has witnessed among the highest spending growth, and in percentage terms, there has also been a large increase in student services spending.

Harvard Endowment drops 2% in 2016, worst since financial crisis -  Harvard University’s endowment delivered its worst investment performance since 2009, and its interim chief warned in an annual report that “returns could be muted for some time to come.” The 2% loss for fiscal 2016 fell short of the university’s goals and contributed to a $1.9 billion drop in the value of the world’s wealthiest endowment. Harvard Management Company, as the endowment is formally known, now manages $35.7 billion. It provides more than one-third of the university’s operating budget. The pullback, the largest since a 27.3% loss during the last financial crisis, is the latest setback for an institution that has struggled with leadership changes and lagging performance when compared with its Ivy League peers. Harvard Management’s board is currently searching for its fourth chief executive in a decade following the July departure of Stephen Blyth, who left after 18 months in the top job. Harvard’s losses for the year ending June 30 reinforce the challenges facing all college endowments as they wrestle with volatile global markets and a sustained period of low interest rates around the world. College and university endowments tracked by Cambridge Associates posted net returns of -2.7% for the year June 30. The S&P 500 gained 3.25% during the same period, according to FactSet.

How the Financing of Colleges May Lead to Disaster! - When the financial industry—banks, hedge funds, loan companies, private equity—gets too involved in any particular activity of the economy or society, it’s usually time to worry. The financial sector, which represents a mere 4 percent of jobs in this country but takes a quarter of all private sector profits, is like the proverbial Las Vegas casino—it always wins, and usually leaves a trail of losers behind. So perhaps alarms should have been raised among both financial regulators and educational leaders when, two decades ago, for-profit colleges began going public on the NASDAQ and cutting deals by which private equity firms would buy them out. Apollo Group, the parent company of the University of Phoenix, was one of the first, becoming a publicly traded corporation in 1994, at a time when the university had a mere 25,000 students. By 2007 the university had expanded to 125,000 students at 116 locations. This was growth pushed by investors who viewed students as federally subsidized “annuities” that, via their Pell Grants and student loans, would produce a fat and stable return in the form of tuition fees. It’s an issue that’s been front and center in recent months, not only with the scandal surrounding Trump University and the recent closure of the ITT chain of for-profit colleges, but also the news that Bill Clinton was, during five years, paid a total of $17.6 million to serve as an “honorary chancellor” of the for-profit college company Laureate International Universities. The sector has been raking in money for some time now. Throughout the roaring 1990s, for-profit college and university enrollment grew by nearly 60 percent, compared to a mere 7 percent rise in the traditional nonprofit sector. As one Credit Suisse analyst looking at the $35 billion industry put it, “it’s hard not to make a profit” in the for-profit education sector. The stock prices of for-profit colleges and universities (FPCUs) reflected that; they rose more than 460 percent between 2000 and 2003 with much support from public subsidies. Their promotional budgets rose, too—Apollo recently spent more on marketing than Apple, the world’s richest company.  But education, sadly, did not benefit. As A.J. Angulo outlines in his detailed history of the for-profit sector, Diploma Mills, that’s because such schools spend a large majority of their budgets not on teaching but on raising money and distributing it to investors.

Student Loan Defaults Drop, but the Numbers Are Rigged - Bloomberg: The good news is that Americans are taking longer to default on their federal student loans, the U.S. Department of Education announced Wednesday. The bad news is that the overall number of defaults continues to rise. How can this be? Well, defaults fell by a half percentage point, to 11.3 percent, compared with a year earlier. This measures the number of former students who went 360 consecutive days without making a payment since their first bill came due in fiscal year 2013. About 593,000 former college students out of 5.2 million total borrowers defaulted on their federal debt as of Sept. 30, 2015, the department said. Default rates at public and for-profit colleges dipped, while private, nonprofit schools experienced a slight increase. Former students who feel duped may take solace in knowing their alma maters could be on the hook, too. Schools whose former students default at sky-high rates—at least 30 percent for three straight years or more than 40 percent during the most recent year—can lose access to the nearly $130 billion in annual student loans and grants made available to colleges. With so much at stake, it’s probably not a surprise the system is being gamed. The default rate doesn’t accurately represent the degree to which former students struggle to repay their loans, federal officials and higher education experts have said. This is because of school efforts to push back eventual defaults to later years by persuading students to postpone payments under federally approved programs. Of 6,155 schools with default rates, just 10 may lose access to federal student aid as a result of their high default rates, the department said.

 Wisconsin Cities Face Billions Of Dollars In Underfunded Retiree Benefits -- There’s a big and expensive problem looming for many of Wisconsin’s cities: billions of dollars in benefits promised to retired teachers, police officers and other public workers. An investigation published this week by the Milwaukee Journal Sentinel found these local retirement obligations total $6.5 billion over the coming generation, with $4.7 billion of that in Milwaukee County alone.  One of the reporters who carried out this investigation is Jason Stein, the Journal Sentinel’s Capitol reporter. Stein said amassing this level of unfunded benefits "doesn’t happen in a day." "In many cases, these are benefits that were first granted to workers in the early 1970s. At that time, health care cost about 30 times less than what it does today, so promises were made to fund public workers' health care in retirement," he said. "Today, a generation later, we see that cost can be, in some cases, enormous."

 Contrary to What AP Tells You, Social Security Is NOT a Main Driver of the Country's Long-term Budget Problem – Dean Baker - The NYT ran a short AP piece on Social Security and "why it matters." The piece wrongly told readers that Social Security is "a main driver of the government's long-term budget problems." This is not true. Under the law, Social Security can only spend money that is in its trust fund. If the trust fund is depleted then full benefits cannot be paid. The law would have to be changed to allow Social Security to spend money other than the funds designated for the program and in that way contribute to the deficit. The piece also plays the "really big number" game, telling readers: "the program faces huge shortfalls that get bigger and bigger each year.In 2034, the program faces a $500 billion shortfall, according to the Social Security Administration. In just five years, the shortfalls add up to more than $3 trillion.  "Over the next 75 years, the shortfalls add up to a staggering $139 trillion. But why worry? When that number is adjusted for inflation, it comes to only $40 trillion in 2016 dollars — a little more than twice the national debt."  Since this is talking about shortfalls projected to be incurred over a long period of time, it would be helpful to express the shortfall relative to the economy over this period of time, not debt at a point in time. This is not hard to do, since there is a table right in the Social Security trustees report that reports the projected shortfall as being equal to 0.95 percent of GDP over the 75-year forecasting horizon. By comparison, the costs of the war in Iraq and Afghanistan came to around 1.6 percent of GDP at their peaks in the last decade.  The piece also gets the reason for the projected shortfall wrong…

Don’t Blame “Baby Boomers” For Not Retiring -- In business, the 80/20 rule states that 80% of your business will come from 20% of your customers. In an economy where more than 2/3rds of the growth rate is driven by consumption, an even bigger imbalance of the “have” and “have not’s” presents a major headwind. I have often written about the disconnect between Wall Street and Main Street. As shown in the chart below, while asset prices were inflated by continued interventions of monetary policy from the Federal Reserve, it only benefited the small portion of the population with assets invested in the market. Cheap debt, excess liquidity and a buyback spree, led to soaring Wall Street and corporate profits, surging executive compensation and rising incomes for those in the top 10%. Unfortunately, the other 90% known as “Main Street” did not receive many benefits. This divide is clearly seen in various data and survey statistics such as the recent survey from National Institute On Retirement Security which showed the typical working-age household has only $2500 in retirement account assets. Importantly, “baby boomers” who are nearing retirement had an average of just $14,500 saved for their “golden years.” Further evidence of the failure of ongoing Central Bank interventions to spark a broad economic recovery that lifted “all boats” is shown in the chart below. 4-0ut-of-5 working-age households have retirement savings of less than one times their annual income. This does not bode well for the sustainability of living standards in the “golden years.” Here is the problem that is unfolding for investors going forward. While the mainstream financial press continues to extol the virtues of investing

Specialty Drug Costs Soar 30% For California Pension Fund | Kaiser Health News: Specialty drug costs jumped 30 percent last year to $587 million for the California Public Employees’ Retirement System, one of the nation’s largest health care purchasers. Though they amount to less than 1 percent of all prescriptions, specialty drugs accounted for more than a quarter of the state agency’s $2.1 billion in total pharmacy costs. Those overall drug costs have climbed 40 percent since 2010. The new figures show just how much financial pressure many employers and government agencies face from rising drug costs and why it’s become such a hot topic in California politics and on the presidential campaign trail. Hepatitis C drugs drove much of the increase for the state retirement system during 2015, as did two rheumatoid arthritis drugs. Drugs for cancer and multiple sclerosis were also among the top 10 specialty drugs for CalPERS. CalPERS spent the most, $94.5 million, on Harvoni, a hepatitis C drug. It is sold by Gilead Sciences Inc., whose steep prices have drawn public outrage and government scrutiny. The agency spent an additional $16.6 million on Sovaldi, another Gilead drug for hepatitis C. Apart from specialty medications, CalPERS’ highest-cost drugs were Lantus, for diabetes; Advair, an asthma inhaler; and Crestor, a cholesterol medicine. Painkiller OxyContin rounded out the top 10 at $14.3 million, according to state data. More than 5 percent of CalPERS’ total drug spending — $118 million — went for Humira and Enbrel, two anti-inflammatory biotech drugs that don’t face competition from lower-priced generics.

New federal nursing-home standards preserve patients’ right to sue - The federal agency that controls more than $1 trillion in Medicare and Medicaid funding has moved to prevent nursing homes from forcing claims of elder abuse, sexual harassment and even wrongful death into the private system of justice known as arbitration. An agency within the Health and Human Services Department on Wednesday issued a rule that bars any nursing home or assisted-living facility that receives federal funding from requiring that its residents resolve any disputes in arbitration instead of in court. The rule, which would affect nursing homes with 1.5 million residents, promises to deliver major new protections. Clauses embedded in the fine print of nursing-home admissions contracts have pushed disputes about safety and the quality of care out of public view. The system has helped the nursing-home industry reduce its legal costs, but it has stymied the families of residents from getting justice, even in the case of homicide.A case involving a 100-year-old woman who was strangled by her roommate was initially blocked from court. So was a case brought by the family of a 94-year-old woman who had died at a nursing home in Murrysville, Pa., from a head wound. “The sad reality is that today too many Americans must choose between forfeiting their legal rights and getting adequate medical care,” U.S. Sen. Patrick Leahy, D-Vt., said Wednesday.

Shaky Obamacare Market Adds to 'Death Spiral' Fears -- Failing insurers. Rising premiums. Financial losses. The deteriorating Obamacare market that the health insurance industry feared is here. As concerns about the survival of the Affordable Care Act’s markets intensify, the role of nonprofit “co-op” health insurers -- meant to broaden choices under the law -- has gained prominence. Most of the original 23 co-ops have failed, dumping more than 800,000 members back onto the ACA markets over the last two years. Many of those thousands of people were sicker and more expensive than the remaining insurers expected -- and they’re hurting results. With more of the nonprofits on the brink of folding, the situation for the remaining providers looks dire. Anthem Inc., for example, is facing an estimated $300 million in losses on its exchange business for individual plans this year, after turning a profit in 2014 and almost breaking even on the program in 2015, according to the company. “These co-ops have attracted, we think, disproportionately high health-care utilizers,” Gary Taylor, an analyst with JPMorgan who follows the industry, said in a telephone interview. Their former members “are now enrolled in these for-profit health plans. That’s been a factor driving the deterioration in their profitability.” ‘Death Spiral’ Large insurers including Aetna Inc. and UnitedHealth Group Inc. have already pulled back from Obamacare’s markets, citing losses. Anthem has said it remains committed to the program. “Are we in an Obamacare ‘death spiral?’” health insurance consultant Robert Laszewski asked in a Sept. 9 bulletin to clients, where he described the grim scenario. In a death spiral, as options for coverage shrink, insurers attract increasingly sick patients and suffer losses. That forces them to raise rates, driving away healthy, profitable customers. Facing more losses, they raise rates again, causing more healthy people to leave, and so on -- until all that’s left are high premiums and a small pool of the unwell.

 Studies Link Cancer Patients’ Survival Time To Insurance Status - Privately insured people with cancer were diagnosed earlier and lived longer than those who were uninsured or were covered by Medicaid, according to two recent studies. In one study, researchers examined data from more than 13,600 adult patients who had glioblastoma multiforme, the most common type of malignant brain tumor, between 2007 and 2012. The other study analyzed data from more than 10,200 adults who were diagnosed with testicular cancer between 2007 and 2011. Both studies, published online in the journal Cancer in August, relied on data from the National Cancer Institute's Surveillance, Epidemiology, and End Results program. SEER tracks cancer incidence and survival in the United States. The two cancers generally progress very differently. Glioblastoma multiforme is very aggressive; patients generally don't live much more than a year following diagnosis and the five-year survival rate is less than 5 percent. Conversely, testicular cancer responds well to chemotherapy even if it has spread to other parts of the body. The five-year survival rate overall is 95 percent. But regardless of cancer type, patients with private insurance had a survival advantage. In the testicular cancer study, uninsured patients were 26 percent more likely to be diagnosed with metastatic disease (meaning their cancer had spread elsewhere) than privately insured patients. Medicaid patients were 62 percent more likely to have metastatic disease. Though the Medicaid patients fared worse than the uninsured patients in this regard, that might be because, until recently, some of them, too, had been uninsured, the researchers say, and only enrolled in Medicaid after their cancer was diagnosed. Compared to privately insured men in the study, uninsured men were 88 percent more likely to die of the cancer, and Medicaid patients were 51 percent more likely to die of the disease. A similar pattern emerged in the glioblastoma multiforme study. Patients who were either uninsured or on Medicaid were more likely to have a larger tumor at the time of diagnosis. An uninsured patient was 14 percent more likely to have a shorter survival time than someone who was privately insured, while a patient on Medicaid was 10 percent more likely to have a shorter survival time, the study found.

A top journalist is suing the FDA over its alleged use of a banned and secretive practice to manipulate the news -- The US Food and Drug Administration (FDA) may reportedly still engage in a banned practice that manipulates popular news coverage, and a few of America's top science journalists are railing against the government organization because of it.  One of them is even suing the FDA for documents related to the matter.  The commotion, raised by NYU journalism professor Charles Seife in a feature story at Scientific American, deals with the FDA's use of a worrisome media strategy called a "close-hold embargo." (Seife's NYU colleague and journalist Ivan Oransky previously detailed the matter in a series of posts at his blog Embargo Watch.)   Close-hold embargoes let a select few journalists get access to newsworthy information, yet only after they agree not contact anyone outside the organization for second opinions.  The result is that due diligence goes out the window: Without the ability to contact outside experts, a bunch of stories appear in the most popular news outlets in the world all at once — yet without any independent expert voices to backstop the new information.  And with the FDA, the stakes couldn't be higher: It's an organization whose decisions can determine whether a drug, medical procedure, or policy is safe for the public.  Some anointed outlets who do agree to close-hold embargoes do add third-party sources to their online stories after the embargo lifts, but many don't. "In that situation, the journalist is allowing his or her reporting hands to be tied in a way that they're not going to be anything, ultimately, other than a stenographer," Seife quoted journalist Vincent Kiernan as saying.

Some cities are taking another look at LED lighting after AMA warning - The American Medical Association issued a warning in June that high-intensity LED streetlights — such as those in Seattle, Los Angeles, New York, Houston and elsewhere — emit unseen blue light that can disturb sleep rhythms and possibly increase the risk of serious health conditions, including cancer and cardiovascular disease. The AMA also cautioned that those light-emitting-diode lights can impair nighttime driving vision. Similar concerns have been raised over the past few years, but the AMA report adds credence to the issue and is likely to prompt cities and states to reevaluate the intensity of LED lights they install. Nearly 13 percent of area/roadway lighting is now LED, according to a report prepared last year for the Department of Energy, and many communities that haven’t yet made the switch plan to do so. LEDs are up to 50 percent more energy-efficient than the yellow-orange high-pressure sodium lights they typically replace. They last for 15 to 20 years, instead of two to five. And unlike sodium lights, the LEDs spread illumination evenly.  Some cities say the health concerns are not convincing enough to override the benefits of the first-generation bright LED lights that they installed in the past three to eight years. New York is one of them, although it has responded to resident complaints by replacing the high-intensity, white LED bulbs with a lower-intensity bulb that the AMA considers safe.

Congress: Flint Residents Can Wait for Clean Water - Lawmakers have come up with a compromise to avoid a potential government shutdown and provide long-awaited aid for Flint, Michigan —though the band-aid measure will still keep that community, which has been grappling with a lead-contamination crisis for more than two years, waiting for funds at least until November.  According to news outlets, U.S. House leaders on Tuesday night struck a deal to allow a vote on an amendment adding $170 million in infrastructure funding under the Water Resources Development Act (WRDA), to help Flint and other cities with water emergencies.  The agreement followed days of tense talks , and came after Senate Democrats earlier on Tuesday blocked a vote to advance a stopgap spending bill to keep the government running after Friday, citing the GOP's refusal to include funding for Flint . The legislation does include emergency flood assistance for Louisiana, West Virginia and Maryland.   House Speaker Paul Ryan (R-Wis.) said the breakthrough on Flint "will help unlock" the short-term spending bill. Indeed, the Washington Post reported that while "Senate Democrats have not yet examined the House amendment ... a senior aide said leaders are 'optimistic' that the deal could offer a path to avert a shutdown."  And Rep. Dan Kildee (D-Mich.), who has been outspoken in his call for Flint funding (and about the cause of the crisis in the first place), said the deal "is a step forward to ensuring that Flint families get the resources they need to recover from this crisis."  "The people of my hometown have waited over two years for their government to help them in their time of need," Kildee said. "We will continue to fight until Flint aid reaches the president's desk."

New Report: Poor Americans of Color Drink Filthy Water and Breathe Poisonous Air All the Damn Time - In 2009, trains arrived in Uniontown, Alabama carrying four millions tons of coal ash, the toxic residue from burning coal. The ash was recovered from a spill in Kingston, Tennessee—a town that is more than 90 percent white—and brought to a new landfill less than a mile from the residential part of Uniontown, which is 90 percent black. Soon, Uniontown residents began reporting breathing problems, rashes, nausea, nosebleeds, and more.  The story is one of many detailed in a scathing report by the US Commission on Civil Rights, a government watchdog group, on the EPA's "long history" of not effectively enforcing its anti-discrimination policies. "EPA does not take action when faced with environmental justice concerns until forced to do so," it reads. "When they do act, they make easy choices and outsource any environmental justice responsibilities onto others." For years, critics have accused the EPA of neglecting communities of color, pointing to cases from toxic air in Richmond, California to lead-contaminated water in Flint, Michigan. The report sheds light on why this might be the case: Despite receiving early 300 discrimination complaints since 1993, the EPA's Office of Civil Rights has "never made a formal finding of discrimination and has never denied or withdrawn financial assistance from a recipient in its entire history," the report found. Last year, the Center for Public Integrity found that it takes the EPA a year, on average, to decide to accept or dismiss a Title VI omplaint, and that the agency dismisses or rejects the discrimination complaints in more than 9 out of 10 cases. Much of the US Commission on Civil Rights report focuses on coal ash, which typically contains arsenic, mercury, and other heavy metals that are "associated with cancer and various other serious health effects," according to the EPA. The ash is America's second largest industrial waste stream (after mining waste), with 130 million tons generated each year—more than 800 pounds for every man, woman, and child in the United States. Until recently, the coal ash was typically dumped in unlined pits and covered with water, sometimes contaminating local water sources.

Poor food 'risks health of half the world' - BBC News: Poor diets are undermining the health of one in three of the world's people, an independent panel of food and agriculture experts has warned. The report says under-nourishment is stunting the growth of nearly a quarter of children under five. And by 2030 a third of the population could be overweight or obese. The report by the Global Panel on Agriculture and Food Systems for Nutrition is being presented to the UN's Food and Agriculture Organisation. The panel - which is led by the former President of Ghana John Kufuor and the former Chief Scientific Advisor to the UK Government Sir John Beddington - says two billion people lack the range of vitamins and minerals in their diet needed to keep them healthy. The result is an increase in heart disease, hypertension, diabetes and other diet-related illnesses that undermines productivity and threatens to overwhelm health services. These non-infectious, chronic diseases have been associated with the fatty, highly processed diet of the developed world. But most new cases are appearing in developing countries. The panel has warned that on current trends the situation will get far worse in the next 20 years. It says only an global effort similar to that used to tackle HIV or malaria will be enough to meet the challenge.

Rising air pollution levels a ‘public health emergency’, says WHO - More than 90 per cent of the global population lives in a place where the air does not meet World Health Organisation safety guidelines, according to a study from the UN agency that warns of a “public health emergency” created by rising pollution levels.The most detailed research on outdoor pollution in individual countries undertaken by the organisation shows an estimated 3m deaths a year can be linked to dirty air from coal-fired power plants, old cars, factories and other sources.Millions more are affected by smoke inside their homes from cooking stoves or fires fuelled with wood or dung, meaning a total of 6.5m deaths were associated with air pollution in 2012, the agency said.“Air pollution continues to rise at an alarming rate, and affects economies and people’s quality of life. It is a public health emergency,” the study says.An interactive map that the organisation based on data drawn from satellites as well as ground air monitors reveals stark disparities among countries’ levels of particulate matter, one of the most dangerous forms of air pollution.   Tiny particles no bigger than 2.5 micrometres, known as PM2.5, can penetrate deep into the lungs and cardiovascular system. WHO guidelines say annual average concentrations should not exceed 10 micrograms per cubic metre.

92% of World's Population Breathes Toxic Air -- More than 90 percent of people on the planet live in places where air pollution levels are dangerously high, and millions of people are dying as a result of the exposure, according to new research from the World Health Organization (WHO) released Tuesday. Using an air quality model based on satellite data and other ground and air monitors in 3,000 locations, the WHO found that fully 92 percent of people worldwide live in regions where the pollution exceeds the organization's safety limits. "To date, air pollution—both ambient (outdoor) and household (indoor)—is the biggest environmental risk to health, carrying responsibility for about one in every nine deaths annually," the report states. "Air pollution continues to rise at an alarming rate, and affects economies and people's quality of life; it is a public health emergency." The organization created an interactive map showing where in the world, both in rural and urban areas, the air is contaminated by toxins that can seep into the lungs and cause cardiovascular diseases, stroke, chronic obstructive pulmonary disease, and lung cancer, among other illnesses. The majority of those locations are in developing counties, largely in the regions of Southeast Asia and the Western Pacific, with "vulnerable populations" at a particularly high risk, the report states. More than 6 million people die every year due to exposure to indoor and outdoor air pollution, according to an International Energy Agency study released in June. "Air pollution continues take a toll on the health of the most vulnerable populations—women, children and the older adults," said WHO assistant director general Dr. Flavia Bustreo. "For people to be healthy, they must breathe clean air from their first breath to their last."

 The United Nations' historic meeting on antibiotic resistance puts the threat on a level with HIV and Ebola — Quartz: For the fourth time in its history, the United Nations has elevated a health issue to crisis level. The UN General Assembly held a high-level meeting earlier this week (Sept. 21) to address how antibiotics have become less useful when treating human illnesses caused by bacteria. In its 70 year history the General Assembly has called similar meetings to discuss HIV, the rise of non-communicable diseases such as heart disease, and Ebola. By pushing antibiotic resistance front-and-center as a global problem, the international body has acknowledged that some of the miracles of modern medicine—including the invention of penicillin and tetracyclines—are at risk of becoming ineffective. Already the US Centers for Disease Control and Prevention estimates that 23,000 people die in the US each year as a direct result of antibiotic resistance. Some of those deaths were from illnesses once easily treated with the drugs, including MRSA and some E. coli infections. At the core of the crisis sits animal agriculture, which includes the some 9 billion food animals slaughtered in the US each year. For years, food companies and farmers have used antibiotics not only to treat sick animals, but also to feed them a steady diet of the drugs to prevent illnesses.Public health advocacy groups have pushed on the federal government to crack down on how farmers use drugs, but the government has been slow to act in a meaningful way. Food companies are not especially transparent about what drugs are being used on different species and how they are being used, and the government mandates little be made public. Some of the biggest pressure on farm practice changes comes from corporate America, which has responded to consumer demand for foods from animals not treated with antibiotics. A new report published this week (Sept. 20) by the Natural Resources Defense Council and a coalition of other advocacy groups shows that in just the last year, the number of US fast food chains that have adopted supply chain policies aimed at reducing the on-farm use of antibiotics for the meat products they sell has doubled.

Neonicotinoids: Unpublished Industry Studies Detail Harm to Bee Health: Chemical giants Bayer and Syngenta commissioned private studies which showed that their neonicotinoid pesticides can cause serious harm to bees, a Greenpeace investigation has uncovered. The revelations come with the UK set to decide its own policy on pesticide use once it leaves the EU. The UK lobbied against the current EU ban when it was introduced. The company research -- designed with regulators to reveal the level at which their products harm bees -- was obtained through freedom of information (FOI) requests to the US environmental regulator. Publicly the two firms have often sought to play down suggestions that their products can cause harm to honey bees. However, the studies will cause little surprise in industry circles. Industry and scientists have long known that the products can harm bees at certain levels. Instead the research has been criticised by experts because it assumes a very narrow definition of harm to bee health and ignores wild bees which evidence suggests are more likely to be harmed by neonicotinoids. It means the studies may substantially underestimate the impact of the two firm's products on pollinators. Due to commercial confidentiality rules, Energydesk is not allowed to release the studies in full.

Gene-ocide | The Economist - IN A competition to find the world’s least-loved animal, the mosquito would be hard to beat. Only a few species of the insect carry the parasites that cause human diseases such as West Nile virus, dengue and yellow fever, but the harm they cause is enormous. Malaria kills more than 400,000 people, mostly children, every year. Zika has spread to dozens of countries (see article). If species such as Anopheles gambiae and Aedes aegypti could be eradicated, the world would surely be a better place.  Genetic engineers have already taken some steps in that direction: male A. aegypti mosquitoes that have been modified to become sterile have been released in Brazil, for example. Such approaches, controversial though they are among some greens, are limited in their impact and geographical range. A nascent technique called a “gene drive”, which could make it far easier to wipe out species, raises harder questions.  The term refers to the engineering of genes so that they are almost guaranteed to be inherited by offspring (the conventional laws of inheritance predict that offspring have only a 50% chance of inheriting a specific gene). You might, say, be able to engineer A. gambiae to produce only male offspring, release the modified bug into the wild and extirpate the entire species.The use of gene drives in the wild is not imminent. But the research is proceeding rapidly, thanks to new gene-editing technology and to some lavish funding: this month the Bill and Melinda Gates Foundation said it would increase its investment in gene drives to $75m. Mosquito species are the main targets, but need not be the only ones. Some wonder if gene drives could be used on the ticks that carry Lyme disease, or to change the genetic makeup of bats, a reservoir of infectious diseases. As interest grows, however, so do the concerns. However carefully scientists model the impact of gene drives, the risk of unintended consequences looms large in complex ecological systems. Another worry is that gene drives could be used for evil: a mosquito could just as well be engineered to be more suited to carrying deadly diseases, for example.

Monsanto grabs Crispr, which could end the war on GMOs - Business Insider The next genetically modified food you eat probably won't be a GMO. At least not in the conventional sense of the term, which stands for genetically modified organism. It will probably be made using Crispr, a new technique that lets scientists precisely tweak the DNA of produce so that it can do things like survive drought or avoid turning brown. On Thursday, the agriculture giant Monsanto nabbed the licensing rights to the technology from the Broad Institute to use in its seed development. This is the first license the institute has issued to a company for use in agriculture. (The agriculture giant DuPont Pioneer, on the other hand, is collaborating with another science company, called Caribou Biosciences, to license its own Crispr crops, including corn.) Using Crispr, an agriculture company can get around the restrictions on GMOs and, they hope, the opposition to them — because a crop altered using Crispr isn't technically a GMO at all.Harvard geneticist George Church thinks crops like these might be our best hope for ending the war against GMOs, which he and dozens of other experts call misguided, once and for all. "It's a beautiful thing," Church recently told Business Insider.  The US Department of Agriculture seems to agree, as does Monsanto. The USDA has already moved two crops made with Crispr — a type of mushroom and a type of corn — closer to grocery store shelves by opting not to regulate them like conventional GMOs. DuPont, the company making the corn, says it plans to see the crop in farmers' fields in the next five years.

Off-label dicamba: the implications and consequences of applications -- One bad apple spoils the whole barrel. I know that there were growers out there this year who grew Monsanto’s new Extend soybeans and cotton and did not make off-label dicamba applications. I also know that many in the ag community urged growers not to. However, those who did make these applications have created a domino effect of bad publicity for U.S. agriculture, regulatory headaches, complaints, and potential soybean yield losses and they have caused negative implications for regulation of future technologies. Let’s be clear, I am not just talking about farmers here. Many growers I have talked to have suggested that they were “told” it would be ok; they were “told” dicamba was great on pigweed; in the case of cotton they were “told” it looked better with a tank-mix of Liberty, etc. This is one of those anonymous cases where “they” say a lot, but who “they” are is tough to get a handle on. Whether you are a Monsanto representative who recommended it, dealer who sold dicamba late in the season, a consultant who called me or someone else asking about in-crop rates (or, worse, tweeted about applications in open social media), the seed dealer talking about pigweed control and when stuff would be legal, the grower who told the guy to spray, or finally the guy who eventually hit the spray button on the tractor, you all share responsibility.

Third GMO Arctic Apple Gets USDA Approval -  A third genetically-modified ( GMO ) apple was commercially approved last week by the U.S. Department of Agriculture (USDA). The Arctic Fuji apple from Okanagan Speciality Fruits, which is engineered to keep from browning, joins the company's two other varieties —the Arctic Golden and Arctic Granny . The company said around 40 percent of apples are wasted because of superficial bruising and browning and created its apples to help keep the popular fruit from being prematurely thrown in the trash while claiming to keep its original texture and flavor. In order to prevent apples from browning, the company said it has"silenced" the enzyme called polyphenol oxidase (PPO) that drives oxidation in apples. Michael Firko, deputy administrator for the USDA's Animal and Plant Health Inspection Service, said the new status for the Arctic Fuji is the "most scientifically sound and appropriate regulatory decision." Neal Carter, Okanagan Specialty Fruits' founder and president, said the feedback they have gotten from consumers has been very positive. "The response to Arctic Fuji apples and our overall platform to deliver direct benefits to consumers has been encouraging," Carter said. "We are confident the positive feedback we have received will translate to the marketplace." However, not everyone agrees."Many big apple buyers don't want this. Consumers don't want this. It's not only an unnecessary product, but the risks have not been fully examined," Wenonah Hauter , executive director of Food & Water Watch , said. "Regulators have glossed over the possible unintentional effects of this technology, including the potential economic impacts on farmers, the potential of contamination for non-GMO and organic apple crops and the potential impact of the non-browning gene silencing, which could also weaken plant defenses and plant health."

In The Midst Of Drought, California Farmers Used More Water For Almonds  - Kelly Watson, an assistant professor of geosciences at Eastern Kentucky University, is an expert in remote sensing. She uses satellite images to study agriculture, specifically the interactions between honeybees and industrial agriculture. At the beginning of this year she started a project with one of her graduate students, Larissa Watkins, looking at aerial photos of California almond farms. The goal was to predict how the rapid increase in almond orchards would affect demand for honeybee pollination. But when they started processing satellite photos of California’s agricultural region taken between 2007-2014, they noticed a surprising trend. Many areas that were classified as natural land cover—things like grasslands, wetlands and forests—were being converted to almond orchards.“We were really shocked when we started looking at the data,” Watson says. “I was surprised this is happening in California with all the attention on the drought.” So Watson and Watkins pivoted, deciding to put honeybees aside and instead quantify the land use changes and how they affected water use. What they found was shocking: based on their estimates, 23,000 acres of natural land have been converted to almond farms. 16,000 of those acres were land previously classified as wetlands. Additionally, some agricultural land has been converted from lower-water crops to almonds. Overall almond acreage increased about 14% in California between 2007-2014, so Watson says based on that number you would expect about a 14% increase in irrigation needs for almonds. But because so much land was converted from natural land or lower-water crops, the irrigation increase for the almond industry was nearly twice that. Watson and Watkins calculated that the growth of almond farms caused a 27% increase in irrigation demands for almond farms between 2007-2014—an increase that coincides with an historic drought in California, which started in 2011 and continues to plague the state.

Farmers say, ‘No apologies,’ as well drilling hits record levels in San Joaquin Valley (Sacramento Bee) Well water is keeping agriculture alive in Tulare County – and much of the rest of the San Joaquin Valley – through five years of California’s historic drought. Largely cut off from the supplies normally delivered via canals by the federal and state water projects, farmers have been drilling hundreds of feet into the ground to bring up the water they need to turn a profit. Two years after Gov. Jerry Brown signed a bill designed to limit groundwater pumping, new wells are going in faster and deeper than ever. Farmers dug about 2,500 wells in the San Joaquin Valley last year alone, the highest number on record. That was five times the annual average for the previous 30 years, according to a Sacramento Bee analysis of state and local data. The new groundwater law won’t kick in until 2020, and won’t become fully implemented for another 20 years. In the meantime, farmers say they will continuing drilling and pumping. It’s their right, they say, and their only practical choice given the government’s limited surface water deliveries. “It’s a business. I’ll make no apologies for trying to stay in business and being successful,” said Western, who’s been relying almost exclusively on well water the past three years. “That’s what we do here.” Part of what’s driving the well-drilling frenzy is a kind of groundwater arms race. Aquifers don’t respect property lines, and in many cases farmers with older, shallower wells are afraid of losing water to neighbors who are digging deeper wells and lowering the groundwater table. So they invest hundreds of thousands of dollars to drill new wells of their own. All told, farmers are expected to spend $303 million this year alone to pump groundwater, according to UC Davis researchers. R

Boycott Launched After Nestlé Outbids Drought-Stricken Town to Buy Well for Bottled Water -- Nestlé's grab of a Canadian community's water supply has sparked international outrage and calls to boycott the company and bottled water . More than 150,000 Facebook users are talking about the news on the social media site .  The Council of Canadians is calling on people to sign a declaration on its website to boycott bottled water and Nestlé. Nestlé Waters Canada, a bottled water operation of the multinational food and drink giant, outbid the Township of Central Wellington in Ontario for water rights to a local well to ensure " future business growth ." The company is already permitted to pull up to 3.6 million liters (roughly 951,000 gallons) of water a day for its bottling operations in nearby Aberfoyle, but decided to swoop up the well near Elora, Ontario in order "to supplement our operations in Aberfoyle." According the Globe and Mail , the company bought the well from Middlebrook Water Company last month after having made a conditional offer in 2015. The reason this issue has blown up is because the Township of Centre Wellington wanted to buy the spring water well for itself in order to safeguard the drinking water supply the growing community, mayor Kelly Linton explained to The Guardian . The township has a population of about 30,000 but "by 2041, we'll be closer to 50,000 so protecting our water sources is critical to us," he said.  Not only that, much of the province of Ontario is experiencing record drought conditions, with rainfall 100 millimeters below normal in some areas from April to June, the National Post reported in July.

This is what climate change is doing to Iran - Lake Urmia, in the mountains of northwestern Iran, was once a source of national pride and one of the country’s top tourism destinations. It’s emerging now as something else entirely: Iran’s most visible symbol of the damage being wrought by global climate change. The lake has lost more than 90 percent of its surface water since the 1970s as agriculture in the region has boomed and farmers have tapped the lake and many of the sources that feed it for irrigation. Warming temperatures have also played an important role, and the receding water has left behind what looks like a post-apocalyptic landscape of rusting ships half-buried in the sand and piers that lead to nowhere. The flamingos and pelicans that once stopped at the lake have ceased visiting, and its tourism industry has disappeared. Scientists who study the lake also point to Iran's inefficient system of dams. And a study published in the journal Science of the Total Environment in April concluded that even efforts that succeeded in reducing how much of the lake's water was used could have a limited impact because of climate change. Donald Trump and many of his fellow Republicans doubt the existence of climate change. The clerical leaders of Iran, widely derided in the US as a backward theocracy, accept that climate change is real — and that concrete measures need to be taken to fight it. Last November, Iran’s supreme leader, Ayatollah Ali Khamenei, released a letter calling for the country to focus on how to "manage climate change" and grow its "green economy." Earlier this year, Tehran formally signed the sweeping Paris climate agreement, pledging to reduce its overall emissions by 12 percent in coming years.

  ‘We are thirsty’, say Tunisians as drought creates tensions – Struggling with extremism and economic woes, Tunisia now faces another menace: persistent drought across several regions that is creating new social tensions and threatening farming, a pillar of the economy. Farmland is too parched to cultivate crops and rural protesters have tried disrupting water supplies to the capital, while one legislator is calling for a "thirst revolt." A lack of rain, combined with years of bad resource management, has left reservoirs and dams at exceptionally low levels that could lead to a "catastrophic situation," said Saad Seddik, who was agriculture minister until last month. With municipal water supplies periodically cut off, residents of some towns are walking several kilometers (miles) to fetch water from public fountains, loading up donkeys with water canisters - if there's any left. "We come here twice a day, first early in the morning before the dam becomes agitated and dangerous. But what we fetch in the morning isn't enough. So we repeat the trip in the afternoon," but it's still not enough to clean the house or wash clothes, said Hadiya Farhani from the town of Sbikha in the central Kairouan region. Fellow resident Samir Farhani says the government is concentrating on fighting terrorism "while forgetting that thirst could make us turn into terrorists." Tunisia suffered two major Islamic extremist attacks last year targeting tourists and sees sporadic violence and threats from the Islamic State group in Libya and other radical groups in the region. "We are thirsty. Give us water, we don't need work, just water," he pleaded. Most of Tunisia's water goes to farming, and drought-related agricultural losses are estimated at 2 billion dinars ($905 million) this year, according to the Tunisian Agriculture and Fishing Union. The grain industry alone is expected to lose 793 million dinars ($359 million) for the 2015/2016 season, it said.

Are Bison More Environmentally Friendly Than Cattle? --This all mostly stems from a general idea that bison, being not domesticated and technically, even when ranched, a wild animal, are more in tune with nature, more balanced in their impact than cattle. They are also native to North America, unlike cattle, which were domesticated from Old World animals. “Because bison are a natural part of the North American ecosystem, bison ranching can be a beneficial to the natural environment,” writes the National Bison Association, a promotional group, on its site.  In truth this is all a much more complicated question than it seems. It’s not a very satisfying answer, but the only undeniable conclusion of this question is that bison ranching can be more sustainable and environmentally friendly than some forms of cattle ranching. The existence of beefalo notwithstanding, bison and cattle are significantly different animals. The primary source of those differences is that bison are not domesticated, which has its pros and cons. The positive elements are that bison are generally acknowledged to be the hardier species, without requiring shelter even in winter. That can reduce the amount of fuel and manufactured or gathered food a bison needs. In general, they also need less medical attention. From Penn State’s guide to bison: “Because of the bison’s rugged nature and calving ease, a veterinarian’s assistance is rarely needed.” That can reduce the need for antibiotics, which can in turn theoretically reduce the rise of antibiotic-resistant bacteria. Bison’s impact while tramping around the prairies is a bit more nuanced. Studies indicate that cattle generally prefer to hang out around trees and water sources much more than bison do; other studies indicate that the presence of cattle around water sources can have an extremely negative effect on the cleanliness and biodiversity of these environments. That said, Chris Helzer at thePrairie Ecologist notes that, well, this isn’t necessarily how this has to go; it’s perfectly possible to simply fence in cattle so they don’t spend too much time at a water source.

 Toxic Algae Blooms Set Historic Records From Coast to Coast -- Toxic algal blooms aren't just a problem in Florida . They've popped up in more than 20 states , with ongoing blooms choking waterways and aquatic life from California to the Chesapeake Bay.  The Associated Press reported that algal blooms have been detected in more than 40 of the California's bodies of water—the highest number in state history. The blue-green cyanobacterium's growth has been fueled by record-breaking heat and a historic drought . "Warm temperatures, increased nutrients, and low water flows aggravated by drought conditions and climate change are favoring toxin-producing cyanobacteria and algae; and a number of lakes, reservoirs and river systems are suffering blooms as a result," the California State Water Resources Control Board announced last month. As the Sacrameto Bee described, this green muck has been spotted across the Golden State: "Since July, officials have issued notices about potentially toxic blue-green algae in the Klamath River near the Oregon border; along an arm of the state's largest reservoir, Shasta Lake ; and at Pyramid Lake in Los Angeles County. They've attributed the deaths of thousands of fish along a section of Clear Lake to toxic blooms. Blue-green algae also has formed in parts of the Sacramento-San Joaquin Delta, prompting health warnings about green, malodorous water in Discovery Bay and Stockton ."  Beverley Anderson-Abbs, an environmental scientist with the State Water Board, told AccuWeather that blooms are usually seasonal, "However, these seasons have been getting longer over the past few years as winters have been relatively warm and water, especially in smaller lakes, has been warming earlier in the year and staying warm later."

A warm ocean ‘blob’ caused last year’s toxic algal bloom — and there’s more to come - Last year, a massive toxic algae bloom swept the West Coast, resulting in record-breaking levels of a potentially deadly brain-damaging chemical and closing fisheries from California to British Columbia. Since then, scientists have been investigating the causes of the event — and now, a group of researchers think they’ve figured out how the event, which they term “unprecedented,” happened.   The algae bloom was facilitated by an unusual “blob” of warm water lurking in the Pacific Ocean at that time, the scientists say. And while the blob itself may have been largely brought on by weird but natural ocean and atmospheric variations, climate change may result in similar conditions cropping up in the future — and hence, more frequent toxic algal blooms. The work was published in Geophysical Research Letters. Algae blooms aren’t uncommon off the West Coast. In fact, they tend to happen around the same time every year, said the new study’s lead author Ryan McCabe, a research scientist at the University of Washington’s Joint Institute for the Study of the Atmosphere and Ocean.  Normally, these algae blooms are composed of many different species of phytoplankton, and most of them are not harmful. The difference in 2015 is that a single toxic species — Pseudo-nitzschia australis, which produces a neurotoxin called domoic acid — dominated the bloom, an event that McCabe says was “absolutely abnormal.” He and his colleagues are arguing that the strange warm blob is what made Pseudo-nitzchia’s take-over possible.While the appearance of the blob is still not completely understood, scientists believe it may have marked the beginning of a shift in a natural oceanic climate swing known as the Pacific Decadal Oscillation. It’s somewhat like a much longer-term version of the El Niño and La Niña cycle, phasing between warm and cool extremes in different parts of the Pacific.

Aquatic plants may accelerate Arctic methane emissions - – Climate change has caused a boom in aquatic plant biomass on the Arctic tundra in recent decades. Those plants, in turn, are releasing increasing amounts of methane into the atmosphere, according to a paper published last week in the journal Global Change Biology. A multinational project in the late 1960s and early 1970s called the International Biological Program (IPB) collected detailed data on major ecological communities around the world, including the Alaskan tundra. IPB researchers weren’t working with climate change in mind, but the data they gathered have provided Andresen and his colleagues with a unique window onto the state of the tundra ecosystem decades ago. The IPB data didn’t include information on methane, so Andresen and his colleagues developed a mathematical model to determine how such factors as vegetation biomass and thaw depth correlate with the amount of methane released today. By plugging the ecological data collected in the 1970s into the model, they could estimate the methane flux at that time.  Their results show that the biomass of grasses and sedges growing in tundra ponds has increased by 20% to 25% since the IPB era, primarily because of longer growing seasons and the increased availability of nutrients released from the thawing permafrost. During the same time period, Andresen and his colleagues estimate, the methane flux from these wetlands has increased by about 60%. Wetland plants that cover just 5% of the tundra’s surface may account for as much as two thirds of the region’s methane flux, the researchers estimate. Warmer conditions in the Arctic don’t lead to increased methane flux on their own. The new study confirmed that aquatic grasses and sedges act like straws, drawing methane up from the anoxic muck at the bottom of a pond and releasing it through their leaves before it can be converted to carbon dioxide.  “If methane’s only path to the atmosphere is through the soil, then the likelihood of a methane molecule being oxidized before it makes it to the atmosphere is very high,” said Joe von Fischer of Colorado State University in Fort Collins, an expert on ecosystem function and methane flux who was not involved in the study. “The presence of these plants as conduits for methane is fascinating.”

Increased Levels of Carbon Dioxide Could Drive Fish Crazy, Study Finds -- High levels of carbon dioxide could impair the brain chemistry of fish, scientists found. Researchers found that increased concentrations of carbon dioxide in the ocean alters the brain chemistry of fish that may lead to neurological impairment.  "Coral reef fish, which play a vital role in coral reef ecosystem, are already under threat from multiple human and natural stressors," Rachael Heuer, lead author of the study, said in a news release.  "By specifically understanding how brain and blood chemistry are linked to behavioral disruptions during CO2 exposure, we can better understand not only 'what' may happen during future ocean acidification scenarios, but 'why' it happens." In the published in the journal Scientific Reports, researchers collected spiny damselfish from the reefs off Lizard Island in Australia's Great Barrier Reef. The fish were separated into two groups: one is exposed to ordinary CO2 "control conditions and the other exposed to elevated CO2 levels expected to occur by the year 2300. After the exposure, the two fish groups were subjected to a behavioral test, and brain and blood chemistry were measured. In the behavioral test, the fish were given the choice between regular seawater and water containing danger cues such as the smell of an injured fish, which triggered alarm among fish exposed to normal levels of CO2 and was avoided by the fish as expected.  However, the group of damselfish exposed to high levels of CO2 spent more time in the water containing the danger cues and did not seem deterred. The researchers found that this group of fish had altered blood and brain chemistry, as their bodies were trying to adapt to the surge in carbon dioxide."Our findings support the idea that fish effectively prevent acidification of internal body fluids and tissues, but that these adjustments lead to downstream effects including impairment of neurological functions," Martin Grosell, co-author of the study, said in a statement. According to the researchers, increased acidification in oceans may lead to impaired behavior among coral reef fish if they to acclimate to increased CO2. This could eventually lead to increased risk of predation and negative impacts on ecosystem function and population.

The mind-boggling New Orleans heat record that no one is talking about   -- During one of the country’s hottest summers, New Orleans quietly set a mind-boggling record. On 43 nights, the temperature did not drop below 80 degrees in New Orleans, according to the Louisiana state climatologist. It blows the previous record out of the water — 13 nights in 2010. It’s also incredible considering in an average summer, New Orleans has just 2.1 nights at or above 80 degrees. This record should be getting much more attention than it has been.Very warm overnight temperatures are hard on your body, let alone your utility bills. The elderly are particularly at risk during these times, as is the entire homeless population and anyone with an illness. You might be inclined to raise a finger to mention that air conditioning negates these effects, but around 30 percent of New Orleans’s population lives in poverty. If a family is lucky enough to own an air conditioner, they probably cannot afford to use it. Why is this happening? In short, man-made climate change. It’s not just New Orleans and the South in general that are suffering through dangerously uncomfortable nights; this trend is obvious across the entire Lower forty-eight. And that’s exactly what we expect in a climate-change world. In reality, very warm overnight low temperatures have been increasing in frequency since the 1970s.The air can hold more water vapor as it warms up. So as global temperatures increase, so does the humidity. That also means there’s more moisture to create clouds. Even though clouds keep things cool during the day — they reflect sunlight — they act as a blanket at night, keeping the day’s heat trapped near the ground. The humidity itself also acts like a warm, wet blanket. At night, the air doesn’t cool down past the dew point, which is inherently linked to humidity. The more moisture that’s in the air, the higher the dew point, and the warmer the overnight temperature.

A weakening La Nina adds a lot of uncertainty to winter forecasts: A weakening La Nina climate pattern is going to make weather and climate forecasts a bit trickier this fall and winter. The National Oceanic and Atmospheric Administration has called off its La Nina watch, and evidence suggests conditions are weakening and returning to neutral. "It means we have a less confident forecast," said Tony Barnston, chief forecaster for Columbia University's International Research Institute on Climate and Society. Barnston is one of the 10 climate scientists from NOAA and institute who decide whether a watch should be put in place. Climate prediction is always a matter of probabilities, and there is always a fair share of uncertainty. But a big change like an El Nino or a La Nina bears certain kinds of effects with enough reliability that forecasters have more confidence in their predictions at those times. If the ocean's temperature rises a half degree above normal, it is a strong sign of an El Nino. A half degree below normal suggests a La Nina, and anything in between is neutral. La Nina patterns tend to bring heavier rain and snow to the northern Rocky Mountain region and drought to the South. El Nino generally brings cool and wet weather to the South and warmer weather to the Northwest. Without such a strong force like a La Nina acting on the climate system, there is a higher chance of more random and unpredictable events influenced by other variables.

Global warming is killing the last native bird species in the mountain forests of Kauai – The few remaining species of native forest birds left on the Hawaiian island of Kauai have suffered population declines so severe – 98 percent in one case – that some are near extinction. The cause of the collapse, according to a recent study in the journal Science Advances, is not alien plants or predators, but rather warming temperatures that have enabled non-native mosquitoes carrying deadly avian malaria to invade the birds' high-elevation strongholds.  In an interview with Yale Environment 360, Eben Paxton, ecologist with U.S. Geological Survey and lead author of the study, says his group's research showed that the mosquitoes moved into the Alakai Plateau over the last decade, infecting the birds and pushing their populations to a tipping point. “We're at the 11th hour,” he says. Paxton cites a number of approaches for eradicating the mosquitoes, including releasing irradiated infertile males, altering the bacteria naturally found in these insects, and even using genetically modified mosquitoes. As he sees it, more than the birds of Kauai are at stake. “The way that we view Kauai is that it's an early warning system for the rest of the islands,” he says. “If we get it right on Kauai then, I feel pretty good about the prospects of some of the other islands.” (interview excerpt, abstract)

 Endangered species rule changed, angering environmental group | TheHill: The Obama administration is changing the process for petitioning the government to protect an endangered or threatened animal. The U.S. Fish and Wildlife Service and National Oceanic and Atmospheric Administration (NOAA) Fisheries finalized a rule Monday that changes the process by which species are petitioned for listing, delisting or reclassification under the Endangered Species Act (ESA). Under the rule, first proposed in May 2015, petitioners will be required to notify each state wildlife agency where a species is located at least 30 days before submitting a petition to the federal government. The delay will gives states an opportunity to provide agencies with pertinent information on the species. The new rule also restricts the number of species that can be petitioned for at one time. Under the rule, only one species is allowed per petition. The agencies say the changes will allow them to better leverage limited resources and more effectively conserve America’s imperiled wildlife. The Center for Biological Diversity was quick to slam the rule, calling it an “impediment" to using the Endangered Species Act. “These new restrictions on citizen petitions are nothing more than a gift to industries and right-wing states that are hostile to endangered species,” Brett Hartl, the group’s director of endangered species policy, said in a statement. “These rules make it harder to get imperiled species the Endangered Species Act protections they desperately need and they do nothing to address the backlog of hundreds of imperiled species that are still waiting to get the protections they deserve.” Hartl argued further delays in a process that already takes too long will increase the risk of extinction for many animals.

Court Stops U.S. Fish & Wildlife from Killing Wild Red Wolves -- The U.S. District Court for the Eastern District of North Carolina today issued a preliminary injunction that orders the U.S. Fish and Wildlife Service (USFWS) to stop capturing and killing—and authorizing private landowners to capture and kill—members of the rapidly dwindling population of wild red wolves .  On behalf of Defenders of Wildlife , the Animal Welfare Institute and the Red Wolf Coalition , the Southern Environmental Law Center argued in a court hearing on Sept. 14 that a preliminary injunction was needed to stop the agency from harming these native wolves in the wild . Earlier that week, the agency announced its proposal to remove most members of the world's only wild population of red wolves that roam a five county area in northeastern North Carolina and put them into captivity, abandoning all protective efforts except in one refuge where one pack lives and in a bombing range.  . "The court was clear that it's the Fish and Wildlife Service's job to conserve this endangered species, not drive it to extinction. The agency cannot simply abandon that responsibility." The groups brought the federal agency to court for its failure to protect the world's only wild population of red wolves—previously estimated to be more than 100 animals. Court filings detail a population decline of 50 percent over the course of two years, as well as the agency's ongoing actions and inactions that imperiled the survival and recovery of the species in the wild. Previously, USFWS stopped key conservation actions and began authorizing private landowners to kill red wolves on their land. It also has been capturing wolves throughout the five-county red wolf recovery area in North Carolina, and holding them for weeks or months before releasing them into unfamiliar territory, separated from their mates and pack.

 200 Farms in China Breed Tigers for Slaughter for Body Parts, Luxury Goods -- In legal tiger farms across China, some 6,000 caged cats are kept in filthy conditions and will be killed for dubious medicinal uses and as home decor for the country's newly-rich elite. The sordid business is mostly legal, but hides behind carefully-worded agreements and pretensions of conservation. The issue is expected to be addressed at this week's Convention on International Trade in Endangered Species (CITES) meeting in Johannesburg. It is estimated that 60 percent of China's 1.4 billion people use so-called traditional medicines made from tiger bones, rhinoceros horn , bear gall bladder and other exotic animal parts. As China has grown in recent decades, creating a larger middle class and many newly rich entrepreneurs, demand for tiger parts has grown.  "The use of endangered tiger products and their medicines is seen as a symbol of high status and wealth," states Tigers in Crisis China signed on to CITES, but maintains about 200 tiger farms, where tigers are bred to serve this growing market. Claiming that these tiger parts are for domestic consumption, and therefore not subject to the treaty on international trade, China also defends the tiger farms as a captive breeding program that actually helps the species.  However, in 1993, China banned trading in tiger bone, and a 1988 wildlife law that purports to protect endangered species sets forth a policy of "actively domesticating and breeding the species of wildlife ."  "What we didn't understand until very recently is that ban in 1993 did not supersede China's wildlife protection law, which was crafted in the 1980s and actually mandates the farming and consumption of tigers and other endangered species," author and wildlife activist Judith Mills told Yale Environment 360 in an interview last year.

 How Small Forests Can Help Save the Planet -  More than half of the 751 million acres of forestland in the United States are privately owned, most by people like Ms. Lonnquist, with holdings of 1,000 acres or less. These family forests, environmental groups argue, represent a large, untapped resource for combating the effects of climate change. Conserving the trees and profiting from them might seem incompatible. But Ms. Lonnquist is hoping to do both by capitalizing on the forest’s ability to clean the air, turning the carbon stored in the forest into credits that can then be sold to polluters who want or need to offset their carbon footprints. “Trees are the No. 1 way in which carbon can be removed from the atmosphere and stored in vegetation over the long term,” said Brian Kittler, the western regional office director for the Pinchot Institute for Conservation, which has a program in Oregon to help the owners of family forests develop potentially profitable carbon projects.  Larger forests around the world have already been enlisted as carbon storehouses, through programs like the United Nations initiative for Reducing Emissions From Deforestation and Forest Degradation, or REDD, that encourage forest conservation worldwide in exchange for credits that can be sold on the global carbon markets. Some large timber companies, including Potlatch, have also entered the markets, reducing their logging to levels below legal limits in order to receive millions of dollars in credits.  But so far, small-forest owners, even conservation-minded ones like Ms. Lonnquist, have not rushed to embrace market-based carbon storage. Many do not even know it exists, and those who do often find the complexities bewildering.  Some owners believe, wrongly, that to enter the carbon markets they must forgo all income from logging. And some, reluctant to forfeit the ability to quickly turn their trees into cash, have balked at signing a contract to keep a forest standing for 15 to 125 years. Even more daunting, the expense of bringing a forest to the carbon market — a process that involves taking an inventory of the trees, assessing the forest’s carbon content, estimating future growth, and submitting to several levels of auditing — has been so high that it would eliminate any profit for most small landholders.

 No big shift in U.S. flood patterns despite climate change  (Reuters) - U.S. flooding patterns have shown some regional changes but no countrywide shift despite heavier rains spawned by global warming, a study by U.S. and Austrian researchers said on Wednesday. Findings that the biggest changes were in the Upper Mississippi Valley, northern Great Plains and New England could help focus resources in dealing with a changing climate, said Stacey Archfield, a U.S. Geological Survey hydrologist and one of the study's authors. "It's a much more nuanced approach than saying, 'We know change is happening everywhere and this is a particular solution for it,'" she said. In weighing the impact climate change is having on flooding, researchers from the Geological Survey and Austria's Vienna University of Technology analyzed records from 345 stream gauges in the conterminous United States from 1940 to 2013. The gauges covered 70 percent of the lower 48 states. The first 30 years served as a base period. The results concluded that most of the United States had shown no major change since 1970 in the categories of flood frequency, peak magnitude, duration and volume. The study said that Wyoming and South Dakota had registered a 150 percent increase in peak magnitude. They joined North Dakota, Nebraska and Kansas in notching significant increases in flood duration along with a fall in frequency. The duration of flooding in sections of the Great Plains went up two to five times. Flood volumes in the area rose almost six times above the average in the base period. New England, on the other hand, showed an increase in the average number of yearly floods to five from two even as duration, magnitude and volume went down.

Florida Residents Sue Mosaic Over Massive, Radioactive Sinkhole -- Mosaic Fertilizer has been slammed with a federal lawsuit over the massive, radioactive sinkhole that opened under its New Wales plant in Mulberry, Florida, 30 miles east of Tampa.  Last month, a 300-foot-deep sinkhole appeared at the Mosaic Fertilizer phosphate mine in Mulberry, Florida. The sinkhole has leaked more than 200 million gallons of potentially radioactive water into the Floridan Aquifer—Florida's main source of drinking water. ClassAction.com The sinkhole, formed below a phosphogypsum stack, has leaked an estimated 215 million gallons of contaminated wastewater into the Floridan Aquifer, posing a potentially serious threat to drinking water. To make matters worse, news reports indicate that the fertilizer giant and state officials knew about the problem for three weeks but failed to notify the public.  Attorneys from ClassAction.com filed a 23-page class action complaint on behalf of Nicholas Bohn, Natasha McCormick and Eric Weckman—local residents who rely on private wells as their source of water. The lawsuit was filed at the Federal Courthouse in downtown Tampa.  "Residents in the communities that surround the New Wales facility have legitimate concern for the integrity and safety of their water supplies as the toxic radioactive and other chemical wastewater is in the Floridan Aquifer causing, and will continue to cause, water contamination," the complaint reads.  "There are approximately 5,000 individuals who live in within five miles of the sinkhole who obtain their water from private wells and are impacted by the sinkhole," it states. "It is estimated there are over 1,500 private wells in the impacted area."

 Oh great — scientists just confirmed a key new source of greenhouse gases -- Countries around the world are trying to get their greenhouse gas emissions under control — to see them inch down, percentage point by percentage point, from where they stood earlier in the century. If everybody gets on board, and shaves off enough of those percentage points, we just might be able to get on a trajectory to keep the world from warming more than 2 degrees Celsius above the temperature where it stood prior to industrialization. But if a new study is correct, there’s a big problem: There might be more greenhouse gases going into the atmosphere than we thought. That would mean an even larger need to cut. The new paper, slated to be published next week in BioScience, confirms a significant volume of greenhouse gas emissions coming from a little-considered place: Man-made reservoirs, held behind some 1 million dams around the world and created for the purposes of electricity generation, irrigation, and other human needs. In the study, 10 authors from U.S., Canadian, Chinese, Brazilian, and Dutch universities and institutions have synthesized a considerable body of prior research on the subject to conclude that these reservoirs may be emitting just shy of a gigaton, or billion tons, of annual carbon dioxide equivalents. That would mean they contributed 1.3 percent of the global total. Moreover, the emissions are largely in the form of methane, a greenhouse gas with a relatively short life in the atmosphere but a very strong short-term warming effect. Scientists are increasingly finding that although we have begun to curb some emissions of carbon dioxide, the principal greenhouse gas, we are still thwarted by methane, which comes from a diversity of sources that range from oil and gas operations to cows.

Hundreds of new dams could mean trouble for our climate - Using rivers and dams to make electricity is often touted as a win for the climate, a renewable source of electricity without the greenhouse gases that come from burning fossil fuels. But it turns out hydropower isn’t quite so squeaky clean—and with countries around the world poised to erect hundreds of new dams, that could have big implications for future emissions. Reservoirs already contribute roughly 1.3% of the world’s annual human-caused greenhouse gas emissions, the study finds—about as much as the entire nation of Canada. It also suggests future reservoirs will have a bigger impact than expected, largely because they emit much more methane, a potent warming gas, than once believed. The methane is produced by underwater microbes that feast on the organic matter that piles up in the lake sediments trapped by dams.  At a time when nations have as many as 847 large hydroelectric dams in the works, the finding “suggests that the impact of that global impoundment will be greater than previously thought,” says John Harrison, a biogeochemist at Washington State University, Vancouver, and one of the authors of the paper, scheduled to be published next week in BioScience. Harrison and colleagues compiled and analyzed the findings of more than 100 studies of emissions from more than 250 reservoirs around the world. They also took account of a factor some previous studies of reservoir emissions had overlooked: bubbles. Some greenhouse gases, including carbon dioxide and nitrous oxide, readily dissolve in water and then diffuse into the atmosphere in a fairly uniform way. Methane, in contrast, often surfaces in sporadic bubbles. That’s made it hard to get a clear picture of how much of the warming gas—which is 34 times more powerful than carbon dioxide—is rising off a reservoir. But new tools, such as special bubble-tracking sonar, have turned up a lot more methane. On average, studies that included methane bubbles found more than double the amount of the gas coming from reservoirs. Overall, the researchers concluded that each square meter of reservoir surface exhaled 25% more methane into the atmosphere than previously thought.

The Earth is soaking up less carbon than we thought — which could make it warm up even faster - Currently, soil is believed to be a carbon sink, meaning it’s still taking up more carbon than it’s releasing into the air, and models have suggested that it will keep sucking up carbon through at least the end of the century. But according to new research, scientists may have been seriously overestimating the extent to which this is going to happen — and that could be a big setback in our global climate efforts. The new study, published Thursday in the journal Science, used carbon dating to help figure out how quickly carbon can be stored in the ground and how long it stays there — information that informs scientists’ estimates of how much carbon will be sequestered by the earth’s soils through the next 100 years. The current models have produced a wide range of predictions, according to the authors, from small losses to gains of several hundred billion tons of carbon worldwide under severe warming scenarios. “We all know that the radiocarbon dating…is a highly accurate tool to trace basically the carbon dynamics in the soil,” Most of the models currently used in soil carbon studies don’t incorporate radiocarbon data, he said, meaning they don’t account for the actual age of the carbon that’s stored in the soil. The authors of the new study wanted to figure out if the current models were on track without incorporating this information. So they collected radiocarbon data from soil samples from 157 sites around the globe, and they incorporated the data into a series of models. Then, they compared their results to the findings produced by the models that have previously been used. Energy and Environment newsletter The science and policy of environmental issues. Sign up They found that, in the real world, soil carbon was generally a lot older than the models had been reporting. In fact, the researchers found that the old models had been underestimating the age of soil carbon, on average, by a factor of more than six.

Soil will absorb less atmospheric carbon than expected this century – ‘The problems of carbon emission and climate change are worse than what we expected’ – By adding highly accurate radiocarbon dating of soil to standard Earth system models, environmental scientists from the University of California, Irvine and other institutions have learned a dirty little secret: The ground will absorb far less atmospheric carbon dioxide this century than previously thought. Researchers used carbon-14 data from 157 sample sites around the world to determine that current soil carbon is about 3,100 years old – rather than the 450 years stipulated by many Earth system models. “This work indicates that soils have a weaker capacity to soak up carbon than we have been assuming over the past few decades,” said UCI Chancellor’s Professor of Earth system science James Randerson, senior author of a new study on the subject to be published Friday in the journal Science. “It means we have to be even more proactive in finding ways to cut emissions of fossil fuels to limit the magnitude and impacts of climate warming.” Through photosynthesis, plants absorb CO2 from the air. When trees and vegetation die and decay, they become part of the soil, effectively locking carbon on or beneath the Earth’s surface – keeping it out of the atmosphere, where it contributes to global warming. In their study, the researchers showed that since this process unfolds over millennia versus decades or centuries, we should expect less of this land carbon sequestration in the 21st century than suggested by current Earth system models.  “A substantial amount of the greenhouse gas that we thought was being taken up and stored in the soil is actually going to stay in the atmosphere,”

Indian Ocean sea level on the rise according to new study - A new paper in the Journal of Geophysical Research shows that sea level rise in the northern Indian Ocean rose twice as fast as the global average since 2003. This represents a stark contrast to the previous decade when the region experienced very little sea level rise at all. The science team led by Philip Thompson, associate director of the University of Hawaiʻi Sea Level Center in the School of Ocean and Earth Science and Technology (SOEST), analyzed two and a half decades of ocean surface height measurements taken from satellites. The satellite data showed a substantial and abrupt increase in decade-long sea level trends in the Indian Ocean region, which prompted the oceanographers to investigate the cause of the shift using computer simulations of ocean circulation.  “Wind blowing over the ocean caused changes in the movement of heat across the equator in the Indian Ocean,” said Thompson. “This lead to suppression of sea level rise during the 1990s and early 2000s, but now we are seeing the winds amplify sea level rise by increasing the amount of ocean heat brought into the region.”  When trade winds in the Indian Ocean are weaker north of the equator compared to the south, warmer water at the ocean surface is driven out of the Northern Hemisphere, and colder, deep water is moved in. This has a net cooling effect on the ocean, leading to the suppression of sea level rise. This is what occurred early in the satellite record, but recently the situation reversed, causing heat to build up in the northern Indian Ocean and enhancing the rate of sea level rise. Many of the world’s most vulnerable populations to sea level rise can be found in these parts of the Indian Ocean, including those in Bangladesh and Jakarta. “What we are learning is that the interaction between the ocean and atmosphere causes sea level to rise like a staircase instead of a straight line—starting and stopping for many years at a time. What we’ve done here is described one stair, which will help us better understand and plan for the future,” said Thompson.

Earth 'Locked Into' Temperatures Not Seen in 2 Million Years -- Earth is the warmest it's been in 100,000 years, a new reconstruction of historical temperature data finds, and with today's level of fossil fuel emissions the planet is "locked into" eventually hitting its highest temperature mark in 2 million years.  The new research published Monday in Nature was done by Carolyn Snyder, now a climate policy official at the U.S. Environmental Protection Agency, as a part of her doctoral dissertation at Stanford University, according to the Associated Press (AP).  Snyder "created a continuous 2 million year temperature record, much longer than a previous 22,000 year record. [Snyder's reconstruction] doesn't estimate temperature for a single year, but averages 5,000-year time periods going back a couple million years," AP reported. "We do find this close relationship between temperature and greenhouse gases that is remarkably stable, and what the study is developing is the coupling factor between the two," Snyder told National Geographic . AP further reports:  Temperatures averaged out over the most recent 5,000 years—which includes the last 125 years or so of industrial emissions of heat-trapping gases—are generally warmer than they have been since about 120,000 years ago or so, Snyder found. And two interglacial time periods, the one 120,000 years ago and another just about 2 million years ago, were the warmest Snyder tracked. They were about 3.6 degrees (2 degrees Celsius) warmer than the current 5,000-year average. With the link to carbon dioxide levels and taking into account other factors and past trends, Snyder calculated how much warming can be expected in the future. "Snyder said if climate factors are the same as in the past—and that's a big if," AP noted, "Earth is already committed to another 7 degrees or so (about 4 degrees Celsius) of warming over the next few thousand years."  Nature described Snyder's findings in greater detail in an article accompanying her published study:

Longest historic temperature record stretches back 2 million years -- A global temperature record published on 26 September in Nature1 extends 2 million years into the past — the longest continuous log yet published — and has sparked debate about how Earth's climate will change in the future. The study harnesses data from dozens of ocean-sediment cores, as well as climate models, to provide estimates of global average surface temperatures. Prior reconstructions have gone back further — in some cases back to 3 million years — but were less comprehensive or focused only on particular time periods. The longest comprehensive temperature record available before this study went back 22,000 years. Using a subset of the reconstructed temperature data, Snyder, who began the study while at Stanford University in Palo Alto, California, analysed the relationship between past temperatures and carbon dioxide (CO2) levels estimated from Antarctic ice cores covering the past 800,000 years. Based on that analysis, she found that future long-term warming induced by greenhouse gases could be more severe than many previous estimates. Even if the amount of atmospheric CO2 were to stabilize at current levels, the study suggests that average temperatures may increase by roughly 5 °C over the next few millennia as a result of the effects of the greenhouse gas on glaciers, ecosystems and other factors. A doubling of the pre-industrial levels of atmospheric CO2 of roughly 280 parts per million, which could occur within decades unless people curb greenhouse-gas emissions, could eventually boost global average temperatures by around 9 °C. This is on the high end of existing estimates.  And this is where the study has encountered scepticism. “The key part of this paper is the temperature reconstruction, which is really valuable,” says Eelco Rohling, a palaeoclimatologist at the Australian National University in Canberra. But he adds that the question of how the planet will respond to atmospheric CO2 over the long term requires more detailed analysis. In particular, the study fails to account for subtle changes in Earth’s orbit that affected global temperatures and helped to drive the expansion and retreat of glaciers throughout the time period covered by the analysis, says Gavin Schmidt, director of NASA’s Goddard Institute for Space Studies in New York City. He says the effects of such orbital variations must be considered when comparing the glacial era to the present.

Global Warming Is Real—But 13 Degrees? Not So Fast New research suggesting that the planet might already be committed to vastly greater warming than previously thought is being dismissed as deeply flawed by prominent climate scientists. A study published today in one of the world's top science journals, Nature, offers the most complete reconstruction to date of global sea-surface temperatures for the past two million years—a valuable addition to the climate record, scientists say. But the conclusions the study's author drew from that research—that even preventing any further increase of greenhouse gases in the atmosphere could still leave the Earth doomed to a catastrophic temperature rise of up to 7 degrees Celsius (about 13 degrees Fahrenheit)—isn't supported by the data, several top scientists said."This is simply wrong," said Gavin Schmidt, chief of NASA's Goddard Institute for Space Studies.  Jeffrey Severinghaus, a paleoclimatologist at Scripps Institution for Oceanography, was equally vehement, arguing that the study's result isn't logical: "It's based on a fundamental mistake," he said. "The problematic conclusion doesn't flow from the main meat of the paper." Two other scientists reached by National Geographic shared that blunt assessment. The study's author, a former postdoctoral researcher at Stanford University, said she wasn't attempting to offer a detailed climate forecast. But she examined the past's tight link between sea-surface temperature changes and natural releases of carbon dioxide and tried to show what that might imply for the future. Her result: an alarming 3 to 7 degree Celsius temperature rise by several thousand years from now, even if fossil fuel emissions were capped today. "We do find this close relationship between temperature and greenhouse gases that is remarkably stable, and what the study is developing is the coupling factor between the two," said Carolyn Snyder, who now works on climate issues for the Environmental Protection Agency.

 As Arctic Ocean Ice Disappears, Global Climate Impacts Intensify -  Peter Wadhams -- The news last week that summer ice covering the Arctic Ocean was tied for the second-lowest extent on record is a sobering reminder that the planet is swiftly heading toward a largely ice-free Arctic in the warmer months, possibly as early as 2020.  After that, we can expect the ice-free period in the Arctic basin to expand to three to four months a year, and eventually to five months or more.   The great white cap that once covered the top of the world is now turning blue — a change that represents humanity’s most dramatic step in reshaping the face of our planet. And with the steady disappearance of the polar ice cover, we are losing a vast air conditioning system that has helped regulate and stabilize earth’s climate system for thousands of years.  Few people understand that the Arctic sea ice “death spiral” represents more than just a major ecological upheaval in the world’s Far North. The decline of Arctic sea ice also has profound global climatic effects, or feedbacks, that are already intensifying global warming and have the potential to destabilize the climate system. Indeed, we are not far from the moment when the feedbacks themselves will be driving the change every bit as much as our continuing emission of billions of tons of carbon dioxide annually. So what are these feedbacks, and how do they interact? The most basic stem from turning the Arctic Ocean from white to blue, which changes the region’s albedo — the amount of solar radiation reflected off a surface. Sea ice, in summer, reflects roughly 50 percent of incoming radiation back into space. Its replacement with open water — which reflects roughly 10 percent of incoming solar radiation — is causing a high albedo-driven warming across the Arctic.  When covered almost entirely by ice in summer — which the Arctic was for tens of thousands of years — water temperatures there didn’t generally rise above freezing. Now, as the open Arctic Ocean absorbs huge amounts of solar radiation in summer, water temperatures are climbing by several degrees Fahrenheit, with some areas showing increases of 7 degrees F above the long-term average.  Such changes mean that a system that was once a vast air conditioner has started to turn into a heater. Just how much extra heat are the dark waters of Arctic Ocean in summer adding to the planet? One recent study estimates that it’s equivalent to adding another 25 percent to global greenhouse emissions.

The Arctic is being utterly transformed — and we’re just starting to learn the consequences --It’s the fastest-warming part of the planet — and the impacts will be felt far, far afield. Among many other assorted impacts, the rapidly melting Arctic is expected to flood shorelines as Greenland loses ice more and more rapidly (it contains some 20 feet of potential sea level rise), further pump greenhouse gases into the atmosphere as permafrost thaws, and become a global heat sink as a once ice-covered ocean exposes more and more dark water. No wonder, perhaps, that on Wednesday, the outgoing Obama administration convened top science policymakers from 25 other Arctic and non-Arctic nations, as well as representatives of Arctic indigenous peoples, in a first-ever Arctic Science Ministerial to coordinate study of what the consequences will be as the Arctic heats up much more rapidly than the more temperate latitudes or the equator. “The temperature is increasing between 2 and 5 times as fast, depending on where in the Arctic you are,” said physicist John Holdren, who heads the White House’s Office of Science and Technology Policy and is Obama’s science adviser, and is chairing the meeting. We know this in broad outline, Holdren said, but our knowledge comes up short in many areas when it comes to more precisely observing what is happening in the remote and at times dangerous Arctic region, and being able to run simulations, or computer models, to chart the consequences. “Basically, the whole Arctic is under-instrumented,” said Holdren. “The observation networks are too sparse in geographic extent, they’re too discontinuous in time, they’re not measuring everywhere all the things they should be measuring. We can’t say, for example, how much CO2 and methane emissions from the Arctic are actually going up. We know they are going up but we don’t really have a good handle on how fast and from precisely where.”

Arctic Melting Defies Scientists -- In an unusually stark warning, a leading international scientific body said the Arctic climate is changing so fast that researchers are struggling to keep up. The changes happening there, it said, are affecting the weather worldwide.  As ice melts, the liquid water collects in depressions on the surface and deepens them, forming these melt ponds in the Arctic. These fresh water ponds are separated from the salty sea below and around it. NASA The World Meteorological Organization (WMO) said:"Dramatic and unprecedented warming in the Arctic is driving sea level rise , affecting weather patterns around the world and may trigger even more changes in the climate system."The rate of change is challenging the current scientific capacity to monitor and predict what is becoming a journey into uncharted territory."The WMO is the United Nations' main agency responsible for weather, climate and water."The Arctic is a principal, global driver of the climate system and is undergoing an unprecedented rate of change with consequences far beyond its boundaries," David Grimes , WMO president, said. "The changes in the Arctic are serving as a global indicator—like 'a canary in the coal mine'—and are happening at a much faster rate than we would have expected," Grimes added.

Greenland's receding icecap to expose top-secret US nuclear project - A top-secret US military project from the cold war and the toxic waste it conceals, thought to have been buried forever beneath the Greenland icecap, are likely to be uncovered by rising temperatures within decades, scientists have said. The US army engineering corps excavated Camp Century in 1959 around 200km (124 miles) from the coast of Greenland, which was then a county of Denmark. Powered, remarkably, by the world’s first mobile nuclear generator and known as “the city under the ice”, the camp’s three-kilometre network of tunnels, eight metres beneath the ice, housed laboratories, a shop, a hospital, a cinema, a chapel and accommodation for as many as 200 soldiers.  Its personnel were officially stationed there to test Arctic construction methods and carry out research. In reality, the camp served as cover for something altogether different - a project so immense and so secret that not even the Danish government was informed of its existence. “They thought it would never be exposed,” said Colgan. “Back then, in the 60s, the term global warming had not even been coined. But the climate is changing, and the question now is whether what’s down there is going to stay down there.”The study suggests it is not. Project Iceworm, presented to the US chiefs of staff in 1960, aimed to use Camp Century’s frozen tunnels to test the feasibility of a huge launch site under the ice, close enough to fire nuclear missiles directly at the Soviet Union.

A New Debate Over Pricing the Risks of Climate Change - NYT - Some companies, including Exxon Mobil, say the economics of climate change are too hard to predict for them to give investors hard numbers about the business impact of global warming. Federal regulators may disagree and are considering requiring Exxon to do just that for the value of its oil reserves. Now a long-shot legislative effort by a Florida congressman to prevent such a move by the federal government has become an unexpected flash point in the battle over disclosing climate-related risks — with potentially hundreds of billions of dollars in the balance. The congressional measure, an amendment to an appropriations bill, originally introduced in July by Representative Bill Posey, a Florida Republican, has been picked up in the Senate version of the legislation. Because the bill is tied up in a partisan debate over spending, there is no certainty the amendment will pass. But at a time when many Republicans dispute the very notion of climate change, the Posey measure has focused the debate over whether it is reasonable — or even possible — to expect companies to put a price tag on the environmental impact of climate change. Advertisement Continue reading the main story Donald J. Trump, the Republican presidential candidate, has called climate change “a hoax” and promises to slash environmental regulations to bolster economic growth. The issue is not limited to Exxon and oil companies. The Posey amendment would allow real estate companies to stay mum on the risks posed to waterfront properties by rising seas, for example, and let food companies leave the impact of future water shortages unaddressed. Continue reading the main story Advertisement Continue reading the main story “Whether it’s oil, apparel, clothing, utility — almost everything in our economy is built off of some use of natural resources, and the risks they face are substantial,”

Slovakia joins climate change fight - A pledge to reduce greenhouse gas emissions was officially announced by Slovakia, which ratified the Paris climate agreement. As reported by The Slovak Spectator, the new document, which was passed by 106 MPs, will introduce new ways to fight climate changes that result in global warming and extreme weather patterns. The long-term aim of the Paris climate agreement is to sustain the growth in global temperature below 2 degrees Celsius compared with the pre-industrialised era. The countries should try to limit it to 1.5 degrees Celsius. “The priority of Slovakia’s presidency of the EU Council is to secure that the Paris agreement is ratified by all crucial states, including the EU itself, by the end of the year,” Environment Minister László Solymos was quoted as saying by Slovakia’s TASR news agency.

From Bicycles To Washing Machines: Sweden To Give Tax Breaks For Repairs -- The Swedish government is putting its money where its mouth is when it comes to encouraging the repair of stuff that would otherwise be thrown away, according to both The Guardian and Fast Company. The country's Social Democrat and Green party coalition have submitted proposals to Parliament that would reduce the value-added-tax (VAT) on bicycle, clothing, and shoe repairs from 25% to 12%. Also proposed is an income tax deduction equalling half the labor cost of repairing household appliances. According to The Guardian, "the incentives are part of a shift in government focus from reducing carbon emissions produced domestically to reducing emissions tied to goods produced elsewhere." Per Bolund, Sweden's Minister for Financial Markets and Consumer Affairs, said the policy also tied in with international trends around reduced consumption and crafts, such as the "maker movement" and the sharing economy, both of which have strong followings in Sweden. The VAT cut may create more jobs for immigrants as it could spur the creation of a new home-repairs service industry. Also, from a science standpoint, the incentives could help cut the cost of carbon emissions on the planet as it should in theory reduce emissions linked to consumption. "I believe there is a shift in view in Sweden at the moment. There is an increased knowledge that we need to make our things last longer in order to reduce materials' consumption," Bolund said. The Guardian's report concludes: "The proposals will be presented in parliament as part of the government's budget proposals and if voted through in December will become law from January 1, 2017."

Deal to curb airline emission not equitable, says India: The proposal introduced on Tuesday of a climate change deal which claims to curb pollution from commercial flights is not equitable and may not lead to a fair agreement, India's aviation minister said. The deal proposed at the ongoing United Nations-led talks from September 27 to October 7 at the International Civil Aviation Organization (ICAO) in Montreal is also considered to be diluted by the fact that it is being made voluntary for the first five years."(We'll decide) once the nuts and bolts become clearer. Until then, our fears are that it is not equitable." Ashok Gajapathi Raju, Union minister for civil aviation was quoted saying by Reuters. The deal that is backed by the United States and China is targeting to limit rising airline pollution to 2020 levels after it takes effect in 2021. Commercial aircraft emit 11 percent of carbon emissions produced from transportation. Ironically, the news comes at a time when Indian civil aviation industry is growing at a fast clip. Indian carriers such as Air India, IndiGo, Jet Airways, SpiceJet, GoAir, AirAsia India and Vistara flew about 83 lakh (8.3 million) passengers during the month of August, an increase of 24 percent over the same month last year. As with other deadlocks with climate change in the past, the question again boils down to developing country wanting more leeway to produce emissions than developed countries whose aviation is growing slowly but were responsible for generating the majority of the industry's greenhouse gases.

In boost to Paris climate pact, Indian PM says will ratify it on October 2 | Reuters: India, the world's third-largest emitter of greenhouse gases, will formally join the Paris agreement on climate change on Oct. 2, Prime Minister Narendra Modi said on Sunday. The ratification by India, which follows that of the United States and China, the world's biggest greenhouse gas emitters, will help accelerate the enactment of the landmark Paris agreement on climate change forged last December. "Now the time has come to ratify the COP21 protocol. India will do it on Gandhi Jayanti, on October 2," Modi said, referring to the anniversary of the birth of Gandhi, viewed by many as the father of modern India. Modi said he chose Gandhi's birth anniversary as he gave an example of how to live with a low carbon footprint. COP21 refers to the Conference of Parties protocol that commits both rich and poor nations to rein in rising carbon levels and aims to eliminate greenhouse gas emissions from human activity. Modi was speaking at the Bharatiya Janata Party's national meeting in Kozhikode, in southern India's Kerala state. In June, India indicated it would work toward joining the agreement on climate change this year.

India ratifies Paris Agreement, but with caveats  -- The Union Cabinet on Wednesday passed the decision to ratify the Paris Agreement, but with conditions. The Cabinet decided India would ratify the global climate change pact ‘in the context’ of its development agenda, availability of means of global climate finance, an assessment of how the rest of the world is doing to combat climate change, and predictable and affordable access to cleaner source of energy. The caveat leaves the window open for India to rethink its ratification or targets, in case the commitments from the developed world on providing finance and technology to developing countries do not come through. It also leaves the option open for India to revisit the ratification and its commitments under the agreement, in case any key country reviews or revises its commitments under the agreement, such as the United States. Donald Trump, the Republican candidate for the US presidency, has threatened to do so several times during his campaign. Once India deposits its instruments of ratification with the United Nations (UN) on October 2, it would take the total number of countries on board to 62 and the total greenhouse gas emissions covered to 51.59 per cent. The agreement requires 55 countries with at least 55 per cent of the emissions covered by ratifying nations.

In the time of climate change, a few smart lessons for Delhi  - Hindustan Times: Last week, the C40, a global network of 86 cities, including six from India, released the list of 35 urban programmes to compete in its annual award on fighting climate change to be held in December. One would have expected the more radical ideas from Mumbai, Delhi, Chennai or Bengaluru to impress the world. But the only Indian city to make it to the shortlist of global finalists was Kolkata, the forgotten metro often mocked as an urban nightmare. Its solid waste management improvement project that aims to reduce the city trash sent to the landfills now competes with Milan’s food wastage reduction and Auckland’s waste to resources programmes for the top slot.  Delhi, where the air is fouled by nine million vehicles, energy is sourced from coal-fired plants, dumpsites are overfilled, and every third resident lives illegally on a river that resembles an open sewer, may not have much to showcase yet in this global competition. But we could take a cue or two from some urban experiments the C40 is talking about: Mexico City’s Mobility Programme Like Delhi, the Mexican capital has to deal with population pressure, car-jammed streets, high air pollution levels and earthquake vulnerability. In 2014, the city passed a law recognising mobility as a fundamental right of its residents, prioritising non-motorised transport and creating a legal framework to streamline and scale up mass transit. Till recently, services for bus, metro and Bus Rapid Transit were fragmented, preventing users from efficiently transferring from one system to another, the Sustainable Cities Collective reported in 2014. So Mexico City integrated all modes of public transport and also placed pedestrians and cyclists on top of the mobility hierarchy, allocating more funds and road space to them.

IPCC special report to scrutinise ‘feasibility’ of 1.5C climate goal: The head of the United Nation’s climate body has called for a thorough assessment of the feasibility of the international goal to limit warming to 1.5C. Dr Hoesung Lee, chair of the Intergovernmental Panel on Climate Change (IPCC), told delegates at a meeting in Geneva, which is designed to flesh out the contents of a special report on 1.5C, that they bore a “great responsibility” in making sure it meets the expectations of the international climate community. To be policy-relevant, the report will need to spell out what’s to be gained by limiting warming to 1.5C, as well as the practical steps needed to get there within sustainability and poverty eradication goals. More than ever, urged Lee, the report must be easily understandable for a non-scientific audience. The IPCC has come under fire in the past over what some have called its “increasingly unreadable” reports. In between the main “assessment reports” every five or six years, the IPCC publishes shorter “special reports” on specific topics. Past ones have included extreme weather and renewable energy. The IPCC was “invited” by the United Nations Convention on Climate Change (UNFCCC) to do a special report on 1.5C after the Paris Agreement codified a goal to limit global temperature rise to “well below 2C” and to “pursue efforts towards 1.5C”. The aim for this week’s meeting in Geneva is, in theory, simple: to decide on a title for the report; come up with chapter headings; and write a few bullet points summarising what the report will cover.

 Statewide blackout plunges Australia into renewable energy debate | Reuters: An unprecedented power outage across South Australia state has stopped production at major miners BHP Billiton and OZ Minerals and left one steelmaker struggling to prevent molten steel from hardening and damaging its factory. The statewide outage sparked political calls on Thursday for an inquiry into the power sector and questions over the state's reliance on renewable energy. Prime Minister Malcolm Turnbull said it was a "wake-up call" to ensure energy security. Although power has been restored to 90 percent of the state after Wednesday's statewide blackout, caused by severe storms, industrial areas north and west of the state capital Adelaide and the steel city of Whyalla are still without power. Whyalla steelmaker Arrium Ltd said it had a blast furnace and four ladles full of molten steel and desperately needed to restore power. "The situation is quite serious and a lot will depend on what happens in the next hour or two," said a company spokesman. The outage has halted more than 300,000 tonnes of annual copper production capacity and knocked out the state's only lead smelter. In the city of Port Pirie, the 185,000-tonnes-per-year lead smelter run by Nyrstar NV will be out of action for up to two weeks, the company said on Thursday. The blackout of the country's fifth most populous state, with 1.7 million people, not only disrupted miners and steelmakers but closed ports and halted public transport.

Electric car boom raises pollution fears -- A boom in electric cars means Europe would have to look at building the equivalent of nearly 50 power stations the size of the UK’s planned Hinkley Point nuclear plant, EU experts have warned. And if big fleets of plug-in cars are charged with electricity from power plants burning coal, the dirtiest fossil fuel, overall levels of sulphur dioxide air pollution are likely to rise, a study from the government-funded European Environment Agency shows. Cars that run on batteries are widely regarded as an unalloyed environmental blessing compared with dirtier, smellier petrol or diesel vehicles and the new research confirms that a big shift to plug-in transport offers many benefits. On average, there would be a noticeable fall in emissions of some types of air pollution, such as nitrogen oxides and particulate matter, as well as planet-warming carbon dioxide, the main greenhouse gas produced by human activities. However, in countries such as Poland, where most electricity comes from coal power plants, the benefits of shifting to electric cars could be “questionable”, said Magdalena Jóźwicka, project manager of the research at the European Environment Agency. “There are clear local benefits and opportunities but there are also some risks,” she told the Financial Times. Electric passenger car sales have grown sharply across Europe over the past six years, boosted by hefty subsidies launched by governments trying to curb climate change. But they still accounted for only 0.15 per cent of all passenger vehicles on Europe’s roads last year. If the vehicles reach an 80 per cent share by 2050, the EEA study found this would require an extra 150 gigawatts of electricity for charging. The Hinkley Point nuclear plant due to be built in the UK will have a 3.2GW capacity, making it one of the country’s largest power plants. The need for so much new power for electric cars “may put stress on electricity infrastructure”, the EEA report warns, especially in countries with plenty of renewable energy.

Environmental critics rail against city’s biofuel push | New York Post: The City Council plans to pass legislation Wednesday to dramatically boost the level of biodiesel fuel in home heating oil, despite claims by critics that the edict could do more environmental harm than good. Current city law requires that 2 percent of home heating oil contain biofuels, such as soybean or other vegetable oils. The bill would boost the mandate to blend biofuel with No. 2 heating oil to 5 percent by next month, 10 percent by October 2020, 15 percent by 2025 and 20 percent by 2030. Council Speaker Melissa Mark-Viverito backs the measure, which is aimed at reducing petro oil consumption and curbing greenhouse gas emissions. But in a letter Sept. 20 to the council and Mayor de Blasio, Jonathan Lewis of the Clean Air Task Force, said, “Increased demand for vegetable-based biodiesel will contribute to higher levels of palm-oil production and higher net GHG [greenhouse gas] emissions.” Another group, HabitMap, claims the biofuels push will lead to increased use of the toxic herbicide glyphosate to treat genetically modified soybean crops — which it says causes miscarriages, birth defects and cancer. Council legislative staffer Edward Atkin said amendments were made to accommodate concerns, and noted that GHG emissions from biodiesel are “considerably less than those of regular oil.”

US to Fail Paris Emissions Pledge Without 'Fundamental Change': Report  - The U.S. is on track to miss its 2025 emissions reduction pledge agreed to in the Paris climate accord last year—because it doesn't have the proper policies in place to meet the target, according to new research. In fact, the country is so far behind in emissions slashing that even if it implemented a slew of new clean energy programs now, it could still miss its 2025 target by nearly 1 billion tons, the study published in the journal Nature has found. In the Paris accord, the U.S. pledged to reduce emissions by 26 to 28 percent below 2005 levels.According to authors Jeffery Greenblatt and Max Wei of the Lawrence Berkeley National Laboratory, the evidence shows it is necessary for the U.S. to make "fundamental changes" to its energy and economic sectors."If the policies were locked today, there would be a low likelihood of meeting the target," Greenblatt told the Guardian. "I wouldn't disparage the U.S.'s efforts so far, but we need to do more as a nation and globally to reduce emissions. However we splice it, that's hard to do. We can't make small alterations to our economy—we need fundamental changes in how we get and use energy." The study comes as President Barack Obama's landmark climate change policy heads to court for a critical decision on whether or not it should be overturned. Measuring previous government projections against updated climate data, Greenblatt's study finds that even if the Clean Power Plan—which would place emissions caps on every state—is kept and implemented, the U.S. could still miss its target by anywhere from 356 million to 1.8 billion tons of greenhouse gases.

Obama power plant rules face key test in court | Reuters: The centerpiece of President Barack Obama's climate change strategy faced a key test on Tuesday as conservative appeals court judges questioned whether his administration overstepped its legal authority under an air pollution law to make sweeping changes to the U.S. electric sector. Twenty-seven states led by coal-producer West Virginia and industry groups are challenging the Environmental Protection Agency's Clean Power Plan rules before 10 judges of the U.S. Court of Appeals for the District of Columbia Circuit. They argue that the EPA overstepped its regulatory authority under the federal Clean Air Act when the agency issued rules to curb greenhouse emissions mainly from coal-fired power plants. The U.S. Supreme Court has put the regulations on hold while the case is litigated. Tuesday's highly anticipated arguments drew a crowd of hundreds at sunrise to watch the opponents face off against the EPA, 18 states and some supportive power companies. The EPA told the judges that the agency had the power under the Clean Air Act to craft the rule, and that it was cost-effective and achievable. The challengers could face an uphill battle to win over a majority of the 10 judges, six of whom are Democratic appointees. Judge Brett Kavanaugh, appointed by former President George W. Bush, said while he understands the political and moral obligation to address global warming and the importance of the United States to international climate action, the Clean Power Plan's impact on the U.S. economy and on certain coal-reliant communities should require Congress to have a say. “This is a huge case. It has huge economic consequences,” said Kavanaugh.

Power-Plant-Emissions Court Case Raises Questions on EPA Rules’ Scope - WSJ: Defenders and detractors of President Barack Obama’s centerpiece climate-change regulation faced critical questions from a federal court Tuesday in a lawsuit that will have a far-reaching impact on how the nation fuels its electricity. The U.S. Court of Appeals for the District of Columbia Circuit heard several hours of oral arguments, with a focus on the separation of powers between Congress and the executive branch, and what constitutes a power plant source. The Environmental Protection Agency issued the regulation, called the Clean Power Plan, last year, requiring a 32% reduction in power-plant carbon emissions by 2030 compared with 2005 levels. The rules are the flagship policy of Mr. Obama’s climate agenda and represents the core of his administration’s commitment to a United Nations agreement in Paris last year to address climate change. The court’s 10 judges hearing the case are across the ideological spectrum and said they recognized the Obama administration was acting on climate change because Congress has opted not to and in response to a Supreme Court decision almost a decade ago giving the EPA legal authority to regulate carbon emissions. But they raised questions about whether the scope of the rules go further than lawmakers intended.The initial session of the arguments reflected a mixed, inquisitive engagement from the court that left stakeholders on all sides parsing questions and reactions, and searching for signs of which way the judges are leaning. Addressing climate change through policy is “laudable,” said Judge Brett Kavanaugh, a judge appointed by President George W. Bush, adding, “The Earth is warming. Humans are contributing. I understand the frustration with Congress.” But Judge Kavanaugh said Congress needs to clearly assign an agency the authority to address a major policy issue like climate change. It’s not clear Congress has done so in this case, he said, despite the EPA’s assertion that it is relying on part of the Clean Air Act. “Global warming is not a blank check,” Judge Kavanaugh said.

Trump Economic Adviser “Pushing” for Climate Denier and Fossil Fuel Apologist to Head EPA -- Stephen Moore — economic adviser for Republican Party presidential candidate Donald Trump’s campaign — recently told Politico’s Morning Energy that he is “pushing” to have a climate change denier and fossil fuel promoter, Kathleen Hartnett White, named as head of the U.S. Environmental Protection Agency (EPA) if Trump is elected president in November. Buried in Politico’s daily newsletter on September 28, the news comes as the Trump campaign has also announced that another climate change denier — Myron Ebell of the Competitive Enterprise Institute (CEI) — is leading Trump’s EPAtransition team. White currently serves as a fellow-in-residence at the Texas Public Policy Foundation, which, like CEI, is funded by ExxonMobil and Koch Industries, and she also serves on the Trump campaign’s economic advisory team. White co-heads the Texas Public Policy Foundation’s Fueling Freedom Project, which has among its stated goals to “explain the forgotten moral case for fossil fuels” and “end the regulation of CO2 as a pollutant.”  In addition, she formerly served as a special assistant to First Lady Nancy Reagan in the Ronald Reagan White House, as former Texas Republican Governor Rick Perry’s appointee to the Texas Center on Environmental Quality (TCEQ) and as an appointee to the Texas Water Development Board under then-Governor George W. Bush.

America’s super polluters | Center for Public Integrity —To see one of the country’s largest coal-fired power plants, head northwest from Evansville, Indiana. Or east, because there’s another in that region. In fact, nearly every direction you go will take you to a coal plant — seven within 30 miles. Collectively they pump out millions of pounds of toxic air pollution. They throw off greenhouse gases on par with Hong Kong or Sweden. Industrial air pollution — bad for people’s health, bad for the planet — is strikingly concentrated in America among a small number of facilities like those in southwest Indiana, according to a nine-month Center for Public Integrity investigation. The Center, which merged two federal datasets to create an unprecedented picture of air emissions, found that a third of the toxic air releases in 2014 from power plants, factories and other facilities came from just 100 complexes out of more than 20,000 reporting to the U.S. Environmental Protection Agency. A third of the greenhouse-gas emissions reported by industrial sites came from just 100, too. Some academics have a name for them: super polluters. Twenty-two sites appeared on both lists. They include ExxonMobil’s massive refinery and petrochemical complex in Baytown, Texas, and a slew of coal-fired power plants, from FirstEnergy’s Harrison in West Virginia to Conemaugh in Pennsylvania, owned by companies including NRG Energy and PSEG. Four are in a single region — southwest Indiana. Together, owners of these 22 sites reported profits in excess of $58 billion in 2014.   Indiana is one of 27 suing the EPA over its Clean Power Plan, which would require reductions in climate-altering greenhouse-gas pollution from electric utilities. Indiana is also among the states that tried to block a federal rule to reduce emissions of dangerous metals and acid gases from coal- and oil-fired power plants. Its governor, Mike Pence — Donald Trump’s running mate — is a pro-coal, climate-change skeptic who says the costs of shifting to cleaner energy sources are too high.

 No new coal? Objections to Wyoming coal mine to be heard (AP) — A state regulatory board plans to consider whether Wyoming’s first major new coal mine in decades should proceed despite the objections of two landowners. A subsidiary of Lexington, Kentucky-based Ramaco seeks to develop the Brook Mine north of Sheridan. The Wyoming Environmental Quality Council on Wednesday will discuss a possible order allowing Brook Mining Company to go ahead despite opposition. One landowner, Big Horn Coal, says the Brook Mine would interfere with its own plans to potentially mine in the area. The other landowner, the Padlock Ranch, says the Brook Mine would block the movement of cattle and could destroy a livestock watering system. Brook Mining Company says it has tried but failed to negotiate with the landowners. Ramaco recently announced plans to open two new coal mines in Appalachia.

Carbon capture and storage could be cheaper than nuclear, says report- Energy produced using carbon capture and storage (CCS) technology could become cost competitive with nuclear and offshore wind power in the 2020s, according to a new parliamentary report. Produced by the Parliamentary Advisory Group on CCS, led by Lord Oxburgh, for the Department for Business, Energy and Industrial Strategy, the report sets out the potential for the beleaguered technology in the UK, and how the government could foster a cost-competitive industry before 2030. “There is a widespread view that CCS has to be expensive,” the report says. The government itself appeared to hold this view when, in 2015, it cancelled its £1bn competition for carbon capture and storage based on its supposedly high costs. This was seen as a huge blow to an industry that had spent years preparing to deliver new CCS projects. But CCS can actually be delivered at £85 per megawatt hour, according to the report, which means that the price paid by consumers for early examples of the technology would be immediately competitive with other forms of clean power.The UK is ready for CCS, says the report — both the technology and the supply chain are ready to deliver. However, lead times for new projects are long and, therefore, decisions need to be delivered quickly. The report envisages new projects being built as soon as 2020, to be operated by 2023.

Pentagon chief pledges $108 billion to fix nuclear force (AP) — Defense Secretary Ash Carter said Monday the Pentagon is committed to correcting decades of short-changing its nuclear force, including forging ahead with building a new generation of weapons at a cost of more than $100 billion. In his first nuclear-focused speech since taking over the Pentagon in February 2015, Carter implicitly rejected arguments for eliminating any element of the nuclear force or scaling back a modernization plan that some consider too costly. With the nose of a B-52 bomber at his back, Carter told airmen that the credibility of the American nuclear arsenal is crucial to ensuring its deterrence power. That credibility, he said, is built on personal performance. “The confidence that you’re ready to respond is what stops potential adversaries from using nuclear weapons against the United States or our allies in the first place,” he said. Earlier he flew by helicopter to a Minuteman 3 missile field and was taken 85 feet underground to a launch control center where two airmen are always present — 24 hours a day, seven days a week, 365 days a year — and ready to execute a presidential order to launch. The nuclear-tipped Minuteman 3 can reach a target on the other side of the globe in about 30 minutes. It was Carter’s first visit to a nuclear weapons base as defense chief. In his speech, Carter argued that even though the Cold War is long over, nuclear weapons are still needed to deter Russian and other potential aggressors from thinking they could get away with a nuclear attack.

Utica Shale Production Has Jumped 35-Fold in Ohio - –As natural gas production from Utica Shale wells soared 35-fold over the last three and a half years, several national environmental groups are advocating a “keep it in the ground” strategy to halt further drilling and fracking efforts for fear of potential water and air pollution. However, officials with the U.S. Chamber of Commerce claim that failing to frack would cost the nation 4.3 million jobs and $548 billion worth of annual gross domestic product. “The ‘Keep It in the Ground’ movement completely ignores the vast benefits to Pennsylvania and our nation’s economy that the energy renaissance has brought to us,” Karen Harbert, president and CEO of the U.S. Chamber’s Institute for 21st Century Energy, said. “For instance, lower electricity and fuel prices spurred a comeback in manufacturing that alone is responsible for nearly 400,000 American jobs. It costs consumers less to drive a car and heat their homes today. “And all the while, our nation has been decreasing its energy imports and lowering emissions.” According to the U.S. Energy Information Administration, natural gas production from the Utica Shale formation jumped from just about 100 million cubic feet per day in December 2012 to 3.5 billion cubic feet per day in June. Oil yields for the region also spiked from 4,400 barrels per day to 76,000 barrels per day during the same time period. Drillers operating in the eastern Ohio Utica Shale include Rice Energy, Gulfport Energy, XTO Energy, Ascent Resources, Antero Resources, Eclipse Resources, Magnum Hunter and others. If the Marcellus and Utica shale boom did not occur, U.S. Chamber officials believe the state of Pennsylvania would have 118,000 fewer jobs and $13 billion less in annual GDP. “The energy renaissance in this country would not have happened without Marcellus and Utica shale, and Pennsylvania is blessed to sit atop the lion’s share of those resources,”

In gas drilling country, the honeymoon is over on royalties  (AP) — Jan Brown pores over his royalty statement and wonders where all the money went. A few months ago, the nation’s second-largest natural gas producer siphoned $2,201 worth of gas from his 240-acre property — but paid him only $359 after taking deductions for transportation and processing. Brown, 59, who relies on the royalties as his sole source of income, says the deductions are outrageous and claims his lease forbids them. He feels cheated and duped. In Pennsylvania and other leading gas-producing states, a battle royal has developed over royalties, with landowners bitterly disputing the sums that some drillers have been taking from royalty checks already severely diminished by a collapse in prices. Chesapeake Energy Corp. alone is facing royalty lawsuits in Texas, Ohio, Louisiana, Oklahoma, Arkansas and Pennsylvania — including one filed by the Pennsylvania attorney general — and says it has received subpoenas from the U.S. Department of Justice, the U.S. Postal Service and states over its royalty practices. The deductions’ impact is especially acute in Pennsylvania, where gas extracted from the Marcellus Shale, the nation’s largest natural gas field, has been selling at a steeper discount than anywhere else in the country. Some landowners have seen their royalty checks dwindle to nothing at all, despite a 1979 state law that mandates a landowner royalty of at least 12.5 percent of the value of the gas. In rare cases, landowners have even gotten statements with negative balances. “This is robbery,” declared Bradford County Commissioner Doug McLinko, an ardent supporter of gas drilling who has nevertheless found himself at war with the industry. “People up here are fighting mad.”

Pennsylvania Justices Strike Down Frack Anywhere Law -- In a wide-ranging ruling reviewing “special treatment” granted to Pennsylvania’s oil and gas industry by the General Assembly, the state Supreme Court has struck down several sections of Act 13, the state’s oil and gas law, including provisions that allowed gas companies to employ eminent domain, exempted private water sources from notification after a spill and prevented doctors from disclosing information about their patients’ chemical exposures.The justices’ ruling in Robinson Township v. Commonwealth, issued late Wednesday, is the high court’s second swipe at the law passed in 2012 by Republican Gov. Tom Corbett. In a landmark 2013 decision under the same caption, the court struck down portions of the act that had allowed drilling in all zoning districts.John Smith of Smith Butz, who argued before the court on behalf of the group of municipalities challenging the law, said the two rulings combined represent the most significant action in the Supreme Court in decades because of the broad swath of Pennsylvanians they will affect. The legislature and industry’s intent in passing Act 13 has been “wiped out,” Smith said. “Their intent was to control local governments and to allow drilling everywhere. That’s gone,” he said. “Their intent to basically place the oil and gas corporate rights ahead of Pennsylvania citizens is gone.”’

Pro-Fracking Law Ruled Unconstitutional by Pennsylvania Supreme Court -- The Pennsylvania Supreme Court has ruled that the state's controversial Act 13 is unconstitutional , calling it a special law that benefits the shale gas industry. The massive Marcellus Shale formation, which underlies a large area of Western Pennsylvania, provides more than 36 percent of the shale gas produced in the U.S.   The Pennsylvania State Legislature passed Act 13 in 2012 and it was almost immediately challenged by seven of the state's municipalities along with the Delaware Riverkeeper Network and a private physician. The onerous law enabled natural gas companies to seize privately owned subsurface property through eminent domain, placed a gag order on health professionals to prevent them from getting information on drilling chemicals that could harm their patients, and limited notification of spills and leaks to public water suppliers, excluding owners of private wells that supply drinking water for 25 percent of Pennsylvania residents. Act 13 also pre-empted municipal zoning of oil and gas development.  "The decision is another historic vindication for the people's constitutional rights," stated Jordan Yeager, lead counsel on the case representing the Delaware Riverkeeper Network and Bucks County municipalities on the case. "The court has made a clear declaration that the Pennsylvania legislature cannot enact special laws that benefit the fossil fuel industry and injure the rest of us."   On Dec. 19, 2013, the state Supreme Court issued a narrow ruling on the grounds that the law violated the Environmental Rights Amendment of the Pennsylvania Constitution. That ruling returned local zoning rights to municipalities. It also ordered the state Commonwealth Court to reconsider other provisions. The ruling by the Supreme Court issued Wednesday addresses those rulings and should end the litigation.

US Justice Department Issues Subpoena to Chesapeake Energy - The U.S. Department of Justice has issued a subpoena to Chesapeake Energy Corp. that seeks information on the oil and natural gas producer's accounting methods for the acquisition and classification of oil and gas properties. Oklahoma City-based Chesapeake disclosed the subpoena, which is part of a Justice Department investigation, on Thursday in a regulatory filing with the U.S. Securities and Exchange Commission. The filing says Chesapeake has been involved in discussions with the Justice Department, the U.S. Postal Service and representatives of state agencies and will continue to respond to such subpoenas and demands.  Gordon Pennoyer, director of communications and investor relations for Chesapeake, declined further comment on the filing Friday. The Justice Department and other agencies asked Chesapeake for documents, testimony and information related to the company's oil and gas leases and purchases as part of its antitrust investigation, the Journal Record reported ( http://bit.ly/2dwWCJ5 ). Chesapeake alluded to being investigated in its 2015 annual report, filed with the SEC on Feb. 25, 2016. The company was named in several lawsuits alleging underpayment of royalties and defended cases in Arkansas, Louisiana, Ohio, Oklahoma, Pennsylvania and Texas. University of Central Oklahoma economics professor Jeremy Oller, an expert witness on antitrust legal matters, said the Justice Department is likely examining other oil and gas companies as part of the investigation.

EPA Must 'Correct Top Claim in Major Fracking Study' -- Led by Food & Water Watch , more than 200 public interest and environmental groups sent a letter to the U.S. Environmental Protection Agency (EPA) today, urging the agency to heed the recommendation of its own independent Science Advisory Board (SAB) and clarify the seemingly unsupported top-line finding of the June 2015 draft fracking report .  The EPA's June 2015 draft of the study featured a dismissive and unsupported topline finding—that fracking has not led to "widespread, systemic" problems nationally, as if that should be the bar. The groups back the SAB's recommendation that the EPA either drop the controversial language or provide a "quantitative analysis" to support it.  The letter, signed by hundreds of national, statewide and local environmental and public interest groups, representing millions of members, was sent directly to EPA Administrator Gina McCarthy. It is being sent on the heels of an EnergyWire FOIA report indicating that the Obama White House was engaged in the "messaging" for the rollout of the controversial EPA study, stating that "White House aides kept tabs on what the 'topline messages' would be."  In the letter, environmental groups specifically call on the EPA to revisit its statement of findings, consistent with the SAB recommendations, and resolve the three major problems with the controversial line:

  • 1. The EPA did not provide a sense of what the agency would have considered "widespread, systemic impacts on drinking water resources in the United States."
  • 2. The "widespread, systemic" line is problematic because it presumes, without discussion, that looking on a national scale, over several years, provides an appropriate metric for evaluating the significance of known impacts.
  • 3. The "widespread, systemic" line is problematic because the EPA failed to explain adequately the impediments to arriving at quantitative estimates for the frequencies and severities of the impacts already occurring.

 Estimating rates for new crude oil pipelines - Many factors are weighed before a midstream company commits to building, or a shipper commits to shipping on, a major crude oil pipeline. Where is incremental pipeline capacity needed? What would be the logical origin and terminus for the pipeline? What should the project’s capacity be, and what would be the capital cost of building the project? Where the economic rubber really meets the road is the question of what unit cost––or rate per barrel––would the pipeline developer need to charge to recover its costs and earn a reasonable rate of return on its investment. Today we continue our review of crude oil pipeline economics with a look at the rules-of-thumb for determining what pipeline transportation rates would be. In Part 1 of this series we discussed the fact that new pipeline development is driven by either need or opportunity, and more often than not, a combination of the two. The key question that pipeline developers and their customers (the shippers) have to consider before committing to build new capacity, we said, is whether it will “pay” to flow crude on the pipeline once it’s built––not just the first year or the first three, but for years if not decades to come. To answer this question, pipeline developers and shippers have to consider both current and future economics. There are three fundamental factors that drive pipeline economics: 1) future supply dynamics (and the resulting price impact) at the origination point (Point A); 2) future demand (and price) at the destination point (Point B); and 3) the transportation cost to flow crude from Point A to Point B. In Part 2, we focused on estimating capital costs. We went through a geometry exercise to confirm an already-popular industry rule-of-thumb for estimating the diameter of the pipe to reach a certain capacity. We also explained and used a “cost per inch-mile” approximation to figure out what the pipe itself would probably cost, then included standard rough estimates of the cost for everything else: the pumps, storage, and meters necessary for the pipeline to work.  We confirmed those numbers by reviewing some pending new projects, and ultimately got to the example of a 200-Mb/d crude oil pipeline 500 miles long costing $990 million to build.  

Permian Gas Output Remains High; Processing Capacity Being Added -- Natural gas production volumes in the Permian Basin are very near the all-time record of 6.9 Bcf/d set last September, and crude oil and gas producers alike see nothing but blue skies for the highly prolific West Texas/Southeast New Mexico play. The Permian already has a lot of gas processing capacity, but a good bit of it is older, and parts of the region—especially the super-hot Delaware Basin—need more of the big, efficient cryogenic plants that can process 100 to 200 MMcf/d. Today, we continue our review of gas production and processing in the biggest U.S. gas-producing region that is not named Marcellus.  The past two years have been a challenging time for crude oil and natural gas producers in most of the U.S., but much less so for exploration and production companies in the 75,000-square-mile Permian Basin. In rock ‘n’ roll terms, the Permian is a lot like Bruce Springsteen––it’s been a consistent producer (of both gas and oil) for decades, and it has more respect today than ever. (You might even call the Permian “The Boss” of hydrocarbon output.) Thanks to favorable production economics and multiple pay zones, output levels in the Permian dipped only slightly as oil and gas prices tumbled, and have since rebounded. As we said in Part 1 of our series, crude oil has always been the big draw for Permian producers, but most of the wells there also produce large volumes of liquids-rich or “wet” natural gas that needs to be processed to extract natural gas liquids (NGLs). In its latest Drilling Productivity Report, the Energy Information Administration (EIA) projected that the Permian would produce an average of nearly 6.9 Bcf/d in October (2016), only 30 MMcf/d less than it did at its peak a year ago. Gas production in the Eagle Ford in South Texas, meanwhile, is projected to fall below 5.6 Bcf/d in October—a 25% drop from its all-time  high in February 2015.

Latinos disproportionately breathe toxic air from big oil and gas - Latinos are 51 percent more likely to live in counties with unhealthy levels of ozone and nearly two million are living less than half a mile from oil and gas facilities, a National Hispanic Medical Association (NHMA) report found. Toxic oil and gas emissions stemming from the summer ozone season alone are causing Latino children some 153,000 asthma attacks and 112,000 lost school days, according to the report published this month. In addition, the report notes that while Latinos made up 17 percent of the U.S. population in 2014, they make up 20 percent of the population in counties with high cancer risk due to oil and gas emissions. This report is the first to quantify the elevated health risk faced by millions of Latinos — who are also more likely to be poor and uninsured — due to pollution from oil and gas facilities like wells, refineries, and storage tanks. Oil and gas facilities are known to emit cancer-causing benzene, hydrogen sulfide, and formaldehyde. Benzene has been linked to cancer, anemia, brain damage, and birth defects, and it is associated with respiratory tract irritation. Hydrogen sulfide gas at high concentrations can cause severe respiratory irritation and death. Formaldehyde has been linked to cancer. It’s been estimated that oil and gas sources produced nearly 22,000 tons of formaldehyde in 2011. The report also comes as the United States Commission on Civil Rights found that the U.S. Environmental Protection Agency (EPA) is failing its environmental justice obligations and struggling to help poor communities of color suffering the effects of pollution. According to the report, more than 1.78 million — or 3 percent of Latinos — live in areas where toxic air from oil and gas production is so high that the associated cancer risk exceeds the EPA’s so-called level of concern.

Navajo Nation lawmakers want study on impact of fracking - KFDA - (AP) - The Navajo Nation is seeking further investigation into the potential environmental fallout of hydraulic fracturing as it looks to update its energy policies. The Farmington Daily Times reports (http://bit.ly/2daZH5w ) that tribal legislators are pushing for a better understanding of energy industry practices as well as any necessary revisions of rules surrounding oil and gas production. The issue of hydraulic fracturing, or fracking, has taken a greater precedence in recent months. Council Delegate Jonathan Hale introduced legislation in April opposing oil and gas drilling on the Navajo Nation. Navajo Nation Oil and Gas Company CEO Louis Denetsosie, however, has said the bill is "not based in sound science." The conflict fueled a tribal committee's request for a scientific study. The tribal council has issued a Dec. 31 deadline for the study.

 North Dakota asks pipeline company to explain ranch purchase  (AP) — North Dakota Attorney General Wayne Stenehjem is asking the developer of the four-state Dakota Access oil pipeline to explain its purchase of a ranch where a protest turned violent earlier this month. Texas-based Energy Transfer Partners recently purchased the 7,000-acre ranch last week for an undisclosed price. Stenehjem is giving the company 30 days to say how the land, where tribal officials said construction crews destroyed burial and cultural sites, will be used. North Dakota law generally bars corporations from owning agricultural land unless the property is controlled by a farm family. The company must prove to the state how its purchase complies with the Depression-era anti-corporate farming law.

 21 Arrested During Peaceful Prayer Ceremony at Standing Rock -- The Morton County Sheriff's Department, whose officers used mace and unleashed dogs on Dakota Access Pipeline protestors earlier this month, sent in armored vehicles and arrested 21 people Wednesday at two sites. But a video released by those at the Sacred Ground Camp shows unarmed protestors conducting a prayer ceremony involving the planting of willow and corn. "We had a really nice ceremony," said a Sicangu Lakota grandmother. "Then we looked and over that way, there were a few police and the next thing we knew there were 40 police all in riot gear." Police moved in as peaceful demonstrators stood with their hands up. The video then shows officers confronting the protestors, grabbing women and ordering everyone into their cars."I've never had a gun pointed at me," said the grandmother. "I went into shock." In a press release issued Wednesday by the Morton County Sheriff's Department, they allege that "a protester on horseback charged at an officer in what was viewed as an act of aggression."Another video shows at least three riders on horseback but does not show any "charging" toward officers. At least one officer raised his weapon toward the civilians even as they shouted, "We are unarmed. We have no weapons." According to the Indian Country news site, Indianz.com , Morton County Sheriff Kyle Kirchmeier "has previously come under fire for spreading his own rumors. As thousands began to flock to North Dakota in early August, he claimed there were pipe bombs at the encampment but resisters told The New York Times that he was mistaken by the presence of sacred Chanunpa pipes used during ceremonies."

As tribes continue to resist Dakota Access pipeline, oil exec suggests paying them off -- A top oil executive with North Dakota’s largest oil producer said the stalemate between tribes and the controversial Dakota Access pipeline that’s sparked mass protests across the country could end if tribes got oil service contracts. James J. Volker, chief executive officer of Whiting Petroleum, told Reuters tribal grievances against the $3.8 billion pipeline could be solved if the industry gave tribes economic opportunities. That would including contracting with Native American-owned firms for water hauling and other oil-related jobs. “We as an industry like to see them provide those services,” Volker told Reuters Tuesday while at the Independent Petroleum Association of America symposium in San Francisco. “It does provide a better standard of living for them. It does provide a direct tie to the energy business and makes them and their tribal leaders more inclined to want to have more energy development.” The Dakota Access pipeline — a 1,172-mile project about as long as the Keystone XL line — would be the largest oil pipeline out of North Dakota’s Bakken oil field. It would move daily more than half a million barrels of crude oil through the Dakotas, Iowa, and into a hub in Illinois. The Standing Rock Sioux Tribe has long opposed the project, saying the pipeline puts the Missouri River it’s set to cross at risk of an oil spill, meaning the tribe’s sole water supply is also in harms way. In addition, the tribe claims it wasn’t properly consulted and that ancestral cultural resources are at risk of destruction, since the pipeline would run through federal land less than half a mile away from their reservation. The tribe’s opposition has inspired protests across the country, backed by 200 tribes and numerous environmental organizations.

Mainstream Media Still Silent As Dakota Access Pipeline Protests Spread, Construction Blocked In Iowa --The media blackout of opposition to the Dakota Access Pipeline continues as widening protests, which have now blocked pipeline construction in Iowa, go unreported by the national corporate media. The “Mississippi Stand” water protector encampment in Sandusky, Iowa, successfully blockedDakota Access Pipeline construction as of Saturday, September 24th. The protests are taking place where the pipeline is planned to cross the Mississippi River. Water protectors attached themselves to construction equipment in acts of civil disobedience until they were eventually arrested — but police failed to corral them before they halted the pipeline’s construction. Law enforcement arrested a total of 12 people on Saturday at the Mississippi Stand site, according to independent media outlet Unicorn Riot. At least 44 people have been arrested at the Iowa protest site in previous weeks.At issue is the $3.8 billion Dakota Access oil pipeline that Native American tribes, led by the Lakota Sioux, say will endanger tribal and public fresh water across an area that spans several states. In a statement to Unicorn Riot, the Mississippi Stand confirmed their opposition to the Dakota Access Pipeline:“Mississippi Stand comes together in solidarity with Standing Rock, because we acknowledge the importance of the protection and preservation of Native Land. It’s crucial that all water protectors rise up together to fight for our Mother Earth, and all who inhabit this beautiful planet. This begins with defending our most valuable life source, water.” Meanwhile, protests continue near the Standing Rock camp at the Dakota Access Pipeline construction site in North Dakota despite the Justice Department’s order to stop construction on Army Corps of Engineer land. Twenty-one water protectors were arrested on Wednesday alone as militarized police with armored vehicles and shotguns descended upon peaceful protesters. The protesters were arrested for trespassing and resisting arrest, among other charges, Rob Keller of the Morton County Sheriff’s Department confirmed to Anti-Media. Since the corporate media has repeatedly shown it is unwilling to cover the Dakota Access Pipeline protests, stay up to date by checking out Anti-Media’s coverage here.

 Bakken producers losing the East Coast market to rising imports -- The prospects for sellers of Williston Basin/Bakken crude oil in what once was a prime growth market—the U.S. East Coast—have been dwindling fast, as have the volumes of Bakken crude being railed and barged to refineries along the Mid-Atlantic coast and the Canadian Maritimes. Today we look at how a combination of weak crude oil prices, declining production, high relative freight costs, and the lifting of the U.S. crude oil export ban have opened the door to more imports from West Africa, and left Bakken producers out in the cold.  The Bakken remains an American success story, but the play’s star has certainly faded along with declining crude prices. As North Dakota oil production ramped up in 2013 and 2014 (peaking at 1.3 MMb/d in December 2014), shipments of Bakken crude to the U.S. East Coast via rail rose in tandem.  From only 10 Mb/d in 2011, Bakken barrels railed to the East Coast ultimately reached 431 Mb/d in May 2015 (see While CBR Gently Weeps). In the early days of CBR, midstream companies, marketers and refiners rushed to develop the infrastructure (rail terminals, rail fleets, etc.) to serve refineries in the Mid-Atlantic states and Maritime Canada. But unfortunately, about the time all that infrastructure was in place, crude prices started to decline, the number of active drilling rigs in the Bakken plummeted, and crude oil production there fell to less than 1.0 MMb/d.  The decline in production continues today; Energy Information Administration’s (EIA’s) Drilling Productivity Report projects that Bakken crude production now (as of September 2016) languishes at only 875 Mb/d. Rail shipments to the East Coast in June 2016 averaged only 132 Mb/d, a decline of 69% since the peak in May 2015.

Technology designed to detect U.S. energy pipeline leaks often fails | Reuters: On a routine check of a surface coal mining facility in rural Alabama early this month, inspector Randall Aldridge first smelled gasoline. Then he saw dead plants and animals along a man-made pond that helps the region manage heavy rain. The cause had nothing to do with a mine. Aldridge happened upon a leak on the main fuel artery to the U.S. East Coast known as the Colonial Pipeline, in what turned out to be the company's largest gasoline spill in nearly 20 years. Colonial Pipeline Co and its peers in the oil and gasoline transport sector, tout high-tech, complex leak detections systems that measure hydraulic data and count on overhead flights and other measures to ensure their pipelines work efficiently and safely. But the fact these systems did not flag the Colonial Pipeline spill is not unique. A Reuters review of U.S. federal records shows that sensitive technology designed to pick up possible spills is about as successful as a random member of the public like Aldridge finding it, despite efforts from pipeline operators. In the past 20 months, Colonial has had eight pipeline spills across its 5,500-mile (8,851 km) fuel pipeline system. None of them were uncovered by the company's primary leak-detection system, according to federal data. The issue stretches beyond Colonial. Over the last six years, there have been 466 incidents where a pipeline carrying crude oil or refined products has leaked. Of those, 105, or 22 percent, were detected by an advanced detection system, according to a Reuters analysis of U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA) data.

The New EIA DUC Estimates and U.S. Oil & Gas Production -- At long last, the Energy Information Administration (EIA) has reported an “official” estimate of the U.S. drilled-and-uncompleted well (DUC) inventory as part of its monthly Drilling Productivity Report.  DUCs are a critical factor in forecasting production trends, as many of these wells are likely to be some of the first to come online as soon as prices move higher and thus have the potential to boost production quicker and easier than would otherwise be the case. However, the number of DUCs has been a difficult thing to measure, though not for lack of trying. There are, in fact, widely varying counts from many different sources circulating in the industry. Today, we begin a short series on these latest DUC counts and their potential implications.  Drilled-and-uncompleted wells, or DUCs, aren’t a new phenomenon. In fact, producers have always carried an inventory of DUCs. But in the environment of low prices and slashed capital budgets the market has been experiencing for the past 20 months or so, DUCs have taken on new relevance, not only as a tool for producers to manage their lease agreements and rig activity, but also as a control valve for production volumes, whether it is to defer supply to a future date or to quickly and economically turn on new production as prices rebound and/or as pipeline capacity is built. You can imagine, then, how without an accurate estimate of DUCs and the rate of actual completions, the current market is ripe for underestimating future production volumes that solely rely on existing and newly drilled wells.

 Mothballing the World's Fanciest Oil Rigs Is a Massive Gamble -- In a far corner of the Caribbean Sea, one of those idyllic spots touched most days by little more than a fisherman chasing blue marlin, billions of dollars worth of the world’s finest oil equipment bobs quietly in the water. They are high-tech, deepwater drillships -- big, hulking things with giant rigs that tower high above the deck. They’re packed tight in a cluster, nine of them in all. The engines are off. The 20-ton anchors are down. The crews are gone. For months now, they’ve been parked here, 12 miles off the coast of Trinidad & Tobago, waiting for the global oil market to recover.The ships are owned by a company called Transocean Ltd., the biggest offshore-rig operator in the world. And while the decision to idle a chunk of its fleet would seem logical enough given the collapse in oil drilling activity, Transocean is in truth taking an enormous, and unprecedented, risk. No one, it turns out, had ever shut off these ships before. In the two decades since the newest models hit the market, there never had really been a need to. And no one can tell you, with any certainty or precision, what will happen when they flip the switch back on. It’s a gamble that Transocean, and a couple smaller rig operators, felt compelled to take after having shelled out millions of dollars to keep the motors running on ships not in use. That technique is called warm-stacking. Parked in a safe harbor and manned by a skeleton crew, it typically costs about $40,000 a day. Cold-stacking -- when the engines are cut -- costs as little as $15,000 a day. Huge savings, yes, but the angst runs high. “These drillships were not designed to sit idle,” said Willard Duffey Jr., an electrician who spent two decades with Transocean. The Deepwater Pathfinder, a ship he had served on for four years, was among the first to be parked off the Trinidad coast. The ship made the voyage there from the Gulf of Mexico about a year ago. “To get the Pathfinder back up would be very difficult to guess actually,” he said.

Dallas Fed: Oil and Gas Activity Rises in Third Quarter - Surveys and reports from the Federal Reserve Bank of Dallas are now available for the third quarter. The business activity index – the survey’s broadest measure of conditions facing Eleventh District energy firms – was up from 13.8 in the second quarter to 26.7. While the survey still shows weakness in both industry employment and production, it does show some encouraging improvement. Oil and gas production, according to E&P firms, fell for the third consecutive quarter, yet at slower rate. Also of note in the report was the poll the Fed conducted that received participation from 149 oil and gas executives. They asked, What WTI price do you think is necessary for U.S. crude oil drilling activity to substantially increase? In an almost unanimous response, executives believe that $50 per barrel is the magic mark, with some indicating $55 as the number that will allow substantial increases in activity. Below is the graph that shows the poll results.Results also showed that most executives did not expect the price of oil to rise until at least the middle of the second quarter 2017. To read the rest of the report go to the Dallas Federal Reserve website. You can also sign up there to be one of their survey panelists.

 SEC: Weatherford International oil firm to pay $140M fine  (AP) — Oilfield-services company Weatherford International PLC has agreed to pay a $140 million fine to settle government claims that it used fraudulent tax accounting to inflate its earnings. The Securities and Exchange Commission announced the settlement Tuesday with Weatherford, which is based in Switzerland and has major operations in Houston. According to a settlement order, Weatherford issued financial statements that inflated its earnings by more than $900 million between 2007 and 2012. The company was forced to restate financial results three times, at least partly due to a tax-accounting fraud orchestrated by two former tax executives to make the company’s tax rate match estimates that had been given to analysts and investors, the SEC said. The scheme was intended to make a Weatherford tax-reduction structure look far more successful than it was, the SEC said. Weatherford restated previous results in 2011, which knocked $1.7 billion off the company’s stock market value, and twice more in 2012. The company and the former executives consented to the SEC order without admitting or denying the findings. James Hudgins, the vice president of tax, resigned in 2012. He was ordered to pay $334,067 to cover a civil penalty and ill-gotten gains, according to the settlement. Darryl Kitay, a tax manager who was fired in 2013, was ordered to pay a $30,000 civil penalty. Over the past four years Weatherford agreed to pay $173 million to settle shareholder lawsuits over the financial restatements, according to company filings.

Oil And Gas Bankruptcies Set To Double This Year - Creditors from bankrupt oil and gas companies are suffering in the current climate, as loan recovery rates have plummeted while insolvencies have increased, which may even be on a par with the collapse of the telecoms industry in the early 2000s, according to Moody’s Investor Service. The branch of the ratings agency which provides credit assessments, research, and risk analysis in 130 countries, has announced that in 2015 a glut of bankruptcies and defaults in the oil and gas sectors, have been encouraged by the low commodity price conditions. Throughout 2015, Moody’s counted that there were 17 oil and gas bankruptcies, with 15 of them coming from the exploration and production sector (E&P). The number of E&P bankruptcies has accelerated this year, with analysts anticipating that the volume of failed E&P companies will reach twice the number for last year.  In comparison, when the telecoms industry boom had turned into bust, Moody’s Database recorded 43 company bankruptcies, during a three-year period between 2001 and 2003. David Keisman, Senior Vice President at Moody’s, suggested that the end result of the current unfolding patterns, could turn out to be a segment wide bust of historic figures.  The knock on effect on creditors has been huge, as the 15 E&P companies who filed for bankruptcy, held debts that totalled at least $100 billion.Recovery rates for E&P bankruptcy in 2015 averaged only 21 percent, a significantly low ratio of arrears being claimed, far lower than the historical average of 58.6 percent. Overall, Moody’s study revealed that the average recovery rate between 1987 and 2015 was 50.8 percent for corporate bankruptcy protection levels in that time. Additionally, at the debt instruments level, in total 81 percent of reserve based loans were recovered in 2015, 17 percent lower than what was retrieved from E&P bankruptcies during 1987 and 2014. Other debt instruments suffered more, high yield bonds recovered a derisory 6 percent, compared to a recorded rate in the low 30 percent range in previous E&P bankruptcies.  The U.S. Federal bank regulator, the Office of the Controller of the Currency, is also keeping a watchful eye on the banks’ oil and gas portfolios, after seeing a rise in undeveloped reserves, which banks have used as collateral for loans.  Overall, the Deloitte report revealed that the debt/EBITDA ratio of a large section of U.S. oil and gas companies has surpassed the asset impairments threshold of over $135 billion by U.S. oil and gas companies.

Low Oil Prices Are Not The Reason Oil Companies Are Going Bankrupt -- The reason oil companies have gone bankrupt over the past few years is not due to “historically low oil and natural gas prices”. Here is a long term inflation adjusted price chart: Does the current price look historically low on an inflation adjusted basis?  Here is the chart not adjusted for inflation.  Natural Gas prices are closer to the lower end of the price range. Below is the inflation adjusted long term natural gas price  However, for as far back as the above data goes the price of natural gas is regularly between $2-4/mcf. This is the natural range. The higher prices have all been “spikes” due to hurricanes, La Nina events or other short term phenomenon.  Here is the non-adjusted price chart. As you can see these are not historically low prices.The real reason energy companies are going bankrupt is more technical. Reserve base lending for unconventional reservoir projects became a ponzi scheme.This is how it works.

    • Step 1) An oil company borrows money or issues equity to drill a well.
    • Step 2) The well “discovers” oil. The reason I put discover in quotations is that the resource (not reserve, there is a difference) potential of shale source rocks has been known for decades.
    • Step 3) Estimate the resource and reserve potential.
    • NB: Resource is properly defined as uneconomic at the current price. Reserve is properly defined as economic at the current price.
    • Step 4) Book the reserve as an asset on the balance sheet as per SEC legislation.
    • Step 5) Borrow money against the reserve.
    • Step 6) Drill more wells and book more reserves and borrow more money.
    • Step 7) Repeat until you cannot repeat again.

Americans are addicted to oil: Gasoline consumption is higher than ever before - August was the biggest month ever for U.S. gasoline consumption. Americans used a staggering 9.7 million barrels per day. That’s more than a gallon per day for every U.S. man, woman and child. The new peak comes as a surprise to many. In 2012, energy expert Daniel Yergin said, “the U.S. has already reached what we can call ‘peak demand.'” Many others agreed. The U.S. Department of Energy forecast in 2012 that U.S. gasoline consumption would steadily decline for the foreseeable future. This seemed to make sense at the time. U.S. gasoline consumption had declined for five years in a row and, in 2012, was a million barrels per day below its July 2007 peak. Also in August 2012, President Obama had just announced aggressive new fuel economy standards that would push average vehicle fuel economy to 54 miles per gallon.Fast forward to 2016, and U.S. gasoline consumption has increased steadily four years in a row. We now have a new peak. This dramatic reversal has important consequences for petroleum markets, the environment and the U.S. economy.How did we get here? There were a number of factors, including the the Great Recession and a spike in gasoline prices at the end of the last decade, which are unlikely to be repeated any time soon. But it should come as no surprise. With incomes increasing again and low gasoline prices, Americans are back to buying big cars and driving more miles than ever before.

 Two Years Into Oil Slump, U.S. Shale Firms Are Ready to Pump More - WSJ: When oil prices began to plunge two years ago due to a global glut of crude, experts predicted U.S. shale producers would be the losers of the resulting shakeout. But the American companies that revolutionized the oil and gas business with hydraulic fracturing and horizontal drilling are surviving the carnage largely unbowed. Though the collapse in prices caused a wave of bankruptcies, total U.S. oil production has only fallen by about 535,000 barrels a day so far this year compared with 2015, when it averaged 9.4 million barrels, according to the latest federal data.As the oil markets ponder where production will resume when prices pick back up, one clear answer has emerged: America. Goldman Sachs forecasts the U.S. will be pumping an additional 600,000 to 700,000 barrels of oil a day by the end of next year—making up for every drop lost in the bust. Few predicted that in the fall of 2014, when Saudi Arabia signaled that it wouldn’t curb its output to put a floor under crude prices. Oil pundits concluded that a brutal culling would force higher-cost players known as marginal producers—a group that includes shale drillers—out of the market. But the greatest consequence of the Saudi decision and subsequent price drop is that it has delayed costly oil megaprojects, from deep-water platforms off Angola to oil-sands mines in Canada. “The U.S. isn’t the marginal barrel but the most flexible,” said R.T. Dukes, an analyst at Wood Mackenzie. “We’ll be the fastest to snap back.” More than 100 North American energy producers have declared bankruptcy during this downturn, but even companies working through chapter 11 keep pumping oil and gas. Many exit bankruptcy stronger thanks to a balance sheet that has been wiped clean. SandRidge Energy Inc., which filed in May, will exit next month after erasing nearly $3.7 billion in debt. Many shale operators are still struggling at current prices, drilling at a loss and tapping Wall Street for new infusions of cash. But the strongest producers, including EOG Resources and Continental Resources soon will be able to generate enough money to pay for new investments and dividends—as well as boost production—even at low prices, analysts say. U.S. production began inching up in July, shortly after oil prices rebounded to $50-a-barrel territory. Producers quickly put 100 rigs back to work this summer.

How is the US shale boom panning out on global markets? --Snapshot video  - S&P Global Platts managing analyst Hetain Mistry discusses and reviews the latest developments in US ethane exports and related current and future crude, naphtha and NGLs pricing trends and impact on cracker margins in Europe. Also discussed are the latest ethane export infrastructure plans and why producers are pursuing plans to acquire US ethane despite the advantage decreasing due to the oil landscape.

How Fracking is Re-Calibrating Global Geo-Politics -- Oil, whether we like it or not, still remains one of the biggest commodities driving the geo-political manoeuvring of nation states, specifically for the US, the lone hegemon. However, the critical role of oil in shaping US foreign policy over the past many decades has now drastically changed, altering the dynamics of the US’s international relations policies. In fact, many of the country’s policies of engagement and dialogue with its traditional foes such as Iran, Russia and Cuba are possible today because the US is close to achieving a significant milestone for its economy and national security – energy independence. The advent of hydraulic fracturing technology, commonly known as ‘fracking’, which uses an injection of high-pressure fluids (often a combination of water and chemicals) to release oil and gas from crevasses of rock formations deep underground, has changed the landscape of American energy. From 2007 to 2012, shale oil saw a 18-fold increase in the production of light tight oil. Apart from the US, only a handful of other countries have commercially viable shale prospects, these are China, Argentina and Canada. The success of these countries, according to researchers Michael Zimmer and Elissa Welch of Ohio University, will also erase the US’s need to import liquefied natural gas (LNG) for the next 20 years (although, arguably, this is a short period of time as far as energy security is concerned). While the US has embraced fracking, some countries have opposed it completely, including major economies in Europe – as the debate around environmental protection and climate change gains global traction. In June, Germany, Europe’s largest economy that had also decided to shun nuclear power, decided to ban fracking. Germany’s decision comes on back of its population’s ‘suspicion’ over the technology and its impact on the environment, specifically on drinking water resources. Others such as the UK have also scuttled progress on fracking on its mainland, with England banning fracking from 40% of its designated ‘shale’ areas and Scotland opting for a complete ban. Other European states such as France and Bulgaria have also banned fracking completely over environmental concerns.The US still remains the only country that has a very successful shale economy because of a host of reasons. First and foremost, in the US, if a private landowner strikes oil on his plot, the natural resource belongs to that person and not the state. Secondly, abundance of other natural resources like water and land, abundantly available in the US, made it much more commercially viable. Third, the US administration provided many tax sops to both companies and land owners to develop and produce shale gas, giving a new lease of economic life to many US states such as North Dakota, Texas, Colorado, Wyoming, Alaska and so on.

NYMEX November gas falls slightly despite bullish storage build - The NYMEX November natural gas futures contract failed to capitalize on bullish weekly gas storage data Thursday, settling at $2.959/MMBtu, down 4.3 cents, after trading in a range between $2.956/MMBtu and $3.032/MMBtu. The US Energy Information Administration estimated a 49-Bcf injection into storage in the week that ended September 23, boosting inventories to 3.600 Tcf. The injection was 5 Bcf below analysts' consensus expectation of a 54-Bcf build and about 50% below the five-year average injection of 97 Bcf. The storage level remained nearly 7% above the five-year-average of 3.38 Tcf heading into October. "Despite about 15 minutes of a brief rally after the storage news came out, the market gave it all back this morning," said David Thompson, PowerHouse executive vice president. "In the bigger scheme, though, we have seen a decent rally in natural gas prices since mid-August despite some weakness over the past week. We haven't collapsed below $2.85 yet, so I am moderately bullish entering October," he added. Meantime, dry gas supplies for the Lower-48 states Thursday are expected to be about 70.6 Bcf, but supplies are expected to rise by nearly 500 MMcf/d to 71.1 Bcf/d by early next week, according to Platts Analytics' Bentek Energy. On the demand side, total US usage was expected to slide by about 1 Bcf Thursday to 62.7 Bcf, mostly on lower power generation volumes. The National Weather Service's six- to 10-day outlook provided support for gas prices heading into next week though.

Conference delegates temper prospects over role of US LNG -  Panel participants gave sobering views of the ability of US LNG to move markets in Europe and East Asia in the near future at S&P Global Platts European Gas Summit over Tuesday and Wednesday. "One's view on the future of Henry Hub prices is crucial," the head of Gas, Coal and Carbon at Energy Aspects Trevor Sikorski said of potential exports to the EU. He said high US gas output in 2015 was a consequence of high prices in the preceding year, and conversely, in 2016 to date, output is already slightly lower. "[They] need a price of around $4/MMBtu to keep production high." As well as Henry Hub, the other crucial factor was the strategy chosen by Gazprom, the Russian gas giant. Sikorski divided Gazprom's plausible courses of action into three scenarios -- either cut, maintain or increase production. He said cutting production to defend prices was the least likely one because it would amount to incentivizing more gas production in the US. Head of strategy and portfolio steering at Wintershall, the energy unit of German chemicals company BASF, Steffen Liermann said: "We believe Russia is more than before willing to maintain its market share [by adjusting its prices]."

Los Angeles jet falls as 'armada' of cargoes boosts supply -  West Coast sources said regional jet fuel inventories have been boosted by a wave of cargoes coming in California from northern Asia. "[An] armada of imports [are] due to hit the West Coast in October," one jet trader said. S&P Global Platts assessed the cash differential for Los Angeles jet fuel at NYMEX October ULSD futures minus 3.75 cents/gal Thursday, down 25 points from Wednesday. Energy Information Administration data released Wednesday showed imports into the West Coast from northern Asia rose 43,000 b/d to 73,000 b/d for the week ended September 23. At least three vessels arrived in California from northern Asia last week. Wednesday saw the first of at least five more expected through the middle of October, sources said. The Glenda Meryl sailed from South Korea on September 8 and arrived at the Port of Los Angeles on Wednesday, according to cFlow, Platts trade-flow software. The Nave Equator sailed from South Korea on September 15 and is expected to arrive at Richmond, California, on Friday. The Elandra Spruce, chartered by Vitol, sailed from China on September 16. It is expected to arrive at Los Angeles on Monday. The FPMC 18 sailed from South Korea on Wednesday. It is expected to arrive at Los Angeles on October 16. The Torm Kansas sailed from Japan on September 25, and is expected to arrive at Honolulu, Hawaii, on October 7. It may continue to the West Coast after that. The latest California Energy Commission data showed statewide jet fuel inventories rose 4.6% last week to 3.08 million barrels.

Japan propane imports from US unlikely to rise on high stocks, closed arb - Japan may not see a rise in US propane imports in coming months, even though product coming from the US rose to a five-month high in August, as firmer Very Large Gas Carrier freight rates for the US-Chiba route and high stockpiles in the country gave no grounds for spot purchases ahead of the peak winter demand season, market sources said Friday. The short-lived arbitrage window for US suppliers to ship spot LPG cargoes to Far East Asia was seen as shut again, after VLGC rates for a trip from the US to Chiba, Japan, climbed to 9.98 cents/gal Thursday, or $52/mt, up from a near two-week low of 8.06 cents/gal, or $44.80/mt September 20. US Mt. Belvieu non-LST propane cargoes for front-month October-loading were assessed at a three-month high at 53.875 cent/gal Thursday, or $280.69/mt, up $7.82/mt from Wednesday, boosted by stronger international crude benchmarks and higher export demand to Asia. At the Asian close Friday, the November CP propane swap was assessed at $337/mt, up $4/mt day on day.VLGC freight rates for the key Persian Gulf to Far East Asia route hovered at around $20-$21/mt levels, shipbroker sources said Friday. Such competitive freight rates offered by VLGC charterers made it a hard call for Japanese buyers to decide between lifting Middle Eastern cargoes or those from the US. "I don't think [Japanese importers] can buy any [more] US spot cargoes," a trader based in Japan said, also pointing to the high stock levels. Since the expanded Panama Canal reopened June 27, Japan has snapped up more parcels from the US through the canal, which is a shorter route compared with going round the Cape of Good Hope.

Canadian light oil output to decrease to 1.471 million b/d by 2018: CERI - Conventional oil production in Canada, which in already on the decline due to the current low prices and reduced drilling activities, will decrease to 1.47 million b/d by 2018 from 1.5 million b/d in 2015, an industry official said Monday. The benefits of cutting-edge technology, particularly multistage fracking along with horizontal drilling, and higher WTI prices were seen in the past few years with Canadian light oil output reaching a high point of 1.5 million b/d in 2015, said Dinara Millington, vice president of research with the Canadian Energy Research Institute.But that has changed with output now expected to decrease to 1.475 million b/d by 2017 and falling to 1.471 million b/d a year later, she said. Output in the current year is expected to be about 1.485 million b/d. Millington's comments came after CERI issued Friday a study called: Canadian Crude Oil and Natural Gas Production and Supply Costs Outlook (2016 to 2036). With an output of about 700,000 b/d, Alberta was the highest producer of conventional oil last year in Canada, followed by Saskatchewan at 500,000 b/d and Eastern Canada (mainly offshore Newfoundland and Labrador) the remaining 300,000 b/d, the study said. The output figures represent both conventional oil and NGL production, the CERI study said, without giving a breakup.

Trudeau government approves Petronas' $36-billion LNG project in BC - Prime Minister Justin Trudeau’s Liberal government has provided the $36-billion Pacific Northwest liquid natural gas (LNG) production and export facility project in Prince Rupert, BC with the green light to proceed. The announcement was made by members of the federal cabinet at a press conference held in Richmond this evening. “The Pacific NorthWest LNG Project will deliver thousands of good middle-class jobs and will help pay for schools and roads and social programs that enrich people’s lives,” said Jim Carr, federal Minister of Natural Resources. “We are moving forward with natural resource development in a sustainable manner, because we have an obligation to leave the planet in better shape than we found it. This is an exciting day for British Columbia, for Canada and for the natural gas industry in this country.” The controversial project is spearheaded by Petronas, a global oil and gas company owned by the Government of Malaysia, and will become the largest single foreign direct investment in Canadian history. It entails constructing a facility on Lelu Island with two LNG liquefaction plants, two LNG storage tanks, a power plant, a two-lane access bridge linking the island with the mainland, marine berths for loading of the LNG onto special LNG carriers to overseas markets, and a suspension bridge connecting the island to the marine berths. Natural gas will be transported to the facility for processing through a new 900-km-long pipeline to be built and operated by TransCanada from an area in northeastern BC to Prince Rupert.

LNG project approval won't mean green light for other pipelines, Jim Carr says - The government's approval of a controversial gas pipeline in B.C. responds to a global "thirst" for Canada's natural resources, but it shouldn't be read as a likely green light for other energy projects, says Natural Resources Minister Jim Carr. The government faced a barrage of criticism Wednesday from those worried about the environmental impact — and from others who say the job-generating project should open the door for other pipelines.But Carr stressed that each project will be judged individually, including Kinder Morgan's Trans Mountain expansion. "Kinder Morgan will be decided on its own merits," he said. "There is no linkage between these projects." The federal government approved the Pacific NorthWest LNG project in British Columbia with 190 legally binding conditions Tuesday night. Today, interim Conservative Leader Rona Ambrose expressed skepticism the pipeline would ever get built, and pressed the government to green light the Kinder Morgan project that's now on Prime Minister Justin Trudeau's "desk." 'It will be built if it's approved," she said. "That's hundreds of jobs and billions of dollars in investment, and it's making sure our oil that is land-locked in Alberta and Saskatchewan can finally get to tidewater and sold at a higher price which benefits all Canadians."

Trudeau Sets November Deadline for Enbridge Pipeline Decision | Rigzone-- Canadian Prime Minister Justin Trudeau’s government has given itself a two-month window to decide on Enbridge Inc.’s Northern Gateway oil pipeline after declining to appeal a legal ruling that revoked its construction permits. A cabinet order, dated Sept. 23, enacted Natural Resources Minister Jim Carr’s recommendation to set the Nov. 25 deadline for a decision on how to proceed with Gateway. Trudeau also has to decide on Enbridge’s Line 3 project on or before that same day.  The two Enbridge projects are among the raft of energy decisions Trudeau will make this fall -- including this week’s approval of Petroliam Nasional Bhd’s Pacific NorthWest liquefied natural gas project. Trudeau must also decide on Kinder Morgan Inc.’s Trans Mountain pipeline expansion by Dec. 19. “Given the complexity of the proposed Northern Gateway Pipelines project, this extension provides the Government with additional time to consider next steps in response to the Federal Court of Appeal decision,” Alexandre Deslongchamps, a spokesman for Carr, said in a written statement Thursday. The government continues to “work to restore public confidence” in Canada’s environmental and regulatory system, he added. Trudeau is said to have decided to approve at least one new oil pipeline in his first term, with Kinder Morgan considered the favorite. Northern Gateway, an estimated C$7.9 billion ($6 billion) project approved by a previous government, had its permits invalidated by a court ruling earlier this year that found the government didn’t fulfill its duty to fully consult indigenous people. The government said on Sept. 20 it wouldn’t appeal that ruling, and now must decide whether to re-do the consultation and, then, reissue the permits. Enbridge also declined to appeal and called on the government to work on a “renewed consultation process.”

Sending Western Canadian Natural Gas East For Export As LNG -   For some time now, discussions about the possible development of Canadian liquefaction/LNG export terminals have focused on the Western Canadian coast in British Columbia––partly because most of Canada’s natural gas reserves are nearby in northeastern BC and in Alberta, and partly due to Asia being a primary LNG target market. . But it could be that liquefaction/LNG export projects in Eastern Canada may make more sense. In today’s blog, “So Far Away –Sending Western Canadian Natural Gas East for Export as LNG,” LNG Ltd.’s Greg M. Vesey considers the rationale for piping Western Canadian natural gas long distances to Quebec and the Canadian Maritimes for export as LNG.Western Canada has vast reserves of natural gas that would be cost-competitive to drill for, produce and transport to market if only there was a new, incremental market for large natural gas volumes. This conundrum has been a frequent topic in the RBN blogosphere, and has been looked at from several angles. Most recently, in One Way or Another, we discussed the facts that natural gas producers in Alberta and BC have been struggling to replace markets in Ontario and the U.S. Midwest that they’ve been losing to Marcellus/Utica producers in recent years, and that––thanks mostly to the current-and-growing glut of worldwide liquefaction capacity (see Too Much, Too Little, Too Late)––no liquefaction/LNG export projects along the BC coast have advanced to Final Investment Decisions (FIDs) and construction. Getting approval for big new gas pipelines from BC and Alberta gas production areas to the BC coast has been another challenge. RBN blogs have also handicapped the leading BC projects (see Slip Sliding Away) and at the possibility of moving Marcellus/Utica gas through New York and New England to Canada’s New Brunswick and Nova Scotia provinces not only to meet in-province needs but to export as LNG (see Movin’ Out andBreak on Through to the Canadian Side).

US drives rainforest destruction by importing Amazon oil, study finds - US imports of crude oil from the Amazon are driving the destruction of some of the rainforest ecosystem’s most pristine areas and releasing copious amounts of greenhouse gases, according to a new report. The study, conducted by environmental group Amazon Watch, found that American refineries processed 230,293 barrels of Amazon crude oil a day last year. And California, despite its green reputation, refines an average of 170,978 barrels, or 7.2m gallons, of Amazon crude a day, with the Chevron facility in El Segundo accounting for 24% of the US total alone. The expansion of planned oil drilling poses “one of the most serious threats” to the western region of the Amazon, with most of the oil originating from Ecuador, Peru and Colombia. While green groups have enjoyed some success in fighting the Amazon ambitions of large oil firms like Chevron, other players from countries such as China have moved in, with proposed oil and gas fields now covering 283,172 sq miles of the Amazon – an area larger than Texas.  Felling the carbon-rich trees of the Amazon produces greenhouse gases even before the oil is transported and burned, while indigenous communities and the Amazon’s vast trove of biodiversity are also at risk.  Ecuador’s state oil company PetroAmazonas recently started drilling close to the Yasuni national park, which is considered to be one of the most biologically rich places on Earth. The park contains 655 endemic tree species – more than the US and Canada combined – as well as two of the last tribes in the world living in voluntary isolation.  As oil interests seek to exploit areas of the Amazon, there are fears that indigenous communities will suffer from pollution, displacement and deadly illnesses due to a lack of acquired immunity. “Our demand for Amazon crude is literally driving the expansion of the Amazon oil frontier and is putting millions of acres of indigenous territory and pristine rainforest on the chopping block, ” said Leila Salazar-López, executive director of Amazon Watch.

Collapse in new projects threatens North Sea oil industry - The UK's North Sea oil industry faces an uncertain future with just one new development project approved so far this year, even as output is likely to remain robust in the short term, lobby group Oil and Gas UK said in a report published Tuesday. The North Sea oil and gas industry has surprised some observers with its resilience since oil prices began collapsing in 2014. Last year saw the first significant increase in UK crude output since 1999, with a 14% rise to 882,000 b/d, helped by an efficiency drive and past investment in big projects. However this year only one new development project has been given the go-ahead: the Arundel oil field in the BP-operated Andrew Area. With the possibility of no further approvals in 2016, "this is set to be the worst year in the history of the UK continental shelf for new field approvals," Oil and Gas UK said in its annual economic report. The report forecast overall capital expenditure this year would be GBP9 billion ($11.7 billion), compared with GBP14.8 billion in 2014.The report paints a picture of near-term resilience that should support production until 2018 and also notes benefits from a weaker sterling currency given that oil revenues are in dollars. New projects are now likely to be 25% cheaper on a like-for-like basis than 12 months ago, it says. But it also describes obtaining finance for new projects as "extremely difficult" and says exploration activity is at an all-time low, meaning the industry collectively is producing four times more oil and gas than it is discovering on an annual basis. It also includes a downgrade to the total volume of estimated recoverable oil and gas, to 10 billion-20 billion barrels of oil equivalent, from 22 billion boe in last year's report. The volume of recoverable reserves sanctioned for development has fallen by 8% to 6.3 billion boe.

Global Oil: Venezuela Sees The Market Oversupplied By 9 Million Barrels Per Day - - As the informal meeting by the leading oil exporters in Algeria is approaching, journalists scrutinize every statement by the world's oil officials in an attempt to find cues regarding potential outcome of the meeting. The mosaic of opinions quoted is colorful and at times entertaining. Last week, the prize for the most head-turning statement goes to Venezuela's Oil Minister Eulogio del Pino. According to a Reuters report, the minister stated in a TV interview with state oil company PDVSA that the current global oil production needs to be reduced by 10% to meet the current level of demand. The minister was also quoted as saying that a "fair price" for oil would be around $70 per barrel. According to Reuters, the minister stated: "Global production is at 94 million barrels per day, of which we need to go down 9 million barrels per day to sustain the level of consumption." Minister del Pino's view on global oil statistics is a bit surprising. Here is OPEC's most recent estimate with regard to the current global crude production (Venezuela is an OPEC member): World liquids supply in August 2016 decreased by 0.14 mb/d m-o-m to average 95.65 mb/d, but grew by 0.18 mb/d y-o-y. From the same source:…world oil demand growth [in 2016, relative to 2015 - RZ] is now pegged at 1.23 mb/d, with total global consumption at 94.27 mb/d. In 2017, world oil demand growth was kept relatively unchanged… at 1.15 mb/d, with total global consumption forecast at around 95.42 mb/d. Given that summer demand is seasonally higher than the average for the year and using OPEC data, it is not obvious that the market was oversupplied in August or is oversupplied currently. What would happen if Minister del Pino's wish came true and global supply unexpectedly dropped by 9 million barrels a day? I would argue that the current global overstock would come down to a benign level within approximately a month. Within two months, the world would begin to experience acute oil shortages. Strategic petroleum reserves would be tapped. The scenario is obviously from a fiction category. A drop of global oil production by 9 million barrels per day is inconceivable without assuming a catastrophic development such as an act of war affecting several key suppliers in the Middle East.

Israeli consortium signs gas deal with Jordan (AP) — Israel’s Delek Group, one of the developers of the country’s biggest natural gas reservoir, says it has signed a deal to sell gas to neighboring Jordan. The agreement announced Monday would provide 45 billion cubic meters (1.6 trillion cubic feet) of gas to Jordan over 15 years. Delek says revenues could amount to $10 billion. Delek Drilling CEO Yossi Abu hailed the “historic” deal and said developers of the Leviathan reservoir would pursue similar agreements with others in the region, including Egypt, Turkey and the Palestinian Authority. Resource-poor Israel announced the discovery of sizeable offshore natural gas deposits about five years ago, and a partnership of Israeli and U.S. companies, including Texas-based Noble Energy and Delek, have already begun extracting.

Russia's Sakhalin 2016 crude production to grow 8% on year, but slowing -  Russia's Far Eastern Sakhalin region is expected to raise crude and condensate production by 8% this year, but with growth slowing further in coming years, Vera Shcherbina, chairman of the Sakhalin regional government, said Wednesday. The region is expected to produce 18.1 million mt, or 362,500 b/d, this year, according to Scherbina's presentation at the annual Sakhalin Oil and Gas forum in Yuzhno-Sakhalinsk. "Such situation is the result of the dynamic development of projects on the exploration of offshore fields in the Sea of Okhotsk," Shcherbina said. The growth rate is a sharp slowdown from the 15% year-on-year rise in 2015, an increase the regional government doesn't believe can be repeated. In fact, the output volumes are seen flattening in the mid-term, Shcherbina said.Sakhalin's governor, Oleg Kozhemyako, last year forecast the region's crude output would grow to 18.85 million mt by 2020, which means a 4% increase in the course of the next three years. Shcherbina said the volume is achievable, but the region's task is to maintain the output despite the difficult economic situation.

Sharp production falls, strong domestic demand curb Indian gasoline exports - India, Asia's largest gasoline net exporter, shipped out only 1.16 million mt of the fuel in August, down 14.99% on the month and 24.5% lower than a year ago, data from the country's Petroleum Planning and Analysis Cell showed. It was the fourth consecutive month of declines and coincided with a sharp fall in production of non-Bharat Stage III and non-Bharat Stage IV specification gasoline -- the so-called "Others" category, the majority of which is exported. Even bigger falls were seen at the state-controlled Indian Oil Corp. and Hindustan Petroleum Corporation Ltd. IOC posted the biggest drop in crude process volume among all Indian refining companies in August -- down 12.88% on the month company-wide. This was due to 25.11% fall at the 300,000 b/d Panipat refinery and 33.34% fall at the Paradip refinery of the same capacity. Similarly, HPCL saw its 166,000 b/d Visakhapatnam refinery run 29.36% lower on the month. A large amount of production from private refiners was expected to be supplied to the domestic market with the production crunch at state-owned refineries. Further tightening the country's balance was a major spike in domestic consumption. The country consumed 2.2 million mt of gasoline in August, 14.95% more than July and 24.70% higher than a year ago. Production of this grade fell 15.31% on the month in August to 1.22 million mt, the lowest since April 2015. PPAC's crude throughput data showed a 3.78% drop at India's biggest gasoline exporter Reliance, with a total of 6 million mt crude refined.

 Shell Nigeria refuses to confirm oil militants' attack (AP) — Shell Nigeria refused Monday to confirm a report by the Niger Delta Avengers militant group that it has bombed the company’s Bonny oil pipeline and again crippled its exports. Friday night’s bombing breaks a month-long ceasefire between militant groups and the government and comes days after repairs from an earlier attack had allowed Shell’s exports to resume. Shell spokesman Precious Okolobo said only that “We cannot comment on the reported incident.” A contractor working at Bonny terminal said production has fallen significantly since Saturday. He spoke on condition of anonymity for fear of losing his contract. The Niger Delta Avengers said the attack “has brought down oil production activities at the Bonny 48 inches crude oil export line,” which can export 600,000 barrels of oil a day. The Avengers said the bombing was “only a wake-up call” responding to a clampdown by security forces that it said violated the ceasefire. The military reported arresting at least two Avenger commanders last week. The ceasefire was a government precondition for negotiations to end attacks, which officials say have halted 40 percent of oil production and thrown Nigeria into recession. Oil accounts for 70 percent of government revenue and 90 percent of exports. Militants this year have damaged installations of the Dutch-British Shell, the American Chevron and ExxonMobil, the Italian Agip and the French Total. The militants demand that the multinationals leave the Niger Delta, where decades of petroleum production has polluted fishing grounds, agricultural fields and mangrove swamps.

Why Oil Prices Will Rise More And Sooner Than Most Believe - As the September 26 to 28 “informal” meeting of OPEC producers in Algeria draws near, media speculation could easily cause mental anguish. On oil news websites simultaneous headlines claim OPEC will both fail and succeed in capping output. Called by OPEC August 8, the stated purpose of the gathering was, “OPEC continues to monitor developments closely, and is in constant deliberations with all member states on ways and means to help restore stability to the oil market”.  Obviously that is the view of the organization, not the member countries. Iran and Saudi Arabia remain at loggerheads over which will exert the most influence in the Persian Gulf. Iraq, Nigeria, Libya and Venezuela are all experiencing various forms of internal meltdown which thankfully (human suffering notwithstanding) is keeping a lot of oil off the market.  On September 20, OPEC Secretary-General Mohammed Barkindo was talking publicly about a one-year production freeze among OPEC members and Russia. Two days later it was reported the Saudis would cut output if Iran followed. We’ll see. In August, OPEC believed non-OPEC production would fall by 1 million b/d this year from 2015 and a bit more in 2017. Even the most pessimistic estimates for demand growth see 1.2 million b/d this year and next. But there is no consensus on these numbers.  At some point global supply/demand curves will cross enough to cause prices to rise. Some data indicates they already have. With low oil prices causing massive cutbacks in spending on new supplies, everyone agrees oil prices are very unlikely to revisit recent record lows and will rise over time. The question is how much and when. The rest of this article is dedicated to the thesis that the market and the price are not the same thing so nobody actually knows. Despite relentless bad news this means something good could easily occur.  Goldman Sachs Group Inc. analyst Jeff Currie opined there would be no price rally anytime soon.  Curry said, “It really looks similar to the period of the early 1990s, when we were at US$20 oil. Is US$45 to US$50 the new US$20?”.  The problem with the Goldman prognosis is oil markets today look nothing like they did in the early 1990s. Then oil was half-way through an extended period of low prices from 1985 to 2004. It is quite common to say oil markets are similar to what they were 20 and even 30 years ago. Except it’s wrong. Review the following and reach your own conclusion.

Why Oil Prices Can’t Stay Low For Much Longer -- For many oil companies, the current downturn in oil is a back-breaker, but some have adapted to the falling prices and are fighting each day to survive and benefit from the higher oil prices that lay at the end of this dark tunnel. In order to understand the prevailing glut, we have to go back more than a decade when investments into the oil and gas sector began to soar.  As seen in the chart above, the investments have multiplied from their lower levels to about $780 billion in 2014. The rise has been steady throughout, with the only dip coming in 2009. Such huge investments in a single decade resulted in the global oil supply increasing by 13 percent. During the same period, OPEC’s supply increased by 21.6 percent. The massive amount of money being pumped into the oil and gas sector was due to the impressive gains in crude oil during that period. According to an analysis by the Zephirin group; between 2003 to 2013, WTI prices increased by 215.3 percent, whereas, Brent rallied by 276.3 percent. However, demand failed to catch up with the breakneck speed at which oil was being pumped into the market. This ended with a massive oil glut, which has led to the worst oil crisis in decades.There are a number of optimistic voices that point to a steep fall in investments from $780 billion to $450 billion in the past two years. They believe that soon the glut will shift to a deficit due to fewer oil discoveries and aging wells, which will boost prices higher..

What If The Oil Rebound Never Happens? - Oil prices are hovering in the mid-$40s per barrel, and the hopes of a rebound have once again been delayed. The IEA’s September Oil Market Report predicts that the supply/demand equation might not come into balance until next year, suggesting another year of low oil prices. But what if oil prices never rebound? The question seems ridiculous, not only because the oil markets always go through booms and busts, but also because demand continues to rise. Supplies are also falling from high cost areas, ensuring that the supply overhang will eventually be erased. Moreover, the oil industry has made unprecedented cuts in spending on exploration and development. The IEA says the industry cut spending by more than $300 billion over the past two years and a separate estimate from Wood Mackenzie expects oil and gas producers to slash about $1 trillion from spending between 2015 and 2020. Such draconian measures are surely sowing the seeds of another supply crunch, guaranteeing a price spike in the years ahead. But the world is still oversupplied with oil, and the recent ramp up in production from OPEC could lead to low oil prices for a few years. Libya is set to bring back around 600,000 barrels per day (although those claims are questionable), and Nigeria has already returned somewhere between 200,000 and 300,000 barrels per day of interrupted supply. Production in the U.S. has also recently leveled off over the past month at 8.5 million barrels per day, after nearly 18 months of declines. The IEA expects global supplies to exceed demand through next year, and inventories to continue to build through 2017. Crude oil and refined product inventories are only slightly down from record levels, and will take a few more years to get worked through. All of that is to say there is a good chance that ample supplies could ensure relatively low oil prices for several years, perhaps as long as towards the end of this decade.

Goldman Cuts Oil Price Target From $50 To $43 On Rising Global Surplus - While we await every new headline out of Algiers, overnight Goldman threw in the towel on its "transitory" oil market bullishness, and in a note by Damien Courvalin looking "Beyond Algiers, Weakening Oil Fundamentals", the bank cut its Q4 oil price target from $50 to $43, as the bank admits the previously anticipated rebalancing will take longer to achieve, and now expects "a global surplus of 400 kb/d in 4Q16 vs. a 300 kb/d draw previously." Speaking of the Algiers meeting, Goldman also notes that "while a potential deal could support prices in the short term, we find that the potential for less disruptions and still relatively high net long speculative positioning leave risks skewed to the downside into year-end. Importantly, given the uncertainty on forward supply-demand balances, we reiterate our view that oil prices need to reflect near-term fundamentals – which are weaker – with a lower emphasis on the more uncertain longer-term fundamentals." Here is the summary from Courvalin: Oil prices have remained range bound ahead of the OPEC consultation in Algiers this week and as production disruptions have yet to meaningfully ramp up. Statements by participants suggest potentially greater collaboration between OPEC members than in previous attempts, although the outcome of this advisory meeting remains uncertain. Our production forecast continues to reflect a seasonal Saudi production decline into year-end and no growth elsewhere (the equivalent of a deal) with OPEC exc. Libya/Nigeria production growth only resuming in 1Q17.

OPEC Circus Sees Oil Volatility Spike -- All eyes are on Algeria this week where the International Energy Forum is being held. But instead of the conference itself, the global oil markets are anxiously awaiting the developments of an informal meeting to be held on the sidelines of the Forum between OPEC and non-OPEC officials. At the time of this writing, no deal had been announced, although there are some unconfirmed reports that Iran and Saudi Arabia are considering some sort of limit on production. The proposal would call for Saudi Arabia cutting output by several hundred thousand barrels per day if Iran froze production at 3.7 million barrels per day. Oil prices surged on Monday on hopes of a deal, jumping more than 2 percent. However, in early trading on Tuesday, WTI and Brent were back down by more than 2 percent as expectations of an agreement began to fade. The result may not be known until Wednesday, but comments from Iran’s oil minister, saying that the talks were simply “consultative,” seemed to dash hopes of any specific agreement. For now, it appears that if anything is agreed to, it would only be the outlines of a deal, which would make the official Nov. 30 summit in Vienna much more important for finalizing the specifics. Saudi Arabia appears more desperate than Iran. For years, Iran wanted higher oil prices while Saudi Arabia was satisfied letting other producers sweat. But after two years of low oil prices, Saudi Arabia is under serious fiscal pressure, an unfamiliar predicament in Riyadh. Saudi Arabia just announced that it would cut its ministers’ salaries by 20 percent and slash benefits for government employees as the country pursues deeper belt tightening. Meanwhile, Iran is seeing a resurgence in its economy after the lifting of international sanctions and the return of supply. Saudi Arabia has a massive budget hole equivalent to 13.5 percent of GDP, while Iran’s deficit will only reach 2.5 percent of GDP. In other words, Saudi Arabia seems to be more desperate than Iran for higher oil prices.

Crude Crashes As Iran Says "No Deal" After Saudi Offer -- And sure enough, as we noted yesterday, the Saudi "cut" offer that juiced crude yesterday was nothing but a strawman to enable them to pinpoint blame on Iran for the failure of talks. Unwilling to freeze its output - even based on the 'offer' of Saudi cuts - Iran's Bijan Zanganeh exclaimed "it’s not our agenda to reach agreement in these two days," blowing a hole in the hope train for crude's recovery. As Bloomberg reports, Iran is not willing to freeze its oil output at current levels and doesn’t intend to forge an agreement with other major crude producers at talks in Algiers this week, the nation’s oil minister said. Iran wants to raise its crude production to 4 million barrels a day, Bijan Namdar Zanganeh told Bloomberg Television in an interview Tuesday. OPEC’s third-largest producer -- with daily output of 3.6 million barrels last month -- will talk to other members at the International Energy Forum in the Algerian capital and it’s possible the group could reach a formal supply deal at its November meeting in Vienna, he said.  “It’s not our agenda to reach agreement in these two days,” Zanganeh said. “We are here for the IEF and to have a consultative informal meeting in OPEC to exchange views. Not more.” OPEC’s decision to hold informal talks this week has fanned speculation that it might be about to deviate from a two-year-old policy of pumping without limits, which succeeded in hurting rival suppliers but also sent prices into free-fall. Ministers from member countries arriving in Algiers have downplayed the prospect of a deal. Iran rejected Saudi Arabia’s offer last week to cut its own production if Iran capped output at current levels. And the result is clear - yesterday's gains gone...

Oil Pops After Crude Inventories Unexpectedly Drop -- In the week since the last API report, oil has ripped and dipped back to unchanged following an unexpected draw and Algiers disappointment, but prices jumped higher (tagging $45.00) as API noted a 752k draw (4th week in a row). This was dramatially below the 3mm build expected. Cushing, Gasoline, an Distillates all saw inventory draws (the latter's first draw in 7 weeks). API

  • Crude -752k (+3mm exp)
  • Cushing -832k
  • Gasoline -3.7mm
  • Distillates-343k

The last 3 weeks have seen the biggest drawdown in crude inventories (over 4%) since July 2013 and if this 4th week's data holds it will hold the biggest drop in 3 years.

Saudis Offer To Cut Production By 500,000 Barrels: "The Oil Market Situation Is Much More Critical" -- Saudi Arabia's oil policy, unveiled just under two years ago, at the November 2014 OPEC meeting where it effectively splintered the OPEC cartel by announcing it would produce excess quantities of oil in hope of putting shale and other high-cost producers out of business has backfired spectacularly: not only has OPEC failed to crush the US shale industry, which as a result of increasing efficiencies, and debt-for-equity exchanges has seen its all in production costs tumble, making even far cheaper oil prices profitable (especially with the addition of hedges), not to mention Wall Street's ravenous desire to buy any debt paper that offers even a modest yield allowing US oil producers to delay or outright avoid bankruptcy. But while shale has avoided annihilation, it is Saudi Arabia that has been suffering. In "Kingdom Comedown: Falling Oil Prices Shock Saudi Middle Class", the WSJ reports that "a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems." The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction companies suffer from drying up government funding. Those spending cuts are now hitting the Saudi working middle class. Saudi consumers in major cities, the majority of them employed by the government, have become more conscious about their spending in recent months, said Areej al-Aqel from Sown Advisory, which provides financial-planning services for middle-class individuals and families. That means cutting back on a popular activity for most middle-class Saudis: dining out. “Most people are ordering less food or they change their orders to more affordable options,” she said.

 In Oil Price Battle With Saudi Arabia, It's Advantage Iran -- Suddenly the tables have been turned on Saudi Arabia. The biggest oil exporter has swapped its traditional role as price dove with regional foe Iran, for years OPEC price hawk. The government in Riyadh is now offering a deal -- including its first output cut in eight years -- to boost prices; Tehran is dragging its feet. At the center of the reversal is their contrasting thresholds for enduring economic pain. "Both countries are coming from different positions," said Jason Tuvey, Middle East economist at consulting firm Capital Economics. "Iran has been under sanctions until recently, so it’s getting an economic boost as investment returns and oil output rises. Meanwhile, Saudi Arabia is facing steep fiscal cuts." The contrast between the two countries is stark. Iran, never as dependent on oil revenue as its neighbor, has seen prospects boosted by rapprochement with the west. In Saudi Arabia, tentative moves toward economic reform haven’t prevented two years of weak prices causing financial havoc: it’s burning through foreign exchange reserves, government contractors have gone unpaid and civil servants will get no bonus this year. Saudi Arabia will suffer a fiscal deficit equal to 13.5 percent of gross domestic product this year, compared with one of less than 2.5 percent of GDP for Iran, the International Monetary Fund estimates. The IMF says the Saudis need oil close to $67 a barrel to square the books. For Iran, it’s lower, at $61.50. Brent crude, the global benchmark, fell to $46.50 a barrel in early trading in London on Tuesday.When it comes to economic growth, Saudi Arabia is slowing sharply to 1 percent while Iran is accelerating toward 4 percent. The current account -- a broad measure of a country’s economic relationship with the world -- tells the same story. Saudi Arabia faces a double-digit deficit this year; Iran’s is nearly balanced following economic reforms in 2012 and 2013 to weather the impact of international sanctions over its nuclear program. While Iranian President Hassan Rouhani faces elections next May and is under pressure over the country’s economic performance since sanctions were lifted, it’s already been through the austerity that’s only starting in Saudi Arabia, according to Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. "Iran has already been through so much pain, incrementally they aren’t really worse off," she said.

Saudis, Iran dash hopes for OPEC oil deal in Algeria - Iran rejected on Tuesday an offer from Saudi Arabia to limit its oil output in exchange for Riyadh cutting supply, dashing market hopes the two major OPEC producers would find a compromise this week to help ease a global glut of crude. "The gap (in views) between OPEC countries is narrowing. I don't expect that an agreement will come out of the consultations tomorrow," Saudi Energy Minister Khalid al-Falih told reporters. Iranian Oil Minister Bijan Zanganeh said earlier: "It is not the time for decision-making." Referring to the next formal OPEC meeting in Vienna on Nov. 30, he added: "We will try to reach agreement for November." The Organization of the Petroleum Exporting Countries will hold informal talks at 1400 GMT on Wednesday. Its members are also meeting non-OPEC producers on the sidelines of the International Energy Forum, which groups producers and consumers. Oil prices LCOc1 have more than halved from 2014 levels due to oversupply, prompting OPEC producers and rival Russia to seek a market rebalancing that would boost revenues from oil exports and help their crippled budgets. The predominant idea since early 2016 among producers has been to agree to freeze output levels, although market watchers have said such a move would fail to reduce unwanted barrels. A deal has also been complicated by acute political rivalry between Iran and Saudi Arabia, which are fighting several proxy-wars in the Middle East, including in Syria and Yemen.

 Oil prices claw back gains after falling on big gasoline stock build: Oil prices rose on Wednesday, rebounding from a brief fall after government data showed a large rise in gasoline stocks and as the focus shifts to a potential output-curbing deal from OPEC later this year. U.S. commercial crude stockpiles fell by 1.9 million barrels to a total of 502.7 million barrels in the week through Sept. 23. Analysts polled by Reuters had forecast of 3 million barrel build. The drawdown in crude stocks was offset by a 2 million barrel build in gasoline stockpiles, compared with expectations in a Reuters poll for a gain of 178,000 barrels. Higher stockpiles of gasoline typically reduce demand for feedstock crude oil. Brent crude rose 69 cents, or 1.5 percent, to $46.66 a barrel by 12:07 p.m. ET (1607 GMT), trading at roughly the same level as prior to the EIA data. U.S. West Texas Intermediate (WTI) crude was up 51 cents, or 1.1 percent, at $45.18 a barrel.Although chances of a deal being finalized in Algeria today are slim, the Organization Of Petroleum Exporting Countries (OPEC) might still agree an oil output-limiting deal later this year. "The market is still trying to figure out and price the outcome of the meeting at Algeria," said Olivier Jakob, oil analyst at Petromatrix. Saudi Energy Minister Khalid al-Falih said on Tuesday Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits which could be set as early as the next OPEC meeting in November. That represents a strategy shift for Riyadh, which has previously said it would reduce output only if every other OPEC and non-OPEC producer followed suit. Iran has said it should be exempt from such limits because its production is recovering after the lifting of European Union sanctions earlier this year.

Oil Oscillates As Production Drops; RBOB Plunges After Biggest Gasoline Build In 4 Months -- Following the surprising across-the-board inventory draws report by API overnight, DOE confirmed crude's overall draw (-1.88mm bartrels vs +3mm exp). However, gasoline saw the biggest build in 4 months (as distillates saw the biggest draw in almost 2 months). Crudeproduction dropped very modestly on the week but remains stuck around 8.5mm barrels. Oil prices popped then dropped and remain lower for now... DOE:

  • Crude -1.88mm (+3mm exp)
  • Cushing -631k
  • Gasoline +2.03mm (+500k exp)
  • Distillates -1.915mm

Total U.S. imports of crude 7835k b/d vs 8309k Imports into U.S. by country in b/d:

  • Canada imports 3194k vs 3460k
  • Saudi Arabia imports 1272k vs 1100k
  • Venezuela imports 775k vs 791k
  • Mexico imports 434k vs 561k
  • Colombia imports 353k vs 547k
  • Ecuador imports 259k vs 218k
  • Nigeria imports 302k vs 141k
  • Kuwait imports 340k vs 155k, highest since wk of July 22
  • Iraq imports 352k vs 358k
  • Angola imports 99k vs 64k

For the 4th week running crude inventories fell but Gasoline saw the biggest build in 4 months...

Oil futures rally on speculation over OPEC supply deal - Oil | Platts News Article & Story: Oil futures climbed Wednesday after OPEC members appeared to find common ground Wednesday on efforts to limit production, lifting prices off lows seen after US inventory data showed a surprise build in gasoline stocks. NYMEX November crude settled $2.38 higher at $47.05/b. ICE November Brent settled up $2.72 at $48.69/b. NYMEX October ULSD settled 8.11 cents higher at $1.4910/gal. NYMEX October RBOB settled up 8.4 cents at $1.4777/gal.Full ratification of the deal will likely come at OPEC's next formal meeting November 30 in Vienna. OPEC members pumped 33.13 million b/d in August, according to the latest S&P Global Platts survey. Using secondary sources, OPEC reported its output that month at 33.24 million b/d. Media reports that OPEC members might have reached a deal seemed to catch the market by surprise after expectations were lowered earlier this week by Iran's insistence on raising its production. Early Wednesday, Iran appeared open to compromise after Zanganeh said his country would seek an exemption until its production was close to 4 million b/d, rather than his previously stated requirement of 4.2 million b/d. "I don't believe for a second that there will be much of a production cut," said Kyle Cooper, principal at ION Energy. OPEC members seemed to agree on a deal that would limit output to between 32.5 million b/d and 33 million b/d, Iran oil minister Bijan Zanganeh said Wednesday after exiting talks.

Oil jumps after report OPEC reaches deal to limit oil output in November: Oil prices rose as much as 6 percent on Wednesday on a report that OPEC members have reached a deal to limit oil supply. OPEC agreed on Wednesday to reduce its oil output to 32.5 million bpd from the current production levels of around 33.24 million bpd, two OPEC sources told Reuters. The producing group will agree concrete levels of production by each country at its next formal meeting in November, the sources said. One source also said that once production targets were reached, OPEC would reach out to non-OPEC producers for cooperation. Brent crude rose $2.53, or 5.5 percent, to $48.50 a barrel by 2:46 p.m. ET (1846 GMT), trading at roughly the same level as prior to the EIA data. U.S. West Texas Intermediate (WTI) crude settled up $2.38, or 5.3 percent, to $47.05 a barrel.Saudi Energy Minister Khalid al-Falih said on Tuesday Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits which could be set as early as the next OPEC meeting in November. That represents a strategy shift for Riyadh, which has previously said it would reduce output only if every other OPEC and non-OPEC producer followed suit. Iran has said it should be exempt from such limits because its production is recovering after the lifting of European Union sanctions earlier this year. Iranian Oil Minister Bijan Zanganeh said on Wednesday OPEC producers were still trying to reach a deal on output limits and that under any such pact the Islamic Republic would agree to curtail its production "at close to 4 million barrels per day." Iranian output has stagnated at 3.6 million bpd. On Wednesday, Mustafa Sanalla, the head of Libya's state-run National Oil Company, said the country's oil production had more than doubled to 485,000 barrels a day following the reopening of oil ports this month, Dow Jones reported.

OPEC Agrees to First Oil Output Cut in Eight Years - Bloomberg: OPEC agreed to a preliminary deal that will cut production for the first time in eight years. Oil prices gained more than 6 percent as Saudi Arabia and Iran surprised traders who expected a continuation of the pump-at-will policy the group adopted in 2014. The group agreed to drop production to a range of 32.5 to 33 million barrels per day, said Iran’s Oil Minister Bijan Namdar Zanganeh, following a meeting in Algiers. While some members of OPEC will have to cut output, Iran won’t have to freeze production, he said. Many of the details remain to be worked out and the group won’t decide on targets for each country until its next meeting at the end of November. The lower end of the production target equates to a nearly 750,000 barrels-a-day drop from what OPEC said it pumped in August. The deal will reverberate beyond the Organization of Petroleum Exporting Countries. It will brighten the prospects for the energy industry, from giants like Exxon Mobil Corp. to small U.S. shale firms, and boost the economies of oil-rich countries such as Russia and Saudi Arabia. For consumers, however, it will mean higher prices at the pump. "The cut is clearly bullish," "What’s much more important is that the Saudis appear to be returning to a period of market management." The agreement also signals a new phase in relations between Saudi Arabia and Iran, which have clashed on oil policy since 2014 and are backing opposite sides in civil wars in Syria and Yemen. The deal indicates that Riyadh and Tehran, with the mediation of Russia, Algeria and Qatar, were able to overcome the differences that sunk another proposal to cap production earlier this year. Brent crude surged as much as 6.5 percent to $48.96 a barrel in London. The shares of Exxon Mobil, the world’s largest publicly listed oil company, climbed 4.2 percent, the biggest one-day increase since February.

OPEC Agrees to Cut Oil Output -- From Bloomberg: OPEC Agrees to First Oil Output Cut in Eight Years In two days of round-the-clock talks in Algiers, the group agreed to drop production to 32.5 million barrels a day, the delegate said, asking not to be named because the decision isn’t yet public. That’s nearly 750,000 barrels a day less than it pumped in August.  As OPEC agreed to limit its output, Russia smashed a post-Soviet oil-supply record, pumping 11.1 million barrels a day in September, up 400,000 from August, according to preliminary estimates. Russia participated in the Algiers talks, but it’s not party to the OPEC deal. This graph shows the year-over-year change in WTI based on data from the EIA. Five times since 1987, oil prices have increased 100% or more YoY. And several times prices have almost fallen in half YoY. Brent and WTI oil prices are now up about 5% year-over-year. The second graph shows WTI and Brent spot oil prices from the EIA. (Prices today added). According to Bloomberg, WTI is at $46.83 per barrel today, and Brent is at $48.41. Prices really collapsed at the end of 2014 - and then rebounded a little - and then collapsed again at the end of 2015 and in early 2016. Who knows if this agreement will hold, but it seems likely that oil prices - and eventually gasoline prices - will be up year-over-year at the end of 2016 and no longer a drag on CPI.

 Relief arrives for U.S. shale firms as OPEC folds in price battle | Reuters: It was a moment U.S. shale oil producers have been waiting on for more than two years: OPEC nations finally agreed to cut production on Wednesday in a move that lifted low prices ravaging their budgets. Two sources in the Organization of the Petroleum Exporting Countries said the group would reduce output to 32.5 million barrels per day (bpd) from current production of 33.24 million bpd, by around half the amount of global oversupply. The agreement effectively establishes a floor on prices near $50 a barrel - around where many U.S. shale oil companies can make money and drill new wells. The floor is twice as high as where oil languished in the depths of the downturn. "This gives U.S. producers more confidence,” said James West, partner at the investment firm Evercore ISI in New York. “They may become a touch more aggressive than they had planned to be.” U.S. benchmark crude rose more than 5 percent to $47 a barrel on the news, pending final details about the cut, which won't be known until after another OPEC meeting in November. One U.S. shale oil industry veteran likened the results of the prolonged price war to a bruising 12-round boxing match that ended in a technical draw. After OPEC in mid-2014 let oil prices fall as it sought to regain market share, dozens of small and high-cost U.S. producers fell into bankruptcy. Meanwhile, budgets of OPEC members from Venezuela to Angola shrank on a 60 percent slide in crude prices. And two days before the deal was announced, Saudi Arabia cut ministers' salaries by 20 percent and scaled back financial perks for public sector employees.

Not Even An OPEC Deal Will Stop Oil Going Lower, Goldman Warns - Having been bullish for nearly half a year, yesterday Goldman's flipped again, when it cut its Q4 oil price target from $50 to $43, admitting the previously anticipated rebalancing will take longer to achieve, and now expects "a global surplus of 400 kb/d in 4Q16 vs. a 300 kb/d draw previously." Moments ago, the same Goldman analyst released a follow up note, confirming what we have been saying for the past year, namely that OPEC is increasingly irrelevant as a marginal supply-setter in a world in which it is the lack of demand that is a far bigger threat. In "OPEC won't stop oil going", Damien Courvalin writes that "an OPEC deal to curb oil production, either today or at the November meeting, is thought more likely than at any point in the past two years." That said, he notes, "we remain sceptical of its impact. For one, our production forecast continues to reflect a seasonal Saudi production decline into year-end, with no growth elsewhere. Second, even with this OPEC help, our updated oil supply-demand forecast now points to a renewed build in inventories in 4Q 2016 vs. a forecast for a draw only last month. This weaker oil outlook into year-end led us yesterday to lower our year-end WTI oil price forecast to $43/bbl, from $51/bbl previously. Given a well-supplied market and a crude curve in contango (with limited spot upside)." Here are the details behind Goldman's pessimism:Intraday oil price volatility has picked up over the past week and ahead of today’s OPEC advisory meeting in Algiers. Statements by participants suggest a deal to curb production today or at the next meeting in November is more likely than at any point over the past two years. We remain sceptical of its impact, for two reasons: (1) independent of today’s outcome, our production forecast continues to reflect a seasonal Saudi production decline into year-end and no growth elsewhere, the equivalent of a deal; and (2) even with this OPEC help, our updated oil supply-demand forecast now points to a renewed build in inventories in 4Q 2016 vs. a forecast for a draw only last month.

 Fade OPEC -- From CLSA:

  • At the conclusion of the Algeria meeting, Reuters is reporting OPEC has agreed to limit production
  • The agreement would be finalized at the next OPEC meeting on November 30, 2016
  • OPEC is supposedly limiting its output to 32.5 mmbpd, which is effectively where OPEC was in January 2016.
  • But in August, output reached 33.47 mmbpd, which implies a 1 mmbpd cut.
  • The delta from August output levels is contributing to the market jolt
  • But remember, Saudi Arabia oil output spikes in the summer due to cooling demand
  • What is unclear is Iran and Libya
  • Iran is at 3.6 mmbpd with a target of 4.2 mmbpd…and a staunch resistance to freezing until reaching 4.2 mmbpd
  • Libya is at 0.3 mmbpd with a target to recover to 1.0 mmbpd by year-end (aggressive)

All-in, if the 32.5 mmbpd number is accurate, then OPEC is rolling back to January levels, which is effectively what it had previously suggested it might due. The market response is not surprising, but probably not sustainable either. The devil is in the details and we still do not know how Iran and Libya fit into the equation, or if this is just another proposal that will be dismissed by Iran. Shale oil economics are an increasingly convincing and credible source of supply growth. Initial production rates have jumped 50 – 100% just in the span of a few years. Spud-to-pipe times have also dropped to 135 days for a pad of three wells, down 13% from 2015. Oil prices sustained in the low $50s is the level that seduces more capital in shale…thus Saudi better be careful what it wishes for. We already expect supplies to flatten out in the US in early 2017 with limited increases in rig activity. A rebirth of activity could prompt a rapid rise in US oil output within 6-months, offsetting OPEC’s efforts once again.  Russia, the world’s largest energy exporter, is reportedly on course to pump a post-Soviet record amount of oil in September, adding as much as 400,000 barrels a day to the country’s production.  Who is going to cut? Iran? No. Iraq? No. Libya? No. Nigeria? No. The tiddlers? No. Maybe Kuwait but without the others? Saudi is nodding at itself in the mirror. It cuts unilaterally or there is no cut.

 OPEC deal shows Saudi oil strategy has backfired, says John Kilduff: The concessions offered by Saudi Arabia in its bid to lock down a deal to limit the globe's oil supply show the world's largest crude exporter is getting pinched by its own policy, Again Capital founding partner John Kilduff said Wednesday. Sources told Reuters that OPEC hammered out a deal on Wednesday to reduce the cartel's production to 32.5 million barrels per day from around 33.24 million, with output levels for each member to be determined in November. The Saudis decided in November 2014 to allow an oversupplied oil market to balance on its own, rather than coordinating an oil output cut among OPEC members. The policy was designed to reduce supply by washing out high-cost producers — such as U.S. shale drillers — but the strategy has also piled pressure on Riyadh. Saudi Arabia's foreign exchange reserves have fallen 20 percent over the last two years, to $587 billion through March, the last month for which IMF data were available. On Monday, the kingdom said it would cut ministers' pay by 20 percent and pare perks for public sector employees, who make up two-thirds of the country's workforce, Reuters reported. The move to squeeze public employees came ahead of an informal gathering of OPEC members and other producers at a previously scheduled meeting in Algeria to discuss a plan to stabilize oil prices, which remain nearly 60 percent below their 2014 peak."The big takeaway is how into a corner the Saudis have backed themselves. This whole plan has backfired on them. They're going to be bearing most of the cutback if they pull it off, and they've had to really kowtow to the Iranians in this whole thing," Kilduff told CNBC's "Power Lunch."

Crude Declines As OPEC Deal Doubts Emerge; Futures Roll Over After oil soared over 5% yesterday, its biggest jump since April which pushed the commodity to a three week high on the unexpected announcement that OPEC had agreed on cutting as much as 700kbpd in production (without providing any actual detail who would cut), overnight skepticism and doubts have emerged about the viability and compliance with the deal, coupled with a boost in production by non-OPEC producers, and as a result WTI has dipped back under $47, down 0.5%, suggesting that the OPEC surge may be short-lived and modestly pressuring US equity futures.“Skepticism on the implementation is probably weighing on prices today - but we also need to see how the U.S. market reacts,” says Giovanni Staunovo, commodity analyst at UBS.The modest rolloff in oil prices has also put a "cap" on US equity futures overnight, which were trading roughly unchanged during the overnight session, but not before yesterday's euphoria pushed stocks in Asia and Europe higher. India’s assets fell after it attacked terrorist targets in Pakistan.Energy companies led gains on the MSCI All-Country World Index, which is on course for its best quarter since 2013. Sovereign bonds fell amid speculation higher energy prices will revive inflation. After posting its biggest gain in five months, crude slipped under $47 a barrel. India’s rupee fell the most in three months after the biggest military escalation since 199For those who missed yesterday's main event, Bloomberg conveniently summarizes that OPEC said its members agreed a preliminary dto trim production to a range of 32.5 million to 33 million barrels per day following informal talks in Algiers, although it won’t decide on targets for each country until a November meeting in Vienna.

Goldman Says OPEC Deal May Add Up To $10 To Price Of Oil, Two Days After Cutting Oil Price Target By $7 -- Goldman has done it again. Two days after the central banker-incubator cut its year end price target from $50 to $43, admitting the previously anticipated rebalancing will take longer to achieve, and now expects "a global surplus of 400 kb/d in 4Q16 vs. a 300 kb/d draw previously", and followed the next day by a report in which it said that not even an OPEC deal would stop oil going lower, overnight the very same analyst, just 24 hours after saying the opposite, Goldman's Damien Courvalin said that the OPEC agreement will "likely provide support to prices, at least in the short term" and added that the announced production quota should boost the price of oil by $7/bbl - $10/bbl. Again: this is two days after cutting the 2016 price target by $7, and one day after saying an OPEC deal would have no impact.Still, trying to avoid looking like a total flip-flopper, Courvalin adds that "at the historical average 4.8% production beat relative to quotas, this target would be 33.7 mb/d, above current production levels. It has historically taken a fall in oil demand to ensure quota compliance, as in that case, production is forced lower by a decline in refinery intake around the world. This is not the case today with resilient demand growth" and said that "we maintain our year-end $43/bbl and 2017 $53/bbl WTI price forecasts given: (1) uncertainty on this proposal until it is ratified, (2) likely quota beats if ratified, (3) potential for production above our cautious forecasts in areas of disruptions (as was the case today in Libya and KRG), and (4) our conservative supply forecasts outside of OPEC for next year."Then again, the only thing that will be stuck in algos' random access memory is that Goldman now expects oil to rebound by up to $10/bbl, which may explain why oil is now rolling over.Here is Goldman's full note for those who care:

 Oil Prices Climb After OPEC Deal - WSJ: Oil prices continued to push higher Thursday, building on gains following the Organization of the Petroleum Exporting Countries’ agreement to cut output. OPEC’s surprise proposal prompted the largest daily gains in crude prices since April on Wednesday, and the rally continued Thursday even as many investors have raised questions about whether the cartel’s members would stand by an agreement and over how much sway the cartel now has over a market still brimming with crude from around the world. West Texas Intermediate crude rose 78 cents, or 1.66%, to $47.83 a barrel on the New York Mercantile Exchange. Brent crude, the global oil benchmark, rose 55 cents, or 1.13%, to $49.24 a barrel on London’s ICE Futures exchange. “Beyond a doubt, I think this is credible,” “There is a lot of concern from the major suppliers that things are going to get worse—this cut is the tip of the iceberg.”The group reached an understanding at a meeting Wednesday in Algeria that there was a need to scale back production. It agreed on a preliminary outline to cut its collective output to between 32.5 million barrels a day and 33 million barrels a day, down from the levels of 33.2 million barrels a day in August, national oil ministers said. OPEC members will wait until the next official meeting in November to complete the details, including the quota for individual producers. The agreement hasn’t been enough to break crude from the roughly $40-to-$50 range it has traded in for months, but some analysts said any sign of cooperation from the group is bullish for the oil market. “You want to see actions not words, but quite frankly, over the last few years, they haven’t even been able to deliver words, so this is a step forward,”

Iraq Revolts, Says "We Cannot Accept" OPEC Deal In This Form - While historically the major conflict within OPEC in recent years had been between Iran, whose oil production had been mothballed since 2013 as a result of the US embargo and which is now eager to regain its roughly 4mmbpd in production, and Saudi Arabia, which successfully picked up market share from Iran, a new source of contention within OPEC emerged last night when Iraq disagreed with OPEC's method of production estimates as reported last night. And now it appears that Iraq - which in August produced between 4.4mmbpd and 4.6mmbpd depending on whose estimates are used, will not be easily placated. As Reuters details, Iraq, which overtook Iran as the group's second-largest producer several years ago but kept its OPEC agenda fairly low-profile, on Wednesday finally made its presence felt. "What it did, however, pleased neither Saudi Arabia nor Iran."Iraq's new oil minister Jabar Ali al-Luaibi told his Saudi and Iranian counterparts, Khalid al-Falih and Bijan Zanganeh, in a closed-door gathering in Algiers that "it was an OPEC meeting for all ministers", a source briefed on the talks said. Luaibi, it turns out, is also the key OPEC member who "didn't like the idea of re-establishing OPEC's output ceiling at 32.5 million barrels per day (bpd), according to OPEC sources." Continuing the point made first yesterday, Luaibi told the meeting that the new 32.5 mmbpd ceiling was no good for Baghdad as OPEC had underestimated Iraq's production, which has soared in recent years. Confusion followed, according to Reuters sources, and after a debate OPEC chose to impose a ceiling in the range of 32.5-33.0 million bpd - a decision dismissed by many analysts as weak and non-binding. OPEC's current output stands at 33.24 million bpd.  "These figures do not represent our actual production," he told reporters. If by November estimates do not change, "then we say we cannot accept this, and we will ask for alternatives".

 US oil rig count rises for 13th week in 14, up 7 rigs to 425: Baker Hughes - Oil prices were on track to their largest weekly advance in more than month on Friday, supported by planned OPEC output cuts, but profit-taking after a two-day rally kept benchmark crude contracts below the key $50 per barrel mark. Also on Friday, the U.S. oil rig count rose by 7 to a total of 425, marking the 13th time in the last 14 weeks the tally has ticked up, oilfield services firm Baker Hughes reported. At this time last year, U.S. drillers were operating 614 oil rigs. On a weekly basis, Brent was up nearly 7 percent, while WTI had climbed 8 percent from last Friday's close. On Friday, the two benchmarks diverged. Global benchmark Brent crude futures were down 29 cents at $48.95 a barrel by 1:04 p.m. ET (1704 GMT), but still nearly five percent higher than levels seen before the OPEC agreement on Wednesday. U.S. West Texas Intermediate crude futures were up 24 cents at $48.07 a barrel. For the quarter, Brent was down about 1 percent and WTI about 0.5 percent lower.

U.S. Oil Rig Counts Rise Again On Permian, Williston Gains -- The U.S. oil rig count rose by seven this week to 425, according to Baker Hughes (BHI) data out Friday, as drilling ramps up in the Permian Basin. Oil rigs have risen in the past 13 out of 14 weeks. In the latest week, rigs in the Permian rose by three to 204. In the Williston formation, they rose by two to 30, and the Cana-Woodford play saw an increase of two to 35. Eagle Ford rigs were steady at 33. Total oil and gas rigs in the U.S. rose 11 to 522. U.S. crude was up 0.6% to $48.10 per barrel. Brent crude dipped 0.5% to $49.00. On Wednesday, the Organization of the Petroleum Exporting Countries agreed to cut output to 32.5 million-33 million barrels per day in November. OPEC's move could bring more rigs online in the U.S. as prices near $50.U.S. rig counts are expected to rise next year. Rigs in operation will average 579 for 2017, up 29% from what's expected this year, according to a study out Wednesday by Platts RigData, a forecasting unit of S&P Global Platts. Analysts forecast 11,151 new wells to be drilled next year, up 25% from the 8,915 wells expected to be started this year.

Saudi Arabia Injects $5.3 Billion Into Banks to Ease Crunch -- Saudi Arabia’s central bank stepped up efforts to support lenders in the Arab world’s biggest economy as they grapple with the effects of low oil prices. The Saudi Arabian Monetary Agency, as the central bank is known, said it decided to give banks about 20 billion riyals ($5.3 billion) in the form of time deposits “on behalf of government entities.” It’s also introducing seven-day and 28-day repurchase agreements, as part of its “supportive monetary policy.” The plunge in oil prices over the past two years forced the government to draw down on its deposits in the banking system, squeezing domestic liquidity. That’s pushed up the three-month Saudi Interbank Offered Rate, a key benchmark used for pricing loans, to the highest level since 2009. The central bank was said to have offered lenders 15 billion riyals in short-term loans in June to help ease liquidity constraints. The move is “the next step in the continuing story we’ve been hearing since the start of the year on the tightening of liquidity among Saudi banks and a follow-on to the first injection provided to banks earlier this year,” said Murad Ansari, a Riyadh-based analyst at investment bank EFG-Hermes. “The liquidity situation remains challenging. However, it shows that the central bank will continue to support Saudi banks.” The announcement comes as the world’s biggest oil exporter prepares to sell its first international bonds to finance a budget deficit that the International Monetary Fund expects to reach about 13 percent of economic output this year. The economy will likely expand 1.1 percent in 2016, according to a Bloomberg survey, the slowest pace since 2009.

Saudi Arabia Cancels Public Sector Bonuses, Slashes Salaries -- While Saudi Arabia scrambles to boost the price of oil without undoing the policy it itself unleashed at the November 2014 OPEC meeting, its economy continues to founder as reportedmost recently on Sunday. The latest indication of just how pressured Saudi budgets have become as a result of persistently low oil prices, a function of the Saudi strategy to push shale producers out of the market, came moments ago when Reuters reported that Saudi Arabia's government has decided to curb to some financial perks for public sector employees,according to a live broadcast of the cabinet's weekly meeting. "The cabinet has decided to stop and cancel some bonuses and financial benefits,"read a line of text on Ekhbariya TV, as a minister read to assembled ministers and royals, including King Salman, a list of cuts to be made in various grades in the civil service.A royal decree read on the channel following the broadcast announced a cut to ministers' salaries by 20 percent and to members of the appointed Shoura Council by 15 percent.  The decision comes as low oil prices have pushed energy-rich Gulf Arab states to rein in lavish public spending. So what are Saudi's options ? Well, if it wishes to undo nearly 2 years of oil policies, it will have to do one of two things. It could claim that supply and demand are now in balance, and it's time for OPEC to manage production again and boost prices. That would stretch the limits of credibility when OPEC's just published forecasts that rebalancing won't happen until the second half of next year. Or, as Bloomberg's Julian Lee writes, Saudi Arabia could admit to its fellow OPEC members that it had got it wrong. "You can just picture the scene in Algiers:"

Saudi Arabia is showing signs of financial strain as its relationship with the US sours | The Independent: Hundreds of foreign hospital workers in Saudi Arabia, unpaid for seven months, went on strike this week and were blocking a highway in Eastern Province in defiance of the ban on strikes and demonstrations in the Kingdom. The employees’ anger was deepened by the belief that the same employer who has been holding back their salaries, regularly offers massive fees to attract international singers to perform at his parties. Things are not well in Saudi Arabia and this week there were two pieces of bad news. Hitherto, there have been protests like this by foreign employees suffering from the knock-on effects of cuts in state expenditure following the drop in the oil price. In work camps far out in the desert workers complain that, not only have they stopped receiving money owed to them, but they are no longer even receiving supplies of food and electricity. Footage shows extent of child malnutrition in Yemen as Britain continues to sell arms to Saudi Arabia But now cuts are extending to the public sector workers who are Saudi citizens, 70 per cent of whom work for the government. So far the austerity is limited, with lower bonuses and overtime payments and a 20 per cent reduction in the salaries of ministers, though those close to political power are unlikely to be in actual need. There are political dangers in this strategy. In the oil states of the Middle East there is a trade-off between the spectacular wealth of a corrupt and autocratic elite and an extensive patronage system through which much of the rest of the native population plugs into oil revenues. Some $120bn, or half of government spending, went on salaries, wages and allowances in 2015.

Gulf States Continue Bumper Debt Issuance, Bahrain Next in Line - WSJ: Bahrain has hired banks to sell bonds to international investors, the latest in a long line of Gulf states raising money to replace revenues lost to falling energy prices this year. The country has hired banks to arrange a series of investor meetings in the Middle East, the U.S., Asia and the U.K, starting Wednesday, one of the banks involved said on Tuesday. If successful, those meetings will be followed up by a U.S. dollar benchmark dual-tranche transaction, the bank said. States in the Persian Gulf have been issuing bonds at their fastest pace ever this year, raising cash to replace lost oil revenue as the energy bust continues. Still, the Bahrain deal would be the first since the start of the summer. The Gulf Cooperation Council states of Saudi Arabia, United Arab Emirates, Bahrain, Kuwait, Qatar and Oman together have raised a record $18 billion in 2016, according to Dealogic. Analysts at Oxford Economics predict an unprecedented amount of new international sovereign debt from the oil-rich region over the next few months, triggered by large fiscal deficits. Tight market liquidity, ratings downgrades and pessimism over the outlook for oil prices, however, means the issues will need to be priced attractively to success, the analysts said. In February, Bahrain canceled a $750 million bond sale after Standard & Poor’s downgraded its credit rating it to junk, although later that month it completed a $600 million bond sale. In a June review S&P affirmed its rating and said the stable outlook on the sovereign’s rating reflected expectations that the country’s modest economic growth could offset ongoing fiscal and external pressures over the coming 12 months. The issuance would be made up of a so-called sukuk bond and a longer-dated conventional tranche, subject to market conditions, the bank said.Sukuk bonds are structured to abide by Islamic law which forbids conventional interest payments. Instead, they are usually backed by assets or cash.

A Disgusting, Child-Murdering Vote – On The $1.15 billion Saudi Arms Sale -- Matthew Cunningham-Cook - In a craven act of genocidal depravity, the US Senate voted Wednesday to approve yet another tranche of weapons sales to the far-right Wahhabist theocracy of Saudi Arabia, bringing the total to over $20 billion in sales since the Saudi war began in March 2015. Those weapons will be used in the Saudis’ campaign of extermination against the civilian supporters of the Houthis, a postcolonial-nationalist militia aligned with Tehran. Because of Saudi Arabia’s indiscriminate bombing of civilians, 14.4 million people in Yemen, out of 25.4 million, are food insecure, according to the World Food Program. On September 21 the BBC released a harrowing documentary on malnutrition among children in Yemen, all a direct result of the Saudi bombing campaign.  Over 4,000 civilians have been killed by the Saudi’s bombing campaign, with likely countless more dead from ancillary effects of malnutrition. The region includes wartorn Somalia–the recipient of numerous US interventions and the site of ongoing drone strikes and US special forces presence–and the dictatorial, pro-US regime in Ethiopia that is also waging a campaign of mass slaughter and starvation, except against its Oromo ethnic plurality and rural villagers. All three countries sit at the center of the Mandeb Strait, a key strategic chokepoint that features around 7% of the world’s oil tanker transportation. Directly north is the fiercely independent nation of Eritrea, one of just two nations in Africa to not cooperate with the US military in its neo-colonial Africom project. What in particular concerns Washington and Riyadh is that a Houthi Yemen would align itself with Iran and Eritrea, forming a counter-hegemonic bloc at the epicenter of global oil transportation and production. That just can’t happen. Hence the campaign of starvation against the Yemeni people. It’s not without historical precedent–the British effort to head off anti-colonial disruption in Bengal by artificially raising the price of food in Bengal, leading to the starvation of over 4 million people, comes to mind. 

Lawmakers Vow Override of Obama's 9/11 Victims Bill Veto - Throughout Obama’s presidency, his vetoes have always survived Congressional challenges. That his first might be a bill about Saudi Arabia reflects waning Saudi influence in lobbying Congress to get their way, and what would likely have once been a very safe veto is now at serious risk. Obama’s Friday veto of the Justice Against Sponsors of Terrorism Act (JASTA) aims to block a bill that would allow family members of 9/11 victims to sue Saudi Arabia in American courts.The House and Senate both passed JASTA unanimously, and many in both parties are expressing confidence they have the votes for an override of the veto. The House was widely expected to override easily, but Sen. Chuck Schumer (D – NY) insisted that the Senate too would “quickly” override Obama’s veto, insisting that the Saudis must be held accountable if the courts find they were culpable in 9/11. President Obama has warned that the JASTA would set a dangerous legal precedent, warning that allowing individual lawsuits against the Saudi government could lead to other countries allowing their own citizens to sue the US government over its own misdeeds. The Administration had originally hoped to keep the veto and override votes until after the November elections, hoping it would make newly reelected senators more willing to listen to Saudi lobbyists and less concerned about strong voter support for the bill. Saudi lobbying clearly isn’t what it once was, however, and those senators that switch sides on the override now risk serious repercussions in the election.

U.S. Corporations Side With Saudi Arabia Against The American People Over 9/11 Victims Bill -- Shortly after the release of the infamous 28-pages earlier today, the White House issued a statement dismissing allegations of Saudi involvement in the attacks of 9/11. I believe such assurances are intended to prevent people from reading it in the first place, because if you actually read them, your mouth will be wide open the entire time in disbelief.There are only two conclusions any thinking person can come to after reading the 28-pages.

  • 1. Elements within the Saudi government ran the operations behind the 9/11 attack.
  • 2. The U.S. government covered it up.

From The 28-Pages Are Way Worse Than I Thought.  If you want to know just how insignificant the interests of the American people are when they happen to conflict with the profit margins of multinational corporations, the following article should leave little doubt. Politico reports: Saudi Arabia is mounting a last-ditch campaign to scuttle legislation allowing families of victims of the Sept. 11, 2001 attacks to sue the kingdom — and they’re enlisting major American companies to make an economic case against the bill. General Electric, Dow Chemical, Boeing and Chevron are among the corporate titans that have weighed in against the Justice Against Sponsors of Terrorism Act, or JASTA, which passed both chambers unanimously and was vetoed on Friday, according to people familiar with the effort. The companies are acting quietly to avoid the perception of opposing victims of terrorism, but they’re responding to Saudi arguments that their own corporate assets in the kingdom could be at risk if the law takes effect.

 Congress Votes to Override Obama Veto on 9/11 Victims Bill - — An overwhelming majority in Congress on Wednesday overturned President Obama’s veto of legislation that would allow families of those killed in the Sept. 11, 2001, terrorist attacks to sue Saudi Arabia for any role in the plot, the first successful override vote of his presidency.  The 9/11 override is a remarkable yet complicated bipartisan rebuttal, even as some of its supporters conceded that they did not fully support the legislation they had just voted for. Mr. Obama and his allies vowed to find a way to tweak the legislation later.  In recent days, Mr. Obama, Defense Secretary Ashton B. Carter and General Joseph F. Dunford Jr., the chairman of the Joint Chiefs of Staff, all wrote letters to Congress warning of the dangers of overriding the veto.The law “could be devastating to the Department of Defense and its service members,” Mr. Obama wrote, “and there is no doubt that the consequences could be equally significant for our foreign affairs and intelligence communities.” The White House and some lawmakers were already plotting how they could weaken the law in the near future.Yet most of Mr. Obama’s greatest allies on Capitol Hill, who have labored for nearly eight years to stop most bills he opposes from even crossing his desk, turned against him, joining Republicans in the remonstrance.Only one senator, Harry Reid, Democrat of Nevada, sided with the president as 97 others voted Wednesday to override. In the House, the veto override was approved a few hours later, 348 to 77. The bill succeeded not with significant congressional debate or intense pressure from voters, but rather through the sheer will of the victims’ families, who seized on the 15th anniversary of the attack and an election year to lean on members of Congress. That effort was aided by the waning patience of lawmakers with the kingdom in recent years. The Senate vote also represents another White House miscalculation on Capitol Hill, where it was once again slow to pressure members and to see the cracks in its firewall against the bill.

Obama Humiliated: Senate Overrides President's Veto Of "Sept 11" Bill In Crushing 97-1 Vote –- Late last Friday, we reported that in a troubling development for all Americans, Barack Obama sided with Saudi Arabia when he vetoed the Justice Against Sponsors of Terrorism Act , better known as the "Sept 11" bill, allowing Americans to sue Saudi Arabia over its involvement in terrorism on US soil, passed previously in Congress, despite clear signs that the veto may be rejected by both the Senate and the House. Moments ago, that is precisely what happened, when the Senate voted overwhelmingly 97 to 1, to override President Obama’s veto of a bill letting the victims of the 9/11 attacks sue Saudi Arabia, striking a blow to the president on foreign policy weeks before he leaves office. The vote marks the first time the Senate has mustered enough votes to overrule Obama’s veto pen.As the Hill reported, not a single Democrat came to the Senate floor before the vote to argue in favor of Obama’s position. Obama has never had a veto overridden by Congress. Lawmakers don’t want to be seen as soft on punishing terrorist sponsors a few weeks before the election, at a time when voters are increasingly worried about radical Islamic terrorism in the wake of recent attacks in Manhattan, Minnesota and Orlando, Fla. Oddly enough, Obama had no problem with those particular optics.

9/11 Bill Crashes Saudi Stock Exchange, Bond Market Ambitions - With oil prices continuing to languish below $50 per barrel, the major oil producers in the Middle East are seeing their financial positions deteriorate. To plug the gap in the government budgets, the Gulf States are having to turn to the international bond markets. Saudi Arabia plans on taking out $10 billion to $15 billion in debt from international financial markets, but a controversial piece of legislation passed by the U.S. Congress could complicate Saudi Arabia’s plans. Congress passed a bill that would allow the victims of the September 11, 2001 attacks to sue Saudi Arabia for its potential involvement. President Obama opposes the legislation for fear of damaging America’s relationship with Saudi Arabia, but the U.S. Senate, with huge levels of support, overrode the president’s veto. The issue is rattling confidence in a crucial strategic and economic alliance between the U.S. and Saudi Arabia. Riyadh has threatened to sell off U.S. treasuries if the bill moves forward. As the veto override vote has worked its way through the Senate, Saudi Arabia’s currency plunged to its lowest level in four months, and its stock market “lost the most in the world for a second straight day,” Bloomberg reported. Bloomberg follows 90 stock indices, and Saudi Arabia’s Tadawal All Share Index was the worst performer in recent days, falling to its lowest point since the beginning of this year (a time when oil prices dropped to below $30 per barrel). This could complicate or delay Saudi Arabia’s bond sale, sources told Bloomberg. The 9/11 bill could interrupt Saudi Arabia’s plans for a bond offering, but it probably won’t derail the effort. The potential rift between the Washington and Riyadh probably won’t be a deal-breaker for Saudi Arabia’s plans for new debt issuance. “It is simply a matter of when, not if, Saudi Arabia decides to tap the international debt capital markets," “This doesn’t change the fact that Saudi Arabia needs to raise a substantial amount of cash through the bond markets.”

Panic In The Kingdom: Saudi Currency, Bonds, Banks Extend Collapse Despite OPEC 'Deal' -- Following Obama's 9/11 bill veto defeat yesterday, and despite a surge in oil prices after a 'deal' was struck by OPEC, Saudi Arabia's markets are signaling panic in The Kingdom.Currency forwards are collapsing, default risk is jumping, and bank stocks are hitting record lows... Mint's Bill Blain, in his Morning Porridge noted that last nights “surprise” OPEC agreement to agree to agree about talks on cutting oil production is fascinating. Not from the likelihood it may not ever happen, (the earliest we will know is the Vienna meeting in November), but what it tells us about how the sands are shifting around Saudi Arabia. Deliberate Saudi over-production caused the oil glut and was a policy designed to take out expensive US producers. Voodoo economics didn’t work – US producers cut and adapted, and the rest of the world hasn’t played along. Last night’s agreement represents a fundamental shift in Saudi – a wake up and smell the camel-waste moment. The result is the kingdom is suffering rising twin deficits amounting to over 20% of GDP. As global oil revenues have tumbled on the back of crashing prices, Saudi faces a cash and spending crisis for which it’s largely unprepared. Social issues are mounting. The elites “salaries” have been slashed. It’s being forced towards the international debt markets – a massive deal is on the new issue stocks. My colleague Martin Malone expects to see Debt/GDP rise from 15% to 50%.

Saudi Arabia Reacts To Sept. 11 Bill Veto Override -- In the aftermath of yesterday stunning snub of Barack Obama, when the Senate overrode Obama's veto of the Justice Against Sponsors of Terrorism Act, or JASTA (aka the Sept.11 bill which would allow US citizens to sue Saudi Arabia over the Sept. 11 attack) with a whopping 99 votes, followed shortly by the same outcome in the House, there was just one question on everyone's mind: would Saudi Arabia make good on its threat from April to sell some or all of its over half a trillion in foreign reserves. And while so far there has been nothing but a stony silence from Riyadh, some Saudis have bristled, saying the kingdom should curb business and security ties in response. To be sure, Saudi's government is in a tight spot as it has always dismissed suspicions that it backed the Sept 11 attackers even though the release of the "28 pages" clearly confirmed Saudi involvement. In the coming weeks it will have to not only simply deny, but also prove in a court of law it had no involvement when an avalanche of lawsuits hits it. While the Saudi government financed an extensive lobbying campaign against the "Justice Against Sponsors of Terrorism Act", or JASTA, in the run-up to the vote, and warned it would undermine the principle of sovereign immunity, Saudi officials who had lobbied against the bill stopped short of threatening any retaliation if the law was passed. Officially. Unofficially the NYT reported on April 15 that Saudi Arabia had told the Obama administration and members of Congress that it will sell off hundreds of billions of dollars’ worth of American assets held by the kingdom if Congress passes the JASTA bill. For now, however, there is no official statement, and no official reaction from Saudi Arabia after the votes, and in the short-term, few expect little more than a curt statement of disapproval from Riyadh. However, unofficial channels have been more forthcoming. As Reuters reports, the long-standing alliance between the kingdom and the United States is one of the cornerstones of Middle East politics, security and trade, and in their reactions on Thursday some Saudis said JASTA would jeopardize what they see as an interdependent relationship. "What would happen if Saudi Arabia froze its cooperation with the United States with regards to counter-terrorism as a response to JASTA?" Salman al-Dosary, editor-in-chief of the pan-Arab, Saudi-owned Al Sharq al-Awsat newspaper, wrote on Twitter.

Iran oil industry fires, blasts raise suspicions of hacking  (AP) — A series of fires at Iranian petrochemical plants and facilities have raised suspicions about hacking potentially playing a role, with authorities saying that “viruses had contaminated” equipment at several of the affected complexes. Iran officially insists the six known blazes over the span of three months weren’t the result of a cyberattack. However, the government acknowledgment of supposedly protected facilities being infected points to the possibility of a concerted effort to target Iranian infrastructure in the years after the Stuxnet virus disrupted thousands of centrifuges at a uranium enrichment facility. Among the worst of the fires was a massive, days-long inferno in July at the Bou Ali Sina Petrochemical Complex in Iran’s southwestern province of Khuzestan. Insurance officials later estimated the damage at some $67 million. Authorities preliminarily blamed the blaze on a leak of paraxylene, a flammable hydrocarbon, without elaborating. Other recent blazes include: — A July 29 fire at a storage tank at the Bistoon Petrochemical

  • — A July 29 fire at a storage tank at the Bistoon Petrochemical Complex in Iran’s western province of Kermanshah that authorities blamed on an electrical fault;
  • — An Aug. 6 gas pipeline explosion in the port city of Genaveh that killed one person and injured three;
  • — An Aug. 7 fire at a storage area of the Bandar Imam Khomeini Petrochemical Complex that burned for two days;
  • — An Aug. 30 inferno that erupted in a sewage unit at Iran’s South Pars gas field; and
  • — A Sept. 14 gas leak and fire at the Mobin Petrochemical Factory that services the South Pars gas field that injured four workers.

The Natural Gas War Burning Under Syria - In 2009, Qatar, a leading natural gas producer, approached Syria about routing its planned 1,500 mile pipeline to the gas markets of Europe through Syria’s Aleppo province. Qatar wanted a pipeline straight to Europe as its current gas transport modes were limited to Liquefied Natural Gas (LNG) tanker, mostly to Asia with limited spot shipments to Europe or the Dolphin pipeline to the United Arab Emirates and Oman. The pipeline would head north and end in Turkey after crossing Saudi Arabia, Jordan, and Syria. Syria declined Qatar’s offer, which would have cut the European market share of its partner, Russia, and instead agreed to participate in the “Friendship Pipeline” between Iran and Iraq that was considered a “Shia Pipeline” to some and a target for the Sunni monarchies of the Gulf. Not understood, or ignored, was Syria’s longstanding support of the Iranian regime, especially during the 1980-1988 Iran-Iraq War, and its long relationship with Russia, dating from 1944, which should have been a warning of who might appear if things hotted up.  In 2011, Syria, Iran, and Iraq agreed to build a pipeline to connect Iran’s South Pars gas field to Europe. The pipeline would run from Assalouyeh, Iran to Europe via Iraq, Syria, and Lebanon, with Syria as the center of assembly and production.  What remains unclear is why, when Syria turned down its original pipeline proposal, it didn’t pursue its second option for the pipeline route: Saudi Arabia – Kuwait – Iraq. Aside from the challenging terrain in Iraq, the mostly likely reasons are the discovery of vast gas reserves in the eastern Mediterranean, and Saudi opposition to a pipeline through Kuwait. If a more Qatar-friendly regime were to gain control of Syria, Qatar would be able to garner more profit and have influence over the state, something it is unable to do with Saudi Arabia, which vehemently opposes Qatar’s historic support of the Muslim Brotherhood, Jordan, a U.S. ally, or Iraq, an Iranian ally. At that point it was nothing personal, just business, and the Assads had to go. To better understand the war in Syria, remember the surge in natural gas discoveries in the Eastern Mediterranean starting in 2009. Israel, Cyprus, and Egypt have found large gas deposits, and offshore Lebanon has the potential for significant gas resources. Israel has the potential to export gas to Egypt, Jordan, the Palestinian Authority, and Turkey.  In the pipeline from Iran to Syria it could create an energy hub in Syria, and could block Qatar gas sales to Europe at a time when Qatar’s gas exports to the U.S. have dropped to zero, largely due to increasing U.S. domestic production of natural gas. Thus Qatar would be limited to the Asian LNG market as it scrapped for the EU market with Iran, Iraq, Syria, and Russia. And the only thing that could make it worse is happening: Europe is forecast to take more than half of U.S. LNG exports by 2020.

How the Pentagon sank the US-Russia deal in Syria – and the ceasefire -- Another US-Russian Syria ceasefire deal has been blown up.Whether it could have survived even with a US-Russian accord is open to doubt, given the incentives for al-Qaeda and its allies to destroy it. But the politics of the US-Russian relationship played a central role in the denouement of the second ceasefire agreement.The final blow apparently came from the Russian-Syrian side, but what provoked the decision to end the ceasefire was the first ever US strike against Syrian government forces on 17 September.That convinced the Russians that the US Pentagon had no intention of implementing the main element of the deal that was most important to the Putin government: a joint US-Russian air campaign against the Islamic State (IS) militant group and al-Qaeda through a “Joint Implementation Centre”. And it is entirely credible that it was meant to do precisely that. The Russians had a powerful incentive to ensure that the ceasefire would hold, especially around Aleppo.  It was understood that the “demilitarisation” north of Aleppo was aimed at allowing humanitarian aid to reach the city and was, therefore, the central political focus of the ceasefire. The Russians put great emphasis on ensuring that the Syrian army would comply with the demilitarisation plan. It had established a mobile observation post on the road on 13 September. And both the Russians and Syrian state television reported that the Syrian army had withdrawn its heavy weaponry from the road early on 15 September, including video footage showing a bulldozer clearing barbed wire from the road. The Syrian Observatory for Human Rights also reported the Syrian army had withdrawn from the road.  At an extraordinary video conference with Kerry immediately after the negotiation of the ceasefire agreement was complete, Secretary of Defence Ashton Carter strongly objected to the Joint Centre – especially the provision for sharing intelligence with the Russians for a campaign against IS and al-Qaeda. Obama had overridden Carter’s objections at the time, but a New York Times story filed the night of 13 September reported that Pentagon officials were still refusing to agree that the US should proceed with the creation of the Joint Implementation Centre if the ceasefire held for seven days.

Syria Claims To Have Recording Of Conversation Between ISIS And US Military Before Strike On Syrian Army -- In a stunning allegation, one which would lead to dramatic gepolitical implications, the speaker of the People's Council of Syria said on Monday that the Syrian intelligence possesses an audio recording of conversation between Islamic State terrorists and the US military taken just prior to the Washington-led coalition's airstrikes on the government troops near Deir ez-Zor on September 17 which left over 60 Syrian troops dead. As reported last weekend, coalition warplanes hit Syrian government troops near the eastern city of Deir ez-Zor on September 17, leaving 62 military personnel killed and a hundred wounded. The Pentagon said initially that the airstrike was a mistake and targeted ISIS militants.  Britain, Australia and Denmark confirmed their air forces' participation in the deadly airstrikes. "The Syrian Army intercepted a conversation between the Americans and Daesh before the air raid on Deir ez-Zor", Hadiya Khalaf Abbas said as quoted by the Al Mayadeen broadcaster. Hadiya Khalaf Abbas, the head of the Syrian parliament, added during her visit to Iran that after the coalition's airstrikes on the government troops US military directed terrorists' attack on the Syrian army. The attack on government positions, followed by an attack on a UN humanitarian convoy which the US has accused Russia of organizing, with Russia in turn putting the blame on US-supported rebels, has led to the collapse of the September 9 Syrian ceasefire. Russia's Foreign Minister Sergei Lavrov said last Friday it was necessary to separate Daesh terrorists from "moderate" opposition forces in order to salvage the truce.

Rogue Mission: Did the Pentagon Bomb Syrian Army to Kill Ceasefire Deal? - A rift between the Pentagon and the White House turned into open rebellion on Saturday when two US F-16s and two A-10 warplanes bombed Syrian Arab Army (SAA) positions at Deir al-Zor killing at least 62 Syrian regulars and wounding 100 others. The US has officially taken responsibility for the incident which it called a “mistake”, but the timing of the massacre has increased speculation that the attack was a desperate, eleventh-hour attempt to derail the fragile ceasefire and avoid parts of the implementation agreement that Pentagon leaders publicly opposed. Many analysts now wonder whether the attacks are an indication that the neocon-strewn DOD is actively engaged in sabotaging President Obama’s Syria policy, a claim that implies that the Pentagon is led by anti-democratic rebels who reject the Constitutional authority of the civilian leadership. Saturday’s bloodletting strongly suggests that a mutiny is brewing at the War Department. The chasm that’s emerged between the Pentagon warhawks and the more conciliatory members of the Obama administration has drawn criticism from leading media outlets in the US (The New York Times) to high-ranking members in the Russian cabinet. On Saturday, at an emergency press conference at the United Nations, Russia’s UN ambassador Vitaly Churkin referred to the apparent power struggle that is taking place in Washington with these blunt comments: “The big question that has to be asked is ‘Who is in charge in Washington? Is it the White House or the Pentagon?’ …Because we have heard comments from the Pentagon which fly in the face of comments we have heard from Obama and Kerry…” (https://www.youtube.com/watch?v=bID01gIEIOY See–10:15 second) Churkin is not the only one who has noticed the gap between Obama and his generals. A recent article in the New York Times also highlighted the divisions which appear to be widening as the situation in Syria continues to deteriorate. Here’s an excerpt from the New York Times: (SECDEF Ash) “Carter was among the administration officials who pushed against the (ceasefire) agreement … Although President Obama ultimately approved the effort. On Tuesday at the Pentagon, officials would not even agree that if a cessation of violence in Syria held for seven days — the initial part of the deal — the Defense Department would put in place its part of the agreement on the eighth day

 Caught On Tape: Did The US Target Syrian Aid Convoy With Hellfire Missile? - Footage of the nighttime attack on the Syrian aid convoy in Aleppo has surfaced. But there's something curious about how the footage has been appearing on Western news reports. A commenter on the Moon of Alabama blog, PavewayIV, made the following observations about what appears in the video, and what it suggests. First, however, here's an unedited version of the blast, courtesy of ABC:In the screen cap above, you can see what looks to be a cloud of sparks following an initial explosion. According to PavewayIV, this is a signature of the Metal-Augmented Charge (MAC) Hellfire AGM-114N, the Predator drone's typical payload. The fiery cloud is produced by the residue of the fine-mesh fluorinated aluminum particles (the "metal augmentation"). Aside from the ABC footage, most other networks have shown edited versions that make this signature difficult to detect.  For example, here's AP's version: Shakey-cam added for jihadi-vision effect? Why would they do this? Thermobaric Hellfire air-blasts don't leave craters, and they typically start fires. No craters are visible in footage of the burned convoy. The Russians have thermobaric bombs, too, according to PavewayIV, but they use different particles and their blast patterns are different: either no "sparkles" or long-duration "sparkles", not the fast-duration flash as seen in the video of the Aleppo blast.

John Kerry Gives Russia An Ultimatum: Stop Bombing Aleppo Or All Cooperation Ends -In the latest, and most dramatic - if perhaps entertaining - escalation of diplomacy between the US and Russian, earlier today Secretary of State John Kerry threatened to cut off all contacts with Moscow over Syria, unless Russian and Syrian government attacks on Aleppo end. Kerry issued the ultimatum in a Wednesday telephone call to Russian Foreign Minister Sergey Lavrov. Kerry told Lavrov the U.S. was preparing to "suspend U.S.-Russia bilateral engagement on Syria," including on a proposed counterterrorism partnership, "unless Russia takes immediate steps to end the assault on Aleppo" and restore a cease-fire. As the AP reported, in the telephone call with Lavrov, Kerry "expressed grave concern over the deteriorating situation in Syria, particularly for continued Russian and Syrian regime attacks on hospitals, the water supply network and other civilian infrastructure in Aleppo," Kirby's statement said. Kerry also told Lavrov the U.S. holds Russia responsible for the use of incendiary and bunker-buster bombs in an urban area. It was unclear what effect Kerry's words would have. There have been many threats lobbed at Russia over the years for the duration of the Syrian conflict, now in its 6th year, and most warnings have gone unfulfilled, including President Barack Obama's declaration that the U.S. would take military action if Syrian President Bashar Assad crossed the "red line" of using chemical weapons. Furthermore, Syria has repeatedly stressed that it is in its right to try to retake Aleppo from rebel forces. "The burden remains on Russia to stop this assault and allow humanitarian access to Aleppo and other areas in need," Kerry told Lavrov, according to State Department spokesman John Kirby.

 US To Suspend Syria Diplomacy With Russia, Prepares "Military Options" --In the most dramatic diplomatic escalation involving the Syrian conflict in the past years,yesterday John Kerry issued an ultimatum to Russia, in which he warned his colleague Lavrov to stop bombing Aleppo or else the US would suspend all cooperation and diplomacy with Russia. 24 hours later, this appears to be precisely what is about to take place, leading to an even greater geopolitical shock in Syria. According to Retuers, the United States is expected to tell Russia on Thursday it is suspending their diplomatic engagement on Syria following the Russian-backed Syrian government's intense attacks on Aleppo, U.S. officials said on condition of anonymity. Why now and what happens next? According to US officials, the Obama administration is now considering tougher responses to the Russian-backed Syrian government assault on Aleppo,including military options. According to Reuters, the new discussions were being held at "staff level," and have yet to produce any recommendations to President Barack Obama, who has resisted ordering military action against Syrian President Bashar al-Assad in the country's multi-sided civil war.However, now that diplomacy with Russia is set to end, this will give the greenlight for Obama to send in US troops in Syria, with Putin certain to respond appropriately, in what will be the biggest military escalation in the Syrian proxy war in its five and a half year history.

 DANGER - Tensions rising sharply between nuclear superpowers - Tension between Russia and USA rose dangerously, on Thursday 29th of September, as the spokesman of the American Pentagon proceeded to indirect, still clear and quite unprecedented threats, about what can happen to Russian soldiers, interests and even cities, if Moscow and Damascus do not alter their policy in Syria. In the same time the US Secretary of State is threatening with suspension of talks with Russia on the situation in Syria. Answering to these threats, the spokesman of the Russian Ministry of Defense said that (Pentagon’s spokesman Kirby’s) “words are the most frank confession by the U.S. side so far that the whole ‘opposition’ ostensibly fighting a civil war in Syria is a U.S.-controlled international terrorist alliance…What makes Kirby’s statement particularly shocking is that the scale of direct U.S. influence on terrorists’ activity is global, and that it reaches as far as Russia.” These exchanges came only three days after US Defense Secretary Ashton Carter went to the Air Force Global Strike Command base, in Minot, South Dakota, to defend the massive modernization of the US nuclear arsenal and issue bellicose threats against Russia, essentially outlining plans for a nuclear war with Russia! Look for more information in the following articles:

 Chemical weapons are being used in Iraq – but the US won’t raise hell about it - The group known as Islamic State (IS) reportedly used a sulpur-mustard gas against US troops in Iraq. It was detected in a black oily substance found on a rocket fired at an American airbase in Qayyarah, south of the city of Mosul. None of the soldiers stationed at the airbase – deployed there to support a forthcoming Iraqi offensive to take back Mosul from IS – have suffered any symptoms of mustard gas poisoning. The base took decontamination measures after the rocket hit. This is not the group’s first chemical strike. Reports are mounting up that weapons of mass destruction (WMD) are now part of the organisation’s arsenal – and all thanks to US foreign policy.  The US-led invasion of Iraq in 2003 and the regional chaos that followed is a major reason why IS emerged in the first place; had the war never happened, the group might never have existed, and it certainly wouldn’t have been able to tear through and take control of huge swathes of the country. So at last, the US has finally found WMD in Iraq, but only after its own actions allowed them to spring up there again. There are lots of reasons not to make a song and dance about the strike. While it’s now been confirmed that sulphur-mustard was used, no-one was hurt – so why make a fuss? The US also probably doesn’t want to admit that IS is capable of carrying out any sort of attack against American troops, especially not with a weapon like this. And with a major push to take back Mosul in the offing, the US doesn’t need IS’s capacity and capabilities amplified any further. Another explanation, however, is less practical: the US doesn’t want to talk about WMD in Iraq because it was an American-led war that created the situation in which these weapons have ended up in the country. It’s also a difficult reminder of the “threats” invoked as a pretext for that devastating conflict. In 2003, the US cried wolf – and despite the change of regime since then, it doesn’t want to remind everyone what a mess that turned out to be.

"America Is On Our Side": Al-Nusra Commander Tells German Press US Is Arming Jihadists -- In a striking interview with German journalist Jürgen Todenhöfer published today the German press including the prominent newspaper Focus, a militant jihadist commander said that US weapons are being delivered to Jabhat Al-Nusra by governments that Washington supports, adding that American instructors were in Syria to teach how to use the new equipment.  “Yes, the US supports the opposition [in Syria], but not directly. They support the countries that support us. But we are not yet satisfied with this support,” Jabhat al-Nusra unit commander Abu Al Ezz said in an interview with Koelner Stadt-Anzeiger newspaper from the city of Aleppo. According to the commander, the militants should be receiving more “sophisticated weapons” from their backers to succeed against the Syrian government.

Satellite Imagery Reveals China's Strategic Petroleum Reserve Is Vastly Greater Than Disclosed - At the end of August, we did a follow up article on what we believe is a far bigger marginal driver to the price of oil than OPEC production (which may or may not be reduced by up to 750kbpd in November), namely the Strategic Petroleum Reserve of China, a major importer of oil in recent years, along with India, taking advantage of low prices and largely supporting global oil demand growth at a time of rampant oversupply, and which we profiled most recently in "A Chinese "Mystery" Has Become The Biggest Wildcard For The Price Of Oil." The simplest reason why China's SPR capacity (and storage) is of key importance, is that it determines the ongoing demand China has for oil - of which much ends up in storage -  and also allows analysts to calculate how much more oil China would need, in order to fill up its SPR. While China has traditionally kept any data about its SPR inventory as opaque as possible, in a rare release this month, Beijing reported adding about 43 million barrels of crude to its strategic reserves between mid-2015 and early this year. Reserves totaled 31.97 million tons in early 2016, equivalent to about 234 million barrels,  However, in retrospect it appears China may have been lying, again. According to satellite images by  geospatial analytics startup Orbital Insight, China, has not only misrepresented how much oil it has stored, it has done so at a massive scale, with the real number dwarfing even JPM own estimate: the real amount of Chinese oil in storage, according to Orbital, was a whopping 600 million barrels as of May. Assuming JPM's estimated rate of SPR accumulation of about 1mmbpd, the 600 million number as of May would have grown to well over 700 million barrels as of September.

 Analysis: Rebound in sight as China's gasoline exports hit five-month low -  China's gasoline exports in August slid further to hit five-month lows, extending the downward trend that started in the previous month, as steady demand at home, a squeeze in local supplies and lower gasoline cracks discouraged refiners from shipping out plentiful cargoes. But analysts said exports could recover in September as gasoline cracks had recovered from the lowest level in more than 32 months that the Asian market witnessed in early July. Gasoline exports fell to 672,347 mt, or 184,353 b/d, in August, which was 30% lower than the 966,528 mt in July, and 41% lower than the historical high of 1.1 million mt, recorded in June, the latest data from the General Administration of Customs showed. Exports in August were also lower than the average of 212,143 b/d registered in the first eight months of the year. But they were nearly 44% higher than the 467,000 mt in the same month of last year, signaling that the year-on-year trend of rising gasoline outflows was still intact.The government-backed Xinhua news agency said that, as domestic demand remained buoyant in August, it led to a 1.5% month-on-month decline in gasoline stocks by the end of August. In addition, supplies in eastern China were tight because of heavy maintenance, as well as the output restrictions imposed during the G20 summit in Hangzhou that started end of August, refining sources in Shanghai said.

China launches a $52.5 billion restructuring fund for state-owned firms - (Reuters) - China has launched a 350 billion yuan (40.59 billion pounds) state enterprise restructuring fund to advance its 'supply-side' reforms as the world's second-largest economy undergoes its most significant transformation in two decades. China has made reform of its lumbering and uncompetitive state-owned enterprises (SOEs) a priority as weak global demand drags on economic growth and excess capacity and idle workers bleed what precious resources companies have at their disposal. Earlier this year, China said it was planning to allocate 100 billion yuan to help local authorities and SOEs finance layoffs in its struggling coal and steel industries. Up to 1.8 million people in the sectors could lose their jobs, official estimates showed. The capital raised by the China State-owned Enterprises Restructuring Fund will focus on boosting the competitiveness of some SOEs and their international operations, including overseas acquisitions, the State-owned Assets Supervision and Administration Commission (SASAC), which will manage the fund, said in a document. "Among SOEs controlled by the central government, some have excess capacity while others are suffering from a severe lack of capacity," state radio cited Xiao Yaqing, head of SASAC, as saying on Monday. "Setting up this new fund will help concentrate state capital on strategic and forward-looking industries." The fund will have an initial registered capital of 131 billion yuan provided by 10 SOEs.

  iPhone production ban among tactics China may deploy in new trade war with the US | South China Morning Post: One economist warns of looming ‘a symmetric trade war’ if the next US Administration imposes punitive trade tariffs on China made goods. The nature of trade policies adopted by the next US President, whether it is Donald Trump or Hillary Clinton, will be critical. Asia, and in particular China and Hong Kong, would arguably have much to lose if Washington moved away from support for open trade. But the United States shouldn’t think it gets off scot free if it erects trade barriers. Any response-in-kind from China would undoubtedly hit the US economy. World trade is already facing headwinds. “According to the preliminary data, the volume of world trade fell 1.1 per cent in July 2016 from the preceding month,”the CPB Netherlands Bureau for Economic Policy Analysis said last week, with the decline “deeper in emerging economies than it was in advanced economies”. Indeed any US President would have to consider the prospect of retaliation particularly in light of the fact that China, through its “One Belt, One Road” policy, is already seeking to diversify and cement its economic relationships with Asia and Europe. But in the event that a new US Administration did impose tariffs on China or other barriers to trade, one scenario the PIIE has modelled is what it calls an “asymmetric trade war”. In the PIIE’s scenario China could choose not to buy US aircraft, desist from buying American business services, put an embargo on imports of US soybeans, or “simply shut down iPhone production in China”. “Chinese value added on iPhone is only about 4 per cent,” said the PIIE concluding that shutting down production in China “wouldn’t cost the Chinese a lot … But it would cost the United States a lot. iPhone prices would go skyrocketing”.

Japan scrambles fighter jets as China gets too close - Chinese aircraft conducting a major military exercise in the East China Sea got a little too close to Japanese territory Sunday, exacerbating tensions between the two powers in the region. Japanese fighter jets flew to intercept dozens of Chinese aircraft as they flew over a strategically important strait between Okinawa and the Miyako islands near Taiwan. While the planes did not technically violate Japanese territory, it is reportedly the first time that Chinese military aircraft have been seen in the area. Japan and China have had a long, contentious history stemming back long before World War II. The current manifestation of tensions between the two powers, however, comes from China's establishment of the "East China Sea Air Defense Identification Zone" (ADIZ) in November 2013. The Chinese protection zone encompasses the Shenkaku islands, which are under the control of Japan. China claims the islands, or Diaoyu, as it refers to them, as its own.Japan strongly disagrees with China's claim of ownership.  “We cannot accept the implication that the airspace over the Senkaku islands, which are part of our territory, belongs to China," Chief Cabinet Secretary Yoshihide Suga told reporters in Tokyo on Monday, according to Bloomberg. The islands are currently uninhabited, but the surrounding waters give Japan important resources, such as oil and fish, and are strategically important in a military sense.

The IMF’s Recommended Fiscal Path For Japan - With a bit of technical assistance, I was able to do a better job of quantifying the IMF’s recommended fiscal path for Japan. The IMF wants a 50 to 100 basis point rise in Japan’s consumption tax every year for the foreseeable future, starting in 2017. A 50 basis point rise would result in between 20 and 25 basis points of GDP in structural fiscal consolidation a year (the call for the tax increase is in paragraph 23 of the staff report, and is echoed in the IMF’s working paper). The IMF doesn’t want Japan to continue relying on fiscal stimulus packages, which typically have funds for public investment and the like (paragraph 23). As a result, there is a 60 basis points of GDP consolidation from the roll-off of past stimulus packages (the change in the structural primary balance is in both table 1 on p.38 table 4 on p.41 of the staff report). That implies 80 to 85 basis points of GDP in structural fiscal consolidation. But, in the staff working paper (not formal advice, but it clearly reflects the IMF’s overall recommendations), the preferred policy scenario shows an 80 basis point of GDP increase in temporary transfers and public wages to support the proposed incomes policy (this is in the working paper appendix, in table I.1 on p. 33). Net it all out; the result is basically a neutral stance, not the consolidation I initially suspected. The 0.5 percent of GDP fall in general government net lending/borrowing in table 2 on p. 25 of the working paper stems from a fall in interest payments and an increase in nominal GDP that is projected from the new incomes policy.* Actually if you look at table 4 in the staff report, Japan’s is expected to receive more in interest income than in pays out in interest in 2017. Japan’s government is projected receive 1.6 percent of GDP in interest on its assets (including its foreign reserves, which are largely held by the ministry of finance) and pay 1.3 percent of GDP in interest on its debt. The total fiscal deficit is thus smaller than the primary fiscal deficit in 2017. Welcome to the world of negative interest rates. The same methodology can be applied to deduce the IMF’s proposed fiscal stance for 2018. It generates a small proposed fiscal expansion in 2018, as the contraction from the roll-off of past stimulus is smaller (table 3 of the staff report shows a smaller change in the primary balance in 2018 than in 2017) and there is an ongoing increase in temporary transfers.

 Kuroda repeats he is ready to ease further if conditions are right | The Japan Times: Bank of Japan Gov. Haruhiko Kuroda said Monday he will loosen the central bank’s monetary grip “without hesitation” if conditions make that the sensible thing to do. In a speech in Osaka, Kuroda expressed concern over falling prices as the central bank pursues its 2 percent inflation target. He said that deepening the BOJ’s negative interest rate and cutting the target for long-term interest rates, a policy adopted last week, will help make market conditions more accommodative. “There can be cases where such powerful monetary easing is needed, depending on developments in economic activity and prices as well as financial market conditions,” he said. “The bank stands ready to use every possible policy tool, if it judges that necessary, to achieve its objectives.” On Wednesday, the BOJ said it will modify the framework of its debt-buying program to keep the yield of the bellwether 10-year Japanese government bond around zero percent, while leaving its negative policy rate unchanged at minus 0.1 percent. Kuroda promised to stoke 2 percent inflation as soon he took office early in March 2013, but he has failed to create even moderate levels of inflation in what has become a solo attempt to kick-start the economy following the government’s abject failure to come through with much-promised structural reforms.

BOJ chief seeks to extend ultraloose legacy beyond his term- Nikkei Asian Review: -- Although the Bank of Japan's pivot toward interest rate controls has been the subject of much interest, Gov. Haruhiko Kuroda was mostly focused on an entirely different issue when forming the new monetary framework: how to ensure the ultraloose stimulus continues even after he steps down. On Sept. 21, which capped the two-day monetary policy meeting, the BOJ vowed to keep expanding the monetary base until the inflation rate exceeds the 2% threshold "and stays above the target in a stable manner." The conventional wisdom in the U.S. and Europe is that central banks should aim for price increases of 3-4%. That view was a hot topic during the late-August gathering of central bankers in Jackson Hole, Wyoming, which Kuroda attended. Deflation is becoming a bigger risk than inflation, goes the argument. For Kuroda, it was only natural to show a fiercer resolve toward beating deflation, said a BOJ official. The fact that the BOJ chief is sticking with the epoch-making easy money policy is also rooted in the mistakes made by the central bank in the past. The BOJ introduced a quantitative easing policy in the early 2000s, eventually succeeding in pushing consumer prices in an upward direction. Toshihiko Fukui, the BOJ governor at the time, wound down the measures in 2006 and proceeded to authorize repeated rate hikes. The Japanese economy once again slipped back into deflation as a result. Kuroda speculates that Fukui may have exited the easing program too soon in consideration of his term in office. The current BOJ chief has now formed a habit of asking, "How is one's term relevant to shaping the right policy?" Barring an extremely rare reappointment, Kuroda's five-year term is slated to end in April 2018. The governor is now looking for ways to fashion an aggressive policy that will remain in place no matter who the successor is.

Won Appreciates, South Korea Intervenes -  South Korea’s tendency to intervene to limit the won’s appreciation is well known.When the won appreciated toward 1100 (won to the dollar) last week, it wasn’t that hard to predict that reports of Korean intervention would soon follow.Last Thursday Reuters wrote:“The South Korean currency, emerging Asia’s best performer this year, pared some gains as foreign exchange authorities were suspected of intervening to stem further appreciation, traders said. The authorities were spotted around 1,101, they added. ”The won did appreciate to 1095 or so Tuesday, when the Mexican peso rallied, and has subsequently hovered around that level. It is now firmly in the range that generated intervention in August. The South Koreans are the current masters of competitive non-appreciation. I suspect the credibility of Korea’s intervention threat helps limit the scale of their actual intervention. And with South Korea’s government pension fund now building up foreign assets at a rapid clip, the amount that the central bank needs to actually buy in the market has been structurally reduced. Especially if the National Pension Service plays with its foreign currency hedge ratio to help the Bank of Korea out a bit.

 Duterte talks big, but the Philippines won’t break ties with the US any time soon - Philippine President Rodrigo Duterte has said he will visit Russia and China to “open alliances” with the two states. His announcement follows weeks of toxic rhetoric from the president about relationships between the Philippines and Western partners, both the United States and the European Union.Since his election, the Filipino leader has made invective-laden speeches against Western partners and their leaders, including US President Barack Obama, decrying them for interfering in Philippine domestic affairs.   At the heart of this emerging dispute is not some fundamental geopolitical clash, but the issue of human rights. Duterte is incensed by increasingly focused criticism of his campaign against drugs, which has led to a spike in murders and provoked uproar among human rights advocates. Not only has the president rebuffed calls for an independent investigation by the United Nations and other concerned organisations, he has also threatened to downgrade military ties with America. Duterte may be inflaming tensions, but on foreign policy he has the law on his side. The Philippines’ 1987 constitution enshrines the principle of independence. It says: The [Philippine] State shall pursue an independent foreign policy. In its relations with other states, the paramount consideration shall be national sovereignty, territorial integrity, national interest and the right to self-determination. This policy of independence mandates that the country should not align itself with either the West or the East, but instead pursue friendly relations with all relevant international actors depending on the national interest. So on the surface, Duterte is simply fulfilling his constitutional duty as the new national commander-in-chief. But a closer look reveals that the Filipino president has something more specific in mind.

Philippines President Compares Himself To Hitler, One Week After Telling Brussels "F**k You" --The world's most entertaining, Tourette syndrome-plagued president, Philippines Rodrigo Duterte has just sparked another scandal. As a reminder, one week ago, in his latest outburst, Duterte stunned reporters and officials when he responded to Europe's condemnation of his government's brutal anti-crime crackdown, when after EU statement urged Duterte to put an end to the "extrajudicial killings" and launch an alternative campaign in line with international human rights laws, the president did not hold back in his response to Brussels when during a speech he said: “I read the condemnation of the EU against me. I will tell them: 'Fuck you.' "You’re doing it in atonement for your sins.”  He accused the bloc of hypocrisy, saying a rudimental check of the history books showed European countries had killed thousands of people in the past.  "He added: And then the EU has the gall to condemn me. I repeat: "Fuck you."   Fast forward one week, when Duterte appeared to liken himself to Nazi leader Adolf Hitler on Friday and said he would "be happy" to exterminate three million drug users and peddlers in the country.  In yet another rambling, disjointed speech on his arrival in Davao City after a visit to Vietnam, Duterte told reporters that he had been "portrayed to be a cousin of Hitler" by critics. Explaining that Hitler had murdered millions of Jews, Duterte said: "There are three million drug addicts (in the Philippines). I'd be happy to slaughter them. "If Germany had Hitler, the Philippines would have...," he said, pausing and pointing to himself. "You know my victims. I would like (them) to be all criminals to finish the problem of my country and save the next generation from perdition."

 There’s too much drug blood on America’s hands to lecture Duterte - Swear all you want, but you know you’re doing your drug war all wrong if the United States says you are. Having messed it up for half a century, no one knows these things better than the US. Some 3,000 people have died in Rodrigo Duterte’s bloody campaign since he took power in the Philippines in June. Now he wants to extend it by six months because he needs time to “kill them all”. But point out the moral pitfalls of his murderous drive and you’ve had it, in colourful expletives, as Barack Obama and the European Union found out. That’s too bad because given the climate of fear in the Philippines and the president’s popularity, any meaningful pushback could only come from abroad. But one can’t help wishing it hadn’t come from the United States. Because no other country has caused more death and destruction in the name of fighting drugs. Ever since Richard Nixon announced the “war on drugs” in 1971, America has used it as a licence for low-intensity warfare in its neighbourhood to prevent drugs from crossing its borders. The damage, as evident in the trail of failed states the policy left behind, is comparable only to its other great crusade – the “war on terror”.  In Mexico alone, more than 100,000 people have died since 2006 in drug-related violence, according to the Drug Policy Alliance. In Colombia, more than 220,000 people have been killed and four million displaced in the last 50 years. For perspective, consider that some 26,000 civilians have been killed in Afghanistan since the US attacked it in 2001 and some 180,000 in Iraq since the US invasion in 2003. To what end? Even while federal spending on anti-drug efforts has ballooned over the decades, there’s little proof drug use in the US has shrunk. After all the blood that has flowed in Colombia, before and after Pablo Escobar, that country is still the world’s top producer and exporter of cocaine, with cultivation actually rising in the last four years. And America’s own jails are bursting at the seams as the country arrests over 1 million people every year over drug-related crimes.

Duterte Calls for End to US-Philippine Military Exercises, Part of Tilt Toward China - Philippine President Rodrigo Duterte promised an end to military exercises with longtime ally the United States today. Speaking from Hanoi, Vietnam, Duterte said that he was “serving notice now to the Americans” that an upcoming drill “will be the last military exercise.” That’s likely to come as a shock to U.S. officials, who have routinely insisted that, behind Duterte’s rhetoric, U.S.-Philippine cooperation is progressing as normal. Earlier this month, Duterte ordered U.S. Special Forces assisting Philippine troops in counterinsurgency operations in Mindanao to leave. He later walked back those comments, explaining, “I didn’t say [U.S. forces] have to leave immediately… I never said, ‘Get out of the Philippines,’ for after all, we need them there in the [South] China Sea.”  That last part is especially interesting, as Duterte has given little indication that he wants U.S. help in the Philippines’ maritime disputes with China. In his remarks in Hanoi, in fact, Duterte made it clear that he is not interested in conducting joint patrols with Washington in the South China Sea. Whereas his predecessor, Benigno Aquino, cleaved close to the United States in the face of increasingly assertive Chinese behavior in waters also claimed by Manila, Duterte dismissed the idea of a Philippine-Chinese conflict as “imaginary.”  Instead, Duterte has actively courted China, downplaying the territorial disputes in the face of economic potential. Earlier this week, Duterte vowed to “open alliances with China” and Russia, saying the Philippines under his leadership would increase ties with the “other side of the ideological barrier.” He added that he was “ready to not really break ties” with Washington, but also said that the U.S.-Philippine relation was at the “point of no return.” China, unsurprisingly, has welcomed Duterte’s overtures. “Huge differences or not, as long as China and the Philippines maintain the political willingness to resolve problems, there will be no insurmountable obstacles in the development of bilateral relations,” Foreign Ministry spokesperson Lu Kang told reporters on September 23.

India exports software, Pakistan exports terror: PM Modi's blistering response to Uri attack - Times of India - Prime Minister Narendra Modi+ on Saturday lauched a blistering attack on Pakistan in his first public address after the Uri terror attack+ . He was speaking at a Bharatiya Janata Party rally in Kozhikode, where he'd attended the party's National Council meet.  Modi said Pakistan - which is widely seen as being the source of the deadly attack+ - "wanted bloodshed, killing of people and terror." In his speech, the PM also addressed the Pakistani people directly. He told them that while both India and Pakistan attained Independence at the same time, India exported software, but Pakistan exported terror.  Speaking about the Uri attack+ , he said, "There's anger in entire country after the Uri attack. 18 of our soldiers sacrificed their lives after our neighbour exported terrorists there," he continued.Saying the whole nation was "very proud" of the Indian armed forces, the PM issued a grim warning to Pakistan+ : "The sacrifice of our 18 jawans will not go in vain. We will leave no stone unturned to isolate Pakistan in the world," he said. He taunted the Pakistani government, asking, "The leaders of (our) neighbouring country used to say that they will fight for 1000 years, but where are they lost now? I want to inform Pakistan that before 1947 even your leaders used to salute this land." And he told Pakistan to look in its own backyard before coveting the territory of others. "Pakistan is aiming for Kashmir. They should first look at the land they have already captured - PoK, Gilgit and Balochistan."He asked the Pakistani people to ask their government the following question: "You can't handle Gilgit, PoK, Balochistan+ which are with you. Then why mislead people by talking about Kashmir?" And he made this remarkable claim: "A day will come when the people of Pakistan will go against their own government to fight terrorism."

 India begins campaign at United Nations to isolate Pakistan - India began a campaign to isolate Pakistan at the United Nations on Monday, telling the 193-member General Assembly it was time to identify nations who nurture, peddle and export terrorism and isolate them if they don’t join the global fight. External Affairs Minister Sushma Swaraj said the arrest of Pakistani Bahadur Ali was “living proof of Pakistan’s complicity in crossborder terror.” India has said Ali confessed that he was trained by the Lashkar-e-Taiba (LeT) militant group. “But when confronted with such evidence, Pakistan remains in denial. It persists in the belief that such attacks will enable it to obtain the territory it covets,” she said on the final day of the annual gathering of world leaders at the United Nations. “My firm advice to Pakistan is: abandon this dream. Let me state unequivocally that Jammu and Kashmir is an integral part of India and will always remain so,” Swaraj said.

India sparks boycott of South Asia summit in Pakistan - November’s meeting of South Asian countries in Islamabad is hanging in the balance after four countries, led by India, said they would boycott it following this month’s attack on an Indian army base in Kashmir, which killed 18 troops. India announced it would not attend the summit as a result of the attack, a move swiftly followed by Bhutan, Bangladesh and Afghanistan. “Increasing cross-border terrorist attacks in the region and growing interference in the internal affairs of member states by one country have created an environment that is not conducive to the successful holding of the 19th summit in Islamabad,” New Delhi’s ministry of external affairs said in a statement. The co-ordinated move is India’s latest attempt to isolate Pakistan and use non-military means of punishing its neighbour for the attack on the Uri base. Warning on Tuesday that “blood and water cannot flow together”, Indian Prime Minister Narendra Modi threatened to maximise India’s use of water in three rivers that flow through India to Pakistan: the Indus, Jhelum and Chenab. This would limit the amount of water that flows to Pakistani agriculture and hydroelectric projects. Mr Modi has also suspended the meetings of commissioners employed by Pakistan and India to arbitrate on disputes relating to the usage of water from six rivers flowing through India into Pakistan.

In ‘Unprecedented’ Move, India Ditches SAARC Summit in Pakistan, Sees Cross-Border Link to Uri - In the biggest fall-out from the current period of strain between South Asia’s largest nations, India on Tuesday pulled out of the SAARC summit in Islamabad citing “increasing cross-border terrorist attacks” and “growing interference in the internal affairs” by Pakistan. Afghanistan, Bangladesh and Bhutan are also going to keep off the summit, thus ensuring that blame for the event’s postponement does not fall on India alone. The other members of the South Asian Association for Regional Cooperation – apart from the host Pakistan – are the Maldives, Nepal and Sri Lanka. India’s announcement was made late on Tuesday evening after a day of developments including the summoning of Pakistan’s high commissioner to South Block where he was presented ‘evidence’ of a ‘cross-border’ hand in the September 18 militant attack at the Indian army station at Uri which cost the lives of 18 soldiers. External affairs ministry spokesperson Vikas Swarup stated that India had informed the current SAARC chair, Nepal, that “increasing cross-border terrorist attacks in the region and growing interference in the internal affairs of member states by one country have created an environment that is not conducive to the successful holding of the 19th SAARC summit in Islamabad in November 2016”. Pakistan wasn’t named but the reference was clear enough. New Delhi insists the current disturbances in the Kashmir Valley are being orchestrated from across the border. Ironically, the charge of “interference in the internal affairs” of a member state has also been levelled by Pakistan against India f0r raising the Balochistan issue at the United Nations

ADB Raises Pakistan's 2017 GDP Growth Forecast Amid War Talk by India -- The Asian Development Bank (ADB) has raised Pakistan's economic growth forecast for fiscal year 2017 (from July 2016 to June 2017) from 4.8% to 5.2%. The Bank also sees brighter outlook for the the entire South Asian region. However, the prospects of even a limited India-Pakistan war could derail the economies of the entire South Asia region. I hope that sanity will prevail in New Delhi to tone down its war rhetoric, abstain from escalation and maintain the current economic momentum. "...assuming further improvement in energy supply and security, and likely recovery in cotton and other agriculture-the growth forecast (for Pakistan) for FY2017 is revised up to 5.2%", says the Asian Development Outlook 2016 Update released September 27, 2016. The ADO which is launched annually in March and updated in September provides a comprehensive analysis of macroeconomic issues in developing Asia. The ADB report says that "growth in Pakistan will outperform the ADO 2016 projection for 2017".  Here's an excerpt  from the ADB report: "In Bangladesh and Pakistan, estimated growth in the 2016 fiscal year, to 30 June, exceeded the forecasts because robust performance in manufacturing and services more than compensated for unexpected weakness in agriculture. Increased consumption and public investment contributed to the better performance in Bangladesh in 2016. A slower growth forecast for 2017 is retained as agriculture growth is expected to moderate. Growth in Pakistan will outperform the ADO 2016 projection for 2017 on improvements in energy supply, higher infrastructure investment in an economic corridor project, and a better security environment. Improved growth in these two large economies contrasts with Nepal, where the growth estimate for the 2016 fiscal year, which ended on 15 July, is below the forecast following disruption to supply and trade, delayed reconstruction of earthquake damage, and a poor monsoon. The economy is expected to recover in 2017 as forecast in ADO 2016 on markedly accelerated reconstruction spending and a good monsoon able to lift agricultural output."

India launches ‘surgical strikes’ on Pakistan terror targets - India said it had carried out “surgical strikes” overnight across its disputed border with Pakistan to target groups of militants that were allegedly planning to carry out terror attacks on Indian territory. In a briefing, Lt Gen Ranvir Singh said the strike — which was carried out along the line of control that divides the disputed Kashmir province between India and Pakistan — had inflicted “significant casualties” on what he described as “launch pads” for terrorism. Lt Gen Singh said the army had acted on “specific and credible” information that “terrorist teams had positioned themselves at launch pads along the line of control with an aim to carry out infiltration in terrorist strikes in Jammu and Kashmir” and various other parts of the country. However, Pakistan’s army said there had been no surgical strikes, just heavy Indian firing, to which Pakistani forces responded in kind. The action — and the highly publicised way in which it has been announced — comes a fortnight after militants attacked an Indian military base at Uri, killing 18 Indian soldiers. New Delhi has publicly blamed the attack on Pakistan.

India Assets Slide After Modi Launches "Surgical Strikes" In Kashmir, Killing Two Pakistani Soldiers -- India conducted "surgical strikes" on suspected terrorist camps just across the border in Pakistan, marking its first direct military response to an attack on an army base it blames on Pakistan. The military offensive was the worst since 1999, when then-Prime Minister Atal Bihari Vajpayee - also a member of Modi’s nationalist Bharatiya Janata Party - responded to what he said was repeated cross-border infiltrations by militants in Kashmir.  At the same time, Pakistan said two of its soldiers had been killed in exchanges of fire and in repulsing an Indian "raid", but denied that India had made any targeted strikes across the de facto frontier that runs through the disputed Himalayan territory of Kashmir. The region is held equally by India and Pakistan but claimed in full by both. Terrorist violence killed 201 people in Kashmir in 2016, the deadliest year since 2010, according to the South Asia Terrorism Portal. India’s announcement of the targeted strikes on terror camps in Pakistan is "very significant," said Shashank Joshi, a fellow at the Royal United Services Institute in London. "India has conducted covert, retaliatory cross-border raids on many occasions in the 1990s and 2000s, but to prominently announce them is a provocative new approach," he said in an e-mail. "Depending on how far the Indians penetrated and the nature of the targets, these might also represent much more ambitious operations." Domestic pressure had been building on Modi to take a tough stand over rising violence in the disputed region of Kashmir, Bloomberg reports, including through non-military measures such as reviewing a 1960 water-sharing treaty. According to Reuters, the cross-border action inflicted significant casualties, the Indian army's head of operations told reporters in New Delhi, while a senior government official said Indian soldiers had crossed the border to target militant camps. The Indian announcement followed through on Prime Minister Narendra Modi's warning that those Delhi held responsible "would not go unpunished" for a Sept. 18 attack on an Indian army base at Uri, near the Line of Control, that killed 18 soldiers.The strikes also raised the possibility of a military escalation between nuclear-armed India and Pakistan that would wreck a 2003 Kashmir ceasefire.

Emerging markets corp debt issuance hits $26 trillion in H1-survey | Reuters: Emerging markets nonfinancial corporate debt rose to more than $26 trillion in the first half of the year, moving to more than 100 percent of the sector's total gross domestic product, according to a survey released on Monday. The Institute for International Finance (IIF) reported that debt issued by emerging market corporates during the first half of the year rose by $1.6 trillion as firms continued to take advantage of a growing appetite for emerging market debt, which generally boasts higher yields than comparable debt issued by companies in developed markets. Debt per adult in emerging markets is estimated to be around 60 percent higher than its level in 2010, with China, Saudi Arabia, Thailand and Korea witnessing the largest build-up in household debt per adult since 2010. The most pronounced rise in issuance came from China, Saudi Arabia and Poland. Brazil, Hungary and Russia recorded the largest declines. "In addition to widely acknowledged risks to financial stability, the continued rise in debt - combined with weak investment spending - also raises concern about potential misallocation of resources," the IIF said. "A growing share of the proceeds from new borrowing has been deployed in sectors where there is already too much capacity - notably in China." Global debt, across the household, government, financial and non-financial corporate sectors, rose by more than $10 trillion in the first half of 2016, surpassing $216 trillion, or 327 percent of global GDP.

 Trade Protectionism Risks Deeper Global-Growth Funk, IMF Warns -- Where have all the exports and imports gone? That’s what policy makers and pundits have been asking themselves since it became clear trade volumes haven’t been growing like they did before the 2008 financial crisis. The volume of goods and services has grown by just 3% a year since the end of 2011, compared with about 9% a year from 2003 to 2007, the IMF said. Merchandise trade hasn’t grown much at all since the end of 2014. Many politicians who back trade agreements say the dearth of new deals is to blame, and they warn a failure to pass the Trans-Pacific Partnership, or TPP, after the election or reduce tariffs in other ways could exacerbate the problem. Presidential candidates Hillary Clinton and Donald Trump both oppose the agreement, which they say could hurt the working class, and Mr. Trump on Monday repeated his plan to tax imports from Mexico, which could further weigh on trade.But other trade experts, many from the business world, blame slower trade on a rejiggering of global supply chains, with both Chinese firms and Western multinationals now more likely to produce more of a finished product within a single country rather than relying on far-flung suppliers shipping parts and components around the globe.Still, structural factors including the lack of trade agreements and shrinking supply chains aren’t the main reason for the slowdown, the IMF says in a 57-page analysis published Tuesday. Instead, ordinary economic weakness—including the “synchronized slowdown in economic activity” through much of the world and a  dearth of investment—is responsible for as much as three-quarters of the collapse in trade between the pre-crisis years starting in 2003 and the post-crisis years, the report says.

IMF study warns free trade seen as benefiting 'only a fortunate few' -- The International Monetary Fund has warned that free trade is increasingly seen as benefiting only the well-off and that help is needed for those whose job prospects have been damaged by globalisation in order to put fresh momentum behind removing barriers to international commerce. In a chapter from the half-yearly World Economic Outlook study released ahead of its annual meeting next week, the IMF said the weakness of the global economy, rather than a wave of protectionism, had been largely responsible for the sharp slowdown in trade growth over the past four years. But it said the uptick in protectionist measures since the financial crisis had “not been innocuous” and stressed that anti-trade sentiment could harden. The IMF noted there had been studies showing “significant and long-lasting adjustment costs” for those whose job opportunities had been impaired by the structural changes associated with the trend, even if the lower prices generated by globalisation helped those on low incomes. “An increasingly popular narrative that sees the benefits of globalisation and trade accrue only to a fortunate few is also gaining traction,” the IMF study said.

 World Trade Set For Slowest Yearly Growth Since Global Financial Crisis - WSJ: World trade will this year grow at the slowest pace since the global financial crisis, a development that should serve as a “wake-up call” given rising antiglobalization sentiment, the World Trade Organization warned Tuesday. The Geneva-based body responsible for enforcing the rules that govern global trade cut its forecast for the growth of exports and imports this year and next, and now foresees an increase of just 1.7% in 2016 and as little as 1.8% in 2017, having projected rises of 2.8% and 3.6%, respectively, in April. The WTO joined other international bodies—such as the Organization for Economic Cooperation and Development—in warning a slowdown in trade could weaken longer-term economic growth. “The dramatic slowing of trade growth is serious and should serve as a wake-up call,” said Roberto Azevedo, the WTO’s director-general. “It is particularly concerning in the context of growing antiglobalization sentiment. We need to make sure that this does not translate into misguided policies that could make the situation much worse, not only from the perspective of trade but also for job creation and economic growth and development which are so closely linked to an open trading system.”The WTO said the cut in its forecast was a response to weak trade growth in China, Brazil and North America during the first six months of the year. According to its figures, trade in goods fell 1.1% in the first three months of 2016, and while there was a rebound in the three months to June, it was “smaller than anticipated” at just 0.3%.

Global Container Volume on Track for Worst Year Since 2009 - WSJ: Global container volumes are on track for zero growth this year, which would mark the sector’s worst performance since the 2009 economic crisis and a sure catalyst for further bankruptcies and possible acquisitions in the beleaguered shipping industry, shipping executives said. Freight rates, the predominant source of income for shipping companies, fell 20% in the benchmark Asia to Europe trade route this week compared with last week to $767 per container. Rates have mostly stayed well below $1,000 since the start of the year and operators say anything below $1,400 is unsustainable. They aren’t expected to turn around soon. China’s Golden Week holiday starts at the beginning of October, marking the slow season for operators as many Chinese factories cut production levels after an output frenzy in the summer months when western importers stack up products for the year-end holidays. “The industry faces its worst year since the Lehman Brothers collapse,” said Jonathan Roach, an analyst at London based Braemar ACM Shipbroking. “Demand is around zero and any moves to increase freight rates will likely fail.” Hanjin Shipping, South Korea’s biggest operator and the world’s seventh largest in terms of capacity, filed for bankruptcy protection last month and is under court order to sell its own ships and returning chartered ships to their owners. Container operators, which move everything from clothes and shoes to electronics and furniture, are burdened by 30% more capacity in the water than demand. Many are fighting for survival as freight rates barely cover fuel costs.

Lagarde Calls Trade Restrictions ‘Economic Malpractice’ - The leader of the International Monetary Fund, Christine Lagarde, warned in a speech on Wednesday that an increase in protectionist trade measures could derail a fragile economic recovery in the United States and the rest of the world. Ms. Lagarde spoke at Northwestern University, in what was billed as a kickoff for the fund’s annual fall meetings to be held in Washington next week. “Restricting trade is a clear case of economic malpractice,” Ms. Lagarde said, making the case that workers and families would be worse off if global trade were restricted. Ms. Lagarde’s comments come in the midst of a polarizing election in the United States, where the Republican and Democratic presidential candidates have both criticized trade deals as hurting, not helping, American workers.  Since the end of World War II, when it was formed, the I.M.F. has been the most vocal global proponent of free trade policies in which countries around the world agree to trade with each other and keep impediments such as tariffs or quotas to a minimum. This doctrine lies at the root of all the advice that it parcels out to its member countries, and liberal trade policies are one of its major conditions when the fund lends money to a country in crisis. But in today’s global climate of weak growth and inward-looking politics, these textbook notions that freer trade benefits all are being questioned by many. Recent research from the fund also shows that since the crisis, the growth in global trade has slowed sharply — barely keeping pace with global output. From 1985 to 2007, global trade expanded at twice the level of overall economic growth, according to fund economists. One reason for the slowdown, the report concludes, has been a steady rise in protectionist rules and regulations over the last three years. “If we were to turn our backs on trade now, we would be choking off a key driver of growth at a point when the global economy is still in need of every good piece of news it can get,” Ms. Lagarde warned.

Trump sends chill through WTO : Between his promises to slap hefty tariffs on allies and threats to withdraw from the World Trade Organization, Donald Trump has officials in Geneva running scared. Faced with the prospect of a U.S. president who stands against the open-market philosophies they have spent their careers promoting, top trade officials are in various states of denial about the election, Pro Trade’s Megan Cassella reports from WTO headquarters. Story Continued Below Some officials who talked to Cassella expressed doubt that the populist billionaire could really win. Others felt there was no way a President Trump would keep the same promises he has made as a boisterous candidate. Still more held onto the hope that even if he tried, the United States’ separation of powers and rules set by organizations like the WTO would keep him from making too much progress. “Policy has to be built on reality, and if you are elected, you cannot disregard reality — not even Trump,” one official told Cassella this week in Geneva, where the WTO just wrapped up its annual public forum. The reactions offer a snapshot of the message Trump’s campaign has sent to trade officials around the world. In the short term, a Trump presidency would likely mean weaker U.S. leadership in Geneva, officials said, which could slow the organization’s ability to get things done. But more broadly, the popularity of his candidacy alone illustrates how far the sentiment has spread among voters that trade might not, in fact, benefit them.

Monetary policy isn’t working, and central bankers are getting desperate - Ed Harrison - The last few days have made clear that monetary policy is having less and less impact as time goes along. In particular, the latest salvos from the Bank of Japan smack of desperation, as if BOJ Governor Kuroda has decided to throw everything but the kitchen sink into his grab bag of unorthodox monetary policy. Because the Bank of Japan is so far along the curve toward both secular stagnation and unorthodox policy to counteract that slowing, we should pay attention to how their experiments go. I do not expect good results.   Let me start off with a baseline on how I think about monetary policy. I apologize if this is a bit wonkish. But I think it’s important in understanding why central banks’ unorthodox policy tool kits are limited.  The first and main tool in the arsenal of any central bank is interest rate policy. And this is because the central bank is a monopolist. In Japan, for example, the Japanese government is the monopoly issuer of Japanese currency, and has given the Bank of Japan monopoly power as its agent to control the reserve monetary base. The Bank of Japan exercises its monopoly power by targeting the overnight rate for money, currently at zero percent with an added tax on excess reserves to boot.  This is how all modern central banks operate. They have explicit targets or target ranges for the overnight interest rate and act within the reserve market that they control to ensure they hit their targets. The point of course is that modern central banks use a price or interest rate target, not a quantity target like targeting reserves or monetary aggregates. And since a monopolist can only control either price or quantity, not both simultaneously, central banks have to pick one or the other. The Volcker experiment at the Fed in the late 1970s and early 1980s made clear that quantity targets don’t work. So central banks target interest rates i.e. price.  Now central banks can’t do that unless they supply their banks with all the reserves that those banks desire to make loans at the target interest rate — meaning central banks must be committed to supplying as many reserves as banks want or need in accordance with the lending that they do. Failure to supply the reserves means failure to hit the interest rate target, since banks would bid up the price of reserves above the target.

The global pivot towards fiscal policy - Fiscal policy activism is firmly back on the agenda. After several years of deliberate fiscal austerity, designed to bring down budget deficits and stabilise public debt ratios, the fiscal stance in the developed economies became broadly neutral in 2015. There are now signs that it is turning slightly expansionary, with several major governments apparently heeding the calls from Keynesian economists to boost infrastructure expenditure.This seems an obvious path at a time when governments can finance public investment programmes at less than zero real rates of interest. Even those who believe that government programmes tend to be inefficient and wasteful would have a hard time arguing that the real returns on public transport, housing, health and education are actually negative [1].With monetary policy apparently reaching its limits in some countries, and deflationary threats still not defeated in Japan and the Eurozone, we are beginning to see the emergence of packages of fiscal stimulus with supply side characteristics, notably in Japan and China. In 2016, budgetary policy in the developed economies will be slightly expansionary and the latest plans suggest that the same will be true next year.

  • In Japan, there has been an overt decision to ease budgetary policy by about 1.3 per cent of GDP in the next 12 months.
  • In China, fiscal policy has probably been eased by at least 1 per cent of GDP this year, though much of this has been outside the official government budget.
  • In the UK, Chancellor Hammond has suggested that he is rethinking his predecessor’s plan to balance the budget by 2020, though this change may not be taken as far as a major easing in the policy stance.
  • In the US, both Hillary Clinton and Donald Trump have outlined spending packages, amounting to 1.5 and 2.5 per cent of GDP respectively, but it is far from clear how much of his would be offset by extra taxation after negotiations with Congress.
  • In the Eurozone, budget deficit targets have been allowed to rise to finance help for migrants and the Juncker infrastructure programme, and even Germany is seriously thinking of tax reductions in 2017, but the overall change in the fiscal thrust still seems rather minor.

  The Return of Fiscal Policy - Nouriel Roubini -- Since the global financial crisis of 2008, monetary policy has borne much of the burden of sustaining aggregate demand, boosting growth, and preventing deflation in developed economies. Fiscal policy, for its part, was constrained by large budget deficits and rising stocks of public debt, with many countries even implementing austerity to ensure debt sustainability. Eight years later, it is time to pass the baton.  As the only game in town when it came to economic stimulus, central banks were driven to adopt increasingly unconventional monetary policies. They began by cutting interest rates to zero, and later introduced forward guidance, committing to keep policy rates at zero for a protracted period.  In rapid succession, advanced-country central banks also launched quantitative easing (QE), purchasing massive volumes of long-term government securities to reduce their yields. They also initiated credit easing, or purchases of private assets to reduce the costs of private-sector borrowing. Most recently, some monetary authorities – including the European Central Bank, the Bank of Japan, and several other European central banks – have taken interest rates negative. While these policies boosted asset prices and economic growth, while preventing deflation, they are reaching their limits. In fact, negative policy rates may hurt bank profitability and thus banks’ willingness to extend credit. As for QE, central banks may simply run out of government bonds to buy. Yet most economies are far from where they need to be. If below-trend growth continues, monetary policy may well lack the tools to address it, particularly if tail risks – economic, financial, political, or geopolitical – also undermine recovery. If banks are driven, for any reason, to reduce lending to the private sector, monetary policy may become less effective, ineffective, or even counter-productive.  In such a context, fiscal policy would be the only effective macroeconomic-policy tool left, and thus would have to assume much more responsibility for countering recessionary pressures. But there is no need to wait until central banks have run out of ammunition. We should begin activating fiscal policy now, for several reasons…

Stop pretending that an economy can be controlled - OECD Insights -- Angel Gurría, OECD Secretary-General -The crisis exposed some serious flaws in our economic thinking. It has highlighted the need to look at economic policy with more critical, fresh approaches. It has also revealed the limitations of existing tools for structural analysis in factoring in key linkages, feedbacks and trade-offs – for example between growth, inequality and the environment. We should seize the opportunity to develop a new understanding of the economy as a highly complex system that, like any complex system, is constantly reconfiguring itself in response to multiple inputs and influences, often with unforeseen or undesirable consequences. This has many implications. It suggests policymakers should be constantly vigilant and more humble about their policy prescriptions, act more like navigators than mechanics, and be open to systemic risks, spillovers, strengths, weaknesses, and human sensitivities. This demands a change in our mind-sets, and in our textbooks. As John Kenneth Galbraith once said, “the conventional view serves to protect us from the painful job of thinking.” This is why at the OECD we launched an initiative called New Approaches to Economic Challenges (NAEC). With this initiative we want to understand better how the economy works, in all its complexity, and design policies that reflect this understanding. Our aim is to consider and address the unintended consequences of policies, while developing new approaches that foster more sustainable and inclusive growth. Complexity is a common feature of a growing number of policy issues in an increasingly globalised world employing sophisticated technologies and running against resource constraints.  The report of the OECD Global Science Forum (2009) on Applications of Complexity Science for Public Policy reminds us of the distinction between complicated and complex systems. Traditional science (and technology) excels at the complicated, but is still at an early stage in its understanding of complex phenomena like the climate.

IMF Economists to World Leaders: You Are Not Out of Economic Ammo (Yet) -Amid the ever-gloomier outlook for long-term global economic growth, a team of top economists at the International Monetary Fund is offering a ray of hope.  Even though interest rates around the world are bumping the floor and government debt loads are heavy, there is still room for fiscal, monetary, and structural policies to lift global growth, they say–provided the policies are “comprehensive, consistent, and coordinated.” Whether triggered by an unanticipated recession or by a realization among leaders of the world’s big economies that “the current policy approach falls short of reviving growth,” these policies would be substantially more potent if they are coordinated across countries than implemented piecemeal, one country at a time, the IMF economists argue in a new staff discussion paper titled “Macroeconomic Management When Policy Space Is Constrained.” Staff discussion notes reflect the latest thinking of IMF economists, not the policy of the institution. This one is noteworthy because its co-authors come from the very top of the IMF hierarchy: Vitor Gaspar, director of the Fiscal Affairs Department; Maurice Obstfeld, chief economist; and Ratna Sahay, acting director of the Monetary and Capital Markets Department. David Lipton, the IMF’s deputy managing director, played a role behind the scenes in shaping the argument. The IMF economists realize that global economic leaders aren’t about to take their advice now. Instead, they are fighting occasional assertions that fiscal and monetary policies will be unable to respond if the world tumbles into recession. “Perceptions that each individual policy instrument could be reaching its limit…are undermining policy credibility,” they warn. “The global macroeconomic risks of 2016 are one-sided,” they add, suggesting that bad surprises are more likely than good ones. “[A] major downdraft now would push the global economy closer toward, and in some regions definitively into, a low-inflation quagmire.”

Global debt climbs towards fresh high as companies and countries keep on borrowing: Global debt issuance is on course to hit a record high in 2016 as figures showed sales this year topped $5 trillion (£3.9 trillion) at the end of September. Debt issuance rose to $5.02 trillion in the nine months to September 22, according to Dealogic, putting 2016 on course to beat the all-time high of $6.6 trillion recorded in 2006. Record low interest rates have encouraged countries and companies to issue debt as central banks around the world try to stimulate growth. The data also showed corporate issuance of investment-grade debt reached a record high of $1.54 trillion since the start of the year, up from $1.41 trillion in the same period a year earlier. Dealogic's figures also highlighted the impact of the Brexit vote.Sterling-denominated investment grade debt rose to $21.3bn in the first nine months of the year, up slightly from $20.9bn raised in the same period of 2015. Volumes in July fell to their lowest since 2000 as the referendum result slowed issuance, with just $564m issued, according to Dealogic. However, issuance is expected to pick up later this year following the Bank of England's decision to buy £10bn of corporate debt as part of its revamped bond-buying programme. Sterling issuance in August jumped to six times the average following the Bank's announcement. Green bonds - which raise money for environmentally friendly projects and often carry tax exemptions - are also rising in popularity. Activity surpassed full-year 2015 levels in September as volumes reached a record high, worth $48.2bn.

Twitter Folds To Erdogan Pressure, Will Block Journalist For "Instigating Terrorism" --Following the permanent banning of conservative commentator Milo Yiannopoulos from using its service, and the suspension of the account of Glenn Reynolds, aka @instapundit and creator of the Instapundit blog, a University of Tennessee law professor and a conservative columnist for USA TODAY; Jack Dorsey has decided that Twitter can only be a 'safe space' if veteran Turkish reporter Mahir Zeynalov with 131,000 followers - described by some as "one of the few voices speaking the truth about the situation in Turkey" - is blocked... On the word of Turkish president Erdogan... Twitter told me that it will block my account at the request of Turkey for "instigating terrorism," putting an end to my ~7-year reporting.— Mahir Zeynalov (@MahirZeynalov) September 26, 2016 The ban comes on the heels of his daring to report on the treatment of jailed journalists under Erdogan's tyrannical new anti-extremism laws...

Turkey hoards well-educated Syrians — Last December, a Syrian refugee living in Turkey received a phone call his family had dreamed about for over three years: The United States had accepted their resettlement application. By May, he was later told, he would be in Chicago. But when he requested an exit permit from Turkish authorities — the last document he needed to leave the country — he was turned away without explanation.As a result, Sameer’s family missed their flight and heard no news about their case through Turkey’s tumultuous summer — which saw a coup attempt — followed by the start of the fourth consecutive academic year his children have been out of school.  Sameer sunk further into despair when the agencies managing his case told him why he was prevented from leaving: For some of the very reasons the United States was willing to accept Sameer — his family’s unblemished background, his wife’s university degree and their potential contribution to society — Turkey wants to keep him for itself. According to staff at agencies that handle resettlement cases, Turkey is preventing some Syrians from leaving the country on the basis of their educational credentials, as it works out plans to offer citizenship to Syrians. A report last week said more than 1,000 Syrians slated to travel to the United States and other countries have been prevented from doing so because they have university degrees. As early as June, German media reported that at least 50 cases approved by Berlin were halted by Turkish authorities for similar reasons. Selin Unal, a spokeswoman for the U.N. refugee agency in Ankara, wrote in an email that the agency is “aware that the Turkish government has, in some cases, applied education criteria when issuing exit permits to Syrian refugees selected for resettlement from Turkey.” Meanwhile, staff at the U.N. refugee agency and the International Catholic Migration Commission, which handles U.S. resettlement cases, have told panicked Syrians trapped in Turkey that the reason they are being held is because of their degrees.

Turkey Lashes Out At Moody's After Downgrade To "Junk" Sends Turkish Assets Plunging - Late on Friday, rating agency Moody's cut Turkey's sovereign credit rating to Ba1 or "junk" from Baa3, citing worries about the rule of law after an attempted coup and risks from a slowing economy, in a move that could deter billions of dollars of investment. "The drivers of the downgrade are ... the increase in the risks related to the country's sizeable external funding requirements (and) the weakening in previously supportive credit fundamentals, particularly growth and institutional strength," Moody's said in an e-mailed statement.  "The government's response to the unsuccessful coup attempt raises further concerns regarding the predictability and effectiveness of government policy and the rule of law.""The large-scale suspensions in the civil service raise doubts over the capacity of Turkey's policy-making institutions to make meaningful further progress in both legislating and implementing the reform program," Moody's said.Moody's did however keep its rating outlook "stable," saying Turkey's flexible $720 billion economy and strong fiscal track record offset the balance-of-payments pressures it faces. AsReuters notes, Turkey depends on investment flows to fund its current account deficit - one of the biggest in the G20 - and service its foreign debt. Ratings downgrades could force it to pay more to borrow money in international markets.The cut is Turkey’s second since a failed (or as some claim orchestrated) coup in July threatened to destabilize national security. Many of the world’s biggest funds require investment-grade ratings from two of the three major ratings companies to consider an asset for investment. The downgrade could drive forced selling of as much as $8.7 billion in Turkish bonds, JPMorgan Chase & Co. said in August. Turkey relies on capital inflows to finance one of the widest current-account deficits among the Group of 20 countries. Fitch is the only one left that has Turkey on investment grade, however, and it is due to review that rating at the start of 2017.

 Central banks loosen purse strings 200 times in less than two years | Reuters: Armenia does not often take the global financial spotlight but a routine rate cut by the tiny former Soviet republic this week marked a global milestone - the 200th case of policy easing worldwide since the start of last year. Fifty seven central banks have cut rates or pumped stimulus into their economies since January 1, 2015, to boost growth, raise inflation or both, highlighting the continued fragility of the global economy eight years after the financial crisis. And even as the financial crash of 2008 and subsequent Great Recession recede further in the rear view mirror, the level of easing activity by central banks is increasing, not decreasing. With three months of 2016 still to run, there have already been 99 policy actions this year, making it almost inevitable that last year's total of 101 will be surpassed. Armenia's rate cut on Tuesday was its ninth in little over a year, a period that has seen the refinancing rate reduced to 6.75 percent from 10.5 percent, placing the South Caucasus nation's central bank among the world's serial easers. Only Argentina has eased policy more often, its central bank slashing the key reference rate on short-term bonds 17 times and by more than 1,000 basis points to 27.25 percent since May this year. At the other end of the spectrum, 18 central banks have eased policy just once. They include the Bank of England, Nigeria's central bank, which has subsequently raised rates twice, and Uzbekistan's, which got the ball rolling on the first day of January last year. Of the 57 central banks to take action, 47 have been emerging or frontier market authorities, and 10 from developed economies.

Angela Merkel Rules Out Assistance for Deutsche Bank - Chancellor Angela Merkel has ruled out any state assistance for Deutsche Bank AG in the year heading into the national election in September 2017, Focus magazine reported, citing unidentified government officials. The German leader also declined to step into the Frankfurt-based bank’s legal imbroglio with the U.S. Justice Department, which may seek as much as $14 billion in sanctions against Deutsche Bank’s mortgage-backed securities business, the magazine said. A German government spokesman declined to comment on the report Saturday. A Deutsche Bank spokeswoman also wouldn’t comment.The finances of Germany’s biggest lender, which has lost almost half of its market value this year, are raising concern among German politicians. At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter.Germany’s government expects a “fair outcome” in the U.S. probe, the Finance Ministry said on Sept. 16. Deutsche Bank has said it’s unwilling to pay the maximum amount sought by U.S. authorities as investors fret about the bank’s capital. Chief Executive Officer John Cryan, 55, has struggled to boost profitability by selling riskier assets and eliminating jobs as unresolved legal probes and claims add to concerns that the lender will be forced to raise capital.

Deutsche Bank Shares Drop on Fears of Capital Raising WSJ - Intensifying concerns about Deutsche Bank’s financial health caused its shares to drop Monday and pushed the company into the awkward position of publicly denying that it had sought help from the German government.Shares of Deutsche Bank, one of the world’s largest banks and a linchpin of Europe’s financial system, tumbled 7.5% in European trading, closing at €10.55 ($11.85), their lowest price in decades. They have slid 53% this year, whittling Deutsche Bank’s market value to about $16 billion, roughly the size of regional U.S. lenders like Fifth Third Bancorp and M&T Bank Corp.   The concerns—voiced by a number of analysts and investors—center on whether Deutsche Bank would need to raise capital to fortify its precarious finances. The latest source of pressure is the possibility of a multibillion-dollar legal settlement with the U.S. Justice Department.The mounting worries threaten to put the German government, which has railed against taxpayer-financed banking rescues in other European countries, in a tricky position. A Deutsche Bank spokesman said Monday that the lender is “fundamentally strong” and that questions about its capital adequacy are “pure speculation.”Deutsche Bank’s first option in raising capital to provide a buffer against future losses likely would be to sell new shares to investors. Such a move would hammer the bank’s long-suffering shareholders.Deutsche Bank spokesman Jörg Eigendorf on Monday denied a German media report that Chief Executive John Cryan had sought help from the German government to resolve a U.S. mortgage-securities investigation. The Wall Street Journal reported earlier this month that the Justice Department proposed that Deutsche Bank pay $14 billion to settle the probes. The bank said it has no intention of paying “anywhere near” the $14 billion amount and that negotiations were just beginning. Analysts say a fine of even half that size could force Deutsche Bank to replenish its depleted capital cushions.

Deutsche Bank in Free Fall. Shares, CoCo Bonds Plunge. Merkel Gives Cold Shoulder on Bailout. Bank Denies Everything - Wolf Richter - Shares of Deutsche Bank got bashed 7.6% today, to €10.49 in Frankfurt, down 67% from April 2015, to the lowest level since they started trading on the Xetra exchange in 1992. They traded below that level in the early 1980s, but decades of inflation have whittled down the purchasing power so much that comparisons are meaningless.  Deutsche Bank’s 5-year default probability spiked to the highest level this year.Its balance sheet, bloated with opaque risks, equals 58% of Germany’s GDP. It lost €6.8 billion last year. To hang on another day and to prop up Tier 1 capital, it has raised $20 billion in capital, in 2010 and 2014, by selling shares and diluted existing shareholders, and by issuing contingent convertible bonds.These infamous “CoCos” are designed to be “bailed in” before taxpayers get to foot the bill. Thus, they’re a measure of investor fears about getting bailed in. So when heck and high water came earlier this year, the bank responded by announcing on February 12 that it would buy back $5.4 billion of its own bonds! Everything soared! Even CoCos, though not included in the buyback, rose 24% over a few weeks. We have long ridiculed this manipulative move [here’s detailed explanation… Deutsche Bank’s CoCo Bonds Speak of Fear of the Worst]. Now shares hit new lows, and the miserable CoCos are getting clobbered, dropping 2.7% today to 73 cents on the euro, down 28% from April 2015 when they still traded at 102 cents on the euro. They’re now just a smidgen from also setting new lows.  The current rout – one in a long series – was triggered because Chancellor Angela Merkel, the ultimate political animal fretting about the general elections in the fall of 2017, let voters and taxpayers know what they wanted to hear. But investors were not amused. On Friday, Focus Magazin reported that Merkel wouldn’t meddle in the legal disputes between Deutsche Bank and the US Department of Justice over the $14 billion fine related to the scandal surrounding residential mortgage-backed securities.

The Deutsche Bank crisis could take Angela Merkel down and the Euro - Our image of German banks, and the German economy, as completely rock solid is so strong that it takes a lot to persuade us they might be in trouble.  And yet it has become increasingly hard to ignore the slow-motion car crash that is Deutsche Bank, or to avoid the conclusion that something very nasty is developing at what was once seen as Europe’s strongest financial institution. Its shares have been in free-fall for a year, touching a new low of 10.7 euros on Monday, down from 27 euros a year ago. Over the weekend, the German Chancellor Angela Merkel waded into the mess, briefing that there could be no government bail-out of the bank. But hold on. Surely that is an extra-ordinary decision? If the German government does not stand behind the bank, then inevitably all its counter-parties – the other banks and institutions it deals with – are going to start feeling very nervous about trading with it. As we know from 2008, once confidence starts to evaporate, a bank is in big, big trouble. In fact, if Deutsche does go down, it is looking increasingly likely that it will take Merkel with it – and quite possibly the euro as well.Deutsche Bank has been wobbly for a year now. Back in July, it announced a slump in profits and revenues. Back in February, the Bank’s co-CEO John Cryan put out a statement re-assuring staff and investors that the institution was ‘rock solid’ amid an earlier slide in the share price. Anyone whose memory stretches back a whole eight years will know that is the kind of thing bank CEOs say about three minutes before the whole thing goes pop. Ever since then, the news has gone from bad to worse. Deutsche has struggled to cuts costs and restore profitability, legal challenges have mounted, and then earlier this month the US Justice Department hit the bank with a $14 billion fine over sales of mortgage securities. In its pomp, Deutsche could have written out a cheque with a nonchalant shrug. Right now, no one is sure where it can get the money from.

Deutsche Bank sells UK asset and battles bailout rumors -- Germany's biggest private lender has sold its British insurance business to raise urgently needed cash to pay looming penalties for its past misdeeds and to fight speculation of requiring state aid to stay afloat.Deutsche Bank announced on Wednesday it had sold Abbey Life Assurance company for 935 million pounds (1.1 billion euros, $1.22 billion) under efforts to restructure its business amid increasing regulation, negative interest rates and a competitive home market. Deutsche's insurance business in the UK was acquired by Phoenix Group - Britain's largest owner of life insurance funds, who added about 10 billion pounds of assets under management and approximately 735,000 policyholders to its portfolio with the deal. Phoenix said it would raise 735 million pounds via a rights issue and use 250 million pounds from a new bank facility to fund the purchase. Both companies said the deal was still subject to regulatory approval by the authorities in Britain and Germany. Deutsche Bank said in a statement that the sale would boost its core capital ratio - the stock of funds regulators require banks to have on hand - by 10 basis points, or 0.1 percent over its level on June 30. The lender is currently restructuring its business, selling assets abroad and planning to slash 200 branches in Germany as well as almost 9,000 jobs worldwide by 2020. Shares in the bank have lost more than half of their value since January after the bank booked a loss of almost 7 billion euros in 2015.

Pressure is building for Germany to show it's ready to rescue Deutsche Bank - German officials could be about to find themselves in an uncomfortable position: Being called on to show they're ready to rescue a bank in a part of the world where such operations are considered taboo.  Deutsche Bank came under intensified market fire Thursday, the latest salvo being a Bloomberg report that a small number of hedge funds are trimming their sails at the German bank.  In a broad perspective, the move would represent a minor dent in Deutsche's derivatives clearing business. Barry Bausano, chairman of Deutsche's hedge fund business, told CNBC on Thursday that while there have been some outflows, there have also been inflows, which he said is "part of the typical ebbs and flows" of the prime brokerage business.  But at a time when investors are fearing what the future holds for the highly leveraged institution, such news is enough to cause ripples. Shares tumbled more than 7 percent in mid-afternoon trading. The plunge took the broader market down as well. Consequently, market talk intensified that it's becoming time for the German government step in and assure investors that it will be at the ready to stabilize both Deutsche and the broader system — much along the lines of what U.S. officials had to do during the 2008 financial crisis. "They're going to probably have to say that they would be willing to put funds into the bank," said banking analyst Christopher Whalen, senior managing director and head of research at Kroll Bond Rating Agency. "It's exactly like what (former Treasury Secretary Henry) Paulson did with Citi ... It's a very analogous situation. Hopefully, the German government will take a page from that particular book and look at how the U.S. responded."

The Deutsche domino - Izabella Kaminska -- Is there something particularly hubristic about a German bank being the bank to trigger a renewed eurozone banking panic? We think so. Here’s Deutsche’s share price as of pixel time (about €10.75 per share). It’s up about half a euro following news on Wednesday that it would be selling off its UK insurance business Abbey Life Assurance to Phoenix for $1.2bn*. The German finance ministry, meanwhile, denied a report in Die Zeit that the German government and financial authorities are preparing a rescue plan, which would involve the government taking a stake in the worst case scenario.So how did it come to this? At FT Alphaville we’ve tracked the Deutsche business model for sometime, and it’s fair to say that describing it as “aggressive” is putting it mildly. For the most part, Deutsche’s edge has always been in the flow business. But flow markets are fairly zero sum, and — as we now know — prone to certain conflicts of interest, which now pose much the same regulatory repercussion risk as business models based on strategic mis-selling.The problem for Deutsche therefore is how to re-establish a profitable edge for itself in the context of a massively over-banked and over-competitive core market, without exposing itself to further regulatory expense through the taking of additional risk, whilst also treating its customer base fairly.As Frances Coppola explained in a Forbes post on Tuesday, it’s the bank’s incapacity to generate enough profits to cover its costs and its current size (including support for legacy bad assets) that is really the issue here.Yet, if Deutsche’s inherent problem is a profitability one, it does beg the question whether government bailouts can ever really be justified, especially if they de facto constitute German-taxpayer funded reparations to the US state for the purpose of keeping unprofitable businesses in play.  As Coppola notes, Merkel’s insistence that there will be no state aid available to Deutsche Bank turns this all into an uncomfortable game of chicken. Yet, it’s also not a game that Merkel is ever likely to win:

Turkey Contemplates Buying Deutsche Bank - In what is surely the most stealthy version of Wednesday humor we have ever posted, Bloomberg reports that according to Yigit Bulut, chief adviser to Turkish President Recep Erdogan, Turkey should consider "using a new wealth fund or a group of state-owned banks to buy" the embattled Deutsche Bank. Bulut made the proposal on Tuesday via his Twitter account, saying Germany’s largest lender should be made into a Turkish bank.  "For months on TV programs, I’ve been calling on Turkey’s private and public capital: ‘Some very good companies in the EU are going to fall into trouble and we need to be ready to buy a controlling stake in them,’” Bulut wrote on Twitter. "Wouldn’t you be happy to make Germany’s biggest bank into a Turkish bank!!" the advisor said, cited by Bloomberg. Aside from the farcically comical overtones of the proposal, the suggestion will likely infuriate Germany and may ignite political opposition in Europe's strongest economy, where Deutsche Bank has long been viewed as a national champion and has played an integral role in Germany’s economy. Going with the flow, Bloomberg does a "serious" analysis of the proposal and notes that  Turkey’s financial industry, long viewed as a source of strength for the $700 billion economy, "has suffered some loss of market confidence over the past few years."   The market capitalization of the country’s publicly traded lenders stands just above $49 billion, roughly the size of General Motors Co. and about half what it was in 2013, while that of Deutsche Bank is almost $17 billion. Banking assets in the country amounted to about $836 billion at the end of July, while Deutsche Bank had total assets of 1.63 trillion euros ($1.83 trillion) at the end of last year. Yeah, the numbers don't really work but that's the smallest issue facing the "contemplated" transaction.

  It's Not Really About Deutsche Bank - It is never a good thing when official sources either named or unnamed are quoted in the media as denying bailout discussions. For any bank such rumors and denials are harmful because, obviously, they are a reflection of common perception. Furthermore, most people know all-too-well the true nature of any denials, thus reinforcing only that much more the troubling perceptions in the first place. For Deutsche Bank to be the institution in question is altogether different. When Germany’s Commerzbank, for example, was forced to request a capital injection from the state’s bailout fund SOFFIN in November 2008 that was a sign of the times. It was just another bad sign in an ocean of them. Should Deutsche Bank even get connected to something like that is perhaps a sign of renewal of those times. Deutsche Bank is not Commerzbank; in many ways Deutsche is the last remaining remnant of what is left of the reigning wholesale, eurodollar system. Where other banks long ago saw this depression for what it was (all risk, no reward), DB was siding with central bankers and deploying “capital” into EM’s and junk bonds. The bank was reticent to reject its derivatives book, once a source of nearly all its power and strength. And it was dreams of reclaiming lost grandeur that drove the bank into its currently perilous state. All that is forgotten in the mainstream media that wants to frame a systemically important bank’s troubles on once again regulation, or at least government action intruding into what it is supposed to be an otherwise stable and healthy environment.This weekend it was reported that Germany’s Chancellor Angela Merkel denied that the state would consider a rescue of Deutsche, even though the bank’s name literally means Germany’s bank.

I Don't See How Germany Can Contain the Deutsche Bank Collapse --Deutsche Bank is the 11th largest bank in the world. It has assets of $1.8 trillion and over ~$60 trillion in derivatives on its books.From a balance sheet perspective, DB’s balance sheet is 50% the size of Germany’s GDP. By way of comparison, imagine if JP Morgan was a $9 TRILLION bank. That’s effectively DB’s status in Germany. However, it’s DB’s derivative book that is the real problem as far as the markets are concerned. As I mentioned before, DB has ~$60 trillion in derivatives. And unlike the other derivatives giant of the financial world (JP Morgan with $52 trillion in derivatives), DB is based in Europe.What are the differences?  Europe is where Negative Interest Rate Policy (NIRP) Brexit and exposure to a banking system that is entirely too laden with debt has proven a disastrous cocktail. What precisely has hit DB remains to be seen. But something happened in the first two weeks of September that triggered a market meltdown. DB shares have fallen straight down a total of 27% since that time. Now we are in full-blown panic mode. This bank is too big to bailout and too big to bail-in. Moreover that massive derivatives book connects DB to over 200 financial entities. Unwinding it will be catastrophic.  This could very well lead to a 2008 type Crash. To be blunt, I don't see how Germany or the ECB can contain it.

Germany "Other" Bank: Commerzbank To Fire 9,000, 18% Of Its Entire Workforce - While the market's attention has been transfixed by the latest crash in the stock of Europe's biggest bank, now that concerns about Deutsche Bank's $2 trillion balance sheet have violently resurfaced, it is worth recalling that Germany's "other" mega bank, DB's smaller rival, Commerzbank, whose balance sheet is hardly looking much healthier, is planning to cut around 9,000 jobs over the coming years as Germany's second biggest lender pushes ahead with a restructuring plan, Handelsblatt reported earlier today, citing unnamed sources in the finance industry. The round of layoffs would eliminate a massive 18% of the bank's entire workforce. Like in the case of Deutsche Bank, squeezed by negative European Central Bank interest rates, Commerzbank has been seeking ways to boost revenue by passing on costs to corporate customers and increasing fees for retail depositors, but profit margins remain thin. That leaves cost cutting high on the agenda. Handelsblatt said it's not clear yet whether Commerzbank will resort to outright dismissals. The bank's restructuring will run through 2020 with costs of up to 1 billion euros ($1.13 billion), according to the newspaper. In addition to the massive layoffs, the bank will scrap its dividend payments for 2016 as part of the strategy revamp due to be published by Chief Executive Martin Zielke on Friday, Handelsblatt reported. All the soon to be laid off workers can send their thank you notes to Mario Draghi: no need to even pony up for international postage - the ECB is conveniently located in Frankfurt.

Major Dollar Shortage Exposed In Europe As Deutsche Bank Contagion Spreads --"Storm in a teacup" this is not. While global markets remain calm(ish), distracted by OPEC headlines, US election 'entertainment', and Middle East proxy wars, the reality is, something very ugly is accelerating in Europe. With the collapse of the "most systemically dangerous bank in the world" we should hardly be surprised, but Deutsche Bank's crash is being shrugged off by average joes on mainstream media... and besides, the central banks will save us, right?  Well, Deutsche contagion is spreading... rapidly. Since Deutsche's recent highs, the short-end of the EUR-USD basis swap curve has collapsed...Simplifying - this chart measures the degree of USD shortage (willingness to spend money just to get USD now) across time - the lower the level, the more desperate for USDs.And no, it's not a quarter-end issue... Still not sure... Then explain why European banks just increased their demand for USDs from The ECB's 7-day lending facility by over 2000%...As @Landonthomasjr notes, since 2009: DB shareholders put up 13.5 billion euros in equity. DB has paid 19.3 billion euro in bonuses. Perhaps they should have saved some of that cash eh?Simply put - trust in the European Banking system is faltering, counterparty risk hedging is accelerating...

Italian Banking Crisis: Weak banks and faltering domestic demand: The sudden panic about a potentially imminent Italian banking sector collapse back in July has somewhat subsided for now, but sooner or later the issue will inevitably rear its ugly head again. Two months after Italian bank stocks collapsed even further in the aftermath of the Brexit vote, fears of an imminent need for a bail-in have receded as the Italian government works on plans to shore up its weakest bank, Monte dei Paschi di Siena (MPS). This will be achieved via an alternative but rather ambitious method culminating—if all goes according to plan—in a new capital injection. However, MPS, which came up short in July’s ECB stress tests, has already received capital injections in the past. Such plans to patch up banks have tended to involve kicking the can down the road rather than providing a more definitive solution to the 360 EUR billion of non-performing loans (NPLs) weighing down Italy’s banking sector, equivalent to one fifth of its GDP. If a sustainable solution is not found to clean up Italian bank balance sheets in the near future, they will inevitably constrain domestic demand and thereby weigh on the country’s already feeble growth even further. Domestic demand, the longstanding mainstay of the Italian economy, is already under intense pressure. In the second quarter, GDP failed to grow in quarter-on-quarter terms, primarily on the back of a broad-based deterioration in all components of domestic demand (private consumption, government consumption and fixed investment), which could not be offset by the unusually-positive contribution of the external sector to growth. The difficult climate for domestic demand in Italy is nothing new, since the austerity policies implemented in recent years have taken their toll and Italian governments have centered their efforts on trying to boost external demand instead in order to reverse the current account deficit Italy had until 2012 and keep it positive going forward. And yet private consumption has remained the main driver of Italy’s feeble economic recovery. Analysts foresee that the poorer-than-expected performance of domestic demand (especially private consumption) in the second quarter this year will be temporary, but its growth rate will nevertheless decelerate in 2017.

Italy's Monte dei Paschi considers debt-to-equity swap to speed rescue | Reuters: Banca Monte dei Paschi di Siena (BMPS.MI) said on Monday it was considering a voluntary conversion of its debt into equity as the Italian lender mulls its options to prevent its centuries-old business from being wound down. Sources told Reuters last month that Monte dei Paschi may convert the bulk of its subordinated debt into equity to cut back a planned five billion euro ($5.63 billion) capital increase and make it more attractive for investors. The bank's fragile state poses a threat to confidence in other Italian lenders and even to heavily-indebted Italy, the euro zone's third-largest economy. Italy's third-largest bank and the world's oldest, announced the share sale in July as part of a wider bailout plan to clean up its balance sheet after emerging as the weakest lender in a health check of 51 European banks. The company added on Monday that a new business plan would be approved on Oct. 24, while a shareholder meeting would be held before the end of November. The proposed timetable suggests that Monte dei Paschi is trying to carry out the planned share issue before the end of this year and limit the uncertainty over the bank's future. This may be complicated by the fact that a referendum over Italian Prime Minister Matteo Renzi's flagship constitutional reform will be held on Dec. 4.

IMF Says Swiss Have Option to Go More Negative on Interest Rates - WSJ: The International Monetary Fund said Monday that Switzerland’s central bank should consider cutting its already deeply negative deposit rate if needed to ease upward pressure on the franc and reduce reliance on currency intervention. The Swiss National Bank SNBN 0.29 % has maintained a -0.75% deposit rate for the past 18 months, after it abandoned a currency ceiling for the franc’s level against the euro in January 2015. The SNB sets an exemption threshold, and the penalty rate only applies to deposits parked at the central bank that are above that amount. The aim of the policy—in addition to interventions in currency markets—is to keep the franc from strengthening too much. The franc is considered a haven in times of global stress, meaning it tends to rise when there are doubts about the global economy or when geopolitical uncertainties are on the rise. “Some widening of the current effective interest rate differential—either by lowering the exemption threshold or the marginal policy rate—could therefore be considered to reduce the frequency of small-scale interventions,” the IMF said in its regular statement on the Alpine economy. “This would also slow the increase in the SNB’s already large balance sheet, which continues to trend upward relative to GDP and is subject to valuation changes that can affect public finances,” the IMF said. When the SNB intervenes in currency markets, it purchases assets denominated in foreign currencies such as euros and dollars. As a result, the bank’s balance sheet has swelled to 627 billion francs ($636 billion), an amount nearly equal to Switzerland’s entire economy. Changes in the value of these assets have led to volatile swings in the SNB’s profits and losses in recent years.

Mario Draghi and ECB go to WAR with Germany over how to save crumbling Eurozone  -   Speaking to MEPs at the European Parliament today, ECB chief Mario Draghi defended his monetray policies amid recent criticism from German politicians. German government figures blame low interest rates for hurting savers and fuelling discontent with Angela Merkels' ruling party. But Mr Drgahi today insisted that low interest rates have been "very effective". And the chief also sought to make clear low interest rates are not the ECB's fault, but rather a "symptom" of low growth. The Italian then heavily hinted that the responsibility of low growth lays at the feet of politicians. He said: “Other policy actors need to do their part, pursuing fiscal and structural policies which will contribute to a self-sustaining recovery and increase the economic growth potential of the euro area."Berlin has already directed a series of public insults at the central bank in recent weeks over its attempts to bolster the eurozone economy, ramping up pressure on the already fraught relationship between the two sides. Mr Schaeuble recently mocked the ECB's money-printing programme, known as Quantitative Easing (QE) in front of an audience of German industrialists.

 ECB's Mario Draghi savaged by MEPs over negative interest rates and fuelling debt economy - MEPs demanded the president justify the bank's low interest rate policy amid growing discontent from across the eurozone. German Christian democrat Werner Langen was just one of the politicians who raised doubts about whether the policy was helping the economy. Another MEP accused Mr Draghi of creating a debt economy through the ECB's money-printing programme. In response, Mr Draghi sought to defend low rates, which are taking their toll on savers in the bloc. He said the policy had been "very effective" and insisted that low interest rates are not the ECB's fault, but rather a result of the eurozone's stuttering economy.He added: "it's true that savers are being penlaised by the current system and we are fully aware of that.. But whoever borrows money is benefitting." The ECB president repeated his recent calls for eurozone governments to implement policies that will help boost the bloc's economy. He said: “Other policy actors need to do their part, pursuing fiscal and structural policies which will contribute to a self-sustaining recovery and increase the economic growth potential of the euro area.” Mr Draghi added: “Actions by national governments are needed to unleash growth, reduce unemployment and empower individuals, while offering essential protections for the most vulnerable."

ECB's Easy-Money Policies Averted a New 'Great Depression,' Draghi Says -- --European Central Bank President Mario Draghi told German lawmakers on Wednesday that the ECB's easy- money policies had helped avert a new Great Depression in the eurozone. In a speech during his first visit to Germany's parliament in four years, Mr. Draghi stressed that Germans were benefiting from the central bank's policies through higher growth and employment, and called on governments across Europe to help out the ECB by implementing economic overhauls. The visit marks an effort by the ECB president to win over a German public that is deeply skeptical of the central bank's aggressive action to bolster growth and inflation in the eurozone. Recent ECB policies, such as negative interest rates and EUR80 billion ($89.6 billion) a month of bond purchases, have sparked criticism across a swath of German society, from executives to businessmen to bankers. In his speech, Mr. Draghi conceded that very low rates affected people's finances and welfare. But he said that, after adjusting for inflation, interest rates are no lower than they have been many times in the past. Low interest rates, he added, reflect weak economic growth, rather than being purely a result of the ECB's policies. "In Germany, exports are benefiting from the recovery in the euro area, unemployment is at its lowest level since reunification, people's take-home pay is increasing noticeably, and venture capital is pouring into Berlin'sSilicon Alley," Mr. Draghi said. He stressed that the central bank has done nothing more than follow its legal mandate. "With our measures, we follow the law," Mr. Draghi said. Mr. Draghi referred directly to Mr. Schäuble, underlining how low financing costs for government bonds had helped the finance ministry to "reduce debt at a considerable speed." Germany's government, he said, saved around EUR28 billion in 2015 alone on lower than expected interest payments. "As Wolfgang Schäuble said in this house a couple of weeks ago...'We will only get out of this phase of low interest rates if we have more sustainable growth in Europe,'" Mr. Draghi said. Top German bank executives have been fiercely critical of the ECB's negative interest rate policy, which they complain undermines their profit and restricts their ability to lend to firms and consumers.

Barroso had deeper ties to Goldman Sachs - EUObserver - Jose Manuel Barroso had closer contact with Goldman Sachs during his tenure as European Commission chief than he has previously admitted, according to Portuguese media. Correspondence obtained by Portuguese daily Publico under a freedom of information request suggests that Barroso, who took a job with the US bank earlier this year, held unregistered meetings with Goldman's top people.  In one email dated 30 September 2013, Goldman boss Lloyd Blankfein thanked Barroso for their “productive discussions” and said the bank’s senior partners were delighted about their “extremely fruitful meetings”. Publico reported that Goldman executives were happy to suggest “on a confidential basis” changes to EU policies, which Barroso’s cabinet read “with great interest”.  The newspaper also found that one of Barroso’s advisers was “unfavourable” to putting down in the commission’s records meetings between his boss and the bank.  Filing meetings between EU top officials and interest representatives was not mandatory at the time, so Barroso’s meetings were registered only when his cabinet deemed it suitable.  Barroso told Publico in a written statement he kept in touch with major banks as part of his job as president of the EU executive in a time of financial crisis.

 Deutsche Bank Explains Why Central Banks Are Stuck - We have spent a lot of time talking about the unintended consequences of accommodative global central banking policies.  Skyrocketing pension liabilities and the numerous corresponding reach for yield/duration trades, which have resulted in several of their own off-shooting market bubbles (in fact we just wrote about how one of the bubbles is bursting just yesterday "P2P Meltdown Continues: LoanDepot's CDO Collapses Just 10 Months After Issuance"), is just one of the many unintended consequences.  But, as Deutsche Bank's European equity strategist, Sebastian Raedler, points out today, even if central banks wanted to steepen the yield curve they likely can't.  Raedler disputes the common explanation that low bond yields are due to discretionary central bank policies and argues instead that the recent fall in bond yields has been due to sustained weak global growth.  This suggests low bond yields are not principally due to discretionary central bank policies (which could be reversed at will), but to the weakened global growth picture, to which central banks have only responded by making policy more accommodative.  Of course, if Raedler is correct, the question then becomes why continue with accommodative policies if they're not driving incremental economic growth but clearly creating detrimental asset bubbles? Raedler argues that global bond yields have fallen with central banking target rates but both have really just followed slowing global economic growth.

Germany sells two-year debt at record low yield in safety rush | Reuters: Germany sold two-year bonds at a record low yield on Wednesday as concerns about the health of the European financial industry kept demand high for debt seen as a safe haven. The euro zone's benchmark issuer sold 3.191 billion euros at minus 0.7 percent, a record low yield at an auction. Two-year yields in secondary markets held just above an all-time low of minus 0.711 percent touched on Tuesday, while 10-year yields hit a six-week low of minus 0.15 percent. German government bond yields -- a refuge in times of market stress -- have fallen sharply this week on concerns the country's largest lender Deutsche Bank may need Berlin's help to settle a $14 billion fine from the U.S. government. The German government and financial authorities are preparing a rescue plan for Deutsche Bank in case the lender is unable to raise capital itself to pay for costly litigation, German weekly Die Zeit reported on Wednesday. "The current yield levels I think to some extent is an over-reaction so we could see some move in yields as the market calms down and German (10-year) Bunds move closer to zero," said DZ Bank analyst Rene Albrecht. The rally may also have been exacerbated by the European Central Bank's asset purchase programme, "Whenever yields fall, the universe of bonds eligible for quantitative easing shrinks and the ECB ends up buying longer-dated Bunds and pushing yields down further. As a result, any rally is magnified,"

German consumer morale falls slightly heading into October | Reuters: The mood among German consumers worsened slightly heading into October but remains at one of the highest levels in more than a decade, a survey showed on Wednesday, suggesting that private consumption is likely to compensate for weakening exports. The consumer sentiment indicator, published by the Nuremberg-based GfK institute and based on a survey of around 2,000 Germans, fell to 10.0 going into October. A Reuters poll had expected unchanged at 10.2. Record-high employment, rising real wages and ultra-low borrowing costs are boosting the spending power of Germans. GfK said the slight fall was linked to a prevailing sense of uncertainty linked to the threat of possible attacks in Germany and the economic consequences of Britain's vote in June to leave the European Union. "The consequences of this (Brexit) for the European and, above all, German economy are still completely unclear," GfK researcher Rolf Buerkl said. "Nevertheless, GfK confirms its forecast that a rise in real private consumer spending of around two percent in 2016 appears achievable and realistic," he added. "Consumption therefore remains an important pillar of economic growth in Germany." A sub-index measuring economic expectations fell for the third time in a row, suggesting German consumers fear the economy will be weaker over the next few months.

Brussels decides against fining Portugal, Spain - Spain and Portugal should not be fined for failing to take “effective action” to correct their budget deficits, the European Commission announced on Wednesday. EU finance ministers can still amend or reject the Commission’s recommendation in the next 10 days, though neither is likely. The Commission explained that its decision to “recommend to the Council to cancel the fine” was made in light of “the challenging economic environment, both countries’ reform efforts and their commitments to comply with the rules of the Stability and Growth Pact.” The SGP rules mandate that the annual budget deficit of EU countries must be kept below 3 percent of GDP. Any country within the bloc that falls outside of that threshold can be fined up to 0.2 percent of GDP. Spain and Portugal’s deficits last year hit 5.1 percent and 4.4 percent, respectively. But both countries had argued for the cancellation of any type of EU sanctions, which they said would be “unjustified” and “counter-productive.”

 Sweden Creates 55 "No-Go Zones" As It Loses Control Of Refugee Crisis - As migrants continue to flow into Europe, certain cities across the continent have seemingly lost their ability to maintain law and order amid a surge in violent crime.  The level of violence within the so-called "no-go zones" has risen to a level such that even the police have abandoned efforts to control the streets.  According to RT, one particular example is Sweden's third-largest city of Malmo where more than 70 cars were set on fire by arsonists over the past several days.  Meanwhile, authorities noted that offenses range from vandalism to drug crimes, sexual assaults and gun violence.  Per recent media reports, there are now as many as 55 “no-go zones” spread throughout several Swedish cities where the police have little to no ability to control rising violence.  The surging violence is putting a huge burden on over-worked police officers who are reportedly choosing to quit the force in record numbers.  Per RT: “We have a major crisis. Many colleagues are choosing to quit,” police officer Peter Larsson told the Norwegian broadcaster NRK. “A drastically worsened working environment means many colleagues are now looking for other work.” Recently the city of Malmo faced a string of arsons in which 16 vehicles were torched across the several neighborhoods in just one night.  As fire commander, Magnus Johansson, noted the rising violence is exhausting public resources and making it impossible to service the needs of Swedish citizens.“All our stations are overloaded and the whole of the Malmo force is out extinguishing the car fires,” fire commander Magnus Johansson told SVT. “It is a burden for our organization, but also for other people who really need our help,” he added. The burning of cars continued into the early hours of Friday morning, with a further 11 vehicles torched. A total of nine neighborhoods were affected by the arson attacks.

Panic sweeps Calais camp as refugees await the bulldozers -- The number of refugee children arriving in ‘the Jungle’ continues to rise despite plans to raze it. There is no plan B. For children like Einas, who spent eight months and his family’s savings journeying from southern Ethiopia to northern France, the dream will die when the Jungle is dismantled. “I am here to reach the UK, that is all I think about, I have no other plan,” said the unaccompanied 17-year-old, who arrived in the Calais camp in January. Europe’s biggest slum – around 10,000 migrants are squeezed into a sprawl of wasteland east of Calais – will be no more in a few weeks. Bulldozers will raze an eyesore that has acquired new political significance in the run-up to next spring’s French presidential elections. Few child refugees appear to have a fallback strategy once the Jungle is no more. As rumours circulate over when the forced eviction will happen, aid organisations in the camp have already begun distributing suitcases. The injection of uncertainty has caused panic among the camp’s unaccompanied children. On Saturday charities said they were witnessing signs of “hysteria”. Some warn that youngsters are taking increased risks as they attempt to climb on to lorries heading into the port, fearing that their chance of reaching the UK is fading.“Children are willing to take more risks. They are going out most nights fearing that all this will be taken away from them. There is real panic. At least the adults have been given options.” Adults and families have been told they will be dispersed to smaller reception camps across France. The mass dispersal has been warmly applauded by local people. Amid polls showing robust support for Marine Le Pen, the leader of France’s anti-immigration, far-right Front National party, the fate of the Jungle has occupied the centre of the political stage.

Sturgeon links Brexit to austerity in London speech - BBC News: Nicola Sturgeon has linked the Brexit vote to the UK government's austerity policies. The Scottish first minister also said remaining a member of the single market after Brexit "will be crucial". And she argued that the UK-wide result of the EU referendum was not a mandate for a hard Brexit. Ms Sturgeon was addressing the annual conference of the Institute of Directors at the Royal Albert Hall in London. Prime Minister Theresa May has predicted that the UK will make a success of Brexit, and that Scotland's status would be enhanced as a result of leaving the EU. But Ms Sturgeon, the SNP leader, told the conference that continued membership of the European single market ‎was the "obvious consensus position" among Leave and Remain voters in the EU referendum. But she acknowledged that certain aspects of single market membership, such as freedom of movement, "will not satisfy everyone". She also argued that inequality was a key reason behind the EU referendum result, and that the UK government "can no longer ignore the social and economic cost" of austerity. Ms Sturgeon said: "There are many, many causes of the vote to leave the EU. For many people, they will have included entirely reasonable doubts and reservations about the EU. It is, after all, an imperfect organisation.

 It’s not just Britain. Europe too has everything to lose from an end to the single market in financial services - Soft or hard exit? As with immigration controls, this was not a question on the ballot paper when Britain voted to leave the European Union. Nor was it a choice that beyond a little Treasury impact analysis was even remotely explored in Whitehall ahead of the vote. In part, this was because Downing Street refused to countenance the possibility of losing. But it was also because Cameron and Osborne believed that if there was a Plan B, it would inevitably leak, thereby providing ammunition for the Leave campaign. By articulating a well thought through alternative to EU membership, it would be essentially game over for their attempt to keep us in. The upshot is today’s confusion in government over what they are trying to achieve. More than three months after the vote, we still have very little idea how the new inhabitants of Downing Street propose to deliver the referendum result. Nor, by the sound of it, do they. If they could be confident that an immediate hard exit would have limited economic impact, they’d do it tomorrow. But they can’t. Up until now, this confusion has worked to Britain's economic advantage, feeding the view in markets and business that since nothing has yet changed fundamentally and won’t do so for some time to come, things should simply carry on as before. But this vacuum in policy can only go on for so long before inflicting real and lasting damage. Finance and business need clarity, so that they can adapt to the proposed change. If they don’t get it, they will assume the worst and act accordingly. For the moment, however, the lack of any obvious economic damage from the Brexit vote has emboldened advocates of a hard exit – that is an immediate departure from the single market and customs union – to think it can be done at comparatively limited short term cost. Their calls for action grow ever louder. And there are unnerving signs of them winning the argument.

 Carney's Corporate-Bond Purchases May Worsen Liquidity Squeeze - The start of the Bank of England’s corporate-bond buying program on Tuesday may exacerbate already tight liquidity in the sterling debt market. The central bank plans to purchase 10 billion pounds ($13 billion) of sterling investment-grade corporate debt over 18 months, heightening competition in a relatively small market that is dominated by investors who favor sterling assets, such as U.K. pension funds. It also adds to a wider debt-market pinch, partly caused by the start of a similar European Central Bank corporate-bond buying program in June. BOE note-buying “is another nail in the coffin of corporate-bond liquidity,” said Jeroen van den Broek, ING Groep NV’s Amsterdam-based head of debt strategy and research. “It creates a real squeeze in the market.” Sterling corporate-bond yields fell after BOE Governor Mark Carney announced the purchase program last month as part of stimulus measures designed to help the U.K. economy weather uncertainty caused by the nation’s vote to leave the European Union. A flurry of issuance subsequently has also done little to expand the debt pool because sales have been dominated by companies such as National Grid Gas Plc refinancing existing debt.The Bank of England has drawn up a list of about 270 bonds that are eligible for purchase under its program, all of which have at least one investment-grade credit rating. The notes have a market value of about 150 billion pounds, the institution has said. Under the purchase program, the bank will attempt to buy each bond on its list at least once a week through reverse auctions on Tuesdays, Wednesdays and Fridays. Purchases will be roughly in line with the makeup of the overall bond market, on an industry basis. In the first auctions on Tuesday, the bank will seek to buy notes in sectors including energy, industrial and transport, and water, according to a list on its website.

QE is here forever, says Bank of England deputy governor --Quantitative easing is here to stay as a standard tool of central bankers, according to the Bank of England’s deputy governor Minouche Shafik. Interest rates are likely to stay relatively low permanently, she said, because of structural and demographic changes in the world economy, and that means central banks have to use other means to ease monetary policy – including QE, whereby the Bank of England creates money and buys bonds.“Deep structural forces have combined to depress the level of interest rates at which the economy would be in equilibrium, obliging us to rely ever more on monetary policies that were once considered unconventional,” said Ms Shafik, speaking at a Bloomberg conference.The deputy governor, who is leaving the Bank to head up the London School of Economics, said that interest rates have been at around 5pc for centuries, but she cannot see the base rate returning to that level any time soon.The neutral rate of interest “is closer to zero than it used to be. You can see from charts that historically, interest rates have always been at around 5pc, going back hundreds of years… even in ancient Babylon,” she said.“Something has changed in the last decade with big forces of demography, global savings and investment, and the neutral rate has fallen and is likely to stay low for a very long time.” As interest rates are going to stay low, central banks need other tools to stimulate the economy, with QE foremost among those. Ms Shafik said that she had initially expected to start unwinding QE once interest rates rose to around 2pc – but instead of hiking, the Bank of England cut its base rate to a new record low of 0.25pc last month.

More blue-chip pensions are set to shut as costs on course to double to £14bn: The cost of running generous pension schemes at Britain’s biggest firms is set to double to an unaffordable £14bn-a-year over the next three years, according to a warning from a retirement consultancy. FTSE 100 firms that run defined benefit pensions, which offer workers a guaranteed income for life once they retire, currently pay £7bn a year to fund their obligations and manage their sizeable investments, JLT Employee Benefits said. Almost all of the running costs, around £6.23bn last year, is used to plug funding shortfalls, which totalled £87bn by March for the 100 biggest firms and has risen further since. Employer contributions for a typical pension have doubled from 26pc to 52pc of total staffing costs over the past three years, and the recent drop in bond yields and interet rates is set to make these long-term liabilities even more of a burden for companies. Several large firms will face a crisis point in the coming year as they go through triennial reviews of their pension obligations, which could require massive cash injections or even closing the scheme to new benefits to reflect their growing burden.

Brexit warning: US bank bosses from Goldman Sachs, Morgan Stanley and BlackRock threaten Theresa May with relocation: The bosses of several of America’s biggest banks and corporations have warned Theresa May they will pre-emptively shift operations into Europe unless she can provide early clarity on the future shape of EU-UK relations, The Telegraph has learned. The ultimatum was delivered at a round-table meeting with Mrs May in New York this week attended by a host of key US investors, including major City investors such as Goldman Sachs, Morgan Stanley and BlackRock. According to an account of the meeting obtained by The Telegraph, Mrs May declined to provide information about how the British government would approach the Brexit negotiations, other than pursuing a deal that was “in the national interest”.There followed “frank exchanges” in which bosses warned they could not wait to discover the final outcome of the two-year Article 50 negotiations before making major investment decisions that could see thousands of UK jobs shift to Europe. “The message was clear from at least some of those present: if Theresa May cannot provide some early clarity about where the negotiations will end up, the only way to avoid that uncertainty would be a move towards Europe – there will not be time to wait,” said the City source with knowledge of the meeting. Before the June 23 vote to leave the EU, the heads of several major foreign banks including JPMorgan and UBS warned that “significant” numbers of jobs could be shipped to Europe when the impacts of Brexit became clear. Estimates of possible City job losses from a “hard Brexit” have ranged widely from 40,000 to 80,000 over the next decade, with JPMorgan and Morgan Stanley saying they could shift over 1,000 employees. Citigroup, Goldman Sachs and Bank of America have also warned of jobs losses to the Continent.

Brexit Leads Three-Quarters of Britain’s CEOs to Consider Moving - The U.K.’s vote to leave the European Union has left more than three-quarters of chief executive officers saying they would consider moving their headquarters or operations outside Britain, according to a survey of 100 business leaders by the accountancy firm KPMG. Some 72 percent of the CEOs surveyed said they voted “Remain” in the June 23 Brexit referendum , KPMG said on Monday in an e-mailed statement. While 69 percent said they’re confident Britain’s economy will continue to grow over the next year, and 73 percent expressed confidence their companies will grow, 76 percent are mulling some form of relocation. “CEOs are reacting to the prevailing uncertainty with contingency planning,” KPMG U.K. Chairman Simon Collins said in a statement. “Over half believe the U.K.’s ability to do business will be disrupted once we Brexit and therefore, for many CEOs, it is important that they plan different scenarios to hedge against future disruption.” The survey suggests Prime Minister Theresa May has work to do to retain businesses and jobs as the U.K. seeks a deal with the EU that curbs immigration while retaining the closest trading ties possible with the bloc’s 27 other members. Before the referendum, the then-Chancellor of the Exchequer George Osborne said a vote to leave would endanger as many as 820,000 jobs.

Brexit, not the EU, will be to blame for Britain’s economic problems -- Britain's economy is sluggish and unproductive, and will worsen with Brexit, according to a report from the Centre for European Reform (CER). The report, authored by Simon Tilford, disputes claims made by those campaigning to leave the European Union that Britain's economy was "dynamic and flexible," and had "little to risk" from a Brexit.  Tilford argues that the UK's economic growth has actually been poor — we are no richer relative to the EU-15 average than we were 15 years ago, and the average Briton has to work more hours than the EU-15 average to achieve that income.  The EU-15 are the fifteen countries who were members of the EU prior to 2004. At a first glance, our growth in GDP over the last 15 years looks great, compared to our EU neighbours:  But to get a better picture of how an economy has performed, it is useful to look growth in GDP per capita:  The UK's economic performance suddenly looks average because its population grew by 10% from 2001. Only Spain's grew faster. France's grew by 8%, Italy's flatlined and Germany's actually shrank by 3%.   However, it is when we turn to productivity that Tilford says the UK's reputation as a strong economic performer is "most clearly exposed as wishful thinking."  Here is the chart, which displays economic output per hour worked: Britain's productivity began deteriorating in around 2005. As of 2015, it stands at just 90% of the EU average. That is a full 25% below French and German levels.  "Sustainable increases in living standards require economies to combine land, labour, capital and technology in ever-more efficient ways," Tilford argues. "Britain has made a poor job of this."

In a Sweeping Victory, Jeremy Corbyn Is Re-Elected as U.K. Labour Party Leader --After the summer saga that’s been dubbed the “chicken coup,” in which a group of Labour Party politicians tried to depose their leader, Jeremy Corbyn has emerged triumphant from another election, and this time with a larger majority. As BBC political editor Laura Kuenssberg points out, winning 62 percent of the vote is not only evidence of his growing support, but “Mr Corbyn’s second defeat of the Labour establishment.” The progressive leader has promised to set out to unite the party after a fractious year, according to The Guardian: Speaking after the result was declared in Liverpool, Corbyn thanked his rival, Owen Smith, and urged the “Labour family” to unite after the summer-long contest.“We have much more in common than that which divides us,” he said. “Let’s wipe that slate clean from today and get on with the work we’ve got to do as a party together.”Corbyn secured 61.8% of the vote to Smith’s 38.2%. The victory strengthens his hold on a party that has expanded dramatically since the 2015 general election and now has more than 500,000 members. In last year’s contest, he won 59.5% of the vote. ... The winner pointed out that he had secured his second mandate in a year and urged his colleagues to accept what had been a democratic decision.Smith congratulated Corbyn for mobilising so many supporters in the party, and said he would reflect on how he could help Labour to win the next election.  Corbyn and his supporters celebrated in what the Mirror calls “the most Jeremy Corbyn thing ever.”

Sadiq Khan confirms 'London work permit' plans to stop post-Brexit exodus | London Evening Standard: Sadiq Khan today confirmed that City Hall is working on a separate London work permit system for when Britain leaves the EU. The Mayor has held discussions with key figures including Brexit Secretary David Davis, Chancellor Philip Hammond and Foreign Secretary Boris Johnson as he seeks to carve out the best possible deal for the capital. Since the June referendum he has been urged by business leaders to introduce London work visas in order to stop the mass departure of highly skilled foreign workers. Now, in an interview with Sky News, Mr Khan revealed he and his City Hall team are currently working on just that.He told Sky News: "We are talking to business leaders, businesses, business representatives to see what we can do to make sure London doesn't lose out on the talent, the innovation, the partnership that has let us be the greatest city in the world. "The good news is the Government gets it. The good news is in all the conversations I've had with members of the Government, from the Chancellor to the Brexit Secretary to the Foreign Secretary and others in Government, I think they get it. "I'll be meeting the Prime Minister soon to discuss our issues but I think the Government recognises it is in nobody's interests for us to get a bad deal with the EU."

May’s Real Opposition Lies in Tory Ranks as Brexit Splits Emerge - Bloomberg: Theresa May is discovering the true opposition to her premiership lies within her own Conservative Party. Less than three months since the vote for Brexit catapulted her into 10 Downing Street, the U.K. prime minister is preparing to helm her first Tory conference as leader. As she heads to Birmingham for Sunday’s start, what should have been a celebration and push to consolidate power risks revealing fresh fault lines over the European Union within her own ranks. While May refuses to give much insight into what she wants from the divorce, colleagues such as Foreign Secretary Boris Johnson and Brexit Secretary David Davis are already signalling they want a hard break. By contrast, other Conservative lawmakers including former finance ministers George Osborne and Ken Clarke are counseling caution. “The principal source of opposition at the moment for Theresa May is not the mainstream opposition parties, but the challenge of establishing basic unity within her own government,” said Matthew Goodwin, professor of politics at the University of Kent. “There are rumblings with the Brexit strategy and the lack of clarity over what that agreement is going to look like.” That leaves May, who has a parliamentary majority of just 12, under pressure to assert her leadership. While known to consume reams of information on Brexit, she has so far largely limited her comments to refusing to start formal talks this year and indicating a crackdown on immigration is a bigger priority than maintaining trade links. Brexit will be discussed on Sunday, leaving the following three days of conference for her domestic goals.

Ken Clarke: Theresa May has “no idea” what to do about Brexit: According to the former Chancellor, “nobody in the government has the first idea of what they’re going to do next”. Has Ken Clarke lost the greatest political battle of his career? He doesn’t think so. Parliament’s most persistent Europhile seems relaxed. He laughs at the pervasive phrase that has issued from Downing Street since Theresa May became Prime Minister: “Brexit means Brexit.” “A very simple phrase, but it didn’t mean anything,” he says. His blue eyes, still boyish at 76, twinkle. “It’s a brilliant reply! I thought it was rather witty. It took a day or two before people realised it didn’t actually answer the question.” A former chancellor of the Exchequer, Clarke has served in three Conservative cabinets. His support for the European Union is well known. Clarke won’t be based here, in this poky rooftop room in Portcullis House, Westminster, much longer. He has decided to step down at the next election, when he will be nearly 80. “I began by campaigning [in the 1960s] in support of Harold Macmillan’s application to enter [the EU], and I shall retire at the next election, when Britain will be on the point of leaving,” he says grimly. Clarke supports Theresa May, having worked with her in cabinet for four years. But his allegiance was somewhat undermined when he was recorded describing her as a “bloody difficult woman” during this year’s leadership contest. He is openly critical of her regime, dismissing it as a “government with no policies”.