HO CHI MINH CITY – Since late 2013, China has been engaged in the frenzied creation of artificial islands and the militarization of the South China Sea. This amounts to an alarming quest for control over a strategically crucial corridor through which $5.3 trillion in trade flows each year. But what is even more shocking – not to mention dangerous – is that China has incurred no international costs for its behavior.
A real border guard at last
The EU’s much-maligned border agency could become far stronger
FEW institutions have been as overwhelmed by the numbers of refugees passing through Europe as Frontex, the European Union’s external border agency. With a weak mandate, no equipment of its own and no power to hire its own border guards, the agency has floundered.
On December 15th the European Commission came forward with a proposal, backed by Germany and France, intended to toughen Europe’s border controls. The plan is long overdue—and is evidence of a growing realisation that far more needs to be done to manage the refugee crisis and preserve Schengen, the passport-free travel zone, which has come under great strain.
Under the proposal, a new European border and coast guard would be created. It would absorb Frontex, which at present cannot do much more than fingerprint and count migrants as they pass through a country. By contrast, the new border agency would have far more authority, with twice as many staff and the ability to buy its own kit. A reserve team of border guards would be at the agency’s disposal, helping prevent shortages, while “liaison officers” would be posted to tricky spots in order to feed back information to the headquarters. Most strikingly, it would be given the power to intervene in a country whether the member state liked it or not. (At present, Frontex has to get permission before working in a country). It would also be able to gain access to European databases more easily, and have a far greater involvement in sending illegal migrants back.
Many are delighted by the proposal, including Fabrice Leggeri, the current boss of Frontex.
(“It has everything I wanted,” he says.) It is less politically toxic than the idea of a “mini-Schengen”, a core group of member states, which has been mooted by several Dutch politicians but is disliked by most other countries. The plan would also deal with a weakness in the current system—the reluctance of “front-line” member states, such as Greece, to ask for help—by giving the commission the power to force them to accept assistance.
But other countries are less pleased by the idea of an agency with mandatory powers. Poland’s foreign minister described it as a potentially “undemocratic structure”. Greece cautiously welcomed the idea but insisted it should retain ultimate authority over its borders. Such grumblers may not have much power when it comes to voting, as the proposal requires only a qualified (weighted) majority among states to pass, rather than unanimous approval.
Yet even if it passes, obstacles remain. “There is a huge gap between what member states vote on and what they actually do,” says Angeliki Dimitriadi of the European Council on Foreign Relations, a think-tank. For example, the EU passed plans in May and September to relocate 160,000 refugees over two years. Yet just under 4,000 places have been allocated and around 200 refugees moved. Without the political will to implement them, such ambitious plans are often stillborn.
International Energy Agency sees 'peak coal' as demand for fossil fuel crumbles in China
'The golden age of coal seems to be over. Given the dramatic fall in the cost of solar and wind, the question is whether coal prices will ever recover'
By Ambrose Evans-Pritchard
The energy watchdog has slashed its 2020 forecast for global coal demand by 500m tonnes, warning that the industry risks unstoppable decline as renewable technologies and tougher climate laws shatter previous assumptions.
“The golden age of coal seems to be over,” said the IEA’s medium-term market report. “Given the dramatic fall in the cost of solar and wind generation and the stronger climate policies that are anticipated, the question is whether coal prices will ever recover.”
“The coal industry is facing huge pressures, and the main reason is China,” said Fatih Birol, the agency’s director.
The IEA reported that China’s coal demand fell by 2.9pc in 2014 and the slide has accelerated this year as the steel and cement bubble bursts. The country produced more cement between 2011 and 2013 than the US in the entire 20th century, according to one study. This will never happen again.
Crucially, the switch is happening because the country is moving up the technology ladder and switching to a new growth model. The link between electricity use and economic growth has completely broken down. The "energy intensity" of GDP fell by 4pc in 2014.
Mr Birol said China’s coal consumption is likely to flatten out until 2020 before declining, but the definitive tipping point could happen much faster if president Xi Jinping carries out his economic reform drive with real vigour. Coal demand will drop by 9.8pc under the agency’s “peak coal scenario”.
The shift is dramatic. China’s coal demand has tripled since 2000 to 3.920m tonnes - half of global consumption - and the big mining companies had assumed that it would continue. The market is now badly out of kilter. Rising demand from India under its electrification drive will not be enough to soak up excess supply or replace the lost demand from China.
The share of global power from coal will drop from 41pc today to 37pc by 2020 before going into relentless decline.
While India has ambitious plans to extend power to 240m people without electricity, it is also betting heavily on low-carbon technology, aiming to install 175 gigawatts (GW) of solar, wind and other renewables by 2022.
South Asia and parts of the developing world still want to build coal plants but they are finding it much harder to obtain funding.
The World Bank and the big multilateral development agencies will not finance or guarantee new coal plants, or will only do so under stringent conditions. The Norwegian pension fund – the world’s biggest wealth fund – is divesting from coal. So is the Church of England. Private banks are becoming wary of the sector, given the tail-risk of class-action “climate lawsuits”.
China is cutting back for its own reasons, shutting down dirty home boilers to curb toxic levels of pollution in the big cities and to head off a middle class revolt.
It has installed 284 GW of hydro power over the past five years, mostly in the mountains of Sichuan and Yunnan. Solar and wind farms pepper the plains of North China. The country installed a record 23 GW of wind turbines in 2014, as much as the rest of the world put together.
The IEA did not address the issue that local governments in China have approved 155 more coal plants this year in a planning frenzy. Experts say this was a result of a new experiment in devolved powers that went horribly wrong.
Communist Party leaders in Beijing are almost certain to block these approvals, since the existing coal plants are running below 50pc capacity. The authorities have learned their bitter lesson from the glut in steel and shipbuilding plant.
In the West, coal faces a “long sunset”. Cheap shale gas has doomed the industry to a slow run-off in America. The IEA says no more coal plants will be built in the country, beyond those already under construction.
Carbon capture and storage (CCS) could come to the rescue, keeping coal viable as tougher climate rules from the COP21 accord in Paris ushers in a ratchet effect of rising – and spreading – carbon fees.
The IEA said the technology is “no longer a theoretical possibility” and is already working at several plants. But governments have failed to follow through. Britain has just cut off a £1bn funding prize for its two pilot projects.
The coal industry does not have long to reinvent itself as a low-carbon source of energy compatible with the Paris accords. “The window of opportunity is closing,” said the IEA.
The Fed's Devil In The Details
"The greatest trick the Devil ever pulled, was convincing the world he didn't exist. And like that, he's gone." - Verbal Kint - The Usual Suspects
Many were focused on the FOMC rate decision of January 16th, 2015. Would they raise or not, and if so how much? Would the statement be dovish or hawkish? Would markets be pleased or not?
Lost in the shuffle of the crowd, the Devil in the details.
In brief, this is the third in a series of thematically related missives which will attempt to identify the macroeconomic forces with potential to adversely affect capital, commodity, equity, bond and asset markets.
Again, I wish to dedicate this missive, to one of my mentor's Salmo Trutta, who is a prolific commenter on SA. Without Salmo's tutelage, and insistence in not masticating and spoon feeding the baby ducks, as in learning the hard way, by doing the leg work and earning it, this missive would not have been possible. To you "Proximo"... "win the crowd and win your freedom" - Spaniard
IMHO - Key Phrase in the Fed Speak of December 16, 2015
"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. "To find the "Devil" in the details, one must always read the fine print. Here is the fine print in the implementation statement…
"The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015."
"Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17-18, 2015, meeting."
"In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the discount rate (the primary credit rate) to 1.00 percent, effective December 17, 2015."
By reading the fine print found above, we find that in effect the Fed not only raised the FFR (Federal Funds Rate) but also raised the discount rate, IOER (interest on excess reserves), RP - repo and RRP (Reverse Repo) rates all by 25 bps.
Raising the discount rate and FFR (overnight interbank lending rate) is a double edged sword as IBDD's (Interbank Demand Deposits) which are a critical measure of systemic liquidity, have been contracting along with everything else.
Above note, the YOY percentage ROC (Rate of Change) in deposits, IBDD and otherwise. Note the oscillations coinciding with the Fed expansions of reserve bank credit. Also note the -18% spike in Sept 2015; and that growth has trended negative whenever the Fed fails to expand reserve bank credit. In other words, outside of Fed pumping, the growth rate of deposits in the CB's (Commercial Banks) is negative or in contraction. This is not a healthy systemic condition.
In any event, higher costs get passed on by raising rates and despite being able to charge a higher rate, higher costs can mean lower flows and less liquidity. As Jeffrey P. Snider accurately points out, the FFR is a useless and volumeless policy lever. To wit, RP and RRP transactions dwarf FFR on a daily basis.
Effectively Repo Rates are the overnight rate on everything at the Fed window and circulating in the system. Raising RP repo rates raises the banks cost to park collateral at the window and take a cash or liquidity injection from the Fed. Raising RRP reverse repo raises the Feds cost to siphon cash out (drain liquidity) from the banks while lending out collateral for the CB's (commercial banks) to hold and collect IOER. Higher repo costs generally mean less flow and therefore, less liquidity.
Raising IOER will cause further bank disintermediation and incentivize the banks to sit on excess reserves by paying them twice as much to do so. In other words, it's business as usual, encouraging further bad behavior (staying in the savings rather than lending business) with higher costs, which should further contract flows and reduce liquidity. What this does for increasing or decreasing NIM (net interest margin) which is the bane of the banksters existence,
I will not fathom here.
In closing and to summarize, to have any hope of the global economy getting on its feet again, getting off the zero bound is necessary. However, IMHO unless changes in IOER, RR and RRP rates are made, the FFR and discount rate increase as implemented is going to cause further:
- bank disintermediation
- contraction in monetary flows
- contraction in market liquidity
- contraction in global economic conditions vis a vis economic stagnation and malaise
- contraction in global demand
- self reinforcing squeeze of the "dollar"
- wash, rinse, spin and repeat
All of the above are negative for the US and global economy. Following the FOMC announcement, those who pay attention to the fine print, should find the "devil" in the details and the wise guys portfolio analysts might begin to quietly realign their portfolios accordingly for the New Year.
Since the market potential is broad in both scope and scale, our conclusion could not be more specific than the discussion already had. Again, more grief in the dollar "short" or squeeze and its associated liquidity issues, with the potential to adversely affect capital, commodity, equity, bond and asset markets. Will it happen? TBD, and forewarned is forearmed.
Investing is an inherently risky activity, and investors must always be prepared to potentially lose some or all of an investment's value. Past performance is, of course, no guarantee of future results.
Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial advisor.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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