Friday, 12 August 2016

Trouble At EU Banks.

Baltic Dry Index. 653 +15     Brent Crude 46.39

LIR Gold Target in 2019: $30,000.  Revised due to QE programs.

Just because something doesn’t do what you planned it to do doesn’t mean it’s useless.

Thomas Edison

Did the European Banking Authority effectively give Europe’s banks a walk on July 29th? To most outsiders looking at American and UK banking tests, they did. From the world’s oldest bank, old Three Card Monte of Sienna to Germany’s largest bank, the derivatives gambling obsessed, Deutsche Bank, Euroland’s banks range from wobbly to insolvent. On America’s more robust standards, most EU banks move from pass to fail.

Below Bloomberg covers the entirely innocent, EBA results.

“If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.”

John Maynard Keynes

European Bank Stress Tests Get More Stressful When You Make Them American

The answers you get depend on who is asking the questions.

August 11, 2016 — 5:53 PM BST
The European Banking Authority's stress tests released on July 29 served as a key plank in the region's effort to publicly demonstrate to markets and regulators around the world that its banking system is on the mend.

----The EBA stress test of 51 lenders in the region initially came in for heavy pounding by critics citing the fact it didn't factor in sovereign defaults, the impact of Brexit, and a prolonged period of negative interest rates. But two recent independent studies are particularly instructive as they reveal the drawbacks of the ECB stress test, using the methodology and disclosures made available by the EBA itself. The studies reveal why, thus far, European policymakers are failing to sow the seeds of market confidence in systemically important lenders.

In short, the European stress test reflects a bank's ability to remain solvent during market shocks — which are, in some respects, more benign than those in the U.S. and U.K. tests — as judged against their prudential regulatory requirements. By contrast, using market-based measures of economic viability highlight how European lenders are much less healthy than EU policymakers assert.

Stephen G. Cecchetti, former economic advisor at the Bank for International Settlements, and Kermit Schoenholtz, economics professor at New York University, explained the shortcomings of the EBA stress test in a blog post this week.

They believe that the EBA stress test — which imposes a three-year stimulated stress episode that sees equity prices drop by 25 percent — fails to reflect true market-based risks. They argue that the economic growth, share-price falls, and property-price assumptions used by the EBA are too benign relative to their regulatory peers in the U.K. and U.S. "While these banks may meet a weak regulatory test, as the more than 40 percent decline of bank equities over the past year implies, they do not meet the market test," they write.

This criticism is consistent with a new research paper published by academic economics Viral V. Acharya, Diane Pierret, and Sascha Steffen. Based on the disclosures made available by the EBA stress test, they estimate that European banks face a capital shortfall of 123 billion euros, when set against U.S. supervisory standards and a 4 percent leverage ratio — also known as a capital-to-asset ratio, a measure that determines how much capital a lender needs to set aside relative to the assets they hold. (The U.S. supervisory approach is known as the Comprehensive Capital Analysis and Review, CCGR.)

However, the equity shortfall is considerably larger when subject to a 5.5 percent leverage ratio and a 40 percent decline in global stock markets, using a systemic risk (SRISK) measure first designed by the Volatility Institute at the New York University Stern School of Business. On this basis, they estimate that the 34 publicly listed banks in the EBA stress tests would face a capital shortfall of 640 billion euros.

Cecchetti and Schoenholtz also combine data from different supervisory sources and use the aforementioned SRISK measures to highlight the market value, rather than the book value of equity. Under a more adverse market-based stress test than the one set by the EBA, they conclude that several large European lenders would need to raise between $24 billion and $40 billion each just to fulfill the modest 3 percent leverage requirement set by the European authority.

Paschi’s Biggest Challenges in Luring Investors in Four Charts

August 12, 2016 — 12:00 AM BST
When Fabrizio Viola presents Banca Monte dei Paschi di Siena SpA’s business plan next month, he’ll have to persuade investors to buy shares worth five times the ailing lender’s current market value.

“The strategic plan in September will be key to convince investors that the bank’s profitability prospects could justify its valuation,” Aldo Comi, an analyst at Societe Generale SA in Milan with a sell rating on the lender, wrote in a note to clients. 

Viola, the 58-year-old chief executive officer, intends to tap investors for as much as 5 billion euros ($5.6 billion) to replenish capital, after first moving 28 billion euros of bad loans off the bank’s books for securitization and sale. The lender announced the financing plan the same day European stress tests showed Monte Paschi would perform the worst in a severe economic crisis among the 51 banks examined.

Below are four charts that illustrate the key financial ratios Viola must address to win over investors.
Up next, China finds that it’s hard ball playing in the big leagues, when China plays hard ball itself and seems to be reverting to Maoism. With China’s Big Wobble back on again, Europe’s rickety banks might soon get to find out who’s stress tests are the more correct.
“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”

John Maynard Keynes

China's economic activity slows in July as reforms begin to bite

Fri Aug 12, 2016 12:42am EDT
China's economic activity slowed in July, with investment growing at its slowest pace in more than 16 years in the year-to period, as the world's second-largest economy grappled with the painful restructuring of its older industrial sectors.

The pace of fixed-asset investment slipped to 8.1 percent in January-July from 9 percent in the January-June period. Analysts had expected it to rise 8.8 percent.

This is the third consecutive month of growth below 10 percent and the weakest year-to-date growth since December 1999, suggesting the effects of a credit boom in the first quarter are fading.

"People are worried about a lack of solid demand over the next few years so they aren't really investing, especially in capex, which is the driving factor of the slowing investment," said Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.

While China's consumption remains strong, investment and net exports are slowing, with the government likely to boost headline growth through fiscal policies.

Trade data this week showed a further drop in exports and a higher-than-expected decline in imports, suggesting sluggish demand at home and abroad.

David Qu, markets economist at ANZ in Shanghai, said while weak industrial activity is a sign of poor economic health, China is unlikely to use monetary policy to restore growth.

"Although economic activity isn't very good, due to the need to continue to get rid of overcapacity, there's not a lot of room to ease," said Qu.

The fixed-asset investment retreat was led by a 22.9 percent decline in mining, suggesting the government's goal of cutting production in older industrial sectors is working.

Real estate investment growth slowed to 5.3 percent but remains elevated.

The decelerating growth rate comes amid fears the country is accumulating too much debt at the local level.
Growth in investment by state firms cooled to 21.8 percent in Jan-July, from 23.5 percent in Jan-June.

China takes a gamble in scapegoating the west

This type of propaganda gives licence to ordinary people to indulge their most primitive prejudices
11/8/2016 by: Jamil Anderlini
Across much of the world, fear-mongering and xenophobia are creeping into public and political discourse.

In liberal democracies with traditions of free speech, vociferous denunciations of these attitudes can act as a counterweight. But in authoritarian countries where alternative narratives are forbidden, official attempts to demonise foreigners and “others” can be especially dangerous. In the past week, the Chinese government has launched several viral online videos that blame “western hostile forces” for a host of ills and supposed conspiracies within China.

The videos are crude but exceptionally powerful in their simplicity and emotional appeal. One video promoted by the Supreme People’s Procuratorate and Communist Youth League, two of the most powerful state bodies, begins with heartbreaking scenes of orphans and victims of the wars in Iraq and Syria, and then jumps to an assertion that the west, led by the US, is trying to subject China to the same fate.

“Under the banner of ‘democracy, freedom and rule of law’ western forces are constantly trying to create societal contradictions in order to overthrow the [Chinese] government,” the subtitles read over pictures of democracy protesters in Hong Kong and President Barack Obama meeting the Dalai Lama.

According to the video, western plots and the “dark shadow of the Stars and Stripes” are also to blame for everything from attacks on Chinese peacekeepers in Africa, to farmers’ riots in China’s hinterland, to the Tibetan independence movement. The effect is heightened by ominous music and juxtaposition of chaos elsewhere with heroic images of Chinese soldiers and weaponry.

In some ways this is a mirror of the populist, jingoistic tilts happening elsewhere in the world. While not a direct reaction to the assertive Trumpism emanating from the US or the rise of rightwing nationalism in Europe, some of the same collective animus is taking hold in China, partly at the instigation of the ruling Communist party.

Many of those propagating this message are the shallowest of nationalists — the kind of party apparatchiks who are diversifying their (often ill-gotten) assets abroad as fast as they can and sending their children to study in Australia, the US, Canada or the UK.

Indeed, one of the main producers of the video on western plots is a 29-year-old PhD student from China now living in Canberra, Australia. Meanwhile, the party has called for the rejection of western values and concepts in favour of Marxism — an ideology named after a German living in London and refracted into China via Moscow.

Regardless of the hypocrisy and contradictions, this kind of propaganda is highly effective and gives licence to ordinary people to indulge their most primitive prejudices.
Since President Xi Jinping took power in late 2012, there has been a noticeable negative shift in Chinese attitudes towards foreigners living in the country.
In the past, most foreigners in China enjoyed a certain level of unstated protection and privilege. In business and in everyday life “foreign friends” were welcomed and often treated with kid gloves by the authorities. Some of them undoubtedly took advantage of this to flout the rules or behave badly without fear of retribution.
Today, that informal immunity seems to have vanished. In its place are hints of a backlash that many long-term foreign residents will tell you can be very ugly, ranging from casual discrimination and racial slurs, to physical altercations that take on a racist dimension.

China’s $15 Billion Energy Ambitions Crushed Within Two Weeks

August 11, 2016 — 12:46 PM BST
China’s infrastructure investors have had a tough two weeks, with plugs being pulled on at least $15 billion of potential deals in nuclear power and electricity distribution.
Britain and Australia refused to sign off on investments where state-owned Chinese companies were ready to provide much-needed funding. In both cases, the long-term utility programs were halted in the later stages, stunning participants. Those in the U.K. were all set to join a signing ceremony when the announcement came.
“As China’s diplomatic policies become more and more assertive, there’s a trend that these countries are gradually enhancing their vetting on Chinese investment,” said Tao Jingzhou, a managing partner at Dechert LLP in Beijing. “This is an attitude change.”
Chinese firms in the midst of a record overseas spending spree are buying foreign utilities at the fastest pace in eight years, according to data compiled by Bloomberg. Infrastructure deals, especially, are set to come under increased scrutiny by incoming governments wary of giving China access to their nations’ critical networks.
U.K. Prime Minister Theresa May’s government is reconsidering a plan to build Britain’s first nuclear-power facility in more than 20 years. China General Nuclear Power Corp. had agreed to pay for about one-third of the 18 billion-pound ($23.4 billion) project, which has been progressing for years. May’s administration said last month it wanted more time to study the deal.

One of May’s advisers, Nick Timothy, warned last year that China’s involvement in nuclear projects might allow it to “shut down Britain’s energy production at will.”
On Thursday, less than two weeks after the U.K. decision, Australia Treasurer Scott Morrison said a proposed sale of the Ausgrid electricity network could endanger national security. Government-owned State Grid Corp. of China was vying with Hong Kong billionaire Li Ka-shing for control in a deal worth more than A$10 billion ($7.7 billion), people familiar with the matter said earlier. Both had submitted binding bids.
“The more assertive a country makes its foreign policy, the harder it will be for partners like Australia to accept its foreign investment,” said Peter Jennings, executive director of the Australian Strategic Policy Institute. “It is a difficult message for China to receive, but a necessary one.”

We close for the week with the big UK energy question of the 21st century, does the UK need to build dangerous nuclear power plants at all, let alone untested technology ones, such as the proposed EDF French experiment at Hinkley Point? Technological advance is racing through competing safer energy alternatives. It’s the 21st century version of DC v AC all over again.  Now if we could just get rid of HS2 and a third Heathrow runway.

Holy Grail of energy policy in sight as battery technology smashes the old order

Ambrose Evans-Pritchard10 August 2016 • 7:28pm
The world's next energy revolution is probably no more than five or ten years away. Cutting-edge research into cheap and clean forms of electricity storage is moving so fast that we may never again need to build 20th Century power plants in this country, let alone a nuclear white elephant such as Hinkley Point.

The US Energy Department is funding 75 projects developing electricity storage, mobilizing teams of scientists at Harvard, MIT, Stanford, and the elite Lawrence Livermore and Oak Ridge labs in a bid for what it calls the 'Holy Grail' of energy policy.

You can track what they are doing at the Advanced Research Projects Agency-Energy (ARPA-E). There are plans for hydrogen bromide, or zinc-air batteries, or storage in molten glass, or next-generation flywheels, many claiming "drastic improvements" that can slash storage costs by 80pc to 90pc and reach the magical figure of $100 per kilowatt hour in relatively short order.

“Storage is a huge deal,” says Ernest Moniz, the US Energy Secretary and himself a nuclear physicist. He is now confident that the US grid and power system will be completely "decarbonised" by the middle of the century.

The technology is poised to overcome the curse of 'intermittency' that has long bedevilled wind and solar. Surges of excess power will be stored for use later at times when the sun sets, and consumption peaks in the early evening.

This transforms the calculus of energy policy. The question for the British government as it designs a strategy fit for the 21st Century - and wrestles with an exorbitant commitment to Hinkley Point - is no longer whether this form of back-up power will ever be commercially viable, but whether the inflection point arrives in the early-2020s or in the late 2020s.

One front-runner - a Washington favourite - is an organic flow battery at Harvard that uses quinones from cheap and abundant sources such as rhubarb or oil waste. It is much cheaper and less toxic than current flow batteries based on the rare metal vanadium. Its reactions are 1,000 times faster.

---- The latest refinement is to replace toxic bromine with harmless ferrocyanide - used in food additives. The battery cannot catch fire. It is safe and clean. "This is chemistry I’d be happy to put in my basement," he said.
The design is delightfully simple. It uses a tank of water. You could have one at home in Los Angeles, Lagos, Buenos Aires, Delhi, or Guangzhou, storing solar power in the day to drive your air-conditioning at night. It could be scaled up for a 500 megawatt wind farm.

It is only when they go wrong that machines remind you how powerful they are.

Clive James

At the Comex silver depositories Thursday final figures were: Registered 27.48 Moz, Eligible 127.11 Moz, Total 154.59 Moz. 

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.
Below, the problem of Euroland is that it needs to start over again.
“Rather than justice for all, we are evolving into a system of justice for those who can afford it. We have banks that are not only too big to fail, but too big to be held accountable.”
Joseph E. Stiglitz

The problem with Europe is the euro

In this extract from his new book, the Nobel prize-winning economist argues that if the euro is not radically rethought, Europe could be condemned to decades of broken dreams
by Joseph Stiglitz Wednesday 10 August 2016

Europe, the source of the Enlightenment, the birthplace of modern science, is in crisis. This part of the world, which hosted the Industrial Revolution that led to unprecedented changes in standards of living in the past two centuries, has been experiencing a long period of near-stagnation. GDP per capita (adjusted for inflation) for the eurozone – the countries of Europe that share the euro as their currency – was estimated to be barely higher in 2015 than it was in 2007. Some countries have been in depression for years.

When the US unemployment rate hit 10% in October 2009, most Americans thought that was intolerable. It has since declined to less than 5%. Yet the unemployment rate in the eurozone reached 10% in 2009 as well, and has been stuck in double digits ever since. On average, more than one out of five young people in the labour force are unemployed, but in the worst-hit crisis countries, almost one out of two looking for work can’t find jobs. Dry statistics about youth unemployment carry in them the dashed dreams and aspirations of millions of young Europeans, many of whom have worked and studied hard. They tell us about families split apart, as those who can leave emigrate from their country in search of work. They presage a European future with lower growth and living standards, perhaps for decades to come.

These economic facts have, in turn, deep political ramifications. The foundations of post-cold war Europe are being shaken. Parties of the extreme right and left and others advocating the breakup of their nation-states, especially in Spain but even in Italy, are ascendant, and in June Britain voted to leave Europe altogether. What had seemed inevitable in the arc of history – the formation of nation-states in the 19th century – is now being questioned. Questions are arising, too, about the great achievement of post-second world war Europe – the creation of the European Union.

While there are many factors contributing to Europe’s travails, there is one underlying mistake: the creation of the single currency, the euro. Or, more precisely, the creation of a single currency without establishing a set of institutions that enabled a region of Europe’s diversity to function effectively.

---- The euro has failed to achieve either of its two principal goals of prosperity and political integration: these goals are now more distant than they were before the creation of the eurozone. Instead of peace and harmony, European countries now view each other with distrust and anger. Old stereotypes are being revived as northern Europe decries the south as lazy and unreliable, and memories of Germany’s behaviour in the world wars are invoked.
The eurozone was flawed at birth. The structure of the eurozone – the rules, regulations and institutions that govern it – is to blame for the poor performance of the region, including its multiple crises. The diversity of Europe had been its strength. But for a single currency to work over a region with enormous economic and political diversity is not easy. A single currency entails a fixed exchange rate among the countries, and a single interest rate. Even if these are set to reflect the circumstances in the majority of member countries, given the economic diversity, there needs to be an array of institutions that can help those nations for which the policies are not well suited. Europe failed to create these institutions.

Solar  & Related Update.

With events happening fast in the development of solar power and graphene, I’ve added this section. Updates as they get reported. Is converting sunlight to usable cheap AC or DC energy mankind’s future from the 21st century onwards? DC? A quantum computer next?

New method for making green LEDs enhances their efficiency and brightness

Researchers at the University of Illinois at Urbana Champaign have developed a new method for making brighter and more efficient green light-emitting diodes (LEDs). Using an industry-standard semiconductor growth technique, they have created gallium nitride (GaN) cubic crystals grown on a silicon substrate that are capable of producing powerful green light for advanced solid-state lighting.
“This work is very revolutionary as it paves the way for novel green wavelength emitters that can target advanced solid-state lighting on a scalable CMOS-silicon platform by exploiting the new material, cubic gallium nitride,” said Can Bayram, an assistant professor of electrical and computer engineering at Illinois who first began investigating this material while at IBM T.J. Watson Research Center several years ago.
“The union of solid-state lighting with sensing (e.g. detection) and networking (e.g. communication) to enable smart (i.e. responsive and adaptive) visible lighting, is further poised to revolutionize how we utilize light. And CMOS-compatible LEDs can facilitate fast, efficient, low-power, and multi-functional technology solutions with less of a footprint and at an ever more affordable device price point for these applications.”
Typically, GaN forms in one of two crystal structures: hexagonal or cubic. Hexagonal GaN is thermodynamically stable and is by far the more conventional form of the semiconductor. However, hexagonal GaN is prone to a phenomenon known as polarization, where an internal electric field separates the negatively charged electrons and positively charged holes, preventing them from combining, which, in turn, diminishes the light output efficiency.
Until now, the only way researchers were able to make cubic GaN was to use molecular beam epitaxy, a very expensive and slow crystal growth method when compared to the widely used metal-organic chemical vapor deposition (MOCVD) method that Bayram used.
Bayram and his graduate student Richard Liu made the cubic GaN by using lithography and isotropic etching to create a U-shaped groove on Si (100). This non-conducting layer essentially served as a boundary that shapes the hexagonal material into cubic form.
“Our cubic GaN does not have an internal electric field that separates the charge carriers–the holes and electrons,” explained Liu. “So, they can overlap and when that happens, the electrons and holes combine faster to produce light.”
---- Having better performing green LEDs will open up new avenues for LEDs in general solid-state lighting. For example, these LEDs will provide energy savings by generating white light through a color mixing approach. Other advanced applications include ultra-parallel LED connectivity through phosphor-free green LEDs, underwater communications, and biotechnology such as optogenetics and migraine treatment.
Enhanced green LEDs aren’t the only application for Bayram’s cubic GaN, which could someday replace silicon to make power electronic devices found in laptop power adapters and electronic substations, and it could replace mercury lamps to make ultra-violet LEDs that disinfect water.

There are three roads to ruin; women, gambling and technicians. The most pleasant is with women, the quickest is with gambling, but the surest is with technicians.

Georges Pompidou

Have a great weekend everyone.

The monthly Coppock Indicators finished July

DJIA: 18432  +03 Up NASDAQ:  5162 +10 Up. SP500: 2173 +01 Up.

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