Saturday, 8 October 2016

Weekend Update 08/10/2016 – Europe’s Broken.

It is a fraud to borrow what we are unable to pay.

Publilius Syrus. 1st Century BC, Roman Writer.  

This weekend, as we await more comprehensive damage assessment from the week’s dangerous hurricane Matthew, the initial assessment seems to be, devastation to Haiti, the Caribbean nation least able to deal with the damage, severe damage in the Bahamas, lesser damage to East Jamaica and East Cuba, while the storm stayed far enough offshore from Florida to spare the state Hurricane Andrew like damage, we take yet another look at broken continental Europe.

Hurricane Matthew kills over 800 in Haiti before hitting U.S.

Fri Oct 7, 2016 | 11:50pm EDT
Hurricane Matthew killed more than 800 people and left tens of thousands homeless in Haiti earlier this week before it skirted Florida's Atlantic coast on Friday and plowed northward over waters just off Georgia.
The number of deaths in Haiti, the poorest country in the Americas, surged to at least 842 on Friday as information trickled in from remote areas previously cut off by the storm, according to a Reuters tally of death tolls given by officials.

Matthew triggered mass evacuations along the U.S. coast from Florida through Georgia and into South Carolina and North Carolina.

---- Matthew smashed through Haiti's western peninsula on Tuesday with 145 mile-per-hour (233 km-per-hour) winds and torrential rain. Some 61,500 people were in shelters, officials said, after the storm pushed the sea into fragile coastal villages, some of which were only now being contacted.

While highlighting the misery of underdevelopment in Haiti, which is still recovering from a devastating 2010 earthquake, the storm looked certain to rekindle the debate about global warming and the long-term threat posed to low-lying cities and towns by rising sea levels.

At least three towns in the hills and coast of Haiti's fertile western tip reported dozens of people killed, including the farming village of Chantal where the mayor said 86 people died, mostly when trees crushed houses. He said 20 others were missing.

Now back to the never ending Motorway car crash of Europe. Will the Italian referendum beat Deutsche Bank into finishing off the rump-EUSSR we all know so well and loath? Time to send in some adults.

The whole history of civilization is strewn with creeds and institutions which were invaluable at first, and deadly afterwards.

Walter Bagehot.

Deutsche Bank’s Cryan Doesn’t Reach Accord With U.S., Bild Says
October 8, 2016 — 11:00 PM BST Updated on October 8, 2016 — 11:45 PM BST

Deutsche Bank AG Chief Executive Officer John Cryan failed to reach an agreement with the U.S. Justice Department to resolve a years-long investigation into its mortgage-bond dealings during a meeting in Washington Friday, Germany’s Bild newspaper reported.

The meeting was meant to negotiate the multi-billion-dollar settlement the bank will have to pay to resolve alleged misconduct arising from its dealings in residential-mortgage backed securities that led to the 2008 financial crisis, according to a Bild am Sonntag report.

The German lender is still considering seeking damages against Anshu Jain and Josef Ackermann, who are both former CEOs of the bank, the newspaper reported. Bild said the bank froze part of the millions in bonus payments to Jain and other former top managers.

A Deutsche Bank spokeswoman declined to comment to Bild about the outcome of Cryan’s Friday discussion or about clawing back former executives’ compensation. Mark Abueg, a Justice Department spokesman, declined to comment.


 Italy Watchers' New Tool To Duck Brexit-Style Shock Flashing Red

A real-time barometer of online chatter that showed "leave" leading

October 6, 2016 — 11:00 PM BST
Too close to call. That's what opinion polls say about the Italian referendum, recalling another vote that confounded pollsters and markets alike: Brexit.

This time, though, investors shouldn't be caught by surprise. A barometer of online chatter that correctly anticipated most Britons would opt to quit the European Union is now suggesting that Italians are so fed up with Prime Minister Matteo Renzi they are willing to vote on Dec. 4 against a slimmed-down legislature just to see him sent home.

This measure of discontent was developed by Predata, a New York-based predictive analytics firm founded in early 2015. It scours around 1,000 sources to quantify how much the online activity of the "Yes" and "No" camps is correlated to the ebb and flow of overall interest in the referendum.

Since Sept. 29, when Renzi officially kicked off the referendum campaigning, Predata's measure shows "No" gaining ground and "Yes" plummeting.

These signals include content posted to sites such as Twitter and Wikipedia by the likes of Basta un Sì (the official "Yes" campaign) and Beppe Grillo ("No" campaigner and founder of the anti-establishment Five Star Movement), explained Aaron Timms, Predata's director of content. "There's a sign that 'No' at this stage is just a more competent and efficient digital outfit than 'Yes' is," Timms said.

A look at Predata's Brexit signals -- where a less-organized "Leave" camp consistently dominated the online debate amid tight polls -- suggests a strong starting position for Italy's "No" campaign.

"What we do know from the experience with Brexit," Timms said, "is that when you have a digital-rich, content-rich political campaign, the shifting momentum between different sides can really be a good indicator of where public opinion is heading in a way that polls can't necessarily catch up with."

Deutsche Bank and the Nonstop Bleeding of Europe’s Lenders

October 7, 2016 — 5:01 AM BST
It’s been more than eight years since the financial crisis. Shouldn’t the No. 1 bank in Europe’s biggest economy have found its footing by now?

Germany’s Deutsche Bank has investors rattled, policymakers muddled, and anyone else who’s paying attention feeling a little queasy. The trigger was news in September that the bank could be hit with a $14 billion penalty for alleged misdeeds during the U.S. mortgage boom. Fearing Deutsche Bank would have to raise capital—selling stock and diluting per-share value—or even find itself in need of a state bailout, investors sent its shares tumbling to a record low on Sept. 26.

While Deutsche Bank’s shares have since stabilized amid hopes it can negotiate a smaller bill with the U.S. Department of Justice, they’re still down 43 percent this year. It’s clear that one of Europe’s too-big-to-fail institutions is struggling to adapt to a post-crisis world defined by more aggressive regulation and fewer ways for banks to make money.

“The European banking model may be broken,” says Peter Hahn, a professor at the London Institute of Banking & Finance. “The existing system isn’t working with low growth and zero-to-negative interest rates.” Rock-bottom rates have lowered banks’ cost of borrowing but also mean they are paid less on loans and investments.
The health of Deutsche Bank has implications far beyond Europe. With €1.8 trillion ($2 trillion) in assets, it raises capital and trades securities for clients in dozens of nations, including the U.S. In June the International Monetary Fund flagged Deutsche Bank as the biggest contributor to systemic risk among global banks

The CEO of Switzerland’s largest bank offers the clearest reason to shun European financials

Published: Oct 6, 2016 6:14 p.m. ET
The CEO of UBS, Sergio Ermotti, delivered the clearest indictment yet of Europe’s embattled banking system on Thursday — at least from an investor standpoint.

The head of Switzerland’s largest bank, and among the world’s heavyweight financial institutions, said European financial institutions are suffering from a world awash in low and negative interest rates.

“The environment isn't very constructive for banks. Low rates, negative rates are putting a lot of pressure on our profitability,” he said during a CNBC interview. His comments highlight the degree to which the European banking system is floundering. Europe’s banking index, the Euro Stoxx Banks F7X, +1.15% has lost a quarter of its value in 2016, with some of the worst constituents of the gauge showing withering year-to-date drops that make Deutsche Bank’s DB, -0.44% DBK, -0.29% recent slump look pedestrian. Italy’s Banco Popolare S.C. BP, -0.27%  is down a whopping 75% this year and its sister Unione di Banche Italiane S.p. A UBI, +1.21% is down 64% year to date.

Comparatively, U.S. banks, although not setting the world on fire with their own yearly performance, are trouncing their European counterparts on a relative basis. Two indicators of U.S. bank performance are solidly in the green. The Financial Select Sector SPDR ETF XLF, +0.15% is up 1.5% for the year while the SPDR S&P Bank ETF KBE, +0.09% as the U.S. Federal Reserve inches toward a normalization of monetary policy. That is a boon to banks whose business models are based on the difference in their short-term borrowings and the long-term loans they offer customers.

Like his Deutsche Bank peer John Cryan, Ermotti blames much of the problems besetting European banks on the sluggish European economy.

France Hops Aboard the State Aid Express

By Chris Bryant  Oct 6, 2016 2:30 AM EDT
Alstom's corporate logo is often appended with the nebulous motto "designing fluidity". Happily, though, the phrase is a perfect description for the French government's attitude towards state aid.

Paris is buying a bunch of high-speed TGV trains it doesn't immediately require so that Alstom won't downsize its Belfort factory in eastern France. Paying a manufacturer 450 million euros ($504 million) to build fast trains for low-speed lines -- whilst skipping an open tender -- is as judicious a use of taxpayer money as decreeing that croissants shall henceforth be free.

It's possible that finance minister Michel Sapin is right, and this isn't a de jure contravention of competition rules. But it looks like a breach of their spirit. The French have a peculiar obsession with keeping factories going, no matter how unnecessary, so Belfort was always likely to be thrown a lifeline with a presidential election approaching. By the time the European Commission gets round to ticking off Paris, the election will presumably have been decided.

---- This is where the problem arises for the French. The ruling Socialists have decided that the loss of local jobs is just too much to bear at a time when Marine Le Pen is peddling her populist message on globalization and its discontents. Of course, it's understandable that France doesn't want all Alstom's jobs migrating overseas, but we're a long way from that. More than two-thirds of its employees are still in Europe.

And there's a cost to all this. Artificial orders won't fix lagging competitiveness -- at Alstom or France. The company is expected to be profitable this year but its 5 percent adjusted Ebit margin is too low for comfort. With China's two largest train makers merging and on the hunt for orders, competition in trains is intensifying, so Alstom needs to up its game internationally.

France's intervention looks less like a case of designing fluidity, more "designing stupidity".

France’s Wine Output to Slump to 4-Year Low as Vineyards Ravaged

October 7, 2016 — 1:47 PM BST
French wine production will be the lowest in four years after spring frost, hailstorms, grape rot and drought combined to damage crops from the northern Champagne region to the Charentes area in the southwest, the Agriculture Ministry forecast.

The 2016 vintage will slump 12 percent to 42.18 million hectoliters, the least since 2012, the ministry predicted, cutting its outlook for a second time since July. Champagne and the Loire valley were hardest hit, followed by the Charentes region and Burgundy. The estimated output equals about 5.6 billion bottles.

“This would be one of the lowest productions in 30 years,” the ministry said. “In many vineyards, the output drop is accompanied by a wide disparity in production depending on the parcel or the grape variety.”

In Italy, output will slip 1 percent to 48.9 million hectoliters, according to a September forecast from that country’s association of wine technicians. Based on that forecast, the country is the world’s biggest wine producer.

Wine is France’s largest agricultural export with a value of 8.27 billion euros ($9.21 billion) last year, boosted by Champagne and Bordeaux, customs data show. Spirits accounted for 3.95 billion euros of exports, led by Cognac, distilled from grapes in the Charentes region.

Champagne, Burgundy and the Loire valley suffered from spring frost that killed flower buds, and Charentes, Burgundy, Beaujolais and the southern Languedoc-Roussillon region faced damage from consecutive hailstorms, according to the ministry. Mildew attacked grapes in Champagne and the Loire valley, while drought weighed on output around the Mediterranean.

In the Burgundy-Beaujolais region, which produces the world’s most expensive wines, volumes may fall 20 percent, while Champagne output is predicted to fall 32 percent.

For Charentes, the source of Cognac grapes, volumes may slump 22 percent, while the Loire valley is France’s hardest-hit wine region with a 35 percent drop, based on the ministry outlook.

Finally, it’s time to drop all the doom and gloom over Brexit, and just get on and do it. Mankind, even Europeans, are innovative and creative, especially so in the pursuit of making money, and Europe and Britain will rise to the challenge of Brexit. Who knows, long overdue real reform might even now be spurred in the rump-EUSSR.

No such thing as hard or soft Brexit

By John Redwood MP  October 6, 2016
Britain’s departure from the EU is a simple choice. Carry on tariff free as at present, or revert to the WTO ready-made schedules.

The new Remain media line is to draw an absurd distinction between hard and soft Brexit.

We were asked to vote to remain or leave. We voted to leave the EU. The Vote Leave campaign made clear that meant taking back control of our laws, our borders and our money. Polling after the event shows starkly that Leave voters understood that and mainly voted to take back control. It also shows that very few Remain voters (about 10% of total voters) bought into the idea of European Union and wanted further integration along continental lines. (Michael Ashcroft post vote polls)

The PM has already rightly ruled out the Norwegian and Swiss options, and ruled out staying in the EEA. We leave what the EU regards as the single market as this is fully integrated with the EU as a whole and includes freedom of movement and financial contributions to the budgets.

The main issue we need to sort out with the rest of the EU is access to the single market. All non EU member states have access to the single market. The rest of the EU has to make a simple choice. Do they want to retain tariff free access to the UK market or not? If not, then their access and our access will be under MFN WTO rules, which allows an average tariff of 3.5%. That leaves us 6.5% more competitive, and them 13.5% less competitive after the devaluation of the pound against the Euro.

They will of course want to stay tariff free. If the EU institutional vindictive policy did win out despite the common-sense of most member states and the interests of business on the continent, then the UK will enjoy tariff free trade on things we are good at like aerospace and services, whilst French agriculture will face quite high tariffs and German cars a 10% tariff.

None of this need take a long time to settle, nor does it require a complex negotiation. It is a simple choice. Carry on tariff free as at present, or revert to the WTO ready made schedules.

There is no soft or hard Brexit. We do not negotiate taking back control – that is a contradiction in terms. Nor do I expect us to lose trade over this, as I do not think our EU partners are both vindictive and stupid.
JC Juncker may look like an idiot and talk like an idiot but don't let that fool you. He really is an idiot.
With apologies to Groucho Marx

And finally, a view from Jason in hurricane proof California.

Stagnation In Wireless Telecom Serves as a Gentle Warning for Tech Sector Broadly

N. Jason Jencka October 8th, 2016 3:35 am ET

At first read, the news that revenues and profits are under pressure in wireless telecom seems to be merely a logical byproduct of robust market competition and nothing to be “worried” about. In actuality, weakness is wireless telecom points to broader issues within the tech sector that go far beyond smoldering smartphone batteries.  From the standpoint of utility, wireless telecom is uniquely positioned because essential communication has morphed toward devices through which many experience and plan the most mundane details of life. Given this circumstance, it is essential for steady revenues that providers and phone manufactures determine where the “value add” lies with each sale. Without this, frustration will build as customers pay “full price” for heavily advertised product that may only be marginally more capable then a previous years’ version.

The relation to tech as a whole in this scenario is that the model of funding within tech depends heavily on raising capital under the premise of investing in growth that will solve a legitimate pain point as a whole. As interest rates inevitably rise and access to capital becomes more restrictive it is essential that tech startups focus on utility and value more so than where to get funding and how much may be available. Such sentiments would tend to fall on deaf ears after a multi-year bull market and but when inevitable downturns occur, “tools trump gadgets.”

N. Jason Jencka is presently studying Finance and Economics at Sierra Nevada College, located near the shores of Lake Tahoe on the border of California and Nevada.His interests include the interplay between world markets and the global political sphere, with a focus on developments of both sides of the Atlantic in North America and Europe.In his leisure time he enjoys connecting with those people that have an interesting story to tell and a genuine desire to make an impact in the world.

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