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Saturday, January 17, 2015

week ending Jan 17

Fed's Balance Sheet 14 January 2015 Again At New Record High. Has QE Really Ended? Fed's Balance Sheet week ending balance sheet was $4.476 trillion - up from the record $4.469 trillion for week ending 24 December 2014 and up from the $4.457 trillion for week ending 31 December.  Note that on the 29 October 2014, the Federal Reserves governing board (FOMC) stated that ..."the Committee decided to conclude its asset purchase program this month [October 2014]". Therefore October 2014 should be the high water mark for the Federal Reserves' balance sheet.  The complete balance sheet data and graphical breakdown of the cumulative and weekly changes follows  - continue reading >>

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 15, 2015: Federal Reserve statistical release H.4.1: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

The Fed’s $3.5T QE purchases have generated $469B for the US Treasury and become one of the largest sources of government revenue --The Federal Reserve just released its annual income statement for 2014, including details on its annual distribution of “residual earnings” to the US Treasury. Last year the Fed earned net income of $101.5 billion, primarily from “$115.9 billion in interest income on securities acquired through open market operations (U.S. Treasury securities, federal agency and government-sponsored enterprise (GSE) mortgage-backed securities (MBS), and GSE debt securities). Note that “acquired” means that the Fed was able to purchase about $474 billion in securities last year in its “open market operations” without any real assets, deposits or money, bringing its total portfolio of securities “acquired” to $4.236 trillion at year end 2014, see red line in chart above. The “acquisition” of $4.236 trillion in marketable securities was mostly the result of the Fed’s monetary expansion known as QE1, QE2 and QE3 that started in 2008 in response to the Great Recession. At the end of 2007, the Fed held “only” about $750 billion in Treasury securities, which then grew to a portfolio of almost $4.25 trillion by December 2014 after the Fed “acquired” almost $3.5 trillion in Treasury securities ($1.7 trillion in purchases from 2008 to 2009) and mortgage-back securities ($1.75 trillion from 2009 to 2014). That’s how expansionary monetary policy (including QE) works – the Fed uses what I call its “magic check book” to purchase securities in the open fixed-income market by writing checks to individuals, organizations and/or financial institutions on an account that has no funds. If a private party tries to acquire assets that way, it’s called check forgery, writing a bad check, or bank fraud; when the Fed does it, it’s called “monetary policy” or “open market operations” or “acquiring securities” or “QE.”

Plosser Says ‘More Normal’ Economy Calls For Fed Reaction - The U.S. economy has improved considerably and Federal Reserve officials should raise interest rates sooner rather than later in order to get ahead of future inflation, Philadelphia Fed President Charles Plosser said Wednesday. Mr. Plosser, who retires in March and has been a frequent critic of the central bank’s unconventional policy response to the Great Recession, said the labor market continues to heal at a quicker pace than many economists had foreseen. “I believe the economy has returned to a more normal footing, and as such, I believe that monetary policy should follow suit,”  The U.S. economy looks set to expand 3% this year, Mr. Plosser said, before cooling off to a longer-run trend of around 2.4%. Inflation has been running below the Fed’s 2% target over 2-1/2 years, and is expected to move lower in coming months because of plunging oil prices before picking up. But Mr. Plosser expressed confidence the energy price drag on U.S. inflation trends would be temporary. “Inflation will gradually move toward the target as the transitory effects of lower oil prices fade,” he said. Reiterating his support for requiring the Fed to adopt a specific monetary policy rule and announce it publicly, Mr. Plosser said Congress should steer the central bank to a singular focus on inflation, as opposed to the current mandate of price stability and maximum sustainable employment.

Fed’s Lockhart Looks to Summertime for First Fed Rate Increase -  Federal Reserve Bank of Atlanta President Dennis Lockhart pointed on Monday to summertime as the most likely time he would favor an increase in interest rates. In a speech, the official said, “I believe the first action to raise interest rates will in all likelihood be justified by the middle of the year,” echoing a view he has held for some time. Mr. Lockhart added that whatever happens with monetary policy will be driven by how the economy performs. “If the early months of this year bring mixed news on the economy, the risk manager in me will lean to preferring a later date for the first policy move to an earlier one,” Mr. Lockhart said in the text of a speech prepared for delivery in Atlanta. But even once rate increases begin, he explained, “a decision to raise rates will not constitute the throwing of a switch from easy money conditions to tight.” For some time, monetary policy will remain very stimulative of growth, even as rates rise from current near-zero levels, he said. Mr. Lockhart, a centrist at the Fed who is often seen as a bellwether of the Fed’s outlook, will hold a voting role on the monetary-policy setting Federal Open Market Committee this year. The veteran policy maker long has suggested that he expects rate increases to come some time after the middle of the year. His outlook jibes with other key Fed policy makers. Most in markets also expect the Fed to embark on its first rate increase some time around its June policy meeting. In his speech, Mr. Lockhart said that the outlook for policy makers is challenging. On one hand, growth and hiring are on the mend. On the other side, inflation is well under the Fed’s 2% target and likely to head lower over coming months, reflecting the sharp drop in the price of oil. Together, that creates conflicting influences on monetary policy making.

Fed’s Rosengren Wants to Avoid Rate Increase Until Inflation Firms - Federal Reserve Bank of Boston President Eric Rosengren wants to hold off on raising short-term interest rates until inflation shows more convincing signs of rising toward the central bank’s 2% target, he said in an interview Wednesday with The Wall Street Journal. Moreover, Mr. Rosengren doesn’t have great confidence that inflation will move up as expected, especially given the behavior of long-term interest rates in recent weeks. Yields on 10-year Treasurys have fallen below 2%, a sign investors expect lower inflation even though the Fed thinks it will go up. He said there was a disconnect between this market behavior and the Fed’s confidence that inflation was moving up. “If you look at the 10-year Treasury rate, it was 1.81%” on Wednesday, Mr. Rosengren said. “If you think about a 2% inflation target, it means a negative after-tax real rate of return for an entire 10-year period. It indicates there might be a difference between the market perception of how quickly we’re going to get back to a 2% inflation target and when the Fed seems to think we’re going to get back to a 2% inflation target.” The Boston Fed president and his research director, Geoffrey Tootell, sat for a wide-ranging interview with The Wall Street Journal. The Boston Fed President is a policy “dove” who has consistently supported very low interest rates. His latest comments offer a glimpse into the arguments dovish Fed officials will make at the central bank’s policy meeting later this month as officials consider how long to keep rates low. Most officials expect to start raising their benchmark short-term rate from near zero this year, with some pointing to midyear as the most likely time for liftoff.

Dear Fed, Please Be Late To the Rate-Raising Party - WSJ: At a joint meeting in December of the Federal Reserve Board’s Open Market Committee and Board of Governors, the possibility that interest rates would be increased this year gained further traction. Meeting minutes indicate that the Fed believes U.S. economic growth, which continues its long climb back, could trigger a change in monetary policy. The Fed also mentioned problems elsewhere in the world, and took the unprecedented action of encouraging central banks to address slowing growth in their regions. As the Fed balances timing for its first interest-rate increase in nearly nine years, it is useful to consider the risks of raising rates too quickly or too slowly. Moving too quickly, amid persistent signs of global economic trouble, could have a damaging effect on economic growth and investors by sending stock and bond markets into turmoil. But moving too slowly risks inflation exceeding 2% for an extended period. The downside risk of waiting is more manageable. In other words, the Fed should be late to the rate-raising party. The steep decline in oil prices, the crash of the Russian ruble, the anemic European economy and nine-year lows in the euro—coupled with questions about China’s ability to sustain its growth and Japan’s persistent deflation—all are bad portents for the new year. Continued caution on U.S. interest rates is the right path. With persistent uncertainty in the global economy, we cannot afford additional economic stress that causes further retrenchment of the investing public.

Weakness Overseas May Delay Fed Rate Increase, World Bank Says --A darker growth outlook overseas is likely to push back the U.S. Federal Reserve’s first rate increase in eight years, the World Bank said Tuesday. “I expect it will prompt the Fed to hold off on an interest rate rise for a little longer than what observers had originally anticipated,” said Kaushik Basu, the bank’s chief economist. The development bank downgraded global growth expectations amid ongoing eurozone troubles and a sharper emerging market slowdown. Markets currently expect the rate rise to come in the middle of the year, based on a raft of signals from Fed officials.But Mr. Basu said three factors are likely to change the Fed’s plans. First, the U.S. recovery is not yet healthy enough. Although employment is improving–jobless claims fell to a 14-year low earlier this month—real wages are relatively stagnant. Second, the tumble in oil prices is not all good. Consumers in Europe and Japan, both crude importers, should have more cash left over after filling up at the pump to spend, potentially juicing growth. But that may take time to feed through the economy, Mr. Basu said. In the meanwhile, it’s exacerbating deflationary pressures.“This is no doubt going to feed into the U.S. Fed calculations,” he said. In fact, the Fed has already indicated a growing concern about oil prices. Third, weaker growth from major trading partners will also weigh on the U.S. recovery, the bank said. That fuels two concerns. U.S. exports will remain weak even as the dollar’s surge bolsters imports. And an increase in borrowing costs could create debt headaches for emerging markets.

Ex-Fed Stein Says Market Tumult Could Affect Fed Rate Hike Outlook -  A former high-level Federal Reserve official said Thursday he’d been favoring a June rate increase until he saw the rapid drop in U.S. long-term bond yields that have dominated the start of the year. Jeremy Stein, who served as a Fed governor until the middle of last year, said “I’d be a little inclined to move in June,” but that outlook is now in flux in the wake of a rapid drop in the U.S. yields that has seen the 10-year note return fall below 2%. Mr. Stein cautioned that it is “a little bit hard to disentangle” what’s happening in bond markets. That said, it is clear that at least part of the situation represents traders and investors expecting to see inflation come in even weaker than its already rock bottom levels, he said. While the exact timing of a rate increase“only matters to traders,” market expectations of Fed policy do matter to the central bank and can affect the timing and pace of future actions, Mr. Stein said. He sees a rising tension between the monetary policy outlook held by central bankers and market participants, and warned that eventually this disconnect will have to be addressed. At the Fed, “so much of what you are doing is making small decisions, things that are small on the economy, but have overwhelming signaling” to market participants, Mr. Stein said. He said the central bank faces a clear communications challenge to have its actions properly understood by financial market participants.

WSJ Survey: Economists Pare Back Fed Rate Rise Expectations - Global market turmoil and weak overseas growth have prompted economists to trim their estimates of how much the Federal Reserve will raise interest rates in coming months, a new Wall Street Journal survey shows. A growing number of economists surveyed by The Wall Street Journal expect the Fed to wait a bit longer to start raising its benchmark federal funds rate this year.ReutersEconomists surveyed Friday through Tuesday on average expected the Fed to lift its benchmark federal funds rate from its current range of zero to 0.25% to a range with a midpoint of just 0.29% by June. That’s lower than the 0.35% respondents projected for June in the Journal’s poll last month and 0.47% they forecast a year earlier. This indicates a growing number of them think the central bank will wait a bit longer before moving. The 66 economists polled in recent days—not everyone answered each question—also saw a lower fed funds rate at the end of this year, 0.89% on average, down from 0.96% in the prior survey. The shift echoes a change in interest rate futures markets, where investors have been altering their expectations for when the Fed will act. Sung Won Sohn, economist at California State University Channel Islands, was among the respondents who saw a greater risk the Fed would start raising rates too soon rather than too late. “The economy has more downside risk,” he said. In contrast, Mike Cosgrove, founder of investment adviser Econoclast Inc., was among several who think Fed policy makers “are already too late” in raising rates. Boston Fed President Eric Rosengren told The Wall Street Journal in an interview Wednesday he would want to hold off on raising rates until inflation shows more convincing signs of rising toward the central bank’s 2% target. Inflation is below the Fed’s 2% target and looks set to move even lower due to falling oil prices before rebounding.However, several other Fed officials, including Chairwoman Janet Yellen, have dismissed the oil price drag on inflation as likely “transitory.”

Fed’s Bullard Still Pushes for First Quarter Rate Rise - Federal Reserve Bank of St. Louis President James Bullard said Friday he still favored raising U.S. interest rates by the end of the first quarter, even with inflation well below the central bank’s 2% target. Mr. Bullard said he was willing to adjust the pace of further rate increases to reflect wider economic trends, but that a “lift off” in inflation was not as important as moving short-term rates from near zero. “I still think we should get going with our rate rises,” he told reporters after a speech in Chicago. “The data lift off is not so critical as the pace.” Mr. Bullard said the Fed risked falling behind the curve if it waited until June, when many investors and some policy makers expect the first rate increase. He added that if the central bank waits until summer to move, the rise could be followed by a faster pace of subsequent increases. “The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said earlier in a speech in Chicago. The Labor Department reported Friday its consumer price index rose 0.8% in December from the same month a year earlier, their slowest annual pace in five years, largely due to a plunge in oil prices. The Fed prefers to look at a different broad measure, the Commerce Department’s personal consumption expenditures price index. Using that gauge, inflation has undershot 2% for more than two and a half years.

She's No Greenspan: Yellen Signals She Won't Babysit Markets in Turmoil  - Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility. The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations. To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad -- just as a put option protects against a drop in stock prices. “The succession of Fed puts over the years has led to a wide range of distortions in financial markets,” said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. “There have been swollen asset values followed by sharp declines. This is a very good time for the Fed to move away.”

Falling 10-Year Yield Raises Doubts About Fed 2% Goal - Federal Reserve officials have said they would raise short-term interest rates in the months ahead even if inflation remains below their 2% objective, as long as they are “reasonably confident” it is heading toward that goal. You can count Federal Reserve Bank of Boston President Eric Rosengren as not at all confident at this point in time. In an interview with The Wall Street Journal Wednesday, Mr. Rosengren said falling 10-year Treasury yields, among several factors, were giving him pause about whether the Fed’s own inflation expectations are realistic. Yields on 10-year notes have dropped below 2%. Presumably investors expect some return on investments in those bonds after accounting for inflation and taxes. A yield below 2% implies negative real returns. Either investors are so hungry for a safe haven asset that they’re willing to accept no return over 10 years, or the market is signaling it doesn’t believe the Fed will hit that 2% inflation goal any time soon. “Based on the data right now I’m not particularly confident” that 2% inflation is within sight, he said. You can find links to our story and extended excerpts from the interview in in today’s Morning Minutes below.

Fed too complacent on US deflation damage  -- The Fed is in an awkward position, as was clear from Janet Yellen’s tough slog through her December 17 press conference. The Fed’s main message – that monetary tightening (interest rate boosts) will probably start in June of this year – squares well with strong growth and falling unemployment but is bizarre given falling inflation and the additional deflationary impulse (from falling energy and commodity prices and a stronger dollar). The Fed has decided simply to assert that US deflation won’t materialize, so it will continue on its current path toward mid-year tightening. This is a dangerous course to follow, especially in view of rising global deflation pressure. Deflation is dangerous for three reasons: (1) it makes people and firms do things that create more deflation; (2) it boosts real, inflation-adjusted interest rates which in turn deters investment and slows growth; and (3) it boosts trade tensions by forcing countries – like Japan, China, and Europe – that are trying to reflate in a world of weak domestic demand to allow their currencies to weaken, thereby exporting deflation to countries like the US that are exhibiting some modest growth of domestic demand. The self-reinforcing nature of falling prices in the US is most evident in the goods markets. Falling prices of TV’s, computers, and automobiles (not to mention all residential real estate) have been so widely discussed that some buyers are choosing just to wait for lower prices, thereby cutting demand and creating a self-fulfilling expectation that tomorrow’s prices will be lower than today’s. Some service prices are falling as well. For example, Uber’s lower fares are revolutionizing local transport options globally

Self-correcting depression and virtue of deflation - Does the Federal Reserve even have history as a guide? The world’s most powerful central bank has said it wants to raise interest rates this year, after six years in which they stuck at zero. We know why it wants to do this. Many fear that monetary policy since the 2008 Lehman crisis has distorted markets and the economy. These were measures for exceptional circumstances, and it naturally wants to return to normal. But investors are desperate for rates to stay on the floor, and take any evidence that rate rises will be postponed as an excuse to buy stocks. Three times in three months world stocks have sold off but rebounded on a cue from the Fed. In October, a near-10 per cent correction ended when James Bullard of the St Louis Fed said the Fed’s “QE” bond purchases, designed to keep rates low, might be continued. In December, after a 5 per cent correction, the announcement by the Fed at its regular meeting that it would be “patient” in waiting for rates to rise triggered another rebound. And this week, after the new year had started with another sell-off, the publication of the minutes from that meeting, which appeared to rule out a rate rise as soon as April, again prompted a rebound. The picture of a market still desperate for easy money, and jumpy about the prospect of any increase in rates, is deeply disquieting. But the stock market should not be a prime concern for the Fed, which is mandated to control inflation and promote full employment. On that basis, inflation is very low, and falling, and the Fed has made clear that it wants to avert outright deflation – which theoretically deters consumers from buying, as goods can later be bought for less money.

Fed Gets Some Good News on Inflation Outlook, Via NY Fed Survey - Federal Reserve officials got a rare bit of good news on the inflation front on Monday. A New York Fed report said consumer expectations of future price pressures are holding steady at around 3% over a one- and three-year horizon.ReutersAt a time when market-based measures of future inflation have fallen sharply, a report from the New York Fed said consumer expectations of future price pressures are holding steady. U.S. households in December projected inflation to be around 3% per year over a one- and three-year horizon. The New York Fed report gives central bankers some comfort in their expectation that inflation will eventually rise from weak levels back closer to their 2% target. Many economists and most policy makers agree that public expectations of future inflation can become a self-fulfilling prophecy. If the public thinks inflation will rise, that’s a welcome thing when inflation has fallen short of the Fed’s 2% target for over two and a half years. At the same time, the New York Fed findings echo other survey-based measures of expected inflation. Most of these types of measures have proved relatively stable. That consumers’ outlook held steady in the face of a big drop in oil prices is also notable. Many economists expect declining crude prices to push headline inflation measures—those that do not strip out volatile food and energy costs–into negative territory over the start of the year. Some expect overall price levels to fall for much of the year. Right now, most Fed officials are looking to raise rates this year, with several pointing to midyear as the most likely time. But increasing borrowing costs at a time when the Fed is far short of its price target is a difficult sell, even when growth is robust and hiring improving at a rapid clip. Fed officials need to be confident that headline inflation is weak because of a single transient factor, and they need to be confident the broader public believes 2% inflation will return.

Key Measures Show Low Inflation in December  - The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in December. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report. Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers fell 0.4% (-4.4% annualized rate) in December. The CPI less food and energy was unchanged (0.0% annualized rate) on a seasonally adjusted basis.  Note: The Cleveland Fed has the median CPI details for December here. Motor fuel declined at a 69% annualized rate in December, following a 55% annualized rate decline in November, and a 31% annualized rate decline in October!

Slow Rise in Consumer Prices May Stymie the Fed -- Consumer prices in the United States are rising at the slowest pace during a period of economic growth in the last half-century, a trend that could delay the Federal Reserve’s retreat from its stimulus campaign. An index of the prices Americans pay for goods and services rose just 0.8 percent during the 12 months ending in December as the collapse of oil prices offset the higher cost of food and health care, the Bureau of Labor Statistics said on Friday. The slow pace of inflation means Americans are experiencing less erosion in the value of their paychecks at a time when wages, too, are rising unusually slowly. But it is also evidence that the recovery from the Great Recession remains incomplete. And sluggish inflation itself can impede debt repayment and other economic adjustments. The Fed has said it plans to start raising its benchmark interest rate around the middle of the year. Job growth has outstripped its expectations and other economic indicators are improving. The University of Michigan’s consumer survey reported on Friday that consumer confidence in January hit the highest level in a decade. Some Fed officials reiterated on Friday that they saw sluggish inflation as a temporary problem. They said that lower oil prices would actually help reverse the trend by contributing to stronger economic growth and, in time, increased inflation.

Targeting from Below - Carola Binder - Inflation targeting (IT) was widely adopted by central banks in both industrialized and emerging-market countries in the 1990s and 2000s. Typically, the objective for switching to an IT framework has been to reduce and stabilize high and volatile inflation. Studies of IT find that it has been successful in regards to this objective.  But how does IT fare when inflation is instead too low? Michael Ehrmann of the Bank of Canada addresses this question in "Targeting Inflation from Below: How do Inflation Expectations Behave?" He notes that the Bank of Japan adopted IT in an environment of undesirably-low inflation. Likewise, when the Federal Reserve announced a 2% inflation target in 2012, core inflation had been below 2% for some time. "Although designed to lower inflation and inflation expectations," Ehrmann writes, "IT is now charged with the objective to raise them, a challenge that has not yet been studied extensively." . We tend to worry about inflation expectations becoming disanchored when inflation goes too high above target or stays above target for too long. This is partly why the inflation target gets treated more like a ceiling than a symmetric target. But in the current situation in the U.S. and Europe, it may be that keeping inflation too low is weakening the anchoring of expectations. A temporary burst of above-target inflation seems unlikely to damage the anchor.

Investors Shift Bets on Fed Rate Increase - WSJ: A wave of global economic gloom has turned the U.S. money market on its head, with more investors now betting that the Federal Reserve will be forced to delay raising interest rates. Many analysts and traders say officials will be loath to increase interest rates, tightening financial conditions, when the economy is showing signs of softness. Expectations that the Fed will this year raise U.S. short-term rates for the first time since 2006 have driven a sharp rally in the dollar, as investors around the globe purchase U.S. assets in the belief that returns here will rise along with interest rates. But signs of economic softness and tumbling oil prices on Monday again sent riskier assets such as stocks lower, while investors piled into ultrasafe Treasury bonds. The yield on the benchmark 10-year U.S. note fell to 1.909%, the lowest level since May 2013. “The market is telling you that a rate increase from the Fed will come later rather than sooner,” . Widely tracked gauges of interest-rate expectations confirm the shift.

Central Banks Must Target Growth Not Inflation - Brookings Institution -- Many policy makers and economists believe in the centrality of inflation targeting as the basis for monetary policy. Inflation targeting was first implemented by the Reserve Bank of New Zealand in 1988 and has become a widespread guiding principle for many central banks. This is about to change. There are two main reasons. One is related to some key flaws in inflation targeting in a world driven by productivity or supply shocks and the other relates to the problem of having a large number of countries with excessive levels of government debt.

U.S. Retakes the Helm of the Global Economy - The U.S. is back in the driver’s seat of the global economy after 15 years of watching China and emerging markets take the lead.The world’s biggest economy will expand by 3.2 percent or more this year, its best performance since at least 2005, as an improving job market leads to stepped-up consumer spending, according to economists at JPMorgan Chase & Co., Deutsche Bank AG and BNP Paribas SA. That outcome would be about what each foresees for the world economy as a whole and would be the first time since 1999 that America hasn’t lagged behind global growth, based on data from the International Monetary Fund. “The U.S. is again the engine of global growth,” said Allen Sinai, chief executive officer of Decision Economics in New York. “The economy is looking stellar and is in its best shape since the 1990s.” In the latest sign of America’s resurgence, the Labor Department reported on Jan. 9 that payrolls rose 252,000 in December as the unemployment rate dropped to 5.6 percent, its lowest level since June 2008. Job growth last month was highlighted by the biggest gain in construction employment in almost a year. Factories, health-care providers and business services also kept adding to their payrolls. About 3 million more Americans found work in 2014, the most in 15 years and a sign companies are optimistic U.S. demand will persist even as overseas markets struggle. U.S. government securities rose after the report as investors focused on a surprise drop in hourly wages last month. Ten-year Treasury yields declined seven basis points to 1.95 percent at 5 p.m. in New York on Jan. 9.

Fed's Beige Book: Economic Activity Expanded at "modest" or "moderate" Pace  --Fed's Beige Book "Prepared at the Federal Reserve Bank of San Francisco and based on information collected on or before January 5, 2015. " Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand during the reporting period of mid-November through late December, with most Districts reporting a "modest" or "moderate" pace of growth. In contrast, the Kansas City District reported only slight growth in December. However, most of their contacts, along with those of several other Districts, expect somewhat faster growth over the coming months. ... And on real estate:  Single-family residential real estate sales and construction were largely flat on balance across the Districts. Sales declined somewhat on a year-over-year basis in the Boston, Cleveland, Atlanta, Chicago, Minneapolis, Kansas City, and Dallas Districts. In the Philadelphia District, year-over-year existing home sales finished lower in November, but pending December sales in some areas were up notably over December 2013. However, builders of new homes in the Philadelphia District reported weak traffic for prospective buyers and fewer contract signings. San Francisco reported that overall home sales picked up in December. Richmond reported a modest increase in housing market activity. Home prices increased modestly, on balance, in the Boston, Philadelphia, Cleveland, Atlanta, Chicago, and Dallas Districts. The Cleveland, Atlanta, Chicago, Minneapolis, and Kansas City Districts all reported slightly slower single-family residential construction activity.

Fed's Beige Book Shows Widespread Concerns Over Oil's Impact  -  The standard modest or moderate growth comments of the Fed's typically boring Beige Book were awkwardly interspersed with a narrative-interrupting 45 mentions of concerns about oil's price plunge impact... The Dallas District indicated that growth slowed slightly during the reporting period and that several contacts expressed concern about the effect of lower oil prices on the District economy. The Dallas District noted that office leasing activity remained strong, but one contact noted a slight pullback in demand from oil and gas firms. Demand for oilfield services fell in the Eleventh District. Declines were concentrated in the Permian Basin as firms moved away from traditional vertical drilling, but the Eagle Ford and other oil basins in the District also saw a slight drop off in activity. Outlooks for the first half of 2015 are very uncertain and significantly weaker than in the prior reporting period, with firms expecting anywhere from a 15 to 40 percent decline in demand for their services. The Kansas City and Dallas Districts reported that demand for oilfield services decreased, while the Atlanta District reported that growth in the supply of crude oil and natural gas continued to outpace demand growth. Oil drilling activity in the Kansas City District declined, and contacts expect that District's energy sector to slow further in response to lower energy prices.

Fed’s Beige Book: We Read It So You Don’t Have To - The economic outlook was generally positive for the end of last year, according to anecdotes from the Federal Reserve’s latest survey of regional economic conditions. Consumer spending was strong and companies were considering raising wages in the New Year. But plunging oil prices are starting to threaten energy-related industries in some parts of the country, according to the report. Here are some of the anecdotes offered from the Fed’s 12 regional banks:

Fed’s Kocherlakota Does Not Like What’s Brewing In The Bond Market - Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday rock-bottom borrowing costs in the bond market are not a positive vote on the economic outlook. “The low long-term yields are actually a source of unease to me” because they suggest investors are marking down the economy’s long-term prospects, while indicating that it’s possible the Fed will have less room to maneuver when it comes to future monetary policy making, the official told reporters after a speech in New York. When it comes to weak growth, “investors seem to think about this as a relatively persistent problem,” the official said. Mr. Kocherlakota was responding to a question about the state of borrowing costs. Even as the Federal Reserve has moved closer to raising rates, bond yields have been falling, at a time when they would normally be rising to price in the prospect of higher short-term interest rates. Many view the drop in borrowing costs a reflection of the U.S.’ value as a safe haven for money at a time where global economic conditions are deteriorating. The market’s movements suggest that even if the Fed meets expectations and raises rates this year—something Mr. Kocherlakota strongly opposes—financial conditions will not reflect this change in Fed policy. New York Fed President William Dudley noted in a speech late last year a lack of market reaction to a central bank rate rise could force the Fed to be more aggressive with subsequent rate actions. In his prepared remarks, Mr. Kocherlakota said any move to raise interest rates this year could imperil the job-market recovery and undermine confidence inflation will move back up to 2%.

Treasury Bond Yield Drops to Record Low Amid Fear of Global Deflation  - Treasury 30-year bonds yields are tumbling to record lows as the collapse in oil and commodity prices smothers inflation and hampers global economic growth. Global sovereign yields fell to records in the U.K., France, Canada and Japan as a report showed retail sales in the U.S. slumped in December by the most in almost a year, reflecting a broad-based retreat that may prompt economists to cut growth forecasts. The slide prompted traders to push back expectations for the timing of the first Federal Reserve interest-rate increase into December less than a month after speculating that rates could rise as soon as April. “The Fed’s between a rock and a couple of hard places.” said Daniel Fuss, Boston-based vice chairman at Loomis Sayles & Co., who helps manage the $24.5 billion Loomis Sayles Bond Fund and has been in the securities business since 1950. “The savings flows go toward safety and return, and the U.S. Treasury market has both.” Even at the record low yield of 2.39 percent reached today, 30-year Treasuries are attractive to global investors looking at negative returns on the sovereign debt of nations including German with the European Central Bank expected to add to its bond-buying program as policy makers seek to avert deflation. The Treasury sold $13 billion of 30-year bonds at an auction-record-low yield of 2.430 percent. Thirty-year bond yields dropped four basis points, or 0.04 percentage point, to 2.46 percent as of 3:45 p.m. in New York, according to Bloomberg Bond Trader data. The momentum that caused the previous record low of 2.44 percent set on July 26, 2012, to be eclipsed is being driven by the following factors.

Plunge in Treasury Yields Is Forecasting More Than Just Deflation - Plunging yields on U.S. Treasury notes and bonds, record low yields on the sovereign debt of countries in the European Union, together with plunging industrial commodity prices, are sending a crystal clear message to stock markets: there is a glut of supply and too little demand from consumers. Such a supply-demand imbalance brings about price wars. Thus we have Saudia Arabia slashing prices on oil to its customers in an attempt to grab market share, triggering a global price war in oil; supermarket pricing wars in Britain; gas station pricing wars in the U.S.; mutual fund fee pricing wars; magazine price wars. There is even a chicken nuggets pricing war. Collapsing yields, collapsing commodity prices are the result of distorted income dispersal, otherwise known as income inequality. Last August, researchers at the Federal Reserve released a study showing the fragility of the U.S. consumer. The Fed’s Division of Consumer and Community Affairs found that 52 percent of Americans would not be able to raise $400 in an emergency from their checking account, savings or borrowing on a credit card that they would be able to pay off when the next statement arrived. There is a delicate equilibrium of income distribution that sustains growing economies. When income distribution becomes insanely skewed to the top 10 percent, deflation is the inevitable outcome. To express it another way, when workers are stripped of an adequate share of the profits of their productive labors on behalf of the corporation, they can’t consume an adequate amount of the corporate output. Supply gluts develop and deflation follows.

David Leonhardt Uses the New York Times to Spread Pete Peterson’s Debt Hysteria --William K. Black -- David Leonhardt came to my attention because of his column purporting that liberals were wrong about families and education. Given my colleagues’ expertise in macroeconomics, money, and jobs, I decided to look at what views Leonhardt was presenting on austerity. Leonhardt lauds himself for avoiding what he dubs the “safe” approach to journalism and instead “providing a service to readers when we’re willing to make analytical judgments.” What kind of “analytical judgments” does he make about austerians and debt hawks in light of their track record of repeated predictive failures? He loves them. I discovered that Leonhardt’s obsession is U.S. government debt. Leonhardt is not someone with expertise in economics. Pete Peterson is finance billionaire. His great goal is to privatize Social Security, which is the finance industry’s fondest hope for it would mean hundreds of billions of dollars in fees for them. Peterson’s means of trying to achieve that goal is to spread panic about U.S. debt. Leonhardt’s proselytizes for Peterson about the diabolical nature of U.S. government debt. Peterson’s numerous front groups have provided the key support for Leonhardt’s efforts to panic the people. At times, Leonhardt writes about why austerity has harmed the U.S. recovery from the Great Depression. At other times, Leonhardt attacks stimulus. He has consistently urged President Obama to agree to the Grand Betrayal (which he views as the Grand Bargain) and begin to undo the safety net. Leonhardt does not even attempt to explain his contradictory positions.

Bernie Sanders opens a new front in the battle for the future of the Democratic Party -- President Obama's biggest problem in the Senate is obviously its new Republican majority, but opposition from the left wing of the Democratic caucus appears to be growing too. Most prominently, Sen. Elizabeth Warren (D-MA) has clashed with the White House on a key Treasury Department position and the CRomnibus spending package. But new budget committee ranking member Sen. Bernie Sanders (I-VT) is poised to break dramatically from traditional Democratic views on budgeting, from Obama to Clinton to Walter Mondale and beyond. His big move: naming University of Missouri - Kansas City professor Stephanie Kelton as his chief economist. Kelton is not exactly a household name, but to those who follow economic policy debates closely, tapping her is a dramatic sign. For years, the main disagreement between Democratic and Republican budget negotiators was about how to balance the budget — what to cut, what to tax, how fast to implement it — but not whether to balance it. Even most liberal economists agree that, in the medium-run, it's better to have less government debt rather than more. Kelton denies that premise. She thinks that, in many cases, government surpluses are actively destructive and balancing the budget is very dangerous. For example, Kelton thinks the Clinton surpluses are nothing to brag about and they actually inflicted economic damage lasting over a decade.

Oh Me Oh My! MMT Is About! – Randy Wray - Here’s an unintentionally hilarious piece by Tim Worstall at Forbes. Watch out, he warns, MMT has come to Washington! Our nation’s capital! No doubt ruin and wastage will follow. Why? Well. Nothing wrong with the theory of Modern Money Theory, he admits. “It’s not actually that I disagree very much with the economics that is being laid out in MMT: indeed, I’m terribly tempted to agree that they’re actually correct in much of what they say.” He admits that MMT is right on budgets: “It’s most certainly not obvious that MMT proponents are all barking mad or anything. Jamie Galbraith (who I’ve had one or two very limited interactions with) is certainly a reasonable guy. And his insistence that a budget surplus, despite the ribbing he gets about it, is in fact economically contractionary doesn’t seem to have anything wrong with it. Budget deficits are fiscally expansive, a surplus is fiscally contractionary, if there’s any one statement at the heart of Keynesianism that’s it.”  And it is right on money:“And their basic outline about money creation is true as far as I can see. If you’re a country with your own central bank you can print as much money as you like.” And really nothing wrong with the policy, either. No, it is all politics. What he’s afraid of is that if politicians understood that they cannot run out of money, they’d spend like they cannot run out of money. And off we’d go to Weimar and Zimbabwe land. It is the same line that Paul Samuelson took, when he argued that the job of an economist is to lie. Or, better, to preach the old time religion and superstition. Put real fear into the politicians and the voters they represent. Government is just like a household, you know. Careful, Gov, you’ll run out of money. You’ll have to go hat-in-hand to Bond Vigilantes when you run out. Uncle Sam will have to go to the Salvation Army for a cup of soup.  It is the same old fear mongering by someone who does not trust the democratic process and does not understand budgeting.

Replacing the Budget Constraint with an Inflation Constraint - Tim Worstall has a post decrying the dangers of MMT ever being used in the real world—even as he recognizes or at least suggests that it might be the correct description of how the monetary system works—and is particularly concerned about Stephanie Kelton’s new appointment as Chief Economist on the Senate Budget Committee. (Note: Randy Wray also posted a critique of Mr. Worstall’s post today.) Mr. Worstall’s main issue is one we’ve heard hundreds of times before—because MMT explains that currency-issuing governments operating under flexible exchange rates and without debt in a foreign currency do not actually have budget constraints, this opens the door to all sorts of problems if put into practice. We can’t trust our government with this information, in other words—it must be required to match spending with revenues over some period (whether each year, over the business cycle, etc.) or at least plan over some period of time to not allow the debt ratio to rise beyond a modest level.** Mr. Worstall notes the frequently heard MMT argument that the point of taxes is to regulate the economy—and takes particular issue with the view that taxes can be increased/decreased in real time. Note, though, that this is simply a metaphorical or simplified explanation—it blends the Chartalist argument that “taxes drive money” with the functional finance view of using the outcomes of the government budget position as the criterion by which to judge it (rather than the state of the budget position itself). It is not intended as a literal point—no MMTer has ever made a specific proposal for raising/lowering income tax rates in real time to manage the economy. Let me explain to Mr. Worstall and others how this could work rather easily—just as the CBO and OMB now evaluate government budget proposals regarding their effects on the budget stance, the CBO and OMB could instead shift focus on evaluating these proposals against the inflation target (I argued the same thing here, printable version here). Much like how policy makers supposedly take estimates of effects on the budget position rather seriously in making budget conditions, they could replace these with projections of inflationary effects. An inflation constraint provides more fiscal space than a budget constraint, but in no way does it provide unlimited fiscal space (again, as we’ve always argued).

What if the Public Understood How Money Works? - William K. Black - There’s something invigorating about people freaking out about modern monetary theory (MMT). . They are petrified that knowledge of the financial equivalent of the “holy of holies” will be released to normal people because they project their greatest terrors onto the possibility that the public will be transformed and empowered by their knowledge of matters that much of the financial world has understood for at least a century. Randy Wray has written about the time when the Nobel Laureate in Economics, Paul Samuelson, explained in an interview with Mark Blaug the need to limit the knowledge of true nature of money to the priestly caste of economists.  “I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.”  Notice the breadth of ideology represented by the economic priesthood – from the hardest right represented by the Nobel Laureate James Buchanan to wherever one places Samuelson on the spectrum. One can see why Samuelson foisted a bowdlerized version of Keynes on economics students for decades in which massive unemployment is essential to avoiding “inefficiency.”

Dynamic Scoring—a First Step?J.D. ALT -- A recent op-ed in the Washington Post (“Dynamic Scoring” by Congressman John K. Delaney) alerts us to an astonishing fact: Not only does our political leadership insist that the federal government manage its budget in the same way as a household—i.e. not spending more than it “earns”—but further insists that the federal government behave like a household devoid of any rational capacity to evaluate the net future benefits of its budgetary decisions. In other words, if the U.S. federal “household” wanted to buy seeds for the federal “household” garden, it is required to deduct from its budgetary calculation the cost of the seeds, but it is NOT allowed to add to its budgetary calculation the value of the tomatoes and cucumbers that will grow from the seeds it intends to plant—nor is it allowed to assign a value to the nutritional benefits that the “household” members will obtain by eating the tomatoes and cucumbers (or the health-care costs incurred if the veggies are not consumed.) This is called “static scoring”, and it is what the Congressional Budget Office, Delaney tells us, is required to do each time Congress proposes to spend money on any particular item or program. The net result of static scoring in a budgeting process, of course, is that the “household” has a lot less calculable money to spend—and a much harder time justifying the spending of it—because the concept of “investment” and “return on investment” are not operable factors. It may well be, in fact, that the static “score” assigned by the Congressional Budget Office will indicate that the federal “household” cannot afford to buy any seeds at all. Just have to tighten our belts and do without. Unless, of course, we want to take money away from something else we’ve already agreed to spend it on. Then we can spend it. If we want to fix failing bridges, we have to NOT provide school lunches in poor urban neighborhoods. In other words, our Congressional leadership is operating with the approximate intellectual acuity and managerial insight of a five year old child on a weekly allowance.

House “Dynamic Scoring” Rule Likely Will Mean More Tax Cuts — Not More Information — House Republicans plan to amend House rules this week to require the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) to use “dynamic scoring” for official cost estimates of tax reform and other major legislation.[1] Under dynamic scoring, the official cost estimates would incorporate estimates of how legislation would affect the size of the U. S. economy and, in turn, federal revenues and spending. Incoming Ways and Means Committee Chairman Paul Ryan has said this change is designed simply to generate more information on the impact of proposed policies.[2] In reality, however, the House would be asking CBO and JCT for less information, not more, and the new rule could facilitate congressional passage of tax cuts that are revenue-neutral only on paper. CBO and JCT already provide macroeconomic analyses of some proposed bills as a supplement to the official cost estimates they produce. These analyses typically present a range of estimates of the legislation’s impact on the economy. The new House rule, in contrast, asks for an official cost estimate that only reflects a single estimate of the bill’s supposed impact on the economy and the resulting revenue impact. By incorporating additional revenue in the official cost estimate (as a result of an estimate of economic growth), this would enable lawmakers to write bills with deeper tax-rate cuts, or smaller offsetting curbs on tax breaks, than they otherwise could do.

Congress Fiercely Divided Over Completely Blank Bill That Says And Does Nothing —A blank piece of legislation that says nothing, does nothing, and contains no text whatsoever has been the source of heated debate in Washington this week, and has sharply divided Congress along partisan lines, Beltway sources confirmed Thursday. Known as S.0000, the bill, which doesn’t have sponsors, co-sponsors, or an author, has reportedly drawn starkly contrasting opinions from legislators in both the Senate and House of Representatives, and has paved the way for a major legislative battle in coming months. “At a time when millions of Americans are still struggling, we simply cannot afford this kind of devil-may-care federal policy,” said Senate Minority Leader Mitch McConnell (R-KY), angrily waving the blank stack of papers in front of reporters. “We will not risk leading the American people into further hardship simply so the Obama administration can once again do whatever they please, regardless of the consequences. As it is now, the bill is both short-sighted and utterly irresponsible.” “Frankly, we need to get back to the negotiating table and make some major changes before members of my party would even consider putting this up for a vote,” McConnell continued. “And if my friends on the other side of the aisle try push it through, well, they’ll pay the consequences at the ballot box.” According to reports, 45 Democratic senators are in favor of the bill—which contains no text whatsoever—while 41 Republicans are staunchly opposed. At least three Republicans, including Sens. Richard Burr (R-NC), David Vitter (R-LA), and Susan Collins (R-ME), have said they would consider crossing the aisle and backing the bill, an announcement that drew fierce criticism from GOP leadership and primary threats from members within their own party.

Rep. Van Hollen, in Opening Budget Salvo, Calls for Paycheck Tax Break - With less than a month before the White House sends its budget proposal to Congress, a senior House Democrat on Monday introduced an action plan” foreshadowing the upcoming battle over the tax code and whom it benefits. The proposal from Rep. Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, is aimed at encouraging companies to boost salaries at a time of stagnant wage growth and enabling workers to keep a bigger chunk of their paycheck. Mr. Van Hollen would offset the cost of his proposal by curbing tax breaks on investment gains and implementing a new fee on financial market transactions. “Our tax code today is stacked in favor of people who make money off of money and against those who make money off of hard work,” Mr. Van Hollen said Monday in a speech at the Center for American Progress, a left-leaning think tank. “There’s a disconnect between the value workers are creating and what they are taking home.” The centerpiece of Mr. Van Hollen’s proposal is a new $1,000 tax break for workers earning under $100,000 per year, or $2,000 for working couples making up to $200,000, with an additional bonus for those who direct part of those extra funds toward their savings. While it faces long-odds due to immediate Republican opposition, the proposal will be among Democratic ideas that are part of an annual months-long budget process where both parties pursue policy priorities. To address the disparity between the compensation of corporations’ top executives and the rest of their employees, Mr. Van Hollen would prevent companies from claiming tax deductions for high-ranking employees’ compensation over $1 million unless their employees also receive an increase in their paychecks linked to higher productivity and the cost of living. To prevent the breaks from increasing the federal budget deficit, Mr. Van Hollen would curb investment tax breaks benefiting high-income households and impose a 0.1% fee on financial transactions in coordination with the European Union. Democrats have proposed similar financial transactions taxes before, but have faced resistance from critics who worry it could tamp down asset prices and limit investment gains widely.

Democrats Propose Increased Tax Progressivity -- We are about to find out how the public really feels about soaking the rich and spreading it out thin. Senior House Democrat Chris Van Hollen just proposed huge changes in the tax code.  The centerpiece of the proposal, set to be unveiled Monday by Rep. Chris Van Hollen (D-Md.), is a “paycheck bonus credit” that would shave $2,000 a year off the tax bills of couples earning less than $200,000. Other provisions would nearly triple the tax credit for child care and reward people who save at least $500 a year.  The windfall — about $1.2 trillion over a decade — would come directly from the pockets of Wall Street “high rollers” through a new fee on financial transactions, and from the top 1 percent of earners, who would lose billions of dollars in lucrative tax breaks.  The proposal is complicated, read the whole article.

Democrats, in a stark shift in messaging, to make big tax-break pitch for middle class - Senior Democrats, dissatisfied with the party’s tepid prescriptions for combating income inequality, are drafting an “action plan” that calls for a massive transfer of wealth from the super-rich and Wall Street traders to the heart of the middle class. The centerpiece of the proposal, set to be unveiled Monday by Rep. Chris Van Hollen (D-Md.), is a “paycheck bonus credit” that would shave $2,000 a year off the tax bills of couples earning less than $200,000. Other provisions would nearly triple the tax credit for child care and reward people who save at least $500 a year. The windfall — about $1.2 trillion over a decade — would come directly from the pockets of Wall Street “high rollers” through a new fee on financial transactions, and from the top 1 percent of earners, who would lose billions of dollars in lucrative tax breaks. The plan also would use the tax code to prod employers to boost wages, which have been stagnant for four decades despite gains in productivity and profits. “This is a plan to help tackle the challenge of our times,” Van Hollen said, previewing a Monday speech at the Center for American Progress. “We want a growing economy that works for all Americans, not just the wealthy few.”

The Poor Pay More in Taxes -- Yes, the rich pay more in taxes (because they earn so much more) — but they don't usually pay more as a percentage of their incomes. According to a new report from the Institute on Taxation and Economic Policy, in nearly every state, low- and middle-income families pay a bigger share of their income in state and local taxes than wealthy families. Patricia Cohen wrote in her very detailed and comprehensive article at the New York Times: "When it comes to the taxes closest to home, the less you earn, the harder you’re hit." According to the study, in 2015 the poorest fifth of Americans will pay on average 10.9 percent of their income in state and local taxes, the middle fifth will pay 9.4 percent and the top 1 percent will average 5.4 percent.  In Bill Gate's great State of Washington, the tax system is the most regressive — where the bottom 20 percent of taxpayers pay 16.8 percent of their income in taxes, while the top 1 percent pay just 2.4 percent. * Not to mention, when it comes to federal income tax, Bill Gate's capital gains are taxed at a lower rate than regular wages for people earning over $36,000 a year. Add to that, those wage earners also pay Social Security taxes on 100% of their earnings up to $118,500 (and 95% of all wage earners make less than this) — whereas, there is no Social Security taxes for billionaires, whose only income is usually from capital gains. And finally: billionaires pay cash for homes and other big-ticket items, so they don't have to pay annual interest on 30-year mortgages and 5-year auto loans. A number of states, including Kansas, have made the situation worse in recent years by cutting income taxes, the only major state revenue source typically based on ability to pay. Income tax cuts thus tend to push more of the cost of paying for schools and other public services to the middle class and poor — exactly the opposite of what is needed.

How Congress is crippling our tax collection system, in charts - I’ve written before about how Congress’s insistence on gutting the IRS has already resulted in more headaches for taxpayers and, eventually, will likely necessitate higher statutory tax rates to make up for the government’s deteriorating ability to collect tax revenue. Today, the National Taxpayer Advocate, the ombudswoman who represents the interests of American taxpayers, released a report with updated numbers on how budget cuts are affecting service. The key chart is this one, which mashes a bunch of different trends together:  The number of tax returns (purple) has risen over time, as you might expect given population growth. Meanwhile, inflation-adjusted funding for the IRS (green line) has fallen sharply, thanks to a combination of sequestration and vengeance for the IRS tea party scandal. As a result, levels of service (aqua bars) — which here refer to the percentage of telephone calls the IRS is able to answer from taxpayers seeking to speak with a live human — have been tumbling. Not shown here is the fact that the tax code has gotten more complicated over time, leading more taxpayers to need assistance from IRS reps. The current filing season is likely to see even more confusion amongst taxpayers, given the complicated tax implications of the Affordable Care Act.  Let’s look a bit more closely at those telephone stats, shall we? About half of calls are expected to get answered this fiscal year … after an average waiting time of 30 minutes.  Again, don’t blame the IRS for wasting your time: blame Congress for cutting IRS resources.

The House Is Set to Pass a GOP Bill Wiping Out Wall Street Reforms -- The Republican-dominated House is poised to approve legislation this week that would obliterate a slew of important Wall Street reforms. The legislation arrives just weeks after Congress and the Obama administration gave Wall Street two big handouts, and serves as an opening salvo in what will be a sustained Republican assault on financial reform over the next two years. The bill, introduced by Rep. Michael Fitzpatrick (R-Pa.), is called the Promoting Job Creation and Reducing Small Business Burdens Act, but its name obscures what it would actually do. The legislation is a compilation of deregulatory bills that failed to pass the Democrat-controlled Senate in the last Congress. It would alter nearly a dozen provisions of the 2010 Dodd-Frank financial reform law, loosening regulation of Wall Street banks. Here's a look at the details of what the bill would do.

  • Delay the Volcker rule. The Volcker rule—one of the most important bits of Dodd-Frank—generally forbids the high-risk trading by commercial banks that helped cause the financial crisis. . In December, the Federal Reserve extended banks' deadline to stop trading CLOs from 2015 to 2017. The Fitzpatrick bill would extend that deadline to 2019.
  • Water down rules on private equity firms. Private equity firms are required to register as brokers with the Securities and Exchange Commission (SEC) if they get paid for providing investment banking services such as merger advice. Brokers are subject to additional rules and more regulatory oversight. The bill would exempt some private equity firms from having to register as brokers.
  • Loosen regs on derivatives. The Fitzpatrick bill would allow Wall Street firms that own commercial businesses such as oil or gas operations to trade derivatives privately instead of in central clearinghouses, which are subject to more oversight. The bill would also forbid regulators from requiring that banks take collateral from companies that buy derivatives.
  • Weaken transparency rules. The bill exempts about 60 percent of publicly traded companies from certain rules regarding how those companies must file financial statements with the SEC.

Kicking Dodd-Frank in the Teeth - The 114th Congress has been at work for less than a week, but a goal for many of its members is already evident: a further rollback of regulations put in place to keep markets and Main Street safe from reckless Wall Street practices.The attack began with a bill that narrowly failed in a fast-track vote on Wednesday in the House of Representatives. It is scheduled to come up again in the House this week.The bill, introduced by Representative Michael Fitzpatrick, a Pennsylvania Republican who is a member of the House Financial Services Committee, has three troublesome elements. First, it would let large banks hold on to certain risky securities until 2019, two years longer than currently allowed. It would also prevent the Securities and Exchange Commission from regulating private equity firms that conduct some securities transactions. And, finally, the bill would make derivatives trading less transparent, allowing unseen risks to build up in the system.  Of course, you wouldn’t know any of this from the name of the bill: the Promoting Job Creation and Reducing Small Business Burdens Act. Or from the mild claim that the bill was intended only “to make technical corrections” to the Dodd-Frank legislation of 2010. Here’s the game plan for lawmakers eager to relax the nation’s already accommodating financial regulations: First, seize on complex and esoteric financial activities that few understand. Then, make supposedly minor tweaks to their governing regulations that actually wind up gutting them.

In New Congress, Wall St. Pushes to Undermine Dodd-Frank Reform - — In the span of a month, the nation’s biggest banks and investment firms have twice won passage of measures to weaken regulations intended to help lessen the risk of another financial crisis, setting their sights on narrow, arcane provisions and greasing their efforts with a surge of lobbying and campaign contributions.The continuing assault on the 2010 Dodd-Frank law has achieved remarkable success, especially compared with the repeated failures of opponents of another 2010 law, the Affordable Care Act.The financial industry has been methodical, drafting technically complicated legislation that can pass the heavily Republican House with a few Democratic votes. And then, once approved, Wall Street has pushed to tack such measures on to larger bills considered too important for the White House to block.The House was back at it this week. Lawmakers approved by a vote of 250 to 175, with just eight Democrats in support, a broad measure to impose a variety of new restrictions on federal regulators, like stricter cost-benefit analyses and an expansion of judicial review. That measure would affect every regulatory agency, be it the new Consumer Financial Protection Bureau or the century-old Food and Drug Administration. And like past attacks on the health care law, it has little chance of overcoming a threat of a presidential veto.But House members also took up a narrower measure that would slow enforcement of Dodd-Frank requirements and weaken other regulations on financial services companies. The legislation will almost certainly pass on Wednesday with Democratic support, and although its future as a stand-alone bill is not bright, elements of it are expected to return on spending bills and other must-pass legislation in the future.

The Fed’s and Republicans’ War Against Dodd Frank and How That Preserves the Greenspan Put and Too Big to Fail -- Yves Smith -- A new story by Gretchen Morgenson of the New York Times highlights how the Federal Reserve and the Republicans* are on a full bore campaign to render Dodd Frank a dead letter, with the latest chapter an effort to pass HR 37, a bill that would chip away at key parts of Dodd Frank. Mind you, we weren’t wild about Dodd Frank precisely because the bill did far too little to stop the reckless practices that produced the crisis. But both the Fed and the newly ascendant Congressional Republicans are keen to restore as much as possible the status quo ante that proved so lucrative to the banks, both the pre-crisis period and the bailouts, which stands as the greatest transfer of wealth in history. So even mild reform must be swept away. Not that the Fed or the Republicans, and the bankers they represent, are being so frontal as to try to repeal Dodd Frank, mind you. Their strategy is a combination of endless implementation delays, like Penelope dealing with her suitors, and modifying or eliminating technical-sounding provisions that are of keen importance to the banksters. The assumption is that the chump public won’t figure out that Congress and the central bank are handing major concessions to big financiers with no punishments or required behavior changes attached. Morgenson isn’t alone in calling out this strategy. David Dayen and your humble blogger have also warned about it.  For the Republicans, any and every measure to help the banks is standard operating procedure (and let’s not kid ourselves, the Democrats give the banks most of what they want but do try to throw a few bones to Main Street and “consumers” to improve the optics).

Republicans Launch Another Wall Street Gimmie: HR 185, the “Tie Regulators in Knots” Act -- Yves Smith - The Republicans are not wasting any time in their ongoing campaign to make sure nothing stands in the way of Wall Street’s rapacious quest for more profits.  The latest example is a bill that is going largely under the radar was tabled last week, HR 185. It has yet another Orwellian name, “Regulatory Accountability Act of 2015.” It’s basically a requirement that regulators do the research of anti-regulation lobbyists on the public dime. I’m not making that up. From the summary of the bill at the Library of Congress:The bill requires agencies to publish advance notice of proposed rulemaking in the Federal Register for major rules and for high-impact rules (rules having an annual cost on the economy of $100 million or $1 billion or more, respectively) and for negative-impact on jobs and wages rules and those that involve a novel legal or policy issue arising out of statutory mandates. The notice must include a written statement identifying the nature and significance of the problem the agency may address with a rule, the legal authority under which the rule may be proposed, the nature of and potential reasons to adopt a novel legal or policy position, and a solicitation for written data, views, or arguments from interested persons. Additionally, the bill: (1) sets forth criteria for issuing major guidance (agency guidance that is likely to lead to an annual cost on the economy of $100 million or more, a major increase in cost or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or ability to compete) or guidance that involves a novel legal or policy issue arising out of statutory mandates; and (2) expands the scope of judicial review of agency rulemaking by allowing immediate review of rulemaking not in compliance with notice requirements and establishing a substantial evidence standard for affirming agency rulemaking decisions. This is far more sweeping than it appears. The language “those that involve a novel legal or policy issue arising out of statutory mandates” covers almost all of what regulators do in the course of new rulemaking. And notice how in (2) in the second paragraph how it increases the ability of Federal judges, when the Federal bench is increasingly populated with jurists skilled at making strained readings to defend big business interests, to force agencies to go through these hoops and uses these studies and reports as the basis for not implementing new regulations.

First Step in Republican Campaign Against Bank Reform: HR 37 Passed in House -- Yves Smith -- We’ve been keeping tabs on Republican efforts to gut bank reform. Last week, as readers may recall, they failed in a fast-track effort to pass a bill, HR 37, intended to vitiate key parts of Dodd Frank. As much as we decried Dodd Frank as being too weak, it nevertheless had some components that would force big financial firms to exit or limit their riskiest activities. HR 37 passed the House today, on a 271-154 vote. 29 Democrats sided with the Republicans. Obama has said he will veto the bill, but the Republicans hope to corner him. From the Financial Times:The White House has already said the president would veto the House bill if it passes the Senate too, saying it would undermine attempts to “prevent the kinds of excessive risk taking that caused the worst recession in more than 70 years”.But Dodd-Frank supporters fear Republicans will try to tack Wednesday’s bill and others on to larger pieces of legislation that it will be harder for the president to reject. Here is the roll call on HR 37. Please call your representative either way (phone numbers here). If they were voted nay, thank them. If they supported it, tell them you are disappointed that they are refusing to support bank reform. If your Representative is a Republican, work in business themes, like how Wall Street is working to the detriment of Main Street, and they need to get behind measures that will prevent future bank bailouts.

Two Lawyers Make the Case for RICO Charges Against JPMorgan Execs: The U.S. Justice Department has yet to summon the courage to bring a criminal courtroom trial against JPMorgan’s top executives but a serious public trial is underway nonetheless at the website  Originally styled as a venue for the public to read a free chapter a month of the book, JPMadoff: The Unholy Alliance Between America’s Biggest Bank and America’s Biggest Crook, the two attorneys who created the site have now moved into their grand jury stage, presenting hard evidence in Chapter 5 on why RICO charges can, and should, be brought against top executives at JPMorgan Chase.As the veteran lawyers have peeled back the layers of deceits and serial crime charges at JPMorgan Chase in their intensive online investigation; as multi-billion dollar settlements are handed out by regulators and the Justice Department and those committing the crimes go scot-free; their passion to see justice served has escalated. The authors wrote recently: “This country cannot move forward with integrity until it faces the fact that bankers have criminalized the financial services industry. We, the people, have to demand an honest government that enforces the law, even against super-rich criminals.” Chaitman and Gotthoffer believe that RICO, the Racketeer Influenced and Corrupt Organizations Act, is “the perfect tool” to bring JPMorgan to heel. The lawyers explain RICO to their readers as follows:

Swiss National Bank Shock: Biggest US Retail Currency Broker’s Equity Wiped Out; Others Suffer Major Losses -- Yves Smith -- Even though traders say they like volatility, their attitude is straight out of Goldilocks: not only is too little too bad, but so is too much.  And today’s big event was so unforeseen as to verge on being in black swan terrain. The Swiss National Bank, which had a program in place to keep the euro from falling below 1.20 to the Swiss franc, abruptly terminated the cap today. The stated reason was, in effect that the euro had weakened so much that even though the Swiss franc might wind up being more overvalued against it,  Analysts believe a second reason was the widely-expected launch of QE in the eurozone, which will weaken the euro further and would required considerably more intervention by the Swiss National Bank to maintain the cap. The currency move was brutal. The euro fell 30% against the franc.* Customers in trading accounts of the trade had their account equity wiped out, according to Bloomberg, in turn leaving the brokerage firms short.  The Wall Street Journal describes the carnage: A major U.S. currency broker said it suffered “significant losses” that wiped out its equity and a New Zealand foreign-exchange trading house failed as the fallout from the decision by the Swiss National Bank to cease capping the nation’s currency spread across the world. FXCM Inc., the biggest retail foreign-exchange broker in Asia and the U.S., said in a statement that due to unprecedented volatility in the euro against the Swiss franc, its losses left it with a negative equity balance of around $225 million and that it was trying to shore up its capital. “As a result of these debit balances, the company may be in breach of some regulatory capital requirements. We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators,” Earlier, small New Zealand currency trading house Global Brokers NZ Ltd. said it would close its doors as it could no longer meet regulatory minimum-capitalization requirements of 1 million New Zealand dollars (US$782,500).

Bitcoin revealed: a Ponzi scheme for redistributing wealth from one libertarian to another --If Bitcoin were a currency, it'd be the worst-performing one in the world, worse even than the Russian ruble. But Bitcoin isn't a currency. It's a Ponzi scheme for redistributing wealth from one libertarian to another. At least that's all it is right now. One day it could be more. Venture capitalists, for their part, are quick to point out that it's really a protocol, like the early internet, and its underlying technology could still be revolutionary. What are they supposed to say, though, when they've bet hundreds of millions of dollars on it? But that's not much of a consolation to anyone who bought anywhere near Bitcoin's $1,100 top. Or near $1,000, or $900, or $800, or, well even yesterday's prices. That's because Bitcoin hasn't just fallen 76 percent the past year. It's fallen 36 percent the past two days, as you can see below, with a 24 percent decline the past 24 hours. It's too bad Bitcoin doesn't have a central bank to help stabilize its value.

Elizabeth Warren Takes a Scalp: Antonio Weiss Withdraws from Nomination for #3 Position at Treasury --  Yves Smith - As readers may recall, Elizabeth Warren blasted the Administration's nomination of a Lazard executive and senior mergers & acquisitions banker Antonio Weiss to the number three Treasury psot, assistant secretary for domestic finance. Warren’s grounds for objecting to Weiss were straightforward: his experience was no fit for the requirements of his proposed Treasury role. On top of that, he had been involved in and therefore profited from acquisitions called inversions that Treasury opposes because they reduce the taxes paid by the acquirer, which uses the acquired company to move its headquarters to a lower-tax jurisdiction. Today Weiss withdrew as a candidate for the Treasury position.

Why is the financial industry so afraid of this man? - If the government were creating a new panel to advise on financial regulation, it would make sense to include a Nobel Laureate considered one of the most influential living economists. Yet Joseph Stiglitz has been barred from such a panel, telling Bloomberg he was out because “they may not have felt comfortable with somebody who was not in one way or another owned by the industry.” The fight to keep Stiglitz off the panel is indicative of a much deeper problem — how the financial industry manipulates the regulatory system. The financial industry does not want Stiglitz on the panel for a simple reason: he has committed the crime of advocating for a modest financial transaction tax. Stiglitz argues that while financial markets normally serve the important function of capital intermediation, some forms of trading, like high-frequency trading, make markets less stable and amount to making money by moving money around. To reduce the incentives for such trading while raising revenue, he has put forward the possibility of a tax on some forms of short-term trading. Such a proposal has gained traction within academia and is already being implemented in Europe. (And it actually used to exist in various forms in the United States.)

NY Fed data confirm revolving door with banks -A “revolving door” between US regulators and banks emphatically exists, according to new statistics published by the Federal Reserve Bank of New York, which last year attracted criticism for its alleged coziness to Goldman Sachs.  The paper published on the New York Fed’s website concludes that banking regulators move into the private sector when the economy is booming, while straitened times result in more former bankers joining regulatory agencies. Restricting hiring by either banks or regulators, however, could result in poor retention of quality staff by government authorities, the study claims. The study, which scrutinised the career paths of 35,000 current and former regulators over 25 years, claims to be one of the only empirical studies into movement between regulators that oversee US banks and private practice.  The authors — two academics and a New York Fed official — concluded the data disproved the so-called quid-pro-quo thesis, which holds that regulators go easy on banks with whom they may later seek employment.  Rather, they found that hiring of former officials spikes when there has been more rigorous enforcement activity or a flood of new regulations as banks try to bring in specialists to tackle thorny subject matters.  William Dudley, president of the New York Fed — and a former Goldman economist — said in December that he did “not think there was much of a revolving door”.  His agency came under Congressional scrutiny in late 2014 over allegations from a former official that her supervisors tempered her criticism of Goldman; and over further revelations about confidential documents allegedly passed between regulators and an ex-junior Goldman banker, who was himself a former official.

Churches as an Alternative to Payday Lenders --Payday loans are exceedingly expensive, often trapping borrowers into a cycle of rolling their loan over for many months while interest compounds. Postal banking has been suggested as a way to provide people with better access to less-expensive loans. And the CFPB has indicated that it intends to regulate payday and similar high-cost loans (maybe that will happen soon?). In the meantime, some churches apparently have taken matters into their own hands. A recent Washington Post article describes how churches in Virginia have helped some of their members secure manageable loans from the Jubilee Assistance Fund (very apt name) and the Virginia United Methodist Credit Union. ("Faith-based" credit unions exist across the country and also offer loans to churches. A few of these credit unions end up as creditors in churches' Chapter 11 cases). The article reports that similar church-run lending programs are sprinkled across the country, with churches in some states seemingly having more coordinated efforts.  In the face of the payday industry, these programs undoubtedly are a blessing to the lucky church members who are able to obtain loans. The existence of these programs--and the interesting personal stories in the article--perhaps show how crucial regulation of the high-cost lending industry is, as well as indicate how desperately many people want and would benefit from access to lower-cost lending options.

How the Bear Market in Crude Oil Has Polluted Non-Energy Stocks -  Perusing the list of the biggest stock-market losers since the price of oil peaked in June yields some predictable results. You have your large-cap energy companies like Transocean Ltd., Denbury Resources Inc., Nabors Industries Ltd., Noble Corp. and Halliburton Co., all down at least 45 percent. Yet mixed in with all the obvious ugliness are some names that bring to mind the question: Man, what are you doing here? The answer illustrates how much of an impact the energy industry has had on the bottom line of corporate America, whether it’s companies profiting from the boom in domestic production or those that made big investments based on the premise that fuel will always be expensive. As such it helps explain why the entire stock market, not just the energy companies, tends to freak out when oil heads lower rapidly. The big bets on high energy prices made by companies like Ford Motor Co. (down 13 percent since oil peaked on June 20) or Tesla Motors Inc. (down 10 percent) or Boeing Co. (down 3.9 percent) jump immediately to mind. Not so obvious, unless you follow the stock closely, is the investment made by Fifth Third Bancorp, one of the regional lenders that tried to chase the fracking boom. (It’s down 12 percent since June 20.)  Here’s how the company’s management described the rationale for the launch of a new national energy banking team two years ago: “The energy sector is a rapidly growing industry,” said the announcement. The new team “demonstrates our commitment to providing dedicated banking services to this evolving sector. The oil and natural gas sector represents a tremendous growth opportunity.”

So Where Did All the Energy Debt Go? - A big puzzle, as oil prices have plunged and look unlikely to return to their former levels, is who is holding energy-related debt, particularly give the high level of issuance in 2014. Yet it is troublingly difficult to get hard information, a situation troublingly similar to the mortgage backed securities and CDO markets in 2008.   One issue under discussion is the energy debt concentration in CLOs. That has come into focus due to the amounts on bank balance sheets (numerous reports on Twitter indicate that the market froze last July) and that one of the provisions of Dodd-Frank gutting HR 37 that is now moving through Congress is to delay for two years a stipulation that would banks to sell most collateralized loan obligations held on their balance sheets. The reason for wanting CLOs out of banks is that they are actively traded vehicles, effectively mini hedge funds.   The reason for concern is the recent plunge in energy-related debt prices and their questionable prospects, and where that debt is sitting.   When the subprime mortgage market shut down, banks wound up eating a lot of their cooking.  If that has happened again, it could show up not only in CLOs but in other assets and exposures. And if not the banks, then who were the bagholders? This chart shows energy debt concentrations in top 40 CLOs. The maximum concentration is 15%, presumably set by section concentration limits.  Unfortunately, it doesn’t provide the dollar amount of those deals so we can’t determine what the dollar amount of that energy related exposure is.  And this is from a discussion of a recent JP Morgan investor call: High yield energy new issuance has doubled since 2008. It constitutes 16-20% of new issuance since 2011. JP Morgan’s projected default rates for US high yield energy: at $65 oil, 3.9% in 2015 and 20.5% in 2016. At $75 oil, 3.9% and 4.8%.  Those forecasts look to be in need of updating to show what would happen if oil prices remain at their current $50 (and below) level.

David Morgan: Oil Derivatives Explosion Double 2008 Sub-Prime Crisis -- David Morgan says the plunge in oil prices is not good news for big Wall Street banks. Morgan explains, “The amount of debt that is carried by the fracking industry at large is about double what the sub-prime was in the real estate fiasco in 2008.”“In summary, we’re looking at an explosion in potential that is greater than the sub-prime market of 2008 because, number one, oil and energy are the most important sectors out there.” “Number two, the derivative exposure is at least double what it was in 2008. Number three, the banking sector is really more fragile and we have less ability to weather the storm.” Morgan, who is also “a big-picture macroeconomist,” says oil derivatives could take down the system just like mortgage-backed securities back in the last financial meltdown.” “The Fed said the sub-prime crisis would be “contained.” It was not. So, could oil derivatives take down other derivatives in a daisy chain type of collapse? Morgan says, “Absolutely, there is no question about it. The main problem is the overleverage of the system as a whole.” “Warren Buffett calls derivatives weapons of financial mass destruction, which is a true statement. Secondly, look at how derivatives are interconnected. Derivatives can tie a financial instrument to another financial instrument or a financial derivative can be tied to an oil derivative.”

As Oil Prices Fall, Banks Serving the Energy Industry Brace for a Jolt -  Tumbling oil prices are dimming one of the few big bright spots that banks have enjoyed since the financial crisis.Banks have been lending hand over fist to companies in the nation’s energy industry, underwriting bonds, advising on mergers, even financing the building of homes for oil workers. All of this has provided a boon to banks that have been struggling to find more companies and consumers wanting to borrow.Yet with the price of crude oil falling below levels sufficient for some energy companies to service their huge debts, strains are being felt and defaults are likely. While it may take some time for the crunch in the oil industry to translate into losses, one thing already seems clear: The energy banking boom is over. This week, as many of the largest banks report their earnings for the final three months of 2014, investors will press the banks for answers on how a sudden slump in the once-roaring oil and gas industry may hurt their bottom lines. The expected slowdown comes as banks, both big and small, have finally dug out from the wreckage of the financial crisis and have been looking for new ways to bolster their revenues. When times are good, the capital-intensive oil business is a banker’s dream. From new wells dug in North Dakota and Texas to the oil patch of Alberta, oil producers have turned to Wall Street and local banks to help them sell billions of dollars in bonds, raise equity and arrange lines of credit.

The Perfect Storm for Wall Street Banks - Oppenheimer analyst Chris Kotowski noted in a report that plunging oil prices could be the greatest threat to the largest U.S. banks since the epic financial turmoil in 2008 while also warning that visibility into the banks’ loan exposure to the oil and exploration industry is limited.That’s a very valid point. Another valid point is that visibility into the big banks’ exposure as counterparties to derivatives tied to plunging oil and commodity prices and shaky emerging market debt is also being kept under wraps – at least for now. The only clue as to which banks may take a hit, either from direct exposure or from loans to hedge funds taking a bath in the sectors, is the price action of the bank shares in the open market.   In a December 15 article in the Financial Times, readers learned that data from Barclays indicated that “energy bonds now make up nearly 16 per cent of the $1.3 trillion junk bond market — more than three times their proportion 10 years ago,” and “Nearly 45 per cent of this year’s non-investment grade syndicated loans have been in oil and gas.” Raising further alarms, AllianceBernstein has released research suggesting that the deals were not fully subscribed by investors with the potential that “as much as half of the outstanding financing from the past couple of years may be stuck on banks’ books.”  The Dow Jones Industrial Average is having its own perfect storm: two big oil plays, ExxonMobil and Chevron are in the Dow along with two big financial plays, JPMorgan Chase and Goldman Sachs. After fifteen minutes of trading this morning, the Dow was down more than 220 points with JPMorgan and Citigroup off by more than 3 percent.

Unofficial Problem Bank list declines to 399 Institutions --This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Jan 2, 2015 (to be updated next week): Slow week as expected for changes to the Unofficial Problem Bank List. There was only removal that lowered the list count to 399 institutions with assets of $124.6 billion. A year ago, the list held 618 institutions with assets of $205.6 billion. The FDIC terminated the action against Business Bank, Burlington, WA ($133 million), which then changed its name to SaviBank after being released from the enforcement action. Next week, we anticipate the OCC will provide an update on its latest enforcement action activity.  CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The list peaked at 1,002 institutions on June 10, 2011, and is now back down to 399.

CoStar: Commercial Real Estate prices increased in November - Here is a price index for commercial real estate that I follow.   From CoStar: CRE Price Recovery Continues With Strong Showing in November The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—increased by 1% and 0.7%, respectively, in the month of November 2014, contributing to annual gains of 9.9% and 14.8%, respectively, for the 12 months ending in November 2014. ... Investors’ healthy appetite for core properties propelled growth in the value-weighted U.S. Composite Index, which surpassed its pre-recession peak previously set in 2007 by 5.1% in November 2014. . Price growth in the equal-weighted U.S. Composite Index, influenced more by smaller, non-core deals, accelerated to an annual pace of 14.8% in November 2014, from an average annual pace of 7.5% in 2013. This graph from CoStar shows the the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index indexes. The value weighted index is at a record high, but the equal weighted is still 14% below the pre-recession peak. There are indexes by sector and region too. The second graph shows the percent of distressed "pairs". The distressed share is down from over 35% at the peak, but still somewhat elevated.

California seeking to suspend Ocwen Financial's mortgage license: The state is seeking to suspend the mortgage license of Ocwen Financial Corp., saying the payment collection firm has failed to turn over documentation showing that it complies with California laws protecting homeowners. The action is the latest against one of the nation's biggest mortgage servicers and raises the level of concern over continuing problems in billing and collecting monthly payments from borrowers, especially those having financial problems. Investigations have cropped up nationwide into Ocwen and other nonbank servicing firms that have acquired mortgage billing portfolios from major banks, which previously faced state and federal probes. Banks began shedding the business after many were snared in the nationwide fiasco over lost and mishandled foreclosure paperwork, robo-signed foreclosure documents and other abuses. California's action accuses Ocwen of defying requests for information by the California Department of Business Oversight, which licenses nonbank mortgage lenders and providers of collection and foreclosure services. Ocwen, which specializes in handling troubled home loans, is the largest mortgage servicer not affiliated with a bank and the nation's fourth-largest servicer overall. Losing a California license would mean that Ocwen, based in Atlanta, would have to sell its rights to handle bill collection and foreclosures in the state

Corporate Recidivism? Ocwen’s Charter Problems - Last month mortgage servicer Ocwen (that's NewCo backwards) was mauled by the NY State Department of Financial Services. Now the California Department of Corporations is seeking to revoke Ocwen's license to do business in that state.  Here's the thing that is often forgotten:  this ain't the first time!  Ocwen used to be a federal thrift. In 2005, however, Ocwen "voluntarily" surrendered its thrift charter in the face of predatory lending/servicing investigation. And here we are, a decade later. What's changed?  By the NY and California allegations, not much. In other words, we're looking at a potential case of corporate recidivism. I'll refrain from commenting on the merits of the allegations, but there should be zero tolerance for corporate recidivism.   While I'm at it, a word about the substance of the NY allegations and remedy. NYDFS accused Ocwen of backdating loan modification denial letters to borrowers facing foreclosure (and thereby depriving the borrowers of a chance to timely appeal the denial). Sadly, this isn't the first time backdating has reared its head in the servicing business. Remember how the robo-signing story broke? A GM/Ally employee named Jeffrey Stephan stated in a deposition that he personally signed some 10,000 foreclosure affidavits a month. That was the story that the media glommed onto. But the 10,000 affidavits/month was an unexpected deposition by-product. The real issue uncovered in that deposition was that GM/Ally had been backdating foreclosure documents to show that it had standing at the time it filed foreclosure suits, despite not actually being the noteholder and mortgagee until a subsequent date. Loans were supposedly transferred on Christmas Day, Easter, New Year's Day, etc. So it would seem that backdating may not be an isolated problem to Ocwen. 

CoreLogic: "Foreclosure inventory down 35.5 percent nationally from a year ago" -- From CoreLogic: Press Release and National Foreclosure Report According to CoreLogic, for the month of November 2014, there were 41,000 completed foreclosures nationally, down from 46,000 in November 2013, a year-over-year decrease of 9.6 percent and down 64 percent from the peak of completed foreclosures in September 2010. ..  As of November 2014, approximately 567,000 homes nationally were in some stage of foreclosure, known as the foreclosure inventory, compared to 880,000 in November 2013, a year-over-year decrease of 35.5 percent and representing 37 consecutive months of year-over-year declines. The foreclosure inventory as of November 2014 made up 1.5 percent of all homes with a mortgage, compared to 2.2 percent in November 2013.  ...“While there has been a large improvement in the reduction of foreclosure inventory, completed foreclosures remain high and serve as one of the obstacles to new single family construction. Until the flow of completed foreclosures declines to normal levels, new-home construction will not pickup because builders have little incentive to compete with foreclosure stock.” In the report, CoreLogic notes that the "completed foreclosures averaged 21,000 per month nationwide between 2000 and 2006" (foreclosure won't decline to zero).

Black Knight Mortgage Monitor: Delinquencies "Spike" in November -- Black Knight Financial Services (BKFS) released their Mortgage Monitor report for November today. According to BKFS, 6.08% of mortgages were delinquent in November, up from 5.44% in October. BKFS reported that 1.63% of mortgages were in the foreclosure process, down from 2.50% in November 2013.This gives a total of 7.71% delinquent or in foreclosure. It breaks down as:
• 1,925,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,163,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 829,000 loans in foreclosure process.
For a total of ​​3,917,000 loans delinquent or in foreclosure in November. This is down from 4,497,000 in November 2013.  Black Knight had several comments on the "spike" in delinquencies in November:

• November’s spike in delinquencies was the largest month-over month increase (for any month) since November 2008
• Much of the increase seems to have been calendar-driven; two federal holidays (Veterans Day and Thanksgiving) and the last two days of the month being a weekend resulted in just 18 possible payment processing days
• The five largest M/M delinquency rate increases over the last 7 years have all occurred in months ending on a Sunday.

If this was just seasonal (and calendar related), then delinquencies should decline solidly in December.

Closer Look at Delinquency Surge and Much More -  In its "first look" at November mortgage data last week Black Knight Financial Services noted a significant surge in mortgage delinquencies compared to the previous month. The 11.8 percent jump in mortgages that were 30 or more days past due brought the national delinquency rate to 6.08 percent, the first time since February it had surpassed 6.0 percent, and was the largest month-over-month increase since 2008, a spike that also occurred in November. In the newest edition of its Mortgage Monitor Black Knight takes a closer look at the November anomaly, one that occurred even as the overall delinquency rate has continued to trend downward and despite the increase was 6 percent below its level a year earlier. According to the Monitor, a sudden rise in the delinquency rate in November is more rule than exception and, while this was the largest, increases have occurred in six of the last seven Novembers. Black Knight said the November spike appears to have been calendar driven. There were two holidays (Veterans Day and Thanksgiving) during the month, as there always are in November, with Thanksgiving typically knocking out the following day for most people. This year the calendar placement of the holidays resulted in only 18 possible payment processing days. The month ended on a Sunday as did the five recent Novembers with the largest increase in delinquencies. November also saw the highest one month volume of loans rolling from current to 30-days delinquent since June 2013. There were, in fact, increased roll-rates across all early stage delinquencies while rolls from delinquent to foreclosure status were still down. The month also saw the lowest cure volume of any month in the last 10 years and the third lowest in the past 15 years. Black Knight aid the decreased rate of loans returning from delinquency to current status might be partially accounted for by the truncated payment processing period during the month.

Lawler: Preliminary Table of Distressed Sales and Cash buyers for Selected Cities in December -- Economist Tom Lawler sent me the preliminary table below of short sales, foreclosures and cash buyers for a few selected cities in December.  Total "distressed" share is down in most of these markets mostly due to a decline in short sales.  Short sales are down in these areas (except Sacramento).  Foreclosures are up in a few areas (working through the logjam).  The All Cash Share (last two columns) is declining year-over-year. As investors pull back, the share of all cash buyers will probably continue to decline.

Borrowers Forgo Billions through Failure to Refinance Mortgages - As of December 2010, approximately 20 percent of households with mortgages could have refinanced profitably but did not do so.  Buying and financing a house is one of the most important financial decisions a household makes. It can have substantial long-term consequences for household wealth accumulation. In the United States, where housing equity makes up almost two thirds of the median household's total wealth, public policies have been crafted to encourage home ownership and to help households finance and refinance home mortgages. The impact of these policies hinges on the decisions that households make. Households that fail to refinance when interest rates decline can lose out on tens of thousands of dollars in savings. For example, a household with a 30-year, fixed-rate mortgage of $200,000 at an interest rate of 6.5 percent that refinances when rates fall to 4.5 percent will save over $80,000 in interest payments over the life of the loan, even after accounting for typical refinancing costs. With long-term mortgage rates at roughly 3.35 percent, this same household would save roughly $130,000 over the life of the loan by refinancing. But in spite of these potential savings, many households do not refinance when interest rates decline.

Consumers Don't Shop for Mortgages and the CFPB Intends to Change That -- Richard Cordray, the director of the Consumer Financial Protection Bureau, gave a short speech today at the Brookings Institution. In his speech, he outlined several steps the CFPB is taking to help fix the mortgage market. In his view, one of the chief problems with the mortgage market is that consumers do not shop around for mortgages the same way they shop for other products, including houses. According to a recent CFPB study, "almost half of all borrowers seriously consider only a single lender or broker before deciding where to apply." The CFPB's aims to solve this problem with some new tools. More after the break. The CFPB's primary solution, as described today, are some new tools on its website. They are generally aimed at improving the amount and quality of information possessed by potential mortgagees. These tools include (i) a mortgage interest rate calculator, (ii) general information about different types of loan products and closing documents, and (iii) a plain language checklist for what to expect at closing and how to avoid common mistakes. In his remarks, Director Cordray focused on the rate calculator, claiming that it will offer more realistic rates for consumers for at least three reasons. First, the calculator draws from mortgage lenders' own internal rate sheets so consumers will have access to the same information that lenders have about the consumers. Second, it allows consumers to input a larger number of variables, including their credit scores, than other calculators. Finally, the CFPB's information is offered free from any agenda other than protecting consumers when they make mortgage decisions.

MBA: "Mortgage Applications Increase by 49 Percent"  - From the MBA: Mortgage Applications Increase by 49 Percent, Largest Weekly Gain Since November 2008: Mortgage applications increased 49.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 9, 2015.... The Refinance Index increased 66 percent from the previous week to the highest level since July 2013. The seasonally adjusted Purchase Index increased 24 percent from one week earlier to the highest level since September 2013. “Mortgage rates reached their lowest level since May of 2013, and refinance application volume soared, more than doubling on an unadjusted basis, and up 66 percent after adjusting for the fact that the previous week included the New Year’s holiday. ... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.89 percent, the lowest level since May 2013, from 4.01 percent, with points decreasing to 0.23 from 0.28 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. 2014 was the lowest year for refinance activity since year 2000. Even with the recent sharp decline in rates, mortgage rates would have to decline further for there to be a really large refinance boom. But it looks like 2015 will see more activity than in 2014, especially from FHA loans after January 26th. The second graph shows the MBA mortgage purchase index. According to the MBA, the unadjusted purchase index is up 2% from a year ago.

Why a Jump In Mortgage-Refinancing Could Be Fleeting - On Wednesday, the Mortgage Bankers Association reported that mortgage applications rocketed 49% in the week ended Jan. 9 from the prior week. They were also up about 30% from the same week a year ago. Calculating mortgage statistics surrounding holiday weeks can be hairy. But the applications figure–combined with 30-year-fixed mortgage rates that were at their lowest point since May 2013–have some lenders and brokers optimistic that volume will stay high. Here’s what to think about: On Thursday, Freddie Mac said that 30-year mortgage rates continued to decline this week to 3.66%, their lowest level since May 23, 2013.   But here’s the problem: A ton of people have already refinanced at low rates at some point in the last few years. Every time rates plummet, a new round of homeowners might take a look at refinancing, but without a big pool of borrowers who are “in the money,” even a 30-year rate of 3.66% might not be enough for most people. Without a big pool of refi-eligible homeowners, banks are going to have to rely on lending to people who want to buy a home. And unfortunately for the industry, the housing market has lately been merely mediocre. The National Association of Realtors said last month that contracts to buy previously-owned homes rose to the third-highest level of the year in November. However, sales of such homes through the first 11 months of 2014 were off 2013′s pace by 4%. Indeed, on Wednesday, the MBA said that while applications to refinance rose 47% in the week ended Jan. 9 from a year ago, applications to purchase homes rose only 1.6%.

FNC: Residential Property Values increased 5.2% year-over-year in November --  In addition to Case-Shiller, and CoreLogic, I'm also watching the FNC, Zillow and several other house price indexes.   FNC released their November index data today.  FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values decreased slightly from October to November (Composite 100 index, not seasonally adjusted). The other RPIs (10-MSA, 20-MSA, 30-MSA) also decreased slightly in November. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales).  Notes: In addition to the composite indexes, FNC presents price indexes for 30 MSAs. FNC also provides seasonally adjusted data.  The year-over-year (YoY) change was lower in November than in October, with the 100-MSA composite up 5.2% compared to November 2013.   In general, for FNC, the YoY increase has been slowing since peaking in March at 9.0%.The index is still down 19.7% from the peak in 2006.

"Russian Buyer Is A Thing Of The Past" - Oligarchs Rush To Sell US Real Estate -For uber-wealthy Russians, "an apartment in Miami, even the most glorious beachfront apartment, is not a priority right now," warns one real estate attorney, as The New York Observer reports Russian buyers no longer felt they had the liquid assets to carry on with the transaction and were looking to break closed real estate contracts. "Your average Russian buyer tends to be someone who works in the $5, $10, $15 million range. Obviously very wealthy people, but also people who are much more likely to feel a pinch given the economic situation and the exchange rate," and with maintenance costs sky-high, the trophy apartments have shifted from 'safe-deposit-boxes' out of reach of sanctions to burdensome drains.

Fed: Q3 Household Debt Service Ratio near Record Low  The Fed's Household Debt Service ratio through Q3 2014 was released two weeks ago: Household Debt Service and Financial Obligations Ratios. I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations.These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households. Note: The Fed changed the release in Q3 2013. The household Debt Service Ratio (DSR) is the ratio of total required household debt payments to total disposable income.The DSR is divided into two parts. The Mortgage DSR is total quarterly required mortgage payments divided by total quarterly disposable personal income. The Consumer DSR is total quarterly scheduled consumer debt payments divided by total quarterly disposable personal income. The Mortgage DSR and the Consumer DSR sum to the DSR. This data has limited value in terms of absolute numbers, but is useful in looking at trends. Here is a discussion from the Fed:   The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only an approximation of the debt service ratio faced by households. Nonetheless, this approximation is useful to the extent that, by using the same method and data series over time, it generates a time series that captures the important changes in the household debt service burden.

The average American pays $280,000 in interest - The average American consumer will pay nearly $280,000 in interest over their lifetime, a figure that varies dramatically from state to state based on credit scores and mortgage size. Residents of the District of Columbia (while not technically a state) pay the most in interest over their lifetimes — $451,890, which includes an average new mortgage balance of approximately $462,000. D.C. residents also have an average credit score of 656, close to the U.S. average of 687, according to, which calculated the figures based on a 30-year mortgage, average car loan balance of $22,750 (assuming nine car loans over one lifetime) and 40 years of revolving credit card debt. Your credit score plays a significant part in how much and at what rate a bank will lend you money, but of course people will pay more interest over their lifetime if they have a large mortgage. That’s why in states with cheaper housing, residents pay much less in interest over their lifetimes. Iowa residents pay the least ($129,394), followed by Nebraska ($137,174), Wisconsin ($144,127) and Maine ($154,340). And it’s why Mississippi residents have the lowest average credit score (635) but pay on average only $170,461 in interest — which ranks them No. 11 out of the 50 U.S. states and D.C. on the list of U.S. states.

Coming soon: The biggest wealth transfer in history - As the world's richest individuals approach retirement, the next three decades will see trillions fall into the hands of their younger family members-the biggest wealth transfer in history from one generation to the next, according to a new report. At least $16 trillion of ultra-high net worth (UHNW) individual's wealth will be passed on to the next generation over this period, spawning a new crop of multimillionaires, the Wealth-X and NFP Family Wealth Transfers Report published on Tuesday said. "As self-made UHNW baby boomers start passing on their wealth to their children, the importance of entrepreneurship and hard work will be put to the test," the report said. The world's population of ultra high-net worth individuals-those with at least $30 million in assets-grew to 211,235 last year, with a combined wealth of $29.7 trillion, a record high for both population and wealth. The U.S., home to the largest billionaire population, will see the greatest amount of wealth transfers, with $6 trillion set to change hands over the next 30 years. Germany, Japan, the U.K. and Brazil follow as the countries with the largest expected wealth transfers-a target for estate planners. Cash or assets? Around 30 percent of the net worth of these individuals' wealth is in liquid assets, allowing more flexibility for the next generation to invest and spend their inheritance as they like.

Retail Sales decreased 0.9% in December -- On a monthly basis, retail sales decreased 0.9% from November to December (seasonally adjusted), and sales were up 3.2% from December 2013. Sales in November were revised down from an increase of +0.7% to +0.4%.  From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $442.9 billion, a decrease of 0.9 percent from the previous month, but up 3.2 percent above December 2013. ... The October to November 2014 percent change was revised from +0.7 percent to +0.4 percent. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales ex-gasoline decreased 0.3%. Retail sales ex-autos decreased 1.0%. The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail and Food service sales ex-gasoline increased by 5.5% on a YoY basis (3.2% for all retail sales). The decrease in December was well below consensus expectations of a 0.1% decrease. Both October and November were revised down. This was a weak report even after removing the impact of lower gasoline prices.

U.S. Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead - The optimism surrounding the outlook for U.S. consumers was taken down a notch as retail sales slumped in December by the most in almost a year, prompting some economists to lower spending and growth forecasts. The 0.9 percent decline in purchases followed a 0.4 percent advance in November that was smaller than previously estimated, Commerce Department figures showed today in Washington. Last month’s decrease extended beyond any single group as receipts fell in nine of 13 major retail categories. While disappointing, the drop followed large-enough gains at the start of the quarter that signaled consumer spending accelerated from the previous three months as the job market strengthened and gasoline prices plunged. Continued improvement in hiring that sparks more wage growth will be needed to ensure customers at retailers such as Family Dollar Stores Inc. also thrive.

December Retail Sales Plunge on Cheap Gas  - The December 2014 Retail Sales report shows retail sales declined -0.9% for the month.  As gasoline prices plunged, sales as gas stations dropped a whopping -6.5%.  Holiday sales on the other hand, were up 4.0%.  Retail sales have now increased 3.2% from a year ago.  December retail sales was not just about gas prices as most categories had monthly declines.  Without autos & parts sales, for example, retail sales dropped -1.0%.  Retail trade sales are retail sales minus food and beverage services and these sales declined -1.1% for the month.. Retail trade sales includes gas. Total retail sales are $442.9 billion for December. Below are the retail sales categories monthly percentage changes. These numbers are seasonally adjusted. General Merchandise includes super centers, Costco and so on. Below is a graph of just auto sales. Auto sales and parts dropped -0.8% for the month and for autos alone, declined -0.3%. For the year, motor vehicle sales have increased 9.8%. Autos & parts together have increased 8.6% Below are the retail sales categories by dollar amounts. As we can see, autos are by far the largest amount of retail sales. We also see online retailers continue to expand. Graphed below are weekly regular gasoline prices, so one can see what happened to gas prices in November. Gasoline station sales are down -14.2% from a year ago. The below pie chart breaks down the monthly seasonally adjusted retail sales by category as a percentage of total November sales by dollar amounts. One can see how dependent monthly retail sales are on auto sales by this pie chart. We also see non-traditional retailers making strong grounds on traditional general merchandise stores and almost equal to gasoline sales in terms of importance. Retail sales correlates to personal consumption, which in turn is about 70% of GDP growth. Yet GDP has inflation removed from it's numbers. This is why Wall Street jumps on these retail sales figures. Below is the graph of retail sales in real dollars, or adjusted for inflation, so one gets a sense of volume versus price increases. Below is the annualized monthly percentage change in real retail sales, monthly, up to October 2014.  Below is a graph of real PCE against real retail sales, quarterly, up to Q3.   See how closely the two track each other?   PCE almost looks like a low pass filter, an averaging, removal of "spikes", of real retail sales. Here are our overviews for PCE.  Here are our overviews of GDP.

Don’t Just Blame Gas Prices for December Retail Sales - Gasoline prices weren’t the only fuel for December’s retail downshift. Sales at retailers and restaurants decreased a seasonally adjusted 0.9% in December from a month earlier, the Commerce Department said Wednesday. The biggest dive occurred at gasoline stations, where Americans spent $39.42 billion last month, down 6.5% from November–the biggest one-month plunge in six years. Tumbling fuel prices translated to $5.92 billion less in spending at service stations in December compared with a year ago. That’s a nice chunk of change. The problem is, consumers didn’t turn around and spend it all. “Gasoline alone can’t bear blame for December’s frailty,” said Royal Bank of Scotland economist Guy Berger. Take away gasoline and spending was still down 0.4% from November. A closely watched gauge that excludes autos, gasoline and building materials also fell 0.4%. Indeed, while gasoline is a major expense it isn’t close to being the biggest for most Americans. Gasoline station spending made up close to 9% of retail sales last month, trailing well behind autos and parts at 20.6%, food and beverage stores at 12.8%, general merchandise stores at 12.5%, restaurants and bars at 11.2% and nonstore retailers like at 9.2%. Retail figures, meanwhile, don’t capture rent, health care or other services that make up the bulk of consumer spending. “Rising costs elsewhere, including health care and low earnings growth, have stunted sales at year-end,”

US Retail Sales Drop Most Since June 2012 (And Don't Blame Gas Prices) - US retail advanced sales dropped a stunning 0.9% MoM (massively missing expectations of a 0.1% drop). The last time we saw a bigger monthly drop was June 2012. Want to blame lower gas prices - think again... Retail Sales ex Autos and Gas also fell 0.3% (missing an exuberantly hopeful expectation of +0.5% MoM) and the all-important 'Control Group' saw sales fall 0.4% (missing expectations of a 0.4% surge). Boom goes the narrative. Advance Retail Sales massively missed For Dec. Ironically, the great gas price plunge was the worst thing to happen to the US economy since the Polar Vortex: The breakdown: a sales decline in 9 out of 13 major categories.

December Retail Sales Took a Dramatic Plunge - The Advance Retail Sales Report released this morning shows that sales in December came in at -0.9% (-0.94% at two decimals) month-over-month, down from a downwardly revised 0.4% in November. Core Retail Sales (ex Autos) came in at -0.1%, down from 0.12% in November, also a downward revision. Today's numbers came in substantially below the forecast of -0.1% for Headline Sales and 0.1% for Core Sales.  The two charts below are log-scale snapshots of retail sales since the early 1990s. Both include an inset to show the trend over the past 12 months. The one on the left illustrates the "Headline" number. On the right is the "Core" version, which excludes motor vehicles and parts (commonly referred to as "ex autos"). Click on either thumbnail for a larger version. The year-over-year percent change provides a better idea of trends. Here is the headline series.  Here is the year-over-year version of Core Retail Sales.  The next chart illustrates retail sales "Control" purchases, which is an even more "Core" view of retail sales. This series excludes Motor Vehicles & Parts, Gasoline, Building Materials as well as Food Services & Drinking Places. I've highlighted the values at the start of the two recessions since the inception of this series in the early 1990s.

Retail Sales Post Huge Downward Surprise; Lower GDP Revisions Coming Up; Economists Easy to Surprise -- So much for those allegedly strong Christmas sales. In fact, sales of nearly everything were down in the today's Commerce Department Retail Sales Report for December 2014.  Retail sales were down 0.9% compared to November vs. economist expectations of a 0.1% decrease. November was revised from +0.7 percent to +0.4 percent. Month-over-month retail sales, autos, general merchandise, and ex-auto sales are all lower. The report shows store retailers down 1.9%, building materials & garden supplies down 1.9%, electronics & appliance down 1.6%, motor vehicles down 0.7%, and general merchandise down 0.9%. Food services and drinking was up 0.8%. Home furnishings posted a 0.8% gain as well. Take a good look at autos, one of the key drivers of overall sales growth for the past year. Commerce reports "auto and other motor vehicle dealers were up 9.8 percent from December 2013, and food services and drinking places were up 8.2 percent from last year."Once again economists were surprised when they should not have been.

Retail sales fall shakes confidence in US recovery - A surprise fall in US consumer spending knocked equities and sent bond yields down sharply on both sides of the Atlantic on Wednesday, amid questions about the strength of an economic recovery the World Bank this week described as the “single engine” of global growth. US Commerce Department figures showing that retail sales dipped 0.9 per cent in December from the previous month, against forecasts of a 0.1 per cent fall, sparked renewed concern over the impact of lower oil prices on the US economy. Falling commodity prices added to the pressure on US equities, as copper hit a five-and-a-half year low. The S&P 500 dipped briefly below the 2,000 mark, before closing at 2,011, as investors slashed bets that the Federal Reserve would raise interest rates in the first half of the year. Falling oil prices had been expected to weigh on the figures, but investors were alarmed to see a 0.4 per cent drop in core retail sales, which exclude gasoline prices, with areas including electronics, clothing and sporting goods all falling on the previous month. “These figures were a big surprise,” . “Between the weakness of the data on the US economy and the continued drop in commodity prices, the market is questioning the conviction that the Fed will raise rates in the middle of the year.” The figures raise questions over how far cheaper prices at the pump are translating into greater consumer confidence, feeding into a nervous investor mood at the start of the year that contrasts with the Fed’s show of confidence only last month.

Big Retail Sales Miss for December Dents Theory that Consumers Will Spend Gas Savings  Yves Smith - Mr. Market is having a major sad today largely as a result of disappointing retail sales figures for December, a 0.9% fall, well below the median forecast of analysts suveyed by Bloomberg of a fall of 0.1% and lower than the most bearish forecast of 0.5%. Maybe I should just pay attention to NC reader and shopping maven Li, who told me repeatedly that the retail environment was in poor shape based on the fact that major retail stores were putting through December markdowns vastly ahead of their usual schedule. We’ve ben skeptical of the theory that lower oil prices would be a boon for the economy. The argument has been that consumers would spend their savings elsewhere. As Ilargi has pointed out, all that does in shift consumption from one category to another. It does not lead to a net increase in spending.  Now admittedly, one month does not make for a trend, so we’ll have to see more data to determine if this pattern holds. However, gas prices were already appreciably lower in December and consumers were not spending those savings at the pump. From Bloomberg: The figures used to calculate gross domestic product, which exclude categories such as food services, auto dealers, home-improvement stores and service stations, decreased 0.4 percent, the worst performance since snow covered much of the country in January 2014, after rising 0.6 percent in November.Sales of electronics declined 1.6 percent last month, while purchases of apparel decreased 0.3 percent, today’s report showed. Receipts fell 0.9 percent at general merchandise stores and 1.9 percent at building materials outlets. Purchases at service stations, which have declined seven straight months, plunged 6.5 percent in December. Gas station receipts accounted for about 10 percent of total retail sales last year.

Despite Dismal Retail Sales, US Consumer Are The Most Exuberant In 10 Years -- UMich Consumer Sentiment surged to 98.2 - smashing expectations of 94.1 by the most in almost 2 years. This is the highest sentiment since February 2004...!!This all seems very odd... especially in light of the dismal retail sales data and weak wage growth (and we note this is the preliminary print). Inflation expectations plunged to 2.4% (from 2.8%) - the lowest since 2010. American optimism remains unphased as a majority (55.2%) now expect higher wages in the next year (despite earninsg actually dropping!!) 54% of Americans think it is a good time to SELL a house.

Producer Price Index: Inflation Remains Tame - Today's release of the December Producer Price Index (PPI) for Final Demand came in at -0.3% month-over-month seasonally adjusted. That's down from the previous month's -0.2% decline. Core Final Demand (less food and energy) was up 0.3% from last month. The year-over-year change in Final Demand is up 1.1% (1.09% to two decimals), the lowest since May of 2013. Here is the essence of the news release on Finished Goods: The Producer Price Index for final demand fell 0.3 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices decreased 0.2 percent in November and advanced 0.2 percent in October. On an unadjusted basis, the index for final demand increased 1.1 percent in 2014 after rising 1.2 percent in 2013....  In December, the 0.3-percent decline in the final demand index can be traced to a 1.2-percent drop in prices for final demand goods. In contrast, the index for final demand services moved up 0.2 percent. More…  The Headline Finished Goods for December came in at -1.26% MoM and is down -0.66% YoY. Core Finished Goods were up 0.32% MoM and 1.82% YoY. Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. The plunge over the past several months in headline PPI is, of course, energy related -- now at its lowest level since 2009. Core PPI has remained quite stable over the past year.

Core Producer Prices Jump 0.3%, More Than Expected As Sliding Energy Prices Drag Headline PPI Down 0.3% - The last thing anyone will care about today is seasonally-adjusted US economic data, but in any event, it is worth noting that in a world allegedly drowning in inflation, moments ago the BLS reported that December wholesale producer prices, while dropping less than expected -0.3% on the headline, actually jumped 0.3% excluding food and energy. The 0.3% decline in the final demand index can be traced to a 1.2-percent drop in prices for final demand goods. In contrast, the index for final demand services moved up 0.2 percent. The headline drop was as expected once again driven by declining gasoline, liquefied petroleum gas, home heating oil, and diesel fuel prices offset by advances in the indexes for motor vehicles, up 0.6%, eggs for fresh use, and residential natural gas. In fact, the 2.1% annual increase in final demand services was the highest since May of 2014.

BLS: CPI decreased 0.4% in December, Core CPI Unchanged - From the BLSThe Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 0.8 percent before seasonal adjustment.  The gasoline index continued to fall sharply, declining 9.4 percent and leading to the decrease in the seasonally adjusted all items index. The fuel oil index also fell sharply, and the energy index posted its largest one-month decline since December 2008, although the indexes for natural gas and for electricity both increased. The food index, in contrast, rose 0.3 percent, its largest increase since September.  The index for all items less food and energy was unchanged in December, following a 0.2 percent increase in October and a 0.1 percent rise in November. This was only the second time since 2010 that it did not increase. This was at the consensus forecast of a 0.4% decrease for CPI, and below the forecast of a 0.1% increase in core CPI.

Consumer Prices Tumble Most In 6 Years, Core Inflation Misses -- Great news! The cost of 'stuff' that Americans buy dropped 0.4% last month, or rahter great news for anyone but economists for whom this is the worst possible outcome imaginable - after all what will spur insolvent Americans, where the middle class no longer exists, to spend their money today if they don't think prices will rise tomorrow? This 0.4% drop (slightly worst than expected) is the biggest monthly drop since Dec 2008. The drop is led by a 9.4% collapse MoM in gasoline prices. Ex Food and Energy, CPI rose 1.6% YoY (less than expected 1.7% rise) missing for the 2nd month in a row. The question is - will the Fed see this as 'transitory' (ignoring the EIA's call for low oil prices for longer) or use it as another excuse to re-uncork QE? The biggest drop in 6 years. The full breakdown shows prices broadly falling... with a total collapse in the prices for fuel and gasoline... From the report: Food The food index rose 0.3 percent in December after a 0.2 percent increase in November. The index for food at home rose 0.3 percent with five of the six major grocery store food groups increasing. The index for dairy and related products posted the largest increase, rising 0.6 percent after declining in November. The energy index continued to decline, falling 4.7 percent in December after a 3.8 percent decrease in November. This was its sixth decline in a row, and the index has fallen 13.3 percent over the six month span. The gasoline index fell 9.4 percent in December and has declined 22.4 percent since June.

December 2014 CPI Annual Inflation Rate Falls from 1.3% to 0.8%. Wow!: The Consumer Price Index (CPI-U) year-over-year inflation rate dropped to 0.8%. Of course energy prices decreased, while food and several other goods increased partially countering energy's decline. The year-over-year core inflation rate again declined 0.1% to 1.6%, and continues well under the targets set by the Federal Reserve.  As a generalization – inflation accelerates as the economy heats up, while inflation rate falling could be an indicator that the economy is cooling. However, inflation does not correlate well to the economy – and cannot be used as a economic indicator. Energy and Shelter was the major influences on this month’s CPI. The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 0.8 percent before seasonal adjustment. The gasoline index continued to fall sharply, declining 9.4 percent and leading to the decrease in the seasonally adjusted all items index. The fuel oil index also fell sharply, and the energy index posted its largest one-month decline since December 2008, although the indexes for natural gas and for electricity both increased. The food index, in contrast, rose 0.3 percent, its largest increase since September.  The index for all items less food and energy was unchanged in December, following a 0.2 percent increase in October and a 0.1 percent rise in November. This was only the second time since 2010 that it did not increase. The shelter index continued to rise, and the index for medical care posted its largest increase since August 2013. However, these increases were offset by declines in a broad array of indexes including apparel, airline fares, used cars and trucks, household furnishings and operations, and new vehicles.

Why You Won’t See Low Inflation in the Dairy Case - Food prices rose 0.3% in December and 3.4% from a year earlier, the largest 12-month increase since February 2012, the Labor Department said Friday. U.S. consumer prices rose at their slowest annual pace last month in more than five years largely due to a plunge in oil prices, a potential complication for the Federal Reserve as it looks to raise interest rates later this year. The consumer-price index rose just 0.8% from the same month last year, and declined 0.4% from November. But food prices were an exception, led by dairy, up 0.6% from November, and fresh vegetables, up 2.4%. (Fresh fruit prices, however, were down 1.3% on the month.) Rising food prices likely reflect the lingering effects of the West’s drought and suggest grocery prices aren’t yet benefiting much from lower transportation costs tied to less-expensive gasoline. Droughts in California are generally associated with increased grocery prices, “but the effects do not occur immediately,” the Agriculture Department said in a report published last fall. For example, California experienced a long drought that ended in 2005. Food prices nationally continued to rise in 2006, a year after drought conditions began to improve.

How BLS Measures Changes in Consumer Prices - BLS -  Effective with the release of the January 2015 CPI on February 26, 2015, the Bureau of Labor Statistics (BLS) will utilize a new estimation system for the Consumer Price Index. The new estimation system, the first major improvement to the existing system in over 25 years, is a redesigned, state-of-the-art system with improved flexibility and review capabilities. In addition, this change eliminates paper in all steps of producing the CPI. The use of the Constant Elasticity of Substitution (CES) formula for initial and interim estimates of the C-CPI-U, and the new quarterly revision schedule for C-CPI-U indexes, are possible because of this new system. Also, as part of the redesign process, a small number of minor methodology changes, primarily affecting the imputation of price changes, were introduced. When a sampled consumer item is temporarily unavailable, its price change is imputed by the price change of other items within a geographic area. In the current estimation system, these missing prices are imputed by all the price changes within a CPI item stratum. CPI item strata, though, are composed of one or more elementary level items, or ELIs. In the new estimation system, the price change will be imputed by price changes within its own ELI, instead of by all price changes within the potentially broader item stratum.  Similarly, price changes in the current estimation system CPI are imputed by a broad geographic definition called a CPI index area. CPI index areas are made up of one or more metropolitan areas called Primary Sampling Units, or PSUs. In the new estimation system, price changes will be imputed at the PSU level instead of the typically broader index area level.

The Biggest Looming Source of Inflation: Non-College Educated Men - In the same week that President Obama advocated for making community college free for all Americans for 2 years for those willing to work for it, we got a jobs report that gave more evidence about a theme that’s been developing over the past couple years: we’re running out of “old economy” men.As much as Silicon Valley complains, a scarcity of web developers doesn’t lead to inflation — most of the technology we use, from Google to Facebook to Twitter to our phone operating systems, is free to consumers. That whole “you can’t eat an iPad” thing. We continued to be over-stored in retail, as this week’s JCPenney and Macy’s store closures reminded us. And we all know what’s happened to the price of oil in recent months.Instead, inflation will come from the most unlikely of sources: the humble, frustrated, beaten-down industrial man. Responding to decades of social and economic clues — Iron Man being the new Marlboro Man, Steve Jobs being cooler than dirty jobs, the outsourcing of manufacturing work, stagnating blue collar wages at home, and the relatively recent fear of robots and technology killing what few blue collar jobs remain, parents have raised their sons for white-collar, intellectual work. But for at least the next several years it looks like the blue collar man has a tailwind. I say man and not woman because the work I’m referring to is done mostly by men. Women represent 12-13% of construction workers and less than 25% of transportation/warehousing workers. Their employment share in these two industries hasn’t risen in 25 years: And it’s those two industries, construction in particular, where profound shortages are developing. Single-family residential construction is still at recessionary levels:  and yet the unemployment rate for construction workers is near the levels of the last boom. The unemployment rate for transportation/utilities workers is similarly low:

Obama Backs Government-Run Internet - President Obama will travel to Cedar Falls, Iowa, on Wednesday to tout the ability of local governments to provide high-speed Internet to their residents. And he will urge the Federal Communications Commission to strike down state laws around the country that restrict the ability of cities to build their own broadband networks. The move is likely to draw fire from Republicans, who argue that states should be free to set their own policies—including restrictions on local governments.   "Laws in 19 states—some specifically written by special interests trying to stifle new competitors—have held back broadband access and, with it, economic opportunity," the White House wrote in a fact sheet. "Today, President Obama is announcing a new effort to support local choice in broadband, formally opposing measures that limit the range of options available to communities to spur expanded local broadband infrastructure, including ownership of networks." Telecom and cable companies have been lobbying for the state laws, arguing that it's not fair for them to have to compete with government-owned Internet providers. The companies claim the city projects discourage private investment and are often expensive failures. House Republicans passed legislation last year to protect the state laws from FCC action. But the White House argues that many Americans lack any option for fast, affordable Internet service from private providers. Some cities have built their own networks offering speeds 100 times faster than the national average.

Subprime Spikes Auto Sales, Delinquencies Soar, Industry in Total Denial, Fallout to Hit Main Street - Wolf Richter - New vehicle sales in the US have been on a tear in 2014, rising 5.6% to 16.5 million units, the highest since banner year 2006. Light-truck sales jumped 10%, cars edged up 1.8%. The industry is drunk with its own enthusiasm.General Motors CEO Mary Barra sees “still plenty of room for the auto industry to grow.” She rattled off politically correct reasons: consumers who’re “feeling pretty good about the future,” due to “the strength of the labor market, better job security and the recovery in home prices,” topped off by the “sharp drop in fuel prices and rising incomes,” possibly confusing them with her rising income. So sales could hit 17 million in 2015, she said in the statement. It would take the industry back to the car-glory days of 2001. It’s going to be younger buyers – the Holy Grail of everyone. They’re not just moving out of their parents’ homes, where they’ve been holed up for years because they can’t afford the soaring rents or home prices, but now they’re also going to splurge on a set of wheels. Because it’s a great time to buy. Interest rates for six-year new-car loans are as low as 2.75%, according to Loan terms can be stretched to seven years, to where these younger buyers will be awfully close to middle-age before they finally get out from under it. Loan-to-Value ratios have soared well past 100%; everything can be plowed into the loan: title, taxes, license fees, cash-back, and the amount buyers are upside-down in their trade. The package is governed by loosey-goosey lending standards. Bad credit, no problem. And that’s exactly the problem.

Update: The recovery in U.S. Heavy Truck Sales - This graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is the December seasonally adjusted annual sales rate (SAAR).  Heavy truck sales really collapsed during the recession, falling to a low of 181 thousand in April 2009 on a seasonally adjusted annual rate basis (SAAR). Since then sales have more than doubled and hit 446 thousand SAAR in August 2014.   Sales have declined a little since August, and were at 411 thousand SAAR in December.The level in August was the highest level since February 2007 (over 7 years ago).  Sales are now above the average (and median) of the last 20 years.

Despite 'Gas Tax Cut', Airlines See Tumbling Traffic, Outsource US Jobs -- This wasn't how it was supposed to be? Collapsing crude oil prices - according to the mainstream (Fed-spoonfed) narrative means lower costs for business and 'massive' tax cuts for consumers enabling disposable income to surge. But, American Airlines just announced a 3.4 percentage point plunge in its load factor (ability to fill its planes) in December and while Southwest saw traffic rise, its load factor also fell as passenger revenue per seat tumbled 4-5%. So no extra spending... and now United reports it is looking to outsource 2,000 jobs in a cost-cutting effort (which seems odd given the total collapse of the fuel cost overhead?). Oh well, just keep repeating - crashing oil prices are unambiguously good.

U.S. bus lines added routes in 2014, airline flights fell: study (Reuters) - U.S. bus companies continued to add daily scheduled routes linking cities around the country in 2014 with a 2.1 percent increase, while airline flights fell 3.5 percent, according to a study released on Monday. According to the study by the Chaddick Institute for Metropolitan Development at DePaul University in Chicago, bus companies introduced new luxury-oriented services and expanded their national networks to capitalize on rising demand for short- and long-distance trips. Bus travel-booking websites like Wanderu and Busbud also contributed to a rise in interest. In the years following the U.S. financial sector collapse and the Great Recession, more people have chosen buses as a cheaper travel option, especially a younger generation of Americans not nearly so wed to cars or airports as their older compatriots. Between 2010 and 2014, the number of U.S. daily scheduled inter-city discount services almost doubled to 1,066 from 589. With their national networks now in place, bus companies will likely focus on continued service enhancements to attract more customers in 2015, the study predicted. . Stagnating middle-class incomes and the widening income gap in America have boosted business at bus companies, which cost less than flying or driving. But a significant part of the boost in bus business comes from younger Americans, who are turned off by extra security at airports and "are used to traveling on a shoestring budget."

Fed: Industrial Production decreased 0.1% in December -- From the Fed: Industrial production and Capacity Utilization Industrial production decreased 0.1 percent in December after rising 1.3 percent in November. The decrease in December reflected a sharp drop in the output of utilities, as warmer-than-usual temperatures reduced demand for heating; excluding utilities, industrial production rose 0.7 percent. Manufacturing posted a gain of 0.3 percent for its fourth consecutive monthly increase. The index for mining increased 2.2 percent after falling in the previous two months. At 106.5 percent of its 2007 average, total industrial production in December was 4.9 percent above its level of a year earlier. For the fourth quarter of 2014 as a whole, industrial production advanced at an annual rate of 5.6 percent, with widespread gains among the major market and industry groups. Capacity utilization for the industrial sector decreased 0.3 percentage point in December to 79.7 percent, a rate that is 0.4 percentage point below its long-run (1972–2013) average. This graph shows Capacity Utilization. This series is up 12.7 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 79.7% is 0.4% below the average from 1972 to 2012 and below the pre-recession level of 80.8% in December 2007. Note: y-axis doesn't start at zero to better show the change. The second graph shows industrial production since 1967. Industrial production decreased 0.1% in December to 106.5. This is 27.2% above the recession low, and 5.7% above the pre-recession peak. This was slightly below expectations.

December 2014 Industrial Production Weakens but Pretty Much at Expectations - The headlines say seasonally adjusted Industrial Production (IP) declined. Econintersect‘s analysis agrees  - BUT consider that the unadjusted rolling averages are accelerating.

  • Headline seasonally adjusted Industrial Production (IP) decreased 0.1% month-over-month and up 4.9% year-over-year.
  • Econintersect‘s analysis using the unadjusted data is that IP growth decelerated 0.4% month-over-month, and is up 4.8% year-over-year.
  • The unadjusted year-over-year rate of growth accelerated 0.2% from last month using a three month rolling average, and is up 4.8% year-over-year.

IP headline index has three parts – manufacturing, mining and utilities – manufacturing was up 0.3% this month (up 4.9% year-over-year), mining up 2.2% (up 11.1% year-over-year), and utilities were down 7.3% (down 5.4% year-over-year). Note that utilities are 9.8% of the industrial production index, whilst mining is 15.9%. Unadjusted Industrial Production year-over-year growth for the past 12 months has been between 2% and 4% – it is currently 4.8%. It is interesting that the unadjusted data is giving a smooth trend line.Economic downturns have been signaled by only watching the manufacturing portion of Industrial Production. Historically manufacturing year-over-year growth has been negative when a recession is imminent. This index is not indicating a recession is imminent.

Industrial Production Drops By Most In 11 Months (After Biggest Surge Since 2010) -- Industrial Production dropped 0.1% in December (slightly worse than expected) after November's 1.3% surge - the biggest sicne may 2010. Not since Jan 2014's Polar Vortex has Industrial Production dropped more than this. The 5.5% surge in vehicle production - as suspected - was entirely unsustainable and dropped 0.9% in December and Utilities collapsed 7.3% on the month - the worst dropo since Jan 2006.

Empire State Manufacturing: A Welcome Bounce from Last Month's Contraction - This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions bounced back after last month's mild contraction. The headline number rose 11 points to 10.0. The forecast was for a reading of 5.00.  The Empire State Manufacturing Index rates the relative level of general business conditions in New York state. A level above 0.0 indicates improving conditions, below indicates worsening conditions. The reading is compiled from a survey of about 200 manufacturers in New York state.  Here is the opening paragraph from the report. The January 2015 Empire State Manufacturing Survey indicates that business activity expanded for New York manufacturers. The headline general business conditions index climbed eleven points to 10.0. This month�s survey also showed modest growth in new orders and shipments. Labor market conditions were mixed, with the index for number of employees rising several points to 13.7, while the average workweek index remained negative at -8.4. Both the prices paid and prices received indexes came in at 12.6, indicating a continued modest increase in input prices and selling prices. As has been the case for much of the past year, indexes for the six-month outlook pointed to widespread optimism about future conditions.  Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead):

Philly Fed Manufacturing Survey declines to 6.3 in January - From the Philly Fed: January Manufacturing Survey The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased 18 points, from a revised reading of 24.3 in December to 6.3 this month.  The current employment index fell 10 points, from 8.4 to -2.0. ... The diffusion index for future activity edged up by less than 1 point, to 50.9, in January and has remained near its current level over the past five months ... This was below the consensus forecast of a reading of 18.8 for January.  Earlier today from the NY Fed: Empire State Manufacturing Survey The headline general business conditions index climbed eleven points to 10.0....Labor market conditions were mixed, with the index for number of employees rising several points to 13.7, while the average workweek index remained negative at -8.4....Indexes assessing the six-month outlook conveyed considerable optimism about future business activity. The index for future general business conditions rose nine points to 48.4, with nearly 60 percent of respondents expecting conditions to improve. The NY Fed survey was above the consensus forecast of 5.0

Philly Fed Business Outlook: Activity Slows Significantly But Remains Positive --- The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware.The latest gauge of General Activity came in at 6.3, a substantial decline from last month's 24.3 and the lowest reading since the -2.0 contraction in February of last year. The 3-month moving average came in at 23.6, down from 27.8 last month. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. The Six-Month Outlook was essentially unchanged at 50.9 versus the previous month's 50.4. Here is the introduction from the Business Outlook Survey released today: Manufacturing activity in the region increased modestly in January, according to firms responding to this month’s Manufacturing Business Outlook Survey. The survey’s current indicators for general activity and new orders fell from their readings in December, suggesting a slower pace of growth. Firms reported continued moderation in price pressures, attributable to lower energy costs. Overall, firms reported that lower energy prices were having overall net positive effects on manufacturing business. The survey’s indicators of future activity show continued optimism about continued growth over the next six months. (Full PDF Report)  Today's 6.3 came in well below the 19.9 forecast at The first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity. We can see periods of contraction in 2011 and 2012 and a shallower contraction in 2013. The indicator is now above its post-contraction peak in September of last year.

Philly Fed Crashes From 21 Year Highs To 12 Month Lows, Employment Tumbles -- With the biggest miss since August 2011, The Philly Fed Factory Index crashed from 21 year highs in November to the lowest since Feb 2014. The headline 6.3 print, missing expectations of 18.7, follows last month's drop for the biggest 2-month drop since Lehman. Under the surface things are even worse with the employment sub-index plunging to its worst since June 2013 and the outlook for CapEx slashed in half from 24.8 to 13.2. But but but fundamentals...

Cheaper Oil a Mixed Bag for Some Manufacturers, Philly Fed Survey Says - The plunge in global oil prices is expected to help boost the U.S. economy in general. But not so much for firms that make equipment for the domestic oil industry. Some 63% of mid-Atlantic manufacturers said they’ve seen positive effects from cheaper oil, versus 16% who saw a negative impact, according to the Federal Reserve Bank of Philadelphia’s January business outlook survey. The survey released Thursday looked at manufacturing firms in the Philadelphia Fed’s district, which includes eastern Pennsylvania, southern New Jersey and Delaware. More than half of firms, 57%, said their own production costs have decreased with the drop in oil prices. But roughly a third said they’ve seen lower demand from customers involved in energy production.  Michael Trebing, senior economic analyst at the Philadelphia Fed, said many firms in the region produce equipment for the energy sector. “It’s a mixed bag in that regard,” he told reporters. The Fed’s Beige Book survey, released Wednesday, raised concerns about signs of a slowdown in oil-producing regions of the country even as the broader U.S. economy continued to expand.

Oil fall could lead to capex collapse: DoubleLine's Gundlach (Reuters) - DoubleLine Capital's Jeffrey Gundlach said on Tuesday there is a possibility of a "true collapse" in U.S. capital expenditures and hiring if the price of oil stays at its current level. Gundlach, who correctly predicted government bond yields would plunge in 2014, said on his annual outlook webcast that 35 percent of Standard & Poor's capital expenditures comes from the energy sector and if oil remains around the $45-plus level or drops further, growth in capital expenditures could likely "fall to zero." Gundlach, the co-founder of Los Angeles-based DoubleLine, which oversees $64 billion in assets, noted that "all of the job growth in the (economic) recovery can be attributed to the shale renaissance." He added that if low oil prices remain, the U.S. could see a wave of bankruptcies from some leveraged energy companies. true Brent crude LCOc1 approached a near six-year low on Tuesday as the United Arab Emirates defended OPEC's decision not to cut output and traders wondered when a six-month price rout might end.

The US 'manufacturing renaissance' doesn't exist, says new report - Have we been letting a good story get in the way of the facts? The “manufacturing renaissance” has been the central point in the return of America’s industrial power. It even has its own national council. Yet here are the facts: the United States may have added only about one new manufacturing job in the last few years for every five that were lost during the financial crisis and the recession that followed. That’s according to a new report from the Information Technology & Innovation Foundation, a non-partisan and nonprofit think tank based in Washington DC. The report was released early this morning. “We have stretched six cool examples [of the rebirth of manufacturing] into a whole news trend,” says Adams Nager, economic research industry at the foundation and, together with its president, Robert Atkinson, the co-author of the report. “A lot of people are desperate for positive economic news, so articles suggesting that there’s a revival of manufacturing get a lot of traction.” Dow Chemical does plan to invest $4bn to expand its chemicals production on the Gulf coast; Flextronics is, indeed, investing $32m to build a product innovation center in Silicon Valley. Airbus is setting up a massive facility in Alabama, its first in North America, for a price of $600m, to build airliners. In the past two years, the aluminum industry has announced $2.3bn of new manufacturing investments in the US. Corporate profits at many manufacturing companies have climbed, too.

Business Inventories January 14, 2015: Growth in business inventories was modest in November, up 0.2 percent for a second straight month, and was steady relative to sales which fell 0.2 percent following a 0.3 percent decline in October. The stock-to-sales ratio was a moderate 1.31 in both months. A look at components shows a 0.3 percent inventory decline at retailers, a draw that may not be repeated in December given the weakness in retail sales posted earlier this morning, weakness that points to a build for retail inventories. Inventories at factories were little changed in November, up 0.1 percent, while inventories at wholesalers rose a sharp 0.8 percent in what appears to have been an unwanted build given a 0.3 percent decline in wholesale sales. But inventory imbalance is not a major risk right now for the economy where growth, despite spots of disappointment, remains solid as evidenced by last week's employment report. Inventory imbalance for oil, however, is a major risk right now for the energy sector where supply is very heavy. Watch for the weekly petroleum inventory report later this morning at 10:30 a.m. ET. Recent History Of This Indicator Business inventories rose slightly in October, up 0.2 percent, but showed no significant change relative to business sales which slipped 0.1 percent. The stock-to-sales ratio was unchanged for a 3rd straight month at 1.30. Looking at components, inventories at retailers rose 0.2 percent in October versus a 0.4 percent rise for sales. Here too the inventory-to-sales ratio is unchanged, at 1.42 for this component. The inventory-to-sales ratios for the two other components, wholesalers and manufacturers, also showed little change with wholesalers at 1.19 for a 3rd month and manufacturers at 1.31 versus 1.30 in September and August.

NFIB: Small Business Optimism Index Increased in December, Highest since 2006 -- From the National Federation of Independent Business (NFIB): Small Business Optimism Perks Up in December The NFIB Small Business Optimism Survey rose 2.3 points to 100.4 in December, its highest level since October of 2006, with positive gains in eight of 10 indices, a strong signal that American small businesses could be finally shaking off the effects of the Great Recession. “The Index showed strength in November but most of the gains were confined to just two categories. The December Index shows much broader strength led by a significant increase in the number of owners who expect higher sales. This could be a breakout for small business. There’s no question that small business owners are feeling better about the economy. If they continue to feel that way 2015 could be a very good year.” –

Small-Business Owners Are the Most Confident Since 2006 - Small-business owners in December reported a big gain in confidence, according to a report released Tuesday. Many in the group expect to raise prices in the future. The National Federation of Independent Business’s small-business optimism index increased a large 2.3 points to 100.4 in December. The index is at its highest point since October 2006, before the last recession. Economists surveyed by The Wall Street Journal expected the index to edge up to 98.5 in December from 98.1 in November. “The gain in December was broad-based,” the report said. The only subindex to decline was the subindex covering expected business conditions. It fell one percentage point to 12% but that followed a 16-point jump in November to 13%. Other components in the top-line index strengthened. The subindex covering real sales expectations increased 6 points to 20% last month. The job creation plans subindex rose 4 points to 15% and the capital-spending plans subindex increased 4 points to 29%. Small-business owners ended 2014 with little pricing power. The NFIB said seasonally adjusted, a net 4% of owners said they have raised selling prices recently, the same reading posted in November. More owners, however, hope to lift prices in the future, “perhaps in anticipation of strong sales which will support price hikes,” the NFIB said. Seasonally adjusted, a net 22% plan price increases, up from 19% saying that in November.

Gallup CEO Blasts US Leadership "The Economy Is Not Coming Back" -- The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity as Gallup CEO Jim Clifton rages, for the first time in 35 years, American business deaths now outnumber business births. Wall Street, Clifton explains, needs the stock market to boom, even if that boom is fueled by illusion. So both tell us, "The economy is coming back." Let's get one thing clear, he exclaims, "this economy is never truly coming back unless we reverse the birth and death trends of American businesses."

How Higher Wages Can Be Boon Rather Than Cost to Business - Better-paid workers are healthier and more productive. That’s among the findings of Justin Wolfers and Jan Zilinsky at the Peterson Institute for International Economics in a review of the academic literature and theory. “Higher wages are associated with better health—less illness and more stamina, which enhance worker productivity,” they write in a blog post on the think tank’s website. The authors posed the question, “Under what circumstances can raising the pay of low-skilled workers at large corporations lead to general improvements in productivity?” They were prompted by word that Aetna Inc., the large health insurer, planned to boost the incomes of its lowest-paid workers to a minimum of $16 per hour to reduce employee turnover and attract top job applicants. The company announced the move Tuesday. The Peterson Institute blog post cites papers going back decades finding numerous benefits to higher wages. They include prompting employees to work harder, attracting more capable and productive workers, and reducing turnover and the costs of hiring and training new workers. Among the papers they cite is one from 1984 by labor economist Janet Yellen, now the Federal Reserve chairwoman, suggesting higher wages make workers more productive. She wrote, “reduced shirking by employees due to a higher cost of job loss; lower turnover; an improvement in the average quality of job applicants and improved morale.”

Jobs, Wages, Wholesale trade - The December employment situation was somewhat stronger than expected at the headline level but the payroll numbers softened. In terms of actual numbers, the report was mixed. Payroll jobs advanced 252,000 after jumping a revised 353,000 in November. Analysts projected a 245,000 gain. October and November were revised up notably by a net 50,000. The unemployment rate decreased to 5.6 percent from 5.8 percent in November. Expectations were for 5.7 percent. Wages actually fell back for the latest month. Going back to the payroll report, private payrolls increased 240,000 after rising 345,000 in November. Expectations were for 238,000. Goods-producing jobs jumped in December, led by construction which advanced 67,000 in December after a 20,000 increase the month before. Manufacturing employment increased 17,000, following a jump of 29,000 in November. Mining rose 3,000 in December, following a 1,000 boost the prior month. Private service-providing jobs gained 173,000 after a 294,000 jump in October. The latest increase was led by professional & business services. Government jobs increased 12,000 after rising 8,000 in November. Average hourly earnings slipped 0.2 percent in December after gaining 0.2 percent the prior month. Expectations were for a 0.2 percent rise. Average weekly hours were unchanged at 34.6 hours and matched expectations.Inventories look a bit heavy in the wholesale sector, up 0.8 percent in November vs a 0.3 percent decline in sales that lifts the stock-to-sales ratio to 1.21 from October’s 1.20 and compared to 1.19 in September. Weak sales made for unwanted inventory builds in metals, chemicals, lumber, machinery and farm products. The nation’s inventories have been steady though today’s report does hint at slowing demand going into year end. Watch for the final data on November inventories in Wednesday’s business inventories report.

Here’s why wages aren’t growing: The job market is not as tight as the unemployment rate says it is - No question, the U.S. job market is tightening up. Last year was the best year for job growth since 1999, and the unemployment rate ended the year at 5.6 percent, a rate that’s just about what many economists will tell you is the lowest it can go without triggering destabilizing growth spirals in prices and wages. And yet, there’s also no question that nothing like such spirals are showing themselves either in the actual data, as shown below, or in forward-looking expectations. As noted, economists associate this concept of “full employment” with a job market that’s tight enough to generate wage and price pressures. But the concept also includes a strong bargaining power component. When there’s too much slack in the job market, as has been the case for most of the past 30 years, workers lack the clout they need to claim a greater share of the growth they’re helping to produce. The problem is, economists are unable to accurately pin down the unemployment rate commensurate with full employment (let’s call it the FEUR). The Federal Reserve guesses it’s between 5.2 and 5.5 percent it's between 5.2 and 5.5 percent, meaning we’re already butting up against its upper bound. That observation is awfully hard to square with the first figure below. It plots the unemployment rate, along with the yearly growth of the Fed’s favorite inflation gauge and the average wage. I’ve also drawn a line for the Fed’s FEUR: 5.35 percent being the mid-point of the range. As is quite clear, although the unemployment rate has fallen to a level just above the Fed’s FEUR, we see no pressure on wage or price growth.

Still No Sign of a Skills Mismatch—Unemployment is Elevated Across the Board -- One of the recurring myths following the Great Recession has been that recovery in the labor market has lagged because workers don’t have the right skills. The figure below, which shows the number of unemployed workers and the number of job openings in November by industry, is a useful way to examine this idea. If today’s labor market woes were the result of skills shortages or mismatches, we would expect to see some sectors where there are more unemployed workers than job openings and others where there are more job openings than unemployed workers. What we find, however, is that there are more unemployed workers than jobs openings across the board.  Some sectors have been closing the gap faster than others. Health care and social assistance, which has been consistently adding jobs throughout the business cycle, has a ratio quickly approaching 1. Wholesale trade is also moving towards a ratio of 1. And on the other end of the spectrum, there are 6.2 unemployed construction workers for every job opening. Arts, entertainment, and recreation has the second highest ratio, at 3.2-to-1. Taken as a whole, these numbers demonstrate that the main problem in the labor market is a broad-based lack of demand for workers—not available workers lacking the skills needed for the sectors with job openings. Interactive

Weekly Initial Unemployment Claims increased to 316,000 -- The DOL reported: In the week ending January 10, the advance figure for seasonally adjusted initial claims was 316,000, an increase of 19,000 from the previous week's revised level. The previous week's level was revised up by 3,000 from 294,000 to 297,000. The 4-week moving average was 298,000, an increase of 6,750 from the previous week's revised average. The previous week's average was revised up by 750 from 290,500 to 291,250.  There were no special factors impacting this week's initial claims The previous week was revised yp to 297,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 298,000.

BLS: Jobs Openings at 5.0 million in November, Up 21% Year-over-year - From the BLS: Job Openings and Labor Turnover Summary There were 5.0 million job openings on the last business day of November, little changed from 4.8 million in October, the U.S. Bureau of Labor Statistics reported today. ... ...Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ... There were 2.6 million quits in November, little changed from October.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for November, the most recent employment report was for December. Note that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of labor market turnover. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings increased in November to 4.972 million from 4.830 million in October. The number of job openings (yellow) are up 21% year-over-year compared to November 2013. Quits are up 7% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Job Openings Rise Near 14-Year High In November - Job openings rose to their highest level in nearly 14 years at the end of November, the Labor Department said Tuesday. Openings rose to a seasonally adjusted level of 4.97 million in November, their highest level since January 2001, according to the Labor Department’s monthly Job Openings and Labor Turnover Survey, known as Jolts. The number of openings rose 27% from a year earlier and stood 15% above the level from December 2007, when the last recession officially began. The uptick in workplace openings meant that there were around 1.8 unemployed workers in November for every opening, the lowest ratio in almost seven years. At the worst point in the recession, there were nearly seven unemployed workers for every available job opening. For months, economists have said that strong improvement in demand for workers should translate into higher wages. So far, it hasn’t. “The increase in job openings is a favorable sign for upcoming payroll growth and perhaps a good sign for earnings growth,” said Daniel Silver, an economist at J.P. Morgan Chase & Co. Still, there hasn’t been a strong relationship between openings and wage gains in the current cycle, he said. The report showed mixed improvement on other fronts. Hiring edged down in November after it advanced in October to a seven-year high. The 4.99 million hires in November rose 9% from a year earlier. Layoffs fell 8% from October. The number of workers who voluntarily left their jobs also edged down after hitting a six-year high in September. The number of workers who have quit their jobs, which economists view as a sign that workers are more confident in the health of the economy, rose 8% over the year ended November.

November 2014 JOLTS -- JOLTS data continue to come in strong.  Older workers tend to have lower unemployment but longer unemployment durations.  Specialization, better personal financial safety nets, etc. create frictions in re-employment so that I think we are seeing demographic-based movements in openings and quits.  Openings are higher, quits are lower, and hires are lower.  If we split the difference between openings and quits, JOLTS data suggest the labor markets are comparable to something around late 2005. The unemployment rate was under 5% then.  I had been expecting this to mean that we would continue to see the unemployment rate drop sharply, but I am starting to think that there is some persistence in measured unemployment.  There might have been a shift right in the Beveridge Curve (x=unemployment, y=openings), even after adjusting for demographics, as there had been in the 1970's and 1980's after there had been several recessions in relatively short succession.  Basically a higher NAIRU, I guess, which I guess is basically the consensus view right now. So, while I don't abide the supposed fear of wage-inflation, I do think that we should see the benefits of an economy running at full employment, even if the unemployment rate is a little high, which should mean higher RGDP growth, decreasing risk premiums, increasing real wage growth, and increasing real interest rates.  According to JOLTS, we are a long way from any concerns.

Little Change in Hires, Quits, or Layoffs in November 2014 -  The hires, quits, and layoffs rate held fairly steady in the November Job Openings and Labor Turnover Survey (JOLTS), released today. Total separations—the combination of quits, layoffs, discharges, and other separations—fell slightly in November. The figure below shows the hires rate, the quits rate, and the layoffs rate. Layoffs shot up during the recession but recovered quickly and have been at prerecession levels for more than three years. This makes sense, as the economy is in a recovery and businesses are no longer shedding workers at an elevated rate. The fact that this trend continued in November is a good sign. However, not only do layoffs need to come down before we see a full recovery in the labor market, but hiring needs to pick up. While the hires rate has been generally improving, it’s still below its prerecession level. The voluntary quits rate had been flat since February (1.8 percent), and saw a modest spike up in September to 2.0 percent, before falling to 1.9 percent in October and holding steady in November. A larger number of people voluntarily quitting their jobs indicates a strong labor market, where hiring is prevalent and workers are able to leave jobs that are not right for them and find new ones. There are still 9.1 percent fewer voluntary quits each month than there were in 2007, before the recession began. We should be hoping for a return to pre-recession levels of in voluntary quits, which would mean that fewer workers are locked into jobs they would leave if they could. Interactive.

Job-Seekers-to-Job-Openings Ratio Continues its Downward Trend in November -- The number of job openings hit 5.0 million in November, according to this morning’s Job Openings and Labor Turnover Summary (JOLTS)—a slight increase from 4.8 million in October. Meanwhile, according to the Census’s Current Population Survey, there were 9.0 million job seekers, which means there were 1.8 times as many job seekers as job openings in November—the lowest since January 2008. A rate of 1-to-1 would mean that there were roughly as many job openings as job seekers. In a stronger economy, the ratio would be smaller, but we are definitely moving in the right direction. This slight decline in the jobs-seekers-to-job-openings ratio is a continuation of its steady decrease, since its high of 6.8-to-1 in July 2009, as you can see in the figure below. The ratio has fallen by 0.8 over the last year. At the same time, the 9.0 million unemployed workers understates how many job openings will be needed when a robust jobs recovery finally begins, due to the 5.8 million potential workers (in November) who are currently not in the labor market, but who would be if job opportunities were strong. Many of these “missing workers” will go back to looking for a job when the labor market picks up, so job openings will be needed for them, too. There is a wide range of “recruitment intensity” with which a company can deal with a job opening. If a firm is trying hard to fill an opening, it may increase the compensation package and/or scale back the required qualifications. On the other hand, if it is not trying very hard, it might hike up the required qualifications and/or offer a meager compensation package. Perhaps unsurprisingly, research shows that recruitment intensity is cyclical—it tends to be stronger when the labor market is strong, and weaker when the labor market is weak. This means that when a job opening goes unfilled when the labor market is weak, as it is today, companies may very well be holding out for an overly-qualified candidate at a cheap price.

JOLTS Data Suggests Labor Market Won't Normalize For Another Three Years -  The good news in today's JOLTS report was that with Wall Street expecting Job Openings to bounce by about 20K from October's 4,834K (remember JOLTs is one month delayed) to 4,850K, instead the number reported was 4,972K. This was coupled with a drop in a hires from 5.1MM to 4.99MM, and separations (either quits or layoffs) from 4.863MM to 4.623MM, for a net separations number of 367K, in line with the revised 353K NFP number revision for November. On the surface, this suggests that Yellen's favorite indicator suggests the mid-summer rate hike is on its way.  However that was not all: the bad news was the as the Beverdige Curve, conveniently added to the JOLTs release shows, a long time has to pass before the US job markets renormalizes again.  This is what the BLS had to say about the skewed Beveridge curve: This graph plots the job openings rate against the unemployment rate.  During an expansion, the unemployment rate is low and the job openings rate is high. Conversely, during a contraction, the unemployment rate is high and the job openings rate is low. The position of the curve is determined by the efficiency of the labor market. For example, a greater mismatch between available jobs and the unemployed in terms of skills or location would cause the curve to shift outward (up and toward the right).

Full Employment Alone Won’t Solve Problem of Stagnating Wages - The most recent employment report brought mixed news. The unemployment rate continues its slow but steady downward path and now stands at 5.6 percent, but wages remain flat. In response, most analysts made two points. First, the lack of wage growth indicates that we are not yet close enough to full employment to generate upward pressure on wages, so policymakers should be patient in reversing attempts to stimulate the economy. Second, once we do get closer to full employment the picture for wages will change and the long awaited acceleration in labor compensation will finally materialize.   I fear this trust that market forces will eventually raise wages will lead to disappointment. Inequality has been increasing for over three decades, and during that time we have been at or near full employment many times. Yet, wages over this time period have been flat. As noted by the Economic Policy Institute, “Since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth.” The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years. There’s more to the story than market forces.

Why Wages Won’t Rise  - Robert Reich  - Jobs are coming back, but pay isn’t. The median wage is still below where it was before the Great Recession. Last month, average pay actually fell. What’s going on? It used to be that as unemployment dropped, employers had to pay more to attract or keep the workers they needed. That’s what happened when I was labor secretary in the late 1990s. It still could happen – but the unemployment rate would have to sink far lower than it is today, probably below 4 percent. Yet there’s reason to believe the link between falling unemployment and rising wages has been severed. For one thing, it’s easier than ever for American employers to get the workers they need at low cost by outsourcing jobs abroad rather than hiking wages at home. Outsourcing can now be done at the click of a computer keyboard. Besides, many workers in developing nations now have access to both the education and the advanced technologies to be as productive as American workers. So CEOs ask, why pay more? Meanwhile here at home, a whole new generation of smart technologies is taking over jobs that used to be done only by people. Rather than pay higher wages, it’s cheaper for employers to install more robots. Not even professional work is safe. The combination of advanced sensors, voice recognition, artificial intelligence, big data, text-mining, and pattern-recognition algorithms is even generating smart robots capable of quickly learning human actions. In addition, millions of Americans who dropped out of the labor market in the Great Recession are still jobless. They’re not even counted as unemployment because they’ve stopped looking for work.

Double Standard Holding Women Back From Top Business Jobs, Pew Survey Finds -  The vast majority of Americans believe women and men are equally capable of being top corporate leaders. So why are there only 26 female chief executives at Fortune 500 companies? More than than two in five say it’s because women are held to higher standards than their male counterparts,  a survey the Pew Research Center released Wednesday found. That was nearly double the fraction saying family responsibilities or lack of connections held women back. Of those polled, 80% said women and men are equally good leaders and that women tended to be more honest and fair to employees. More women aren’t CEOs because they are being held to higher standard, according to 43% of those polled. “The idea that women had to do more to prove themselves, interestingly, outweighed character traits or family decisions,” said Kim Parker, director of social trends research at Pew. That potential roadblock “is harder to pinpoint and could be harder to overcome.” That matched the share saying that companies weren’t ready to hire women for a top position. Those polled could select more than one “major” reason for women being held out of the executive suite. A much smaller share, 23%, said family responsibilities didn’t leave enough time for women to ascend the corporate ladder, and 20% said women didn’t have the right connections. Very few said women weren’t “tough enough,” or didn’t make good managers.

Aetna to Boost Incomes of Lowest-Paid Workers - WSJ - Amid signs of a tightening labor market, Aetna Inc. plans to boost the incomes of its lowest-paid workers by as much as a third in a bid to draw top prospects and reduce turnover. The move by the big health insurer highlights larger debates over the pace of the economic recovery and the compensation of people toward the bottom of the wage scale. Around 12% of Aetna’s domestic work force will see a raise to a floor of $16 an hour, primarily employees in customer service and billing-related jobs. Aetna, which also said it will cut health-care costs for many of the same employees next year, follows Gap Inc., Starbucks Corp. and others in raising the lower limit on workers’ wages. Aetna Chief Executive Mark T. Bertolini said the company’s shift reflects changes in the insurance industry, which is increasingly selling coverage to individuals. “We’re preparing our company for a future where we’re going to have a much more consumer-oriented business,” he said, and Aetna wants “a better and more informed work force.” Economists and policy makers have been on the lookout for signs of growth in workers’ pay, which has lagged behind other markers of improved economic activity, including rising employment and economic output. While many economists say wage inflation remains a remote concern, some point to scattered signs of pressure as an indicator that the recovery may be accelerating and spreading its benefits to a wider group.

How Many Workers Would Gain Overtime Protections under an Updated Threshold? - The Fair Labor Standards Act (FLSA) requires employers to pay all covered workers a premium when they work overtime: 1.5 times the regular rate of pay for each hour beyond 40 in a week. Even some salaried employees with some managerial responsibilities, if they earn wages beneath a certain threshold, are covered by this protection, which is designed to spread available work and increase employment, and to raise the wages of employees who are required by their employers to work long hours. But far too many salaried workers are not covered by overtime or minimum-wage protections because the salary threshold at $23,660 per year has not kept up with wage growth or inflation and is far too low. The interactive map below compares the share of workers who currently fall under the overtime protection threshold in each state to how many more would be eligible for overtime protections under an updated threshold.  Economic Snapshot.  Millions more workers would be covered under updated overtime threshold: Share of salaried workers with overtime protections under current and proposed threshold, 2013. interactive

The Failure of a Past Basic Income Guarantee, the Speenhamland System - Yves Smith - The idea of a basic income guarantee is very popular with readers, more so that the notion of a job guarantee. Yet as we have mentioned in passing, this very sort of program was put in place on a large-scale basis in the past. Initially, it was very popular. However, in the long run it proved to be destructive to the recipients while tremendously beneficial to employers, who used the income support to further lower wages, thus increasing costs to the state and further reducing incentives to work. And when the system was dismantled, it was arguably the working poor, as opposed to the ones who had quit working altogether, who were hurt the most. It is also intriguing to note that this historical precedent is likely to resemble a a contemporary version of a basic income guarantee.

Over 40% of Americans Took ZERO Vacation Time in 2014 - There have in recent years been a lot of electrons annoyed pointing out the sharp increase in wealth inequality in America. And now comes survey results showing that not only do the well off enjoy a substantially higher standard of living than the working class, they actually have leisure time in which to enjoy their largess. All in all, 41% of American working adults reported taking no vacation time whatsoever. And as the chart above shows, by far the highest percentage of people in that category made less than $25,000 a year. Here are some more of the gory detailsAlthough it isn’t legally required, most full-time employees in the US receive some paid vacation. It’s around 10 paid work days a year in addition to six federal holidays, according to the Center for Economic and Policy Research, a nonprofit think tank.  That may seem like small mercy by Western standards (European workers typically get far more), but the sad truth is that Americans aren’t even using the handful of vacation days at their disposal. Last year, Americans left 169 million paid vacation days on the table, saying they were too busy to use them. A series of consumer surveys conducted by travel website Skift throughout 2014 summed up Americans’ woeful travel habits. Here are some highlights:
--Only 13% of Americans traveled abroad for a vacation from August 2013 to August 2014.
--Nearly half of Americans didn’t take a single day off in the summer of 2014.
--63% of Americans did not travel at all from September 2013 to September 2014

35 maps that explain how America is a nation of immigrants - American politicians, and Americans themselves, love to call themselves "a nation of immigrants": a place where everyone's family has, at some point, chosen to come to seek freedom or a better life. America has managed to maintain that self-image through the forced migration of millions of African slaves, restrictive immigration laws based on fears of "inferior" races, and nativist movements that encouraged immigrants to assimilate or simply leave. But while the reality of America's immigrant heritage is more complicated than the myth, it's still a fundamental truth of the country's history. It's impossible to understand the country today without knowing who's been kept out, who's been let in, and how they've been treated once they arrive.

Home Care Workers Denied The Right To Make Minimum Wage And Overtime -- Emily puts in long days, often working 16 hours in one day. But she doesn’t get a dime of overtime pay; her employer pays her the same daily rate as if she worked 12 hours no matter how many she actually did. That’s because she’s a home care worker, and under a current loophole called the “companionship exemption,” she and her coworkers aren’t required to be paid overtime or minimum wage.  That was supposed to change this year after the Department of Labor (DOL) issued a rule change that would have closed the loophole. But late on Wednesday evening, U.S. District Judge Richard Leon issued a decision vacating that change. In his decision, he ruled that the DOL doesn’t have the authority to redefine the companionship exemption that has excluded this workforce despite the fact that they perform tasks beyond keeping clients company. He had previously struck down most of the rule, saying that this loophole “is not an open question.”

This powerful Reddit thread reveals how the poor get by in America - The poor pay more for everything, from rolls of toilet paper to furniture. It's not because they're spendthrifts, either. If you're denied a checking account, there's no way for you to avoid paying a fee to cash a paycheck. If you need to buy a car to get to work, you'll have to accept whatever higher interest rate you're offered. If you don't have a car, the bus fare might eat up the change you'd save shopping at a larger grocery store as opposed to the local corner store.  It's easy to feel that "when you are poor, the 'system' is set up to keep you that way," in the words of one Reddit user, "rugtoad." That comment is at the top of an extraordinary thread full of devastating stories about what it's like to get by with nothing in the United States of 2015. "Growing up really poor means realizing in your twenties that Mommy was lying when she said she already ate," wrote "deviant_devices," another commenter. You can buy only a single pack of paper towels at a time, rather than saving on a bundle of 10, as "Meepshesaid" noted: When you are broke, you can't plan ahead or shop sales or buy in bulk. Poor people wait to buy something until they absolutely need it, so they have to pay whatever the going price is at that moment. If ten-packs of paper towels are on sale for half price, that's great, but you can only afford one roll anyway. In this way, poor people actually pay more than others for common staple goods. You can't pay for health insurance, and instead buy medicine from pet stores, as "colorcoma" writes: I buy "fish" antibiotics online because I can't afford health care. … Amoxicillin and such. Mostly for husband who has Lyme's disease. We can't afford our monthly health care rates. We are 30somethings in the US. Really feel like a "bottom feeder". You can't also buy shoes that will last for more than a few months, according to "DrStephenFalken"

Elites fight back against mismeasure of poverty - Our understanding of poverty is starting to undergo a transformation, thanks to new research and the backing of wealthy and powerful interests. United Way chapters in six states and the Rochester Area Community Foundation in New York are putting financial hardship in 21st century America on their volunteers’ and donors’ agendas. Since these organizations represent business leadership as well as prosperous and generous families, the development suggests that the power structure in these places is working to redefine what it means to be in need.  Their separate initiatives hold the promise of addressing one of the worst black marks on American society: A third of U.S. children live in poverty, giving us one of the worst child poverty rates among developed countries. This rate also acts as a tax on the country’s future that will be paid in lost economic output, increased demand for social services and human misery. Lowering the child poverty rate, on the other hand, will ease taxpayer burdens by producing fewer tax eaters and more tax payers.   The push from elites to recognize the real extent of financial hardship began five years ago in Morris County, New Jersey, one of the richest places in America.  “With a poverty rate of less than 5 percent [in Morris], United Way was getting so many requests to help low-income families” that leaders decided to find out why, . “It soon became obvious that the 50-year-old federal poverty level did not reflect the high cost of living in New Jersey and therefore did not capture the number of struggling households.”The United Way came up with ALICE, an acronym for “asset limited, income constrained, employed.”

Oil States’ Budgets Face Crude Awakening - WSJ: Energy-producing U.S. states are paring budget forecasts and planning spending cuts amid a plunge in prices that is testing their reliance on revenue from the oil patch. From Texas to North Dakota, states that benefited from a surge in domestic oil production in recent years are now bracing for reduced collections of extraction levies known as severance taxes and royalties as prices fall and companies cut back on drilling. In turn, income- and sales-tax growth could slow as producers cut jobs. While most energy-rich states have amassed ample rainy-day funds in anticipation of the oil industry’s historic booms and busts, the falling prices have budget writers scrambling to adjust earlier fiscal projections that had assumed much higher crude-oil prices. In Texas, the country’s top oil producer, officials on Monday said the windfall from the recent oil-shale boom will carry over to the budget for the next two fiscal years. But they are expecting the gush of cash from oil production to slow down considerably, projecting a 14% drop in oil-related taxes to $5.7 billion in fiscal 2016 and 2017.The consequences are more severe in Alaska, where oil-industry taxes account for 89% of the state’s operating revenue, and budget problems loomed even before oil prices dropped. Alaska now has a $3.5 billion hole in its $6.1 billion budget, and Gov. Bill Walker has called on state agencies to reduce budgets by 5% to 8% for the coming fiscal year. The state expects to dip heavily into its $14 billion in reserves to bridge the gap, but officials acknowledge that is not a sustainable solution.

Oil Prices Will Slow the Texas Jobs Engine, Dallas Fed Says - Texas, which has been zipping past other states when it comes to job creation, is now set for a slowdown as declining oil prices reverberate through the energy-state’s economy, says the Federal Reserve Bank of Dallas. The bank is forecasting the state will add jobs at a rate between 2% and 2.5% in 2015, down from the 3.6% it’s estimating for 2014, according to its latest Texas economic outlook released Tuesday. That’s still 235,000 to 295,000 new jobs, more than most other states created last year. But with oil companies cutting back on drilling and announcing layoffs, the Dallas Fed says the overall Texas economy will likely take a bigger hit than the job market because workers in that sector are 4.6 times more productive than the state average. Texas also stands to shed thousands of jobs beyond the oil patch. Each of the 100,000 plus jobs created by the oil industry in Texas since the end of the recession supports 2.3 other jobs, said Dale Craymer, a former state budget planner and president at the Texas Taxpayers and Research Association, a business trade group. The plunging oil prices will likely put a dent on tax collections in Texas cities near the state’s most prolific oil-production areas as well, Fitch Ratings said in a note on Tuesday. Business for hotels, restaurants and shops in places like Midland, which sits atop the Permian Basin, and Cotulla, near the Eagle Ford Shale, will sag as oil companies stop drilling new wells, Fitch predicted. State officials already said Monday they’re expecting oil-related tax collections to sink by 14% in the next two fiscal years.

Obama Proposes Tapping Private Investors to Fund Infrastructure Projects - The White House unveiled a tax proposal and administrative actions on Friday that are aimed at promoting private investment in roads, bridges, water systems and broadband networks. The plans are an attempt to find ways to finance the vast backlog of American infrastructure projects without using any new federal money. President Obama has repeatedly said that a broad effort to address the nation’s infrastructure needs is a potential area of agreement between his administration and the Republican Congress, although deep divisions remain on how to handle such projects. Vice President Joseph R. Biden Jr. is scheduled to discuss the plans here on Friday afternoon at the construction site of the Anacostia River Tunnel, which would handle the two billion to three billion gallons of contaminated sewage water that pour into the river each year.One proposal that could draw bipartisan backing would create so-called qualified public infrastructure bonds that could be issued to finance airports; roads; mass transit, water and sewer systems; and other projects. They would be the first type of municipal bonds available for public-private partnerships and would be exempt from the alternative minimum tax. The White House did not detail the cost of Mr. Obama’s bond proposal, which officials said would be included in his budget, or how it would be paid for.

Of More Than 3,000 U.S. Counties, Just 65 Have Recovered From Recession, NACo Says -  Seven years after the recession began, only one in 50 U.S. counties has fully bounced back, according to a study the National Association of Counties released Monday. The 2014 County Economic Tracker shows that 65 of the nation’s 3,069 counties have met or surpassed prerecession levels in four measured categories: jobs, unemployment rate, economic output and home prices. Those places range from Anderson County, S.C., to McKenzie County, N.D., to Kodiak Island, Alaska. National employment surpassed 2007 levels during 2014 and the U.S. gross domestic product had fully recovered from the recession by 2011. But the national unemployment rate was 5.6% in December compared with 5% when the recession began seven years earlier. And housing values in much of the country have yet to fully return. The recovered counties are largely located in energy-rich areas and have small populations. Of the 65 recovered counties, 24 are in Texas and 16 are in North Dakota. The others are generally in the middle of the country, including nine in Minnesota and eight in Kansas. None of the recovered counties has more than 500,000 residents. Only one large county, Kent County, Mich., has bested its prerecession unemployment rate. That county had a 3.5% unemployment rate in November, on a non-seasonally adjusted basis. That was down from 5.3% in November 2007. But housing prices in the area that includes Grand Rapids, Mich., have not fully recovered. Strong job growth and a national economy forecast by the Federal Reserve to near 3% GDP growth in 2015 should allow more counties to fully recover this year. But shifts in population and industries could mean that many counties struggle for extended periods to match 2007 economic readings.

State and Local Tax Systems Hit Lower-Income Families the Hardest, CBPP: In nearly every state, low- and middle-income families pay a bigger share of their income in state and local taxes than wealthy families, a new report from the Institute on Taxation and Economic Policy (ITEP) finds. As the New York Times’ Patricia Cohen wrote, “When it comes to the taxes closest to home, the less you earn, the harder you’re hit.”... Only California taxes the top 1 percent of households at a higher effective rate (8.7 percent) than middle-income taxpayers (8.2 percent), ITEP found.  In the ten states with the most regressive tax systems, the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy neighbors.  Washington State’s tax system is the most regressive, according to ITEP.  The bottom 20 percent of taxpayers pay 16.8 percent of their income in taxes, while the top 1 percent pay just 2.4 percent.  After Washington, the most regressive state and local tax systems are in Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Ari­zona, Kansas, and Indiana.  A number of states, including Kansas, North Carolina, and Ohio, have made the situation worse in recent years by cutting income taxes, the only major state revenue source typically based on ability to pay.  Income tax cuts thus tend to push more of the cost of paying for schools and other public services to the middle class and poor — exactly the opposite of what is needed.

Family ties that bind: Having the right surname sets you up for life   If your surname reveals that you descended from the “in” crowd in the England of 1066—the Norman Conquerors—then even now you are more likely than the average Brit to be upper class. To a surprising degree, the social status of your ancestors many generations in the past still exerts an influence on your life chances, say Gregory Clark of the University of California, Davis, in the US and Neil Cummins of the London School of Economics in the UK. They used the Oxbridge attendance of people with rare English surnames (last names) to track social mobility from 1170 to 2012. In an article in Springer’s journal Human Nature, they show that social mobility in England has always been slow and today is not much greater than it was in pre-industrial times. Social status is generally seen as a ranking of families across such aspects of status as education, income, wealth, occupation, and health. Clark and Cummings used various databases to calculate the social trajectory of families with rare English surnames over the past 28 generations. For this purpose, they analyzed the surnames of students who attended Oxford and Cambridge universities between 1170 and 2012, rich property owners between 1236 and 1299, as well as the national probate registry since 1858. Rare surnames such as Atthill, Bunduck, Balfour, Bramston, Cheslyn, and Conyngham were included in the study. Clark and Cummins found that social status is consistently passed down among families over multiple generations—in fact, it is even more strongly inherited than height. This correlation is unchanged over centuries, with social mobility in England in 2012 being little greater than in pre-industrial times. Their analysis further shows that the rate of social mobility in any society can be estimated from the knowledge of just two facts: the distribution over time of surnames in the society and the distribution of surnames among an elite or underclass.

Approximately 1 Million Unemployed Childless Adults Will Lose SNAP Benefits in 2016 as State Waivers Expire — Center on Budget and Policy Priorities: Roughly 1 million of the nation’s poorest people will be cut off SNAP (formerly known as the Food Stamp Program) over the course of 2016, due to the return in many areas of a three-month limit on SNAP benefits for unemployed adults aged 18-50 who aren’t disabled or raising minor children. These individuals will lose their food assistance benefits after three months regardless of how hard they are looking for work. One of the harshest pieces of the 1996 welfare law, this provision limits such individuals to three months of SNAP benefits in any 36-month period when they aren’t employed or in a work or training program for at least 20 hours a week. Even SNAP recipients whose state operates few or no employment programs for them and fails to offer them a spot in a work or training program — which is the case in most states — have their benefits cut off after three months irrespective of whether they are searching diligently for a job. Because this provision denies basic food assistance to people who want to work and will accept any job or work program slot offered, it is effectively a severe time limit rather than a work requirement, as such requirements are commonly understood. Work requirements in public assistance programs typically require people to look for work and accept any job or employment program slot that is offered but do not cut off people who are willing to work and looking for a job simply because they can’t find one.  In the past few years, the three-month limit hasn’t been in effect in most states.  The 1996 welfare law allows states to suspend the three-month limit in areas with high and sustained unemployment; many states qualified due to the Great Recession and its aftermath and waived the time limit throughout the state.  But as unemployment rates fall, fewer and fewer areas will qualify for waivers.  We estimate that the number of states qualifying for state-wide waivers will fall to just a few states by 2016 and that approximately 1 million SNAP recipients will have their benefits cut off due to the time limit in fiscal year 2016.

Local and state police can’t use federal law to seize assets anymore -- Attorney General Eric Holder announced Friday that the Department of Justice would be putting a stop to local and state police participation in a federal asset seizure program called “Equitable Sharing.” The program has allowed local and state police to seize assets—usually cash and vehicles—without evidence of a crime. If the former owner of the seized property fails to make a case for the return of his or her property, the local and state police were allowed to keep up to 80 percent of the assets, with the remaining portion returning to federal agencies. "This is a significant advancement to reform a practice that is a clear violation of due process that is often used to disproportionately target communities of color," Laura Murph, the American Civil Liberties Union's Washington legislative office director told Ars in a statement. The Electronic Frontier Foundation also did its own research into how much of the federal asset forfeiture funds were going back into surveillance and wiretapping, finding that California spent $13.6 million on spying.

Did "Stealing From Americans" Just Stop? AG Holder Moves To End Civil Asset Forfeiture - Since 2011, we have been warning of the rise of 'civil asset forfeiture' (here) with the 'stealing of American's hard-earned assets' having been on the rise signficantly in recent months; as the apparent final stage of empire begins. However, in an odd apparent success for "safeguarding civil liberties," Reuters reports that U.S. Attorney General Eric Holder said today that State and local police in the United States will no longer be able to use federal laws to justify seizing property without evidence of a crime.

Where Do We Go from Here? Mass Incarceration and the Struggle for Civil Rights - On the surface, crime and punishment appear to be unsophisticated matters. After all, if someone takes part in a crime, then shouldn’t he or she have to suffer the consequences? But dig deeper and it is clear that crime and punishment are multidimensional problems that stem from racial prejudice justified by age-old perceptions and beliefs about African Americans. The United States has a dual criminal justice system that has helped to maintain the economic and social hierarchy in America, based on the subjugation of blacks, within the United States. Public policy, criminal justice actors, society and the media, and criminal behavior have all played roles in creating what sociologist Loic Wacquant calls the hyperincarceration of black men. But there are solutions to rectify this problem. To summarize the major arguments in this essay, the root cause of the hyperincarceration of blacks (and in particular black men) is society’s collective choice to become more punitive. These tough-on-crime laws, which applied to all Americans, could be maintained only because of the dual legal system developed from the legacy of racism in the United States. That is, race allowed for society to avoid the trade-off between societies “demand” to get tough on crime and its “demand” to retain civil liberties, through unequal enforcement of the law. In essence, tying crime to observable characteristics (such as race or religious affiliation) allowed the majority in society to pass tough-on-crime policies without having to bear the full burden of these policies, permitting these laws to be sustained over time.

Married Women in America Are Having More Kids. Unmarried Women? Not So Much - American women aren’t having children the way they did before the recession, but that obscures a little-noticed fact: Married women have staged a comeback. New data from the Centers for Disease Control and Prevention show that while America’s fertility rate slipped in 2013 to a record low, birth rates for married women are rising—even as rates for unmarried women continue to fall. For every 1,000 unmarried U.S. women ages 15 to 44 in 2013, there were 44.3 births, down 2% from 2012 and 7% from 2010, CDC data show. In contrast to unmarried women, birth rates for married women increased 1% in 2013 from 2012 to 86.9 births. In fact, they’re up 3% since 2010, after declining 5% between 2007 and 2010. (The absolute number of births among married women in 2013, 2.34 million, remained slightly below 2010’s 2.37 million.) The divergence is “unprecedented over the last three decades,” says Sally Curtin, a demographer and statistician at the CDC’s National Center for Health Statistics. “We’ve seen a rebound—but it’s just been in married women.” Because severe recessions tend to temporarily impair fertility, the latest numbers suggest America’s married women are recovering from the financial crisis and 2007-09 economic gloom faster than their unmarried counterparts. But there’s also a more troubling takeaway: The legacy of the Great Recession, combined with rising income inequality, could be dividing women into haves and have-nots when it comes to having children.

First Comes the ‘Marriage Gap,’ Then Comes the ‘Baby Gap’ - There’s a widening gap between the baby-having of married women, who tend to be more educated and more affluent, and their less-educated, less-financially-secure, unmarried peers. A growing body of research, including work by Johns Hopkins University sociologist Andrew Cherlin, raises the possibility that because people like to feel financially secure before taking the marriage plunge, the rise of income inequality has divided Americans into those who marry and those who don’t. Now this could be playing out with childbearing, too. America’s recessionary “baby bust” has clearly leveled off now, but we’ve yet to see the birth recovery one would expect as high unemployment falls and growth picks up. For  every 1,000 women of childbearing age in the U.S., there were just 62.5 births in 2013, down slightly from 63 births in 2012. (The CDC released this particular figure last month but this week fleshed out all its numbers with more demographic detail.) The nation’s so-called total fertility rate—the estimated number of children a U.S. woman will have over her lifetime—edged down 1% to 1.86 children, below the 2.1 children every couple needs to have to replace themselves. The latest numbers partly reflect women putting off children and reducing family size. Birth rates for U.S. women ages 35 to 39 are the highest in nearly five decades.

Requiring kindergartners to read — as Common Core does — may harm some - The Common Core State Standards call for kindergartners to learn how to read, but a new report by early childhood experts says that forcing some kids to read before they are ready could be harmful. Two organizations that advocate for early childhood education — Defending the Early Years and Alliance for Childhood — issued the report titled “Reading in Kindergarten: Little to Gain and Much to Lose.”  It says there is no evidence to support a widespread belief in the United States that children must read in prekindergarten or kindergarten to become strong readers and achieve academic success. The authors  found that:

  • Many children are not developmentally ready to read in kindergarten, yet the Common Core State Standards require them to do just that. This is leading to inappropriate classroom practices.
  • No research documents long-term gains from learning to read in kindergarten.
  • Research shows greater gains from play-based programs than from preschools and kindergartens with a more academic focus.
  • Children learn through playful, hands-on experiences with materials, the natural world, and engaging, caring adults.
  • Active, play-based experiences in language-rich environments help children develop their ideas about symbols, oral language and the printed word — all vital components of reading.
  • We are setting unrealistic reading goals and frequently using inappropriate methods to accomplish them.
  • In play-based kindergartens and preschools, teachers intentionally design language and literacy experiences which help prepare children to become fluent readers.
  • The adoption of the Common Core State Standards falsely implies that having children achieve these standards will overcome the impact of poverty on development and learning, and will create equal educational opportunity for all children.

Held to Account - The students of Utopian Academy for the Arts are being called on the carpet. Yesterday, their middle school mischief found the classic victim: a substitute teacher. The seventh-grade science room grew so loud that the classes on either side could hear the commotion through the walls. Today, as they do every morning, the children have assembled in the cafeteria, with its red and blue cinder block walls and folding tables arranged in long rows, Hogwarts style. The whole school is here—all 180 students. The girls from Mr. Henderson’s class. The boys from Ms. Terry’s. The girls from Mr. Moore’s. The boys from Mr. Farrior’s. It is 7:55 in the morning; the school day won’t end for another eight hours, and many students will remain on campus until 6:30 p.m. This is a charter school, so Utopian Academy plays by its own set of rules. Eight-hour school days. Classes every other Saturday. A longer school year. A tougher curriculum. Dance, music, theater, and arts for all. And a rigid code of conduct. “Good morning,” says a man from the stage. His name is Frederick A. Birkett, and he is not smiling. Birkett looks precisely how you’d imagine a former military man who went into academia might: bow tie, spit-shined shoes, ramrod posture. Just over a year ago, Birkett was an education professor at the University of Hawaii. But then he learned about this upstart school in Clayton County, Georgia, where the school board was so dysfunctional that the entire system lost its accreditation a few years ago. Birkett had never heard of such a thing, and this is a man who knows something about schools; he’s got a master’s in education from Harvard and ran pioneering charter schools in Harlem, Boston, and Kailua, Hawaii. When it comes to charters, he literally wrote the book—Charter Schools: The Parent’s Complete Guide.

Majority of U.S. public school students are in poverty - For the first time in at least 50 years, a majority of U.S. public school students come from low-income families, according to a new analysis of 2013 federal data, a statistic that has profound implications for the nation. The Southern Education Foundation reports that 51 percent of students in pre-kindergarten through 12th grade were eligible under the federal program for free and reduced-price lunches in the 2012-2013 school year. The lunch program is a rough proxy for poverty, but the explosion in the number of needy children in the nation’s public classrooms is a recent phenomenon that has been gaining attention among educators, public officials and researchers. “We’ve all known this was the trend, that we would get to a majority, but it’s here sooner rather than later,” said Michael A. Rebell, the executive director of the Campaign for Educational Equity at Columbia University, noting that the poverty rate has been increasing even as the economy has improved. “A lot of people at the top are doing much better, but the people at the bottom are not doing better at all. Those are the people who have the most children and send their children to public school.” The shift to a majority-poor student population means that in public schools, more than half of the children start kindergarten already trailing their more privileged peers and rarely, if ever, catch up. They are less likely to have support at home to succeed, are less frequently exposed to enriching activities outside of school, and are more likely to drop out and never attend college. It also means that education policy, funding decisions and classroom instruction must adapt to the swelling ranks of needy children arriving at the schoolhouse door each morning.

Public schools - Via Alternet: New data reveals our public—not private—school system is among the best in the world. In fact, except for the debilitating effects of poverty, our public school system may be the best in the world. The most recent data from the National Center for Education Statistics (NCES) reveal that the U.S. ranked high, relative to other OECD countries, in reading, math, and science (especially in reading, and in all areas better in 4th grade than in 8th grade). Some U.S. private schools were included, but a separate evaluation was done for Florida, in public schools only, and their results were higher than the U.S. average.  Perhaps most significant in the NCES reading results is that schools with less than 25% free-lunch eligibility scored higher than the average in ALL OTHER COUNTRIES.

What America’s Public School Teachers Want You to Know -- For the fourth edition in our series on America's public school teachers, we're looking at the broad narratives of teachers' lives, histories, and careers. When we first called for submissions from America's public school teachers in November, I noticed that there was never just one topic that teachers wanted to talk about. Our email submissions were often lengthy chronicles of the joys, dismays, frustrations, and successes teachers experienced every day, ranging from critiques of administration to problems with students to malaise about state testing.  Since I received so many emails that had both timelines and narrative arcs, it felt like a disservice to cut them short, or box their details into certain categories, if there was much more on offer. Instead, here are three essays sent to me by email that break down a wide breadth of experiences and challenges that teachers—past and present—often face. Tomorrow, we will publish a second post with three more. Note: The following essays were submitted on the condition that their authors remain anonymous.

Maryland Parents Investigated For Neglect After Letting Their Kids Walk Home From School AloneIt’s one thing for an 80 year old to nostalgically lament that things aren’t as they used to be. The problem is, I’m only 36 years old and this country already barely resembles the place I grew up in.. The transformation into a nanny-state, snitching culture has severe negative long-term repercussions for U.S. society, as well as the economy, if the trend isn’t reversed. We have written about this dangerous change many times in the past; but the ridiculous circumstances now faced by these Maryland parents for simply allowing their children a rite of passage that kids from time immemorial have enjoyed, is beyond incredulity. This is not what freedom looks like.From the Washington PostAlexander agreed to let the children, Rafi and Dvora, walk from Woodside Park to their home, a mile south, in an area the family says the children know well. The children made it about halfway. Police picked up the children near the Discovery building, the family said, after someone reported seeing them.

Silicon Valley Turns Its Eye to Education - The education technology business is chock-full of fledgling companies whose innovative ideas have not yet proved effective — or profitable. But that is not slowing investors, who are pouring money into ventures as diverse as free classroom-management apps for teachers and foreign language lessons for adult learners. Venture and equity financing for ed tech companies soared to nearly $1.87 billion last year, up 55 percent from the year before, according to a new report from CB Insights, a venture capital database. The figures are the highest since CB Insights began covering the industry in 2009. Notable financing deals include Pluralsight, a company that provides online training to technology professionals, which raised $135 million; Remind, a free messaging service for teachers to communicate with students and parents, which raised $40 million from venture capital firms including Kleiner Perkins Caufield & Byers; and Edmodo, an online social network customized for classroom use that is free to individual teachers, which raised $30 million.

Take Note of This: Handwritten Notes are More Effective than Typed Ones - It’s time to bring the pen and paper back to class.  Taking notes on the computer is detrimental to learning, and it’s not just because of Facebook, according to a new study conducted by researchers at Princeton University and the University of California, Los Angeles (UCLA).  While computers can certainly be distracting (a kid in front of me in economics once watched the entire Kitty Olympics during class, no joke), it’s not just the Internet that hinders student learning. Even when all distractions are eliminated, handwritten notes are still dramatically more effective at helping students retain information, according to the study.  “The studies we report here show that laptop use can negatively affect performance on educational assessments, even—or perhaps especially—when the computer is used for its intended function of easier note taking,” the researchers said in the report, which was published in the June issue of Pyschological Science.  What’s particularly interesting about this study is that the majority of students would tell you the opposite. Sixty-five percent of students claim that taking notes on a laptop benefits their learning, according to a separate University of Ontario study.  Contrary to students’ belief that verbatim note taking is more effective for their learning and studying, the study shows that students who take direct notes retain significantly less information. Verbatim note taking requires relatively shallow cognitive processing compared to handwriting notes, the report explains. The process of rewording and summarizing information, as handwritten-note takers are more likely to do, is more engaging and thus helps students retain information.

Did Obama Just Introduce a ‘Public Option’ for Higher Education? - President Obama is announcing a plan to make two years of community college free for those maintaining a GPA and making progress towards completing a program. It will be one of the new ideas proposed at the State of the Union on January 20th. Though a smart plan in its own right, one that puts defenders of higher education on the offense for a change, this plan could be the beginning of a better way to provide public goods.The headline benefits of the plan are obvious. The White House estimates that it will benefit nine million students to the tune of $3,800 a year. Given that community college students disproportionately come from poorer families, that’s a major plus. It will help boost and stabilize an important civil and education tool consistently threatened by state-level austerity. And it’s good for the economy too, as there’s no story about the twenty-first-century economy that doesn’t have an increased need for education playing a major role. But it may also herald a larger shift. For the past generation we’ve seen higher education move from a model where it was largely free, to one where it is expensive and discounted for poorer students. Obama’s proposal is a move in the opposite direction, the sort of vision proposed by people like Sara Goldrick-Rab and Nancy Kendall who argue that the first two years of all public colleges should be free. And when you dig deeper into the economics of this story, there are additional benefits. By embracing this public option, we can lower hidden taxes on the working-class and avert reactionary political coalitions, while also helping to contain costs and create a reasonable set of regulations.

Who Has a Stake in Obama’s Free Community-College Plan? -  President Obama’s proposal to make community college free is getting an enthusiastic reception from two-year colleges and their advocates across the nation. Not surprisingly, though, representatives of other higher-education sectors aren’t quite so bullish. One of their greatest fears: that the plan, if enacted, could end up pushing a large number of students away from their institutions and into community colleges. Here’s a look at several groups of institutions with something at stake—and at how they’ve responded to the proposal. For-Profit Colleges It’s hard not to see the president’s proposal as a direct shot at proprietary colleges, which have been targets of criticism from the administration for high costs and high loan-default rates. A program that makes public community colleges free could further cut into enrollment, . "If these proposals were implemented," according to Mr. Silber, "we believe it would have a negative impact on the for-profit sector, particularly on schools with a high percentage of associate and certificate degrees." In addition, the plan could stem the flow of federal Pell Grants, on which many for-profit colleges rely heavily, said Claudia Goldin, a professor of economics at Harvard University. But some reasons that might drive a student to choose a for-profit college over a community college come down to convenience, not cost,   "These factors included being able to support family, campus proximity to home and work, flexible class schedules, and the accelerated nature of the program,"

Obama’s free community college plan - David Leonhardt writesThe plan — which would require congressional approval — would apply to students attending a two-year college, including part time, so long as the college offered credits that could transfer to a four-year college or provided training that led to jobs. David’s article is excellent and has much useful information: As Reihan Salam of National Review notes, community college tuition is already low. In fact, it’s zero, on average, for lower-income families, after taking financial aid into account. Vox’s Libby Nelson wrote, “Community college tuition for poorer students is often entirely covered by the need-based Pell Grant.” One potential implication is that by making community college universally free, the government is mostly reducing the cost for higher-income families.  Calculating the completion rate at community colleges is difficult, this estimate does some work to get it up to 38 percent.  What would the completion rate be for the marginal students encouraged under the Obama plan?  We don’t know, but I’ll guess at 20-30%, no more.  That’s the real problem. Furthermore some of the value of education is signaling to the labor market that you are able to finish college.  I do think the learning component of education is generally more important, but for “marginally not attending community college individuals” — who are often regarded with suspicion by employers — I would not be surprised if the signaling component were one third or more of the value of a degree.  To that extent, pushing more marginals into the degree funnel lowers the value of the degree for the others who were getting it already by lowering the average productivity of the pool of finishers.  That would lower the efficiency gains from the program and also partially offset some of the intended distributional consequences.

The biggest winners in Obama's free college plan: middle-class students - President Obama's proposal to offer two years of free community college to many students has plenty of hurdles ahead — chief among them the massive task of persuading a Republican Congress to go along.  But the proposal is important, even if it's unlikely to happen, because it puts forward a radical idea: a future where free, universal education expands beyond K-12 through the first two years of college. That's a huge change.  But tuition isn't the main barrier to a college degree for many community college students. If free tuition plans are going to succeed, they'll eventually have to grapple with that. The most radical part of Obama's free community college proposal isn't that it's free — it's that it's universal. About one-third of all college students in the US — 6.1 million — attend community college, either as a first step on the road to a four-year degree or as an end in itself.And community college is already a relative bargain. For the poorest students, tuition is usually entirely covered by federal financial aid, sometimes with money left over to help pay for living expenses. Obama's plan could boost enrollments higher still by making free community college available to students from middle-class and wealthy families.

On the multiplication of community college tuition subsidies -- Here is some testimony from 2011 (pdf), by Mason M. Bishop: …the myriad of job training programs funded by multiple federal agencies needs to be curtailed.  Currently, the U.S. Department of Energy, the U.S. Department of Health and Human Services and the National Science Foundation are all funding community college education and training grants.  The proliferation of funding for post-secondary education and training programs from Federal agencies with no experience in education and training issues, only serves to foster “mission creep,” duplication of effort and a waste of valuable resources.  Here are my earlier remarks on the new community college subsidies proposal.  Here is Mason Bishop on Twitter, with further remarks.

Can Community College Systems and Infrastructure Handle Free Tuition? - “We don’t expect the country to be transformed overnight, but we do expect this conversation to begin tomorrow.” The conversation President Obama’s domestic policy chief, Cecilia Munoz, is referring to is one that we are all familiar with: access to quality education. This extended conversation, which continued today with the president's speech at Pellissippi Community College in Knoxville, Tennessee, includes President Obama’s new proposal to make the first two years of community college completely free for students looking to transfer, or to get an associates degree or technical job training. The president’s proposal, America’s College Promise, is looking to build a shared responsibility between the federal government, states, colleges. and students across the country to reexamine and reinvest in our education systems. Modeled after similar plans currently being adopted by states such as Tennessee, community colleges offering programs that fully transfer, or provide a degree or job training would be eligible for funding from the federal government to help make tuition free for students. Even without all of the specifics, I can say that as a current community college student, access to and affordability of classes is crucial in determining whether or not I will graduate in a timely manner. However, it is not solely lack of money that hinders us students from being able to complete a program in two years, but a combination of multiple infrastructural issues such as course offerings, classroom space, and most importantly, proper guidance to navigate the complex systems that are the basis of the college itself.  

Profs: Obama’s ‘free’ community college plan to make four-year degrees more expensive - One of the program’s goals is to break down the financial barriers that keep many students from pursuing a useful certificate or degree. Two free years at a community college supposedly will make a four-year bachelor’s degree more affordable. Yet four-year colleges and universities depend on larger classes taught to first and second year students to keep cost down,” they wrote in the Post. “These larger introductory classes are the flip side of the smaller and more teacher-intensive upper level classes of the final two years. The upper division courses are the ones that truly prepare students for a job market that prizes advanced training in technical and non-technical fields alike.“If the proportion of freshmen and sophomores at four-year universities falls (due to students taking advantage of the ‘free’ community college program), this could push up the cost of a four-year degree for students who go directly to places like Ohio State or Oregon. Welcome to the ‘law of unintended consequences.’”

Is higher education the answer to reducing income inequality? - The White House last week announced a new proposal that would make two years of community college available free of charge to students who meet a series of requirements. The new plan is one of the several President Obama will discuss in his State of the Union address next week. In pitching the plan, the president cites higher education as vital for the future success of U.S. workers and the overall economy. And given that higher education is often cited as a key tool to reduce economic inequality, the new community college free-tuition proposal seems likely to reduce record levels of inequality. But does this last claim hold up? Is higher education still that important? Research increasingly shows that boosting education levels might not live up to the hype. In setting the stage for Obama’s new proposal at The Upshot, economist Justin Wolfers compares the expansion of free higher education to the “high school movement” of the early 20th century. This movement dramatically increased the supply of educated workers in the U.S. economy and helped give it a boost. The increased access to college after World War II also boosted the education level of the workforce. But Wolfers notes that since the late 1970s, the growth in the supply of educated workers has stalled. The Obama community college proposals could help reverse this trend. The decades-long stagnation in the supply of highly educated workers is cited by some economists as a major cause of rising inequality. They argue that skill-biased technological change—a change in technology that resulted in an increased demand for skilled workers—caused the demand for skilled workers to grow faster than the supply of workers to fill those jobs. The resulting large wage premium for college educated workers increased income inequality.

Private colleges are a waste of money for white, middle class kids - Many parents whose kids have their eye on an exclusive, private college face a difficult question: Is it worth unloading your life's savings or having your child take on tens of thousands of dollars in student loans? The average four-year private college costs over $42,000 a year for tuition, room and board, after all, while the average four-year public school costs less than half that -- $18,943 for in-state students, according to the College Board. So the question is really, really important, especially at a time when nearly half of recent college grads have a job that doesn't even require a degree. Fortunately, for many Americans -- white, middle-class kids -- there's an easy answer: Don't pay more to go to a private college. That means choosing the University of California over Pomona, the State University of New York over NYU and the University of Maryland over nearby American or George Washington. Of course, if a student is getting a scholarship that heavily discounts the cost of attendance, the question isn't as relevant. And the answer to the question is much more complicated for kids from families in other racial socioeconomic groups. But for white kids with well educated parents, what matters is getting a college degree, not where it came from.

Phyllis Schlafly: Campus sex assault is on the rise because too many women go to college - Conservative icon Phyllis Schlafly is worried that college campuses are populated by too many women, a phenomenon she insinuated has contributed to increased sexual assault on campus. In a Monday column for the far-right website World Net Daily, the longtime anti-feminist crusader lamented the declining portion of university enrollments accounted for by men. Schlafly — BA and JD, Washington University in St. Louis; MA, Radcliffe College — argued that it may even be time to implement quotas to ensure that men constitute at least half of a college’s enrollment. “Long ago when I went to college, campuses were about 70 percent male, and until 1970 it was still nearly 60 percent,” Schlafly wrote. “Today, however, the male percentage has fallen to the low 40s on most campuses.” Never one to shirk victim-blaming, Schlafly proceeded to link the problem of campus sexual assault to the increased enrollment of women in postsecondary institutions. “Boys are more likely than girls to look at the cost-benefit tradeoff of going to college,” Schlafly asserted. “The imbalance of far more women than men at colleges has been a factor in the various sex scandals that have made news in the last couple of years.” With so many women around, what do you expect a college man to do — seek consent!?

Ivy League’s meritocracy lie: How Harvard and Yale cook the books for the 1 percent - For nearly a century, universities across the country have used SAT scores and other quantifiable metrics to make decisions about admitting one candidate versus another—decisions that can have far-reaching impact on both the admitted and declined candidates’ educational, social, professional, and financial futures. On the basis of what? we might ask. Originally the acronym SAT stood for Scholastic Aptitude Test, on the strength of the argument that a high schooler’s success on the test correlated with his or her success in the increasingly rigorous environment of college. As evidence of this correlation dwindled, the name was changed first to the Scholastic Assessment Test (keeping the handy, well-known acronym) and later to the SAT Reasoning Test. Call it what you will, the SAT still promises something it can’t deliver: a way to measure merit. Yet the increasing reliance on standardized test scores as a status placement in society has created something alien to the very values of our democratic society yet seemingly with a life of its own: a testocracy. Allow me to be clear: I’m not talking about all tests. I’m a professor; I believe in methods of evaluation. But I know, too, that certain methods are fairer and more valuable than others. I believe in achievement tests: diagnostic tests that are used to give feedback, either to the teacher or to the student, about what individuals have actually mastered or what they’re learning. What I don’t believe in are aptitude tests, testing that—by whatever new clever code name it goes by—is used to predict future performance. Unfortunately, that is not how the SAT functions. Even the test makers do not claim it’s a measure of smartness; all they claim is that success on the test correlates with first-year college grades, or if it’s the LSAT (Law School Admission Test), that it correlates with first-year law school grades.

Education plus ideology exaggerates rejection of reality -- We like to think that education changes people for the better, helping them critically analyze information and providing a certain immunity from disinformation. But if that were really true, then you wouldn't have low vaccination rates clustering in areas where parents are, on average, highly educated. Vaccination isn't generally a political issue. (Or, it is, but it's rejected both by people who don't trust pharmaceutical companies and by those who don't trust government mandates; these tend to cluster on opposite ends of the political spectrum.) But some researchers decided to look at a number of issues that have become politicized, such as the Iraq War, evolution, and climate change. They find that, for these issues, education actually makes it harder for people to accept reality, an effect they ascribe to the fact that "highly educated partisans would be better equipped to challenge information inconsistent with predispositions."

Average is over: It’s graduate degree holders versus the rest of us - The chart above, from Rob Valletta’s new piece for the San Francisco Fed, illustrates the annual change in employment by occupation category. It shows that job growth has been focused on the high-skill and low skill occupations, with losses in the middle of the skill scale (i.e. those jobs “for which computer technologies are well-suited and can largely replace human labor”), indicating increasing polarization in the labor market. Valletta points out that, beginning in 2000, the US labor market has increasingly favored workers with a graduate degree, while the “wage advantage” for four-year college grads has hardly changed. This divergence between those with college and graduate degrees “may be one manifestation of rising labor market polarization, which benefits those earning the highest and the lowest wages relatively more than those in the middle of the wage distribution.” One explanations for this, says Valletta, is the polarization hypothesis, which “accounts for excess employment and wage growth in the top and bottom portions of the wage distribution, with erosion in the middle.” According to this hypothesis, the increasing “reliance on computer-related technologies increases the employment and wages of workers” — primarily the highly educated ones with the skills to use those technologies, that is. He continues (emphasis added):

Why SallieMae is a F***ing Shark: Part 1: I made one of the biggest mistakes of my life when I was 23 years old. I’m still paying for it. In fact, I’ll be paying for it until I am 60. I got a private student loan through SallieMae to finance my education. I have $100,000 in student loan debt for my Bachelors of Music from Berklee. It’s like a dying pet that we drag around everywhere with us. We lovingly refer to it as The Hundred-Thousand-Dollar BM.Now, going to an expensive college was my choice. Financing it with student loans was also my choice, although in this case, my choices were limited. A lot of things played into it: the desire to please my family and not seem like a total fuck-up folksinger topped the list. Anyway, it didn’t seem so bad. The loan had a fixed rate of 4%. It said right there on the front page, which, being well-trained by my parents, I read carefully. There were 80 other pages, but I was 23 and embarrassed to take up too much of the Financial Aid Officer’s time, so I didn’t read those. Besides, the writing was really, really tiny. I’m a fast reader, but I would’ve been there a week going through all that. Imagine my surprise when, six months after graduation, standing in the kitchen holding my five-month-old daughter, I open my first bill from SallieMae and see VARIABLE INTEREST RATE in big letters. I figured, I’ll call and straighten this out. After waiting on hold for almost an hour (the going rate for my interactions with SallieMae) I talked to a representative who informed me that the fixed rate of 4% was a promotion. It was only good while I was enrolled. As soon as I graduated, the rate became variable. WHAT?! A promotion? Like from the cable company? But this was a student loan, people!

To Mark Cuban on Student Loans: Grab some Bench, “Rookie” - There has been a disturbing coalescence of papers, positions, and proposals coming from Stanford graduates, academics, and Silicon Valley tycoons regarding student loans recently. All of these have, unfortunately failed to address the relevant economic dynamics governing the lending system, and their proposed solutions either completely neglect the $1.3 Trillion dollar problem at hand, or even defend the Public Policies that gave rise to it. Whether by chance, design, or otherwise, these proposals, collectively, are badly distracting the public discourse, and perpetuating a problem that is simply false. It started with a paper by G. Marcus Cole, Stanford professor, who argues that because student loans are unsecured, there should be no bankruptcy protections for them. Cole completely fails to acknowledge that both private banks and the federal government administer unsecured loans, many of which are very profitable (for instance, the credit card industry). . Would Cole argue similarly that medical debt, credit cards, and other unsecured credit be non-dischargeable?   Most recently, Mr. Mark Cuban, Dotcom Billionaire, Dallas Mavericks owner, television celebrity, and yes- Stanford alum, has calledfor a 10% reduction in lending limits to undergrads. Cuban, like the others, completely fails to acknowledge the root causes of the out-of-control inflationary spiral the student loan system is now on. As such, his solution does absolutely nothing to cure the root causes of the problem, does nothing to address the massive injustices and harms now being inflicted on the citizenry- many of them Dallas Mavericks fans, and only perpetuates the true “shark tank” mentality that has overtaken this industry, and the big-government behemoth that oversees it (scroll down the link to get the punch line).

Pennsylvania cities have $7.7 billion pension gap -state auditor (Reuters) - Cities and towns in Pennsylvania that administer their own public pension systems have nearly $7.7 billion of unfunded future liabilities, according to a report on Wednesday from state Auditor General Eugene DePasquale. DePasquale called for immediate steps to repair the distressed municipal pension plans, including negotiations between the state and public sector unions, and eliminating so-called spiking, when public employees load up on overtime at the end of their careers to drive up the base used to calculate benefits. "I'm going to continue to beat this drum until we tackle this comprehensively, as a state," DePasquale said at a Capitol news conference. true Another solution that could standardize management and help reduce costs would be merging municipal plans into separate statewide plans for police, fire and non-uniformed employees, he said. Nearly half of Pennsylvania's 1,223 municipal pension plans are in some distress. Their current total pension shortfall, based on January 2013 financial data, is $1 billion higher than when last measured in 2011, even as the stock market was rising, DePasquale said.

Warning: Disability Insurance Is Hitting the Wall - For years Social Security’s trustees (of which I am one) have warned that lawmakers must act to address the troubled finances of the program’s disability insurance (DI) trust fund.   Congress has nearly run out of time to do so.  Legislation will be required during this Congress or, at the very latest, in a rush at the beginning of the next one, to prevent large sudden benefit cuts.  The House of Representatives recently passed a procedural rule to prepare for the coming legislative debate.  In this column I explain the issues in play. The problem in a nutshell is that Social Security’s disability trust fund is running out of money.  The latest trustees’ report projects a reserve depletion date in late 2016.  By law Social Security can only pay benefits if there is a positive balance in the appropriate trust fund (there are two: one for old-age and survivors’ benefits (OASI), the other for disability benefits).  Absent such reserves, incoming taxes provide the only funds that can be spent.  Under current projections, by late 2016 there will only be enough tax income to fund 81 percent of scheduled disability benefits.  In other words, without legislation benefits will be cut 19 percent. 

The CBO on VA vs non-VA costs - I only recently learned that the CBO published a paper comparing the costs of the Veterans Health Administration with those of the private sector. Here’s a bit from the summary: Legislation enacted in 2014 calls for the Veterans Health Administration (VHA) to expand the availability of health care to eligible veterans. That legislation provided temporary funding to expand VHA’s capacity to deliver care and to increase the amount of care purchased from the private sector. […] One useful analytic approach [to compare VHA and private sector costs], which was most carefully and comprehensively employed by researchers in 2004, estimates what costs would be if private-sector doctors, hospitals, and other health care providers supplied the same number and types of services as those actually delivered by VHA. Similar to earlier studies, those researchers concluded that the health care provided by VHA generally cost less than would equivalent care provided in the private sector, even though the comparison used Medicare’s relatively low payment rates for private-sector doctors and hospitals. The document goes on to discuss a range of important caveats and limitations and includes as thorough a review of the literature on this subject as I’ve seen.

The Costs of Stinginess in Medicaid - How much money does Arkansas save by offering stingier Medicaid than Vermont?It looks like a straightforward calculation. Arkansas makes it tougher for children to qualify for Medicaid than Vermont does, and it spends much less on each beneficiary. Even though Arkansas’s poverty rate is double Vermont’s, Medicaid’s costs in Arkansas in 2012, the most recent year for which figures are available, were $600 less per resident than in Vermont.But there is a price to pay for such parsimony. Children in Arkansas get fewer regular checkups at the doctor and dentist. More adults forgo care because of the expense. More Arkansans are overweight and have diabetes. More are disabled. They die younger.  This is not to pick specifically on Arkansas or to extol the virtues of Vermont. The contrast between these two disparate states frames a broader debate about the purpose of the American government. With a new Republican majority in Congress looking to further the cause of low taxes and less spending, it is easy to forget that tightfisted government imposes very real costs. That we can’t easily measure them doesn’t mean they don’t exist.Over the last couple of years, voters have been spared the bitter partisan brawl over taxes and spending that scarred President Obama’s first term in office. Having gained hefty spending cuts — notably through the process known as sequestration — Republicans concentrated on other goals, like sinking the Affordable Care Act. Content to have raised some taxes on the wealthiest Americans, the president, too, turned his attention elsewhere. But the fundamental partisan conflict never went away. When the new session of Congress opened last week, Republicans put the fight squarely back on the table.

How Medicaid for Children Recoups Much of Its Cost in the Long Run - When advocates talk about the advantages of government health care, they often talk about a moral obligation to ensure equal access. Or they describe the immediate health and economic rewards of giving people a way to pay for their care.  Now a novel study presents another argument for the medical safety net, at least for children: Giving them health coverage may boost their future earnings for decades. And the taxes they pay on those higher incomes may help pay the government back for some of its investment.The study used newly available tax records measured over decades to examine the effects of providing Medicaid insurance to children. Instead of looking at the program’s immediate impact on those children and their families, it followed them once they became adults and began paying federal taxes.People who had been eligible for Medicaid as children, as a group, earned higher wages and paid higher federal taxes than their peers who were not eligible for the federal-state health insurance program. And the more years they were eligible for the program, the larger the difference in earnings.“If we examine kids that were eligible for different amounts of Medicaid over the course of their childhood, we see that the ones that were eligible for more Medicaid ended up paying more taxes through income and payroll taxes later in life,” said Amanda Kowalski, an assistant professor of economics at Yale and one of the study’s authors.The results mean that the government’s investment in the children’s health care may not have cost as much as budget analysts expected. The study, by a team that included economists from the Treasury Department, was able to calculate a return on investment in the form of tax revenue.

Big Data Diagnoses Medicare Fraud: Late on an April evening in 2010, agents with the Federal Bureau of Investigation broke into a medical clinic in Bath Beach, Brooklyn, an area popular with Russian immigrants. Once inside, they installed a hidden camera in an air-conditioning vent in the ceiling directly above a desk.  Over the next six weeks, the camera recorded a blonde-haired woman stuffing envelopes with $100 bills, which she handed to elderly patients. In exchange, patients handed over their Medicare identification number, which Bay Medical used to bill for services that the patients would often never receive. If there were any doubts about the legality of the scheme, Bay Medical kept a Soviet-era poster pinned to the wall showing a woman with her finger pressed against her lips and a simple message in Russian: “Don’t Gossip.” Bay Medical fleeced Medicare, the US taxpayer-funded healthcare programme for the elderly and disabled, for $50m in illegal payments, US authorities later proved. Its employees used the proceeds of the fraud to splurge on plastic surgery, luxury cars and vacations. Fraudulent billings are estimated to make up as much as 10 per cent of Medicare spending in the US, according to the most recent study. Medicare, which funds hospital visits, prescription drugs and other services for retirees and the disabled, paid over $600bn to provide medical services to 51m Americans in 2013, according to the US Government.Though still in start-up mode, US investigators’ embrace of big data analysis could save taxpayers billions of dollars a year from healthcare fraud alone. Ultimately, the US Department of Justice hopes to adapt these tactics to crack down on other forms of fraud. The DoJ says the scheme is already paying off. For every dollar spent to combat healthcare fraud, the US government has collected $8 in recoveries from forfeiture, asset seizures and fines, amounting to $4.3bn in 2013 and a total of $19.2bn over five years.

The great Obamacare-Medicaid bait 'n' switch—commentary: Hey, are you one of the 9.7 million Americans who have been put onto the Medicaid rolls since 2013 mostly as a result of the Affordable Care Act? Congratulations! But that and $2.75 will get you one ride on the New York City subway.  That's because finding a doctor who accepts Medicaid payments – never all that easy to do even before 2013 – is getting harder than ever thanks to a steep drop in reimbursement rates for doctors who treat patients on Medicaid.  When I say "steep," I mean it. We're talking an average of 43 percent nationwide and almost 60 percent in California. Incidentally, California has added 2.7 million more people to Medicaid since 2013. The result is simple: more and more doctors are simply not accepting Medicaid patients and/or dropping the ones they already have.  And before you call those doctors greedy or evil, consider the alternative: Most private-practice doctors literally care for Medicaid patients at a personal financial loss. Do that too much and you start not being able to practice at all, and that will hurt everyone.  By the way, did you know it was illegal for doctors to write off giving people care for free or at a financial loss on their taxes? Well it is. Meanwhile, lawyers and fancy law firms deduct tremendous amounts all the time for pro bono work. Remind me again, have there been more lawyers or doctors in Congress and the White House over the last 100 years?

How Medicare Spending Rises with Age -   The rising costs of Medicare are one of the great question marks for health care policy and federal budget policy. Tricia Neuman, Juliette Cubanski, Jennifer Huang, and Anthony Damico offer a useful analysis of one aspect of Medicare costs--how those costs vary by the age of the recipient--in "The Rising Cost of Living Longer: Analysis of Medicare Spending by Age for Beneficiaries in Traditional Medicare," a January 14, 2015 report for the Kaiser Family Foundation.As a starting point, remember that the number of elderly in the U.S. population is rising: the number of Americans age 65 and over will more than double from 2010 to 2050; the number of Americans 80 and over will nearly triple; and the number of American 90 and over will quadruple. It's already true, as one might expect, that older Americans typically have higher health care costs paid by Medicare. (One caveat: The results that follow are based on data from "traditional" Medicare, in which the government reimburses service providers as services are paid, and thus don't include the 25% of Medicare Advantage recipients, a program where the government pays the  health care provider a fixed amount each month. Of course, the hope of a fixed payment or capitated health care plan is that it gives the provider an incentive to find ways of holding down costs.) For example, those 80 and older are 24% of those receiving traditional Medicare, but receive 33% of Medicare spending

Why Enrollment Figures Are a Deceptive Metric for ObamaCare’s Success -- The political class seems to have collectively agreed that the key metric for ObamaCare’s success or failure is the enrollment numbers; perhaps because they love a horse-race; perhaps because enrollment numbers are the only numbers we have, and so we face The Streetlight Effect. So I’ll take a quick look at the enrollment numbers, then look at some other potential metrics, and finally ask what is (in my mind) the key question: Can shopping in the ObamaCare “marketplace” enable citizens to match insurance to their health care needs? Spoiler alert: No, because the ObamaCare marketplace is a lemon market. The administration — hold onto your hats, folks, this is a shocker — has been gaming and lowballing the numbersThe U.S. administration on Monday dramatically cut expectations for 2015 Obamacare enrollment, saying it aims to have a total of 9.1 million people enrolled in government-backed federal and state health insurance marketplaces next year. The stated goal, 30 percent lower than a Congressional Budget Office forecast of 13 million enrollees, reflects the government’s latest thinking about new enrollees and returning customers, according to officials who expect the actual number to fall between 9 million and 9.9 million  The ACA sign-ups site — surprise! — supports the 9 million figure: It would take quite an enrollment surge to make 13 million: Anyhow, for “progressives” whose metric is enrollment, there’s a considerable degree of triumphalism. Kevin Drum is typical: Today, Gallup released new results for the final quarter of 2014, which marked the start of Obamacare’s second year of enrollment, and guess what? The ranks of the uninsured are dropping yet again. The percentage of adults without health insurance dropped from 13.4 percent to 12.9 percent.  Which is a pretty curious definition of “working,” isn’t it? Since when is the mere purchase of a product regarded as a sign the product works? I mean, unless you’re an insurance salesperson, which, granted, many career “progessives” (like Drum) have become. Then, whatever sells, “works,” which is another problem with career “progressives,” come to think about it. (See Joe Firestone for an alternative perspective.) So let me propose some alternative metrics.

U.S. House Republican optimistic about Obamacare replacement plan - (Reuters) - Congressional Republicans believe they can replace Obamacare with their own healthcare reforms, if the Supreme Court strikes down a key segment of the current healthcare law in a ruling expected in June, a senior U.S. lawmaker said on Monday. Representative Tom Price, Republican chairman of the House Budget Committee, told a conservative forum that the high court's anticipated ruling in the case known as King v. Burwell could cause President Barack Obama's signature domestic policy to unravel quickly. "We need to be ready, willing and able to move forward," said Price, a leading Obamacare critic who replaced Wisconsin Republican Paul Ryan as House Budget Committee chairman earlier this year. “We believe we are going to get to that point. I believe the president is actually going to be open to a better way,” he added. The White House had no immediate comment on Price's remarks. At issue in King v. Burwell is whether federal subsidies to help people pay for health insurance should be available through a federal insurance marketplace that serves 36 states. Plaintiffs contend that the law provides subsidies only through insurance marketplaces set up by individual states.  If the high court decides that subsidies should not be available through the federal marketplace, coverage costs would rise sharply and more than 8 million people would lose health insurance, according to a recent study by the nonprofit Urban Institute.

Republicans Consider ‘Reconciliation’ in Taking on Health Law -- Republicans head to an annual retreat this week wrestling with a subject that many within the caucus have preferred to avoid: whether to use a divisive procedural tool to attempt to repeal President Barack Obama‘s signature health law. On Thursday, the chairmen of the six relevant committees–Senate Finance, Senate Commerce, and the Senate Health, Education, Labor and Pensions committees, and their House counterparts–will headline a panel discussion about health policy. Republican opposition to the health-care law is not the issue – most of them are in agreement on that point. The question involves whether to use a politically divisive procedural tactic known as budget reconciliation to repeal the Affordable Care Act. The technique would allow Senate Republicans to drive through a repeal with a simple majority instead of the 60 votes necessary for most legislation to clear Senate procedural hurdles.  The reconciliation process is fraught with controversy, though both parties have used it to their advantage – and to pass major pieces of legislation. While it was designed to reconcile tax and spending legislation with the overall annual budget, it came over time to be used to enact more overtly political agendas. Whatever the method, the notion of targeting the health law is a touchy one for many Republicans because it brings back memories of October 2013, when a Republican push to defund the law ended in a government shutdown. At the same time, it’s unavoidable for many Republicans because they vowed as candidates to do everything within their power to eliminate the law.

Signs of a Decline in Financial Distress Connected to Medical Bills - After rising for a decade, the number of Americans experiencing financial distress from their medical bills has started to decline, a new survey has found.  The result provides new evidence that the Affordable Care Act, by providing uninsured people with health insurance, is also improving their financial security, a major goal of the law. The large telephone survey, from the New York-based health research group the Commonwealth Fund, has been asking people about their medical bills every few years for a decade. In each survey through 2012, a higher percentage of Americans said they struggled to pay their medical bills, were paying off medical debt or had been contacted by a collection agency. The most recent installment of the survey, the first since the health law’s major provisions kicked in, shows a reversal in that trend.  The survey also found that fewer people were avoiding doctors’ visits because of concerns about cost. “Health insurance really provides people with a financial means to get care,” said Sara Collins, a vice president at Commonwealth, who worked on the study. “We don’t know yet that the law is improving people’s health, but this is a first indication that people are affording care that they weren’t able to get in the past.”

More than a third of American workers don’t get sick leave, and they’re making the rest of us ill -- Today, President Obama's proposing legislation that would give American workers 7 days a year of paid sick leave. The U.S. remains the world's only wealthy nation that does not mandate a minimum of paid sick leave, vacation leave or parental leave. Nationally, nearly 4-in-10 private sector workers -- 39 percent -- do not have access to any sick leave at all. Zero. Zilch. None. According to Betsey Stevenson of the White House Council of Economic Advisers, that amounts to 43.5 million workers who may be compelled by financial reasons to come into the office when they're sniffling, sneezing, barfing, and generally feeling under the weather, making the rest of us ill in the process. Data from the Bureau of Labor Statistics show that access to paid sick leave varies considerably by occupation. 88 percent of private sector managers and financial workers have access to paid leave, more than double the rate among service workers (40 percent) and construction workers (38 percent).

Coming soon to a workplace near you: 'wellness or else'  (Reuters) - U.S. companies are increasingly penalizing workers who decline to join "wellness" programs, embracing an element of President Barack Obama's healthcare law that has raised questions about fairness in the workplace. Beginning in 2014, the law known as Obamacare raised the financial incentives that employers are allowed to offer workers for participating in workplace wellness programs and achieving results. The incentives, which big business lobbied for, can be either rewards or penalties - up to 30 percent of health insurance premiums, deductibles, and other costs, and even more if the programs target smoking. Among the two-thirds of large companies using such incentives to encourage participation, almost a quarter are imposing financial penalties on those who opt-out, according to a survey by the National Business Group on Health and benefits consultant Towers Watson (For graphic see For some companies, however, just signing up for a wellness program isn't enough. They're linking financial incentives to specific goals such as losing weight, reducing cholesterol, or keeping blood glucose under control. The number of businesses imposing such outcomes-based wellness plans is expected to double this year to 46 percent, the survey found. "Wellness-or-else is the trend,"

Flu Vaccine Not Working Well; Only 23 Percent Effective - — This year's flu vaccine is doing a pretty crummy job. It's only 23 percent effective, which is one of the worst performances in the last decade, according to a government study released Thursday.The poor showing is primarily because the vaccine doesn't include the bug that is making most people sick, health officials say. In the last decade, flu vaccines at their best were 50 to 60 percent effective."This is an uncommon year," said Dr. Alicia Fry, a flu vaccine expert at the Atlanta-based Centers for Disease Control and Prevention, who was involved in the study.The findings are not surprising, though. In early December, CDC officials warned the vaccine probably wouldn't work very well because it isn't well matched to a strain that's been spreading widely.Each year, the flu vaccine is reformulated, based on experts' best guess at which three or four strains will be the biggest problem. Those decisions are usually made in February, months before the flu season, to give companies that make flu shots and nasal spray vaccine enough time to make enough doses.But this year's formula didn't include the strain of H3N2 virus that ended up causing about two-thirds of the illnesses this winter. And that strain tends to cause more hospitalizations and deaths, particularly in the elderly, making this a particularly bad winter to have a problem with the flu vaccine.

UN Ebola czar says epidemic has 'passed the tipping point' - (AFP) - The Ebola crisis has "passed the tipping point" and there is now a reasonable chance the deadly outbreak could end quickly, the UN special envoy said Thursday.  UN Ebola coordinator David Nabarro welcomed fresh data from the World Health Organization showing that all three hardest-hit countries in West Africa had registered the lowest weekly tally of new cases in months. "I'm absolutely delighted to see that the incidence of confirmed Ebola cases week-on-week is reducing," Nabarro told AFP in an interview. "This suggests that we have passed the tipping point and we are beginning to be on the downward slope of the outbreak," he said. Liberia reported its lowest weekly number of new cases since early June, while Guinea and Sierra Leone both saw the fewest new cases since August. More than 8,400 people have died since the Ebola outbreak began in Guinea in December 2013, nearly all of them in the three hardest-hit countries: Guinea, Liberia and Sierra Leone.

Study Suggests Wi-Fi Exposure More Dangerous To Kids Than Previously Thought - Most parents would be concerned if their children had significant exposure to lead, chloroform, gasoline fumes, or the pesticide DDT.  The International Agency for Research on Cancer (IRIC), part of the United Nations’ World Health Organization (WHO), classifies these and more than 250 other agents as Class 2B Carcinogens – possibly carcinogenic to humans.  Another entry on that same list is radiofrequency electromagnetic fields (RF/EMF).  The main sources of RF/EMF are radios, televisions, microwave ovens, cell phones, and Wi-Fi devices. Obviously, these devices and the resulting fields are extremely (and increasingly) common in modern society.  Even if we want to, we can’t eliminate our exposure, or our children’s, to RF/EMF.  But, we may need to limit that exposure, when possible. That was among the conclusions of a report published in the Journal of Microscopy and Ultrastructure entitled “Why children absorb more microwave radiation than adults: The consequences.”  From an analysis of others studies, the authors argue that children and adolescents are at considerable risk from devices that radiate microwaves (and that adults are at a lower, but still significant, risk).  The following points were made:

  • Children absorb a greater amount of microwave radiation than adults.
  • Fetuses are even more vulnerable than children.  Therefore pregnant women should avoid exposing their fetus to microwave radiation.
  • Adolescent girls and women should not place cellphones in their bras or in hijabs (headscarf).
  • Cellphone manual warnings make clear an overexposure problem exists.
  • Government warnings have been issued but most of the public are unaware of such warnings.
  • Current exposure limits are inadequate and should be revised.
  • Wireless devices are radio transmitters, not toys.  Selling toys that use them should be monitored more closely.

Yep, Gasoline Lead Explains the Crime Decline in Canada Too -- Erik Eckholm of the New York Times writes that violent crime has plunged dramatically over the past two decades. But the reasons remain elusive: There are some areas of consensus. The closing of open-air drug markets....revolution in urban policing....increases in drug and gun sentences....Various experts have also linked the fall in violence to the aging of the population, low inflation rates and even the decline in early-childhood lead exposure. But in the end, none of these factors fully explain a drop that occurred, in tandem, in much of the world. “Canada, with practically none of the policy changes we point to here, had a comparable decline in crime over the same period,” I'm happy to see lead at least get a shout out. Unless I've missed something, this might actually be the first time the New York Times has ever mentioned childhood lead exposure as a possible explanation for the decline in violent crime. Progress! But while Eckholm is right to say that none of the other factors he mentions can explain a decline in violent crime that happened all over the world, he's wrong to include lead in that list. It's the one explanation that does have the potential to explain a worldwide drop in crime levels. In particular, the chart on the right shows the use of gasoline lead in Canada, which peaked in the mid-70s and then began dropping as catalytic converters became more common. Leaded gasoline was banned for good in 1990, and is now virtually gone with a few minor exceptions for specialized vehicles.

Half of All Children Will Be Autistic by 2025, Warns Senior Research Scientist at MIT --  For over three decades, Stephanie Seneff, PhD, has researched biology and technology, over the years publishing over 170 scholarly peer-reviewed articles. In recent years she has concentrated on the relationship between nutrition and health, tackling such topics as Alzheimer’s, autism, and cardiovascular diseases, as well as the impact of nutritional deficiencies and environmental toxins on human health. At a conference last Thursday, in a special panel discussion about GMOs, she took the audience by surprise when she declared, At today’s rate, by 2025, one in two children will be autistic.” She noted that the side effects of autism closely mimic those of glyphosate toxicity, and presented data showing a remarkably consistent correlation between the use of Roundup on crops (and the creation of Roundup-ready GMO crop seeds) with rising rates of autismThis month, the USDA released a study finding that although there were detectable levels of pesticide residue in more than half of food tested by the agency, 99% of samples taken were found to be within levels the government deems safe, and 40% were found to have no detectable trace of pesticides at all. The USDA added, however, that due to “cost concerns,” it did not test for residues of glyphosate. Let’s repeat that: they never tested for the active ingredient in the most widely used herbicide in the world. “Cost concerns”? How absurd—unless they mean it will cost them too much in terms of the special relationship between the USDA and Monsanto. Glyphosate is present in unusually high quantities in the breast milk of American mothers, at anywhere from 760 to 1,600 times the allowable limits in European drinking water. Urine testing shows Americans have ten times the glyphosate accumulation as Europeans. “In my view, the situation is almost beyond repair,” Dr. Seneff said after her presentation. “We need to do something drastic.”

USDA Green-Lights Yet Another Monsanto GMO crop » Today, the U.S. Department of Agriculture (USDA) approved the sale and planting of Monsanto’s genetically engineered dicamba-tolerant soybeans and cotton. This approval follows that of 2,4-D tolerant soybeans and corn, billed as the next generation of herbicide-tolerant crops to tackle glyphosate (Roundup)-resistant weeds. Dicamba-tolerant soy and cotton are simply the latest example of USDA’s allegiance to the biotechnology industry and dependence upon chemical solutions. This continues the disturbing trend of more herbicide-tolerant crop approvals taking place under President Obama’s watch. Once again, the USDA has neglected to look at the full range of impacts associated with these GMO herbicide-tolerant crops. Instead the agency has opted for a short-term solution to superweeds that have become resistant to herbicides because of previous approvals of GMOs, thereby perpetuating and escalating chemical use. The USDA’s Environmental Impact Statement predicted that dicamba use will increase 88-fold and 14-fold for soybeans and cotton, respectively, compared to current levels. Dicamba-tolerant crops will allow for wider windows of spraying throughout the season at unprecedented levels. Now that dicamba will be used in larger quantities, Monsanto has petitioned the Environmental Protection Agency to increase the tolerance level of dicamba on cottonseed 150-fold. Higher levels of dicamba in the environment and our food pose unacceptable risks to human health and a wide variety of flora and fauna.

More Than 100 Businesses Call On White House To Protect Bees From Pesticides  -- More than 100 businesses, many of them food companies that depend heavily on pollinators for their products, sent a letter to the White House and multiple agencies Tuesday, urging the Environmental Protection Agency to protect pollinators by halting the use of certain pesticides. Representatives from 118 businesses — including the owners of Clif Bar and Nature’s Path and the CEOs of Stonyfield and organic food company Amy’s — signed the letter, which calls on the EPA to immediately suspend its registration of neonicotinoids, a class of pesticides which have been linked to bee declines by at least 30 studies. Neonics are used on a variety of U.S. crops, including corn, soybeans, oranges, and leafy greens. They been found to affect the nervous system of honeybees, with studies finding that exposure to neonics can cause honeybees to forget what food smells like and can create short- and long-term memory loss in bees.  “Our businesses are deeply concerned about the continued and unsustainable loss of bees and other essential pollinator populations and urge that significant action be taken now to address the threats they face from pesticides and other stressors threatening their survival,” the companies write in the letter. “Bee losses have a ripple effect across the entire economy, and in many cases, affect our bottom-line.”

Searching for critical thresholds in temperature effects | Greed, Green & Grains: If Google scholar is any guide, my 2009 paper with Wolfram Schlenker on the nonlinear effects of temperature on crop outcomes has had more impact than anything else I've been involved with. A funny thing about that paper: Many reference it, and often claim that they are using techniques that follow that paper. But in the end, as far as I can tell, very few seem to actually have read through the finer details of that paper or try to implement the techniques in other settings. Granted, people have done similar things that seem inspired by that paper, but not quite the same. Either our explication was too ambiguous or people don't have the patience to fully carry out the technique, so they take shortcuts. Here I'm going to try to make it easier for folks to do the real thing. So, how does one go about estimating the relationship plotted in the graph above? Here's the essential idea: averaging temperatures over time or space can dilute or obscure the effect of extremes. Still, we need to aggregate, because outcomes are not measured continuously over time and space. In agriculture, we have annual yields at the county or larger geographic level. So, there are two essential pieces: (1) estimating the full distribution of temperatures of exposure (crops, people, or whatever) and (2) fitting a curve through the whole distribution.

FAO food price index drops in December: FAO's monthly Food Price Index declined in December after three months of stability. Continued large supplies and record stocks combined with a stronger U.S. dollar and falling oil prices contributed to the decline. The December Food Price Index averaged 188.6 points, a drop of 1.7 percent from November, led down by sugar and palm oil. For the whole of 2014, the Food Price Index averaged 202 points, down 3.7 percent from 2013, marking the third consecutive annual decline. This year-on-year drop came despite FAO's sub-index for meat rising to an all-time high annual average of 199 points, up 8.1 percent from 2013. Cereals, by contrast, dropped 12.5 percent from the previous year, buoyed by forecasts of record production and ample inventories. FAO's Food Price Index is a trade-weighted index that tracks prices of five major food commodity groups on international markets. It aggregates price sub-indices of cereals, meat, dairy products, vegetable oils and sugar. Four of those indices fell in 2014 and are at, or close to, their lowest levels in five years.

California drought: Early months of 2015 will be critical -Drought? What drought? Californians could be forgiven for asking that question after two big storms in December brought record rain to the north and mountain snow to Southern California that dusted palm trees in some lower-elevation towns. The start of a new year, however, has the state back in a dry stretch, and experts wonder what's in store for the critical few weeks ahead. "We must necessarily plan for the worst but hope for the best," said Jeanine Jones, deputy drought manager with the California Department of Water Resources. "We are only now entering the normally wettest part of our winter season, and what happens -- or doesn't -- in the next six weeks or so will tell us a lot about the likely outcome of the water year." But the start to 2015 does not look promising for the Golden State. On New Year's Eve, the Los Angeles branch of the National Weather Service summarized the outlook on its Facebook page. "Rain for California to bring in the New Year?" it asked. Showing a map modeling precipitation over the next week, its answer was blunt: "Not very likely." And with California's rainy season being defined by a short winter window, what happens in January and February will be critical. "A worst-case scenario for us would be a repeat of last year's very dry hydrology -- fourth driest year on record in terms of statewide runoff," said Jones. "A best-case scenario would be a series of storms that provides the snowpack to refill the major reservoirs, but not with a timing that causes flooding problems." Snowpack typically provides a third of the state's water via reservoirs, but Sierra Nevada levels are just half their long-term average, even with the December storms.

Cities Parched by Drought Look to Tap the Ocean -- After three years of drought, California’s reservoirs are filled with more mud than water. Many farmers can’t irrigate their fields and have no choice but to leave them fallow.  As insurance against future droughts, San Diego is turning to a vast and largely untapped body of water for help: the Pacific Ocean. A huge desalination plant is under construction just outside the city that is expected to provide 7% of the arid region’s water needs. “Desalination isn’t dependent on rainfall or snowpack,” . “Traditional sources have been cheap and plentiful, and that’s not necessarily the case anymore.”Desalinization is an old technology used widely in the Middle East that is getting new attention in the United States because of innovation and lower costs. With growing populations and increasingly scarce water, more than 15 California coastal cities are considering the ocean as an alternative to fickle Mother Nature.But desalination is still far more expensive than damming rivers and pumping ground water. Furthermore, critics worry about the environmental consequences and argue that water conservation is a much cheaper option.When complete, the $1 billion Carlsbad desalination plant will be the largest in the Western Hemisphere, providing up to 50 million gallons of water daily to San Diego County and its more than 3 million residents. Seawater sucked up from an offshore pipe will be blasted through a series of membranes that have microscopic holes to help filter out the salt, sand and algae.Construction, delayed for years by lawsuits, is expected to be completed by late 2015 or early 2016. Ultimately, the water produced by the plant will be “bottled water quality,”

2014 Was Hottest Year on Record, Surpassing 2010 - Last year was the hottest in earth’s recorded history, scientists reported on Friday, underscoring scientific warnings about the risks of runaway emissions and undermining claims by climate-change contrarians that global warming had somehow stopped.  In the annals of climatology, 2014 now surpasses 2010 as the warmest year in a global temperature record that stretches back to 1880. The 10 warmest years on record have all occurred since 1997, a reflection of the relentless planetary warming that scientists say is a consequence of human emissions and poses profound long-term risks to civilization and to the natural world. Of the large inhabited land areas, only the eastern half of the United States recorded below-average temperatures in 2014, a sort of mirror image of the unusual heat in the West. Some experts think the stuck-in-place weather pattern that produced those extremes in the United States is itself an indirect consequence of the release of greenhouse gases, though that is not proven. Several scientists said the most remarkable thing about the 2014 record was that it occurred in a year that did not feature El Niño, a large-scale weather pattern in which the ocean dumps an enormous amount of heat into the atmosphere. 

2014 Is The Hottest Year On Record, Breaking 2005 And 2010 Highs - The National Oceanic and Atmospheric Administration (NOAA) and the National Aeronautics and Space Administration (NASA) officially declared 2014 the hottest year in 134 years of record keeping.  NOAA reported that this was the hottest December on record and that 2014 as a whole was 1.24°F (0.69°C) above the 20th century average: “This was the highest among all years in the 1880-2014 record, surpassing the previous records of 2005 and 2010 by 0.07°F (0.04°C).”  As the NOAA data makes clear, human-caused global warming has seen no “hiatus.” In fact, as the top figure shows, the decade of the 2010s is on track to be the hottest decade on record. The 1980s were the hottest decade on record at the time. Then they were beat by 1990s, which in turn were beat by the 2000s for the title of hottest decade. Each decade this century is likely to be the hottest on record — unless we slash carbon pollution ASAP.  “This is the latest in a series of warm years, in a series of warm decades,” said Dr. Gavin Schmidt director of NASA’s Goddard Institute of Space Studies, which tracks global temps. “While the ranking of individual years can be affected by chaotic weather patterns, the long-term trends are attributable to drivers of climate change that right now are dominated by human emissions of greenhouse gases.”

NOAA and NASA: 2014 was Earth’s warmest year on record (since 1880) - December 2014 record warm; Global oceans also record warm for 2014.  The globally averaged temperature over land and ocean surfaces for 2014 was the highest among all years since record keeping began in 1880, according to NOAA scientists. The December combined global land and ocean average surface temperature was also the highest on record. This summary from NOAA's National Climatic Data Center is part of the suite of climate services NOAA provides to government, business, academia and the public to support informed decision-making. In an independent analysis of the data also released today, NASA scientists also found 2014 to be the warmest on record.

  • During 2014, the average temperature across global land and ocean surfaces was 1.24 °F (0.69 °C) above the 20th century average. This was the highest among all years in the 1880–2014 record, surpassing the previous records of 2005 and 2010 by 0.07 °F (0.04 °C).
  • Record warmth was spread around the world, including Far East Russia into western Alaska, the western United States, parts of interior South America, most of Europe stretching into northern Africa, parts of eastern and western coastal Australia, much of the northeastern Pacific around the Gulf of Alaska, the central to western equatorial Pacific, large swaths of northwestern and southeastern Atlantic, most of the Norwegian Sea, and parts of the central to southern Indian Ocean.
  • During 2014, the globally-averaged, land-surface temperature was 1.80 °F (1.00 °C) above the 20th-century average. This was the fourth highest among all years in the 1880–2014 record.
  • During 2014, the globally-averaged, sea-surface temperature was 1.03 °F (0.57 °C) above the 20th-century average. This was the highest among all years in the 1880–2014 record, surpassing the previous records of 1998 and 2003 by 0.09 °F (0.05 °C).

Global warming made 2014 a record hot year – in animated graphicsNASA and NOAA have just reported that global surface temperatures in 2014 were the hottest on record. That also means 2014 was the likely hottest the Earth has been in millennia, and perhaps as much as 100,000 years. But what’s really remarkable is that 2014 set this record without the aid of an El Niño event. El Niño events create conditions in which sea surface and hence global surface temperatures are anomalously hot. We call this part of the Earth’s “internal variability” because these events just temporarily shift heat around between the ocean surface and its depths.  As this graphic shows (click here for an animated version), the last 5 record hot years of 2010, 2005, 1998, 1997, and 1995 were all assisted by El Niño events.   In contrast, 2014 had a slight cooling influence from La Niña-like conditions at the beginning of the year, a slight warming influence from El Niño-like conditions toward the end, and no net temperature influence from the El Niño Southern Oscillation (ENSO) for the year as a whole. 2014 was by far the hottest ENSO-neutral year on record, and the first year since 1990 to set a record without influence from El Niño.1998, which saw the strongest El Niño on record, now falls to 5th-hottest year on record. The intense El Niño event made global surface temperatures in 1998 about 0.2 °C hotter than they would have otherwise been. Due to human-caused global warming, ENSO-neutral years are now hotter than even the most intense El Niño years a decade or two ago.

Just another hot year for the record books? Not quite. How 2014 US temperatures support the case for global weirding -- At first glance, the 2014 US Climate Report released this week by the National Oceanic and Atmospheric Agency (NOAA) might look like the new, hotter normal. Overall, the average annual temperature in the lower 48 states was 0.5 °F above the 20th century average. That makes 2014 the 18th warmer-than-average year in a row and the 34th warmest year on record. For those of us who live in the West, these numbers come as no surprise. All 11 Western states experienced warmer-than-normal years. Eight of them landed in the  top-ten hottest years on record, with California, Nevada and Arizona all experiencing their hottest years ever. Alaska also had a record-breaking hot year, with Anchorage never dipping below 0 °F at any point in 2014, a historic first. Looking east of the Rockies, however, the story quickly becomes, well, weirder. South Dakota had the 34th coldest year on record, and Oklahoma the 29th coldest. Seven states in the middle of the country, from Wisconsin to Louisiana, experienced top-ten most frigid years on record. Most notably, a polar vortex brought the Arctic to the Midwest for the first few weeks of 2014, but cooler-than-normal blasts moved through the region multiple times throughout the rest of the year.  While regional weather differences are nothing new, the prolonged hot-cold divide of 2014 was unprecedented. "Never before have such large areas of the country experienced such radically different temperature extremes," Rebecca Lindsey, managing editor for, explained in a post this past August. From January to July, nearly 40% of the country was affected by extreme temperatures, though which extreme depended on which side of the country you were on.

NOAA Reduces Odds of El Niño Conditions This Winter - The chance of a noteworthy El Niño event this winter is becoming more slender, diminishing along with California’s chances for more drought relief. In its latest monthly outlook on the state of the El Niño/Southern Oscillation (ENSO), issued this morning, NOAA's Climate Prediction Center continued its El Niño Watch but reduced the odds of El Niño conditions from the previous 65% to approximately 50–60%. Moreover, the agency now calls for ENSO-neutral conditions (neither El Niño nor La Niña) to be the most likely state of affairs from March onward. This is a significant change from NOAA’s previous monthly outlook, which had projected that El Niño conditions would likely extend into spring 2015.  NOAA considers El Niño conditions to be in place when monthly sea-surface temperatures (SSTs) are at least 0.5°C above average in the Niño3.4 region of the tropical Pacific. To qualify as an El Niño episode, the SSTs in this region must remain at or above the 0.5°C threshold for five consecutive overlapping periods of three months (i.e., a total of seven months).  Using this yardstick, weak El Niño conditions have now prevailed for more than two months. After rising above 0.5°C in mid-October, the Niño3.4 SST anomalies peaked near 1.0°C in late November, then began dropping (see Figure 1). The anomalies are now at 0.5°C, barely qualifying as El Niño-worthy. Should the 0.5°C anomaly hold for a few more months (not at all a sure thing), the 2014–15 El Niño would manage to go down in history as a bona fide episode, though a rather unimpressive one.

Is climate change real? The Senate will put it to a vote. - Senate Majority Leader Mitch McConnell (R-Ky.) said Tuesday that he would allow a vote on an amendment from Sen. Bernie Sanders (I-Vt.) on whether climate change is real, and whether humans have a small window to fix the problem or damage the Earth irreparably.  Sanders has been seeking to attach his language to legislation approving the Keystone pipeline, a possibility that’s allowed by Senate Republicans, who have said they’d allow amendments to that bill.  Democrats have criticized the Keystone bill as something that would harm the environment, and Sanders’ language is aimed at driving that point home.

Global Warming Linked To More Extreme Weather And Weaker Jet Stream - We have seen a quantum jump in extreme weather events in the Northern Hemisphere in the last several years. Droughts, deluges, and heat waves are increasingly getting “stuck” or “blocked,” which in turn worsens and prolongs their impact beyond what might be expected just from the recent human-caused increase in global temperatures. A growing body of research ties that unexpected jump to a weakening of the jet stream — in particular to “more frequent high-amplitude (wavy) jet-stream configurations that favor persistent weather patterns,” as a new study puts it.  Much of this new research ties the weakening jet stream to “Arctic amplification (AA) — defined here as the enhanced sensitivity of Arctic temperature change relative to mid-latitude regions,” in the words of the new study, “Evidence for a wavier jet stream in response to rapid Arctic warming” by Jennifer Francis and Stephen Vavrus. But that is no by no means a universally accepted explanation. I’ll review some of the evidence in this post.

Inside the lonely fight against the biggest environmental problem you've never heard of - Ecologist Mark Browne knew he’d found something big when, after months of tediously examining sediment along shorelines around the world, he noticed something no one had predicted: fibers. Everywhere. They were tiny and synthetic and he was finding them in the greatest concentration near sewage outflows. In other words, they were coming from us. In fact, 85% of the human-made material found on the shoreline were microfibers, and matched the types of material, such as nylon and acrylic, used in clothing. It is not news that microplastic – which the National Oceanic and Atmospheric Administration defines as plastic fragments 5mm or smaller – is ubiquitous in all five major ocean gyres. And numerous studies have shown that small organisms readily ingest microplastics, introducing toxic pollutants to the food chain. But Browne’s 2011 paper announcing his findings marked a milestone,  By sampling wastewater from domestic washing machines, Browne estimated that around 1,900 individual fibers can be rinsed off a single synthetic garment - ending up in our oceans.

Ocean Life Faces Mass Extinction, Broad Study Says -- A team of scientists, in a groundbreaking analysis of data from hundreds of sources, has concluded that humans are on the verge of causing unprecedented damage to the oceans and the animals living in them. “We may be sitting on a precipice of a major extinction event,” said Douglas J. McCauley, an ecologist at the University of California, Santa Barbara, and an author of the new research, which was published on Thursday in the journal Science.  But there is still time to avert catastrophe, Dr. McCauley and his colleagues also found. Compared with the continents, the oceans are mostly intact, still wild enough to bounce back to ecological health.. “The impacts are accelerating, but they’re not so bad we can’t reverse them.” Scientific assessments of the oceans’ health are dogged by uncertainty: It’s much harder for researchers to judge the well-being of a species living underwater, over thousands of miles, than to track the health of a species on land. And changes that scientists observe in particular ocean ecosystems may not reflect trends across the planet.

Bird carcasses along Pacific shore baffle biologists: The carcasses of thousands of small birds called Cassin's auklets have been washing ashore over the last few months from Northern California up to the north coast of Washington. Scientists along the Pacific Coast have been trying to determine what is causing the large die-off of the birds this winter. The University of Washington's Coastal Observation and Seabird Survey Team has seen more than 1,200 bodies wash ashore since fall began. Executive Director Julia Parrish thinks that is only a small fraction of the total number of dead birds. It is probably in the tens of thousands, she said. Parrish, a professor of marine sciences at the University of Washington, said the die-off was largely a mystery to experts. The birds have been found mostly starved to death, so the deaths are not a result of an oil spill or a toxic reaction to food, said Lindsay Adrean, a wildlife biologist with the Oregon Department of Fish and Wildlife. One explanation is that the birds are starving as a consequence of an unusually successful breeding session last year in British Columbia. Almost every breeding pair laid an egg, and as the young birds fly south for the winter they may not all be finding the small fish and shrimp they normally feed on, Parrish said. The Pacific has also been a few degrees warmer this winter, which could touch off subtle changes in the food chain that make it harder for the small birds to find sustenance, Adrean said.  But other birds along the coast are not dying at unusual rates, Parrish said.

Climate change threatens India’s native plants - If India is to save hundreds of endemic plant species from extinction as a result of climate change it may need to resort to interventions such as assisted migration and expansion of existing protected areas, says a new study.  Vishwas Sudhir Chitale, researcher at the Indian Institute of Technology, Kharagpur and corresponding author of the study, published last month (December) in PLoS One, explains that endemic plants are found in particular geographical regions of the world and not anywhere else.   With 2010 as the base year, the study used computer models to predict the future distribution of 637 endemic plant species in three biodiversity hotspots in India — Himalaya, Western Ghats and Indo-Burma — for the years 2050 and 2080. The projected changes suggest that these species will be adversely impacted, even in a moderate climate change scenario.  According to the study’s findings, future distribution is likely to shift to the northern and north-eastern direction in the Himalaya and Indo-Burma hotspots and in the southern and south-western directions in Western Ghats hotspots, due to cooler climatic conditions in these regions.

How climate change is making its mark on the world – pictures -- Over the last century, climate change has transformed the surface of the planet. Since the industrial revolution, humans have pumped more than 1,890 gigatonnes of carbon dioxide into the atmosphere, warming the planet by around 0.85C. This heat has resulted in glaciers retreating, lakes shrinking and droughts spreading. Some areas of the world have changed beyond recognition, and some of the damage is irreversible.  In a series of almost 300 images taken by cameras and satellites, NASA has illustrated where climate change is already scarring the face of the earth.

Small volcanic eruptions partly explain 'warming hiatus' -- The "warming hiatus" that has occurred over the last 15 years has been caused in part by small volcanic eruptions. Scientists have long known that volcanoes cool the atmosphere because of the sulfur dioxide that is expelled during eruptions. Droplets of sulfuric acid that form when the gas combines with oxygen in the upper atmosphere can persist for many months, reflecting sunlight away from Earth and lowering temperatures at the surface and in the lower atmosphere. New research further identifies observational climate signals caused by recent volcanic activity. The warmest year on record is 1998. After that, the steep climb in global surface temperatures observed over the 20th century appeared to level off. This "hiatus" received considerable attention, despite the fact that the full observational surface temperature record shows many instances of slowing and acceleration in warming rates. Scientists had previously suggested that factors such as weak solar activity and increased heat uptake by the oceans could be responsible for the recent lull in temperature increases. After publication of a 2011 paper in the journal Science by Susan Solomon of the Massachusetts Institute of Technology (link is external) (MIT), it was recognized that an uptick in volcanic activity might also be implicated in the warming hiatus.

John Abraham: The Antarctic ice sheet is a sleeping giant, beginning to stir - In a paper I just published with colleague Dr Ted Scambos from the National Snow and Ice Data Center, we highlight the impact of southern ice sheet loss, particularly the West Antarctic Ice Sheet, on sea-level rise around the world.We know that human emissions of greenhouse gases are causing the Earth’s temperature to rise and are creating other changes across the Earth’s climate system. One change that gets a great deal of attention is the current and future rates of sea-level rise. A rising sea level affects coastal communities around the world; approximately 150 million people live within 1 meter of current sea level.The waters are rising because of a number of factors. First, water expands as it warms. In the past, this “thermal expansion” was the largest source of sea-level rise. But as the Earth’s temperatures continued to increase, another factor (melting ice, particularly from large ice sheets in Greenland and Antarctica) has played an ever increasing role.In the Southern Hemisphere, the largest player is the Western Antarctic ice sheet (WAIS). It is less stable than Eastern Antarctica and is particularly vulnerable to melting from below by warmed ocean waters. Scientists are closely watching the ice near the edges of the WAIS because they buttress large volumes of ice that are more inland. When these buttressing ice shelves melt, the ice upstream will slide more rapidly toward the ocean waters.  As reported in our paper, according to some studies, “no further acceleration of climate change and only modest extrapolations of the current increasing mass loss rate are necessary for the system to eventually collapse ... resulting in 1-3 metres of sea-level rise.” And this is from just one component of the great southern sheets.

Supra-glacial Rivers Are Draining Greenland Quickly: NASA-UCLA - Rivers of glacial meltwater flowing over Greenland's frozen surface may be contributing as much to global sea level rise as all other processes that drain water from the melting ice sheet combined, according to researchers at the University of California, Los Angeles, and NASA. The new finding is published today in the journal Proceedings of the National Academy of Sciences. Eighty percent of Greenland, which is about the size of the United States west of the Rocky Mountains, is covered by ice, which has the potential to make a significant contribution to sea level rise as it melts. Because Greenland's ice sheet is vast and difficult to study from ground level, scientists are still learning about the many processes by which its melting water reaches the ocean. This is the first study of the drainage system of rivers and streams that forms atop the ice sheet in summer. The researchers traveled by helicopter to map the network of rivers and streams over about 2,000 square miles (5,600 square kilometers) of Greenland. They were especially interested in learning how much of the meltwater remained within the ice sheet and how much drained to the ocean.  Virtually all of the flowing water drains directly to the ocean through sinkholes, the researchers found.

New Research May Solve Puzzle in Sea Level’s Rise -- A team of researchers reported Wednesday that the ocean did not rise quite as much as previously believed in the 20th century. They proposed a seemingly tiny adjustment that could make a big difference in scientific understanding of the looming problem of sea-level rise. Instead of rising about six inches over the course of the 20th century, as previous research suggested, the sea actually rose by approximately five inches, the team from Harvard and Rutgers Universities found. The difference turns out to be an immense amount of water: on the order of two quadrillion gallons, or enough to fill three billion Olympic-size swimming pools.  If the findings stand up to scrutiny by other scientists, they could help resolve a longstanding conundrum in climate research. For years, when experts added up their best measurements of melt water from land ice and of other factors causing the sea to rise, the numbers fell a bit short of the rise that had been recorded at harbors around the world. If the harbor measurements were right and the ocean really had two quadrillion gallons of extra water, where was it coming from? The discrepancy set off an intensive search for additional ice that might be melting from glaciers and ice sheets, or extra heat that might be causing ocean water to expand, and so on. To some scientists, the answers that emerged were never entirely satisfactory. Now, in a paper published Wednesday by the journal Nature, the Harvard and Rutgers scientists applied advanced statistical techniques to the measurements taken at harbors. They found that previous research on that record had slightly overestimated the amount of sea-level rise in the 20th century. With their downward revision, the harbor record now matches the other records rather neatly.

Correcting estimates of sea level rise -- The acceleration in global sea level from the 20th century to the last two decades has been significantly larger than scientists previously thought, according to a new Harvard study. The study shows that previous estimates of global sea-level rise from 1900-1990 had been over-estimated by as much as 30 percent. The report, however, confirms previous estimates of sea-level change since 1990, suggesting that the rate of sea-level change is increasing more quickly than previously believed. The new work is described in a January 14 paper published in Nature. "What this paper shows is that sea-level acceleration over the past century has been greater than had been estimated by others," Morrow said. "It's a larger problem than we initially thought." "Scientists now believe that most of the world's ice sheets and mountain glaciers are melting in response to rising temperatures." Hay added. "Melting ice sheets cause global mean sea level to rise. Understanding this contribution is critical in a warming world." Previous estimates had placed sea-level rise at between 1.5 and 1.8 millimeters annually over the 20th century. Hay and Morrow, however, suggest that from 1901 until 1990, the figure was closer to 1.2 millimeters per year. But everyone agrees that global sea level has risen by about 3 millimeters annually since that time, and so the new study points to a larger acceleration in global sea level.

The Methane Monster Roars -- Paul Beckwith, a climatology and meteorology professor at the University of Ottawa, Canada, is an engineer and physicist who researches abrupt climate change in both the present day and in the paleoclimatology records of the deep past. "It is my view that our climate system is in early stages of abrupt climate change that, unchecked, will lead to a temperature rise of 5 to 6 degrees Celsius within a decade or two," Beckwith told me. "Obviously, such a large change in the climate system will have unprecedented effects on the health and well-being of every plant and animal on our planet." Vast amounts of methane lie frozen in the Arctic. It's not news that the Arctic sea ice is melting rapidly, and that it will likely be gone for short periods during the summers starting as early as next year. Losing that ice means releasing larger amounts of previously trapped methane into the atmosphere. Additionally, lying along the Arctic's subsea continental margins and beneath Arctic permafrost are methane hydrates, often described as methane gas surrounded by ice. In March 2010, a report in Science indicated that these cumulatively contain the equivalent of 1,000 to 10,000 gigatons of carbon. For perspective, humans have released approximately 1,475 gigatons in total carbon dioxide since the year 1850. Beckwith warns that losing the Arctic sea ice will create a state that "will represent a very different planet, with a much higher global average temperature, in which snow and ice in the northern hemisphere becomes very rare or even vanishes year round."

Obama Administration Reveals Plan To Slash Methane Emissions In Oil And Gas Sector - On Wednesday, the Obama Administration announced plans to cut methane emissions from the oil and gas sector by 40 to 45 percent from 2012 levels by 2025. The U.S. is currently the largest natural gas producer in the world and domestic oil production is at its highest level in nearly three decades. Methane, the primary component of natural gas, is also a potent greenhouse gas. According to the White House methane has 25 times more heat-trapping potential than carbon dioxide over a 100-year period. The IPCC has a higher measurement, putting it at 34 times more.  In 2012, methane emissions accounted for nearly 10 percent of all U.S. greenhouse gas pollution, of this total nearly 30 percent came from the production, transmission, and distribution of oil and natural gas. Emissions from the oil and gas sector are projected to rise more than 25 percent by 2025 without substantial efforts to reduce them. According to the Environmental Defense Fund (EDF), greenhouse gases from leaks in the oil and gas sector are equivalent to the pollution from 180 coal-fired power plants.  The Administration said it will work closely with states and industry on crafting and implementing the standards to avoid conflict or overlap. The EPA will be taking a series of steps to set emissions standards for new and modified gas wells. Existing wells will not be included in the regulations, but there is hope that industry efforts will be significant in the area. Leaking methane is undesirable for industry from an economic standpoint as well.

EPA’s Methane Announcement: There are other important aspects of today’s announcement. First, EPA plans to “explore potential regulatory opportunities” in methane monitoring and measurement technologies to help undergird its GHG emissions reporting system (and also will work with industry in their own voluntary efforts to better monitor, report and verify methane emissions). These steps are very important. We would counsel that efforts to actually measure the amount of methane leakage needs to be developed rather than just leak detectors. Second, BLM has agreed to update its methane standards around flaring, venting and leaking, in coordination with EPA. Our earlier analysis of BLM proposed standards applying to oil and gas extraction of federal lands revealed that, in general, the revised standards were weak compared to what many states were doing. Thus, coordination with EPA is a positive development. Third, EPA plans to work with industry “to develop and verify robust [but voluntary] commitments to reduce methane emissions.” EPA mentions several voluntary efforts, including One Future, which among many activities is examining the potential for a market-based approach for reducing methane, something RFF is looking into as well. EPA recognizes that these voluntary actions could “reduce the need” for future regulation, but is careful not to say that voluntary efforts substitute for regulations.

Frackers Don’t Want Regulations on Methane Leakage -  That they deny actually having. Which was the same logic Cheney used to get the Halliburton Loophole: “If there are no problems, there should be no regulations which might find problems.”— In President Obama’s latest move using executive authority to tackle climate change, administration officials are announcing plans this week to impose new regulations on the oil and gas industry’s emissions of methane, a powerful greenhouse gas. The administration’s goal is to cut methane emissions from oil and gas production by up to 45 percent by 2025 from the levels recorded in 2012, according to a person familiar with Mr. Obama’s plans. The Environmental Protection Agency will issue the proposed regulations this summer, and final regulations by 2016, according to the person, whom the administration asked not to speak about the plan. The White House declined to comment on the effort. The new rules are part of Mr. Obama’s push for regulations designed to cut emissions of planet-warming greenhouse gases from different sectors of the economy. The White House says it can make the moves under the Clear Air Act. Mr. Obama issued rules in his first term to regulate emissions of carbon dioxide, the most common greenhouse gas, from cars and trucks. Last year, he proposed regulations on carbon dioxide from power plants. Methane accounts for about 9 percent of greenhouse gas emissions in the United States, but it has over 20 times the planet-warming potency of carbon dioxide. It is released during the production of oil and gas, when it leaks from underground wells and pipes, then leaks from transmission lines, then from aging distribution systems, and finally from the burner tip.

Food & Water Watch not impressed by Obama's methane plan - -  Wenonah Hauter, Executive Director of Food & Water Watch, issued the following statement in response to the release of the Obama Administration’s regulations to directly regulate methane leaks from the oil and gas industry:  “Persident Obama’s proposed rules are yet another half-measure, aimed at trying to clean up an inherently dirty fuel, essentially slapping lipstick on the proverbial pig and calling it ‘climate friendly’. If adopted, these regulations would wrongly promote natural gas as a ‘clean’ alternative to oil and coal, triggering even more fracking across the United States – bringing water contamination, earthquakes and health problems along with it.”  “Implementing the proposed methane reductions could not possibly hold off the growing climate crisis. Leak reductions from the regulations will be undermined by increases in methane releases from expanded fracking. Further, setting aside the industry’s methane problems, and looking solely at carbon dioxide emissions from natural gas, more than 95 percent of fracked gas must remain in the ground, if we are to avoid the worse of expected impacts from global warming. To be serious about curbing climate change, President Obama needs to move aggressively to keep fossil fuels in the ground, stop promoting expanded drilling and fracking, and do everything in his power to accelerate the transition to a 100% renewable energy economy.”

Leave fossil fuels buried to prevent climate change, study urges -- Vast amounts of oil in the Middle East, coal in the US, Australia and China and many other fossil fuel reserves will have to be left in the ground to prevent dangerous climate change, according to the first analysis to identify which existing reserves cannot be burned. The new work reveals the profound geopolitical and economic implications of tackling global warming for both countries and major companies that are reliant on fossil fuel wealth. It shows trillions of dollars of known and extractable coal, oil and gas, including most Canadian tar sands, all Arctic oil and gas and much potential shale gas, cannot be exploited if the global temperature rise is to be kept under the 2C safety limit agreed by the world’s nations. Currently, the world is heading for a catastrophic 5C of warming and the deadline to seal a global climate deal comes in December at a crunch UN summit in Paris.  “We’ve now got tangible figures of the quantities and locations of fossil fuels that should remain unused in trying to keep within the 2C temperature limit,” said Christophe McGlade, at University College London (UCL), and who led the new research published in the journal Nature. The work, using detailed data and well-established economic models, assumed cost effective climate policies would use the cheapest fossil fuels first, with more expensive fuels priced out of a world in which carbon emissions were strictly limited. For example, the model predicts that significant cheap-to-produce conventional oil would be burned but that the carbon limit would be reached before more expensive tar sands oil could be used.

Limiting global warming means forgoing vast fuel reserves - study: (Reuters) - A third of the world's oil reserves, half of gas reserves and 80 percent of current coal reserves should not be used in the coming decades if global warming is to stay below an agreed 2 degree Celsius target, scientists said on Wednesday. In a study published in the journal Nature, researchers said the vast majority of coal reserves in China, Russia and the United States should stay in the ground, as well as more than 260,000 million barrels of oil reserves in the Middle East, equivalent to all of Saudi Arabia's oil reserves. The Middle East should also leave more than 60 percent of its gas reserves in the ground, the study found. "Policy makers must realise that their instincts to completely use the fossil fuels within their countries are wholly incompatible with their commitments to the 2 degrees C goal," said Christophe McGlade, who led the study at University College London's Institute for Sustainable Resources. He said policymakers and the public should be made aware of the discrepancy between what they are doing and what they are saying -- particularly ahead of United Nations talks on a deal to combat global warming due in Paris in December 2015.  "Greater global attention to climate policy ... means that fossil fuel companies are becoming increasingly risky for investors in terms of the delivery of long-term returns," . "I would expect prudent investors in energy to shift increasingly towards low-carbon energy sources."

Study: Fracking Good; Coal Bad - Climate negotiators have agreed that warming should be limited to 3.6 degrees Fahrenheit above preindustrial level. That means that humans can release about 1.1 trillion metric tons of carbon dioxide emissions, and we've gone through about half of that already. The remaining emissions are known as our "carbon budget"; if we "spend" emissions beyond our budget, we're much more likely to push the planet to dangerous levels of warming. If we burned through all of our current reserves of fossil fuels, we would overspend the budget by about threefold.  The fact is, there's no way to prevent global warming from reaching catastrophic levels if we burn up our remaining reserves of oil, gas, and coal.  In other words, there are a lot of fossil fuels that are "unburnable" if we're going to stay within the prescribed warming limit. But how much, exactly? And where exactly are those unburnable fuels? That's the question asked in a study released today in the journal Nature by a team of energy analysts at University College London. The answer matters because mapping the geographical spread of unburnable fuels is a key step in understanding the roles specific regions need to play in the fight against climate change.  The results, shown below, are what the model finds to be the most cost-effective distribution that stays within the 3.6-degree limit. A couple interesting things pop out. As you might expect, the vast majority of the world's coal would need to stay buried. The United States is able to use most of its oil and gas in this scenario, because those resources are relatively cost-efficient to extract and bring to market compared to, for example, gas in China and India. In other words, according to this study, the US fracking boom can go forward full steam as long as the gas it produces aggressively replaces our coal consumption. But Canada can't touch most of its oil, because the oil there—the kind that would be carried in the Keystone XL Pipeline—is exceptionally carbon-heavy tar sands crude.

Ohio’s Renewable Energy Freeze Threatens Growth of Solar and Wind Investments and Jobs  - When Ohio Governor John Kasich signed SB 310, a two-year freeze of the state’s renewable energy and energy efficiency standards, last June, he was leading the way—backwards. Ohio became the first state to roll back standards that were already in place, passed in 2008 in an uncontroversial unanimous bipartisan vote. Those standards—which required that, by 2025, 25 percent of the state’s energy be created by advanced energy sources, half of them renewables, and that utilities reduce energy use by 22 percent—proved effective not only in moving the state closer to a clean energy future but in creating jobs, fueling economic growth and generating new investment. That’s now threatened by the freeze, according to a new report from The Pew Charitable Trusts. “Ohio is a prime example of why policy matters,” said the Pew report. “Just as the state’s energy policies once encouraged the development of a clean energy industry, recent uncertainty surrounding the renewable and efficiency portfolio standards has stunted investment and growth.” Pew’s findings should be a warning for other states considering such a rollback bill, called the “Electricity Freedom Act” by lobby group the American Legislative Exchange Council (ALEC), which is pushing the effort. The study found that the standards had spurred business investment and manufacturing in a state well-positioned to take advantage of opportunities in the renewable sector because of its industrial history and infrastructure. Ohio was first in the country in the number of facilities making wind energy components and second in the country in making solar-related equipment as of 2013.

Pope Francis declares war on climate change, other religions follow - A few months ago, Pope Francis urged humanity to have more respect for nature, saying that we are the custodians of a planet created by God.  It's not for nothing that the Pope chose to name himself after St. Francis of Assisi -- the Patron Saint of Ecology who, it is said, preached to birds and blessed wolves.  The environment may feature highly among the Pope's priorities in 2015. There are reports that Pope Francis will issue a powerful edict -- called an Encyclical -- telling the Catholic world to step up the fight against climate change. And news of the Pontiff's environmental intentions have made waves -- both within the Catholic world and outside it.  For more on this we were joined by:

  • Heather Eaton is as an ecological Catholic Theologian at Saint Paul University in Ottawa.
  • Asma Mahdi is an environmental scientist and a board member of a non-governmental organization called Green Muslims in Washington.
  • Jim Wallis is a Christian Evangelical writer and political activist and the founder of Sojourners magazine

Human Civilization No More In ‘Safe Operating Space’ As It Exceeds 4 Of 9 Planetary Boundaries: Study: A team of researchers has said in a new study that the human civilization has exceeded four of nine planetary boundaries that are crucial for maintaining a “safe operating space.” The study, conducted by an 18-member research team, was published in the journal Science on Thursday. The four planetary boundaries that are already beyond the point of no return include climate change, the loss of biosphere integrity, land-system change and altered biogeochemical cycles like the surplus of phosphorus and nitrogen. Surpassing nine of four planetary boundaries means that the human civilization is already 44 percent doomed. It should be a wake-up call to policymakers that “we’re running up to and beyond the biophysical boundaries that enable human civilization as we know it to exist,” Steve Carpenter, director of the University of Wisconsin-Madison Center for Limnology, said in a statement. According to Carpenter, Earth had been in a “remarkably stable state” for the last 11,700 years until about 100 years ago -- an era known as the “Holocene epoch”-- when “everything important to civilization” occurred on the planet. But, over the last century, some of the factors that made the Holocene so hospitable have changed. “It might be possible for human civilization to live outside Holocene conditions, but it’s never been tried before,” Carpenter said. “We know civilization can make it in Holocene conditions, so it seems wise to try to maintain them.”

Green Growth or No Growth? - Yves Smith - Many readers have taken the position that we need to put a brake on growth in order to cut greenhouse gas emissions and reduce consumption of other resources. In a Real News Network interview, Robert Pollin goes through the math of carbon output and shows why a no growth approach is inadequate. A separate issue that often goes by the wayside is that conservation efforts, contrary to conventional wisdom, can increase profits. For instance, BP in 1997 decided to lower its carbon emissions below the 1990 level by 2010. It achieved the goal in 3 years rather than 13 at a cost of $20 million. Oh, and it happened to save $650 million. With that sort of calculus, you’d think that every big corporation would be on the emissions-reduction bandwagon. One of the major impediments is the reflex to reject government “interference” even when it is to the business’ benefit.   Now having said that, humans are wiping out so many species as to increase ecological risk. We need to start eating much further down the food chain and getting much more serious about containing, and better yet reducing, population sizes (note that the argument that a slowly growing or declining population is based on the notion that the dependency ratio will rise. Labor force participation is a function of employment conditions and social norms, and the concern is also based on the social welfare costs of the young and old. We instead have a big issue of underutilized resources, in terms of un and under employment, and a tremendous amount of revenues going to the military-industrial complex, and its young cousin, the fear-industrial complex. We can afford more butter if we cut down on the guns). This is the fifth segment in an eight-part series. You can view the latest segment, number seven and find links to the earlier ones, here.

Carbon pricing coming to Ontario, strategy to be unveiled this year - The Ontario government is closing in on a plan to put a price on carbon emissions after nearly seven years of delays. The Liberals have promised to make corporations and consumers pay for burning carbon – an effective way to battle global warming – since 2008, but have put off making a decision. However, Environment Minister Glen Murray is now working on a comprehensive plan to slash greenhouse gas emissions, and he pledges carbon pricing will be part of it.“We’re looking at how we can transition Ontario to a low-carbon economy through initiatives such as setting a price on carbon … it will be real, efficient, effective and economically positive,” Mr. Murray, who will unveil his strategy this year, told The Globe and Mail. He said his plan will also include cleaner fuel standards and energy conservation measures. The province committed to carbon pricing when it signed the Western Climate Initiative (WCI) with California, British Columbia and Quebec in the summer of 2008. Since then, B.C. has implemented a carbon tax that has helped slash fuel use by 16 per cent. Quebec and California, meanwhile, created a joint cap-and-trade system. A carbon tax places a levy on every purchase of fossil fuel. In a cap-and-trade model, the government limits how much carbon a company can burn; if it wants to use more, it must buy “credits” from a company that has used less than its share. Despite passing enabling legislation in 2009 and years of consultation, Ontario has not moved ahead with either system.

Too Much Of A Good Thing: Scotland Gags On Wind Power - Ilargi - I last looked into the details and consequences of Scottish energy policy in the pre-referendum post Scotch on the ROCs. The expansion of Scottish renewables is progressing at breakneck speed and the purpose of this post is to update on where we are and where we are heading whether anyone likes it or not (Figure 1). Objections to wind power normally come from rural dwelling country folks whose lives are impacted by the construction of wind turbine power stations around them. My objections tend to be rooted more in the raison d’être for renewables (CO2 reduction), their cost, grid reliability and gross environmental impact. One issue I want to draw attention to is the vast electricity surplus that Scotland will produce on windy days in the years ahead. That surplus has to be paid for. Where will it go and how will it be used?  This post was prompted by a couple of emails in the wake of my recent post on WWF Masters of Spin that brought my attention to two short reports prepared by Professor (emeritus) Jack Ponton that describe how operational and consented wind farms will already take Scotland beyond its 2020 target. The small pdfs can be downloaded here and here and the two key charts are reproduced below. Figure 2 shows how in August 2014 operational and consented wind farms already had the capacity to meet the Scottish Government target of 100% electricity from renewables by 2020. Subsequent to that there has been a new round of wind power stations consented that takes us way beyond the target (Figure 3). So what is there to worry about? Figure 1 shows the status of Scottish electricity generating capacity in 2010, 2015 and 2020 (it’s reproduced below to ease inspection). There has been an astonishing transformation.

March of the Squirrels - Archdruid John Michael Greer - So far, the crash of 2015 is running precisely to spec. Smaller companies in the energy sector are being hammered by the plunging price of oil, while the banking industry insists that it’s not in trouble—those of my readers who recall identical expressions of misplaced confidence on the part of bankers in news stories just before the 2008 real estate crash will know just how seriously to take such claims.  The shiny new distractions disguised as energy breakthroughs I mentioned here two weeks ago have also started to show up. A glossy puff piece touting oceanic thermal energy conversion (OTEC), a white-elephant technology which was tested back in the 1970s and shown to be hopelessly uneconomical, shared space in the cornucopian end of the blogosphere over the last week with an equally disingenuous puff piece touting yet another rehash of nuclear fission as the answer to our energy woes. (Like every fission technology, of course, this one will be safe, clean, and affordable until someone actually tries to build it.)   No doubt there will shortly be other promoters scrambling for whatever government subsidies and private investment funds might be available for whatever revolutionary new energy breakthrough (ahem) will take the place of hydrofractured shales as America’s favorite reason to do nothing. I admit to a certain feeling of disappointment, though, in the sheer lack of imagination displayed so far in that competition. OTEC and molten-salt fission reactors were already being lauded as America’s energy salvation back when I was in high school: my junior year, I think it was, energy was the topic du jour for the local high school debate league, and we discussed those technologies at length. So did plenty of more qualified people, which is why both of them—and quite a few other superficially plausible technologies—never made it off the drawing board.

Terror Attack on Charlie Hebdo Ignites Fear of Global Nuclear Disaster » For decades our global security apparatus and its attendant media mavens have pretended that the radioactive elephant in the room of global terror does not exist. But after Fukushima, Chernobyl, Three Mile Island, 9/11, Charlie Hebdo and so much more, a terrible reality has become all too clear. We have seen four American-designed reactors explode and three melt at a single Japanese site. A severely escalated thyroid cancer rate has followed, with more health disasters yet to come. Some two dozen sibling GE reactors currently operate in the U.S. We have seen an entire continent—and more—irradiated by Chernobyl, with at least one major study calculating well over a million downwind deaths. Chernobyl-style reactors still operate in Europe. We have seen a U.S. reactor rocked by a 1979 hydrogen explosion and melt-down (repeatedly denied by its owners) that poured still-unknown quantities of radiation into the Pennsylvania countryside. Today, the Ohio Public Utilities Commission is poised to force ratepayers to subsidize the fault-riddled Davis-Besse nuke—a Three Mile Island clone—with millions of gouged dollars to keep it running despite profound vulnerability to its own advanced deterioration and the absolute impossibility of protecting it from a possible terror attack. It has long been established that the accused 9/11 attackers contemplated hitting the reactors at Indian Point, 35 miles up the Hudson from Manhattan.  Neither U.S. military nor local police forces could have stopped such an attack, which could have poisoned millions of people in the American northeast and gutted the entire U.S. ecology and economy.

New Analysis Shows West Virginia’s Chemical Spill Traveled Into Kentucky - The chemical that contaminated West Virginia’s drinking water supply last year traveled father and lingered longer than had been previously recorded, according to a new study by U.S. Geological Survey researchers.  Published online in the journal Chemosphere, the peer-reviewed research shows that the chemical — 4-Methylcyclohexanemethanol, also known as crude MCHM — was present at very low concentrations in Charleston, West Virginia’s tap water more than six weeks after the spill began on Jan. 9, 2014. The official tap water ban in Charleston was lifted five days later, with the Center for Disease Control saying concentrations of MCHM had reached an “appropriate” level of below 50 parts per billion. By Feb. 25, the researchers said Charleston’s tap water still measured crude MCHM concentration of 1 part per billion.  The researchers also say they detected crude MCHM in the Ohio River at Louisville, Kentucky, meaning the chemical traveled at least 390 miles downriver from the spill. Though prominent spill researchers have long speculated that the chemical traveled across state lines, the study’s leader author Bill Foreman told ThinkProgress that his represented, “as far as I know of, the first, reported, published-in-a-journal documentation of [crude MCHM] found there in the Louisville area.”

230,000 People Told Not To Drink Their Water After Diesel Fuel Spill In Canada --The 230,000 residents of Longueuil, a city just outside of Montreal, Canada, have been told that their tap water is unsafe to drink following a diesel fuel spill that leaked into the water supply.  According to media reports, 7,400 gallons of diesel fuel spilled from a city-owned wastewater treatment center in Longueuil, apparently due to equipment failure. Canada’s CBC News reported that the spilled diesel made its way into the sewers from a generator, eventually flowing into the river that supplies drinking water to the city.  The city told its residents on Wednesday morning not to drink their tap water, but then told residents later that afternoon that the water was safe to drink, according to a report from Global News. Then, after reports that residents could still smell diesel in their water, the city on Thursday again put a “do not drink” advisory in place. The city of Longueuil’s press release says the spill is unlikely to cause “any adverse health effects,” and according to Montérégie Public Health, the smell and taste of the diesel-contaminated water would be the biggest issue. Symptoms like diarrhea and vomiting could happen if people ingest the water, but average healthy adults should be safe, according to a CBC report.

Too dirty for the USA - High-pollution fuels exported - Pollution linked to global warming keeps rising even though the world's two largest carbon polluters have pledged to combat climate change, with the US committing to deeper cuts and China saying its emissions will stop growing by 2030. It's a dangerous trajectory the US is stoking with record exports of dirty fuels, even as it reduces the pollution responsible for global warming at home. The carbon embedded in those exports helps the US meet its political goals by taking it off its pollution balance sheet. But it doesn't necessarily help the planet. That's because the US is sending more dirty fuel than ever to other parts of the world, where efforts to address the resulting pollution are just getting under way, if advancing at all. While the exported fuel has got cleaner, in the case of diesel, about 20 per cent of the exports are too dirty to burn in the US.

Ohio Quakes Linked To Fracking - Geologists from the University of Miami report that hydraulic fracturing, or fracking, caused 77 small earthquakes in northeastern Ohio, an area that is normally geologically quiet. Their study, published online on Jan. 5 by the Bulletin of the Seismological Society of America, said energy companies caused the quakes in March 2014 as a result of fracking into an underground area near Youngstown, Ohio, that contained a previously unknown geological fault.  Seismic data determined that the earthquakes ranged in magnitude from 1.0 to 3.0 on the widely used Richter scale between March 4 and March 12, according to Robert Skoumal and Michael Brudzinski, geology professors at Miami, and graduate student Brian Currie. They said the earthquake measuring 3.0 on the Richter scale, which occurred on March 10, was large enough to be felt by people on the surface in the vicinity of Poland Township, a few miles southeast of Youngstown. The researchers matched the dates of the earthquakes with records of fracking activity in the area kept by the Ohio Department of Natural Resources. The two coincided. But Skoumal said there was no way for the energy companies to know that their activities might be hazardous. “These earthquakes near Poland Township occurred in … a very old layer of rock where there are likely to be many pre-existing faults,” he said. “This activity did not create a new fault, rather it activated one that we didn’t know about prior to the seismic activity.”

Study ties 77 Ohio earthquakes to two fracking wells - A new study links nearly 80 earthquakes that occurred in Mahoning County in March 2014 to nearby fracking operations. In the study, published online this week in the Bulletin of the Seismological Society of America, the researchers say that the earthquakes were caused when companies fracked into a previously unknown fault. The result, they say, included a magnitude 3.0 earthquake on March 10 that was strong enough that people in and around Poland Township felt the tremors. After the March earthquakes, the state suspended fracking operations at the two wells, which are operated by Hilcorp, a Texas-based energy company. This study is the second in six months to link fracking along previously unmapped fault lines to earthquakes. In October, researchers released a study showing that fracking triggered hundreds of small earthquakes on a previously unmapped fault in Harrison County in 2013. A process that disposes of fracking wastewater also has triggered earthquakes in Ohio. The water, sand and chemicals that come up with oil and gas often are injected into disposal wells across the state. In September, the state suspended operations at two injection wells near Warren, in northeastern Ohio, after earthquakes rattled the areas around the wells. ODNR started working on new permits for injection wells last year after concluding that 12 earthquakes that occurred near Youngstown in 2013 were caused by injection wells.

Tioga County 'a cautionary tale' about fracking busts -  — The sand trucks barely rumble along the quaint main street in this town in northern Pennsylvania anymore. Three years ago, it was difficult to have a conversation with someone walking next to you, the roar of traffic was so constant. Driving, it could take an hour to get from one end of town to another. But the trucks also came with business: Mining companies had started drilling wells all over the rolling hills surrounding Wellsboro, extracting the precious natural gas that lay beneath. Hydraulic fracturing (“fracking” for short) brought a bonanza to the town the likes of which it hadn't seen even in the heydays of lumber and coal. With 800 wells drilled over five years, royalties paid to landowners for their mineral rights flowed through the community, helping people buy new farm equipment and donate to local charities. New tax revenues poured into local government coffers that never had much to begin with. But like all booms, it only lasted while the money was good. Natural gas prices hit a high of $13.42 per million BTU in October 2005, stayed high for three years, then started falling - fast - bottoming out at $1.95 in April 2012, and stood at $3.48 last month. Without enough profit to justify further investment, most of the activity vaporized. Shell Oil, which had bought up most of the leases in Tioga County, went from a dozen drilling rigs to one. Businesses that had been gearing up for years of sustained growth were left hanging. “With really no warning at all, the bottom fell out of that,” says Jim Weaver, the Tioga County planner, who advises the county's commissioners on land use decisions. “In hindsight, looking at boom and bust cycles that have gone on forever, we should've known that. But when the dollar's dangling in front of you and you're chasing the carrot, before you know it you're out on a limb, and the limb gets sawed off.”

Marcellus Shale Coalition opposes O&G having to report pollution releases -- The Marcellus Shale Coalition is still opposed to including the oil and gas extraction industry on the list of industries that disclose the release of pollutants. Last Wednesday, PennFuture and eight other environmental advocacy groups and organizations sued the Environmental Protection Agency (EPA) in efforts to placing reporting requirements on the oil and gas industry. The group is specifically wanting the industry to make emissions disclosures to the Toxics Release Inventory, a public database that keeps records of certain emissions from facilities in specific areas.However, the coalition is still objecting to the industry being added to the report.  According to the coalition, wells and related facilities, like compression stations, do not emit enough pollutants to meet the EPA standards for having to report.  This is the reason why the EPA did not include the oil and gas industry to begin with, states the coalition. In 2012, the groups filing the lawsuit asked the EPA to broaden the reporting requirements.  At the time, the agency responded saying it would consider it, but never pursued anything more.

Scientists Discover Two New Pollutants In Fracking Waste -- The primary waste product created by oil and gas drilling contains two types of potentially hazardous contaminants that have never before been associated with the industry, research published in the peer-reviewed journal Environmental Science & Technology on Wednesday revealed. Duke University geochemistry professor Avner Vengosh and his team of scientists found that wastewater produced by both conventional and unconventional oil drillers contains high volumes of ammonium and iodide — chemicals that, when dissolved in water or mixed with other pollutants, can encourage the formation of toxins like carcinogenic disinfection byproducts and have negative impacts on aquatic life.  That’s a problem, the study said, because oil and gas industry wastewater is often discharged or spilled into streams and rivers that eventually flow into drinking water systems.

New Toxic Chemicals Found in Frack Waste  -- That treatment plants can’t treat. Coming to a trout stream near you . . .  Unexpected toxic chemicals are surfacing with fracking fluid at drilling sites in Pennsylvania and West Virginia, researchers say. Treatment plants, never designed to handle the mess, are sending the pollutants straight to the region’s waterways. Researchers find alarming levels of ammonium and iodide in fracking wastewater released into Pennsylvania and West Virginia streams.  Two hazardous chemicals never before known as oil and gas industry pollutants – ammonium and iodide – are being dumped and spilled into Pennsylvania and West Virginia waterways from the booming energy operations of the Marcellus shale, a new study shows. Treatment plants were never designed to handle these contaminants. The toxic substances, which can have a devastating impact on fish, ecosystems, and potentially, human health, are extracted from geological formations along with natural gas and oil during both hydraulic fracturing and conventional drilling operations, said Duke University scientists in a study published today in the journal Environmental Science & Technology.

Environmental concerns raised as oil companies take fresh look at fracking in Kentucky - There's been little heat so far in Kentucky over hydraulic fracturing, or fracking, a technique of drilling for oil and natural gas that has caused division elsewhere in the country, but now the controversy has gushed up here.The potential to develop a vast underground shale layer that curves from the northeastern part of the state through Central Kentucky has sparked increased interest among oil and gas companies within the last 18 months.Companies signed hundreds of additional oil and gas leases with landowners in 2014, according to local officials. Much of the interest has been in Lawrence, Johnson and Magoffin counties, which are no strangers to significant oil and gas exploration. But leasing agents also have approached landowners in places with little history of oil production, including southern Madison County and northern Rockcastle County, spooking some residents.Industry engineers say fracking is a proven, safe technology. However, some landowners have refused leases over concerns about the potential for industrial development and heavy truck traffic in their rural area, and about spills or leaks that could damage springs and streams.Some people in the area have organized in hopes of persuading neighbors not to let energy companies drill for oil and gas under their land.The object of the interest among oil and gas companies is an ancient geologic layer called the Rogersville shale.It lies in a basin called the Rome Trough, which in Kentucky curves southwest from Lawrence County through parts of Central Kentucky and on into the southern part of the state.

Frack Loophole Closes Itself as Napalm Clusterfracker Goes Bankrupt - The New York Frack Babies thought they were going to make an end run around the proposed generic guidelines by fracking themselves with gelled LPG (ie. Napalm) instead of water. But the contractor they were negotiating with, Gasfrac, just filed for bankruptcy – along with hundreds of other oil field service providers. Plus there was that thing about their liability coverage – they kept blowing people up. So they ran out of pizzas. Imagine that. Imagine what a partially collapsed salt cavern of this stuff would do . . .  Gasfrac Energy Services Inc. has filed for protection from creditors after the struggling drilling company failed to find a buyer or attract new customers as oil and gas markets sputter. Gasfrac, known for its unique waterless rock fracturing technology, said on Friday it filed for court protection under the Companies’ Creditors Arrangement Act. The move comes two months after it hired financial advisers to seek out strategic options, including a sale. The company said in a statement that it is unable to meet its financial obligations due to negative operating results, limited access to new capital, the slowdown in the energy industry and the absence of a buyer for its assets. The stock was halted on on the Toronto Stock Exchange Friday. It last traded at 27.5 cents, down from $1.99 in May, “The corporation was unable to restructure its affairs in an adequate manner, and after careful consideration of all other available alternatives, the board of directors … determined that it was in the best interests of the corporation and all of its stakeholders to file for an application for creditor protection under the CCAA,” it said.

Controversial Gas Storage Facility in Finger Lakes One Step Closer -- The Crestwood facility would connect to the existing TEPPCO Liquid Petroleum Gas interstate pipeline. The facility would ship LPG by pipeline, by truck via Routes 14 and 14A, and by rail via the existing Norfolk & Southern Railroad. As proposed, the project involves construction of a new rail and truck LPG transfer facility, which “would be capable of operation on a 24-hour basis, 365-days a year.” Construction would also include “surface work consisting of truck and rail loading terminals, LPG storage tanks, offices and other distribution facilities, and storm water control structures.” The proposed facility, which has been under review for five years, has become highly controversial in the Finger Lakes. The draft permit conditions were released by the DEC less than a week after Governor Cuomo’s re-election. Organizations like Gas Free Seneca point to a risk analysis by Rob Mackenzie, MD, which found that, “under the proposal in question the likelihood of an LPG disaster of serious or extremely serious consequence within the county in the next twenty-five years is greater than 40 percent.” Mackenzie’s analysis, which was apparently requested by the Schuyler County Legislature, pointed to the possibility of a truck or rail accident in which LPG was released into the surrounding environment. The bigger risk, said Mackenzie, was a structural collapse or other problem within the caverns themselves. Between 1972 and 2012, “there have been 18 serious or extremely serious incidents in salt cavern storage facilities,” he said. “Nine of the salt cavern incidents were accompanied by large fires and/or eight explosions. Six involved loss of life or serious injury. In eight cases evacuation of between 30 and 2000 residents was required,” reported MacKenzie. “The likelihood of a serious, very serious, or catastrophic incident [in the formations themselves] over twenty-five years is 35 percent,”

Gas storage on Seneca Lake: all burden, no benefit  -- In support of its plans to expand gas storage in the salt caverns adjacent to Seneca Lake, the deepest lake in New York state and the longest of the Finger Lakes, Texas-based oil and gas company Crestwood-Midstream is circulating the claim that the increase in storage capacity will benefit Finger Lakers by helping control propane costs. More storage of butane, propane, and methane is supposed to protect us from shortages and price hikes. It's time to debunk this myth because the bottom line is that Crestwood's plan to expand storage is about their drive to find markets for fracked gases, not keeping prices low for Finger Lakers. The propane is not for us. We are just supposed to hold it -- and bear all the environmental consequences -- until Crestwood finds buyers willing to pay a high enough price. A Texas company makes the money, and New York's efforts to develop renewable energy is shoved onto back burners, propane burners. The spike in propane prices last winter is offered as evidence of the urgent need for more storage -- even though the Crestwood plan goes back nearly five years (having been brought forward by Inergy, a company with which Crestwood merged). If the price hike last year was related to a lack of storage, then one explanation for the current drop in propane prices this year could be because storage has increased. But it hasn't. Crestwood's development plans have been on hold pending more thorough inquiry into hazards associated with storing LPGs next to the drinking water of 100,000 people. The price drop in propane has nothing to do with storage. It's about markets. There is a glut of propane and butane, and the oil and gas companies are looking for customers to buy it.   According to a 2013 industry analysis,"the propane market has been grappling with an over supply situation since Spring 2012." Propane inventories were pushed into "the stratosphere" and increased even further the following year.

Insurgents On The Front Line Of America’s Fracking War -  In audio recordings of a 2012 oil and gas industry conference in Houston obtained by CNBC, Matt Carmichael, manager of external affairs for Anadarko Petroleum, advised attendees to read Rumsfeld’s Rules (Donald Rumsfeld’s guide to life and war), and to download the Army’s counter-insurgency manual. In a separate recording from the same conference, Matt Pitzarella, director of communications for the gas exploration firm Range Resources, bragged that his company employed several former Army psychological operations specialists, noting that they had been “very helpful” in Pennsylvania. It hasn’t hurt the industry either that it’s been given a royal welcome by lawmakers, who have cut the Department of Environmental Protection’s budget by 40 percent since 2009. A 2012 executive order from Pennsylvania Governor Tom Corbett has compelled the Department to approve drilling permits “as expeditiously as possible,” which they have done by the thousands. A 2012 law passed by the state legislature allows drillers to keep the chemicals used in the fracking process secret. Under a medical provision in the measure, doctors treating patients can see the list of chemicals, but only after signing a nondisclosure agreement. Frustrated with the lack of will to police fracking they have encountered locally, many of the insurgents in Pennsylvania’s fracking war have turned their attention to halting the transmission of the gas, targeting a slew of new federally regulated infrastructure projects aimed at getting methane pulled from the ground in their backyards over to markets on the Eastern seaboard and abroad.

Fracked Gas, Coming Through —Fighting these constant attempts to increase fossil fuel infrastructure capacity may feel like whack-a-mole, but clearly from a climate change perspective, every new pipeline is a disaster. That’s why there has been so much effort put into halting the major Keystone XL pipeline that would carry Canadian tar sands oil through the United States to export. The Constitution pipeline might be smaller, running from northern Pennsylvania to Schoharie county, where it would connect into existing pipelines, but it bears many similarities to KXL: It would create precious few permanent jobs; its supporters try to talk about our need for access to fuel, but it seems clearly designed to allow access to export markets; its approval would set back the necessary transition to a lower-carbon-footprint energy infrastructure immensely by making exploiting some of the last remaining fossil fuels easier; and the environmental costs would be high. Some courageous land owners are trying to stand up and say no under incredible pressure.

Idea for gas terminal off East Coast rankles fracking foes - — All that would peek above the ocean waves off New York and New Jersey would be two small buoys tethered to underwater pipes. But they’re already casting a large shadow, with potential effects on the economy of the New York metropolitan area, the marine environment, and even America’s future as a net importer or exporter of energy. Liberty Natural Gas wants to build a deep-water port in federal waters 19 miles off Jones Beach, New York, and 29 miles off Long Branch, New Jersey. Its stated purpose is to bring additional natural gas into the New York area during times of peak demand, thereby lowering home-heating prices. Business and labor groups support the plan, which was first proposed in 2008 and is projected to generate 800 construction jobs. But environmentalists, fishing groups and some elected officials say it is a dangerous, unnecessary project, given that America is awash in large supplies of domestically produced natural gas, much of which is produced in the Marcellus Shale formation just west of New York. A public hearing on the proposal last week drew more than 1,000 people, many of whom said they fear the project, dubbed Port Ambrose, is really a Trojan horse designed to be switched to an export facility once it is built, to facilitate the sale of gas produced by hydraulic fracturing, better known as fracking, to overseas markets. “It seeks to bring us liquefied natural gas: a dirty, foreign, expensive fossil fuel that will be a target for terrorism, and threaten fisheries, clean ocean jobs and tourism,” said Cindy Zipf, executive director of Clean Ocean Action. Jim Lovgren, who runs the Fishermens’ Dock Cooperative in Point Pleasant Beach, called the proposal “an attempt to turn the ocean waters off New Jersey to Louisiana North. If this project is approved, the oil companies will line up seeking to build their own ports and start exporting the huge Marcellus gas reserves” that are currently being developed using fracking.

Lincoln Trail digs in for new fracking program -- Lincoln Trail College this month announced the Robinson based community college would launch a petroleum drilling technology degree program. The program is set to officially welcome students in the fall of 2015. College administrators explained the program’s launch is vital to the area, citing horizontal fracking technology will soon make its way to the already oil-rich Southern Illinois area. “We didn’t want to be left behind, so we petitioned to the state to bring this program back we called it petroleum drilling.” Lincoln Trail College President, Kathyrn Harris, explained that the first big oil boom, and subsequent need for oil education, took over the college about 35 years ago. At that time, Harris explained, the college swelled with students looking to get into the industry. However, the original oil processing degree slowly was dissolved after qualified graduates “saturated the market.” Now, with a change in technology and the original oil boomers looking to retire, the college refocused its efforts to cater to a new wave of oil staffers. “The idea is that many of the people who are working in the oil fields right now are at retirement age because they were our students 30 years ago and they’re ready to get out, so they need a new work force,” said Harris.

Adventures in Mapmaking: Mapping a Fracking Boom in North Dakota - US oil production has been booming the past few years, due in large part to North Dakota’s Bakken formation, a rock layer tapped through fracking. Each well travels down about two miles, then turns horizontally and snakes through the rock formation for another two miles. There were 8,406 of these Bakken wells, as of North Dakota’s latest count. If you lined them all up—including their vertical and horizontal parts—they’d loop all the way around the Earth. As a journalist digging into the long-term potential for shale oil, I wanted to create a map showing the extent of this drilling boom to help me look for trends. In this post, I’ll explain how I did that, but first I want to say why this matters. If there is a lot less oil and natural gas available at affordable prices, this could be good news or bad news, depending on your values, and how the country reacts. On the other hand, if our estimates and forecasts for oil and gas are too optimistic, we could wind up in a bind, dependent on fossil fuels that are significantly more expensive than we’d expected. In a recent feature for Nature, “The Fracking Fallacy,” I reported on differing forecasts for the future of shale gas. If the US continues to try to extract natural gas as fast as possible, and also to export as much as possible, this could lead to much higher energy prices that would likely have a large impact on the economy. As one researcher I spoke with put, we could be “setting ourselves up for a major fiasco.”

North Dakota Admits Half Its Shale Regions Below Breakeven - While talking heads and TV personalities reassure the investing public that low oil prices are "unambiguously awesome" for everyone, it seems the cracks in this narrative are starting to show. From falling wages, surging job cuts, plunging rig counts, and crashing capex, it's becoming a lot harder to 'pretend' that everything's fine. One wonders, when the companies themselves are slashing workweeks and cutting rig counts, when will 'investors' believe... perhaps now that Lynn Helms, Director of the North Dakota Department of Mineral Resources explains to the House Appropriations Committee that at least half of its shale regions are already below breakeven. From a 12 page presentation... The following shale regions are below breakevens (at which new drilling would cease)...(table)

Boom's End? Saudis Sock It to North Dakota - Only a few weeks ago--it feels like eternities now--we talked about how the Saudi Arabian government convinced other OPEC nations not to lower their cartel's output in response to falling oil prices. Rather than take their collective foot off the pedal of production, it signaled that it would be steady going as far as output was concerned. The result has been a further fall in oil prices. In the space of less than half a year, they are down over 50%. Although it's still early going, some of Saudi Arabia's intended targets--US shale produeers--are feeling the pinch. In particular, producers in marginal sites are in trouble given their higher operating expenses in extracting oil and gas. That is, not enough is extracted there to make up for what it costs to perform hydraulic fracturing at current market prices. Anecdotally, the number of oil rigs operating in these sites in North Dakota--second after Texas in terms of shale production--is noticeably decliningOnly five oil rigs were drilling in Divide County this week, down from 12 last August, according to state data. While those only account for a handful of the more than 162 rigs still drilling in North Dakota, the drop has been much steeper than elsewhere in the state and could signal trouble across the No. 2 U.S. oil producer behind Texas if prices continue to slide.  A "Coming Soon" sign still marks the spot on a patch of fallow farmland just outside of Crosby, the county seat, where a 200-person "man camp" to house oil workers was set to be built. Late last fall, Timberline Construction Group, an Alabama-based contractor, put the project on hold after an oil company pulled out of a housing contract. In downtown Crosby, restaurants and bars report fewer rig workers, and foot traffic has noticeably slowed. Two businesses have been put up for sale.

EDITORIAL: Attack sex trafficking across all state lines - A special investigative television report on sex trafficking in North Dakota ’s Bakken oil region and the Midwest Sunday wrapped up Forum News Service’s multi-media investigative project. The Trafficked TV special report can be found along along with all the series’ content at This TV special report is a must-see piece of excellent reporting. It further probes and exposes the phenomenon of sex trafficking in young girls in a part of the country where such criminal activity was unheard of just a few years ago. Investigative reporting can only do so much. The examination of shocking facts, disturbing trends, and societal failings revealed in articles by reporters Amy Dalrymple and Katherine Lymn will have been worth the effort only if action is taken to halt the abuse and kidnapping of girls as young as 14 years in the lucrative sex trade in North Dakota and the Midwest Law enforcement and other agencies are doing a lot. Make no mistake about it. Their work has made a difference. But much more needs to be done to counter organized, sophisticated criminal enterprises.

Brine spills into creek north of Williston - The North Dakota Department of Health has reported that an unspecified amount of material used in the hydraulic fracturing production process was released into a creek in Williams County. The Department of Health was notified of the spill by Summit Midstream. The produced salt water known as brine was released approximately 15 miles north of Williston from a disposal line. The spill has impacted nearby waters in Blacktail Creek which is located downstream from Blacktail Lake. Currently, an environmental contractor for the responsible party is on the location working on the cleanup and remediation process. Personnel from the North Dakota Department of Health and the North Dakota Oil and Gas Division have also responded to the scene. The Environmental Protection Agency says that produced brine water may contain toxic metals and radioactive waste. These substances can be extremely damaging to the environment and public health if released onto the surface.

Utah Oil Boomtown Hostile to Midwife’s Concern Over Skyrocketing Infant Deaths  - When a polluting industry creates jobs and economic activity, especially in the very poor areas where these industries often land, there’s a tendency of citizens to want to deny any impact on its health or environment. Such a clash of interests has reached a sad impasse in a Utah oil boom town where some citizens are scapegoating a midwife who is raising questions about a spate of infant deaths. A heartbreaking story in the Los Angeles Times tells about 20-year midwife Donna Young, who noticed what she thought was an exceptional number of gravestones for infants at the local cemetery in Vernal, Utah.  She wondered if there could be a connection to the oil industry, which underpins the area’s economy and provides about half the town’s annual budget. A state investigation is underway, but in the meantime, area residents—even mothers of some of the deceased infants—are already angrily denying the connection and demonizing Young for asking questions, reports the L.A. Times. She’s gotten threatening calls, been attacked on local talk radio and online, and even found rat poison in the animal feed on her ranch, exposing the fear, anger and denial some people feel when fossil fuel industries are the linchpin of an economy. As Vernal’s Mayor Sonya Norton aptly told the paper, “People get very protective of what we have here. If you challenge our livelihood, it’s considered personal. Without oil, this town would be a couple of storefronts and a gas station.”

Seismologists Disagree Over Texas Earthquake Swarm - - A swarm of recent earthquakes that has rattled residents in and around Irving, Texas, has sparked a disagreement among seismologists over how to determine whether fracking could be to blame.  On the one side, the seismologist for the regulatory agency overseeing the state's oil and gas industry said he sees no connection between the two.“There are no oil and gas disposal wells in Dallas County,” Craig Pearson, the seismologist for the Texas Railroad Commission, said in a statement. “And I see no linkage between oil and gas activity and these recent earthquakes in Irving.” But a geophysicist from the U.S. Geological Survey said an investigation must look at all possibilities. “It’s too early for us to say that we don’t see any connections yet,” said Robert Williams, a coordinator with the U.S. Geological Survey Earthquake Hazards Program in Golden, Colorado. “We don’t want to rule anything out at this point.” And an investigation into whether fracking could be responsible should look at wells over a greater area than the Railroad Commission would consider, Williams said. Recent studies have shown larger distances between wastewater disposal wells and the earthquakes associated with them, he said.

Could Fracking Cause a Major Earthquake? : Discovery News: Shortly before midnight on Aug. 23, 2011, residents of Trinidad, Colo. and surrounding communities were startled when the ground started shaking beneath them, knocking bricks and stones loose from buildings. Fortunately, no one was injured. As far as earthquakes go, the 5.3 event and the aftershocks that followed were relatively mild. Nevertheless, the Trinidad quake raised anxiety for another reason. The U.S. Geological Survey eventually concluded that it probably was a man-made quake, caused by the disposal of waste water produced by the oil and gas industry.  Similarly, scientists have linked disposal of oil-gas industry waste water to increased seismic activity in states ranging from Texas to Ohio. That's raised additional worries about one of the sources of that waste water -- fracking, the controversial process in which water, sand and chemicals are injected into the earth at high pressure to crack rock formations and reach deposits of natural gas and oil. While the fracking boom in recent years has provided an economic boost to the United States and increased its energy independence, some worry that there's a potentially catastrophic downside, if the process adds to the waste water that's lubricating earthquake faults.  And while most of the quakes linked to waste water injection wells have been small to moderate in intensity, some worry that one eventually could trigger a major quake that might seriously damage buildings and important infrastructure, and endanger people as well.

The Crash of 2015: Day 9 - With oil prices at about half what they were six months ago, the most vulnerable players in the oil business, the frackers who brought about the new American Oil Revolution, are imploding. If you think that’s just their end of the boat sinking, no worries here, think again. They are, or were, the last best hope of continuing the oil bonanza, and they’re done. As soon as that fact is so obvious that even Faux News has to admit it (this may take a few months), it will dawn on us all that the very same thing is happening to the deep water drillers, the Arctic drillers and the tar sands wringers.It would have happened at any oil price.  That’s the meaning of the Crash of 2015.  Here’s what’s happened, what’s happening and what’s about to happen.

  • WBH Energy files for bankruptcy protection. American Eagle Energy suspends all drilling  operations. US Steel to close two plants making steel pipe for oil drillers, laying off 750. Dallas Federal Reserve Bank sees job losses of 250,000 in eight states.
  • Resolute Energy, operating in Texas, Utah and Wyoming, has just borrowed $150 million from the “alternative” investment group Highbridge Capital at an effective interest rate (after fees, guarantees and other legerdemain) of as much as 25%.  It  would be bad enough if Resolute had to borrow to keep on drilling, but this loan was taken for the sole purpose of avoiding default on previous debt (which, if negotiated more than six months ago in the prevailing market, probably cost around six per cent).
  • Sanchez Energy, after having announced a reduction in its capital spending plans in November, announced a second cut that brings its capital budget down to half what it was expected to be. This was one of several such announcements from around the world as the oil companies try to preserve cash by not spending as much on developing new wells.
  • Laricina Energy, operating in the Canadian tar sands with $1.3 billion in equity financing (from stock sales) and $150 million in four-year notes, is in default on the notes and needs another $350 million to do what it’s doing. Next step: probably liquidation.

Money Dries Up for Oil and Gas, Layoffs Spread, Write-Offs Start - When money was growing on trees even for junk-rated companies, and when Wall Street still performed miracles for a fee, thanks to the greatest credit bubble in US history, oil and gas drillers grabbed this money channeled to them from investors and refilled the ever deeper holes fracking was drilling into their balance sheets. But the prices for crude oil, US natural gas, and natural gas liquids have all plunged. Revenues from unhedged production are down 40% or 50%, or more from just seven months ago. And when the hedges expire, the problem will get worse. The industry has been through this before. It knows what to do.  Layoffs are cascading through the oil and gas sector. On Tuesday, the Dallas Fed projected that in Texas alone, 140,000 jobs could be eliminated. Halliburton said that it was axing an undisclosed number of people in Houston. Suncor Energy, Canada’s largest oil producer, will dump 1,000 workers in its tar-sands projects. Helmerich & Payne is idling rigs and cutting jobs. Smaller companies are slashing projects and jobs at an even faster pace. And now Slumberger, the world’s biggest oilfield-services company, will cut 9,000 jobs.  It had had an earnings debacle. It announced that Q4 EPS grew by 11% year-over-year to $1.50, “excluding charges and credits.” In reality, its net income plunged 81% to $302 million, after $1.8 billion in write-offs that included its production assets in Texas.  Larger drillers outspent their cash flows from production by 112% and smaller to midsize drillers by a breathtaking 157%, Barclays estimated. But no problem. Wall Street was eager to supply the remaining juice, and the piles of debt on these companies’ balance sheets ballooned. Oil-field services companies, suppliers, steel companies, accommodation providers… they all benefited. Now the music has stopped. Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under.

New Documentary Proves Fracking = ZOMBIES -- Not just human zombies, but zombie dogs, zombie cats, zombie deer, and zombie trout. Even publicly-listed frack companies that are financial zombies. A new hard-hitting documentary is scheduled for its world premiere next month in Fracksylvania. Coming close on the heels of New Yorks’ DOH study, the documentary conclusive ties the increase in the number of teenage mutant ninja zombies to . . . you guessed it . . . fracking. Or so the trailer and promo material have led me to believe. And I’ll believe just about anything negative about fracking these days, even that it causes earthquakes for goodness sakes. “Zombie Killers: Elephant’s Graveyard,” a movie thriller whose executive producer is event center owner Jeff Trainer and which was shot in the Poconos last summer, has been given a commercial release date of Feb. 3.  And the event center will hold a premiere showing with several of the stars in attendance at 5 p.m. Feb. 21. The film, which stars “Titanic” alum Billy Zane, “E.T.: The Extra-Terrestrial” star Dee Wallace and “The O.C.” star Mischa Barton, is set for wide release on DVD and Blu-ray, according to a release from Anchor Bay Entertainment, which is distributing the film.

Opinion: How fracking changes everything. — Forget, for the moment, whether you think fracking is an energy godsend or an endtimes disaster. Just consider how it’s everywhere. In the long run, fracking will impact our lives far more than four of its fellow inductees into the Merriam-Webster dictionary this past year: Hashtags, selfies, tweeps, and turduckens all have their place in society. But none touch everyone’s lives like fracking will, and already has. The coal industry readily admits that it’s being undercut by low natural gas prices. A growing boneyard of shuttered coal-fired power plants, and rushed plans to salvage the U.S. coal industry by creating export markets to Asia are a direct impact of the fracking boom, and a domestic oversupply of oil and natural gas.   Nuclear power is on the ropes as well. The December shutdown of the Vermont Yankee nuke plant followed other closures in Wisconsin, California and Florida. Judgment day is nearing for nukes in Ohio, Illinois, and New York where cheap natural gas has made nuclear power too costly. And the oil and gas industry’s fracking windfall is even claiming victims in the oil and gas industry. Citing the collapse in oil prices, energy giants Royal Dutch Shell and Suncor both announced layoffs and cutbacks in tarsands production this week.

Shale oil and gasoline prices -- Only a few years ago, many observers expected a steadily growing global shortage of crude oil. This shortage did not materialise in part because of the rapidly growing production of shale oil in the US. The production of shale oil (also referred to as tight oil) exploits technological advances in drilling. It involves horizontal drilling and the hydraulic fracturing (or fracking) of underground rock formations containing deposits of crude oil that are trapped within the rock. This process is used to extract crude oil that would have been impossible to release by conventional drilling methods designed for extracting oil from permeable rock formations. Shale oil production relies on the availability of suitable drilling rigs and skilled labour, which is one of the reasons why the US shale oil boom so far has been difficult to replicate in other countries. US shale oil production has grown from about 0.4 million barrels a day in 2007 to more than 4 million barrels a day in 2014. This expansion was stimulated by the high price of crude oil after 2003, which made the application of these new drilling technologies cost competitive. The expansion of US shale oil production soon captured the imagination of policymakers and industry analysts. By 2012, the International Energy Agency projected that the US would become the world’s leading crude oil producer, overtaking Saudi Arabia by the mid-2020s and evolving into a net oil exporter by 2030 (International Energy Agency 2012). Pundits envisioned the US becoming independent of oil imports, net oil exports financing the US non-oil trade deficit, and consumers enjoying an era of cheap gasoline with a resulting rebirth of US manufacturing. My recent research, however, suggests that these visions remain far removed from reality (Kilian 2014).

This Is Just the Beginning of the Great American Oil Bust  “This is going to be a painful period of time,” explained Texas Governor Rick Perry.  His speech to a conservative forum on Friday in Austin made one thing clear: for Texas, the largest oil-producing state in the nation, the oil bust won’t be easy, even if seen from the perennially optimistic point of view of a politician. It won’t be easy for any oil-producing state – or the country. A few days ago, Helmerich & Payne, announced that it would idle 50 more drilling rigs in February, after having already idled 11 rigs. Each rig accounts for about 100 jobs. This will cut its shale drilling activities by 20%. The other two large drillers, Nabors Industries and Patterson-UTI Energy are on a similar program. All three combined are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ,”  “They all know they’re staring down a cliff, they just don’t know how far it goes yet,” , according to FuelFix. This year, spending on oil and gas drilling could plunge by $58 billion – or 30% – from last year’s $196 billion, based on a survey of 225 companies in the sector. Barclays conducted the survey over the past four weeks, and the price of oil has continued to drop since, and companies will adjust to the new realities. Small to midsized drillers are making even deeper cuts in drilling to stem the cash outflow. For example, Houston-based Halcón Resources cut its 2015 budget to a range of $375 million to $425 million, down 55% to 60% from its 2014 budget of $950 million. These companies are just trying to hang on. Shares closed at $1.59 on Friday, down 87% from their $12 peak in February 2012, and down 79% from June 2014.

The Shale Crash of 2015 --  Remember the Housing Market Crash of 2008 ? That put the country into the worst recession since the Great Depression. Standby for The Shale Crash of 2015. Wherein the shale drilling and service companies and their lenders, particularly some oil patch regional banks and junk bond financiers get royally fracked. Tumbling oil prices are dimming one of the few big bright spots that banks have enjoyed since the financial crisis.  Banks have been lending hand over fist to companies in the nation’s energy industry, underwriting bonds, advising on mergers, even financing the building of homes for oil workers. All of this has provided a boon to banks that have been struggling to find more companies and consumers wanting to borrow. Yet with the price of crude oil falling below levels sufficient for some energy companies to service their huge debts, strains are being felt and defaults are likely. While it may take some time for the crunch in the oil industry to translate into losses, one thing already seems clear: The energy banking boom is over.

America’s Shale Boom is Not Dead: Folks are comparing today's U.S. oil market to a run of the mill Ponzi scheme, shell game or bond bubble. But when you crunch the numbers, all of those fear-mongering terms don't make sense in the context of today's oil market. Sure, there are a lot of derivative contracts involved in the oil market. Heck, it seems like you can't make a turkey sandwich without a derivative contract these days. But those derivatives aren't a black plague set to take down the whole U.S. shale industry. Far from it, in fact. You see, the key to a good "scheme" is that it's built on false money flows and lies. Today I'll show you why we won't see widespread, Ponzi-like collapse in the oil market. Fact is, the U.S. has a lot of economic oil to go around. There's no "great lie" found at the heart of America's shale boom. And many of the well-run players in this space will never get close to default - let alone spark a 2008-type meltdown. It's time to spread the good word: the shale boom ain't dead. Simply put, the mainstream media and the folks that joined the "we hate the shale boom" bandwagon, still have the story wrong. America's oil boom is real. Underneath domestic soil sits a massive supply of oil and gas - decades worth of supply. I've been to North Dakota's oil rigs. I've seen the boom in South Texas, Pennsylvania, Oklahoma and Colorado...

Shale War Full Frontal -- Despite Saudi prince bin Talal's explanations of the imbalances between supply and demand being the prime driver of lower oil prices, we thought a look at just where that over-supply is coming from might provide some context into the 'shale oil war'. As the following chart shows, since the start of 2014, rig counts in Saudi Arabia, Kuwait, and UAE have surged (just as they did in the mid-2000s). As of this week, US rig counts are now at 14 month lows as it appears clear that the core OPEC producers are intent on drowning the shale oil industry in excess supply.  And as T.Boone Pickens noted previously, the last time this happened (massive oversupply from Saudis), the US rig count was more than halved (from what then was an unprecedented surge)... And as T.Boone Pickens noted previously, the last time this happened (massive oversupply from Saudis), the US rig count was more than halved (from what then was an unprecedented surge)...

OPEC Wants to “Crush U.S. Shale” » Just how low can the oil price go? What was unthinkable even a few months ago is now becoming distinctly probable, even likely. As analysts dissect the ramifications for the oil industry of $40 a barrel, oil traders are now thinking that the price of crude will halve that to a staggering $20 a barrel. Prices have not been that low for 20 years. Just a few weeks ago, traders believed that the oil price would bottom out at around $40 a barrel, but two weeks into January and we have reached that level already. If the price of oil drops to $20 per barrel there will be carnage in the upstream unconventional oil industry in North America. This is looking increasingly likely. As The Australian Business Review reports this morning “the number of contracts or options to sell U.S. crude at $US20 in June has jumped from close to zero at the beginning of the year to 13 million barrels of oil.” The next few months could be some of the most defining ones in the whole of the hydrocarbon era. If that sounds like hyperbole, think again. The Telegraph reports that the Arab states of OPEC are preparing to “crush U.S. shale,” in their strategy to counter the shale gas revolution headon.

The Scariest Chart For America's Shale Industry -- Back in early November, when we posted "If WTI Drops To $60, It Will "Trigger A Broader HY Market Default Cycle", it was greeted with the usual allegations of conspiracy theorism, tin-foil hattery and pretty much everything else, except rebutting facts.  Two months later, it was none other than Goldman which threw in the towel on its call from July 28 of 2014 when it said that "the long-awaited global recovery appears to be getting on track, lifting commodity demand" and scrambled to explain overnight that nothing short of a mass default wave within the shale space will end the ongoing collapse in prices, which are driven not by supply/demand fundamentals but by ZIRP, and a generation of junk bond BTFDers, who can't wait to invest in the latest 10%, 15%, 20% or higher "yielding" opportunity (ignoring that the issuer may default before even one coupon is paid). In other words, those bond holders who wish to blame someone for the collapsing prices of junk bonds, feel free to address them to Ben Bernanke and his successor, who have enabled insolvent companies to live long beyond their viable lifecycle thanks to a zero cost of capital and a generation of traders who no longer know risk.   This is how Goldman's Currie tongue-in-cheekly explained this dilemma:  [U]nlike physical stress, how low prices need to go is dependent upon the producer’s view of the future and the persistence of the current low price environment. The lower and more persistent the producer views the future pricing outlook, the quicker the restructuring. Given the optimistic nature of the oil drilling business, producer views are unlikely to change until the environment becomes extremely hostile with prices low enough such that survival becomes questionable.

Shale Debt Matters Most to Stock Investors as Oil Plunges - U.S. shale drillers may tout how much oil they have in the ground or how cheaply they can get it out. For stock investors, what matters most is debt. The worst performers among U.S. oil producers in a Bloomberg index owe about 5.7 times more than they earn, before certain deductions, compared with 1.7 times for companies that have taken less of a hit. Operations, such as where the companies drill or how much oil versus gas they pump, matter less. “With oil prices below $50 and approaching $40, we’re in survivor mode,” Steven Rees, who helps oversee about $1 trillion as global head of equity strategy at JPMorgan Private Bank, said via phone. “The companies with the higher degrees of leverage have underperformed, and you don’t want to own those because there’s a fair amount of uncertainty as to whether they can repay that debt.” The biggest drop in oil prices since 2008 has spared few energy companies. The Bloomberg Intelligence North America Independent Exploration & Production Index, which includes 57 U.S. companies in the analysis as well as 17 Canadian ones, lost 53 percent since crude peaked in June, wiping out $346 billion in market value. The most-indebted producers suffered most, suggesting investors are concerned with their ability to pay back borrowers and fund future drilling. Because shale wells deplete more quickly than conventional wells, producers need to keep drilling to maintain output. That takes debt. The companies in the index owe a combined $247.1 billion, an 85 percent increase from three years ago. Including some overseas assets, total production rose 60 percent to 13.3 million barrels a day in that time, data show.

How much fracking is happening in the Gulf of Mexico? - We don’t know nearly enough about the fracking that’s already going on in the U.S. — that’s the point of two lawsuits filed this past week by environmental advocates against the federal government. In the first suit, an environmental group is suing the feds to get more information about hydraulic fracturing happening off U.S. coastlines, an increasingly common practice that hasn’t yet sparked the same public debate that fracking on land has. In the second, a coalition of nine groups is suing the EPA to force companies to release information about toxic chemicals used in the fracking process. Fracking allows drillers to get at hard-to-reach oilfields that weren’t readily accessible before, especially offshore. Many underwater areas that were considered tapped out are now looking potentially profitable once again. The Gulf of Mexico appears especially lucrative — Heather Smith wrote recently for Grist that drillers are viewing it as a “giant, underwater piggybank.” But, as this gold rush begins, environmentalists are pointing out that we know very little about the risks involved with projects like these. And, in the past, when we’ve lacked knowledge about the dangers of risky offshore drilling operations, bad things have happened. (See: Deepwater Horizon.) Thus the lawsuit, filed by the Center for Biological Diversity. By compelling the Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement to disclose permits, documents, and emails related to the approval of drilling operations, the Center hopes to learn the extent of the practice.

Pope Francis Says No to Fracking -- We’ve been busy lately providing news on all the great ways Pope Francis is working to create a healthy, sustainable planet. In July 2014, Pope Francis called destruction of nature a modern sin. In November 2014, Pope Francis said “unbridled consumerism” is destroying our planet and we are “stewards, not masters” of the Earth. In December 2014, he said he will increase his call this year to address climate change. And, last week we announced that Pope Francis is opening his Vatican farm to the public.  Now, we learn from Nicolás Fedor Sulcic that Pope Francis is supportive of the anti-fracking movement. Watch this interview by Fernando Solanas where he met with Pope Francis soon after finishing a film about fracking in Argentina.

As Frac Sand Mining Expands, Community Activists Face Off Against Companies  -- Wisconsin acts as the heart of the industry, with sands mined in the state making up 75 percent of the US market.  Estimates of total sand mined in 2014 are expected to be 30 percent higher than 2013 totals. Six years ago, when Popple first learned about proposals to open frac sand mining facilities in Chippiwa County, there were only four sites in Wisconsin. Today, 140 have been developed, with handfuls more in the works. Wisconsin alone is expected to soon mine 50 million tons of frac sands each year, equivalent to 9,000 semi-truck loads. These days, Popple tells Truthout, there are "piles of dust" on railroad tracks, which makes its way into local communities when trains go past. The air is thick with it in the boiling hot summers.  Popple and others are worried about the impact all that dust is having on their lives. And without strong oversight from the Wisconsin Department of Natural Resources (DNR), they have little way of knowing. The DNR doesn't require companies to monitor levels of airborne crystalline silica dust, a byproduct of mining and a known carcinogen. Heavy exposure can scar tissue and lead to chronic pulmonary problems, heart problems, kidney disease and autoimmune disorders. Research led by Dr. Crispin Pierce of the University of Wisconsin at Eau Claire shows that crystalline silica levels at the state's frac sand operations are higher than workplace standards set by the federal Occupational Safety and Health Administration (OSHA). Researchers from the University of Iowa are now measuring crystalline silica dust in Wisconsin communities near frac sand sites to better understand whether widespread exposure is also occurring.

Keystone Pipeline’s Nebraska Path Cleared; Congress Votes - The Keystone XL pipeline faces one less hurdle after Nebraska’s highest court cleared its path through the state, sending the matter back to Washington. The pipeline would funnel crude from Alberta’s oil sands to a network junction in southeast Nebraska, for transport to Gulf Coast refineries. While the ruling is a victory for energy independence proponents, the project’s fate remains uncertain. It now returns to President Barack Obama, who had put off a decision citing the pending lawsuit. Today, the House of Representatives passed a bill that would force approval of the pipeline. Why Keystone CountsWhile four of the seven Nebraska Supreme Court judges held that they would block Keystone XL, five were needed to declare unconstitutional a law that allowed the governor to dictate its path. As a result, the route survived by default.

Senate Votes to Proceed on Keystone XL Pipeline Bill --After a short debate on the floor today, the Senate voted 63-32 to overcome a 60-vote threshold to begin debate on SB 1—the bill to approve the Keystone XL pipeline. This is the first time the Senate has been able to clear this key procedural hurdle, thanks to a now Republican-controlled Senate. Ten Democrats and one independent—Senator Angus King of Maine—voted with Republicans to move forward on the bill.  The debate wound up prior to the late-afternoon vote with an impassioned though factually shaky presentation by pipeline supporter John Hoeven of South Dakota, who used a map to emphasize his contention that shipping tar sands oil from Canada would help make the U.S. energy-independent. Indiana Senator Dan Coats also spoke in favor of, while Virginia Senator Tim Kaine, Washington Senator Maria Cantwell of Washington spoke in opposition to the pipeline.“Here we stand in what people still call the world’s greatest deliberative body, and the first bill that we are taking up is not infrastructure generally, not national energy policy, and not even national laws as they relate to our pipeline infrastructure,” said Schatz. “No, we are legislating about a specific pipeline which will move oil from Canada through the U.S. to be primarily exported from our southern border.” He added, “Our economy will do better and grow faster and be more resilient if we embrace the technologies at our fingerprints and end our reliance on fossil fuels. We have a chance to embrace the future here and our future in not in tar sands oil.”

Senate Advances Bill To Approve Keystone Pipeline Despite Obama's Veto Threat - The Senate advanced legislation Monday night to approve the Keystone XL pipeline, even though President Barack Obama has already said he would veto it.  The Senate voted 63-32 to clear a procedural hurdle and begin debate on the bill. Ten Democrats and one independent, Angus King (Maine), voted with every Republican to move the bill forward. Those Democrats included Sens. Michael Bennet (Colo.), Tom Carper (Del.), Bob Casey (Pa.), Joe Donnelly (Ind.), Heidi Heitkamp (N.D.), Joe Manchin (W.Va.), Claire McCaskill (Mo.), Jon Tester (Mont.), Tom Udall (N.M.) and Mark Warner (Va.). A final vote is expected later this week. Despite the strong vote, the Senate lacks the two-thirds majority vote needed to overcome a veto. The House passed the bill last week by a vote of 266 to 153 -- also shy of the 290 votes needed to clear a veto.  Congressional action on Keystone comes after the Nebraska Supreme Court cleared the way last week for the proposed pipeline's route through the state. The Obama administration had been waiting for the Nebraska ruling to render its own decision on the pipeline, which is still forthcoming.

For the Love of Carbon - Krugman -   It should come as no surprise that the very first move of the new Republican Senate is an attempt to push President Obama into approving the Keystone XL pipeline, which would carry oil from Canadian tar sands. After all, debts must be paid, and the oil and gas industry — which gave 87 percent of its 2014 campaign contributions to the G.O.P. — expects to be rewarded for its support. But why is this environmentally troubling project an urgent priority in a time of plunging world oil prices? Well, the party line, from people like Mitch McConnell, the new Senate majority leader, is that it’s all about jobs. And it’s true: Building Keystone XL could slightly increase U.S. employment.  For more than seven years ... the United States economy has suffered from inadequate demand. . In such an environment, anything that increases spending creates jobs. ... From the beginning, however, Republican leaders have held that we should slash public spending... And they’ve gotten their way... The evidence overwhelmingly indicates that this kind of fiscal austerity in a depressed economy is destructive...Needless to say, the guilty parties here will never admit that they were wrong. But if you look at their behavior closely, you see clear signs that they don’t really believe in their own doctrine.  Consider, for example, the case of military spending. When it comes to possible cuts in defense contracts, politicians suddenly begin talking about all the jobs that will be destroyed. This is the phenomenon former Representative Barney Frank dubbed “weaponized Keynesianism.”And the argument being made for Keystone XL is very similar; call it “carbonized Keynesianism.”  But government spending on roads, bridges and schools would do the same thing.

I too believe that Keystone XL could be environmentally damaging ... But that doesn't mean I'm necessarily against it.  We should be comparing the benefits of KXL against its costs. This means that we should not (1) be opposed to any project that is environmentally damaging and (2) ignore the jobs by calling them trivial, but treat them correctly in the analysis. In other words, jobs are costs unless an economy is having trouble generating jobs. Even if the economy is having trouble generating jobs you should only include about 50% of the income over a limited time period (e.g., the average duration of unemployment). With a 5.6% unemployment rate and more and more evidence that we may be going from recovery to expansion in the business cycle it is probably OK to ignore jobs but let's do the calculation just for completeness. If the jobs earn $50k annually (I got that number from Keystone) and unemployment duration is 6 months then the benefits from the jobs is about $525 million.  Just guessing, let's say that the annual chance of a major spill is 1%. That puts the expected environmental costs at something like $6 million (using replacement costs instead of willingness to pay to avoid a spill). Discounted in perpetuity at 5%, the present value of environmental costs is $120 million.  Pegging the net effect on the price of gasoline and carbon emissions at zero, the benefits of KXL range from zero to $525 million (depending on where we are in the business cycle) and the costs might be about $120 million. This is just a SWAG (or maybe just a WAG) but still, it is better than Krugman's analysis.

Wild Card: Will Low Oil Prices Impact Obama's Decision on Keystone XL? - In the past five months, crude oil prices also have dropped to their lowest points since April 2009, arming Keystone opponents with a new argument. With benchmark Brent and WTI crude oil now selling for about $50 or so a barrel, they say Keystone XL flunks Obama's sole test for the pipeline, which he described in a June 2013 speech: that it "not significantly exacerbate the problem of carbon pollution." To understand that argument, it's important first to distinguish between new oil wells and wells that are already producing.  Keystone XL is and has always been not about existing tar sands production – which for the most part is locked in – but whether we enable the expansion of tar sands production, whether we build a major pipeline that will enable new tar sands production projects to move forward and be locked in for the future," says Anthony Swift, a staff attorney with the Natural Resources Defense Council. When it comes to developing the tar sands, most of the costs are upfront during the drilling phase; once a well is producing, operating it is pretty cheap. In Canada's tar sands in particular, extracting oil is especially expensive, meaning for companies to break even on any new wells there, they need not only a higher market price for oil but also minimal expenses. "Oil prices really have an impact on drilling rather than production, because the cost to get it out of the ground is pretty low," says Michael Webber, deputy director of The Energy Institute at the University of Texas-Austin. "You might not drill if it’s $50 a barrel, but you probably will produce – you’ve already sunk the money."

Is Keystone Still Viable Amid Low Oil Prices? -  While the political machinations of Keystone, with all the horse trading it inevitably entails, certainly make for some excellent headlines, an equally pressing question is whether the project is even viable with today’s oil prices, which dropped further on Monday to below $46 a barrel in North America.The rationale for Keystone was a way to bring together booming US oil production, and to a lesser extent, production from the oil sands in Northern Alberta, to Gulf Coast refineries that were facing declining imports from Mexico and Venezuela. The project was first proposed in 2008 and was supposed to begin carrying 830,000 barrels a day in 2012.  But the market didn’t wait for the pipeline to be built, and landlocked Canadian crude has found its way to Texas and Louisiana refineries by rail instead. Canadian oil exports by rail tripled to a record 182,000 barrels a day in the third quarter, according to Canada’s National Energy Board. The United States has also been importing Canadian oil like gangbusters, showing that the trade will happen with or without the pipeline extension (Keystone XL is an addition to the existing pipeline). Data from the US Energy Department showed US imports of Canadian crude reached a record 3.1 million barrels a day in September. So with some of the project’s goals already being met, in terms of increased production flowing from Canada to the US, the question has become, why is a pipeline needed anymore? And now, with the oil price down more than 50 percent since June, Canadian production is certain to fall, lessening demand for oil transportation and thus casting doubt on the economics of the project according to observers.

Shell to cut 5 to 10 percent of jobs at oil sands project (Reuters) - Royal Dutch Shell will cut between 5 and 10 percent of the just over 3,000 jobs at its Albian Sands mining project in northern Alberta, a company spokesman said on Friday, although he refrained from connecting the move to plunging oil prices. Spokesman Cameron Yost said the actual number of job reductions at the Canadian operation had not yet been finalized, adding it would be "well below" 10 percent. The cuts were announced to Shell employees on Thursday. true Yost said those affected will be considered for other positions within Shell's operations. "It's not layoffs in the traditional sense of the word," Yost said. "It's adjustments to the organizational structure." Albian Sands is the mining portion of Shell's Athabasca Oil Sands project near Fort McMurray, Alberta, which also includes the 255,000 barrel-per day Scotford upgrader. Last February, Shell halted work on its proposed 200,000 bpd Pierre River oil sands mine in Alberta, saying it was re-evaluating the timing of various asset developments. Asked whether the reductions were related to the halving of global oil prices in the past six months, Yost said: "Even if oil price had remained stable we would still be looking at these areas of our business."

Suncor Energy Slashes FY15 CapEx Budget By $1 Bln; To Cut 1,000 Jobs - Suncor Energy Inc. (SU.TO, SU) on Tuesday announced significant spending reductions to its 2015 budget in response to the current lower crude price environment. The cuts include a $1 billion decrease in the company's capital spending program, as well as sustainable operating expense reductions of $600 million to $800 million to be phased in over two years offsetting inflation and growth. Suncor is implementing a number of initiatives to achieve the cost reduction targets, including deferral of some capital projects that have not yet been sanctioned, such as MacKay River 2 and the White Rose Extension, as well as reductions to discretionary spending. Suncor also said it will reduce total workforce numbers in 2015 by about 1000 people, mainly through its contract workforce, in addition to reducing employee positions. There will also be an overall hiring freeze for roles that are not critical to operations and safety, the company said. Major projects in construction such as Fort Hills and Hebron will move forward as planned and take full advantage of the current economic environment. Suncor has issued an update to its 2015 guidance to reflect, among other items, reduced spending and lower pricing and related assumptions. Production guidance for 2015 has not changed.

Suncor Cuts Capex By $1 Billion, Fires 1000, Implements Hiring Freeze -- For all those who have forgotten that the I in the GDP equation stands for Investment, here is a reminder courtesy of the latest crude collapse victim, Suncor, which moments ago announced it is not only cutting its 2015 CapEx by $1 billion (as in I, directly and adversely impacting US GDP by the same amount) but that it would also cut "operating expenses" by up to $800 million, and, drumroll, implementing "a series of workforce initiatives that will reduce total workforce numbers in 2015 by approximately 1000 people, primarily through its contract workforce, in addition to reducing employee positions. There will also be an overall hiring freeze for roles that are not critical to operations and safety." Or as Joe LaVorgna and all the other mainstay CNBC "analysts" would call it, "unambiguously good."

The 2014 oil price slump: Seven key questions - Plunging oil prices affect everyone, albeit no two countries will experience it in the same way. In this column, the IMF’s Chief Economist Olivier Blanchard and Senior Economist Rabah Arezki examine the causes as well as the consequences for various groups of countries and for financial stability more broadly. The analysis has important implications for how policymakers should address the impact on their economies.   This column attempts to answer seven key questions about the oil price decline:

  1. What are the respective roles of demand and supply factors?
  2. How persistent is the supply shift likely to be?
  3. What are the effects likely to be on the global economy?
  4. What are likely to be the effects on oil importers?
  5. What are likely to be the effects on oil exporters?
  6. What are the financial implications?
  7. What should be the policy response of oil importers and exporters?

The Deep State Strategy: Burn Everyone Else's Oil First, Leave Ours In The Ground -- The point is that being able to produce one's own energy and food offers a kind of security that countries dependent on other nations for these essentials of survival can never enjoy.Since cheap oil will eventually become scarce for all the reasons listed here and elsewhere many times--depletion of easy-to-pump reserves, geopolitical instability, rising domestic consumption in oil-exporting nations and a contraction in capital available to replace declining production--it makes excellent sense to consume all the oil anyone is willing to sell for $40-$50/barrel and retain one's own reserves for the time when $100/barrel has become "cheap."m If we follow this logic, then we conclude that the U.S. Deep State is in favor of Saudi Arabia's strategy of forcing production cuts (and the resulting collapse of income) on its rivals and marginal producers for two profound reasons:

  • 1. The loss of income to rivals/enemies is a very cheap form of financial warfare that weakens their ability to maintain military forces, social welfare states and everything else currently being funded almost solely by oil export revenues
  • 2. The opportunity to consume everyone else's cheap oil while leaving more of the U.S. oil reserves safely in the ground for later use.

It's always wise to remember the elected government is the ant riding on the Deep State elephant, grandly declaring it guides the great beast. It's also worth remembering that the Deep State is not monolithic; rather, it is a dynamic network of power-nodes, each with its own agenda and each jockeying for dominance on key issues within the Deep State.

We burn 2.7 million gallons a minute, so why’s oil so cheap?-- The world burns enough oil-derived fuels to drain an Olympic-sized swimming pool four times every minute. Global consumption has never been higher - and is rising. Yet the price of a barrel of oil has fallen by more than half over the past six months because the globe, experts say, is awash in oil. So, where did all this oil come from? The Earth has been accumulating oil and natural gas for about a billion years or so. Humans have been drilling and burning crude and gas in significant amounts for only the last 156 years, since the 1859 birth of the oil industry in Pennsylvania. So, even when oil prices spiked earlier this decade amid worries that oil supplies would soon run low, scientists and oil companies knew there was plenty available. It wasn't so much a question of how much oil and gas was left in the earth's crust, but whether we could figure out how to squeeze it out and make money doing so. "How much oil we have is an economic and technical question, not a geologic one," says Doug Duncan of the U.S. Geological Survey. "There's far more than we can extract economically using today's technology."

Over a barrel? Falling oil prices and the environment -- IS THE recent oil price crash good or bad for the environment? For years, environmentalists have been seeking carbon taxes and other measures to ratchet up oil prices to encourage us on to a clean-energy path. But some are now hailing the recent price crash as good for the environment, because it could fatally weaken big oil and its hold on the world's energy system. You could be forgiven for being confused.  What gives? Oil prices have more than halved since last June, to just under $50 for a barrel of Brent crude, the industry's global benchmark. This is likely to increase the amount of oil burned as fuel, both because people are less careful with stuff that is cheap and because low fuel prices will stimulate economic activity. The price crash will also discourage investment in alternative sources of energy such as renewables. The oil glut shows no signs of easing, as major producers such as Saudi Arabia and other OPEC nations are reluctant to pump less.  "High-priced oil dampens petroleum demand and makes oil alternatives more viable [whereas] lower oil prices reboot oil demand, leading to higher overall production and consumption," according to Deborah Gordon, an energy and climate analyst for Washington DC-based think tank the Carnegie Endowment for International Peace.  In the past decade of high oil prices, people in the US have been driving less, and more economically. Now, the argument goes, gas-guzzlers will be back.

An Endless Sea Of Energy - With crude oil prices in a strong corrective mode, energy depletion is understandably not on people’s minds these days. However, this is a scenario that many of us might have to deal with at some point in our lifetimes. Yes, the world currently has more than abundant supplies of crude oil. US tight oil production has been rising exponentially, accounting for the biggest share of global growth since 2009. This is by any measure an amazing technological and logistical achievement. OPEC has simply been incapable to accommodate the resurgence of the US as a major producer; and falling prices may actually prompt some of its members to sustain outputs, otherwise lost revenues will be even larger. We might be swimming in oil for now, but this should be no reason to become complacent. As an example, an important fact that is often overlooked is that tight oil exploration is a different animal, and relatively recent in terms of its significance. Each tight oil well has very steep decline rates – in many cases 90% within 5 to 7 years, much steeper than conventional wells. This means that to sustain (let alone increase) production many new wells need to be drilled each year. And at US$5-10 million cost per well, this is not cheap either. Here’s an interesting question: with all these massive production increases, when is crude oil production projected to peak in the US? In its annual energy outlook reports, the US Energy Information Agency (“EIA”) puts out estimates of future crude oil production taking into account the most recent reserve and production figures. Here’s when they believe production will peak according to their reference (baseline) scenario: 2019.

Schlumberger Cuts 9,000 Jobs - Here come the oil-related job cuts. In its fourth quarter earnings announcement on Thursday, oilfield services company Schlumberger announced that it will cut 9,000 jobs, or about 8% of its workforce. The company said the job cuts come, "In response to lower commodity pricing and anticipated lower exploration and production spending in 2015." Schlumberger is a provider of equipment and services to oil and gas companies, and over the last six months shares of the $100 billion company have declined more than 30% amid the crash in oil prices. In addition to announcing job cuts, Schlumberger reported earnings per share of $1.50, excluding special charges, on revenue of $12.6 billion. Earnings were up 11% over the prior year while revenue was a 6% increase. Following the news shares of Schlumberger were up about 1.5% in after hours trading on Thursday. The company also raised its dividend 25% and repurchased $1.1 billion worth of its own stock during the quarter, both efforts to reward shareholders that have stuck with the company amid the decline in oil prices and selling pressure faced by all companies in the energy sector. In the fourth quarter, Schlumberger also took a $472 million devaluation charge related to the decline in the value of the Venezuelan bolivar against the US dollar. And as Business Insider's Linette Lopez noted on Thursday, the bond market is worried about the situation in Venezuela. In a presentation on Tuesday, DoubleLine's Jeff Gundlach talked about the rapid decline in energy prices, and said that while the market is still making sense of the massive decline, the knock-on effects, like a reduction in capital investment and job cuts, will take a few quarters to really kick in.

Oil extends fall; Goldman Sachs cuts forecasts (Reuters) - Oil renewed its decline on Monday, dropping below $49 a barrel as Goldman Sachs slashed its short-term price forecasts and Gulf producers showed no signs of curbing output. Brent and U.S. crude are near their lowest since April 2009, having fallen for seven straight weeks on a growing supply glut. The February Brent contract was down $1.33 at $48.78 a barrel at 1220 GMT. U.S. crude oil for February was down $1.20 at $47.16 per barrel. true Analysts at Goldman Sachs cut their three-month forecasts for Brent to $42 a barrel from $80 and for the U.S. West Texas Intermediate contract to $41 from $70 a barrel. The bank cut its 2015 Brent forecast to $50.40 a barrel from $83.75 and U.S. crude to $47.15 a barrel from $73.75. Despite declining investments in U.S. shale oil, the main driver in the current supply glut, production will take longer to come down, Goldman said in a report. "To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer," the analysts said. Speaking to Reuters Global Oil Forum, Commerzbank analyst Carsten Fritsch said he expected output cuts to start impacting prices in the second half of 2015."At some point market participants will realize that a lot of oil will leave the market if prices stay low,"

Goldman Sees Need for $40 Oil as OPEC Cut Forecast Abandoned - Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market. The bank reduced its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year, according to an e-mailed report. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York. The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom that’s unlocked supplies from formations including the Eagle Ford in Texas and the Bakken in North Dakota. Prices slumped almost 50 percent last year as the Organization of Petroleum Exporting Countries resisted output cuts even amid a global surplus that Qatar estimates at 2 million barrels a day. Oil Prices“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.” West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter.

Oil Producers Betting on Price Drop With OPEC Not Curbing Output - The oil industry was listening as OPEC talked down crude prices to a more than five-year low. Drillers, refiners and other merchants increased bets on lower prices to the most in three years in the week ended Jan. 6, government data show. Producers idled the most rigs since 1991, with some paying to break leases on drilling equipment. Companies are hedging more and drilling less amid concern that the biggest slump in prices since 2008 will continue. Oil dropped for a seventh week after officials from Saudi Arabia, the United Arab Emirates and Kuwait reiterated they won’t curb output to halt the decline. Oil Prices“Producers are desperately hedging their production in a drastically falling market,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone Jan. 9. “They’re trying to lock in prices because they are convinced that the market will stay down for a while.” WTI slid $6.19, or 11 percent, to $47.93 a barrel on the New York Mercantile Exchange on Jan. 6, settling below $50 for the first time since April 2009. Futures for February delivery declined $1.53 to $46.83 in electronic trading at 8:09 a.m. local time.

Oil Prices Fall to Fresh Lows - WSJ: The global oil benchmark settled below $50 a barrel for the first time in nearly six years Monday after Goldman Sachs Group Inc. slashed its forecasts, saying lower prices are needed to reduce global supplies. The price rout weighed on other markets. Energy stocks fell, and copper slid to a five-year low. After dropping in half in 2014, Brent oil prices are already down 17% for the year, as robust global supply growth continues to outpace demand. The Organization of the Petroleum Exporting Countries chose not to lower its production quota in November, putting more pressure on non-OPEC producers such as the U.S. and Canada to cut back on output. Goldman Sachs and Société Générale sharply lowered their oil-price forecasts in reports released Sunday and Friday, respectively. Goldman called for the U.S. oil benchmark to average $40.50 a barrel and Brent to average $42 a barrel in the second quarter.  Traders said several U.S. refinery outages also pressured prices Monday on expectations that demand for crude oil could temporarily drop. Brent dropped $2.68, or 5.3%, to $47.43 a barrel on ICE Futures Europe, the lowest settlement since March 2009.  U.S. oil for February delivery settled down $2.29, or 4.7%, at $46.07 a barrel on the New York Mercantile Exchange, the lowest level since April 2009. The U.S. benchmark has fallen 14% so far this year.

Oil Extends Selloff on UAE Minister's Comments -- The oil market extended its selloff Tuesday, coming close to six-year lows, after the United Arab Emirates’ oil minister said the Organization of the Petroleum Exporting Countries would stand firm on its decision to keep output unchanged. The market shrugged off strong data out of China and pushed below the $45 a barrel mark for the U.S. oil benchmark. The oil slide rattled financial markets and knocked currencies world-wide.  Brent crude for February delivery fell by around 3%, flirting with $46 a barrel on London’s ICE exchange. On the New York Mercantile Exchange, light, sweet crude futures traded at $44.92 a barrel, down more than a dollar from Monday’s settlement. “We are still very much sentiment-driven and the sentiment will continue to be negative as long as there is no change in production,” said Thina M. Saltvedt, senior oil analyst at Nordea Bank Norge. “Oil is still piling up.” Market participants estimate that the supply of crude is currently overshooting tepid demand for the commodity by as much as 2 million barrels a day. That mismatch has driven prices off a cliff since last summer, with Brent falling to its lowest levels since March 2009. The oil price lost around 5% on Monday alone.

Oil Drops Below $45; U.S. Stockpiles May Speed Collapse - Bloomberg: Oil extended losses to below $45 a barrel amid speculation that U.S. stockpiles will increase, exacerbating a global supply glut that’s driven prices to the lowest in more than 5 1/2 years. Futures fell as much as 4.1 percent in New York, declining for a third day. Crude inventories probably gained by 1.5 million barrels last week, a Bloomberg News survey showed before government data tomorrow. The United Arab Emirates, a member of the Organization of Petroleum Exporting Countries, will continue to expand output capacity, while shale drillers will probably be the first to curb production as prices fall, according to Energy Minister Suhail Al Mazrouei. Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. Goldman Sachs Group Inc. said crude needs to drop to $40 a barrel to “re-balance” the market, while Societe Generale SA also reduced its price forecasts.

Oil Surplus Grows Even as Prices Plummet - When the world gives you too much oil, drill for more.That seems to be the motto of some of the most prolific oil producers today. Iraq, Russia, Latin America, West Africa, the United States, Canada – all may increase production this year, and by more than just balancing out the reduced production in war-torn Libya. On top of this, expect even more oil on the market if Iran comes to terms with the West over its nuclear program and is freed of the constraints of sanctions.That’s the conclusion of Adam Longson, an oil analyst at Morgan Stanley writing in an e-mailed report on Jan. 5. All this new oil is flooding a market already awash because OPEC has refused to cut its production cap below 30 million barrels a day – and is even exceeding that level – and the United States is pumping oil, mostly from shale, faster than it has in 30 years. This has caused the average price of oil to plunge more than 50 percent, from about $115 in June 2014 to just over $50 today.This is creating an unmitigated bear market for oil, according to Morgan Stanley. “With the global oil market just passing peak runs and Libyan supply already at low levels, it’s hard to see much improvement in oil fundamentals near term,” its report said. “A number of worrying signs have already emerged, lifting the probability of our ‘bear’ case.”One more sign is that Iraq’s production is at its highest level in more than three decades, now that Baghdad has finally reached agreement with Kurdistan to allow it to export oil through Turkey. And just before the New Year there were reports that Russian oil output has hit post-Soviet records without any sign of abating.

Oil near six-year low; Brent trades at par to U.S. crude  (Reuters) - Oil tumbled 5 percent to near six-year lows before recovering ground on Tuesday, and Brent briefly traded at par to U.S. crude for the first time in three months as some traders moved to take advantage of ample storage space in the United States. Traders were searching to store the glut of oil, which has knocked prices down 60 percent in the last six months. So far this week, Brent has lost 7 percent and U.S. crude 5 percent. Brent LCOc1 settled down 84 cents at $46.59 a barrel, after falling to $45.19, its lowest since March 2009. true U.S. crude CLc1 closed down 18 cents at $45.89, after hitting an April 2009 low of $44.20. Oil tumbled earlier after big OPEC producer United Arab Emirates defended the group's decision not to cut output to boost prices. Losses were pared by a flurry of short-covering toward the close, as players moved to cash in on profitable short positions, traders said. The arbitrage between Brent and U.S. crude traded at parity for the first time since October, with both markets touching $46 a barrel at one point. Traders said the benchmarks converged as limited storage on land for Brent forced traders to look for storage in the Cushing, Oklahoma, delivery point for U.S. crude.

US rig count plunges by 74 to 1,676 - Oilfield services company Baker Hughes Inc. says the number of rigs exploring for oil and natural gas in the U.S. tumbled by 74 this week to 1,676. The Houston firm said Friday in its weekly report 1,366 rigs were exploring for oil and 310 for gas. A year ago 1,777 rigs were active. Of the major oil- and gas-producing states, Texas' count dove by 44, North Dakota dropped six, Oklahoma fell five, California and Wyoming each lost four and New Mexico declined by three. Arkansas, Kansas and West Virginia were down two each and Colorado, Louisiana and Utah were off one apiece. Ohio gained one rig. Alaska and Pennsylvania were unchanged. The U.S. rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999.

U.S. rig count slides again, hits lowest total since October 2010: U.S. rig count slides again, hits lowest total since October 2010 The U.S. drilling rig count plunged 74 units, all on land, to settle at 1,676 rigs working in the latest week for the lowest total since Oct. 2010, Baker Hughes (NYSE:BHI) says in its weekly report. The count has now fallen for seven straight weeks as it has lost 244 units, and the U.S. now has 101 fewer rigs than during the same week a year ago. Most of the losses came in Texas, where the count fell 44 units to 766 to bring the state’s total to its lowest since Mar. 2011; North Dakota gave up just six units to 156. Canada added 74 rigs, but still has 125 fewer rigs compared with this week a year ago

U.S. rig count sees biggest drop in six years: — More than 40,000 upstream oil and gas jobs in Texas could be lost as energy sector activity here continues to slow, said Karr Ingham, the economist who compiles the monthly Texas Petro Index tracking the industry’s economic indicators. The latest data point that spells trouble for the industry: data released Friday indicating that that the number of rigs operating in the U.S. was down 74 this week, the rig count’s biggest one-week decline in more than six years. “We’re now at the point where there’s likely to be some damage inflected on the Texas economy,” Ingham said. “I’d sure be fine if I was dead wrong, but a turnaround in drilling activity is not on the horizon at this point. Ingham said the industry suffered 40,000 upstream job losses in Texas when crude oil prices fell as low as $35 per barrel during the 2008-2009 downturn. The last time the rig count fell as dramatically as it did this week was in January 2009, when it fell by 98. This time, Ingham said, the job losses might even be bigger because the drop in oil prices could be more prolonged. Texas, which has more rigs operating than any other state, also saw more rigs put down than any state in this week’s report. The state’s rig count was down by 44 to 766 rigs in this week’s report. Last year’s Texas rig count peaked at 906, but Ingham said that figure could eventually fall in half. The impact, he said, could mean more than 200,000 job losses for the state, when positions indirectly connected to the industry are included.

Oil rebound on horizon as oil companies start to turn off the taps, IEA says - The international body that monitors the world's energy supply says it can see a rebound in oil prices in the not too distant future. Crude oil prices have dropped like a stone since the summer, off by about 60 per cent over that time frame. The main reason for the decline is that the U.S. mainland has ramped up production, as new technology allowed previously unattainable shale oil to be collected and sold. U.S. shale players rushed to market when oil was above $100 a barrel and energy self sufficiency was a stated aim in Washington D.C.  But it hasn't quite worked out as planned. All that new supply flooded the market, and pushed down prices as the world realized there is currently far more oil being pumped out every day than is needed to meet current demand. The Organization of the Petroleum Exporting Countries, an oil cartel of oil-producing nations primarily in the Middle East and Africa and led by Saudi Arabia, is believed to be in a stand-off with the U.S. shale producers, and seems willing to ride out cheap prices for as long as it takes to push them out of business. An International Energy Agency report Friday shows the first tentative signs that the strategy may work. "The oil selloff has cut expectations of 2015 non-OPEC supply growth by 350,000 barrels per day since last month to 950,000 barrels per day," the IEA said. "Effects on North American supply are so far limited to [95,000 barrels per day and 80,000 barrels per day] to the Canadian and U.S. forecasts, respectively."

A New Ceiling for Oil Prices - Anatole Kaletsky - – If one number determines the fate of the world economy, it is the price of a barrel of oil. Every global recession since 1970 has been preceded by at least a doubling of the oil price, and every time the oil price has fallen by half and stayed down for six months or so, a major acceleration of global growth has followed. Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil? Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20. To see why, first consider the ideological irony at the heart of today’s energy economics. The oil market has always been marked by a struggle between monopoly and competition. But what most Western commentators refuse to acknowledge is that the champion of competition nowadays is Saudi Arabia, while the freedom-loving oilmen of Texas are praying for OPEC to reassert its monopoly power.   Now let’s turn to history. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today’s money. From 1986 to 2004, it ranged from $20 to $50 Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis. In other words, the trading range of the past ten years was similar to that of OPEC’s first decade, whereas the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985, owing to North Sea and Alaskan oil development, causing a shift from monopolistic to competitive pricing. This period ended in 2005, when surging Chinese demand temporarily created a global oil shortage, allowing OPEC’s price “discipline” to be restored.

The casualties of cheap oil -- Oil prices have fallen to below $50 a barrel, down from a high of $115 in the past year. American drivers and consumers are cheering at cheaper prices, but the news isn’t great for everyone. The price drop is squeezing profits at oil and gas producers, forcing them to shut down wells and lay off employees from the North Sea to North Dakota. Schlumberger, the world’s biggest oilfield services provider, said Thursday that it is cutting 9,000 jobs, or about seven percent of its workforce. The contraction is creating knock-on effects throughout the economy -- for example, reducing loan growth at banks in energy-producing states. The oil and gas industry generated around 15 percent of Wells Fargo’s investment banking fee revenue last year, and around 12 percent for Citigroup, according to data from Dealogic. As long as oil remains below $50 a barrel, the majority of the world’s oil projects will struggle to break even. The chart below, created by Ed Morse and team at Citi Research, shows the break-even cost – the price that a barrel of oil needs to cost for the project to remain profitable – of the major oil projects expected to be online in 2020. The break-even costs for the major oil exporting countries and U.S. shale plays are noted at the left.

America’s Going to Lose the Oil Price War - The financial debacle that has befallen Russia as the price of Brent crude dropped 50 percent in the last four months has overshadowed the one that potentially awaits the U.S. shale industry in 2015. It's time to heed it, because Saudi Arabia and other major Middle Eastern oil producers are unlikely to blink and cut output, and the price is now approaching a level where U.S. production will begin shutting down.   Representatives of the leading members of the Organization of Petroleum Exporting countries have been saying for weeks they would not pump less oil  no matter how low its price goes. Saudi Arabian Oil Minister Ali Al-Naimi has said even $20 per barrel wouldn't trigger a change of heart. Initial reactions in the U.S. were confident: U.S. oil producers were resilient enough; they would keep producing even at very low sale prices because the marginal cost of pumping from existing wells was even lowerOPEC would lose because its members' social safety nets depends on the oil price; and anyway, OPEC was dead.  That optimism was reminiscent of the cavalier Russian reaction at the beginning of the price slide: In October, Russian President Vladimir Putin said "none of the serious players" was interested in an oil price below $80. This complacency has taken Russia to the brink: On Friday, Fitch downgraded its credit rating to a notch above junk, and it'll probably go lower as the ruble continues to devalue in line with the oil slump.  It's generally a bad idea to act cocky in a price war. By definition, everybody is going to get hurt, and any victory can only be relative. The winner is he who can take the most pain. My tentative bet so far is on the Saudis -- and, though it might seem counterintuitive, the Russians.  For now, the only sign that U.S. crude oil production may shrink is the falling number of operational oil rigs in the U.S. It was down to 1750 last week, 61 less than the week before and four less than a year ago. Oil output, however, is still at a record level. In the week that ended on Jan. 2, when the number of rigs also dropped, it reached 9.13 million barrels a day, a 44-year high. Oil companies are only stopping production at their worst wells, which only produce a few barrels a day -- at current prices, those wells aren’t worth the lease payments on the equipment.  Since nobody is cutting production, the price keeps going down; today, Brent was at $48.27 per barrel and trends are still heading downward.

Jim Chanos: Days of drilling for cheap oil over: Jim Chanos, head of the world's largest short-selling hedge fund, told CNBC on Friday he's been short major oil companies for a couple years because the North American shale explosion has been "uneconomic for drillers." "The fracking and shale revolution was propelling us to be the largest oil producer in a way that I thought was uneconomic and still is uneconomic for the drillers. But it was going to be enough supply to really disrupt the markets," he said. Big oil companies like Exxon Mobil and Royal Dutch Shell are finding their business models challenged, he added, "because the days of finding cheap oil is over." The founder of Kynikos Associates, with $3 billion in assets under management, has been betting against the economic situation in China for some time now. "We came across China because of our work in the mining sector in 2009."

Could terrorists destroy oil facilities to drive up price? -- It would be a mistake for energy analysts to look at the market and assume that states with a stake in energy prices will play by the rules, or that terrorists won’t target the industry.  Much of the world’s oil is transported by ship, and many of these ships pass through just a few choke points. Perhaps 20% of the world’s oil demand transits through the Strait of Hormuz which, at its narrowest, is just 24 miles wide. On occasion, Iran’s Islamic Revolutionary Guard Corps threatens to close the waterway, although this is more bluster than reality. Not only would the United States Navy overpower their Iranian counterparts in a matter of hours, but because the Iranians also rely on the Strait to export their own product, any closure would be self-defeating for a cash-crunched regime. That said, given the looming transition in Oman, the southern shore of the Strait remains a wildcard. Should any tanker strike a mine or suffer any other damage in the Strait, insurance on tankers would skyrocket and psychology alone would drive up the price of oil. The Suez Canal is another choke point also in peril. Approximately 5% of the world’s oil transits the canal. Gen. Abdel Fatah el-Sisi and the Egyptian government understand just how important the Suez is as a cash cow and take its protection seriously. That said, Egypt has been unable to defeat an Al Qaeda-affiliated insurgency in the Sinai, and it would take only one successful strike on a ship mid-canal to paralyze traffic for weeks and cripple Egypt’s economy. And let’s not forget the Bab al-Mandab, the 20-mile choke point between Yemen and Djibouti. Yemen is also facing an Al Qaeda-led insurgency, and the ghost of the USS Cole looms over the region.

Oil Companies Pump More U.S. Crude, Drill Fewer Wells -- The oil industry is at a crossroads. Figures in the Federal Reserve’s December industrial production report show oil and gas extraction surged last month, rising 2.8% from November. But the same companies that are pumping more crude out of the ground are drilling fewer wells. Drilling activity sank 1.9%, the third consecutive monthly drop.  The mismatch in activity follows a crash in oil prices. Crude has lost more than half of its value since the summer amid booming U.S. production and weak global demand. Global Brent crude contracts traded below $50 a barrel on Friday. “The continued rise in oil output suggests the marginal cost of production is below $50, so if OPEC wants to hurt U.S. shale  output it will have to drive prices down further,” . “Exploration activity is plummeting, but that’s not the same thing.”  The oil cartel in November decided to maintain its output rather than slashing global supplies to buoy prices.  So far, the effect on extraction in the U.S. has been muted.  The Energy Information Administration this week forecast total U.S. crude oil production would average 9.3 million barrels per day this year and 9.5 million barrels in 2016, the second-highest annual average level of production in U.S. history. Production averaged an estimated 9.2 million barrels per day in December, the EIA said.  But the impact on exploration and drilling is already becoming apparent. Schlumberger Ltd., the world’s biggest oilfield services  company, on Thursday said it laid off 9,000 workers late last year, reducing global head count 7%. Smaller service companies are making similar moves across the U.S. while producers slash capital budgets.

US oil production to rise - US oil production will increase both this year and next despite the 60 per cent slide in oil prices since mid-June and an Opec policy designed to rein in the North American shale boom, the US government said. The forecast came as a leading Opec producer said the cartel was sticking to its strategy of maintaining output and testing the mettle of high-cost producers around the world. The US Energy Department said output would rise by 600,000 barrels a day this year to 9.3m b/d and by 200,000 b/d to 9.5m b/d in 2016. The projected increase for this year is slightly lower than a previous a forecast in December, reflecting the pressure of lower crude prices on the US oil industry. “Many oil companies have cut back on their exploration drilling in response to falling crude prices and will concentrate their drilling activities in established areas that already have productive wells,” the department said. The combination of technologies such as horizontal drilling and hydraulic fracturing, or “fracking”, has unlocked America’s vast shale resources and propelled US production to around 9m b/d. The official estimates suggest the US shale industry has proved more resilient in the face of collapsing oil prices than initially feared. Although production will slow, officials said output next year will be at its highest level since 1970. However some analysts are less optimistic, predicting a major pullback in investment which will lead to production declines by the end of this year. The slide in oil prices accelerated in November last year after Opec, the producers’ cartel, which pumps a third of the world’s oil, decided to keep output steady at 30m b/d, rather than cut its production to shore up prices. Speaking at an energy conference in Abu Dhabi, Suhail bin Mohammed al-Mazroui, the oil minister for the United Arab Emirates — a leading Gulf producer — said the cartel would not change its strategy.

Demand factors in the collapse of oil prices - The price of oil passed another milestone last week, falling below $50 a barrel, a level that I had not expected to see again in my lifetime. Price of crude oil (West Texas Intermediate, dollars per barrel). Source: FRED.It’s interesting that we crossed another milestone last week, with the yield on 10-year Treasury bonds falling below 2%. That, too, is something I had not expected to see. Nominal interest rate on 10-year Treasury bonds. Source: FRED.And these two striking developments are surely related. I attribute sinking yields to ongoing weakening of the global economy, particularly Europe. And slower growth of world GDP means slower growth in the demand for oil. Other indicators of an economic slowdown outside the United States are falling prices of other commodities and a strengthening dollar. A month ago I provided some simple analysis of the connection between these developments in the form of a regression of the weekly change in the natural logarithm of the price of WTI on the weekly log changes in dollar price of copper and trade-weighted value of the dollar along with the weekly change in the yield on 10-year Treasuries. Here again are the results of that regression when estimated from April 2007 to June 2014: Last month I used that regression to ask how much of the decline in oil prices  could be predicted statistically by the changes in copper prices, bond yields and value of the dollar. That is, of the $55 drop in the price of oil since the start of July, about $24, or 44%, seems attributable to broader demand factors rather than anything specific happening to the oil market. That’s almost the same percentage as when I performed the calculation using data that we had available a month ago.

A capital contango, and why oil storage economics may be dead -  by Izabella Kaminska -- $80 oil, $70 oil, $60 oil, $50 oil and counting… If you suspect the structure of the oil market has fundamentally changed, you may be on to something. There was a time when all you needed to balance oversupply in the oil market was the ability, and the will, to store oil when no-one else wanted to. That ability, undoubtedly, was linked to capital access. For a bank, it meant being able to pass the cost of storing surplus stock over to commodity-oriented passive investors and institutions happy to fund the exposure. For a trading intermediary, that generally meant having good relations with a bank which could provide the capital and financing to store oil, something the bank would do (for a fee) because of its ability to access institutional capital markets and its reluctance to physically store oil itself. On the flip-side, if a shortage of oil appeared in the market, there was a time when all it took to balance the market was a release of stored supply by trading companies, oil companies and/or national producers. . For oil companies of all sorts this was thus a time to leverage up and go drilling, but only if they could be assured that the high prices that make such efforts worthwhile would be sustained. Now, because filling an oil supply void could take up to a decade of prospecting, development and organisation, prices had to be pretty hight to make that situation worthwhile. To get around the spot price volatility and overshoot problem, Simmons recommended the industry move to long-term pricing contracts instead. But now, shale’s faster “time to build” factor changes the risk paradigm completely. In short, because the industry can bring new supply to market relatively quickly, we go from a spare capacity model, to a just-in-time model instead.The key consequence of that fact: the market no longer needs so great a risk premium embedded into the spot price, because supply can be delivered to the market as and when needed, without too much concern of a system-chocking shortage ever happening.

Oil Collapse of 1986 Shows Rebound Could Be Years Away - Bloomberg: The last time excess supply caused a plunge in oil, it took almost five years for prices to recover. The CHART OF THE DAY shows how West Texas Intermediate, the U.S. oil benchmark, tumbled 69 percent from $31.82 a barrel in November 1985 to $9.75 in April 1986 when Saudi Arabia, tiring of cutting output to support prices, flooded the market. Prices didn’t claw back the losses until 1990. Oil has dropped 57 percent since June and OPEC members say they’re willing to let prices sink further. Surging prices in the 1970s led to the development of the North Sea and Alaska oil fields. OPEC members also increased capacity, leaving the Saudis to trim output when demand softened. In the 1980s, Saudi Arabia “was tired of the other members cheating and just opened the spigots,”  After the plunge in prices “the Saudis lost their nerve and they resumed the role of swing producer. If they hadn’t lost their nerve, we wouldn’t be seeing the shale oil boom today and North Sea production would be substantially lower because investment would have been less,” he said.

Was the 2008 oil price an anomaly?  - A theory we have proposed in the past is that 2008 amounted to a self-squeezing effect brought on by overly tight monetary policy during the 2004-2007 period, which suddenly made it much more lucrative to hold value in cash-form rather than in zero-yielding commodity-form. In other words, because interest rates were raised to levels above the natural rate in the economy, the industry was provided with a huge and sudden incentive to destock buffer reserves that were usually kept for the purposes of managing volatility and to transform them into more liquid cash instead. This in turn led to a shortage of supply at the margin driving prices to the necessary levels to compensate the private sector for taking a punt on new investment and/or for holding stock in reserve for the purposes of volatility management. In an ironic twist, if the theory checks out, it could mean that monetary policy which was designed to stifle inflationary forces was inadvertently the cause of the transitory inflationary effects we all experienced during that period.  Think of it, perhaps, as Alan Greenspan transferring a giant dividend payment to anyone prepared to transform their own illiquid commodity-money into much more liquid and better-yielding dollar cash. An industry rush for dollar liquidity which ended up competing for liquidity with other industries and foreign governments, and thus effectively ended up transferring value from the real economy over to commodity producers. None of these factors would have been helped by the general shortage of safe assets in the system at that point. All this, meanwhile, whilst sending a signal to the markets that screamed “more investment in commodities now!” — a fact that incentivised more capital to be transferred from the consumption economy and over to the production of commodities, constraining demand in the process.

A view on oil, courtesy of the subprime securitisation sector -- The drop in oil prices – with WTI now drifting down towards $46 a barrel – has been nothing short of stunning. On that note, here’s an interesting thought from Chris Flanagan, head of US mortgages and other structured finance research at Bank of America Merrill Lynch. When this securitisation veteran sees the fall in oil prices he thinks of one thing – the ABX index. The ABX was the mother of all synthetic subprime credit indices.  Consisting of baskets of credit default swaps tied to subprime mortgages, it allowed investors to go long — or short — the market without actually having to hold onto physical bonds. As you might imagine the ABX index took a rather deep dive starting around the middle of 2007, taking almost two years to bottom out in early 2009 and only beginning to recover after the US undertook some extraordinary policy intervention. Fast forward to today, and here’s what the ABX looks like against the price of oil: The point is not that oil-related investments are the new subprime, but merely that price action in oil is looking rather disorderly – even against the wild swings of the ABX that became notorious during the run-up to the financial crisis. Particularly remarkable, as Mr Flanagan points out, is that the fall in oil prices has been far more precipitous and more monotonic than the drop in the ABX price back in 2007. To wit, oil has slipped from about $107 in June of last year to its current low – a 55 per cent fall. Over the same period in 2007, the ABX dropped from par to 70 – a decline of about 30 per cent. It wasn’t until 2008 that it slipped to 55.

Puerto Rico approves 68 percent oil tax increase - (AP) — Puerto Rico's governor signed a law Thursday that will increase the excise tax on a barrel of crude oil by 68 percent to help generate funds and sell an anticipated $2.9 billion in bonds. Gov. Alejandro Garcia Padilla said he plans to file additional legislation to slightly amend the new law and help the government access financial markets. Garcia called a special session on the issue late last year and legislators passed the measure. He had until Saturday to sign it. The tax per barrel would increase from $9.25 to $15.50 and generate about $178 million a year.

Oil’s slump could upend $2 trillion in investments: Goldman - —The global oil sector is getting increasingly squeezed by the slump in oil prices and future investments worth trillions of dollars are at risk of being scrapped unless the industry succeeds in consolidating and cutting costs, according to analysts at Goldman Sachs. In a research note published Monday morning, the analysts lowered their long-term estimates on Brent oil to $70 a barrel from $90 a barrel—a level so low that several oil companies will struggle to make money. In fact, Goldman Sachs found in its Top 400 analysis of the world’s largest new oil-and-gas fields, that pre-sanctioned projects will be “uneconomic” at $70 a barrel. Such developments, are those where a final investment decision hasn't been taken yet, represent some 20 million barrels of oil a day. In dollar terms, this means that around $2 trillion worth of future investments are at risk, unless the industry figures out a way to adapt to oil’s new world order through mergers or by taking an ax to budgets. This also includes shale developments, where investments for $930 billion are in jeopardy, according to the report. Over the past several months the industry has been wrestling with oil prices that have cratered by more than 50% since peaking last June. So what does the oil industry have to do? Goldman Sachs calls for two key changes in the industry to make these developments profitable and avoid cancellation of the projects: cost-cutting and consolidation.

What is the oil crash going to do to Canada? - Unlike most rich countries, Canada is a net oil exporter. According to the US Energy Information Administration, Canada’s net exports of petroleum have more than doubled since 2005 to about 1.7 million barrels per day: Any reduction in the oil price directly reduces the incomes of producers, which in turn gets passed on to the home-builders, restaurateurs, and grocers who depend on the roughnecks for their sales — unless the oilmen are somehow able to “make it up on volume.” That’s not practical for Canada, however, because the market price is currently far below the cost of production. According to Lane and the EIA, the price of a barrel of West Texas Intermediate needs to be at least between $60 and $65 for existing oil sands investments to be profitable. At pixel time, WTI is still below $50 a barrel. Some producers argue that their existing investments can produce oil at a cost of just $30-$35 a barrel because it is easy to extract the resource once the enormous upfront expenses have been paid. (Lane thinks this “mid-cycle breakeven cost” is closer to $50.) And unlike shale, new investment isn’t required to maintain existing production levels, so Canadian producers may not cut their output as much as their US competitors in response to lower prices. That said, more Canadian investment dollars are spent on “mining and oil and gas extraction” than any other sector except housing. Put another way, about 30 per cent of Canadian business investment is directly exposed to oil prices. In the heart of the oil patch, that number is closer to 60 per cent. (For comparison, the equivalent figure in the US is about 13 per cent.) These new investments may have a long life, but Lane estimates they won’t be profitable if WTI is below $100 per barrel:

$50 Oil Kills Bonanza Dream Making Greenlanders Millionaires - Greenland, an island that may be sitting on trillions of dollars of oil, has had to acknowledge that its dream of tapping into that wealth looks increasingly far-fetched. Back when oil was headed for $150 a barrel, Greenlanders girded for a production boom after inviting in some of the world’s biggest explorers, including Chevron Corp. and Exxon Mobil Corp. (XOM) Now, with Brent crude dipping below $50 last week, Deputy Prime Minister Andreas Uldum says Greenland’s hope of growing rich quickly on fossil fuels was “naïve.” “I myself believed back when I was first elected” to parliament in 2009 “that billions from oil and minerals would start flowing to us the next year or the year after that,” he said in an interview in Copenhagen. “However, that’s just not the reality. I don’t know any politician in Greenland today who won’t admit to having fueled the hysteria.” Oil PricesThe nation of about 56,000 had imagined its oil and mineral production would turn every citizen into a millionaire. Instead, Greenland continues to rely on an annual 3.68 billion-krone ($586 million) subsidy from Denmark to stay afloat, a sum that’s equivalent to almost half its gross domestic product. Talk of severing ties from its former colonial master has also faded as Greenlanders see little prospect of achieving economic independence anytime soon.

£2 billion of North Sea oil projects at risk - Plummeting oil prices are putting at risk £2 billion of projects in the North Sea, according to an expert analysis published today as a survey found more than two-thirds of workers in the industry are worried about the impact. Wood Mackenzie, the global energy consultancy firm, said there were only 23 “exploration” oil wells in the North Sea last year, a sharp fall compared to the previous ten-year average of 81. But the firm’s annual review of the industry said the price, which dipped below $48 per barrel yesterday, would inevitably bring further budget cuts with spending on exploration “on top of the list”. Even if the price recovered to $60 per barrel, it said 95 per cent of the projects awaiting the go-ahead would achieve less than a 15 per cent return on the required investment. The report was published as a survey of around 400 oil workers found 68 per cent are worried about the impact of low prices on the long-term development of offshore projects. Around four in ten are concerned about their job prospects, according to the poll by industry website Rigzone, while only nine per cent said the independence referendum had had a positive impact compared to 36 per cent who described it as “negative”.

Shell scraps $6.5bn Qatar project due to oil price rout - Royal Dutch Shell has scrapped plans for a $6.5bn petrochemicals project with Qatar Petroleum, citing “the current economic climate prevailing in the energy industry”, the oil major said on Wednesday. The Al Karaana project, an 80:20 joint venture between Qatar Petroleum and Shell, would have produced 2m tonnes a year of petrochemicals products, largely intended for Asian markets. The decision not to proceed — a significant move following the halving of oil prices since last summer — was taken “after a careful and thorough evaluation of commercial quotations” from engineering, procurement and construction bidders, Shell said. These showed “high capital costs rendering it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry.” Crude oil prices have plunged by more than 50 per cent since mid-June, creating winners and losers. Those who have suffered include producers and governments, whereas some companies stand to benefit from a fall in energy costs. This has encouraged analysts to liken the potential boost for the global economy to a huge programme of “quantitative easing”. For oil companies, the falling price has triggered industry-wide scrutiny of capital spending, with the so-called majors — the biggest groups with upstream and downstream operations — expected to cut billions of dollars from exploration and development projects in the coming year, deferring and even axing programmes.

Manufacturing in Saudi Arabia: Making it in the desert kingdom --  SWEET-TOOTHED locals cheered when Mars, an American confectioner, opened its first factory in Saudi Arabia in December. The kingdom’s policymakers cheered too. It was a sign of progress in their drive to create a more extensive and sophisticated manufacturing industry as a way of reducing dependence on oil, which accounts for 45% of GDP and 80% of government revenues. Manufacturing’s share of GDP has long been stuck at around 10%, and much of that has involved making pretty basic stuff like bulk chemicals. For all the country’s huge reserves of cheap crude, the recent slump in the oil price makes that seem a sensible aim. Yet there are good reasons to question whether manufacturing is the right sector to seek to expand, and whether Saudi Arabia is a good place to locate factories.The government is throwing money at its policy. It is investing more than $70 billion in building up to six new “economic cities” with modern infrastructure and business-friendly regulations. Mars put its factory in one of them, King Abdullah Economic City, on the Red Sea coast (pictured). It hopes these cities will host clusters in which firms from a particular industry huddle together, their proximity boosting their productivity and creativity. The country is not starting from scratch. It is already strong in plastics and petrochemicals. SABIC, its largest public company, is one of the world’s biggest producers of these; and Saudi Aramco, the national oil company, is building a $20 billion petrochemicals plant in a joint venture with an American giant, Dow Chemical. Several large aluminium producers have already set up shop, including Alcoa of America, since Saudi Arabia has the two ingredients needed to produce the metal: bauxite ore and cheap electricity. Some fairly big Saudi food manufacturers already export around the region, such as Almarai, which produces milk and baby formula among other things, and Savola, whose mainstay is edible oils.

Revealed: Saudi Arabia's 'Great Wall' to keep out Isil -  When a raiding party from Islamic State of Iraq and the Levant attacked a Saudi border post last week, it was no mere hit on a desert outpost. The jihadists were launching an assault on the new, highest profile effort by Saudi Arabia to insulate itself from the chaos engulfing its neighbours. The Saudis are building a 600-mile-long “Great Wall” - a combined fence and ditch - to separates the country from Iraq to the north. Much of the area on the Iraqi side is now controlled by Isil, which regards the ultimate capture of Saudi Arabia, home to the “Two Holy Mosques” of Mecca and Medina, as a key goal. The proposal had been discussed since 2006, at the height of the Iraqi civil war, but work began in September last year after Isil’s charge through much of the west and north of the country gave it a substantial land border with the Kingdom to the south. The border zone now includes five layers of fencing with watch towers, night-vision cameras and radar cameras. Riyadh also sent an extra 30,000 troops to the area. It is not the only fence with which Saudi Arabia has chosen to surround itself. Despite the difficulty of access to westerners, the country is relatively open to fellow Muslim nations, particularly during the Haj season when pilgrims from across the world come to Mecca and Medina.  It has also created a physical barrier along parts of the even longer, 1,000-mile border with Yemen to the south.

Iran Has Never Been More Influential In Iraq - In the eyes of most Iraqis, their country's best ally in the war against the Islamic State group is not the United States and the coalition air campaign against the militants. It's Iran, which is credited with stopping the extremists' march on Baghdad. Shiite, non-Arab Iran has effectively taken charge of Iraq's defense against the Sunni radical group, meeting the Iraqi government's need for immediate help on the ground. Two to three Iranian military aircraft a day land at Baghdad airport, bringing in weapons and ammunition. Iran's most potent military force and best known general — the Revolutionary Guard's elite Quds Force and its commander Gen. Ghasem Soleimani — are organizing Iraqi forces and have become the de facto leaders of Iraqi Shiite militias that are the backbone of the fight. Iran carried out airstrikes to help push militants from an Iraqi province on its border. The result is that Tehran's influence in Iraq, already high since U.S. forces left at the end of 2011, has grown to an unprecedented level. Airstrikes by the U.S.-led coalition have helped push back the militants in parts of the north, including breaking a siege of a Shiite town. But many Iraqis believe the Americans mainly want to help the Kurds. Airstrikes helped Kurdish forces stop extremists threatening the capital of the Kurdish autonomous zone, Irbil, in August. But even that feat is accorded by many Iraqis to a timely airlift of Iranian arms to the Kurds.

Gold Hits $1235 As Commodities Crash To 12-Year Lows Amid $45 Oil -- The only other times that Bloomberg's broad-based (i.e. not all OPEC's fault) Commodity Index has fallen so far so fast was in 1999 (before stocks crashed) and 2008 (before stocks crashed). At 12-year lows, the raw material of the world's economies is flashing a big fat red warning signal that all is not well (despite stocks being a 'smidge' off record highs). WTI traded with a $45 handle... but apart from that, everything's great (oh wait and the 230 pip USDJPY roundtrip). Amid all this turmoil, gold just broke to $1235 - its highest in a month.

Commodity Carnage Continues - Copper & Crude Crushed -- Despite calls for a bottom all the way down from $90, $85, $80, $75, $70, $65, $60, $55, and then $50... crude oil prices (both Brent and WTI) are now below that crucial level (and as Kyle bass notes, even very wealthy nations like Saudi Arabia and Norway are going to have to tap into their sovereign wealth funds to support their annual budgets this year or next). WTI is trading with a $46 handle once again (at fresh cycle lows), and Brent is trading oince again at fresh cycle lows with a $48 handle.  Just as worrying away from the apparently OPEC-over-supplied (and nothing to do with demand) oil complex, copper prices just broke below $6000/mt for the first time in 5 years (which 'over-supplier' will get the blame for that? Or is it really about demand after all, just as Saudi Prince bin Talal warned). And don't mention Iron ore, Steel, Aluminum... which all hit new cycle lows...

Copper prices slump to 2009 levels, sparking growth concerns - High-grade copper for March delivery HGH5, +0.78% dropped 14 cents, or 5.2%, to $2.51 a pound, hitting levels not seen since mid-2009. Copper had lost 8 cents in Tuesday trade on the New York Mercantile Exchange. Copper also fell sharply on other markets, with Reuters reporting a 4.8% drop for London Metal Exchange copper amid stop-loss selling, while March copper lost 5% on the Shanghai Futures Exchange. Concerns over a supply glut and slowing consumption in China have weighed on copper prices in recent months. Weakness in copper is often seen as an omen for the global economy because the metal is used in a wide array of construction and manufacturing activities. While many analysts are bullish on where the global economy is headed this year, the copper action suggested a different story.

Is a global economic recession coming? Copper price say 'yes' -- The copper market crashed overnight to its lowest level since the middle of the financial crisis in 2008, fueling fears that the global economy is slowing more sharply than many experts had anticipated. Wednesday’s drop is the sixth consecutive decline in copper prices. Currently trading at around $5,560 a ton, the prices are causing significant pain to mining companies like Glencore, whose stock responded to the copper crash by hitting a record low. Like oil, copper has a deep effect on the world economy because it is key for phone lines, cables and other infrastructure. It is also important to several world economies; the world’s largest copper producers, in order, are Chile, China, Peru, the US and Australia. The copper market is just the latest commodities market to suffer from a kind of panic, as oil prices have halved in just a few months. Copper is also at the center of a black market trade that has been shrinking from a level of $1bn just two years ago, as an epidemic of copper thefts swept the country with thieves robbing warehouses and stripping telephone wires to resell the metal for a profit. The National Insurance Crime Bureau, which tracks metal theft, called the crime wave a threat to US infrastructure. Claims for metal theft have since declined, the NICB said. The worry about the fall in copper is that the rout in crude-oil prices could be spreading to other commodities, sparking concerns that the slowdown in the global economy might be much deeper than thought and not limited to the energy market.

China funds bring Chaos to metals markets - Until a few days ago, only copper market cognoscenti had heard of Shanghai Chaos. But now the Chinese hedge fund is the talk of the metals trading world. While it might sound like a 1980s pop band, the fund is believed to have been a key player in this week’s precipitous fall in copper, according to people familiar with the situation. Shanghai Chaos Investment Co is one of a coterie of funds exercising a growing impact on global metals markets, where the price of everything from aluminium drinks cans to lead batteries is set. Their trading muscle was seen to spectacular effect on Wednesday when copper suffered its biggest one-day fall in more than three years. Aggressive selling of futures contracts by Chinese funds, first on the London Metal Exchange and then on the Shanghai Futures Exchange, pushed copper, used extensively in household and car wiring, to its lowest level since 2009. “If you think American traders are aggressive, these guys are three times as big and as fast and crazy,” said a senior trader. “It’s like they’re on speed.” It is unclear how much money the funds made betting against copper on Wednesday or whether they have closed their bearish bets. But traders said the assault was “beautifully” timed, coming at a time of jitters on commodity markets because of the collapse in the oil price. Shanghai Chaos is just one of the Chinese entities active in commodity markets. Others include Hangzhou-based Dunhe, run by Ye Qingjun, known as China’s George Soros for parlaying a Rmb100,000 mortgage on his home in 2003 into a Rmb10bn ($1.6bn) fortune through a bet on a bull market in soybeans. The aggressive tactics employed by the Chinese funds can have an almost instant effect given the increasing presence of computer-based high-frequency traders that feed off their moves.

Plunging Oil Prices, Rising Debt Leaves Asia Staring at Deflation: Morgan Stanley -- Asia’s rapid accumulation of debt in recent years is holding back central banks from easing monetary policy to fight the risk of deflation, endangering private investment needed to boost faltering growth, according to Morgan Stanley. Debt to gross domestic product ratio in the region excluding Japan rose to 203 percent in 2013 from 147 percent in 2007, with most of the increase coming from companies, analysts led by Chetan Ahya in Hong Kong wrote in a report yesterday. The ratio is close to or has exceeded 200 percent in seven of 10 nations including China and South Korea, they said. Deflation risk is spreading from Europe to Asia as oil prices plunge, raising the specter of companies and consumers postponing spending and threatening a recovery in the global economy. Asia could take its cue from the U.S. where a policy of keeping real rates low after the 2008-2009 global financial crisis encouraged private-sector investment and boosted productive growth, the analysts said. “When real rates are high, only the public sector or government-linked companies will take on leverage,” the Morgan Stanley economists wrote in the report. The key concern with an approach of keeping real rates at elevated levels is that the private sector will remain hesitant to take up new investment, which is critical for reviving productivity, the report said

Low Prices Spark Biggest Surge In Chinese Crude Imports Ever -- Despite the collapse of several key industries (cough Steel & Construction cough), as we have discussed in detail related to the record number of VLCCs charging towards China, Chinese crude oil imports surged by almost 5 million barrels in December - the most on record. This 19.5% surge MoM (and 13.4% YoY) indicates significant efforts to fill the nation's strategic reserve but - absent this 'artificial' demand - spells problems for an already over-supplied global oil market (and its near record contango).

China's Iron Ore Inventories Post Biggest Decline in Two Years  -- China's iron ore inventories have plunged like a rock as has the price of iron ore itself. Bloomberg reports Iron Ore Holdings at China’s Ports Drop Below 100 Million Tons. Iron ore inventories at ports in China fell below 100 million metric tons for the first time since February as the holdings in the world’s largest buyer dropped for a seventh week to post the longest run of declines in two years. About 71 percent of the port inventories are owned by mills and the remainder belongs to traders, Steelhome said in the report. The holdings, tallied at 44 ports, are sufficient to support steel-making in China for 30.37 days, it said. This brings up an interesting observation. Just a few years back, hyperinflationists thought it would

Low Prices Spark Biggest Surge In Chinese Crude Imports Ever -- Despite the collapse of several key industries (cough Steel & Construction cough), as we have discussed in detail related to the record number of VLCCs charging towards China, Chinese crude oil imports surged by almost 5 million barrels in December - the most on record. This 19.5% surge MoM (and 13.4% YoY) indicates significant efforts to fill the nation's strategic reserve but - absent this 'artificial' demand - spells problems for an already over-supplied global oil market (and its near record contango).

China Buying Up Latin American (And Russian) Oil - As the world’s number one energy consumer China is enjoying the low prices while they last. Never one to settle however, China is finding still more ways to take advantage of the dire straits gripping several oil producers. China’s slowdown is real – preliminary data suggests 2014 will mark the weakest GDP growth in 24 years – but the country still has plenty of money to play with that is taking it places the World Bank and the International Monetary Fund (IMF) wouldn’t dare. Their reward? More oil of course. With tough conditions and greater access to raw commodities, China looks to turn the high risk into equal or greater returns. In Russia, much has been made of the deepening energy ties with its neighbor to the south. With western financing no closer to a return and a hesitancy to dig deeper into its foreign exchange reserves, Russia turned to China for a bailout. China has obliged, agreeing to finance state-owned Rosneft’s debt in addition to opening a $24 billion currency swap program, which could expand further. For its part, China gains access to Russia’s tightly held upstream sector – in the form of the giant Vankor field – and fulfills its needs downstream with favorable long-term oil and gas deals. Further loans and infrastructure investments are likely moving forward – one of China’s biggest debt-rating agencies Dagong believes Russian debt is a safer investment than US government debt.infrastructure investments.

China’s New Silk Road Takes Shape in Central and Eastern Europe -- First revealed by Chinese President Xi Jinping in 2013, the vision of the New Silk Road has since become a cornerstone of China’s public diplomacy. The idea of establishing two logistics corridors—the Silk Road Economic Belt and the 21st Century Maritime Silk Road—has also gained a firm foothold in the foreign policy domain through numerous specific initiatives that not only aim to lay down infrastructure for a new transportation network but also to facilitate deeper cooperation, economic and otherwise, between China and the countries along the Silk Road routes.  Long neglected by policy makers in Beijing, Central and Eastern Europe (CEE) has grown in importance to China’s foreign policy in recent years, especially since it was “rediscovered” as an important part of the New Silk Road puzzle (CASS, November 13, 2014; Xinhua, December 17, 2014). [1] On the eve of the last Meeting of Heads of the Government of China and CEE (known as the Belgrade Meeting), the now annual meeting of leaders from China and the 16 CEE countries (CEEC), Chinese Premier Li Keqiang emphasized the importance of the CEE region for China’s “one belt, one road” initiative. Li stated that:  The Northern route, thanks to regular trains between China and Europe, could become a new transport and logistics artery extending to Western Europe through Central and Eastern Europe. Based on the Greek Port of Piraeus and the Railway connecting Belgrade and Budapest, the Southern route could be a China-Europe land-sea express line. It will significantly enhance regional connectivity, boost the economic development of countries along the route, and provide new and convenient access for Chinese exports to Europe and for European goods to enter China, as it goes through an area that involves 32 million people (sic) and 340,000 square kilometers of land...The China-Europe land-sea express line, together with regular trains between China and Europe and existing transport and logistics routes, will become an integral, convenient and efficient connectivity network linking Asia with Europe (Tanjug, December 14, 2014).

China's Economy Eased Pace in 2014: The past year may mark a turning point for China's economy, or merely a downturn after decades of higher growth rates. In November, President Xi Jinping told leaders of the Asia-Pacific Economic Cooperation (APEC) summit that China's lower growth rates are now the "new normal," using a label he first applied to the decelerating economy in May. "We must boost our confidence, adapt to the new normal condition based on the characteristics of China's economic growth in the current phase, and stay cool-minded," Xi said during a tour of central Henan province seven months ago. Since then, economic activity has continued toward its third consecutive year of below 8-percent growth, posting an expansion of 7.3 percent in the third quarter after 7.7- percent increases in 2012 and 2013, the slowest annual pace since 1999. Although much of the past year has been marked by expectations of a return to major stimulus policies, the government has largely stuck to its guns with smaller steps and targeted measures aimed at assuring more sustainable "medium-to-high" growth. The leadership that took office in March 2013 has been grappling with the expansionary excesses of the previous government's 4-trillion yuan (U.S. $646-billion) stimulus package from 2008-2009, now blamed for a binge of construction, pollution, energy consumption, and debt.

China misses trade growth target - China’s trade with the rest of the world missed the government’s target for the third year in a row in 2014 as external demand failed to offset the slowing domestic economy, official data released on Tuesday show. Total Chinese trade increased 3.4 per cent in 2014, compared with an annual goal of 7.5 per cent growth set by the Communist party at the start of last year. The missed target comes as China prepares to release annual gross domestic product figures next week that will show growth in the world’s largest economy (in purchasing power terms) came in below the government’s annual target for the first time since 1998. Growth below last year’s target of “around 7.5 per cent” will also mark the slowest Chinese expansion in a quarter of a century. The economy is expected to have grown by between 7.2 per cent and 7.4 per cent last year. The last time China’s growth rate was below 7.5 per cent was in 1990 when the country was still under international sanctions in the wake of the Tiananmen Square massacre. The year the tanks rolled in, 1989, is the only other time the economy has missed the government’s forecast since Beijing began publishing targets in 1986. Despite falling short of expectations last year, China’s trade and wider economy are still performing better than nearly every other major economy, with net exports making a positive contribution to GDP growth for the first time in four years. That was partly due to subdued domestic demand combined with lower commodity prices.

The risks of deflation in China -- Or the risk of “lethal damage” if you’re into that sort of thing. As said before, we’ve had 34 months and counting of negative PPI inflation in China with CPI at best lacklustre — coming in at 1.5 per cent in December. The risk is that, in a country charmingly wrapped in debt based uncertainty, we get outright deflation. As Pettis wrote recently: Where China faces a problem, like many other countries, is in the relationship between debt and deflation. In a deflationary environment unless productivity growth rates are high, it is very difficult to keep the value of assets rising in line with the value of debt. There is a natural tendency for asset values to decline in line with deflation, whereas the nominal value of debt is constant (and, when interest costs are added, the nominal value of monetary obligations actually increases). Of course if the value of debt rises faster than the value of assets, by definition wealth (equal to equity, or net assets, in a corporate entity) must decline. This is why highly indebted countries and businesses struggle especially hard with deflation. This is a problem for many Chinese borrowers. For nearly two decades, when nominal GDP growth was as high as 20-21% and the GDP deflator at 8-10%, even if they were horribly mismanaged the nominal value of assets soared relative to debt. Very low interest rate – around 7% for preferred borrowers – made servicing the debt almost an afterthought. Under those conditions it was pretty easy to ignore debt costs, and even easier to pick up very bad investment habits. Now that nominal GDP growth has dropped to around 8-10%, and could be substantially lower in a deflationary environment even if growth did not continue to decline, as I expect it will, those bad habits have become brutally expensive.

China unveils fresh support measures as economy shows renewed weakness (Reuters) - China announced fresh support measures on Friday for its slowing economy after data showed a worrying drop in bank lending and foreign investment growth falling to a two-year low. The central bank said it would lend 50 billion yuan ($8.1 billion) to banks at discounted rates to allow them to re-lend the money to farmers and small businesses - areas of the economy that are usually short of cash. The latest attempt to ease policy in a "targeted" manner to help the most vulnerable sectors came as data showed that foreign direct investment (FDI) in China rose just 1.7 percent in 2014, the slackest pace since 2012. true The world's second-largest economy drew a record $119.6 billion worth of FDI last year, slowing markedly from growth of 5.3 percent in 2013, the Ministry of Commerce said. Investment flows into China are an important gauge of the health of the world economy, and are also a good indicator of where capital is flowing within the Chinese economy.

A third straight record for Chinese investment in the US - For the third year in a row, Chinese investment in the US (excluding bonds) has set an annual record. In 2014 alone it was $17 billion, a far cry from 2011 when US – China commercial relations soured over the activities of telecom firm Huawei.  It would not be surprising for Chinese investment in the US to hit $20 billion in 2015, with the potential for more in years following.  According to the just released American Enterprise Institute-Heritage Foundation China Global Investment Tracker, the US is the leading national recipient for investment, at $78 billion since 2005. The Tracker follows Chinese investment and construction all over the world – using corporate information rather than the unhelpful numbers provided by the Chinese government. (These treat Hong Kong as a final destination, rather than a transit point, and show it as by far the top recipient.) Since 2012 there have been 55 investments of $100 million or more in the US While the acquisition of Smithfield Foods grabbed headlines, Chinese enterprises have also bought stakes in American shale and alternative energy firms, acquired lower-end technology companies, and poured huge sums into US property, especially in 2014. Looking at the last decade as a whole, finance remains the leading sector at $21 billion, though the vast bulk of that occurred before the Lehman shock. Property and energy investment, in that order, combine for another $27 billion since 2005, and more than half of this amount has been spent in the past three years.

Leaked Records Reveal Offshore Holdings of China’s Elite -- Close relatives of China’s top leaders have held secretive offshore companies in tax havens that helped shroud the Communist elite’s wealth, a leaked cache of documents reveals. The confidential files include details of a real estate company co-owned by current President Xi Jinping’s brother-in-law and British Virgin Islands companies set up by former Premier Wen Jiabao’s son and also by his son-in-law. Nearly 22,000 offshore clients with addresses in mainland China and Hong Kong appear in the files obtained by the International Consortium of Investigative Journalists.  Among them are some of China’s most powerful men and women — including at least 15 of China’s richest, members of the National People’s Congress and executives from state-owned companies entangled in corruption scandals. PricewaterhouseCoopers, UBS and other Western banks and accounting firms play a key role as middlemen in helping Chinese clients set up trusts and companies in the British Virgin Islands, Samoa and other offshore centers usually associated with hidden wealth, the records show. For instance, Swiss financial giant Credit Suisse helped Wen Jiabao’s son create his BVI company while his father was leading the country. The files come from two offshore firms — Singapore-based Portcullis TrustNet and BVI-based Commonwealth Trust Limited — that help clients create offshore companies, trusts and bank accounts. They are part of a cache of 2.5 million leaked files that ICIJ has sifted through with help from more than 50 reporting partners in Europe, North America, Asia and other regions. Since last April, ICIJ’s stories have triggered official inquiries, high-profile resignations and policy changes around the world.

Occupy Hong Kong Meets Occupy Taiwanese Parliament - There is a saying that "the market" takes the brunt of the blame in capitalist countries when economic times are sour, while "the state" does in communist countries. In East Asia, there is another, rather more sinister offshoot at work--blame the PRC. We received a taste of this with the backlash against Hong Kong-based tycoons being perceived as the key mediators in the relation between that special administrative region and the mainland some weeks back. Well, guess what: largely the same things are happening in Taiwan at the moment as President Ying-Jeou is perceived as being too close to the PRC. Just as disaffected youths closed down Hong Kong's main thoroughfares for months on end, so too is there a youth backlash in Taiwan: A 26-year-old graduate student is widely considered the spokesman for Taiwan's under-30 set, a generation struggling amid poor job prospects, stagnant wages and rising economic inequality. Lin Fei-fan is also one of the island's brightest political stars, thanks to his strong anti-China stance. He may well go on to influence cross-strait relations and even the democratic movement in Hong Kong, though he has not said whether he plans to run for public office.. Nicknamed God Fan by his supporters, Lin made his name as a frontman of the Sunflower Movement, a mass anti-Beijing rally that started in late March and saw a group of students occupy the island's legislative chamber for three weeks. The students were protesting the Nationalist government's efforts to push through a services trade deal with China.  It's another sign of disaffection with cottoning up to the mainland and supposedly accepting a subordinate political position relative to it as a result:  The Sunflower movement and the election results reflect growing public unease with Ma's direction. While the president has claimed his mainland initiatives are necessary for Taiwan's economic survival, many now think the 21 pacts he has signed with Beijing have benefited only big conglomerates, while hurting small businesses and undermining the island's de facto sovereignty.

Japan 5-year bond yields hit zero - Yields on five-year Japanese government bonds touched zero for the first time ever on Tuesday morning, in the latest sign of the Bank of Japan’s stranglehold on the market. Bond prices — which move inversely to yields — have been soaring under the central bank’s aggressive asset-purchasing programme, which has pushed yields on debt of up to four years’ duration into negative territory. As the bull market strengthened further on Tuesday, the yield on the current five-year bond due in December 2019 dipped from just 0.006 per cent to 0.000 per cent. Asking prices were even higher, according to Bloomberg, implying a yield of minus 0.005 per cent — or that buyers are paying for the privilege of holding Japanese government debt. Global bond yields are tumbling in the wake of plunging oil prices and declining measures of inflation. Investors are buying shorter-maturity bonds as they worry that central bank policy and faltering global demand will not arrest a trend towards deflation. The JGB market joined Swiss five-year bond yields in negative territory. Meanwhile German five-year paper also turned negative on Tuesday and equivalent Gilts fell below 1 per cent after UK annual inflation plumbed a 15-year low. Analysts say the JGB negative yields — which mean investors are guaranteed to lose money — are a reflection of the extraordinarily tight market conditions caused by the BoJ in its headlong pursuit of its 2 per cent inflation target. In October the bank stepped up its monthly purchases of long-term JGBs from Y6tn-Y8tn to Y8tn-Y12tn while extending the average remaining maturity of purchases to about seven to 10 years, saying such actions were necessary to overturn “entrenched” deflationary sentiment in the world’s fourth-largest economy.

Japanese Stocks Surge After Machinery Orders Crash 14.6% - Worst In 5 Years --So much for that short-lived hope-fest that Abenomics was not a total and utter disaster. Japan Machinery Orders (excluding -rather ironically- volatile orders) plunged 14.6% Year-over-Year in November (missing expectations of a 6.3% drop) for the biggest fall since Nov 2009. In this new farcical normal of course, this is just what the surging JPY of the last week needed and it is now dumping back towards 117.50 dragging Nikkei futures 150 points higher with it!!

Analysis: Why Cheap Oil Helps Japan’s Industries More Than Consumers - Real Time Economics - WSJ: The recent drop in crude oil prices is expected to provide a major boost to Japan’s economy, which is fueled almost entirely by imported energy. But its benefits will be felt much more by industrial users than by households. Petroleum products–whether fuel oil used by a power utility or naphtha by a chemical producer–are subject to few taxes. That’s a result of Japan’s decades-old tax system designed to encourage industrial development. These users are positioned to take full advantage of cheaper oil prices. In contrast, nearly half of the gasoline price drivers pay at the pump goes to taxes. Japan has long used the gasoline tax to build and maintain roads. In 2012, an additional levy was imposed to cover the cost of fighting the greenhouse effect. So the changes in oil prices only affect the nontax portion of the costs, muting the effects. The price of low-sulfur fuel oil has fallen 36% from six months ago to ¥48,750 ($418) per kiloliter, while that of naphtha dropped 48%, according to data provided by the Nihon Keizai Shimbun economic daily. Meanwhile, the average gasoline price has declined just 18% to ¥130 per liter, the equivalent of $4.20 per gallon. This could further amplify the diversion in the economic fortunes of big companies and consumers. The weakening of the yen has benefited many Japanese multinationals because it increases the value in yen terms of the dollars they earn overseas. For consumers, the yen’s drop has meant higher prices of food and other imported items. Still, cheap oil is a boon overall for Japan’s economy. In the past six months, global crude oil prices have fallen by roughly half. Even after considering a 14% decline in the yen’s value over the same period, that means crude oil now costs at least 30% less for buyers in Japan. Japan imports about ¥25 trillion worth of natural gas and oil a year, equivalent to 5% of its gross domestic product. A 30% drop in crude oil prices would produce a cost saving of at least ¥4 trillion, or 0.8% of GDP, according to government estimates.

Measure of Japanese Export Prices Hits Long-Term Low - An index of Japanese export prices fell to the lowest level in more than three decades in December, the Bank of Japan said Thursday, a sign that manufacturers may be starting to lower prices in an attempt to recapture lost market share after a two-year decline in the yen. The central bank’s index, which measures prices of Japanese exports based on currencies in which overseas buyers promised to pay, fell to 96.4 in December. That was the lowest since February 1979–a time when an influx of Japanese goods such as color TVs was fueling trade tensions between Tokyo and Washington. The index is down 4.3% since late 2012, when Prime Minister Shinzo Abe took office vowing to weaken the yen, whose strength had battered Japanese exporters in the preceding years. The latest data come amid cautious optimism that export volumes may finally be rebounding following a nearly 40% drop in the yen over the past two years. Volumes have been roughly flat during the period, according to data from the Ministry of Finance, as most companies chose to pocket profits rather than cut prices. Still, volumes rose 4.8% in October and 2.8% in September, before slipping 1.7% in November, finance ministry data showed.

Oil Price Gave a Clue To India Rate Cut - India’s rate cut on Thursday isn’t too much of a surprise, given the oil-driven fall in inflation across the region. Policy makers were caught off guard by the slowing growth of consumer prices. It has pushed up real interest rates, crimping growth at a time of concerns over China’s economic stability and jitters in the eurozone. But the decline in oil also has opened a window for central banks to take action, easing monetary policy to spur consumer demand and business investment.  Most analysts don’t think the Reserve Bank of India is done cutting and expect further easing from central banks in China and South Korea. The easing could help developing countries as they deal with slower growth, even countries like India that until recently had little capacity to cut rates this year. The World Bank this week slashed its 2015 growth forecast for all developing countries by more than half a percentage point to 4.8%, including a sizeable downgrade for China to 7.1% from 7.5%.Weaker inflation has already spurred the Bank of Japan to aggressively expand its campaign against deflation in October. Falling global crude prices, which make it harder for the BOJ to meet its 2% inflation target, played a role in the decision. China also cut its benchmark interest rate in late November, a move aimed at spurring activity as its economic growth slows amid very low inflation. Add to that two rate cuts in 2014 by South Korea, another country worried about Japan-style deflation.

World Bank: India Set to Become World’s Fastest-Growing Big Economy -- India is on course to overtake China to claim the position as the world’s fastest growing, big economy in the next two years, the World Bank said Tuesday, the latest vote of confidence in the roadmap set out by the new leaders of the South Asian nation to revamp the economy.  The Washington-based development institution raised its forecasts for India, saying growth in Asia’s third-largest economy would accelerate in the coming years even as much of the world is slowing down. The reason? New Delhi is implementing changes that will make the country’s economy more efficient and vibrant. “After several years of stalled progress, the newly-elected government has begun to implement measures to cut red tape, raise infrastructure investment, deregulate key parts of the economy, and shrink the role of government,” the World Bank said in its “Global Economic Prospects“ report released Tuesday. “Implementation stepped up during the fourth quarter, with the opening up of the coal industry to private investors, a deregulation of diesel prices to reduce the fiscal subsidy bill, a relaxation of labor market laws, and a linking of cash transfers with efforts to increase financial inclusion”  were all cited by the report as helping in India’s progress towards supercharged growth. While China has held the title as hardest-hitting heavyweight economy for years, it has been suffering through a slowdown and may have to give up the belt in 2017, according to World Bank projections in the report. India has been struggling to emerge from China’s shadow for more than a decade but in 2017 it may at last outgrow its neighbor to the north, expanding 7.0% that calendar year while China’s growth slows to 6.9%.  Some other economists–including those at Goldman Sachs—predict India could outpace China as early as next year.

Pakistan blames India as US holds back aid to Islamabad -  Pakistan is blaming India for the Obama administration holding back aid to Islamabad, amid calls in the US for a re-evaluation of Washington's munificent policy towards a country that continues to foster terrorists. A donor conference in Islamabad on Friday aimed at extracting $380 million from the world community to rehabilitate Pakistan's internally displaced people (IDP) effectively collapsed after the US reportedly didn't come through with its commitment to announce $250 million in aid. The $250 million was part of the $532 million under the Kerry-Lugar assistance package that the US ambassador to Pakistan Richard Olson had reportedly assured the Pakistani finance minister the US would disburse.  In recent days, however, the United States has come under sustained diplomatic pressure from India over its financial assistance to Pakistan. New Delhi wants the US to stop all aid to Pakistan until terrorists it accuses of having masterminded attacks on Indian soil are caught and punished,'' the Express Tribune newspaper reported on the weekend even as US officials in Washington said the Obama administration had not notified Congress for any aid to Pakistan but ''obviously there'll be additional funding.''

Rupiah Drop to ’98 Low Puts Fund Managers on Alert  - The last time the Indonesian rupiah was this weak in 1998, governments across Asia were seeking international bailouts to pay off foreign creditors. Now money managers are again asking whether borrowers are overextended. Offshore corporate debt surged to a record $128.8 billion in the third quarter of last year, about 22 percent more than the nation’s foreign currency reserves, Bank Indonesia data show. Companies weren’t deterred by the rupiah’s slump to its lowest level since the Asian financial crisis 17 years ago. “I would be far more comfortable holding local currency-denominated debt than the U.S.-denominated debt in Indonesia, and I’d rather hold sovereign debt than corporate,” Goetz Eggelhoefer, managing partner of Asia discretionary investment at New York-based emerging market specialist TRG Management LP, said in a Jan. 14 e-mail. “Years of super-low U.S. rates have encouraged corporates to issue U.S. dollar paper, and the hunt for yield has encouraged global investors to buy it with too little regard for the underlying credit risk.” With less than a fifth of Indonesian companies graded by Standard & Poor’s hedging their foreign liabilities, investors are raising red flags. Developer PT Lippo Karawaci (LPKR) and tire maker PT Gajah Tunggal have amassed more than 95 percent of their debt in U.S. dollars, prompting the central bank to impose limits on firms borrowing abroad.

Where the Pivot Went Wrong – And How To Fix It -- The Obama administration’s Southeast Asia policy has been badly misguided. The policy has been wrong in two important ways. First, the White House has focused too much on the countries of mainland Southeast Asia, which—with the exception of Vietnam—have provided minimal strategic benefits in return. This focus on mainland Southeast Asia has distracted attention from the countries of peninsular Southeast Asia—Indonesia, the Philippines, and Singapore—that are of greater value strategically and economically. Indonesia, in particular, is a thriving democracy and an increasingly important stabilizing force in regional and international affairs. Second, increased U.S. ties with mainland Southeast Asia have facilitated political regression in the region by empowering brutal militaries, condoning authoritarian regimes, and alienating young Southeast Asian democrats. This regression is particularly apparent in Thailand. It seemed to have established a working democracy in the 1990s, but has regressed politically more than any other state in Southeast Asia over the past twenty years. In May 2014, Thailand was taken over by a military junta. Reform also has stalled in Myanmar, Vietnam, Cambodia, and Malaysia. This political regression has had and will have strategic downsides for the United States as well. In the long run, young Southeast Asians—the region’s future leaders—will become increasingly anti-American and an authoritarian and unstable mainland Southeast Asia will prove a poor partner on economic and strategic issues for the United States.

Skyscraper Index Goes Global -- If the Barclays Skyscraper Index, which posits bursts of skyscraper construction are a harbinger of great economic collapse and market crashes, is accurate, then the world is in for a, well, world of pain. And nowhere more so than in China. As Skyscraper Center reports, 2014 saw an all-time high record 97 buildings of 200 meters or more completed with an increasing shift towards Asia (with a stunning 76% of all tall-building construction). For the seventh year in a row, China completed the most (58) skyscrapers... mal-investment boom much?

Bracing for Stagnation by Raghuram Rajan - As 2015 begins, the global economy remains weak. The United States may be seeing signs of a strengthening recovery, but the eurozone risks following Japan into recession, and emerging markets worry that their export-led growth strategies have left them vulnerable to stagnation abroad. With few signs that this year will bring any improvement, policymakers would be wise to understand the factors underlying the global economy’s anemic performance – and the implications of continued feebleness. In the words of Christine Lagarde, the International Monetary Fund’s managing director, we are experiencing the “new mediocre.” The implication is that growth is unacceptably low relative to potential and that more can be done to lift it, especially given that some major economies are flirting with deflation. Conventional policy advice urges innovative monetary interventions bearing an ever expanding array of acronyms, even as governments are admonished to spend on “obvious” needs such as infrastructure. The need for structural reforms is acknowledged, but they are typically deemed painful, and possibly growth-reducing in the short run. So the focus remains on monetary and fiscal stimulus – and as much of it as possible, given the deadening effects of debt overhang. And yet, the efficacy of such policy advice remains to be seen. It is worth noting that the Japanese checked each of these boxes over the last two decades: They held interest rates low, introduced quantitative easing, and launched massive debt-financed spending on infrastructure. Few would argue that Japan has recovered fully from its malaise.

Global Economic Perspectives on Fiscal Policy, Oil Prices, and the Trade Slowdown -- Two chapters from the World Bank’s Global Economic Perspectives are out.  Chapter 3 is “Fiscal Policy Challenges in Developing Economies”Over the past three decades, fiscal policy in developing countries has become increasingly countercyclical. The wide fiscal space accumulated prior to the global financial crisis not only made it possible for developing countries to implement fiscal stimulus during the crisis, but also made the stimulus more effective in supporting growth as fiscal multipliers tend to be higher in countries with greater fiscal space. …  Chapter 4 covers three topics. The first is “Understanding the Plunge in Oil Prices”: … There are a number of drivers behind the recent plunge in oil prices: several years of upward surprises in oil supply and downward surprises in demand, unwinding of some geopolitical risks that had threatened production, changing OPEC policy objectives, and appreciation of the U.S. dollar. … The second is “What Lies Behind the Global Trade Slowdown?”: Since the financial crisis, activity in many developing countries has been adversely affected by weak global trade. In 2012 and 2013, global trade grew less than 3.5 percent, well below the pre-crisis average of 7 percent. Part of this slowdown can be attributed to cyclical forces—especially, the slowdown in import demand that reflects weak growth in advanced economies. However, structural forces were also at work. In particular, the sensitivity of trade flows to changes in global activity between the pre-crisis 2000s and the post-crisis period halved. The third section addresses the question “Can Remittances Help Promote Consumption Stability?”.

World Bank lowers outlook for global economic growth - The World Bank cut its outlook for global growth Tuesday, saying a strengthening U.S. economy and plummeting oil prices won’t be enough to offset deepening trouble in the eurozone and emerging markets. The Washington-based development institution expects the global economy to expand 3% this year, up from 2.6% in 2014, but still slower than its earlier 2015 forecast of 3.4%. The bank’s economists see oil prices, which have lost more than half their value in the last six months, providing uneven benefits to major oil importers. The tumble in oil has bolstered the U.S. recovery by giving consumers more money to spend, leading the bank to revise up its growth projection for the world’s largest economy by 0.2 percentage point to 3.2%. But the price plunge is failing to spur stronger growth in importers such as Europe and Japan, while also exacerbating financial problems in major oil exporters. Kaushik Basu, the World Bank’s chief economist, said the global economy is being pulled by a single engine--the U.S. economy. “This does not make for a rosy outlook for the world,” he said. “It is really not enough.”

The World Bank’s Global Economic Outlook — In Charts - The World Bank cut its outlook for the global economy Tuesday. Here are some of the key findings from the report: Stronger U.S. growth isn’t enough to offset weaker growth overseas. Trade growth is slowing and is at risk of prolonged eurozone and Japanese stagnation, as well as a sharper slowdown in China: Oil’s tumble isn’t giving the eurozone much of a boost. Instead, falling prices are exacerbating deflation concerns, slowing growth and fueling debt problems: And eurozone members haven’t been restructuring their economies fast enough to spur future growth: Meanwhile, emerging markets are straining their capacity to grow without major economic overhauls: And as the Fed raises borrowing costs and, some emerging markets could be at risk from a massive credit boom turning into a bust, particularly if the growth slowdown accelerates and exchange rates values continue to fall: Emerging markets have much thinner government buffers than before the crisis: China is one of the biggest borrowers: A nosedive in Chinese growth would send shock waves across the global economy:

Global Growth Cut On Oil  - The World Bank has cut their global growth projections from 3.4% to 3.0% for 2015.  In 2016 they predict global GDP of 3.3% and in 2017 the world bank believes the globe will have a 3.2% annual GDP.  In seems plummeting oil prices are great for nations which import and horrific, of course for countries that export.  The World Bank's below graph shows what is projected to happen to Russia for 2015 and it ain't pretty with a -2.9% 2015 GDP projection.  That's quite a dependency on the price of oil. Several major forces are driving the global outlook: soft commodity prices; persistently low interest rates but increasingly divergent monetary policies across major economies; and weak world trade. In particular, the sharp decline in oil prices since mid-2014 will support global activity and help offset some of the headwinds to growth in oil-importing developing economies. However, it will dampen growth prospects for oil-exporting countries, with significant regional repercussions.The United States GDP was actually increased in projections to 3.2%, with the U.K. also faring better.  The Eurozone and Japan are expected to be drags on the global economy and deflation is much more of a risk as well.  Below is a graph showing which nations contributed to the overall global revisions.  The Eurozone and Japan were about 1/3 of the downward trend. Now one of the things the World Bank objects to is a slowdown in global trade and notice how they blame high income countries for reducing their cheap imports:  Global trade grew less than 4 percent a year during 2012-14, well below the pre-crisis average annual growth of about 7 percent. If global trade had continued to expand at its historical trend, it would have been some 20 percent above its actual level in 2014. The slowdown in global trade has been driven by both cyclical factors, notably persistently weak import demand in high-income countries, and structural factors, including the changing relationship between trade and income. Specifically, world trade has become less responsive to changes in global income because of slower expansions of global supply chains and a shift in demand toward less import-intensive items.

Despite Oil Price Drop, World Bank Cuts Global Economic Forecast - The World Bank on Tuesday lowered its global growth forecast for 2015 and next year due to disappointing economic prospects in the euro zone, Japan and some major emerging economies that offset the benefit of lower oil prices.  The global development lender predicted the global economy would grow 3 percent this year, below a forecast of 3.4 percent made in June, according to its twice-yearly Global Economic Prospects report. World GDP growth will reach 3.3 percent in 2016, as opposed to a June forecast of 3.5 percent, before dipping to 3.2 percent in 2017, it said.  “The global economy is at a disconcerting juncture,” World Bank chief economist Kaushik Basu told reporters. “It is as challenging a moment as it gets for economic forecasting.” The world economy has been more sluggish than expected since the 2007-2009 global financial crisis.  The World Bank said strong growth prospects in the United States and Britain separated them from other rich nations, including members of the euro zone and Japan, which continue to face anemic economies and deflation fears.

Lower Oil Prices and the World Economy -- What do lower oil prices mean for the world economy? The World Bank offers an overview in one section of Chapter 4 of its January 2015 Global Economic Prospects report. Here are some points that caught my eye.  The recent drop in oil prices is large, a drop of almost 50% over the last six months of 2014 from slightly over $100/barrel of crude oil to about $50/barrel. However, drops of similar magnitude are not uncommon. The World Bank notes: Between 1984-2013, five other episodes of oil price declines of 30 percent or more in a six-month period occurred, coinciding with major changes in the global economy and oil markets: an increase in the supply of oil and change in OPEC policy (1985-86); U.S. recessions (1990–91 and 2001); the Asian crisis (1997–98); and the global financial crisis (2007–09). There are particularly interesting parallels between the recent episode and the collapse in oil prices in 1985-86. After the sharp increase in oil prices in the 1970s, technological developments made possible to reduce the intensity of oil consumption and to extract oil from various offshore fields, including the North Sea and Alaska. After Saudi Arabia changed policy in December 1985 to increase its market share, the price of oil declined by 61 percent, from $24.68 to $9.62 per barrel between January-July 1986. Following this episode, low oil prices prevailed for more than fifteen years.  Here's a graph comparing recent drops in oil prices in the last 30 years.

Declining Population Could Reduce Global Economic Growth By 40% -  Declining population growth that shrinks the pool of available labor over the next 50 years will reduce by 40% the rate of growth in global economic output for the world’s 20 largest economies compared to the past 50 years, according to a new study. The report from the McKinsey Global Institute says that to compensate for the drop in the growth of the labor force, productivity needs to accelerate 80% from its historical rate to keep global growth in gross domestic product from slowing. Over the past 50 years, global growth increased six-fold, and average per capita income nearly tripled. McKinsey researchers estimate that around half the increase stemmed from gains in productivity and half from the growing labor force. Now, the workforce isn’t going to grow nearly as fast, and it could peak in most of the 20 countries analyzed in the report over the coming 50 years. Employment growth averaged 1.7% since 1964 and is set to drop to 0.3% in the coming decades. “In a world in which we can no longer rely on…the supply of labor to drive GDP growth, productivity is largely it,” says James Manyika of McKinsey & Co. Among the 20 nations studied, only Nigeria will see employment growth and GDP growth increase over the coming 50 years, based on recent demographic patterns, says McKinsey. (On a per capita basis, Turkey, Argentina and South Africa will see GDP growth increase.) Several nations will see outright declines in employment, including Japan, Germany, Russia, Italy and China. McKinsey sees GDP growth in the U.S. slowing by around one third, from an annual rate of 2.9% to 1.9%. (That’s better than Canada, where growth will drop by more than half to 1.5% from 3.1%). On a per capita basis, GDP growth is seen falling to around 1.3% from 1.9%.

Why the world economy may face a permanent slump -- The math is the math. Global population growth is slowing and so is the working-age population. Employment will grow by just 0.3% annually during the next 50 years, forecasts a new report from the McKinsey Global Institute. And if even if productivity growth matches the rapid rate of the past half century, “the rate of increase in global GDP growth will therefore still fall by 40%, to about 2.1 percent a year.” Or to put it another way, the “new normal” would be global growth slower than what it has been during the Not-So-Great-Recovery. Global living standards will still rise, but more slowly. Not such a big deal for advanced economies versus the impact on developing nations.So productivity needs to accelerate. McKinsey:The world isn’t running out of technological potential for growth. But achieving the increase in productivity required to revitalize the global economy will force business owners, managers, and workers to innovate by adopting new approaches that improve the way they operate. Our study found that about three-quarters of the potential productivity growth comes from the broader adoption of existing best practices, or catch-up improvements. The remaining one-quarter—counting only what we can foresee—comes from technological, operational, or business innovations that go beyond today’s best practices and push the frontier of the world’s GDP potential. Efforts to improve the traditionally weak productivity performance of the large and growing government and healthcare sectors around the world will be particularly important.

Synthesising views on west’s poor growth --  Heleen Mees - There is a fierce debate over the origins of the disappointing economic growth seen in advanced economies. On one side there is former world chess champion and political activist Garry Kasparov and internet entrepreneur Peter Thiel, while on the other, there is Kenneth Rogoff, a Harvard economist. Mr Rogoff argues that the systemic financial crisis is the root cause of the prolonged economic slump in the western world. In their research, Mr Rogoff and Ms Reinhart found economic growth following a systemic financial crisis to be about a full percentage point below trend growth. Mr Kasparov and Mr Thiel, on the other side, disavow Mr Rogoff’s claim that the collapse of advanced-country growth is the result of the financial crisis. In their view, the flailing western economies reflect stagnating technological development and innovation, and without radical changes in innovation policy, advanced economies are unlikely to see any prolonged pickup in productivity growth.Robert Gordon of Northwestern University espouses an even more dire view, suggesting that the 250 years of rapid technological progress that followed the Industrial Revolution may prove to be the exception, rather than the rule. A synthesis of the positions held by Mr Rogoff and Mr Kasparov and Mr Thiel is rather obvious. Most advanced economies are indeed suffering from a full-blown balance sheet recession in the aftermath of the worst systemic financial crisis since the Great Depression. Households, all too often saddled with mortgage debt exceeding the value of their home, are desperate to pay down debt and reluctant to spend money, let alone take out new loans.

The economy is worse than you hoped but better than you think - The oil price has fallen by more than half in a little over six months, and you might expect investors to be cheering. Perhaps they would have been — had the result not been a precipitous drop in inflation. A flight to the safety of government bonds has caused yields to fall lower than they have been at any time other than the darkest days of the euro crises of 2012. Although stock markets are still only 3.5 per cent from their all time highs, they have become a lot choppier. Prices are bouncing up and down, suggesting investors have become more nervous about the prospects for economic growth. Economists believe the fall in the oil price was triggered mainly by an increase in the supply of oil, following a rise in US production, and the decision by Opec to keep output high. Standard economic models suggest this should boost global output by between 0.5 and 1 per cent this year, if present oil prices are maintained. There will be significant losses among oil producers — but even bigger gains to oil consuming households and businesses. Investors initially accepted this, sending equity prices higher outside the energy sector. But lately, they have become sceptical, as inflation expectations have fallen off a cliff — for reasons that are not obvious, if the oil shock really is a boon for economic growth. The answer lies in the eurozone. Although lower oil prices should have boosted growth there, the economy keeps crawling along with growth of less than 1 per cent, and inflation expectations have been torn loose from the European Central Bank’s inflation target of below but close to 2 per cent. A deflationary process — in which consumers put off spending money because they expect prices to fall, companies cut prices to lure people into the shops, and households sit tight because their expectations have been confirmed — may be taking an inexorable grip on the single currency. The consequences would be disastrous, and far-reaching.

Global Joblessness Returns To Precrisis Levels In New IMF Employment Gauge - Global unemployment is finally back to levels seen before the global financial crisis. But the recession has left a sharp divergence between advanced and emerging economies, according to a new gauge unveiled by the International Monetary Fund. The world’s jobless rate ended 2014 at 5.6%, where it stood in 2007. But global employment is growing at just 1.5% a year, far slower than the 2% to 2.5% growth rate seen before the crisis. The figures are from a new Global Jobs Index by the IMF and the Economist Intelligence Unit. The index, the first worldwide gauge of its kind, will offer quarterly estimates based on employment in 64 economies that represent about 95% of the world’s economic output and 80% of its labor force. (Some jobs numbers are drawn from historical relationships between jobs and economic growth.) The world’s top policy makers, convening through the G-20 and the IMF, have long used overall economic growth measures to assess their progress. But they often note that jobs are the key measure of their success. The latest gauge shows one way they’re struggling. Top-line measures such as unemployment are returning to normal levels in many nations, including the U.S., but overall employment growth remains sluggish. “The index can be used to take the pulse of global labor markets at more regular intervals than has been done before,” IMF economist Prakash Loungani wrote. “While financial markets are monitored second-by-second, data on jobs—which matters more to most people—are often not available every quarter because many countries do not report employment numbers in a timely manner.”

Emerging Markets After The Tantrum - Krugman - You all remember — well, if you do monetary policy you all remember — the “taper tantrum”; the sharp rise in U.S. long-term interest rates when the Fed began signaling its intention to slow and eventually stop buying long-term assets. One consequence of that tantrum was a sharp fall in emerging-market currencies, which made sense: prospective yields in the US were up, so less reason to go chasing yield in Brazil or India.But here’s the thing: the tantrum has subsided, and US interest rates have retraced much of their rise. But EM currencies haven’t rebounded:Photo Credit Why not?I don’t have any definite answer. One guess is that we’re seeing retroactive evidence that the EM thing was a bubble, which the tantrum burst and the subsequent fall in US rates didn’t reinflate. But anyway, something to puzzle at.

Venezuelan shortages, long lines spark violence, arrests - (Reuters) - At least a dozen protesters arrested in Venezuela remained in jail on Monday and masked assailants burned a bus amid scattered unrest over swelling lines for basic goods, activists said. Police rounded up 16 people for protesting outside stores over the weekend, according to the opposition MUD coalition, which said four of them were released shortly after. Rights group Penal Forum said 18 protesters were still behind bars on Monday. The government did not confirm that. Venezuela is suffering from chronic shortages of goods ranging from diapers to flour that have worsened since an ebb in deliveries over Christmas. The scarcity has forced shoppers across Venezuela to line up in front of stores before dawn. The MUD also accused soldiers posted outside shops of banning photos of the lines, which can snake around blocks. "Not only is the government forcing people to get into humiliating queues ... it also wants the lines to be Cuban-style, silent and terrified," said MUD chief Jesus Torrealba. On Saturday, an explosive device was thrown into a building of the state phone company Cantv in southeastern Puerto Ordaz city, burning eight vehicles, the government said. In western San Cristobal, six masked men threw a Molotov cocktail into a parked bus belonging to a university, students said on Monday.

Venezuelan states ban night queues outside shops as grocery shortages continue -- Governors in three Venezuelan states have banned overnight queuing amid huge and sometimes rowdy lines around shops across the scarcity-plagued country. Shortages of basic consumer products from milk to toilet paper have worsened since a lull in distribution over the Christmas and New Year holidays, prompting many to wait from the early hours on foot - or in hammocks - before shops open. The ubiquitous lines and frequent jostling for places when shop doors finally open are an embarrassment and irritation to Venezuelans across the political spectrum. There have also been scattered protests and arrests. “We are going to prohibit lines outside commercial establishments,” Falcon state governor Stella Lugo said late on Tuesday. “Security forces have been instructed.” She joined two other governors, in the states of Bolivar and Yaracuy, who have announced the same measure in recent days.

Haiti’s Economic Aftershocks - — Five years is an eternity in the news cycle of natural disasters. It’s been that long since the 2010 Haiti earthquake killed hundreds of thousands of people (no one really knows how many died) and triggered an influx of international aid (an exact accounting remains elusive). .Over the last five years, working as an architect here on reconstruction projects, I’ve witnessed some physical and social recovery. But the disheartening reality is that Haiti’s post-quake economy is identical to its pre-disaster model: Haitians remain dependent on foreign donations to maintain their subsistence existence. NGOs with tunnel vision and international aid agencies with top-down agendas hobble the weak government and cite Haiti’s culture of corruption as an excuse to deny distributing aid through local channels. Economic autonomy is not disaster relief’s primary objective. But Haiti will be a global stepchild until it makes something people want to buy. Yet as a low-wage country close to the world’s largest consumer market, it offers advantages. Shipping goods from Haiti is a bargain because containers importing humanitarian aid often leave here empty. Its annual exports are about a third of neighboring Jamaica and less than half of its African cousins Mali and Senegal.  Yet Haiti faces big impediments to becoming a successful exporter of manufactured goods. A history of unstable governments and restrictive policies on foreign investment keep multinational corporations away. Convoluted bureaucracies and corruption make business transactions difficult. An unreliable workforce impedes efficiency.

Boko Haram may have just killed 2,000 people: ‘Killing went on and on and on’ - For months, fear of Boko Haram has gripped Nigeria’s northeast. The goals of the Islamic militant group, which captured international attention through a relentless campaign of brutality, have long been about killing. But last summer, something changed. Its aspirations became as much about territory as terrorism. It no longer wants to just cripple a government. It wants to become one. In August, Boko Haram leader Abubakar Shekau announced the establishment of his “Islamic Caliphate,” quickly taking over every corner of Borno State in northeast Nigeria. But one town called Baga, populated by thousands of Nigerians along the western shores of Lake Chad, held out. Anchored by a multinational military base manned by troops from Niger to Chad, it was the last place in Borno under the national government’s control. Over the weekend, that changed.  “They came through the north, the west and from the southern part of the town because the eastern part is only water,” one resident told the BBC. It’s not clear how many people were killed in Baga. Early reports on Thursday said hundreds. Others said it was many more. Musa Alhaji Bukar, a senior government official in Borno, said Boko Haram killed more than 2,000 people which, if true, would mean the group equaled its total kill count last year in one attack.  Baga, local government officials say, is simply no more. It’s “virtually non-existent,” Bukar told the BBC. One man who escaped with his family told Agence France-Presse he had to navigate through “many dead bodies on the ground” and that the “whole town was on fire.” Another man told Reuters he “escaped with my family in the car after seeing how Boko Haram was killing people … I saw bodies in the street. Children and women, some were crying for help.” He added: Bodies were “littered on the streets and surrounding bushes.” “The indiscriminate killing went on and on and on,” Lawan told BBC.

World Bank expects Russia's economy to contract by -2.9 pct in 2015 (Reuters) - The World Bank expects Russia's economy to contract by 2.9 percent in 2015, it said in a report on global economic growth on Wednesday, cutting its forecast from December when it expected a 0.7 percent contraction. The bank also predicted 0.1 percent growth in 2016 and 1.1 percent growth in 2017, following 0.7 percent growth in 2014. It cut its global growth forecast for 2015 and next year due to poor economic prospects in the euro zone, Japan and some major emerging economies that offset the benefit of lower oil prices.

Inflation in Russia hits 11pc in 2014 as value of ruble plummets - Inflation in Russia escalated above 11 percent at the end of 2014 as the value of the Russian ruble plummeted, said by the federal statistics agency Rosstat here the other day. Russia’s Central Bank had early in the year set an inflation target of 5 percent — a not unreasonable goal at the time, given inflation of 6.5 percent in 2013 and 6.6 percent in 2012. Inflation accelerated in the second half of the year after Russia in August banned some food imports from countries that had imposed sanctions on Russia over its meddling in Ukraine, forcing retailers and distributors to abruptly build new supply chains. The price of food products rose 15.4 percent last year, according to Rosstat, while the cost of all other products rose an average of 8.1 percent. The situation was severely aggravated late in the year by a steady plunge in the price of oil, one of Russia’s main exports, sending the Russian ruble hurtling off the rails in December. In the week beginning Dec. 16, the day the ruble nosedived to a staggering low of 80 to the U.S. dollar before rebounding to less than 68, weekly inflation accelerated to 0.9 percent — the highest rate recorded since Rosstat began publishing data on weekly inflation in 2008, according to news agency Interfax.

Russia Just Pulled Itself Out Of The Petrodollar - When the price of crude started its self-reinforcing plunge, such a death would happen whether the petrodollar participants wanted it, or, as the case may be, were dragged into the abattoir kicking and screaming. It is the latter that seems to have taken place with the one country that many though initially would do everything in its power to have an amicable departure from the Petrodollar and yet whose divorce from the USD has quickly become a very messy affair, with lots of screaming and the occasional artillery shell. As Bloomberg reports Russia "may unseal its $88 billion Reserve Fund and convert some of its foreign-currency holdings into rubles, the latest government effort to prop up an economy veering into its worst slump since 2009." "Together with the central bank, we are selling a part of our foreign-currency reserves,” Finance Minister Anton Siluanov said in Moscow today. “We’ll get rubles and place them in deposits for banks, giving liquidity to the economy."

Russia says Ukraine has violated loan terms: agencies  (Reuters) - Ukraine has violated the terms of a $3 billion Russian loan but Moscow has not yet decided whether to demand early repayment, Russian Finance Minister Anton Siluanov was quoted on Saturday as saying. Russia lent the money in December 2013 by buying Ukrainian Eurobonds, two months before Ukraine's then-president, the pro-Moscow Viktor Yanukovich, fled the country amid mass protests against his rule. The terms of the loan deal included a condition that Ukraine's total state debt should not exceed 60 percent of its annual gross domestic product (GDP). true Last month, rating agency Moody's estimated that Ukraine's debt amounted to 72 percent of GDP in 2014 and would rise to 83 percent in 2015. It also said "the risk of default is rising". "Ukraine has definitely violated the terms of the loan, and in particular (the condition) not to increase its state debt above 60 percent of GDP," Russia's Siluanov said, according to Interfax news agency. "So Russia definitely has the right to demand early return of this loan. At the same time, at present this decision has not yet been taken." Siluanov was commenting on earlier remarks by an anonymous government official saying that Russia was likely to demand early repayment as Ukraine had violated many of the loan terms.

Russia Cuts Off Ukraine Gas Supply To 6 European Countries -- Vladimir Putin ordered the Russian state energy giant Gazprom to cut supplies to and through Ukraine amid accusations, according to The Daily Mail, that its neighbor has been siphoning off and stealing Russian gas. Due to these "transit risks for European consumers in the territory of Ukraine," Gazprom cut gas exports to Europe by 60%, plunging the continent into an energy crisis "within hours." Perhaps explaining the explosion higher in NatGas prices (and oil) today, gas companies in Ukraine confirmed that Russia had cut off supply; and six countries reported a complete shut-off of Russian gas. The EU raged that the sudden cut-off to some of its member countries was "completely unacceptable," but Gazprom CEO Alexey Miller later added that Russia plans to shift all its natural gas flows crossing Ukraine to a route via Turkey; and Russian Energy Minister Alexander Novak stated unequivocally, "the decision has been made."

Russia Fires Ukraine as Natural Gas Transit for Europe - Ukraine is finished as a supply route for Russian natural gas headed for European Union countries. EU countries get 25% to 30% of their natural gas from the Ukraine pipeline. The gas transiting Ukraine will be diverted to the recently announced Russia-Turkey pipeline. The Turks will create a portal at the Greek border where Europeans can purchase natural gas. The pipeline will be complete in 2017.  Of course, the EU countries will need to build the pipeline infrastructure from the Turkish portal to various European countries. Russian natural gas delivered to Europe via Ukraine was off 47% in 2014. The end of Ukraine transit will eventually eliminate $1.7 billion a year that Ukraine earns from hosting the pipeline. The Ukraine gas pipeline has been a headache for Russia for years. The Russians claim that Ukraine siphoned off gas from amounts intended for Europe. The issue came to a head in 2006 with Ukraine officials confessing that they had taken gas intended for Europe. United States intelligence agencies tapping the phones of European leaders must be getting an earful about this announcement. The EU must replace the Russian gas, 30% of their annual supply, by 2017.

EU must link to Turkey pipeline for gas’: Russia’s gas giant, Gazprom, says if the European Union needs the Russian gas, it has no option but to link to a new pipeline Moscow plans to build through Turkey. Alexei Miller, who serves as the deputy chairman of the board of directors and chairman of the management committee at the Russian gas company, said in Moscow on Wednesday that the so-called Turkish Stream is the only route along which a projected annual 63 billion cubic meters of Russian gas can be supplied. “There are no other options,” Miller reminded the new European Commissioner for Energy Union Maros Sefcovic. On December 1, 2014, Russia’s President Vladimir Putin announced that Moscow had scrapped the South Stream pipeline project that would have supplied the EU through the Black Sea waters, bypassing Ukraine. Russia currently supplies Turkey with its gas through the existing Blue Stream. The South Stream was abandoned due to the dispute between Russia and the European Union over the crisis in eastern Ukraine. The Gazprom official said the “European partners have been informed of” the construction of the new pipeline to Turkey, “and now their task is to create the necessary gas transport infrastructure from the Greek and Turkish border.”

Crisis in Ukraine could trigger nuclear war, warns Gorbachev - Mikhail Gorbachev, the former Soviet leader, has warned that the world is at risk of a “nuclear war” because of the tensions between Russia and the West over Ukraine. In an interview with the German magazine Spiegel, Mr Gorbachev said that if either side lost its nerve in the current stand-off, it could lead to nuclear war, and spoke of his fears that the world “will not survive the next few years”. “I actually see all the signs of a new Cold War,” Mr Gorbachev said. “It could all blow up at any moment if we don’t take action. The loss of confidence is catastrophic. Moscow does not believe the West, and the West does not believe Moscow.”  Asked if he thought the situation could lead to a war, Mr Gorbachev said: “Don’t even think of it. Such a war today would probably lead inevitably to nuclear war. But the statements and propaganda on both sides make me fear the worst. If anyone loses their nerve in this charged atmosphere, we will not survive the next few years.” Such a stark warning from the former Soviet leader who brought about the end of the Cold War will raise concerns. “I do not say such things lightly,” Mr Gorbachev said. “I am a man with a conscience. But that’s how it is. I’m really extremely worried.” The 83-year-old has spoken out about the current stand-off between Russia and the West before. Last year he used a speech in Berlin on the 25th anniversary of the fall of the Berlin Wall to warn: “The world is on the brink of a new Cold War”.

It Begins: IRS Launches International Data Exchange Service - Yesterday, the IRS announced the International Data Exchange Service. If you’ve not heard of it, it’s is an outgrowth of the Foreign Account Tax Compliance Act (FATCA), which requires every single bank in the world to get in bed with IRS to share information about customers. We’ve said this over and over, FATCA is probably the dumbest law in the history of the United States. And we don’t say that lightly, because there’s definitely stiff competition. Like any other bankrupt government, the US government has taken to intimidating its own citizens and the entire world in an attempt to make ends meet. But the fact is that tax revenues actually haven’t improved at all. It doesn’t take a rocket scientist to realize that the rest of the world is one day going to create its own alternative system. One that would no longer rely on the US dollar.

Public backlash threatens EU trade deal with the US - The EU has been hit by a stinging public backlash against its landmark trade deal with the US, making it increasingly unlikely that the accord will be concluded this year. Brussels last year launched a public consultation to gauge popular sentiment about the most contentious part of the deal: clauses mapping out the rights of foreign investors to sue governments in international tribunals, bypassing national courts. The European Commission received almost 150,000 responses to its survey — more than 100 times more than any previous consultation on trade — and admitted on Tuesday that the majority of respondents expressed fears that the deal’s investment clauses would undermine national sovereignty. “The consultation clearly shows that there is huge scepticism against the [investment] instrument,” said Cecilia Malmström, the EU trade commissioner. The 28 EU nations want to conclude the Transatlantic Trade and Investment Partnership this year, finalising what would be the world’s biggest trade deal. But the so-called Investment State Dispute Settlement provisions are now the biggest political obstacle to a deal, with activists arguing that they could be used to undermine national safeguards on health, food and the environment. Opposition is particularly strong in Germany, the EU’s most powerful country. Businesses argue that ISDS is vital to protecting investors against bias in national courts. Of the replies, a large number were based on copy-and-paste templates circulated by non-governmental organisations campaigning against TTIP. However, trade officials in Brussels said they would not discount these submissions as they were still a sign of discontent.

TTIP: European commission faces huge scepticism towards free trade deal - Consultation on a controversial trade deal between the EU and the US has revealed huge scepticism, it has been revealed. An unprecedented 150,000 responses were received – over a third from the UK – mainly opposing the Transatlantic Trade and Investment Partnership. European commission officials said they were surprised at the number of replies, adding it was a matter of concern that so many were negative. But trade commissioner Cecilia Malmström stressed that any agreement would be good for economic growth and jobs across Europe. An outline deal is planned for the end of the year, although commission officials admitted there was more work to be done to address concerns. Campaign groups such as 38 Degrees and trade unions have been warning that TTIP would lead to NHS services being privatised. European commission officials said 50,000 of the replies came via 38 Degrees, although hundreds of different organisations and thousands of individuals responded. The consultation was on the inclusion of investor protection provisions, especially an investor-state dispute settlement mechanism, which is designed to protect companies’ foreign investments against harmful or illegal rulings in the countries where they operate.

The Achilles Heel Of The Global Status Quo: Deflation - That the global Status Quo is terrified of deflation is the background of every policy decision and official PR sound-bite. The reason behind this unremitting terror: deflation is the Achilles Heel of the global Status Quo. My colleague Gordon T. Long explains why in the latest of our video/slide programs. Though central banks are constantly claiming their policies are intended to spark "growth," their over-riding motivation is sustaining the colossal mountain of debt that is the foundation of the Status Quo's wealth and power. If interest rates rise, the debt can no longer be serviced without ballooning deficits (i.e. more borrowing just to pay the rising interest) or the extreme pain of budget cuts--cuts that will necessarily come of discretionary government spending or entitlements. If liquidity (easy, abundant credit) dries up, the portion of the debt mountain that must be rolled over into new loans cannot be refinanced, and the loans and bonds that have come due/reached maturity will default, toppling the system's teetering financial dominoes. If asset purchases (i.e. quantitative easing) by central banks taper to zero, risky assets will go bidless and/or yields will rise as investors demand higher risk premiums. The only way to make debt service easier on borrowers is to create inflation, which depreciates the purchasing power of existing loans and lets borrowers service their debts with cheaper (depreciated) currency. A world without inflation threatens to collapse the Status Quo's mountain of debt.

The global deflation shock – how big and how bad? -- The Brent oil price has fallen by a further 9.3 per cent in the first few days of 2015, making the total decline since mid 2014 a remarkable 56 per cent. With Saudi Arabia showing very little sign of restricting supply, economists have been scrambling to reduce their global inflation forecasts in line with the new reality in the oil market. For investors and central bankers, two questions are dominating discussion – how much deflation will be seen in 2015, and how severe a threat does it pose to the health of the global economy? The answers are complex, because deflation is occurring simultaneously in two different varieties. The first is “good” deflation, stemming from the huge beneficial supply shock from oil. But the second is “bad” deflation, stemming from a persistent shortage of aggregate demand in the developed economies, especially the eurozone.  At present, good deflation is definitely dominating the global picture, and this is being priced into asset markets. But the threat from bad deflation in the eurozone is still rumbling away in the background. How low will inflation go in the next few months? The impact of lower commodity prices will be to reduce global inflation by about 1.2 per cent, and to reduce inflation in the developed economies by 1.6 per cent. According to Bruce Kasman at J.P. Morgan (who says he has “learned to stop worrying and love deflation”), global inflation, including the emerging markets, will drop to below 1 per cent in the middle of 2015, the lowest reading outside a recession in the past 40 years. In the developed economies, headline inflation will be negative for much of the year.

Deflation As Betrayal - Paul Krugman -- Ambrose Evans-Pritchard writes that Europe’s slide toward deflation amounts to a “betrayal” of Southern Europe. . So let me elaborate with a picture I find illuminating. The attached chart shows core inflation (excluding energy, food, alcohol, and tobacco) in Germany, Spain, and the euro area as a whole. As you can see, there have been two distinct eras for the euro system. In the first era, up to the crisis, capital was flooding into southern Europe. In retrospect, this was a bad thing, but few in positions of authority were complaining at the time — oh, and in Spain it was private borrowing, not public. The result was a boom in the south, and also somewhat elevated inflation.  Then the capital flows stopped, and it become necessary for southern Europe to reverse the rise in relative costs and prices that had taken place during the era of inflows. Both basic macroeconomics and the agreed-on rules of the game for the euro said that this adjustment should be symmetric with what went before — that overall euro area inflation should remain at target (or higher, says the economics, but leave that aside), with Germany running significantly higher inflation so that low inflation in the south could deliver the needed “internal devaluation”. In fact, however, there was no rise in German inflation, and at this point it amounts to a fall. Overall euro inflation, even using the core, is far below target. And southern Europe has been forced into deflation, which is very costly and also worsens the debt burden. And then you have the Germans saying that they dealt with their problems, so why can’t southern Europe do the same? Why, because southern Europe played by the rules, but in its time of need the rules were changed, hugely to its disadvantage.

Eurozone must act before deflation grips - Deflation in the eurozone has nothing to do with the price of oil. Its cause is a series of policy errors over several years — the interest rate increase in 2011, the failure to act when inflation rates dropped off a cliff in 2013 and the pursuit of austerity in a recession. If the European Central Bank had met its inflation target of “close to but below 2 per cent”, the oil price collapse would have been harmless. Inflation would have fallen from 2 per cent to 1 per cent at most. Central bankers would have been right to ignore it. But if you start at close to zero, you get deflation. A year ago it was said that the eurozone was only one shock away from deflation. Since then, we have had two: Russia’s aggression against Ukraine and the fall in the oil price. Shocks happen. The fall in crude oil prices would normally be benign for a net oil importer such as the eurozone. But beware the second-round effects, those that come with a delay. There are already signs that German pay negotiators are dropping the ECB’s 2 per cent inflation target in their wage formulas. They tend to calculate increases by adding together the ECB’s inflation target of 2 per cent and some portion of the increase in German productivity. But with inflation stuck at zero that formula leaves only productivity, which has also not grown by much. If inflation expectations fall, so will wage increases. The yields on German bonds — negative rates for two-year paper; zero for five-year — tell you that investors expect inflation to be close to zero for a long time. Why should company wage negotiators expect anything different? Low inflation leads to wage moderation, which in turn bears down on future inflation. By the time the oil price effect falls out of the inflation index — in about 12 months — the 2015 wage round kicks in dragging down inflation further. What does this scenario imply for policy? The ECB is now very likely to vote in favour of a programme of quantitative easing — the purchase of sovereign debt — when it meets on January 22. My expectation is that QE will fall short for a number of reasons.

ECB Should Address Low Inflation Sooner, Not Later, Nowotny Says - The European Central Bank should act sooner rather than later to address the eurozone’s low inflation rates, European Central Bank Governing Council Member Ewald Nowotny said Monday evening.  Over the medium term, inflation rates are expected to remain well below the ECB’s price stability target of an inflation rate just under, but not above 2%, Mr. Nowotny said. The long lags in the effect of monetary policy measures means the ECB “shouldn’t wait too long,” he said. The rate setter said the eurozone however is not in a deflationary period—a period of falling prices, or a negative inflation rate. The ECB’s conventional monetary tools to address deflationary risks are limited, he said. Among the unconventional measures open to the ECB is the purchase of assets, but the discussion is what type of assets, whether government debt or corporate bonds could be purchased, Mr. Nowotny said. The question of who carries the risk of these purchases—whether there is risk sharing among the eurozone’s member states or each individual member state would carry the risk of its own central bank’s purchases—is very important, Mr. Nowotny said. He added it is important that any purchases made by the ECB have a strong legal basis. Mr. Nowotny was speaking at a pre-launch event for the Austrian edition of the Swiss daily Neue Zürcher Zeitung.

The ECB exploring QE options - The ECB is currently in the process of designing a fresh €500bn securities purchase program. There are multiple options on the table and the central bank is having staff run through a number of scenarios. Asset classes and asset quality scenarios run the gamut - from AAA assets only to everything from BBB- and up. The possibilities include government bonds only as well as a mix that also contains private credit. This is all in addition to the ABS and covered bond buying programs already in place.  But here comes the tough part - risk sharing. The ECB is looking at three possibilities:
Method-1. The full amount of securities purchased is shared based on each member-state ownership of the ECB (capital subscriptions). This is how risk has been shared so far on purchases by the central bank. It would be similar to the so-called Securities Market Program (SMP), which is how the ECB originally got stuck with defaulted Greek debt. Of course the Germans, with their 26% exposure to the ECB, are quite unhappy about this.
Method-2. Another option on the table is to run bond purchases similarly to the so-called emergency liquidity assistance (ELA). In such a program "any costs of, and the risks arising from, the provision of ELA are incurred by the relevant NCB" (NCB stands for National Central Bank, such as the Bank of Italy for example). In such structure, each NCB would buy some prescribed amount of its nation's government bonds and assume all the risk of these purchases. Thus the Bank of Italy, not the ECB, would assume all the risk for Italian government bonds it purchases via this program.
Method-3. The third option would apply Method-1 of risk sharing (above) up to some amount of purchases (let's say the first €250bn), after which the ECB reverts to Method-2 (above) for the remaining purchases.
At this point it's all about picking the "lesser evil". Any large government bond purchase program in the euro area creates a moral hazard, removing the incentives for fiscal discipline. With interest rates at historical lows driven by central bank purchases, politicians are likely to institute new spending programs - such as the ones that brought about the Eurozone crisis.

Europe is leaking - From JPM’s Flows & Liquidity team, this is what ECB QE incontinence looks like: Specifically, that shows the 3-month rolling buying of foreign debt by euro area residents jumped to above €100bn in October, the last data point, and the highest pace since the depths of the euro area debt crisis. More so, say JPM, the causality appears to be running from Bunds to USTs. From JPM: The main message from Figure 1 is of accelerating leakage from ECB’s QE to the rest of the world even before the ECB announced sovereign QE. As we highlighted before (F&L Oct 31st “The BoJ strikes as the Fed ends QE”), liquidity is not constrained by borders and the evidence over the past months has been of duration buying flowing from Japan and the Euro area into the US rather than the other way around. In other words, the argument often made last year that the BoJ’s or ECB’s QE would be less global and thus less powerful than the Fed’s QE proved wrong by flows. Admittedly the data are fuzzy due to incorporation and reporting issues but the direction seems clear: Admittedly the increase in the purchases of foreign bonds by euro area residents does not necessarily mean that these purchases were directed to US bonds. Many euro area institutional investors will use their UK entities to trade US bonds and hedge funds will use their Caribbean legal residences. As a result, the picture we are getting by looking at the TIC cross border flow data is of strong purchases of US bonds by UK entities between February and September and by Caribbean entities in October, i.e. the buying of USTs was likely driven by hedge funds in October and by real money investors before then.

Banks prepare plans for Greek eurozone exit - Banks and other financial institutions in Europe are stress-testing their internal systems and dusting off two-year-old contingency plans for the possibility Greece could leave the region’s monetary union after a key election later this month. Among the firms running through drills are Citigroup, Goldman Sachs and brokerage ICAP, according to people familiar with the matter. The firms’ plans include detailed checks on counterparties that could be significantly affected by a Greek exit, looking at credit exposures and testing how they would provide cross-border funding to local operations. Some firms are also preparing for the impact on payment systems and conducting trial runs of currency-trading platforms to see how they would cope with adding a new Greek currency or dealing with potential capital controls. The moves come as Greek leftist opposition party Syriza continues to lead in recent public opinion polls ahead of national elections on Jan. 25. The ruling coalition government has framed the election as a de facto poll on whether the country stays in the eurozone, saying Syriza’s antiausterity policies would force a break with eurozone partners. Syriza, though, hasn’t campaigned on an exit and most Greek voters want to stay in the monetary union, according to recent polls.

WSJ: Banks Stress Test for Grexit - The European policy makers have dragged their feet (especially the Germans), and Grexit is back in the news.  From the WSJ: Banks Ready Contingency Plans in Case of Greek Eurozone Exit Banks and other financial institutions in Europe are stress-testing their internal systems and dusting off two-year-old contingency plans for the possibility Greece could leave the region’s monetary union after a key election later this month.  Among the firms running through drills are Citigroup Inc., Goldman Sachs Group Inc. and brokerage ICAP PLC, according to people familiar with the matter. The firms’ plans include detailed checks on counterparties that could be significantly affected by a Greek exit, looking at credit exposures and testing how they would provide cross-border funding to local operations. And from Business Insider: Here's What A 'Grexit' Would Cost Europe A snap election in Greece on January 25 could bring to power the far-left Syriza party, which wants to abandon the austerity policy imposed by the EU and IMF as part of the country's 240-billion-euro ($282 billion) international bailout. The market selloff was triggered by media reports indicating that if a new government in Athens reversed course, Germany was ready to let Greece leave the European club of common currency users.  Most analysts doubt it would come to that, but if it did Athens would be hard pressed to repay its bailout loans and would likely default.

Greek anti-bailout party Syriza holds 4.5 point lead before vote: poll (Reuters) - Greece's anti-bailout Syriza party held a steady lead over Prime Minister Antonis Samaras' conservative party ahead of a Jan. 25 snap election, a poll showed on Monday. The survey conducted by the University of Macedonia research institute for Greek Skai TV showed Alexis Tsipras' Syriza leading by 4.5 percentage points over Samaras' New Democracy party. Both parties' ratings rose 2 percentage points from a poll by the same institute in December. The latest survey, conducted between Jan. 10 and Jan. 12, put support for Syriza at 31.5 percent versus 27 percent for center-right New Democracy. Syriza says it will cancel austerity imposed under Greece's 240 billion euro bailout and renegotiate some debts, raising fears of a standoff with EU/IMF lenders that could result in Greece leaving the euro zone. However, the head of the euro zone's rescue fund said Syriza might moderate its position if it came to power. Opinion polls by various firms have shown Syriza leading the conservatives, but have also indicated that no party is likely to win outright, making a coalition government a likely outcome.

SYRIZA Will Face a €7 Billion Funding Gap if Creditors Back Out - Greece will face a 7-billion-euro funding gap in March if SYRIZA comes to power and clashes with the country’s international creditors who will stop the 7.2-billion-euro installment of the current bailout program, said a report of Greek newspaper “Proto Thema.” In March, Greece has to come up with 4.6 billion euros for bond maturities. Total bond maturities for 2015 come up to 31 billion euros. Therefore, issuing Treasury bills, even if the Troika of international creditors allow it, won’t exceed 4-5 billion euros, financial analysts say. Also, tax revenue is not guaranteed to reach the desired amounts. Athens must collect 4-5 billion euros each month from taxes. So far, tax revenue ranges 40-50% below target. The new government needs 17-22 billion euros for its funding needs in 2015, provided that tax revenue is as high as projected in the state budget. In February, the government has to return 2 billion euros to Greek creditors. In March, Athens needs another 1.5 billion euros for the first of three equal installments to the International Monetary Fund (IMF). The other two are due in June and September. In July and August, Greece needs 17.585 billion euros for maturing five and 10-year bonds. In July, 9.585 billion euros are needed for 10-year bonds with 3.7% yield, while another 8 billion are due one month later for 5-year bonds with 6.1% yield.

Spanish PM backs Samaras, stresses risk of anti-austerity sirens: On a lightning visit to Athens on Wednesday, Spanish Prime Minister Mariano Rajoy expressed support for his Greek counterpart Antonis Samaras and defended the tough economic program the outgoing government has been pursuing under the supervision of foreign creditors, saying the reforms were “necessary” and had “produced results,” advising Greeks to ignore “impossible” promises. Rajoy, who like Samaras is under increasing pressure from the anti-austerity opposition, said economic reforms were “tough” but unavoidable. “These are the policies which guarantee the future,” Rajoy told a joint press conference with Samaras. Noting that he had been obliged to accept agreements made by his socialist predecessor when he assumed the Spanish premiership in 2011, Rajoy said agreed-to measures cannot simply change with every new government. The same sentiment was echoed by Samaras. The Spanish premier, who must compete with the increasingly popular anti-austerity party Podemos in Spanish general elections in November, also made an apparent dig at SYRIZA. “To promise things that are impossible makes no sense and generates an enormous amount of frustration,” he said.

Let us hope for a Syriza victory - If you think this sentiment is dangerous, because you have read that if this left wing party formed a government after the forthcoming Greek elections the Eurozone would be plunged into crisis, I suspect you should reconsider where you get your information from.[1] Here is why. Syriza wants to reduce the burden of Greek government debt by various means, which would clearly benefit Greece and mean losses for its creditors. Its bargaining position is strong because the government is running a primary surplus. This means that if all debt was written off and the Greek government was unable to borrowing anything more, it would be immediately better off because taxes exceed government spending. In contrast the creditors’ position in such a situation is normally very weak, which is why some kind of deal is usually done to reduce the debt burden. Creditors take a hit, but not as bad a hit as they would if all debt was written off. It might appear as if the creditors have an extra card in this particular case - they can throw Greece out of the Eurozone. Be absolutely clear, that is a threat being made by the creditors. Greece under Syriza has no intention of leaving the Euro, even if they defaulted on all their debt, so they would have to be forced out. I have never seen it set out clearly how the rest of the Eurozone would force Greece to leave without compromising the independence of the ECB, but let’s assume that they have the power to do so. Would the Eurozone ever carry out this threat? Expelling Greece from the Eurozone because they wanted to renegotiate their debts would be an incredibly stupid thing to do. For a start, the creditors would lose everything, because obviously Greece would go for complete default in those circumstances. In addition, individuals and markets would immediately worry that the same fate might befall other periphery countries. (The story that Dani Rodrik tells is all too plausible.) What would be the gain?

It’s time we reconsidered the principle that states must always repay their sovereign debt - Is it true that states must always repay their sovereign debt – even after a major regime change – to maintain their future creditworthiness? Odette Lienau writes that this conventional wisdom on sovereign debt is overly simplistic and in some cases entirely wrong. She argues that the assumptions of political neutrality, creditor uniformity, and historical constancy, upon which this common narrative rests, do not stand up to closer inspection. This suggests that more flexibility exists in terms of our understanding of government debt and how the market determines creditworthiness.

Moody’s: ‘Grexit’ likely to trigger renewed recession in the eurozone - - The upcoming snap elections and recent political turmoil in Greece have raised the risk of the country leaving the eurozone, which could have negative consequences for the other members of the currency union, Moody’s Investors Service said in a report on Wednesday. “Any exit from the single currency would be a defining moment for the euro: it would show that the monetary union is divisible, not irreversible,” said Colin Ellis, the report’s author and Moody’s chief credit officer, EMEA. “However, although a Greek exit today would likely trigger renewed recession in the remaining euro area, the credit impact may be less pronounced than in 2012 because contagion risk from a Greek euro exit has materially declined and because policy makers now have stronger tools to limit the damage from such an event,” he added. The credit-ratings firm said the possibility of a “Grexit” is still lower than during the peak of the eurozone debt crisis in 2012 and that it remains “relatively unlikely”.

No Exit for Greece - Another Chapter 11 for Greece, the third in five years — and no exit in sight. The Greeks won’t do the eurozone the favor of absconding from the common currency. Never mind that they should never have been accepted in the first place, when they cooked the books to look prim and proper.  Not even Alexis Tsipras, the leader of the radical leftist Syriza party, wants out. . If Mr. Tsipras wins and then imposes another haircut on the country’s creditors while nixing market reforms and fiscal rigor, then it will be auf Wiedersehen to Hellas. So goes the unspoken — but ultimately hollow — threat from Berlin.  In the meantime, Ms. Merkel’s spokesman has volubly denied that threats, even implicit ones, were made. Nonetheless, the euro crisis is back to where it started five years ago: in Greece. Is it another rising tide that will recede, as in years past, or a deadly tsunami that will drown first Greece and then the eurozone?  Unless you overbought now-melting Greek bonds, sit back and enjoy the theater with its two starring antagonists, the chancellor of Germany and the would-be prime minister of Greece. Ms. Merkel, as is her habit, deploys innuendo and leaks. Mr. Tsipras flings wild-eyed threats. He wants to “tear up” austerity pledges and stop servicing Greek debt, invoking the metaphor of the Cold War’s nuclear standoffs: “If one side pushes the red button, then all will lose.” This is the core of the crisis: a monetary game of chicken. As we know from war gaming, the party that appears to be crazier than the rest tends to score. Strategists call this the “rationality of irrationality.” Foam at the mouth, and you’ll get your way more easily than meekly asking for another 100 billion euros. Crazy the game is not. The Greeks have been saved twice: in 2010, with 110 billion euros ($147 billion), and in 2012, with 130 billion euros ($173 billion). In 2011, private investors had to take a 50 percent write-down on their holdings of Greek government debt. These bailouts have created their own expectations in Greece.

Why a Grexit Is More Costly for Germany Than a Default Inside the Euro Area - A few days ago the influential IFO Institute published a short paper suggesting that a Greek default inside the euro-area would cost Germany €77.1 billion, while a default combined with an exit from the euro would cost €75.8 billion. The two numbers are about the same, yet unsurprisingly, media reports emphasised that a Grexit would be cheaper for Germany by €1.3 billion (see e.g. a Focus report here).  We think that the publication of such numbers falsely suggests that direct losses can be calculated precisely. Even more importantly, we noticed that the calculation did not consider three major factors:

  • the different haircuts likely under the two scenarios,
  • private claims,
  • other second round losses.

All three factors suggest that direct losses for Germany would be much larger if Greece was to exit the euro.

Russia's Modest Proposal To Greece: "Exit Europe And We Will Lift The Food Import Ban" - And just to make things interesting, overnight Russia told a beleaguered Greece, and specifically its hurting farmers, that it "may lift its ban on food imports from Greece in the event it quits the European Union" according to Russian Minister of Agriculture Nikolai Fyodorov who spoke in Berlin on Friday. “If Greece has to leave the European Union, we will build our own relations with it, the food ban will not be applicable to it,” Fyodorov said as reported by Tass. In other words, Russia has casually thrown out feelers to Greece (and any other peripheral European country) and given it the option of joining the greater Russian sphere of influence (because the USSR 2.0 and satellites is still not trademarked), should it decide that 5 years after the first Greek "bailout" things for the country caught in an endless depression are as good as they will get with a bunch of Goldman bankers in charge.

Zugzwang! Spanish Radical Left Party Podemos Surges Into Lead  - Podemos, a Spanish far-left populist party led by Pablo Iglesias is once again in the lead the polls.Chart from El Pais. Elections are scheduled in November of 2015.  The surge of Posemos adds another contagion wrinkle to the German bluff that Greece does not matter. Actually Greece very much matters, but Spain would be a bombshell. Recall that Podemos "Economic Manifesto" Calls for Debt Restructuring, Spain to Abandon the "Euro Trap". "Spaniards should be aware that it is physically impossible that they can pursue policies that meet the national interest, within the euro as it is designed. The euro was conceived as a real trap, but nowhere is it written that people have to accept it ." said Iglesias. Also consider Incredible Populist Positions in Podemos' "Economic Manifesto".

Paris attacks boost support for Dutch anti-Islam populist Wilders (Reuters) - Support for the anti-Islamic Freedom Party of Dutch populist Geert Wilders has jumped to its highest level in more than a year after the Islamist militant attacks in Paris. Wilders, known for his inflammatory rhetoric, said after the Paris bloodshed that the West was "at war" with Islam, drawing a rebuke from Dutch Prime Minister Mark Rutte on Sunday. If elections were held now, his party would be the single largest in the Netherlands, with 31 seats in the 150-member parliament, more than twice as many as it won in the last elections, according to a Sunday poll.

Paris towards militarization, Europe to follow -- Another attack at the heart of Europe, another opportunity for the implementation of the new conditions. We are watching the radical transformation of the security orientation in Europe and the West. Years of wars and destruction in the Middle East caused by the military-industrial-security-financial complex, managed to bring "asymmetric wars" inside the US and the European soil.  From PressTV:  “France’s defense minister has announced that more than 10,000 troops will be stationed across the country to ensure security after the recent terrorist attacks in the country’s capital city of Paris. [...] France’s such use of army to establish security in the country is unparalleled in recent history. France Prime Minister Manuel Valls estimated earlier on Monday that the number of military troops will be around 8,500.From BBC: “Home Secretary Theresa May, speaking after chairing a meeting of UK government emergency committee Cobra, said security had been increased at the France/UK border - notably at the Eurostar rail terminal in Paris and the Channel Tunnel entrance at Calais. UK border staff had 'intensified checks on passengers, on vehicles and goods coming from France', she said. The move was a 'precautionary' measure and was not as a result of any specific intelligence, she added. Armed patrols have also been increased at St Pancras International station, the Eurostar terminal in London, British Transport Police said. The UK terror threat level remains unchanged at 'severe', meaning a terrorist attack is 'highly likely'.

Record Crowd In German Anti-Islam Rally Forces Merkel To Urge Tolerance - In Germany, citizens are increasingly worried, with 57% of non-Muslims seeing Islam as a threat; and these fears prompted, as Bloomberg reports, about 25,000 people to turn out for an anti-Islam rally last night in the eastern city of Dresden. Protesters demanded tighter immigration laws, measures to fight 'religious preachers of hatred' and a zero-tolerance policy for immigrants who commit crimes. Angela Merkel has urged tolerance after the rally, warning that some of the organizers have "hatred in their hearts," but it appears the slippery clope has begun, summed up by one 73-year-old German, "I want lots of money for a program to pay Muslims to go home."

Which Economists Told the Wall Street Journal that 24% Unemployment Wasn’t “Dire?” - William K. Black - Sometimes it is the little things than make everything clear. The WSJ gem I ran across explains so much about what is wrong about economists and the Wall Street Journal. The headline of the January 9, 2015 article foreshadows the strong chance that the reader is about to be transported into a strange dimension: “Weak Industrial Data Suggest Eurozone Economy May Be Faltering.” I don’t know how to break this to Murdoch’s minions, but the word “may” is hilarious and “faltering” is a euphemism. Here’s the money quote. “Though some economists caution that things in Germany and Spain aren’t dire, as both economies are expected still to have grown in the fourth quarter, conditions there remain challenging. Germany’s economy—the powerhouse of the eurozone—has stagnated through much of 2014 after an artificially strong first quarter of the year. Spain also has one of the highest rates of unemployment in Europe which, though falling, is at nearly 24%.”   Conditions are “challenging” – but not “dire” – in Spain?!? Six years after the peak of the financial crisis, Spain remains in a depression that has lasted longer and is more severe than the Great Depression. As I have explained in prior articles, in late 2014, Ollie Rehn, the troika’s propagandist-in-chief for austerity and TINA (“there is no alternative” to austerity) has admitted that under his most optimistic scenario (already wiped out by reality) Spain would need 10 more years (until 2024) to emerge from the “crisis.” Full recovery would take additional years. Spain’s economy was tanking in 2007, so Rehn is admitting that its crisis phase would, if all had gone well, end 17 years after it began. Youth unemployment in Spain is about 50 percent and the emigration of Spanish university graduates is commonplace. Spain’s “lost generation” really will be lost to Spain. Spain is not a “dire” situation, it is a catastrophe.

Rise in Bank of Italy liabilities fuels worries of capital flight (Reuters) - Debt owed by the Bank of Italy to other central banks in the euro zone rose in the second half of last year, prompting concerns about possible capital flight as tensions over weaker economies in the bloc resurface. Germany's Ifo economic research institute on Monday noted Italy's position within the so-called Target2 system - which settles cross-border payments in the euro area - was worsening, with Bank of Italy liabilities rising to 209 billion euros in December from a low of 130 billion euros in July. Ifo President Hans-Werner Sinn said in a note he saw signs of fresh capital flight from the bloc's third-biggest economy, adding the euro zone debt crisis was not over but dormant. true A spokesman for the Italian Treasury said on Tuesday capital was not leaving Italy, adding there were no problems in managing the country's 2.1 trillion euro debt - the second highest as a share of gross domestic product in the euro zone after Greece's. The Bank of Italy in November put the rise of its liabilities mostly down to what it called technical factors, such as Italian banks using new longer-term funds offered by the ECB in September to borrow less from foreign banks on the interbank market.

ECB Coeuré: Ready to Decide on Govt Bonds Jan. 22, Outcome Open - The European Central Bank is in a position to make a decision on a government bond-buying program at its next meeting on Jan. 22, but this doesn’t mean it has made a decision yet, ECB Executive Board member Benoît Coeuré said in an interview published Tuesday. German newspaper Die Welt quotes Mr. Coeuré as saying that steadily falling oil prices worsens the danger “that people lose confidence in our inflation target.” Annual inflation in the eurozone was most recently recorded at -0.2%, well off of the ECB’s target of just below 2%. Mr. Coeuré said he wouldn’t describe current conditions as deflation, but that he would call it that if both prices and economic output are falling and the problem builds on itself as people hold off investing or buying waiting for prices to fall. “That isn’t the case so far,” he said. Still, inflation rates across Europe are “extremely low,” he said. Asked how confident he was about the discussion on a possible government bond-buying program being completed in time for the ECB’s meeting on Jan. 22, Mr. Coeuré said “discussions are well advanced. Last week, we discussed lots of technical details. In any case, we will be able to take a decision on 22 January. Which does not mean that we have, in fact, already reached a decision.”

EU gives deficit countries more flexibility to meet budget rules --The European Commission has said it will offer member states that present credible reform plans more time to bring their budgets in line with EU laws, a move that could be positive for nations such as France and Italy. The Commission on Tuesday announced that rules allowing punishment of member states for excessive deficits and debts will now be "applied in an intelligent, effective and credible manner." Commission Vice President Valdis Dombrovskis said that in certain cases the EU executive "may allow a member state to deviate temporarily from its medium-term budgetary objective or adjustment path." The offer is aimed at supporting structural reforms and investment, and is part of a host of measures aimed at kick-starting Europe's flagging economy. These include a much-touted EU investment plan, the details of which were also unveiled Tuesday. The move means France and Italy are less likely to face penalties for violating debt and deficit limits. The commission stressed that the new measures will not require changes to the Stability and Growth Pact, which sets the EU's deficit cap and stipulates that national debt should not exceed 60 percent of GDP.

ECB’s Knot Supports QE if National Banks Buy Country’s Bonds - European Central Bank Governing Council member Klaas Knot supports having national central banks in the eurozone buy their own country’s bonds as part of a broad-based bond-buying program, he told a German news magazine in remarks published Friday. “Were each central bank only to buy the papers of its own state, this would lower the danger of there being an undesired redistribution of financial risks,” said Mr. Knot, who heads the Dutch central bank, in comments to Der Spiegel magazine. Mr. Knot’s remarks suggest that while he is opposed to spreading the risks of any government bonds on national central bank balance sheets, he may be open to compromise on other aspects of quantitative easing. Der Spiegel also reports, without naming sources, that a bond-buying plan along these lines is taking shape as the ECB prepares for its next meeting on Jan. 22. It is widely expected that the central bank will announce a bond buying plan known as quantitative easing at that meeting, though details on the program remain unclear.

What will European QE look like? And will it work? -Claire Jones at the FT reports: The European Central Bank is set to unveil a programme of mass bond buying next week to save the eurozone from deflation, but has bowed to German pressure to ensure that its taxpayers are not liable for any losses incurred on other countries’ debt. This is not a surprise.  Alen Mattich had a good Twitter comment:How could you trust ECB promise to “do whatever it takes” if it doesn’t accept the risk of holding national sov debt on its books? Guntram B. Wolff has an excellent, detailed analysis, worth reading in full, here is one bit:So the purely national purchase of national sovereign debt would either leave the private creditors as junior creditors, or the national central bank has to accept negative equity. What would negative equity mean for a central bank? De facto it would mean that the national central bank, that has created euros to buy government debt, would have lost the claim on the government. It would still owe the euros it has created to the rest of the Eurosystem.(4) The Eurosystem could now either ask the national central bank to return that liability, which it is unable to do without a recapitalisation of its government. Or, the Eurosystem could decide to leave the claim standing relative to the national central bank. In that case, the loss made on the sovereign debt would de facto have been transferred to the Eurosystem. In other words, the attempt to leave default risk with the national central bank will have failed... Overall, this discussion shows that monetary policy in the monetary union reaches the limits of feasibility if the principle of joint and several liability at the level of the Eurosystem is given up.

ECB set to unveil on Thursday policy of mass bond-buying: The European Central Bank is set to unveil a programme of mass bond-buying next week to save the euro zone from deflation, but has bowed to German pressure to ensure that its taxpayers are not liable for any losses incurred on other countries’ debt. Policy-makers in Frankfurt are expected to take the momentous decision to embark on quantitative easing (QE) on Thursday, with the most likely option at this stage for the ECB to force the 19 national central banks that make up the euro zone to stand behind their own sovereign bonds. The decision will come just two weeks after it emerged that euro zone prices had fallen in the year to December for the first time in five years. Market expectations of euro zone inflation in the longer term are close to record lows. The move will bring the ECB closer into line with the US Federal Reserve and the Bank of England, which adopted quantitative easing after the global financial crisis. But ECB officials have reluctantly concluded that introducing full-blown quantitative easing is impossible in the face of implacable opposition from the German political and economic establishment.

Much Excitement—and Lots of Confusion—about “Helicopter Money” of Late -  Wolfgang Münchau is one of those rare sensible voices in the international media reporting on the euro crisis. He has been consistently right in his gloomy assessments of euro crisis management in recent years. He is also correct in pointing out that the observed deflationary trend in the eurozone is not primarily due to any recent oil price shock but mainly driven by the chosen deflationary intra-area “rebalancing” path: with German wage-price inflation well below the 2-percent stability norm, everybody else is forced into deflation to restore their competitiveness. But Münchau got it pretty wrong in his FT column this week suggesting that so-called helicopter drops of money would constitute monetary policy. Milton Friedman famously used the helicopter analogy in pushing his monetarist mantra, but he forgot to mention that central banks are not in the business of running money-dropping helicopters. Friedman’s story went like this: “In our hypothetical world in which paper money is the only medium of circulation, consider first a stationary situation in which the quantity of money has been constant for a long time, and so have other conditions. Individual members of the community are subject to enough uncertainty that they find cash balances useful to cope with unanticipated discrepancies between receipts and expenditures. … Under those circumstances, it is clear that the price level is determined by how much money there is—how many pieces of paper of various denominations. If the quantity of money had settled at half the assumed level, every dollar price would be halved; at double the assumed level, every price would be doubled. … Let us suppose, then, that one day a helicopter flies over our hypothetical long- stationary community and drops additional money from the sky equal to the amount already in circulation. … The money will, of course, be hastily collected by members of the community.

Europe thrown into turmoil as Swiss let franc soar: Global markets were thrown into turmoil on Thursday as a shock move by Switzerland to abandon its more than three-year-old cap on the franc sent the currency soaring and Europe's shares and bond yields tumbling. The franc jumped by almost 30 percent in a chaotic few minutes after the 1.20 per euro cap in place since late 2011 was lifted, surging past parity to trade as high as 0.8052 francs per euro. It was trading at 1.02600 at just after 1200 GMT. The move reversed an earlier rebound in risk appetite following an overnight recovery in commodity prices. Over 100 billion francs ($98 billion) was wiped off the value of Swiss stocks, their biggest daily fall in 26 years, while the pan-European FTSEurofirst 300 slumped 2 percent and Wall Street futures turned negative. As investors scrambled for traditional safe-haven assets, there were new record low yields for Germany's government bonds and gains for the yen and gold. "This is extremely violent and totally unexpected, the central bank didn't prepare the market for it,» said Alexandre Baradez, chief market analyst at IG in France. "It's sparking panic across all asset classes. It suddenly revives the risk of central bank policy mistakes, right when central bank action is what's keeping equity markets going."

Oh, the Swiss franc went up 39% today - Track it on Twitter.  By the way, it doesn’t seem to be settling at 39% up (18% as of late), but that was the FT headline.  The Economist offers some commentarySome analysts speculated that political pressure may have caused the Swiss to abandon the policy; in November last year, a referendum campaign to force the SNB to hold 20% of its balance sheet in gold (which would have made it more difficult to maintain the cap) was defeated. But others felt that the SNB may be expecting the European central Bank to announce quantitative easing in the near future; a shift that would weaken the euro and require even more intervention to cap the franc. In a hole, the SNB may have decided to stop digging. Swiss equities were down over thirteen percent.  And this means a revaluation of Swiss-franc denominated mortgages, which are plentiful in Eastern Europe, Russia and Hungary come to mind first.  And it raises the question of how much we can trust central bank commitments, looking forward… Here is summary coverage from Neil Irwin.

"It's Carnage" - Swiss Franc Soars Most Ever After SNB Abandons EURCHF Floor; Macro Hedge Funds Crushed - Over a decade ago, George Soros took on the Bank of England, and won. Less than two hours ago the Swiss National Bank took on virtually every single macro hedge fund, the vast majority of which were short the Swiss Franc and crushed them, when it announced, first, that it would go further into NIRP, pushing its interest rate on deposit balances even more negative from -0.25% to -0.75%, a move which in itself would have been unprecedented and, second, announcing that the 1.20 EURCHF floor it had instituted in September 2011, the day gold hit its all time nominal high, was no more. What happened next was truly shock and awe as algo after algo saw their EURCHF 1.1999 stops hit, and moments thereafter the EURCHF pair crashed to less then 0.75, margining out virtually every single long EURCHF position, before finally rebounding to a level just above 1.00, which is where it was trading just before the SNB instituted the currency floor over three years ago.

Behold The Carnage: Hedge Funds Most Short The Swiss Franc Since June 2013 - It appears the Swiss National Bank decided to wait til they saw the whites of the eyes of the 'speculators'. The SNB's surprise decision to scrap the EURCHF ceiling has unleashed major pain across the hedge fund community as speculators, according to CFTC data, are the most short Swiss Francs (long the USD) since June 2013. Holding a huge 24,171 contracts short USDCHF futures (which surged 24 handles on the news) will not go unnoticed by the margin clerks..... Speculators are the shortest Swiss Franc (against the USD) since June 2013... Which explains the massive liquidations... Here are the 10 "halts" (courtesy of @NanexLLC) in Swiss Franc futures... For a sense of the move - that 24 handle surge cost each contract holder $30,000 - almost 9 times the initial margin required for hedge traders. And now with margins set to triple as of tomorrow's close... we suspect things get a little more volatile.

10 Takeaways From Lagarde’s Swipe at the Swiss National Bank - At least 10 lessons can be gleaned from International Monetary Fund Managing Director Christine Lagarde’s thinly veiled criticism (on CNBC) of the Swiss National Bank’s action Thursday:

  • 1. It wasn’t just a shock for markets.  2. It  also irked her. “This was a bit of a surprise…I find it a bit surprising that he did not contact me, but you know, we’ll check on that.”
  • 3. Swiss central bank chief Thomas Jordan may not have warned European Central Bank chief Mario Draghi and others about the move, either: “I would hope that it was communicated with other colleagues from central banks. I’m not sure it was.”
  • 4. The move hasn’t been endorsed by the IMF: “I’m going to reserve judgment on the pertinence of that move because we have not discussed it with governor Jordan and I would certainly want to understand exactly where he was coming from.”
  • 5. Expect more exchange-rate volatility ahead, particularly if central banks fudge communication strategies that are now almost as important as policy moves: “Clearly what is needed is cooperation, collaboration, communication.”
  • 6. That’s why central bankers must take greater care than the SNB showed Thursday to avoid global financial instability: “I think I understand why he’s doing it, but talking about it would be good.”
  • 7. While Mr. Jordan is likely not close to Ms. Lagarde, the IMF chief and Fed Chairwoman Janet Yellen appear to see eye to eye.
  • 8. In contrast to the SNB chief, the Fed boss is doing it right:  “The IMF is supporting the policy of Janet Yellen, who is communicating very clearly.”
  • 9. By inference, major central banks must normally telegraph their intentions to the IMF.
  • 10. The IMF just isn’t the coordinator of global exchange-rate stability that it used to be.

Economic Lessons From Switzerland’s One-Day, 18 Percent Currency Rise - These are strange and unnerving times in global financial markets, and if Thursday’s jaw-dropping move in the Swiss currency didn’t prove it, nothing will.It is not every day that the currency of an advanced, economically important country rises by double-digit percentages against the currencies of other such countries within mere hours. But that is what happened to the Swiss franc on Thursday. It is up 18 percent against the euro as of Thursday morning, and at one point was up 39 percent. Currency strategists were searching for any analogue in modern history for a similarly abrupt move in major Western currency and coming up empty.The Swiss move offers interesting lessons about the oddly precarious state of the global economy, but first it’s worth working through what exactly the Swiss National Bank has done.After its earlier efforts to cut interest rates hadn’t done enough to dampen interest in the franc, it set a peg, announcing it wouldn’t allow the franc to appreciate such that one franc buys fewer than 1.2 euros. They backed it by going onto foreign exchange markets at will and buying euros as necessary to defend the peg. It worked for a long time. But now, the European Central Bank looks to be on the verge of an extensive new effort to try to pump money into the European economy to get it out of its doldrums, which is creating downward pressure on the euro. All that means that the 1.2 euro peg is becoming more and more expensive to defend. And on Thursday, the Swiss National Bank, led by Thomas Jordan, basically waved the white flag.  In a news release, the bank said that it believed the franc was less overvalued now than it had been when the policy started, so no more peg.

Why did the Swiss break the peg of the franc? -- Paul Krugman writes: Two things to bear in mind. First, having in effect thrown away its credibility – in today’s world, the crucial credibility central banks need involves, not willingness to take away the punch bowl, but willingness to keep pushing liquor on an abstemious crowd – it’s hard to see how the SNB can get it back. Second, there will be spillovers: the SNB’s wimp-out will make life harder for monetary policy in other countries, because it will leave markets skeptical about whether other supposed commitments to keep up unconventional policy will similarly prove time-limited. Brad DeLong and Scott Sumner agree the Swiss move was a bad idea.  We’re all in accord on the economics (more or less), but I am more interested in a different question.  The Swiss central bank, had it continued the peg, probably would have had a balance sheet larger than Swiss gdp.  But does this matter?  Should anyone care?  Or does that make them “too big a guy on the block”? I see two views of the world running around in these discussions, but not always articulated as such:

  1. 1. Bureaucrats, which includes central bankers, are not so much budget maximizers as hoarders of institutional capital.  They hoard institutional capital when they should be spending it down, in the interests of the broader polity.  So this is a public choice problem, rather than a matter of macroeconomic ignorance. 
  2. 2. Bureaucrats hoard and indeed extend institutional capital because they know how important it is to maintain the quality of significant institutions, such as central banks.  Without such capital , semi-independent central banks would soon cease to exist, to the detriment of us all.  Outside academics, however, rarely can see the importance of this factor, because they have less experience running political institutions. 

Swiss Shock Tarnishes Central Banks - WSJ -- R.I.P. the Swiss National Bank’s exchange-rate policy, 2011-2015—and, potentially, the central bank’s credibility. The SNB’s decision Thursday to scrap its policy of capping the Swiss franc at 1.20 to the euro shocked markets. News that it was also cutting interest rates further into negative territory did little: The franc rocketed, reaching 0.85 to the euro before retracing to 1.0245; Swiss equities fell 9%, and the yield on 10-year Swiss government bonds fell to 0.04% from 0.2% a week earlier. The SNB’s capitulation reverberated around global markets. Switzerland’s economy is small, but its currency has long acted as a haven in times of trouble. The move is particularly troubling because central-bank surprises such as these are few and far between—particularly since the financial crisis, when policy makers have sought to placate markets. That the SNB was willing to deliver such a bombshell suggests it was facing tough choices as the global monetary-policy outlook shifts unusually, with the U.S. Federal Reserve potentially thinking about raising rates while the European Central Bank and Bank of Japan row in the opposite direction. The SNB looks to be moving ahead of the risk that the ECB announces large government-bond purchases as early as next week. The challenges for central banks keep stacking up. Some are grappling with the risk of deflation, like the SNB and ECB. Others face the tricky task of trying to bring interest rates off the floor after years of ultraloose policy, like the Fed and Bank of England. That is against the background of a still-uncertain growth outlook in much of the developed world and financial markets that have been pumped up by central-bank largess. For investors, the SNB’s reversal raises the risk that central bankers are finding they aren’t as all-powerful as they have been believed to be. Markets have come to rely on central banks to save their bacon. But Thursday’s ructions are likely to have left investors disoriented and potentially nursing large losses that could ripple through markets in unexpected ways.

A Franc Question: What Was the SNB Thinking? - The decision by the Swiss National Bank to let the Swiss franc rise against the euro is reverberating around the globe. Two currency brokers are already in trouble and more are likely to confess big losses. One reason for all of the pain is that Switzerland’s central bankers had said repeatedly that they would keep the cap on the currency, and not let it rise.  It is doubtful the Swiss wanted to cause so much pain, but their move begs the question of why they acted when they did. The main reason, it appears, is that the European Central Bank is poised to launch a new bond-buying program in the hope of stimulating the region’s struggling economy.That move would likely weaken the euro against other currencies because the ECB would effectively be printing euros to buy bonds. But since the Swiss committed to not allowing the franc to strengthen, the country’s central bank would have to fight harder to keep the franc from appreciating. To do that, the bank would sell francs and buy euros. There’s nothing wrong with that, and it’s much easier for a central bank to keep its currency from strengthening than weakening. But it means the central bank ends up holding billions (or trillions) of dollars in the currency it is trying to fight against — in this case, euros. For the Swiss central bank, 45% of its foreign-currency investments were in euros at the end of the third quarter of 2014, which means it has big exposure to a decline in the euro.  China suffers the same problem with U.S. dollars. To keep its currency from strengthening, the People’s Bank of China buys lots of dollars and sells yuan. That’s left it with nearly $4 trillion worth of dollars, a big bet on an asset it can’t really control. The Swiss central bank became so stuffed with euros that it became a political issue, with some right-wing politicians demanding the bank hold more gold to offset the euros it was holding. The matter went to a vote and it was only rejected by Swiss citizens in November after central-bank officials weighed into the debate.

Casualties From Swiss Shock Spread From New York to New Zealand -  Losses mounted from the Swiss currency shock as the largest U.S. retail foreign-exchange brokerage said client debts threatened its compliance with capital rules and a New Zealand-based dealer went out of business. FXCM Inc., which handled a record $1.4 trillion of trades by individuals last quarter, said clients owe $225 million on their accounts after the Swiss National Bank’s decision to abandon the franc’s cap against the euro roiled markets worldwide. Global Brokers NZ Ltd. said losses from the franc’s surge are forcing it to shut down. IG Group Holdings Plc estimated an impact of as much as 30 million British pounds ($45.5 million) and Swissquote Group Holdings SA set aside 25 million francs ($28.4 million). “I would be astonished if we did not see more casualties,” Nick Parsons, the London-based head of research for the U.K. and Europe at National Australia Bank Ltd., said by phone from Sydney. “This was a 180-degree about turn by the SNB. People feel hurt and betrayed.” The franc surged as much as 41 percent versus the euro on Thursday, the biggest gain on record, and climbed more than 15 percent against all of the more than 150 currencies tracked by Bloomberg. Dealers in London at banks including Deutsche Bank AG, UBS Group AG and Goldman Sachs Group Inc. battled to process orders yesterday when the SNB surprised markets with its announcement in Zurich.

Swiss-Franc Move Crushes Currency Brokers - Brokers around the world are crumbling in the wake of the Swiss National Bank ’s shock decision to remove the cap on its currency.  A major U.S. currency broker warned its equity was wiped out, a U.K. retail broker entered insolvency and a New Zealand foreign-exchange trading house failed after the Swiss central bankstunned markets Thursday by triggering a massive rally in the franc.  On Friday, regulators in Japan, Hong Kong, Singapore and New Zealand sought information from brokers about what happened. In Japan, the Finance Ministry was checking on trading firms amid concerns that the country’s army of mom and pop foreign-exchange traders suffered big hits.  The losses were caused when big wholesale banks stopped quoting franc rates, liquidity dried up and volatility spiked in the foreign-exchange market Thursday, making it impossible for brokers to execute trades while losses spiraled. Many of these brokers offer 100 to 1 leverage, allowing clients to stake large sums with relatively little cash, meaning a 1% loss can wipe out a client. The Swiss franc jumped 30% against the euro in minutes after the SNB scrapped its cap on the nation’s currency against the euro. The surprise move caused big losses for traders who had bet against it.  FXCM Inc., the biggest retail foreign-exchange broker in the U.S. and Asia, said in a statement that the unprecedented volatility in the euro against the Swiss franc triggered losses that left it with a negative equity balance of about $225 million and that it was trying to shore up its capital.

Euro’s March Lower Getting Boost From Swiss Bankers -- The euro is shaping up as the biggest casualty of Switzerland’s decision to scrap its currency cap. Soon after the Swiss National Bank unexpectedly decided yesterday to end its three-year policy of keeping the franc from appreciating beyond 1.20 per euro, bearish bets on Europe’s common currency soared. While setting a record low versus the franc, the euro also plunged 3.5 percent against a basket of 10 developed-nation peers, the most since its 1999 debut. The SNB’s decision removes a key pillar of support for the euro, boosting the odds that its recent slide will accelerate. Companies from Goldman Sachs Group Inc. to Pacific Investment Management Co., the world’s biggest manager of active bond funds, have in recent days talked about the increasing chance the euro falls to parity with the dollar, which would represent a 14 decline from its current level. “It adds fuel to the fire,” . “This move out of Switzerland certainly exacerbates the trade-weighted euro weakness that we expect to see.” The difference in the cost of options to sell Europe’s common currency against the dollar, over those allowing for purchases, jumped by the most in almost two years yesterday. The euro dropped 1.3 percent to $1.1633 yesterday after falling as low as $1.1568, the weakest level since November 2003. It traded at $1.1631 at 9:23 a.m. in London. The euro also sank below parity with the franc yesterday to an all-time low of 85.17 centimes, recovering to 1.011 per euro today.

It’s raining euros in Geneva -- Sources on the ground tell us that queues have been forming outside money changers in Geneva since at least last night. Here’s the latest scene of Swiss folk eager to cash in their money’s worth by way of Twitter user @Halders1: That’s despite the overly grim weather conditions in Geneva on the day. If you’re wondering about the logic driving the queues, we presume three factors are in play:

  • 1) Switzerland’s key cities are all within a stone’s throw of a Eurozone border and the thus also incredibly near the now increasingly well priced delights available at the Eurozone-based Carrefours.
  • 2) There are many people in Switzerland who earn in Swiss francs but live just across the border — a.k.a frontaliers.
  • 3) Switzerland’s immigrant communities also earn in francs and will just have had a 15 per cent pay rise and will no doubt be keen to share some of that wealth with their families abroad.

Eastern European Currencies Dive as Swiss Loan Costs Hurt Banks - Eastern European currencies tumbled and banking stocks slumped after Switzerland’s move to allow its currency to appreciate stoked concern individuals will struggle to repay loans denominated in Swiss francs. Poland’s zloty weakened 15 percent to 4.1533 against the the Swiss currency by 5:56 p.m. in Warsaw, paring an earlier loss of as much as 28 percent. Hungary’s forint and the Romanian leu tumbled to records. Warsaw-listed Getin Noble Bank SA sank 16 percent, while Bank Millennium SA and PKO Bank Polski SA, the country’s biggest lender, slid at least 6.5 percent. The Swiss National Bank’s unexpected decision to scrap its minimum exchange rate is threatening to spur a rise in bad debt as the move raises the cost of paying off loans in francs, including mortgages. Many Poles and Hungarians opted to borrow in francs in the run-up to the 2008 financial crisis because loan rates were lower than for local currencies. Their payments increased as the franc appreciated against the zloty, forint and leu in all but one of the past five years. “Massive Swiss franc appreciation is extremely bad news for foreign-currency borrowers in central Europe,” Michal Dybula, an economist at BNP Paribas SA in Warsaw, said in an e-mailed note. “It will make servicing franc loans more expensive, reducing disposable income and hurting consumption. That’s bad news for growth and the banking sector as the non-performing ratio of Swiss franc mortgages is likely to increase.” The zloty, forint, leu, Bulgarian lev and Czech koruna were the biggest decliners against the franc today among 24 developing countries tracked by Bloomberg. A 5.5 percent drop in the Polish banking gauge led the benchmark stock index in Warsaw down the most since March, while equities in Budapest slid 2.4 percent.  The situation is more precarious in Poland since that switch is less advanced. Lenders had 131 billion zloty ($35 billion) of Swiss-franc mortgages on their books as of the end of November, 46 percent of total home loans, according to data from the country’s financial-market supervisor

Stop worrying about Swiss franc mortgages in Poland --The Swiss franc gained about 23 per cent today against the Polish zloty. That should be good news for Polish manufacturers, but a few commentators have noted that it’s bad news for Polish mortgage borrowers who have loans either denominated in francs or indexed to the franc. And it seems like there are a lot of them: 46 per cent of total home loans are tied to the franc. Bloomberg quotes a currency strategist saying that the weaker zloty “might fuel concerns about financial stability in Poland.” Getting stuck with ballooning foreign currency debts was extremely painful for Poland, Hungary, and other Eastern European countries in 2008 and 2009. But we think some people may be overstating the risks today. For starters, 46 per cent of a small amount is small. There are about 131 billion zlotys worth of CHF mortgages in Poland as of the end of November. Poland’s GDP as of the middle of 2014 (annualised) was about 1.65 trillion zlotys. In other words, this dangerous debt was worth a little bit less than 8 per cent of Poland’s GDP before the currency move. Assuming the new CHFPLN rate holds, that debt is now worth about 10 per cent of Poland’s GDP.

Bank of England’s Mark Carney Joins Fed in Nudging European Central Bank to Action - The Bank of England has joined the U.S. Federal Reserve in endorsing new measures by policy makers at the European Central Bank to stimulate the eurozone economy. The ECB hasn’t yet launched those new measures, although it has said it will reassess its policy stance on Jan. 22. With the economy near stagnation, and consumer prices falling, most investors expect the ECB to launch a large-scale program of government bond purchases–known as quantitative easing–at that meeting, or if not then, at its March gathering. In an interview published Tuesday, ECB Executive Board member Benoît Coeuré said the governing council is in a position to make a decision on a government bond-buying program at its next meeting on Jan. 22, but this doesn’t mean it has made a decision yet. BOE Governor Mark Carney clearly shares the expectations of investors. “The eurozone, they have been very clear, President [Mario] Draghi has been very clear, other members of the ECB have been clear that we can expect considerable asset purchases, quantitative easing, in the months to come,” he said in an interview with the BBC Tuesday, after figures showed the U.K.’s annual inflation rate fell to 0.5% in December, its lowest level in over 14 years. Leading developed-country central banks rarely comment on each other’s decisions. But Mr. Carney’s comments follow similar, if less explicit statements by Fed officials in the minutes of their Dec. 16-17 meeting, which were published Jan. 7. The minutes showed Fed officials “regarded the international situation as an important source of downside risks to domestic real activity and employment.” They added that the risks were particularly serious “if foreign policy responses were insufficient.”

0.5% annual CPI inflation. Good news? --That’s what George Osborne’s twitter feed would have you believe. And it was echoed by Andrew Sentance. Statements like these are at odds with modern monetary macro, and they are pretty irresponsible. Why irresponsible? Well, the Chancellor told the Bank of England’s MPC to hit a 2% target. How could it be good news that the Bank undershot it by 1.5 percentage points? Are we to believe that the Chancellor, if he had time to get far enough down into his in-box, would lower the target, to try to ensure more ‘good news’? A common gripe with Eurozone policy is that the ECB defined its own target somewhat asymmetrically. It ‘clarified’ the treaty set mandate to achieve ‘price stability’ as obligating it to achieve inflation ‘close to, but below’ 2 per cent. I doubt that these words mean much any more, since former Chief Economist Ottmar Issing’s departure [this clarification happened on his watch]. But their effect has been quite pernicious, and many people disagree with my assessment that they don’t weigh on policy now and think that the current difficulties reflect the ECB’s deflationary bias. George Osborne should be more careful about what he says that could colour interpretations of the Bank’s remit. Why inconsistent with modern monetary macroeconomics? The suggestion is that if we had prices falling 20% that would be even better. 50%, better still. No. The inflation target was set at 2% for a good reason. The view that monetary policy can’t improve living standards by generating falling prices, or, if we return to the old 70s fallacy, neither can we buy lower unemployment with higher inflation. The best monetary policy can do is to keep inflation stable and low, additionally weighing inflation stability with real activity stability in the short run.

BoE Governor warns deflation is now 'possible' - Telegraph: The UK economy is in danger of falling into deflation, the Bank of England’s Governor warned on Tuesday as data showed that inflation had fallen to a 14-year low. Price growth fell to 0.5pc in December, a bigger slump than economists had anticipated. A poll of analysts before the numbers were release predicted that inflation would ease from 1pc to 0.7pc. Mark Carney, the Governor of the Bank of England, told BBC News: “We will expect it to fall further, and inflation to continue to drift down in the coming months.” In a separate interview, Mr Carney told ITV News that deflation was now "possible". Inflation has now hit a level only once before recorded by the Office for National Statistics - in May 2000. George Osborne, the Chancellor of the Exchequer, said that the data were “welcome news” with “inflation at its lowest level in modern times”.The falling price of oil and a price war between the UK’s largest supermarkets have contributed to the slowdown in price increases. “These figures are good news in the short-term for British households,” Mr Carney told the BBC. Economists suggested that slower increases in the cost of living will lead to higher consumer spending, helping to boost the UK economy. However, the news was not well received by investors who pushed the pound lower against the dollar. Sterling fell by around four-tenths of a cent to a low of $1.5078 before recovering the loses by the end of the day.

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