News Summary

News Summary
What a start to 2016! Media reports of more than $2.3trln

wiped off the value of global stocks for the week.
Hello and welcome to another Poon Report. Yes, $2.3trln
wiped off this week. FT said this is the worst start to a year
for markets in at least two decades. It is not surprising for
the newspaper to pin the blame on China. FT said catalyst
for this weeks market turmoil has been Chinas plunging
stock market and weakening currency. Even a robust US NFP
failed to rescue the grim week (see page 2).
In The Sunday Observer, Blackrock remains sanguine about
the prospects for 2016, seeing events of the past week as
akin to the brief period of turmoil last August rather than
the start of a bear market. Fathom Consulting says Beijing
has hit the panic button: In our view, the ongoing series of
stimulus measures employed by the Chinese government
merely highlights their discomfort. Quite simply, we believe
that their actions belie their words. China is suffering a hard
landing. Fathoms Laura Eaton expects the Peoples Bank of
China to devalue its currency aggressively over the coming
months (page 4).
Barrons Online wrote that it isnt yet time to buy the rest of
emerging markets, either. For every one-percentage-point
drop in the yuan, emerging markets fall by 1.1%. The Street
now sees onshore Yuan falling to 6.8 to seven per dollar this
year, or another 3% to 5.7% decline (page 13).
In Sunday Telegraph Jeremy Warner wrote everything rests
on China, which is engaged in a herculean battle to defend
its currency against a veritable flood of capital outflows.
There is no doubt that it will be very bad for everyone
should the Yuan go into free fall, setting off a further round
of destabilising competitive devaluation in the region. And
the fact is that the Chinese are burning through their
reserves at frightening speed. It would only take three or
four more months of this before Chinas once mighty arsenal
looks less than adequate for such a large economy (page 15).
Fidelitys Tom Stevenson wrote the key question, though, is
whether investors in the rest of the world have overreacted
to a storm in a China teacup. The main trigger for this
weeks slide in prices does seem to have been an expected
lifting of a ban on sales by major shareholders rather than
any real concern about the Chinese economy. What we know
about Chinese GDP is largely unchanged. The country is
slowing but it is not grinding to a halt. The good news for
investors is that this two-speed economy provides excellent
opportunities for stock-pickers, especially as the overall
market in China now stands at a significant valuation
discount to those in the developed world. Investors in the
rest of the world may come to be grateful for the popping of
the Shanghai bubble (page 16).
SAFE, on Saturday said China's financial system is "largely
stable" and foreign exchange reserves are "relatively
abundant" (page 16).
Still on China, inflation numbers were released on Saturday
Jan 9. National Bureau of Statistics said CPI rose 1.6% in
December from a year earlier, slightly above Novembers
1.5% increase. However, PPI fell 5.9% year-on-year (page 12).
London gold and silver vault, enlarging its footprint in the

city's bullion market (page 14). Does this mean they will
start buying gold?
It will be the Mother of all IPO. Saudi Arabia is considering
the partial privatisation of Saudi Aramco, paving the way for
what could be one of the biggest stock market flotations in
history, valuing the company at more than $1trln. The
company plans to list its shares in Riyadh but Saudi Stock
Exchange has total value of less than $400bn (page 2). The
Independent said with a market capitalisation of more than
$1trln, its likely that a dual listing would be on the cards,
on the Saudi stock exchange and, most likely, in New York.
The question Independent asked is just how deep in a hole
must the Saudis be to consider selling off Aramco (page 3)?
Meanwhile, World Bank has issued a warning to Saudi
government to use its massive foreign exchange reserves to
defend the riyal. Franziksa Ohnsorge, lead economist at the
World Bank, said investors are betting the Saudis dollar peg
will soon collapse, but oil giant should deploy the full force
of firepower to protect the currency (page 3).
On Saturday, the two pro-independence parties in the
Spanish region of Catalonia have struck a last-minute deal to
form a new government. The move increases pressure on
acting Prime Minister Mariano Rajoy (page 6).
In Sunday Times, traders are now betting that BOE will not
hike interest rates until Feb 2017 (page 7).
SNB Chairman Thomas Jordan expects the overvalued
franc to stay at its current level or slightly weaken in 2016.
Jordan said, If the franc weakens a lot, that would be very
good for the economy: Exports would be much better and
growth would be more, (page 8).
There is a good story posted in FT on Sunday on securities
lending, which is an area of growing concern to global
regulators who are worried about potential risks to financial
market stability. The article said some believe moves by
regulators to impose stricter rules on securities lending
could hurt returns to investors, reduce profits for asset
managers and increase the risk of asset price bubbles
developing in financial markets. Although the new rules are
not likely to affect the availability of the largest and most
liquid US stocks for securities lending, they could have a
greater impact on transactions related to smaller companies
(page 11).
Malaysias PM Najib Razak confirmed Malaysia would need to
revise its 2016 budget given the expected revenue shortfall
stemming from its US$48 oil premise in October when the
budget was tabled (page 14).
In Kathimerini, Eurogroup chief Jeroen Dijsselbloem
suggested that the process of Greeces first bailout review
could take months (page 6).
Finally, North Korean leader Kim Jong Un said the country
conducted a hydrogen bomb test as a self-defensive step
against a U.S. threat of nuclear war and had a sovereign
right to do so without being criticized (page 17).
Have a great week ahead!
One interesting article from The Telegraph that Chinas ICBC

is buying the lease on Deutsche Bank's huge 1,500 tonne
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.
World News
Worst start to market year in two decades
Taken from the FT Saturday, 9 January 2016
More than $2.3tn was wiped off global stocks this week as
Chinas slowing economy and currency depreciations spooked
investors around the world, leading to the worst start to a
year for markets in at least two decades.
A robust US jobs report, which added a stronger-thanexpected 292,000 extra jobs in December, allayed some
concerns over US economic growth on Friday but failed to
rescue the grim week for financial markets.
The catalyst for this weeks market turmoil has been Chinas
plunging stock market and weakening currency. Beijings
powerful influence over financial markets this week
underlines for investors how the countrys policy decisions
reverberate across the global stage.
This heightened sensitivity of risk assets to Chinese policy is
a relatively new phenomenon, said Mark Haefele, global
chief investment officer at UBS Wealth Management. We
can see how even relatively small falls in the Chinese
[renminbi]...are having a major impact on global
markets.
After initially climbing on the jobs report, the S&P 500
sagged to take its loss for the week to about 6 per cent its
worst start to a year on record as it briefly suffered a
technical correction, according to S&P Dow Jones Indices.
The index has lost more than $1tn so far this year.
Every major European stock market also fell again on Friday.
Chinese stocks managed to stabilise at the end of a
turbulent week after authorities scrapped a controversial
circuit-breaker and lifted the daily currency fix for the first
time in nine days.
The FTSE All-World index has lost a total of 6.1 per cent this
week, making it the worst five-day start to a new year since
at least 1994, when the index was established, and the worst
week overall since 2011. More than $2.3tn was lopped off
the index.
China is playing a bigger and bigger role in global markets,
said Win Thin, a strategist at Brown Brothers Harriman. This
is the new reality and markets have to accept that.
Chinese volatility has complicated the outlook for money
managers already dealing with tensions between Iran and
Saudi Arabia and the start of a US interest rate tightening
cycle by the Federal Reserve.
Investors are fearful of many factors as the negative
narrative gains traction generating a sense of malaise, said
Tobias Levkovich, an equity strategist with Citi. There is
some fairly impressive good news but it seems to be
overshadowed by headline risks including recent geopolitical
ones.
Interest rate futures indicate that investors are still
discounting the chances of the Federal Reserve lifting
interest rates another four times this year as planned,
despite the unexpectedly strong unemployment data
released on Friday.
Some fund managers and analysts argue that the developing
world and China in particular could be the final stage of
a three-part rolling global crisis that began in the US in 2007
and then moved to the eurozone in 2010. Emerging market
exchange rates took another dive after the strong US jobless
report lifted the dollar, sending the JPMorgan Emerging
Market Currency index to a new all-time low.
Natural resource prices have also fallen into an even deeper
funk due to concerns over slowing Chinese demand, with the
Bloomberg Commodity index tumbling to a fresh 17-year low.
The WTI and Brent crude oil prices have both fallen to about
$33 a barrel this week, the lowest since 2004.
Mr Thin said Chinese policymakers had mishandled its
currency management, and pointed out that in the absence
of communication, markets assume the worst. But he
argued that investors were overreacting to the moves and
cautioned against extrapolating too much from a handful of
trading days.
Markets are panicking and lurching from one concern to the
next, but we cannot judge the year as a whole by the first
week, he said. We shouldnt throw in the towel quite
yet.
(Full article click - FT)
---
Saudis plan $1 trillion flotation for state oil firm

Saudi Aramco
Taken from the Times Saturday, 9 January 2016
Saudi Arabia is considering the partial privatisation of its

state oil producer, paving the way for what could be one of
the biggest stock market flotations in history, valuing the
company at more than $1 trillion. Saudi Aramco, which
pumps about one in eight barrels of the worlds crude, is the
biggest oil company in terms of output and reserves far
exceeding ExxonMobil or Royal Dutch Shell on both counts.
Based in Dhahran, it controls reserves of 261 billion barrels,
ten times more than ExxonMobil, and more than 15 per cent
of world deposits.
The company, which is expected to list its shares in Riyadh,
said that it has been studying various options to allow
broad participation in its equity. The total value of the
Saudi stock exchange is less than $400 billion. Saudi Aramco
said that this could include listing an appropriate
percentage of the companys shares and/or the listing of a
bundle of its downstream subsidiaries.
This proposal is consistent with the broad and progressive
direction pursued by the kingdom for reforms, including
privatisation in various sectors of the Saudi economy and
deregulation of markets, which the company strongly
supports, it added.
Mohammed bin Salman, Saudi Arabias deputy crown prince,
first signalled that Riyadh was considering its options for
Saudi Aramco in an interview with The Economist this week.
The prospect of an IPO comes as Saudi Arabia has been hit
hard by a 70 per cent fall in the price of oil since June 2014.
Riyadh is battling to rein in a budget deficit which touched
$98 billion last year and is forecast to rise further to hit 13
per cent of GDP this year.
Oil revenues, which account for three quarters of receipts,
have collapsed. The kingdom is cutting energy subsidies,
introducing VAT, reining in public sector pay and launching a
privatisation programme for airports and other assets.
Michael Poulsen, an oil market analyst at Global Risk
Management, said that an IPO of Saudi Aramco underscored
Saudi Arabias commitment to maintaining high levels of oil
production to retain market share. When you start selling
out the crown jewels, that shows you are not ready to back
down, he said. They are exploring new opportunities to
keep their strategy going. Taking Saudi Aramco public is
another way to keep the boat afloat.
Saudi Aramco has low costs of production, with some of its
fields capable of pumping oil at less than $5 per barrel.
(Full article click - Times)
---
How deep in a hole must the Saudis be to

consider selling the state oil giant?
Taken from the Independent Saturday, 9 January 2016
How much longer will Apple be the worlds largest traded

company? Not much longer if an interview with The
Economist this week is anything to go by. According to
Deputy Crown Prince Mohammed bin Salman, Saudi Arabia is
considering an initial public offering of Saudi Aramco, the
state oil producer.
Any decision is a few months away, but if the company were
to list, it could be the first IPO with a market capitalisation
of more than $1trn (680bn). Its likely that a dual listing
would be on the cards, on the Saudi stock exchange and,
most likely, in New York.
Saudi Aramco controls 15 per cent of the worlds oil reserves
and produces more than three times as much output daily as
ExxonMobil, currently the largest traded oil company, at a
fraction of the per barrel cost.
Thats a lot of oil, and a lot of broker commission. As for the
worlds largest company, for the most part its a meaningless
position that bestows nothing other than an ego massage for
the people running it. Tim Cook, Apples fairly low-ego chief
executive, will not lose any sleep over losing that spot.
It might mean little in terms of size, but the potential sale
of their largest state asset has great meaning as far as the
Saudis are concerned the oil markets too. Just how deep in
a hole must the Saudis be to consider selling off Aramco?
How deep a hole is the oil market in? The answer to both is
very deep. The price of oil is stuck in the mid-thirties, and
there arent many people in the oil industry who can see it
back in triple digits any time soon.
With a $100bn hole in Saudi Arabias budget, the sale of all
or part of Aramco would be a short-term fix for long-term
structural problems. Given that every Tom, Dick and Harry in
the Saudi royal family will want a share of the billions on
offer, its hard not to feel that this will not work out well.
Besides, the rise of alternative energy is inexorable. It might
not happen in my lifetime but the oil, gas and coal markets
are doomed.
The American stock market guru Jim Cramer might not be
everyones cup of tea, but when he said last week that fossil
fuels are an obvious multi-year short, he was not far off the
mark. The thought of the Saudis selling even a small chunk
of an asset that they felt was still a goldmine is ridiculous;
they obviously agree with him.
(Full article click - Independent)
---
Saudis told to prop up currency amid global

devaluation war fears
Taken from the Sunday Telegraph 10 January 2016
Investors are betting the kingdom's dollar peg will soon

collapse, but oil giant should deploy the full force of
firepower to protect riyal, says World Bank
Saudi Arabia should use its massive foreign exchange
reserves to defend the riyal, amid fears the world is
descending into a new phase of global currency wars, the
World Bank has said.
The kingdoms shaky currency peg with the dollar has come
under record pressure this week as the price of oil has
plummeted to near 12-year lows at $32-a-barrel.
With the world's stock markets in turmoil, analysts fear a
Saudi devaluation could spark a new wave of deflation and
competitive beggar-thy-neighbour policies in a fragile
global economy.
But the worlds largest producer of brent crude should
continue to defend its exchange rate by drawing down on its
war chest of reserves, according to Franziksa Ohnsorge, lead

economist at the World Bank.
For now they have large reserves, and reserves can be used
during an adjustment period, Ms Ohnsorge told The
Telegraph.
Oil accounts for more than three-quarters of Saudi Arabias
government revenues. But a record supply glut has led to the
kingdom burning through its reserves at a record pace in
order to defend the riyal.
Central bank reserves have dropped from a peak of $735bn
to around $635bn this year - a pace of spending which will
exhaust the kingdoms fiscal buffers within five years, Bank
of America Merrill Lynch calculate.
A fresh round of conflict with rivals Iran and a sustained low
oil price world would reduce this cushion substantially, said
David Hauner at BaML.
The monarchy has vowed to stick by the exchange regime
and is instead planning to strengthen its coffers through the
unprecedented flotation of its state-owned oil giant,
Aramco.
Concerns about the Saudi peg come as fears that China was
engineering on its own covert currency devaluation rippled
through global markets this week.
The S&P 500 endured its worst start to a year since 1928,
while European equities suffered their biggest opening year
losses for over 45 years. More than 85bn was also wiped off
the FTSE 100 in a torrid start to 2016 trading which matched
August's Black Monday markets crash.
Investment bank Goldman Sachs has warned that despite
Beijings efforts to stimulate the economy, authorities may
resort to abandoning their support for the renminbi and
make way for a full-blown devaluation.
Just as the US and European phases of the financial crisis
were eventually curtailed by currency devaluation and
quantitative easing, the fear is that emerging market
economies and even China might need to do the same, said
Peter Oppenheimer at Goldman.
Faced with declining revenues, the Saudi monarchy has been
forced to unveil a radical programme of government
austerity to compensate for the 70pc decline in brent prices
over the last 18 months.
Deteriorating finances have led to markets betting that the
kingdom will have to abandon its exchange rate regime which has fixed the riyal at 3.75 to the dollar since 1986.
Forward contracts for the riyal have soared to their highest
levels in nearly 20 years - a sign that investors no longer
believe in the viability of the peg.
However, Ms Ohnsorge said plans for fiscal consolidation gave
the kingdom room to carry on defending the riyal in order to
limit the pain on its oil-reliant economy.
Saudi Arabia can smooth the adjustment to a future of
lower commodity prices, which by our estimates will be low
for a long time said Ms Ohnsorge.
The World Bank expects global commodity prices will not
return to their post-financial crisis peaks until the next
decade, while oil will average around $49-per-barrel in 2016.
Currency pegs allows nations to keep inflation and export
prices stable. But the commodities crash has already swept
away currency controls in Kazakhstan and Russia who have
both abandoned control over their exchange rates in recent
months.
Ms Ohnsorge said the Saudi Arabia remained one world's
"luckiest" oil exporters on account of its relatively large
foreign reserves.
"Any option is difficult. Having fiscal adjustment is difficult
and having an exchange rate depreciation is difficult. It's not
like there is one which is an easier way out", she said.
(Full article click - Telegraph)
---
Is 2016 the year when the world tumbles back

into economic crisis?
Taken from the Sunday Observer 10 January 2016
Some see Chinas share collapse as merely a symptom of

middle-class prosperity. Others take a darker view and if
they are right, the global threat is real
Rarely have financial markets had a more traumatic start to
the year. Shares plunged, the price of oil clattered to its
lowest level in 11 years, trading on the Chinese stock market
was halted twice, and the World Bank warned that a
perfect storm might be brewing.
George Osborne chose his moment well to go public with his
concern that the UK faces a cocktail of threats. In
addition to the $2tn wiped off global stock markets, the
North Koreans claimed they had exploded a hydrogen bomb
and relations between Saudi Arabia and Iran worsened
markedly.
On the face of it, there seems no reason why the global
markets should remain depressed. Rising oil prices have
traditionally been associated with recessions, so a drop of
more than two-thirds in the cost of a barrel of crude should,
logically, be good for growth. Cheaper energy means lower
costs for businesses and additional spending power for
consumers. There are winners and losers from a falling oil
price but on balance the impact should be positive.
Whats more, it could be that the gloom about China is
overdone. The slowdown in the rate of growth is not just
intentional but desirable. Should the economy cool more
quickly than planned, Beijing has plenty of power to ensure
there is no hard landing: it can boost public spending; it can
push the currency lower to boost exports; it can cut interest
rates.
Trading on the Chinese stock market was a farce. Circuit
breakers were introduced at the start of the year to
prevent turbulence, used twice to stop investors selling
shares, and then abruptly dumped at the end of last week.
But the chaos needs to be put into perspective. Only the rich
play on the Chinese stock market and their activities have
little bearing on corporate investment. Share prices rose by
150% between June 2014 and May 2015: events since have
seen the froth blown off the market, but the wider
implications for China, let alone the rest of the world, are
negligible.
The US-based fund manager Blackrock remains sanguine
about the prospects for 2016, seeing events of the past week
as akin to the brief period of turmoil last August rather than
the start of a bear market. On balance, the US economy is
in decent shape (outside of manufacturing) and economic
conditions in Europe are improving as well. The declines in
these markets may have more to do with sentiment than
substance, it said.
There is, though, an alternative and much darker
interpretation of the events of the past week, which begins
and ends with China.
Rapid growth in what is now the worlds second-biggest
economy helped prevent a second Great Depression in 200809, but there was a heavy price to pay. China spent public
money lavishly often on pointless projects and by making
credit cheap and abundant it set off a property boom. There
has been misallocation of capital on a colossal scale,
resulting in empty office blocks and unproductive factories.
Laura Eaton of Fathom Consulting says Beijing has hit the
panic button: In our view, the ongoing series of stimulus
measures employed by the Chinese government merely
highlights their discomfort. Quite simply, we believe that
their actions belie their words. China is suffering a hard
landing.
Eaton expects the Peoples Bank of China to devalue its

currency aggressively over the coming months. The impact
of that would be to flood the global economy with cut-price
Chinese goods, putting added pressure on competing
developing nations and turning ultra-low inflation to outright
deflation in the west.
All this would happen at a time when other central banks
and finance ministries are low on ammunition. In previous
economic cycles, countries have gone into recessions with
healthy public finances and relatively high levels of interest
rates. That has allowed public spending to rise, taxes to be
cut and the cost of borrowing to be lowered. Almost seven
years into the recovery from the downturn of 2008-09,
interest rates in the developed world are barely above zero
and the repair job on public finances remains unfinished.
Christine Lagarde, the managing director of the International
Monetary Fund, said last week the global economy would
remain fragile in 2016. She said there was likely to be an
increased divergence in monetary policy in developed
countries. The fund thinks the Bank of Japan and the
European Central Bank will be providing extra stimulus at a
time when the US Federal Reserve and the Bank of England
are pushing up interest rates. In the past, this has tended to
be a recipe for trouble in the markets.
Lagarde also predicted that Chinas attempt to rebalance its
economy towards consumer spending rather than exports
would prove a bumpy process rather than a trouble-free one:
the transition was leading to lower demand for commodities,
with knock-on effects for those countries producing oil and
industrial metals.
Pressures on commodity producers are already evident.
Russia and Brazil are in recession; Saudi Arabia has
announced an austerity budget and is planning to sell a stake
in its state-owned oil company Aramco. If the Saudis are
feeling the pinch from an oil price that has fallen from $115
a barrel in August 2014 to $33 a barrel on Friday, other
countries in the emerging world are probably getting close
to breaking point.
The last time the developing world was in crisis, Alan
Greenspan, the then chairman of the US Federal Reserve,
rode to the rescue with cuts in interest rates. The dotcom
bubble resulted, and when that went pop Greenspan
responded by again slashing interest rates. That led to the
US sub-prime housing bubble. When that went pop, China
came to the rescue while the west sorted out its wrecked
banking system.
So what happens if the first week of 2016 is more than a
temporary wobble? More quantitative easing? Negative
interest rates? Helicopter drops of money? Nobody really
knows. As Sir Alex Ferguson once said: this is squeaky bum
time.
(Full article click - Observer)
---
Underperforming but not underpaid hedge

funds accused of rewarding failure
Taken from the Sunday Observer 10 January 2016
Latest accounts for leading fund Brevan Howard show that

returns fell by 2% while partners pay rose by 35m. But not
every fund manager is doing so well
When the European Central Bank announced a smaller-thanexpected stimulus plan last month, Brevan Howard, one of
Europes largest hedge funds, was one of the biggest
casualties. Its master fund is said to have lost $670m after
misreading the runes.
From being ahead on the year by 2.4%, the fund went 1.2%
behind and finished the year down 1.99%, according to
figures that came out last week. The performance, though
not dismal, must have disappointed investors.
But if anybody expected such an event to have any financial
impact on the firms partners, they have now have been
disabused of that notion.
According to a filing from Companies House, the companys
UK unit paid 120.6m in compensation, up from 85.3m in
the previous year, to its partners. The number of partners
averaged 37 in the year, down from 45, meaning they were
paid an average of 3.3m.
The hedge funds filing coincided with Fat Cat Tuesday, the
day on which the average FTSE chief executive will have
earned more than the average British worker does in a year.
The average chief executives salary is now 4.96m a year,
so Brevan Howards partners didnt make as much as that
but then they dont have to face the same level of public
scrutiny as their public-company counterparts.
Brevan Howard says traders are paid on a performance basis
and therefore those that did well were paid accordingly. It
adds that some of those who contributed to the
underperformance of its main fund might not be represented
by the latest accounts, which is for the UK unit only.
Outside the industry there is widespread scepticism about
the high fees charged, both in good and bad times, by hedge
fund operators. Very high rewards for good performance
are only really justified if there are penalties for bad
performance, says Ruth Bender, who researches corporate
governance for the Cranfield School of Management.
Partners at Brevan Howard have continued with the
traditional hedge fund practice of charging 20% of any
profits they make for clients alongside a fixed fee of 2%.
The twittersphere was full of incredulity over Brevan
Howards numbers. All that is wrong with hedge funds,
said one commenter.
Brevan Howards co-founder Alan Howard, whose personal
fortune is estimated at 1.5bn by the Sunday Times Rich List
and who is normally one of the more media-shy hedge fund
managers, raised his profile when he quit the UK for Geneva
in 2010. His move to low-tax Switzerland, followed by half
his employees, was blamed on the threat of tighter EU
regulation of hedge funds. Recently, however, some of those
that departed have returned to London, unimpressed by
living overseas.
Another of Brevan Howards co-founders was star fund
manager Chris Rokos, who left in 2012 after generating a
total of $4bn for the firm. Brevan Howard maintains a
financial interest in Rokoss new firm. The two parties
earlier settled a lawsuit brought by Rokos over an
employment agreement which would have prevented him
from managing investors money until 2018.
UK-based hedge funds as a whole ended the year some 2%
higher than 12 months earlier, according to Preqin, a
financial data company. But during the past few months a
number of hedge funds have closed to outside investors, as
their investment returns have faltered.
Last week Nevsky Capital joined hedge fund firms such as

billionaire Michael Platts BlueCrest Capital Management,
Seneca Capital and SAB Capital Management in returning
money to clients and adding to an accelerating trend of
hedge funds shutting down globally.
Brevan Howard says it always does better when theres some
movement in interest rates, so is expecting better days
ahead after the US Federal Reserve raised borrowing costs
for the first time in almost a decade. The firm also expects
the closure of the BlueCrest fund to be a blessing. Were
expecting a bunch of new investors in the master fund, an
insider says.
So maybe a better year ahead for Brevan Howards investors?
No doubt its traders will have a pretty good one too again.
(Full article click - Observer)
---
European News
Pro-independence parties
Catalonia government
Taken from the FT Sunday, 10 January 2016
to
form
new
The two pro-independence parties in the Spanish region of

Catalonia have struck a last-minute deal to form a new
government, after regional president Artur Mas agreed to
step aside and let another politician lead the planned push
towards secession.
Confirming his decision in a press conference on Saturday
evening, Mr Mas said: The most important principle is the
country and its people. They stand above any party and
above any person. Mr Mas and other independence leaders
had until midnight on Sunday to either form a new regional
government or resign themselves to an early election.
The decision is likely to have important repercussions both
for the region and for Spain at large. The new Catalan
government plans to steer the region towards a historic
break with Spain over the next 18 months, by effectively
setting up a state within the state from a Catalan central
bank to a separate tax authority.
Any such move is certain to invite a furious reaction from
Madrid. In the short term, the Catalan accord is also likely to
raise the pressure on Spanish political leaders from the
centre-right to the centre-left to set aside their differences
and form a strong unionist government. Party leaders in
Madrid have been at loggerheads since Spains inconclusive
general election last month, which left even the strongest
party the ruling Popular party of Prime Minister Mariano
Rajoy far from a governing majority.
Mr Rajoy has repeatedly urged the centre-left Socialists to
support him as part of a national unity government designed
to fend off the Catalan challenge. That appeal is now certain
to gain in urgency.
Saturdays deal marks a striking reversal for Mr Mas and his
Junts pel Si movement, which had insisted until the last
moment that it would not sacrifice the veteran leader. But
with talks deadlocked, and a repeat election moving ever
closer, Mr Mas finally agreed to make way for a party
colleague, Carles Puigdemont, the mayor of Girona. The
former journalist and editor is expected to be voted in as
president of Catalonia in a special session of the regional
parliament on Sunday.
Mr Mas made clear he was not retiring from politics, saying
he was ready in particular to help the cause of Catalan
independence in the international arena. I remain at the
disposition of the future president and the future
government, he said.
The decision to swap out presidents followed months of talks
between Junts pel Si, the more mainstream of the
independence parties, and the Popular Unity Candidacy
(CUP), a far-left secessionist group. Last September, the two
parties won a majority of seats in the Catalan parliament,
but then fell out over the issue of who should lead the next
regional government.
Mr Mass Junts pel Si party is by far the bigger of the two,
holding 62 of the 135 seats in the Catalan parliament. But
the CUP, a fiercely anti-capitalist party that rejects Catalan
membership of both the EU and Nato, refused to back him.
Late last month, the CUP even held a meeting of its party
base to test the mood. But the gathering produced a perfect
tie, with 1,515 members voting to back Mr Mas and 1,515
members voting against. The party leadership then decided
to withhold its support forcing Mr Mas to withdraw on
Saturday.
Osbornes 6bn raid could kill off company

pensions
Taken from the Times Saturday, 9 January 2016
George Osborne has come under fire for his changes to

pension tax reliefs which experts have dubbed a 6 billion
stealth tax on Middle England.
The chancellors measures, which come into effect on April
6, will hit more than 300,000 higher-rate taxpayers, net the
Treasury 5.9 billion over five years and threaten the future
of company pension schemes as senior executives consider
pulling out of them, they claim.
From April, the annual allowance the amount you can pay
into a pension scheme and benefit from tax relief will be
reduced by 1 for every 2 of income above 150,000 until
the minimum allowance of 10,000 is reached at an income
of 210,00.
However, this income calculation will include not only salary,
but also investment income, rental income, company
benefits, such as car allowance, and all pension
contributions..
One illustrative calculation seen by Times Money shows that
an executive on a basic salary of 133,500 ends up with an
adjusted income of 194,478.
In this example, the executives new reduced annual
allowance is 17,600. If the individuals pension
contributions are more than this figure, they would pay tax
at 45 per cent on the excess.
Malcolm McLean, of Barnett Waddingham, a pensions
consultant, said: This could threaten the very existence of
company pension schemes, because if the boss and senior
staff opt out, what message does that send to more junior
employees?
One alternative would be to trim your pension contributions
by the amount they exceed your new limit. So if your
contributions are 2,000 over the new limit, you simply
reduce them by that amount.
Another way to get more money into your pension without
suffering any extra tax would be to make full use of this
years annual allowance of 40,000. You can also make use
of any unused contribution allowances from the three
previous tax years.
Meanwhile, as a further squeeze on pension savers, the
lifetime allowance is being cut from 1.25 million to 1
million from April. If your pension pot exceeds the limit you
will be liable for a tax charge on the excess when you start
to receive your pension benefits.
---
Athens irked by suggestion review will be

drawn out
Taken from the Kathimerini Saturday, 9 January 2016
Finance Minister Euclid Tsakalotos began a tour of European

capitals Friday in a bid to ensure that Greeces first bailout
review passes without any significant hitches, but back in
Athens government officials were upset by comments from
Eurogroup chief Jeroen Dijsselbloem suggesting that the
process could take months.
Tsakalotos met with Italian Finance Minister Pier Carlo
Padoan in Rome Friday on the first stop of his eurozone tour,
which will also include Lisbon, Paris, Helsinki, Amsterdam
and Berlin before a Eurogroup meeting on Thursday.
According to Finance Ministry sources, the timetable for the
completion of the first review of Greeces third bailout
program was one of the main topics of discussion during
Fridays meeting with Padoan.
However, officials in Athens were angry that Dijsselbloem

had pre-empted the outcome of talks over the next few days
and suggested that the first review, which is due to begin in
mid-January, could not be completed in a matter of weeks.
The stance adopted by some in Europe is familiar now,
said government sources. Before every negotiation they try
to create tension and to make an impact. It has been proved
that in the end they are always in the minority.
The Greek government is expected to receive the first
official reaction at the beginning of next week from its
lenders on the pension reform proposals it put forward this
week.
(Full article click - Kathimerini)
---
City traders bet interest rates wont rise until

2017
Taken from the Sunday Times 10 January 2016
INTEREST RATES will be stuck at their record low until next

year, City traders are now predicting, following a further
slump in oil prices and turmoil in financial markets.
A week ago, traders were betting the Bank of England would
raise rates in the autumn. Now the chances of an increase
are put at just 45%, with predictions that it will come in
February 2017.
Bank rate has been fixed at 0.5% since March 2009, when it
was slashed in the wake of the global financial crisis.
Market predictions of borrowing costs can be calculated
from sterling overnight interest rates. As markets closed for
new year, these rates suggested a 65% chance of a rise in
November. By the end of last week, that possibility was put
at 45%.
The Banks monetary policy committee sets interest rates
with the aim of keeping inflation within 1% of its 2% target.
The most recent figure showed an increase of just 0.1% in
the year to November. Since then, petrol prices have fallen
about 5%. Last week the price of North Sea crude dipped
below $33 per barrel, its lowest since 2004. That is likely to
feed through into further cuts in pump prices.
George Buckley, chief UK economist at Deutsche Bank, said:
With inflation so far below the . . . 2% target, policymakers
may be reluctant to sanction higher rates until they can be
confident that inflation is on its way back to normality.
---
Anglo to sell prized Brazil mine for $1bn

ANGLO AMERICAN is set to launch the $1bn (680m) auction

of its prized niobium and phosphate operation this week as
the mining giant steps up plans to repair its balance sheet
after the collapse of its stock price.
The shares tumbled by a fifth last week amid fresh signs that
China, the engine for a decade-long commodities boom, is
slowing down.
Anglo has been caught out by the sharp fall in the prices of
most of its key products, including platinum, iron ore,
diamonds and coal. The rout has pushed it deep into the red
and raised questions over its ability to operate in world of
low commodity prices.
In November, chief executive Mark Cutifani unveiled a
radical plan to raise money by selling two-thirds of Anglos
mines and slashing 85,000 jobs. The niobium and phosphate
operation, based in Brazil, is the most valuable he has put
on the block. Cutifani has hired Goldman Sachs and Morgan
Stanley to run the auction.
Anglo sounded out potential suitors last year. Those that
expressed an interest are thought to include Mosaic, the
American fertiliser giant; Israeli rival ICL; Cargill, the worlds
largest food company; and at least one Chinese state

company.
Anglo was once the worlds largest miner, but its share price
has plunged 94% in five years. If it doesnt recover, Anglo is
expected to fall out of the FTSE 100 index in March.
---
North Sea oil faces wipeout as prices keep on

plunging
Exploration has been cut right back, jobs are being slashed,
operators are going bust and there is no relief in sight
A DESPERATE situation can sometimes be best summed up by
numbers.
Heres one that neatly captures the effect the oil price crash
has had on the London market. The combined market value
of 112 publicly traded oil companies the entirety of
Britains listed industry excluding the top three of Shell, BP
and BG is the same as that of Marks & Spencer: 7bn.
Two years ago, just one of the 112 Tullow Oil was worth
more than Britains preferred seller of sandwiches and
underwear, with a healthy 8.2bn market value. Its fall has
been stunning. As the numbers above attest, it is but one of
many.
The primary culprit for this collective capsize is the oil
price. Brent crude has plunged 70% from $115 in the summer
of 2014 to $33 a barrel last week amid a prolonged price war
between Saudi Arabia, the worlds largest producer, and
American shale drillers. Such a dramatic collapse in the
value of the only product these companies sell has,
predictably, wreaked havoc.
The problem is that as 2016 begins many companies that
clung on by their fingertips last year, hoping to ride out the
storm, are finally buckling as the global glut of crude
deepens.
In the North Sea this has led to a disastrous contraction,
threatening an industry that employs more than 375,000
people and was, until recently, one of the richest sources of
tax revenue for the exchequer.
Last year the Office for Budget Responsibility predicted that
2016 tax revenue would fall to 600m, a 95% drop from the
12.9bn generated for the exchequer in 2009. Even that low
figure may prove optimistic.
Already, 65,000 jobs have been lost. The governments Oil
and Gas Authority (OGA) has launched an array of
programmes to jolt the sector into life, from carrying out
seismic analysis of new frontiers to forcing owners of
pipelines to open their infrastructure to smaller developers.
OGA chief executive Andy Samuel said: Our role as an
urgent catalyst for change is more significant than ever.
The results have, so far, been negligible. According to
specialist consultancy Hannon Westwood, companies are
expected to drill just six exploration wells this year. That
would be the lowest number since 1964, when the UK
Continental Shelf Act threw open the region to explorers.
The previous low was 13, set last year. The drilling drought
means that as decades-old fields run dry, there will be few
new projects to replace them, pushing the North Sea closer
to terminal decline.
Rock-bottom crude value has also clouded the prospects for
projects sanctioned during the boom between 2010 and
2014, when oil hovered at more than $100 a barrel and
executives were flush with cash.
In November 2013, Amjad Bseisu, chief executive of
EnQuest, the largest independent North Sea producer, was
riding high. He had just approved a plan to spend $3bn on
Kraken, a giant new field 75 miles east of the Shetlands.
George Osborne praised the flagship development, claiming

it was evidence that our efforts to create a competitive tax
regime that gets the most oil and gas out of the North Sea
are working.
Today EnQuest is on its knees. Last month Moodys Investors
Service pushed its credit two notches deeper into junk
territory. Its share price has halved in a year, giving it a
market value of just 141m ($206m) roughly an eighth of
its $1.6bn debt pile.
Bseisu, who owns 9% of the beleaguered company, is
furiously cutting costs to free up cash for Kraken, scheduled
to start production next year. He has even put up for sale
part of his 60% stake in the project in the hope of slashing
his bill.
Yet soon he may have to take on more of the projects
expense.
Just before Christmas, First Oil, a private company that is
the heart of the 350m fortune of 68-year-old Aberdonian
Ian Suttie, quietly put itself up for sale amid deepening
losses.
The company owns 15% of Kraken; listed rival Cairn Energy
owns the other 25%. Each partner is on the hook for its
corresponding share of Krakens costs.
First Oils obligation this year is expected to exceed $100m.
It is unlikely to be able to pay, which means its stake will
probably be divided up between Cairn and EnQuest. First Oil
declined to comment.
The pain across the sector is likely to become more acute as
the buffers that companies put in place to protect them
from the carnage fall away.
The most important for many producers were hedges sales
contracts that locked in prices as much as a year in advance.
Many were struck in late 2014, when crude started to fall
but was still healthy.
As these have expired, producers have faced the reality of
selling every barrel at a loss. This has bitten particularly
hard in the North Sea, one of the most expensive places in
the world to operate because of treacherous weather and
strong unions. Last week Iona Energy, a producer with stakes
in half-a-dozen reservoirs, became the latest casualty, filing
for administration.
Companies with big debts are particularly vulnerable. That
seems to be Tullows sin and EnQuests. The former has run
up $3.7bn in debts nearly twice its market value to
finish a key project in Kenya.
What is most striking about this downturn, however, is how
indiscriminate the collapse in faith has been. Shareholders
seem unwilling to differentiate between companies simply
hit by the weak commodity price and those that are truly
mismanaged. That blanket disgust is born, in part, of years
of promises by executives that have gone unfulfilled.
Consider Premier Oil. Back in 2011 the company predicted
its new $850m Solan reservoir, west of the Shetlands, would
start in 2013. It is now scheduled to start pumping this year
after expenditure that will top $2bn roughly 10 times
Premiers battered market value of 153m.
One big investor summed up the general attitude, saying: I
have no interest in funding another company that will simply
add to the sectors pile of dead wood.
---
Franc Key to Swiss Economy in 2016, Central

Banker Says
Taken from the WSJ Sunday, 10 January 2016
Swiss central bank expects overvalued franc to be a major

factor
The Swiss central bank expects the overvalued franc to
stay at its current level or slightly weaken in 2016, its
chairman Thomas Jordan said on Saturday.
In fact, a big drop in the currency would be welcome, Mr.
Jordan said. The Alpine countrys economy came under
pressure last year after the Swiss National Bank decided to
scrap a long-standing cap on the franc of 1.20 to the euro.
The decision sent the franc soaring in value against the euro,
the currency of Switzerlands main export market. That hurt
exports, which were suddenly more expensive for foreign
buyers.
The franc gave back ground during 2015, providing some
relief. The currencys value will have a major effect on the
Swiss economy this year, Mr. Jordan said.
If the franc weakens a lot, that would be very good for the
economy: Exports would be much better and growth would
be more, Mr. Jordan said in a radio interview with state
broadcaster SRF. If the franc rises, it will go the other way.
For 2015, the central bank has said it expects the countrys
gross domestic product to have risen just under 1%, down
from 2% in 2014. The central bank expects output to rise by
1.5% in 2016, although it will depend on the francs strength
and developments in the global economy.
In the interview, Mr. Jordan defended the decision to scrap
the three-year-old ceiling on the franc. Keeping the limit
wouldnt have been sustainable, because the central bank
would have needed to buy massive amounts of foreign
currency, he said.
Mr. Jordan said he had great confidence in the Swiss
economy, despite a challenging period for Swiss industry,
particularly exporters.
The big concern that there could be a very sharp recession
in Switzerlandmass unemployment and a deflationary state
all this has not arrived, he said.
Companies would continue to develop new, innovative
products and create new jobs in Switzerland, he said.
The franc has weakened since initially rising to parity with
the euro but remains overvalued Mr. Jordan said. The
franc is currently trading at around 1.09 francs to the euro,
compared with the limit of 1.20.
The SNB has introduced negative interest rates and is ready
to intervene in currency markets to balance against the
franc rising higher in value, Mr. Jordan said. He said those
tools were the right ones to keep a check on the currencys
strength.
In a separate interview scheduled to be broadcast on
Monday, Mr. Jordan said the U.S. Federal Reserves decision
to raise interest rates last month had eased the situation
partly by strengthening the dollar against the Swiss franc.
It is now at about parity, and that is actually a good sign for
us, Mr. Jordan told Swiss television program ECO.
(Full article click - WSJ)
News Americas
Heard on the street
The Fed's Dilemma: Jobs vs. China
Taken from the WSJ Saturday, 9 January 2016
December report was strong but points to a looming problem

The strong jobs report must have pleased the Federal
Reserve. But coming during a week of renewed global
financial market turmoil, it also underscored a thorny task
for the central bank this year: Figuring out how to set
monetary policy for an economy that isn't following the old
rules.
The U.S. added 292,000 jobs last month, the Labor
Department reported Friday, versus economists' estimate for
a 210,000 job gain. With another round of upward revisions
adding 50,000 jobs to October and November's figures, job
gains have averaged 283,000 over the past three months--far
better than most forecasters expected. Since September the
unemployment rate has dropped to 5% from 5.1%, but would
have dropped to 4.7% if it hadn't been for a pickup in the
share of the population looking for jobs.
So, good. But to look at long-term Treasury yields, you would
hardly know it. Indeed, the 10-year note, after initially
rising on the strong jobs data, fell back to yield just 2.12%
later in the day. That was slightly below the 2.19% it yielded
on the day in September when the Fed opted to delay raising
rates on worries that trouble overseas might bleed into the
U.S. economy.
The reasons yields remain so low are twofold. First, those
troubles overseas have hardly gone away. China continues to
flash weak, while tumbling energy and raw materials prices
portend further slowdowns in global demand and financial
strains for commodity producers. That makes the safety of
Treasurys appealing.
Second, and relatedly, the weakness in overseas economies
continues to put pressure on import prices, and that will
flow through into low U.S. inflation figures. Particularly as
the latest leg down in commodity prices, and China's move
to further lower the value of the yuan versus the dollar, take
hold.
It is a situation that could make it very hard for the Fed to
raise rates by the full percentage point it expects to this
year. For while the recent run of jobs strength, if it
continues, would probably make it feasible to again tighten
policy in March, further rate increases would be tough
absent a pickup in inflation.
More troubling, the low level of Treasury yields, despite the
job market's recent strength, and despite the Fed's move to
start raising rates last month, shows how unhinged long-term
rates have become from U.S. economic conditions and Fed
policy.
America used to be the straw that stirred the global
economy's drink. Now the drink is stirring it.
---
Market tumult may upend Fed's plans for more

hikes
Taken from the Nikkei Saturday, 9 January 2016
With the U.S. interest rate hike partly to blame for the
recent market turmoil, the Federal Reserve may have to
rethink its assumptions for further hikes this year and next.
The Fed ended its near-zero rate policy in mid-December on
signs of an American economic recovery. Recent data,
including better-than-expected jobs numbers that month,
underscores the solidity of the economy. New-auto sales
marked a record in 2015. Home prices have been on the rise
in major cities, including New York. And unemployment has
dropped to the pre-Lehman-shock level of 5%, while average

hourly wages have climbed 2.5% on the year. Consumer
spending has been in an uptrend as well.
But the global market turmoil since the start of the year -including sliding crude oil prices and a softening Chinese
yuan that led to a sell-off in stocks -- now must also be
reckoned with. The Fed's rate hike contributed to such
developments by prompting investors to shift money to the
dollar on prospects of higher returns.
The U.S. economy is not immune to market turmoil or
slowing emerging economies. In November, the value of
exports from the U.S. fell to the lowest in around four years.
And the country's manufacturing index has fallen under the
boom-or-bust line of 50.
The Federal Open Market Committee will hold its next
meeting Jan. 26 and Jan. 27. One month is not enough to
gauge the impact of a rate hike, former Fed Vice Chairman
Donald Kohn notes, so another hike in January is seen as
unlikely. Based on FOMC members' assumption of 1percentage-point increases in both 2016 and 2017, which
breaks down to four quarter-point hikes a year, another hike
may come in March.
But the market increasingly doubts that such a pace will be
kept up. Futures trading data indicates that just over half of
investors anticipate a rate hike in March. And U.S. price
growth remains short of the Fed's 2% target.
The greenback's status as the linchpin currency means that
the Fed is expected to act as the central bank to not only
the U.S., but also the world. Uncertainty over its next move
is growing.
(Full article click - Nikkei)
---
Brazil ex-finance head joins World Bank

The World Bank is bringing one of the architects of a new

Chinese-led rival into its management ranks and appointing
recently departed Brazilian finance minister Joaquim Levy as
its new chief financial officer.
Jim Yong Kim, the World Banks president, is due to
announce early next week that Shaolin Yang will take up a
new post as the banks chief administrative officer, people
familiar with the situation said on Friday. Mr Yang heads the
Chinese ministry of finances office of international cooperation and was one of the key officials behind the
establishment of the Asian Infrastructure Investment Bank.
His appointment as well as that of Mr Levy would fill voids
left by the unexpected resignations late last year of two of
the banks senior executives. They also would bolster the
ranks of executives from key emerging economies in the
banks senior management at an important time in the
relationship with China and Brazil.
The launch of the AIIB, which is due to be inaugurated
formally next week in Beijing and to begin extending loans
by the spring, has been seen as one of the biggest challenges
to the US-led global economic order since the establishment
of the World Bank and the International Monetary Fund at
Bretton Woods in 1944.
With the appointment of Mr Yang, who served as Chinas
board representative at the World Bank until 2013, the bank
will be bringing in an executive with close links to the
Chinese leadership and the AIIB at a crucial moment.
Both the World Bank and the AIIB have pledged to work
together and some of the AIIBs first projects are expected
to be co-financed by the Washington-based bank.
Mr Levys arrival, meanwhile, comes as Brazils deepest
recession in more than a century is becoming a source of
growing anxiety at the bank and the IMF.
But while the former banker is well respected in

international financial circles it is unclear whether his
appointment will be of benefit to the banks relationship
with the government of President Dilma Rousseff, who has
had an uneasy relationship with orthodox economics.
Mr Levy, a fiscal hawk, resigned as finance minister in
December after serving for less than a year when Brazil
suffered its second ratings downgrade in months.
As infighting over a corruption scandal at state-controlled oil
company Petrobras consumed Brazils Congress, Mr Levy
found himself increasingly isolated. A move to impeach Ms
Rousseff only made his job harder as it forced the president
to seek support among the far left of her Workers party,
which is bitterly opposed to austerity measures.
Mr Levy will replace Bertrand Badr, a former French
banker, who is due to leave as chief financial officer later
this year after overseeing a controversial reorganisation of
the bank.
Besides his new role overseeing the banks vast bureaucracy,
Mr Yang will become Chinas new top voice at the bank. That
role was left empty by the departure of Jin-Yong Cai, a
former Goldman Sachs banker who left as head of its private
sector arm, the International Finance Corporation, at the
end of December amid some controversy.
The World Banks press office declined to comment on the
appointments. The Chinese embassy in Washington also did
not immediately respond to a request for comment.
---
Irwin Stelzer
American Account: The times they are achangin and America is anxious
Americans are convinced that things are not going well, and
are not likely to improve soon. Gerald Seib, who follows
these things for The Wall Street Journal, says Republican
pollsters report the national mood as: Sour and dour.
Nervous, on edge, a feeling of vulnerability and a lack of
control. Democratic pollsters use different words to
capture the same mood: Anxious, dissatisfied, impatient
and basically any other word that connotes uncertainty.
My own experience in and around the new year weekend
verifies those findings. At almost every event, people who
typically pay more attention to college football scores than
to international affairs seem unnerved when China tells us
where we might fly in Asia, the Russians do the same in the
Middle East, Vladimir Putin grabs Crimea despite warnings
from Barack Obama that he is on the wrong side of
history, Iran sends missiles whizzing by our aircraft carriers,
and Syrias Bashar al-Assad crosses the presidential red line.
An estate agent worries that the strong dollar will deter
foreign buyers.
A woman nearing retirement who played by the rules
and saved rather than partying wants to know whether to
cash in her retirement plan or switch it out of equities.
A retailer tells me that his 8% drop in sales last year is
tolerable, but fears that online sales are about to make
him an economic dinosaur because if mighty Macys cant
survive in the Amazon era, neither can he.
A housebuilder who is doing well nevertheless wonders
whether interest rates will rise four times this year for a
total of a full percentage point, as Fed vice-chairman
Stanley Fischer says is likely, making mortgages more
expensive, or the market is right that increases will be fewer
and less.
A rather prosperous lawyer is convinced his children and
grandchildren, burdened with $18 trillion of government
debt and $66 trillion in unbooked obligations (Medicare,

Medicaid, social security), some 500% of GDP in all, will not
live as well as he has.
An environmentalist, disappointed at the failure of the
Paris climate change conference to set sufficiently stringent
and enforceable emission limits, says irreparable damage to
the planet will bring it to the brink of livability, soon.
A long-time Republican wise man despairs at what
Donald Trump is doing to the partys prospects in the
congressional and presidential elections, and a well-known
conservative pundit prepares to vote for Hillary Clinton.
So all sides are dour, sour and anxious defined by New York
Times columnist David Brooks as an unfocused corrosive
uneasiness. Throw in a share-price tumble that in the first
four days of the year wiped $2.6 trillion off the value of the
worlds stock markets, and it is no surprise that anxiety
mounts.
All this before the publication last Friday of the first jobs
report of the year, one that even the dourest and sourest
observers have to concede is good news. The economy added
292,000 jobs in December and the Bureau of Labor Statistics
revised its figures for September and October up by 50,000.
For the year as a whole, the economy added 2.7m posts,
except for last year the largest jump since 1999 (3.2m new
jobs). Not enough, though, to offset dour and sour, at least
for some. They fear that what seems like good news is really
bad news: it will encourage the Fed to go on raising rates in
an economy that is still limping along at a 2%-or-lower
growth rate, its manufacturing sector hit by the largest drop
in demand in six years, and suffering gale-force headwinds
from China.
Then there is a fact that professional economists tend to
ignore. While we pore over the latest data, most Americans
look to familiar figures for guidance. Warren Buffett, the
man in the streets favourite capitalist, racked up
investment losses of about 10% last year. George Soros, the
man who made something like $1bn beating the experts in
the currency markets and is the darling of liberal
organisations into which he pours millions, sees a serious
challenge which reminds me of the crisis we had in 2008.
Apple, regarded as a symbol of unending innovation and
growth, its products on the desks, in the pockets and on the
wrists of millions, sees $50bn wiped off its market value in
four days. Republican candidates, in debates watched by
more than 24m viewers, announce that our economy is
broken, and offer plans varying from the undecipherable to
the incredible to make it great again. And grim reports on
the value of savings accounts are bringing the share-price
news up close and personal.
Despite this, the sour and dour continued to troop into
showrooms to buy a record 17.5m cars and light trucks last
year, at average prices that were up on 2014. There has to
be some cheer from filling up with $2-a-gallon petrol ($1.76
in Texas), en route to a more secure job from a home worth
on average about 35% more than it was at the low point in
March 2012. But talk to people, and they say the savings on
petrol are more than offset by increases in rents (up about
$600 a year in 2015), and rising healthcare costs. Almost half
of all Americans, insured and uninsured, are having problems
paying their medical bills, according to the well-regarded
Kaiser Family Foundation. Add up the pluses and minuses,
and 70% of Americans say the country is on the wrong track.
It might be true, as Nat King Cole famously warbled, that
the partys over, its time to call it a day, theyve burst your
pretty balloon, and taken the moon away. Or it might just
be the case, as retired general David Petraeus, now an
investment banker, and consultant Paras Bhayani argue in a
study funded by Harvards John F Kennedy School of
Government, that advances in energy production,

manufacturing, life sciences and IT amount to four
interlocking revolutions that could make North America the
next great emerging market as long as policymakers in this
country dont impede their potential. Which is exactly what
Americans fear the policymakers will do.
---
Securities lending unsettles regulators

Taken from the FT Sunday, 10 January 2016
Securities lending the practice among institutional

investors of swapping equities, bonds and cash with one
another is an area of growing concern to global regulators
who are worried about potential risks to financial market
stability.
But some observers believe moves by regulators to impose
stricter rules on securities lending could hurt returns to
investors, reduce profits for asset managers and increase the
risk of asset price bubbles developing in financial markets.
Tighter rules surrounding securities lending were imposed
after some investors incurred heavy losses through
transactions linked to Lehman Brothers, the US bank that
collapsed in 2008.
Market participants are concerned, however, that the
numerous regulatory changes are damaging liquidity in
equity and fixed income markets.
Stefan Gavell, head of regulatory affairs at State Street, the
US financial services group, says securities lending activity
remains well below the levels seen before the financial
crisis, partly due to increased risk aversion but also because
the stricter rules have made lending less attractive
financially.
There have been more than 25 regulatory initiatives
globally that have affected demand and supply levels for
securities lending, as well as the structure of transactions,
says Mr Gavell.
He believes securities lending is a socially useful activity,
adding that it would be regrettable if activity levels fell
further.
Josh Galper, managing principal of Finadium, a US-based
consultancy, agrees: Securities lending activity has been
heavily constrained by global regulations that have
dramatically increased borrowing costs for loans that were
previously viewed as low risk.
Finadium examined the securities lending activities of a
group of 54 US public pension funds between 2008 and 2013.
These schemes together earned almost $104m between 2008
and 2013.
Some investors did lose money in 2008 from securities
lending activities after Lehman Brothers collapsed, one of
the primary reasons for the introduction of stricter rules.
But the 54 public pension plans earned a total of $20.6m
from securities lending in that year.
Finadium also looked at revenues generated by securities
lending for a group of 10 large investment managers
comprising BlackRock, Vanguard, Fidelity, JPMorgan AM,
Franklin Templeton, Charles Schwab, T Rowe Price, MFS,
Putnam and BNY Mellon subsidiary Dreyfus.
These managers together earned $19.3m from securities
lending activities between 2011 and 2015.
Although these revenues are relatively small, investors
receive indirect benefits through lower trading costs as
securities lending transactions increase the number of active
buyers and sellers participating in markets.
Securities loans play an integral part in reducing
transaction costs, providing liquidity to financial markets
and generating income for retirement plans and other longterm investors, says Mr Galper.
Charles Jones, a finance professor at Columbia Business

School in New York, adds that stricter regulations for
securities lending could lead to asset prices becoming
unhinged from their fundamental values.
Although the new rules are not likely to affect the
availability of the largest and most liquid US stocks for
securities lending, they could have a greater impact on
transactions related to smaller companies, he says.
End investors should be concerned because impeding shortselling activity could lead to asset price bubbles forming,
says Mr Jones.
Nonetheless regulators are continuing to increase their
monitoring of securities lending, which remains an opaque
market with limited publicly available data.
According to Markit, the data provider, the value of assets on
loan globally stands at around $2tn, but this is just part of a
larger $15tn worldwide pool of lendable assets.
In November, the Financial Stability Board, the body that coordinates financial regulators, published proposals to gather
data on securities lending on a global basis from the end of
2018.
The Securities and Exchange Commission, the US regulator,
last year also put forward plans requiring US-registered
funds to provide monthly data on securities lending
activities.
As part of its efforts to limit the build-up of leverage outside
the banking system, the FSB has also, for the first time, set
global rules that require the value of equities and corporate
bonds to be marked down when they are used as collateral
in securities lending transactions.
But proponents of securities lending believe the activity is a
valuable source of additional returns for institutional
investors.
Asset owners such as pension funds might earn only 2 or 3
basis points annually from lending out widely available
assets such as large US stocks.
Less easily available assets, such as emerging markets
equities that are also known as specials, can earn 20bp or
more a year if they are in high demand.
Asset owners can earn significantly more if they are
prepared to lend out securities for an extended period in
arrangements known as term loans.
Demand for term loans has risen significantly as a result of
regulatory changes affecting banks, which are now required
to hold high levels of government debt or cash to be able to
meet redemption needs in periods of acute market stress.
Duncan Willsher, head of the custody research at Towers
Watson, the consultancy, says the increased demand for
term loans has provided asset owners with opportunities to
earn real money from securities lending.
Some clients might be missing out on revenue opportunities
by not agreeing to term loans, he says.
Regulation: transparent, resilient sources of financing
Although many observers believe moves by regulators to
impose stricter rules on securities lending could increase the
risk of bubbles developing in asset prices, influential forces
still argue that the practice poses big risks.
The International Monetary Fund warned in July 2015 that
pension funds could create systemic risks to the US financial
system if they were to chase returns by engaging in
securities lending.
More needs to be done in the area of securities lending and
cash collateral reinvestment to ensure that risks are properly
appreciated and managed, the IMF said.
It called for comprehensive disclosure requirements to be
imposed on securities lending activities, adding that it was
otherwise impossible to understand the full extent of the
risks facing investors.
Publicly available data on securities lending activities

remains scarce but this is set to change. The Financial
Stability Board, the body that co-ordinates financial
regulators worldwide, published proposals in November for
gathering data on securities lending on a global basis from
the end of 2018.
Mark Carney, the governor of the Bank of England and
chairman of the FSB (pictured), said that the improved
gathering of data would help transform securities financing
markets into more transparent and resilient sources of
financing that would better serve the needs of the [global]
economy.
News Asia
Chinas Consumer
December
Inflation
Edges
Up
in
Taken from the WSJ Saturday, 9 January 2016
Chinas December and 2015 CPI figures remain well below

Beijings suggested ceiling
Chinas consumer inflation edged higher in December on
rising food prices, signaling that demand may be stabilizing
at a low level in the worlds second-largest economy.
But the consumer price indexes issued Saturday for last
month and all of 2015 remained well below the
governments suggested ceiling, giving Beijing ample room to
pursue easy money policies this year as manufacturers
continue to struggle in a weakening economy.
The inflation profile remains soft, said Commerzbank AG
economist Zhou Hao. China will maintain a relaxed
monetary policy to reduce the local borrowing cost for
corporates. Mr. Zhou added that yuan exchange rates are
expected to weaken further as China attempts to reduce its
external debt.
The National Bureau of Statistics said Chinas CPI rose 1.6%
in December from a year earlier, slightly above Novembers
1.5% increase. The rise was in line with the median forecast
of 15 economists polled by The Wall Street Journal.
For all of 2015, CPI rose 1.4%--its slowest annual increase
since 2009 and well below Beijings goal of keeping last
years inflation below 3%. This compared with a CPI increase
of 2.0% in 2014.
Food prices rose 2.7% in December, up slightly from
November, while nonfood items rose 1.1%, matching
Novembers increase.
Vegetables seem to be a bit more expensive recently, said a
45-year old Beijing homemaker wearing a cream-colored
down jacket who gave her surname as Li, adding that she
hasnt noticed much change in the price of meat or fruit.
Ms. Li said her family isnt planning on buying any new
appliances but might purchase a car if it can win a license
plate, which are allocated in Beijing by lottery to reduce
congestion and pollution. Most of the time, if I need
something, Ill just buy it, she said.
Chinas depreciating currency could add to inflationary
pressure by pushing up the cost of imported goods in yuan
terms, said Oliver Barron, China research director with
investment bank North Square Blue Oak. In addition, Beijing
will likely have to ease monetary policy to cushion the
impact of industrial restructuring and rising debt levels.
So a potential benefit if inflation is below target is the
reform aspect, Mr. Barron said. Its easier when inflation is
low.
Chinas producer-price index declined 5.9% in December
from a year earlier, unchanged from the decline in
November. It was the PPIs 46th consecutive monthly decline
as Chinese manufacturers continue to battle fierce price
pressure and fight overcapacity.
For all of 2015, the PPI fell 5.2% compared with a decline of
1.9% in 2014.
Less downward pressure on prices at the factory gate in the
coming months would signal that the government is serious
about reducing excess capacity, although progress is likely to
be incremental, Mr. Barron said. Theres still huge
overcapacity in the industrial sector thats not being
addressed, he said. I think the governments push to
address overcapacity this year will go slowly.
While lower prices help an economy if consumers and
companies use the savings to buy and invest, protracted
price declines may encourage them to delay spending in the
belief that waiting will result in still lower costs in the near
future, dragging down already slowing growth.
---
China Starts 2016 Off With a Crash
Taken from the Barrons Online Saturday, 9 January 2016
Asia started 2016 inauspiciously. On Monday, Chinas stock

markets triggered its new circuit breaker on the very day it
was launched. Last Thursday, Chinas markets took a break
after only 15 minutes of trading, then closed for the day
after 30 minutes. After Beijing suspended the circuit breaker
later that day, the CSI 300 Index closed slightly up Friday,
though the benchmark fell by 9% on the week.
Unlike Japanese investors, Chinas stockholders get nervous
when the currency weakens. Chinas central bank started
the year bolder than expected. The bank lowered its yuan
fix rate past the psychologically important 6.5 per dollar on
Monday, the first time since 2011, and down by 0.5%, to
6.5646, on Thursday, the steepest drop since last Augusts
surprise devaluation. Offshore yuan, which isnt subject to
the 2% trading band and is viewed as a more marketoriented rate, tumbled as much as 1.8% in four days.
Traders were also nervous about a massive lockup expiry on
Friday. On July 8, amid the earlier market meltdown, Beijing
banned shareholders with more than 5% stakes from selling
for six months. This lockup, which had been scheduled to
end on Jan. 8, represents more than 1.1 trillion yuan of
stock holdings, or 5.8% of the total free-float market
capitalization, estimates Goldman Sachs. We will probably
see about CNY100 billion ($15.15 billion) per month in selling
from company insiders, warned Citi Research.
NOT HELPING MATTERS was the poor design of the circuit
breaker. It was designed to suspend trading for 15 minutes if
the CSI 300 Index moves beyond 5% in either direction, and
to close trading for the day if it blows past 7%. But the
thresholds are too tight, says Deutsche Bank strategist
Yuliang Chang. In the U.S., the circuit breaker kicks in if the
Standard & Poors 500 drops more than 7% and 13%, and halts
trading completely at 20%. On Monday, it took more than
two hours for the CSI 300 to hit 5%, but only five minutes to
reach 7%; on Thursday, the CSI 300 hit 7% three minutes
after trading resumed. Driven by retail investors, China is
one of the worlds most volatile markets. Over 2% of the
trading days there close beyond the 5% threshold, compared
with 0.6% in the U.S.
To be sure, we can expect China to calm down as Beijing
scrambles to assure investors. On Thursday, besides the
suspension of the circuit breaker, Chinas securities regulator
said that in the next three months major shareholders can
sell only up to 1% of outstanding shares and must disclose
their intent 15 days prior to sale. The central bank injected
CNY190 billion into the banks, the most in almost a year, and
guided its yuan fix rate higher on Friday. Although the
breaker is gone, individual stocks in China cant move
beyond 10% in one day.
The worst may be yet to come. Company insiders will want
to sell their shares. Last year, taking advantage of the bull
market, they net sold CNY456 billion in the first half, but
had to reverse course, net buying CNY252 billion in the
second half after Beijing nudged them to prop up the stock
markets.
It isnt yet time to buy the rest of emerging markets, either.
For every one-percentage-point drop in the yuan, emerging
markets fall by 1.1%, Goldman estimates. The Street now
sees onshore yuan falling to 6.8 to seven per dollar this year,
or another 3% to 5.7% decline.
(Full article click - Barron's)
---
Kazakh sovereign wealth fund is latest victim of

oil price fall
Kazakhstans $64.2bn sovereign wealth fund has become the

latest victim of the collapse in the price of oil and is
predicted to be completely drained by 2026.
Billions of dollars are expected to be pulled from global
asset managers as a result.
The assets managed by the national fund in Kazakhstan,
which relies heavily on oil to finance its economy, have
fallen by 16 per cent to $64.2bn in just 18 months. During
the same period, the price of oil has plummeted to $33 from
$115 a barrel.
As the price of oil fell last year, government funds across the
world pulled money from asset managers at the fastest rate
on record. At least $19bn was withdrawn by state
institutions during the third quarter of 2015, according to
eVestment, the data provider, denting investment managers
profits in the process.
The Kazakh fund, which was set up in 2000 and is financed
through tax and royalties from the commodities industry,
does not disclose the external managers it uses, but about a
third of its assets are thought to be run by global fund
houses. The rest is mainly invested in high-grade sovereign
bonds.
According to documents seen by the FT, which were shared
between officials at the National Bank of Kazakhstan, the
countrys central bank, the sovereign fund will be depleted
within 10 years if oil prices stay low and the government
continues withdrawing cash to prop up the struggling
country.
Berik Otemurat, chief executive of the central banks
National Investment Corporation, which was set up to
diversify the banks investment approach, said: [The fall in
assets in the national fund] is a very serious issue for the
country. It is very critical that the government takes action
on this and does something to prevent the fund being
depleted.
He added that if the fund, which has returned less than 2
per cent a year on average over five years, does not invest in
riskier and less conservative assets, the vehicle will have to
be wound up sooner.
The National Bank of Kazakhstan, which has total
responsibility for the fund, declined to comment. The bank
is in the process of a reorganisation, following the
replacement of its governor last November. Mr Otemurat
believes his job is at risk.
The Kazakh government, which has said it expects to
withdraw $28.8bn from the sovereign fund over the next
three years, did not respond to a request for comment.
Kazakhstan, the 18th largest oil producer in the world, has
been hit hard by falling commodity prices. The countrys
autocratic president, Nursultan Nazarbayev, warned last year
that the country faced a real crisis as the central Asian
states budget revenues fell by 40 per cent.
The country is embarking on an ambitious privatisation plan,
offering stakes in its largest state-owned enterprises to
international investors, as it attempts to prop up its balance
sheet.
Samruk-Kazyna, the countrys other sovereign wealth fund,
is planning to sell KazMunaiGas, the oil and gas company,
and Kazakhtelecom, the largest telecoms company, as well
as several other businesses.
A person familiar with the matter in Kazakhstan, who did not
want to be named, said: [The national fund] has been
created as a vehicle for a rainy day. It is OK that it [the
funds assets] are increasing on a good day and depleting on
a bad day.
BlackRock, Franklin Resources, Invesco, Aberdeen and the

fund arms of US banks State Street, JPMorgan and Goldman
Sachs all suffered large outflows from sovereign funds last
year.
The outflows are expected to continue in 2016. Robert
Callagy, a senior credit officer at Moodys, the rating agency,
said: Resource-reliant sovereigns will come under
increasing pressure to use [sovereign fund] assets to stop gap
budget deficits and support domestic economies. This should
result in further pullback by [sovereign funds] from external
asset managers.
---
Budget to be revised soon, GST a saviour: Najib

Taken from the Business Times Saturday, 9 January 2016
Revenue shortfall, now at RM30b, may widen should oil

prices remain at low US$30 range
MALAYSIA's budget planners must be experiencing a sense of
dj vu and it's mainly to do with oil.
With global oil prices slumping to a 12-year low of about
US$33 a barrel amid China's economic slowdown and
currency depreciation, Prime Minister Najib Razak confirmed
Malaysia would need to revise its 2016 budget given the
expected revenue shortfall stemming from its US$48 oil
premise in October when the budget was tabled.
While he did not state a date for the revision, he indicated
the fiscal deficit target of 3.1 per cent of gross domestic
product (GDP) could still be met owing to the
implementation last year of a 6 per cent goods and services
tax (GST).
".. If there is no GST, the national deficit will rise to 4.8 per
cent this year and will no longer be 3.1 per cent," he said in
an address to finance ministry staff on Friday, where he also
stated every US$1 drop in oil price would see RM300 million
(S$98 million) less in government revenues.
According to a Bernama report Mr Najib indicated the
revenue shortfall stands at around RM30 billion at present
but it could widen should oil prices remain at the low US$30
range.
Also the finance minister, he highlighted the redeeming role
GST would play as the new tax is expected to rake in an
estimated RM39 billion this year after netting about RM27
billion for the April to December period last year. "So it is
not wrong if I were to say that the GST is the saviour of the
national financial and economic position as a whole."
This is the second consecutive year the net oil and gas
exporter has had to "recalibrate" its budget to reflect
current economic conditions underscored by the collapse in
commodity prices.
The previous revision to the 2015 budget was announced in
January last year after dated Brent slumped by more than
half to US$48 barrel against the government's US$100
assumption. Then, the fiscal deficit target was tweaked to
3.2 per cent for 2015 instead of 3 per cent and governmentlinked companies were told to hold off overseas investments
in a bid to not weaken the ringgit further. In his address on
Friday, Mr Najib alluded to agencies' "optimising expenditure"
and hinted government-linked companies would likely be
roped into greater national service.
Recently civil servants were instructed to be thriftier and
the Cabinet reminded to spend allocations "prudently".
Even so, considering the wasteful extravagance unearthed by
the Auditor-General in his near quarterly reports, no one is
holding their breath. Indeed, many took to social media to
poke fun at Mr Najib after he posted his "prudent" reminder
on Facebook.
His remarks about GST coming to the country's rescue met
with even more scathing remarks since many blame the
unpopular tax for the significant rise in prices although some

of the increases are due to the shrinking ringgit. "Why is
there even a need for GST?" many asked, some adding if it
was needed only because of the massive financial mess
state-owned 1MDB created for itself.
Others pondered why despite the many years of oil price
boom Malaysia continues to run 19 straight years of a budget
deficit and has little reserves. "Speaking of savings, did the
govt not save for a rainy day or did they expect the sun to
always shine?" youcandobetter asked.
A number of businesses have already folded under cost
pressures while tax-payers - especially urbanites - are angry
at having to shoulder numerous additional expenses - for
instance, guarded security because of the crime problems
and the toll that badly maintained roads and tolled highways
that are often congested anyway exact on their vehicles and
time.
The last budget revision did nothing to stem the ringgit's
plunge - the currency is now about a fourth smaller and is
expected to shrink further although analysts differ on how
much more from its present 4.42 to the US dollar.
Analysts observe that little headway has been made by an
economic action committee established in August to tackle
the problems. While Nomura had been confident the fiscal
deficit target of 3.1 per cent would be met because of GST
takings, Bank of America Merrill Lynch had pencilled in a
wider deficit of 3.5 per cent as it is of the view that
consumption has been badly hit and GST forecast earnings
are overly optimistic.
(Full article click - BT)
---
China's largest bank buys huge 1,500-tonne

gold vault in London
Taken from the Telegraph Saturday, 9 January 2016
ICBC Standard Bank has also applied to become a clearing

member of the London gold and silver over-the-counter
business
China's largest bank is buying the lease on Deutsche Bank's
huge London gold and silver vault, enlarging its footprint in
the city's bullion market, according to reports.
ICBC Standard Bank, which took a controlling stake in
London-based Global Markets business last year, has also
applied to become a clearing member of the London gold
and silver over-the-counter business.
The Chinese and South African lender is aiming to fill the gap
left by Western banks, which are retreating from
commodities to cut costs and reduce regulatory burden.
"They [ICBC Standard Bank] have taken on the lease for the
vault," Reuters quoted a source as saying.
Currently, five banks - JP Morgan, HSBC, Bank of Nova
Scotia, Barclays and UBS - settle daily bullion transactions
between dealers, amounting to more than $5 trillion-worth
of metal each year in the London over-the-counter market.
These banks are shareholders of the London Precious Metals
Clearing company. They will decide whether to accept or
reject ICBC Standard Bank's application within the next few
months.
"They are applying for clearing membership at the moment,
but that's still subject to a vote, which has not taken place
yet," the source said.
The vault became operational in June 2014 and has a
capacity of 1,500 tonnes. It was built and is managed by
G4S.
"The figure that was initially talked about may have been
around $4m, but it's way lower now," another source told
Reuters, without disclosing the figure paid for the vault.
Deutsche Bank resigned as a clearing member in 2015, after

closing its physical precious metals trading arm and
withdrawing from gold and silver benchmark price setting.
---
Japan's Asahi to submit bid next week for

SABMiller's Grolsch and Peroni: Yomiuri
Taken from the Reuters News Saturday, 9 January 2016
Japanese beverage maker Asahi Group Holdings Ltd (2502.T)

will submit a bid as early as next week to buy SABMiller PLC's
(SAB.L) Grolsch and Peroni beer brands for as much as 400
billion yen ($3.41 billion), the daily Yomiuri reported.
If accepted, it would be the biggest overseas beverage
acquisition ever by a Japanese company, topping Kirin
Holdings Co Ltd's (2503.T) $3.3 billion takeover of Australia's
Lion Nathan in 2009, the paper said.
Asahi Holdings officials could not be reached for comment.
Anheuser Busch InBev SA (ABI.BR), which agreed to buy
SABMiller for $100 billion plus, has been seeking potential
bidders to buy Grolsch and Peroni, sources close to the
process told Reuters last month.
Peroni and Grolsch are small, premium brands and AB InBev
wants to avoid getting bogged down in regulatory scrutiny
over a European portfolio that already includes Corona and
Stella Artois, the sources said.
Indicative offers are due in mid-January, with a tight
schedule for due diligence in order to clinch a deal by early
March, the sources said.
The sources had estimated a potential combined value for
Peroni and Grolsch of about 1.8 billion euros ($2 billion),
based on earnings before interest, taxes, depreciation and
amortization (EBITDA) of 120 million to 150 million euros and
a possible multiple of around 12 times EBITDA.
(Full article click - Reuters)
---
Japan still feeling sick after too many years of

central banks bad medicine
Taken from the SCMP Sunday, 10 January 2016
Bank of Japan governor Haruhiko Kuroda suffers from the

delusion that an inflation rate of 2 per cent will cure all his
problems
One of the drawbacks of appointing career civil servants to
head the worlds central banks is that they rarely understand
why its not a brilliant idea to throw good money after bad.
Admittedly, persistence is sometimes a virtue and proves the
right course. Just as often, however, particularly in a
competitive financial marketplace, it is not. If you wish to
survive there you must be prepared every now and then to
say, Oops, got that one wrong. Sorry. Lets try another
way.
Civil servants do not work in a competitive marketplace.
They do not say, Oops. They do not say, Sorry. They use
words like strongly and absolutely and as Ive always
said. They are sure of themselves and neither people nor
facts can tell them they are wrong.
Take the record of the Bank of Japan. In the United States
people are puzzled that their central bank, led by an
academic (just as bad), has applied the medicine of a zerointerest rate policy for seven years and still the patient is
bedridden. How much more puzzled must they be in Japan
where, as the first chart shows, Mr Kuroda, a career civil
servant, and his predecessors have tried that medicine for
more than 20 years with even less of a result. In fact the
patient has sickened further.
In a commercial bank the clock would be ticking and others
would be waiting in the wings with different ideas if the
profit and loss account does not soon show results. Central
bankers, however, like the pope, are never wrong and never
sacked.
Take also the evidence of the second chart. Mr Kuroda
believes that an inflation rate of 2 per cent would solve all
his problems. This is a delusion that commonly afflicts
central bankers. It may quite naturally lead you to ask why
higher living costs is a better thing than stable living costs or
even lower ones. Good question and not one to which Mr
Kuroda has ever given a satisfactory answer. He is of the
view that if a booming economy brings higher prices then it
stands to reason that higher prices should bring a booming
economy. Mr Kuroda, as I believe I have mentioned, is a
career civil servant. But the effort to achieve this 2 per cent
inflation rate target has undoubtedly been successful.
Consumer prices in Japan are now just a smidgin over 2 per
cent higher than they were 20 years ago. Did we forget to
mention that this was to be a yearly target? Oh well.
And, in order to achieve this applause-worthy result, the
government of Japan has pushed its sovereign debt to the
equivalent of 215 per cent of gross domestic product. Put
this into perspective. Even the US federal government, with
US$19 trillion of debt, has only nudged the 100 per cent
mark on this ratio.
Bolder steps, you know, and doing whatever it takes.
(Full article click - SCMP)
---
Jeremy Warner
Chinas giant threat to global financial stability
It would only take three months of burning through reserves

before Chinas once mighty arsenal looks less than adequate
for such a large economy
For stock markets, its been a grim start to the year, and it
may be that things will get grimmer still before getting
better. Everything rests on China, which is engaged in a
herculean battle to defend its currency, the renminbi,
against a veritable flood of capital outflows.
For those of us who spent the best part of a decade railing
against the iniquities of Chinese reserve accumulation
designed to keep the currency from appreciating and by that
means bolster the competitiveness of Chinese goods this is
a somewhat ironic turn of events.
Well, things have changed, and there is no doubt that it will
be very bad for everyone should the renminbi go into free
fall, setting off a further round of destabilising competitive
devaluation in the region and adding to the already powerful
deflationary forces coming out of China.
You may wonder why these Far Eastern traumas matter to
Britain, less than 6pc of whose exports go to China. You may
also wonder why we are worrying about defence of the
Chinese currency at all when China still has $3.33trillion
(2.3trillion) of foreign exchange reserves to throw at the
problem.
The fire power the Bank of England had to play with back in
1992, when it unsuccessfully attempted to defend the pound
against speculative attack from the likes of George Soros,
looks like a mere pea-shooter against Chinas big bazooka.
Yet the fact is that the Chinese are burning through their
reserves at frightening speed. It would only take three or
four more months of this before Chinas once mighty arsenal
looks less than adequate for such a large economy. In the
meantime, the foreign exchange reserve sell-off is having a
similar effect to a monetary tightening, which is just what
the fast slowing Chinese economy doesnt need right now.
China is caught between a rock and a hard place. It risks
triggering a dollar debt crisis across the region if it allows
the currency to fall, but it further accelerates the economic
slowdown by attempting to counter it.
Faith in Chinas ability to keep growing at a supercharged

rate has always rested on the entirely bogus assumption that
because China is a command economy, it can in some way
defy the usual laws of economics. Looking at the regimes
incompetent series of policy miscalculations the past year,
you would be hard pressed to sustain this view.
---
Tom Stevenson
Investors may end up glad the Shanghai bubble
burst
There are good reasons to think that Shanghai is punching

above its natural weight
Well here we go again. Just as they did last summer, Chinas
volatile stock markets have spooked investors all around the
world. Its been a shocking first week of 2016 and a worrying
portent of returns for the year as a whole if you believe the
moderately compelling long-run evidence that January sets
the tone for the next 11 months.
The key question, though, is whether investors in the rest of
the world have overreacted to a storm in a China teacup. I
think there are good reasons to think that Shanghai is
punching above its natural weight as far as global investment
sentiment is concerned.
The gloomy reading of this weeks turmoil is that we are
continuing to witness the third wave of the deflationary
slump that started in the US housing market in 2007, moved
into the eurozone in 2011 before enveloping emerging
markets a couple of years ago. According to this view of the
world, the ongoing slide in Chinas shares and currency
heralds a further reduction in demand for commodities and
traded goods and will lead to another downturn in global
output.
The less gloomy assessment of this weeks slide in Chinese
equities is that it is just unfinished business from last years
partial deflation of the 2014-15 A-share bubble, and as such
a purely domestic affair. The 45pc slide in Chinas stock
market last summer was painful but it still left Shanghai and
Shenzhen up on the year. A proper purge was prevented by
government intervention as the authorities used the socalled national team of state-owned brokers to engineer a
30pc rally in prices between August and December.
The main trigger for this weeks slide in prices does seem to
have been an expected lifting of a ban on sales by major
shareholders rather than any real concern about the Chinese
economy. Profit-taking after the autumn rally and
anticipatory selling ahead of that relaxation was then
accentuated by new market circuit-breakers. These were
designed to calm trading but actually achieved the precise
opposite as investors rushed to sell before markets closed
for the day.
The authorities in Beijing are learning the hard way that
markets work best when they are left to their own devices.
The consequences of intervention tend to be unintended and
unwelcome.
The truth about the Chinese stock market is that it is largely
uncorrelated with the Chinese economy. When the stock
market doubled in the year before last summers rout, no
one seriously thought that the outlook for China was
improving. It is unrealistic therefore to think that the
bursting of that bubble should have anything more
meaningful to say about the outlook for economic activity.
What we know about Chinese GDP is largely unchanged. The
country is slowing but it is not grinding to a halt. The oldeconomy, northern industrial heartlands are in bad shape
while the coastal, service-sector new economy remains
strong. Both Chinas bulls and its bears tend to focus on one
or other of these stories and extrapolate the evidence to the
whole country. Its a bit more nuanced than that.
The transition from an export and investment-led economy
to one driven by domestic consumption is happening but its
not a smooth process. There are going to be bumps along the
way. The good news for investors is that this two-speed
economy provides excellent opportunities for stock-pickers,
especially as the overall market in China now stands at a
significant valuation discount to those in the developed
world.
Stepping back from China, investors in the rest of the world
may come to be grateful for the popping of the Shanghai
bubble. Thats because of two silver linings to the China
crisis. First, the price of oil and other commodities is likely
to remain low this year. The boost to consumption in net
energy importers has been notable for its absence as
households have chosen to rebuild their personal balance
sheets. Car sales on both sides of the Atlantic suggest the
appetite to spend may be returning.
Second, the Federal Reserves aspiration to raise interest
rates four times this year may start to look like wishful
thinking if markets remain volatile. For the Bank of England,
I dont expect a move this year at all. As for that January
barometer, well it works a lot better in rising markets.
My research into the past 32 years since the FTSE 100 started
shows a rising market in January foreshadows a positive year
as a whole 80pc of the time. When January is negative,
however, its pretty much a coin toss what the rest of the
year holds.
---
China financial system "largely stable": forex

regulator
Taken from the Xinhua News Sunday, 10 January 2016
China's financial system is "largely stable" and foreign

exchange reserves are "relatively abundant", the State
Administration of Foreign Exchange (SAFE) said Saturday.
The official remarks came after the Chinese yuan, under
persistent depreciation pressure, dipped to a five-year low
against the U.S. dollar this week.
The SAFE said in an online statement that it will further
facilitate cross-border trade and investment, and continue
to promote the yuan's convertibility under the capital
account in an orderly manner.
The administration will strengthen the monitoring of China's
balance of payments, and improve the management of
foreign debt and cross-border capital flows.
The SAFE will also try to better operate and manage the
country's foreign exchange reserves.
(Full article click - Xinhua News)
---
North Korea's Kim Jong Un says H-bomb test

self-defensive step against the U.S.
Taken from the Reuters News Sunday, 10 January 2016
North Korean leader Kim Jong Un said the country conducted

a hydrogen bomb test as a self-defensive step against a U.S.
threat of nuclear war and had a sovereign right to do so
without being criticized, state news agency KCNA reported
on Sunday.
North Korea's fourth nuclear test on Wednesday angered
both the United States and China, which was not given prior
notice, although the U.S. government and weapons experts
doubt the North's claim that the device it set off was a
hydrogen bomb.
"The DPRK's H-bomb test ... is a self-defensive step for
reliably defending the peace on the Korean Peninsula and
the regional security from the danger of nuclear war caused
by the U.S.-led imperialists," KCNA quoted Kim as saying.
"It is the legitimate right of a sovereign state and a fair
action that nobody can criticize," he said.
Kim's comments were in line with the North's official rhetoric
blaming the United States for deploying nuclear weapons on
the Korean peninsula to justify its nuclear program but were
the first by its leader since Wednesday's blast.
The United States has said it has no nuclear weapons
stationed in South Korea. But it has been in discussion with
the South about deploying strategic weapons on the Korean
peninsula after the test. Media said these could include
nuclear-capable B-2 and B-52 bombers, and a nuclearpowered submarine.
Experts believe the test, which produced a seismic tremor of
5.1, too small to be a proper hydrogen bomb test, was
designed to set the stage for a rare general meeting of its
ruling Workers' Party, the first since 1980.
Kim noted the significance of the timing of the test as being
held in the year of the party congress, "which will be a
historic turning point in accomplishing the revolutionary
cause of Juche," according to KCNA.
Juche is the North's home-grown state ideology that
combines Marxism and extreme nationalism established by
the state founder and the current leader's grandfather, Kim Il
Sung.
KCNA said Kim made the comments on a visit to the country's
Ministry of the People's Armed Forces.
(Full article click - Reuters)

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