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The S&P might just have catastrophically damaged its credibility. The US Treasury has just issued this rebuttal of S&P’s downgrade of US debt. As if the ratings agencies did not have enough trouble in Europe, they have now given the US government justifiable cause to shake up the present ratings system. This basic error in its calculations appears irresponsibly casual and unprofessional, at the worst possible time. The scapegoating of the ratings agencies in Europe may be ludicrous, but it’s a fair bet that EU politicians are going to make capital out of this. If S&P’s downgrade was motivated by a desire to make up for its shortcomings during the credit bubble, it has seriously miscalculated.

Has Standard & Poor’s Got Its US Numbers Wrong? »

Global Temperatures Fall Way Below IPCC Projections

By Martin Fluck | Published: June 26, 2011

Global temperatures are far below levels that IPCC climate models predicted we’d have even if we “stabilised” CO2 emissions at levels for the year 2000 (orange curve), confirming how worthless climate models are

The actual temperatures (bright blue curve for HadCRUT) show temperatures falling back to 2000 level, while  the darker blue, green and red curves show how much temperatures should have risen, if climate models had any validity.

Posted in Global Warming Scare | 111 Comments

The EU’s Carbon Tax on Airlines Won’t Fly

By Martin Fluck | Published: June 25, 2011

‘Saving the planet’ was always going to bring the EU into conflict with countries not foolish to cripple their industries with anti-carbon taxes. But the EU is now trying to impose its emissions trading scheme directly on non-EU airlines. So it’s not surprising that China has put a shot across the EU’s bows – in what could turn into the first carbon war – by blocking a $3.8 billion dollar order by Hong Kong Airlines for 10 Airbus superjumbo aircraft.

China had already announced its intention to deploy countermeasures against European aviation, if the EU goes ahead and makes all airlines flying into Europe pay to ‘pollute’ from Jan 2012. But only weeks after the head of Airbus and the International Air Transport Associate warned Brussels it faces a trade war with China and other powerful nations, China’s move shows that it really does mean business.

But it’s not only China that the EU is squaring up against, it is also the US. US airlines have mounted a legal challenge, which will be heard by the European Court of Justice on 5 July – though a judgment is not expected for some months. If they fail, the US is likely to mount retaliatory measures with European airlines and Airbus as targets.

Washington has warned the EU that it expects US airlines to be exempted from the EU’s emissions trading scheme. But it now fears that if the EU accepts that China’s announcement of an aviation emissions plan is an “equivalent measure” then US airlines could be penalized.

The EU’s climate commissioner, Connie Hedegaard talks tough, and is warning that caving into the Chinese or the US would set a worrying precedent. However, with 4.5 million jobs at risk, the EU can’t afford a loose cannon like Hedegaard. The question, therefore, is whether French, British, and German governments will take action to reign her in – before rising aviation costs cause serious damage to the global economy.

Pleas by worried European airlines  - who are struggling with a wafer thin 0.7% profit margin – have so far fallen on deaf ears. But perhaps Europe will start listening when China blocks the other deals Airbus has made with Chinese carriers; or if retaliatory sanctions push an industry – whose net profits are already expected to nosedive to $4 billion from $18 billion in 2010 – over the edge.

With the Indian government and others declaring that the forced inclusion of global airlines in the EU’s scheme is illegal, it looks like it will never fly, unless Europe wants to see another industry take wing.

Posted in Companies, Economy, Global Warming Scare, Politics | Tagged , , , , | 98 Comments

Transparently Time to Sell Chinese B Shares.

By Martin Fluck | Published: June 11, 2011

The entire Chinese stock market is feeling the weight of fraud fears, as growing concerns about accounting irregularities in US-listed stocks tars every stock with the same brush.

The overall lack of transparency in Chinese companies and the Chinese economy is now a major liability. China is “the new dot-com” of the investment world, says Martin Wheatley, Hong Kong’s former securities regulator.

The sell-off has turned into a rout following a belated warning from the US Securities and Exchange Commission urging investors to review company filings for foreign companies that have listed in America through reverse mergers. Today, there are more than 500 such Chinese companies in the United States, collectively worth billions of dollars.

Institutional investors with reputations on the line simply cannot afford to stay in China stocks, hoping that they won’t become the victims of fraud. Even Sina.com, a Chinese internet stock which was supposed to be one of the most credible Chinese companies has been hit, as shareholders like Wells Fargo, UBS, T Row Price, and dozens of hedge funds review their stakes.

Understandably, questions are now being asked about the real level of bad and doubtful loans in Chinese banking, and the undisclosed ownership of some of China’s largest companies.

As China’s property bubble threatens to burst, economists like Nouriel Roubini are predicting that China will soon face a massive non-performing loan problem in the banking system and a massive amount of overcapacity that is going to lead to a hard landing. Guaging these risks is made all the harder when investors don’t know the actual pace of credit growth, because of the scale of off-balance sheet lending.

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A Plague of Fraud In Chinese Stocks

By Martin Fluck | Published: June 4, 2011

Corporate governance in China is known to be so appalling that wise investors steer well clear of the mainland. But the big story right now is the number of fraudulent companies listing on Western stock exchanges. Muddy Waters Research, the agency set up by short seller Carson Block, has been exposing one fraudulent company after another. And an SEC investigation is likely to lead to enforcement against a number of accounting firms.

Last week Muddy Waters, which likes to “expose substantial frauds before they suck up more money from investors”, caused a storm when it released a damning report on Chinese forest operator, Sino-Forest, comparing it to Madoff’s ponzi scheme.

Hong Kong based Sino-Forest Corp had apparently been overstating timberland holdings and production in China. The land the company said it bought from Lincang City in China’s Yunnan province doesn’t match city records and it couldn’t have produced as much timber in the area as it claimed.

Fraud has plagued several Chinese IPOs in recent years, including China Energy Savings Technology, Fuwei Films, and China Water and Drinks, Fuqi International, Rino, and China Life Insurance which was plagued by $625 million in “financial irregularities” months after it floated. In total, some 40 Chinese companies have either acknowledged accounting problems or seen the SEC or US exchanges halt trading in their stocks because of accounting questions, since February.

The Sino-Forest scandal follows reports that Chaoda Modern Agriculture Holdings Ltd, a Chinese supplier of fruit and vegetables, exaggerated the amount of land it controls. Muddy Waters has itself caused the shares of Orient Paper to fall 50%, Rino to fall 60%, China MediaExpress to de-list altogether, and Duoyuan Global Water to fall 40%.

Indeed, so tainted by fraud have such Chinese companies become that the Bloomberg Chinese Reverse Mergers Index of US listed stocks has fallen 38% in 2011. Now the SEC is investigating the use of reverse takeovers, in which a closely held firm becomes public by purchasing a shell company that already trades. “Stock manipulators have devised a kind of template for stock fraud — one that exploits fundamental weaknesses in the regulatory apparatus of the two countries — and now use the template to cheat investors in deal after deal,” reports The Street.

What makes this extra interesting is that the SEC is now investigating the accounting firms that audit these firms. Perhaps this will now include Ernst & Young, which audits Sino-Forest.

As for Muddy Waters, it is broadening its scope to include Latin America.

Posted in Companies, Stockmarket | 151 Comments

Update: Call for A Eurozone Break-up

By Martin Fluck | Published: October 10, 2010

A rare column arguing that the peripheral countries of the monetary bloc should simply leave the eurozone by decree, has been published in the Institutional Investor.  Vincent J. Truglia, Managing Director of Global Economic Research at Granite Springs Asset Management, writes that the flawed structure of the eurozone – which was built for political rather than economic reasons – leaves only two questions: 1) How do you handle the shrinking or dismantling of the Eurozone? and 2) What is the timing of such changes?  As the tensions tearing the euro apart will only grow, it’s likely that we’ll see a lot more articles like this one in the future.

Truglia makes some very well made points. Firstly that countries on the periphery have historically dealt with economic or fiscal crises by using their exchange rates and/or domestic interest rates to readjust relative prices:

“These tools were used because not only were they effective, but exchange rate and interest rate changes are easily understood by the local populations as barometers of the seriousness of the problem. That provided the national authorities greater latitude in dealing with needed reforms. In addition, these tools made the reform process considerably less painful to the locals.”

He also pours cold water on the idea that  some countries exiting the Eurozone would spell the end of the European Union:

“There are many good reasons for the EU to continue with its present membership. Throwing out exiting members would be analogous to a person shooting oneself in the foot. It’s pointless and it hurts. Right now, a number of countries presently in the EU do not, and may never, intend to become Eurozone members. Perhaps the best example is the UK.”

At the end of the day the lack of any mechanism to compensate the losing regions doomed the euro from the start.  Just as the unification of Italy caused savings to flow to Northern Italy, and left the southern economy to whither (which had been industrializing around Naples), so the euro benefits the more efficient parts of Europe at the expense of the rest.

The only reason why the eurozone isn’t already being dismantled is beacause politicians generally don’t want to admit failure, says Truglia.  But the false assumptions underpinning the euro – such as the idea that members would inevitably move towards the Euro-mean – are now clear.  And given a pan-EU Federal government similar to Australia, Canada or the U.S. is politically inconceivable, ”the only real solution to the euro’s problems is for most, if not all members, to free themselves from the Eurozone’s strictures by recreating their domestic currencies, and letting their exchange rates float freely. ”

Related: Saving the euro: Tall ambition, flawed foundations [Financial Times]

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California’s Prosperity Terminating Lessons for the UK

By Martin Fluck | Published: September 19, 2010

As if the UK economy doesn’t have enough problems, the new coalition government is going out of its way to create new ones, by pursuing its self-indulgent ‘clean’ energy policy.  You’d imagine that it would be self evident that cutting greenhouse gas emissions by 34% within 10 years is completely hair brained – and reducing emissions by 80% in 2050 is economic suicide.  But developments in California may soon highlight the prosperity terminating effect of such clean energy policies – now that it has become a major election issue in the California midterms.

For now, most Californians apparently believe the propaganda that efforts to cut greenhouse gases actually create new jobs. But severe debt deflation is changing the political landscape. With unemployment at 12.3% and employment appearing to fall again, the economic picture is so bleak that even those who believe in global warming are having second thoughts about California’s Global Warming Solutions Act of 2006 – better known as AB 32.

Mirroring the UK’s greenhouse gas cutting goals, AB 23 requires the state’s CO2 emissions to be reduced by 25-30% to 1990s levels. And despite the population being expected to nearly double to 59 million from 34 million, emissions are to be cut by 80% by 2050.  However, Proposition 23, would suspend AB32 until unemployment stays below 5.5% for four consecutive quarters, has won enough support to be put to a referendum in November.

Former Hewlett Packard CEO Carli Fiorina, who is running for the Republicans, may have been a little hesitant in supporting the initiative – given that 53% of the electorate still support AB 23 – but she is now squaring up to her Democratic opponent, Senator Barbara Boxer, over the issue.  She says AB-23 is a “job killer” and that the science needs to be properly looked at before U.S. companies are put at a severe competitive disadvantage in the global marketplace.  Meanwhile, Boxer, apparently still believes a pathetically small number of green jobs will solve California’s economic problems.

Naturally, such a crackpot policy will not create lots of fantasy green jobs, but only destroy millions of ordinary ones and hobble the economy. Even the California Air Resources Board now admits that AB32 will cost jobs.  A study by Charles River Associates, funded by CARB and using CARB’s own data found the agency’s worst-case assumption of a 1.4% drop in Gross State Product was the best case scenario, and that a $1,175 drop in household income is the best possible result.  Even the loss of 1.1 million jobs, that a 2009 study commissioned by the California Small Business Roundtable forecast, could be conservative.

That the Republicans even have a shot in a blue state like California says a lot about the state of the U.S.. But California’s deficit is $19 billion and ballooning out of control – in large part because of unfunded public sector pensions – and this is having a sobering effect on an electorate who are characteristically eager to follow the latest fashionable cause.

It’s doubtful, though, that they are willing to ‘save the planet’ if it means ruining themselves.  After all, they already have some the highest energy prices in the country.  Judging by the nationwide backlash against the stimulus, labelling Boxer a tax and spend politician may be a vote winner for Fiorina. Boxer in turn says Fiorina is in the pocket of “big oil and dirty coal.”

But as evidence grows of the limited number of jobs the renewable energy industry can create – apart from the ones being exported abroad – it wouldn’t be surprising if support for Proposition 23 gains traction in the next couple of months.

Related: Britain’s Energy Policy Is In Crisis [Daily Telegraph]

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Deutsche Bank Aligns Itself With Disgraced ‘Hockey Stick’ Scientist

By Martin Fluck | Published: September 16, 2010

Deutsche Bank increasingly seems to be in the misinformation business.  Believe it or not, it is now crawling out on a limb that has already broken off, and is trying to defend Michael Mann’s infamous “hockey stick” graph.  After its recent rose-tinted analysis of the global economy, the incompetent and one-sided report on climate change it has just published hardly inspires confidence in the veracity of anything they say – especially following its failure to come clean on its real sovereign bond exposure.

The hockey stick became an icon – and was central to virtually every government’s argument that something had to be done about global warming.  By ‘reconstructing’ temperatures over the past 1,000 years, it conveniently ignored the Medieval Warm Period when temperatures were much higher than today, and showed the earth warming at alarming rate in the 20th century.

But work by economist Ross McKitrick and statistician Steven McIntyre showed that Michael Mann had been cherry picking data to get the result he wanted, as had many others in the scientific community.  A reconstructed temperature series based on tree rings from Siberia – produced by Keith Briffa of the Climate Research Unit at the University of East Anglia – was being used in every termperature reconstruction around.  But by replacing Briffa’s 12 selected tree cores with 34 cores from the same area, McIntyre made the sharp uptick in the series at the end of the twentieth century  vanish, leaving a twentieth century apparently without a significant trend (see chart).

Subsequent studies of Mann’s methodology showed that a hockey stick shaped graph would have been produced even if random numbers had been used.  Climategate then provided further evidence of the lengths some scientists were willing to go to to deceive – and thus the hockey stick has become one of the biggest scientific scandals in history.

Which is why, of course, Michael Mann has distanced himself from the hockey stick.  He now says it was a mistake to make it an icon of the global warming movement.  Odd, therefore, that Deutsche Bank now goes out of its way to defend it.

In ‘Climate Change: Addressing the Major Skeptic Arguments,’ Deutsche Bank Climate Change Advisors attempts to critique the skeptical arguments against climate change.  They say that the soundness of the research and primary conclusions Michael Mann came to were unaffected by any methodological problems!

Never mind its attempt to justify scientific fraud, Deutsche Bank’s report completely fails to properly quote the material it purports to rebut.  This is why Ross McKitrick says it is “shallow and unconvincing” in his ‘Response to Misinformation By Deutsche Bank‘, published by the Science & Public Policy Institute.  It also reflects poorly on Deutsche Bank.

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Update: Germany Heads into the Double-Dip Zone

By Martin Fluck | Published: September 14, 2010

The fiscal austerity being implemented in Greece and the other Club Med countries would soon be felt in Germany because it has been relying on exports to these countries – not China – for growth, the Angry Analyst warned.  Now, German economic sentiment, as measured by the ZEW institute, collapsed in September.  This is particularly significant because it leads the other key indicators produced by the IFO institute – as can be seen from the accompanying chart.   And where this indicator leads, German industrial output is sure to follow

According to the ZEW institute, the collapse in sentiment reflects growing risks at the moment, such as “the slowdown of the US growth and the yet unresolved problems in the eurozone which are for instance reflected by the large interest rate spreads for Greek government bonds.”

Sensationally, former German finance minister Peer Steinbrück admitted today in an interview with Der Spiegel that Greece will not manage to get back on its feet without restructuring its debt. As he says, this will create substantial losses for the creditors including many European and German banks – though he thinks it won’t be a problem for ‘many’ banks.

This would explain why Deutsche Bank was so quick out of the starting blocks, and is now leading the European banking field in raising more capital. The German bank says it will raise at least €9.8bn via a fully underwritten rights issue, with the preliminary subscription price set at €31.80.  It may have “first mover advantage,” but given that a week is a very long time in finance these days, one wonders what the final subscription price will be when it is announced on 20 Sep – and how much more its shareholders will have to be diluted.

The suspicion must be that funding the consolidation of Deutsche Postbank is a convenient FIG leaf.  The real reason why it needs the money is surely that Deutsche Bank knows that it will need as much capital as possible to weather the approaching storm in German banking.

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More Evidence of German Banking Untruths

By Martin Fluck | Published: September 12, 2010

As if further evidence was needed that the German banks have been lying about the true state of their balance sheets, and that a German banking crisis is in the offing, we learn that German mortgage lender Hypo Real Estate will receive another €40 billion of state guarantees.

It’s a move that can only fuel suspicions that the European sovereign debt on its balance sheets is going sour.  And the news is likely to be taken very badly by the market, following as it does on the heels of Deutsche Bank’s new capital raising efforts.

Germany’s Soffin bank-rescue fund said Hypo Real Estate needs the funds to “safeguard restructuring efforts,” but the real reason for the move is probably that the record risk premium on Irish debt is reducing the value of its lunatic Irish mortgage ‘investments.’  The German government took over Hypo Real Estate in 2009 after the lender’s Dublin-based Depfa Bank Plc unit couldn’t raise any financing – thus becoming Germany’s biggest bank failure since World War II.

Soffin said that it needs the extra funds to avoid any “liquidation bottlenecks” when it shifts €180-185 billion in toxic ‘non-strategic’ assets to FMS Wertmanagement, its planned bad-bank – which has yet to be approved by the E.U..  In other words, “unfavourable” market developments are causing a plunge in Hypo Real Estate’s remaining assets.

This shouldn’t come as that much of a surprise, though.  In July, Hypo Real Estate was the only German bank to fail European Union-wide stress tests which were merely cosmetic, as we’ve learnt.  That must have taken some doing

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The First Green Energy Trade War?

By Martin Fluck | Published: September 11, 2010

If Congress votes to penalize Chinese imports and start a trade war it may have a lot to do with the Democrats’ frustration at their inability to build a homegrown clean energy sector. After all, it would be particularly embarrassing if the companies the stimulus has already invested in and which President Obama has boasted about being “the future” were to go bankrupt.  So, because the green stimulus has failed to live up to the hype, and mostly created new jobs abroad, leading Democrats may now think the answer is to restrict imports.

Only this week Obama said that he “doesn’t want to see new solar panels or electric cars or advanced batteries manufactured in Europe or in Asia.”  Yet, as much as 80% of some green programs, including $2.3 billion of manufacturing tax credits, went to foreign firms that employed workers overseas, rather than in the U.S., according to the Department of Energy.  So only 82,000 jobs have been created, rather than the 190,700 jobs the White House claims.

The administration’s efforts to create jobs through “green” energy projects have proved “disappointing, if not dismal,” reports the Washington Times.  Because green subsidies merely create jobs in China, and other countries like Germany, Spain, Japan – a study of 11 U.S. wind farms used their grants to purchase 695 out of 982 wind turbines from overseas suppliers – the job creating benefits of green stimulus spending has been “squandered.”

The administration’s appetite for pushing green projects as an economic cure may have been “killed” as the Washington Times says.  But there’s still enthusiasm for it in the Democratic party.  And besides, the problem with job leakage that affects clean energy is one that affects other high-tech industries benefitting from artificially valued Asian currencies.

Chinese manufacturers in particular have taken the lead in making renewable-energy components, through massive subsidies and its access to cheap labor – which is why the United Steelworkers union have filed a complaint.

And job leakage overseas will only get worse, because the U.S. is the only major developed country still flooding the market with government funding.  As governments in Europe and Japan drastically cut back on their green subsidies, competition from overseas suppliers will only grow.

Never mind that wind and solar contribute less than 1% of total U.S. energy production.  And never mind that the only way that clean energy can possibly compete with cheaper traditional fuels, such as gas and coal, is though a constant infusion of government funding and by purchasing the least expensive equipment.  President Obama simply wants to save face.

Given the importance of maintaining face in Chinese relations – because it translates into power and influence – that is surely something that the Chinese will understand.

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