Sunday, March 1, 2015

Big Banks Face Scrutiny Over Pricing of Metals

If you are an investor in precious metals you should be outraged, unless you read This Time It's Different Not. Aivars Lode
By Jean Eaglesham and Christopher M. Matthews
U.S. officials are investigating at least 10 major banks for possible rigging of precious-metals markets, even though European regulators dropped a similar probe after finding no evidence of wrongdoing, according to people close to the inquiries. 
Prosecutors in the Justice Department’s antitrust division are scrutinizing the price-setting process for gold, silver, platinum and palladium in London, while the Commodity Futures Trading Commission has opened a civil investigation, these people said. The agencies have made initial requests for information, including a subpoena from the CFTC to HSBC Holdings PLC related to precious-metals trading, the bank said in its annual report Monday.
HSBC also said the Justice Department sought documents related to the antitrust investigation in November. The two probes “are at an early stage,” the bank added, saying it is cooperating with U.S. regulators. 
Also under scrutiny are Bank of Nova Scotia , Barclays PLC, Credit Suisse Group AG , Deutsche Bank AG , Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Société Générale SA, Standard Bank Group Ltd. and UBS AG , according to one of the people close to the investigation.
Bank representatives declined to comment or couldn’t be immediately reached. A CFTC spokesman declined to comment, as did a spokeswoman for the Justice Department. 
The precious-metals probes are the latest example of regulatory scrutiny into how the world’s biggest financial institutions influence widely used benchmarks. Until last year, prices for gold, silver, platinum and palladium were set using a decades-old practice of once- or twice-a-day conference calls between a small group of banks. The process for setting each of the price “fixes” has since been overhauled.
Benchmarks for the four precious metals affect jewelry prices and financial products such as exchange-traded funds. U.S. commercial banks regulated by the Office of the Comptroller of the Currency had $115.1 billion of precious metals-related contracts outstanding as of Sept. 30.
Previously launched investigations of the interest-rate and foreign-currency markets have led to billions of dollars in settlements from major financial firms. Related probes are continuing in the U.S. and Europe, with additional cases against firms and individuals by the Justice Department expected in the coming months, according to people familiar with the matter.
In the interest-rate investigations, banks often reached settlements with U.S. and U.K. regulators, which made similar allegations of collusion in the rate-setting process. In contrast, the U.K. Financial Conduct Authority and German financial watchdog BaFin reviewed the precious-metals benchmarks but closed their inquiries without finding evidence of wrongdoing, according to people familiar with those probes.
Robert Hockett, a law professor at Cornell University, said it is “not particularly surprising” that the Justice Department is plowing ahead despite the decision by European regulators. Recent scrutiny of big banks’ operations in the physical commodities markets and criticism of the Justice Department’s financial-crisis track record make it “quite understandable” that the agency would investigate allegations of precious metals price-rigging.
Last year, the FCA fined Barclays £26 million ($40.2 million) for lax controls after one of its traders allegedly manipulated the gold fix at the expense of a client. 
The bank said at the time that it regretted the situation that led to the settlement and has enhanced its controls. A Barclays spokesman declined further comment.
Swiss regulator Finma settled last year allegations of foreign-currency manipulation with UBS. The regulator said it found “serious misconduct” among precious-metals traders at UBS, including “front running,” or trading ahead of, the silver-fix orders of one client. A spokeswoman for UBS, which said at the time that it “instituted significant cultural and compliance changes,” declined further comment.
Some of the banks under scrutiny by the regulators are also fighting potential class-action lawsuits filed by investors, traders and other plaintiffs in a federal court in Manhattan.
More than 25 lawsuits have been filed against Barclays, Deutsche, HSBC, Bank of Nova Scotia and Société Générale over their alleged role in setting the gold fix. The plaintiffs are seeking damages for losses suffered due to the alleged manipulation of the price of the metal and gold derivatives. Law firm Berger & Montague, the court-appointed co-lead counsel for the proposed class-action suits, said the gold fix affected trillions of dollars worth of gold and related financial contracts.
Jewelry company Modern Settings LLC last year sued the firms that used to set the platinum and palladium fixes. The proposed class-action suit seeks unspecified damages from Goldman, HSBC, Standard Bank and BASF Metals Ltd, a unit of chemical giant BASFSE, for losses suffered from their alleged “nearly eight-year unlawful conspiracy to manipulate and rig” the metals benchmarks. 
The banks and BASF are fighting the lawsuits.
Meanwhile, the CFTC and Justice Department are pushing ahead with an investigation into another interest-rate benchmark, according to people familiar with the probe. Investigators are scrutinizing whether bank traders or brokers were involved in the potential manipulation of the ISDAfix, a measure used widely in areas such as setting payout rates on pension funds and determining the cost of real-estate loans.
Representatives of the agencies declined to comment.

BHP Profit Falls as Commodity Prices Slide

Now resource companies profits are hit because of the commodity slow down. Aivars Lode

Miner Deepens Cost-Cutting to Counter Resources Slowdown

By Rhiannon Hoyle
SYDNEY— BHP Billiton Ltd. reported a 47% decline in first-half profit amid a downturn in world commodity markets, and said it had further deepened cost-cutting to counter weaker prices as a decadelong resources boom fades. 
BHP—the world’s biggest mining company by market value—said it recorded a net profit of US$4.27 billion for the six months through December, down from a US$8.11 billion profit a year earlier. The result was higher than the median US$3.59 billion forecast of six analysts polled by The Wall Street Journal.
Prices of two of BHP’s most important commodities, iron ore and oil, halved in value last year. Iron ore alone previously accounted for nearly half of the group’s earnings. 
Demand has been outpaced by a supply surge from projects planned when prices were booming. New production has come at a time when China’s economy is slowing and concerns about global growth are rattling confidence. 
The company said noncash charges against assets including some oil fields in North Louisiana reduced its earnings by US$938 million. 
Still, BHP said it would lift its interim dividend 5% to US$0.62 a share. It also said it had no plan to rebase its dividend lower following a proposed demerger later this year, implying a higher underlying payout ratio is on the horizon, it said.
“While revenues were marginally below expectations, a strong cost performance, in particular in iron ore, has seen BHP come in ahead of expectations” on profit, said Sydney-based RBC Capital Markets analyst Chris Drew.
BHP said it continued to squeeze costs across all its businesses, and had cut unit costs in its iron-ore business in Western Australia by 29% over the past six months. Costs in its coal business in Australia’s Queensland state were down 15%, it said.
“We continue to surprise ourselves” in terms of the scale of cost reduction and productivity gains being achieved across the business, Chief Executive Andrew Mackenzie said on a conference call.
The miner expects to record more than US$4 billion in annual productivity gains by mid-2017, it said. 
Net debt was lowered by US$847 million over the six-month period, to US$24.9 billion.
The company meanwhile lowered its projections on future capital expenditure. It now forecasts a budget of US$12.6 billion in the current year through June, 15% below earlier estimates. It expects that to fall to US$10.8 billion in the following year.
BHP is overhauling its strategy to focus on producing iron ore, copper, coking coal and petroleum. It intends to spin off assets including nickel pits and aluminum smelters into a separately listed company, named South32, by midyear.
Management separately said they expected sustained growth in China, stronger consumer spending in the U.S. and lower energy prices to underpin an improvement in global economic activity over the remainder of 2015.

U.S. Productivity Now Grows Faster Than Jobs. What Changed?

Productivity up, not jobs. I commented a number of years ago that there will not be a job recovery because of technology. Glad that this has now been observed. Aivars Lode

Some economists call it the “great decoupling.”

For decades, U.S. productivity and total employment rose in lockstep. From 1953 to 1999, average annual growth in productivity was 2.1%, exactly the same as growth in jobs. As the U.S. grew richer and its workers generated more output with the aid of better machines, it created a correspondingly healthy number of new jobs.

But at the turn of the century, something changed. Since 1999, productivity growth kept rolling along at 2.1%–but job growth has slumped to an average of 0.5%. Part of the problem can be traced to the last recession, which hit the job market hard and was followed by an extremely slow recovery.

Beyond that, economists see two other longer-lasting forces at work: globalization and technological advances. The offshoring of work has helped make U.S. businesses more efficient, while new machines allow the remaining U.S. workers to produce more with less.
“Technological progress has been a big cause—and my prediction for the future is that it will be an even bigger force going forward,” says Andrew McAfee, a management professor at the Massachusetts Institute of Technology’s business school who studies the trend. 

Advanced automation keeps pushing up output, he says, “but there’s less and less demand for good old-fashioned human labor.”

Mr. McAfee notes there’s been a similar decoupling in recent years between productivity and wage growth.
Mr. McAfee co-authored a book about the impact of automation on the job market with fellow MIT professor Erik Brynjolfsson, entitled “Race Against the Machine.”

It's official: February was Toronto's coldest month ever

There are certain types of people that will tell you that the coldest month in Toronto’s record was caused by man made global warming. Whoops... They changed that to global climate change so that they can explain these anomalies. Aivars Lode

By Sam Colbert  
Brag to your family: You just survived Toronto's coldest month in recorded history. 
Despite the ridiculous cold, people still flocked to the Beach to do selfies with nature's ice sculptures last month. 
Brag to your family. Print it on t-shirts. Whine to your heart’s content.
The numbers are in: February was Toronto’s coldest month in recorded history. And spring is just a few weeks away.
“Canadians laugh at us,” said Environment Canada’s senior climatologist David Phillips. “We’re often the brunt of all kinds of jokes here in the city because of our weather.
"Well hey, Canada, we just earned our badge of courage. Nobody alive today has ever experienced a colder month in Toronto than we did this month.”
Technically, it was a tie. February 1875 was exactly as cold at an overall average temperature of -12.6 C. But not even your grandparents can claim to recall that 140-year-old record.
In the past 37 frigid days, the daily high never broke the melting point – peaking at -1.4 C. The lowest of the lows in February dropped to -25.5 C, with a wind chill that neared -40 C. Twenty-three days were labelled extremely cold by Toronto’s Public Health department. That total well exceeded February 2014’s 12 alerts, and the three in February 2013 and two in February 2012.
February normally averages out -4.5 C — more than eight degrees warmer than this year.
Phillips said that, between a population boom, climate change and major infrastructure development, it’s remarkable that Toronto could get as cold as it did in 1875. “Cities are different now,” he said. “They’re urban heat islands.”
This week, Environment Canada is forecasting a high above 0 C for the first time since Jan. 24, with a single degree of warmth expected to last through Tuesday and Wednesday along with chances of snow and rain. In 1976 and 1977, a 51-day stretch of sub-zero chills lasted from Dec. 21 to Feb. 9. That’s a record Toronto won’t likely beat this year.
It didn’t break the coldest day record, either. Jan. 4, 1981 got down to -31.3 C.
The previous coldest month record in the Pearson Airport measurements was the January 1994 average of -12.4 C.
Measurements at the University of Toronto campus began in 1842. Pearson, which is the source of the city’s modern data-of-record, started collecting measurements in 1937.
Beyond Wednesday, daily highs are expected to drop back down to the single digits below freezing. But March is generally about five degrees warmer than February, said Phillips, and the countdown is on to the first day of spring on March 20.
For all Phillips’ interest in the cold, he wasn’t even around the experience it. He just got back from Florida.
“I’m kind of sad I wasn’t here to break that record.”
February 2015: By the Numbers
Record-breaking average overall temperature: -12.6 C
Average daily high: -8.3 C
Average daily low: -16.9 C
Warmest point: -1.4 C (Feb. 4)
Coldest point: -25.5 C (Feb. 15)
Days in a row below freezing: 37 (as of March 1)

Spooked by Yuan Drop: China’s Top 1%

So you think the USA is finished? Think again. Many predicted the fall of the US dollar as the reserve currency and the rise of Euro or the Chinese RMB; that does not look to be the case now. As we highlighted a number of years ago, there is just too much trust at the moment in the Chinese system. Over time this will change; just the sheer number of people in China and the size of its economy as it continues to grow will overshadow the US economy. Aivars Lode

Fears the megarich will take flight puts a floor under the currency’s slide against dollar
By Andrew Browne 
SHANGHAI—China’s superrich are nervously watching as the Chinese currency weakens against the dollar.
Because of the extreme concentration of money at the apex of Chinese society, national stability rests to an extraordinary extent in the hands of just two million or so families. They are the top 1% of urban households, and already, their confidence in China’s future under President Xi Jinping is shaky.
Many are fleeing with their cash--not all of it, but enough to bid up prices of luxury real estate from Mayfair to Manhattan to Mission Bay, a waterfront neighborhood of Auckland, New Zealand. 
Financial authorities are trying to ensure that the remainder doesn’t disappear across the borders. A potential trigger for a disorderly exodus of capital, one that could threaten the entire fragile financial system, would be a precipitous decline in the value of the Chinese currency.
That’s one reason—an important one—why a sharp yuan drop is unlikely, even though a slowing economy is increasing domestic pressure on the government to let the yuan fall in a bid to boost exports.
Indeed, in recent weeks there’s evidence that financial authorities are reversing years of intervention in foreign-exchange markets aimed at stopping the yuan from rising too rapidly against the dollar: Now the government appears to be surreptitiously propping it up—or at least to try to prevent a too-sharp decline.
One sign of reassurance that the yuan won’t be allowed to plunge came last week from a senior State Administration of Foreign Exchange official, who was quoted by the official Xinhua News Agency quoted as saying the yuan would remain “basically stable” in 2015.
That doesn’t mean the yuan will halt its gentle downward trajectory. It lost about 2.5% against the dollar last year and has edged down almost 1% so far this year. However, against the currencies of China’s other major trading partners, including Japan and those in Europe, it’s still riding high, partly a result of its loose peg to the dollar. 
Beijing’s apparent efforts to defend a still-strong yuan in the face of the weakest growth in China in almost a quarter-century reflect a variety of national concerns.
Not least, under Mr. Xi a powerful yuan has become a symbol of China’s global resurgence. The thrust of Chinese currency policy has been to erode the influence of the mighty dollar in international trade and investment and to persuade foreign governments to include the yuan in their baskets of foreign-exchange reserves. A volatile yuan would work against all those goals.
There’s little doubt that the growing anxieties of China’s superrich also weigh on currency decision-making.
Mr. Xi has shaken up the status quo with the fiercest campaign against corruption in modern times. That’s creating political tensions at the heart of the Communist Party. The Gilded Age is over: We’re in a new era of austerity. All this uncertainty has unsettled the owners of China’s great fortunes who are now focused on protecting their capital.
Those on the lower rungs of China’s monied classes don’t have many options. They’re suffering, too, as the economy slows and the property market teeters. But it’s hard for them to get around the rule that prevents individuals from taking out of China more than $50,000 each year. 
The superrich have clever ways of circumventing such restrictions—one of the reasons many of them got rich in the first place. The government knows this. It also understands that although its $4 trillion in foreign-exchange reserves would be a formidable defense in any crisis, they are not invulnerable.
In 2011, a study by Victor Shih, then a professor at Northwestern University, showed that the richest 2.1 million Chinese households controlled a staggering $2 trillion to $5 trillion in financial assets, such as stocks and bonds, and real estate. If they liquidated 30% of their wealth and moved the proceeds out of China, Mr. Shih calculated, they’d drain $1 trillion or more from the reserves.
Since that report came out, the concentration of wealth in China has likely become even more extreme. Capital flight is well under way. And the reserves are already starting to dwindle as hot money pulls out of China in anticipation that the U.S. Federal Reserve will increase interest rates, making investments outside China more attractive. 
Making matters worse, the megarich and the companies they control have been using their Chinese assets as collateral for loans outside China. Those borrowings—more than $1 trillion, according to the Bank for International Settlements--are now so large they’ve caught the attention of banking regulators elsewhere, particularly those in Hong Kong. A devaluation of the yuan would add to the burden of repaying that foreign debt. 
Moreover, if foreign banks turn wary about the value of that collateral, and call in their loans, the rich might have to sell off their Chinese assets and send the cash offshore, further depleting the foreign-exchange reserves.
Preventing panic is now a priority for the Chinese government. That doesn’t rule out more weakening of the yuan. But it does dramatically reduce the chances of a sudden devaluation as authorities put a floor under its slide.