It appears that following the resignation letter fiasco from Friday, the venerable IMF is trying to regain some level of credibility in the world. In a note obtained by SPIEGEL, senior IMF officials patience has clearly come to an end and has decided that, with Greece likely to go bust by September, it is no longer willing to provide additional Greek aid (we assume in light of the push-backs on the promised cuts that the aid was based upon). Pointing to this now being a euro-zone problem, their cessation of Greek aid is even more critical since both Holland and Finland pledged support because the IMF was involved. August 20th marks an important short-term hurdle as Greece is required to pay back EUR3.8bn to the ECB - and with collateral being withdrawn, we wonder how long before the ECB pulls the plug entirely - even on Greek T-Bills. Whether this is sabre-rattling before the delayed TROIKA visit or the IMF (and the rest of the TROIKA) indeed deciding enough is enough and realizing finally that more debt (or even maturity extensions) does not solve the problem of too much debt - only default will do that!
All organic structures can be modelled using evolutionary theory and governance, politics and economics, which involve the cooperation of millions of human beings are no exception. Because everyone is more familiar with evolutionary theory being used to model changes in the natural world, we’ll start by looking at examples in the natural world where revolution occurs as part of the process of evolution, demonstrating that revolution is not an artificial human construct but actually quite normal under particular circumstances. Revolution occurs in the natural world when a lifeform becomes extinct because the environment it depends on for survival changes at a faster rate than it can evolve. This can happen in two ways, either the environment is subject to sudden change, as in the case of the dinosaurs or, far more commonly, the environment changes gradually and the lifeform finds itself increasingly ill-adapted before becoming extinct. Because each lifeform has a relationship with other lifeforms there is a knock on effect.
For over four years, virtually everyone in the finance industry knew that Libor was manipulated. The stench of manipulation rose to the very top and thanks to a document release of formerly confidential information, we now know for a fact that even the Fed was in on it - recall that as part of production, the Fed provided a transcript of an April 2008 phone call between a Barclays trader in New York and Fed official Fabiola Ravazzolo, in which the unidentified trader said: "So, we know that we're not posting um, an honest LIBOR." And yet without any tangible, black on white evidence, there was no catalyst for pursuing legal action. That all changed when in a desperate attempt to protect its ass, Barclays decided to rat out everyone by settling with regulators, and "turn state" producing e-mail based evidence, most of it quite visual (after all what is more tangible to the common man that evil bankers sipping on Bollinger), which essentially threw years of quiet cartel cooperation under the bus. As a result, regulators, enforcers, and legal authorities, many of whom were in on this manipulation from the beginning, no longer had an excuse to not pursue civil and criminal charges against perpetrators, who until recently were footing the tabs at various gentlemen's venues and ultra expensive restaurants. And while the imminent waterfall of civil prosecution will force bank litigation reserves to go through the roof, here comes, with a very long delay, the criminal charges. As Reuters reports, here come the arrests.
In their Ten Thousand Commandments 2012 report which was released in June, the CEI estimates the cost of US government regulation at $US 1.75 TRILLION. That is just under half (48 percent) of the budget of the federal government. It is almost ten times the total of all corporate taxes collected and almost double the total collected from individual income taxes. It is also one-third higher than the total of all pre-tax corporate profits. It is the hidden cost of doing business in an interventionist economy. The fact that the cost of complying with these regulations is substantially higher than the total of corporate profits is a stark illustration of the end result of economic intervention. That end result is capital consumption.
Even as Europe has become an utterly dysfunctional experiment in everything relating to modern economics and monetary theory, it has one redeeming feature: it has proven that the Defection regime under Game Theory is 100% correct. It says that once the defections from an unstable Nash equilibrium begin, there is no stopping until the entire system collapses under its own weight. This is precisely what has happened in Spain, where first Catalunya, then Valencia on Friday, and now virtually everyone else is set to demand a bailout. From Bloomberg: The Balearic Islands and Catalonia are among six Spanish regions that may ask for aid from the central government after Valencia sought a bailout, El Pais reported. Castilla-La-Mancha, Murcia, the Canary Islands and possibly Andalusia are also having difficulty funding themselves and some of these regions are studying plans to tap the recently created emergency-loan fund that Valencia said it would use yesterday, the newspaper said, without citing anyone."
And you can restructure all you like, but many underwater homeowners with a serious income shortfall will still not be able to pay their mortgages. Who carries the can? If the mortgage has been sold on then the loss will be on the new owner. In reality this is far more likely to be the taxpayer. Simply, the taxpayer may well end up carrying the can for a whole lot of bust mortgages. What Taibbi — who usually has a very good sense of moral hazard — and MRP effectively seem to be considering is not only the continuation and expansion of Kelo, but also potentially the transfer of liability from bust irresponsible lenders to the taxpayer. While this is sure to enrich the bureaucracy and well-connected insiders — and admittedly, while it may help some underwater homeowners — it seems incredibly risky for the taxpayer. While debt-forgiveness is one way out of the debt trap, we should be careful and recognise that many so-called debt-forgiveness schemes may instead be dressed-up scams and frauds that end up enriching special interests while putting the taxpayer deeper into a hole.
Perhaps it is worth a reminder that, while every effort by the Central-Banker-In-Chief and his political play-things to proclaim free-market omnipotence in stark contrast to the wholesale manipulation of any and every market and macro-economic lever possible, Adam Smith some 250 years ago pointed out the inevitable unintended consequences of such grand conceit. As the [central planner] seems to "imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board", the end result is that "society must be at all times in the highest degree of disorder."
By now everyone is aware of the silver-like surge in corn prices over the past month, driven by the recognition that what is quickly becoming the most severe drought in US history is here to stay indefinitely longer as elusive rainfall remains just that. As can been seen on the chart below, corn prices have risen by 54% since mid-June. What may come as a surprise is that another critical commodity - Soybeans - has only risen by half as much, or just 28% in the past month. Why "only"? Because as the following two charts from Morgan Stanley show, the fundamental picture for soybeans may be just as bad if not worse as corn, which would mean there is far more price upside in soy in the coming days, especially if strategies based on prayer, for either central bank intervention or rain, remain unasnwered.
With just a few days left until the pre-opening soccer games begin in the UK, we continue our five part series (Part 1, Part 2, Part 3) on the intersection between markets and the Olympics by considering whether an integrated Europe would have performed relatively better - i.e. would 2+2>4 - and what are the factors. Goldman's analysis of the pros and cons of 'integrating' their Olympic teams is extremely apropos the current deteriorating (yet desperately dreaming of improving) coordination of these 17 disparate nations. The answer, of course, is that there are some benefits from this medal 'integration' in specific cases but since German reunification, their medal performance has deteriorated - even in the team events where aggregating talent pools should have its greatest gains. In a 'zero-sum' context such as competing for Olympic medals, Germany's gains must come at the expense of other countries - and rather notably there are few French medal winners before or after an 'integration. Sounds familiar?
With Valencia bust, Spanish bonds at all-time record spreads to bunds, and yields at euro-era record highs, Spain's access to public markets for more debt is as good as closed. What is most concerning however, as FAZ reports, is that "the money will last [only] until September", and "Spain has no 'Plan B". Yesterday's market meltdown - especially at the front-end of the Spanish curve - is now being dubbed 'Black Friday' and the desperation is clear among the Spanish elite. Jose Manuel Garcia-Margallo (JMGM) attacked the ECB for their inaction in the SMP (bond-buying program) as they do "nothing to stop the fire of the [Spanish] government debt" and when asked how he saw the future of the European Union, he replied that it could "not go on much longer." The riots protest rallies continue to gather pace as Black Friday saw the gravely concerned union-leaders (facing worrying austerity) calling for a second general strike (yeah - that will help) as they warn of a 'hot autumn'. It appears Spain has skipped 'worse' and gone from bad to worst as they work "to ensure that financial liabilities do not poison the national debt" - a little late we hesitate to point out.
If last week's 74-page all-encompassing thesis on "how 'everything' is interconnected and headed for 'complete systemic disintegration'" is a little too much, here is a 10 minute clip that ties together all the loose ends of the reality bubbling just beneath the veneer of hope that so many call our markets. A spectacular gathering of all things bearish that provides everything you wanted to know about the inevitability of a major economic collapse but were afraid to ask: a little too doom and gloomish perhaps, but sadly that does not make it improbable, especially in the current environment where the central planners keep doing the same over and over, hoping that just once "this time will be different." From demographic trends, over-leveraging, corporate profit extremes, deflationary impacts, and hyperinflationary reflexivity- there's a little here for everyone on a warm Saturday afternoon.
There is no mystery to the “headwinds” that continue to plague and mystify monetary policymakers. The global economy is not pulled into re-recession by some unseen magical force, conspiring against the good-natured efforts of central bankers. Instead, the very thing central banks aspire to is the exact poison that alludes their attention. Conventional economics will continue to believe and empirically “prove” that the theory of the neutrality of money is valid, giving them, in their minds, unrestricted ability to intervene and manipulate over any short-term period (though it is getting harder to argue that these emergency measures are “short-term” nearly five years into their continued existence). The occurrence of panic in 2008 and the unresolved and unremoved barriers to recovery in the years since, however, fully attest to nonneutrality, an ongoing form of empirical proof that their models will never be able to refute. And we are all condemned by it.
To evaluate the impact of private sector deleveraging on economic growth/GDP in the context of a rapidly releveraging sovereign, we present the following analysis from Citi which observes various European countries and analyzes the "credit intensity" of GDP growth, or in other words which country has preserved, or even grown its GDP even as its private sector has seen substantial deleveraging. The results are interesting and may present a framework for evaluation the winners and losers in Europe in the era of "great sovereign leveraging", permitting a reverse engineering of the success stories, and applying their lessons to the losers.
Sometimes it seems like the investment community operates on the assumption that the world started in 1929 – or at least that the financial booms, busts and speculators preceding the 1920s are irrelevant to the modern investor. We think this is misguided. Just consider that this common worldview ignores an age where speculators lived in sprawling mansions on Fifth Avenue (as opposed to apartments in the same place measuring about 1/100th the size)! We imagine that there’s a lot to learn from looking at the past 300 years as opposed to the past 80. With this in mind; here we present what we believe to be the best trades of all time...
I am fairly certain the answer to why Bernanke isn’t increasing inflation when his former self and former colleagues say he should be is actually nothing to do with domestic politics, and everything to do with international politics. Most of the pro-Fed blogosphere seems to live in denial of the fact that America is massively in debt to external creditors — all of whom are frustrated at getting near-zero yields (they can’t just flip bonds to the Fed balance sheet like the hedge funds) — and their views matter, very simply because the reality of China and other creditors ceasing to buy debt would be untenable. Why else would the Treasury have thrown a carrot by upgrading the Chinese government to primary dealer status (the first such deal in history), cutting Wall Street’s bond flippers out of the deal?