If you have been waiting for the "global economic crisis" to begin, just open up your eyes and look around. I know that most Americans tend to ignore what happens in the rest of the world because they consider it to be "irrelevant" to their daily lives, but the truth is that the massive economic problems that are currently sweeping across Europe, Asia and South America are going to be affecting all of us here in the U.S. very soon. Sadly, most of the big news organizations in this country seem to be more concerned about the fate of Justin Bieber's wax statue in Times Square than about the horrible financial nightmare that is gripping emerging markets all over the planet. After a brief period of relative calm, we are beginning to see signs of global financial instability that are unlike anything that we have witnessed since the financial crisis of 2008. As you will see below, the problems are not just isolated to a few countries. This is truly a global phenomenon.
- Euro-Area Growth Eases Pressure on Draghi for Stimulus (BBG)
- Germany Beats Growth Estimates With France Amid Recovery (BBG)
- Argentina revises ‘bogus’ inflation figures (FT)
- Wells Fargo edges back into subprime as U.S. mortgage market thaws (Reuters)
- China Banks’ Bad Loans Reach Highest Since Financial Crisis (BBG)
- Time Warner Cable Deal to Test Comcast CEO's Washington Clout (WSJ)
- Risky Loans in Europe Banks’ Dark Corners to Be Exposed (BBG) - yeah, right... sure
- Gold Extends Climb Above $1,300 as Investors Boost SPDR Holdings (BBG)
- SEC Takes Steps to Stem Courtroom Defeats (WSJ)
- Comcast Agrees to Buy Time Warner Cable for $45.2 Billion (BBG)
- Italian leadership squabble weighs as shares halt hot run (Reuters)
- Russia says Syria aid draft could open door to military action (Reuters)
- China trust assets rise 46% in 2013 (WSJ), China Trust Assets Surge to $1.8 Trillion Amid Default Risks (BBG)
- Australian Unemployment Jumps to 10-Year High (BBG)
- Tea Party Scorns Republicans as House Lifts Debt Ceiling (BBG)
- Peso plunge forces Argentine soya hoarding (FT)
- BNP Paribas Net Falls After $1.1 Billion U.S. Legal Charge (BBG)
- Hacking Joins Curriculum as Businesses Seek Cyber Skills (BBG)
- Android's 'Open' System Has Limits (WSJ)
- Blackstone-Fueled Single-Family Home Boom Lifts Chicago (BBG)
By hosting the Winter Olympics in Sochi, Russia has brought a surge of international attention to the state of its economy, its interethnic relations, its domestic politics, and its foreign policy. Already much of the scrutiny has become unwelcome. The reluctance of many foreign leaders to come to Sochi provides a convenient scorecard by which to evaluate Russia’s global standing. Corruption, terrorism, human rights protests, high-level no-shows—all these represent ways in which the Sochi Olympics have embarrassed Putin. Yet in each case, the problem goes well beyond any connection to the Games. Each reflects a major tension in the system that Putin has created...
Three days ago it was S&P that opened the can of Puerto Rico junk worms. Moments ago it was Moody's turn to downgrade the General Obligation rating of the Commonwealth from Baa3 to Ba2, aka junk status. We note this just in case someone is confused what the catalyst was that just sent stock to a new intraday high in the aftermath of today's disappointing jobs number which until this moment barely managed to push the S&P higher by 1%. From the report: "While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth."
Having benefited from the earlier QE-un-taper hope, the Turkish Lira is dropping rapidly following the move by S&P to put Turky on negative outlook:
- *TURKEY'S OUTLOOK TO NEGATIVE FROM STABLE BY S&P
- *S&P SEES RISKS OF HARD ECONOMIC LANDING IN TURKEY
Furthermore, the ratings agency raising questions over the Central Bank:
- *TURKEY SUFFERING EROSION OF GOVERNANCE STANDARDS, S&P SAYS
- *TURKEY SUFFERING EROSION OF CHECKS AND BALANCES, S&P SAYS
- *CONSTRAINTS ON TURKEY CENBANK INDEPENDENCE: S&P.
Following the evaluation of liquidity needs (and availability) for the Commonwealth of Puerto Rico, S&P has decided that "it doesn't warrant an investment-grade rating":
- PUERTO RICO GO RATING CUT TO JUNK BY S&P, MAY BE CUT FURTHER
- GOVT. DEVELOPMENT BANK FOR PUERTO RICO CUT TO BB FROM BBB-:S&P
- PUERTO RICO GO RATING LOWERED TO 'BB+': S&P
- PUERTO RICO REMAINS ON WATCH NEGATIVE FROM S&P
Both the G.O.s and the Development Bank have been cut. Note that 70% of muni mutual funds own this - and it is unclear if a junk rating forces (by mandate) funds to cover. Worst of all, S&P warns Puerto Rico could now face a $1 billion collateral call on short-term debt - the same waterfall collateral cascade that took down AIG.
- Emerging-Market Rout Seen Enduring on Low Real Rates (BBG)
- After rocky January, markets eye data and central banks (Reuters)
- Europe will feel the pain of emerging markets (FT)
- Lloyds delays dividend prospect after mis-selling charge (Reuters)
- Snow Set to Snarl New York Commute as U.S. Flights Halted (BBG)
- Rate Decision to Drive Yellen's Early Agenda (Hilsenrath)
- Thai protesters move to downtown Bangkok in bid to topple PM (Reuters)
- China says Japan's 'hype' on air defence zone spreads tension (Reuters)
- Hedge funds seek 1.8 billion euros damages from members of Porsche's owning family (Reuters)
There is no point in trying to avert or prevent bubbles caused by monetary pumping by regulatory means. If one avenue for bubble formation is cut off, the newly created money will simply flow into another area. In fact, new bubbles almost always become concentrated in new sectors. If there were a genuine desire to keep the formation of bubbles in check, adopting sound money would be a sine qua non precondition. However, no-one who has any say in today's system has a desire to adopt sound money and give up on the failed centrally planned monetary system in favor of a genuine free market system. Our guess is that the booms and busts the current system inevitably produces will simply continue to grow larger and larger until there comes a denouement that can no longer be 'fixed'.
As the nation anxiously awaits President Obama's State of the Union speech tomorrow, we thought a brief reflection on the nation's view of him and his government was worthwhile. A glance at Gallup's front page tells us all we need to know. A mere 17% of respondents say their representatives deserve re-election; Obama's approval ratings are among the most polarized on record; 65% are unsaitsified with how government works; and, at 40%, the President's overall approval rating is practically at record lows. But, apart from that, we are sure the state of the union will be strong and it's nothing but up from here...
What a difference half a year makes. It seems like it was yesterday when Blackrock head Larry Fink, when discussing the future of capital markets with the now defunct money honey, uttered these infamous words about any and all possible risks: "it doesn't matter." Suddenly, it matters. Speaking in Davos, Fink warned there is 'way too much optimism' in financial markets as he predicted repeats of the market turmoil that roiled investors this week. As Bloomberg reports, Fink warned a Davos panel that "the experience of the marketplace this past week is going to be indicative of this entire year... We’re going to be in a world of much greater volatility."
Back in the years just before the previous housing bubble burst (not to be confused with the current, even more acute one), one person did the math on subprime, realized that the housing - and credit bubble - collapse was imminent, and warned anyone who cared to listen - almost nobody did. That man was Kyle Bass, and because he had the guts to put the money where his mouth was, he made a lot of money. Fast forward to 2014 when subprime is all the rage again and the subprime bubble is bigger than ever: it may comes as a surprise to some that in 2013, subprime debt was one of the best performing fixed income instruments, returning a whopping 17% in a year when most other debt instruments generated negative returns. And this time, while Kyle Bass is busy - collecting nickels (each costing a dime) perhaps - it is someone else who has stepped into Bass' Cassandra shoes: that someone is Jeff Gundlach. “These properties are rotting away,”
Following last night's surprise event, which was China's HSBC PMI dropping into contraction territory for the first time since July, which in turn sent Asian market into a tailspin, the most relevant underreported news was a speech by International Monetary Fund Deputy Managing Director Naoyuki Shinohara who said that "As long as steady progress is being made toward the 2% target, we do not see a need for additional monetary accommodation in Japan." He added that while exit from unconventional monetary policy "is still very likely some way off for the euro area and Japan, I believe that the moment to start planning is now." This warning - an echo of prcisely what we said yesterday - promptly roiled the Yen, sending it far higher and sending the EMini futures sliding by over 10 tick in no time: a drop from which they have not recovered yet.
When it comes to the opinions of financial pundits and "experts", most can be chucked into the garbage heap of groupthink and consensus. However, one person whose opinion stands out is Elliott Management's Paul Singer. One of the most successful hedge fund managers has consistently stood against the grain of conventional wisdom over the past three decades and been handsomely reward, which is why his opinion is certainly one worth noting. Singer, together with Martin Wolf and several other panelists will be speaking at 45 minutes past the hour on a panel discussing one of the most pressing topics nearly 6 years after the Bear Stearns collapse: "Are Markets Safer Now." Watch their thoughts on the matter in the session live below.
S&P filed a declaration of McGraw yesterday in federal court in Santa Ana, California, as part of a request to force the U.S. to hand over potential evidence the company says will support its claim that the government filed a fraud lawsuit against it last year in retaliation for its downgrade of the U.S. debt two years earlier. In his court statement, McGraw said Geithner called him on Aug. 8, 2011, after S&P was the only credit ratings company to downgrade the U.S. debt. Geithner, McGraw said, told him that S&P would be held accountable for the downgrade. Government officials have said the downgrade was based on an error by S&P. “S&P’s conduct would be looked at very carefully,” Geithner told McGraw according to the filing. “Such behavior would not occur, he said, without a response from the government."