Sovereign Debt

Spanish bad loans rose for the fourth month in a row, surging to a new all-time high at 11.97% of total loans outstanding. With the total loans outstanding falling (as credit demand collapses in Spain's supposed 'recovery') and delinquent loans rising, the picture is set to to get worse - even as the Bank of Spain's rescue plan for real estate market is under way. Crucially though, as the chart below suggests, the spread of Spanish sovereign debt - which by now is so symbiotically-linked with the domestic financial system as to be almost inseparable - has collapsed on the back of OMT promises. Our question is - at what point does the marginal buyer of Spanish sovereign debt (i.e. Spanish banks) run out of 'cover' to soak up Spain's supply and force Draghi's hand - exposing the fallacy that OMT is?

For all complaints about painful, unprecedented (f)austerity, the PIIGS (even those with restructured debt such as Greece) sure have no problems raking up debt at a record pace. Over the weekend, Spanish Expansion reported that Spanish official debt (ignoring the contingent liabilities) just hit a new record. "The debt of the whole general government reached 942.8 billion euros in the second quarter, representing an increase of 17.1% compared to the same period last year. Debt to GDP of 92.2% exceeds the limit set by the government for 2013..." Moments ago, it was Italy's turn to show that with employment still plunging, the only thing rising in Europe is total debt. From Reuters, which cites a draft Treasury document it just obtained: "Italy's public debt will rise next year to a new record of 132.2 percent of output, up from a previous forecast of 129.0 percent."

Confused why despite numerous rounds of bailouts, a sovereign debt restructuring, an imminent bail-in, and years of so-called austerity, Greek debt is once again "Rising At Its Fastest Rate Since March 2010"? Maybe anecdotes such as the following will put the big picture in context: as reported by the BBC, Greek civil servants will no longer have an additional six days of extra holidays each year. What was the reason for the nearly full week of vacation time? Why using a computer. "The privilege was granted in 1989 to all who worked on a computer for more than five hours a day. However, Reform Minister Kyriakos Mitsotakis, speaking on Greek TV, said the custom "belonged to another era." What is shocking is that nearly four years after the first Greek bailout of May 2010, this custom from "another era" was still active and public workers were happy to partake in its generosity. Ironically, since now the perks from using a computer are no longer there, watch the Greek economy flounder even faster as instead of playing solitaire, Greek finmin workers migrate to playing tic-tac-toe on paper, not to mention using an Abacus to calculate just how much better than the IMF expectations, Greek 2022 debt/GDP will end up being.

Even as the popular press if focused on the 5 year anniversary of Lehman, we decided to go back double that period, and take a look at what happened to the developed world economy in the past decade, starting with 2003. What we found was interesting.

The collapse of Lehman Brothers, the risk of other large important banks failing in the coming months and the still significant systemic, macroeconomic, monetary and geopolitical risk of today shows the vital importance of real diversification and an allocation to physical gold.

Everything flows, it all evolves and nothing remains static. The Lavoisier Universal Law whereby nothing is created, nothing is lost, everything is transformed. 

To summarize:

1. Government has too much debt to issue more debt
2. Government nationalizes private pension funds making their debt holdings an "asset" and commingles with other public assets
3. New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio
4. Debt/GDP drops below threshold, government can issue more sovereign debt

"I have met a number of politicians over the years, but lately it has dawned on me that very few of them are seriously prepared to stand up for their beliefs, if indeed they have any. ...

Ideologies and courage have been consigned to the past and, as I see it, Europe’s Achilles’ heel is the German Chancellor Angela Merkel, the de facto leader of the EU, and her lack of vision for the single-currency bloc. ... Her lack of vision stands as a striking contrast to the emotional feelings that dominated much of post-war European political thinking. ...

As I see it, the research is done. The verdict is out. We have to re-evaluate the EU."

In a sense the markets are experiencing a "Vietnam Moment" where we all believed what we were told and we all accepted the official headlines until the day came when we found out we had been flimflammed and you know the results of that fiasco. We believe that the markets are quite close to a shift in psychology where people and institutions alike no longer blindly accept the stories as told.

With the value of the rupee plunging to new lows, the current account deficit at an all-time high and inflation running at nearly a ten-percent annual clip, India is in serious economic trouble. Indeed many are beginning to wonder whether the country is edging toward a replay of the events in the summer of 1991. Back then, an acute balance of payments crisis forced New Delhi into the indignity of pawning its gold reserves in order to secure desperately needed international financing. At a small public event the other week, Duvvuri Subbarao, the outgoing head of the central bank conceded that policymakers rarely learn from their mistakes: "...in matters of economics and finance, history repeats itself, not because it is an inherent trait of history, but because we don’t learn from history and let the repeat occur."

Will a US led war in Syria be the precursor to a multi year run in Gold?

Even as the Indian capital outflows and current account exodus may be threatening to shut down the economy altogether (except for the three oil companies that received a last ditch USD infusion from the RBI yesterday), the central bank is planning and strategizing. And it appears to have come up with more of precisely the same that has led it to its current unprecedented predicament: prevent the population from converting their wealth into hard money, i.e., gold. But while the government's attempts to impose capital controls on gold purchases have been well documented, the latest foray is just a headspinner. Reuters reports that India is now considering a "radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency." Here we can safely assume that the commercial banks will pay for the gold in... Rupees which just hit an all time low?

Japanese finances are in a shambles and very soon investors are going to run screaming from the Yen and JGB markets.

The 10Y Treasury yield has jumped nearly 130bp from its low point in early May. Given the tight ranges and low volatility of yields during the most of QE era, this kind of move in just over 3 months seemed stunning to some investors. Consequently, the question that has come up often recently is: what has been driving Treasury yields? As UBS' Boris Rjavinski notes, several years ago a rate strategist would give you a straightforward and predictable answer: inflationary expectations, economic growth projections, and current and future monetary policy. But now, as Rjavinksi notes, central banks and politics in the driver seat. Volatility will remain elevated as we await key messages from the Fed in September, and U.S. political calendar will start to heat up as we approach the “drop-dead” dates to fund the government and extent the dent ceiling.

The yield on 10 year U.S. Treasuries is skyrocketing, the Dow has been down for 5 days in a row and troubling economic news is pouring in from all over the planet.  The much anticipated "financial correction" is rapidly approaching, and investors are starting to race for the exits.  We have not seen so many financial trouble signs all come together at one time like this since just prior to the last major financial crisis.  It is almost as if a "perfect storm" is brewing, and a lot of the "smart money" has already gotten out of stocks and bonds. Of course a lot of people believe that we will never see another major financial crisis like we experienced in 2008 ever again.  A lot of people think that this type of "doom and gloom" talk is foolish.  It is those kinds of people that did not see the last financial crash coming and that are choosing not to prepare for the next one even though the warning signs are exceedingly clear.  The following are 18 signs that global financial markets are heading for a vicious circle...