If we look at the global economy with unclouded eyes, we reach this conclusion: "This whole thing is about leverage." If leverage doesn't increase, the system implodes. But since collateral is disappearing from the global economy like sand castles in a rising tide, and disposable income has stagnated, there is no foundation for more leverage. As a result, the State/finance cartel has only one choice: increase leverage by whatever means are left. There are only two:
- Allow banks to claim phantom assets as capital/reserves
- Lower interest rates so stagnant income can leverage ever greater quantities of debt
The State/finance Empire and its army of academic toadies (economists) must cloak this reliance on leverage from the citizenry, lest they grasp the precariousness of the entire financial system. As the economic Establishment is discredited by reality (that their sputtering reflation policies have come at an unbearable cost is now undeniable), their attempts to discredit their critics become increasingly comic: only PhD economists in the employ of the Empire are qualified to comment on the Empire's policies, etc.
The global economy is an entangled affair, make no mistake in your calculation here, and the numbers from around the globe are telling and will affect both the U.S. bond and equity markets. Much of the financing for the Emerging Markets was provided by the European banks and as they pull back and reorganize based not just on Basel III but based upon problems of the sovereign where they are domiciled the situation exacerbates. Two of the world’s financial axises are slowing and troubled and to not think that this will not affect America will lead you to conclusions causing you to play the Great Game badly. What did the meeting of the European Finance Ministers accomplish; not much. They nodded to the Spanish banks and agreed to inject $30 billion by the way of the sovereign, increasing the debt of Spain, with veiled promises of a new ESM fund which would lend money directly to the banks at some point in the future and this point is highly subjective depending upon to whom you listen. The Spanish claim within days or weeks while the Germans indicate it may be sometime next year. There is now a “maybe-maybe” timeline in Europe for almost anything as the weaker nations prod the stronger nations for more money.
European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.
More and more Asian nations — led by China and Russia — have ditched the dollar for bilateral trade (out of fear of dollar instability). Tension rises between the United States and Asia over Syria and Iran. The Asian nations throw more and more abrasive rhetoric around — including war rhetoric. And on the other hand, both Obama and Romney — as well as Hillary Clinton — seem dead-set on ramping up the tense rhetoric. Romney seems extremely keen to brand China a currency manipulator. In truth, both sides have a mutual interest in sitting down and engaging in a frank discussion, and then coming out with a serious long-term plan of co-operation on trade and fiscal issues where both sides accept compromises — perhaps Asia could agree to reinvest some of its dollar hoard in the United States to create American jobs and rebuild American infrastructure in exchange for a long-term American deficit-reduction and technology-sharing agreement? So the future, I think, will more likely involve both sides jumping off the cliff into the uncertain seas of trade war, currency war, default-by-debasement, tariffs, proxy war and regional and global political and economic instability.
A preview of the key events in the coming week (which will see more Central Banks jumping on the loose bandwagon and ease, because well, that is the only ammo the academic econ Ph.D's who run the world have left) courtesy of Goldman Sachs whose Jan Hatzius is once again calling for GDP targetting, as he did back in 2011, just so Bill Dudley can at least let him have his $750 million MBS LSAP. But more on that tomorrow.
Japan's core machinery orders were expected to post a modest -2.6% drop. Instead they had a worse collapse than anything seen in the aftermath of the Fukushima disaster, plunging by a stunning 14.8% . And the kick in the groin cherry on top was the current account surplus plunged by 62.6%: consensus forecast: -14.5%. The Japanese economy has once again ground to a halt, only this time it has no earthquake or nuclear explosion to blame. This time it is the entire world's fault, where demand has collapsed proportionately. As a reminder the BOJ expanded its QE yet again on April 27. Must be time for another QE because this time will certainly be different after more than 30 years of failures. It is time for those brilliant central planners Ph.D's to do engage in more of the same insanity that Einstein warned about decades ago. And incidentally this is not a joke: on Thursday the BOJ is expected to ease yet again. As a reminder, the BOJ already buys ETFs, Corporate Bonds, and REITs. What's left: gold?
When on Friday news broke that German regulator BAFIN (which is just like the SEC except that it also regulates, investigates and actually prosecutes, instead of just watching porn all day) was launching a probe of the biggest bank in Europe, and actually, make that the world, Germany's Deutsche Bank, the shares took a quick, brisk hit, sliding 5% with everyone anxiously expecting to find out just which bank will follow Barclays into the scapegoat abattoir (because nobody had any clue Liebor manipulation was going on until a week ago). Yet while external inquiry into banks is to be expected (everywhere but in the US of course, because in the US no banks manipulated anything. Ever) as a proactive act on behalf of regulators to cover their back, things get a little more tricky when the bank itself admits there was an obvious supervision problem. From Reuters: "Two Deutsche Bank employees have been suspended after it used external auditors to examine whether staff were involved in manipulating interbank lending rates, German magazine Der Spiegel reported, citing no sources." Now what can possibly go wrong if the biggest bank in the world, with just shy of $3 trillion in "assets", which just happens to have a 1.68% Core Tier 1 ratio, is suddenly thrust smack in the middle of the scandal that the Economist just aptly named the finance industry's "tobacco moment"?
A generation of market participants has grown up knowing only the era of central bankers and the 'Great Moderation' of (most of) the last two decades elevated their status significantly. While central bankers are generally very well aware of the limits of their own power, financial markets seem inclined to overstress the direct scope of monetary policy in the real world.
If markets fall, investors need only to run to central bankers, and Ben Bernanke and his ilk will put on a sticking plaster and offer a liquidity lollipop to the investment community for being such brave little soldiers in the face of adversity
Monetary policy impacts the real economy because it is transmitted to the real economy through the money transmission mechanism. This has become particularly important in the current environment, where, as UBS' Paul Donovan notes, some aspects of that transmission mechanism have become damaged in some economies. Simplifying the monetary transmission mechanism into four very broad categories: the cost of capital; the willingness to lend; the willingness to save; and the foreign exchange rate; UBS finds strains in each that negate some or all of a central bank's stimulus efforts. In the current climate, it may well be that the state of the monetary transmission mechanism is even more important than monetary policy decisions themselves. Some monetary policy makers may be at the limits of their influence.
Following his somewhat epic blog debate with Paul Krugman, Steve Keen appears on Capital Account with Lauren Lyster to debunk more Keynesian propaganda and the kleptocratic status quo 'debt doesn't matter' arguments. Poking holes in the stable/exogenous shock equilibrium 'model' versus the real-world's dynamic systems, the Aussie economist warms up with the zero-interest rate conundrum and liquidity trap; moves on to the empirical falseness of the debt-to-unemployment relationship - implying 'debt matters all the time' as Keen explains common-sensibly (but not Neoclassically) that the 'change in debt adds to demand' and that involves banks which breaks modern economic theory (since lending is credit creation not savings transfer). Echoing the deleveraging from the Great Depression, it could take 15 years of unwinding this epic debt bubble before its all over - but not if the status quo of deficit spending is maintained - as Keen somewhat controversially concludes: "you can't just cure this with deficit spending [since debt is already beyond the black-hole's 'event horizon'], you have to abolish the private debt as well" by "quantitative easing for the public".
"It's impossible to have a political solution to a balance sheet problem" says Paul Brodsky, bond market expert and co-founder of QB Asset Management. The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making their coupon payments. No amount of political or policy intervention is going to change that reality. (Unless a global "debt jubilee" transpires, which Paul thinks is unlikely). Looking at the global monetary base, Paul sees it dwarfed by the staggering amount of debts that need to be repaid or serviced. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it. So how will this debt overhang be resolved?
Central bank money printing -- and lots of it -- thinks Paul.
Japan Inc. is still trying, but now protests erupt in the streets.
Barclays Wins Euromoney's Best Global Debt, Best Investment Bank, And Best Global Flow House Of The Year AwardsSubmitted by Tyler Durden on 07/05/2012 18:24 -0400
Financial magazine Euromoney, which in addition to being a subscription-based publication appears to also rely on bank advertising, has just held its 2012 Awards for Excellence dinner event. And in the "you can't make this up" category we have Barclays winning the Best Global Debt House, Best Investment Bank, And Best Global Flow House Of The Year Awards. Specifically we learn that "the bank’s commitment to the US is exemplified by the addition of another global senior manager to the country – Tom Kalaris is now going to be splitting his time between New York and London as executive chairman of the Americas as well as overseeing wealth management. Jerry del Missier, who has overseen the corporate and investment bank through its Lehman integration and was recently appointed COO of the Barclays group, says the bank is well positioned. "We came out of the crisis in a stronger strategic position and that has allowed us to continue to win market share and build our franchise. Keep in mind that the US is the largest investment banking, wealth management, credit card and investment management market in the world, and in terms of fee share will remain the most dynamic economy in the world for many years. As a strong global, universal bank operating in a competitive environment that is undergoing significant retrenchment, we like our position." That said, with the Chairman, CEO and COO all now fired, just who was it who accepted the various award: the firm's LIBOR setting team? And if so, were they drinking Bollinger at the dinner?
Fourteen years ago during the Asian financial crisis, Indonesia endured a currency collapse, a severe 2-year recession, and an embarrassing IMF bailout. Western bureaucrats wagged their fingers incessantly at Indonesia, lecturing the country about the dangers of excess and fiscal irresponsibility. How sweet the irony is. In a stunning rags-to-riches story, Indonesia contributed US$1 billion to the IMF last week in order to help bail out bankrupt Western nations. Unlike Japan, the US, and Europe — which all seem to think the answer to an economic bust brought on by a debt-binge is to borrow and spend even more money– Indonesia took its medicine when its economy collapsed back in 1998. Ironically, US President Barack Obama spent some of his childhood in this same suburb of Jakarta. Unfortunately, as he pulls out all stops to cling to power for a second term, the kind of tough decisions that could help the US emerge from its economic malaise have no chance of being made. It’s the ENTIRE system that’s the problem. And that goes for nearly every Western, “free market,” democracy out there.
I understand the dream of the common socialist. I was, after all, once a Democrat. I understand the disparity created in our society by corporatism (not capitalism, though some foolish socialists see them as exactly the same). I understand the drive and the desire to help other human beings, especially those in dire need, and the tendency to see government as the ultimate solution to all our problems. That said, let’s be honest; government is in the end just a tool used by one group or another to implement a particular methodology or set of principles. Unfortunately, what most socialists today don’t seem to understand is that no matter what strategies they devise, they will NEVER have control. And, those they wish to help will be led to suffer, because the establishment does not care about them, or you. The establishment does not think of what it can give, it thinks about what it can take. Socialism, in the minds of the elites, is a con-game which allows them to quarry the favor of the serfs, and nothing more. There are other powers at work in this world; powers that have the ability to play both sides of the political spectrum. The money elite have been wielding the false left/right paradigm for centuries, and to great effect. Whether socialism or corporatism prevails, they are the final victors, and the game continues onward… Knowing this fact, I find that my reactions to the entire Obamacare debate rather muddled. Really, I see the whole event as a kind of circus, a mirage, a distraction. Perhaps it is because I am first and foremost an economic analyst, and when looking at Obamacare and socialization in general, I see no tangibility. I see no threat beyond what we as Americans already face. Let me explain…
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