Eventually the money runs out. Much of America was shocked when the city of Detroit defaulted on a $39.7 million debt payment and announced that it was suspending payments on $2.5 billion of unsecured deb. Anyone with half a brain and a calculator could see this coming from a mile away. But people kept foolishly lending money to the city of Detroit, and now many of them are going to get hit really hard. But what Detroit is facing is not really that unique. In fact, Detroit is a perfect example of what the future of America is going to look like. We live in a nation that is rotting, decaying, drowning in debt and racing toward insolvency. Just like Detroit, a day is rapidly approaching when America will not be able to kick the can down the road anymore. Sadly, our politicians don't seem inclined to do anything about it and most of the population seems to think that our exploding national debt is not a significant problem. By the time it becomes clear how wrong they were, it will be far too late to do anything about it.
Five Eurozone countries now have loans for half a trillion Euros. These members of the Euro currency union are receiving loans from the one of two bailout funds which are financed by the other 12 Eurozone members. Eurozone members receiving assistance from the two European rescue funds do not pay into it. That means the higher the assistance, the higher the obligations of the healthier countries. Germany already guarantees 27 percent of the loans, France 20 percent and Italy 18 percent. The rescue funds borrow capital, guaranteed by nations of the European Union, in the financial markets and then hand the money to the indebted countries. In doing this they engage in a kind of Quantitative Easing where money is printed based upon the various guarantees. None of these guarantees are counted against the liabilities of any country when the debt to GDP ratios are made public. There is a new scheme underway where bondholders would have to pay for the vast amount of any losses with the money of depositors also in question. There is no agreement yet on this plan. What can be said is that the playing field is being tilted with much more risk now placed in the hands of bond owners and depositors.
One look at the airplane traffic map below should be enough to convey which socialist European country has a just started a 3-day air traffic controller strike. Sure enough, as a result of the French ATC union demands for 'fairness', i.e., an elimination in the "unprecedented" cost-cutting plan, the eastern air border of France now looks like the 405 Freeway during rush hour.
S&P Revises U.S. Credit Outlook To "Stable" From Negative
Fed's Bullard Details How QE Can Be Cut
Fed Retreat From Bond Buying Expected By Fourth Quarter - Poll
U.S., Japan Leading Recovery In Major Economies - OECD
To get a sense of the momentous volatility in Japan, consider that the Nikkei225 is more or less in the same numeric ballpark as the Dow Jones, and that each and every day now it continues to have intraday swings of more than 500 points! Last night was no different following swing from 13100 on the high side to 12548 on the low, or nearly 600 points, with all this ridiculous vol culminating in a close that was just red however for a simple reason that the rumor of the Japanese Pension Fund reallocation taking place hit shortly before the close sending the USDJPY higher by 200 pips... only for the news to emerge as an epic disappointment when it was revealed that the GPIF would raise its target allocation to domestic equities from 11% to... 12%. So much for the "Great Japanese Rotation."
The United States is estimated to have anything from 700 military bases around the world to more than 1000. Hans-Hermann Hoppe asks "how can democracy be a stable equilibrium if it is possible that it be transformed democratically into a dictatorship, i.e., a system which is considered not stable?" Empirically, democracies are anything but stable. Concluding it may be better to heed the advice of Erik von Kuehnelt-Leddihn and, instead of aiming to make the world safe for democracy, we try making it safe from democracy - everywhere, but most importantly in the United States.
In November, NYU Professor Nouriel Roubini stated, “gold at $1,500 is utter nonsense.” In less than two years, gold was above $1,900. This week, the mad professor is back with his swiss-cheese logic and anti-gold rants.
Portugal suffered the most - with its bond spreads now a huge 45bps wider on the week. It seems between the ever-increasing vol in Japan, a rapidly fading JPY carry funding mechanism, and lack of fresh meat from Draghi, Italian and Spanish bonds and stocks are losing their 'greater fool' bid. Sovereigns are seeing their worst day since February; stocks among their worst days since Feb - with several Spanish and Italian banks halted limit-down (as ECB's QE-like collateralization was not eased); and EUR is strengthening against the USD as risk-flows are repatriated. Italian and Spanish stocks are now at 6 week lows, and Spanish, Italian, and Portuguese credit spreads at six-week highs. European financial and corporate credit are now wider (worse) on the year and equities are catching down. And the ultimate 'greater fool' momentum trade - GGBs - is fading - now down 9.5% in the last week...
Following on from our annual update on the wealth (re)distribution of nations, we thought it important to look at the other side of the household balance sheet - that of 'debt' to see just how much 'progress' has been made in the world. In the aftermath of the credit crisis (and the ongoing crisis in Europe), government debt levels continue to rise but combining trends in household debt highlights countries that have sustainable (and unsustainable) overall debt levels - and thus the greatest sovereign debt problems. Whether the 'number' is from Reinhart & Rogoff or not, the reality is that moar debt is not better and the nations with the highest debt-per-capita may surprise many. Critically, despite the rise in 'wealth' from 2000-2008, the ratio of debt-to-net-worth rose on average by about 50% (and in many nations continues to rise). The bottom line - in almost all countries, government liabilities exceeded government financial assets in 2011, leaving the government a net debtor.
House prices - with respect to both levels and changes - differ widely across OECD countries. As a simple measure of relative rich or cheapness, the OECD calculates if the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability) are above their long-term averages, house prices are said to be overvalued, and vice-versa. There are clearly some nations that are extremely over-valued and others that are cheap but as SocGen's Albert Edwards notes, it is the UK that stands out as authorities have gone out of their way to prop up house prices - still extremely over-valued (20-30%) - despite being at the epicenter of the global credit bust. Summing up the central bankers anthem, Edwards exclaims: "what makes me genuinely really angry is that burdening our children with more debt to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing." It's not different this time.
This is no time to be complacent. Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine. In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing. Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Unfortunately, the majority appear to be purposely ignoring the economic horror that is breaking out all over the globe.
The only thing more ominous for the world than a Hindenburg Omen sighting is a Bilderberg Group meeting. The concentration of politicians and business leaders has meant the organisation, founded at the Bilderberg Hotel near Arnhem in 1954, has faced accusations of secrecy. Meetings take place behind closed doors, with a ban on journalists. We suspect the agenda (how the US and Europe can promote growth, the way 'big data' is changing 'almost everything', the challenges facing the continent of Africa, and the threat of cyber warfare) has been somewhat re-arranged as market volatility picks up and the status quo begins to quake once again. The annual gathering of the royalty, statesmen, and business leaders, conspiratorially believed to run the world (snubbing their Illuminati peers and Freemason fellows), will take place this week at the Grove Hotel in London, England. The Telegraph provides the full list of attendees below - for those autogrpah seekers - including Britain's George Osborne, US' Henry Kissinger, Peter Sutherland (the chairman of Goldman Sachs), the Fed's Kevin Warsh, Jeff Bezos?, Peter Thiel, Italy's Mario Monti, and Spain's de Guindos.
While we are told day-after-day just how 'fixed' Europe is; just how 'past the crisis' they are; and just how close to banking union; the reality is the nations of Europe are as disparate as they have ever been. We discussed the dismal unemployment picture last week, but one glance at the chart below will highlight the growing divergence between the haves and have-nots in Europe. As Bloomberg's Niraj Shah notes, unemployment rates are diverging at record levels in the euro area.
“It’s counterproductive to fight against windmills,” it explained
Ireland has seen its youth unemployment rate drop for 10 of the last 11 months and has dropped to a 'mere' 26.6% - the lowest since July 2010 - in what is truly the only possible silver lining in today's absolutely dreadful data release. All four of the other PIIGS nations now have broken the dismal Maginot Line of 40% youth unemployment with Italy finally joining the club (Italy 40.5%, Portugal 42.5%, Spain 58.2%, and Greece 62.5%). What is even more concerning is that not only are these rates extremely high but they are accelerating with all four of these dark nations seeing their rates rising faster than in recent months (this was the 2nd fastest rise in Greek youth unemployment ever). Overall, Europe's youth unemployment rate continues to march higher (to 24.4%) having not fallen for 24 months, but it is Spain that is the 'winner' with 41 consecutive months without a drop in youth unemployment. With welfare benefits running dry, and Sweden and Switzerland already running hot, we fear this summer may bring the much-feared unrest so many have been concerned about.