Sovereign Debt

No one in Germany is allowed to get in the way of the sacrosanct exporters.

Ukraine, we are told, is infamous for its colorful proverbs and as the title suggests Citi's Matt King warns that emerging market (EM) bond investors may yet become familiar with more of them in coming weeks. Unfortunately Ukraine’s importance is greater than its economic or even geopolitical significance would suggest. Risk premia everywhere have been compressed by the prolonged force-feeding of central bank liquidity. EM in particular has benefited from enormous inflows. However, for developed market (DM), King believes even a serious deterioration in Ukraine still feels unlikely to really derail the serene march tighter we see in spreads – but even so, he warns there are some broader implications of the EM woes which investors would do well to be aware of as "drunkards know no danger".

There probably isn’t a more over-used phrase thrown across the media landscape than, “It’s different this time.” One can’t look at the financial markets, the political stage, and more without shaking ones head. Nothing seems to make sense. Yet if one wants to lazily answer, “It’s different this time.” Things become crystal clear. Water now seems to run uphill. The definition of words no longer mean what they once did. (we’re still marveling on what is – is) Free society means the loss of only a few freedoms per year, as opposed to everything at once. Work is a bad thing however, if someone else goes to work and pay for your things – then that’s good. You can keep your plan if you like your plan – but if we don’t like it – well – you can’t. The Federal Reserve would never monetize the debt – however if you’re a preferred dealer in the QE (quantitative easing) program – they’ll do it for you. These precarious times leave many scratching their heads. Expressed another way, When everyone is on the band wagon – except the band. You had better take notice.

The sovereign debt of the developed world has risen from approximately 80% of GDP to 110%, an additional $12 trillion of debt, while interest rates have fallen to nothing. A ‘normal’ short term interest rate is one that is in line with inflation, which has been an average of 2% for the period 2007-2013. Therefore we can roughly calculate that ‘citizen-savers’ of the world have lost $1.75 trillion in unreceived interest. This is nothing short of being an undeclared tax levied by the State. As the quantum of debt has increased, a rise in interest rates would bring hefty costs to the State; currently, interest outlay in the USA alone, at 2.5%, is $400 billion  per annum. Any sustained interest rate rise with the continued level of deficit is not manageable without growth being greater than the yields paid. Simply put, interest rates cannot rise without high growth, therefore a ‘lost interest generation’ is unfolding.

The developments are bullish for gold prices as various bitcoin exchanges had captured capital flows from investors and speculators who are skeptical of the current financial and monetary system and many of whom would have previously have bought gold and silver.  Some of this capital is more likely to flow into gold in the coming months.

After surging yesterday for no reason whatsoever because as we explained on several occasions, there were no surprises in the Tuesday BOJ statement, and the doubling and extension of its loan facilities was implicit and factored into the doubling of its monetary policy (as goldman explained quite well), both the Nikkei and the USDJPY has been forced to revert, with the latter all important carry funding pair back to 102 and in danger of sliding lower, as a result ES is now below yesterday's lows. Which is why the 102 USDJPY "invisible hand" tractor beam will be all important today especially if the market finally starts paying attention to the proxy civil war that has gripped the Ukraine. Stocks traded lower, albeit in a relatively range-bound range this morning, with the Spanish IBEX-35 underperforming. Banking names remained under pressure, with focus still on yesterday’s reports that Spanish banks' bad loans marked a fresh record, together with comments by ECB's Weidmann, who said that sovereign debt purchases would constrain the central bank via political pressure. Similar view was also echoed by ECB’s Nowotny, who said that government bond buying US Fed-style would be difficult to do under ECB's mandate.

Get long 'Depends' may be the most befitting headline for tonight's massive macro miss in Japan. For the 3rd quarter in a row, Japanese GDP missed expectations with a meager +1.0% annualized growth (versus a +2.8% expectation), and a tiny 0.3% Q/Q change vs expectations of a 0.7% increase, this is the biggest miss and slowest growth since Abe retook the economic throne after his chronic-diarrhea-prone first attempt to save the nation. No matter how hard they try to spin this, there's no silver lining as consumer and business spending missed expectations notably and the only Tokyo snow fell just last week so long after the quarter was over... and this is before a tax hike that is aimed at showing how fiscally responsible the nation and not simply an insolvent ponzi scheme alive through the good graces of the greater fools of leveraged carry trades.

They have promised more than they can possibly deliver, so a lot of their promises are going to be broken before we see the end of this current bust that began in 2000. And that outcome of broken promises describes the huge task that we all face. There will be a day of reckoning. There always is when an economy and governments take on more debt than is prudent, and the world is far beyond that point. So everyone needs to plan and prepare for that day of reckoning. We can't predict when it is coming, but we know from monetary history that busts follow booms, and more to the point, that currencies collapse when governments make promises that they cannot possibly fulfill. Their central banks print the currency the government wants to spend until the currency eventually collapses, which is a key point of The Money Bubble. The world has lost sight of what money  What today is considered to be money is only a money substitute circulating in place of money. J.P. Morgan had it right when in testimony before the US Congress in 1912 he said: "Money is gold, nothing else." Because we have lost sight of this wisdom, a "money bubble" has been created. And it will pop. Bubbles always do.

The winner of a currency war is the country that ends up with the most gold.

Following the 20% devaluation of Kazakhstan's currency on Tuesday, the nation has quietly drifted into a very un-safe scenario. As the following clip shows, tanks and Humvees are lining the streets around Almaty as stores are closed and food is running desperately short. Local accounts note that the people are growing increasingly indignant. At a mere 192bps, the cost of protecting Kazakhstan sovereign debt from default (or further devaluation) seems cheap in light of this.

I crush the JP Morgan Managing Director and Head of FX, John Normand, and his false-factual rant against Bitcoin. Fear, envy & loathing in seeing your bonus floating margin at cryptocurrency risk!

The German Constitutional Court’s recent decision to refer the complaint against the European Central Bank’s so-called “outright monetary transactions” to the European Court of Justice (ECJ) leaves the scheme’s fate uncertain. What is clear is that the economics behind OMT is flawed – and so is the politics. The line between audacity and hubris is a fine one. Rather than constituting a great success, OMT may well be remembered as an error born of expediency. Worse, it could undermine the ECB’s hard-won independence and credibility. That is an outcome that the eurozone might not survive.

The chart below is very familiar to anyone who was observing the hourly turmoil in the European bond market in November of 2011, when Italian bonds crashed, when yields soared to record levels, and every downtick of the Euro could have been its last. What the chart may not show are the dramatic transformations in Italy's government that took place just as the Italian bond spread exploded, which saw the resignation of career-politician Sylvio Berlusconi literally days after yields soared, and the instatement of Goldman technocrat Mario Monti as Italy's next Prime Minister. In fact as some, certainly this website, had suggested the blow out in Italian yields was merely a grand plan orchestrated to usher in a new Italian government that would, with the support of yet another Goldman alum, the ECB's then brand new head Mario Draghi, unleash a new era in Italian life, supposedly one of austerity, and which would give the impression that Europe is being fixed all the while preserving the broken European monetary system for at least another year or two. In other words a grand conspiracy theory of a pre-planned bloodless coup.... And so, as lately so often happens, courtesy of the narrative by Alan Friedman of what really happened that summer, this too conspiracy theory has just become conspiracy fact.

Argentina is a country re-entering crisis territory it knows too well. The country has defaulted on its sovereign debt three times in the past 32 years and looks poised to do so again soon. Its currency, the peso, devalued by more than 20% in January alone. Inflation is currently running at 25%. Argentina's budget deficit is exploding, and, based on credit default swap rates, the market is placing an 85% chance of a sovereign default within the next five years. Want to know what it's like living through a currency collapse? Argentina is providing us with a real-time window.

The point isn't that "the Fed can't do that;" the point is that the Fed cannot create a bid in bidless markets that lasts beyond its own buying. The Fed can buy half the U.S. stock market, all the student loans, all the subprime auto loans, all the defaulted CRE and residential mortgages, and every other worthless asset in America. But that won't create a real bid for any of those assets, once they are revealed as worthless. The nuclear option won't fix anything, because it is fundamentally the wrong tool for the wrong job. Holders of disintegrating assets will be delighted to sell the assets to the Fed, of course, but that won't fix what's fundamentally broken in the American and global economies; it will simply allow the transfer of impaired assets from the financial sector and speculators to the Fed.