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“One Size Fits Germany” Math Impossibility, Get Your Money Out of Italy Now!

Italy, on the Euro, has a currency that is 9% too high. Germany, on the Euro, has a currency that is 11% too low.

There was much discussion yesterday about the US Treasury report that determined China was not a currency manipulator.

However, there are six countries on the manipulation watch list: China, Japan, Korea, India, Germany, and Switzerland.

  • Japan, Germany, and Korea have met two of the three criteria in every Report since the April 2016 Report having material current account surpluses combined with significant bilateral trade surpluses with the United States.
  • Germany has the world’s largest current account surplus in nominal dollar terms, $329 billion over the four quarters through June 2018, which represented its highest nominal level on record. Germany also maintains a sizable bilateral goods trade surplus with the United States, at $67 billion over the four quarters through June 2018. There has been essentially no progress in reducing either the massive current account surplus or the large bilateral trade imbalance with the United States in recent years, in part because domestic demand in Germany has not been sufficiently strong to facilitate external rebalancing and because Germany’s low inflation rate has contributed to a weak real effective exchange rate.

Try Fixing This

  1. The Euro is 11% undervalued in Germany, the largest Eurozone economy.
  2. The Euro is 9% overvalued in Italy, the third largest Eurozone economy.

The normal way central banks make adjustments to fix over-valued or undervalued situation is through interest rate policy or direct currency intervention.

No matter which the ECB does, it will impact Italy and Germany in opposite directions.

Meanwhile, interest rates are on the verge of spiraling out of control in Italy.

Italy vs Germany 10-Year Bond Spread

…click on the above link to read the rest of the article…

Russia And China Prepare To Ditch Dollar In Bilateral Trade

In a time when many nations have gone public with their intention to ditch the dollar in part or in whole, in bilateral trade with non-US counterparts, either to prevent the US from having “veto power” of commerce courtesy of SWIFT or simply in response to Trump’s “America First” doctrine, attention has long focused on Russia and China – the two natural adversaries to the US – to see if and when they would accelerate plans for de-dollarization.

To be sure, the two nations wouldn’t be the first to reduce their reliance on the dollar, as we have discussed in recent months:

However, when it comes to symbolism and optics, no other pair of nations would have as much an impact in dumping the dollar as (quasi) superpowers China and Russia. Which is why we found it a material development when Russia’s Ministry of Economic Development said on Thursday that Moscow and Beijing are working on an inter-governmental agreement to expand the use of the ruble and yuan in mutual trade settlements.

“The document is currently being prepared, the process is not easy,” said Deputy Minister of Russia’s Economic Development Sergey Gorkov, as quoted by TASS. “Russia and China have had some experience of using national currencies in bilateral trade.”

…click on the above link to read the rest of the article…

The ECB on the Verge of Collapse?

 

The European Central Bank (ECB) will NOT aid Italy with an EU rescue program if the country or its banks are in financial turmoil. The Italian government is taking the view that Italy has become an “occupied” country and that Germany has conquered Europe imposing austerity and its view of inflation upon the whole of Europe without firing a shot. While the spin is that the ECB is making Italy a test case to demonstrate that Europe and its mechanisms work, in reality, it is a realization that the ECB cannot save Italy’s financial institutions because austerity has created the greatest economic depression perhaps in economic history.

The new five-star Movement in Rome and Lega have been on a confrontational course with the EU Commission, as they plan a higher level of new debt to fulfill election promises. The EU Commission, on the other hand, is calling for less spending and the implementation of austerity as demanded by Germany. Italy is already sitting on a debt of around 131% of GDP. The financial markets are nervous for they see a confrontation that could tear Europe apart at the seams. Italy now has to offer investors significantly higher interest rates when placing its government bonds in order to raise money. In addition, the gap to the yield of German government bonds widened. But in reality, stopping the ECB’s Quantitative Easing will result in interest rates rising by at least 300% very rapidly. Italy is getting ahead of the curve BEFORE everything comes crashing down.

…click on the above link to read the rest of the article…

Oil’s $133 Billion Black Market

Oil’s $133 Billion Black Market

rig

Oil is still the world’s leading energy source, with growing demand, a fluctuating pricing system, and much of its production in volatile regions. The oil market’s value is larger than the world’s valuable raw metal markets combined, with an annual production valued at US$1.7 trillion. A flourishing black market is no surprise, with about US$133 billion worth of fuels stolen or adulterated every year. These practices fund dangerous non-state actors such as the Islamic State, Mexican drug cartels, Italian Mafia, Eastern European criminal groups, Libyan militias, Nigerian rebels and more – and are a major global security concern.

The top five countries accused of oil trafficking – Nigeria, Mexico, Iraq, Russia, and Indonesia – are also producers. It is estimated that Nigeria alone loses US$1.5 billion a month due to pipeline tapping, illegal production and other sophisticated schemes. In Southeast Asia, about 3 percent of the fuel consumed is sourced from the black market, estimated to be worth up to US$10 billion a year. In Mexico, drug cartels launder drug revenues through the oil trade

Other countries are not immune. Turkey is not an oil producer yet serves as a major transit route for hydrocarbons flowing to Europe from OPEC countries like Iraq and Iran. As an energy hub, Turkey is strategically situated for the illegal trade and lost an estimated US$5 billion in tax revenue in 2017. An uptick in smuggling oil and other refined products began 2014, when ISIS took control of major Syrian and Iraqi oil fields.

As with most commodities, the volume of oil smuggling is primarily linked to fluctuating prices. With climbing oil prices, illicit trade is expected to increase.

…click on the above link to read the rest of the article…

Inevitable De-Industrialisation of Europe

EU ministers agreed to binding cuts in CO2 emissions of 35% by 2030. The German auto industry won’t be able to deliver.

Hamburg was first in May. Stuttgart, home of Mercedes and Porsche, was second in July.

A diesel ban in Frankfurt came third.

Only older cars that do not meet emission standards are banned, but diesel is now toxic. No one wants to buy diesel.

Merkel Can No Longer Protect Car Makers

Adding to the woes, Merkel has lost control. She is no longer able to protect German industry.

The European Parliament just voted to cut CO2 emissions by 40%. The European ministers voted for a 35% reduction. The latter is binding.

Car sales dropped sharply in September.

Eurointelligence on Autos and German Industry

The German government – backed by its usual eastern European allies – fought in vain to head off the tougher standards.

Germany’s environment minister Svenja Schulze deliberately – and astonishingly – weakened her own negotiating position by making clear that her personal preference would have been for tougher targets than those she was officially defending as her government’s position.

An administrative court in Berlin decided yesterday that the city of Berlin needs to ban diesel cars – compliant with Euro norms five and earlier – in important areas of the city, including Friedrichstrasse and Leipziger Strasse. There is no ban for petrol cars as the emissions in question are nitrogen oxide. The ban will have to be implemented by July 2019 at the latest. The plaintiff was a German environmental NGO, which had sued for a city-wide ban of diesel.

Car Sales Plunge

…click on the above link to read the rest of the article…

US Officials Say Russia To “Seize” Syria’s Oilfields As Moscow Presses Europe On Reconstruction

Russia is attempting to woo European countries like Germany into a program of reconstruction cooperation in Syria, where broad swathes of the country have been destroyed through seven years of grinding proxy war; however, Pentagon officials have charged Russia with wanting to “seize” Syria’s oil and gas resources.

This comes as the United States has resolved to keep its over 2,000 troops in the east of Syria while vowing zero reconstruction aid so long as Iranian troops and advisers are present in the country. This week a top US military official even went so far as to accuse Russia of seeking “to take advantage in any way they could” and that a “great power competition” for Syria will continue to shape its post-war future.

Air Force Brig. Gen. Leah Lauderback, who served as director of intelligence for Operation Inherent Resolve until June, told an Army conference that “Great power competition was an objective by Russia,” and that specifically they are looking to “seize” oilfields in Syria. But a Russian official has slammed the US and Europe as living in a “fantasy land” if they still have removal of Assad on the table as “radicals will take over that will slit people’s throats’’ should regime change happen.

Al Omar Oil Field in Deir ez-Zor, Syria

Gen. Lauderback said of Russia in the context of discussing US anti-ISIS operations at an Army conference in D.C. this week: “Economically, they wanted to seize oilfields, they wanted bids and contracts to develop Syria for infrastructure in order to stabilize Syria over the long term,” she said according to Al-Monitor news.

…click on the above link to read the rest of the article…

Does the United States strive for a new Cold War?

Does the United States strive for a new Cold War?

Donald Trump’s administration regularly increases military presence in Central Europe. The currently discussed idea is to create an American permanent military base in Poland, that is to say, a further shift of the US military presence towards the Russian border. The question arises whether, through the constant presence of the US Army in Poland, Donald Trump wants to improve the defense of the Old Continent or strives to play against each other the interests of individual members of the European Union. The weaker Europe is, the stronger is the United States.

Although the idea of American permanent military presence in Central Europe is not new, it gained much publicity after the September meeting at the White House between Polish President Andrzej Duda and Donald Trump. Warsaw suggested not only building a base but also a name for it: Fort Trump. After initial doubts, Washington, noting the benefits which it might derive, accepted this proposal.1)That’s why a few days later, Secretary of Defense Jim Mattis reported that certain areas are already being evaluated whether they are suitable for this purpose.2)Leaving aside the issue of allegedly improving the security of NATO’s eastern flank, there is more to see than meets the eye in the permanent presence of Americans in Poland. Warsaw perceives the United States as an ally in an ongoing dispute with the EU. Relations between Brussels and Washington have also deteriorated. Therefore, by relocating its troops to the east, the United States would be putting pressure on Germany to increase defense spending, import US LNG or veto Nord Stream II.

…click on the above link to read the rest of the article…

The World Is Quietly Decoupling From the U.S. – And No One Is Paying Attention

 

Blind faith in the U.S. dollar is perhaps one of the most crippling disabilities economists have in gauging our economic future. Historically speaking, fiat currencies are essentially animals with very short lives, and world reserve currencies are even more prone to an early death. But, for some reason, the notion that the dollar is vulnerable at all to the same fate is deemed ridiculous by the mainstream.

This delusion has also recently bled into parts of the alternative economic movement, with some analysts hoping that the Trump Administration will somehow reverse several decades of central bank sabotage in only four to eight years. However, this thinking requires a person to completely ignore the prevailing trend.

Years before there was ever an inkling of a trade war, multiple nations were establishing bilateral agreements that would cut the dollar out of trade. China has been a leader in this effort, despite it being one of the largest buyers of U.S. Treasury debt and dollar reserves since the 2008 crash. In the past few years, these bilateral deals have been growing in scope, starting small and then expanding into massive agreements on raw commodities. China and Russia are a perfect example of the de-dollarization trend, with the two nations forming a trade alliance on natural gas as far back as 2014. That agreement, which is expected to start boosting imports to China this year, removes the need for dollars as a reserve mechanism for international purchases.

Russia and parts of Europe, including Germany, are also growing closer in terms of trade ties. With Germany and Russia entering into the Nordstream 2 gas pipeline deal despite condemnations from the Trump Administration, we can see a clear progression of nations moving away from the U.S. and the dollar, and into a “basket of currencies”.

…click on the above link to read the rest of the article…

Italian Stocks, Bonds Collapse After EU Rejects Rome’s Budget Plans

Italian stocks tumbled with the FTSE MIB dropping 2.3% – the worst performer among major European markets on Monday – and hitting its lowest level since April 2017, while the country’s bonds plunged to the lowest level since February 2014 amid what now appears to be an inevitable showdown between Italy and the EU, after the European Commission said Italy’s budget plans are in breach of common rules.

Over the weekend, the European Commission told Italy it is concerned about its budget deficit plans for the next three years since they breach what the EU asked the country to do in July, but a defiant Rome insisted on Saturday it would “not retreat” from its spending plans.

In a letter to Italy’s Economy Minister Giovanni Tria, the Commission said that with a planned headline deficit of 2.4 percent of GDP in 2019, Italy’s structural deficit, which excludes one-offs and business cycle effects, would rise by 0.8 percent of GDP. Under EU rules Italy, which has a public debt to GDP ratio of 133 percent and the highest debt servicing costs in Europe, should cut the structural deficit every year until balance.

“Italy’s revised budgetary targets appear prima facie to point to a significant deviation from the fiscal path” commonly agreed by European Union governments, EU Commissioners Valdis Dombrovskis and Pierre Moscovici wrote in a letter to Italian Finance Minister Giovanni Tria. “This is therefore a source of serious concern,” the commission’s finance chiefs said in their letter Friday responding to a note sent by Tria the day before.

“We call on the Italian authorities to ensure that the Draft Budgetary Plan will be in compliance with the common fiscal rules,” the letter added at the same time as the council of EU ministers asked Italy in July to reduce that structural deficit by 0.6% of GDP next year, which means the deficit would be 1.4 points off track, Reuters reported.

…click on the above link to read the rest of the article…

Europe’s Junk Bond Bubble Has Finally Burst

Earlier this week, the euphoria over US high yield bonds hit new post-crisis highs when amid a sharp slowdown in supply, a rise in the oil price and generally solid economic conditions, insatiable buyers of junk sent the Bloomberg Barclays Corporate high yield spread to the lowest since before the financial crisis, dropping as low as 303bps, the tightest level since late 2007 before drifting somewhat wider during the late week bond rout.

Yet while the US high yield market remains remarkably resilient in the face of sharply higher yields, the same can not be said of European junk bonds where the bubble may have finally burst.

As Bank of America’s Barnaby Martin writes in his latest research note, in stark contrast to shrinking US spreads, European high-yield spreads have blown out by 70bp wider, with total returns just +13bp, a far cry from the average annual returns of +11% observed over the last decade. Putting this dramatic reversal in context, at the start of the year Euro HY spreads were 80bp tighter than US spreads. Now they are 35bp wider, in large part due to the deterioration in the Italian backdrop, concerns about the end of the ECB’s QE and the recent deterioration in the European economy.

As Martin shows in the chart below, “one has to go back to late 2012 to find that last time that Euro HY spreads were this wide to US spreads.” Also note the variance in quality: 41% of the US HY market is single-B versus just 24% in Europe.

What has prompted this curious reversal in the fates of the European and US junk bond markets? According to Martin, a key theme for European risk assets in general is that Quantitative Tightening by the Fed has made simple “cash” in the US a competitive asset class again.

…click on the above link to read the rest of the article…

Sanctions Busting, European Style

Sanctions Busting, European Style

U.S. officials were infuriated last week when Germany, the UK, and France unveiled plans to create a European payments channel to help Iran to avoid U.S. sanctions. Even more surprising was their chosen allies: in announcing their sanctions busting plan, the Europeans were joined by Russia and China.

There has been very little detail provided on the proposed payments channel. The press release describes it as “a Special Purpose Vehicle, to facilitate payments related to Iran’s exports (including oil) and imports.” Nor did EU High Representative Federica Mogherini’s comments after the press release contain much information about the special purpose vehicle’s technical specifications, other than to say that it would be “opened to other partners in the world.”

Despite the lack of particulars, I’ll make some educated guesses in this post about the intended role of the Special Purpose Vehicle (SPV) and how it will be designed. I think that the SPV will probably be able to carve out some space for the rest of the world to engage in Iranian trade, but we shouldn’t overestimate its power. The U.S., after all, wields an incredible amount of economic might and under Trump hasn’t been shy about deploying it.

Trump leaves the Nuclear Deal

The background for the creation of the new European payments channel is the Trump administration’s recent departure from the Iran nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA). This was a deal signed by the France, UK, Germany, U.S., Russia, and China, or the E3+3, in 2015. The JCPOA promised to normalize Iran’s economic relations with the rest of the world in return for fully-audited limitations on Iran’s nuclear efforts.

…click on the above link to read the rest of the article…

Maybe a rethink from Brussels?

The entire fabric of the European Union is under threat while the hierarchy in Brussels sleepwalks into yet another crisis.

The UK is highly likely to walk away from further Brexit negotiations, Italy which once survived on a diet of high interest rates and high inflation is threatening to blow the whole fiscal responsibility demanded by the ECB apart and the rise in nationalism and demands for a curb on immigration, which was until recently actively encouraged by Germany, continues to be “kicked into the long grass”.

It may just be time for Messrs Juncker and Tusk to re-examine their roles in these crises and to consider the intransigence that has been born from trying to run on so many fronts before it can walk.

Ten years ago, I gave a radio interview in Dubai about my feelings for the longevity of the euro. I made a comment that lived with me for many years, saying that “I would live longer than the euro”. Those words dogged me for quite a while but now I firmly believe again that the state of my health far outweighs that of the common currency despite the Italian Prime Minister calling it “unrenounceable”.

The issues will continue to pile up since trying to govern 28 states (after Brexit) using treaties that become out of date in a modern world almost before the ink is dry and having 28 different points of view on every subject is unworkable.

Furthermore, the absolute basis of the EU, the four freedoms, have become a millstone around the neck of anyone trying to negotiate. If there was no freedom of movement, for example, it is almost certain there would be no Brexit. Even if the UK had still voted for Brexit how much easier would negotiations have been without the Irish border issue?

…click on the above link to read the rest of the article…

US Threatens To Destroy Russian Nuclear-Capable Missile System If Necessary

U.S. Ambassador to NATO Kay Bailey Hutchison on Tuesday warned that the U.S. could be forced to “take out” missiles Russia is developing that violate a Cold War-era treaty. If completed, the 9M729 Russian missile system could give it the capability to launch a missile strike on Europe with little or no notice, the Associated Press reported.

“It is time now for Russia to come to the table and stop the violations,” Hutchison told reporters in Brussels, where US Defense Secretary Jim Mattis would later meet his NATO counterparts. She added that if the system became operational, the U.S. “would then be looking at the capability to take out a missile that could hit any of our countries in Europe and hit America.”

The Novator 9M729 missile system

Hutchison also urged Russia to cease development of the missile system, which fits into a class of banned weapons under the 1987 Intermediate-range Nuclear Forces Treaty.

“There will come a point in the future in which America will determine that it has to move forward with a development phase that is not allowed by the treaty right now,” Hutchison said.

Earlier in the day, NATO Secretary General Jens Stoltenberg urged Russia to be more transparent, and explain its alleged breaches of the INF Treaty.

She also noted that the US had no intentions of violating the 1987 Intermediate-Range Nuclear Forces Treaty (INF), adding, however, that it might occur because of Russia. The pact bans countries from developing land-based cruise missiles with a range of between 310 and 3,410 miles. NATO officials have said the nascent Russian system fits into that category, the AP reported.

According to the US, the new Russian 9M729 missile systems violate the conditions of the pact, as they give Russia the possibility of launching a nuclear strike in Europe with little or no notice.

…click on the above link to read the rest of the article…

Beware of the Real Debt Crisis on the Horizon – not the BS on TV

We have to come to the reality that from 2019 onward, we are headed into a Pension Crisis that will be serious. Many are starting to yell about the debt crisis. They lump on private debt and yell its a bubble. What they miss entirely is the fact that we face more than a decade of crises that would have been avoidable, had governments been actually managers and central bank had not tried to keep using Keynesian Demand Side Economics that even Paul Volcker warned back in 1978 had failed.

This is by no means prophecies of doom and gloom. Unfortunately, they are prophecies not even of a pessimist, but only facts that are comprehensible simply using a pocket calculator and not even a computer. The Pension Crisis is the end of Socialism. Promises that were made which were never sustainable but were a scheme to win votes. Then the money needed to pay the pension required 8% interest annually. Then the central banks enter the game and mess everything up even more. Instead of DIRECTLY aiding the economy, they lower rates and HOPE that the banks will pass it along. They never did. The banks parked the money at the Excess Reserve Window that the Fed has still not closed.

The cost of pensions is currently stifling Western society beyond belief. Europe itself is ahead of the curve and will crack before the United States. Europe already has between  30% to 40% of the population who have already retired or are about to leave the labor market. They have used the old Roman pension system of the army which was earning an average of 20 years service to qualify for a pension. It was the pensions which contributed to the Decline and Fall of the Roman Empire.

…click on the above link to read the rest of the article…

Iran “Finalizing” Mechanism To Bypass SWIFT In Trade With Europe

Just days after Europe unveiled a “special purpose vehicle” meant to circumvent SWIFT and US monopoly on global dollar-denominated monetary transfers – and potentially jeopardizing the reserve status of the dollar – Iran said it was finalizing mechanisms for the oil trade to bypass US sanctions against the country, said Iranian Deputy Foreign Minister Abbas Araghchi.

According to RT, Araghchi said that Tehran is not ruling out the possibility of setting up an alternative to the international payments provider SWIFT to circumvent sanctions imposed by Washington.

As we know, Europeans are also trying to see how SWIFT can continue working with Iran, or if a parallel [financial] messaging system is necessary… This is something that we are still working on,” Araghchi said.

According to the Iranian diplomat, the independent equivalent of the SWIFT system that was earlier suggested by the EU to protect European firms working in Iran from US sanctions will be available for third countries.

This is the important element in SPV (Special Purpose Vehicle) that it is not only for Europeans but other countries can also use this. We hope that before the re-imposition of the second part of the US sanctions [from November 4], these mechanisms can be in place and be functional,” said the official.

One can see why: the Iranian economy has been hit hard in recent days, and the Rial has plunged to all time lows, amid fears that the sanctions will cripple Iran’s most valuable export resulting in a shortage of hard currency, eventually leading to a replica of Venezuela’s economic collapse.

Separately, Iran’s Foreign Ministry spokesman Bahram Qassemi said that “after much negotiation over a clear mechanism with Europe, we have neared certain understandings; and for sure, US sabotage in that regard will fail.”

…click on the above link to read the rest of the article…

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