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New Zealand tech CEO, Kim Dotcom did the math on the United States’ sovereign debt and he tweeted a thread about it, saying it may the most important thread that he may ever make.

Kim explains that US spending and debt have spiraled out of control and the Government can only raise the money it needs by printing more of it, which means that hyperinflation is guaranteed.

He says this has been going on for decades and there’s no way to fix it and that the US got away with this for so long, because US dollar is the world’s reserve currency. When the US Government prints trillions, it is thereby robbing Americans and the entire world in what he calls the biggest theft in history.

He says the total US debt is at $90 trillion, which together with $169 trillion in US unfunded liabilities totals $259 trillion, which is $778,000 per US citizen or $2,067,000 per US Taxpayer.

Now, the value of all US assets combined: every piece of land, real estate, all savings, all companies, everything that all citizens, businesses, entities and the state own is worth $193 trillion.

Our total debt, $259 trillion minus our total net worth, $193 trillion equals negative $66 trillion of debt and liabilities after every asset in the US has been sold off.

So even if the US could sell all assets at the current value, which is impossible, it would still be broke.

This is where the ‘Great Reset’ comes in and he asks, “Is it a controlled demolition of the global markets, economies and the world as we know it? A shift into a new dystopian future where the elites are the masters of the slaves without the cosmetics of democracy?”

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

Blain’s Morning Porridge – May 11th 2020 – Bond Triggers Tumble

May 11, 2020

Blain’s Morning Porridge – May 11th 2020 – Bond Triggers Tumble

“When this baby hits 88 miles per hour, you’re going to see some serious…. “

After last night’s Boris announcement on not reopening the economy, it clearly doesn’t need any further explanation.. (US Readers – complex sarcasm alert.)

Over the course of the lockdown, I’ve been brushing up on Quantum Entanglement Theory and almost accidently I’ve created a time machine. I’m not quite sure how it works – so I reckon that qualifies me a job in Whitehall – but I was able to download The Morning Porridge from May 2021…..

*********************

Blain’s Morning Porridge – May 2021

“Sell in May – oh don’t bother – you are already away…”

It’s just over a year since 20mm Americans lost their jobs in a single month and United Airline’s failed $2 bln bond issue in the first week of May 2020 became the unstable pebble that triggered the most devasting landslide in financial market history.

All around the globe, bond investors woke up to their doubts on just how much government QE programmes, miniscule yields, and the value of their collateral of unproductive obsolete economic assets could be. Equity holders caught the whiff of panic – figuring out rising P/E’s in a crashing global economy meant nothing – even if central banks were promising to intervene. Sovereign debt buyers went on immediate strike, citing concerns on debasement, inflation, and the implausible promises being made.

The result was the most precipitious tumble in history – everyone tried to exit the markets and discovered the truth: “there are many ways to buy, but only one exit marked sell.”

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

“Yellow Light” – Is The Credit Market Finally Reversing

July 26, 2019

“Yellow Light” – Is The Credit Market Finally Reversing

Keep digging

Yesterday, the European Central Bank held a stand-pat meeting, keeping the benchmark deposit rate at negative 40 basis points.

However, ECB president Mario Draghi indicated that rate cuts and a resumption of asset purchases are on tap for September. In the accompanying presser, the outgoing ECB chief captured the mood of central bank-levitated markets, stating that: “it’s difficult to be too gloomy today,” while the outlook “is getting worse and worse.” The German 10-year yield traded as low as negative 42 basis points, briefly crossing below the 40 basis point deposit rate.

While sovereign debt holders continue to rack up mark-to-market gains, not everyone is enamored with the prospect of still-more negative interest rates.

“We already have a devastating interest rate situation today, the end of which is unforeseeable,” Peter Schneider, who represents banks in the south-eastern German state of Baden-Württemburg, told Bloomberg yesterday.
“If the ECB aggravates this course, that would hit not only the entire financial sector hard, but especially savers.”

Meanwhile, policymakers down under attempt to quantify the practical limits of negative policy rates. In a paper written to New Zealand finance minister Grant Robertson in January and recently released to the public, staffers in the Treasury Department concluded:

“The Reserve Bank expect rates could only fall at most 35 basis points below zero before risking the hoarding of physical cash.”

Today, the global stock of negative-yielding debt rose to $13.74 trillion, a new record.

Yellow light

As we close out month 121 of the longest economic expansion on record, let’s take a look at the state of U.S. corporate credit. Year to date, investment-grade bonds have generated a whopping 12.3% total return, while high-yield has returned 10.6%. Leveraged loans have lagged far behind, with the LSTA Index gaining just 3.3% so far this year.

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

The Once and Future Unit of Finance – Precious Metals Supply and Demand

December 20, 2018

The Once and Future Unit of Finance – Precious Metals Supply and Demand

Sally Forth and Speculate on my Behalf!

Last week, the price of gold was down ten bucks and silver four cents. Someone on Twitter demanded if we didn’t find it odd that the biggest sovereign debt bubble has managed to inflate a bubble in virtually every asset price except for gold.

Snapshot from a recent Goldbugs Anonymous meeting. Why, oh why have you failed to bubble my asset, dear fellow speculators? [PT]

Given that he went on to assert there is a bubble in paper gold claims, he is trying to say that gold has to besuppressed. Otherwise its price would be much higher. We won’t reiterate here the proof that this conspiracy theory is false.

Instead, we want to address two points. One, the term bubble is used quite flexibly. Does it mean the price of something is too high? For example, the S&P Index at nearly 3000. Or does it mean there is too much quantity of something, e.g. debt.

Or that something is being done to unhealthy degree, e.g. sending non-students off to university to get degrees that will not increase their employability? One should use each word with care and precision. Otherwise ambiguity permits one to migrate freely between different concepts.

Clearly, this guy is jealous that the prices of other assets have gone up, making other speculators rich. But the price of gold has not, thus not making him rich. Instead of admitting he was wrong to believe the gold-to-$10,000 story, he blames the world. Also, he is wrong about something else. The price of oil has not exactly gone up; or real estate in many non-trendy locations.

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

Five Pillars of Debt Default

July 17, 2018

Five Pillars of Debt Default

Regular readers of Gold Goats ‘n Guns know that I’ve been handicapping a major sovereign debt default to begin here in 2018 or early 2019. But, what do I mean by that?

How does a sovereign debt default come about? And who will default?

There are a staggering number of factors that feed into this thesis but, for me, to keep it simple it comes down to five important trends coming to a head at the same time.

I call them the Five Pillars.

#1 Massive Foreign Corporate Debt

After ten years of ‘experimental monetary policy’ which drove borrowing costs in U.S dollars down to record lows, foreign companies still reeling from the after-effects of the 2008 financial crisis borrowed trillions of dollars to fund the global expansion of the past few years.

That debt pays investors in US dollars.

But, foreign companies tend to book revenue in their local currency.

A falling local currency makes dollar-denominated debt more expensive to pay off.

This leads to the next Pillar…

#2 Quantitative Tightening.

QT is simply the opposite of QE, Quantitative Easing. QE expanded the stock of dollars. QT is contracting it. This is what is fueling a rising U.S. dollar. This, in turn, is making it harder for foreign companies to keep up with their bond payments.

They are forced to sell, aggressively, their local currency and buy dollars in the open market.

This is why the Turkish Lira is in serious trouble, for example.

That puts pressure on the country’s sovereign bond market. Since a falling currency lowers the real rate of return on the bond.

Falling currency, falling bonds, Turkey will put on capital controls next.

This feeds into the next Pillar…

#3 Political Unrest in Europe and Emerging Markets

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

Which Banks Are Most Exposed to Italy’s Sovereign Debt? (Other than the Horribly Exposed Italian Banks)

May 29, 2018

Which Banks Are Most Exposed to Italy’s Sovereign Debt? (Other than the Horribly Exposed Italian Banks)

“Doom loop” begins to exact its pound of flesh.

Risk. Exposure. Contagion. These are three words we’re likely to hear more and more in relation to Europe, as the Eurozone’s debt crisis returns.

On Friday, Italy’s 10-year risk premium — the spread between Italian ten-year bond yields and their German counterparts — surged almost 20 basis points to 212 basis points. This was the highest level since May 2017, when a number of Italy’s banks, including third biggest bank Monte dei Paschi di Siena (MPS), were on the brink of collapse and were either “resolved” or bailed out. Now, they’re all beginning to wobble again.

Shares of bailed-out and now majority-state-owned MPS, whose management the new government says it would like to change, are down 20% in the last two weeks’ trading. The shares of Unicredit and Intesa, Italy’s two biggest banks, have respectively shed 10% and 18% during the same period.

One of the big questions investors are asking themselves is which banks are most exposed to Italian debt.

A recent study by the Bank for International Settlements shows Italian government debt represents nearly 20% of Italian banks’ assets — one of the highest levels in the world. In total there are ten banks with Italian sovereign-debt holdings that represent over 100% of their tier-1 capital (which is used to measure bank solvency), according to research by Eric Dor, the director of Economic Studies at IESEG School of Management.

The list includes Italy’s two largest lenders, Unicredit and Intesa Sanpaolo, whose exposure to Italian government bonds represent the equivalent of 145% of their tier-1 capital. Also listed are Italy’s third largest bank, Banco BPM (327%), Monte dei Paschi di Siena (206%), BPER Banca (176%) and Banca Carige (151%).

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

The Mind Blowing Concept of “Risk-Free’ier”

March 28, 2018

The Mind Blowing Concept of “Risk-Free’ier”

The Earth is flat
Cigarettes are healthy
Leeches are the cure for everything
The universe revolves around the Earth
California is an island
Red wine is healthy, unhealthy, healthy…

Facts are essential as they offer humans a sense of stability in a chaotic world. For instance, we find comfort in the “fact” that the life-sustaining sun will continue to shine for billions of years. If there were serious doubts about this fact, our lives would be very different today.

In this article, we debunk a “fact” that serves as the foundation for the pricing of all financial assets. It was not that long ago that people who thought the earth round were labeled delirious madmen. Today, questioning the “risk-free” status of U.S. Treasury securities (UST), as we do, will lead many financial professionals to decry our prudence as foolish irrationality. That said, we would rather assess the situation objectively than get caught “swimming naked when the tide goes out”.

Mesofacts

In a must-read article entitled, My Leitner-esque Moment, Kevin Muir of The Macro Tourist blog broaches the topic of sovereign debt risk and, in what must be a moment of temporary insanity, questions the so-called “risk-free” status of UST.

Sovereign debt risk exists and said bonds default from time to time. Despite history and facts, associating the word “risk” with UST is for some reason blasphemous amongst financial professionals. The yields of UST are treated by all investors, even those nay-sayers like Muir and ourselves, to be the risk-free rate. This argument does not refer to the risk of changing yields but more importantly to that of credit risk.

All financial and investment models and theories assume that UST have no credit risk which, by definition, implies zero chance of default. What in this world has no risk? If you can name something, congratulations, we cannot.

For background, consider that sovereign debt defaults have been commonplace among big and small countries. The graph below shows the frequency by country since 1800.

Graph Courtesy Carmen Reinhart and Kenneth Rogoff

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

Despite Years of ECB’s QE (Ending Soon), Italy’s “Doom Loop” Still Threatens Eurozone Financial System

March 16, 2018

Despite Years of ECB’s QE (Ending Soon), Italy’s “Doom Loop” Still Threatens Eurozone Financial System

Even banks outside Italy have an absurdly out-sized exposure to Italian sovereign debt.

The dreaded “Doom Loop” — when shaky banks hold too much shaky government debt, raising the fear of contagion across the financial system if one of them stumbles — is still very much alive in Italy despite Mario Draghi’s best efforts to transfer ownership of Italian debt from banks to the ECB, according to Eric Dor, the director of Economic Studies at IESEG School of Management, who has collated the full extent of individual bank exposures to Italian sovereign debt.

The doom loop is a particular problem in the Eurozone since a member state doesn’t control its own currency, and cannot print itself out of trouble, which leaves it exposed to credit risk.

The Bank of Italy, on behalf of the ECB, has bought up more than €350 billion of multiyear Treasury bonds (BTPs) in recent years. The scale of its holdings overtook those of Italian banks, which have been shedding BTPs since mid-2016, making the central bank the second-largest holder of Italian bonds after insurance companies, pension funds and other financials.

But Italian banks are still big owners of Italian debt. According to a study by the Bank for International Settlements, government debt represents nearly 20% of banks’ assets — one of the highest levels in the world. In total there are ten banks with Italian sovereign debt holdings that represent over 100% of their tier 1 capital (or CET1), according to Dor’s research. The list includes Italy’s two largest lenders, Unicredit and Intesa Sanpaolo, whose exposure to Italian government bonds represent the equivalent of 145% of their tier 1 capital. Also listed are Italy’s third largest bank, Banco BPM (327%), MPS (206%), BPER Banca (176%) and Banca Carige (151%).

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

Debt is a Determining Factor in History

December 14, 2017

Debt is a Determining Factor in History

Photo by airpix | CC BY 2.0

Sovereign debt has been a crucial factor in a series of major historical events. From the early 19^th century, in Latin American countries such as Colombia, Mexico and Argentina, struggling for independence,as well as Greece when seeking funds for its war of independence, these nascent countries borrowed from London bankers under leonine conditions which finally subjugated them into a new cycle of subordination.

Other states lost their sovereignty quite officially. Tunisia enjoyed some amount of autonomy in the Ottoman Empire, but was indebted to Parisian bankers. France used the ruse of debt to justify its tutelage over Tunisia and its colonization. Ten years later, in 1882, Egypt similarly lost its independence. In the pursuit of recovering debts owed to the English banks, Great Britain launched a military occupation of the country and then colonized it (http://www.cadtm.org/Debt-as-an-ins… ).

Debt “assures” the domination of one country over another

The Great Powers were quick to realise that the interest from a country’s external debt would be massive enough to justify a military intervention and a tutelage, at a time when it was considered acceptable to wage wars for debt recovery.

The 19^th century Greek debt crisis resembles the current crisis

The problems flaring up in London in December 1825, ensued from the first major international banking crisis. When banks feel threatened, they no longer want to lend, as could be seen after the Lehman Brothers crisis in 2008. Emerging states, such as Greece, had borrowed under such obnoxious conditions, and the sum in hand was so little compared to the actual loan, that fresh borrowing became necessary to repay their existing debt. When the banks stopped lending, Greece was no longer able to refinance its debt and so suspended repayments in 1827.

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

Rig For Stormy Weather

December 5, 2017

Rig For Stormy Weather

What storm? The Dow Jones Industrial Average (DOW) reached another all-time high. Interest rates in the U.S. are yielding multi-decade lows, some say multi-century lows. Trillions of dollars in global sovereign debt have negative yield and European junk bonds yield less than 10 year U.S. treasuries. “Official” unemployment is low. Borrowing is inexpensive. Things are good, so they say!

I Doubt It!

Do you believe the above is a fair and accurate representation of our economic world? If so, how do you explain the following?

Global debt exceeds $200 trillion and is rising rapidly. This massive debt will NOT be paid back in currencies with 2017 purchasing power. Debt MUST be rolled over in continually DEVALUING dollars, euros, yen and pounds.
The financial system rolls over maturing debt, adds more, and pretends repayment will not be problematic. Those who hope this will remain true ignore the lessons of history, including sky-high interest rates in the late 1970s, the Asian and Long Term Capital crises in the late 1990s, many defaults and hyperinflations in the last century and the credit-crunch-recession-market-crash of 2008.
Official inflation statistics show that consumer price inflation is low – supposedly in the two percent range. However, if you pay for health care, hospital bills, prescription drugs, Obamacare, beer, cigarettes, college tuition, fresh vegetables, processed food, auto insurance, and many other necessities, you know better. The Chapwood Index agrees with your experience. Their statistics show consumer price inflation is much higher than official numbers.
National debt – the official debt of the U.S. government exceeds $20.5 trillion – more than the U.S. Gross Domestic Product. The debt has increased exponentially (straight line on a log scale chart) for the past century.

Interest paid on the official national debt is approximately $500 billion per year and climbing. Congress is influenced by the financial elite and will not operate within a balanced budget. Therefore the U.S. will pay more interest each year.

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

The Long and Winding Road to a Haircut

December 2, 2017

People queue to withdraw money from an ATM in Caracas

The Long and Winding Road to a Haircut

There are significant differences between Puerto Rico and Venezuela regarding the origins of their economic crises, their political systems, their relationship with the US and the rest of the world, and much else. Nonetheless, some notable similarities are likely to emerge as their debt sagas unfold.

CAMBRIDGE – Default is back. Sovereign finances weathered a wrenching global recession and a collapse in commodity prices surprisingly well over the past few years. But failed economic models cannot limp along forever, and the slow bleeding of the economies of Puerto Rico and Venezuela have now forced their leaders to say “no mas” to repaying creditors.

Earlier this year, Puerto Rico declared bankruptcy. At the time, the United States commonwealth had about $70 billion in debt and another $50 billion or so in pension liabilities. This made it the largest “municipal” bankruptcy filing in US history.

The debt crisis came after more than a decade of recession (Puerto Rico’s per capita GDP peaked in 2004), declining revenues, and a steady slide in its population. The demographic trends are all the more worrisome because those fleeing Puerto Rico in search of better opportunities on the US mainland are much younger than the population staying behind. And in September, at a time of deepening economic hardship, hurricane Maria dealt the island and its residents an even more devastating blow, the legacy of which will be measured in years, if not decades.

More recently, in mid-November, Venezuela defaulted on its external sovereign debt and debts owed by the state-owned oil company, PDVSA. Default on official domestic debt, either explicitly or through raging hyperinflation, had long preceded this latest manifestation of national bankruptcy.

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

EU Concern Rising About Italian Debt

November 24, 2017

EU Concern Rising About Italian Debt

The EU Commission is deeply concerned that Italy is under pressure to spend frivolously because of the upcoming elections. The EU is apply more scrutiny for Italy’s huge sovereign debt. Because of the vast size of the Italian economy, the high level of total debt is a major cause for the Eurozone as a whole. The EU Commission sent a letter to the Italian government warning them not to deviate from the course of fiscal consolidation before the parliamentary elections in the spring.

Instead of creating simply a trade union, the idea that a single currency would save the day has seriously distorted reality. This idea of surrendering sovereignty by each member state to maintain a single currency if the worst possible design. Had the EU consolidated the debts and thereby created a federal EU debt, then each member state would have been responsible for themselves. In the USA, we have 50 states issuing debt in dollars, yet they have no part in the dollar. Had Europe consolidated the debts and drew the line in the sand at that moment, then states would be able to issue whatever debt the market would accept. This way, Brussels imposes austerity upon member states simply because they failed completely to comprehend the nation of the system they were creating.

How Cheap Debt Avoids Countries Of Going Bankrupt

March 5, 2017

How Cheap Debt Avoids Countries Of Going Bankrupt

It’s not a secret the cheap debt policy from the European Central Bank has really helped out several European countries to keep the government finances under control. Well, more or less, as several members of the Eurozone are still running huge budget deficits.

Source: European Commission

When the ECB was created, its main ( and sole) mission was to keep an eye on the monetary policy in the Eurozone and to ensure price stability. The focus was on the inflation rate, which should be approximately 2% as that was thought to be ideal in the longer term. In order to keep the economy going and to boost the inflation rate, the ECB has started an asset purchase program just a few years ago. This would allow the Central Bank to pump more liquidity into the system.

Source: ECB.europa.eu

This plan was expected to have a ‘trickle down’ effect, but in reality most of the cash has been sticking to the wrong fingers. Banks and asset managers are benefiting, but the common man on the street doesn’t notice any benefit.

Au contraire, as the requirements for mortgages are becoming more strict, and you can just forget about easy access to credit cards or personal loans.

So let’s be clear, the low interest rate isn’t serving any other purpose than to make the institutions rich.

And we aren’t talking about a few billion and not even about a few hundred billion euro, as you can see on the next chart. The counter is at in excess of 1.6 trillion… and counting.

Source: Royal Bank of Canada

But perhaps more important, it also avoids the annual government budgets to fall off a cliff. In fact, even Jens Weidmann, one of the most fierce opponents of the buyback program, now expects the ECB to continue the purchase program.

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

Europe or Anti-Europe?

March 5, 2017

Europe or Anti-Europe?

MILAN – A knowledgeable friend in Milan recently asked me the following question: “If an outside investor, say, from the United States, wanted to invest a substantial sum in the Italian economy, what would you advise?” I replied that, although there are many opportunities to invest in companies and sectors, the overall investment environment is complicated. I would recommend investing alongside a knowledgeable domestic partner, who can navigate the system, and spot partly hidden risks.

Of course, the same advice applies to many other countries as well, such as China, India, and Brazil. But the eurozone is increasingly turning into a two-speed economic bloc, and the potential political ramifications of this trend are amplifying investors’ concerns.

At a recent meeting of high-level investment advisers, one of the organizers asked everyone if they thought the euro would still exist in five years. Only one person out of 200 thought that it would not – a rather surprising collective assessment of the trending risks, given Europe’s current economic situation.

Right now, Italy’s real (inflation-adjusted) GDP is roughly at its 2001 level. Spain is doing better, but its real GDP is still around where it was in 2008, just prior to the financial crisis. And Southern European countries, including France, have experienced extremely weak recoveries and stubbornly high unemployment – in excess of 10%, and much higher for people younger than 30.

Sovereign debt levels, meanwhile, have approached or exceeded 100% of GDP (Italy’s is now at 135%), while both inflation and real growth – and thus nominal growth – remain low. This lingering debt overhang is limiting the ability to use fiscal measures to help restore robust growth.

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

With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict

July 10, 2016

With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict

Friday’s unprecedented surge to all time highs in both stock and treasury prices, has got analysts everywhere scratching their heads: which is causing which, and what happens if there is a violent snapback in yields like for example the infamous bund tantrum of May 2015.

But first, the question is what exactly will pause what the WSJ calls the “Black Hole of Negative Rates” which is dragging down yields everywhere. Here is how the WSJ puts it:

The free fall in yields on developed-world government debt is dragging down rates on global bonds broadly, from sovereign debt in Taiwan and Lithuania to corporate bonds in the U.S., as investors fan out further in search of income. Yields in the U.S., Europe and Japan have been plummeting as investors pile into government debt in the face of tepid growth, low inflation and high uncertainty, and as central banks cut rates into negative territory in many countries. Even Friday, despite a strong U.S. jobs report that helped send the S&P 500 to a near-record high, yields on the 10-year Treasury note ultimately declined to a record close of 1.366% as investors took advantage of a brief rise in yields on the report’s headlines to buy more bonds.

As yields keep falling in these haven markets, investors are looking for income elsewhere, creating a black hole that is sucking down rates in ever longer maturities, emerging markets and riskier corporate debt.

“What we are seeing is a mechanical yield grab taking place in global bonds,” said Jack Kelly, an investment director at Standard Life Investments. ” The pace of that yield grab accelerates as more bond markets move into negative yields and investors search for a smaller pool of substitutes.”

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

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