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The China Syndrome
The China Syndrome
Getting Ugly
I am sure that you have all been watching the meltdown in the Chinese stock markets. I posted a blog (in the China Ad Nauseam section) on May 6 about the Chinese stock market, finishing up with the statement that “this is going to get really ugly.” It looks like the ugliness is here.
I claim no particular prescience here and I certainly wouldn’t want anyone to mistake my writings for investment advice. With this one, the only question was when it would blow, not if. My own investment abilities are largely encapsulated in the famous saying that “the graveyards of Wall Street are filled with the bodies of men who were right too soon.” But this is still better than being right too late.
I won’t bother to repeat all the statistics about the meltdown, which are readily available elsewhere. I just want to make two points.
In the meantime, the Shanghai Composite has bounced a bit, but only after China’s authorities had thrown everything and then some at the situation, including bans on short selling an banning large domestic institutional investors from selling at all, via StockCharts, click to enlarge.
No “Yellen Put”
The first is the implication of what is happening in China for asset prices around the world. The Chinese government is doing everything possible to prop up the market at this point: cutting interest rates, reducing reserve requirements, providing central bank liquidity to brokers, directing government entities to buy shares, organizing “private sector” (as if that phrase means anything in China) stabilization funds, restricting IPOs, loosening margin requirements, restricting short selling, and suspending share trading.
…click on the above link to read the rest of the article…
Bank of Canada Decides More Bubble-Blowing is Needed
Bank of Canada Decides More Bubble-Blowing is Needed
You Can’t Keep the Printing Press Idle for too Long …
We have recently portrayed Canada’s new central bank governor Stephen Poloz, to whom we have alternately referred to as a comedian and a delusional bubble blower. This may perhaps strike some readers as uncharitable; then again, central economic planning bureaucrats should be fair game, especially as nearly all of them are slaves to hoary inflationism and are apodictically certain to do grave damage to the economy, based on economic theories that at best deserve to be called a form of voodoo. It’s really that bad.
Mr. Stephen Poloz, Canada’s new bubble-blower in chief, gazing into the distance – presumably in a futile attempt to divine the future.
Photo credit: Adrian Wyld / The Canadian Press
As readers may recall, Mr. Poloz has continued where his fellow bubble-blower and predecessor Mark Carney left off, by keeping the bubble blown with all his might. We imagine he may be a bit intimidated by the truly daunting size the combined real estate and consumer credit bubbles have attained in Canada. To call them monuments to monetary megalomania would be an understatement. Among developed nations, only the bubbles in a few Scandinavian countries and Australia can hold a candle to them.
Surely Poloz must be aware that there can simply be no painless way of getting out of this mess. Hence, he is trying to delay said end, possibly in the hope that the bust can be postponed beyond his watch (Carney showed judicious timing, we think, when jumping off the Canadian ship).
We were therefore decidedly unsurprised when it emerged yesterday that the Bank of Canada has cut rates again – apparently the Canadian economy has entered an official recession, which must however not be mentioned (!).Really.
According to the Financial Post:
…click on the above link to read the rest of the article…
Greek Parliament Votes In Favor of “Prior Actions” – Protests Erupt in Athens (Live Stream)
Greek Parliament Votes In Favor of “Prior Actions” – Protests Erupt in Athens (Live Stream)
Euro-Group Deal Approved by Greek Parliament
The result of the parliamentary vote in Athens just came through, and was remarkably closely aligned with recent surveys of Greek voters. Funny enough, these surveys revealed approximately 70% approval of the dealoffered by the euro-group among the population. No doubt the fact that the insolvency of Greece’s fractionally reserved banking system was recently painfully revealed to depositors after the ECB froze ELA had something to do with this sudden surge in support. Moreover, it is always possible that a majority of Greece’s citizens actually realizes that there is no way around wide-ranging reform.
Recent polls show soaring support for Syriza in spite of Tsipras ignoring the referendum outcome (source: Keep Talking Greece)
There were 229 “Yes” votes, 64 “No” votes and 6 abstentions. Make of this what you will, but the only parties unanimously voting “No” were the Stalinist KKE and the Neo-Nazi party “Golden Dawn”. In addition, a greater number of Syriza MPs rebelled than was previously expected (apparently 38 of the 149 Syriza MPs voted “No”, roughly equivalent to the size of the party’s Marxist Bloc) . Ironically, even though Mr. Tsipras has decided to completely ignore the “No” vote returned in the referendum, support for Syriza has soared among voters as well.
As a result of the vote, there are now protests in Athens – of which you can see a live stream below:
…click on the above link to read the rest of the article…
Italy – Non-Performing Loans Hit a New Record High
Italy – Non-Performing Loans Hit a New Record High
While all Eyes are on Greece, Italy’s Banks are Drowning in Bad Debt
The real danger to the euro area probably doesn’t emanate from Greece, but from two of its heavyweights, namely France and Italy. A small note in the European press reminds us that all is not well in at least one of these countries, least of all with its banks (currently this is only a “page 16 story”, but it has great potential to eventually move to the front page).
Regional distribution of non-performing loans in Italy
The note reads as follows:
“Rome – because of the recession of recent years and corporate bankruptcies, the total of bad loans has continued to rise in Italy. According to Italy’s banking association ABI, non-performing loans amounted to 193.7 billion euro in May, 25.1 billion more than in the same month in 2014. This is the highest level since 1996.
Non-performing loans represent 10.1 percent of all loans granted by Italian banks, ABI said on Tuesday. Especially small and medium enterprises continue to be under pressure due to bad loans, so will take a long time before banks will see the bad loan situation ease, the ABI report stated. Italian companies are currently struggling with the effects of the longest economic crisis since World War II and are therefore often no longer able to service their loans.”
(emphasis added)
If our calculator can be trusted, this means that bad loans in Italy’s banking system have increased by roughly 14.9% over just the past year – by no means a peak crisis year, although Italy’s listing economy continued to contract slightly.
As the following chart shows (unfortunately we were only able to obtain this slightly dated version), Italian NPLs stood at € 165 bn. in Q1 2014. However, to this one must actually add all sorts of loans that are otherwise delinquent/dubious or sub-standard, but haven’t yet reached “full” NPL status. These are summarized together with NPLs under the term impaired loans below.
…click on the above link to read the rest of the article…
The Kicking of the Can
The Kicking of the Can
Hello, Mr. Tusk … New Orders
Yesterday it emerged that the normally hardline European Council president Donald Tusk (the former prime minister of Poland), suddenly felt “debt relief” for Greece was needed after all. While he is undoubtedly correct, it seems to us that he likely received a stern phone call from Washington.
Donald Tusk, the life-like android currently presiding over the EU council, here photographed in hardline mode
Photo credit: Radek Pietruszka / PAP
It is also unlikely to be a coincidence that the IMF released its debt sustainability analysis last week, in what appeared to be a case of especially ill-chosen timing, at least from the perspective of the euro-group. Note here that the IMF only wants the EU to provide debt relief to Greece – the IMF itself intends to get back every cent of its Greek loans.
Politicians in neo-con infested Washington no doubt don’t want to let slip Greece away into the arms of its Russian Orthodox co-religionists, which would almost certainly happen after a Grexit. Such strategic considerations are certainly exercising the NATO bureaucracy and very likely the EU’s movers and shakers as well. A Grexit would also be a victory of the Marxist wing of Syriza (a Pyrrhic victory though it may be), which would over time throw Greece’s continued NATO membership into doubt.
According to press reports from this morning:
“The White House has been putting its immense diplomatic weight behind a debt restructuring for Greece. Treasury secretary Jack Lew made an intervention earlier this week, and seems cautiously optimistic that Greece’s current proposals should be enough to satisfy creditors, and gain some crucial debt concessions in return.
…click on the above link to read the rest of the article…
Gold and the “Grexit” Threat
Gold and the “Grexit” Threat
The Everything is Fine Meme
Initially, we were also a bit surprised that the gold price didn’t rise when the threat of a Greek exit from the euro area became more palpable following the breakdown in negotiations and the outcome of the Greek referendum. After all, it was to be expected that “risk assets” would suffer and so-called safe haven assets would be sought after, at least temporarily.
However, upon giving the matter some thought, we have concluded that gold’s lack of a response (in fact, it went slightly down rather than up, so there was actually a response) could actually be explained quite easily. For one thing, speculators increased their net long position in gold futures by more than 20,000 contracts net in the week before the negotiations broke down, apparently in anticipation. While they did so, the gold price barely budged, so in a sense it was “wasted firepower”.
Image via eghtesadnews.com
Prior to the breakdown in negotiations between the troika and Greece, speculators increased their net long position in gold (above the net hedger position is shown, which is the inverse of the speculative position) – click to enlarge.
When no large increase in prices occurred on the Monday after the referendum had been announced, these new positions were quickly liquidated again. The downturn in prices in turn emboldened speculators to add to their short positions, pressuring prices even further.
There are other reasons for the reaction as well. One is that in spite of a bit of a wobble in stocks, the essential “everything is just fine” story hasn’t really been derailed. The dangers of a “Grexit” are probably underestimated and up until recently, no-one believed it to be a likely outcome anyway (it still isn’t, although it is more likely than it once used to be).
…click on the above link to read the rest of the article…
Organized Plunder, a.k.a. The State
Organized Plunder, a.k.a. The State
Whose Side Are You On?
On one side: the Fed… the NSA… the CIA… Fannie Mae… Freddie Mac… the trade unions… Wall Street… the dollar… Obamacare… New York’s taxi system… QE… the wars on terror, poverty, illiteracy, and drugs… Dodd-Frank… the TSA… the ATF… millions of retirees and disability scammers… General Motors… Hillary Clinton… and many, many others…
A widely held and quite erroneous belief …
On the other: Airbnb… Uber… cryptocurrencies… “Main Street”… businesses… families… gold… young people… savers… Freemasons… Ron Paul… truck drivers… the Episcopal Church… Elks… entrepreneurs… free markets… and millions of honest people who make their livings and live their lives as best they can without holding a gun to anyone else’s head.
Yes, dear reader, maybe it was too much alcohol or too little food. But in the night, a vision came to us. It revealed the big picture in a way we hadn’t seen it. Zombies, you’ll recall, are people and institutions that live at the expense of others. How?
Some are freelance criminals. But most depend on government to get the flesh they need. People don’t give up their own blood readily. They run. They hide. They try to protect themselves. But government maintains a territorial monopoly on the one thing that does the trick – violence.
So today, we stoop to admire the institution of government. What a beautiful racket! It typically takes 20% to 50% of an economy’s output. It makes the rules. It sets the pace. And woe to anybody or anything that gets in its way…
Murray Rothbard’s concise definition of the State
…click on the above link to read the rest of the article…
The Crash in China Continues – and is Engulfing Hong Kong
The Crash in China Continues – and is Engulfing Hong Kong
Efforts of Potent Directors Ignored
When we first commented on the emerging problems with China’s market bubble, we warned that although a bounce from oversold levels was the most likely outcome, it wasn’t set in stone. It appeared to us that Chinese investors were especially prone to falling for the “potent directors fallacy” (a term coined by Robert Prechter of EWI many years ago) – the belief that powerful decision makers, in this case the central bank and the government – would be willing and able support the market no matter what. Willing they have been – able, less so.
Chinese retail investors are shell-shocked
Photo credit: EPA
For a long time it has been the general impression that due to its tight control over the banking system and other sectors in the economy, China’s leadership could just “order the markets around”. Investors who were aware of China’s enormous debt problems and its insanely overvalued real estate markets were regularly baffled by the fact that China’s mandarins were apparently capable of arresting any decline in prices or any emerging credit blow-ups with the flick of a finger. Faith in their abilities is currently being shaken to its core. This is highly relevant to the asset bubbles currently underway in other countries, even though what happens in China has little direct effect due to the country’s closed capital account.
China’s stock market crash just keeps going – the index has now reached an important lateral support level. It will probably bounce from there, but for a variety of reasons this is actually somewhat less certain than it would otherwise be – click to enlarge.
…click on the above link to read the rest of the article…
Greek Citizens Vote “No” on a Bailout Offer that no Longer Exists
Greek Citizens Vote “No” on a Bailout Offer that no Longer Exists
An exercise in futility has just ended in Greece, with its population voting down an offer that has expired almost a week ago already. Given the futility of the referendum, its outcome was actually irrelevant from a formal perspective – once the verdict was in, Greece and its creditors would be exactly back where they were half a year ago already: at square one.
In one sense the referendum’s outcome was of course not futile: It has solidified the current Greek political leadership’s grip on power. It merely hasn’t brought it any closer to a solution. Greek voters want Greece to retain the euro, but they cannot vote on how much money governments (or rather, taxpayers) of other countries should hand to Greece or under what conditions. They can also not vote on whether the ECB should resume lending to technically insolvent banks.
Futile exercise
Cartoon by Ilias Makri
There are of course powerful reasons why the EU is indeed interested in implementing another can-kicking agreement. For instance, as Carl Weinberg has pointed out in Barron’s, a Greek default is a very costly affair, as what were hitherto contingent liabilities will have to be reflected in government budgets:
“Greece is on the verge of defaulting on 490 billion euros ($540 billion) in loans, bond obligations, central-bank liquidity assistance, and interbank balances. Who will bear those losses? Greece’s creditors, which are all public entities across the euro zone, and that are on the hook for some €335 billion in loan guarantees. How will those losses be covered? Bonds will have to be sold that will roughly equal the increase in annual debt purchases by the European Central Bank announced last January.
…click on the above link to read the rest of the article…
Who Enables the Man?
Who Enables the Man?
“The Man” is Playing with Fire
Photo credit: Keystone
What is “the man” doing?
1 Printing money… literally. Paused… for now. Still reinvesting principal/proceeds from maturing securities to maintain $4.5 trn. balance sheet size.
2 With that freshly printed money [of which there were never any quantitative limits] “The Man” is buying government debt [treasury notes and bonds] to purposely lower interest rates since 0% just is not low enough to adequately stimulate final demand.
3 As the largest purchaser of U.S. federal debt [30% of all new issues] “The Man” is purposely increasing the price of that debt [making it more expensive for you to acquire] in order to disincentivize you from purchasing “risk free” assets. The idea is to direct you toward investing in riskier assets [i.e., equities] because “The Man” knows what’s best for you and the general economy.
4 “The Man” receives interest payments from “The Man’s Father” [federal government]. “The Man” then automatically returns that interest income to his “Father”. So basically…”Father” pays zero interest on his IOU’s…which…as a reminder…were purchased with newly printed [un-earned and non-productive] dollars.
BTW… it is against the law [not that “The Man” really cares about the law] for “The Man” to directly purchase debt from “Father”… so he simply acquires it in the secondary market in order to maximize market price impact. “The Man” also allows Wall Street investment banks to “front run” its purchases to assure trading profits.
Assets held by the Federal Reserve, via Saint Louis Federal Reserve Research, click to enlarge.
5 “The Man” then prints more money to buy your mortgage [35% of the U.S. residential real estate market] in order to free up capital on the banks’ balance sheets. That “freed up” capital is then channeled back to “Father” in the form of aggressive fines, since 2009, currently totaling over $128B and counting.
The fines are a result of, according to “Father”, bank malfeasance leading up to the 2008-9 residential real estate/national economic crash. That malfeasance initially escaped the purview of “The Man” and many other regulators but, apparently, they finally “figured it out”. In the meantime, the taxpayers handsomely compensated the regulators for failing to properly execute their jobs in the many years predating the housing crisis.
Forget Greece … China Is the Real Threat
Forget Greece … China Is the Real Threat
When the ATMs Went Dark …
There’s a time for calm, rational behavior … and a time to panic. On Tuesday, investors in U.S. stocks decided not to panic. Monday’s sell-off halted. But it did not reverse.
And it left the street with its worst half-year performance since 2010. Gain for 2015 so far? Zilch. But have we seen the top? We will have to wait to find out.
Fox News reports that Greeks are eyeing Bitcoin to protect their savings. At midnight Tuesday night, the Greek government defaulted on a €1.5-billion loan repayment to the IMF. And it has imposed a 60-euro-a-day limit on cash withdrawals.
As of today, depositors reportedly only get 50 euro per day, because the banks have run out of 10s and 20s.
This leaves many Greeks short and looking for alternatives. Pity those who were last in line at the ATMs before they went dark. Says a restaurant owner in Athens, quoted by the Associated Press:
“You don’t know what can happen. In my case, I have money, and I don’t have money in a sense. I have it in the bank, but I can’t get it in my hands. It’s crazy.”
As we’ve been pointing out, money in the bank is not the same as money in hand. The first is just a loan to what could be a bankrupt institution. It could be worth nothing. The second is cash – ready, handy, and extremely useful.
In a financial emergency, there won’t be a liquor store in town that won’t welcome you as a customer. A Greek butcher… also to Associated Press:
“I have no cash to pay for meat supplies for next week because of the capital controls. Sooner or later, probably in this month, I’ll have to let 10 people go.
The people are buying with cash, not credit cards, and the problem is the customers don’t have cash.”
…click on the above link to read the rest of the article…
In Gold We Trust 2015
In Gold We Trust 2015
The Gold Standard of Gold Reports is Back
As every year around this time, our good friends Ronald Stoeferle and Mark Valek, the managers of the Incrementum Fund, have published their annual “In Gold We Trust” report, the extended version of which can be downloaded below.
This year’s report is slightly longer than the 2014 report and discusses practically the entire breadth of gold-related topics, including highly instructive excursions into economic theory, monetary history and an extensive discussion of current political and economic trends.
For the past few years, gold investors certainly had little to write home about. In dollar terms, gold has essentially been going nowhere, with a slight downward bias. Actually, the past three years in the USD gold price look a bit like the past 18 years of “global warming”.
And yet, a lot depends on one’s home currency. Gold’s sideways trend in dollar terms actually represents a small victory, given the strong rally in the dollar in 2014. As a result, gold price charts actually look quite encouraging in terms of most non-dollar currencies. In fact, its performance in euro and yen terms over the past 18 months has been none too shabby.
Moreover, as Ronnie and Mark point out, gold has held up extremely well in a disinflationary environment in which many commodities such as crude oil have been obliterated. As our readers know, we believe that the underlying bid that is supporting gold is from people who are looking at the third huge asset bubble blown by loose monetary policy within the past two decades and are feeling increasingly queasy. It can’t hurt to hold some insurance – and sooner or later it will be essential.
…click on the above link to read the rest of the article…
The Money is Just Sleeping … Let us Wake it Up!
The Money is Just Sleeping … Let us Wake it Up!
J.C. Juncker Sets Out to “Wake Up Liquidity”
In a recent article on the never-ending Greek Kabuki theater, we have come across parts of an interview EU budget commissioner Kristalina Georgieva has given to AFP, in which she explains J.C. Juncker’s cunning plans to “kick-start” the European economy by pumping €300 billion he doesn’t have into infrastructure projects and other assorted white elephants (we have previously discussed this Stalinesque plan, as well as what usually happens when even some of the “best stewards of EU funding” are “investing in in infrastructure” – see The EU’s Ghost Airports for the ghastly details). The interview contained the following gem:
“The Juncker plan is to wake up the liquidity sleeping in our financial system, to give courage to our money, to pump investment into the real economy,” Georgieva said.
The always open spigot, spitting out what is apparently valiumed money.
So the idea is that the enormous mountain of money created by the ECB and depicted below is somehow “just sleeping” and if only someone – ideally JC Juncker – manages to wake it up and give it the necessary courageto get wasted on projects no-one needs or wants, the economy will magically improve. Prosperity is practically around the corner! Riiiiight.
Europe’s huge pile of ECB confetti – just sleeping! The total is the red line, the annualized rate of change the blue line. Yes, that red line is going parabolic, via ECB, click to enlarge.
Apart from the problems with this plan we have already discussed, which consist mainly of the fact that governments cannot sensibly invest, because rational economic calculation is situated somewhere between totally alien and utterly impossible for them, there is another problem with this idea Juncker (and many others) apparently don’t understand.
…click on the above link to read the rest of the article…
Pathetic Zombie Wars
Pathetic Zombie Wars
Our New Friend, al-Qaeda
The wars go on!
We’re not against them. We might as well be against stomach gas – it will happen whether we like it or not. Real wars, as we’ve been exploring recently, are glorious and moronic. But zombie wars are just sordid are pathetic.
A new item in the Wall Street Journal tells us that our enemy’s enemy is becoming our friend.
“In the three-way war ravaging Syria, should the local al-Qaeda branch be seen as the lesser evil to be wooed rather than bombed?
This is increasingly the view of some of America’s regional allies and even some Western officials. In a war now in its fifth year, in which 230,000 people have been killed and another 7.6 million uprooted, few good options remain for how to tackle the crisis.”
These are not real wars. There are no real war aims, no enemy worthy of the name, and no real victories. Instead, they are zombie wars. They go on and on… with changing targets and shifting alliances. Why do we never win?
Vetting process …
Cartoon by Steve Breen
Because too many people benefit from losing… The media, the military, the contractors, the politicians, the lowlife defense contractors in Northern Virginia, the grandstanders in Congress, the CIA, the NSA … all have been zombified.
Jon Basil Utley in the American Conservative:
“America doesn’t “win” its wars, because winning a war is secondary to other goals in our war making. Winning or losing has little immediate consequence for the United States, because the wars we start, Wars of Choice, are not of vital national interest; losing doesn’t mean getting invaded or our cities being destroyed.”
…click on the above link to read the rest of the article…
The FOMC Decision – Studying the Flight of Birds and Gold
The FOMC Decision – Studying the Flight of Birds and Gold
Federal Open Yawn Committee puts Kremlinologists all over the World to Sleep …
The Fed’s monetary policy statement delivered on Wednesday was the non-surprise/yawn-inducer of the year. Readers can take a look at the trusty WSJ statement tracker, which reveals that apart from a few minor and unimportant changes, the statement was basically a carbon copy of the last one.
Not a single dissent mars this bland exercise in bureaucratese, so there isn’t even anything to report on that front. If you have trouble sleeping, reading this statement might be a very good alternative to Valium.
So did anything noteworthy happen? Well, yes. Apparently market participants believe they have to react to the forecasts of a bunch of bureaucrats who are quite likely among the worst economic forecasters in the world – and that’s really saying something.
Augurs in ancient Rome, observing the behavior of hens.
The High Priests of Augury
It is widely assumed that it is the job of economists to “make predictions”. This is actually not the case. The job of making predictions is that of augurs and soothsayers. In fact, modern-day economists strike us as today’s equivalent of the caste of augurs in ancient Rome.
As Wikipedia informs us:
“The augur was a priest and official in the classical world, especially ancient Rome and Etruria. His main role was the practice of augury, interpreting the will of the gods by studying the flight of birds: whether they are flying in groups or alone, what noises they make as they fly, direction of flight and what kind of birds they are. This was known as “taking the auspices.” The ceremony and function of the augur was central to any major undertaking in Roman society—public or private—including matters of war, commerce, and religion.”
(emphasis added)
…click on the above link to read the rest of the article…
