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Why It Really All Comes Down To The Death Of The Petrodollar
Why It Really All Comes Down To The Death Of The Petrodollar
Last week, in the global currency war’s latest escalation, Kazakhstan instituted a free float for the tenge. The currency immediately plunged by some 25%.
The rationale behind the move was clear enough. The plunge in crude prices along with the relative weakness of the Russian ruble had severely strained Kazakhstan, which is central Asia’s largest crude exporter. As a quick look at a chart of the tenge’s effective exchange rate makes clear, the pressure had been mounting for quite a while and when China devalued the yuan earlier this month, the outlook for trade competitiveness worsened.
What might not be as clear (on the surface anyway) is how recent events in developing economy FX markets following the devaluation of the yuan stem from a seismic shift we began discussing late last year – namely, the death of the petrodollar system which has served to underwrite decades of dollar dominance and was, until recently, a fixture of the post-war global economic order.
In short, the world seems to have underestimated how structurally important collapsing crude prices are to global finance. For years, producers funnelled their dollar proceeds into USD assets providing a perpetual source of liquidity, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop. That all came to an abrupt, if quiet end last year when a confluence of economic (e.g. shale production) and geopolitical (e.g. squeeze the Russians) factors led the Saudis to, as we put it, Plaxico’d themselves and the US.
The ensuing plunge in crude meant that suddenly, the flow of petrodollars was set to dry up and FX reserves across commodity producing countries were poised to come under increased pressure. For the first time in decades, exported petrodollar capital turned negative.
…click on the above link to read the rest of the article…
The 8 Trillion Black Swan: Is China’s Shadow Banking System About To Collapse?
The 8 Trillion Black Swan: Is China’s Shadow Banking System About To Collapse?
“Wealth management products in China have come under the spotlight after a series of missed payments raised concerns over the shadow banking sector that often directs credit to firms shut out from bank lending or capital markets,” Reuters said in February, after reporting that CITIC (China’s top brokerage), was looking at ways to repay investors after the issuer of one of the wealth management products the broker sold missed a $1.12 million payment to investors.
That news came a little over a year after the now infamous “Credit Equals Gold #1 Collective Trust Product” incident and a subsequent default scare on a similar product backed by loans to a struggling coal company.
Although wealth management products and CTPs (which differ from WMPs) are often described as “murky” and “opaque”, the basic concept is fairly simple. WMPs are marketed to investors as a way to get more bang for their buck (er.. yuan) than they would with bank deposits. Funds from these investors are then invested at a higher rate. If the assets investors’ money is used to fund run into trouble, that’s not good news for WMP investors. Simple.
The main issue here is the sheer size of the market. As FT notes, “in 2010, as regulators tried to rein in the explosion in bank credit resulting from the country’s Rmb4tn economic stimulus plan, banks turned to trusts to help them comply with lending controls.” So essentially, trusts helped banks offload credit risk at the behest of the PBoC. Here’s the process whereby banks use trusts to get balance sheet relief:
…click on the above link to read the rest of the article…
Canadian Supreme Court’s top judge dismisses activist label
Canadian Supreme Court’s top judge dismisses activist label
CALGARY, Alberta (Reuters) – Supreme Court of Canada Chief Justice Beverley McLachlin brushed off criticism on Thursday that her court, which has clashed with Prime Minister Stephen Harper, has been too activist.
McLachlin, the court’s longest-serving chief justice, has presided over numerous decisions that reversed Parliament’s decisions, and made landmark rulings on prostitution and physician-assisted suicide that were opposed by the ruling Conservatives.
In response to a question as to whether her court is improperly activist, she said: “We try to answer the questions put before us in accordance with the constitution and the law. I leave the labels to other people.”
Harper’s Conservative government has also found itself at the losing end of decisions on mandatory minimum sentences and Senate reform. Last year, the court rejected one of Harper’s picks to fill a Supreme Court vacancy.
While Harper’s critics charge that he has been dismissive of the rule of law and the constitution, some social conservatives have argued McLachlin has gone to far in extending constitutional rights.
The National Post ran a headline in May dubbing her “unofficial leader of the opposition.”
Asked by a reporter how she felt about that title, she said: “My feelings are irrelevant, but descriptions of various sorts as to how institutions are perceived or function, one can expect this, so it’s par for the course.”
McLachlin, 71, was speaking at a rare press conference, during a Canadian Bar Association conference. She said she welcomed robust debate on the role of the court, but declared: “I’m not a politician, I’m a judge.”
Euro ministers give blessing to Greek bailout, wooing IMF on debt
Euro ministers give blessing to Greek bailout, wooing IMF on debt
Euro zone finance ministers have agreed to lend Greece up to 86 billion euros ($96 billion) after Greek lawmakers accepted their stiff conditions despite a revolt by supporters of leftist Prime Minister Alexis Tsipras.
Assuming approval by the German and other parliaments, 13 billion euros should be in Athens next Thursday to pay pressing bills and a further 10 billion will be set aside at the European Stability Mechanism, earmarked to bolster Greek banks’ capital.
In all, euro zone governments will lend 26 billion euros in a first tranche of the bailout before reviewing Greece’s compliance with their conditions in October.
One remaining uncertainty – aside from Tsipras’ ability to deliver sweeping budget cuts and privatizations opposed by many of his own party – is the role of the International Monetary Fund. After backing two previous bailouts, the IMF renewed its call for the Europeans to grant Athens debt relief – a bone of contention between the Eurogroup and the Washington-based Fund.
Managing Director Christine Lagarde told the Eurogroup by telephone that she could not commit until the IMF board reviewed the situation in the autumn. Officials said the Fund needed more assurances and detail on Greek reforms, notably to pensions, and steps to persuade it that Greece’s debt burden was sustainable.
But after deadlock since January that ravaged the already weak Greek economy and ended in a dramatic U-turn a month ago by the anti-austerity leftist government to avert Athens’ expulsion from the euro, there was a cautious sense of optimism among ministers gathered in a Brussels deep in summer holiday languor.
“After six months of very difficult negotiations with lots of ups and downs, we finally have an agreement,” Greek Finance Minister Euclid Tsakalotos told reporters on Friday. His appointment by Tsipras six weeks ago in place of his abrasive predecessor has been hailed by counterparts as a mark of a new Greek “realism”.
…click on the above link to read the rest of the article…
The Seventh-Largest Economy in the World Spirals Down
The Seventh-Largest Economy in the World Spirals Down
HSBC, which knows a thing or two about the world, and about Brazil, is bailing out of Brazil.
It’s unloading its “entire business in Brazil,” it said this week, including retail banking and insurance. It will hand its long list of wealthy clients and over 21,000 employees to Bradesco, one of the largest private banks in Brazil, for $5.2 billion. Too much? Bradesco’s stock has since plunged over 9%.
Once the deal gets regulatory approval and closes, HSBC is out of Brazil. “The transaction represents a significant step in the execution of the actions announced during the Investor Update on 9 June 2015,” it said. After that update, Reuters had described HSBC’s motivations with these choice words:
For shareholders, betting on Brazil was risky as lenders grapple with tax hikes, weak credit demand, rising defaults, and the impact of what looks likely to be the country’s worst recession in over two decades.
The seventh largest economy in the world in 2014, according to the World Bank, is spiraling down, with private sector output, as Markit put it, falling at the “sharpest pace since March 2009.”
This is how Markit titled its Brazil Services PMI report on Wednesday: “Service sector activity drops at joint-fastest rate in survey history.”
The index hit 39.1 in July (50 is the dividing line between contraction and expansion), the fifth month in a row of contraction, with all sub-sectors in the survey “registering substantial falls in business activity.”
To add to the toxic mix, costs soared, with the rate of increase reaching an 81-month high, third fasted in survey history, due to “inflationary pressures, exchange rate factors, and client fee adjustment.” No green shoots in the immediate future: new orders fell for the fifth month in a row. The “deteriorating operating environment” caused the pace of job losses to accelerate “to a survey record.”
…click on the above link to read the rest of the article…
Greek Stocks, Economy Collapse, Suffer Worst Declines In History
Greek Stocks, Economy Collapse, Suffer Worst Declines In History
The Athens Stock Exchange reopened on Monday and unsurprisingly, some folks were selling.
Trading was suspended five weeks ago after PM Alexis Tsipras’ dramatic midnight referendum call precipitated capital controls and a lengthy bank “holiday.” Shares opened lower by nearly 23% and the country’s banks traded limit-down, which makes sense because they are, after all, largely insolvent. Here’s NY Times:
The Athens Stock Exchange plunged 22.8 percent when it reopened on Monday after a five-week shutdown imposed by Greek authorities as part of efforts to prevent a financial collapse.Bank stocks, which are particularly vulnerable as Greek lenders are set for new recapitalization in the coming months, took a battering, falling by as much as 30 percent.
Although foreign investors face no restrictions in the Athens exchange, local traders can only use existing cash holdings to buy shares; they are prohibited from tapping local bank deposits to buy shares as the authorities seek to prevent capital flight.
Asked about the harrowing decline, European Commission spokeswoman Mina Andreeva had no comment but did say that Brussels has “taken note” of the reopening. Amusingly, she also said the decision was made by “competent” Greek officials. A ban on short-selling was due to expire on Monday but will be extended, an unnamed official told Reuters.
Meanwhile, monthly PMI data from Markit confirmed that the Greek economy suffered an outright collapse in July. Last month marked the 11th consecutive month of contraction, but it was the depth of the downturn that was truly shocking as the index plummeted to 30.2 from 46.9 in June. It was the lowest print on record. New orders plunged to 17.9 from 43.2.
“July saw factory production in Greece contract sharply amid an unprecedented drop in new orders and difficulties in purchasing raw materials,” Markit said. Here’s more from the report:
…click on the above link to read the rest of the article…
An Exasperated Tsipras Calls For Syriza Referendum On Bailout Cancellation
An Exasperated Tsipras Calls For Syriza Referendum On Bailout Cancellation
Anyone who thought Greece’s third bailout program was a done deal or that, at the very least, the market would get a few months of respite before having to grapple with daily Grexit headlines again, got a rude awakening late last week when reports of a secret plot (hatched by ex-Energy Minister Panayiotis Lafazanis along with several Left Platform co-conspirators) to storm the Greek mint and seize the country’s currency reserves underscored the deep divisions within Syriza and betrayed the extent to which passing a third set of prior actions and sealing the deal on an ESM program would prove to be anything but simple.
Just days after Lafazanis’ plan leaked last week, Kathimerini claimed it had transcripts from a conference call between former Finance Minister Yanis Varoufakis and international hedge fund managers during which Varoufakis described yet another secret ploy to return the country to the drachma by way of establishing a parallel payments system set up using surreptitiously obtained tax filer ID numbers. Later, the full audio recording was released.
At that juncture, the opposition parties which helped PM Alexis Tsipras beat back a Syriza rebellion and pass the first two sets of bailout prior actions through parliament began to ask questions.
Essentially, opposition lawmakers wanted to know whether Tsipras was allowing his party to undermine progress on the bailout just as he was desperately courting MPs from across the aisle in order to win parliamentary approval for the deal’s conditions.
On Wednesday, in an interview with Sto Kokkino radio, Tsipras addressed friction within the party andsuggested that if he lost his majority in parliament he would call for snap elections.
…click on the above link to read the rest of the article…
One Economic Datapoint, Two Vastly Different Interpretations
One Economic Datapoint, Two Vastly Different Interpretations
Earlier today, Case-Shiller reported that in May, housing prices dropped by 0.18%, the biggest decline since July 2014. Hardly a euphoric validation of the Fed’s rate hike intentions.
So what was the mainstream media’s take on the topic? It all depends on who you ask.
or the WSJ.
Futures Soar On Hope Central Planners Are Back In Control, China Rollercoaster Ends In The Red
Futures Soar On Hope Central Planners Are Back In Control, China Rollercoaster Ends In The Red
For the first half an hour after China opened, things looked bleak: after opening down 5%, the Shanghai Composite staged a quick relief rally, then tumbled again. And then, just around 10pm Eastern, we saw acoordinated central bank intervention stepping in to give the flailing PBOC a helping hand, driven by the BOJ but also involving NY Fed members, that sent the USDJPY soaring which in turn dragged ES and most risk assets up with it. And while Shanghai did end up closing down -1.7%, with Shenzhen 2.2% lower at the close, the final outcome was far better than what could have been, with the result being that S&P futures have gone back to doing their thing, and have wiped out all of yesterday’s losses in the levitating, zero volume, overnight session which has long become a favorite setting for central banks buying E-Minis.
As Bloomberg’s Richard Breslow comments, the majority of Asian equity indexes finished with losses but on an upbeat note, helping most European markets to start with modest gains that have increased with the morning, thanks to the aforementioned domestic and global mood stabilization. S&P futures have been positive all day other than a brief dip negative at the worst of the day’s China levels. Chinese equities opened quite weak and were down another 5% before the authorities assured the market that speculation they would withdraw from market supportive measures was misguided. This began a rally of over 6% before a mid-afternoon swoon.
…click on the above link to read the rest of the article…
Chinese Stocks Suffer Second Biggest Crash In History, 1,500 Companies Halted Limit Down
Chinese Stocks Suffer Second Biggest Crash In History, 1,500 Companies Halted Limit Down
This was not supposed to happen.
After pledging, investing and otherwise guaranteeing the Chinese stock market to the tune of 10% of GDP, and intervening on at least 40 different occasions in the past month ever since China’s stock bubble burst in late June, with the subsequent crash nearly taking the Shanghai Composite red for the year, overnight China officially lost control for the second time, when after a weak start to the Monday trading session, things turned very ugly in the last hour, when the Shanghai Composite plunged by 8.48%, closing nearly at the lows, and tumbling some 345 points for its biggest one-day drop since February 2007 and its second biggest crash in history!
The selling was steady throughout the day, but spiked in the last hour on concerns China would rein in its market-supporting programs following IMF demands to normalize its relentless market intervention. According to Bloomberg’s Richard Breslow: “fear that the extraordinary support measures employed to hold up the market may be scaled back caused heavy afternoon selling resulting in a down 8.5% day.” Of course, one can come up with any number of theories to explain the plunge: for example the PBOC did not buy enough to offset the relentless selling.
The last thing the communist party and the PBOC wanted was another massive sell off after having not only fired the “bazooka” but come up with a different bazooka to halt “malicious sellers” virtually every day, including threats of arrest.
Nobody was spared in the selloff and of the 1,114 stocks in the Shanghai Composite, 13 closed higher on Monday.
Here, courtesy of the WSJ, are some of the more amazing numbers of today’s selloff:
…click on the above link to read the rest of the article…
Greek Capital Controls To Remain For Months As Germany Pushes For Bail-In Of Large Greek Depositors
Greek Capital Controls To Remain For Months As Germany Pushes For Bail-In Of Large Greek Depositors
Two weeks ago we explained why Greek banks, which Greece no longer has any direct control over having handed over the keys to their operations to the ECB as part of Bailout #3’s terms, are a “strong sell” at any price: due to the collapse of the local economy as a result of the velocity of money plunging to zero thanks to capital controls which just had their 1 month anniversary, bank Non-Performing Loans, already at €100 billion (out of a total of €210 billion in loans), are rising at a pace as high as €1 billion per day (this was confirmed when the IMF boosted Greece’s liquidity needs by €25 billion in just two weeks), are rising at a pace unseen at any time in modern history.
Which means that any substantial attempt to bailout Greek banks would require a massive, new capital injection to restore confidence; however as we reported, a recapitalization of the Greek banks will hit at least shareholders and certain bondholders under a new set of European regulations—the Bank Recovery and Resolution Directive—enacted at the beginning of the year. And since Greek banks are woefully undercapitalized and there is already a danger of depositor bail-ins, all securities that are below the depositor claim in the cap structure will have to be impaired, as in wiped out.
Now, Europe and the ECB are both well aware just how insolvent Greek banks are, and realize that a new recap would need as little as €25 billion and as much as €50 billion to be credible (an amount that would immediately wipe out all existing stakeholders), and would also result in a dramatic push back from local taxpayers. This explains why Europe is no rush to recapitalize Greece – doing so would reveal just how massive the funding hole is.
…click on the above link to read the rest of the article…
Japan Inc Rocked By Massive Accounting Fraud: Toshiba CEO Quits After Admitting 7 Years Of Cooked Books
Japan Inc Rocked By Massive Accounting Fraud: Toshiba CEO Quits After Admitting 7 Years Of Cooked Books
While Abenomics has been an unmitigated disaster for Japan’s ordinary population, where the soaring stock market has benefited the top decile of the population while everyone has been slammed by a record 25 consecutive months of declining real wages and soaring input costs, there had been one bright spot: corporate earnings, which unlike in Europe or even the US, have been growing at a steady double-digit clip. What was surprising is that Japan was perhaps the one place where currency debasement was leading to an immediate flow through to rising EPS.
Then on Friday, a report out of Reuters caught our attention when news hit that 140 year old electronics conglomerate, and “pillar of Japan Inc“, Toshiba had inflated profits by a stunning $1.2 billion for a whopping 7 years, with fabricated figures amounting to 30% of the company’s “profits” since 2008!
Suddenly we saw Japan’s profitability “renaissance” in a very different light as Toshiba’s scandal suggested that, if endemic, Japan Inc’s house of soaring profits was built on nothing more than fabricated foundations.
And while we await to see which other companies will admit they too had been cooking their books in the past few years, we will have to do it without Toshiba’s CEO Hisao Tanaka, who together with five members of his senior staff, resigned earlier today.
According to the FT, “Tanaka said on Tuesday at a news conference, following a 15-second bow of contrition, that he “felt the need to carry out a major overhaul in our management team in order to build anew our company.” “We have suffered what could be the biggest erosion of our brand image in our 140-year history.”
IMF Declares War On Germany: In “Secret” Report Lagarde Says Greece Will Need Massive Debt Relief
IMF Declares War On Germany: In “Secret” Report Lagarde Says Greece Will Need Massive Debt Relief
A divide between the IMF and Europe (read: Germany), regarding writedowns on Greece’s debt to the EU has been brewing for quite some time and recently returned to the international spotlight when, a few months back, the Fund indicated debt relief was a precondition for its participation in any further aid for Athens.
More recently, the IMF released a report on Greece’s debt sustainability just prior to the referendum. The timing appeared to be strategic and may have helped secure the “no” vote for Tsipras.
Unfortunately, the IMF didn’t appear to anticipate the PM’s complete capitulation and now, the subject of debt relief has again been put off, this time until Greece officially passes the new “deal” through parliament and legislates its terms.
Now, another “secret” IMF document on the sustainability of Greece’s debt burden has surfaced and not surprisingly, the Fund is once again pounding the table on a haircut. One is certainly left to wonder if the US (and its veto power) are pulling the strings behind the scenes and orchestrating “leaks” at opportune times. Here’s more from Reuters:
Greece will need debt relief far beyond what euro zone partners have been prepared to consider due to the devastation of its economy and banks in the last two weeks, a confidential study by the International Monetary Fund seen by Reuters shows.
The updated debt sustainability analysis was sent to euro zone governments late on Monday, hours after Athens and its 18 partners agreed in principle to open negotiations on a third bailout programme of up to 86 billion euros in return for tougher austerity measures and structural reforms.
…click on the above link to read the rest of the article…
World Powers Reach Landmark Nuclear Deal With Iran, Oil Slides – Full Deal Text
World Powers Reach Landmark Nuclear Deal With Iran, Oil Slides – Full Deal Text
It is only fitting that almost exactly 24 hours after the Greek “pre-deal”, which may and will end up crashing and burning in very short notice, another long expected “deal”, one which has been about a decade in the making, was reached, when Iran reached a landmark nuclear agreement with the U.S. and five other world powers, a long-sought foreign policy goal of the Obama administration. However, just like with the Greek deal celebrations, these too will likely be short lived as the outcome sets the White House on course for months of political strife with dissenters in Congress and in allied Middle Eastern nations.
In the end, however, the reality is that with little oversight both Iran and the West will maintain the status quo, even if the chances of a middle-east “preemptive” war involving Israel and/or Saudi Arabia increase substantially.
Here are some of the deal highlight bullets from Reuters and Bloomberg:
- Iran ballistic missile embargo seen in place for 8 years
- Conventional weapon embargo seen in place for 5 years
- Iran to cut 98% of enriched uranium stockpile under deal
- Iran will eliminate two-thirds of centrifuges under deal
- EU to lift sanctions on Iran as it meets nuclear obligations
- Iran deal implementation will take months, officials say
- Iran won’t receive sanctions relief until it complies with terms of agreement
In terms of the next steps timeline, Bloomberg adds that oil sanctions on Iran unlikely to be lifted before December 2015, according to most optimistic assessment of steps involved in draft of nuclear agreement obtained by Bloomberg. Most analysts expect this to happen sometime in 2016.
Key steps as follows: the Joint Comprehensive Plan of Action, or JCPOA, will be adopted 90 days after endorsement by UN Security Council resolution, or sooner by unanimous consent of all parties.
…click on the above link to read the rest of the article…
Greece Just Lost Control Of Its Banks, And Why Deposit Haircuts Are Imminent
Greece Just Lost Control Of Its Banks, And Why Deposit Haircuts Are Imminent
Yes, Greek banks may have been insolvent – something that was clear since the first bailout of 2010 – but at least the Greek state had control over them: as such it could have mandated mergers, recapitalizations, liquidity injections, even depositor bail-ins (perhaps the harshest lesson for the ordinary Greek population as a result of this latest crisis is that deposits are not “cash in the bank” but liabilities of insolvent financial organizations).
Starting on Wednesday that will no longer be the case.
Because while Greek banks will maintain their capital controls for months and withdrawals will be limited to €60 or less for months (the ECB is well aware that any boost to the ELA will result in a promptly surge in deposit outflows until the new ELA ceiling is reached, and so on ad inf) the one key change on Wednesday when the Tsipras government, whose coalition no longer has a majority in parliament and will have to rely on opposition votes, votes through the humiliating Greek “pre-deal” to unlock negotiations for the promised €86 billion in bailouts (which will be used almost entirely to repay the Troika) is that it will hand over the keys of Greek banks to the ECB.
Here is Reuters with this little known fact:
One of the preconditions imposed on Greece for a deal is that it signs into law European rules that would put euro zone authorities at the ECB and in Brussels, rather than Athens, in charge of identifying and closing or breaking up sick banks.
This in turn could lead to a shake-up of the sector that could see some banks close, with losses pushed onto bondholders and possibly even large depositors. In such circumstances, there would be little that Athens could do to prevent this.
…click on the above link to read the rest of the article…
