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Much like BoJ governor Haruhiko Kuroda, Paul Krugman thinks that the key for Japan when it comes to overcoming decades of deflation is a positive outlook.

“Japan needs to reach a point where everyone believes that it has pulled out of deflation. And then if that can be believed, then it may be able to stay out of trouble thereafter,” he told an audience in Tokyo last September.

That rather ridiculous pronouncement is reminiscent of something Kuroda said last summer: “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’ Yes, what we need is a positive attitude and conviction.”

In other words, Krugman and Kuroda believe that Japan can wish its way out of deflation. Krugman’s comments in Tokyo came around 10 months after he visited Japan in 2014. On that trip, he’s said to have helped convince PM Shinzo Abe to delay a planned sales tax hike. “That nailed Abe’s decision — Krugman was Krugman, he was so powerful,” Japanese economist Etsuro Honda said, recounting a meeting between the economist and the premier.

Well, 16 months has passed since that fateful visit and virtually nothing has changed in Japan. In fact, the Japanese have since taken a further plunge down the Keynesian rabbit hole by taking interest rates negative and not only is inflation still languishing at essentially zero, stocks are some 20% off their highs and this month the yen actually hit its highest levels since Kuroda announced the second round of QE two Octobers ago.

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

Which Countries Have The Highest Default Risk: A Global CDS Heatmap

March 8, 2016

Which Countries Have The Highest Default Risk: A Global CDS Heatmap

Sweden beats USA and Germany as the least likely to default on its bonds but at the other end of the global sovereign risk spectrum lie two socialist utopias – Venezuela (CDS just shy of 6000bps) and Greece (CDS around 1800bps) are the nations most likely to default.

Of course, our readers will be well aware of this: back in December, when its CDS was trading at “only” 2300 bps (or whatever points upfront equivalent it was back then) we said Venezuela CDS are going much, much wider. Little did we know that in just about 14 months they would more than double, and as of last check, Venezuela CDS are just shy of 6000bps suggesting a default is virtually guaranteed.

So aside from these two socialist utopias, who else is on the default chopping block? The CDS heatmap below lays out all the countries which according to the market, are most likely to tell their creditors the money is gone… it’s all gone.

Below, in order of declining default risk, are the ten most likely to follow Venezuela and Greece into the great default unknown:

Ukraine
Pakistan
Egypt
Brazil
South Africa
Russia
Portugal
Kazakhstan
Turkey
Vietnam

Sovereign Credit Default Swaps (CDS) are financial contracts that measure the risk of default on sovereign debt: the higher the spread, the greater the risk of default.

Source: BofA

Average:

2008 Revisited?

March 6, 2016

2008 Revisited?

NEW YORK – The question I am asked most often nowadays is this: Are we back to 2008 and another global financial crisis and recession?

My answer is a straightforward no, but that the recent episode of global financial market turmoil is likely to be more serious than any period of volatility and risk-off behavior since 2009. This is because there are now at least seven sources of global tail risk, as opposed to the single factors – the eurozone crisis, the Federal Reserve “taper tantrum,” a possible Greek exit from the eurozone, and a hard economic landing in China – that have fueled volatility in recent years.

First, worries about a hard landing in China and its likely impact on the stock market and the value of the renminbi have returned with a vengeance. While China is more likely to have a bumpy landing than a hard one, investors’ concerns have yet to be laid to rest, owing to the ongoing growth slowdown and continued capital flight.

Second, emerging markets are in serious trouble. They face global headwinds (China’s slowdown, the end of the commodity super cycle, the Fed’s exit from zero policy rates). Many are running macro imbalances, such as twin current account and fiscal deficits, and confront rising inflation and slowing growth. Most have not implemented structural reforms to boost sagging potential growth. And currency weakness increases the real value of trillions of dollars of debt built up in the last decade.

Third, the Fed probably erred in exiting its zero-interest-rate policy in December. Weaker growth, lower inflation (owing to a further decline in oil prices), and tighter financial conditions (via a stronger dollar, a corrected stock market, and wider credit spreads) now threaten US growth and inflation expectations.

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

Striking Admission By Former Bank Of England Head: The European Depression Was A “Deliberate” Act

March 2, 2016

Striking Admission By Former Bank Of England Head: The European Depression Was A “Deliberate” Act

Once again we find that it is only after they leave their official posts that central bankers finally tell the truth.

Last night, it was Alan Greenspan who blasted the state of the economy, saying that “we’re in trouble basically because productivity is dead in the water” and when asked if he is optimistic going forward, Greenspan replied “no, I haven’t been for quite a while.”

Then on Sunday, the former head of the BOE, Mervyn King, warned that another aspect of the global economy, namely the financial system whose structural problems remain untouched since the financial crisis have been untouched, is “certain to have another crisis.

“To be sure, warnings by former central bankers who are more responsible about the current global mess sound as nothing but revisionist bullshit. And yet, it was what King said today at the launch of his new book that left us surprised.

As the Telegraph reports today, according to the former head of the Bank of England Europe’s economic depression “is the result of “deliberate” policy choices made by EU elites. Mervyn King continued his scathing assault on Europe’s economic and monetary union, having predicted the beleaguered currency zone will need to be dismantled to free its weakest members from unremitting austerity and record levels of unemployment.

King also said he could never have envisaged an economic collapse of the depths of the 1930s returning to Europe’s shores in the modern age. But, he added, the fate of Greece since 2009 – which has suffered a contraction eclipsing the US depression in the inter-war years – was an “appalling” example of economic policy failure, he told an audience at the London School of Economics.

“I never imagined that we would ever again in an industrialised country have a depression deeper than the United States experienced in the 1930s and that’s what’s happened in Greece.

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

Satyajit Das: This Is Why You Can Expect Another Global Stock Market Meltdown

February 26, 2016

Satyajit Das: This Is Why You Can Expect Another Global Stock Market Meltdown

Authored by Satyajit Das’, author of the new book “The Age Of Stagnation” (via MarketWatch),

The mispricing of assets across world markets has reached epidemic proportions.

Stock prices have made strong advances over the past several years, yet market analysts see further gains, arguing that the selloffs of August 2015 and early 2016 represent a healthy correction.

But this rise in stock values has been underpinned by financial engineering and liquidity — setting the stage for a global financial crisis rivaling 2008 and early 2009.

The conditions for a crisis are now firmly established:overvaluation of financial assets; significant leverage; persistent low-growth and deflation; excessive risk taking reliant on central banks for liquidity, and the suppression of volatility.

Steve Blumenthal, CEO of CMG Capital Management Group, tells Barron’s funds writer Chris Dieterich that his firm has been clinging to ultra-safe bonds and utility stocks during the market storm.

For example, U.S. stock buybacks have reached 2007 levels and are running at around $500 billion annually. When dividends are included, companies are returning around $1 trillion annually to shareholders, close to 90% of earnings. Additional factors affecting share prices are mergers and acquisitions activity and also activist hedge funds, which have forced returns of capital or corporate restructures.

The major driver of stock prices is liquidity, in the form of zero interest rates and quantitative easing.

To be sure, stronger earnings have supported stocks. But on average, 70% to 80% of the improvement has come from cost-cutting, not revenue growth. Since mid-2014, corporate profit margins have stagnated and may even be declining.

A key factor is currency volatility. The strong U.S. dollar is pressuring American corporate earnings. A 10% rise in the value of the dollar equates to a 4%-5% percent decline in earnings. Rallies in European and Japanese stocks have been driven, in part, by the fall in the value of the euro and yen respectively.

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

European Disunion

February 26, 2016

European Disunion

Greece vs. Austria: Non-Friendly Acts

Two days ago we came across a headline at Reuters, informing us that “Greece rages at neighbors as fears migrants could be halted”. Say what? What the hell is this supposed to mean? Is this even English? Possibly Reuters employs the same headline editor as Bloomberg….he or she is definitely equally bad.

Kotzias, enraged Nikos Kotzias (νίκοσ κοτζιάσ), a former member of the Central Committee of the Greek Communist Party. Nowadays, oddly enough, he is Greece’s foreign minister. Here seen enraged. Photo credit: Simela Pantzartzi

Anyway, we delved into the article to see what it was about. Here are a few pertinent excerpts:

“Greece raged at neighbors and began busing refugees and migrants back from its northern border on Tuesday, after new restrictions by countries on the main land route to Western Europe trapped hundreds behind a bottleneck at the frontier. Athens filed a rare diplomatic protest with fellow EU member Austria for excluding Greek officials from a high-level meeting on measures aimed at curbing Europe’s biggest inward migration since World War Two.

[…]

Austria is due to host west Balkan states on Wednesday to discuss efforts to manage and curb the flow, but did not invite Greece. In unusually heated language that shows how the migration crisis has raised passions across Europe, Greek Foreign Minister Nikos Kotzias described the snub as a “unilateral and non-friendly act”.

“The exclusion of our country at this meeting is seen as a non-friendly act since it gives the impression that some, in our absence, are expediting decisions which directly concern us.”

[…]

Austria, the last country on the overland route to Germany, said last week it had imposed a daily limit of 3,200 migrants passing through, and 80 asylum claims.

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

“We Are Heading Into Anarchy”: Official Says EU Will “Completely Break Down In 10 Days”

February 25, 2016

“We Are Heading Into Anarchy”: Official Says EU Will “Completely Break Down In 10 Days”

Norwegian PM Erna Solberg doesn’t want to have to skirt her country’s responsibilities under the Geneva Convention and she doesn’t want to trample over human rights either, but she will if she has to.

“It is a force majeure proposals which we will have in the event that it all breaks down,” Solberg said, in an interview with Berlingske, describing new measures she believes Norway may have to take if Sweden buckles under the weight of the refugee influx which saw some 163,000 asylum seekers inundate the country last year.

Solberg is effectively prepared to turn everyone away and go into lockdown mode should everything fall apart completely, causing Europe to descend into some kind of lawless, Hobbesian, free-for-all.

If that sounds far-fetched or hyperbolic consider that on Thursday, EU migration commissioner Dimitris Avramopoulos warned that the bloc has just 10 days to implement a plan that will bring about “tangible and clear results on the ground” or else “the whole system will completely break down.”

Avramopoulos also cautioned that a humanitarian crisis in Greece and in the Balkans is “very near.” Moves by countries to adopt ad hoc, state-specific measures to stem the flow are exacerbating the problem, the commissioner contends.

“We cannot continue to deal through unilateral, bilateral or trilateral actions; the first negative effects and impacts are already visible,” he said. “We have a shared responsibility –- all of us -– towards our neighbouring states, both EU and non-EU, but also towards those desperate people.”

By “the negative effects,” of unilateral actions, Avramopoulos is likely referring to the bottlenecks that are leaving thousands stranded in the Balkans. The chokepoints are being pressured by a series of border fences that have been erected over the past six months and the problem is exacerbated by stepped up border checks. In short: we’re witnessing the death of the bloc’s beloved Schengen.

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

The Balkanization of Europe

February 25, 2016

The Balkanization of Europe

Danae Stratou, Ilargi, Yanis Varoufakis and Steve Keen Feb 16 2016When my mate Steve Keen took me to meet Yanis Varoufakis for dinner last week when we all happened to find ourselves in Athens together, I at least sort of regretted not having the time and space to talk to Yanis about his DiEM25 project for the democratization of Europe. It was a private occasion, there were other people at the dinner table, Steve and Yanis had no seen each other for a while, it was simply not about that.

I did think afterward that it would be great to do this kind of get together more often, and get ideas running, but then realized we are all workaholics and we all live thousands of miles apart, so the odds of that happening are slim at best. And that in turn made me think of how inspiring the years were when I toured the world with my Automatic Earth partner in crime Nicole Foss, how important it is to have people around to bounce off your ideas of what’s going on, how much faster that crystallizes your own ideas.

But as things are, and as they happened, I didn’t have that time with Yanis. And not nearly enough with Steve either, for that matter, who has/is a brain that I would love to pick for days if not weeks, he’s such a brilliant mind. When you have just a few hours, though, the time is filled with drinking wine and catching up with what’s happened in each other’s personal lives, it had been 3 years since we met, and professionally, since Steve knows Nicole very well, they did quite a few presentations together, yada yada.

Immensely gratifying, of course, to be able to renew a friendship like that, but almost as frustrating to not be able to expand on it.

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

How Italy will fail and drag down the European Project

February 23, 2016

How Italy will fail and drag down the European Project

Italy is big enough to matter (it is the eight largest economy on the planet), but so uneventful that most does not pay any attention to what is going on there. We contend that Italy will, during the next year or two, be on everyone’s radar screen as it has the potential to derail the European project for real.

Greece, Portugal and Ireland were mere test subjects for what will come. Spain would have been a challenge, but were narrowly avoided. Italy will drag the whole structure down if it continues on its current trajectory, and there is nothing to suggest it will change course.

The main problem for Italy is its stagnating level of nominal GDP, which we refer to as “Japanificaton” of the economy. While people usually think of deflation when they hear “Japan”, that is not an entirely correct observation. It is true that nominal GDP flat lined after the crisis in the 1990s which dragged down revenue. However, if it was truly a deflationary period, expenditures should fall also as prices paid for services rendered would drop concomitantly. This has not been the case and it is more correct to say Japan has been trapped in a revenue / NGDP deflation, hence the perceived need for Abenomics, or in plain English, the creation of a helluva lot of currency units to boost NGDP and revenue and thus reduce the need for bond issuance. As our first chart show, so far it has been modestly successful. Please note that Abenomics have nothing to do with creating real prosperity (no one can be that ignorant), but all about getting the spiraling debt problem under control by jacking up the inflation tax.

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

Greek Attempt To Force Use Of Electronic Money Instead Of Physical Cash Fails

February 21, 2016

Greek Attempt To Force Use Of Electronic Money Instead Of Physical Cash Fails

While the “developed world” is only now starting its aggressive push to slowly at first, then very fast ban the use of physical cash as the key gating factor to the global adoption of NIRP (by first eliminating high-denomination bills because they “aid terrorism and spread criminality”) one country has long been doing everything in its power to ween its population away from tax-evasive cash as a medium of payment, and into digital transactions: Greece.

The problem, however, is that it has failed.

According to Kathimerini, “Greek businesses are not ready for the expansion of plastic money through the compulsory use of credit and debit cards for everyday transactions.”

Unlike in the rest of the world where “the stick” approach will likely to be used, in Greece the government has been more gentle by adopting a “carrot” strategy (for now) when it comes to migrating from cash to digital. The government has told taxpayers that they will have to spend up to a certain amount of their incomes via bank and card transactions in order to qualify for an annual tax-free exemption.

This appears to not be a sufficient incentive however, as a large proportion of stores still don’t have the card terminals, or PoS (Points of Sale), required for card payments, while plastic is accepted by very few doctors, plumbers, electricians, lawyers and others who tend to account for the lion’s share of tax evasion recorded in the country.

Almost as if the local population realizes that what the government is trying to do is to limit at first, then ultimately ban all cash transactions in the twice recently defaulted nation as well. It also realizes that an annual tax-free exemption means still paying taxes; taxes which could be avoided if one only transacted with cash.

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

A Contagious Crisis Of Confidence In Corporate Credit

February 14, 2016

A Contagious Crisis Of Confidence In Corporate Credit

Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder – can prove particularly hazardous (to finance and the real economy).

Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and other financial excess (and shorten the Credit cycle).

A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global scale. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.

The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.

The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance.

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

10,000 Greek Farmers Stage Massive Revolt In Athens, Destroy Police Cars

February 13, 2016

10,000 Greek Farmers Stage Massive Revolt In Athens, Destroy Police Cars

On Friday, some 800 angry Greek farmers marched on the Agriculture Ministry in Athens and beat police with Shepherd’s crooks.

No, really:

The farmers are understandably upset with Alexis Tsipras and the government for a proposal to triple the social security burden and double income taxes in an effort to appease the powers that be in Brussels who claim Greece has not made enough progress towards fiscal consolidation since the country’s third bailout was agreed last August.

Tsipras and Syriza swept to power a little over a year ago with promises to roll back austerity, but prolonged negotiations with creditors and the resulting economic malaise that gripped the country last summer broke the PM’s revolutionary spirit and now, he’s been reduced to something of a technocrat rather than a socialist firebrand.

Putting Greece on a sustainable path is a virtual impossibility at this juncture. There are myriad structural problems that cut to the heart of the currency bloc’s woes and on top of that, Athens’ debt burden is simply astounding. In other words, Tsipras and Brussels can raise taxes and cut pension benefits all they want but this problem is never going to be solved. It’s too late.

Adding insult to injury, data out Friday shows the country slipped back into recession in Q4.

All of this helps to explain why, after the tomato-tossing, stick-waving melee at the Agriculture Ministry, the farmers – joined by some 10,000 of their compatriots as well as union members, massed in Syntagma Square on Friday where tractors could be seen meandering through the crowd.

While that clip depicts a mostly peaceful scene, things weren’t so calm earlier in the day when still more farmers clashed with authorities and beat a police car half to death:

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

Greece Slides Back Into Recession Amid Riots, Rewewed “Grexit” Calls

February 12, 2016

Greece Slides Back Into Recession Amid Riots, Rewewed “Grexit” Calls

It was just over a year ago that Greece elected Alexis Tsipras and Syriza amid a flurry of anti-austerity sentiment.

Things didn’t exactly go as planned.

The new PM and his “radical” finance minister Yanis Varoufakis thought they could shake things up in Brussels and wrench Greece from the clutches of Berlin-style fiscal rectitude. As it turns out, Wolfgang Schaeuble is not a man who is easily bested at the bargaining table and after more than six months of negotiations, the imposition of capital controls, a referendum on the euro that Tsipras promptly sold down the river, Greeks ended up facing an outright depression.

In the end, Varoufakis unceremoniously resigned and Tsipras agreed to a third bailout before calling for snap elections that would ultimately see the PM re-elected albeit at the helm of a party that was completely gutted by the arduous bailout talks.

As we and quite a few others warned, the new bailout and the attached terms would do exactly nothing to turn the Greek economy around. We’re all for being responsible with the budget but you can’t very well implement fiscal retrenchment during a depression unless you intend to remain in said depression in perpetuity, but alas, that’s exactly what Brussels forced Greece to do and on Friday we learn that the country has slipped back into recession.

GDP contracted 0.6% in Q4 after shrinking 1.4% in Q3. “With opposition mounting to the government’s pension reform plan, the European Union pressuring it to stem the tide of refugees entering the country and the global market rout hastening the sell-off in Greek assets, dark clouds are gathering again,” Bloomberg writes. Ironically, capital controls appear to have helped the economy perform better than expected:

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

Meanwhile In Greece, Familiar Scenes Are Back: General Strike, Molotov Cocktails, Tear Gas

February 4, 2016

Meanwhile In Greece, Familiar Scenes Are Back: General Strike, Molotov Cocktails, Tear Gas

Greece was fixed for a few months, when the so-called “anti-austerity” government of PM Tsipras which came to power just over a year ago did what each on its predecessors did by kicking the can and trading off what little sovereignty Greece has left for promises of more cash from Europe, but it is broken once again.

Earlier today, services across Greece ground to a halt Thursday as workers joined in a massive general strike that cancelled flights, ferries and public transport, shut down schools, courts and pharmacies, and left public hospitals with emergency staff. Even the undertakers are striking.

Thursday’s general strike is the most significant the coalition government of Prime Minister Alexis Tsipras has faced since he initially came to power about a year ago. As an opposition party, Tsipras’ radical left Syriza party had led opposition to pension reforms, but he was forced into a dramatic policy U-turn last year when he faced the stark choice of signing up to a third bailout or the country being kicked out of the eurozone.

The strike comes as the government negotiates with Greece’s international debt inspectors, who returned to Athens this week to review progress on the country’s bailout obligations. The central Athens hotel where the inspectors were staying was heavily guarded by police.

As CBC reports, well over 20,000 supporters of a Communist party-backed union were marching through central Athens, while around 10,000 more people — including about 1,000 lawyers in suits and ties — were gathering for a separate demonstration. A heavy police presence was deployed in the capital, as previous protests have often degenerated into riots.

Unions are angry at pension reforms that are part of Greece’s third international bailout.

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

What A Cashless Society Would Look Like

January 31, 2016

What A Cashless Society Would Look Like

Calls by various mainstream economists to ban cash transactions seem to be getting ever louder, while central bankers have unleashed negative interest rates on economies accounting for 25% of global GDP, with $5.5 trillion in government bonds yielding less than zero. The two policies are rapidly converging.

Bills and coins account for about 10% of M2 monetary aggregates (currency plus very liquid bank deposits) in the US and the Eurozone. Presumably the goal of this policy is to bring this percentage down to zero. In other words, eliminate your right to keep your purchasing power in paper currency.

By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).

This in turn could boost consumption, GDP and inflation to pay for the massive debts we have accumulated (leaving aside the very controversial idea that citizens should now have to pay for the privilege of holding their hard earned money in a more liquid form, after it has already been taxed). So at long last we can finally get out of the current economic funk.

The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.

However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that.

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

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