- Let’s bring capital back to USA, too
It’s laudable that Trump wants to bring factories back to USA. But how about virtual, monetary factories? Moving financial institutions such as banks, insurers, brokerage houses, exchanges, and other institutions brings the most bang for the buck when it comes to revitalizing America’s economy.
The business climate in USA is about to change greatly, pro-business. But let’s not forget that capital is portable, we can bring capital back to USA too- not just factories. Capital has been fleeing USA faster and faster. Let’s stop the leaks and then bring it home. We printed it – it’s our money! – @FXBanker
It’s laudable that Trump wants to bring factories back to USA. But how about virtual, monetary factories? Moving financial institutions such as banks, insurers, brokerage houses, exchanges, and other institutions brings the most bang for the buck when it comes to revitalizing America’s economy.
No doubt, re-building America’s factories, previously the manufacturing base of the world, should be a priority for a number of reasons. Not only does it provide jobs and stimulate the local economy – it’s a security issue. Since when is it ‘politically correct’ to ‘outsource’ military technology development to foreign countries? 60% of the actual activities of the CIA are outsourced, many of them by companies that do not operate in America! For example, the system used by Prisoners to call friends and relatives involves special features such as call tracking, call recording, and other functions for obvious criminal tracking purposes. The company who provides this software to prisons, is based in Israel. Nothing against Israel – but it seems to be a conflict of interest? At least for functions such as finance, the military, security, software encryption, and other critical infrastructure – it shouldn’t be outsourced. Brining an H1B genius to Charlotte, NC from India is one thing, outsourcing development to a firm in Mumbai, is another. The difference is like, the enemy manufacturing the weapons; there’s no telling when guns will ‘misfire’ due to an ‘error.’ While this didn’t happen on a large scale in a glaringly obvious smoking gun fashion as we saw during 9/11 – subtle security breaches are so common it’s become a niche black industry, stealing and selling data on the black market. Well they aren’t stealing it, they have it – it’s just a grey area, how data is ‘lost’ and then ‘found’ by partner companies.
To a large extent, the fact that ‘technology’ has been offshored & outsourced was due to bad planning and cost saving. The majority of Intellectual Property (IP) remains in USA with companies that are heavy outsourcers like Amazon, Google, Apple, and others. They went into China and India at a time when it was the ‘hip’ thing to do, and Steve Jobs knew a lot about India, practically being a Yogi himself (or anyway, a wannabe Yogi). The logistic thought of moving all those machines, which would all need to be retooled, to USA is practically impossible. But if they were once built in China – why can’t they be built in Oklahoma? You know, there’s cheap labor in USA too. I heard recently about someone who writes for a blog that is paid $10 for 200 words, a US Citizen. Oh yes, factory work, the unions, the unions.. But what about California wineries and other fairly large businesses using illegals anyway? The lines of states and countries have become so blurred, especially when ‘American’ companies may have non-US investors, an HQ office in Chicago, factory in Costa Rica, and a European sales force. Of course, all their IP is owned by a Luxembourg based holding company which they pay ‘licensing fees’ to tax free, even though they’ve never been to Luxembourg or even know what it is (a town, right?). Actually, Luxembourg actually participates in the Olympics.
There’s one consideration too that Trump needs to be aware of – if he’s going to court Silicon Valley and get them to ‘bring it home’ he’s going to have to offer them some serious benefits. USA’s biggest taxpayers, “Big Oil” (Chevron, Exxon) pay the top maximum tax every year, billions upon billions of dollars. They don’t use tax loop holes, but they get a huge benefit of working with the government, as their customer. They get the US military protecting their international assets, they get the CIA opening up new markets for them (and squashing the competition, literally). They get direct access to politicians on a number of levels and issues without the need of lobbyists (although, they employ them too). They don’t protest the government like the liberal left coast, they practically own it. It’s another approach toward crony capitalism.
Capital is so portable now, Trump will have to sell the billionaire class which fought against him during the campaign through their Illuminati puppet HRC. There’s literally nothing stopping JP Morgan from moving to Canada in 2 weeks. They don’t even have to get plane tickets, they can purchase 18 wheelers and other transport vehicles and build a small city outside of Toronto. Not a likely scenario just to outline how easy it is for money to flow in and out of an economy in today’s world, without capital controls.
Best example is Forex – billions flowed quickly outside of USA to trade this new and exciting market. A change in the Forex rules could quickly see those billions and more flow back, within a short time period of Dodd-Frank FX rules being deleted, as
explained in this article on Global Intel Hub.Join the Delete FX Rules in Dodd-Frank Petition today by
clicking here.
- "Governments Are Running Out Of Excuses" Paul Craig Roberts Exposes "The Western War On Truth"
Authored by Paul Craig Roberts,
The “war on terror” has simultaneously been a war on truth. For fifteen years—from 9/11 to Saddam Hussein’s “weapons of mass destruction” and “al Qaeda connections,” “Iranian nukes,” “Assad’s use of chemical weapons,” endless lies about Gadaffi, “Russian invasion of Ukraine”—the governments of the so-called Western democracies have found it essential to align themselves firmly with lies in order to pursue their agendas. Now these Western governments are attempting to discredit the truthtellers who challenge their lies.
Russian news services are under attack from the EU and Western presstitutes as purveyors of “fake news.” Abiding by its Washington master’s orders, the EU actually passed a resolution against Russian media for not following Washington’s line. Russian President Putin said that the resolution is a “visible sign of degradation of Western society’s idea of democracy.”
As George Orwell predicted, telling the truth is now regarded by Western “democratic” governments as a hostile act. A brand new website, propornot.com, has just made its appearance condemning a list of 200 Internet websites that provide news and views at variance with the presstitute media that serves the governments’ agendas. Does propornot.com’s funding come from the CIA, the National Endowment for Democracy, George Soros?
I am proud to say that paulcraigroberts.org is on the list.
In the West those who disagree with the murderous and reckless policies of public officials are demonized as “Russian agents.” The president-elect of the United States himself has been designated a “Russian agent.”
This scheme to redefine truthtellers as propagandists has backfired. The effort to discredit truthtellers has instead produced a catalogue of websites where reliable information can be found, and readers are flocking to the sites on the list. Moreover, the effort to discredit truthtellers shows that Western governments and their presstitutes are intolerant of truth and diverse opinion and are committed to forcing people to accept self-serving government lies as truth.
Clearly, Western governments and Western media have no respect for truth, so how can the West possibly be democratic?
The presstitute Washington Post played its assigned role in the claim promoted by Washington that the alternative media consists of Russian agents. Craig Timberg, who appears devoid of integrity or intelligence, and perhaps both, is the WaPo stooge who reported the fake news that “two teams of independent researchers” – none of whom are identified – found that the Russians exploited my gullibility, that of CounterPunch, Professor Michel Chossudosky of Global Researh, Ron Paul, Lew Rockwell, Justin Raimondo and that of 194 other websites to help “an insurgent candidate” (Trump) “claim the White House.”
Note the term applied to Trump – “insurgent candidate.” That tells you all you need to know. You can read here what passes as “reliable reporting” in the presstitute Washington Post, and here.
Glenn Greenwald of The Intercept, which somehow escaped inclusion in The 200, unloads on Timberg and the Washington Post here.
Western governments are running out of excuses. Since the Clinton regime, the accumulation of war crimes committed by Western governments exceed those of Nazi Germany. Millions of Muslims have been slaughtered, dislocated, and dispossessed in seven countries. Not a single Western war criminal has been held accountable.
The despicable Washington Post is a prime apologist for these war criminals. The entire Western print and TV media is so heavily implicated in the worst war crimes in human history that, if justice ever happens, the presstitutes will stand in the dock with the Clintons, George W. Bush and Dick Cheney, Obama and their neocon operatives or handlers as the case may be.
- Is It Over? Dow Futures Drop As USDJPY Tumbles Most Since July
After 16 days in a row without a meaningful decline, Asia trading has opened with USDJPY dumping back from almost 114.00 to 111.50 – the biggest drop since July 29th. The USD Index is down most since Trump's win but for now the moves in equities (Japanese and US) are modest (but down)…
Yen is heavily bid as Asia trading opens
The biggest drop in USDJPY since July…
As the post-Trump surge in the dollar has seemingly stalled…
Japanese equities are getting hit…
but for now, the Friday spike in US equities at the close is stalling (though modestly)…
- 60% Of New Yorkers Are One Paycheck Away From Homelessness
More than half of all New Yorkers don’t have enough money saved to cover them in the event of a lost job, medical emergency, or other disaster, according to a new report by the Association for Neighborhood & Housing Development.
Click image for massive legible version)
As The Gothamist reports, nearly 60 percent of New Yorkers lack the emergency savings necessary to cover at least three months’ worth of household expenses including food, housing, and rent, but that statistic isn’t spread evenly across the five boroughs.
The Bronx has the highest rate of families without adequate emergency savings: in Mott Haven, Melrose, Hunts Point, Longwood, Highbridge, South Concourse, University Heights, Fordham, Belmont, and East Tremont, 75 percent of families have inadequate emergency savings. The Staten Island neighborhoods of Tottenville and Great Kills have the lowest rate, with just 41 percent of families lacking the funds necessary to cover three months’ worth of expenses.
Without these savings, families who face emergencies could be at risk of eviction, foreclosure, damaged credit, and even homelessness.
In Brooklyn, families in Brownsville (70%), Bed-Stuy (67%), Bushwick (68%), East New York (67%), and South Crown Heights/Prospect Heights (67%) are the most at-risk—in Manhattan, an average of 67 percent of families in Harlem, Washington Heights, and Inwood lack necessary savings.
In Queens, the neighborhoods with the highest percentage of these households were Elmhurst/Corona (64%), Rockaway/Broad Channel (60%), Sunnyside/Woodside (59%), and Jackson Heights (59%).
As The ANHD report above shows, there are a litany of other statistics that, when looked at together, paint a picture of a neighborhood’s potential (or lack of it) for economic opportunity: incarceration, unemployment, poverty rates for each neighborhood are included, as are each neighborhood’s percentage of small businesses, percentage of households without internet, and percentage of rent-burdened households.
Now the question is – is this fake news? is this peddling fiction? Since it sure doesn’t add up to the utopia that Clinton/Obama/Dems have spewed to their identity-divided supporters.
- Ron Paul Lashes Out At WaPo's Witch Hunt: "Expect Such Attacks To Continue"
WaPo publishes article that says @RonPaulInstitut (and others) are "sophisticated Russian propaganda" https://t.co/r8QPFEH92X pic.twitter.com/E7wVbKY0vW
— Ron Paul (@RonPaul) November 26, 2016
Washington Post Peddles Tarring of Ron Paul Institute as Russian Propaganda, via The Ron Paul Institute for Peace & Prosperity,
The Washington Post has a history of misrepresenting Ron Paul’s views. Last year the supposed newspaper of record ran a feature article by David A. Fahrenthold in which Fahrenthold grossly mischaracterized Paul as an advocate for calamity, oppression, and poverty — the opposite of the goals Paul routinely expresses and, indeed, expressed clearly in a speech at the event upon which Fahrenthold’s article purported to report. Such fraudulent attacks on the prominent advocate for liberty and a noninterventionist foreign policy fall in line with the newspaper’s agenda. As Future of Freedom Foundation President Jacob G. Hornberger put it in a February editorial, the Post’s agenda is guided by “the interventionist mindset that undergirds the mainstream media.”
On Thursday, the Post published a new article by Craig Timberg complaining of a “flood” of so-called fake news supported by “a sophisticated Russian propaganda campaign that created and spread misleading articles online with the goal of punishing Democrat Hillary Clinton, helping Republican Donald Trump and undermining faith in American democracy,” To advance this conclusion, Timberg points to PropOrNot, an organization of anonymous individuals formed this year, as having identified “more than 200 websites as routine peddlers of Russian propaganda during the election season.” Look on the PropOrNot list. There is the Ron Paul Institute for Peace and Prosperity’s (RPI) website RonPaulInstitute.org listed among websites termed “Russian propaganda outlets.”
What you will not find on the PropOrNot website is any particularized analysis of why the RPI website, or any website for that matter, is included on the list. Instead, you will see only sweeping generalizations from an anonymous organization. The very popular website drudgereport.com even makes the list. While listed websites span the gamut of political ideas, they tend to share in common an independence from the mainstream media.
Timberg’s article can be seen as yet another big media attempt to shift the blame for Democratic presidential nominee Hillary Clinton’s loss of the presidential election away from Clinton, her campaign, and the Democratic National Committee (DNC) that undermined Sen Bernie Sanders’ (I-VT) challenge to Clinton in the Democratic primary.
The article may also be seen as another step in the effort to deter people from looking to alternative sources of information by labeling those information sources as traitorous or near-traitorous.
At the same time, the article may be seen as playing a role in the ongoing push to increase tensions between the United States and Russia — a result that benefits people, including those involved in the military-industrial complex, who profit from the growth of US “national security” activity in America and overseas.
This is not the first time Ron Paul and his institute has been attacked for sounding pro-Russian or anti-American. Such attacks have been advanced even by self-proclaimed libertarians.
Expect that such attacks will continue. They are an effort to tar Paul and his institute so people will close themselves off from information Paul and RPI provide each day in furtherance of the institute’s mission to continue and expand Paul’s “lifetime of public advocacy for a peaceful foreign policy and the protection of civil liberties at home.” While peace and liberty will benefit most people, powerful interests seek to prevent the realization of these objectives. Indeed, expect attacks against RPI to escalate as the institute continues to reach growing numbers of people with its educational effort
- The U.S. Silver Market Experienced Two Signficant Developments
By the SRSrocco Report,
According to the USGS most recent report, the U.S. silver market experienced two significant developments in August. From the data published in the USGS August Silver Mineral Industry Survey, U.S. silver production declined significantly while silver imports surged to near record highs.
First, U.S. silver production in August is down a stunning 14% compared to the same month last year and down 10% versus the previous month:
This is certainly a big decline compared to the trend earlier in the year where the average U.S. silver mine supply was approximately 95 metric tons a month. What makes this quite surprising is that the price of silver hit a high of $20.7 in August, nearly $5 higher than during January-March. So, why is U.S. silver production declining so much as the price continued higher??
I called up the USGS Silver Specialist and left a message on their answering service as to the details why silver production in the U.S. declined so much in August. However, no reply was forthcoming in the following days.
Secondly, the U.S. silver imports hit a near record high of 581 metric tons (mt) in August versus 502 mt in July and 464 mt in June:
This large jump in U.S. silver imports is interesting as demand for the iShares Silver ETF was basically flat in August. Even though the SLV ETF silver inventories surged during the first half of the year, it was relatively flat in July and August.
What I found also quite interesting is that the U.S. imported 55 mt of silver from Poland in August which was half of their total monthly mine supply. Poland produces about 105 mt of silver a month. Normally, Poland exports no more than 10-20 mt of silver a month to the United States.
For whatever reason, U.S. silver imports surged as the price hit a record high of $20.7 in August. As I mentioned, this silver did not make its way into the iShares Silver SLV ETF as their inventories remained flat. So, where did it go?
Well, according to the information from the COMEX, total inventories on the exchange increased from 153 million oz (Moz) at the beginning of August to 163 Moz by the end of the month. Thus, the COMEX silver inventories increased 10 Moz or 311 metric tons in August. Thus, some of the nearly 80 metric tons imported by the United States in August made its way into the COMEX silver inventories.
Of course, that is if the COMEX holds all the silver it states in its inventories or if each silver bar doesn’t have several owners.
Regardless, to see such a large decline in U.S. silver production in August was quite surprising. Furthermore, the Silver Institute just put out their 2016 Interim Silver Report which they state that world silver production is forecasted to decline in 2016.
Unfortunately, once U.S. and global oil production starts to head south in a big way, world silver production will most certainly follow suit. More about this in future articles.
Lastly, I will begin posting articles by The Hills Group on the oil and energy market this weekend. Bedford Hill of The Hills Group, has a wealth of knowledge on the oil industry, their ETP Oil Model as well as other aspects of the energy industry. I posted The Hills Group short response to the USGS announcement of a new 20 billion barrel oil resource in the Wolfcamp Shale formation in Texas.
Lastly, if you haven’t checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.
Check back for new articles and updates at the SRSrocco Report.
- Is This The Democrats' Real Strategy In Launching Recounts?
Over the past couple of days we’ve written numerous times about Jill Stein’s recount efforts in WI, MI and PA (see here, here and here). And while it’s clear that Stein intends to move forward with recounts in all three states (she’s now up to $6.1mm in donations), what is unclear, and quite perplexing, is exactly why she’s pursuing these recounts in the first place. Here are the potential justifications from Stein’s perspective, as we see them:
- Personal self-interest? – Obviously, No. With less than 1% of the vote in WI, MI and PA, Stein obviously has no shot of winning any of the states in question.
- Hopes of recount tipping states to Hillary? – No. Multiple experts and even Hillary campaign insiders have admitted that overturning election results with a margin of victory of several 1,000 votes is extremely unlikely. To win, Hillary would have to flip WI, MI and PA even though she trails by ~20k, ~12k and ~70k votes in each of those states, respectively…not going to happen.
- Exposing voting machine hacking? – No. Even the Obama administration has confirmed the the election was “free and fair from a cybersecurity perspective” and that votes “accurately reflect the will of the American people.” By failing to present even a shred of evidence of vote tampering in her WI recount petition, instead choosing to focus on wild conspiracy theories, Stein effectively also admits that there was no “hacking” of voting machines.
- Fundraising scam to get millions in donations from disaffected Hillary voters? – Maybe. As of right now, Stein has raised ~$6mm of the $7mm she says she needs to fund recount efforts. Assuming Stein goes through with recounts in all three states and her cost estimates are reasonably accurate then she won’t really have that much money left over to be added to the general Green Party coffers.
So, with no practical reason for forcing recounts, what exactly is Jill Stein up to?
One theory is that Stein is simply hoping to disrupt the electoral college process to push the 2016 election into the hands Congress while drawing the legitimacy of Trump’s presidency into question.
As Edward Foley, an expert in election law at Moritz College of Law at Ohio State University, pointed out to the Milwaukee Journal Sentinel, electors from around the country have to meet by December 19th to cast their electoral college votes. To the extent recounts in WI, MI and PA have not been completed by that time, which experts assign a high probability that they will not, there is a chance that the electoral votes from those three states wouldn’t be counted leaving neither candidate with the required electoral votes to win the presidency (electoral count would be Trump 260 versus Hillary 232).
If the electoral college process fails to select a President then the election would be left in the hands of Congress to decide. Given that the Senate and House are both controlled by Republicans, in theory they would then choose Trump/Pence, though in this election cycle nothing is a certainty. Moreover, even if Trump/Pence are chosen, the whole process of being appointed by Congress, combined with a loss of the popular vote, would then cast a dark shadow over their administration.
Wisconsin’s recount will likely begin late next week, once the state has tallied a cost estimate and received payment from Stein’s campaign, said Michael Haas, administrator of the Wisconsin Elections Commission.
Political scientist Barry Burden, the director of the Elections Research Center at the University of Wisconsin-Madison, said it would be extremely difficult to complete the recount on time.
“You may potentially have the state electoral votes at stake if it doesn’t get done by then,” said Haas.
A lawyer with Stein’s campaign has said it wants the recount done by hand. That would take longer and require a judge’s order, Haas said.
Perhaps the most important deadline is Dec. 19, when electors around the country must meet to cast their Electoral College votes, said Edward Foley, an expert in election law at Moritz College of Law at Ohio State University.
“That is a hard deadline and if a state were to miss that deadline, it would be technically in jeopardy of not having its electoral votes counted,” he said.
Of course, if this theory is even partially true then it’s extremely disturbing on a variety of levels. That a person with absolutely no standing. in terms of personal damages, and no presentation of credible evidence of wrongdoing could unilaterally disrupt a presidential election is not only a failure of Stein’s personal character but it’s a failure of our election rules and procedures that such reckless behavior would be permitted.
- Up To Eight Italian Banks May Fail If Renzi Loses Referendum
Just as we were concluding our write up on the return of Europe’s solvency crisis, facilitated by Donald Trump’s NATO funding demands and the end of the ECB’s unprecedented can kicking exercise, the FT reported that as many as eight of Italy’s troubled banks “risk failing” if prime minister Renzi loses next weekend’s constitutional referendum and ensuing market turbulence deters investors from recapitalizing them, citing senior bankers.
This particular rather adverse outcome is captured by the lower-right, glowing red box in the Danske Research flowchart shown below
Renzi, who has previous said he will quit if he loses the referendum although has since changed his tune, has championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing “resolution” of Italian banks under new EU rules. A resolution restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds.
The following chart from the ECB demonstrates why a bail-in of Italian banks would be the equivalent of political suicide: the vast majority of bail-inable Italian debt is held domestically, read savers and pensioners. Should they be impaired, it would lead to an overnight social crisis.
However, if Renzi is already on his way out post a “No” vote, which most polls have assured is the most likely outcome, he will have far less motivation to seek a private bail-out, making a bail-in far more likely, boosting the chances of an adverse social reaction. As the FT adds, in the event of a “No” vote and Mr Renzi’s exit, bankers fear protracted uncertainty during the creation of a technocratic government. Lack of clarity over a new finance minister may lethally prolong market jitters about Italy’s banks. Italian lenders have more than halved in value this year on concerns about their non-performing loans.
For those who have followed the neverending saga of Italy’s insolvent banks, the details are familiar: the “boot” has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.
As warned here since 2011, the biggest problem facing Italy’s (and Europe’s banks) is the inordinate share of NPLs: Italy’s banks have €360bn of problem loans versus €225bn of equity on their books after successive regulators and governments failed to tackle a bloated financial system where profitability was weakened by a stagnant economy and exacerbated by fraudulent lending at several institutions.
The problem is that a market rescue of the insolvent banks has proven nearly impossible due to fears over the full magnitude of the bad debt problem:
But the market solutions, including a JPMorgan plan to recapitalise Monte Paschi and the efforts of a government-sponsored private vehicle Atlante to backstop problems at smaller banks, are looking shaky in the face of expected market turbulence if a “No” vote wins, said officials and bankers.
Lorenzo Codogno, a former chief economist at the Italian Treasury and founder of LC Macro Advisors, argued that the “biggest concern” in the aftermath of the referendum is its impact on “the banking sector and implications for financial stability”.
“The capital increases of Italian banks due to be announced right after the referendum may become even trickier than currently perceived in the case of a “No” vote”,” Mr Codogno said.
What is the worst case scenario (for now)? The answer: the third consecutive failure of Monte Paschi (which would likely have significant downstream consequences on all other Italian banks). Senior bankers and officials said that the worst-case scenario was where a failure of Monte Paschi’s complex €5bn recapitalisation and bad-debt restructuring demanded by regulators would translate into a wider failure of confidence in Italy and imperil a market solution for its ailing banks.
Under this scenario, officials and senior bankers believe that all eight banks could be put into resolution. They fear that contagion from the small banks could threaten a €13bn capital increase at UniCredit, Italy’s largest bank by assets and its only globally significant financial institution, planned for early 2017.
Should the Monte Paschi bailout deal fail, “all theories are possible” including “a resolution of the eight banks”, especially if a “No” vote led to Mr Renzi quitting office and a period of protracted political uncertainty, according to the FT. Indeed, the prospectus for the recapitalisation of Monte Paschi, which includes a debt for equity swap that begins on Monday, warns that the vote weighs on its chances of success. The Bank of Italy has warned of market volatility around the vote. Critics of Mr Renzi have accused the central bank of fear-mongering ahead of the vote.
No matter what, a renewed focus on BMPS would likely be the catalyst for the next Italian, and shortly after, Europen banking crisis. At that point the Italian dominos would – once again – be in free fall.
To be sure, the market has already sniffed out much of the risks with spreads on Italian government bonds versus German Bunds rising above 190 points on Friday, a level not seen since October 2014, as markets priced in expectations of turbulence.
One possibility is bailing out any domestic investors who get bailed in as a last ditch workaround to prevent a full-blown banking panic:
Bankers and officials can envisage a technocratic government agreeing with Brussels and Frankfurt a systemic “bail-in” of vulnerable Italian banks which emerged among Europe’s weakest in stress tests two years ago and again this summer. Under a bail-in, which forces losses on bond holders, Brussels could allow for some compensation for vulnerable retail investors, officials said.
Germany, however, would be less than enthused by such an outcome. Unfortunately, no matter the political framworks, Italy’s banks are only going to deteriorate following next Sunday’s vote:
Nicolas Véron, senior fellow at think tank Bruegel, argued that “if anything the ECB has been very lenient in addressing the system-wide banking situation [in Italy] that has been very visible since the comprehensive assessment two years ago”. “It is a very difficult moment but it is not sustainable. The problem of banking fragility is not going away. It is not something that resolves itself with time,” Mr Veron said.
All hope is not lost, however. The Economist, the once reputable economic and financial publication half-owned by the Rothschilds, has had a terrible track record of advising its declining readers on how to vote in critical political events: from urging a “Bremain” vote this past June, to begging for a vote for Hillary on November 8, the Economist has gotten virtually every major political event wrong. Which is why the fact that over the weekend the publication came out with an article “Why Italy should vote no in its referendum” may be the best hope Renzi has to remain in power.
- Trump And Draghi May Bring A Return Of The "European Solvency Crisis": Barclays
Since Drahi’s infamous “whatever it takes” warning in the summer of 2012, European bond yields have been a one way street lower, and until the recent Trumpflation rally, had tumbled to all time lows, in many cases well below 0%. There are two catalysts, however, that may be ending Europe’s QE-driven free ride, and according to a recent report by Barclays, their names are Donald Trump and Mario Draghi.
First, when looking at the impact of Trump, Barclays notes that his election as US president may have created an additional burden on European budgets: defence spending.
The president-elect has suggested that European NATO members should reach the 2% GDP military spending target, as pledged under the NATO treaty. In 2015, the 22 EU countries that are also NATO members spent on average only 1.4% of GDP on defence, or 1.3% excluding the UK, while the US spent 3.6%. This is a shortfall of USD94bn, or 0.7% of the total GDP of EU-NATO members.
Those countries whose debt to GDP ratios already exceed 100% (Italy, Spain and Portugal) are also the ones with low defence spending and would need to add 0.7-1.1% of GDP in defence spending if they were to reach the 2% target as shown in the figure below.
In Trump carried out his threat and enforced a mandatory topping of contributions, and Italy had to boost its annual defence spending permanently to 2% of GDP (all else equal), its primary surplus would more than halve, from 1.7% currently to 0.7% of GDP. For France, Fillon and Juppe are arguing to increase military spending progressively to 2% of GDP by 2025, while they do not envisage any significant change in stance towards NATO.
It’s not just Trump’s NATO policies: there is also the impact of the ECB’s QE which sooner or later will be tapered off. That, however, will result in the tide going out, and exposing just how naked Europe’s economies have been all along.
As Barclays also writes, “the ECB‘s QE has been an important driver of EA growth and public debt dynamics, but at the cost of moral hazard.”
Barclays finds that QE-generated growth, more so than low interest rates, has significantly contributed to a slowdown in the rise of the public debt, particularly in Italy and Spain. As shown in Figure 2, public debt would have risen an alarming 12% in these countries without QE.
The British bank’s analysis also suggests that those countries with the most significant bond market pressure also pursued the most reforms. But rather than using the temporary relief created by QE to reform and repay public debt, fiscal policy in Italy and Spain became expansionary and reforms ground to a halt. In other words, as we warned all along, all QE does is kick the ball into the ECB’s court, while giving lazy, incompetent politicians the justification to do, well, nothing – certainly nothing that may threaten their careers – and simply watch as the stock maret rises, giving the false impression that “things are good.”
Debt sustainability issues will likely therefore resurface not only due to higher interest but also, critically, because long-term growth prospects are poor without reforms, and it is now entirely recognized that it was the ECB’s fault why Europe’s nations – all badly in need of structural reform – abandoned all such efforts; after all why bother when “Mr. Chairman will get to work.”
Here are Barclay’s details on why solvency concerns will re-emerge for Europe the moment Draghi even whispers a hint that QE is about to get tapered, let along end:
With funding costs at historical lows and QE expected to remain in place for the foreseeable future, few investors are worrying about the long-term sovereign solvency of the euro area. But this could change. Draghi reminded us of the obvious in September, namely that “QE is not forever”. When the tide turns, many euro area sovereigns may very well be confronted with higher “r-g”, not only because of higher r (as monetary policy tightens) but, critically, because of low g, as long-term growth prospects are dismal without reforms.
Compounding the problem of sensitivity to the assumptions (for r and g) is the issue of interdependence across variables. Primary balances and fiscal stances in general affect both interest rates and growth rates while growth rates affect the fiscal performance. If it is indeed the case that low interest rates – supported by ultra-accommodative monetary policy – delays necessary fiscal consolidation and supply-side reforms, arguably low r means low future g. Growth plays a critical role into debt dynamics through direct and indirect effects: the largest public debt contribution of QE came from the growth channel. If our assessment is correct, and governments fail to raise the long-run growth rates of their economies owing to complacency, it is plausible that the European economy will remain stuck in a low-growth equilibrium, where permanent QE is required to keep funding costs down, which coincidentally leads to delay in important reforms.
There is another problem, in fact the biggest problem of all from day one: massive debt loads, which were never reduced in the aftermath of the great financial crisis, and which need soaring prices to be reflated away, however in the process of rising rates, those same debt balances effectively assures a financial crisis. Quote Barclays:
The political landscape across the euro area argues against very high primary balances; in fact, we have seen how the primary balance has recently worsened and fiscal accommodation has increased. For Italy, public debt is currently at 134% of GDP, the primary balance at 1.5% of GDP, nominal r is at c. 3.2% and g is c. 1.5% (i.e., r-g = 1.7%). A small increase of r-g to say 2 or 2.5% would put debt/GDP along a rapidly growing path.
In theory high debts do not necessarily imply a sovereign crisis, especially if the government spends its money wisely and collects taxes efficiently. But if it does not, solvency concerns could re-emerge, sovereign interest rates quickly rise above the average funding costs, and the 2010-11 adverse market dynamics could return. The big difference is that this time there would be far less monetary, fiscal, and political space to confront them.
Two conclusions: i) as Barclays puts it, “the great fiscal success of QE could therefore turn out to be its biggest downfall in due course” and ii) everything that has happened since Draghi’s infamous “whatever it takes” gambit nearly 5 years ago, has been one great can-kicking detour, and the moment he market even gets a whiff that Draghi will punt on record QE, Europe’s crisis is back with a bang.
On, and there is the whole “Trump” wildcard, not only as a result the wildcards from his NATO funding policies, but also because should the global reflation scare accelerate, then the ECB may have no choice but to tighten/taper/end QE sooner than anticipated as inflation worries spread to Europe, which in turn will catalyze the next leg of the Europea solvency crisis, which is inevitable as Europe failed miserably to engage in reform in the five years since Draghi’s words pushed European interest rates to all time lows.
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