- THERE’S Your Hyperinflation!
by Keith Weiner
Hyperinflation is commonly defined as rapidly rising prices which get out of control. For example, the Wikipedia entry begins, “In economics, hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of the local currency…” Let’s restate this in terms of purchasing power. In hyperinflation, the purchasing power of the currency collapses. Before the
onset, suppose one collapsar buys ten loaves of bread. Soon, it buys only one loaf. Shortly thereafter, it buys only one slice. Next, it can only purchase a saltine cracker. Pretty soon the collapsar won’t buy any bread at all. Stick a fork in it, it’s done.
For example, the price of crude oil was cut almost in half (so far). There’s little to see if one looks at the purchasing power of the dollar, euro, Swiss franc, etc. Purchasing power, as conventionally understood, is doing just fine.
Fed apologists are happily cooing about this. Last month, Nobel Prize winning economist Paul Krugman said, “This is actually wonderful.” Last year, he was gloating, comparing people who predict runaway inflation to “true believers whose faith in a predicted apocalypse persists even after it fails to materialize.”
And yet, all is not well in the realm of the central banks. Krugman may be right about prices, but nothing is wonderful. The economic downturn, which began in 2008, has been so bad that central banks persist in their unprecedented monetary policies. So if purchasing power isn’t collapsing, where can one find evidence of the problem?
Yield Purchasing Power (YPP) shows how much you can buy, not with a dollar of cash, but with the earnings on a dollar of productive capital. No one wants to spend their life savings or inheritance. People are happy to spend their income, but not their savings.
To come back to the analogy of the family farm, people should think in terms of how much food it can grow, not how much food they can buy by selling the farm. The tractor
is good for producing food, not to be exchanged for it. Why, then, do people think of the purchasing power of their life savings, in terms of its liquidation value?If they want to live long and prosper, they should think of their yield purchasing power. Their hard-earned assets should provide income. And it is here, that hyperinflation has set in.
Previously, I compared two archetypal retirees. Clarence retired with $100,000 in 1979, and Larry retired with $1,000,000 in 2014. Clarence was able to earn 2/3 of the median income in interest on his savings. Larry was nowhere near that. He would need over $100 million to do the same. In 35 years, the YPP of a 3-month CD fell more than 1,000-fold.
The collapse in YPP suggests an analogy to hyperinflation. Look at how much capital you need to support a middle class lifestyle. Measured in dollars, the dollar price of this capital is skyrocketing.
This skyrocketing price of capital has the same effect as hyperinflation: it undermines savings and causes people to eat themselves out of house and home.
What does this mean for anyone with less than what they need to support themselves—$100M and rising? They must liquidate their capital, and live by consuming their savings. It’s terrifying to anyone in that position—which means anyone in the middle class.
This problem is not well understood, because it masquerades as rising asset prices. The first tractor to go to the block fetched $1,000. The second went for $2,000. The farmland may fetch a few million. Everyone loves rising asset prices, and so in their greed and euphoria they miss the point.
This article is from Keith Weiner’s weekly column, called The Gold Standard, at the Swiss National Bank and Swiss Franc Blog SNBCHF.com.
- Chinese Stocks Plunge Again, "VIX" Hits Record, "Nasdaq" Down 40% From Highs
Despite all the hopes and prayers of illiterate farmers everywhere, Chinese stocks refuse to hold a bid and down 3-4% at the open amid suspension of around 160 individual securities. In the pre-open to open, Shanghai Composite is down 3.2%, Shenzhen is off 3.5%, and China's Nasdaq – ChiNext is down 3.8%. This leaves ChiNext down over 40% from its highs as the cost of insuring downside in Chinese stocks explodes to record highs. As China goes through the 1929 playbook to save its 'market', it appears "momentum" has shifted.
- *SHANGHAI MARGIN DEBT BALANCE DECLINES FOR RECORD ELEVENTH DAY
- *HKEX DROPS AS MUCH AS 4.2%, FALLING FOR 8TH STRAIGHT SESSION
Not a good start to the day…
And the morning session ends NOT OFF THE LOWS…
Some context for the moves…
As we noted prerviously – psychology has shifted… every government-driven ramp is sold into by as many retail locals and foreign professionals as possible… and remember the local professionals are now stuck with losses as they are not allowed to sell.
Which explains why downside vol costs explode… (if you're not allowed to sell stocks… what's your next move?)
The cost of options protecting against a 10 percent drop in the ETF was 11.5 points more than calls betting on a 10 percent increase on Monday, according to three-month data compiled by Bloomberg. The price relationship known as skew climbed to 11.8 points last week, the highest since the ETF started in November 2013.
For Aberdeen Asset Management’s Nicholas Yeo, China needs to let fundamentals govern its stock market, not state directives.
“International investors are skeptical that all the government measures are short-term, cosmetic,” said Yeo, the Hong Kong-based head of Chinese equities at Aberdeen Asset, which oversees about $491 billion worldwide. “If you want it to be a proper market, there should be less interference.”
1929 Deja vu all over again…
“The more resources authorities commit to propping up the stock market, the more they ratchet up the potential fall-out risks should the market continue to collapse,” said Andrew Wood, an analyst at BMI Research. “This could give rise to a crisis of confidence in the authorities’ ability to support both the stock market and the real economy.”
And with 888 stocks down and only 29 up – PBOC is gonna need a bigger boat fund
* * *
On the bright side – though we are not sure of that – it seems the twice burned Chinese are greatly rotating their newly lost equity wealth back into real estate…Via ForexLive:
Preliminary results from the China Household Finance Survey
- 31.5% of respondents plan to reduce their stock holdings
- 12.3% said they plan to increase their stock holdings
- Remaining saying they do not plan to change their holdings
- For Q2 4.8% of stock investors bought homes, compared with 2.3% recorded in Q1
- Of those who bought property, 70% came from households that have made money in the stock market.
The China Household Finance Survey is a quarterly survey carried out by researchers at Southwestern University of Finance and Economics in Chengdu.
* * *
Will they never learn?
- Jade Helm, Terrorist Attacks, Surveillance & Other Fairy Tales For A Gullible Nation
Submitted by John Whitehead via The Rutherford Institute,
“Strange how paranoia can link up with reality now and then.” – Philip K. Dick, A Scanner Darkly
Once upon a time, there was a nation of people who believed everything they were told by their government.
When terrorists attacked the country, and government officials claimed to have been caught by surprise, the people believed them. And when the government passed massive laws aimed at locking down the nation and opening the door to total government surveillance, the people believed it was done merely to keep them safe. The few who disagreed were labeled traitors.
When the government waged costly preemptive wars on foreign countries, insisting it was necessary to protect the nation, the citizens believed it. And when the government brought the weapons and tactics of war home to use against the populace, claiming it was just a way to recycle old equipment, the people believed that too. The few who disagreed were labeled unpatriotic.
When the government spied on its own citizens, claiming they were looking for terrorists hiding among them, the people believed it. And when the government began tracking the citizenry’s movements, monitoring their spending, snooping on their social media, and surveying their habits—supposedly in an effort to make their lives more efficient—the people believed that, too. The few who disagreed were labeled paranoid.
When the government let private companies take over the prison industry and agreed to keep the jails full, justifying it as a cost-saving measure, the people believed them. And when the government started arresting and jailing people for minor infractions, claiming the only way to keep communities safe was to be tough on crime, the people believed that too. The few who disagreed were labeled soft on crime.
When the government hired crisis actors to take part in disaster drills, never alerting the public to which “disasters” were staged, the people genuinely believed they were under attack. And when the government insisted it needed greater powers to prevent such attacks from happening again, the people believed that too. The few who disagreed were told to shut up or leave the country.
Finally, the government started carrying out covert military drills around the country, insisting they were necessary to train the troops for foreign combat, and most of the people believed them. The few who disagreed, warning that perhaps all was not what it seemed, were dismissed as conspiracy theorists and quacks.
By the time the government locked down the nation, using local police and the military to impose martial law, there was no one left in doubt of the government’s true motives—total control and domination—but there was also no one left to fight back.
Now every fable has a moral, and the moral of this story is to beware of anyone who urges you to ignore your better instincts and trust the government.
In other words, if it looks like trouble and it smells like trouble, you can bet there’s trouble afoot.
For instance, while there is certainly no shortage of foul-smelling government activities taking place right now, the one giving off the greatest stench is Jade Helm 15. This covert, multi-agency, multi-state, eight-week military training exercise is set to take place from July 15 through Sept. 15 in states across the American Southwest.
According to official government sources, “Jade Helm: Mastering the Human Domain” is a planned military exercise that will test and practice unconventional warfare including, but not limited to, guerrilla warfare, subversion, sabotage, intelligence activities, and unconventional assisted recovery. The training exercise will take place in seven different southwestern states: California, New Mexico, Colorado, Arizona, Texas, Utah and Nevada.
U.S. Army Special Operations Command will primarily lead this interagency training program but the Navy Seals, Air Force Special Operations, Marine Special Operations Command, Marine Expeditionary Units, 82nd Airborne Division, and other interagency partners will also be involved. Approximately 1,200 troops are expected to participate in these exercises.
The training is known as Realistic Military Training because it will be conducted outside of federal property. The exercises are going to be carried out on both public and private land, with the military reportedly asking permission of local authorities and landowners prior to land usage. The military map listing the locations that will host the exercise shows Texas, Utah, and the southern part of California as “hostile territory.” According to U.S. officials, these three areas are marked as hostile to simulate environments where American troops are viewed as the enemy. The other areas on the map are marked as permissive, uncertain (leaning friendly), or uncertain (leaning hostile).
Military officials claim that the southwestern states were chosen because this exercise requires large areas of undeveloped land as well as access to towns and population hubs. These states purportedly also provide a climate and terrain that is similar to that of potential areas of combat for the United States, particularly Iraq, Iran and Syria.
Now the mainstream media has happily regurgitated the government’s official explanation about Jade Helm. However, there is a growing concern among those who are not overly worried about being labeled conspiratorialists or paranoid that the government is using Jade Helm as a cover to institute martial law, bring about total population control, or carry out greater surveillance on the citizenry.
In the first camp are those who fear that Jade Helm will usher in martial law. These individuals believe that by designating the two traditionally conservative and Republican-dominated states, Utah and Texas, as hostile territory, while more Democratic states like Colorado and California are marked as friendly, the military plans to infiltrate the states with large numbers of gun owners and attempt to disarm them.
Adding fuel to the fire is the mysterious and sudden temporary closures of five Walmart stores in Texas, California, Oklahoma and Florida, two of which are located near Jade Helm training sites. Those in this camp contend that the military is planning to use the Walmart stores as processing facilities for Americans once martial law is enacted.
Pointing to the mission’s official title, “Jade Helm: Mastering the Human Domain,” there is a second camp that fears that the military exercises are merely a means to an end—namely total population control—by allowing the military to discern between friendly civilians and hostiles. This concern is reinforced by military documents stating that a major portion of Jade Helm training will be about blending in with civilians, understanding how to work with civilians, using these civilians to find enemy combatants, and then neutralizing the target.
In this way, the United States military is effectively using psychological warfare to learn how people function and how to control them.
As a study written by military personnel states, mastering the human domain, also known as identity processes, means “use of enhanced capabilities to identify and classify the human domain; to determine whether they are adversarial, friendly, neutral, or unknown.” The study later states that identity processes can be used to “manage local populations during major combat, stability, and humanitarian assistance and/or disaster relief operations.”
While the military has promised that the work they are doing is aimed for use overseas, we have seen first-hand how quickly the military’s weapons and tactics used overseas are brought home to be used against the populace. In fact, some of the nation’s evolutionary psychologists, demographers, sociologists, historians and anthropologists have been working with the Department of Defense’s Minerva Initiative to master the human domain. This security research includes “Understanding the Origin, Characteristics, and Implications of Mass Political Movements” at the University of Washington and “Who Does Not Become a Terrorist and Why?” at the Naval Academy Post Graduate School. Both studies focus on Americans and the different movements and patterns that the government can track to ensure “safety and security.”
The Department of Homeland Security (DHS) is also working to infiltrate churches across the country to establish a Christian Emergency Network, carry out emergency training exercises to prevent and prepare for disasters (active shooter drills and natural disaster preparedness), and foster two-way information sharing, while at the same time instituting a media blackout of their activities. As the DHS continues to establish itself within churches, a growing number of churches are adopting facial recognition systems to survey their congregations, identify and track who attends their events, and target individuals for financial contributions or further monitoring. As the partnership between churches and the DHS grows, their facial recognition databases may be shared with the federal government, if that is not already happening.
Finally, there is the third camp which fears that Jade Helm is merely the first of many exercises to be incorporated into regular American life so that the government can watch, study, and better understand how to control the masses. Certainly, psychological control techniques could be used in the future to halt protests and ensure that the nation runs “smoothly.”
It remains to be seen whether Jade Helm 15 proves to be a thinly veiled military plot to take over the country (one lifted straight out of director John Frankenheimer’s 1964 political thriller Seven Days in May), turn the population into automatons and psychological experiments, or is merely a “routine” exercise for troops, albeit a blatantly intimidating flexing of the military’s muscles.
However, as I point out in my book Battlefield America: The War on the American People, the problem arises when you add Jade Helm to the list of other troubling developments that have taken place over the past 30 years or more: the expansion of the military industrial complex and its influence in Washington DC, the rampant surveillance, the corporate-funded elections and revolving door between lobbyists and elected officials, the militarized police, the loss of our freedoms, the injustice of the courts, the privatized prisons, the school lockdowns, the roadside strip searches, the military drills on domestic soil, the fusion centers and the simultaneous fusing of every branch of law enforcement (federal, state and local), the stockpiling of ammunition by various government agencies, the active shooter drills that are indistinguishable from actual crises, the economy flirting with near collapse, the growing social unrest, the socio-psychological experiments being carried out by government agencies, etc.
Suddenly, the overall picture seems that much more sinister. Clearly, there’s a larger agenda at work here, and it’s one the American people had better clue into before it’s too late to do anything about it.
Call me paranoid, but I think we’d better take James Madison’s advice and “take alarm at the first experiment on our liberties."
- Russia Celebrates Independence Day By Flying Strategic Bombers 200 Miles Off California Coast
As Americans stared heavenwards at the sound and fury of incendiary devices lighting the dark to celebrate their independence from an over-taxing monarchy, there were other fireworks going off in the skies above Alaska and California. As Fox News reports, two pairs of Russian bombers flew off the coast of California and Alaska – forcing the Air Force to scramble fighter jets to intercept both flights, according to two senior defense officials who did not confirm if the bombers were armed. As Free Beacon adds, it was the second time Moscow dispatched nuclear-capable bombers into the 200-mile zone surrounding U.S. territory in the past two weeks.
Watch the latest video at video.foxnews.com
While the United States celebrated Independence Day, two pairs of Russian bombers flew off the coast of California and Alaska — forcing the Air Force to scramble fighter jets to intercept both flights, two senior defense officials tell Fox News.
The first incident occurred at 10:30 a.m. ET on July 4 off the coast of Alaska, Fox News is told. Two U.S. Air Force F-22 jets were scrambled from their base in Alaska to intercept two Tupolev Tu-95 long-range strategic bombers, capable of carrying nuclear weapons.
The second incident occurred at 11:00 a.m. ET also on July 4, off the central coast of California. Two F-15s from an undisclosed location were scrambled to intercept another pair of Tu-95 Bear bombers.
A spokesman for NORAD would not confirm if either pair of bombers was armed.
As FreeBeacon.com further adds,
A defense official said the Pacific coast intrusion came close to the U.S. coast but did not enter the 12-mile area that the U.S. military considers sovereign airspace.
The bomber flights near the Pacific and earlier flights near Alaska appear to be signs Moscow is practicing the targeting of its long-range air-launched cruise missiles on two strategic missile defense sites, one at Fort Greely, Alaska and a second site at Vandenberg Air Force Base, Calif.
In May, Russian Gen. Nikolai Makarov, the chief of the Russian General Staff, said during a Moscow conference that because missile defense systems are destabilizing, “A decision on pre-emptive use of the attack weapons available will be made when the situation worsens.” The comments highlighted Russian opposition to planned deployments of U.S. missile defense interceptors and sensors in Europe.
The U.S. defense official called the latest Bear H incident near the U.S. West Coast “Putin’s Fourth of July Bear greeting to Obama.”
Retired Air Force Lt. Gen. Thomas McInerney, a former Alaska commander for the North American Aerospace Defense Command, said the latest Bear H intrusion appears to be Russian military testing.
“It’s becoming very obvious that Putin is testing Obama and his national security team,” McInerney told the Free Beacon. “These long-range aviation excursions are duplicating exercises I experienced during the height of the Cold War when I commanded the Alaska NORAD region.
…
“These are not good indications of future U.S. Russian relations.”
Pentagon spokesman Capt. John Kirby said the incident occurred July 4. He said the “out-of-area patrol by two Russian long range bombers … entered the outer [Air Defense Identification Zone]” and the bombers “were visually identified by NORAD fighters.”
Kirby said the bombers did not enter “sovereign airspace.” He declined to identify the specific distance the aircraft flew from the United States due to operational security concerns. He also declined to identify the types of aircraft used to intercept the bombers.
In last month’s intercept of two Russian Tu-95 bombers, U.S. F-15s and Canadian CF-18s were used.
* * *
As Adm. Bill Gortney, the general at the head of North American Aerospace Defense Command (NORAD), told reporters in April,
Russia was using its long-range bomber fleet to "message" the US about Moscow's international military capabilities.
"They are messaging us. They are messaging us that they are a global power," Gortney said, while noting that the US does "the same sort of thing" to Russia in Europe.
- The Biggest Winner From The Greek Tragedy
Long after Greece has left the Eurozone and Germany is using the Deutsche Mark as its currency, the people of the two nations, antagonized to a level unseen since World War II, will be accusing each other of benefiting more from the brief but tumultuous period of the common currency.
In reality, nobody had put a gun to Greece’s head and told it to lever up, enriching local oligarchs and corrupt politicians, taking advantage of credit that was artificially cheap only due to the common currency and an implicit monetary, if not fiscal, union.
Germany, whose exports account for nearly 50% of GDP, on the other hand experienced an unprecedented exporting golden age, made possible only due to an artificial currency, the Euro, that was by definition created to be weaker than the Deutsche Mark and benefitted from any bout of weakness in Europe’s periphery, such as the past 5 years.
The truth is, when things were good nobody second-guessed any decisions for a second, and since the rising economic tide lifted all boats, nobody cared.
And then the tide rolled out, displaced by trillions in bad loans and gargantuan mountains of sovereign and financial debt, which ultimately would lead to the first, then second, then third and then an all-out cascade of sovereign defaults.
Sadly, the losers – regardless of the propaganda and jingoist rhetoric – are the ordinary, common, taxpaying people of Germany and Greece (and every other European nation), who enjoyed a few brief years of artificial prosperity, which in retrospect was entirely due to debt, masked well by the “currency swaps” and other financial engineering concocted by banks such as Goldman Sachs, in clear violation of the Maastricht treaty which is now a long-forgotten memory of the founding ideals behind the Eurozone.
For every loser there is a winner, and in the case of Greece and its tragedy, just as millions are about to lose everything, a few not only made billions but quietly, under the guise of “sovereign bailouts” transferred their entire risk onto the taxpaying public.
They are shown in the chart below.
It is that transfer of private-to-public risk, which is also the main reason why the public debt of so many European countries, not only Greece, whose debt is record high despite a default to its private creditors in 2012 and where only 10% of bailout proceeds ever made it to the actual economy…
… but the entire periphery has soared in the last few years.
Inevitably, there will be many angry people, because what is about to come to Europe will be hardship unlike anything seen in generations. Our suggestion: before neighbor takes it out on neighbor, study the following map closely because just like Libor was an impossible conspiracy theory until it was a proven fact, what is happening in Europe was propagated and effectuated by one bank more than any other.
This one:
Or, one can ignore this as merely yet another conspiracy theory. And that’s fine.
But there is one critical, factual loose end that has to be investigated.
Back in June 2012, the ECB, whose head was the recently crowned Mario Draghi who had less than a decade ago worked at none other than Goldman Sachs, was sued by Bloomberg’s legendary Mark Pittman under Freedom of Information rules demanding access to two internal papers drafted for the central bank’s six-member Executive Board. They show how Greece used swaps to hide its borrowings, according to a March 3, 2010, note attached to the papers and obtained by Bloomberg News. The first document is entitled “The impact on government deficit and debt from off-market swaps: the Greek case.” The second reviews Titlos Plc, a securitization that allowed National Bank of Greece SA, the country’s biggest lender, to exchange swaps on Greek government debt for funding from the ECB, the Executive Board said in the cover note. From Bloomberg:
In the largest derivative transaction disclosed so far, Greece borrowed 2.8 billion euros from Goldman Sachs Group Inc. in 2001 through a derivative that swapped dollar- and yen-denominated debt issued by the nation for euros using a historical exchange rate, a move that generated an implied reduction in total borrowings.
“The Greek authorities had never informed Eurostat about this complex issue, and no opinion on the accounting treatment had been requested,” Eurostat, the Luxembourg-based statistics agency, said in a statement. The watchdog had only “general” discussions with financial institutions over its debt and deficit guidelines when the swap was executed in 2001.
“It is possible that Goldman Sachs asked us for general clarifications,” Eurostat said, declining to elaborate further.
The ECB’s response: “the European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency.“
Considering the crisis of the (not so) single currency is very much “inflamed” right now as it is about to be proven it was never “irreversible”, perhaps it is time for at least one aspiring, true journalist, unafraid of disturbing the status quo of wealthy oligarchs and central planners, to at least bring some closure to the Greek people as they are swept out of the Eurozone which has so greatly benefited the very same Goldman Sachs whose former lackey is currently deciding the immediate fate of over €100 billion in Greek savings.
Because something tells us the reason why Mario Draghi personally blocked Bloomberg’s FOIA into the circumstances surrounding Goldman’s structuring, and hiding, of Greek debt that allowed not only Goldman to receive a substantial fee on the transaction, but permitted Greece to enter the Eurozone when it should never have been allowed there in the first place, is that the person who oversaw and personally endorsed the perpetuation of the Greek lie is none other than Goldman’s Vice Chairman and Managing Director at Goldman Sachs International from 2002 to 2005. The man who is also now in charge of the ECB.
Mario Draghi.
- What It Really Takes For a US-Iran Deal
Authored by Pepe Escobar, Op-Ed via RT.com,
Forget the mad spinning. Here it is, in a nutshell, what it really takes for Iran and the P5+1 to clinch a game-changing nuclear deal before the new July 7 deadline.
Iran and the P5+1 agreed in Lausanne on a “comprehensive plan of action,” taking into account delicate constitutional considerations in both the US and Iran. A crucial part of the plan is the mechanism to get rid of sanctions. Lausanne – and now Vienna – is not a treaty; it’s an action plan. There will be a declaration when a deal is reached. But there won’t be a signing ceremony.
The next important step is what happens at the UN Security Council (UNSC). All the concerned parties at the UNSC will endorse a declaration, and a resolution – which is still being negotiated – will render null and void all previous sanctions resolutions.
As it stands, all the parties – except the US government – want to go to the UNSC as soon as possible. Washington remains, at best, reticent.
Iranian negotiators have made it very clear at the table that Tehran will start implementing its nuclear restriction commitments – removal of a number of centrifuges, removal of the core of Arak’s reactor, disposal of uranium stock, etc. – immediately. The IAEA will be constantly checking Iran has complied with an extensive list.
But it has to be a parallel process; the US and the EU must for their part and “take physical action”, tackling the complex mechanism of lifting all economic sanctions. Once again; a UNSC signature instantly erases all previous sanctions.
And here is something crucial; all of this has been agreed in Lausanne. The work must be simultaneous, as stressed, in tandem, by Iranian Foreign Minister Mohammad Javad Zarif and EU representative Federica Mogherini.
Those fateful parameters
Meanwhile, we have the media centrifuges spinning like mad, as I described here. On the negotiating table, there are still skirmishes related to the US desire in trying to “prove a negative” – as in the “possible military dimensions” (PMD) of Iran’s nuclear program.Logically, you don't need to be a neo-Wittgenstein to see that’s impossible.
The deadline extension from June 30 to July 7 is mostly about finding – rather, finding again – a “reasonable common narrative” inbuilt in the Lausanne framework, and even before.
This means Washington should make the political decision to tone down repeated attempts to introduce new demands. Iranian officials admit, “we may have had disagreements on how we do simultaneous work,” but that’s part of Lausanne. New demands are not.
In Lausanne, US Secretary of State John Kerry and Foreign Minister Zarif agreed on a “set of parameters” – after excruciating nine hours of debate.They also agreed, crucially, that both sides would refrain from humiliating one another publicly.
The recent record shows that’s been the case – as far as negotiators and diplomats are concerned. On the other hand, US corporate media predictably has been wreaking the proverbial havoc.
Which brings us to the clincher; Iranian negotiators have yet to detect a readiness of the US government to really change the “culture of sanctions” in the UNSC. And here a diplomatic consensus emerges, involving, very significantly, Russia and Germany; this agreement will be made – or broken – on one crucial point; whether the Obama administration wants to lift the sanctions or keep them.
Watch the BRICS front
The least one can say about what’s really happening in the Palais Coburg since this past weekend is that the Obama administration’s position is oscillating wildly. There seems to be – finally – some movement on the American side in the sense they feel a strategic interest in changing the situation.
That will depend, of course, on the Obama administration’s evaluation of all factions operating in the Beltway establishment. Diplomats in Vienna agree Kerry is personally involved in trying to change the equation. So this means the ball is really in the US court.
But all’s still murky; even oscillating wildly; the Americans continue to entertain what an Iranian official described to me as “buyer’s remorse” regarding what they agreed on Lausanne in the first place.
Serious, key sticking points remain. The duration of the sanctions; confidentiality issues – as in the US, especially, respecting terms of access to Iranian military installations; and what’s defined as “managed access” under certain conditions.
Also very crucial is the BRICS front at the P5+1. Neither China nor Russia wants to see any exacerbation of tensions, in Southwest Asia and beyond, because a deal is not clinched. The bottom line; with their eye in the Big Picture – as in Eurasia integration – both are committed to facilitate a deal.
Until tomorrow, all remains in play. Obama has been spinning he doesn’t want a “bad deal”. That’s not the issue. The issue is Obama himself making the fateful political decision of abandoning the weapon of choice of US foreign policy; sanctions. Has he got what it takes to pull it off?
- Are You Ready For The e-PATRIOT Act?
Submitted by Mark Nestmann via nestmann.com,
Earlier this month, news emerged that the US government had suffered its worst cyberattack ever.
On June 4, the Office of Personnel Management (OPM) revealed that hackers had penetrated its networks, possibly for many months. The data thieves stole personal information of up to 18 million current and former federal government applicants and employees.
There’s a good chance the attack is even worse than what you’ve read about. The OPM hack included a database holding security clearance information on hundreds of thousands of federal employees and contractors. This database contains details of applicants’ financial and investment records, family members, and even names of neighbors and close friends.
Another database that may have been breached includes criminal history, psychological records, and information about past drug use. The hackers might even have acquired detailed personal and sexual profiles obtained through lie detector tests.
With all the talk of Edward Snowden and the supposed “irreparable” damage he did to US interests, this theft is a lot worse. While OPM doesn’t hold personnel records for the CIA, it does for other US intelligence agencies. The hackers now know the identity of hundreds of thousands of federal employees with security clearances. Not only that, they also have sensitive background information on each of them, which they could easily use for blackmail.
Oh, and get this – the breach wasn’t actually discovered by the OPM. It was only uncovered during a sales demonstration by a security company named CyTech Services.
So what does the Obama administration want to do to solve the problem?
For starters, it’s proposed “economic sanctions” against China, which it holds responsible for the attack. We’ve seen how effective those were against Russia after the US imposed them last year in the wake of its takeover of Crimea. There’s no reason to think that sanctions against China will be any more effective.
Obama administration officials, led by the FBI, also want to force US companies to insert “back doors” into their encryption products that the government can unlock with the appropriate key. That’s a horrible idea, because strong encryption is really the only certain way to protect sensitive databases from this type of attack. And of course, there’s a very real prospect that hackers might discover the back door. That’s happened on numerous occasions in the past.
And Obama wants Congress to pass a bill to strengthen federal cybersecurity legislation. In April, the House passed its version of the bill and sent it to the Senate. Only a few days after the OPM hack, Senate leaders tacked on the Cybersecurity Information Sharing Act (CISA) to a defense bill to avoid debate on the measure. It didn’t work – the Senate failed to advance the legislation.
It’s no wonder they didn’t want a debate. CISA provides liability protection for businesses that voluntarily share “cyberthreat” data with the government. But it also creates a back-door channel for government agencies to retrieve, analyze, and store enormous volumes of personal data. And since information sharing would be voluntary, the government would be able to obtain all of this information without a warrant. Think of it as an “e-PATRIOT Act.”
Is there a better way? Yes.
The biggest change needed is that both private companies and the feds should encrypt all data – everything. And they should use strong, peer-reviewed encryption protocols – not the watered-down variety with back doors that the Obama administration wants them to adopt.
Sure, this will make life more difficult for the likes of the NSA and other spy agencies to carry out domestic surveillance. But investigators can still seize domestic phone records, email header data, and much more, without a warrant. Encrypting everything won’t affect access to this data.
In the meantime, what can you do to protect your own data from cybersecurity breaches? As is often the case, some of the best solutions are outside the politically charged atmosphere of the US.
First, subscribe to a robust virtual private network (VPN) to encrypt the data stream on your smartphone and your PC. I use one called “Cryptohippie.” The company’s only US presence is to authenticate connections to Cryptohippie servers in other countries. None of Cryptohippie’s servers are in the United States.
Second, use an email program that facilitates transmission of encrypted messages. My personal choice is Thunderbird, along with a free plug-in called Enigmail. Once you exchange encryption keys with the people you correspond with, Enigmail automatically encrypts and decrypts your messages.
Third, if you use webmail services, ditch US providers such as Gmail and the online version of Microsoft Outlook (formerly Hotmail). Use a non-US service that is serious about security and encryption. I use a company called Century Media, which has its servers in Switzerland, for this purpose, but there are many other choices.
A good time to begin securing your electronic life would be today. The US government certainly isn’t going to do it for you.
- Can China Keep Miami's Condo Bubble From Bursting?
After Xi Jinping’s anti-corruption campaign emptied the VIP baccarat tables in Macau causing gaming revenue to plunge 40% month after painful month, China’s stock market miracle might well have functioned as a convenient outlet for the gambling propensities of the country’s ultra rich.
That all came to a rather unceremonious end three weeks ago when the unwind of as much as CNY1 trillion in backdoor margin lending triggered a terrifying 30% collapse in Chinese equities.
Fortunately for China’s ultra rich, dollar strength has served to completely eliminate the South American bid from Miami’s once-booming condo market. As a reminder, here is the situation in South Florida:
As you can see, price increases leveled off in H1. The reason (according to Kevin Maloney, founder and principal of Property Markets Group who spoke to Bloomberg last month): “A very strong shift in the last year in the dollar … has literally pushed whole countries out of the marketplace.”
Yes, whole Latin American countries (and maybe a few Russian oligarchs), but certainly not China, and what better way to shore up a market in which price appreciation has recently flatlined after three consecutive years of 15%+ gains than to lure in Chinese buyers who, having helped send Manhattan condo prices to nosebleed levels and who are perhaps now looking for less volatile places to park their fortunes having watched their domestic stock market take a nosedive, may now be looking for a fourth, fifth, or sixth home away from home. WSJ has more:
Wealthy buyers from Brazil, Venezuela and Argentina have fueled a real-estate frenzy in Miami in recent years, sending luxury-condo prices soaring. Now, Miami developers and real-estate agents are setting their sights on a more distant part of the world: China.
In April, representatives for several Miami condo buildings made the 8,000-mile-trip to the Beijing Luxury Property Show, a trade show that attracted more than 5,200 wealthy Chinese to look at international properties. Sales agents for the Fendi Chateau Residences, a luxury development going up near Florida’s Bal Harbour, handed out brochures in Mandarin for condos priced from $5 million to $22 million. Nearby was Lauren Marks, the marketing coordinator for two luxury-condo buildings: Palazzo Del Sol and the forthcoming Palazzo Della Luna, on Miami’s Fisher Island.
“I’m here on a fact-finding mission,” said Ms. Marks. “I’m trying to decide if this is the right place for us to facilitate a meaningful relationship with Chinese buyers.”
Executives of the Miami Association of Realtors, the largest local group of the National Association of Realtors, were there, too, handing out Miami market data and gold palm-tree pins attached to a card with the tagline, written in Chinese, “Enjoy the unique taste of life.”
Part of the reason for their journey: South American buyers, who comprise the largest foreign buying group in Miami, aren’t buying as rapidly anymore. A recent study by the Miami Downtown Development Authority found that sales of new condo units still under construction have slowed, in part because South American investors have less buying power, due to the increase of the U.S. dollar compared with South American currencies.
Meanwhile, Chinese buyers are beginning to take a closer look at the city. “The Chinese are coming along very strong,” said Simon Henry, co-founder of Juwai.com, a China-based website that connects wealthy Chinese with overseas properties. “Miami looks relatively cheap compared with some of the big cities like San Francisco and New York.” Juwai says the average budget for Chinese buyers shopping for overseas properties on its site is $2.3 million.
Currently, only 2% of international buyers in Miami come from China, according to the Miami Association of Realtors. But potential changes in Chinese investment policies, and the relatively strong Chinese yuan, are making the Chinese look like a good bet to Miami developers. The Chinese government is expected to begin raising annual limits on how much an individual can invest overseas from the current $50,000 cap—a rule often skirted.
And Chinese buyers have become an increasingly dominant force in U.S. real estate overall. According to the National Association of Realtors, Chinese buyers recently surpassed Canadians as the top foreign buyers of homes in the U.S., purchasing $28.6 billion of properties in the 12-month period ending in March.
There it is. The reason why Carlos Rosso, president of Related Group of Florida so confidently told Bloomberg last month that this time is “different” and that the current deceleration in condo price appreciation will not soon turn into a rout.
In short, Miami condo developers are depending on the China bid to rescue the market from overbuilding much as the entire world depended on China to absorb oversupply in the lead up to the financial crisis. We’ll check back next quarter to see if an influx of Chinese buyers was enough to stop prices from posting their first Y/Y decline in seven years.
- Russia Is Taking Full Advantage Of Greek Crisis
Submitted by Nick Cunningham via OilPrice.com,
With Greece’s debt situation spiraling downwards, the European project is showing some cracks. The July 5 referendum could amount to a vote on whether or not Greece stays in the euro.
In the meantime, the turmoil offers an opportunity for Russia to advance its interests. Of course, the EU is an absolutely critical trading partner for Russia, so if the bloc starts to fray at the seams, that presents financial risks to an already struggling Russian economy. Russia’s central bank governor Elvira Nabiulllina warned in June of the brewing threat that a Greek default would have on Russia. “We do consider that scenario as one of possible risks which would increase turbulence in the financial markets in the European market, bearing in mind the fact the European Union is one of major trading partners, and we are definitely worried by it,” she said in an interview with CNBC.
With the economic fallout in mind, Russia does see strategic opportunities in growing discord within Europe. First, Russia is pushing its Turkish Stream Pipeline, a natural gas pipeline that it has proposed that would run from Russia through Turkey and link up in Greece. From there, Russian gas would travel on to the rest of Europe. Russia is vying against a separate pipeline project that would send natural gas from the Caspian Sea through Turkey and on to Europe.
In mid-June, Alexis Tsipras met with Russian President Vladimir Putin at the St. Petersburg International Economic Forum. Russia and Greece signed a memorandum following the meeting to push the project forward. Russia’s energy minister Alexander Novak emphasized that Gazprom would not own the section of the pipeline on Greek territory, a crucial fact that avoids heavy antitrust scrutiny from EU regulators.
With an eye on the looming default, Russia agreed to finance the project, and Greek officials portrayed the project as economic assistance amidst its ongoing debt crisis.
The pipeline remains in limbo. Despite Russian insistence that construction could begin in 2016 and be completed by 2019, the 2 billion euro project does not have firm commitments from Turkey, and it also still faces opposition within Europe, which is trying to wean itself off of Russian gas.
But with Greece’s debt crisis hitting new lows, there remains the possibility that Russia could come to Greece’s aid if the latter starts to pull away from Europe. And Greece has tried to use a potential turn towards Russia as leverage in talks with Europe.
To be sure, a Russian bailout for Greece is probably not in the cards, given Russia’s own financial troubles. And both Russian and Greek officials stressed that they did not discuss direct financial assistance when they met in June. Still, there are mutual benefits for both Russia and Greece in highlighting their relationship.
Another way that Russia may be benefitting from the unravelling of Greece is the fact that the attention of European officials and the media have been diverted away from Gazprom’s latest maneuver in Ukraine. The Russian company cut off gas supplies to Ukraine, citing a pricing dispute. Gazprom slashed the discount that it provided to Ukraine for importing its gas, and without prepayment upfront from Ukraine, the Russian company has stated it will not supply gas.
That is not the first instance in which Russia has turned off the taps, having done so in 2006 and 2008 as well. Russia cited pricing disputes in those cases as well. But those prior events also took place during a brutally cold winter, leaving parts of Eastern Europe to freeze. The message was clear: fall in line, or we will cut off your energy supplies.
Of course, that sparked outrage in European capitals, leading to calls for greater European energy security. But after years of little progress, the conflict in Ukraine in 2014 kicked of a new era of icy relations between Russia and Europe, and renewed calls for energy independence from Russia.
One would think that Russia once again cutting of gas flows to Ukraine would certainly raise howls across Europe, but the Greek crisis is sucking all of the air out of the room and crowding out media attention. The fact that the latest incident took place during summer and not winter helped damp down a European reaction, and Russia was careful to insist that Europe would not be affected. But the incident has passed with much less of a reaction than one might have thought.
There are huge financial risks to Russia from chaos in the Eurozone, and the longer the crisis drags out the more likely there could be economic fallout for Russia. But Putin no doubt sees a silver lining in collapsing European unity.
- In China, Hairdresser Bull Call Goes Horribly Wrong, Broker IPO Crashes 31%
Around two weeks ago, Wang Weidong, who WSJ describes as “one of China’s top fund managers,” drew a crowd so large at the Grand Hyatt in Lujiazui that the building’s air conditioning unit was, much like the SHCOMP’s volume tracking software in April, overwhelmed by the sheer number of aspiring Chinese day traders in attendance.
The message was clear: buy Chinese stocks.
“The 4000 level was only the beginning of the bull market,” Wang said, implicitly suggesting that the greater fool theory of investing is the way to go if you’re trading on the SHCOMP or the Shenzhen. Wang even went so far as to suggest that anyone who chose to take a vacation instead of spending their holidays day trading was making a big mistake. “They say the world is too big and I need to go and take a look. I would say, the stock market is hot, so how can I leave it behind?” he asked.
Anyone who took that advice — and you can bet quite a few of the 600 attendees did — was in for a rude awakening.
Chinese stocks have suffered a brutal sell-off over the past three weeks as a massive unwind in the shadowy world of backdoor margin lending has overwhelmed official efforts to stop the bleeding and indeed, even a weekend move by the PBoC to pledge central bank support for increased margin lending (and yes, that is as ludicrous as it sounds) wasn’t enough to stabilize the market as evidenced by the SHCOMP’s wild ride on Monday.
Here’s WSJ with more on why your hairdresser won’t always be right when it comes to identifying attractive entry points.
On a hot, humid Sunday afternoon in mid-June, around 600 eager stock investors packed the largest ballroom at the Grand Hyatt in Lujiazui, Shanghai’s equivalent of Wall Street.
With Chinese stocks at a seven-year high, the investors had gathered to listen to a talk by one of China’s top fund managers, Wang Weidong, of Adding Investment. The crowd was so large, the air conditioning couldn’t keep up and hotel staffers brought in chairs and bottled water for the sweaty participants.
Today the Shanghai index and smaller, more-volatile indexes in Shenzhen are off more than a quarter from highs reached in June.
Even after the peak, new investors opened millions of brokerage accounts so they could play the rally. Sophie Wang, a 32-year-old college art teacher in Nanjing, said in a recent interview that she opened her first stock trading account two weeks ago and bought some shares on “the advice of my hairdresser.”
Ms. Wang said her holdings are down 32%. “I don’t really follow news on stocks that closely. My hairdresser said it was still a bull market and I needed to get in,” she said.
She said she didn’t know what to do when the market started falling and she is still holding her shares.
The government has shown increasing concern about the selloff, but its efforts, including an interest-rate cut, have failed to stem the slide. On Saturday, Beijing took its most-decisive action yet, suspending initial public offerings and establishing a market-stabilization fund to spur stock purchases. The Chinese central bank also pledged to provide funding to support brokerages’ margin finance operations that allow investors to borrow cash to buy stocks.
China has suspended IPOs before in hopes of boosting the market by way of cutting supply. This time, the stakes are higher because an estimated four trillion yuan ($645 billion) worth of IPOs was in the works, and Beijing had hoped to use a buoyant stock market to help heavily indebted companies raise cash.
Speaking of IPOs, it appears as though brokers are just as ineffective at propping up their own shares as they are at providing plunge protection for the broader market, because as the following from Bloomberg makes clear, Guolian Securities’ debut did not go as planned.
Chinese brokerage Guolian Securities Co.’s shares tumbled in the worst major Hong Kong trading debut since 2011, even after China rolled out emergency measures to stabilize the nation’s stock market.
Guolian closed 31 percent lower than its offer price at HK$5.51.
Guolian’s debut was the worst since 2011 for any Hong Kong initial share sale of at least $100 million, Bloomberg-compiled data show. While the securities firm’s shares were in part catching up with market declines since the stock was priced on June 26, investors are concerned that the Chinese slump isn’t over, Castor Pang, head of research at Core Pacific Yamaichi in Hong Kong, said by phone.
Where we go from here is anyone’s guess because as we noted on Sunday evening, retail investor psychology has now suffered irreparable damage, meaning panicked hairdressers and banana vendors looking to sell the rips will be battling the PBoC for control of an insanely volatile market.
In short, expect the wild swings investors have seen over the course of the last two months to continue and indeed to become even more exaggerated as the battle between Politburo plunge protection and frantic farmer selling heats up.
- There is Only One Way Out For Greece
Submitted by Martin Armstrong via ArmstrongEconomics.com,
Brussels has been dead wrong. The stupid idea that the euro will bring stability and peace, as it was sold from the outset, has migrated to European domination as if this were “Game of Thrones”. Those in power have misread history, almost at every possible level. The assumption that the D-marks’ strength was a good thing that would transfer to the euro has failed because they failed to comprehend the backdrop to the D-mark.
Germany moved opposite of the USA toward extreme austerity and conservative economics because of its experience with hyperinflation. The USA moved toward stimulation because of the austerity policies that created the Great Depression, which led to a shortage of money, and many cities had to issue their own currency just to function. The federal government thought, like Brussels today, that they had to up the confidence in the bond market and that called for raising taxes and cutting spending at the expense of the people. The same thinking process has played out numerous times throughout history. Our problem is that no one ever asks – Hey, did someone try this before? Did it work? This is why history repeats – we do ZERO research when it comes to economics. It is all hype and self-interest.
Greece should immediately begin to print drachma. By no means has the introduction of a new currency been a walk in the park. There is always a learning curve, as in the case of East Germany’s adoption of the Deutsche mark, the Czech-Slovak divorce of 1993, and the creation of the euro itself . However, the bulk of transactions today are electronic, meaning we are dealing with an accounting issue more than anything. The euro existed electronically BEFORE it became printed money; Greece should do the same right now.
The difference concerning East Germany and others was the fact that there was no history. This is more akin to the 1933 devaluation of the dollar by FDR whereby an executive order reneged on promises to pay prior debt in gold. This would be similar. The new drachma should be issued at two-per euro, only because the people will think the drachma should be worth less than a euro based on pride. If the new drachma is issued at par, the speculators will sell, assuming it will decline. Issue it at 50% and you will eventually see the opposite trend emerge once people see the contagion begin to spread.
Brussels already cut off the banks in Greece. All accounts in Greece should be electronically switched to drachmas. Begin to issue printed drachma for small change. The umbilical cord to Brussels must be cut immediately for Greece to stand on its own. You cannot negotiate with people who will not change their view of the world, for their own self-interest will cloud their perspective.
All EXTERNAL debt should be suspended. Any future resolution of debt should be reduced by 50% to account for the overvaluation of prior debt, thanks to the euro, and any interest previously paid should be deducted from the total loan.
All income tax should be abolished and the only taxation should be indirect. A close examination of the cost of government should be carried out and as many aspects of government as possible should be privatized and put out for bid. For example, motor vehicle and police agencies can privatize, eliminating pensions paid by the government. The size of government must be addressed, or Greece will risk civil war between government workers and private citizens.
Eliminating the income tax is critical and desperately needed for job creation. Small business must be profitable to begin to creating jobs and those who had to leave, whom are the nations’ brightest, will return. Bring your best talent home and build an economy.
Eliminating the debt is critical. Some 20 nations forgave all debt for Germany after World War II. The London Agreement on German External Debts, also known as the London Debt Agreement, was a debt relief treaty between the Federal Republic of Germany and its creditor nations that concluded August 8, 1953.
The London Debt Agreement covered a number of different types of German debt, both public and private, from before and after World War II. Some of them arose directly out of the efforts to finance the reparations system, while others reflect extensive lending, mostly by U.S. investors to German firms and governments. Those who forgave German debt: Belgium, Canada, Denmark, France, Great Britain, Greece, Iran, Ireland, Italy, Liechtenstein, Luxembourg, Norway, Pakistan, Spain, Sweden, Switzerland, South Africa, the United States, Yugoslavia, and others. The total amount under negotiation was 16 billion marks of debt, a result of the Treaty of Versailles after World War I, a debt that went unpaid during the 1930s that Germany decided to repay to restore its reputation. This was money owed to government and private banks in the U.S., France, and Britain. Another 16 billion marks represented postwar loans by the USA. Under the London Debts Agreement of 1953, the repayable amount was reduced by 50% to about 15 billion marks and stretched out over 30 years, and compared to the fast-growing German economy were of minor impact.
Therefore, what enabled Germany to rise from the ashes is a successful model. Greece too must be debt free. End federal borrowing, suspend all debt, and do not accept any more bailouts from Brussels.
- This Is How Much It Cost To Keep The Shanghai Composite Green For A Day
Over the weekend, as China scrambled to put together a coherent plan to combat the vicious equity sell-off that has pruned nearly 30% off the market’s world-beating rally, we remarked that the entire effort looked quite similar to what took place in the wake of Black Thursday some eight and a half decades ago:
“The move by the broker consortium is reminiscent of an ill-fated 1929 effort by JP Morgan and others to support the US market after Black Thursday and is, according to some, doomed to fail because i) it is a laughably small effort compared to daily turnover in China, and ii) it targets the wrong kind of stocks.”
The “consortium” refers to the 21 brokers who came together on Saturday and pledged 15% of their net assets to support the flagging Chinese stock market. The PBoC later (on Sunday) announced it would channel funds to the China Securities Finance Corp which will in turn use the cash to help brokerages expand their businesses and reinvigorate stocks.
The message was clear: stocks absolutely could not open red on Monday morning.
Consider the following from BofAML which shows just how imperative it was for the SHCOMP to open green: “We suspect that the initial PBoC loans to CSFC will be used on Monday morning to fund the MSF until brokers’ funds arrive (by 11am on Monday as ordered by the CSRC).”
In other words, the $20 billion or so in committed broker funds needed to be in place the second the market opened and not a minute later and if that meant the central bank had to front the money while the CSFC waited on the broker cash to clear then so be it. Here’s Bloomberg:
21 Chinese brokerages had transferred at least 128b yuan to China Securities Finance Corp. as of 11am Monday, Shanghai Securities News reports on Weibo, citing Wang Min, deputy head of Securities Association of China.
That explains the opening 8% ramp on the SHCOMP. Of course by the end of the session, whatever boost stocks received from early buying had almost entirely worn off, supporting the contention that, to quote one Bocom equity strategist who spoke to Bloomberg over the weekend, “that CNY120 billion won’t last for an hour in this market.”
With all of the above in mind, we bring you the following chart which, by way of comparison with the above-mentioned JP Morgan Black Thursday plunge protection team, shows you how effective China’s effort is likely to be.
- Greece Fallout: Italy & Spain Have Funded A Massive Backdoor Bailout Of French Banks
Submitted by Benn Steil and Dinah Walker via The Council on Foreign Relations,
In March 2010, two months before the announcement of the first Greek bailout, European banks had €134 billion worth of claims on Greece. French banks, as shown in the right-hand figure below, had by far the largest exposure: €52 billion – this was 1.6 times that of Germany, eleven times that of Italy, and sixty-two times that of Spain.
The €110 billion of loans provided to Greece by the IMF and Eurozone in May 2010 enabled Greece to avoid default on its obligations to these banks. In the absence of such loans, France would have been forced into a massive bailout of its banking system. Instead, French banks were able virtually to eliminate their exposure to Greece by selling bonds, allowing bonds to mature, and taking partial write-offs in 2012. The bailout effectively mutualized much of their exposure within the Eurozone.
The impact of this backdoor bailout of French banks is being felt now, with Greece on the precipice of an historic default. Whereas in March 2010 about 40% of total European lending to Greece was via French banks, today only 0.6% is. Governments have filled the breach, but not in proportion to their banks’ exposure in 2010. Rather, it is in proportion to their paid-up capital at the ECB – which in France’s case is only 20%.
In consequence, France has actually managed to reduce its total Greek exposure – sovereign and bank – by €8 billion, as seen in the main figure above. In contrast, Italy, which had virtually no exposure to Greece in 2010 now has a massive one: €39 billion. Total German exposure is up by a similar amount – €35 billion. Spain has also seen its exposure rocket from nearly nothing in 2009 to €25 billion today.
In short, France has managed to use the Greek bailout to offload €8 billion in junk debt onto its neighbors and burden them with tens of billions more in debt they could have avoided had Greece simply been allowed to default in 2010. The upshot is that Italy and Spain are much closer to financial crisis today than they should be.
- Obamacare Sticker Shock Arrives: Insurance Premiums To Soar 20-40%
Two months ago, we outlined why the CPI-boosting Affordable Care Act is on the verge of bankrupting that all important driver of the US economic growth engine — the American consumer.
Put simply, inflation in medical care services costs hadn’t yet reared its ugly head because many insurers were as yet unable to gauge the full base-effect impact of Obamacare on their P&L. That, we said, was about to change: “After finally digesting the true cost of Obamacare, any recent insurance prime hikes will seem like a walk in the park compared to what is coming.
Sure enough, insurers have now taken a close look at exactly how much socialized medicine is costing them.
Not surprisingly, the picture isn’t pretty.
In some cases, forecasters grossly underestimated the number of claims they would likely receive, and indeed, even a PhD economist can tell you that when the amount going out for claims is greater than the amount coming in via premiums, there’s a problem with the model and because staunching the outflow is effectively now forbidden, something has to give on the receivables side of the equation which means dramatically higher premiums.
NY Times has the story:
Health insurance companies around the country are seeking rate increases of 20 percent to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected. Federal officials say they are determined to see that the requests are scaled back.
Blue Cross and Blue Shield plans — market leaders in many states — are seeking rate increases that average 23 percent in Illinois, 25 percent in North Carolina, 31 percent in Oklahoma, 36 percent in Tennessee and 54 percent in Minnesota, according to documents posted online by the federal government and state insurance commissioners and interviews with insurance executives.
The Oregon insurance commissioner, Laura N. Cali, has just approved 2016 rate increases for companies that cover more than 220,000 people. Moda Health Plan, which has the largest enrollment in the state, received a 25 percent increase, and the second-largest plan, LifeWise, received a 33 percent increase.
Jesse Ellis O’Brien, a health advocate at the Oregon State Public Interest Research Group, said: “Rate increases will be bigger in 2016 than they have been for years and years and will have a profound effect on consumers here. Some may start wondering if insurance is affordable or if it’s worth the money.”
The rate requests, from some of the more popular health plans, suggest that insurance markets are still adjusting to shock waves set off by the Affordable Care Act.
Blue Cross and Blue Shield of New Mexico has requested rate increases averaging 51 percent for its 33,000 members. The proposal elicited tart online comments from consumers.
“This rate increase is ridiculous,” one subscriber wrote on the website of the New Mexico insurance superintendent.
In their submissions to federal and state regulators, insurers cite several reasons for big rate increases. These include the needs of consumers, some of whom were previously uninsured; the high cost of specialty drugs; and a policy adopted by the Obama administration in late 2013 that allowed some people to keep insurance that did not meet new federal standards.
“Our enrollees generated 24 percent more claims than we thought they would when we set our 2014 rates,” said Nathan T. Johns, the chief financial officer of Arches Health Plan, which covers about one-fourth of the people who bought insurance through the federal exchange in Utah. As a result, the company said, it collected premiums of $39.7 million and had claims of $56.3 million in 2014. It has requested rate increases averaging 45 percent for 2016.
The rate requests are the first to reflect a full year of experience with the new insurance exchanges and federal standards that require insurers to accept all applicants, without charging higher prices because of a person’s illness or disability.
There you go. Precisely as we said, the ACA and of course the ballooning cost of new drugs proxied by Janet Yellen’s “stretched” biotech sector mean manidtorily insured Americans will now be charged more. Much more.
But do not despair because where there’s an Obama there’s always “hope”. And on that note, we’ll leave you with the following, from the President:
If insurance regulators “do their job, my expectation is that [rates hikes] will come in significantly lower than what’s being requested.”
- Is It Slowing China Or Grexit That Is Driving Financial Market Price Changes?
Submitted by Bryce Coward via Gavekal Capital blog,
While some of the post Greferendum moves in financial markets could have been and were predicted by the financial punditry – lower euro, lower stocks, lower US bond yields, higher gold – the real moves have appeared elsewhere.
Indeed, as of this writing the euro is only lower against the USD by less than .5%, the MSCI World Index is barely off by 1%, bonds are bid, but not emphatically, and gold is only marginally higher.
The real moves have been in oil (WTI down 6.3% and Brent down 5%) and copper (down 3.9%).
While at first glance this may strike one as odd, there could be something larger at work.
Perhaps the more important catalyst for asset price changes of late is Chinese economic slowing rather than fears of Grexit?
As the charts above show, Chinese industrial output is closely related to oil and copper prices. Or said differently, oil and copper prices are closely related to Chinese economic activity and the slowing of which is having a direct impact on these growth sensitive commodities.
- "Greece Is Coming To Your Neighborhood" Marc Faber Warns
“Wake up people of the world and investors. Greece will come to your neighborhood very soon, maybe not this year, but next year or whenever it is, because the world is over infected. And defaults will follow, or they will have to create very high inflation rates.”
That’s Marc Faber’s message to all of those who may still think that Greece doesn’t matter in the grand scheme of things. In an interview with Bloomberg TV, Faber talks Greece, China, and of course the Fed.
On Greece:
And everybody knows in the world that Greece cannot pay its debt at the current size. So what will happen, in my view, is either Greece will leave the EU and will suffer very badly for a few months, maybe even longer. There will be a cash shortage. Or the EU, and the ECB and the IMF will have to cut a significant haircut. And Tsipras proposed a haircut of something like 30 percent. I don’t think that’s enough. I think they will need a haircut of at least 50 percent.
I think the likelihood of contagion is very high. And I have to say when you have a borrower, you also have a lender. And it’s actually, in my view, amazing how the EU kept on pumping money into Greece, partly also to bail out their own banks. And suddenly now the debt is no longer manageable.
And I would say, wake up people of the world and investors. Greece will come to your neighborhood very soon, maybe not this year, but next year or whenever it is, because the world is over infected. And defaults will follow, or they will have to create very high inflation rates.
On China:
Well my view was that after this 100 percent increase in Chinese stocks and huge speculation, and huge speculation on margin, margin index in China, the percent of the economy, was almost twice as large as in the U.S. So it was very large. And my view was that the market would fall from the peak by at least 40 percent.
And I still maintain that — that the market will move lower before it starts to move up again. But I don’t think we’ll see a new high in China for some time.
I think the economy is very weak by Chinese growth standards. And we’ve seen that also in industrial commodity prices. I think lots of sectors in China are no longer growing.
On ‘liftoff’:
Well, as you know, the majority of Fed’s governors that are voting are those that always they will use any excuse to essentially delay a rate increase.
Full interview:
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- Meanwhile, Back In Obama Legacy-Land
- Why Greece Matters A Lot: The Case Of Europe's Falling Dominoes
Over the weekend, we showed why contrary to unfounded speculation that Greece is entirely contained, there are still extensive linkages when it comes to the fallout a Grexit would reap if not directly on private commercial banks which over the years managed to offload their Greek exposure to the Europe’s taxpayers….
… but on the sovereign economies of the Eurozone as well as the ECB, at first via the EFSF, then also via the SMP, the MRO, Target 2 and so on.
Overnight, Barclays took this analysis and also showed the absolute national euro exposure to Greece broken down by bailout program and also as a % of respective host nation’s GDP. What it found is the following:
And here is what it looks like when we redo our prior chart showing just European Grexit exposure via EFSF, to total sovereign exposure as a % of GDP. The total amount in question: €341 billion, or just about 3.4% of the €10 trillion in notional European GDP.
But wait, rules-based Europe has “firewalls” now, all laid out and proper, so there can’t possibly be contagion.
Only that’s not true: for example, two years after introducing the OMT, the ECB still does not even have a regular term sheet laying out the rules of what the purpose of the OMT is aside to be some massive, amorphous “whatever it takes” bazooka. And as for the ECB’s QE, it is all downhill from here as net issuance in Europe trickle to a halt, and the ECB risks crushing an already illiquid bond market by monetizing even more of it. Of course, it could engage in outright stock monetization but that would be the signal that the end of the current system is truly near.
As for “rules-based”, we’ll just leave that to the ECB which just hiked Greek bank collateral effectively admitting the banks are insolvent, but not too insolvent, because now the ECB is officially and without doubt a political entity whose only purpose is to further political agenda.
But that’s just the beginning, and as Barclays cautions investors have largely taken the view that even if the worst case scenario did unfold, the impact on portfolios would be manageable. At this point Barclays warns that it is perfectly plausible that this Sunday’s “no” vote may not follow the benign narrative that markets have largely adopted.
Below are some of the scenarios where the contagion will be worse than any algo, not to mention central banker, expects:
The backstops are not entirely infallible
Some of the backstops, if needed, are either untested or incomplete. One example might be the new banking union. At present, the €55bn resolution fund is still 95% unfunded, deposit guarantee schemes are still mostly ex-post funded and there is still no pan-European deposit insurance. More importantly, holdings of peripheral debt on domestic bank balance sheets are rising substantially in recent years. In Italy and Spain, for instance, domestic government bonds as a percent of total bank assets have risen from 1.5% and 2.3% respectively in 2009, to 6.5% and 7.8% at end 2014 and February 2015 respectively. Any period of prolonged, significant peripheral stress would almost surely lead to some, perhaps significant, widening in bank credit spreads.
As for the ECB’s OMT programme, it has never been tested and it is not quite the pure “lender of last resort” backstop many in the market have come to believe it to be. To start, ECB OMT purchases come with significant conditionality. Any country seeking this assistance must apply for a programme, which would almost surely come with fiscal and structural reform prescriptions.
Greek exit and an official sector default would be new precedents
The biggest risk for contagion, in our view, is that the Greek “no” vote would most likely set in motion two precedents – an exit and default of official sector debt – that have never really been stress tested in the euro zone, either technically, or perhaps more importantly, politically.
Greek default would have a non-negligible effect on EA balance sheets…
As we have said in the past, a default on official sector debt would be large, but technically manageable, at about EUR195bn in bilateral loans and EFSF/ESM loans. In addition, SMP bonds held by the ECB amount to EUR27.7bn and Intra Eurosystem liabilities (mainly Target 2) amount to EUR118bn. Altogether, the official exposure to Greece amounts to about EUR340bn, nearly 3.5% of EA’s GDP, sizeable but probably manageable [ZH: and enough to push the Eurozone into a depression if the entire liability is written off].
… while a default opens up a host of political risks that remain unanswered
A default on the European loans could create considerable political backlash in EA countries against further support for periphery economies. Right-wing parties, such as AfD in Germany, Front National in France, Party of Freedom in the Netherlands, and True Finns in Finland, have repeatedly opposed bail-outs to periphery countries, especially to Greece. But even more moderate parties may question the bail-out mechanisms as the Greek default of 2012 was meant to be a one-off. Smaller countries are also unlikely to take it lightly as; as a percentage of their country GDPs, these countries would bear a larger share of the burden (eg, the Baltic countries).
All of this puts into perspective today’s ECB decision to raise Greek haircuts, because as Goldman noted two weeks ago, it appears to have ultimately been the ECB’s intention to launch a controlled Grexit contagion, one where Europe will see a steep but not too dramatic drop in its GDP, and perhaps a triple-dip recession can be avoided once more with some new changes in the definition of what GDP is, all so Mario can pull a Kuroda from October 31, 2014 and increase the ECB’s QE just so European stocks rise higher, and just as importantly, the EUR slides even more (some 7 figures according to Goldman) toward parity which make both Europe’s – really Goldman’s – bankers delighted when gettting their year end bonus, and keep Germany’s exporters happy.
As for the collateral damage, i.e., millions of broke Greeks who just lost everything, you know what they say about making a QE omelette.
Curiously, the German government hasn’t published estimates of how much it could lose in case of a default, arguing that this scenario could unfold in too many different ways. However, as the WSJ reports, according to the Munich-based Ifo economic institute, total German exposure to Greece, including the loans and a host of other liabilities, at €88 billion while S&P estimates it at €91 billion. This is in line with the estimate shown above.
According to Jens Boysen-Hogrefe, economist with Kiel-based institute Ifo, the hit “would hardly be noticeable for Germans.” He may be right, but where he is wrong is looking at Greece as an isolated case: since Europe is, or rather was, a union, one has to evaluate the combined impact of a third of a trillion in impaired assets across the Eurozone. For the vast majority of European nations, the effect of a “write-off” of 3-4% of GDP would be sufficient to launch a depression, which would then promptly drag Germany lower as well, adverse impact (and thus quite welcome to Germany) on the EUR notwithstanding.
We just hope that the ECB has done its math right and what it believes will be the contained demolition of Greece does not spiral out into an out of control tumble of dominoes, because not even a hollow “whatever it takes” threat from Draghi would offset that, especially if and when the deposit run moves from Greece to Italy, Spain and the rest of the Europe.
- "Greece Is Contained" Except In Crude, Copper, FX, US & EU Stocks, & Peripheral Bonds
Seemed appropos…
"Greece is contained" was the clear message desperately trying to be provided to the masses today as PPTs from all around the world lifted FX (and equities directly in some regions) in an effort to keep the dream alive… It didn't work!
It started in China… and failed…
Then Europe… and failed… (in stocks)
With Spain, Portugal, and Italy dumped…
and bonds…
Then US… and failed…
Don't get too excited about the bounce – we've seen it all before…
Broken markets and VIXnado'd…
FX markets turmoiled but it appears The ECB and BoJ had an 'understanding'…
Here's how EURJPY was used to ingite carry trade-spewed momos into lifting stocks higher…
Treasuries well well bid out of the gate as investors sought safety… then sold off into the European close… then yields ripped to the lows of the day…
Commodities mixed…
Crude clubbed like a baby seal…
Some context for Crude today… Carnage!!
Copper crashed…
And finally – gold and silver! Makes perfect sense as all hell breaks loose for the precious metals to trot along the flatline ignoring all the noise as if some external factor was crushing the life-giving volatility out of the status-quo-meme-destroying prices…
But apart from all that – Greece is priced in, Greece is contained, and Greece doesn't matter
Charts: Bloomberg
Bonus Chart: How do you say "Deja Vu All Over Again" in Chinese?
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