Today’s News June 27, 2015

• The US & Europe Will Collapse Regardless Of Economic "Contagion"

  Submitted by Brandon Smith via Alt-Market.com,

  

  In order to understand what is really going on around the globe in terms of the collapsing economy, we must set aside false mainstream versions of reality. When it comes to the EU and its current fiscal turmoil, it is very important to, in some respects, ignore Greece entirely. That’s right; forget about all the supposed drama surrounding Greek debt obligations. Will they find a way to pay creditors? Will they default? Will they make a deal with Russia and the BRICS? Will there be last-minute concessions to save the system? It doesn’t matter. It’s all a soap opera, an elaborate Kabuki theater run by international financiers and globalists.

  It is most important to remember the fundamentals. Greece will default on its debts. Period. There is no way around it. Maybe Greece makes a deal today, maybe it makes a deal tomorrow; but eventually, the country’s ability to stretch out its resources in order to meet its exponential liabilities will end. It is inevitable, and no last-minute “deal” is going to change the math at the core of it all.

  Why are so many economists so worried about a little country like Greece? It's all due to a great lie: a dishonest narrative being perpetuated by the establishment that if Greece falls, defaults or leaves the EU, this could trigger a domino effect of other nations hitting a debt wall and following suit. The lie embedded in this narrative is the claim that Greece will cause a “contagion” through the act of default.  Let's be clear – there is no contagion. Multiple countries within the EU have developed their own debt problems in spite of Greece over the past couple of decades, not because of Greece. Each of these countries, from Italy, to Spain, to Portugal, etc. has its OWN sovereign debt disasters to deal with caused by its own fiscal irresponsibility. The only legitimate reason for a so-called contagion is the fact that these countries have been forced into socialist interdependency through the EU structure.

  Never forget this: The EU is in trouble not because of Greece, but because of forced supranational interdependency. The EU by all rights should not exist, nor should any centralized supranational single currency system.

  I would also point out that globalist institutions like the International Monetary Fund are highly motivated to initiate disaster in the EU, despite some people’s assumptions that the EU is some kind of representative model of globalization. It’s not. If this were the case, then the IMF would not be stiffing Greece on debt aid while continuing to help Ukraine despite Ukraine’s similar inability to pay.

  Why would the globalists want a partial breakup of the EU? What would they gain from such an event? That’s easy; they gain crisis, chaos and an opportunity to present a false dialectic.

  Europe is not at all representative of what globalists really want in terms of economic and political structure, no matter what many people assume. It is a, rather, a kind of facsimile; a half measure. When Europe hits the bottom of the financial abyss and the bewildered public begins asking what the hell happened, the elites will be there with an immediate explanation. They will claim that it was not the EU’s interdependency that was the problem. Instead, they will assert that the EU was actually not centralized ENOUGH. They will claim that in order for a supranational economy and currency to work, we must also have supranational governance. In other words, the system failed because it needs to be stabilized by global government.

  The Fabian socialists will argue that it was the barbaric and outdated institution of national sovereignty that caused the full-spectrum crisis. They will completely gloss over the negative effects of an interdependent economic system and the fact that a lack of redundancy leaves cultures simpering and impotent. We’re all one big human village after all, so we should accept the idea that we all succeed or fail together. Free markets and individual innovation apparently have nothing to do with a thriving economic structure. What we really need is a hive mind amalgamation that turns us all into easily replaceable parts in a massive rumbling lawnmower that chews up our heritage, history and principles for the sake of some arbitrary greater good and the promise of alchemical floating cities in the sky where no one has to work anymore.

  The fall of the EU is a means to an end for globalists. There is almost no nation or institution they will not sacrifice if that sacrifice can be exploited to further their goal of total global political and economic dominance. They don’t just want a completely centralized system; they want all of us to BEG them to put that system in place. They want the masses to think it was all our idea. This is the most pervasive and effective form of slavery, when the slaves are manipulated into demanding their own enslavement.  When the slaves are fooled into believing their enslavement is something to be proud of — a badge of honor in service of the collective, if you will.

  The fall of the U.S. will be no different in this regard. We do not necessarily have a supranational structure like the EU. So our narrative for collapse will be slightly different, and the engineered lesson we are meant to learn will be carefully crafted.

  You see, Americans are meant to play the role of the spoiled imperialists who are finally getting what we deserve, an economic punch in our tender parts. We are the new Rome, bread and circuses and all. And when the U.S. comes crashing down like Europe, the Fabians will be there yet again to admonish the greed inherent in national sovereignty and the destructive aspirations of power that must be squelched by a more evenhanded global political system. I don’t really know how many people out there realize this, but we are meant to play the bad guys in the global theater being put on by the elites. Americans are the villains, the rest of the world plays the role of innocent victim, and globalist centers like the IMF and the BIS are meant to play the heroes, coming to the rescue of humanity when all appears lost.

  Our debt generation by far outmatches that of the whole of EU nations combined, a fact I outlined in Part 3 of my series One Last Look At The Real Economy Before It Implodes.  Unlike Greece, though, the U.S. has the direct option to print fiat at will in order to prolong punishment for our massive debt spending. However, as we have seen with recent market reactions to the very notion of an interest rate hike by the Federal Reserve in September, such an event will trigger extensive outflows from stock markets and herald the end of the “new normal.” Again, why would the banksters do this? Why not keep interest rates at a constant near zero?  It is not as if there is any public pressure to raise rates; in fact, it's quite the opposite. Why is the Fed ignoring the hundreds of signals showing that the U.S. is in a recession and pushing ahead with discussion of interest rate hikes despite what one might logically conclude would be in the Fed's best interest?

  The Fed knows that the only things propping up American markets are free money and blind faith by the public that banks and government will act to stop any pain or economic suffering, should such a potential for crisis arise. When the free money is gone and that faith disappears, then we will have an epic catastrophe on our hands. The globalists within the Fed know this, and they want this – at least , they want a controlled version of this. The elites NEED the fall of the current U.S. system exactly because this will make way for the rise of what they often term the “great economic reset.”  This reset is the next stage in the plan for total global economic centralization.

  This is not about contagion. There is no such thing. It is an excuse, a scapegoat designed to distract from the real problem. This is about a concerted effort over the past several decades by internationalists to maneuver Western cultures into a position of vulnerability. When people are weak and frightened, they become malleable. Social changes you would have never thought possible today become very possible tomorrow in the midst of a crisis. I believe we are now seeing the onset of the next great crisis, and the fundamentals of economy support my view. When the entire European system hangs by the thread of Greek debt and the entire U.S. system hangs by the thread of near zero interest rates and blind market faith, something is about to shatter. There is no going back from such a condition. There is only the path forward, and the path forward is not pleasant or comfortable and it cannot be ignored.

  We cannot forget that crisis is in itself a distraction as well. Whatever pain we do feel tomorrow, or the next day, or the next decade, remember who it was that caused it all: the international banks and their globalist political counterparts. No matter what happens, never be willing to accept a centralized system. No matter how reasonable or rational it might sound amid the terror of fiscal uncertainty, never give the beast what it wants. Refuse to conform to the dialectic. This is the only chance we have left to get back to true prosperity. Once we cross the line into the realm of worldwide institutionalized interdependency, we will never know prosperity or freedom again.

  

  

  
  
  

  

• The New "Scariest Chart" For American Citizens

  For the average American citizen, this may well become the “scariest” chart…

   

  

  h/t @Not_Jim_Cramer @Lizzie363

  Remember, the only truly compliant submissive citizen in today’s police state… is a dead one…

  “Do exactly what I say, and we’ll get along fine.
  Do not question me or talk back in any way. You do not have the right
  to object to anything I may say or ask you to do, or ask for
  clarification if my demands are unclear or contradictory. You must obey
  me under all circumstances without hesitation, no matter how arbitrary,
  unreasonable, discriminatory, or blatantly racist my commands may be.
  Anything other than immediate perfect servile compliance will be labeled
  as resisting arrest, and expose you to the possibility of a violent
  reaction from me. That reaction could cause you severe injury or even
  death. And I will suffer no consequences. It’s your choice: Comply, or die.”— “‘Comply or Die’ policing must stop,” Daily KOS

  Americans as young as 4 years old are being leg shackled, handcuffed, tasered and held at gun point for not being quiet, not being orderly and just being childlike—i.e., not being compliant enough.

  Americans as old as 95 are being beaten, shot and killed for questioning an order, hesitating in the face of a directive, and mistaking a policeman crashing through their door for a criminal breaking into their home—i.e., not being submissive enough.

  And Americans of every age and skin color are being taught
  the painful lesson that the only truly compliant, submissive and
  obedient citizen in a police state is a dead one.

  *  *  *

  This is the death rattle of the American dream, which was
  built on the idea that no one is above the law, that our rights are
  inalienable and cannot be taken away, and that our government and its
  appointed agents exist to serve us.

  

  

  
  
  

  

• The Importance Of RMB Internationalization

  Submitted by Louis-Vincent Gave via InvestorInsights.com,

  The Fed's QE policies of recent years have, for all intents and purposes told the world that “the dollar is our currency and your problem.”

  And, in recent years, the dollar has been a genuine problem for a number of emerging countries. Indeed, if nothing else, the Lehman Brothers bust revealed the extent to which almost all of the trade (and project financing, and private bank lending, etc…) between emerging markets still takes place in dollars. This means that emerging market nations must either first earn dollars, or find someone to lend dollars to them, before expanding their trade and capital spending. It also means that, if US banks are mismanaged, emerging markets tend to fall apart as companies there can no longer obtain financing for trade, investment projects, etc…

  

  This was the main lesson that most emerging market policymakers learnt in 2008. Until then, having 100% of one's trade denominated in dollars did not seem awkward. But once the Lehman bust showed to the world that American bankers were no smarter than anyone else's and worse, that American regulators were also no better than any other countries’, then financing every trade and every investment in dollars rapidly shifted from being the “easy thing to do” to a “problem that needed to be addressed”. All of a sudden, it became obvious that depending on the dollar made no sense if the US banking system was badly managed and badly regulated. The scales fell from the eyes of the emerging markets' policymakers. And chief amongst the countries looking to make a shift was China which, by 2008, had become the number one, or at worst number two trading partner for almost any emerging market, importing commodities from Latin America, Africa, the Middle-East, Russia or South East Asia and exporting manufactured goods everywhere around the world.

  With Lehman and AIG hitting the skids, trade finance just dried up and China’s exports fell -25% YoY:

  

  Now the fact that the US, or Europe, would import less as they entered into a recession was understandable enough. But really what stung most was that China’s emerging market trading partners also cancelled orders and, as a result, some 25mn migrant workers lost their jobs almost overnight.

  Following this traumatic event, and the change in the perception of US stability, China went around the world and invited the likes of Brazil, Indonesia, South Africa, Turkey and Korea to shift some of their China trade away from the dollar and into renminbi. China started doing this in 2011 and, as we see it, the renminbi’s attempt to become a trading currency is potentially one of the most important financial developments. Yet no-one seems to care.

  For the likes of Brazil, Turkey or South Africa to start trading in renminbi means that these countries' central banks will need to keep some of their reserves in renminbi. Which, in turn, means that China needs to offer assets for these central banks to buy. This simple reality has pushed China to create the offshore renminbi bond market in Hong Kong, the “dim-sum” bond market. China’s invitation to other countries to start trading more in renminbi also explains why, over the past two years, the PBoC has gone around the world and signed swap agreements with the central banks of Brazil, Korea, Turkey, Australia, Argentina and countless others. In essence, China has told her emerging market trading partners: “Let’s move our trade to renminbi and if you don’t have any, you can come borrow some on my HK dim sum bond market, or alternatively, we will just lend some to you directly through our central bank.”

  Given the increasing risk that a US with a structurally improving trade balance (thanks to falling energy imports) will send ever fewer dollars abroad, China’s attempt to mitigate its dependency on the dollar could not be better timed. Of course, these efforts can only bear fruit if both the renminbi bond market and the renminbi exchange rate prove to be stable — in essence, if the renminbi is seen as offering a reasonable alternative to the dollar; if the renminbi manages to transform itself into the deutschemark of emerging markets.

  Which brings us to the global bond market meltdown that followed the Fed’s announcement of a possible tapering of US treasury purchases — the Spring 2013 ‘taper tantrum’. Following Ben Bernanke’s May 2013 declarations, emerging and OECD government bond markets sold off aggressively to the point where, in the second quarter of 2013, renminbi bonds were the only bonds globally to offer investors positive returns! Like the hounds in Silver Blaze, the renminbi bond market has been the dog that did not bark; and just as Sherlock Holmes was quick to deduce an important message from the dogs’ silence, perhaps we should listen to the sound of the renminbi bond markets stability?

  

  Indeed, in the face of weak Asian currencies, underwhelming Chinese economic data and disappointing global industrial and consumption numbers during 2013 (weak US ISM, weak EU retail sales, etc.) most would likely have expected Chinese bonds, or the renminbi, to fare poorly. Yet, renminbi bonds have been the new shelter-in-the-storm; a reality which draws two possible explanations:

  1. The offshore renminbi bond market, and the Chinese exchange rate, represent small, easily manipulated markets. And Beijing is manipulating them to suck in even more foreign capital into an economy that is increasingly spinning its wheels. Beijing will soon enough lose control and this will all end in tears (from our meetings, this would seem to be the consensus view — the pessimism on China is so deep that, if there was an Olympic medal for pessimism, most investors wouldn't even fancy China's chances).  
  2. The offshore renminbi bond market, and exchange rate, represent small, easily manipulated markets. And Beijing is manipulating the markets in a clear bid to transform the renminbi into a trading currency.

  We tend to favor the latter explanation, probably because, for China, successfully transforming the renminbi into a trading currency is more than just evolving towards settling its own imports in its own currency (as advantageous as that may be). Internationalizing the currency may well be the key to China’s future economic growth. Indeed, when thinking about China’s economic development, most of us intuitively think of all the “Made in China” goods stocking up the aisles of Walmart or Carrefour. And it is undeniably true that China’s prosperity has relied heavily on the export of cheap consumer goods to rich countries. China’s modern economy has mostly been export-led. This is unlikely to change overnight, even if ‘net trade’ has historically not been such a large contributor to GDP growth. Instead, exports have been central to China’s development model as the country’s insertion into the global supply chain has forced constant productivity gains. This cycle of improvement has been driven by technology and management know-how transfers, along with rapid shifts in the labor force. Thus, it is hard to imagine a strongly growing future for China without growing exports.

  Which brings us to China’s current quandary: basically, over the past 30 years, China got rich by selling cotton underwear and plastic-soled shoes to the world. This is why most people carry an image of China as a phalanx of sweatshops, churning out T-shirts and toys for American and European shoppers. However, this image is now as outdated as skinny jeans. Instead, most of the growth in Chinese exports comes from industrial goods — and the customers are increasingly firms in developing countries building local infrastructure. China clearly no longer wants to pursue the high volume, highly polluting, low margin businesses which enabled it to rise from dire poverty. Instead, China (or at the very least, the Chinese Ministry of Commerce) now envisions its future as one of selling earth-moving equipment to Indonesia, telecom switches to India, cars to the Middle East, oil rigs to Russia and auto machinery to Eastern Europe or Latin America. The problem, of course, is that once one starts to compete with the likes of Caterpillar, Siemens, or Komatsu, having low prices may not be enough. Instead, offering attractive financing terms may be the deal clincher.

  

  

  
  
  

  

• "Warning" Signs In America

  Presented with no comment…

   

  

   

  Source: Townhall.com

  

  

  
  
  

  

• What Would Happen In Case Of Grexit?

  Submitted by Pieter Cleppe, of the independent think tank Open Europe in Brussels

  What would happen in case of Grexit?

  In order to “help” Greece, since 2010, we’ve seen fiscal transfers and foreign intervention into its domestic economic policies. Greece’s debt to GDP ratio is now around 180% to GDP, while a lot of the bailout cash has merely served to bail out banks, as Open Europe already warned in 2012.

  A number of policy makers now wants to try something new: a Greek exit from the Eurozone. One of them is Christian von Stetten, a Member of Germany’s Parliament and of Angela Merkel’s CDU. He states what a majority of Germans believe should happen: “The experiment with the Greeks in the eurozone, who are unwilling to implement reforms, has failed and must be ended”. He adds that he’s in favour of providing “many billions” in support so Greece can make the transition onto its own currency.

  Hereunder I explore what would happen if Greece were to leave the Eurozone, through a legal fudge.

  1.    Default

  If Greece wouldn’t have already defaulted before it would introduce a new currency, Grexit would  make it virtually certain that the country would default. It’s not wise to take out a considerable loan in a foreign currency, but that’s what Greece has done since 2001, when it entered the Eurozone. If Greece would introduce a new currency, which then likely would lose value against the euro, it would still need to pay back its debt in euro, which woud appreciate in value as compared to the new Drachma, making this task even harder.

  If Greece would only pay back what it owes in a new, devalued currency, this would be considered a default.  As a result, the Greek government would face higher borrowing rates in the future. In theory, the fact that it wouldn’t be burdened by an excessive 180% debt to GDP may serve as a factor countering this, giving that the financial situation of the government would look more rosy. But this ignores the second aspect of Grexit, which I’ll discuss next.

  2.    The Greek banking system would be cut off from the ECB’s cheap money canal, with real austerity to follow

  A default would only relieve Greece from its excessive external public debt burden, not from the exposure it has to its banking system. Almost half the “capital” in the four largest Greek banks really consists of “deferred tax assets” or discounts on future tax bills. When banks make no profit, they won’t enjoy such discounts.

  Moody’s has estimated that at the end of April, 32% of total assets of Greek banks were derived from central bank funding. This was 12% in September and estimates put it at close to 50% today., with bank deposits at their lowest level in 11 years, below 130 billion euro. As Greeks withdraw deposits from their banks, using the money to buy hard assets like cars, whose sales have risen, the ECB still makes sure Greek banks enjoy sufficient liquidity, by allowing the Greek central bank to create euros itself through the system of “emergency liquidity assistance” (ELA), which should only be allowed to prop up solvent banks. Some five billion euros was withdrawn from Greek banks last week, with the ongoing bank run forcing the ECB to decide on increasing or maintaining the ELA – lifeline for Greek banks on a daily basis now.

  The ELA loans to Greek banks are in theory a risk for the Greek central bank, and not for the ECB, but of course any new euro which wouldn’t have been created in “normal” circumstances reduces the value of the existing stock of euros, representing a transfer to those who withdrew the cash. Also those who didn’t withdraw don’t need to despair, as a Greek euro exit would signify a goodbye gift for the Greek economy, a “dowry”, as German economist Hans-Werner Sinn has put it. With Open Europe, we already warned in March that a bankrun may drive the eurozone to support capital controls, in order to stop this. In one wants to know what would happen if every central bank in the eurozone would do what the Greek central bank is doing, perhaps it’s interesting to have a look at the breakup of the Ruble zone.

  ELA is not the ordinary way for the ECB to shower Greek banks with liquidity. The normal way of doing business is for Greek banks to provide the ECB with – shaky – collateral, as Greek government debt, in return for cash. As a result, the ECB has been building up considerable exposure to Greece through the so-called “Target2” payment system, which makes it again less appealing to go for Grexit.

  Importantly, the ECB announced in February it will – finally – no longer accept Greek government debt as collateral, forcing banks to their last resort – Emergency Liquidity Assistance. The ECB also imposes a discount on the collateral posted by Greek banks to get their ELA cash from the Greek central bank – making it harder for banks to get the cash. Will the ECB cut off funding for Greek banks if Greece defaults? An insider, quoted by Reuters, seems to think so, saying that “If Greece declared default, everything would change. It would be very hard for the ECB to authorize financing with collateral of a debtor in default.”

  To make a long story short: when a country enters the Eurozone, having access to the ECB’s cheap money provision is without any doubt one of the most important elements of Eurozone membership. That this cheap money may one day be used by the ECB to exert political influence, can be confirmed by former Italian PM Silvio Berlusconi, who was toppled by the ECB’s ability to affect Italy’s borrowing rate, according to some. The ECB now also uses it to pressure Greece into bowing to its demands, as it has been doing to Cyprus and Ireland. Perhaps Paul Krugman may not agree with it, but in the real world there is no such thing as a free lunch.

  After euro-accession – or actually since it became clear they’d join the Eurozone, given the expectation effect-  Greek, Italian, French, Belgian, Spanish and Irish banks were suddenly flooded with cheap money, whereas before they faced higher interest rates. As a result, investments were being made that would otherwise not have been made, with very considerable economic distortions as a result. In the case of Greece, Italy and Belgium, much of the cash went to public spending. In the case of Ireland and Spain, it went to unsustainable private spending, ending up in a gigantic real estate bubble and bust, very high private debt rates and broken banking systems which have only partially been cleaned up. The ECB could have partially countered this, for example by not gradually loosening up collateral requirements for banks to get ECB cash over the years since 2008, but at the end of the day, it was inavoidable.

  If the ECB would cut off or limit funding for Greek banks to the point where the bank run couldn’t be dealt with, a bank holiday would be called. Greek banks would be restructured. Shareholders would lose everything, just like bondholders, and depositors would either lose a part of their deposits or would receive them in devalued Greek currency. Parallel currency solutions may be tried, transition bailouts may be given, but in the end the cheap money party would be over.
  Most analysts of Grexit are concerned about how this “Corralito”, as a similar episode in Argentina in 2001-2002 has been dubbed, would play out, but that’s not even the most risky aspect of Grexit.

  The Greek state, strongly reliant on the  ECB, through the Greek banking system, wouldn’t be able to pay salaries and pensions any longer. Dismissals of public servants, cuts into their salaries to Balkan-style levels, or both, would become necessary, whether Syriza would survive in power or not. To predict that this will never happen without very serious protests isn’t hard. But depending on the size of transition bailouts, it would be possible to smooth out this process over time. Those who really care about ending the clientelist system in Greece, to which Syriza may be taking part, should rejoice. In the same way that Georgia managed to reduce state corruption and boost economic growth by simply cutting the number of government workers by 50% and reducing the state’s role into the economy, Greece may achieve the same success. To end Greek access to the ECB’s cheap money canal may not be a sufficient condition for this to happen, but it is probably a necessary condition. Higher interest rates would secure that Greek politicians would no longer be able to burden their citizens with ever more debt.

  3.    Depreciation of the new Greek currency

  As explained, the main problem of Greece’s Eurozone membership wasn’t so much the fact that it had an overvalued currency, but rather that the euro served as a massive debt machine for the country. Still, the country did lose a lot of competitiveness, contributing to the inability to serve its debt obligations, after it entered the euro. One must give Greece credit for having partially restored competitiveness, through labour market reform, rising 48 places in the World Bank’s Doing Business report between 2010 and 2015. Given that the currency would lose value, economic sectors like tourism may benefit, but this effect has already been partially achieved by the efforts to achieve an “internal devaluation”.

  It should be noted that the introduction of a new currency may well fail. This happened in Ecuador, leading the country to adopting the US Dollar as its currency. Montenegro and Kosovo already use the euro as their currency, without their banks having access to the cheap money canal of the ECB. If the ECB cuts off Greek banks, Greece will become like Montenegro. The good part is that politicians then won’t be able to abuse the printing press to fund state spending. The bad part is that Greece would need to rely on these politicians to restore competitiveness. If Greece would have its own currency, investors could just sell it off in case the country’s competitiveness would be in trouble. This would impoverish the Greeks, but it would also make them cheaper to hire. It would make it cheaper to go on a holiday in Greece. It really is a trade-off then: Becoming like Montenegro or like Turkey.

  4.    (Long term) Contagion

  The process of introducing a new currency may in theory set off immediate contagion: bank runs in Portugal, higher borrowing rates for Italy. However, the ECB can just print money in order to bail out Portugese banks and manipulate sovereign borrowing rates, through QE or other various instruments.

  A more likely risk is long term contagion. Grexit would set a precedent. After Grexit, once another Eurozone state would get in trouble, much more money may be needed to assure that the country would stay in, for example Portugal. This may make it less likely that Eurozone countries would bail out Portugal, in turn raising attention to Italy and Spain, increasing the chance of a complete Eurozone break-up.

  On the other hand, bailing out Greece once more also comes at a cost. It will emboldens these populists in countries like Portugal and Spain who’re hostile to the strings attached to the bailouts their countries have received or continue to receive indirectly, through the ECB’s easy money canal. This in turn may make the wealthier Eurozone states, like Germany, less keen to provide more bailouts. It increases the chance of a Eurozone break-up.

  Conclusion:

  Regardless of whether one thinks the Eurozone should be broken up or not: if it can only survive through continuous transfers, states mingling into each other’s national policy choices, which strains once-beneficial relations between European countries, it may not be such a great idea to continue with it. Those who believe that if only we do a few more transfers, everything may turn quiet, have been trying for five years. There will be no calm in a transfer union which lacks sufficient political unity. But perhaps the euro can survive, without transfers. Those who believe so, and I doubt that they’re right, may now try Grexit to prove their point.

  

  

  
  
  

  

• "Critical" Debt "Domino Chain" Threatens To Destabilize China's Financial System, SocGen Says

  Since the beginning of March when we first explained why QE (or at least some manner of “unconventional” monetary policy) may be inevitable in China, we’ve tracked developments around the country’s local government debt refi effort closely. For those in need of a refresher, we’ve documented the program from inception to implementation and beyond in exhaustive detail in the following posts:

  • China’s Latest Spinning Plate: 10 Trillion In Local Government Debt
  • China Floats QE Trial Balloon, PBoC May Launch LTROs
  • Failed Chinese Local Bond Offering Leads To PBOC Easing Confusion
  • China Officially Launches Critical Local Government Debt Swap — But Is The PBoC Really Just Issuing Treasury Bonds?
  • China Creates Perpetual Leverage Machine After Dropping Debt Directive
  • Confusion Reigns At PBoC As Multi-Trillion Yuan Bailout Threatens To Undermine Rate Cuts

  While we won’t endeavor to recap the entire series of events here, note that the entire effort comes down to one simple thing: China’s local governments have managed to accumulated a debt pile worth 35% of GDP via off-balance sheet, high-cost loans which are now being swapped for low interest muni bonds in an effort to reduce debt servicing costs and extend WAM. This is part of a wider effort on China’s part to deleverage an economy laboring under $28 trillion in debt. This deleveraging effort goes far beyond local government debt, as Beijing is now moving to allow for more corporate defaults as the country moves to liberalize its financial markets.

  There’s a critical link between local governments’ off-balance sheet financing (the loans that China is now working to restructure) and China’s financial system as a whole. The LGFVs (the vehicles local governments used to skirt official borrowing limits) are guaranteed by provincial governments, as are some critical state owned enterprises. In turn, LGVFs and SOEs have guaranteed the debt of private enterprises. This state of affairs, combined with the central government’s willingness to allow for more defaults, sets up the potential for a destabilizing knock-on effect that could trigger the beginning of a long-delayed NPL cycle at Chinese banks and send tremors through the system. SocGen has more:

  As the growth deceleration intensifies and financial market liberalisation accelerates, denying the debt problem is becoming an increasingly unviable strategy. The Chinese government may be able to keep papering over the debt problem by continuing to offer implicit credit guarantees to everyone for another year or two. However, developments in the past year suggest that top policymakers are now willing to face up to the problem and work on a deleveraging plan. One recent announcement in this direction came from Premier Li, who told a roomful of international and domestic media in March this year that allowing credit events to occur and leaving them to the market to work out will be necessary to address the moral hazard problem.

   

  Market pricing of interest rates is at the core of interest rate liberalisation, which policymakers are keen to push through. That is simply impossible without the existence of risk. Besides installing a deposit insurance scheme, which implicitly admits the possibility of bank restructuring, onshore bond defaults have started to emerge alongside the acceleration of interest rate liberalisation. By the time of this publication, we have counted four credit events in the onshore secondary bond market, including one SOE, and close to a dozen private placement bond defaults (Table 1). While in a few default cases (e.g. Chaori and Zhongsen) investors were eventually paid, the occurrence of these credit events have kick- started risk revaluation in the bond market (Chart 7). We think that, due to its signalling effects, the bond market will continue to be a cautious test ground for the government. 

   

  

   

  The fiscal reform will also bring more credit risk to the fore. The fiscal reform has started to limit local governments’ ability to extend credit guarantees at a time of slowing domestic growth and tightening global liquidity. Local governments have played a critical role along the credit risk chain. They extend credit guarantees to LGFVs, local SOEs and even some private companies that are deemed local champions, and it is also a common practice for LGFVs and local SOEs to provide credit guarantees to small and medium-size private enterprises. As this critical domino chain of local governments in China’s credit risk situation begins to wobble, there could be significant ramifications for broad financial market stability. Such a chain reaction seems to have begun: SOEs and LGFVs are the guarantors in a majority of private placement bond default cases but have failed to provide credit protection as promised (Table 1). 

   

  

   

  Apart from reform, the pressure exerted by the multi-year growth deceleration is already weighing on commercial banks, whose NPLs have doubled since 2012 (Chart 8), indicating that private sector debt restructuring has begun and that the process so far is rightly being left to market mechanisms. Consequently, for the first time Chinese loan officers are prioritising containing credit risk over growing loan books, and this has gotten in the way of the transmission of monetary policy easing. 

  For reference, here’s what SocGen had to say after reviewing several LGFV bond covenants:

  • Leverage of LGFVs is generally high, with the average D/E ratio close to 200% and the median at around 150%.
  • Profitability is very low, with ROA at only 2%. Nearly 80% of LGFVs in the sample have negative cash flows. Since LGFVs are mostly operating in the infrastructure space, the lack of short-term return is partially understandable.
  • Debt-servicing capacity is simply dismal. The effective interest rate of these LGFVs is already very low, at less than 2.5%, probably implying a big share of non-interest bearing debt (e.g. accounts payable). Even so, half of the LGFVs still have an interest rate coverage ratio of less than one, which generally points to a situation of financial stress. The corresponding debt-at-risk accounts for close to 60% of total debt in the sample.

  Admittedly, all of this is terribly convoluted, and indeed, that’s precisely the point. China has gone to great lengths to mask its enormous debt problem by spreading credit risk across a dizzying variety of financing vehicles that are carried off-balance sheet and, in the case of China’s banking sector, outside of traditional loans. Now, Beijing is attempting to untangle the mess. The only question is whether it’s possible to delverage the system before it collapses under the weight of its own complexity. 

  

  

  
  
  

  

• It's 2 In The Morning And Greeks Are Lining Up At ATMs; Alpha Limits Online Banking

  Because correlation does not equal causation, we present the following with no comment other than to note that according to Goldman’s estimates (shown below), Alpha Bank, which has announced that web banking will “operate with limited functionality” over the weekend, happens to have the smallest ELA buffer of the four major Greek banks. 

  And of course, Greek PM Alexis Tsipras has just called for a referendum on euro membership to be held next Sunday.

  Draw your own conclusions.

  

  

  

  From Kathimerini:

  Notice decreased function of the service Alpha Web Banking for the weekend issued by the bank, tufting scenarios in view of the Eurogroup Saturday.

   

  Specifically, the communication states: From Saturday 06.27.2015 at 11:30 am to Monday 29/06/2015 at 8:00 am through the Alpha Web Banking there will be possibilities: Information on the balances and accounts and cards movements. Registration of orders on transfer of funds at a later date (will not be direct transfers executed). Registration of orders on payments dated 29/6 or higher . Enter orders for transfers to other banks dated 30/6 or later. The transfer orders will be registered for Sunday 28/06/2015, will be performed on Monday 29/06/2015.

  And meanwhile, at the ATMs (via Protothema):

  

  

  

  

  Photo: Long cues at #Greek ATM’s after announcement of referendum – @MakridisAkis pic.twitter.com/InrhjHt1Vr

  — Conflict News (@rConflictNews) June 26, 2015

   

  ??? ???? ??????? ???? ??? ??? ? ???? ??? ???? ??? ?????? ??? ?? ATM ???????? ???!

  #dimopsifisma pic.twitter.com/9mzu10XG1F

  — Marianna Karezi (@MariannaKarezi) June 26, 2015

  Picture of people assaulting the ATM in Athens… It’s over. #Greece #Tsipras #Europe pic.twitter.com/rdETf2Cw7X

  — Alessandro Cuman (@Alecuman) June 26, 2015

  ??????????? ??????? ??? ??? ??? ????? – http://t.co/cDuIzuQM04 pic.twitter.com/2CUO14Wk2s

  — volosnow.gr (@volosnow) June 26, 2015

  On main roads, bank branches ATMs packed with ppl. 01:37am local time.
  #referendumGR pic.twitter.com/jOgvkO40N9

  — ???????? ???? (@Ouinston) June 26, 2015

  

  
  
  

  

• Guest Post: America's Obamacare Nightmare Is Just Beginning

  Submitted by Robert E Moffit via TheNationalInterest.org,

  This week the U.S. Supreme Court ruled that the federal government could continue to subsidize health-insurance coverage through Healthcare.gov, the federal exchanges. An ecstatic President Obama declared that Obamacare is “here to stay.”

  No, it’s not.

  A judicial victory doesn’t automatically translate into a political victory, let alone a policy success. Once they’ve quaffed their celebratory champagne, the president and White House staff will need to suit up and get ready to play some hard-nosed defense.

  Here’s why. The driving force behind health reform has been the desire to control rising health-care costs. From 2008 onwards, President Obama promised that his reform agenda would reduce the annual cost for the typical American family by no less than $2,500. After a while, it became a rather tiresome talking point. But it was pure nonsense from the start.

  Health-care spending increases were slowing down well before Congress enacted Obamacare. But with the onset of Obamacare, health-insurance premiums in the exchanges jumped by double digits, while deductibles increased dramatically. If you liked your doctor, you would be able to keep you doctor, the president insisted, but maybe not, in reality, depending upon whether or not your physician networks narrowed. Looking toward 2016, health insurers say premium costs will soar.

  In the days, weeks and months leading up to the King v. Burwell decision, commentators obsessed over the roughly 6.4 million persons who could lose health-insurance subsidies. With the Court’s ruling, they can keep the federal subsidies. But that doesn’t come close to ending the debate.

  Roughly 6.4 million persons in thirty-four states could have been negatively affected if the Court struck down the federal exchange subsidies. But there is a much wider universe of persons adversely affected by the law: the roughly 15 million persons in the individual and small group market who don’t get—and won’t get—the federal government’s health-insurance subsidies. Under Obamacare, millions of Americans are forced to pay more for their government standardized coverage, regardless of whether they like it or not, whether they want it or not, or whether or not it forces them to pay for medical procedures that violate their ethical, moral or religious convictions.  

  So, the debate will intensify over the primary issue: costs. In every state, the fundamental components of state health-care costs—the demographics, the underlying costs of care delivery and the competitiveness of the markets—are juiced up by expensive federal benefit mandates and individual and group insurance rules and regulations. These all drive costs skyward. As my Heritage colleagues have demonstrated, this regulatory regime forces young people to pay up to 44 percent more in premiums. Washington’s subsidies simply try to hide the true costs of the law; they don’t control them.

  The law remains unworkable. The complicated insurance subsidy program itself has been a mess. H&R Block reported that about two thirds of subsidy recipients had to repay money back to the government because they got bigger than allowable subsidies. With the individual mandate, the administration has been granting lots of exemptions to insulate most of the uninsured from any penalty. That’s rather predictable; after all, even candidate Barack Obama argued that an individual mandate was unfair and unenforceable.

  As for the employer mandate—another fractured cornerstone of Obamacare—the administration has delayed it for one year. Even liberal supporters now want to repeal it, fearing damage to the labor markets.

  And what about those big “savings” from the Medicare payment reductions? They were earmarked to help cover the costs of the insurance subsidies. Yet the Medicare Actuary and the CBO have both routinely dismissed the massive Medicare payment cuts as either unrealistic or unsustainable.

  Meanwhile, other problems mount. The state exchanges are financially troubled. Coverage is still insecure, especially when loss of employment is tantamount to a loss of a health plan. Bureaucracy, red tape and paperwork plague the system, increasing costs and frustrating doctors and patients alike. All of those problems are getting worse, not better.

  This is the second time in two years that President Obama has declared the debate over Obamacare to be “over.” Here’s a better prediction: America is entering into the next phase of an equally contentious but broadly educational debate over the direction of the nation’s health-care future.

  In a free society, debate is over only when the people decide it’s over.

  

  

  
  
  

  

• Deutsche Bank CEO May Have Lied To Bundesbank About Rate Rigging, BaFin Says

  A lot has transpired at Deutsche Bank over the last three months. Let’s recap. 

  In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

  Oh, and both CEOs resigned on June 7. 

  Now, Germany’s financial regulator says departing co-CEO Anshu Jain may have lied to the Bundesbank about LIBOR manipulation when he apparently denied having any knowledge of rumors that the fixes may have been fixed (so to speak) even as his inbox told a different story. FT has more:

  Deutsche Bank’s senior management allegedly acted “negligently” over the fixing of Libor rates and Anshu Jain, its outgoing joint leader, may have lied to the German central bank, the country’s financial regulator concluded in a recent report that leaves Deutsche vulnerable to further action by authorities.

   

  One of the bank’s biggest clients, Pimco, the asset management group, also lost out when one of Deutsche’s traders attempted to manipulate Isdafix, a key derivatives benchmark whose potential rigging is being investigated by US watchdogs.

   

  The explosive conclusions are contained in a report into Libor-manipulation by BaFin, the German financial regulator, which has been seen by the Financial Times. It concludes that special “banking supervisory measures” should be considered for Deutsche.

  Amusingly, BaFin says it was “astonished” to learn that anyone thought Anshu Jain had been cleared of wrongdoing:

  “I have been astonished to learn […] that the suggestion is that the audit by BaFin supposedly resulted in clearing the senior management of DB, especially Mr Jain, and that supposedly no banking supervisory measures are expected,” wrote Frauke Menke, head of banking supervision at the German watchdog, in the report, which was not made public. “I expressly want to point out that this is not correct.”

   

  Mr Jain, who stepped down as joint chief executive earlier this month, is suspected by BaFin of having “knowingly made inaccurate statements” in a 2012 interview with Germany’s Bundesbank about the benchmark-setting process. He is accused of telling the central bank he had no knowledge of rumours of possible rigging in 2008, but contemporaneous emails about a meeting on the subject were forwarded to him at the time.

   

  “I consider the failures with which Mr Jain is charged to be serious,” Ms Menke wrote, alleging that he created an environment “which favoured behaviour involving the exploitation of conflicts of interest”

   

  Mr Jain oversaw a reorganisation in London that involved traders and submitters sitting together and sharing information, according to the report.

  
  

  The report does not conclude that the management board directly knew of or ordered Libor rigging by the bank’s traders, nine of whom are named in the report. It is understood that the bank will dispute several of BaFin’s concerns, including that Mr Jain may have deliberately misled the Bundesbank or been responsible for the seating-plan reorganisation.

  
  

  The report also raises the spectre of Isdafix for the bank: BaFin found that a New York-based trader tried to rig Isdafix in 2010 in order to bolster the value of an option at the expense of Pimco. It was only when the fund manager complained that the matter surfaced, resulting in an undocumented verbal warning, according to BaFin.

   

  Deutsche then took another four years to cut the bonus of the trader in question, according to the report. It was Mr Jain who headed the relevant division at the time, BaFin adds.

  Got it.

  So basically BaFin thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

  While none of this should come as any surprise to anyone, what is disconcerting — if you’re a shareholder anyway — is that there doesn’t seem to be a light at the end of the tunnel here when it comes to allegations, investigations, litigation, and fines. Having already shelled out some $9 billion over three years for legacy litigation, and with key employees defecting like rats from a sinking ship, one is certainly left to wonder if the firm is essentially rotting away at the core. 

  

  

  
  
  

  

• Tsipras Calls For Referendum In Televised Address

  Greek PM Alexis Tsipras has announced a referendum in a televised speech to the nation after another day of fractious negotiations with creditors closed without a deal. 

  The dramatic move comes after Athens rejected a proposal from the troika aimed at delivering some €16 billion in aid to Greece as part of an extension of the country’s second bailout program. From Kathimerini:

  The government is considering a referendum on the substance of the agreement, according to recent reports, during the enlarged meeting taking place from Friday night at the Maximos Mansion. The referendum is expected to be held next Sunday, while the prime minister has already informed the political leaders. The prime minister after returning from Brussels convened the extraordinary Governing Council at the Maximos Mansion, which after 23:00 turned into cabinet by attendance of ministers and party executives to discuss the latest developments and next steps in view of tomorrow’s Eurogroup.

  EU finance ministers will convene in Brussels tomorrow and it appears as though Tsipras is set to turn the tables by threatening to effectively put euro membership to a popular vote. 

  • GREECE’S TSIPRAS SAYS CREDITORS POSED ULTIMATUM TO GOVT
  • GREECE’S TSIPRAS SAYS CREDITORS PROPOSALS ARE AGAINST EU RULES
  • TSIPRAS SAYS CREDITORS AIM TO HUMILIATE GREEK PEOPLE
  • TSIPRAS SAYS WILL CALL REFERENDUM ON GREEK DEAL WITH CREDITORS
  • TSIPRAS GREEK REFERENDUM WILL BE HELD ON JULY 5
  • TSIPRAS SAYS HE NOTIFIED MERKEL, DRAGHI ON REFERENDUM PLAN
  • TSIPRAS SAYS GREECE IS, AND WILL STAY PART OF EUROPE
  • TSIPRAS SAYS GREECE NEEDS TO SEND DEMOCRATIC RESPONSE TO EU

  (Live feed)

  

  

  
  
  

  

• America Is A Dangerous Flailing Beast

  Submitted by John Chuckman via ConsortiumNews.com,

  When I think of America’s place in the world today, the image that comes to mind is of a very large animal, perhaps a huge bull elephant or even prehistoric mammoth, which long roamed as the unchallenged king of its domain but has become trapped by its own missteps, as caught in a tar pit or some quicksand, and it is violently flailing about, making a terrifying noises in its effort to free itself and re-establish its authority.

  Any observer immediately knows the animal ultimately cannot succeed but certainly is frightened by the noise and crashing that it can sustain for a considerable time.

  I think that is the pretty accurate metaphor for the situation of the United States today, still a terribly large and powerful society but one finding itself trapped after a long series of its own blunders and errors, a society certain ultimately to become diminished in its prestige and relative power with all the difficulties which that will entail for an arrogant people having a blind faith in their own rightness.

  America simply cannot accept its mistakes or that it was ever wrong, for Americanism much resembles a fundamentalist religion whose members are incapable of recognizing or admitting they ever followed anything but the divine plan.

  America has made a costly series of errors over the last half century, demonstrating to others that the America they may have been in awe of in, say, 1950, and may have considered almost godlike and incapable of mistakes, has now proved itself indisputably, in field after field, as often not even capable of governing itself. The irony of a people who are seen as often unable to govern themselves advising others how to govern themselves brings a distinct note of absurdity to American foreign policy.

  America’s establishment, feeling its old easy superiority in the world beginning to slip away in a hundred different ways, seems determined to show everyone it still has what it takes, determined to make others feel its strength, determined to weaken others abroad who do not accept its natural superiority, determined to seize by brute force and dirty tricks advantages which no longer come to it by simply superior performance.

  Rather than learn from its errors and adjust its delusional assumptions, America is determined to push and bend people all over the world to its will and acceptance of its leadership. But you cannot reclaim genuine leadership once you have been exposed enough times in your bad judgment, and it is clear you are on the decline, just as you cannot once others realize that they can do many things as well or better than you.

  In the end, policies which do not recognize scientific facts are doomed. Policies based on wishes and ideology do not succeed over the long run, unless, of course, you are willing to suppress everyone who disagrees with you and demand their compliance under threat. The requirement for an imperial state in such a situation is international behavior which resembles the internal behavior of an autocratic leader such as Stalin, and right now that is precisely where the United States is headed.

  Stalin’s personality had a fair degree of paranoia and no patience for the views of others. He felt constantly threatened by potential competitors and he used systematic terror to keep everyone intimidated and unified under him.

  Stalin’s sincere belief in a faulty economic system that was doomed from its birth put him in a position similar to that of America’s oligarchs today. They have a world imperial system that is coming under increasing strain and challenge because others are growing and have their own needs and America simply does not have the flexibility to accommodate them.

  America’s oligarchs are not used to listening to the views of others. Stalin’s belief in a system that was more an ideology than a coherent economic model is paralleled by the quasi-religious tenets of Americanism, a set of beliefs which holds that America is especially blessed by the Creator and all things good and great are simply its due.

  Dominion over the Earth?

  Americanism blurrily assumes that God’s promise in the Old Testament that man should have dominion over the earth’s creatures applies now uniquely to Americans. Such thinking arose during many years of easy superiority, a superiority that was less owing to intrinsic merits of American society than to a set of fortuitous circumstances, many of which are now gone.

  In Vietnam, America squandered countless resources chasing after a chimera its ideologues insisted was deadly important, never once acknowledging the fatal weaknesses built right into communism from its birth. Communism was certain eventually to fail because of economic falsehoods which were part of its conception, much as a child born with certain genetic flaws is destined for eventual death.

  America’s mad rush to fight communism on all fronts was in keeping with the zealotry of America’s Civic Religion, but it was a huge and foolish practical judgment which wasted colossal resources.

  In Vietnam, America ended in something close to total shame – literally defeated on the battlefield by what seemed an inconsequential opponent, having also cast aside traditional ethical values in murdering great masses of people who never threatened the United States, murder on a scale (3 million) comparable to the Holocaust.

  The United States used weapons and techniques of a savage character: napalm, cluster bombs, and secret mass terror programs. The savagery ripped into the fabric of America’s own society, dividing the nation almost as badly as its Civil War once had. America ended reduced and depleted in many respects and paid its huge bills with devalued currency.

  Following Vietnam, it has just been one calamity after another revealing the same destructive inability to govern, the same thought governed by zealotry, right down to the 2008 financial collapse which was caused by ignoring sound financial management and basically instituting a system of unlimited greed. The entire world was jolted and hurt by this stupidity whose full consequences are not nearly played out.

  The wars in Afghanistan and Iraq were completely unnecessary, cost vast sums, caused immense misery, and achieved nothing worth achieving. We now know what was kept hidden, that more than one million Iraqis died in an invasion based entirely on lies. These wars also set in motion changes whose long-term effects have yet to be felt. Iraq, for example, has just about had its Kurdish, oil-producing region hived off as a separate state.

  Mishandling Russia

  America’s primitive approach to the Soviet Union’s collapse, its sheer triumphalism and failure to regard Russia as important enough to help or with which to cooperate, ignored America’s own long-term interests. After all, the Russians are a great people with many gifts, and it was inevitable that they would come back from a post-collapse depression to claim their place in the world.

  So how do the people running the United States now deal with a prosperous and growing Russia, a Russia which reaches out in the soundest traditional economic fashion for cooperation and partnership in trade and projects? Russia has embraced free trade, a concept Americans trumpeted for years whenever it was to their advantage, but now for Russia is treated as dark and sinister.

  Here America fights the inevitable power of economic forces, something akin to fighting the tide or the wind, and only for the sake of its continued dominance of another continent. Americans desperately try to stop what can only be called natural economic arrangements between Russia and Europe, natural because both sides have many services, goods, and commodities to trade for the benefit of all. America’s establishment wants to cut off healthy new growth and permanently to establish its primacy in Europe even though it has nothing new to offer.

  America’s deliberately dishonest interpretation of Russia’s measured response to an induced coup in Ukraine is used to generate an artificial sense of crisis, but despite the pressures that America is capable of exerting on Europe, we sense Europe only goes along to avoid a public squabble and only for so long as the costs are not too high.

  The most intelligent leaders in Europe recognize what the United States is doing but do not want to clash openly, although the creation of the Minsk Agreement came pretty close to a polite rejection of America’s demand for hardline tactics.

  The coup in Ukraine was intended to put a hostile government in control of a long stretch of Russian border, a government which might cooperate in American military matters and which would serve as an irritant to Russia. But you don’t get good results with malicious policy.

  So far the coup has served only to hurt Ukraine’s economy, security and long-term interests. It has a government which is seen widely as incompetent, a government which fomented unnecessary civil war, a government which may have shot down a civilian airliner, and a government in which no one, including in the West, has much faith.

  Its finances are in turmoil, many important former economic connections are severed, and there is no great willingness by Europe, especially an economically-troubled Europe, to assist it. It is not an advanced or stable enough place to join the EU because that would just mean gigantic subsidies being directed to it from an already troubled Europe.

  And the idea of its joining NATO is absolutely a non-starter both because it can’t carry its own weight in such an organization and because that act would cross a dangerous red line for Russia.

  Kiev is having immense problems even holding the country together as it fights autonomous right-wing outfits like the Azov Battalion in the southeast who threaten the Minsk Agreement, as the regime tries to implement military recruiting in western Ukraine with more people running away than joining up, as it finds it must protect its own President with a Praetorian Guard of Americans from some serious threats by right-wing militias unhappy with Kiev’s failures, as it must reckon with the de facto secession of Donetsk and the permanent loss of Crimea – all this as it struggles with huge debts and an economy in a nosedive.

  America is in no position to give serious assistance to Ukraine, just plenty of shop-worn slogans about freedom and democracy. These events provide a perfect example of the damage America inflicts on a people with malicious policy intended only to use them to hurt others.

  There is such a record of this kind of thing by America that I am always surprised when there are any takers out there for the newest scheme. One remembers Secretary of State Henry Kissinger in 1975 encouraging the Iraqi Kurds to revolt against Saddam Hussein and then leaving them in the lurch when the dictator launched a merciless suppression.

  I also think of the scenes at the end of the Vietnam War as American helicopters took off in cowardly fashion from the roof of the embassy leaving their Vietnamese co-workers, tears streaming down their faces, vainly grasping for the undercarriages of helicopters, a fitting and shameful end to a truly brainless crusade.

  Messing up Ukraine  

  I don’t know but I very much doubt that the present government of Ukraine can endure, and it is always possible that it will slip into an even more serious civil war with factions fighting on all sides, something resembling the murderous mess America created in Libya. Of course, such a war on Russia’s borders would come with tremendous risks.

  The American aristocracy doesn’t become concerned about disasters into which they themselves are not thrust, but a war in Ukraine could easily do just that. In ironic fashion, heightened conflict could mark the beginning of the end of the era of European subservience to America. Chaos in Ukraine could provide exactly the shock Europe needs to stop supporting American schemes before the entire continent or even the world is threatened.

  I remind readers that while Russia’s economy is not as large as America’s, it is a country with a strong history in engineering and science, and no one on the planet shares its terrifying experiences with foreign invasion. So it has developed and maintains a number of weapons systems that are second to none. Each one of its new class of ballistic missile submarines, and Russia is building a number of them, is capable of hitting 96 separate targets with thermo-nuclear warheads, and that capability is apart from rail-mounted ICBMs, hard-site ICBMs,  truck-mounted missiles, air-launched cruise missiles, sea-launched cruise missiles, and a variety of other fearsome weapons.

  Modern Russia does not make threats with this awesome power, and you might say Putin follows the advice of Theodore Roosevelt as he walks softly but carries a big stick, but I do think it wise for all of us to keep these things in mind as America taunts Russia and literally play a game of chicken with Armageddon.

  I don’t believe America has a legitimate mandate from anyone to behave in this dangerous way. Europe’s smartest leaders, having lived at the very center of the Cold War and survived two world wars, do understand this and are trying very carefully not to allow things to go too far, but America has some highly irresponsible and dangerous people working hard on the Ukraine file, and accidents do happen when you push things too hard.

  The Israel Obsession

  In another sphere of now constant engagement, instead of sponsoring and promoting fair arrangements in the Middle East, America has carried on a bizarre relationship with Israel, a relationship which is certainly against the America’s own long term interests, although individual American politicians benefit with streams of special interests payments – America’s self-imposed, utterly corrupt campaign financing system being ultimately responsible – in exchange for blindly insisting Israel is always right, which it most certainly is not.

  An important segment of Israel’s population is American, and they just carried over to Israel the same short-sightedness, arrogance and belligerence which characterize America, so much so, Israel may legitimately be viewed as an American colony in the Middle East rather than a genuinely independent state.

  Its lack of genuine independence is reflected also in its constant dependence on huge subsidies, on its need for heavily-biased American diplomacy to protect it in many forums including the United Nations, and on its dependence upon American arm-twisting and bribes in any number of places, Egypt’s generous annual American pension requiring certain behaviors being one of the largest examples.

  Here, too, inevitability has been foolishly ignored. The Palestinians are not going anywhere, and they have demonstrated the most remarkable endurance, yet almost every act of Israel since its inception, each supported by America, has been an effort to make them go away through extreme hardship and abuse and violence, looking towards the creation of Greater Israel, a dangerous fantasy idea which cannot succeed but it will fail only after it has taken an immense toll.

  Despite America’s constant diplomatic and financial pressure on other states to support its one-sided policy here, there are finally a number of signs that views are turning away from the preposterous notion that Israel is always right and that it can continue indefinitely with its savage behavior.

  Recently, we have had a great last effort by America and covert partners to secure Israel’s absolute pre-eminence in the Middle East through a whole series of destructive intrusions in the region – the “Arab Spring,” the reverse-revolution in Egypt, the smashing and now dismemberment of Iraq, the smashing and effective dismemberment of Libya, and the horrible, artificially-induced civil war in Syria which employs some of the most violent and lunatic people on earth from outside and gives them weapons, money and refuge in an effort to destroy a stable and relatively peaceful state.

  *  *  *

  I could go on, but I think the picture is clear: in almost every sphere of American governance, internally and abroad, America’s poor political institutions have yielded the poorest decisions. America has over-extended itself on every front, has served myths rather than facts, has let greed run its governing of almost everything, and has squandered resources on achieving nothing of worth.

  I view America’s present posture in the world – supporting dirty wars and coups in many places at the same time and treating others as game pieces to be moved rather than partners – as a desperate attempt to shake the world to gain advantages it couldn’t secure through accepted means of governance and policy.

  America is that great beast, bellowing and shaking the ground, and for that reason, it is extremely dangerous.

  

  

  
  
  

  

• Taking Stock Of The Global Illegal Drug Trade

  How’s the global “war on drugs” progressing, you ask?

  Not so good, according to the UN Office of Drugs and Crime’s most recent World Drugs report, which tracks overall trends as well as more granular data on the trafficking and use of specific illicit substances.

  Specifically, one out of every 20 people the world over used illegal drugs in 2013, for a total of 246 million but, as the UN cheerfully notes, “because of the increase in the global population, illicit drug use has in fact remained stable.” Here’s more:

  According to the most recent data available, there has been little change in the overall global situation regarding the production, use and health consequences of illicit drugs. 

   

  Furthermore, the increase in global opium poppy cultivation and opium production to record levels has yet to have major repercussions on the global market for opiates. This raises concerns about the size of the challenge to law enforcement posed by increasingly sophisticated and versatile organized criminal groups.

  First, a look at the big picture, which shows that not only has nothing changed, but if anything, the number of drug users and prevalance of drug use has risen over the last decade.

  

  Meanwhile, 2014 was the second ‘best’ year for opium production since “the late 1930s”, and as you can see from the chart below, “this was mainly attributable to the fact that opium poppy cultivation reached historically high levels in the main country in which opium poppy is cultivated, Afghanistan,” which means that the trend we highlighted last August (namely that poppy cultivation has risen sharply since the beginning of the US occupation) has continued unabated. 

  

  And as a morbid reminder:

  

  Finally, here’s a look at trafficking flows for opiates, coke, and meth:

  

  

  

  Time to legalize it? 

  *  *  *

  Bonus chart: Is this what happens when you replace all the carbon based traders on Wall Street with machines?

  

  

  
  
  

  

• Forex brokers again brace for impact

  Scared by the recent surprise CHF event that caused many Forex brokers to completely collapse, brokers are taking no chances as Greece sits on the brink.  From one broker:

  Dear Trader,

  Due to uncertainty in the markets brought about by the current situation with
  Greece, margin requirements for all EUR pairs will be increased from 1% to 2%
  as of 20:00 server time TODAY (June 26th) and will revert to 1% at 22:00 server
  time on Sunday (June 28th).

  Please monitor your account prior to 20:00 today and adjust your positions (if
  required) to avoid potential margin call / stop-out.

  As ever, if you have questions or need some assistance, our friendly live-chat
  team are standing by.

  Regards,

  Customer Services

  From another:

  Due to the current
  speculations and the ongoing Greece debt negotiations, there is potential that
  an announcement over the weekend will have a significant impact on the market
  open on Sunday, June 28th.  

  With this in mind, we will require at least double the usual margin you
  currently have in your account for all EUR currency pairs and for the GER30,
  valid from tomorrow Friday, 26.06.2015 15:00 German time. I.e. You currently
  have a leverage of 1:200 (0.5% margin requirement) for EUR currency pairs, this
  will be changed to leverage 1:100 (1% margin requirement). You currently have a
  leverage of 1:100 (1% margin requirement) for the GER30, this will be changed
  to leverage 1:50 (2% margin requirement).

  For the avoidance of doubt, please ensure that you are comfortable with any
  positions you hold and margins required.

  If you have any questions, please do not hesitate to contact your Client
  Relationship Manager…

  Is this another part of the plan to consolidate the market into a single one world currency (ha.. ha), or just another example of broker stupidity?  How many more dead bodies will rise to the surface in this next battle in the Currency Wars?  

  Don’t let it be you!  Turn off your systems this weekend, monitor the news, and wait for opportunity! 

  On the other hand, many of these ‘last minute’ situations turn out to be nothing more than a tool for politicians to gain favor with their constituents, as if they are ‘doing something about the problem’ thus justifying their huge salaries and lavish accomodations.  Is this situation really about testing Tsipras (will he ‘buy in’ to the global agenda or stand up for his principles and turn Greece into a rogue state) or again a test of the “Northern Europeans” who are financially responsible and the “Southern Europeans” who are lazy and always in debt?  Or again is it about cultural differences, that Greeks have another financial view of how life should be lived, compared to the Germans and the Swiss?  What does history tell us about the financial overtones of Greek culture?

  In 1929 the Harvard economist Charles Bullock published a magnificent essay on a monetary experiment conducted by Dionysius the Elder, ruler of the Greek city state of Syracuse from 407 BC until his death in 367. After running up vast debts to pay for his military campaigns, his lavish court and spectacles for the common people he found himself painfully short of ready cash. No one wanted to lend him any more money and taxes were drying up. So Dionysius came up with a great wheeze. On pain of death he forced his citizens to hand in all their cash. Once all the drachmas were collected he simply re-stamped each one drachma coin as two drachmas. Simple. Problem solved. Syracuse was rich again.  Except, of course, it wasn’t. Bullock used it as an early example of why just minting more money out of thin air was seldom a reliable way of creating more wealth. There was, however, another lesson to be learned. When it comes to making a mess of the economy and fiddling the figures the Greeks have been at the top of their game for a very, very long time. 

  But should the world be surprised?  Maybe they know Greeks history of non repayment of debts, and somehow want to teach Greece a lesson in German finance:

  After the formation of the modern Greek state in 1829 the country went on to default on its debts in 1843, 1860 and 1893. According to calculations by the economists Carmen M. Reinhart and Kenneth S. Rogoff Greece has spent more time in default to its creditors than any other European country. It has been skipping its repayments for 50 per cent of the years since 1800, compared with a mere 39 per cent of the time for the next worst offender, Russia. Indeed, even if you moved it across to Latin America – generally regarded among bond traders as default central – it would still be among the worst offenders. Only Ecuador and Honduras have a worse record of meeting their debts. 

  For Forex Traders

  If you have existing positions which are unhedged, especially in Euro region currencies, it would be advisable to scale back your positions or protect them with options.  

  If you have no positions and want to capitalize on the event risk, try a Euro straddle deep out of the money.  

  Call your broker to discuss their plan and how they are mitigating the potential risks (if at all).

  Good Luck!

  

  
  
  

  

• 5 Things To Ponder: While We Wait On Greece

  Submitted by Lance Roberts via STA Wealth Management,

  Another week has come and gone, and there is still no resolution on Greece. Germany's Angela Merkel has firmly stated to the EU party members on Thursday that a deal on Greece must be on the table before the markets open on Monday. She also stated that "we won't be blackmailed."

  Not only has the entire Greek "drama" to the point of boredom in the media, it is Greece who should realize that they are under no obligation to do anything. It is the EU banks who have absorbed the Greek debt in massive tranches to garner higher yields with the belief that the EU will always bail them out. However, as the old saying goes:

  "If you owe your banker $100,000 it is your problem. If you owe the bank $1 million, it is the bank's problem."

  With primarily banks and hedge funds owning the bulk of the Greek debt currently, each bailout of Greece so far has only benefitted the owners of those bonds as the bailouts passed directly through Greece to those portfolios. It seems that this is a "bank problem" rather than a "Greek problem." And if that is indeed the case, it will be the ECB and the EU giving into a deal for Greece sooner rather than later.  

  In the meantime, as we await the final capitulation by the ECB, EU and IMF to provide Greece another bailout, I have assembled a list of reading for you that has ABSOLUTELY NOTHING to do with Greece.

  ---

  1) What To Expect In Second Quarter GDP by Elizabeth MacDonald via Fox Business

  "While blame is placed on the cold weather and the west coast port strikes, Stephanie Pomboy at MacroMavens notes a weird anomaly that may explain why growth continues to flatten.

   

  Consumer spending growth is key to the U.S. economy. But spending slowed just as job growth stepped up, as the U.S. economy continues to muddle through in its seventh year of the weakest recovery in the postwar era. Since President Obama took office in January 2009, GDP has grown at an average annual rate of 1.8%.

   

  "'It should be patently clear that something isn't what it purports to be on the surface,'" Pomboy says. Something else is trimming away at consumer wallets, besides glacial job and wage growth."

  Read Also: Harsh Winter/ObamaCare Boosted Economy In Q1 by Tyler Durden via ZeroHedge

  

   

  2) Pants On Fire: 10 Lies In The Financial Services Industry by Robert Seawright via Above The Market

  "We all lie, especially to and about ourselves. Sometimes the lies are overt. Sometimes they are unintentional. Sometimes they are sales puffery. And sometimes they are devious. What follows are ten great lies in the financial services industry. The first three are propagated primarily by academic finance. The fourth is within the province of the academics but is a bigger problem amongst the professionals – advisors and money managers alike. The next three are predominantly professional lies. Number eight is asserted most often by the professional class and believed by consumers while the last two are universal but play out most unfortunately amongst consumer investors. I'm sure there are more. Do you have others to suggest?"

  

  Read Also: Predicting The Future Is Difficult by Streettalklive.com

   

  3) Still Waiting For A Breakout by Lawrence McMillan via MarketWatch

  "On the upside, the S&P 500 is eyeing record highs. Unfortunately, we don't see the confirming buy signals that one would normally expect if another major upleg was about to unfold.

   

  Equity-only put-call ratios are meandering sideways. They are stuck in neutral. Technically, the standard ratio is creeping slightly downward, and thus would be in a bullish mode. The weighted ratio, conversely, is edging higher and is thus in a bearish mode. But neither is trending strongly, so in reality neither is giving a tradable signal at this time.

   

  Market breadth is an indicator that we closely follow — especially on upside breakouts. When the S&P 500 rose to record highs a month ago, breadth was mediocre at best.

   

  The desired combination is to see the market breaking out to the upside and breadth expanding rapidly — becoming overbought while the market breaks out. That combination is usually a strong one and indicates that the breakout is strong and broad. However, that didn't happen in May, and given recent mediocre breadth figures, it's doubtful if there would be upside confirmation from breadth in the near future, even if SPX does mange to claw its way to new record highs.

  

  Read Also: Fear And Greed Collide In The Stock Market by John Kimelman via Barron's 

  Read Also: Don't Fight The Market by Joe Calhoun via Alhambra Partners

   

  4) How The Federal Reserve Has Distorted The Economy And Markets by Doug Kass via Kass' Korner

  "The Federal Reserve's extended six-year policy of injecting massive amounts of system liquidity and stabilizing interest rates at near zero has been a powerful force on our capital markets and on stimulating rate-sensitive economic sectors (e.g., housing and autos). But, in maintaining monetary indulgence for such a lengthy period of time, our central bank has now distorted and screwed up our economy and our markets – perhaps for some time to come."

  

  Read Also: How The Reach For Yield Ends by Charlie Bilello via Pension Partners

   

  5) The Hegelian Dialectic by Cam Hui via Humble Student Of The Markets

  "Regular readers know that I have been cautious on the US equity market for several months. Instead of re-hashing the same points over and over again, I thought that I would try something different this week. I will re-examine the bull and bear case for stocks in the framework of the Hegelian Dialectic of 'thesis, antithesis and synthesis', otherwise known as 'thinking outside the box.'"

  

  Read Also:  The Worst Case Of Investing In A Hot Stock Market via CNN Money

  ---

  OTHER STUFF THAT'S NOT ABOUT GREECE

  The New American Dream Under Obama: Renting by Andrew Malcom via IBD

  To Boost Freedom, End The Free Lunch by Jeffrey Dorfman via Real Clear Markets

  It's No Time For Bulls To Get Complacent by Avi Gilburt via MarketWatch

  CNBC Demystified via Doug Litowitz via TheAlphaPages

  ---

  "You're cruisin' for a bruisin'." – Kenickie, Quote From "Grease"

  Have a great weekend.

  

  

  
  
  

  

• "Blood On The Streets" – Bonds Battered, Stocks Slammed As Greece Suddenly "Matters"

  How many Greeks will awake to this on Monday morning….

   

  Before we start on the details, here is a quick summary of the turmoiling this week…

  • Chinese stocks worst 2 week drop ever (CHINEXT -25%, Shenzhen -20%, Shanghai -19%, IPO -18.5%)

  

   

  • Greek Stocks best week since post-Lehman dead-cat bounce (fell 37% after that)

  

   

  • Trannies down 6 of last 7 weeks to 8-month lows

  As the divergence between Industrials and Transports is getting insane…

  

  • Nasdaq worst week in last 8 weeks (after record highs)
  • S&P closed below 50DMA and tested 100DMA intraday

  

  • Biotechs worst week since May

  

  • USD Index best week in last 5 weeks
  • Copper best week in last 8 weeks
  • Gold worst week since March

  • 30Y TSY Futures lowest weekly close since July 2014
  • 10Y TSY Futures lowest close in 2015
  • 7Y, 10Y, 30Y TSY Yield highest since Oct 2014
  • 5Y Yield highest weekly close since Jan 2014

  So suddenly – given no change in monetary policy machinations this week and no data to really spook or spectaculize the markets – everything was driven by Greek fears…

  *  *  *

  Remember Monday when "Greece was Rescued"… yeah…

  

   

  Futures show the volatility even more as pre-US Open headline swings drove us all week…

  

   

  Today was The Dow rescued by Nike's channel stuffing (NKE accounted for over half the Dow's gains on the day) as Nasdaq bit it on Micron's weakness…

  

   

  June remains red for most but Small Caps love it… (all the rebalance bullshit)

  

   

  Here's the last hour of the day in IWM (The Russell ETF)…

  

   

  VIX had a week… from an 11 handle on Tuesday to almost 15 today…

  

   

  NFLX knackered…

  

   

  Micron Massacred…

  

   

  Total and utter carnage in bond land today and this week…

  

   

  The USDollar was well bid all week but the biggest moves were EUR weakness Monday and Friday…

  

   

  Despite USD strength, copper managed gains on the week. Gold and Silver were ugly and Crude algos tried to rally it back but faded…

  

   

  Just look at Silver today!!!!!

  

   

  Charts: Bloomberg

  Bonus Chart: Greece? or "Good" News?

  

  Bonus Bonus Clip: Yeah, it's that bad…

  "Grexit: the better choice between two bad outcomes" pic.twitter.com/HGOOjlFcAV

  — Rudolf E. Havenstein (@RudyHavenstein) June 26, 2015

  

  
  
  

  

• Greece Invokes Nuclear Option: Tsipras Calls For Referendum

  Update: Greek PM Alexis Tsipras has announced a referendum in a televised speech to the nation after another day of fractious negotiations with creditors closed without a deal.

  The dramatic move comes after Athens rejected a proposal from the troika aimed at delivering some €16 billion in aid to Greece as part of an extension of the country’s second bailout program.

  • GREECE’S TSIPRAS SAYS CREDITORS POSED ULTIMATUM TO GOVT
  • GREECE’S TSIPRAS SAYS CREDITORS PROPOSALS ARE AGAINST EU RULES
  • TSIPRAS SAYS CREDITORS AIM TO HUMILIATE GREEK PEOPLE
  • TSIPRAS SAYS WILL CALL REFERENDUM ON GREEK DEAL WITH CREDITORS
  • TSIPRAS GREEK REFERENDUM WILL BE HELD ON JULY 5
  • TSIPRAS SAYS HE NOTIFIED MERKEL, DRAGHI ON REFERENDUM PLAN
  • TSIPRAS SAYS GREECE IS, AND WILL STAY PART OF EUROPE
  • TSIPRAS SAYS GREECE NEEDS TO SEND DEMOCRATIC RESPONSE TO EU

  Protothema now says the Greek parliament will meet on Saturday and a referendum will be called as early as next week. Whether this is simply a last minute attempt to put pressure on EU finance ministers ahead of Saturday’s Eurogroup meeting remains to be seen, but one thing is for sure: Tsipras is playing a dangerous game with the ECB ahead of a difficult week that could very well see the imposition of capital controls.

  ???????? ????????? – ??????? ??? ?????????: ???????? ??? ?????? ?? ??????? ??? ??????????? ?? ???? ????? http://t.co/J23WZiI8Cb

  — ????? ???? (@protothema) June 26, 2015

  More from Kathimerini:

  The government is considering a referendum on the substance of the agreement, according to recent reports, during the enlarged meeting taking place from Friday night at the Maximos Mansion. The referendum is expected to be held next Sunday, while the prime minister has already informed the political leaders. The prime minister after returning from Brussels convened the extraordinary Governing Council at the Maximos Mansion, which after 23:00 turned into cabinet by attendance of ministers and party executives to discuss the latest developments and next steps in view of tomorrow’s Eurogroup.

  Earlier:

  Protothema is reporting that Tsipras has confided in a fellow EU official that if the country’s creditors insist on sticking to pension and VAT red lines and if Friday’s bailout extension proposal (which the Greek government apparently views as a patronizing stopgap) is the troika’s final offer, he is prepared to call for snap elections.

  Via Protothema (Google translated):

  The dramatic developments of the last few hours, following the government’s move to reject the proposal of the creditors may conceal preparation for use of the popular verdict, a decision which is expected to be finalized in the next few hours if the lenders do not move from its rigid positions. According secure information protothema.gr, a few hours ago he Prime Minister Alexis Tsipras European leader confided in Eurozone member country adjacent friendly in Greece that the data are up to this moment is ready even to call early elections. 

   

  This revelation of thought by the Greek prime minister to the foreign leader can be interpreted in two ways: Either Mr. Tsipras is ready “plan B” if tomorrow the negotiation fails or leaked deliberately in order to exert indirect pressure on lenders to mitigate their requirements. Upon completion of the meeting Mr. Tsipras with Angela Merkel and Francois Hollande, the Greek side revealed that the Prime Minister pointed out to the leaders of Germany and France that does not understand why the institutions insist on so hard measures. The prime minister insisted his decision to reject the proposal of the creditors for a five-month extension of the existing agreement with a funding of 15.5 billion euros. “The proposal does not cover us, because the financial part of barely meets the needs for payment of installments to the lenders, not help anywhere else the economy,” emphasized a close associate of Alexis Tsipras and adds: “We will not accept the proposal, as we said, we were waiting to bring us another proposal tomorrow.”

  Greece has rejected creditors’ bailout extension proposal.

  • GREECE SAID TO REJECT EU15.5B BAILOUT EXTENSION PROPOSAL: ANA

  #Greece gov’t rejects institutions’ proposal for programme extension & funding of €15.5 bln (via @amna_news) #ec #ecb #imf #eurogroup

  — Manos Giakoumis (@ManosGiakoumis) June 26, 2015

  *  *  *

  On Friday, the German press reported (and Bloomberg later confirmed) that Greece’s creditors had presented PM Alexis Tsipras with a document (essentially an outlining the following available funds that could theoretically be part of either an extension of the country’s second bailout or a third program (with the latter having been previously ruled out by the IMF and German lawmakers). The details are as follows:

  • EU creditor proposal foresees EU8.7b in EFSF funds: official
  • Creditor proposal foresees EU3.3b in SMP profits: EU official 
  • Creditor proposal foresees EU3.5b in IMF funds: EU official

  As noted, if Greece receives €3.3 billion from SMP profits it will mean that the ECB has forfeited the money it made on the Greek bonds it purchased in the past, effectively allowing Athens to repay the central bank with its own money. Here’s DB with some color:

  There may be a more rapid disbursement option. EUR1.9bn of the EUR7.2bn stalled tranche is SMP profits. Releasing these funds might only involve a decision by finance ministers without necessarily consulting parliaments. Disbursing EFSF funds, on the other hand, requires the national approval process (e.g., the joint decision by the German Finance Minister and the Budget Committee, if not a full plenary vote). In other words, SMP profits could be disbursed at short notice. These would be sufficient to pay the EUR1.6bn owed to the IMF on Tuesday.

  As for the EFSF funds, it’s long been suggested that bank recap funds could be chanelled to Athens under the ‘right’ circumstances and apparently imminent default is as good an excuse as any. Citi has more on the EFSF funds:

  The interim proposal would likely allow Greece to use part of the €10.9bn from the original Hellenic Financial Stability Fund (HFSF) designated for Greek bank recapitalization, and later transferred back to the EFSF/ESM. Various media outlets have reported on the possibility that around €9bn could be used for current expenditure, in line with our estimates of the financing needs of the Greek sovereign for 3Q. Although a unanimous agreement will be required at the ESM board level to redirect the resources away from its banking recapitalization objective, we believe that a deal is likely to be found. The release of such funds would allow an extension of the current programme for several months, while giving more time for creditors and the Greek authorities to complete the negotiations for a third aid programme. It could also convince the ECB to increase the T-bill ceiling and the SSM to raise the ceiling on the exposure of Greek banks’ to their sovereign. All this however remains conditional on the approval of the ‘interim’ package by the Greek Parliament as well as by various national parliaments (in Germany, the Netherlands and Finland among others).

  German Chancellor Angela Merkel implored Tsipras to accept what she calls a “generous” offer and has been adamant that a deal must be struck by the time the market opens on Monday which effectively means that EU finance ministers will need to strike an agreement at tomorrow’s Eurogroup meeting which starts at 2 pm local time. “I spoke today about a very generous offer because we simply have moved a step toward Greece, also with respect to the February agreement,” Merkel said.

  In the wake of this morning’s news, the rhetoric from Tsipras has only hardened with the Greek PM pledging to uphold the democratic values upon which the euro was founded and to not accept “blackmail” (which of course is rather ironic, considering Merkel said precisely the same thing with regard to the Greek on Thursday):

  Document of proposals presented to the Greek side by the institutions is “worse than a memorandum,” ANA reports, citing Greek govt officials in Brussels.

   

  Greek Prime Minister Alexis Tsipras says he will defend the European Union’s founding principles of “democracy, solidarity, equality, mutual respect” as he seeks an agreement with international creditors to unlock aid for the country.

   

  “These principles were not based on blackmails and ultimatum, and especially in these crucial times no one has the right to put in danger these principles,” Tsipras tells reporters in Brussels after an EU summit

   

  “The Greek government will continue decisively to give the fight in favor of these principles, to continue to give the fight on behalf of the European people and of course on behalf of the Greek people,” he says. 

   

  
  

  Source in #Greece negotiations: “Not going well… Greeks backtracking significantly. Measures not credible. Don’t know if there’ll be deal”

  — Ed Conway (@EdConwaySky) June 26, 2015

  Big concerns among creditors that Greek measures both unambitious & growth unfriendly. Will def be document for eurogroup. May not be agreed

  — Ed Conway (@EdConwaySky) June 26, 2015

  For reference, here’s a breakdown of what Greece’s fiscal situation (i.e. budget deficit) looks like going forward:

  

  *  *  *

  Or, summarized:

  

  

  
  
  

  

• Leaking Las Vegas: Lake Mead At Record Lows, "We Have To Change"

  This is it, warns one water advocate, "it really does (make critical) the fact that we have to start changing." Lake Mead water levels have sunk to their lowest levels on record (below the levels when the dam was built) at 1075 feet. This is a major problem, as USA Today reports, since Las Vegas water authority's current "straws" glean water from 1,050 feet and 1,000 feet – leaving the first straw just 25 feet away from pulling in air. With the drought only set to get worse as the summer begins, the water wars are just beginning as Lower-basin states are still taking more than the river system can sustain.

   

  

   

  Bad and getting worse…

  

   

  As USA Today reports,

  Lake Mead sunk to a record low Tuesday night, falling below the point that would trigger a water-supply shortage if the reservoir doesn't recover soon.

   

  …in the long run, as a U.S. Bureau of Reclamation spokeswoman said, "We still need a lot more water."

   

  The reservoir stores water for parts of Arizona, Southern California, southern Nevada and northern Mexico — all of which have endured a 15-year drought that continues.

   

  …

   

  But Tuesday's record low signals that Colorado River water users consume more than the river provides, said water-policy manager Drew Beckwith of the Western Resource Advocates, a nonprofit environmental law and policy organization.

   

  "This is the check-engine light," Beckwith said. "It really does (make critical) the fact that we have to start changing."

   

  For Las Vegas, the record reinforces the need for a nearly $1.5 billion project to tap deeper into Lake Mead. The Southern Nevada Water Authority soon will complete a 3-mile tunnel that will suck water from an 860-foot elevation level. The plan also includes a pumping station.

   

  …

   

  The water authority's current "straws" glean water from 1,050 feet and 1,000 feet. Lake Mead hovers around 1,075 feet Wednesday — leaving the first straw just 25 feet away from pulling in air.

   

  Leaders launched the third intake project about 10 years ago, seeking to reach better-quality water at deeper depths. Water closer to the surface is warmer and requires more treatment to bring it to drinking quality, said Bronson Mack, a spokesman for the water authority.

   

  

   

  *  *  *

  Drought or no drought, the Colorado River is over allocated, Beckwith said.

   

  

   

  Lower-basin states take more than the river system can sustain.

   

  

  

  

  
  
  

  

• Bank of America Trolls The Middle Class, Or How Wall Street Destroyed Main Street

  While the punchline of this post is well-known by everyone, and even the Federal Reserve finally admits that its own actions have led to record inequality and a world in which the rich have never been richer and poor, never been poorer (over the objections of some certifiable lunatics), we find it amazing that even the banks – those ultimate beneficiaries of every action by the Fed in the past 7 years – are now openly trolling what little is left of the middle class.

  Presenting: Bank of America’s chart showing who the undisputed victor in that age-old war between Wall Street and Main Street, truly is.

  

  “So what chu gonna do about it?”

  – Bank of Countrywide Lynch (already bailed out once by Main Street)

  

  

  
  
  

  

• What Electricity Consumption Tells Us About The State Of The US Economy – An Update

  Submitted by Erico Matias Tavares via Sinclar & Co (co-authored with DegreeDays.net),

  A year ago we wrote about how electricity consumption could provide clues to the performance of the US economy, which generated a lot of interest and comments.

  A relationship between the two variables makes sense, but needs to be framed in the proper context. Genuine economic (and population) growth should translate into more electricity consumption, as we have more activity and transactions taking place throughout the economy.

  However, factors such as energy efficiency and the weather can muddle this relationship:

  • An increase in efficiency means that the same output can be obtained with less inputs. Therefore, a small-ish reduction in electricity consumption versus a prior period may not necessarily be indicative of a sluggish economy over that time. And we know that this efficiency has been on the rise in recent years (just look at the power rating of your new appliances).
  • Likewise, a warmer winter versus the prior year may also cause a drop in electricity consumption, simply due to home heaters not being used as hard, not necessarily because the economy is doing badly.

  So can we adjust electricity consumption to take these factors into consideration and get a better measure of its relationship with economic growth?

  We developed an indicator to do just that together with DegreeDays.net, an energy systems data company. We provide a brief technical explanation of our proposed methodology below (for a much better overview please visit this supporting article). Bear with us, the analysis is quite interesting!

  To account for weather variations, we regressed the weekly electricity consumption data against US-population-weighted heating degree days (“HDD”) and cooling degree days (“CDD”) that we calculated for matching weekly periods:

  • Degree days are a specialist type of data derived from detailed temperature readings and used for analysis of heating and cooling energy consumption. This is exactly what we need to normalize the effects of changes in the weather on electricity consumption.
  • Energy required to heat a building over a period is proportional to the HDD over that period; energy required to cool a building over a period is proportional to the CDD over that period. Calculating this is pretty straightforward for one building in a specific location.
  • But in order to account for the millions of different buildings and variations in weather patterns across the country we calculated population-weighted HDD and CDD using census per city and weather data (again, this is much better explained in that article).

  Accounting for energy efficiency is a bit trickier. We did not find any recent data (and which is updated regularly) that could measure this effect. So we decided to run those regressions over much shorter time frames. The rationale being that longer periods could lead to an apples and oranges comparison since the installed power demand base changed. For instance, a new refrigerator consumes much less electricity than a decade ago.

  So at the start of each calendar year we ran the regression over the prior 12 months. We then estimated electrical consumption using the regression coefficients and the updated population-weighted HDD and CDD variables, compared it to the actual electricity consumption each week and voilà, we came up with an adjusted indicator based on the percentage differential between the two.

  If actual electricity consumption is higher than the one predicted by our regression, which as we have seen should be adjusted for weather changes and some efficiencies, this is a sign that the economy should be doing well. If it is considerably lower then the economy may not be doing so great (or everyone is buying those new refrigerators). 

  OK! Let’s look at the actual results.

  First, some context. Here’s the actual electricity consumption in the US without any adjustments since 1995:

  

  Weekly US Electricity Consumption (MM kw hrs): Jan 95 – Present

  Source: EEI.

  As we pointed out last year, this is not exactly a picture of economic dynamism. Since then electricity consumption across the US has pretty much remained in the doldrums:

  • The red line shows the weekly historical peak, reached all the way back in the summer of 2006. Notice how far we have been from it in recent years, despite all the GDP and population growth that has occurred since then.
  • The black line, which is the smoothed consumption data over time (the longer-term trend if you prefer), has recently turned negative.

  It is curious to note that financial commentators regularly gauge China’s economic performance by looking at its electricity consumption, but this is not done for the US. Perhaps there is something there that does not fit with the prevailing narrative. Sure, China remains a manufacturing economy while the US is largely a services economy; but as far as we know restaurants, insurance companies, hospitals and IT service providers still use electricity.

  In fact, growth in data has been so significant – requiring ever more power-hungry data centers – that IT now consumes some 10% of world electricity production. All the iPhones, clouds, tablets, chats, likes and whatever else have materially increased our demand for electricity, both on the front- and the back-end. So it is surprising that electricity consumption statistics haven’t been a bit perkier in the US, given all the IT development there.

  And here’s the evolution of annual electrical generation in the world’s leading economies/blocks since 2006:

  

  Annual Electrical Generation Index (‘06=100): ’06-‘14

  Source: BP World Energy Review.

  The US (dotted line) has pretty much underperformed everyone in the group in terms of growth (except in 2014 when OECD ex-US, Canada dropped below it). Even Canada, its northern neighbor, has done better. What does this tell you about the US “decoupling and leading global growth"? That Americans must have much more efficient refrigerators and data centers than everyone else? Or maybe there is more to this story.

  With that in mind, let’s finally put our “energy indicator” to use. We aggregated weekly data into quarters because as you can imagine we are dealing with quite a noisy data series. Here are the results, compared to year-on-year (“y-o-y”) Real GDP growth (red line):

  

  Quarterly Real GDP y-o-y Growth and the Energy Indicator: 1Q’01 – 1Q’15

  Source: EEI, BEA, degreedays.net.

  The graph brings out some interesting points:

  • Overall, the percentage differential between actual and predicted (by our methodology) electricity consumption reflects the ebbs and flows of the GDP cycle.
  • At time the energy indicator precedes GDP turns, although it may take some quarters for this to become evident (again, we are dealing with noisy, unsmoothed data, unlike quarterly GDP which has a host of seasonal adjustments). Notice the jump in 3Q’02, before GDP growth recovered in earnest. And in the run up to the Great Recession in 2008, we had the biggest drop in the indicator in the series while official GDP statistics were still showing economic growth.
  • An advantage of our methodology is that we can update the indicator on a weekly basis, and so at the end of each quarter we can have a sense of how the economy performed almost in real-time. The last (red) bar is the accumulated reading to date for 2Q’15, which being positive suggests also a positive y-o-y Real GDP growth in 2Q.
  • However, a divergence has formed since early 2013: the trend in the energy indicator is going down, while y-o-y GDP growth seems to be moving higher (notice the two arrows).

  OK, so what accounts for that divergence? We can’t say for sure, but back in 2013 the Bureau of Economic Analysis “modernized” its GDP accounting methodology, to include things like R&D, copyrights and pension deficits. As a result total GDP increased by 3%. Presumably the series was updated as far back as 1929 but we can certainly debate whether such variables reflect actual transactions and human activity, which is what our indicator picks up.

  Other countries have been even more creative in GDP accounting revisions, adding estimates for illegal activities such as prostitution and drug consumption. Ah, but we already have these covered, as presumably they also consume electricity (even if under very dim lights).

  You can take your pick as to which measure you would like to focus on to gauge real economic performance. 

  But just looking at electricity consumption, adjusted or otherwise, things are definitely looking very sluggish in the US economy right now.

  

  

  
  
  

  

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