GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN
SOVEREIGN DEBT & CREDIT CRISIS
John Plender - A dangerous shift in the global economy
What is needed globally is for both debtor and creditor
countries to rebalance their economies. The debtors need
to tidy their balance sheets, while the creditors need to
bump up domestic consumption, let currencies float and
reduce export dependence. This would also be in China’s
own interest because its economy is in disequilibrium. It
cannot, among other things, prevent inflation and
asset-price bubbles while running an artificially low
exchange rate. Yet the obstacles to change are formidable.
The key to rebalancing towards consumption, says Mr Dumas,
may be relaxation of government control over its citizens,
which is unlikely to happen. There are also powerful
lobbies against change, not least the inefficient
producers who have been featherbedded by a cheap currency
and whose economic survival depends on continuing
There is, then, a Chinese policy impasse. How does the
world escape from its dire potential economic
consequences? One scenario might be muddle-through: the US
responds to an impending economic slowdown with looser
fiscal and monetary policy, at the cost of racking up more
debt and a crunch later on. Another would see US fiscal
conservatives prevent budgetary loosening, while monetary
policy remains lax. This would cause the US current
account deficit to shrink sooner rather than later.
Either way, the risks of a protectionist backlash
against China would rise. Under either scenario, the
world’s creditor countries would ultimately see their
chief market dry up. The main difference is in the timing.
When, you might well ask, will the creditors wake up?
SPAIN / PORTUGAL
Government urged to reveal 'true' debt of £4.8 trillion
Ireland May Buy Anglo Irish Loans at Discount of More Than
Fear of double dip intensifies
Research US - A deeper slowdown, but no recession
U.S. deficit forecast masks true scope of problem
And now we're headed for the GREATEST depression: Gerald
The fake "recovery" was nice while it lasted, says
famous apocalyptic forecaster Gerald Celente, founder of
Trends Research Institute. But now the fun's over, and
we're headed for what Celente describes as the "Greatest
Specifically, the always startling Celente says the
country is headed for rising unemployment, poverty, and
violent class warfare as the government efforts to keep
the economy going begin to fail.
The crux of the problem, Celente
argues, is that the middle class has been wiped out.
America used to be a land of opportunity for all, where
hard-working people could build their own small businesses
in their own communities and live prosperous and
fulfilling lives. But now a collusion of state and
corporate interests that Celente describes as "fascism"
have conspired to help only the biggest companies and the
richest Americans. This has put a shocking amount of the
country's wealth in the hands of a privileged few and left
the rest of the country to subsist on chicken-feed wages
and low job satisfaction as Wal-Mart "associates" -- or
The answer, Celente says, is to bring back the laws
that prevented huge companies from getting so big and
powerful, and put some opportunity back in the hands of
ordinary people. But doing that is going to take a
while. And in the meantime, we're headed for
(Celente's dead right about U.S. wealth
inequality, by the way. It's shocking. And
it's getting worse. For a quick overview, see "15
Mind-Blowing Facts About Wealth And Inequality In America)
Economic Weakness Accelerating
becomes clearer every day that the economy is headed for a
renewed recession or a recovery so slow it will seem like
Initial unemployment claims climbed to 500,000
last week for the first time since November
Philadelphia Fed index dropped below the zero
line for the first time since July 2009.
This follows a pattern of generally softening
economic data over the last two or three months.
BALANCE SHEET RECESSION
As we have long expected, the
economy is tracing out a trajectory typical of a balance
sheet induced recession rather than the garden-variety
inventory recessions typical of the period since the end
of World War ll.
In a balance sheet recession the dire effects of
debt deleveraging overwhelm the efforts of the government
to stimulate the economy as is happening now, and the
economy undergoes a lengthy period of deflation,
and frequent slowdowns as the U.S. experienced during the
1930s and Japan over the last 20 years.
While the massive stimulative
measures undertaken by the Fed, Congress and the White
House have succeeded in averting a financial collapse,
they are being more than offset by the deleveraging now
The effects of inventory replenishment are winding down
without any other major drivers to sustain growth.
Typically a new economic expansion is led by
inventories, consumer spending, employment, housing and
readily available credit.
This time only inventories have performed their
usual function, meaning that the economy has been acting
on only one of five cylinders.
The Fed has already used all of
its conventional weapons and will undoubtedly resort to
untried unconventional measures with unknown outcomes and
the possibility of unintended consequences.
The most likely measures will probably be
- further large purchases of
Treasury securities and mortgage bonds together with
- a ceiling on Treasury bond
yields as outlined in Chairman Bernanke's famous 2002
speech that earned him the nickname "Helicopter Ben".
This is commonly referred to as quantitative easing
or QE2. We
doubt, however, that this will have any more effect than
QE1 as it would be more than offset by debt
deleveraging in the private sector.
We also believe that the market is
currently too complacent about the global economy.
China is attempting to prevent a bubble by
engineering a soft landing that will at best result in a
substantial slowing of imports, and at worst a
full-fledged recession as often happens when governments
aim for soft landings.
Japan, too, is undergoing renewed economic weakness
following two decades of deflation and minimal growth.
Europe is going through a short period of temporary
calm after the EU and the IMF threw a lifeline to the
struggling southern tier.
However, the authorities have failed to deal with
the underlying structural debt problems that will continue
to be a major problem while the austerity measures that
that are being implemented will be a major drag on the
For example the German magazine,
Der Spiegel points out that the austerity measures
applauded by the EU are already having dire effects on the
The Greek government has reduced its budget deficit
by an astounding 39.7% and spending by 10%.
This has had a drastic effect on income,
consumption, employment and bankruptcies, leading to a
"mixture of fear, hopelessness and anger".
According to the article another wave of layoffs is
likely in the fall and this could have "extreme social
Such an outcome could come as a severe shock to
a U.S. market that has factored in a quieter Europe.
In sum, we believe that the
market is still discounting a continued U.S. recovery as
well as a supportive global economy.
In the current climate such hopes are
likely to be disappointing and corporate earnings
estimates for 2010 and 2011 will probably be revised down
The market peaked in late April and is now
trending down amid a lot of volatility.
Change, U.S. Debt Is Staying in the U.S.
Foreign governments, whose purchases were once critical, were net
sellers of Treasury securities in the first half of 2010.
Global Hunt for Yield
CHART OF THE DAY- How To Blow A Bond Bubble
if we take the U.S. mutual fund flows into
bonds for the six months ending June, and multiply it by two,
then we arrive at an annualized 2010 fund flow which is set to
be larger than even what we saw in 2009 (in blue). Meanwhile,
stock fund flows continue to be negative (in red).
Bonds are either 1) Already over-hyped, or
2) Soon will be if this current trend continues:
ShoreBank of Chicago Shuttered by Regulators to Open as Urban
Failure Of Obama's Pet ShoreBank Costs Taxpayers $368 Million,
Which Immediately Goes To Goldman Sachs Among Others ZH
Some details on the bank from the
FDIC press release: "As of June 30, 2010, ShoreBank had
approximately $2.16 billion in total assets and $1.54
billion in total deposits." In other words, the value of
ShoreBank's assets was well below 70% of face, if the bank
was undercapitalized at its current deposit level.
Continuing: "The FDIC and Urban Partnership Bank entered
into a loss-share transaction on $1.41 billion of
ShoreBank's assets. Urban Partnership Bank will share in
the losses on the asset pools covered under the loss-share
agreement. The loss-share transaction is projected to
maximize returns on the assets covered by keeping them in
the private sector. The FDIC estimates that the cost to
the Deposit Insurance Fund (DIF) will be $367.7 million."
Netting the incremental cost of taxpayer DIF subsidies,
means that the real value of assets was ($1.54 billion -
$367.7 million)/$2.16 billion or 54%
of face. And this is a bank that
Obama wanted to keep alive at all costs? And just
who is this "Urban Partnership Bank" that is receiving a
taxpayer subsidy of $368 million? Why all the usual
suspects of course: "The significant investors in Urban
Partnership Bank are American Express Company,
Bank of America, Citigroup, Ford Foundation, GE Capital
Equity Investments, Inc., Harris Bank, the John D. and
Catherine T. MacArthur Foundation, JPMorgan Chase & Co.,
Key Community Development Corp., Morgan Stanley, Northern
Trust Corporation, PNC Investment Corp., State Farm Mutual
Automobile, The Goldman Sachs Group, Inc., and Wells Fargo
& Company." And so the old
game continues, only this time it includes administration
darling banks that should have been liquidated long ago.
By keeping ShoreBank artificially
alive for far longer than it deserved, the assets
amortized far more than they would have had it been taken
into receivership by a non-conflicted bank,
and thus the final cost to taxpayers would have been far
As it stands, Goldman and 11
other banks are receiving a multimillion dollar gift to
conduct a portfolio liquidation run-off of ShoreBank's
assets, while merely making sure existing deposits are
serviced. At least we now know just how truly angry at
Wall Street Obama is.
The funniest bit: this is how
efficient the auction process was (from the press release)
FDIC received only one bid, which
included an asset discount of $146 million and a 0.5
percent deposit premium. This saved the FDIC’s insurance
fund $250 million to $334 million over liquidation.
This also padded the top line of
the abovementioned banks by $368 million off the bat, over
and above whatever they make as they collect the proceeds
from the portfolio run off.
In other words, Wall Street's
core banks could have come up with any bid they wanted,
and the FDIC would have had no choice but to fund the
difference, because the alternative would be, gasp, so
much scarier. Hm, where have we heard this before.
Full press release (link)
and supplemental information (link)
to this latest taxpayer gift to Wall Street's kleptocrats.
DODD FRANK ACT
Fighting Flares on Derivatives Rules
Banks, companies and trade associations challenged federal
regulators Friday over the controversial question of how to
regulate derivatives under the new Dodd-Frank financial revamp,
the first big day of posturing since the law was enacted last
The meetings, particularly a three-hour roundtable hosted
jointly by the Commodity Futures Trading Commission and the
Securities and Exchange Commission, illustrate how Wall Street's
attention has shifted from Congress to the federal agencies that
have to interpret the law by writing hundreds of new rules.
Perhaps nowhere is the attention to detail more apparent than
the focus on complex financial instruments known as derivatives,
in part because the rules will impact scores of companies and can
affect how hundreds of billions of dollars in credit moves through
the economy.Jason Kastner, vice chairman of the Swaps and
Derivatives Markets Association, said if regulators don't allow
more companies to participate as part of derivatives
clearinghouses, the concentration of big banks dominating these
firms would lead to a "real risk that we're going to end up right
where we started."
Regulators Begin Process of Labeling the 'Systemically Important'
Recovery fears knock appetite for risk
RRESIDENTIAL REAL ESTATE - PHASE II
15 Signs The U.S. Housing Market Is Headed For Complete And Total Collapse
GORDON T LONG:
banks only wrote off approximately
$8 billion on
mortgages during the quarter of 2010, and if this pace
continues it will even exceed 2009's
staggering full-year total of $31 billion. That being
said (the hype the banKS put out, look at the above
chart closely. The gap isn't in billions, it is the
Now look at the chart below and ask
how the "accountants" gap above can be sustained
Also remember this
it could take up to
5 trillion MORE dollars
to completely "fix" Fannie Mae and Freddie Mac. But without Fannie Mae and Freddie Mac we might not even have a mortgage
industry at this point. Fannie Mae, Freddie Mac, the Federal Housing
Administration and the Veterans Administration backed
percent of all U.S. home loans during the first half of 2010
US banks seizing homes at record levels Telegrpah
EXPIRATION FINANCIAL CRISIS PROGRAM
PENSION & ENTITLEMENTS CRISIS
Record Number Of Americans Using Retirement Funds As Source Of Immediate
|If our readers have been wondering where, in addition to the
decision to never make mortgage payments again, do Americans get
the money to buy a 2nd iPad (for that real 3D-effect of
iTunes porn), preorder the iPhone 12.499, and bid up Amazon stock
at 999x P/E, here is your answer: according to a new study by
Fidelity, a record number of workers tapped their retirement funds
and made hardship withdrawals from their accounts in the second
quarter. In other words, just like the country they live in,
Americans no longer give a rat's ass about the retirement years in
a narrow sense, and the future in a broader one, and since real
unemployment is about 20%, wage deflation is everywhere, even as
Solitaire time is down to 0 (except for SEC employees), and nobody
has any money left, the only logical recourse is to borrow from
the self-funded pension fund. According to the
Fidelity study, "Among the 11 million workers whose
401(k) plans are run by Fidelity, 11 percent took out a
loan from their plan during the 12 months ended June 30, the
company said, up from 9 percent at the same point a year earlier.
By the end of the second quarter, plan
participants with loans outstanding against their 401(k) accounts
had reached 22 percent versus 20 percent a year earlier."
And if anyone is so deluded to think that these not so gracious
retirees have any intention of ever paying these "loans" back, we
have some AJ-rated CMBS to sell you at par prime. Which also means
that suddenly Fidelity may find itself with worthless liens
instead of cash, and should the market plunge again and the fund
giant find itself in a need to satisfy billions in collateral
calls, it is game over. After all, it is not like investors have
been steadily putting cash into stocks over the past 15 weeks.
Nevada Sets New High For Unemployment At 14.3%
GOVERNMENT BACKSTOP INSURANCE/b>
The Fannie and Freddie effect is here long term
GORDON T LONG:
I keep looking and waiting for
the Bankruptcy wave. However, like Japan's banks we now
have large Zombie corporations instead. The zombies can't
be allowed to go into bankruptcy because of CDS payouts
that senior secured lenders no doubt have heavily sold to
bolster yield where the senior holders actually control
the bankruptcy event.
Below is a new twist, though
not laid out in the FT articles but can clearly be seen
between the lines.
When you can no longer 'extend
& pretend' and 'milk the cow' you shift your strategy from
1- Naked Short the Bonds,
2- load up on CDSs (making
debt more expensive & effectively acting as a trigger for
3- file under British Law as a
4-be FULLY reinbursed as
senior debt (screw the subordinated)
5- pass control to new entity
effectively controlled through an off balance sheet SPE
where of course the structured senior debt are position
6- start all over again by
issuing even more debt to the new entitiy to replace the
liquidated subordinated and unsecured debt holders.
SLICK! -- NICE!
Now the implementation - ->
Bankrupt Europeans are flocking to London
The City of London is getting itself a bad name. A “bankruptcy
brothel” is what some now call it – a haven for
European companies and their owners fleeing creditors,
into the welcoming arms of its courts. In recent
weeks, these fears have been further reinforced with
companies from Greece and the Netherlands moving their
“centres of main interest” to London so that they fall
under English law in apparent first steps towards their
own debt restructurings. While this trend of
jurisdiction shopping for insolvency is not new, in the
wake of the credit crisis, the losses for debt investors
when companies shift to England can be searingly painful.
a court process that has
become controversial during the crisis. It allows a
company to be sold quickly by senior ranking
lenders to a new owner. Importantly it can be
done without the permission, and often with the purpose of
leaving behind the claims, of lower ranking creditors such
as unsecured bondholders, suppliers or landlords.
creditors get a better recovery in pre-packs
credit markets have improved over the past year, the UK
government is worried about a £90bn debt refinancing
mountain facing UK companies over the next few years
City is getting a bad name as a haven for those fleeing
Unsecured creditors need protection, says OFT
Businesses defy forecast of insolvency rise
|UK corporate resilience was partly thanks to:
historically low interest rates,
2- quantitative easing and
3- cooler-headed management than during the recession of
the early 1990s.
4- Executives have cut marketing
activities less severely and agreed
reduced pay and hours deals with workers to limit
6- In addition creditors, ranging from
the tax authorities to bank lenders, have pursued debts
less aggressively than in past downturns.
Many businesses are fatally debilitated by recessionary
wounds that include large debts. But Mr Hickmann said he
could find no evidence that there was a big cohort of such
“zombie companies” across business.
Resource demand spurs M&A deal surge
China and India behind more than $50bn of proposed takeovers
Resources are easier to buy
Will an M&A Boom Lift Sagging Markets ZH
M&A Losers in $10 Trillion Deal Binge Led by McClatchy, Sprint
HSBC leads race for S Africa’s Nedbank
KNOC launches hostile bid for Dana Petroleum
How Much Debt Does the S&P 500 Have ZH
|About 25 years ago I worked for a few months with a team of
deep thinkers who were trying to convert Capital Leases into
Operating Leases for tax and accounting purposes. The objective
was to get the most optimal treatment; (1) tax deductible
amortization of the asset and (2) keep it off the balance sheet so
as to hide the true debt level and therefore improve balance sheet
ratios. There were strict rules that were supposed to avoid this.
But is was a goldmine idea if it could be done. This was early
derivative days. Make something look different than what it
actually was. I thought it was a dumb idea, so I quit and went to
sell junk bonds at Drexel. Turns out the folks involved figured it
out and made a bundle selling it. I am still glad I was not
WHEN you lease something—a boat, a warehouse, a machine for
making ball-bearings—you agree to pay for it bit by bit over
time. So it is like incurring a debt, say the International
Accounting Standards Board (IASB) and America’s Financial
Accounting Standards Board (FASB). Therefore, it should be on
your balance-sheet. This new rule, proposed on August 17th by
the two regulators, has shocked companies everywhere. It is up
for public comment until December, but could be enacted as
soon as June next year.
Today, companies can opt either for a “capital lease”,
which goes on the balance-sheet, or an “operating lease”,
which does not. This distinction makes a certain sense. But
the IASB and FASB think it is open to abuse. By labelling
leases as “operating”, firms can appear less indebted than
they really are. The new rules would put the right to use the
leased item in the assets column. The obligation to pay for it
would go in the debit column.
That will make a lot of firms look wobblier: a survey by
PricewaterhouseCoopers, an accounting firm, found that it
would add about 58% to the average company’s interest-bearing
debt. Not only new leases but also existing ones would
immediately be subject to the new rules. On the other hand,
since rents will no longer be a running expense, operating
earnings could see a bump upwards. But since the downturn,
many companies are close to their maximum debt limits, and the
new rules could push them over the edge. Small wonder they are
The new rules’ effects will vary widely. Retailers, who
often lease prime property, will take a beating. Airlines,
which seldom own their jets, will suffer too. Some businesses,
such as utilities, will barely notice. But others will see
their apparent return on capital plunge. Many firms will see
their debt-to-equity ratio rise and their ability to borrow
fall. Some will start leasing the tools of their trade on
short-term contracts. Others will simply buy instead of lease,
predicts Deloitte, an accounting firm.
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE
FLASH CRASH - HFT - DARK POOLS
Wild Trades Put Focus on Fund Manager WSJ
Profiting From Next 'Black Swan' WSJ
|Investors are flocking to strategies designed to cash in on
calamity. Will they fly?
Second Hindenburg Omen Confirmation In As Many Days, Third H.O. Event In
One Week ZH
Knight Trading Reports July Average Daily Share Volume Lowest Since April
|For a firm which
as "the leading source of off-exchange liquidity in U.S.
equities and [has] greater share volume than any U.S.
exchange" , "share volume", as one can surmise, is the lifeblood
of the firm. And should there be a dramatic drop in "share volume"
it means that both revenue, as well as the general volume of other
exchanges must be very low, since Knight is presumably a good
proxy of trends elsewhere. Which is why when we pulled up Knight's
recent trading volume we were rather surprised by the dramatic
plunge in stock trading over the past 4 months. After hitting a
near record in April of just under 16 billion daily average
shares, volume has since plunged to 7.4 billion, or the lowest
since last April, when it was a mere 5.9 billion. And no, this is
not merely the seasonal summer slowdown: last July Knight did an
average of 10.2 billion shares, thus July 2010 was a 27% decline
in share volume. But one doesn't need to look far to confirm this:
a casual glimpse at the NYSE daily volume, or the ridiculous moves
in stocks on vapor trading when a block of SPOOs can move the bid
ask by a quarter of a dollar, are sufficient to demonstrate just
how fragmented the market has become. This merely reinforces our
observations that in addition to pulling capital out of equity
mutual funds, retail investors and increasingly institutional
ones, simply refuse to trade. Luckily our message that the market
is (at least for the time being) broken has finally been heard far
and wide. And to all those who think that based on a series of
lucky coin tosses, they can outwit an irrational and chaotic
system, we wish them all the best.
VIDEO TO WATCH
Paul Craig Roberts: America is
Truly being Destroyed by Design
The Alex Jones Show 1/3
PART 1 Below
QUOTE OF THE WEEK
“It ain’t what you don’t know that gets
you into trouble. It’s what you know for sure that just ain’t so.”
"the recent financial crisis and recession was not caused
by high interest rates but by low rates that contributed to
excessive debt and leverage among consumers, businesses and
government. We need to get off of the emergency rate of zero,
move rates up slowly and deliberately. This will align more
closely with the economy’s slow, deliberate recovery so that
policy does not lag the recovery.
Monetary policy is a
useful tool, but it cannot solve every problem faced by the
United States today. In trying to use policy as a cure-all, we
will repeat the cycle of severe recessionand unemployment in a
few short years by keeping rates too low for too long. I wish
free money was really free and that there was a painless way
to move from severe recession and high leverage to robust and
sustainable economic growth, but there is no short cut."
Kansas City Federal Reserve
QUOTE OF THE WEEKtable style="width: 500px">
“It ain’t what you don’t know that gets you into trouble. It’s what
you know for sure that just ain’t so.” – Mark Twain