RACE TO DEBASE : The "Race to Debase" Accelerates in a "Race to the Bottom"
The November GMTP issue discusses the Regional Macro Economic Issues in Europe, Japan, China and the Emerging Economcis and BRICS countries. The IMF, World Bank and BIS have all warned of heightened economic and financial risk. The IMF cut the grwoth rate of the advanced economies by 25% taken it down to levels not seen since 2009. The World Bank released a study indicating theat 600 million new jobs must be created over the next 15 years to meet economic and social demands. Meanwhile global growth is falling at rates not seen since the early stages of the 2008 financial crisis.
Currency Wars have entered a new stage has global economies fight for a shrinking piece of export/import demand. Any Geo-Politicl event, an unresolved US Fiscal cliff or unexpected corporate financial failure could be the catalyst to push the world into its first global recession.
MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
THE P/E COMPRESSION GAME: An Old Game with a Different Twist to Misprice Risk
We are manipulating markets metrics in such a fashion as to intentionally Misprice, Misrepresent & Hide RISK. Prior PE reference boundary conditions which reflected risk have decoupled. Never has the game of forward operating earnings (versus historically trailing earnings) been more inappropriate than presently. Forward PE's can only be of value in rapid revenue and profit growth eras. This is not what we have presently. It is the wrong tool for the wrong job! Unless you are a sell side analyst, then it is exactly the right too for the difficult selling job you have. We have an era of Peak earnings growth RATES, slowing profit growth RATES and Peak PEs which are reflective of rapidly contracting PE's. We have a secular bear market in REAL terms but PE's are not contracting at a sufficient enough rate to reflect this. Though PEs in nominal terms net out inflation, they don't reflect the underlying downward trend in real terms. MORE>>
We have witnessed QEfinity "Unlimited", OMT "Uncapped', and the US Election results. Now we begin to watch the Fiscal Cliff political poker game unfold. So far it has been a Buy on the Rumor, Sell on the News scenario with markets down significantly since each event, but appearing to find support at the 200 DMA. With US government facing another downgrades to its "Risk Free" status, earnings plummeting and a clear global slowdown in progress, what should we expect before year end and more importantly in the New Year? The short answer is 'volatility' as we complete the "Right Shoulder" of a classic Head and Shoulders pattern of a major Long Term Technical structure. Once complete we then head lower.
A Santa Claus Rally is highly likely despite a rarely confirmed Hindenberg Omen and technical chart patterns that mirror the pre-1987 market crash - way too closely for this analyst. The markets are at levels of extreme risk which is not priced in. Most investors are best advised to stand aside and error on being too conservative. It is too risky at this moment to be either net long or short. Soon however there will be a lower risk entry to be net short the market for the 2013 market clearing event, which the macro charts are consistently signaling.
MORE>> EXPANDED COVERAGE INCLUDING AUDIO & EXECUTIVE BRIEF
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
A shockingly low 30% of S&P 500 firms beat revenue expectations in the prior quarter and while Bloomberg's data suggests around 65% beat earnings expectations, the in-period adjustment of expectations (analysts ratcheting down earnings as the season progresses) naturally biases this to look rosier. The critical question is - how much more fat is there to cut? With Sales (and outlooks) so weak, how many more jobs need to be cut to meet margin expectations? 2013 top- and bottom-line (+13.6% EPS growth) expectations remain magnificent in their optimism - do you believe in miracles?
Chart: Bloomberg Chart of the Day
17 - Shrinking Revenue Growth Rate
GLOBAL SHADOW BANKING - Increases $6T to $67T On Total Global GDP of $70T
Earlier today, the Financial Stability Board (FSB), one of the few transnational financial "supervisors" which is about as relevant in the grand scheme of things as the BIS, whose Basel III capitalization requirements will never be adopted for the simple reason that banks can not afford, now or ever, to delever and dispose of assets to the degree required for them to regain "stability" (nearly $4 trillion in Europe alone as we explained months ago), issued a report on Shadow Banking. The report is about 3 years late (Zero Hedge has been following this topic since 2010), and is largely meaningless, coming to the same conclusion as all other historical regulatory observations into shadow banking have done in the recent past, namely that it is too big, too unwieldy, and too risky, but that little if anything can be done about it.
Specifically, the FSB finds that the size of the
US shadow banking system is estimated to amount to $23 trillion (higher than our internal estimate of about $15 trillion due to the inclusion of various equity-linked products such as ETFs, which hardly fit the narrow definition of a "bank" with its three compulsory transformation vectors), is the largest in the world, followed by the
Euro area with a $22 trillion shadow bank system (or 111% of total Euro GDP in 2011, down from 128% at its peak in 2007), and the
UK in third, with $9 trillion.
Combined total shadow banking, not to be confused with derivatives, which at least from a theoretical level can be said to offset each other (good luck with that when there is even one counterparty failure), is now $67 trillion, $6 trillion higher than previously thought, and virtually the same as global GDP of $70 trillion at the end of 2011.
Of note is that while the US shadow banking system has been shrinking (something our readers are aware of, and a fact which in our opinion implies there is nearly $4 trillion more in Fed monetization still to come, as Bernanke has no choice but to offset the credit destruction within shadow conduits, which in turn are deleveraging to the tune of nearly $150 billion per quarter), that of Europe has been increasing.
Aggregating Flow of Funds data from 20 jurisdictions (Argentina, Australia, Brazil, Canada, Chile, China, Hong Kong, India, Indonesia, Japan, Korea, Mexico, Russia, Saudi Arabia, Singapore, South Africa, Switzerland, Turkey, UK and the US) and the euro area data from the European Central Bank (ECB), assets in the shadow banking system in a broad sense (or NBFIs, as conservatively proxied by financial assets of OFIs15) grew rapidly before the crisis, rising from $26 trillion in 2002 to $62 trillion in 2007. The total declined slightly to $59 trillion in 2008 but increased subsequently to reach $67 trillion in 2011.
And while the the bulk of the shadow activity is contained within the 3 well-known jurisdictions (US, Europe, UK) whose credit creation capacity in the traditional banking system appears to have ground to a halt, especially in Europe where unencumbered collateral is virtually nil (thus forcing credit creation in the deposit-free, unregulated shadow space), the FSB also found previously unexplored shadow banks in some brand news venus including Switzerland, China and Hong Kong:
Expanding the coverage of the monitoring exercise has increased the global estimate for the size of the shadow banking system by some $5 to 6 trillion in aggregate, bringing the 2011 estimate from $60 trillion with last year’s narrow coverage to $67 trillion with this year’s broader coverage. The newly included jurisdictions contributing most to this increase were Switzerland ($1.3 trillion), Hong Kong ($1.3 trillion), Brazil ($1.0 trillion) and China ($0.4 trillion).
Not unexpectedly, the FSB focuses mostly on Europe, and provides the following color:
The size of the shadow banking system (or NBFIs), as conservatively proxied by assets of OFIs, was equivalent to 111% of GDP in aggregate for 20 jurisdictions and the euro area at end-2011 (Exhibit 2-3), after having peaked at 128% of GDP in 2007.
The summary is by now well-known to most who realize that the primary driver of marginal credit money creation (in Europe) and destruction (in the US) is none other than the world's shadow banking system. As per Bloomberg:
The size of the shadow banking system, which includes the activities of money market funds, monoline insurers and off- balance sheet investment vehicles, “can create systemic risks” and “amplify market reactions when market liquidity is scarce,” the Financial Stability Board said in a report, which utilized more data than last year’s probe into the sector.
“Appropriate monitoring and regulatory frameworks for the shadow banking system needs to be in place to mitigate the build-up of risks,” the FSB said in the report published on its website.
Sadly, shadow banking, like every other unsustainable aspect of the foundering "modern" financial system, will not be fixed, resolved, or in way improved or made sustainable until the entire system crashes.
CONTINUED BELOW IN: MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Nov 18th - Nov 24th, 2012
Japan might offer a glimpse of what developed economies may look like in the future (aging, non-growing, zero population growth, etc.). And then beyond that, the Japanese election features one candidate -- former PM Shinzo Abe of the Liberal Democratic Party -- who is running on an explicitly pro-QE, pro-inflation platform that is unusual.
Already the Japanese yen is at 7-month low (against the dollar) and folks on Wall Street are betting on much more weakness to come.
Morgan Stanley's just-released 2012 FX outlook is titled "2013: The Year Of JPY Weakness." They write:
With early elections less than a month away, and with the current administration’s approval rating at depressed levels, popular polls show that the LDP’s Abe will almost certainly become Japan’s next Prime Minister by year-end. This will have large ramifications on FX markets, given how vocal he has been on defeating deflation and currency strength. Specifically, Mr. Abe is pushing for
The BoJ to cut the benchmark rate to zero or lower,
Intervene in unlimited amounts, and
Adopt an inflation target of up to 3%.
Additional pressure on the central bank to act more aggressively should catalyze sustained JPY weakness, in our view. Indeed, the current structure of the FX market suggests that JPY weakness will beget further weakness. On the one hand, the Japanese private sector has amassed short-term external debt of roughly US$1.8 trillion. With little incentive to raise debt at higher rates abroad, this suggests to us that these positions are used to currency-hedge longer-duration USD investments. According to our calculations, the Japanese private sector is now almost fully hedged.
On the other hand, over the past two years, net portfolio inflows into Japan have been almost entirely in the money markets. With Japanese money market instruments providing no yield, foreign investors have bought these investments in the hope that JPY appreciation ‘pays the dividend’. As such, with the BoJ likely to engage in a much more aggressive easing stance, this should drive not only an unwinding of currency hedges, but also an outflow from the Japanese money market. We believe that the combination of these flows will drive JPY materially weaker – we target 92.00 next year.
As for the actual election, at this point, there doesn't seem to be much doubt that Abe will win.
The Gaza Conflict Reverberates in the West Bank and Jordan 11-19-12 Stratfor
A Palestinian who was wounded Nov. 17 during protests in the West Bank against Israel's ongoing operations in the Gaza Strip has died from his injuries, the Palestinian Ma'an news agency reported Nov. 19. The West Bank has been calm in recent years, but significant protests have been taking place across the eastern Palestinian territory -- which is ruled by Hamas' secular rival, Fatah -- in response to Israel's Operation Pillar of Defense. The protester's death could widen that unrest.
These developments have implications in Jordan, where the regime of King Abdullah II is also struggling with political unrest. The duration of the Israeli-Gaza conflict will determine the extent of the brewing unrest in the West Bank and the toll it has on Jordan.
The ongoing conflict between Hamas and Israel has generated a significant amount of sympathy for Hamas in the West Bank. In some parts of the territory, anti-Israeli youth protesters have thrown stones and Molotov cocktails at Israeli security forces patrols. The protests, while at a low level for now, complicate matters for the administration of Palestinian President Mahmoud Abbas.
While the Arab Spring created conditions that increased the power of Hamas, it also added to the woes of Fatah, which has been deteriorating for some time. The group suffers from an aging leadership, internal splits, corruption charges amid poor economic conditions in the West Bank and a failure to make progress toward Palestinian statehood in negotiations. Thus, it is no surprise that Fatah, despite its deep animosity toward Hamas, has come out in support of its rival and in solidarity against Israel. Fatah likely chose not to interfere with the West Bank protests to avoid aggravating matters, but it cannot allow the protests to spiral out of control.
Fatah is hoping that Hamas and Israel reach a truce as soon as possible. Indeed, the West Bank group is likely using its channels with the United States and Israel toward this end. Clearly, Fatah does not want protests in the West Bank to go from supporting Hamas and Gaza to turning against mismanagement in the West Bank. At the same time, this could be a reason why Hamas, which seeks a resurgence in the West Bank, would want to prolong the conflict somewhat.
The stirring of turmoil in the West Bank is very worrisome for Jordan, which neighbors the Palestinian territory and is home to a large population of Palestinian heritage that harbors anti-Israeli sentiments. The ruling Hashemites do not want to see the Gaza issue spill over Jordan's borders and accentuate their own problems.
The effects of the Arab Spring have not really manifested themselves in Jordan, but the kingdom has not been stable either. Since the outbreak of the regional unrest in early 2011, King Abdullah II has replaced three prime ministers in response to low-level but steady protests. The dilemma that the Hashemites face is that unrest has spread into the ranks of the tribal forces (aka East Bankers), who until recently have served as the bedrock of the monarchy's stability. At the same time, in urban areas, the country's largest political movement, the Muslim Brotherhood, has departed from its traditional role as the loyal opposition and begun demanding that the palace share power with parliament.
Meanwhile, the economic situation in the country has deteriorated to the extent that the government was forced to cut fuel subsidies earlier this month. The public backlash to the rising energy costs has intensified the protests. In the early months of the Arab Spring, there were isolated cases of tribal youths chanting slogans against the Jordanian king and queen. Such instances of public criticism -- some even calling for the king to step down -- appear to be growing.
Still, neither the rural-based tribal principals nor the urban-centered Brotherhood appear to be interested in trying to topple the monarchy. Indeed, both have made it clear that they do not wish to see unrest turn into anarchy. But the problem is that neither institution seems to have a monopoly over the protests; youth groups and other non-brand entities are driving some of the agitation.
The Brotherhood, which has long called for the kingdom to cut ties with Israel, has once again raised this demand. Such calls have not gained traction in the past. But in the post-Arab Spring atmosphere -- and now with the conflict in Gaza -- the demand could become a tool for the Brotherhood to extract even greater concessions from the palace. Already, the king has been on the defensive, asking the Brotherhood to end its boycott of the political system and participate in upcoming parliamentary polls. Moreover, after restoring ties with Hamas earlier this year, the king has sought the mediation of Hamas chief Khaled Meshaal toward this end.
It is too early to tell what domestic political gains the Brotherhood could obtain by leveraging the fighting in Gaza. But the king's persistently defensive approach could lead to apprehension within his camp about whether he has what it takes to steer the country out of its downward spiral. Any fissures within the ranks of the Hashemite state will lead only to greater instability. Over the longer term, instability in Jordan breeds the same in the West Bank, where the ruling Palestinian National Authority has been unable to resolve its own political problems.
The always prescient NAHB index reached levels not seen since May 2006 this morning completing its sixth beat out of the last seven with its biggest jump since July (a five-sigma beat of expectation no less!). Driven by a huge 8 point jump in 'present' sales (an all-time record 13-month rise?) and a rise in the outlook driven by a huge jump in Midwest expectations. We can only look on with incredulity that this index is given any credibility at all. Perhaps a longer-term look at the index is useful to realize that while we have risen, we are merely at the 9/11/01 trough levels - as always context is king.
NAHB Index rises to May 06 levels...
The Present Sales index has risen its most ever in the last 13-months - historically this kind of epic rise in the index has capped further gains for 3-6 months...
led by Midwest Present Sales... which are back near the highs of 2005!!!
Consensus is for existing home sales to fall to an annualized pace of 4.7 million and for the housing market index to rise to 42.
Homebuilder Sentiment jumped to its highest level since 2006, hitting a reading of 46. This is potentially a big deal. On Twitter, @pawelmorski reprises this chart from DB's Torsten Slok, comparing NAHB homebuilder sentiment with Residential Construction's contribution to GDP (with a 12-month lag). Given the surge in sentiment, if the pattern continues, espect to see homebuilding make a monster contribution to the economy.
12 - Residential Real Estate - Phase II
HOUSING - Potential Increase in Household Formations due to "Headship" Surge
It's actually astonishing how much new housing starts can add to the economy.
Says Deutsche Bank's Joe Lavogna, in regards to homebuilding...
The year-to-date contribution to real GDP has been 30 bps per quarter. This should increase to 60 bps per quarter next year given the scenario highlighted above. Additionally, higher consumption of housing-related services coupled with the indirect effects from home price appreciation (i.e., wealth effects) could easily raise the housing contribution to one full percentage point. In short, housing could provide a meaningful (and critical) lift to overall economic activity at a time when other growth drivers, like exports, are slowing.
It's great that homebuilding has the potential to add 1 full percentage point per quarter, but what will keep homebuilding going?
In a recent note, Goldman economists Hui Shan, Sven Jari Stehn, and Jan Hatzius explained the forces that will drive increasing household starts/homebuilding for the next few years.
Recent housing market data have been encouraging. Household formation has started to rebound from its post-crisis lows and housing starts have shown notable gains in recent months, surging by 15% in September alone. In light of these encouraging developments, we revisit the homebuilding outlook in today’s comment.
First, we update our model of household formation, which combines projections of the headship rate—defined as the percent of people who are heads of households—with Census population projections. Our analysis suggests that annual household formation will increase from its current 1.0 million rate to 1.2 million in 2013 and 1.3 million in 2014-2016. The improvement in expected household formation is driven by an increasing headship rate among the young, population growth, and the aging population.
Second, we use our household formation projections to forecast housing starts in two steps. We first estimate excess housing supply based on a long-run relationship between the number of houses and the number of households. We then link the estimated excess housing supply to housing starts. Our analysis implies that annual housing starts will increase to 1.0 million by the end of 2013 and 1.5 million by the end of 2016.
For those not familiar with the term "headship rate" it basically just means the rate at which individuals become heads of households, something that dropped precipitously during the crisis, as more and more young people lived at home, and immigrants stayed away.
This chart shows how headship rate among 25-34 year olds really collapsed during the crisis, but is now rebounding back towards pre-crisis trends. Goldman expects the direction to keep going up.
Here are Goldman's headship projections:
So ultimately, consistent with growing headship rates among the 18-34 demographic (and only slowly declining rates among the others) Goldman sees a solid basis for more household formation and more starts.
The potential to add to GDP is significant.
12 - Residential Real Estate - Phase II
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Nov 18th - Nov 24th, 2012
EU BANKING CRISIS
GLOBAL SHADOW BANKING - Increases $6T to $67T On Total Global GDP of $70T
CONTINUED FROM ABOVE
What is notable, is that for the first time, the issue that is the lynchpin of virtually infinite shadow banking asset "creation" courtesy of rehypothecation, a topic that came to prominence with the MF Global collapse, and which allows infinite ownership chains on the same asset to be created as long as the counterparties are solvent, to fall under the spotlight, especially the legal loophole to create infinite rehypothecation chains with zero haircuts in the UK (hence geographic arbitrage as noted below). To wit:
Requirement on re-hypothecation
“Re-hypothecation” and “re-use” of securities are terms that are often used interchangeably; they do not have distinct legal interpretations. WS5 finds it useful to define “re-use” as any use of securities delivered in one transaction in order to collateralise another transaction; and “re-hypothecation” more narrowly as re-use of client assets.
Re-use of securities can be used to facilitate leverage. WS5 notes that if re-used assets are used as collateral for financing transactions, they would be subject to the proposals on minimum haircuts in section 3.1 intended to limit the build-up of excessive leverage, subject to decisions taken on the counterparty scope and collateral type (sections 3.1.4 (ii) and 3.1.4 (iii), respectively).
WS5 believes more safeguards are needed on re-hypothecation of client assets:
Financial intermediaries should provide sufficient disclosure to clients in relation to re-hypothecation of assets so that clients can understand their exposures in the event of a failure of the intermediary. This could include, daily, the cash value of: the maximum amount of assets that can be re-hypothecated, assets that have been re-hypothecated and assets that cannot be re-hypothecated, i.e. they are held in safe custody accounts.
Client assets may be re-hypothecated by an intermediary for the purpose of financing client long positions and covering short positions, but they should not be re-hypothecated for the purpose of financing the intermediary’s own-account activities.
Only entities subject to adequate regulation of liquidity risk should be allowed to engage in the re-hypothecation of client assets.
Harmonisation of client asset rules with respect to re-hypothecation is, in principle, desirable from a financial stability perspective in order to limit the potential for regulatory arbitrage across jurisdictions [ZH: ahem UK]. Such harmonised rules could set a limit on re-hypothecation in relation to client indebtedness. WS5 thinks that it was not in a position to agree on more detailed standards on re-hypothecation from the perspective of client asset protection. Client asset regimes are technically and legally complex and further work in this area will need to be taken forward by expert groups.
That the FSB has no idea how to regulate infinite rehypothecation should come as no surprise to anyone. After all, enforcing limits on creating "assets" out of thin are would limit the amount of millions Wall Street CEO can pay themselves in exchange for creating soon to be vaporized ledger entries, which they "do not recall" how those got there upon Congressional cross examination.
Finally, perhaps the most important section of all deal with what the FSB terms "Facilitation of credit creation."
Facilitation of credit creation
The provision of credit enhancements (e.g. guarantees) helps to facilitate bank and/or non-bank credit creation, may be an integral part of credit intermediation chains, and may create a risk of imperfect credit risk transfer. Non-bank financial entities that conduct these activities may aid in the creation of excessive leverage in the system. These entities may potentially aid in the creation of boom-bust cycles and systemic instability, through facilitating credit creation which may not be commensurate with the actual risk profile of the borrowers, as well as the build-up of excessive leverage. Credit rating agencies also facilitate credit creation but are outside the scope as they are not financial entities.
Examples may include:
Financial guarantee insurers that write insurance on financial products (e.g. structured finance products) and consequently facilitate potentially excessive risk taking or may lead to inappropriate risk pricing while lowering the cost of funding of the issuer relative to its risk profile. – For example, financial guarantee insurers may write insurance of structured securities issued by banks and other entities, including asset-backed securitisations, and often in the form of credit default swaps. Prior to the crisis, US financial guarantee insurers originated more than half of their new business by writing such insurance. While not all structured products issued in the years leading up to the financial crisis were insured, the insurance of structured products helped to create excessive leverage in the financial system. In this regard, the insurance contributed to the creation of large amounts of structured finance products by lowering the cost of issuance and providing capital relief for bank counterparties through a smaller capital charge for insured structures than for non-insured structures. Because of large losses on structured finance business, financial guarantee insurers have in some cases entered into settlement agreements with their counterparties under which, for the cancellation of the insurance policies, the counterparties accepted some compensation from the insurer in lieu of full recovery of losses. In other cases, financial guarantee insurers have been unable to pay losses on insured structured obligations when due. These events exacerbated the crisis in the market.
Financial guarantee companies whose funding is heavily dependent on wholesale funding markets or short-term commitment lines from banks – Financial guarantee companies may provide credit enhancements to loans (e.g. credit card loans, corporate loans) provided by banks as well as non-bank financial entities. Such financial guarantee companies may be prone to “runs” if their funding is heavily dependent on wholesale funding such as ABCPs, CPs, and repos or short-term bank commitment lines. Such run risk can be exacerbated if they are leveraged or involved in complex financial transactions.
Mortgage insurers that provide credit enhancements to mortgages and consequently facilitate potentially excessive risk taking or inappropriate pricing while lowering the cost of funding of the borrowers relative to their risk profiles – Mortgage insurance is a first loss insurance coverage for lenders and investors on the credit risk of borrower default on residential mortgages. Mortgage insurers can play an important role in providing an additional layer of scrutiny on bank and mortgage company lending decisions. However, such credit enhancements may aid in creating systemic disruption if risks taken are excessive and/or inappropriately reflected in the funding costs of the banks and mortgage companie
Why is this section so imporant? Because recall that in a Keynesian system, credit creation = money creation = growth. Without "facile" credit creation, there is no growth period. The problem, however, is that the world is approaching its peak credit capacity across the various verticals: sovereign, financial, corporate non-financial, shadow, and of course, household. The reality is that unless some existing debt is not eliminated to make space for future "credit creation", there simply can not be growth, and the problem is that wiping out credit, means the equity tranches below it are worthless. And that is the Catch 22, because wiping out equity somewhere in the world, would have dramatic implications not only on the wealth of the 0.0001% but on credit and faith in a system, which only operates due to the inherent "credit" (hence the name) and "faith" in it. Without those, ultra-modern finance crumbles like a house of cards.
In other words, while the FSB, like any other prudent regulator, is diligently warning about the dangers associated with unprecedented leverage across shadow, and all other systems, in reality what it is saying is that the only way to resolve a record debt problem is... with more debt.
And so we are back to square zero, only this time we are a few trillions dollars closer to complete systemic debt saturation.
* * *
For more on the topic of Shadow Banking, we suggest the following reading material:
The shadow banking industry has grown to about $67 trillion, $6 trillion bigger than previously thought, leading global regulators to seek more oversight of financial transactions that fall outside traditional oversight.
The FSB, a global financial policy group comprised of regulators and central bankers, found that shadow banking grew by $41 trillion between 2002 and 2011.
The share of activity based in the U.S. has declined from 44 percent in 2005 to 35 percent in 2011, moving to the U.K. and the rest of Europe.
The size of the shadow banking system, which includes the activities of
money market funds,
monoline insurers and
off- balance sheet investment vehicles,
“can create systemic risks” and “amplify market reactions when market liquidity is scarce,” the Financial Stability Board said in a report, which utilized more data than last year’s probe into the sector. “Appropriate monitoring and regulatory frameworks for the shadow banking system needs to be in place to mitigate the build-up of risks,” the FSB said in the report published on its website.
While watchdogs have reined in excessive risk-taking by banks in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008, they are concerned that lenders might use shadow banking to evade the clampdown. Michel Barnier, the European Union’s financial services chief, is planning to target money market funds in a first wave of rules for shadow banks next year.
Supervisors consider shadow banking activities to be those that allow banks to carry out business off balance sheets, as well as those which allow investors to bypass lenders and the functions they traditionally fulfill on the markets.
The FSB also targeted repurchase agreements and securities lending for tougher rules, recommending that regulators implement minimum standards for calculating losses on the different types of collateral used in the transactions.
Repurchase agreements are contracts where one investor agrees to sell a security and then buy it back at a future date and a fixed price. Securities lending agreements involve institutional investors such as pension funds lending financial instruments against cash collateral.
The group is also concerned that regulators are unable to monitor the scale of the trades. Supervisors should “collect more data on securities lending and repo exposures amongst large international financial institutions with high urgency,” the FSB said in the report.
Large firms should disclose more information about the deals to investors, the FSB said, and may be required to publish regular statements detailing how much collateral they have and what it is used for.
A bankruptcy examiner’s report found that Lehman used so- called Repo 105 transactions to move as much as $50 billion temporarily off its balance sheet to convince investors it wasn’t carrying too much debt.
Final rules will be submitted to leaders of the Group of 20 nations at a summit in St. Petersburg, Russia, next year, the FSB said. Mark Carney, chairman of the FSB, said earlier this month that regulators are holding “intense discussions” on shadow banks.
...using customer money to fund loans. The FSB is right to be concerned. Shadow banking...their leveraging power and profits. The FSB’s concerns are not limited to banks...cyclical effects, poor execution of the FSB’s plans could stifle the more productive...
...early discussions of shadow banking, the FSB was careful to say that some shadow banking...lending in the “repo” markets. The FSB has also proposed tighter rules on “rehypothecation...Tucker, Bank of England official and an FSB member, who has suggested that minimum... By Brooke Masters in London
The FSB wants stricter controls on shadow banking: Minimum repo haircuts...maintain constant net present value are among measures that the FSB will push for. (Financial Times)(FSB overview - PDF) EU makes budget plans without UK: EU officials... Kate Mackenzie
...regulating shadow banking. And in particular, the FSB likes the stable NAV requirement. From the FSB's consultative document published yesterday...of Securities Comissions came up with at the FSB's behest (scroll down for the FSB's response... Kate Mackenzie
...tougher regulations, these look increasingly likely now that the FSB is supporting similar measures to Shapiro's as part of it...Friday between President Barack Obama and leaders in Congress. FSB seeks to tame shadow banking: Non-bank lending markets face... Masa Serdarevic
...and which parts are dangerous. The latest FSB data show that “other financial institutions...is hardly a precise definition, and the FSB was careful to say that it did not have...Lord Turner, the UK regulator who led the FSB’s work. Either, they create credit... By Brooke Masters in London
Historically the bond market has been a disciplining force for policymakers. When the Fed was too soft on inflation or the fiscal deficit was out of control, interest rates spiked higher. In our view, this has changed and today the stock market is the disciplining force for Washington. Stocks have generally endorsed Fed policy. We estimate that stock prices rose a cumulative 15% in the past three years in response to Fed announcements or actions. While some investors have misgivings about what the Fed is doing, the overall market likes it. By contrast, the stock market is giving a clear no-confidence vote to fiscal policymakers. This was particularly clear when the TARP bailout plan failed to pass and at the end of the debt ceiling debate.
The Grand Distraction
The post-election discussion underscores the futility of trying to get a quick “grand bargain,” putting in place a long-term plan for deficit reduction. Speaker Boehner has emphasized that any increase in tax revenues should come from broad-based reform: “in order to garner Republican support, the President must be willing to reduce spending and shore up the entitlement programs that are the primary drivers of our debt.” While tax and entitlement reform are good long term goals, are they really feasible in a few months?
A near-term grand bargain faces not just one, but four major hurdles:
A low starting point: Neither party has even scratched the surface in presenting a feasible plan for either tax or entitlement reform, in our view. Tax reform requires tough choices around which loopholes to cut, a topic that has been carefully avoided by both parties. Medicare reform also requires tough choices around how care is rationed. Republicans have offered a voucher plan, but haven’t mentioned that it will only reduce costs if patients have large out-of-pocket expenses so they have an incentive to limit their spending. Democrats have offered to cut payments to providers, but without any impact on service. The American public needs to be educated about the true options it faces.
Bi-partisan cooperation: As was clear in the 1986 tax reform, getting complicated and contentious reforms enacted is very hard without true cooperation, particularly with relatively evenly divided government. The leaders of the two parties have to stand together and fight the special interests.
High complexity: The US tax code is extremely complicated and any attempt to change it creates many winners and losers. It has big impacts on the many special interests with tax advantages. It also redistributes income across not just income classes but between states (ironically, high-income people in the “Blue states” that voted for the Obama have the most to lose since those states tend to have high mortgages and high state and local taxes). If anything, Medicare reform is even more difficult since it involves life and death choices and there are fundamental disagreements about the relative role of markets and administration in controlling costs.
A sizable gap in view: The two parties strongly disagree about how tax reform impacts the economy. Republicans argue that most of the revenue from tax reform will come from creating a stronger economy. In the past week, President Obama countered: "What I will not do is to have a process that is vague, that says we're gonna sorta, kinda raise revenue through dynamic scoring or closing loopholes that have not been identified."
We agree that it is important to start laying the ground work for tax and entitlement reform, but we also believe it is also important to get the sequencing right. First, dismantle the fiscal cliff, and then start negotiations on the longer term solutions.
2- Sovereign Debt Crisis
JAPAN - DEBT DEFLATION
GEO-POLITICAL - Israel, Egypt and the Gaza Strip
Israel Defense Forces confirmed Nov. 14 that it had killed Ahmed Jabari, the leader of Hamas' armed wing, the Izz al-Deen al-Qassam Brigades. The airstrike that killed Jabari came a day after Israel warned that it was considering targeted assassinations in response to increasing rocket fire from Gaza. In addition to the strike on Jabari, the Israeli air force reportedly attacked a cache of 20 long-range missiles and a Gaza police station, and loud explosions are being reported in Gaza City. An IDF spokesman announced that the Israeli military was embarking on Operation Pillar of Defense, which could include a ground incursion into Gaza. The assassination of Jabari seems to have been a first salvo, one that will provoke retaliation from Hamas and that could affect Jordan and Syria. Renewed and expanded bouts of rocket fire are certain, including rockets targeting urban areas. But the question is what other operations Hamas can and will conduct. Stratfor
It was widely reported that Israel agreed to delay any war against Iran until after U.S. elections. A little over a week after the election, Israel launched a "targeted assassination" against the leader of Hamas (who Haaretz called Israel's subcontractor in Gaza). That is what started the current round of fighting.
Professor Michel Chossudovsky notes: On November 14, Hamas military commander Ahmed Jabari was murdered in a Israeli missile attack. In a bitter irony, barely a few hours before the attack, Hamas received the draft proposal of a permanent truce agreement with Israel.
The targeted assassination of Ahmed Jabari was followed by an extensive bombing campaign under Operation Pillar of Cloud. The latter consists of a carefully planned military endeavor.
Leading German newspaper Spiegel reports: Israeli Prime Minister Benjamin Netanyahu is hoping the offensive in the Gaza Strip wins his Likud party more votes in January’s election. “When the cannons roar, we see only Netanyahu and Barak on the screen, and all the other politicians have to applaud them,” wrote the daily Haaretz in a commentary published Thursday. “The assassination of (Hamas’ top military commander Ahmed) Jabari will go down in history as another showy military action initiated by an outgoing government on the eve of an election.”
Asia times writes: So why snuff out al-Jabari? Simple. Israel goes to the polls in January. Thus emerges Bibi's political campaigning in full-action mode. Campaign motto: Let's kill Palestinians. With such thrills on offer, any other Israeli political voice - even slightly dissenting - is drowned.
This escalation occurs just days after widespread reports about newly reelected Obama mulling a grand bargain with Iran over its disputed nuclear program. Barbara Slavin and Laura Rozen at Al-Monitor reported on Monday that US officials told them Washington was considering offering a “more for more” deal with Iran, based on the fuel swap deal from Obama’s first term.
So what does Israel’s impending war on defenseless Gaza have to do with Iran diplomacy? Here’s a tweet from the Tehran bureau chief for the New York Times, Thomas Erdbrink:
Forget ANY #Iran-US talks if conflict in Gaza escalates
I suspect this point was not lost on the Israeli leadership, either. So, is Netanyahu knowingly escalating military tensions in order to avoid a successful diplomatic overture? I’m speculating, but it isn’t far fetched. We know from extensive reporting, mainly in Israeli media, that in 2010 – just as President Obama requested a freeze on Jewish settlements in the West Bank with the aim of resuming peace talks – Israeli Prime Minister Benjamin Netanyahu tried to provoke Iran into a war with Israel that would eventually drag in the United States.
It reminds me of what former CIA Middle East analyst Paul Pillar referred to this week as “Netanyahu’s tension-stoking brinksmanship: to divert attention from continued Israeli occupation of Palestinian territory and inaction on the festering Israeli-Palestinian conflict.” “[T]he Iran issue,” Pillar has previously written, provides a “distraction” from international “attention to the Palestinians’ lack of popular sovereignty.” Now the situation seems reversed: Israel is escalating war with Gaza to maintain deadlock with their favorite scapegoat, Iran.
Israel, lest we forget, instigated this resumption of missile exchanges last week when two Palestinian civilians were shot and killed and
Israeli tanks intruded into Gaza, prompting Gaza militants to respond by targeting Israeli soldiers, which then gave Israel an excuse to unleash successive airstrikes. And Israel had numerous chances to pacify the situation, considering Hamas publicly offered to establish a total ceasefire and Egypt appeared about to broker a truce between the two. Israel has intentionally inched towards escalation from the beginning. Are we to believe this isn’t strategic?
THEORY 2 - A second theory is that this is a prelude to an Israeli attack on Iran. Specifically, some theorize that Israeli is trying to assassinate top Hamas militants before hitting Iran … so that Iran’s proxy Hamas cannot retaliate.
THEORY 3 - A third theory is that Israel is trying to drag Iran into a war. Given that Israeli treatment of Palestinians is perhaps the key source of hostility towards the current Israeli administration in the Arab world, starting a war in Gaza may be an attempt by Israeli to drag Iran into war.
After all, Iran backs Hamas, and Israel just assassinated a top Hamas leader after making an overture of peace to him. So some believe that Israel is attempting to poke the hornet’s nest in an attempt to justify wider war. By provoking Hamas into attacking, Israel might point to Hamas-backer Iran. Specifically, Israel may claim that pre-emptive strikes on Iran are "necessary" to undermine Hamas and make sure it doesn't obtain "weapons of mass destruction".
8 - Geo-Political Event
AMERICAN HERO: Ron Paul's Congressional Farewell Speech
On Wednesday, Rep. Ron Paul (R-Texas) delivered a 48-minute farewell address on the House floor after serving 30 years in Congress. His farewell speech is arguably the best in his career.
Time permitting, I strongly encourage everyone to play the video or at least read the full and complete text. For now ...
Here are a few highlights.
Note: For ease in reading, I dispense with my normal blockquotes (indentation).
The major stumbling block to real change in Washington is the total resistance to admitting that the country is broke. This has made compromising, just to agree to increase spending, inevitable since neither side has any intention of cutting spending.
If liberty is what we claim it is- the principle that protects all personal, social and economic decisions necessary for maximum prosperity and the best chance for peace- it should be an easy sell. Yet, history has shown that the masses have been quite receptive to the promises of authoritarians which are rarely if ever fulfilled.
In the early part of the 20th century our politicians promoted the notion that the tax and monetary systems had to change if we were to involve ourselves in excessive domestic and military spending. That is why Congress gave us the Federal Reserve and the income tax. The majority of Americans and many government officials agreed that sacrificing some liberty was necessary to carry out what some claimed to be “progressive” ideas. They failed to recognized that what they were doing was exactly opposite of what the colonists were seeking when they broke away from the British.
We Need an Intellectual Awakening. Without an intellectual awakening, the turning point will be driven by economic law. A dollar crisis will bring the current out-of-control system to its knees.
If it’s not accepted that big government, fiat money, ignoring liberty, central economic planning, welfarism, and warfarism caused our crisis we can expect a continuous and dangerous march toward corporatism and even fascism with even more loss of our liberties. Prosperity for a large middle class though will become an abstract dream.
Economic ignorance is commonplace. Keynesianism continues to thrive, although today it is facing healthy and enthusiastic rebuttals. Believers in military Keynesianism and domestic Keynesianism continue to desperately promote their failed policies, as the economy languishes in a deep slumber.
The immoral use of force is the source of man’s political problems. Sadly, many religious groups, secular organizations, and psychopathic authoritarians endorse government initiated force to change the world. Even when the desired goals are well-intentioned—or especially when well-intentioned—the results are dismal.
We now have a standing army of armed bureaucrats in the TSA, CIA, FBI, Fish and Wildlife, FEMA, IRS, Corp of Engineers, etc. numbering over 100,000. Citizens are guilty until proven innocent in the unconstitutional administrative courts.
Government in a free society should have no authority to meddle in social activities or the economic transactions of individuals. Nor should government meddle in the affairs of other nations. All things peaceful, even when controversial, should be permitted.
The Constitution established four federal crimes. Today the experts can’t even agree on how many federal crimes are now on the books—they number into the thousands. No one person can comprehend the enormity of the legal system—especially the tax code. Due to the ill-advised drug war and the endless federal expansion of the criminal code we have over 6 million people under correctional suspension, more than the Soviets ever had, and more than any other nation today, including China. I don’t understand the complacency of the Congress and the willingness to continue their obsession with passing more Federal laws. Mandatory sentencing laws associated with drug laws have compounded our prison problems.
The federal register is now 75,000 pages long and the tax code has 72,000 pages, and expands every year. When will the people start shouting, “enough is enough,” and demand Congress cease and desist.
It is claimed that war, to prevent war for noble purposes, is justified. This is similar to what we were once told that: “destroying a village to save a village” was justified. It was said by a US Secretary of State that the loss of 500,000 Iraqis, mostly children, in the 1990s, as a result of American bombs and sanctions, was “worth it” to achieve the “good” we brought to the Iraqi people. And look at the mess that Iraq is in today.
Excessive government has created such a mess it prompts many questions:
Why are sick people who use medical marijuana put in prison?
Why can’t Americans manufacture rope and other products from hemp?
Why are Americans not allowed to use gold and silver as legal tender as mandated by the Constitution?
Why do our political leaders believe it’s unnecessary to thoroughly audit our own gold?
Why can’t Americans decide which type of light bulbs they can buy?
Why is the TSA permitted to abuse the rights of any American traveling by air?
Why should there be mandatory sentences—even up to life for crimes without victims—as our drug laws require?
Why haven’t we given up on the drug war since it’s an obvious failure and violates the people’s rights? Has nobody noticed that the authorities can’t even keep drugs out of the prisons? How can making our entire society a prison solve the problem?
Why do we sacrifice so much getting needlessly involved in border disputes and civil strife around the world and ignore the root cause of the most deadly border in the world -the one between Mexico and the US?
Why does Congress willingly give up its prerogatives to the Executive Branch?
Why does changing the party in power never change policy? Could it be that the views of both parties are essentially the same?
Why did the big banks, the large corporations, and foreign banks and foreign central banks get bailed out in 2008 and the middle class lost their jobs and their homes?
Why do so many in the government and the federal officials believe that creating money out of thin air creates wealth?
Why do so many accept the deeply flawed principle that government bureaucrats and politicians can protect us from ourselves without totally destroying the principle of liberty?
Why can’t people understand that war always destroys wealth and liberty?
Why is there so little concern for the Executive Order that gives the President authority to establish a “kill list,” including American citizens, of those targeted for assassination?
Why is patriotism thought to be blind loyalty to the government and the politicians who run it, rather than loyalty to the principles of liberty and support for the people? Real patriotism is a willingness to challenge the government when it’s wrong.
Why is it is claimed that if people won’t or can’t take care of their own needs, that people in government can do it for them?
Why do some members defend free markets, but not civil liberties?
Why do some members defend civil liberties but not free markets? Aren’t they the same?
Why don’t more defend both economic liberty and personal liberty?
Why does the use of religion to support a social gospel and preemptive wars, both of which requires authoritarians to use violence, or the threat of violence, go unchallenged? Aggression and forced redistribution of wealth has nothing to do with the teachings of the world’s great religions.
Why do we allow the government and the Federal Reserve to disseminate false information dealing with both economic and foreign policy?
Why should anyone be surprised that Congress has no credibility, since there’s such a disconnect between what politicians say and what they do?
What are the greatest dangers that the American people face today and impede the goal of a free society? There are five.
1. The continuous attack on our civil liberties which threatens the rule of law and our ability to resist the onrush of tyranny.
2. Violent anti-Americanism that has engulfed the world. Because the phenomenon of “blow-back” is not understood or denied, our foreign policy is destined to keep us involved in many wars that we have no business being in. National bankruptcy and a greater threat to our national security will result.
3. The ease in which we go to war, without a declaration by Congress, but accepting international authority from the UN or NATO even for preemptive wars, otherwise known as aggression.
4. A financial political crisis as a consequence of excessive debt, unfunded liabilities, spending, bailouts, and gross discrepancy in wealth distribution going from the middle class to the rich. The danger of central economic planning, by the Federal Reserve must be understood.
5. World government taking over local and US sovereignty by getting involved in the issues of war, welfare, trade, banking, a world currency, taxes, property ownership, and private ownership of guns.
The problem we have faced over the years has been that economic interventionists are swayed by envy, whereas social interventionists are swayed by intolerance of habits and lifestyles. The misunderstanding that tolerance is an endorsement of certain activities, motivates many to legislate moral standards which should only be set by individuals making their own choices. Both sides use force to deal with these misplaced emotions. Both are authoritarians. Neither endorses voluntarism. Both views ought to be rejected.
I have come to one firm conviction after these many years of trying to figure out “the plain truth of things.” The best chance for achieving peace and prosperity, for the maximum number of people world-wide, is to pursue the cause of LIBERTY.
If you find this to be a worthwhile message, spread it throughout the land. End Paul - Start Mish
It sounds so logical, doesn't it? So why are we in this mess?
The answer is we nominate clowns like Mitt Romney and President Obama and the vast majority of people choose between Tweedle-Dum and Tweedle-Dee based on some sense of morality orperhaps some kind of handout.
The pro-life hypocrites were willing to vote from Mitt Romney who is hell bent on starting a war with Iran in spite of obvious failures in Iraq and Afghanistan, in spite of the fact that war kills real living people.
As Paul said, "500,000 Iraqis, mostly children, in the 1990s died, as a result of American bombs and sanctions." Supposedly it was “worth it” for the greater “good”. It was so "worth it" that we did it a second time, and lied to do it.
Congressional lemmings supported the war en masse. Paul didn't. Neither did I, and I am proud of it. Question of the Day
If Republicans are not in favor of deficit spending and Democrats are not either, then how the Hell do we have trillion dollar deficits?
The answer is vast majority of politicians are liars, with no backbone to stand up and tell the truth to US citizens: "the country is broke".
We cannot afford wars. We cannot afford to keep troops in 140 countries. We cannot afford to be the world's policeman.
We also cannot afford Davis-Bacon and prevailing wage laws. We cannot afford the pension promises we have made. We cannot afford collective bargaining of public unions. We cannot afford all kinds of entitlements that have been promised.
How Does It Happen?
We have all of these things because corrupt politicians buy votes of constituents who want to hear the lie that we can afford those things. In the end, that's what it's really all about.
The unions, the warmongers, the banks, and all the other special interest groups buy votes of corrupt politicians every step of the way. The "compromise" in Congress is Republican get their wars and Democrats get fiscally unsound social programs.
In the meantime, government grows bigger and bigger and bigger. And the Fed (and Congress) repeatedly bail out the banks and the wealthy at the expense of the middle class.
Hope - it appears - peaked at the start of the year in the US, following the global coordinated central bank pump which ramped it from lows to highs within a few months. All that hope - and then some - has now apparently faded. The General Business Conditions expected six months forward dropped to its lowest level since March 2009. What is perhaps worse, given the focus on jobs jobs jobs, is that for the first time since April 2009, the employment outlook for employment turned negative - suggesting firms are looking to reduce employees at the fastest rate in over three-and-a-half years. The hopium seems to have been depleted...
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