Financial War is over, we all lost.
Financial War is over, we all lost.
by Lushfun
Extracting future value into the present via leveraging credit up the pyramid scheme is likely at its’ end. U.S. financials are slowly crawling back into reality as their losses are becoming more clear. Non-performing for auto and student loans are periodically glimpsing at us and we feel the attempt by capital to automate as much as possible to extract the fleeting dollars of consumer demand into profits to keep alive their perceived solvency.
China is slowly emerging from a capital investment boom that turned bust and will lead to a deflationary tornado of pain for every actor involved. Consumers are being hit with higher prices and fleeting jobs as global demand for most product implodes. Cities of empty apartments that are unaffordable by most locals won’t be filled until they flood the market and clear at rock bottom prices. Unfortunately even if that does occur some won’t be able to afford ongoing costs with infrastructure and related upkeep as it relates to these buildings. Nationalism is periodically used to re-direct the energy of anger at the problems that aren’t being solved. Tariffs that are now being erected will only increase barriers faced by Chinese goods abroad
Japan is imploding as it monetizes its’ debt and consolidates the robbery of the elderly citizenry. It destroyed the hope of any new generation sprouting through wage stagnation and repressing its’ youth and the job market they participate in. It keeps attempting to push through inflation and the success it gains is reciprocated by the confiscation of purchasing power of its’ population. Yen is strengthened every time it is revealed that negative rates of monetized bonds essentially reduce the volume of its’ debt.
Europe is approaching Japanese solution to the same problem. Too many bad debts, too little capital for the banks to absorb them other than by making the destitution of the population an institutional priority. Europe is slowly attempting to exchange old problems for new problems in an attempt to reduce the number of problems by increasing the number of problems. I know complicated stuff, but it apparently does not work. Whom knew. Elite seems to be focused on furiously doing nothing, because attempting to lead or actually solve anything is not possible without upsetting someone. It seems strange to most bureaucrats and leading politicians that doing nothing is the right thing to do because it forces discipline, and outward scape-goating for self-created problems. There is a fundamental consensus that there has to be consensus even if the problem becomes deadly to functionality and well being of the system at large it may not solve it, for that solution may undermine the system, and whom knows where that will lead?
Across the spectrum the youth has been bamboozled by education that does not give fundamental skills or knowledge, student loans that create indentured servitude, and job market that provides meager-to-non-existing wages or ability to build up a career or an ability to survive in the system as it currently exists.
The elderly have been swindled by the mortgages and financialization of their savings into the perpetual investment holes of fluctuating markets, while being provided negative real rates of return throught the suppression of interest rates. Healthcare costs have been given the ability to carry loan shark growth rates in order to put to good use anyone falling into the system that needs care to suck out any savings they have.
Ah the bright future ahead of us, looking at the blazing sun where the global warming is shining bright, although it seems kind of cooler these past few decades. I know soon the message will change but until then we have this amongst a myriad of other useless distractions. Perhaps when virtual reality becomes the norm we can be provided virtual government services for which we pay real money but until then we can simply imagine them as they should be.
Strange times are upon us, and yet the vortex of yesterday is slowly making its way toward the horizon of the future. It is catching up with all the stupidity and pyramid schemes built on the numerical impossibilities tied into the weaving threads of corruption. Things always come undone at the worst possible moment, the question is; For whom?
Money, China, Consumers, and Cash Cycles.
Money, China, Consumers, and Cash Cycles.
by Lushfun
There seem to be a strange dissonance between purchasing power available for consumers and it being embedded in the monetary system globally. As division of available free cash was pledged to more and more long term ‘capital’ in the form of loans, bonds, and other forms there formed an idea that further and further division in favor of capital would occur indefinitely and at higher exponential rates, FOREVER. Alas, we live in a finite system. Every country that attempts to industrialize rapidly runs the risk of going into an adverse cycle both in the industrial sense and cash conversion sense. Ergo it will begin to deploy factories and capacity into a rapidly declining purchasing power environment from the consumer front, as was the point of entry for China.
What would be the fix for an environment such as this? Division of cash flows between capital and labor to re-balance participation rates in the cash cycle. Giving people ability to participate more broadly in the economy would require jacking up rates to implode asset prices and give more churn in the transactional sphere. This will not happen of course.
Devaluation games such as the one China is attempting do not work. They do not work for several reasons. Competitiveness for export products through devaluation does not rise, since generally products that are embedded in the export product have to be brought from the outside at real world prices, which have their own variations in price. Devaluation is an attempt to sequester purchasing power in the capital sector at the expense of the labor sector and the consumer at large. Ergo, it attempts to create an environment where capital that was spent on excess capacity can be profitable at the expense of the environment in which it operates, because its’ destruction is feared more than the consequences of externalities emanating from these actions.
Long term and short term these costs that appear to be inconsequential, but they destroy not just the capital in question but the overall ability of the economy to function and compete in said industry. The reason is that excess capital will be competing with depreciating capital that will gain from technological progress through the cash cycle and become more cost efficient and far more dynamic. It is tantamount to a surrounded army getting more and more reinforcements as it is getting slowly annihilated while the equipment is uses is going back in time and the adversary is slowly getting newer and newer stock.
Participation in financial markets in allowing the Yuan to float will not make it enticing for those buying it as an instrument. The reasons for these are many but the most common are it maintaining purchasing power long term, ability to have instruments that provide you with yield that is over and above inflation in said currency, and ability to use it as an asset purchasing mechanism globally. Expecting others to share in the depreciation in order to grow out the monetary base and fill it with purchasing power is a folly. It is very erroneous to think that nomination of a denomination gives it convertibility or acceptability, a market does this but it has to have ease of entry and exit.
We shall see what happens.
Turkey Dark Decade ahead? (a satirical escapade)
Turkey Dark Decade ahead? (a satirical escapade)
by Lushfun
A huge statue of Turkish former leader Erdogan is going up in Trabzon, “Bless that man” says one local named Ahmed, “if it weren’t for him none of this would have been possible” he exclaimed as his eyes welled up in emotion. It seems fitting that Laz autonomous republic under Russian guidance was formed and incorporated into Armenia giving it access to maritime trade. Once the denunciation of Treaty of Kars occurred and Kurdish independence was recognized by the United States, Russia, and Iran borders of Turkey were considerably changed. Syria regained most of Hatay province except for parts in the north that were given to the Kurds to establish maritime access. Between ten and fifteen million refugees went to Europe where their relatives helped them integrate into society. Germany had its’ population swell to 95 million as it was the most obvious choice. Most of the new arrivals were being settled in the state of Yeni Ankara formerly known as Lower Saxony.
While a blessing for some it was a true disaster for Turkey. Chaos that occurred after invasion of North-Eastern Syria and Iraq created a shock in financial markets. Lira began to plunge precipitously as most of foreign capital began to flee, capital controls were imposed and overnight it went from 3 to the dollar to 7, after a week it hit 10 and you could not get dollars anywhere but the black market, foreign reserves were almost completely depleted in futile attempts to prevent the unwinding and to refinance industry. European Union bureaucrats were running around screaming about “stability loans” and “immigration prevention subsidies” but the tumult that was unleashed could not be put back as it was before. Bread shortages occurred after two months because Russia would not export grain and other producers had already sold their forward.
On the front the army was being decimated and massive casualties collapsed any semblance of structure. The insurrection of Kurdish rebels in many places all over South-East and elsewhere created pandemonium. When the flag of PKK the ‘terrorist organization’ that Turkey tried to destroy went up in Gaziantep the expeditionary front collapsed. All reserves were thrown to re-establish Adana-Sivas-Samsun line of defense. Three hundred thousand casualties occurred when retreat north was enveloped from various forces in two cauldrons that were decimated. Millions of displaced were shutting down traffic and paralyzing the country. People went to the streets in every city demanding something, anything, but to no avail. Panic consumed every facet of daily life as famine broke out.
That was ten years ago.
Today in the year 2027 Turkey a country of 43 million people with good relations with all its’ neighbors is back on the path to prosperity. Lira is at 2 to the dollar after it was denominated and three zeros were removed, years ago. Confederation of the Straights that was modeled after Switzerland, Kurdish Republic, Syria, Laz AR within Armenia, all have good trade relations established after the government in Ankara collapsed and a treaty of complete capitulation was signed. President Erdogan in a fit of rage as he was rallying the parliament in Ankara had a stroke, but the one after him was a tranquil man that enjoyed the rebuilding process. Reparations of $150 billion dollars and 1500 tons of gold were almost completely paid off to all the actors including Cyprus which was reunited after Turkey evacuated troops from the island.
Hopefully this was somewhat entertaining and enjoyable read with food for thought.
Be well and enjoy spring.
Central Bank Olympics
Central Bank Olympics
by Lushfun
We are witnessing battle after battle on the monetary front. Central banks are in dire attempt to hide away asset losses in clouds of easy money and negative rates assessable to the inner circle. Europe has found a way to side step its’ mandate and prop-up assets and it’s magnificently leveraged banks along with them. For a time of course.
If and when rates are increased by the Federal Reserve we will witness a considerable wave of actual money run for the exit towards U.S. and elsewhere where the books aren’t as cooked nor the asset liquidation cannot occur.
The crux of the matter is that the consumer is dead, borrowing isn’t turning over, and non-performing loans are piling up. Yet, assets are being stock piled as their usefulness depreciates away in the winds of time. It is fascinating to see the bottomless pockets of electronic account mechanisms be filled and refilled to battle the actual real demand that is waining and contracting due to their intervention. All purchasing power has already been sucked out from the plurality of those that had it, however there is still an attempt of banks to somehow, someway, save themselves for another day. By this point there could have been some sort of an orderly auction mechanism to gradually liquidate portions of assets that could have garnered something, anything. This begs a very rational question. Are these assets really worthless? Assuming anything worthwhile has been already sold and re-packaged into something else, perhaps what is remaining is simply holes in the non-existing capital that prevents the complete destruction of the savings (deposit) base. In some sense this is where the pathway leads.
However, one would question the existence of savings if purchasing power does not exist in relation to being tied to said savings.
If you have money but you cannot afford to buy anything with it without credit do you really have money?
So letting asset prices implode as they should have would restore some balance in the cycle of supply demand and otherwise. The ever present garnishing of the purchasing power by the financial system, seems to have gone too far. Appropriation of contingent liabilities tied to said ‘assets’ in relation to the ever increasing demand in the future that will never materialize due to these actions only creates a further gap of space we must fall through to reach reality.
Three outcomes are simultaneously slowly occurring.
1) Parallel monetary systems where these assets are worthless and nullified. I am not talking about Bit-Coin because it is tied to notional currencies directly via exchange mechanisms. What I am talking here is purchasing power tied to non currencies and non governments.
2) Demand required for profitable industry does not supply enough liquidity to carry expanding debt loads. Ergo, companies that can produce and make money have to reduce debt loads since expanding it to buy back shares or issue dividends cannot be prudently expected to last through payback of debt AND capital(machinery etc.) needs. a) This removes profitable debt that brings revenues to the financial system and removes an asset that could be conveyed for monetary liquidity. b) Repayment of debt reduces the amount of money in the system since most of the funds are parked at the Central Bank since their redeployment into real economy is in question. Thus reinforcing the likelihood of of purchasing power snapback.
3) Flows through the system are making it systemically weak in establishing a post-moment reality. Ergo, imagine asset liquidation begins to occur and other non liquidating assets start clearing at those levels as well. Access to get credit would be nil for some time for most participants, so alternative mechanisms will spring up to provide said funding. If you are forced into using part of assets you get as currency to function and the system becomes significantly entangled where one business owns part of another to supply it with inventory and so on along the chain to address liquidity that nobody has access to anymore. Even in an improving environment dis-entangling the system will be problematic.
Be well dear reader and enjoy the clouds.
Brazil, Petrobras, and Leverage.
Brazil, Petrobras, and Leverage.
by Lushfun
Hopefully Brazil makes it out of the path it is upon today, but my sense it is unlikely. What is happening is something similar to Russia when western sanctions went into effect and credit refinancing became unavailable for oil producers and other firms as a whole. The difference is that Russia had reserves which could be used to do the refinancing in order for those firms to not implode, and drag the rest of the industrial chain that is reliant upon them into dire straits. What also makes a difference is the amount of leverage those firms had, Lukoil and Rosneft combined had less than half the debt that Petrobras has today, while production was probably larger per firm while reserves are probably similar per firm. Even if one compares Petrobras to Conoco Phillips which produces similar amounts but probably has less reserves, there is a quick realization of the difference in debt burden.
As we speak Petrobras owes somewhere in the ballpark of about 130 billion dollars in debt, around 75% of it is denominated in dollars, 5% in euros and rest in reais. The problem is not the debt per se, but the maturity waterfall. Starting next year around 16-17 billion has to be paid back annually, it is likely that refinancing would be costly from a paying rate if it was available say at 8 or 9+ percent but it is also likely it is not available as questions regarding the validity of books and sustainability of cash flow at current oil prices will make underwriting unlikely.
The impact on Brazil at large just from this one company is not to be understated. If your commodity exports fell in value due to prices and your external reserves are under pressure due to debt maturities there may be an issue with meeting the regular import and export requirements if there is a mismatch that forces you to go insolvent with the outside world by having a shortage of external currency to CLEAR your transactions. Hence the isolvency issue arising in the future say a year or two from now. Note that I didn’t even bring up issues regarding Brazil sovereign debt itself nor other firms such as Oi or Braskem which themselves have issues.
Devaluation is a symptom of attempts by the government at large to create an environment where the purchasing power of the public is re-directed to pay-down or refinance debt to both internal and external holders by freezing the aggregate purchasing power EXCEPT for the transitional amounts. The mistake longer term is that this creates lack of trust for the home currency and reinforces foreign funding since the devaluation in home currency would be looked at as a undeniable fact of life. My rationalization of reis strengthening in light of investigation into corruption schemes is the fact that it will force some cure into the public breach of trust by the government at large. It would be better if companies that cannot survive their debt fail and be essentially given to the bond holders at large once they do, this would prevent a external debt crisis in the future and allow the government to simply reshape the fiscal constraints in regards to these companies to regain their lost equity. In regard to Petrobras at least. Most of these assets are worth 2, 3 or even less times than they were when the debt was taken on, even if you discount current equity to zero. Even Petrobras is probably worth half to two-thirds of its’ debt load or probably around 80 billion in my view in regards to today and possibly foreseeable future.
The long term problem of government attempts to shape how debt is pushed outward while control of desirable institutions is kept is that it expends a very real ‘financial trust’ that creates harsher costs for every actor that needs capital other than the favored institutions. Longer term even if local lenders swap into shares the debt waterfall maturity problem does not go away neither for the company or the country as a whole. The marginal impact of paying tens of billions of dollars in a month would eliminate a lot of reserve power needed longer term to operate in a global context.
Why is this dangerous? Considering the overall situation I’ll provide an example. Imagine you are a miller of grain into flour and everyone around you is going bankrupt (competition wise). Your bank requires higher rates of interest for the equipment you have financed and the grain you buy on the world market with U.S. dollars. Everyone around you whom provides you with a service or machinery is in a similar situation and requires higher prices for their products and in a sense you have to buy some of those services & goods to operate. You in turn will require higher prices for flour to break-even, as the market buys less products as a whole because the economy is declining you need higher margins for lower volume of goods for the survivors to compensate the marginal destruction of capital that occurred in the system. Now imagine the whole supply and production chain reeling from similar winds and having capital needs that are being closed by the market refocusing on larger actors. Top down you have structural problems in regards to necessity to change the big companies for them to remain alive, but bottom-up you are sending a cyclical message as those companies with leverage get wiped out and those without capital run out of product or machinery to operate. In a sense business becomes costlier, volumes implode, margins collapse, supply chain destruction permeates, and access to raw materials if they are external becomes questionable if you have no foreign exchange outside the country. This creates a push for those that do to take them out from the bottom and pressures those at the top to close that venue. In a sense something that Argentina experienced. Mistake in focusing the direction of credit is that once the cycle in that particular industry turns against you, all credit is at risk since what was focused will not be paid back in risk-adjusted terms, nor in greater purchasing power. Thus one industrial overexpansion garners an overall industrial over contraction. The way out is not forcing credit availability since that will never flow evenly to where it is needed, but to allow the most solvent firms to survive and allow the break up of the most inefficient and insolvent. The problem is that whom decides whom is insolvent or inefficient and generally the financial sphere wants those to survive because those are the ones whom owe it credit.
How fast things occur? Well that depends on maturities and if they bunch up in certain months this year and next. How much of ‘hot money’ leaves, this is money that is in funds or by international or institutional investors parked in stocks, bonds, etc. in Brazil’s markets. Essentially hot money is foreign deposits of foreign investors that a country would be returning that they invested into the country. According to IMF, reserves are ~360 billion with convertible currencies ~333 billion for January 2016. If one goes to the bcb Chapter V.28 External Indebtedness indicators there is more clarity. If one goes to line 31 you gain some scope of how fast things really occur. Over 2015 debt service over exports rose from 39.1% to 64.6% coming in at 66.1% for January 2016. You could say a 50% growth a year, perhaps over this year it goes to 100%. You could take line 31 of debt service over goods and service exports that grew at a 66% clip over a year so you would end up with ~90% using that number. These are the actual flows into the country, the reason I look at them and not other things is because if you have to pay in foreign currency for maturities and your service costs do not go away you are limited to your reserves and the number between your left over flows. Currently reserves more or less match external debt. However, I am going to give some food for thought.
Imagine a following scenario over the course of the year, maturities of short term external debt at around 55 billion dollars, hot money outflows of say another 50 billion dollars, with balance of trade outflows of say another 45 billion, and you roughly halve the reserves from 330 to 180 billion dollars. A year later you’re left with 30 billion. So roughly two years of reserves currently. But since markets are forward discounting mechanisms, and politicians are presently rationalizing people the later tend to distribute reserves in such a fashion that the former generally are overoptimistic about what is currently happening.
In 2009 Brazil instituted a 2% fee on foreign investment capital on entry, what happened most likely is some of that issuance moved abroad. What they do not capture is the credit shifts in regards to these aspects. Imagine if you issued capital abroad and then lent it to your own firm from the subsidiary that is not wholly owned. Theoretically if the company defaults the subsidiary would become the holding company and take over the parent since it is owned by other non-related investors. I know very unlikely but imaginative scenario, however at that point the capital base of the country flips and those foreign claims you thought you had on paper are no longer yours{from a country view} from every legal stand point the foreign entity{that may have same owners} is now the owner of this firm and you essentially exported capital since you are forcing it to flow where the people that own it cannot allow it for their livelihood depends on it.
How does any of this matter? Well if you gradually clamp down on foreign exchange reserves and companies that need to use them cannot, they will attempt to front run the event. Ergo the miller above will likely shift his available capital at least partly to finance his future grain buys, however he will try to do so with credit to himself so that capital is not ‘frozen’ in the country and he can no longer use it. Thus over a period of time the country incentivizes more capital to be brought out while associated credit tied to said capital brought in, which in the long run will make flows more unstable. Precisely what they are attempting to regulate away.
Be well, dear reader and look into the sky, the clouds are good.
http://gulfnews.com/business/economy/brazil-s-debt-king-1.1634986
http://en.mercopress.com/2016/02/25/moody-s-downgrades-brazil-s-sovereign-debt-to-junk-territory
http://www.reuters.com/article/brazil-corruption-petrobras-debt-idUSL2N15V17W
http://www.bcb.gov.br/?INDICATORS
http://www.bcb.gov.br/pec/Indeco/Ingl/IE5-28i.xlsx
Accelerating depredation on Global Capital
Accelerating depredation on Global Capital
by Lushfun
In some interesting sense nobody is realizing that all these tumultuous goings on in the markets are impacting capital investment decisions. I am not talking about stock or bond markets here, but about real live projects in regard to infrastructure, power grids, water, and otherwise. This is not about China which invested and overinvested in these aspects and still needs more capacity. It is more about everyone else from U.S., Europe, Asia, Africa, and so on.
Capital investments in a negative interest rate environment when real rates of return are sub-zero may be an unpalatable proposition. If deflation accelerates due to loss recognition by banks and asset prices falling it would alter the structure of price formation across all sectors. Returning capital deployed at that point into infrastructure of any sort would be unlikely. Theoretically there would have to be a shift in how it is approached to make it attractive for capital to go there.
The problem to all this is that consumer and other end-users of infrastructure will not be looking for overhead costs to go up as their income declines, and asset prices implode around them. Shifting costs in such an environment would not end well. Gasoline being stolen from pipelines in Mexico comes to mind. Payback requirements for factory or other ground up investments would look different from today in the ways expectations would finally hit home where exponential returns on investment compound over time.
It feels as though the Central Banks acting in concert in pushing forth negative rates do not understand that a global pressure on limiting capital flows and attempts to restrain depositor movements will bring about complete and utter destruction of savings from which all of these loans and other machinations are created to feed the financial system. If you cannot deploy capital anywhere for a period of time due to risk of not getting it back, you won’t. Strange but any marginal destruction will simply re-distribute purchasing power to whatever is left over.
http://www.insightcrime.org/news-briefs/mexico-gas-vendors-forced-to-buy-fuel-stolen-by-gangs
Brexit is the first bell of Euro’s End
Brexit is the first bell of Euro’s End
by Lushfun
UK has been paying into the budget of European Union to the tune of about 15 billion euro. This is with the rebate which got lowered by Blair government. Balance of trade between UK and EU is about 230b pounds of exports for 290b pounds of imports for the last year. At an exchange of 1.27 Euro per Pound this comes out to 292b in exports and 368b in imports in Euros or around 76b euro net a year. It is extremely likely that as soon as UK leaves the competition that was suppressed by EU regulations in regard to what kind of tomatoe shapes can be exported within the common market or other non-tarriff barriers will slowly but surely gather speed. EU will not lose the market completely but they will have to compete and this will lower the overall deficit for UK.
The notion that service by the banks in London will be impacted is possible but unlikely. If the EU attempts to impose taxes on firms issuing bonds or equity in London the likelihood of success would be very low, since most would find a way around it. If they succeeded the costs for capital for those firms would move higher, and their ability to hedge by selling Forex or other contracts in London would also rise in cost. None of this would be beneficial for the firms nor their end customers. If you can’t buy a coffee contract without paying a financial transaction tax to the EU on the contract the cost will become imbedded for consumers through the supply chain.
Finally the biggest reason for UK leaving is the notion that non-Euro countries have to commit to Eurozone stability. The ESM and EFSM funds which essentially create backing by making non-Euro countries commit to back debt issued for the benefit of Eurozone bailouts.
“The EFSM issues bonds backed by all 28 European Union members and was used to help Ireland and Portugal.”
If one thinks about this long term, in the span of a decade or two at least there is a quick realization. If you are not in the Euro you are being forced to commit to it one way or another. Those commitments essentially pull you into the Euro by expanding its’ share in the incremental claims you issue and by implication decrease support for your national currency. After UK leaves and the budget contracts within the EU, there will be increased pressure to expand the Eurozone to keep it alive. At that point countries will be given some sort of ultimatum in regards to joining the Euro as promised ‘sometime in the future’ previously, or commit to it surreptitiously. Those commitments will become binding and more costly and eventually those costs will be far higher than joining the Euro. However, as other countries assert their sovereignty in regards to monetary means the Euro area will get backlash and eventual ultimatums with which it will not be able to cope. Visehrad (Poland, Czech Republic, Slovakia, Hungary) creates a common front for the countries to have an out in regards to Eurozone integration. Sure Slovakia is in the Eurozone but it has an out through the Czech relationship.
Be healthy & happy dear reader.
http://www.reuters.com/article/us-eu-britain-budget
http://forbritain.org/140518_eu_rebate_blair.pdf
http://researchbriefings.files.parliament.uk/documents/SN06091/SN06091.pdf
Negative Rates and Cash, possible futures.
Negative Rates and Cash, possible futures.
by Lushfun
There are several possible futures with negative rates and the “War on Cash”. Expectations that purchasing power would be contained within the financial system if Cash is eliminated is a folly. Any limit that is placed on deposit holders that prevents their use of their own resources leads to destruction of said purchasing power. Be it through a bail-in of depositor money into bank capital shortages or certain other ways. If said “War on Cash” ever succeeded it would lead to Chinese style mal-investments where funds would be stratified into non-liquid assets for the sake of controlling purchasing power in the future via natural claims. Ergo, you would buy a ton of copper even though you may not need it, because it would be more mobile if capital controls occurred, or if your bank decided to take a holiday and confiscate your savings.
All of this would not create inflation because every person and or business would go for assets that would have some intrinsic value or perceived value either for their business, liquidation, perceived liquidity, perceived transportability, and other attributes. In effect people would take higher discounts in the future through exchange of these ‘barter style’ funds in order to have more certainty in having something, rather than nothing. This would make the financial system not just insolvent if not on the brink of collapse but create a systemic market that shifts value and exchange outside of it. With banks losing the most and prevention of such a shift would be very unlikely.
Forcing capital and savings to eat negative rates long term will not be possible, even if most of this capital and savings is captured in the financial system and forced to not be convertible into physical cash. It will be shifted one way or another as discussed above.
Potential outcome of attempting to corral purchasing power as it is being amortized into non-performing loans will be to have no faith or backing in the system long term and every participant will be looking to get out as soon as their money clears and appear in their bank account. Ergo a perpetual bank run…
Negative rates will not trickle to end-users or corporations because they are a product of too much risk being in the system and too many losses taken on collateral. Margins for loans actually expand in a negative-rate environment, since banks have to ‘earn’ back their losses that they are not showing but carry on their loan books. The whole point of negative rates is to subsidize banks to earn enough capital to regain some measure of stability, so that they could perform the clearance mechanism in the financial system.
Be well dear reader, and fear not, for all things pass.
Lack of Global Liquidity making countries act more aggressive?
Lack of Global Liquidity making countries act more aggressive?
by Lushfun
As we approach the liquidation phase of the debt paradigm. Perhaps the internal/external dynamic as it impacts economies via debt growth and constraint by the necessity to pay it back in the future, we may see this desperation seep into the global political establishment. Every bet becomes more dear since the resources spent to establish it are no longer available in the same dynamic as before. This is can be seen in Turkey, Russia, Saudi Arabia, Iran, Syria nexus. We can even notice how lack of ability to expand trade or clear out debt is forcing China to posture outward to give it an out, if need be to re-direct any possible discontent from gradual marginal decline in global demand.
Theoretically there would be a clearance mechanism other than war for aspect such as this one. Where some countries lose their “bet” and are cleared negatively while other win and cleared positively. Ramifications of these aspects would seep into the financial system since a lot of sovereign debt is denominated in foreign currency and along with that corporate, and other debt of those countries as well. In some sense since the world was ‘stagnant’ for so long with borders not being dynamic in the sense of exchange of goods and services, the pent up energy of disequilibrium was directed elsewhere into destructive ideologies or geopolitical plans to rectify prior aspects.
We have yet to see a full unraveling of something coming to a heed, where the global financial waves are uplifted and shoock for a bit for some of the conflicts happening in the world today. If one loocks back in history the impact from various crisis changes some sort of dynamic of our lives, be it asset prices in the form of real estate, or how people are treated, or perhaps how we see the world. Right now most of the crisis that occur are somewhat in a vacuum and are only beginning to impact the world at hand. Refugees coming to Europe and setting off a right-shift in ideological lean is part of this but to a degree this was coming for a while simply was an accelerating catalyst to an already shifting world view there. Imploding debt setting off the need for ‘guaranteed income’ to maintain asset prices is more where my thoughts are going.
Money Geopolitics, Europe sinking.
Money Geopolitics, Europe sinking.
by Lushfun
Negative rates in Europe are a result of leverage, and the necessity to steal, take, replenish, financial capital in the banking system. All the risk has been taken it did not work out, it was not liquidated and the assets are on the books, or what is left of them at least. This will not work and will end in depositary bail-ins but if Europe saves the banking system, it will effectively destroy any and all productive capital deployed to do that. Ergo, attempts to keep the distribution of the financial sector’s share in the economy as is, or rising is not possible, and de-leveraging the system by “poofing” savings in order to cover up capital destroyed already will have very long term consequences.
- Trust will take decades to build back-up nation by nation and between nations.
- Euro will essentially be a dead currency either long before this occurs or right after. No solvent business will pay into a system that robbed it of part of its’ capital. Attempts to force them will create a drive to get out of the system anywhere else.
- International claims, in regards to deposits for products that were to be delivered will most like be extremely large.
- Asset implosion spiral and deflationary pressure would be so high after such an event as to become an unpredictable black swan. With people in official positions claiming “we didn’t know this would happen” after segments of markets go outside the boundaries that were ingrained in the psyche of the population in regards to; ‘how things work’.
Globally this will be akin to someone throwing a meteorite into the sea, expecting only mild waves slowly rising and falling just a few inches higher than before, and instead getting a tsunami.
Trade flow disruption will be interesting. The worst effects of demand will not be in Europe but all the marginal demand Europe provided to countries near and far. The more elastic demand for goods the worse ramifications for that country’s trade in Europe afterwards.
If one steps back it is almost like shrinking a market in nominal and absolute terms internally so much, that the price competition from external actors simply would not be able to devalue hard enough to gain competitive adjustment. Imagine for a moment goods that were sold for 1 euro to be halved not just in price, but in cost-basis for the producer so that he could be profitable from the new levels long term. On the other hand, when too many factors are in play, and people think they have thought of everything, something generally goes so very wrong, as to remind and humble them quiet certainly. Looking on the bright side, after an event such as this the financial system will most likely be the least of everyone’s problems and its’ subsequent decline into utility function will be most precipitous.
First aspect of something like this, will create a severe psychological push on values in Europe. An individualistic, consumption oriented view will be severely dented and people will seek something to anchor their being to as they search for closure of some sort across. Second aspect is the availability heuristic as it relates to responsibility will detach what people demand in regards to outcomes, something like this will not have a rationalization that could be hi-jacked and re-directed elsewhere; there will be a clear ‘actor’ responsible. Third aspect and the least understood is behavior when everything has been lost and consequences cease to exist, at least in the mind of the body politic.
Then again whom knows it is all imaginary speculation.
Be well and keep on going, things are getting ‘interesting’.
A society of goals, anchoring, and the disillusioned psyche
A society of goals, anchoring, and the disillusioned psyche
by Lushfun
If we look at things that we are told by society at large we are constantly presented with plans that we must make, ambitions we must have, wants we need, and hoops we have to jump through. By placing before you a set piece of information that gets into your perception of relative achievement in one or more areas of life you anchor to the relative position you are in, in regard to that information. What happens is you are driven forth by giving you relative discomfort to the lack of achievement in regards to “others” that are out there doing better than you and are far happier because of it. All of this is implied but the psyche plays its’ own games with us.
“Tversky and Kahneman (1974) introduced the concept of anchoring and adjustment. Specifically, when individuals need to reach some judgment–perhaps the price they are willing to pay to purchase a particular car or the number of jelly beans in a jar–they form an initial judgment from some simple feature and then adjust this estimate, called an anchor, to form a final judgment. The adjustment, however, is usually conservative, and hence the final judgment is usually biased towards the anchor.”
We have some sort of a conscious understanding of where we fit and how well we do. However, once relative anchors are set by society at large and it itself is molded in various verticals of happiness determinants all of which have median adjustments to unrealistic expectations we all end up sort of well below those marks. In some sense it is a pre-determined failure because you are setting your happiness relative to the global median of various vertical happy outcomes in various verticals that are conformed to various medians of societal manipulated “desirable” outcomes. None of these aspects create a better conscious happiness in any of us, but it does create a sense of ‘lacking’ and broken people are easier to manipulate. Easier to direct someone to ‘fix themselves’ over and over until they are completely broken down from their own internal compass. At that point their own path to happiness is so thoroughly trampled on what they think they should build, see, do, achieve, it becomes very hard to return to realistic positioning of what that person really needs for happy living. Being happy is relative to your own internal clock of desirable outcomes, setting those to the relative desires of society is generally a false paradigm. Especially today. Good thoughts on consciousness of one’s’ standing already permeates our being. How this is used is another matter.
If one goes back to my prior post about hedonic treadmill and our average median expectations are pushed in various directions on the curve of what we think would make us happy, after we come to grips and ‘adjust’ from the surrealism or false perception given by our surroundings we never adjust enough to get out of the loop, of the supposition made before. The whole premise is created on a false dichotomy. It is never about the anchor but the one whom is making the anchor, you. What you see around you, what you feel when you are exposed to various societal instructions, plans, goals, and so on is the goal. What you actually want without these things is another matter, far more interesting if one tries to get at it.
Real rebels, rebel against themselves first, define your own happiness.
Be well, and happy, as well as you can be.
http://www.psych-it.com.au/Psychlopedia/article.asp?id=135
http://jspp.psychopen.eu/article/view/492/pdf
https://lushfun.wordpress.com/2016/01/20/philosophy-of-happiness-hedonic-treadmill-aside/
Guaranteed Income Thoughts
Guaranteed Income Thoughts
by Lushfun
Imagine a world where you are guaranteed an income stream. Not much just enough for basic necessities. It may theoretically be plausible, so far Finland , Switzerland , and France have thrown out feelers to see what public thinks in essence. Theoretically in order to eat through the mountains of imaginary debt that won’t be paid back inside Europe there would have to be some sort of inflationary starter that makes it possible. Workers are losing jobs left and right and the youth is unemployed since global growth is really negative, so it could to a degree be interesting way to go. Printing money to give to the population to stimulate some sort of multiplier effect and generally allaying the unrest, and so on.
The problem with schemes like this is the distribution of costs that a system like this would set in motion. If one reflects on things in U.S., food stamps and other things, a unifying guaranteed income which essentially replaces these things in Europe. Perhaps not be such a bad thing from a social point of view. It would solve certain problems in regards to people becoming desperate and driven to change the dynamic. However, certain problems would be created, entitlement problems and what is ‘fair’. As of right now this is the only way to distribute enough money to keep the system going from imploding under the weight of financial leverage and non-written-off bad loans that accumulated due to asset-bubble mania and encouragement by the financial system at large.
I can see this being implemented. Ergo, 800 euro per person per month would be enough to create enough liquidity in order to promote some sort of wage-price-spiral. If Quebec and Canada at large move in this direction it is likely the U.S. may as well. Essentially a first-world self-liquidity loop to make sure the population has basic needs met. One begins to think about Huxley and the “Brave New World” in this context. The shift would be monumental, not just from an income-inequality stand point. If income is guaranteed then the printing press would essentially be ‘democratized’ a bit. The necessity of this action is apparent in the distraught implosion of demand for goods, services, and otherwise globally. Impact on capital, if one imagines 10-20 people pooling say 100 euro a month to fund themselves into a business and the dispersion of capital productivity into the economy would be interesting. Labor impact is far more cloudy. Any thoughts?
If we have about a billion people in this system and each gets $1,000 a month of guaranteed income the infusion of cash is $12 trillion a year. Considering that some people have money and jobs and that extra income will be taxed on that end and perhaps a third would actually be in need of the income right away, say students and elderly. The marginal spending would perhaps increase by half say $6 trillion a year. Amount of slack demand and trade boost this would provide would certainly fix a lot of problems.
There is a dark side to all of this. Government control and international government control would get a significant amount of leverage over vast populations. Political influence in certain areas would increase and allow Federal Gov’t or the EU beuracracy to cram down policy to the states and nation-states. Imagine the amount of control if your emission center is in Germany and Spain passes a law that deals with something “contrary to the spirit” of Eu constitution or laws and the emission of funds is suspended for the ‘guaranteed income’ in Spain? What do you think would happen? There would simply be hints of bureaucrats to national leaders to follow the policy of the central state and the funds to buy that power would be created out of nothing, backed by the populations of those same countries on the ground against their own self-determination in regards to laws and policy matters. This would create puppet states that are beholden to the central emission center from Foreign Policy to Family Planning and all for the price of guaranteed minimum income, printed out of thin air. Magnificent? is it not.
There are always strings, attached. Depends to whom and why, and how they are directed.
Be well dear reader.
http://www.helsinkitimes.fi/business/11243-is-finland-ready-for-a-basic-income-2.html
http://www.dw.com/en/basic-income-for-the-swiss/a-19016377
http://www.basicincome.org/basic-income/
http://jetpress.org/v24/danaher.htm#_edn37
Demand for Stuff and Positive Interest Rates
Demand for Stuff and Positive Interest Rates
by Lushfun
Watched Hugh Henry and he brought up certain things in regard to demand and China. Theoretically if we could globally push up wage rates for labor and overall labor force participation rates for a time, some suppressed demand would come back to drive the stagnation and perhaps push growth a bit. The problem is debt constraints globally will not allow asset price adjustment for the economy to clear. Liquidation in the words of Mellon
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people “
is what we need. Housing and overpriced capital asset equipment today simply does not clear the market, because banks would lose money if they were auctioned off. There is no urgency to reclaim capital since interest rates allow gradual amortization of unused property or sale at prices higher than it would otherwise claim.
Getting back to the wage rates and stimulation via pushing these up for the wage inflation spiral to take some sort of push to unwind that “suppressed” demand. Nobody wants to loose purchasing power, not the banks, not the public at large, not the government that gets to redistribute it. The only way this could occur is if a large enough ‘gulp’ of stagnation was on the horizon and fear of loosing control forced the issue at hand. Ergo essentially budget supported push to employ slack laborforce people, while similarly providing incentive for asset clearance at a faster rate from bank balance sheets.
Thus far the only thing I see is the increase of the Fed Funds rate to 1% or more. Simply to push through that inefficiently deployed capital will either clear at lower levels or be destroyed. Banks will have their margins pressed down or they liquidate and re-deploy capital into more productive assets. Whichever, they prefer while external capital is invited to participate in the process to magnify the pressure while smoothing over the system. I sense the biggest asset lenders which were the car wholesaling creditors are in the similar situation.
It is interesting that “guaranteed income schemes” from Switzerland to Finland are coming forward, yet how they would ever be funded? constant debasement of currency from those whom have to those whom have not? I don’t think that would work on a global scale. My sense it is far more likely for debts to essentially be ‘nullified’ both government and otherwise and budgets having work or financing works that keeps people busy while re-distributes more income into the system. Thus giving it some multiplier effect by pushing it through the system. Wondering how the nullification of said debt would work on a global scale.
Theoretically if the Eurozone breaks up a forced conversion of Euro denominated bonds could be a trigger for something like this. Imagine Italy going back to the lira, while issuing a law that demands all lira debt is 1-to-1 converted to the Euro, otherwise it is unenforceable under Italian law and within Italy. Similar things for France, Spain, Portugal, Greece, etc. All of these countries would instantly de-value most of their debt and currency at same time. Productive capacity would give their purchasing power more weight while the debt burden declines.
An even more interesting idea would be if the Eurozone breaks with every participant leaving. In the end the Euro would be a currency backed by nothing and the reverse could occur every country would translate depositors in their countries to the new currency 1 for 1 but the debt would remain in Euros that would eventually be manipulated into worthlessness. This is more ambitious but kind of interesting.
Be well dear reader and have good thoughts.
https://en.wikipedia.org/wiki/Andrew_W._Mellon
https://www.youtube.com/watch?v=ZWz_Pln_uuI
http://www.bloomberg.com/bw/articles/2014-01-16/inequality-fight-swiss-will-vote-on-minimum-income
http://yle.fi/uutiset/kela_to_prepare_basic_income_proposal/8422295
Global Glut
Global Glut
by Lushfun
A glut of inventory.
A glut of assets that are really liabilities, in the form of deposits, real estate, and cars.
A glut of ideology that no longer works for most countries or people at hand.
A glut of thoughts that are thinking about same things.
A glut of migrating people seeking a glut of dreams
A glut of wars and proxy wars with unresolved issues
A glut of political ambition that provides no resolution to a glut of problems
A glut of choices and a glut of emptiness along with a glut of illusions and discontent
Strange everyone wants everything and yet all this everything is preventing something from fixing the stagnation all around us. It sort of seems a bits surrealistic like you’re in a painting where figures are painted upon one another until the painting juts out from the thickness of paint. All jumbled up into a carcass of thickness without any space for reflection or introspection.
Instant gratification syndrome a la concentrated tunnel vision for the mobs of seekers, everyone rushing forward like a lemming, yet no results or beneficial outcomes to resolve the restless idiocy that keeps building upward from all venues of society. Everyone wants to do something that yields nothing to feel better about their decisions. This drive that is directed at driving somewhere, somehow, with everyone else.
In some ephemeral sense the lack of resources or ideas, seems to be the fertile ground from which something can spring up to solve a problem. Here everyone can do their individual part to create a greater whole. But the whole coalescing of problems is no longer built from the ground up, but from a top down. You are presented with a complete painting of what someone somewhere pretended into being and are kaleidascoped into choice as part of a festive crowd that needs ACTION! and so you all choose to run around like little hamsters in a wheel, never attempting to stop one-self and think.
So for today just stop yourself and reflect. What would you want? Take nine seconds it is an awful long time if you stop the world for just that short period, if only in your own head.
Be well dear reader.
http://www.brookings.edu/research/papers/2015/07/09-behavioral-govenment-politics-economic-gayer
http://plato.stanford.edu/entries/arrows-theorem/
Sticky prices, negative interest rates, and a pyramid of fools
Sticky prices, negative interest rates, and a pyramid of fools
by Lushfun
Strange how the most leveraged borrowers, banks that have leverage 10-30+ times are pushing for negative interest rates from which they could loan money at positive rates to non-leveraged borrowers the public and productive businesses.
Fascinating that destruction of savings for the sake of providing funding to banks in the form of permanent transfer of purchasing power at an ever-increasing rate is actually being promoted globally. The logical conclusion of negative rates is dissolution of monetary system completely. Stimulating demand by having people buy things they don’t need to escape destruction of their savings may work but the dis-intermediation it would cause would be one of the effects nobody may have considered.
All these struggles to prevent assets that are worthless from clearing at their natural prices that are lower than today. Curious if the public is forced to fund the financial system via negative rates what kind of shift would constitute wealth in the future? Everyone is ignoring the overarching costs of having overpriced assets with those whom have lower utility for their use.
The most dire consequences will be the most unforeseen. Why save if it is punished? Why keep deposits in a jurisdiction that taxes them by negative rates? What medium of exchange would become more desirable if the war on cash goes on? What sort of battles would we see in the war on cash? If people begin to choose inventory say boxes of wine they like that they could hypothetically barter exiting the financial system completely what would happen to money? If financing is predicated on deposits when those run at what point would those countries and banks start confiscating them to convert into equity? Precious metals and jewelry seem useful but utility of something is very subjective and perhaps the most obvious answer is usually wrong.
If we in the U.S. raise rates to 1% while, Europe and Japan go to -1% wouldn’t their marginal capital flow here and their financial systems implode? What is also completely ignored is the amount of inefficiency in having negative rates and the amount of systemic trash both in assets and how the money flows through the system clogs up how things are rationalized in the real economy. If everything is predicated on financing those things that can be financed are not just artificially bid up by having a ready currency bid for it but are set up to have the trend to do so via the underlying systemic preference in their favor. All that overhead to re-distribute capital into assets that are pushing into negative present value creates negative marginal returns in having underlying system when the velocity of its’ use drops. Returns on things that you can’t finance or can’t finance anymore becomes much harder and structural shifts in the economy become extremely painful.
Banks want to be both the credit and capital of the new system yet if history is any guide all that capital will be destroyed just like credit that was poured into things that went bust. Having the infinite ability to finance something does not imply you stopping when future returns are negative because all of these actors are guided by the present instead of the total return decades outward. Nobody pushing the negative interest rate mantra is thinking that once cash is pushed out, black and grey markets cease to exist. Demand for those markets will make certain to create an exchange medium one that is thoroughly outside the system. The problem will occur when the system is so weakened by restrictions and regulation it sets upon itself that there would be a partial switch into those exchange mediums by the real economy due to not being able to operate efficiently in the cashless society promoted.
1) http://www.zerohedge.com/news/2016-01-31/bloomberg-op-ed-calls-end-cash
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