Tag: finance

Unlike so many television shows, House of Cards shows how politicians use their power to help themselves and their friends – not the people who elected them. The fictional character at the center of the series, Frank Underwood, shows us the pitfalls of bureaucratic democracy. As professor Steve Horwitz explains in this brief clip, the series exposes the truth of public choice theory, rent seeking behavior, psychopathic tendencies, Machiavellian inclinations, corruption, and scandal. House of Cards is not that far from reality theses days and the following 3 lessons should be heeded by every voter.

 

via Zero Hedge http://ift.tt/1l3phW6 Tyler Durden

With G10 Macro data the most negative in 8 months, it is perhaps unsurprising that Goldman’s Advanced Global Leading Indicator dropped further – to its lowest in at least a year. Firmly in “slowdown” phase, Goldman remains adamant that “weather-related” inputs will mean this will all be fixed any day now (apart from the fact that the trend has been down for months now). None of the factors improved, as momentum also slowed notably.

 

 

Via Goldman Sachs,

…

 

The February Advanced reading signals a further month of activity growth deceleration and continues to locate the cycle in the ‘Slowdown’ phase. While the speed of deceleration does not appear to have increased by much, the overall level of Momentum has fallen significantly over the past six months. However, given the weather-related distortions to US data, we will wait for the Final release with the full set of components for a firmer signal.

 

…

 

None of the seven Advanced GLI components have improved in February so far but the level of deterioration has differed widely. Weakness was most pronounced in the Philadelphia Fed headline and New Orders less Inventories components (the Advanced proxies for our Global PMI and NOIN aggregates), which both declined sharply.

 

…

 

The February Advanced GLI places the global industrial cycle in the ‘Slowdown’ phase, characterised by positive but decreasing Momentum. This phase is generally less supportive for risky assets than ‘Expansion’. The February Advanced reading continues to signal deterioration in the global data, following a strong run over the summer. The drop in growth levels since August is certainly worrisome…

 

However, given that US data will likely be distorted by weather effects for some time, this could weigh on the GLI in the near term.

So we’ll ignore it?!?

via Zero Hedge http://ift.tt/1d7caLm Tyler Durden

With G10 Macro data the most negative in 8 months, it is perhaps unsurprising that Goldman’s Advanced Global Leading Indicator dropped further – to its lowest in at least a year. Firmly in “slowdown” phase, Goldman remains adamant that “weather-related” inputs will mean this will all be fixed any day now (apart from the fact that the trend has been down for months now). None of the factors improved, as momentum also slowed notably.

 

 

Via Goldman Sachs,

…

 

The February Advanced reading signals a further month of activity growth deceleration and continues to locate the cycle in the ‘Slowdown’ phase. While the speed of deceleration does not appear to have increased by much, the overall level of Momentum has fallen significantly over the past six months. However, given the weather-related distortions to US data, we will wait for the Final release with the full set of components for a firmer signal.

 

…

 

None of the seven Advanced GLI components have improved in February so far but the level of deterioration has differed widely. Weakness was most pronounced in the Philadelphia Fed headline and New Orders less Inventories components (the Advanced proxies for our Global PMI and NOIN aggregates), which both declined sharply.

 

…

 

The February Advanced GLI places the global industrial cycle in the ‘Slowdown’ phase, characterised by positive but decreasing Momentum. This phase is generally less supportive for risky assets than ‘Expansion’. The February Advanced reading continues to signal deterioration in the global data, following a strong run over the summer. The drop in growth levels since August is certainly worrisome…

 

However, given that US data will likely be distorted by weather effects for some time, this could weigh on the GLI in the near term.

So we’ll ignore it?!?

via Zero Hedge http://ift.tt/1d7caLm Tyler Durden

By now everyone knows that the Chinese credit bubble has hit unprecedented proportions. If they don’t, we remind them with the following chart of total bank “assets” (read debt) added since the collapse of Lehman: China literally puts the US to shame, where in addition to everything, the only actual source of incremental credit growth over the same time period has been the Fed as banks have used reserves as margin for risk purchases instead of lending. 

 

Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace.

 

Finally, what everyone learned over the past month, is that as the two massive, and unresolvable forces, come to a head, the first cracks in the facade are starting to appear as first one then another shadow-banking Trust product failed and had to be bailed out in the last minute.

However, as we showed last week, and then again last night, the default party in China is only just beginning as Trust failures in the coming months are set to accelerate at a breakneck pace.

 

The $64K question is will the various forms of government be able to intercept and bail these out in time, as they have been doing so far despite their hollow promises of cracking down on moral hazard: after all, everyone certainly knows what happened when Lehman was allowed to meet its destiny without a bailout – to say that the CNY10 trillion Chinese shadow banking industry will not have far more dire consequences if allowed to fall without government support is simply idiotic.

But what could be the catalyst for this outcome which inevitably would unleash the long-overdue Chinese hard landing, and with it, a new global depression?

Ironically, the culprit may be none other than the Fed with the recently instituted taper, and the gradual, at first, then quite rapid unwind of the global carry trade.

Bank of America explains:

QE and the Emerging Markets carry trade

 

The QE channel has worked through Emerging Markets and China is a key vehicle. By lowering the US government bond yields to a bare minimum, and zero –ish at the short end, a search for yield globally ensued. Emerging market banks and corporates have gone on an international leverage binge, yet another carry trade, the third in 20 years. The first one was driven by European banks, financing East Asian capex – that ended in 1997. The second one was global banks and equity-FDI supporting mainly capex in the BRICs. That ended in 2008. This time, it is increasingly non-equity: commercial banks and more importantly, the bond market – often undercounted in the BoP and external debt statistics that conventional analysis looks at.

 

Chart 9 shows the rise of EM external loans and bond issuance (both by residence and nationality). Since, end-3Q2008 to end-3Q2013, external borrowing from banks and bonds has risen USD1.9tn. Bank loans have risen by USD855bn and bond issuance in foreign currencies by nationality is up USD1,042bn. In the prior five-year period (i.e. end-3Q2003 – end-3Q2008), forex bond issuance rose only USD432bn. Clearly, the importance of external bond issuance is rising. See Table 5 for details.

 

In China, since, end-3Q2008 to end-3Q2013, outstanding external borrowing from banks and bonds has gone from USD207bn to USD849n – a net rise of USD655bn. Outstanding bank loans are up from USD161bn to USD609bn – a net rise of USD464bn. Bond issuance in foreign currencies by nationality is up from USD46bn to USD240bn – a net rise of USD191bn. In the prior five-year period (ie, end-3Q2003 – end-3Q2008), forex bond issuance rose only USD28bn in China. Clearly, the importance of external bond issuance is rising in China.

 

 

There is more to this story.

 

As mentioned earlier, for externally-issued bonds, USD1,042bn has been raised by the nationality of the EM borrower since end-3Q 2008, but USD724bn by residence of the borrower – a gap of USD318bn, or 44%. This undercount is USD165bn in China, USD100bn in Brazil, USD62bn in Russia, and USD37bn in India. The carry trade this time around was helped substantially by access to the bond market, especially from overseas affiliates of EM banks and corporations.

 

There are a lot of moving parts in the balance of payments that finally affect the change in international reserves at any EM central bank – eg, the current account, portfolio equity investment and direct equity investment, and debt flows – both from the bond market and lending from banks. We focus on the link between these debt flows and the international reserves in China. As Table 5 below shows, China’s external debt – from bond issuance and forex borrowing from banks – rose USD655bn during 3Q08-3013.

 

 

We posit that this large rise was in part driven by the carry trade offered up by QE – China banks and corporates issued substantial forex-denominated bonds, and borrowed straight loans from international banks. We recognize the caveat that correlation does not imply causation. The USD655bn rise in China debt issuance is highly correlated to the Fed’s balance sheet since late-2008. As Chart 11 shows, the rise in China debt issuance of USD 655bn has (along with FDI and the C/A surplus), boosted international reserves by USD1,773bn since late-2008. Also, as Chart 11 shows, the USD1,773bn rise in China international reserves mirrors the rise of USD2,585bn in the EM monetary base. Lastly, the rise of China’s monetary base of USD2,585bn correlates well with the USD10.9tr rise in China’s broad money expansion.

 

 

 

As the Fed tapers, and the size of its balance sheet stabilizes/contracts, we should expect this sequence to reverse. Confidence is a fragile membrane. Not only does the Fed’s balance sheet matter as a source of funds, but we believe so does the attractiveness of the recipient of the carry trade – and the trust in its collateral. As Gary Gorton puts it…

 

The output of banks is money, in the form of short-term debt which is used to store value or used as a transaction medium. Such money is backed by a portfolio of bank loans in the case of demand deposits, or by collateral in the form of a specific bond in the case of repo. The backing is designed to make the bank debt as close to riskless as possible — in fact, so close to riskless than nobody wants to really do any due diligence on the money, just transact with it. But the private sector cannot produce riskless debt and so it can happen that the backing collateral is questioned. This typically happens at the peak of the business cycle. If its value is questioned, it loses its “moneyness” so no one wants it, and cash is preferred. But as we know, if everyone wants their cash at the same moment, their demands cannot be satisfied. In this sense, the financial system is insolvent. (interview with the FT) 

 

What makes sense for an individual carry trade – borrow low, invest at higher rates – falls prey to the fallacy of composition, when too many engage in the same carry trade. And eventually question the underlying collateral, now huge, and potentially suspect. China is a case in point. If our colleagues David Cui and Bin Gao are right, the trust sector in China could create rollover risks that reverse a gluttonous carry trade within China, but partly financed overseas. In China’s case, this trade was between low global interest rates, low Chinese deposit rates, expectations of perpetual RMB appreciation on the one hand, and higher investment returns promised by Trusts on the other. A part of the debt funds raised overseas, we suspect were put to work in this Trust carry trade. The HK-based banks are big participants in intermediating the China carry trade – as Chart 12 shows, their net lending to China went from 18% of HK GDP in 2007 to 148% in late-2013.

 

There are always fancy names given to carry trades – financial liberalization of capital accounts, the Bangkok International Banking Facility, currency internationalization, etc. We remain skeptics of these buzzwords.

 

 

 

The potential consequences of Trust defaults and a China carry trade unwind

 

1. If the EM carry trade diminishes as a consequence of a changed Fed policy and/or less attractive risk-adjusted returns in EMs as collateral quality is questioned, the sources of China’s forex reserve accumulation will need to change. Perhaps to bigger current account surpluses, more equity FDI and portfolio investment through privatization and more open equity markets. If that does not happen, expanding the Chinese monetary base might require PBOC to increase net lending to the financial system and/or monetize fiscal deficits (this last part has not worked so well in EMs).

 

2. Potential asset deflation is a risk, as the carry trades diminish/unwind. Property prices are at risk – the collateral value for China’s financial systems. This is not a dire projection – it simply seeks to isolate the US QE as a key driver of China’s monetary policy and asset inflation, and highlights the magnitudes involved, and the transmission mechanism. Investors should not imbue stock-price movements and property price inflation in China with too much local flavor – this is mainly a US QE-driven story, in our view.

 

3. Currently, China’s real effective exchange rate is one of the strongest in the world. Concerns about China’s Trust sector, and its underlying collateral value, sees some of this carry trade unwound, the RMB could be under pressure.

 

 

4. Given HK’s role in the China carry trade, HK property prices and its banking system should be watched carefully for signs of stress.

 

5. UK, US, and Japan banking systems have been active lenders to China since QE. They should be on watch if the Trust rollover risk materializes and creates a growth shock in China. See Chart 15.

 

 

 

6. Safe haven bids for DM government bonds, overseas property and precious metals might emerge from China.

 

Could the party go on? Yes, if for some reason a significant deterioration in the US labor market, or a deflationary shock from China, or any other surprise that could lead to a cessation of the US tapering could prolong this carry trade. This is not the house base case. We believe it is better to start preparing for a post-QE world. As one of our smartest clients told us: “the main theme in the past five years was QE. If that is coming to an end, investments and themes that worked in the past five years must therefore be questioned.” We agree.

* * *

Yes, Bank of America said all of the above – every brutally honest last word of it.

The question, however, in addition to “why”, is whether the Fed also agrees with BofA’s stunningly frank, and quite disturbing conclusion, perhaps finally realizing that aside from the US, the biggest house of cards that would topple once the “flow”-free emperor is exposed in his nudity, is that of the world’s largest “growth” (and credit) dynamo of the past two decades – China. Because, as noted above, if Lehman’s collapse was bad, a deflationary collapse brought on by Chinese hard landing coupled with a full unwind of the global carry trade, would be disastrous and send the world into a depression the likes of which have never before been seen.

Finally, for those who want the blow by blow, here is BofA’s tentative take of what the preliminary steps of the next global great depression will look like:

If we do experience a sizable default, the knee-jerk market reaction will be cash hoarding since it will strike as a big surprise. Thus, we expect the repo rate to rise first, while the long term government bond would get bid due to risk aversion flows.

 

However, what follows will be quite uncertain, aside from PBoC injecting liquidity and easing monetary policy to help short term rate come down. It has been proven again and again the Chinese government will get involved and be proactive. The bond market reaction will be different depending on the government solution.

Alas, at that point, not even the world’s largest bazooka will be enough.

At this point one should conclude that reality – through massive, unprecedented liquidity injections – has been deferred long enough. It is time to let the markets finally return to some semblance of uncentrally-planned normalcy: there is a reason why nature abhors a vacuum. Even if it means the eruption of the very painful grand reset, washing away decades of capital misallocation, lies and ill-gotten wealth, so very overdue.

via Zero Hedge http://ift.tt/1bPWQZ8 Tyler Durden

By now everyone knows that the Chinese credit bubble has hit unprecedented proportions. If they don’t, we remind them with the following chart of total bank “assets” (read debt) added since the collapse of Lehman: China literally puts the US to shame, where in addition to everything, the only actual source of incremental credit growth over the same time period has been the Fed as banks have used reserves as margin for risk purchases instead of lending. 

 

Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace.

 

Finally, what everyone learned over the past month, is that as the two massive, and unresolvable forces, come to a head, the first cracks in the facade are starting to appear as first one then another shadow-banking Trust product failed and had to be bailed out in the last minute.

However, as we showed last week, and then again last night, the default party in China is only just beginning as Trust failures in the coming months are set to accelerate at a breakneck pace.

 

The $64K question is will the various forms of government be able to intercept and bail these out in time, as they have been doing so far despite their hollow promises of cracking down on moral hazard: after all, everyone certainly knows what happened when Lehman was allowed to meet its destiny without a bailout – to say that the CNY10 trillion Chinese shadow banking industry will not have far more dire consequences if allowed to fall without government support is simply idiotic.

But what could be the catalyst for this outcome which inevitably would unleash the long-overdue Chinese hard landing, and with it, a new global depression?

Ironically, the culprit may be none other than the Fed with the recently instituted taper, and the gradual, at first, then quite rapid unwind of the global carry trade.

Bank of America explains:

QE and the Emerging Markets carry trade

 

The QE channel has worked through Emerging Markets and China is a key vehicle. By lowering the US government bond yields to a bare minimum, and zero –ish at the short end, a search for yield globally ensued. Emerging market banks and corporates have gone on an international leverage binge, yet another carry trade, the third in 20 years. The first one was driven by European banks, financing East Asian capex – that ended in 1997. The second one was global banks and equity-FDI supporting mainly capex in the BRICs. That ended in 2008. This time, it is increasingly non-equity: commercial banks and more importantly, the bond market – often undercounted in the BoP and external debt statistics that conventional analysis looks at.

 

Chart 9 shows the rise of EM external loans and bond issuance (both by residence and nationality). Since, end-3Q2008 to end-3Q2013, external borrowing from banks and bonds has risen USD1.9tn. Bank loans have risen by USD855bn and bond issuance in foreign currencies by nationality is up USD1,042bn. In the prior five-year period (i.e. end-3Q2003 – end-3Q2008), forex bond issuance rose only USD432bn. Clearly, the importance of external bond issuance is rising. See Table 5 for details.

 

In China, since, end-3Q2008 to end-3Q2013, outstanding external borrowing from banks and bonds has gone from USD207bn to USD849n – a net rise of USD655bn. Outstanding bank loans are up from USD161bn to USD609bn – a net rise of USD464bn. Bond issuance in foreign currencies by nationality is up from USD46bn to USD240bn – a net rise of USD191bn. In the prior five-year period (ie, end-3Q2003 – end-3Q2008), forex bond issuance rose only USD28bn in China. Clearly, the importance of external bond issuance is rising in China.

 

 

There is more to this story.

 

As mentioned earlier, for externally-issued bonds, USD1,042bn has been raised by the nationality of the EM borrower since end-3Q 2008, but USD724bn by residence of the borrower – a gap of USD318bn, or 44%. This undercount is USD165bn in China, USD100bn in Brazil, USD62bn in Russia, and USD37bn in India. The carry trade this time around was helped substantially by access to the bond market, especially from overseas affiliates of EM banks and corporations.

 

There are a lot of moving parts in the balance of payments that finally affect the change in international reserves at any EM central bank – eg, the current account, portfolio equity investment and direct equity investment, and debt flows – both from the bond market and lending from banks. We focus on the link between these debt flows and the international reserves in China. As Table 5 below shows, China’s external debt – from bond issuance and forex borrowing from banks – rose USD655bn during 3Q08-3013.

 

 

We posit that this large rise was in part driven by the carry trade offered up by QE – China banks and corporates issued substantial forex-denominated bonds, and borrowed straight loans from international banks. We recognize the caveat that correlation does not imply causation. The USD655bn rise in China debt issuance is highly correlated to the Fed’s balance sheet since late-2008. As Chart 11 shows, the rise in China debt issuance of USD 655bn has (along with FDI and the C/A surplus), boosted international reserves by USD1,773bn since late-2008. Also, as Chart 11 shows, the USD1,773bn rise in China international reserves mirrors the rise of USD2,585bn in the EM monetary base. Lastly, the rise of China’s monetary base of USD2,585bn correlates well with the USD10.9tr rise in China’s broad money expansion.

 

 

 

As the Fed tapers, and the size of its balance sheet stabilizes/contracts, we should expect this sequence to reverse. Confidence is a fragile membrane. Not only does the Fed’s balance sheet matter as a source of funds, but we believe so does the attractiveness of the recipient of the carry trade – and the trust in its collateral. As Gary Gorton puts it…

 

The output of banks is money, in the form of short-term debt which is used to store value or used as a transaction medium. Such money is backed by a portfolio of bank loans in the case of demand deposits, or by collateral in the form of a specific bond in the case of repo. The backing is designed to make the bank debt as close to riskless as possible — in fact, so close to riskless than nobody wants to really do any due diligence on the money, just transact with it. But the private sector cannot produce riskless debt and so it can happen that the backing collateral is questioned. This typically happens at the peak of the business cycle. If its value is questioned, it loses its “moneyness” so no one wants it, and cash is preferred. But as we kno
w, if everyone wants their cash at the same moment, their demands cannot be satisfied. In this sense, the financial system is insolvent. (interview with the FT) 

 

What makes sense for an individual carry trade – borrow low, invest at higher rates – falls prey to the fallacy of composition, when too many engage in the same carry trade. And eventually question the underlying collateral, now huge, and potentially suspect. China is a case in point. If our colleagues David Cui and Bin Gao are right, the trust sector in China could create rollover risks that reverse a gluttonous carry trade within China, but partly financed overseas. In China’s case, this trade was between low global interest rates, low Chinese deposit rates, expectations of perpetual RMB appreciation on the one hand, and higher investment returns promised by Trusts on the other. A part of the debt funds raised overseas, we suspect were put to work in this Trust carry trade. The HK-based banks are big participants in intermediating the China carry trade – as Chart 12 shows, their net lending to China went from 18% of HK GDP in 2007 to 148% in late-2013.

 

There are always fancy names given to carry trades – financial liberalization of capital accounts, the Bangkok International Banking Facility, currency internationalization, etc. We remain skeptics of these buzzwords.

 

 

 

The potential consequences of Trust defaults and a China carry trade unwind

 

1. If the EM carry trade diminishes as a consequence of a changed Fed policy and/or less attractive risk-adjusted returns in EMs as collateral quality is questioned, the sources of China’s forex reserve accumulation will need to change. Perhaps to bigger current account surpluses, more equity FDI and portfolio investment through privatization and more open equity markets. If that does not happen, expanding the Chinese monetary base might require PBOC to increase net lending to the financial system and/or monetize fiscal deficits (this last part has not worked so well in EMs).

 

2. Potential asset deflation is a risk, as the carry trades diminish/unwind. Property prices are at risk – the collateral value for China’s financial systems. This is not a dire projection – it simply seeks to isolate the US QE as a key driver of China’s monetary policy and asset inflation, and highlights the magnitudes involved, and the transmission mechanism. Investors should not imbue stock-price movements and property price inflation in China with too much local flavor – this is mainly a US QE-driven story, in our view.

 

3. Currently, China’s real effective exchange rate is one of the strongest in the world. Concerns about China’s Trust sector, and its underlying collateral value, sees some of this carry trade unwound, the RMB could be under pressure.

 

 

4. Given HK’s role in the China carry trade, HK property prices and its banking system should be watched carefully for signs of stress.

 

5. UK, US, and Japan banking systems have been active lenders to China since QE. They should be on watch if the Trust rollover risk materializes and creates a growth shock in China. See Chart 15.

 

 

 

6. Safe haven bids for DM government bonds, overseas property and precious metals might emerge from China.

 

Could the party go on? Yes, if for some reason a significant deterioration in the US labor market, or a deflationary shock from China, or any other surprise that could lead to a cessation of the US tapering could prolong this carry trade. This is not the house base case. We believe it is better to start preparing for a post-QE world. As one of our smartest clients told us: “the main theme in the past five years was QE. If that is coming to an end, investments and themes that worked in the past five years must therefore be questioned.” We agree.

* * *

Yes, Bank of America said all of the above – every brutally honest last word of it.

The question, however, in addition to “why”, is whether the Fed also agrees with BofA’s stunningly frank, and quite disturbing conclusion, perhaps finally realizing that aside from the US, the biggest house of cards that would topple once the “flow”-free emperor is exposed in his nudity, is that of the world’s largest “growth” (and credit) dynamo of the past two decades – China. Because, as noted above, if Lehman’s collapse was bad, a deflationary collapse brought on by Chinese hard landing coupled with a full unwind of the global carry trade, would be disastrous and send the world into a depression the likes of which have never before been seen.

Finally, for those who want the blow by blow, here is BofA’s tentative take of what the preliminary steps of the next global great depression will look like:

If we do experience a sizable default, the knee-jerk market reaction will be cash hoarding since it will strike as a big surprise. Thus, we expect the repo rate to rise first, while the long term government bond would get bid due to risk aversion flows.

 

However, what follows will be quite uncertain, aside from PBoC injecting liquidity and easing monetary policy to help short term rate come down. It has been proven again and again the Chinese government will get involved and be proactive. The bond market reaction will be different depending on the government solution.

Alas, at that point, not even the world’s largest bazooka will be enough.

At this point one should conclude that reality – through massive, unprecedented liquidity injections – has been deferred long enough. It is time to let the markets finally return to some semblance of uncentrally-planned normalcy: there is a reason why nature abhors a vacuum. Even if it means the eruption of the very painful grand reset, washing away decades of capital misallocation, lies and ill-gotten wealth, so very overdue.

via Zero Hedge http://ift.tt/1bPWQZ8 Tyler Durden

A considerable area of investor concern rmains on emerging economies. As UBS’ Larry Hatheway notes, the last thing that vulnerable emerging economies need at the moment is worries about a global growth slowdown, if that is indeed what is happening. That’s particularly true given that one of the relative few bright spots in the emerging complex of late was improved PMIs, reflecting some pickup in global manufacturing, exports and trade. While that lift might not help the down-trodden commodity producers within the emerging complex, it is helpful for the more manufacturing-oriented economies of Asia, selected parts of EMEA, or Latin America. But as Hatheway warns below, emerging vulnerability is about much more than just growth.

Emerging economy vulnerabilities (via UBS’ Larry Hatheway)

It reflects the convergence of several challenges, including unsustainable increases in indebtedness (relative to GDP), current account deterioration, and the prospect of tighter global liquidity (and funding) conditions as the Fed proceeds with its tapering program.

The risks inherent in the emerging complex have been well documented. And to be sure, China is not the major concern. Recent attention-getting headlines about wobbly trusts are, of course, useful reminders of China’s overly rapid credit growth and misallocation of resources, but it is unlikely that a ‘trust bust’ heralds a growth-destabilizing credit event in China.

But when we turn to the ‘fragile five’ (and others with similar characteristics), we note considerable risks to emerging market asset returns, and potentially to global financial stability and growth.

Much has been made of the facts that current account deficit financing among emerging economies has been mainly via local currency-denominated portfolio inflows and that the countries in question have flexible monetary and exchange rate policies. Hence, a repeat of the Asian balance of payments crisis in its form and with its consequences (e.g., default on foreign currency liabilities) is less likely.

That’s correct, but those facts alone don’t ensure benign outcomes for either the countries at risk or for global capital markets. To begin, countries such as Turkey or South Africa, which have persistent large current account deficits, will have to reduce domestic spending relative to domestic output in order to return to more sustainable positions. Given limited potential for either a strong cyclical lift in the demand for their exports or for an autonomous increase in domestic output, domestic demand will have to slow to achieve a more sustainable external balance.

Growth can either slow gradually, with the help of the right policies or abruptly, via a sudden stop of foreign financing.

Some might argue that exchange rate depreciation can also facilitate the adjustment. Possibly, but the potential for currency depreciation is limited by several factors. First, domestic rates of inflation in the India, Brazil, Turkey or South Africa are relatively high. Weaker exchange rates will push up import prices. As a result, changes in real exchange rates are likely to be small. Second, and perhaps more worrisome, is the reality that reliance on local-currency portfolio inflows means that currency risk has shifted to the foreign holders of those assets. If they begin to get nervous about currency risk they may try to liquidate existing holdings and balk at financing prevailing current account deficits. In either case, moderate currency depreciation could become a rout. Domestic interest rates would spike, putting a sharp brake on growth. And that could lead to social and political unrest.

That’s why we struggle to agree with recent comments by some high-profile investors, extolling the valuation case for emerging equities (mostly) or local currency debt markets. Sure, emerging equity valuations are low. But investors are not looking for value alone. Their primary focus remains on earnings. And if big chunks of the emerging complex are likely to experience slower growth (as external demand remains sluggish and domestic demand softens), then profit margins and asset turnover will fail to impress. Equally, if emerging currencies wobble it will introduce greater volatility into dollar- (or euro-) denominated returns from local currency holding. As a result, ex ante emerging Sharpe ratios don’t look very attractive.

The implication is that a ‘Goldilocks’ scenario is required for emerging equity, bond and currency markets to outperform. Global growth will have to be strong enough to facilitate the required improvement in net exports, but not so strong as to elicit a re-think about the Fed’s gradual approach to monetary policy—one that would send bond yields higher and exacerbate current account financing. Goldilocks scenarios are, of course, very nice. But they aren’t terribly frequent or long-lasting.

 

via Zero Hedge http://ift.tt/1d6YKz2 Tyler Durden

By: Chris Tell

“Oh, but he’s ex-Goldman Sachs.”

This post is dedicated to our friend Greg Miller of Myanmar Capital Partners who, though he’s an “ex-hot shot investment banker”, remains an exceptional individual and a talented professional.

In our world of private equity, the statement above tends to crop up often. It is brandished like the trident of King Triton. A badge of honor, a statement that is meant to end all concerns, to eliminate any doubts.

Since when does JPM, Goldman, RBS or any of the large investment banks provide a benchmark for anything but an insatiable greed, avarice and a propensity for double-dealing?

I believe the days of my hearing this statement are numbered and here’s why:

Goldman Sach’s prop desk earns unreal returns. We know this and are envious. Who wouldn’t be? I too want a Bentley. I’ve always thought that such an exceptionally ugly car ought to either be used as a hearse, or be rallied across back country roads at speed, and I have quite a few lonely country roads where I am right now.

I’ve not had the “pleasure” of working on a Goldman prop desk, but I have spent time at similar institutions and can tell you that the traders are absolutely NOT genetically superior to the guy in the next cubicle. Nope, they’re mostly late 20s, sometimes early 20s guys. Some are great, others are arrogant morons. Nothing unusual either way.

The reason the prop desks are so profitable is that unlike other market participants they have an edge. They can and do trade against their client books by front running them.

As Nomi Prins, a former Goldman trading strategist states:

“Any information that you get, particularly if it’s going to move the markets a lot, is – is – is going to filter into the trading positions you take.”

If you had the power to move a market with your client’s money, and you further knew that you could take the other side of that trade and buy yourself a Lamborghini at the end of the year…what do you do?

Matt Taibbi, Rolling Stone’s exceptionally brash and talented journalist (we need more of these guys) exposed money laundering at HSBC here and Wachovia was exposed here. After being caught red-handed laundering hundreds of billions of dollars for drug cartels, not a single person has been arrested or even lost so much as a job.

Meanwhile these same “crack” government watchdogs are busy apprehending uber criminals like Charlie Shrem, the CEO and founder of BitInstant. Shrem was arrested at the end of January on charges of money laundering, operating an unlicensed money transmitting business and willful failure to file a suspicious activity report.

REALLY? How do you spell Hypocrisy?

Where this gets interesting is not in what I care to think about Goldman or any such institution. What I think is largely irrelevant. What is important is what the herd thinks, and their exists a rising global sentiment against these bankers…Jewish bankers in particular. Rightly or wrongly, banking is considered to be a Jewish profession.

Martin Armstrong believes that the bankers have just a few short months left before they become targeted. You can read Martin’s thoughts on this in a post entitled, “Gangster bankers too big to jail”, and another great piece, “Anti-Semitic and Pro-Nazi Activities Rising”, where he states:

“Of course the protection of the NY bankers has nothing to do with the fact that they are Jewish in general. Nevertheless, this is always how the anti-Semitic and pro-Nazi activities movements emerge by connecting the dots and blaming someone for the economic decline.

The worse the economy gets, the higher the probability we will see a major outbreak in anti-Semitic and pro-Nazi activities.”

If you were of Japanese origin, living in the US during WWII you were targeted simply for being Japanese. We’re heading for similar times. In times of economic distress people act irrationally and look for someone to blame…anyone. Since Wall Street is heavily weighted towards Jewish gentlemen, they make an easy target.

In a similar vein, the backlash against “foreigners” is coming in Europe. I just read news that Switzerland has just dealt the first decisive blow to the European Union, and ultimately the Euro itself, by effectively shutting their borders.

Economic woes typically precede civil and sometimes cross-border strife. It is extremely important to understand these risks as they have serious implications for Gold, The Dow and European Markets.

There are reasons to consider investing outside of “traditional markets”. We will be in Sri Lanka in a few weeks meeting with our exclusive syndicate. Sri Lanka is a country which has enjoyed a healthy dose of aggression, economic strife and missed opportunities. Right now betting on a country such as Sri Lanka, rather than many European countries may sound absurd to those reading the dishwater that masquerades as financial news, but it may actually make sense.

We frankly don’t know, which is one reason we are going to take an initial look at the place to learn more. This report provides a good overview on the country for anyone interested in digging a bit deeper.

What I do know is that the problems that are now coming to the surface in Europe are not unique, new or startling in any way. They are the natural result of the intense fraud and corruption that has been foisted on the citizenry.

When bankers, together with politicians blow up the economy and then turn around and bail each other out, and create regulations to impede business growth and capital flows, even an intelligent 5th grader will be able to tell you that things are likely to turn ugly.

It makes me wonder how long the likes of Goldman Sachs, and other such institutions will be used as credentials of value, rather than hidden from view?

Will “Oh he’s from Goldman” become a statement of ridicule, something to be ashamed of, something that even puts one in danger…like being accused of being a Ku Klux clan member whilst walking through Harlem?

To be clear, I have nothing against bankers, Jewish folks, Arabs or even those who don’t speak English as a first language…the Australians and Kiwis for example. I’ve been known to live amongst them quite peacefully.

– Chris

“I’m doing Gods work.” – Lloyd Blankfein – CEO, Goldman Sachs

via Zero Hedge http://ift.tt/1cvpKLV Capitalist Exploits

By: Chris Tell

“Oh, but he’s ex-Goldman Sachs.”

This post is dedicated to our friend Greg Miller of Myanmar Capital Partners who, though he’s an “ex-hot shot investment banker”, remains an exceptional individual and a talented professional.

In our world of private equity, the statement above tends to crop up often. It is brandished like the trident of King Triton. A badge of honor, a statement that is meant to end all concerns, to eliminate any doubts.

Since when does JPM, Goldman, RBS or any of the large investment banks provide a benchmark for anything but an insatiable greed, avarice and a propensity for double-dealing?

I believe the days of my hearing this statement are numbered and here’s why:

Goldman Sach’s prop desk earns unreal returns. We know this and are envious. Who wouldn’t be? I too want a Bentley. I’ve always thought that such an exceptionally ugly car ought to either be used as a hearse, or be rallied across back country roads at speed, and I have quite a few lonely country roads where I am right now.

I’ve not had the “pleasure” of working on a Goldman prop desk, but I have spent time at similar institutions and can tell you that the traders are absolutely NOT genetically superior to the guy in the next cubicle. Nope, they’re mostly late 20s, sometimes early 20s guys. Some are great, others are arrogant morons. Nothing unusual either way.

The reason the prop desks are so profitable is that unlike other market participants they have an edge. They can and do trade against their client books by front running them.

As Nomi Prins, a former Goldman trading strategist states:

“Any information that you get, particularly if it’s going to move the markets a lot, is – is – is going to filter into the trading positions you take.”

If you had the power to move a market with your client’s money, and you further knew that you could take the other side of that trade and buy yourself a Lamborghini at the end of the year…what do you do?

Matt Taibbi, Rolling Stone’s exceptionally brash and talented journalist (we need more of these guys) exposed money laundering at HSBC here and Wachovia was exposed here. After being caught red-handed laundering hundreds of billions of dollars for drug cartels, not a single person has been arrested or even lost so much as a job.

Meanwhile these same “crack” government watchdogs are busy apprehending uber criminals like Charlie Shrem, the CEO and founder of BitInstant. Shrem was arrested at the end of January on charges of money laundering, operating an unlicensed money transmitting business and willful failure to file a suspicious activity report.

REALLY? How do you spell Hypocrisy?

Where this gets interesting is not in what I care to think about Goldman or any such institution. What I think is largely irrelevant. What is important is what the herd thinks, and their exists a rising global sentiment against these bankers…Jewish bankers in particular. Rightly or wrongly, banking is considered to be a Jewish profession.

Martin Armstrong believes that the bankers have just a few short months left before they become targeted. You can read Martin’s thoughts on this in a post entitled, “Gangster bankers too big to jail”, and another great piece, “Anti-Semitic and Pro-Nazi Activities Rising”, where he states:

“Of course the protection of the NY bankers has nothing to do with the fact that they are Jewish in general. Nevertheless, this is always how the anti-Semitic and pro-Nazi activities movements emerge by connecting the dots and blaming someone for the economic decline.

The worse the economy gets, the higher the probability we will see a major outbreak in anti-Semitic and pro-Nazi activities.”

If you were of Japanese origin, living in the US during WWII you were targeted simply for being Japanese. We’re heading for similar times. In times of economic distress people act irrationally and look for someone to blame…anyone. Since Wall Street is heavily weighted towards Jewish gentlemen, they make an easy target.

In a similar vein, the backlash against “foreigners” is coming in Europe. I just read news that Switzerland has just dealt the first decisive blow to the European Union, and ultimately the Euro itself, by effectively shutting their borders.

Economic woes typically precede civil and sometimes cross-border strife. It is extremely important to understand these risks as they have serious implications for Gold, The Dow and European Markets.

There are reasons to consider investing outside of “traditional markets”. We will be in Sri Lanka in a few weeks meeting with our exclusive syndicate. Sri Lanka is a country which has enjoyed a healthy dose of aggression, economic strife and missed opportunities. Right now betting on a country such as Sri Lanka, rather than many European countries may sound absurd to those reading the dishwater that masquerades as financial news, but it may actually make sense.

We frankly don’t know, which is one reason we are going to take an initial look at the place to learn more. This report provides a good overview on the country for anyone interested in digging a bit deeper.

What I do know is that the problems that are now coming to the surface in Europe are not unique, new or startling in any way. They are the natural result of the intense fraud and corruption that has been foisted on the citizenry.

When bankers, together with politicians blow up the economy and then turn around and bail each other out, and create regulations to impede business growth and capital flows, even an intelligent 5th grader will be able to tell you that things are likely to turn ugly.

It makes me wonder how long the likes of Goldman Sachs, and other such institutions will be used as credentials of value, rather than hidden from view?

Will “Oh he’s from Goldman” become a statement of ridicule, something to be ashamed of, something that even puts one in danger…like being accused of being a Ku Klux clan member whilst walking through Harlem?

To be clear, I have nothing against bankers, Jewish folks, Arabs or even those who don’t speak English as a first language…the Australians and Kiwis for example. I’ve been known to live amongst them quite peacefully.

– Chris

“I’m doing Gods work.” – Lloyd Blankfein – CEO, Goldman Sachs

via Zero Hedge http://ift.tt/1cvpKLV Capitalist Exploits

When the Arab Spring sprung a few years ago, the world's eyes only really cared about one nation. If Saudi Arabia's elite could not keep paying off their poor, an uprising in the world's largest oil supplier could have significant (and catastrophic) consequences for the rest of the world. Of course, between being paid to lose weight (in gold) and raising unemployment insurance, the government has kept trouble at bay. However, things are shifting. As DPA repots, two police were killed after coming under heavy gunfire while trying to arrest several Shiite activists. Of course, this is a one off but notable in its occurrence for the first time since 2011. Saudi Arabia blames Iran of inciting its Shiite citizens to disturb security and stability.

Via DPA,

Two policemen and two fugitives were killed Thursday in Saudi Arabia when security forces tried to arrest the wanted men, the Interior Ministry said.

 

The incident occurred in Awwamiyyeh, in Qatif governorate, a stronghold of the country's Shiite opposition.

 

Police came under heavy fire while carrying out the arrest operation and were forced to shoot back, ministry spokesman General Mansour al-Turki said.

 

A wave of protest swept the Shiite-dominated Qatif area, in eastern Saudi Arabia, in 2011. Since then there have been a number of shooting incidents, while authorities have pursued wanted Shiite activists.

 

The Shiites accuse authorities in the kingdom, which is dominated by the hardline Sunni Wahhabi tendency, of discrimination. Saudi Arabia denies this, describing the protesters as "rioters" financed by foreign countries to cause unrest in the world's top oil exporter.

Saudi Arabia blames Iran of inciting its Shiite citizens to disturb security and stability.

In January, the US embassy in Riyadh warned its citizens against travelling to the district after gunmen attacked the car of two German diplomats.

 

Security forces who tried to arrest those suspected of being behind "armed unrest" were shot at and retaliated, a ministry spokesman was quoted as saying.

 

They seized "two weapons, a large quantity of ammunition, a bulletproof vest and weapons sights," he added, warning the  authorities would crush any such resistance with "an iron fist".

Awamiya has continued to experience problems despite the end of mass protests that erupted in the eastern region in March 2011 in the wake of the Arab Spring.

via Zero Hedge http://ift.tt/NfplUi Tyler Durden

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Last year saw a great number of widely publicized instances of food fraud and general nastiness when it came to the various items many of us regularly put in our bodies. From “fake tuna,” to rat meat in the streets of Shanghai, to alcohol in New Jersey diluted with “river water,” the list was seemingly endless.

While 2014 has been off to a slow start, it appears the corporate food industry in America is trying to make up for lost time. According to a news release from the USDA on Valentine’s Day titled: “California Firm Recalls Unwholesome Meat Products Produced Without the Benefit of Full Inspection,” we discover that:

WASHINGTON, Feb. 14, 2014 – Rancho Feeding Corporation, a Petaluma, Calif. establishment, is recalling approximately 8,742,700 pounds, because it processed diseased and unsound animals and carried out these activities without the benefit or full benefit of federal inspection. Thus, the products are adulterated, because they are unsound, unwholesome or otherwise are unfit for human food and must be removed from commerce, the U.S. Department of Agriculture’s Food Safety and Inspection Service (FSIS) announced today.

Oh, and by the way, this is a Class I recall. What does that mean?

Basically if you live California, Florida, Illinois, Oregon, Texas and Washington you should stay away from Hot Pockets.

Scratch that. You should stay away from Hot Pockets no matter where you live. Forever.

Full USDA release here.

via Zero Hedge http://ift.tt/1cvhXxz Tyler Durden