Month: July 2014

It continues to go from bad to worse for Africa’s “deadliest ever” Ebola epidemic which has officially claimed well over 600 lives, and unofficially many more.

Following the death of a Liberian government worker two days ago who collapsed in the international airport of Nigeria’s 20-million megacity, Lagos which resulted in a “red alert” Nigeria clamping down into a quasi-quarantine state, sending specialists to airports and seaports fo containment, overnight we got an update on the other major Ebola story from last week, namely the female patient whose family broke her out of a hospital in Sierra Leone’s capital Freetown, and who had been on the loose of several days, leading to a nationwide hunt. She has passed out, dying in an ambulance on the way to hospital, Reuters reports.

Amadu Sisi, a senior doctor at King Harman hospital in the capital Freetown, from which the patient was taken, said on Saturday that police found her in the house of a healer. Her family refused to hand her over and a struggle ensued with police, who finally retrieved her and sent her to hospital, he said. “She died in the ambulance on the way to another hospital,” Sisi said.

Sierra Leone is now the African country with the highest number of Ebola cases, at least 454, surpassing neighboring Ginea where the outbreak allegedly originated in February. What is making things worse and is hindering the containment is that fear and mistrust of health workers in Sierra Leone, where many have more faith in traditional medicine. And over the past few days, this has culminated in crowds gathered outside clinics and hospitals to protest against what they see as a conspiracy, in some cases clashing with police as they threatened to burn down the buildings and remove the patients.

The hostility against the doctors is threatening the stability of the country itself:

Police were guarding the country’s main Ebola hospital in Kenema in the West African country’s remote east on Saturday, where dozens are receiving treatment for the virus.

 

Thousands had gathered outside the clinic the day before, threatening to burn it down and remove the patients. Residents said police fired tear gas to disperse the crowds and that a 9-year-old boy was shot in the leg by a police bullet.

 

Assistant Inspector General Alfred Karrow-Kamara said on Saturday the protest was sparked by a former nurse who had told a crowd at a nearby fish market that “Ebola was unreal and a gimmick aimed at carrying out cannibalistic rituals”.

 

He said calm had been restored to Kenema on Saturday, adding that a strong armed police presence was in place around the clinic and the local police station.

 

Some health workers from the clinic have been reported absent from work because of “misconceptions by some members of the community,” according to a local doctor.

It has gotten so serious, even the country’s president has had to intervene: President Ernest Bai Koroma said on Saturday the government planned to “intensify activities and interventions in containing the disease and stopping it spread” with a view to ending the disease within 60 to 90 days.

And while the US public has been generally unaware of the severity of the breakout, this may soon change following news that a 33-year-old US doctor working for relief organization Samaritan’s Purse in Liberia was the latest to test positive for the disease on Saturday. Telegraph reports:

The charity Samaritan’s Purse issued a news release Saturday saying Dr Kent Brantly was being treated at a hospital in Monrovia, the capital. DR Brantly had been serving as medical director for the aid organisation’s case management centre there.

 

Photos of Dr Brantly working in Liberia show him in white coveralls made of a synthetic material that he wore for hours a day while treating Ebola patients.

 

Brantly was quoted in a posting on the organization’s website earlier this year about efforts to maintain an isolation ward for patients.

 

“The hospital is taking great effort to be prepared,” Dr Brantly said. “In past Ebola outbreaks, many of the casualties have been healthcare workers who contracted the disease through their work caring for infected individuals.”

Dr. Kent Brantly (right) with colleagues Stephen Snell (left) and an unidentified doctor at center in a Facebook photo posted May 25, 2013 (via NYDailyNews) 

Kent Brantley pictured with his wife and children:

And a picture of the infected doctor wearing full protective garb (left) treating an infected patient:

Is Dr Brantly’s infection a possible link to bring the African epidemic into the US? Unlikely, but his family is an open question: “Samaritan’s Purse spokeswoman Melissa Strickland says Dr Brantly’s wife and children had been living with him in Africa but are currently in the US.”

For now, one can only hope that even as the infection appears on the verge of breaking out of its west-African containment, that the local authorities will somehow magically prevent further spreading of the epidemic whose mortality rate is between 60% and 90%.

via Zero Hedge http://ift.tt/1rqtqU5 Tyler Durden

The main drivers in the week ahead will come from the United States.  Rarely does the Federal Reserve Open Market Committee meet in the same week as the monthly jobs report.  In addition, the government will publish its first estimate of Q2 GDP and the Employment Cost Index. For extra measure, auto sales and the manufacturing ISM are also due. 

 

The capital markets appear to be at potential turning points.  The US Dollar Index posted its best weekly advance since March as the euro fell to new lows for the year.  The S&P 500 posted record highs on July 24, but gapped lower the next day.  The Russell 3000 peaked on July 3, the retest last week faltered, and it too gapped lower before the weekend.  

 

Major European markets have already turned lower.  The UK’s FTSE peaked in mid-May, the French CAC in early-June and the German Dax in late-June.   The Nikkei made is high at the start of the year.  In contrast, the MSCI Emerging equity market is at its best level since early last year. weiThe MSCI Asia-Pacific Index is at its best level in six years.  

 

US Treasuries remain firm, and the 10-year yield spent most of last week below 2.50%.  We see two main sources of demand that are worth underscoring.  The first is from US banks.  Their Treasury holdings have increased sharply in recent months.  The second is from foreign central banks.  The evidence is largely circumstantial, but is consistent with the recent TIC data (May).  It appears they are extending duration ostensibly as a strategy to cope with a change in monetary policy.  

 

The US 10-year yield has fallen almost 7 bp over the past month.  Most sovereign bond market.  Most euro zone benchmark yields are off between 10 and 13 bp lower, with the 7 bp decline in the 10-year Gilt is an exception.  Portuguese bonds have rallied for the past two weeks, but the yields have not returned to levels seen before the scare.  

 

It appears that demand for European debt has slackened somewhat.  Some of the flows appear to have been re-directed toward the dollar-bloc and emerging markets.  The Canadian 10-year yield has fallen 12 bp over the past month, Australia 15 bp and New Zealand 21 bp.  The EMBI+ has is bouncing along its recent trough, which just above 280 bp, it is off 100 bp since the start of the year and just above where it bottomed (~250 bp) in 2010 and again early last year.

 

Despite the active US diary next week, the risk is we do not learn much new and that which we do learn is disappointing.  Given Yellen’s recent testimony before Congress and the absence of updated forecasts and a press conference, the FOMC meeting is as likely as these things can be to a non-event.  Minor tweaks in the statement and another $10 bln in tapering is expected.  No more and no less.  

 

With the weekly jobless claims recording new cyclical lows and regional Fed surveys all improving in July, another, the sixth, consecutive non-farm payroll gain over 200k is understandably widely anticipated.  Yet in the current context this is not sufficient to change expectations.  The ADP estimate steals the thunder, and the other components of the employment report are slower moving.  

 

Average weekly earnings may tick-up on a year-over-year basis, but this does not represent true acceleration of wages.  Average weekly earnings have risen by an average of 0.2% a month over the last 3-months, 12-months and 24-months.  They are expected to have risen by 0.2% in July.  

 

The Q2 Employment Cost Index is due out the day before the monthly jobs report.  It covers wages, salaries and most benefits (excludes stock options) for the private sector and local and state governments.  It appears that of the various measures of labor costs, the ECI has the strongest correlation with the core PCE deflator.  

 

The Q2 ECI is expected to have risen at a 0.5% pace after 0.3% in Q1.  While this may pose some headline risk, such an increase does not represent an acceleration of inflation.  Consider that the four-quarter average is 0.44, and the 8- and 20-quarter averages are 0.44.   We should not exaggerate short-run fluctuations around a long-term average.  

 

The risk for disappointment seems greater from the other data.  The regional Fed surveys for July have been upbeat, but the flash Markit PMI (both manufacturing and services) eased.  There were two more auto selling days in July than in June, but it might not be sufficient for auto sales to top the 16.92 mln pace in June, which was the highest in eight years.  

 

The biggest risk of disappointment comes from the GDP estimate.  Recent data warns that Q2 ended a dip in momentum.  Economists had thought that Q2 growth would more than offset the unexpectedly dramatic 2.9% contraction in Q1.  It does not look like such a sure thing anymore.  In addition, there will be benchmark revisions going back to the start of 1999 that will change the historical profile.  

 

Turning to the euro area, last week’s money supply and credit report showed a small improvement. Some linked it to the June rate cuts.  The ECB’s lending survey may shed more light.  The flash July CPI demands attention as well.  The debate over whether inflation has bottomed is unlikely to be resolved by the July print which is expected to be unchanged from June at 0.5% on the headline and 0.8% at the core.  The ECB’s staff which lowered this year’s CPI forecast seems to assume that the CPI bottoms near current levels.  

 

Both Spain and Italy have large bond maturities in the days ahead.  Spain has almost 16.4 bln euros maturing on July 30th.  Its 10-year bond yield fell to record lows last week.  Italy has about 36 bln euros of debt maturing, of which 27 bln, the largest of the year, takes place on August 1.  Italy is hoping that the freed up funds are simply recycled into the new supply offered in the first half of the new week.  Some observers linked the recent chunky LTRO repayment to these maturing issues.  

 

Spain and Belgium are the first euro zone members to report Q2 GDP.  With the Bundesbank warning the that German economy may have stalled in Q2, if Spain reports the 0.5% as expected, it will likely be the fastest growing of the large euro zone countries.  

 

Japan reports economic data every day next week.  Most of the data is for June.  In many ways, officials appear to have written off Q2 due to the sales tax hike.  It is betting, as it were, that the economy rebounds in Q3.   The preliminary July manufacturing PMI, reported last week,  slipped to 50.8 from 51.5 in June, though, of note, the export orders component rose above the 50 boom/bust level for the first time since March.   

 

The June industrial output figure will be reported, but it is not expected to confirm the recovery in the PMI from May’s 49.9 reading.  The Bloomberg consensus is for a 1.2% decline.    July vehicle sales figures to be released on August 1 may be an indication of whether the Japanese consumer has recovered from the tax increase.  Auto sales fell each month in Q2 after rising sharply between last September through March.    

 

Many participants expect that the BOJ will be forced to provide more stimulus.  As it was a fiscal shock the is the culprit, we suspect that if the July data is as weak as we suspect that a supplemental budget will be considered for the second half of the fiscal year.  Given the economic conditions and the erosion of public support for Prime Minister Abe, we suspect the government will chose not to implement the second leg of the retail sales tax increase.  

 

Geopolitics remains a wild card with the focus on both Gaza and Ukraine.  Gold in particular looks supported, but out-performance of emerging market equities (over developed equity markets) and the gains in the peripheral and dollar-bloc bonds does not speak to a risk-off period.  Lastly, of the emerging market central banks that meet in the week ahead, only the Philippines and Columbia are expected to hike rates.

via Zero Hedge http://ift.tt/WZ6Zfq Marc To Market

Submitted by Erico Tavares of Sinclair & Co.

Can Germany Carry Europe’s Weight in the Next Financial Crisis?

Within the European economic context Germany has been a star performer in recent years, outgrowing in GDP terms its Eurozone peer group as a whole in all but one year since 2006 (complete with a magnificent football/soccer team). This was quite a reversal of fortune from the ten years prior, when Germany consistently lagged in wealth creation.

Together with its size and unwavering historical commitment to the EU project, this has created the expectation in political and even financial circles that if Europe faces another major economic crisis Germany will have no choice but to support the most vulnerable member states, possibly even relenting to the mutualisation of the Eurozone’s debts.

While this is a very complex topic, the following graph puts the odds in favor of one outcome: the next time push comes to shove in a big way, Germany will likely say NEIN!

Evolution of Government Debt-to-GDP in Selected European Countries
(Source: EuroStat)

(a) Simple average of the Netherlands, Denmark, Finland and Sweden.

Several notable facts stand out from this graph:

Since 1995, Germany’s government debt-to-GDP ratio increased by almost 50% from trough to peak. This increase is particularly evident when compared to Germany’s Northern European peers (the EU Nordic countries plus the Netherlands, also traditionally fiscally-prudent exporters) and even its much smaller and historically more indebted German-speaking neighbor, Austria.

The reunification is undoubtedly a major reason behind this increase… This is a major political, not economics, project but the financial ramifications are quite significant. While we could not find official figures of how much has been paid to date to shore up the eastern half of the country (probably because this is a sensitive political topic), some think tanks estimate somewhere in the vicinity of €1.5-2 trillion. This is a very large figure indeed, easily exceeding half of current GDP levels.

… and is still costing a lot of money. Twenty years on, an estimated €70-90 billion a year are still flowing east through various support mechanisms, including the renewed Solidarity Pact that is projected to last until 2019. West German politicians clearly underestimated how much the reunification would cost. How can we tell? In 1992, as part of the Maastricht Treaty Germany agreed (and most likely pushed) to have a 60% government debt-to-GDP limit on all EU member states (they were at 42% then); but then it took them just six years to breach that level, despite a relatively benign economic environment throughout the 1990s. Oops.

What about the banks? Contingent government liabilities, including exposure to potential financial sector losses, are not included in this graph. As will be outlined in a forthcoming article, prior bank stress tests and rating agency notes suggest that European banks could need help yet again in case of another financial crisis. This could throw another wrench at government finances across the board.

And what’s going on in France? French politicians did not have to worry about funding a massive reunification effort, but that did not stop them from keeping pace with Germany’s debt increases as percentage of GDP. And from 2009 they finally got ahead and never looked back… Allez les Bleus (Go Blues)! While we speculate that expensive social programs and lenient working hours may have something to do with it, for whatever reason France’s fiscal policy looks truly extravagant compared to all other countries in this graph.

***

Where does this leave us? German taxpayers are still coping with the reunification and a national debt that is much higher than they ever expected. So while many European politicians continue to push for more “solidarity”, Germany is in short supply of financial resources, let alone political will, to bail out other member states.

And France, Italy or Spain, which together with Germany account for 55%+ of the EU’s GDP, are in a worse position – nobody saved for a rainy day. And many states across the EU are still reeling from the last financial crisis.

If global growth picks up considerably from here, a lot of these issues could be postponed or even fall away. But it’s the scenario where it does not that concerns us.

Anything could happen then, including politicians throwing all remaining caution and financial orthodoxy to the wind. After all, Germany pushed its leverage up a full 17 percentage points from an already stretched level in response to the recent financial crises – making the prospect of going back to the 60% debt level unattainable in a decade, if not much longer. France, Germany’s big partner in the EU project, already seems to be going down that path with gusto.

However, at some point this policy could have unpredictable consequences, especially if financing costs in certain states begin spiraling out of control. Central banks can continue to provide liquidity and – to a measured degree – hold interest rates down to ease the debt burden, but they can’t restore solvency on their own. Social and pension programs, economic growth, the ability to backstop the financial system and even cohesion within Europe could all suffer as a result.

All this makes us wonder: does Europe have a credible Plan B in case Germany does not show up with the goods next time around? European bank depositors should be very concerned, and indeed everyone else for that matter.

via Zero Hedge http://ift.tt/1Am0Fhp Tyler Durden

Does it feel like you’re poorer? There is a simple reason why – you are! According to a new study by the Russell Sage Foundation, the inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36% decline… Welcome to America’s Lost Decade.

 

Simply put, the NY Times notes, it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too.

The reasons for these declines are complex and controversial, but one point seems clear: When only a few people are winning and more than half the population is losing, surely something is amiss.

 

As Russell Sage Foundation concludes, through at least 2013, there are very few signs of significant recovery from the loss of wealth experienced by American families during the Great Recession. Declines in net worth from 2007 to 2009 were large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their total wealth. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.

 

The American economy has experienced rising income and wealth inequality for several decades, and there is little evidence that these trends are likely to reverse in the near-term.

 

It is possible that the very slow recovery from the Great Recession will continue to generate increased wealth inequality in the coming years as those hardest hit may still be drawing down the assets they have left to cover current consumption.

The inequality-battler-in-chief remains unaware of the greatest irony of this surging rich-getting-richer as poor-get-poorer society:

 

 

Inequality in the U.S. today is near its historical highs, largely because the Federal Reserve’s policies have succeeded in achieving their aim: namely, higher asset prices (especially the prices of stocks, bonds and high-end real estate), which are generally owned by taxpayers in the upper-income brackets. The Fed is doing all the work, because the President’s policies are growth-suppressive. In the absence of the Fed’s moneyprinting and ZIRP, the economy would either be softer or actually in a new recession. 

 

The greatest irony is that the President is railing against inequality as one of the most important problems of the day, despite the fact that his policies are squeezing the middle class and causing the Fed – with the President’s encouragement – to engage in the radical monetary policy, which is exacerbating inequality. This simple truth cannot be repeated often enough.

via Zero Hedge http://ift.tt/1nJVm7n Tyler Durden

Does it feel like you’re poorer? There is a simple reason why – you are! According to a new study by the Russell Sage Foundation, the inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36% decline… Welcome to America’s Lost Decade.

 

Simply put, the NY Times notes, it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too.

The reasons for these declines are complex and controversial, but one point seems clear: When only a few people are winning and more than half the population is losing, surely something is amiss.

 

As Russell Sage Foundation concludes, through at least 2013, there are very few signs of significant recovery from the loss of wealth experienced by American families during the Great Recession. Declines in net worth from 2007 to 2009 were large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their total wealth. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.

 

The American economy has experienced rising income and wealth inequality for several decades, and there is little evidence that these trends are likely to reverse in the near-term.

 

It is possible that the very slow recovery from the Great Recession will continue to generate increased wealth inequality in the coming years as those hardest hit may still be drawing down the assets they have left to cover current consumption.

The inequality-battler-in-chief remains unaware of the greatest irony of this surging rich-getting-richer as poor-get-poorer society:

 

 

Inequality in the U.S. today is near its historical highs, largely because the Federal Reserve’s policies have succeeded in achieving their aim: namely, higher asset prices (especially the prices of stocks, bonds and high-end real estate), which are generally owned by taxpayers in the upper-income brackets. The Fed is doing all the work, because the President’s policies are growth-suppressive. In the absence of the Fed’s moneyprinting and ZIRP, the economy would either be softer or actually in a new recession. 

 

The greatest irony is that the President is railing against inequality as one of the most important problems of the day, despite the fact that his policies are squeezing the middle class and causing the Fed – with the President’s encouragement – to engage in the radical monetary policy, which is exacerbating inequality. This simple truth cannot be repeated often enough.

via Zero Hedge http://ift.tt/1nJVm7n Tyler Durden

Submitted by World Dollar

Has Fractional-Reserve Banking Really Passed the Market Test?

In 2003, Jörg Guido Hülsmann, a senior fellow of the Mises Institute, published the essay “Has Fractional-Reserve Banking Really Passed the Market Test?” in a Winter edition of The Independent Review. The key conclusion drawn was that it is the obfuscation of the difference between fractional-reserve IOUs and genuine money titles which preserves the the practice of fractional-reserve banking.

It is the belief of this author that this essay has not received the acclaim that it so richly deserves. Indeed, its implications for the future of money and banking are monumentous. If those who advance the Austrian School of economics, the Mises Institute and Zero Hedge most prominently among them, were to grant its ideas a great renaissance, the worldwide return to sound money may happen far sooner than most could have believed possible.

J.G. Hülsmann explains why “in a free market with proper product differentiation, fractional-reserve banking would play virtually no monetary role” (p.403). The incisive reason given is that genuine money titles are valued at par with money proper, while fractional-reserve IOUs + RP (Redemption Promise) would be valued below par, due to default risk.

Here is the deductive argument being made:

1.    Debt (IOUs + RP) is promised money.
2.    A promise has the risk of not being kept (default risk).
3.    Therefore, promised money, debt (IOUs + RP), is less valuable than genuine money titles (/money proper).

J.G. Hülsmann goes on to explain why the mispricing of fractional-reserve debt (IOUs + RP) persists. The reasons given include the outlawing of genuine money titles and deceptive language (“deposits”).  This author would like to add one more reason, namely the myth that the government could actually “guarantee” deposits in the event of a systemic run. Systemic runs mean, by definition, most if not all money proper exiting the fractional reserve banking system, meaning the money proper with which the “guarantees” could be fulfilled doesn’t exist, short of unprecedented levels of new money printing and financial repression. This point is acknowledged on p.22 of the otherwise unexceptional “The Chicago Plan Revisited” by Jaromir Benes and Michael Kumhof.

The history of fractional reserve banking is, then, defined by informational inefficiency. Market participants have failed to reflect the price differential between fractional reserve debt (IOUs + RP) and genuine money titles.

Let us now extend the deductive argument:

4.    Therefore, an arbitrage opportunity exists. All holders of Debt (IOUs + RP) have an economic incentive to make the redemption request for genuine money titles (/money proper).

Mervyn King, ex-governor of the Bank of England, once claimed that it is irrational to start a bank run, but rational to participate in one once it has started. While the second part of the claim is correct, the first is not. It is irrational not to start a bank run, due to the arbitrage opportunity that exists.

This, of course, holds the assumption that the market will become informationally efficient, and will therefore capitalise on the mispricing. But the holding of this assumption is only credible if this idea is spread. We live in a time with an unprecedented level of competing voices wanting to be heard, the unfortunate consequence of which is that we drown out the voices that are truly exceptional. It is no exaggeration to say that “Has Fractional-Reserve Banking Really Passed the Market Test?” may prove to be the most revolutionary essay in the history of monetary economics and banking, if only it  receives the level of appraisal and promotion it deserves.

On this matter, the reasons given for the persistence of the mispricing of fractional-reserve debt (IOUs + RP) are unsustainable in the long run. The lack of legal protection for genuine money titles is no more than a technicality, for there is nothing in practice that can sustainably prevent the existence of full reserve banks. Awareness that “deposits” are not actually money being held for safekeeping is a matter of educating the public, as is awareness that government’s deposit “guarantees” are not actually credible in the event of a systemic run. 

If we assume, then, that fractional-reserve banking will come to its logical ending, there is good reason to believe that the shock will herald the endgame for fiat money. It is in fact the case that all fiat money is the liability of the central bank, which also carries the risk of non-repayment (default risk). This, again, means an arbitrage opportunity for market participants to withdraw the fiat money from the fiat money banking system. This confirms that the original basis for fiat money is destroyed, for its repayment to the central bank is not credible.

Finally, at long last, we have a worldwide return to sound money. Will there be a new 21st century Gold Standard? Will we recourse to cryptocurrencies such as Bitcoin? Will we see the rise of the Equal Opportunity Standard, with everyone in the world being issued once with an equal amount of World dollars? Or will there be another innovation to come? What we must defend, as proud advocates of freedom, is that the free market will decide. That governments finally learn to stop their oppressive, damaging interference with the monetary system.

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

Perhaps the NYT was on to something when even the most liberal of media outlets finally came out against the president’s recreational plans as reported in “A “Tone-Deaf” Obama Mocked By The NYT For Vacationing While The World Burns.” The latest case in point:

Pres Obama playing golf this afternoon at Congressional Country Club. It’s his first time at the course in Bethesda, MD.

— Mark Knoller (@markknoller) July 26, 2014

Pres Obama’s foursome includes ESPN co-hosts Kornheiser and Wilbon. Also WH aide Marvin Nicholson, his most frequent golf partner.

— Mark Knoller (@markknoller) July 26, 2014

Pres Obama played about 5 hrs of golf at Congressional and then returned to the WH.

— Mark Knoller (@markknoller) July 26, 2014

via Zero Hedge http://ift.tt/1zh51os Tyler Durden